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Dividend Yield Strategy

Many investors choose dividend stocks based on their dividend yield. This dividend yield strategy can be risky as companies that are failing may choose to pay high dividends in order to keep shareholders from selling shares as the price falls. A dividend is a cash payment from company profit to shareholders who are eligible, usually on a quarterly basis. As a rule, dividends are a sign that a company is making money, has a strong margin of safety, and is a safe place to invest your money. The caveat is that when a company starts to falter, it may continue paying the same dividend. The rate goes up because the stock price falls. Investors who only look at the dividend yield may be fooled into thinking that a failing stock is a good investment.

Dividend Yield per Month

A company will always show its dividend yield as the amount of money paid in dividends for one share of stock divided by the value of one share. This is always expressed as a percentage. To calculate the dividend yield per month, simply divide the annual dividend yield by twelve. It should be noted, however, dividends are rarely if ever paid per month. Quarterly is most common but some companies pay dividends twice or even once a year. However, the dividend yield per month is useful for retires as it gives you a clearer idea of how much money will be available for expenses every month.

Dow Jones Historical Dividend Yield

When devising a dividend yield strategy, it is useful to have a little perspective. For example, the Dow Jones historical dividend yield is a good place to start. All of the current Dow companies pay dividends. The current range of dividend yields in this group is 0.66% to 5.7% per year. The average number of years the companies have been paying dividends is 70 years with JPMorgan Chase & Company at the long end at 192 years. Within this group, the average number of years that companies have increased dividends every year is 18 years.

Dividend Rate and Yield

Make sure that you know the difference between rate and yield when dividend investing. The rate of the dividend is the amount of money you receive per year in dividend payments. The yield is that amount divided by the share price and expresses as a percentage. When you are looking for a good return for your investment, look for dividend yield. But, when calculating how much you will receive, or be able to reinvest, look at the dividend rate! The rate is important to look at when you see the stock price going down but the yield going up. This means that the company is buying your allegiance with dividends when they are not growing but rather shrinking!

Dividend Yield Model

Some investors use a dividend yield model or dividend discount model to assess the value of a stock based on its forward-looking dividend payments. This approach is similar to the assessment of intrinsic stock value as it attempts to predict the future earnings and dividend payments of a company. The point of this approach is that you can arrive at a fair market value based on dividends instead of variable market sentiment. This approach is especially useful for companies that have paid dividends for decades and usually increased dividends on a yearly basis.

Dividend Yield Factor

Our stock investments are always based on several factors. These include the prospect of growth of the company and the growth of its stock price. Companies are rising to dominance in their sectors, companies with a strong margin of safety, and companies with a lock on given technologies are all ones with strong factors that we take into consideration when investing. The dividend yield factor plays into this as well. Companies whose dividend yield keeps going up along with their stock price are ones that are doing things right and likely to reward your investment for years to come.

Dividend Yield Enhancement

Many investors view dividend stocks as an alternative to bonds and make the mistake of thinking these sorts of investments are the same. They are not. When you choose well when buying dividend stocks you not only get a dividend that is comparable to a bond but you get the likelihood of dividend yield enhancement. As we noted, the average number of years that stocks in the Dow have increased their dividend payment every year is 18. With this sort of dividend yield enhancement, you get a better return for your original investment as a stock that is probably growing in price as well!

Dividend Yield Calculation Example

Value investors looking for reliable dividend income should look at dividend yield as it tells you what a company pays to shareholders each year in relation to its share price. Here is a dividend yield calculation example. Start with the dollar value of the yearly dividend and divide by the price of one share.

In June of 2020, Microsoft announced a dividend of $0.51 a share per quarter or $2.04 per year with the first payment at this level to start September 10, 2020, to shareholders of record on August 20, 2020. The current yearly dividend of Microsoft is $2.04 and the current share price in September 2020 is $214.25.

Thus the dividend yield of MSFT is $2.04/$214.25 = 0.9%.

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Where to Invest During the Next Market Crash

 The stock market has gotten ahead of any economic recovery and is at risk of a correction or crash. We noted some time back that the stock market seems to be ignoring the economy. This should concern investors. Where to invest during the next market crash is something to seriously consider. For that matter, investors should give some thought to where they should invest before a likely correction. Here are a few thoughts on the subject.

Where to Put Your Money before the Market Crashes

Investors who are staying short can put their capital into short term bonds or CDs. This will protect your money and allow it to be available for investments when the market goes down. Another good idea is to pay off debts. Getting a better return on your investments than the rate for credit card interest can be difficult. Getting rid of high-interest-rate debt is an excellent idea during uncertain times. Long term investors may consider dividend stocks with a good margin of safety.

Where to Invest during the Next Market Crash - pay off credit card debt
Paying Off Credit Card Debt Is a Good Investment

Best Investments during Stock Market Crash

The Motley Fool has a good article about where to invest during the next market crash. They suggest companies with high margins of profit, a large cash reserve, and the prospect of good cash flow to cover ongoing operations and debt service. Three that they suggest are MasterCard, VISA, and PayPal Holdings. Consumer goods stocks generally do well during a recession but as unemployment levels continue at Depression era levels, people will start to budget their money and only those selling necessary items will do well.

Real Estate Investing during Recession

Those with substantial cash and experience in real estate may consider these sorts of investments during a recession and market crash. The most important part is the ability to understand all aspects of real estate investment and have the management skills (and time) needed to carry projects through to completion. Having a good sense of where growth and profits will be over the coming years is necessary before looking for good real estate deals as many cheap properties are cheap for good reasons.

What to Buy during Market Crash

There are two strategies for investing during a stock market crash. One aims for short term profits and the other aims at picking up long term investments at bargain prices. In our article about safe investments if the pandemic gets worse we mentioned a company that makes Covid-19 tests. They are likely to do very well no matter how the market does and probably go up in price during a crash. But, when Covid-19 subsides, so will their stock. This could a good short term investment during a market crash. On the other hand a company like Microsoft has gone up from $150 a share to $230 a share this year. Their rally in the face of the pandemic is partially because of the movement to online work which is very likely to continue once the pandemic subsides. Companies have found ways to function just as well as before and with fewer expenses by having their employees “telecommute.” Microsoft is therefore a good long term bet and could be picked up at an attractive price when the next crash occurs.

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Define Investment Risk

Risk and reward go hand in hand when you are investing. You need to be able to define investment risk for every investment that you engage in. In any investment, the risk is the chance that your investment gains will be different from the outcome you expect. That risk always includes the chance that you will lose some or all of your investment capital. In trying to determine risk before going into an investment, the most common way is to look at how the same type of investment usually turns out. Using tools such as the standard deviation, investors get a sense of just how risky or safe an investment likely is.

Different Types of Investment Risk

Some types of investment risk have to do with the type of investments you make. Some have to do with things like your age, how long you plan to stay invested, and how long you may need to accumulate capital for things like starting your own business or having money for retirement that does not run out. Here are the usual investment risks:

Market Risk

This group of risks includes changes in interest rates, relative currency valuations, and the prices of stocks that you purchase.

Liquidity Risk

This is the risk of not being able to get out of an investment when it goes bad. One of the strongest reasons for investing in US stocks on the NYSE or NASDAQ is that they generally trade with a good degree of liquidity. Nevertheless when an overpriced market corrects, you will generally have to take a loss when getting out unless you have protected yourself with put options.

Concentration Risk

This risk is why most investors diversify their investments. When all of your capital is tied up in one stock, one real estate project, or one type of bond, you will lose across the board with the investment goes bad. Diversification can be investing in several stock sectors, real estate, and in different countries.

Credit Risk

This is the risk that a company or a country that issues bonds will not be able to pay. Investors assess credit risk by looking at credit rating. The best credit rating is AAA and in the USA only two companies have AAA ratings, Johnson & Johnson and Microsoft.

Reinvestment Risk

This risk has to do with interest rates. You purchased bonds at 5% interest and they have matured. But when you want to buy today the interest rates are nearly zero. This is the reinvestment risk associated with low interest rates in the current era. The same applies to reinvesting interest paid except when you simply spend the money!

Inflation Risk

Inflation risk is the loss of purchasing power of your money when the currency devalues. In the 1970s interest rates were high but inflation was higher. Thus investors lost purchasing power with bank accounts, bonds, and treasuries. Those who invested in stocks saw share prices go up and real estate kept up because prices rose. Gold was very popular and rose from $32 an ounce to nearly $800 before it corrected back to the $200 to $300 range.

Investment Horizon Risk

This risk has to do with how long you need to stay invested in order to see a profit. Stocks tend to outperform other investments over the long term but if you lose your job and need to sell stocks during a market correction you will lose money.

Other risks include devaluation of foreign currencies when you invest offshore and simply running out of money as you live long and use up your savings.

Investment Risk Reward

All investments have a potential risk to reward ratio. For example, an investment risk reward ratio of 1:5 means that you are willing to risk $1 for the possibility of making $5. In general, investors look for at least a 1 to 3 risk reward ratio when they are putting their capital at risk. However, folks who want to invest without losing any money will be happy with a bond that returns a set rate of interest and returns their capital when it has matured. Unfortunately, anyone with such investments needs to accept the risk of inflation eating up their purchasing power and the possibility that rates will get ever worse to go negative!

Investment Risk and Return Analysis

The first thing that most investors consider when investing is the history of a given type of investment. Well-chosen stocks tend to go up over time. The same applies to real estate and both also have their bubbles and crashes. The longer you plan to stay invested and the greater margin of safety you have, you can simply wait out the down times and expect to make money in the long term. If you are trying to time the market, you may become rich and you may lose everything. The key to avoiding such disasters is to start by assessing the intrinsic value of any investment and then paying close attention to the details along the way.

How to Calculate the Risk of an Investment

The first step in calculating investment risk is to look at how your type of investment has done over time. What is the maximum return you might expect and what is the worst case scenario? What the most common scenario and how often does that occur. Then to calculate the risk of an investment you need to look closely at the details associated with best case, worst case, and average scenarios. What conditions favor the best case and what situations will lead to an investment disaster? In short, you need to know exactly how a given investment works in order to make a profit!

Reducing Your Investment Risk

There are four good ways to reduce your risk when investing. The first is to avoid putting all of your eggs in one basket. Diversify and spread out your risk. The second is to be clear about your goals when you invest. Don’t find yourself holding a 10-year Treasury when you need the money in 5 years! Then, pay attention. We have writing about the pros and cons of dollar cost averaging. One risk of this approach is that you get lulled into a false sense of security and quit paying attention! A good approach for the average investor is to keep your portfolio small enough that you can easily keep track of each investment.

How to Minimize Risk in Investment

If you simply don’t want to deal with the risk of losing money in your investments you typically need to accept a lower projected rate of return. Folks going into retirement often move a larger part of their portfolio from stocks to bonds and treasuries as they are assured of an income without their principal being at risk. But this approach needs to be adjusted a bit at times like now when interest rates are likely to remain low for a long time. A better approach, in this case, may be secure dividend stocks that are both sources of steady income and likely to appreciate in value over the years.

Define Investment Risk - risk and reward
Reward Always Goes with Risk

Components of Investment Risk

When you read about the components of investment risk, you see lists of external risks like changes in interest rates, liquidity, and the economy. But, the biggest component of investment risk lies with the individual investor. Successful investing takes time, patience, experience, and sound judgment. A person who makes a good income in their profession will have money to invest. They have the same or great intelligence as successful investors. What they lack are the time to track their investments, patience needed to wait for good results, and experience. Taking time away from their work means lost income and investing without having the time and experience results in lost investments. Warren Buffett has suggested that most investors in this situation are best served by an ETF that tracks the S&P 500 than by trying to pick and choose individual investments!

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Safe Investments if the Pandemic Gets Worse

The coronavirus pandemic continues and may even get worse when the fall flu season arrives. What are some safe investments if the pandemic gets worse? Investors have piled into tech stocks like the FAANG as these investments seem reasonably secure. But, these stocks are also high-priced and not immune to a correction if sales fall off. And, sales could fall off as more and more people continue being out of work and without any discretionary spending. There are some companies that have done well during the pandemic and which stand to prosper if things get worse.

Safe Investments if the Pandemic Gets Worse

The Motley Fool suggests three stocks to buy ahead of a potential second wave of the virus. They are PayPal, Logitech, and Quidel.

PayPal has nearly doubled its stock price since the beginning of the year from $102 a share to $198. They are benefitting from the wholesale move of commerce online.

Logitech is a computer hardware maker that has also benefitted from the move of business and social activity online and from home. They have seen a nice stock price increase from $47 to $74 a share.

Safe Investments if the Pandemic Gets Worse - Covid-19 Vaccine

Making Covid-19 Tests is Profitable During the Pandemic

Quidel’s stock has gone from $74 a share to $241 a share since the first of the year. These folks make tests for Covid-19! Our opinion is that this company is in the best position of the three to do well if the pandemic worsens this fall. Their Lyra SARS-CoV-2 rapid assay test got emergency use authorization from the FDA in March and their Sofia 2 SARS Antigen FIA test that produces results in fifteen minutes was approved in May. As the Covid-19 virus reemerges as a problem across Europe, the UK, Japan, and other countries that had seen it subside, there will be a need for more testing across the globe. As the pandemic continues to grow out of control in the USA, the need in North America will be even greater. In the coming months and into at least 2021 one can expect to see Quidel to be a safe investment as the virus continues to be a major problem.

Other companies that make Covid-19 tests include Roche, Abbot Labs, and Thermo Fisher. However, these are larger companies for whom the benefit of making a Covid-19 is diluted by the success or failure of their other products and services.

How Long Will Covid-19-related Profits Last?

Companies that make tests for the Covid-19 virus and those that are developing vaccines are going to make money in the coming year or so. But, this may be a one-time occurrence no matter how dire the need is right now. If it turns out that the Covid-19 virus keeps mutating, there may be the need for vaccinations every year. Then, it will essentially be another “flu” shot. This can be a good business but not something exceptional. Thus, the companies like Quidel that are money-makers now will probably cool off in a year or two.

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What Is Alternative Data in Finance?

Using alternative data in finance can help investors get ahead of the competition. What is alternative data in finance? A simple example is the relationship between Google searches and prices of individual stocks. In a broader sense, alternative data in finance include news feeds, social media, payments information, any non-financial information that indicates interest in, fear of, or the intention to buy equities. This sort of information gives investors insights into what drives decision making of those who buy and sell stocks. Hedge funds and private equity firms use this information to gain early knowledge of trends both positive and negative.

Types of Alternative Data

There are many useful types of alternative data. This list contains sources commonly used by investors and traders. The list is arranged alphabetically and does not reflect the relative importance of any of these kinds of alternative data.

Credit card transactions
Email receipts
Geolocation (foot traffic)
Internet activity and quality data
Mobile App or App Store analytics
Obscure city hall records
Online browsing activity
Point-of-sale transactions
Price trackers
Product reviews
Satellite images
Shipping container receipts
Shipping trackers
Social media posts
Tracking corporate jets
Web site usage

What Is Alternative Data in Finance?

Those who successfully use this sort of data do not forsake standard analytic tools like important moving averages but rather use them to indicate trends and investor thinking outside of “box” of standard analytic tools.

Top Alternative Data Providers

Using this sort of information can help investors, but where can you get it? What you can do is to use one of top alternative data providers who do all of the “legwork” for you. Datarade offers a list of their choices for the top 10 alternative data providers.

Brain Company
Exante Data

By using one of these services, you can get clues that will give you an advantage in the markets but not take up all of your time trying to track down many bits of information that may or may not be of value.

List of Alternative Data Providers

If none of the top list of alternative data providers offers the services that you want, there are many more such companies. In addition to the list we just provided, Arm Insight, Omni Sci, QuantCube Technology, Alternative Data Group, Crux, Preqin, Quandl, SEntieo, and Thasos, Group are excellent choices for providing extra information to give you an advantage in investing and trading. You may end up using one or two data providers before you settle on one that fits your unique investing and trading requirements.

Driving Investment Performance With Alternative Data

Although the use of alternative data in finance is becoming popular, you need to understand the benefits and potential drawbacks of your attempts at driving investment performance with alternative data. This data is unlike the sort of “hard” data that comes directly from analyzing market pricing, reading financial reports, and following the economy. This kind of information is partial, suggestive, and often incomplete. Too often the data is poor and difficult to verify. Most investors start with standard analytic tools and then use alternative data to fine tune or direct further research.

Machine Learning and Alternative Data Approach to Investing

Artificial intelligence can be extremely useful in helping sort through large amounts of data in order to optimize your investment choices. In this regard, machine learning and the alternative data approach to investing fit well together. The value of alternative data is that you can pick up very useful information to guide your investing. The problem is that there is an awful lot of data available and sorting through it to see what is useful and is not can be time consuming and often useless. By having an artificial intelligence program do the sorting, you can get it done faster and more effectively.

Alternative Data Is Valued on Wall Street

What Is Alternative Data in Finance - google search and consumer behavior

When investors have to wait for official data such as unemployment numbers, they often look to alternative sources to get a head start on those who simply wait for the official figures. Thus alternative data is valued on Wall Street where any tiny advantage can be parlayed into big gains. Alternative data has been especially helpful in the Covid-19 era when companies have put off offering guidance and Congress dilly-dallies with stimulus money while millions are out of work and in danger of eviction. Likewise, the stock market has recovered while the epidemic persists and the economy is not well. Alternative data offers useful insights to guide investment decisions in these times.

Alternative Data Investment Management

Because alternative data can be helpful in making smart investment decisions, it is applicable to managing investments on a broad scale as much as for guiding single investment choices. Alternative data investment management should always be coupled with an artificial intelligence tool to make it more efficient. And, all such data should be (at times) taken with a grain of salt to make sure that you do not follow a lie propagated on social media and lose all of your investment capital.

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Investment Options 2020

The stock market is back to record highs while the economy is in trouble. What are your investment options in 2020? Folks are investing in stocks because they don’t anything else to invest in. Is that really the case and, especially, are stocks really a safe bet right now? Nobody has a crystal ball to predict exactly where the future will take us but we would nevertheless like to offer our thoughts about profitable and safe investment options for 2020 and beyond.

Best Place to Invest Money Right Now

This is what investors would always like to know but to know the perfect answer you need your crystal ball to predict the future. The issues today affecting investments include a stock market where investors are putting their money because interest rates are low and the market has been going up. However, the economy is not yet back on track and further growth in stocks will be tied to the shape of the economic recovery. Many investors are betting on a quick recovery with a “V” shape instead of a prolonged “U-shaped” recovery or an “L” shape that lasts for years.

Short Term, Safe Investments

If you are unsure about how this will turn out, short term investments might be your best bet. Bankrate has some useful advice about the best short term investments in August of 2020. They suggest the following:

Savings accounts
Short-term corporate bond funds
Short-term US government bond funds
Money market accounts
Certificates of deposit
Cash management accounts

Investment Options 2020 - US Treasury

As you will note, stocks are not on this list.

Investing for the Future (and Accepting Short Term Risk)

Bloomberg offers several options in their article about Where to Invest $10000 Right Now. It is a useful read and looks at where growth will be down the line. Here is where you need to apply the concept of intrinsic stock value and look out a few years. That will take away much of the concern about a second market crash in 2020. Artificial intelligence is mentioned in their article along with investment in the Eurozone and UK. If you are willing to take the risk of a short term correction, an ETF that follows the FAANG stocks and using a dollar cost averaging approach would be a sound approach.

Good ideas about where to invest money to get good returns in the short term can be found on the Bankrate list. And ideas about where to invest to benefit for the long term will be found in the Bloomberg article.
Finding safe investments with high returns is always a problem because there are always tradeoffs.

Investment Options 2020 - investment in AI

Investing Money for Beginners

The best advice for beginners who want to invest is to start early, invest regularly, do your homework and avoid “tips.” Pay down your credit cards before you start any serious investing because the odds of your finding a safe investment that outpaces the interest rates on credit cards is pretty remote. Unless you have the expertise and time to study the stock market and individual stocks, it is a good idea to start with an ETF (exchange traded fund) that tracks the S&P 500. These funds have outpaced most investment managers for the last decade. When you do start to pick your own investments whether in stocks, bonds, or real estate, follow the thinking of pros like Warren Buffett who only invests when he fully understands what a company or other investment does to make money and how its business plan will continue to reliably make money into the distant future.

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Buying Cryptocurrency 101

Cryptocurrencies have been with us since 2009 when Bitcoin was introduced. A cryptocurrency can be bought a sold via the internet using a decentralized network. It is an efficient way to transfer money and to hold wealth outside of the system of fiat currencies, precious metals, and property. Although Bitcoin was the only cryptocurrency to begin with, by 2020 there are more than 6,000 cryptocurrencies.  The value of various cryptocurrencies has gone up substantially over the years and at times has fluctuated widely. It can be hard to get a handle on all of this, how to buy, what to buy, and when to avoid cryptocurrencies completely. Here we present a brief explanation of what you need to know, Buying Cryptocurrencies 101.

Buy Cryptocurrency Without Bitcoin

Although Bitcoin is the oldest and best known cryptocurrency, there are many (more than 6,000) different cryptocurrencies. Unfortunately, there have been cryptocurrencies that have appeared and disappeared as their exchanges were hacked or simply mismanaged. Thus most who buy cryptocurrencies stick with the larger and better run exchanges and types. Here are the ten most popular if you would like to buy cryptocurrency without Bitcoin.

Bitcoin Cash
Bitcoin SV
Binance Coin

Buying Cryptocurrency 101

Each of these alternatives to Bitcoin has its pros and cons but all appear to be safe bets if you want to purchase cryptocurrencies and not have your wealth stolen overnight.

Challenges Facing Cryptocurrency

As cryptocurrencies have become increasingly popular, they have attracted the attention of regulators and law enforcement. Because monetary value is transferred via cryptocurrencies outside of the banking system and normal money transfer channels it has been used to move illegally gotten, intended, or hidden wealth (drug money, funding of terrorists, not paying taxes, etc.). Cryptocurrency exchanges in the USA now need to report to the IRS (IRS Form 8949, Schedule D). The main issue for those holding wealth in cryptocurrencies is security. Too many exchanges have folded, taking millions with them due to hacking or outright theft. And, unlike a US bank account, your money is not insured by anyone! Smart investors tend to stick with the best known and best run exchanges and cryptocurrencies to avoid losses.

Chart of Cryptocurrency Prices

Buying Cryptocurrency 101-Bitcoin Price Chart

Aside from the ease of transferring money with cryptocurrencies, an attractive feature is the prospect of the value of your Bitcoin or other cryptocurrency going up substantially. Here is a chart of cryptocurrency prices.

Bitcoin price at the far left in 2009 is $1 and the price in August 2020 is more than $12,000. As the chart shows, the cryptocurrency experienced a huge boom and bust from September 2017 to January 2018. It is going up again in response to the uncertainty generated by the current Covid-19 pandemic and its effects on global economies.

Breakout Cryptocurrency

Folks who want to speculate in cryptocurrencies can time their purchases to take advantage of changes in the global economy and specific events that drive fiat currencies down. Or they can look for a specific breakout cryptocurrency, which is typically a new one that gets a lot of attention. Forbes wrote about one particular breakout cryptocurrency earlier this year.

While bitcoin, the world’s original and most valuable cryptocurrency, has risen almost three-fold over the last 12 months, tezos has rallied some 400%, climbing from under $0.40 per tezos token in February 2019 to just over $2 today.

Thus, newness can lead to at least temporary popularity and a surge in price of a new breakout cryptocurrency.

Bullion Cryptocurrency

When the economy suffers and fiat currency values drop, both gold and cryptocurrencies go up. For those who would like to take advantage of this, it is possible to buy a bullion cryptocurrency. In fact, Bullion is the name of a cryptocurrency that is based on gold bullion and not the US dollar. This exchange has been in existence since 2013 and is promoted as an “ideal storage of wealth.” Thus, it is unlike Bitcoin and others which can grow wealth, or lose it, and are promoted as ideal ways to hold and exchange wealth. This bullion cryptocurrency is meant as a long term investment

Buy Cryptocurrency Penny Stocks

The investment community has ongoing concerns about the boom and bust quality of cryptocurrencies and the fact that there is nothing backing the currency. However, they are excited about the blockchain technology that underlies and many buy cryptocurrency penny stocks hoping to get in on the ground floor of big price surge or capitalize on a company’s important position in the technology that drives cryptocurrencies. Examples include Marathon Patent Group (MARA), Riot Blockchain, Inc. (RIOT), MGT Capital Investments, Inc. (MGTI), and DPW Holdings, Inc. (DPW) which are newer companies.

Buying Cryptocurrency for Someone Else

Many investors purchase stocks and other investments for their children or others. Buying cryptocurrency for someone else is typically done by making the purchase yourself and then sending to the other person’s account. Coinbase facilitates these sorts of purchase and transfer operations as do some other exchanges. This can be done as a gift or to start one of your kids out on the road to investing. Because cryptocurrency profits are now taxed in the USA, it may be to your advantage to gift to your children to be used for college or simply to make a wealth transfer far in advance of your death. To make sure that you do this correctly, check with a tax advisor who understands cryptocurrencies.

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Will the Market Crash Again in 2020?

The stock market started the year strong and then come the coronavirus pandemic and the market crashed. The stock market as a whole has largely recovered from the covid-19 crash. But, with a weak economy and no substantial stimulus, will the market crash again in 2020? If you look at how things played out in the wake of the 1929 market crash you see that the market crashed, partially recovered, fell again, and partially recovered and continued in a downward course until 1932. A major difference between then and now is that economists and especially the Federal Reserve realize that the crash turned into the Great Depression because credit was cut off and the USA picked a poorly-advised trade war by passing the Smoot-Hawley Act. Given that the Fed is “all in” doing whatever it takes to keep credit flowing, will the market crash again in 2020?

Why Is the Stock Market Doing So Much Better Than the Economy?

Will the Market Crash Again in 2020 - 1929 - 1932 crash chart
Three Year Course of the 1929 Stock Market Crash

A few months ago we asked why the stock market is ignoring the economy.  As we noted at that time, the stock market anticipates the next moves of the economy. .As such it has discounted airline stocks, hotels, and all tourism-related businesses among others. And, after a brief fall in prices it has not discounted the big tech stocks which are still leading the market. Much of this makes sense in that profits continue for many tech operations as businesses move online. What concerns us is that eventually there needs to be money being spent by ordinary people to buy things and that is what eventually supports everything else. As stimulus payments go away and Republicans in the US Senate wait, the economy may well be set for a fall and that could drive the market down.

Will the Market Crash Again in 2020?

If we go back to 1929 we see that there was lots of optimism along with pessimism as people bought back into the market and repeated drove prices back up. Unfortunately, the things that needed to be done in terms of credit and trade did not happen and the downward course of stocks went on for three years. New Balance says that another crash or at least large correction, or two, is possible. They look at other market crashes, their causes, and how in each case there were partial recoveries and losses on the way down. These crashes played out over a couple of years and were typically exacerbated by a lack of appropriate response or no response.

What is unsettling now is the optimism of some investors or perhaps pigheadedness of some investors in plowing money into stocks when the economy is just as likely to weaken as to improve. The 1929 crash was largely played out by 1932 but that is also when Roosevelt came into office and initiated stimulus programs. With elections coming up it is possible that a Democratic majority might take over the US Senate as well and hold the House of Representatives. And, if this happens along with a Democrat in the Oval Office we can expect to see impressive investments in US infrastructure and US R&D that could forestall any follow up dips in the market.

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Pros and Cons of Dollar Cost Averaging

Many investment advisors suggest that the average investor should use a technique called dollar cost averaging when investing. This approach lets you buy fewer stocks when the price is high and accumulate more when the price is low. It is a disciplined approach that avoids trying to time the market. By setting an amount that you want to invest every payday, month, or quarter, you set up an investing plan that is reliable and likely to succeed in accumulating wealth over the years. This having been said, what are the pros and cons of dollar cost averaging?

What Does Dollar Cost Averaging Mean?

Investopedia provides us with a formal definition of dollar cost averaging.

Dollar-cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset’s price and at regular intervals; in effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices. Dollar-cost averaging is also known as the constant dollar plan.

For those with no skill or interest in timing the market, this is generally a good choice.

What is Dollar Cost Averaging in Stocks?

While dollar cost averaging is generally used for investing in stocks it can also be used for investments like buying CDs or treasuries. However, the approach works best for stocks. In fact, if you are enrolled in a direct purchase plan for a stock, you can often buy fractions of shares which action then relieves you of the problem of buying more or less that you wanted. Many dividend reinvestment plans also include a direct purchase option.

Pros and Cons of Dollar Cost Averaging

Is Dollar Cost Averaging a Good Idea?

The value of dollar cost averaging is that it relieves you of the task of trying to time the market. But, it also leaves you open to blindly purchasing shares of a stock that you really ought to get out of. So, is dollar cost averaging a good idea for all stocks and all investors? The answer is no. Whenever you are invested in a stock you need to keep track of its intrinsic stock value and get out if the stock is not likely to grow and return profits over time. Dollar cost averaging helps keep you from buying excessively in a rising market and allows you to purchase more in a falling market. But, you need to make certain that the fundamentals of your stock warrant staying with that investment.

Why Do Investors Use Dollar Cost Averaging?

Smart investors use dollar cost averaging to ensure that they are investing at a steady pace over the years. They use this approach because it keeps them from buying excessively when shares are overpriced and allows them to accumulate more shares when prices are down. Not only does this approach help you avoid trying to time the market, but it also reduces the effects of fear and greed on your investing. Discipline is a necessity for successful long term investing and dollar cost averaging is a disciplined way to invest your money.

Pros and Cons of Dollar Cost Averaging - Why It Works

Power of Dollar Cost Averaging

The power of dollar cost averaging in your investments comes from two things. First, when you invest on a regular and steady basis you will generally realize the benefits of exponential growth with the regular appreciation of your stock. Second, when you have been purchasing your using dollar value of stocks in a down market and the market recovers and surges, you will see a nice increase in the value of your portfolio. This approach can be especially powerful in volatile markets such as this year with the covid-19 crash and recovery. Anyone who did not panic but simply continued to invest as always has commonly been very pleased.

Reverse Dollar Cost Averaging

While you can build your portfolio using dollar cost averaging, what do you do when retirement comes and you want to reap the rewards of your disciplined investing? The answer is reverse dollar cost averaging. Sell the same dollar amount of shares every month or quarter and do not try to time the market. By leaving your money in the market you will still realize gains and in retirement you will not have to be bothered with trying to time the market to cover your expenses while you live the retirement life that you worked for and deserve.

How to Do Dollar Cost Averaging

For dollar cost averaging to work, you need to be invested in stocks or ETFs that reliably grow your wealth. So, you need to pick investments wisely and pay attention as you go. Alternatively, you can choose an ETF that tracks the S&P 500 or one of its sectors and very often do better than someone who tries to time the market, including many investment advisors. Pick a dollar amount that you can comfortably invest on a regular basis and stick with that amount for a year or so. If and when you have more to invest, do so. The key is to stay invested in good investments and invest on a regular basis for years and years!

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Weaker Dollar and Your Investments

The US economy is going to need more stimulus money to recover and that will drive the dollar down. How about a weaker dollar and your investments? A weaker dollar is often good news for US exports but how does that work out in a world where every economy is weak and nobody has the money to buy anything? Let’s look at how a weaker dollar might affect the various sectors of the stock market.

Weaker Dollar and Your Investments in the Stock Market

Whenever the dollar goes up or down it affects different sectors of the stock market differently. Market Watch looks at what Wells Fargo says about a falling dollar and market sectors.

A falling U.S. dollar is getting a lot of attention from stock-market investors, and according to the chart below from Wells Fargo Investment Institute, the focus isn’t misplaced.

The chart sums up how the stock market and a variety of sectors have performed during past episodes of dollar weakness stretching back to 1988. As noted previously, the dollar’s long-term correlation with the S&P 500 SPX is somewhat negative, meaning that equities tend to rise as the dollar falls – though there are exceptions.

Weaker Dollar and Your Investments - Stock Market Sectors to Watch
This Chart Shows Who Prospers and Who Falls With the Dollar

In general, a weaker dollar means more sales by multinationals offshore and thus higher profits. This is especially true with high tech companies that do not need to ship anything but simply download software via the internet. Companies that need to ship materials can still profit but have a higher overhead. On the other hand, companies that sell products and services within the USA tend not to do so well when the dollar falls. Much is this because discretionary spending goes down in recessions and whenever the dollar is weak. Utilities also suffer a bit during these times.

Where Is the Dollar Going Next?

Gold is going up as the US prints more money to deal with the pandemic. Is this a short term phenomenon or something long term? NBC writes about the dollar headed for a fall.

There are certainly plenty of economists out there who will tell you that the dollar is headed for a fall. If the rest of the world stops buying our IOUs, the Treasury Department would have to keep raising interest rates until it could find buyers. That could, in theory, throw the U.S. economy into tailspin.

But for all its vulnerability, the U.S. dollar is still the most powerful currency in the world. And one big reason is that the U.S. economy is still the largest and most resilient in the world.

Because of this, the US has an outsized effect on the rest of the world. With a fifth of the world’s GDP and the dominant currency, the dollar often drives the rest of the world’s currencies and not the other way around. In regard to a weaker dollar and your investments, you can expect the USD to weaken from its three year high and then to slowly inflate over the years. But, because other currencies will follow the same course that part will have little effect on specific stock sectors. The greater effect over the next couple of years will be how the pandemic plays out and the abilities of nations to display the discipline needed to cope with this health crisis and its effect on their economies.

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