Why Is the Dollar Falling?

The dollar is a safe haven currency for people all over the world. When times are difficult, investment tends to flow into the USA and strengthen the dollar. Now that vaccines are expected to help stop the pandemic global optimism is on the rise and this strengthens investment options other than the USA.
In addition, the US Federal Reserve has promised to go “all in” on keeping interest rates low, buying bonds, and printing money to keep credit flowing and the economy from going into free fall. The prospect of interest rates being low for the long term weakens the dollar. And, the Biden administration will most-likely push for more financial support across the board and for low interest rates into the long term future. Investors looking for high returns will end up looking to Europe or Asia for investment opportunities.

Will the Weakening of the Dollar Continue?

A hallmark of the Trump administration has been the trade war with China and high tariffs. This has tended to strengthen the dollar. Because Biden is more likely to rely on other means of dealing with China, consumers will be paying less for imported products, global growth will be positive and the dollar will continue to fall.

As we have frequently noted, a weak dollar is not a bad thing for American industry and tends to support exports. Thus the dollar will fall until it hits a level where it helps American industry and then it will stabilize. Meanwhile the price of oil will be cheaper in foreign currencies as will other commodities that are routinely denominated in dollars.

Because not all nations prefer a surge in their currency versus the dollar we can expect central banks to take action, which will modify the picture.

Because the pandemic is the root cause for effects on the global economy and currencies, we can expect all of this to continue for months as the disease worsens in the winter months, vaccines take months to be administered in sufficient quantity and people are convinced to abide by common sense precautions to drive down the incidence of Covid-19.

How Should You Invest with a Weakening Dollar?

The US economy is going to worsen before getting better. The longer Congress waits before passing more broad-based stimulus measures the worse it will be. To avoid having your investments hurt by a weakening dollar look offshore. You can purchase ETFs that track offshore stocks or bonds. You can increase your investments in US multinationals that have huge offshore footprints. And, you can move savings into foreign currencies or purchase commodities that will benefit from a falling dollar. For most folks, US multinationals or ETFs in the USA that track foreign stocks are easier to invest in and get out of and don’t require you to learn Forex or commodity trading!

Your Investments and the Weakening Dollar – Slideshare Version

Your Investments and the Weakening Dollar – DOC

Your Investments and the Weakening Dollar – PDF

(Investopedia: S&P Annual Return)

Knowing Which Are the Best Stocks to Invest In

Our opinion at Profitable Investing Tips is that there are always best stocks to invest in. However, these stocks change as time goes by. Knowing what makes the current favorites the best stocks to invest in is how to succeed always in the business of investing. In this regard, there is an old saying in regard to how to help someone in need.

Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.

Although the idea is old, the current quote may only be about 50 years old.

(Quote Investigator: Give a Man a Fish)

We at Profitable Investing Tips would like to follow this example and rather than routinely give you short-lived stock tips, we prefer to give you, our readers, the tools to know how to invest in stocks both now and for years to come.

Investing Goals, Timelines, and Risk

As we note in our companion article, investing in stocks, we invest to make money, attain specific goals, and be financially secure. It sounds simple but most truths are. The U.S. Securities and Exchange Commission advises beginning investors to define your goals as a first step to investing in stocks.

A good idea when investing is to be very careful with a portion of your money so that a bad investing decision, a market crash, and recession, or some other unforeseen problem does not totally wipe you out. In this regard, we wrote about how to invest without losing any money. Read this article for some useful thoughts about how to treat the most conservative part of your investment portfolio.

Some of the most successful investors are also some of the richest people in the world. Warren Buffett, the so-called Oracle of Omaha, comes to mind. People who invest over the very long term benefit from that 10% per year per year market appreciation that the stock market offers. They make a lot of money in a bull market and may lose some in a bear market, but over the years their investments continue to appreciate. And, because they do not attempt to time the market, they are not caught with short term losses on investments that they first made. Although there is the promise of great profits when you pick just the right stock at just the right time, jumping in and out of investments carries its own risk and a greater investing overhead in terms of fees, commissions, and taxes.

The best stocks to invest in over the years are from companies that make money year in and year out and who business plans are likely to continue to work for decades to come.

How to Get Started Investing

When we think about how to start investing at 18, just out of school, what comes to mind are penny stocks simply because they are cheap. But, the best stocks to invest in for beginners are not necessarily the cheapest stocks. And, you do not necessarily need to wait until you have saved up to buy even a single share to get started investing.

Fractional Share Investing

With fractional share investing, beginning investors can invest in the stocks of their choice. The Balance lists seven excellent choices for fractional share investing.

If you want to invest in the stock market, you might be scared off by the perception that you need thousands of dollars right from the start. But that isn’t true – in fact, you can get involved without even buying a whole share of stock at once. With fractional share investing, you can buy as little as $5 or $10 of a stock in a single trade.

Rather believing that you will never be able to buy stocks that sell for more than $1,000 a share like Amazon.com or Alphabet (or Berkshire Hathaway at more than $300,000 a share) beginning investors can go to a brokerage that buys these stocks and then resells fractions of shares. Here is their suggested list of brokerages.

• Stockpile
• Motif
• M1 Finance
• Folio Investing
• Betterment
• Stash
• Computershare

Additionally, when you have purchased stock from a company like 3M (about $210 a share) you can sign up for their dividend reinvestment plan. This allows you to buy fractional shares with your quarterly dividends, without paying fees or commissions. This is another good way to purchase good companies without paying a lot.

Investing Using Dollar Cost Averaging

When a beginning investor purchases inexpensive stocks, or preferably fractional shares of excellent stocks, the best approach is to simply pick an amount that you can afford to invest and put that into stocks every payday, every month, or every quarter. U.S. News wrote about dollar cost averaging.

DOLLAR-COST AVERAGING is a disciplined way for investors to build wealth in their portfolio over time while helping them avoid emotional-driven decisions.
Many people mistakenly believe that they need thousands of dollars to start investing for their retirement, causing them to be risk-averse in opening a traditional investment retirement account or Roth IRA. But nearly anyone can get started with the strategy. For instance, this style of investing can help novice investors who have recently opened a retirement portfolio, and don’t have a large sum of money for an initial investment.

Always buying the same dollar amount of stocks works because by purchasing more stocks when prices are low you will get good deals and by purchasing fewer stocks when prices are high you will not overspend in an overpriced market.

Best Stocks to Invest in Now

You can take stock tips from your barber or a taxi driver. You can take stock tips from any of the numerous pundits on the various investing publications. But, you need to do a bit of homework to verify that the suggested stock tip is really a good idea. There are two ways to approach this decision. First, is this a stock that has, in your mind, a temporary low price? If so, you are in the business of marketing timing. You buy the stock, wait for the price to go up and then you sell it before a volatile market takes the price down again. This is short term investing and to do it successfully you are more interested in how the market views this stock than in its long term value. As noted in our article about proven stock market strategies, this is simply a matter of buying low and selling high.

But, what if you want the best stocks to invest to buy right now but hold onto forever? The first part is the same. You are looking for stocks that are cheap and likely to go up in price. The second part is that you are not looking for a stock that will have a higher price in a month or two but a stock that will keep appreciating value for ten, twenty, thirty years, or more!

The Real Value of a Stock Investment

Back in the “Roaring Twenties” it was common to “play the stock market.” Stocks were going up and almost no matter which one you bought it was more valuable the next year or even the next month. Then the 1929 stock market crash ushered in the Great Depression and not many folks wanted to “play the stock market” any more. Nevertheless, the market recovered and money investing before the 1929 crash is what is used in the estimate that the market returns 10% per year per year on the average!

It was the in years after that the 1929 crash that a new view of investing appeared. It was an approach that did not dwell first of all on the price of the stock but on the ability of the company to make money and the likelihood that the company would continue to do so for the indefinite future. Intrinsic stock value is based on anticipated earnings. In order to determine if a stock is a good investment today and for years to come an investor needs to understand what the company does to make money and how that business plan will continue to work for years to come. Then the investor determines what that ability to generate income will do to the stock price over years and he or she compares that projected stock price to the current market price.

Best Stocks to Invest In Based on Intrinsic Value

Kiplinger wrote about what they consider to be the 10 best value stocks to buy now. Here is their list.

• Berkshire Hathaway
• Loews (NYC holding company, $2.1 billion stock portfolio plus insurance companies, hotels, a packaging business, and oil businesses)
• Viacom
• J.M. Smucker
• CVS Health
• Macy’s
• Best Buy
• Southwest Airlines
• Dollar Tree
• Lennar

If you are interested in any of these stocks, start by reading the Kiplinger’s article and then do your homework. The point of using intrinsic stock value is a guide is that it helps you determine if a stock is a good long term bet instead of something to buy, hold for a few months and then sell. But, even though a stock with strong intrinsic value is always a good bet long term, these stocks are better when you pick them up at bargain prices. Such was the case when Berkshire Hathaway bought lots of Coca Cola stock at depressed prices in the late 1980s. Today the dividend paid on these shares of stock is close to half the original share price!

Why Is the Stock Price Depressed?

As we noted before, there is a temptation to buy penny stocks because they are affordable. But, why is the stock cheap? Is the price depressed because the company has long term unfixable problems? Are its competitors taking away all of its business? Are its debts so overwhelming that recovery is merely a fantasy? When this is the case, the stock is cheap but not cheap enough! On the other hand, there are stocks that have fallen off the Wall Street “radar.” They have made changes and will soon be reporting fantastic earnings. Once the earnings are reported the stock price will skyrocket. These are absolutely the best stocks to invest in when you find them. But, be careful. Some such stocks are “story” stocks and the story may never materialize. These stocks are being hyped. When the stock price goes up the folks hyping the stock will sell, leaving your investment to plummet. This is called a “pump and dump. Investopedia offers advice about how to avoid getting pulled into a pump and dump scheme.

Investors should be wary about notices that a stock is about to take off – especially when they are unsolicited – no matter how tempting it may be. Consider the source and check for red flags. Many notices come from paid promotors or insiders, who should not be trusted. If an email or newsletter only talks about the hype and doesn’t mention any of the risk, it’s probably a scam. Always do your own research in a stock before making an investment.

This advice takes us back to the beginning. The best stocks to invest in are those that have money-making potential in excess of what the market as a whole currently appreciates. When someone is talking up a storm about a stock, check it out. But, remember something that the famous investor Warren Buffet said. It was that when he and his team look at stocks and their intrinsic stock value, they throw out 95% of the stocks they look at as being “too difficult to call.” And, if you don’t know and cannot be sure, do not buy the stock. There is absolutely nothing wrong with leaving your money in your bank account until you make a decision that you can live with!

Investing in Blue Chip Tech Stocks

The stock market was driven to higher and higher values since the financial crisis largely due to earnings of a handful of tech stocks, Alphabet (Google), Microsoft, Apple, Amazon.com, Facebook, and Netflix. Are stocks from large companies like these the best stocks to invest in? Facebook is having issues of its own and may be left out of this discussion. But, many smart investors do not worry about finding a “needle in the haystack” stock that is underpriced and due to skyrocket. Rather, they are perfectly happy with a stock that pays a nice dividend (which they reinvest) and appreciates nicely in stock price year after year. For this approach to work, you still need to understand how the company makes its money and how they will continue to do so into the indefinite future. But, many believe that the best stocks to invest in are not only ones that provide a nice return on your capital but also allow you to sleep soundly at night.

Boeing

Boeing was founded by William Boeing in 1916 as Pacific Aero Products Co. He changed the name to The Boeing Company two years later. In 1997 Boeing merged with McDonnell Douglas in 1997. Boeing is the largest US exporter by dollar amount. The company ranks number five in the world as a defense contractor. Boeing manufactures and sells airplanes, rockets, satellites, and helicopters of its own design. It also leases products and provides lifetime product support to everything that it sells.

High Cost of Entry Business

Why invest in Boeing? Our first reason is that they are in a high cost of entry business. They deal in state of the art, high technology, and produce very expensive products, which they are able to routinely sell at handsome, profits for years and even decades. The amounts money needed to compete in this arena are huge, the skill sets needed take decades to develop, and the base technologies are closely held.

State of the Art Jets

The most recent major addition to Boeing’s fleet of jets is the 787 Dreamliner. This wide-body, long haul, mid-sized jet is roughly a fifth more fuel-efficient than its predecessors and competitors. Built with composite materials, the plane is lighter and cheaper to operate than other jets of comparable size and range.

Its noise-reducing features are state of the art as are it mostly electrical flight systems. The jet entered testing in 2009 and finished testing in 2011. Boeing spent roughly $32 Billion developing this jet.

Not only did Boeing spend $32 Billion in development, but also it took just over 10 years from concept to a flying and sellable jet. Now the 787 is a mainstay in the commercial aviation market and Boeing is looking to develop the next start-of-the-art commercial jet. The only other company with comparable resources is Airbus.

Missiles and Satellites

Going back to the Minuteman missiles in silos across the wheat fields of North Dakota and grasslands of Montana to the current partnership with Lockheed Martin in the United Launch Alliance, Boeing has been in the rocket business. They still maintain missiles for the US nuclear deterrent and run the United Launch Alliance with Lockheed Martin. They maintained the Space Shuttles when that program was still running. This is again, a high cost of entry business that takes huge amounts of resources, state of the art technological skills, and the capacity to guard what are essentially state secrets forever.

Boeing does this work and does it at a profit as part of its Defense, Space, and Security division. This company is one of the mainstays of US military readiness and able to make a steady profit year in and year out.

Why Invest in Boeing?

As we so often come back to on these pages, long term successful investing depends on the analysis of intrinsic stock value and Boeing has this is spades! The company routinely makes money. This ability starts with the ability to turn new technology into marketable products. But, it is more with Boeing because they have such a wide range of skills and virtually control the commercial jet business along with Airbus. When they have to, they share little and inconsequential parts of their knowledge base to do offshore fabrication to maintain customer bases. Then they do all design, critical manufacturing, and assembly in the USA.

Adding Boeing to Your Portfolio

The Motley Fool writes about 3 Stocks to Build Your Portfolio Around. The first on their list is Boeing.

If you’re looking for one stock to build your portfolio around, one great company you can count on to hold its value over time while paying you a steady dividend, I can’t think of a better place to start than Boeing.

In business for more than a century, Boeing clearly has staying power. This company isn’t going to disappear until someone invents a better way to move quickly over long distances across large bodies of land and water. And while Boeing doesn’t have a monopoly on building planes, it arguably has the next best thing: an oligopoly between it and its rival Airbus, which between them account for roughly 88% of all commercial aircraft revenue.

With $13.6 billion in annual free cash flow to back up its $10.5 billion in reported earnings, you know that Boeing’s earnings are of exceedingly high quality, and more than sufficient to cover the dividend. Boeing’s payout ratio, in fact, is a very low 38%, meaning that only 38% of earnings suffice to pay the entire dividend.

Boeing has been paying dividends for decades and has been steadily increasing their dividend for the last seven years.

Boeing is a major player in commercial aviation and in the defense industry. This allows it to use technologies and skill sets developed in one arena and apply them to another. They are also important to the US economy as the exporter who rivals all of US agriculture in how much money they bring back to the USA. Although Boeing has substantial cash reserves, they do not have a large hoard of cash offshore.

There are certainly companies that have grown faster, but as the folks at The Motley Fool note, until someone invents a new technology for moving people and cargo quickly from one continent to another, Boeing will have customers. And, as higher technical skills make that job more efficient and profitable, Boeing will remain at the head of the line.

another, Boeing will have customers. And, as higher technical skills make that job more efficient and profitable, Boeing will remain at the head of the line.

Also, a person may wish to use only conservative investments to avoid risking their investment capital on more risky investments in hopes of more spectacular gains. What we have put together is not a list of stock tips but rather a consideration of the wide range of choices and their pros and cons.

How to Invest in Stocks

There are successful and famous long term investors in the stock market and there are folks who have made money by skipping in and out of the market for short term profits. Some investors focus on a single investment while most choose to diversify their investment portfolios. Ultra-conservative investors choose ways to invest without losing any money while most investors realize that in order to make a profit over the years you need to tolerate the usual market volatility and accept a reasonable degree of risk. In fact, the trading off of risk versus profit potential is a recurring issue as you consider how to invest in stocks over the years.

Investing in Stocks for Beginners

Take Care of Loose Ends before Investing in Stocks

As you start your stock market investing journey, there are a couple of housekeeping chores to consider. One is that you should not be investing with the grocery or rent money. Thus, a beginning investor needs to simply put enough money in a bank account to cover the bills for the next three months. That way you will not end up taking money out of a promising investment in order to pay routine expenses. The other chore is paying off your credit card debt before starting to put money in the stock market. The interest rate charged on credit card debt is far and above what a beginning investor will make in the market and more than veteran investors expect over time.

How to Invest in Stocks Most Successfully Is to Start Early

Although there are times when a well-chosen stock investment will make a lot of money in a hurry, the vast majority of successful investors are in it for the long haul. They invest in such a way as to gain a high average return on their investment year after year. The important part here is the average return on investment. Many times the market goes into a slump and nobody’s stocks appreciate in value. And then a bull market takes hold and stocks go up a lot. The best investments are the ones that appreciate in value ten percent a year or more on the average.

Exponential Investment Growth

What investors get in the stock market is exponential growth of their investment capital. The S&P 500 is an index of 500 stocks meant to reflect the stock market as a whole. From the time this index started keeping track in 1926 until the present day, it has gone up 10% per year on the average. This is a better return, on the average, than any other investment vehicle available to investors. This rate of return, if delivered every year for seven years, with all appreciation and dividends reinvested, will double your investment during that time frame. Obviously, as the market moves through bull and bear cycles the rate will change but over the long term, the exponential growth of the market as reflected in the S&P 500 is what generates returns and builds wealth. The sooner you start, the more years you have to see your investments grow!
(Investopedia)

How to Invest in Stocks: Active Investing

The wealthiest long term investors pick their own stocks. They also invest in stocks as a full time occupation and when they are very successful they have lots of smart people helping them do research. The individual beginning investor does not start out with the knowledge, experience, and helpers that these folks have. But, the average investor has areas of expertise which the “experts” often do not. If you have insights that will help your investing, use them. And, stick to the areas where you expertise will make a difference.

The legendary manager of the Fidelity’s Magellan Fund, Peter Lynch, made this point. In the 1970’s one of the “in” investments for the wealthy was to buy railroad boxcars and lease them. Thus, many doctors followed this advice. These folks had money to invest but were pressed for time. They also had great insights in regard to pharmaceutical stocks, medical supply companies, and the like.

It turns out that the buy and lease boxcar investment strategy did not work out all that well as the folks who sold the boxcars did not help the good doctors with the leasing. And at the same time, the pharmaceutical giant, Smith Kline & French discovered cimetidine (Tagamet) which is a medicine that revolutionized medical treatment of ulcers, gastritis, and esophagitis, making ulcer surgery a thing of the past. Lynch said that all a physician needed to do was look at what was happening in the field of medicine and invest in Smith, Kline, & French as the stock soared. And, they needed to ignore the losing investments (like leasing railroad boxcars) that they knew nothing about!

The point of this little story is that there is definitely a place for active investing if you have unique insights and experience. Active investing takes work and time. And, it requires that the investor understand both the fundamentals that drive stock prices over the long term and market forces that cause shorter term volatility. Understanding and using important moving averages is a critical skill for active investing.

How to Invest in Stocks: Passive Investing

Letting someone else make investment decisions is the most common route for most beginning investors. In fact, today nearly half of all money investing in the U.S. stock market is directed by investment vehicles that track index funds. Although there are some concerns about too much passive investment being risky, this is still the most conservative and risk-free approach for beginners.

Investing in Mutual Funds

Mutual funds are a commonly used passive investment vehicle. Investopedia defines mutual fund.

A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains and/or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.

The benefit if putting you money in a mutual fund is that someone who very likely knows more about stocks and bonds and spends their life making investments will invest your money for you. However, there are three drawbacks. First of all, these folks charge fees for making the investments. Second, if the fund buys and sells very frequently there are fees and commissions all the time and there are capital gains taxes to be paid on short term earnings. Third, in recent years many mutual funds have not done as well as ETFs (Exchange Traded Funds) that simply track the S&P 500!

Index Fund Investing

Index funds are a popular vehicle for passive investing and are becoming more popular all of the time. There are index funds that track the S&P 500 or the Dow Jones Industrial Average and there are funds that track sectors of the market. For those with insights into certain areas of the economy but not enough time to make individual investments, this can be a good mix of active investment choices but passive day by day investing.

Investment Managers

Wealthy individuals and families often rely on professionals to invest and manage their money. This approach can be useful if the money manager is good at what he or she does. But the expense of paying someone with an exceptional skillset to buy and sell stocks should result in both better return on investment and fewer headaches than other approaches. Certainly, wealthy individuals need to pay attention because it can be all too easy to be bilked such as what happened with the Bernie Madoff Ponzi scheme.

It was great being in Bernie Madoff’s orbit, until it wasn’t. For decades, Madoff was a respected Wall Street financier, generous with employees and beloved by his family. But after his securities firm was exposed a decade ago as the biggest Ponzi scheme in U.S. history, thousands of investors lost their money, in many cases their life savings – $19 billion in principal, all told. Those closest to Madoff suffered in other ways, amid criminal convictions and giant payouts.

(Bloomberg)

A simple answer to avoid a Madoff-type disaster for both the wealthy and for other normal investors is to diversify so that a disaster in one part of your portfolio does not take down rest.

How to Invest in Stocks: Diversify

The point of diversifying your investment portfolio and the stocks within that portfolio is to reduce risk and increase your chances of finding a spectacular investment. Fidelity writes about investment diversification.

Choosing a mix of different kinds of investments and maintaining that mix are among the most important ingredients in your long-term investment success. This means creating an investment mix based on your goals, risk tolerance, financial situation, and timeline; and being diversified both among and within different types of stocks, bonds, and other investments.

The usual advice that investment advisors give is to keep part of your money in stocks and part in bonds. The idea is that there is more room to grow your wealth with stocks and guaranteed preservation of your investment capital with investments like US Treasuries or AAA corporate bonds. Likewise, owning your own home should be part of that mix.

If you are an active investors picking individual stocks, you should diversify with stocks in different business sectors and a mix of growth stocks and value investments. However, if you are a passive investor who simply buys shares of an ETF that tracks the S&P 500 the stock sector of your investment portfolio is already diversified!

One smart way to diversify your stocks is to have a mix of dividend stocks and stocks whose whole value comes from the appreciation of their share price. This approach also works if you want to part of your money to work in socially responsible investing.

How to Invest in Stocks the Tax Deferred Way: IRA and 401k

Taxes become an issue with your stocks when you sell or when you collect dividends. When a long term investor sells a stock that he or she purchased more than a year before, they are liable for long term capital gains taxes on any appreciation. If they sell within a year, they are liable for taxes at the higher short term capital gains rate. Either way, paying taxes when you sell on stock and buy the next reduces how fast you can grow your wealth. And, when you receive a dividend payment you need to pay taxes on that even if you routinely reinvest dividends.

Fortunately, there are vehicles that an investor can use to defer paying taxes on capital gains and reinvested dividends. These are IRAs and 401k plans from work. In each case, money invested in stocks typically remains in the account until you retire at which time any profits are taxed at your current tax rate. And, of course, if you are retired you will be in a lower tax bracket! But, perhaps more importantly, your wealth multiplies more rapidly because the IRS is not taking their share every year and reducing your rate of appreciation!

Every investor should take advantage of every tax-deferred way investment vehicle that they can.

How to Invest in Stocks by Yourself

There are investors who want to manage their own money, pick their own stocks, and not rely on or pay someone else to do the work. Choosing stocks to own and to hold is not an impossible task but it does require that the investor learn how to assess intrinsic stock value. This is the “real value” of the stock based on the projected ability of the company to make money and to continue to do so for many years to come. Whether an investor works from a stock “tip” or decides on a stock for some other reason, it is important to know what the company does to make money and how their business plan is likely to remain viable for years to come. And, it is important to use the intrinsic value calculation to come up with a reasonable valuation of the stock based on fundamentals as opposed to its market value.

Successful long term investors will often evaluate many stocks before choosing one with good earnings potential for years to come and a current market price that is less than the price based on intrinsic value assessment. However, when an investor finds such a stock, it can typically be held in their portfolio for years if not decades as it steadily appreciates in value and pays dividends (hopefully reinvested). An excellent choice for average investors in this era is the FAANG group of stocks. What does FAANG mean? These are the leading tech stocks, Facebook, Amazon, Apple, Netflix, and Google.

Invest in Stocks Early and Routinely: Dollar Cost Averaging

The “secret” to successful long term investing in stocks is to start early and let exponential growth take care of creating wealth. Picking good stocks and paying attention are important as not all stocks that have been strong for years remain strong forever. So, re-balancing a stock portfolio from time to time is advisable. But, many investors worry about waiting for the right time to invest. A simple and advisable way to avoid this worry is called dollar cost averaging.

DOLLAR-COST AVERAGING is a disciplined way for investors to build wealth in their portfolio over time while helping them avoid emotional-driven decisions.

Many people mistakenly believe that they need thousands of dollars to start investing for their retirement, causing them to be risk-adverse in opening a traditional investment retirement account or Roth IRA. But nearly anyone can get started with the strategy. For instance, this style of investing can help novice investors who have recently opened a retirement portfolio, and don’t have a large sum of money for an initial investment.

With dollar cost averaging an investor invests a set amount each month, such as $100. When stocks are expensive, they are not overspending on their investing and when stocks are cheap they are buying at bargain prices and getting more for their money. Perhaps more importantly, with dollar cost averaging an investor sets up a system by which they invest routinely for years and years. That is really how to invest in stocks to grow wealth.
(U.S. News & World Report)

How Do You Choose Which Assets Classes to Invest In: Stocks

Stocks have two basic things going for them. Over the years the US stock market has outperformed real estate, bonds, and money in the bank. And, the stock market offers liquidity that real estate investments lack. You can buy a stock one day and sell it the next. Try doing that with a piece of real estate! So, why shouldn’t you put all of your investment capital in stocks? If you remember the 2008 stock market crash, the dot com crash, or the various other market crashes going back in time you can see that there can be risk in investing in stocks. There are ways to deal with that risk such as by choosing a range of stocks instead of just one or two and learning to assess intrinsic stock value as a guide to profitable investing.

How Do You Choose Which Assets Classes to Invest In: Bonds

We discussed treasury and corporate bonds in our article entitled how to invest without losing any money.

US Treasury bills have maturities of a year or less. US Treasury notes have maturities from two to ten years. And, US Treasury bonds have maturities of ten to 30 years. Each of these investment vehicles is backed by the “full faith and credit” of the US government. The risk of loss of any of these if held to maturity is nil.

How to invest without losing any money in US Treasuries is to hold them to maturity or only sell them at a profit.

The same approach applies to AAA corporate bonds issued by Johnson & Johnson or Microsoft. These asset classes do not outperform the S & P 500 over the years but they do outperform a lot of individual stocks. If want you want is to keep your money safe, not lose any, and make a decent rate of interest along the way, bonds as an asset class are a good addition to any investment portfolio.

How Do You Choose Which Assets Classes to Invest In: Cash and Short Term Investment Vehicles

If you believe you will need your money fairly soon, you do not want to tie it up in stocks, long term bonds, or real estate. Any of these asset classes may go into a slump and that would mean that you lose money when you take your cash. A good way to get a little interest on your money is to create a ladder of short term bonds or even CD’s at your bank. You will always have cash available when needed. This asset class does not outperform any of the others but it is the most flexible. There are a lot of smart investors who hold cash when they do not trust which way interest rates, the stock market, or real estate prices are going.

How Do You Choose Which Assets Classes to Invest In: Real Estate

Your own home is the real estate investment that you need to make first and foremost. Long term real estate investment is a skill that needs to be developed over the years and hopefully not by losing money along the way. If you want to take advantage of profits from real estate and not sink all of your money into a piece of property, consider REITs which are real estate investment trusts. These are investments you can get  into for a reasonable amount of money and get a good return. And, you do not need to manage the property yourself!

How Do You Choose Which Assets Classes to Invest In: Gold

Gold bugs think that sooner or later all paper currencies will be worthless. Thus, the only way to retain any value for the future is to hold precious metals. The problem with gold is that it does not pay a rate of interest and its price goes up and down. If you want to have a little gold as a reserve, just in case, there are to viable approaches. One is to simply wait for the price of gold to plummet and then buy. The other is to use cost averaging. Buy the same dollar amount of gold every month or so. Gold is a valid hedge against catastrophic economic and social events but the S & P 500 has been a better choice over the years.

How Do You Choose Which Assets Classes to Invest In? PPT

Learning how to invest successfully can pay dividends for a lifetime. In learning how to invest an individual will learn about types of investments and how to approach them. Just as importantly learning how to invest well teaches a brand of discipline that leads to benefits in all parts of life. The investor will always ask himself “what is a good investment,” “what are safe investments,” and “what is the best investment for my money?”

In choosing the best investment for his money a beginning investor needs to think of having a stable platform from which to invest. Simply speaking this means paying off credit card debt and having sufficient cash reserves for mortgage payments, food, utilities, and other needs sufficient for several months. Then the beginning investor needs to develop sufficient amount of cash for investing and start looking for investments. In this regard how to start investing in the stock market may be to put $50 into a mutual fund every month or it may mean picking new winners in the stock market through research and observation of the stock market.

Stock investors and traders achieve financial independence by learning both fundamental and technical analysis of stocks. Technical analysis helps investors buy low and sell high as market sentiment move prices higher and lower. Fundamental analysis helps investors spot the intrinsic value of a stock.

Intrinsic stock value is its fundamental value. It is obtained by adding up predicted future income of a stock and subtracting current price. It can also be seen as actual value of an equity versus its book value or market value. The concept of fundamental analysis of equities evolved from this concept. Using fundamental analysis the intrinsic value of a stock is the expected company cash flow discounted to current dollars. It is a discounted cash flow valuation.

How to achieve financial independence by investing in the stock market requires that you select the right stocks, ones that are underpriced compared to their ability to generate long term cash flow. This is the point of the intrinsic stock value calculation.

Buy and Hold versus Timing the Market

The most spectacular gains in stocks come from predicting that a stock like Microsoft will increase in value by more than a hundred-fold and then predicting that that same stock will take a hit during the dot com market crash and level off to be a solid dividend stock. But this requires market timing which can be tricky. Successful investors like Warren Buffet only invest in stocks that they understand. Buffet has said that he avoids high tech stocks because he does not know what they will be worth in a year. By comparison he has a good idea what a snickers bar will sell for or how much money a railroad will make hauling freight. The most successful investor in the world sticks with stocks that he understands and has long ago achieved financial independence. This can be your plan for financial independence too.

How to Achieve Financial Independence PPT

Analysis of Fast Moving Markets

In a fast moving market technical analysis supersedes fundamental analysis as a source of useful stock investment information. Everyone knows the same fundamentals and is buying stock or selling stock based upon their own interpretation of the fundamentals. The most useful stock investment information for many can be found in Candlestick pattern formations as Candlestick patterns can tell investors or traders where a stock price is likely to go next. Spotting a market reversal or predicting the continuation of market trends with Candlestick analysis can be the most profitable way to interpret and take advantage of useful stock investment information.

Standard References

Good sources of useful stock investment information include business news sources such as Bloomberg, the Financial Times, CNN, Reuters, the New York Time, the Wall Street Journal, and Forbes. To the extent that the investor can harvest absolutely fresh news from one of these sites or print media he may be able to sell stock at the top of an earnings cycle before the rest of the market responds. However, doing so typically requires that the investor has done a considerable amount of fundamental analysis first. Stock investment information is only useful stock investment information when the investor is able to accurately and promptly interpret it in order to buy stock or sell stock in a timely fashion. More commonly the investor will use these sources as background information. This is then the useful stock investment information that he will already have in his head when a piece of news breaks.

Useful Comparisons

Compare stock earnings to stock price. Check its price to sales ratio. Information as to its margin of safety or its intrinsic stock value are useful stock investment information. These are, however, fundamentals which everyone knows or can know with a little effort. Once an investor knows how a stock is trading in relation to its intrinsic value, margin of safety and current earnings he will want to look at how it is doing in technical analysis. With Candlestick charting techniques the investor can commonly anticipate market movement. If a stock has already been bid up due to its good fundamentals he will know that perhaps it is not the time to buy. Using the useful stock investment information in annual and quarterly reports, in news releases, or from stock price analysis using Candlestick charts the investor will not always buy or sell stock but when he do he will commonly do so more profitably.

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When Gold Was the Standard and then Not

A gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. In essence, when a country had the gold standard as its monetary system it promised to redeem currency with gold coins. In the USA a twenty dollar gold piece contained an ounce of gold. Thus gold was pegged at $20 an ounce. When the Great Depression hit, President Roosevelt decreed that all gold coins be turned in at the standard rate and exchanged for non-gold currency. Americans were forbidden from owning gold. This was the case for forty years. Then, as inflation took its toll President Nixon took the USA off the gold standard in 1971 when the standard was $30 an ounce. President Ford signed a law allowing Americans to own gold bullion and coins in 1974 as gold climbed against the dollar to nearly $860 an ounce by January of 1980. It subsequently crashed and settled in the $300 range from where it eventually fell to around $200 an ounce until the beginning of this century. When considering current gold prices remember the history of gold prices over the last forty years. This is the start of sound fundamental analysis of gold as an investment.

Comparisons to Buying and Holding Gold

Gold is great when it is going up and not so great when it is going down. Gold does not sent you a quarterly check like dividend stocks. The sole rationale for buying and holding gold is that one does not trust the economy or the government to maintain a stable economy. One believes that war is imminent and therefore buys gold to hoard. When the US dollar weakens and interest rates are low gold is popular. When inflation is rampant like in the 1970s gold goes up in price and everyone buys. When the economy stabilizes gold goes down and stays there for a decade or two, or longer. If you purchased gold in 1980 and held it for twenty years you would have received no dividends on your investment and the value of your investment would have fallen by half in the first year. If you purchased gold in 2000 and held until early 2011 you could have sold for a profit of $1,600 an ounce. And if you bought instead of sold at the high point in 2011 you would have lost nearly $700 an ounce by today at current gold prices. It is best to beware and to pick and choose carefully when deciding to buy or sell at current gold prices.

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In an improving economy many companies may seem to have a new lease on life. However, the same fundamental analysis that guides all long term investment should apply when investing in turnarounds. If the company is showing a profit it is important to understand where that profit is coming from. Is the company increasing its cash reserves? If it once paid dividends is it paying dividends again? A company that increases cash flow by selling assets may be trimming down and getting rid of obsolete aspects of its business. However, the investor should not be fooled into thinking that this sort of cash flow represents a turnaround. The company needs to be improving products, widening markets, and profiting from sales.

Big companies like General Motors, historically, are dividend stocks, as well as value opportunities. If GM continues its recovery investors should expect to see quarterly dividends resume. They should also expect to see the company’s products start to reclaim market share from competitors. In the case of GM this means Toyota, Ford, and to a lesser degree other automakers. Of course, once this is accomplished, the company in question will have a stock price commensurate with its success. The basic idea of investing in turnarounds is to invest before the turnaround drives the company’s stock price up. A useful clue as to what others with a vested interest think of the turnaround is if the turnaround company can get credit. In the case of GM it secured early on a $5 billion line of credit to assure constant cash flow. And it started making money fairly quickly once it was out of bankruptcy. Considering how tight banks had become in offering credit early in the recession this was a vote of confidence.

Investing in turnarounds is like investing in growing companies. The investor will want to asset how much market penetration the company will be able to accomplish and to what degree it will be able to profitably price its products. In the case of a large company accomplishing a turnaround there will always be a limit to how far it can recover and grow.

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What is UNH?

Paraphrased from Google Finance this is a description of UNH:

UnitedHealth Group Incorporated (UnitedHealth Group) is a diversified health and well-being company. The Company operates in four segments: UnitedHealthcare, which includes UnitedHealthcare Employer & Individual, UnitedHealthcare Medicare & Retirement and UnitedHealthcare Community & State; UnitedHealthcare Community & State; OptumHealth; OptumInsight, and OptumRx. The Company operates these businesses across eight markets: integrated care delivery, care management, consumer engagement and support, distribution of benefits and services, health financial services, operational services and support, health care information technology and pharmacy.

United Health Group started out as a physician based health maintenance organization (HMO) in Minneapolis. It has morphed bit by bit into a major player in the health insurance market. The company saw the opportunity for profit in the HMO business but operated in Minnesota where it is illegal for an HMO to be a for profit enterprise. The company broke up into a health treatment arm and a management arm. The management arm is now a national entity and provides information and management services to many other health insurers and HMO’s.

UNH Stock Response to Obama Care Problems

It is a major player in helping insurers decide how to set up their plans and payment options under Obama Care and has spent a significant amount of money setting up computer systems to track care and payments. If Obama Care gets scrapped as most the Republican Party and many voters wish UNH will have wasted a lot of money on nothing. It will have to rewrite many of its own plans and will have to generate information to help its own clients readjust to a post Obama Care world. Or if the system is merely modified UNH will have to readjust as needed.

UNH Stock

In the last 15 years UNH grew from a $4.50 stock to a $75 stock with three two for one splits along the way. The stock reached $60 in 2005 but fell to the $20 range with the 2008 market crash. It has since grown steadily back to its $70 + niche. When the Obama Care rollout proved to be faulty the stock fell below $70 but has since recovered to nearly $72. From the viewpoint of value based stock investing this company is well established in each of it niches which gives it a good margin of safety and as it profits from both increased dollars spent on health care and savings on health care it has good intrinsic value. However, in the short term the UNH stock response to Obama Care problems could be bumpy with repeated drops. If one believes that the company will prosper long term it might be wise to profit from a stock selloff by purchasing the stock on each retreat.

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