Wednesday, June 4th, 2008
We have all heard people harp on having a financial plan and investing for the future, but what does that mean? What happens when you develop your asset allocation, purchase your Dividend Growth Stocks and Dividend ETF’s and have saved for an emergency fund with a high interest online account like ING Direct?
We have also heard all of the “talking heads” on television talk about diversification. They are more than likely talking about diversifying within the stock market. Diversifying between stocks, sectors, and industries as well as between fixed income investments like bonds and equity investments like stocks. This is usually good advice, but what about other types of investments? Where do they fit in the picture and how can they help you to further grow and protect your wealth?
What Happens Next?
At Blueprint for Financial Prosperity, they ask what is next in your financial plan after you have successfully accomplished the following:
- Paid down all your debt until all you owe on is your mortgage.
- Maintain six months of expenses for your emergency fund in a high yield money market account.
- Fully fund your and/or your spouses 401k, 403b, 457, etc.
- Maximize your and/or your spouses Roth or Traditional IRA up to the allowable limit.
- Invest some money each month in a 529 plan (and possibly even a Coverdell “Education†IRA) for each of your children’s future educations.
- Set aside some additional money each month and at bonus time into a taxable brokerage account for such goals as that long-awaited trip to the Orient, the sunny vacation property on the water, or even retirement.
- All your investments are properly diversified by asset type according to your goals, time frame, and risk level.
The article goes on to mention investments in tangible assets such as gold coins or a stash of gasoline, although the latter is difficult to manage.
Diversify Away From The Stock Market!
I would suggest that diversification away from the stock market take into account a variety of tangible assets such as precious metals, raw land (vacation property is preferred), Real Estate, and valuable collectibles or antiques.
You should be aware that these tangible assets typically have narrow markets and can be very illiquid. However, they can be very valuable in times when the stock markets are out of favor and should comprise a small piece of one’s overall investment portfolio.
It is essential that you do your due diligence with every form of investment. Purchasing these tangible assets can be tricky if you are not well versed in the particular niche market. That said, thorough research could yield tremendous value so get out there and test the waters!
I have little in the way of antiques and coins, but I have had some success with Real Estate and I do own some semi-valuable sporting collectibles.
I am a strong believer in diversifying away from the stock market and I prefer rental Real Estate because I am adamant that cash flow is the engine that drives wealth. Real Estate is the only avenue where the average person can utilize the power of a mortgage as financial leverage to compound their wealth.
Posted in Investment News | 6 Comments »
Tuesday, June 3rd, 2008
Time and time again I hear the same thing from friends and family about investing the way that I do. Most of them ask me why I invest in “boring” dividend paying stocks when all of the money to be made is in the high growth stocks.
To be completely honest, they are right…sort of.
Some people do find the less volatile dividend paying stocks boring, I find them exhilarating! As you may have noticed, I’m a huge fan of cash flow. Cash flow is the ticket to play the game of life and dividend growth stocks will eventually allow me to play the game on my own terms!
Yes, it is a long road and the process can be uneventful at times. And no, I’m not going to get rich overnight. However, I also won’t go broke overnight and I am compounding my future cash flow with every dividend payment that is reinvested.
Yes, there is money to be made in growth stocks. There are actually a lot of people making a lot of money in high growth stocks. However, that just isn’t my style and I’m not ashamed to admit it.
I like to have cash flow back to me so that I can make the decision whether or not to re-invest it into the company. I also like the fact that I don’t have to watch the market every day to see if my “high-growth” stock has tanked and left me with nothing!
I have nothing against traders and I actually learn a lot of useful techniques from very good stock traders. However, I have recognized that over the past 14 years an investment in the S&P 500 would have you receiving all of your original investment back just in dividends.
So I guess one could say that dividend stocks are boring, but I’ll give you one more thought to ponder before I get off of my dividend paying soap box!
Take a boring old dividend paying stock — or at least one that seems that way — paying 5% in dividends yearly and racking up a conservative 5% in capital appreciation. Begin with $1,000 and reinvest those dividends. After 30 boring years, you’ll possess a staggering $18,700! (Let’s multiply that number by 10X for a more realistic example)
$187,000 How boring is that?
Posted in Investment News | 4 Comments »
Wednesday, May 28th, 2008
It seems like there is a never ending stream of “get rich” books and can’t miss investing courses out there and to be honest, some of them might actually work.
I’m not sure about you, but I have always believed that in order to actually profit from a strategy, you have to feel comfortable with it. I know there are stock traders out there that make a lot of money moving in and out of stocks, but that was never really my style. I have learned a lot about stock charts and technical analysis from some of these traders and have applied some of their techniques to my own investing. But that’s just it, you have to develop a style that is right for you.
Developing Your Investing Style
I have always believed that no matter what your thoughts are about a particular investing strategy, it is never a bad idea to learn about it. Most publicized techniques combine several data points and have been successful at one time or another. I personally like to learn about various techniques and utilize certain pieces that I feel may help me to make better decisions when buying stocks.
I have combined information from techniques that focus on value investing, momentum investing, swing trading, yield chasing, and growth investing to assist me in purchasing stocks and ETF’s for my portfolio.
Use Investing Elements That Make Sense To You
While understanding all there is to know about an investing strategy from reading a book or two is usually out of the question for me, I can always find a nugget of information that makes complete sense and add it to my stock screening routine.
For instance, reading How To Make Money In Stocks by William O’Neil is about trend trading and momentum trading. However, I have used some of the techniques in that book to understand the relationship between price and volume. I have used this information to develop my own strategies on when to buy stocks that are on my watch list. I have found that O’Neil’s strategies work especially well in up-trending markets where traditional value investing leaves us with few stocks trading at a deep discount.
Combining Data Points For Increased Accuracy
In statistical theory, the more pieces of information (points of reference) that you have on a particular item, the more accurate your results should be. The same holds true with investing in stocks – unless you hold out for more and more points of reference and never pull the trigger on a buy.
The general idea is to combine several different points of reference when analyzing a stock in order to minimize your risk. Use those investment strategies that make sense to you and look for common results from different points of reference. For example: if the chart is showing significant volume buying (showing institutional investors buying large amounts of stock) and both the earnings per share and revenue are growing rapidly, there is a good chance that this stock is going to trend higher.
Your Personality Can Make You Money
If you are a laid back and patient person, you can make money investing.
If you are hyperactive and bordering on attention deficit disorder, you can make money investing.
The key to making any investment strategy work for you is to understand your personality. I personally do not have the motivation (or the patience) to follow stock tickers on a daily basis, let alone minute by minute, as some day traders do. And guess what – that’s okay! I still make money in the stock market and so can you.
If you dread the fact of holding stocks over long periods of time and seeing a stock in your portfolio over a week or even overnight scares you to death – that’s okay! You can still make money in the stock market.
If we can understand ourselves, we then have the ability to tailor an investing program that fits our differing lifestyles and personalities.
In Summary
- Understand if your personality and risk tolerance are more appropriate for long-term investing or shorter term trading.
- Use only investing strategies that make sense to you. (If you don’t really understand them, then you’re not going to make money)
- Develop many points of reference and pieces of data to ensure you feel comfortable with your investment decision
- Combine the strategies that you understand into your own system.
Once you have a profitable system that you feel comfortable with, continue to review strategies that may allow you to add another point of reference to your toolbox. However, I always abide by the rule “if it’s not broke, don’t fix it!”
I hope this helps you in developing your own investment strategy and I’d love to hear how you have developed your current investing process. Feel free to contact me or drop a comment below!
-Tyler
Posted in Investor Education | 5 Comments »
Wednesday, April 16th, 2008
I always enjoy seeing dividend investing articles in the news, especially when the article offers a buying opportunity for dividend investors.
A previous Yahoo Finance article, featuring Dividend ETF DVY, is an example of just that.
I own shares of DVY for my Roth IRA and I’m not overly worried about the share price lagging the broader market, as the article references.
I am re-investing the dividends from DVY and I am glad to be able to buy more shares with my dividend payouts during my accumulation phase (The time between now and when I begin to need the funds for income).
At some point, investors will be seeking more income producing stocks and we will be there to cash in as the demand for dividend stocks and therefore the Dividend ETF’s rises. I have previously written about my thoughts on why we should buy dividend stocks now.
I believe that it will be in the not too distant future when the baby boomer generation will be seeking to add dividend growth stocks to their portfolio in order to hedge their retirement funds against inflation. This generation is living longer than expected and cannot survive on just bonds that offer no chance for capital growth or inflation hedged income.
So, when you see articles that mention lagging dividend stocks or dividend ETF’s let that be a buy signal and not a signal to jump ship and chase performance. I’ve tried chasing performance and it seems that when I did, I was always late for the party.
Buy stocks and ETFs that increase their dividends and start your own party!
Posted in Investment News | No Comments »
Wednesday, April 9th, 2008
As investors, we can spend a lot of time managing various risks within our portfolio.
There is inflation risk, political risk, systematic and non-systematic risk the list goes on. However, the average investor may not pay a lot of attention to the effects of currency risk.
Currency Risk Example
If you are a U.S. investor and you have stocks in Canada, the return that you will realize is affected by both the change in the price of the stocks and the change of the Canadian dollar against the U.S. dollar. Suppose that you realized a return in the stocks of 15% but if the Canadian dollar depreciated 15% against the U.S. dollar, you would realize no gain.
The Kicker
In most cases, bearing more risk gives the investor and opportunity for a higher return. However, this is not the case with currency risk. Actually, several academic studies (without 100% certainty mind you) have determined that a portfolio with no hedge against currency is at no particular advantage to gain superior returns than the same portfolio for which currency risk is hedged.
What does this mean?
Essentially, this means that if you are carrying currency risk, meaning your portfolio is not hedged against currency fluctuations, you are carrying a needless risk.
As you can see, currency risk can have a dramatic effect on your portfolio’s “real return”. It is for that reason that you should not only pay attention to the stock markets, but also take a glimpse at the currency markets from time to time.
How Currency Risk Affects Your Retirement Plan
Yes, currency risk does have a place in retirement planning. For example, if you are a Canadian who is nearing retirement and you have a steady (and growing) stream of dividends coming in from Canadian companies you are set. Or are you? If you are like many retired Canadians, you will travel during your retirement to different countries. Currency risk may not affect the casual traveler too much during retirement if most of their expenses are in Canadian dollars.
On the other hand, many retired Canadians travel for extended periods of time, particuarly in the southern United States. Therefore, they bear a lot of expenses that are in United States Dollars. In this case it would be prudent to hold some investments in high quality, dividend growth stocks that pay their dividends in United States Currency.
If your retirement plan is one in which you expect to travel extensively and/or have many expenses in another currency, you might want to remember this little article. It just might save you some headaches in the future.
Here’s to retirement!
Posted in Investor Education | 3 Comments »
Saturday, April 5th, 2008
Here is why you must start buying dividend paying stocks now!
It has long been a strategy of mine to invest in high quality Dividend Growth Stocks as a for retirement and I’m about to show you why you should do the same!
The beauty about this strategy is that it is not rocket science and that everyone can understand the basic principles behind it. I’m not promoting trickery or complex technical mumbo jumbo, just good old fashioned common sense with a side of logic.
The Stock Market Crash Scare Tactic
I’m sure that we have all heard that the baby boomer generation is aging and entering into retirement. We have also been told that all of these individuals are going to make a mass exit out of the stock market, causing the greatest stock market crash that we have ever known.
Some so called “Gurus” have suggested that the aging demographic is going to cause havoc with the markets by selling all of their stocks to fund their retirement.
Is This Possible?
In theory, the outlined scenario could be possible if all of the baby boomer’s withdrew their money from the stock market at the same time. But, as we know, the boomer generation lasts for a couple of decades…they were not all born in the same year! And even if they were, not everyone can or will remove their equity from the markets at the same time.
Therefore, we can clearly see that this scenario is highly unlikely.
But Aren’t All of The Baby Boomers Going to Buy Bonds?
While conventional wisdom dictates that fixed income (bonds) should comprise a larger portion of ones portfolio as they near retirement, it might not be as simple as black and white these days.
For instance, as time goes by the life expectancy of retirees becomes longer and longer. This means that a retiree will need to make their nest egg last for several more years than they my have previously thought.
Therefore, the retiree will need to take on additional risk in order receive higher returns in order to ensure that they do not deplete their principal prior to death. Taking on more risk means investing in more equities (stocks) gaining capital growth in their portfolio to fund a longer retirement.
So Why Should I Buy Dividend Paying Stocks?
The reason we must invest in dividend paying stocks now is because they will be the investment of choice to fund the retirement of Baby Boomers.
You see, dividend paying stocks have the potential for both capital gain and income production. Not only that, these investors will be looking for stocks that have a track record of increasing dividends…giving them yet another hedge against inflation. This combination, as explained earlier, will be necessary to fund the lengthening retirement that comes with a greater life expectancy.
If we combine this factor with today’s low interest rate environment, we can see that fixed income instruments (with the exception of TIPS) such as bonds and CD’s provide little, if any, protection against inflation.
Factor that in with the fact that historically, dividend paying stocks have outperformed non-dividend paying stocks.
So what do I do now?
In order to provide potential capital growth, income, and protection against the erosion of purchasing power, we must buy the best dividend growth stocks and hold them for a very long time. Read How To Choose Dividend Growth Stocks.
Even if you are young, the generation of retirees that are looking for this 3-part combination of shareholder yield to fund their retirement will start to accumulate shares in high quality, dividend growing, blue chip companies in order to fund a long retirement and help to hedge against inflation.
The accumulation of these stocks will, of course, drive up the share price which means big profits for you!
The Closing
You see, it doesn’t take rocket science to see what is going on. I’m certainly not leading the charge with this idea.
Get out there and search for some great companies that grow their dividends year after year. You won’t get rich overnight, but the strategy works.
Remember to always do your due diligence and as Charles Kirk reminded me, don’t buy a stock just for the dividend!
Posted in Stock Studies | 16 Comments »
Thursday, November 29th, 2007
I’m sure that from time to time we have all fallen victim to the lure of wealth and riches. After all, we are all devoted to investing and developing wealth through the ownership of stocks and other assets.
However, once in a while there are times when we find ourselves so caught up in the market and the performance of our portfolio, that we feel completely stressed. I suppose that some would say this is simply the “nature of the beast”. If you want to have a fantastic life and become wealthy, then you have to pay the price.
What Exactly Is that Price?
- Must we pay with sleepless nights worrying about which way the market futures are pointed?
- Should we be spending hours examining the relationship between the price of oil and various world currencies?
- Is it healthy to spend our weekends devouring every newspaper article, blog post, podcast, iTune, Powerpoint presentation, instructional video, stock chart and Egyptian Pyramid Hieroglyphic to squeeze an extra percentage point out of our portfolio?
My answers to these questions came from my dog!
Yes, an 11 pound Shit-Zu/Poodle named Ralphie provided me the answer these most intriguing questions without even saying a word.
As I was pondering these thoughts, I noticed that Ralphie had picked up one of his toys and wanted to play fetch. Interestingly enough, this toy was the first one that I bought for him (3 years ago). For some reason he always likes to play with the that toy.
Anyway, I played with him for a little while and then he decided that he had played enough to earn a treat. I agreed, so I went and got him a crusty milk bone from the bulk bag that I purchased so long ago that I can’t even remember. After I made him lay down, roll over, play dead and dance I finally gave him the treat. And, per usual, he was just as happy with that treat as the first one that I gave him from that 20lb bag months ago.
After devouring his milk bone, Ralphie decided it was time to curl up and sit down next to me on the couch. He was content to just fall asleep there as he has countless other times over the past few years. Ralphie was happy.
What Does This Have To Do With Personal Finance?
Ahhh…I’m glad you asked. I was just getting to that!
You see, our society puts so much stock in tangible goods and keeping up with the Jonses that we often forget how to be happy. It’s true; as our lives move along we become more and more stressed and worried about how we are going to become rich and famous so that we can buy all this “stuff” and we seriously forget how to be happy.
Why can’t we be like Ralphie and be ecstatic about playing fetch with our first toy(driving that old car you have) or eating that favorite meal that you’ve cooked a thousand times instead of going out for dinner (You know you like it or you wouldn’t make it) or falling asleep on that old couch like you did back in college?
Why can’t all of those things be good enough? My dog is happy 24-7 and he sleeps like a log! He is content with his life, he has the necessities and he enjoys the simple things.
Yes, it is nice to have goals and dreams of wealth and riches but is it worth the cost of enjoying the things that you already have?
This article is about taking time to stop and smell the roses, but more importantly to learn to recognize the roses that are already in your garden!
I encourage you to all take some time to be more like Ralphie (No, I won’t scratch your belly). Schedule some ‘time out’ this weekend to enjoy the fruits of your labor and take a break from the quest for more stuff!
Posted in Investment News | 9 Comments »
