Tag Archives: economics

Are Stocks Currently Overvalued, Undervalued, or Fairly Valued? Answer: Yes.

10 Tuesday May 2016

Posted by in academia, academics, asset allocation, Average Returns, business, CAPE, CAPE P/E Ratio, Consumer Finance, Cyclically Adjusted Price Earnings Ratio, Education, finance, finance theory, financial advice, financial goals, financial markets, Financial Media, Financial News, financial planning, financial services industry, Forward P/E Ratio, Individual Investing, individual investors, interest rates, investing, investing advice, investing information, investing tips, investment advice, investments, Nobel Prize, Nobel Prize in Economics, P/E Ratio, passive investing, personal finance, portfolio, risk, Robert Shiller, Schiller, Shiller P/E Ratio, statistics, stock market, Stock Market Returns, Stock Market Valuation, stock prices, stocks, Valuation, volatility

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Confusing and frustrating as it may be, the answer about the current valuation of stocks will always be different depending on who you ask. Various economists, mutual fund portfolio managers, research analysts, financial news print and TV personalities, and other parties seem to disagree on this very important question.  Financial professionals will offer a wide range of financial and economic statistics in support of these opinions on the current valuation of stocks.  One of the most often cited statistics in support of a person’s opinion is the P/E ratio of the stock market at any given point in time.   Many financial professionals use it as one of the easiest numbers to be able to formulate a viewpoint on stock valuation.  However, when it comes to any statistic, one must always be skeptical in terms of both the way the number is calculated and its predictive value.  Any time one number is used to describe the financial markets one must always be leery.  A closer examination of the P/E ratio is necessary to show why its usage alone is a poor way to make a judgement in regard to the proper valuation of stocks.

The P/E ratio is short for Price/Earnings ratio. The value is calculated by taking the current stock price divided by the annual earnings of the company.  When it is applied to an entire stock market index like the S&P 500 index, the value is calculated by taking the current value of the index divided by the sum of the annual earnings of the 500 companies included in the index.  One of the very important things to be aware of is that the denominator of the equation may actually be different depending on who is using the P/E ratio.  Some people will refer to the P/E ratio in terms of the last reported annual earnings for the company (index).  Other people will refer to the P/E ratio in terms of the expected earnings for the company (index) over the next year.  In this particular case, the P/E ratio is referred to as the Forward P/E ratio.  Both ratios have a purpose.  The traditional P/E ratio measures the reported accounting earnings of the firm (index).  It is a known value.  The Forward P/E ratio measures the profits that the firm (index) will create in the future.  However, the future profits are only a forecast.  Many analysts prefer to use the Forward P/E ratio because the value of any firm (or index of companies) is determined by its future ability to generate profits for its owners.  The historical earnings are of lesser significance.

The P/E ratio is essentially a measure of how much investors value $1 worth of earnings and what they are willing to pay for it. For example, a firm might have a P/E ratio of 10, 20, 45, or even 100.  In the case of a firm that is losing money, the P/E ratio does not apply.  In general, investors are willing to pay more per each $1 in earnings if the company has the potential to grow a great deal in the future.  Examples of this would be companies like Amazon (Ticker Symbol:  AMZN) or Netflix (Ticker Symbol:  NFLX) that have P/E ratios well over 100.  Some companies are further along in their life cycle and offer less growth opportunities and tend to have lower P/E ratios.  Examples of this would be General Motors or IBM that have P/E ratios in the single digits or low teens, respectively.  Investors tend to pay more for companies that offer the promise of future growth than for companies that are in mature or declining industries.

When it comes to the entire stock market, the P/E ratio applied to a stock market index (such as the S&P 500 index) measures how much investors are willing to pay for the earnings of all the companies in that particular index. For purposes of discussion and illustration, I will refer to the S&P 500 index while discussing the P/E ratio.  The average P/E ratio for the S&P 500 index over the last 40 years (1966-2015) was 18.77.  When delivering an opinion on the valuation of the S&P 500 index, many financial professionals will cite this number and state that stocks are overvalued (undervalued) if the current P/E ratio of the S&P 500 index is above (below) that historical average.  If the current P/E ratio of the S&P 500 index is roughly in line with that historical average, the term fairly valued will usually be used in relation to stocks.  The rationale is that stocks are only worth what their earnings/profits are over time.  There is evidence that the stock market can become far too highly priced (as in March 2000 or December 2007) or far too lowly priced (as in 1982) based upon the P/E ratio observed at that time.  Unfortunately, the relative correlation between looking at the difference between the current P/E ratio of the stock market and the historical P/E ratio does not work perfectly.  In fact, it is only under very extreme circumstances and with perfect hindsight that investors can see that stocks were overvalued or undervalued in relation to the P/E ratio at that time.

Here are the historical P/E ratios for the S&P 500 index from 1966-2015 as measured by the P/E ratio at the end of the year. Additionally, the annual return of the S&P index for that year is also shown.

Year P/E Ratio Annual Return
2015 22.17 1.30%
2014 20.02 13.81%
2013 18.15 32.43%
2012 17.03 15.88%
2011 14.87 2.07%
2010 16.30 14.87%
2009 20.70 27.11%
2008 70.91 -37.22%
2007 21.46 5.46%
2006 17.36 15.74%
2005 18.07 4.79%
2004 19.99 10.82%
2003 22.73 28.72%
2002 31.43 -22.27%
2001 46.17 -11.98%
2000 27.55 -9.11%
1999 29.04 21.11%
1998 32.92 28.73%
1997 24.29 33.67%
1996 19.53 23.06%
1995 18.08 38.02%
1994 14.89 1.19%
1993 21.34 10.17%
1992 22.50 7.60%
1991 25.93 30.95%
1990 15.35 -3.42%
1989 15.13 32.00%
1988 11.82 16.64%
1987 14.03 5.69%
1986 18.01 19.06%
1985 14.28 32.24%
1984 10.36 5.96%
1983 11.52 23.13%
1982 11.48 21.22%
1981 7.73 -5.33%
1980 9.02 32.76%
1979 7.39 18.69%
1978 7.88 6.41%
1977 8.28 -7.78%
1976 10.41 24.20%
1975 11.83 38.46%
1974 8.30 -26.95%
1973 11.68 -15.03%
1972 18.08 19.15%
1971 18.00 14.54%
1970 18.12 3.60%
1969 15.76 -8.63%
1968 17.65 11.03%
1967 17.70 24.45%
1966 15.30 -10.36%

Average             18.77

The P/E ratio for the S&P 500 index has varied widely from the single digits to values of 40 or above. The important thing to observe is that very high P/E ratios are not always followed by low or negative returns, nor are very low P/E ratios followed by very high returns.  In terms of a baseline, the S&P 500 index returned approximately 9.5% over this 40-year period.  As is immediately evident, the returns of stocks are quite varied which is what one would expect given the fact that stocks are known as assets that exhibit volatility (meaning that they fluctuate a lot because the future is never known with certainty).  Thus, whenever a financial professional says that stocks are overvalued, undervalued, or fairly valued at any given point in time, that statement has very little significance.  Whenever only one data point is utilized to give a forecast about the future direction of stocks, an individual investor needs to be extremely skeptical of that statement.  The P/E ratio does hold a very important key for the future returns of stocks but only over long periods of time and certainly not over a short timeframe like a month, quarter, or even a year.

An improvement on the P/E ratio was developed by Dr. Robert J. Shiller, the Nobel Prize winner in Economics and current professor of Economics at Yale University. The P/E ratio that Dr. Shiller developed is referred to as the Shiller P/E ratio or the CAPE (Cyclically Adjusted Price Earnings) P/E ratio.  This P/E ratio takes the current value of a stock or stock index and divides it by the average earnings of a firm or index components for a period of 10 years and also takes into account the level of inflation over that period.  The general idea is that the long-term earnings of a firm or index determine its relative valuation.  Thus, it does a far better job of measuring whether or not the stock market is fairly valued or not at any given point in time.  However, another very important piece of the puzzle has to do with interest rates.  Investors are generally willing to pay more for stocks when interest rates are low than when interest rates are high.  Why?  If it is assumed that the future earnings stream of the company remains the same, an investor would be willing to take more risk and invest in stocks over the safety of bonds.  A quick example from everyday life is instructive.  Imagine that your friend wants to borrow $500 for one year.  How much interest will you charge your friend on the loan?  Let’s say you want to earn 5% more than what you could earn by simply buying US Treasury Bills for one year.  A one-year US Treasury Bill is risk free and, as of May 10, 2016 yields interest of 0.50%.  Therefore, you might charge your friend 5.5% on the loan.  Now back in the early 1980’s, one-year US Treasury Bills (and even savings accounts at banks) were 10% or higher.  If you were to have provided the loan to your friend then, you would not charge 5.5% because you could simply deposit the $500 in the bank.  You might charge your friend 15.5% on the loan assuming that the relative risk of your friend not paying you back is the same in both time periods.  It is very similar when it comes to investing in stocks.  Due to the fact that stocks are volatile and future profits are unknown, investors tend to prefer bonds over stocks as interest rates rise.  This phenomenon causes the value of stocks to fall.  Conversely, as interest rates fall, the preference for bonds decreases and investors will choose stocks more and prices go up.  Now this assumes that the future earnings of the company or index constituents stay the same in either scenario.

With that information in mind, a better way to gauge the relative valuation of stocks in terms of being overvalued, undervalued, or fairly valued, would be to look at the Shiller P/E ratio in combination with interest rates. It is most common for investors to utilize the 10-year US Treasury note as a proxy for interest rates.  Here are the historical values for the Shiller P/E ratio and the 10-year US Treasury note over the same 40-year period (1966-2015) as before:

Year CAPE Ratio 10-Year Yield
2015 24.21 2.27%
2014 26.49 2.17%
2013 24.86 3.04%
2012 21.90 1.78%
2011 21.21 1.89%
2010 22.98 3.30%
2009 20.53 3.85%
2008 15.17 2.25%
2007 24.02 4.04%
2006 27.21 4.71%
2005 26.47 4.39%
2004 26.59 4.24%
2003 27.66 4.27%
2002 22.90 3.83%
2001 30.28 5.07%
2000 36.98 5.12%
1999 43.77 6.45%
1998 40.57 4.65%
1997 32.86 5.75%
1996 28.33 6.43%
1995 24.76 5.58%
1994 20.22 7.84%
1993 21.41 5.83%
1992 20.32 6.70%
1991 19.77 6.71%
1990 15.61 8.08%
1989 17.05 7.93%
1988 15.09 9.14%
1987 13.90 8.83%
1986 14.92 7.23%
1985 11.72 9.00%
1984 10.00 11.55%
1983 9.89 11.82%
1982 8.76 10.36%
1981 7.39 13.98%
1980 9.26 12.43%
1979 8.85 10.33%
1978 9.26 9.15%
1977 9.24 7.78%
1976 11.44 6.81%
1975 11.19 7.76%
1974 8.92 7.40%
1973 13.53 6.90%
1972 18.71 6.41%
1971 17.26 5.89%
1970 16.46 6.50%
1969 17.09 7.88%
1968 21.19 6.16%
1967 21.51 5.70%
1966 20.43 4.64%

Average                19.80                          6.44%

These two data points provide a much better gauge of whether or not stocks are currently overvalued or undervalued. For example, take a look at the Shiller P/E ratio in the late 1970’s and early 1980’s.  The value of the Shiller ratio is in the single digits during this time period because interest rates were higher than 10%.  Lately interest rates have been right around 2.0%-2.5% for the past several years.  Therefore, one would expect that the Shiller P/E ratio would be higher.  Now the historical average for the Shiller P/E ratio was 19.80 over this period.  The Shiller P/E ratio was in the neighborhood of 40 during 1998-2000 which preceded the bursting of the Internet Bubble in March 2000.  The Shiller P/E ratio was at its two lowest levels of 7 and 8 in 1981 and 1982, respectively which is when the great bull market began.  However, while this Shiller P/E and interest rates are better than simply the traditional P/E ratio, there are flaws.  The Shiller P/E in 2007 was 24.02 right (and interest rates were around 4.0% which is on the low side historically) before the huge market drop of the Great Recession between September 2008 and March 2009.  In fact, the S&P 500 index was down over 37% in 2008, and the Shiller P/E did not provide an imminent warning of any such severe downturn.  Therefore, even looking at these two measures is imperfect but better than the normal P/E ratio in isolation.

To summarize the discussion, individual investors will always be told on a daily basis by various sources that the stock market is currently overvalued, undervalued, and fairly valued at the same time. One of the most commonly used rationales is a reference to the current P/E ratio in relation to the historical P/E ratio.  As we have seen, this one data point is a very poor indicator of the future direction and relative value of stocks at any given period of time, especially for short periods of time (one year or less).  The commentary and opinions provided by financial “experts” to individual investors when the P/E ratio is mentioned normally relates to the short term.  By looking back at the historical data, it is clear that this one data point is really only relevant over very long periods of time.  The Shiller P/E ratio in combination with current interest rates is a great improvement over the traditional P/E ratio, but it is even imperfect when it comes to forecasting the future returns of the stock market.  There are two general rules for individual investors to take away from this discussion.  Whenever a comment is made about the current value of stocks and only one statistic is provided, the opinion should be taken with a “grain of salt” and weighed only as one piece of information in determining investment decisions that individual investors may or may not make.  Additionally, and equally as important, if a financial professional cites a statistic about stock valuation that you do not understand (even after doing some research of your own), you should always discard that opinion in most every case.  Individual investors should not make major investment decisions in terms of altering large portions of their investment portfolios of stocks, bonds, and other financial assets utilizing information that they do not understand.  It sounds like common sense, but, in the sometimes irrational world of investing, this occurrence is far more common than you imagine.

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A New Paradigm for Investing on 50 year-old Investment Advice Available on Amazon.com

01 Saturday Mar 2014

Posted by in asset allocation, beta, business, Consumer Finance, Education, Fama, finance, financial planning, Free Book Promotion, Individual Investing, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investment advisory fees, investments, Markowitz, math, Modern Portfolio Theory, MPT, passive investing, personal finance, portfolio, risk, Sharpe, sigma, statistics, stock prices, stocks, volatility

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I have decided to make my recently published book FREE for today only, March 1, 2014(it normally retails for $4.99).  The book is another installment in my A New Paradigm for Investing series.  In this particular book, I focus on the use of Modern Portfolio Theory (MPT) as the primary tool by Financial Advisors to recommend portfolio allocations.  The theory is over 50 years old, and most of its assumptions have been shown to be less and less useful.  I explore the reasons why in my text.  I have tried to write in such a manner that you do not need a degree in mathematics or statistics to understand its contents.  Moreover, you do not need to know about the intricacies of MPT in order to follow my logic.  You would find the same information in a college textbook but in a condensed format here.  It actually is quite surprising how little Financial Advisors know about MPT in general and how the ideas apply to individual investors.

Note that this book is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Amazon.com Prime Members can borrow the book for FREE as well. I have provided a link below to make it easier.   My email address is latticeworkwealth@gmail.com should you have any questions/comments/feedback.

The book is:

1)      A New Paradigm for Investing:  Is Your Financial Advisor Creating Your Portfolio with a 50 Year-Old Theory?:

http://www.amazon.com/New-Paradigm-Investing-Financial-ebook/dp/B00FQQ0CKG/ref=sr_1_1?s=books&ie=UTF8&qid=1381520643&sr=1-1&keywords=a+New+paradigm+for+investing+by+William+Nelson

I would like to thank my international viewers as well of my blog that can be found at https://latticeworkwealth.com/.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would strongly recommend following for their content and insight):

Followers on @NelsonThought:

–  The Wall Street Journal Wealth Report @WSJwealthreport – #wsjexperts

–  Institutional Investor @iimag

–  The Royce Funds @RoyceFunds – Small Cap value investing asset manager

–  Research Magazine @Research_Mag – Latest industry information for wirehouses and ETFs

–  Barron’s Online @BarronsOnline – Weekly financial news magazine of Dow Jones

–  Cleveland Fed Research @ClevFedResearch

–  Euromoney.com @Euromoney

–  Pedro da Costa @pdacosta – Central banking and economics reporter at The Wall Street Journal

–  Muriel Siebert & Co. @SiebertCo

–  Roger Wohlner, CFP® @rwohlner

–  Ed Moldaver @emoldaver

–  Sylvia Maxfield @sylviamaxfield – Dean of the Providence College of Business

–  The Shut Up Show @theshutupshow

–  Berni Xiong (shUNG) @BerniXiong

Followers on @LatticeworkWlth:

–  Tracy Alloway @tracyalloway – US Financial Correspondent at Financial Times

–  Vanguard FA @Vanguard_FA – Vanguard’s ETF research and education

–  EU External Action @eu_eeas – Latest news from the European External Action Service (EEAS)

–  Direxion Alts @DirexionAlts

–  Charlie Wells @charliewwells – Editor at The Wall Street Journal

–  Jesse Colombo @TheBubbleBubble – Columnist at Forbes

–  Alastair Winter @AlastairWinter – Chief Economist at Daniel Stewart & Company

–  AbsoluteVerification @GIPStips

–  Investment Advisor @InvestAdvMag

–  Gary Oneil @GaryONeil2

–  MJ Gottlieb @MJGottlieb

–  Bob Burg @BobBurg

–  TheMichaelBrown @TheMichaelBrown

–  Phil Gerbyshak @PhilGerbyshak

– MuniCredit @MuniCredit

Happy New Year, Beginning Thoughts, and Information for International Viewers

01 Wednesday Jan 2014

Posted by in asset allocation, bonds, business, Consumer Finance, Education, Fed Taper, Fed Tapering, Federal Reserve, finance, financial planning, Individual Investing, interest rates, investing, investments, math, Modern Portfolio Theory, MPT, personal finance, portfolio, rising interest rate environment, rising interest rates, risk, statistics, stock prices, stocks, volatility

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I am looking forward to sharing more information regarding investing, finance, economics, and general knowledge about the financial services industry in 2014.  I am hopeful to increase the pace with which I publish new information.  Additionally, I am happy to announce that I reached viewers in 40 countries in all six continents.  Countries from Japan, France, Germany, and Russia to Ghana, Colombia, and even Nepal.

Since the number of my international viewers has grown to nearly 20% of overall viewers of this blog I wanted to allocate a short potion of this post to the international community.  Some of my comments are most applicable to the US financial markets or the developed markets across the globe.  If you are living in a country that is considered part of the developing markets, I would strongly recommend that you seek out information in your country to see how much of my commentary is applicable to your stock or bond market and situation in general.  It is extremely important to realize that tax structure, transparency of information, and illiquidity of stock and bond markets can alter the value of what I might say.  During the course of the coming year, I will attempt to add in some comments to clarify the applicability.  However, as the aforementioned statistic regarding the global diversity of viewers of this blog suggests, I would be remiss if I did not acknowledge that I will not hit on all the issues important to all international individual investors.

I encourage you to take a close look at your portfolio early on in 2014.  It is a perfect time in terms of naturally wanting to divide up investing into calendar increments.  As you listen to all the predictions for the New Year, I would encourage you to look at your personal portfolio and financial goals first.  The second step is to always look at that economist’s or analyst’s predictions at the beginning of 2013.  Now I am not implying that incorrect recommendations in the previous year will mean that 2014 investing advice will be incorrect as well.  However, the important takeaway is that trying to account for the entire unknown factors both endogenous (speed of the Fed taper) and exogenous (geopolitical risk in the Middle East and Asia) affecting the global financial markets with a high degree of precision is exponentially difficult and challenging.

There will always be unknown items on the horizon that make investing risky.  You hear that we need to get more visibility before investing in one particular asset class or another.  It usually means that the analyst wants to be even more certain how the global economy will unfold prior to investing.  I will remove the anticipation for you.  There will only be a certain level of confidence at any time in the financial markets.  One can always come up with reasons to not invest in stocks, bonds, or other financial assets.  The corollary also is true.  It can be tempting to believe that it is now finally “safe” to invest even more aggressively in risky stocks, bonds, or other assets.  As difficult as it might be, you need to try to take the “emotion” of the investing process.  Try to think of your portfolio as a number rather than a dollar amount.  Yes, this is extremely difficult to do.  But I would argue that it is much easier to look at asset allocation and building a portfolio if you think of the math as applied to a number instead of the dollars you have.  Emotional reaction is what leads to “buying high and selling low” or blindly following the “hot money”; that is when rationality breaks down.

Here is an experiment for you to do if you are able.  There are two shows I would recommend watching once a week.  The first show is Squawk Box on CNBC on Monday which airs from 6:00am-9:00am EST.  The second show is the Closing Bell on CNBC on Friday afternoon which airs from 3:00pm-5:00pm EST.  You only need to watch the last hour though once the stock and bond markets are closed.  Note that these shows do air each day of the week.  It is not necessary and, more importantly, will negate the experiment if you watch them every day.  Now depending on whether or not you have the ability to tape these shows first and skip through commercials, this exercise will take you roughly 12-16 hours throughout the month of January.  You will be amazed at how different the stock and bond markets are interpreted in this manner.

When you remove the daily bursts of information, I am willing to bet that you will notice two things:

Firstly, Friday’s show should demonstrate that many “experts” got the weekly direction of the market wrong.  It is nearly impossible to predict the direction of the stock market over such a short period.

Secondly, Monday’s show should illustrate what a discussion of all the issues that have relatively more importance are.  Now this is not always a true statement though.  Generally though, financial commentators and guests appearing on the show will have had the entire weekend to reflect on developments in the global financial markets and current events.  Since the stock, bond, and foreign exchange markets are closed on Saturday and Sunday, there is “forced” reflection for most institutional investors, asset managers, research analysts, economists, and traders.  The information provided is usually much more thoughtful and insightful.

I believe that the exercise will encourage you to spend less time attempting to know everything about the markets; rather, it may be more helpful to carefully allocate your time to learning about the financial markets.

Best of luck to you in 2014.  As always, I would encourage anyone to send in comments or suggestions for future topics to my email address at latticeworkwealth@gmail.com.

A New Paradigm for Investing on 50 year-old Investment Advice Available on Amazon.com

03 Tuesday Dec 2013

Posted by in alpha, asset allocation, Bernanke, beta, bonds, business, Consumer Finance, Education, Fama, Fed, Fed Taper, Fed Tapering, Federal Reserve, finance, financial advisor fees, financial planning, Individual Investing, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investment advisory fees, investments, Markowitz, math, Modern Portfolio Theory, MPT, Nobel Prize, Nobel Prize in Economics, portfolio, rising interest rate environment, rising interest rates, risk, Schiller, Sharpe, sigma, statistics, stock prices, stocks, volatility, Yellen

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I am happy to announce that I have published another book on Amazon.com.  I have decided to make it FREE for the rest of the week through Saturday, December 7th (it normally retails for $4.99).  The book is another installment in my A New Paradigm for Investing series.  In this particular book, I focus on the use of Modern Portfolio Theory (MPT) as the primary tool by Financial Advisors to recommend portfolio allocations.  The theory is over 50 years old, and most of its assumptions have been shown to be less and less useful.  I explore the reasons why in my text.  I have tried to write in such a manner that you do not need a degree in mathematics or statistics to understand its contents.  Futhermore, you do not need to know about the intricacies of MPT in order to follow my logic.  You would find the same information in a college textbook but in a condensed format.

Note that this book is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Amazon.com prime members can borrow the book for FREE. I have provided a link below to make it easier.   My email address is latticeworkwealth@gmail.com should you have any questions/comments/feedback.

The book is:

1)      A New Paradigm for Investing:  Is Your Financial Advisor Creating Your Portfolio with a 50 Year-Old Theory?:

http://www.amazon.com/New-Paradigm-Investing-Financial-ebook/dp/B00FQQ0CKG/ref=sr_1_1?s=books&ie=UTF8&qid=1381520643&sr=1-1&keywords=a+New+paradigm+for+investing+by+William+Nelson

I would like to thank my international viewers as well.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would recommend following for the content and insight):

Followers on @NelsonThought:

The Wealth Report @wsjexperts – Wall Street Journal #wsjexperts

The Royce Funds @RoyceFunds

Research Magazine @Research_Mag

Barron’s Online @BarronsOnline

Vanguard FA @Vanguard_FA

Cleveland Fed Research @ClevFedResearch

Pedro da Costa @pdacosta

Muriel Siebert & Co. @SiebertCo

Roger Wohlner, CFP® @rwohlner

Ed Moldaver @emoldaver

Sylvia Maxfield @sylviamaxfield

The Shut Up Show @theshutupshow

Berni Xiong (shUNG) @BerniXiong

Followers on @LatticeworkWlth:

Euro-banks @EuroBanks

Direxion Alts @DirexionAlts

Charlie Wells @charliewwells

AbsoluteVerification @GIPStips

Investment Advisor @InvestAdvMag

Gary Oneil @GaryONeil2

MJ Gottlieb @MJGottlieb

Bob Burg @BobBurg

Melody Campbell @SmBizGuru

TheMichaelBrown @TheMichaelBrown

Phil Gerbyshak @PhilGerbyshak

MuniCredit @MuniCredit

D.J. Rob-Ski @DJRobSki

A New Paradigm for Investing Available on Amazon.com – FREE for Thanksgiving Holiday

27 Wednesday Nov 2013

Posted by in asset allocation, Bernanke, bonds, business, Charlie Munger, Consumer Finance, Education, Fed, Fed Taper, Fed Tapering, Federal Reserve, finance, financial advisor fees, financial planning, GIPS, GIPS2013, Individual Investing, interest rates, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investment advisory fees, investments, math, Modern Portfolio Theory, MPT, personal finance, portfolio, risk, statistics, stock prices, stocks, Suitability, volatility, Warren Buffett, Yellen

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Greetings to all my loyal readers of this blog.  In keeping with the Thanksgiving spirit, I have decided to make my first two books absolutely FREE for the rest of the week.  These two books on Amazon.com are available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Please feel free to check out the titles below.  I have provided links to make it easier.   My email address is latticeworkwealth@gmail.com.

The books are as follows:

1)      A New Paradigm for Investing:  Can Your Financial Advisor Answer These Questions?:

http://www.amazon.com/New-Paradigm-Investing-Financial-ebook/dp/B00F3BDTHW/ref=sr_1_1?s=books&ie=UTF8&qid=1381107823&sr=1-1&keywords=A+New+Paradigm+for+Investing+by+William+Nelson

2)       Spend 20 Hours Learning About Investing to Prepare for 20+ Years in Retirement

http://www.amazon.com/Learning-Investments-Prepare-Retirement-ebook/dp/B00F3KW9T2/ref=sr_1_1?s=books&ie=UTF8&qid=1379183661&sr=1-1&keywords=William+Nelson+Spend+20+Hours

The first book listed is normally $9.99 but available for FREE until November 30th.  The other book is normally $2.99, but it is also FREE for the same time period.

I would like to thank my international viewers as well.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would recommend following for the content and insight):

Followers on @NelsonThought:

The Wealth Report @wsjexperts – #wsjexperts

The Royce Funds @RoyceFunds

Research Magazine @Research_Mag

Barron’s Online @BarronsOnline

Vanguard FA @Vanguard_FA

Cleveland Fed Research @ClevFedResearch

Pedro da Costa @pdacosta

Muriel Siebert & Co. @SiebertCo

Roger Wohlner, CFP® @rwohlner

Ed Moldaver @emoldaver

Sylvia Maxfield @sylviamaxfield

The Shut Up Show @theshutupshow

Berni Xiong (shUNG) @BerniXiong

Followers on @LatticeworkWlth:

Euro-banks @EuroBanks

Direxion Alts @DirexionAlts

Charlie Wells @charliewwells

AbsoluteVerification @GIPStips

Investment Advisor @InvestAdvMag

Gary Oneil @GaryONeil2

MJ Gottlieb @MJGottlieb

Bob Burg @BobBurg

Melody Campbell @SmBizGuru

TheMichaelBrown @TheMichaelBrown

Phil Gerbyshak @PhilGerbyshak

MuniCredit @MuniCredit

D.J. Rob-Ski @DJRobSki

The Two Numbers the Financial Services Industry Does NOT Want You to Know Available on Amazon.com

11 Monday Nov 2013

Posted by in asset allocation, bonds, business, Charity, Consumer Finance, Education, Fed Taper, Federal Income Taxes, Federal Reserve, finance, financial planning, Income Taxes, Individual Investing, interest rates, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investments, math, personal finance, portfolio, risk, State Income Taxes, stocks

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I wanted to pass along the latest installment of my book series, A New Paradigm for Investing that I have published on Amazon.com.  The subtitle is The Two Numbers the Financial Services Industry Does NOT Want You to Know.  Have you ever struggled with trying to determine how much value you get for the investment advice you are paying for?  It can seem like everyone has the same “pitch” and the same fees.  Since you are entrusting a Financial Advisor or other financial professional with a large part of your net worth and financial future, you deserve to know exactly how fees work in general.  I am by no means advocating dumping the individual you have developed a relationship with.  Rather, I would like to provide some insight into investment fees and how much they actually are when compared to your annual income.  I assure you that, if you are utilizing a full service brokerage firm or other advisory services, these figures will astound you.

Note that this book is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Amazon.com prime members can borrow the book for FREE. I have provided a link below to make it easier.   My email address is latticeworkwealth@gmail.com should you have any questions/comments/feedback.

The link to the book is:

A New Paradigm for Investing:  The Two Numbers the Financial Services Industry Does NOT Want You to Know:

 

http://www.amazon.com/New-Paradigm-Investing-Financial-Services-ebook/dp/B00GCQACF4/ref=sr_1_1?s=books&ie=UTF8&qid=1384183129&sr=1-1&keywords=a+new+paradigm+for+investing+by+william+nelson

I would like to thank my international viewers as well.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would recommend following for the content and insight):

Followers on @NelsonThought:

The Wall Street Journal Wealth Report @wsjexperts – #wsjexperts

The Royce Funds @RoyceFunds

Research Magazine @Research_Mag

Barron’s Online @BarronsOnline

Vanguard FA @Vanguard_FA

Cleveland Fed Research @ClevFedResearch

Pedro da Costa @pdacosta – Reporter for Reuters covering economics and the Federal Reserve

Muriel Siebert & Co. @SiebertCo

Roger Wohlner, CFP® @rwohlner

Ed Moldaver @emoldaver

Sylvia Maxfield @sylviamaxfield

The Shut Up Show @theshutupshow

Berni Xiong (shUNG) @BerniXiong

Followers on @LatticeworkWlth:

Euro-banks @EuroBanks

Direxion Alts @DirexionAlts

Charlie Wells @charliewwells – Editor of the Wall Street Journal Wealth Experts

AbsoluteVerification @GIPStips

Investment Advisor @InvestAdvMag

Gary Oneil @GaryONeil2

MJ Gottlieb @MJGottlieb

Bob Burg @BobBurg

Melody Campbell @SmBizGuru

TheMichaelBrown @TheMichaelBrown

Phil Gerbyshak @PhilGerbyshak

MuniCredit @MuniCredit

D.J. Rob-Ski @DJRobSki

A New Paradigm for Investing Available on Amazon.com

11 Friday Oct 2013

Posted by in asset allocation, Bernanke, bonds, business, Charlie Munger, Consumer Finance, Education, Fed, Fed Taper, Fed Tapering, Federal Reserve, finance, financial planning, GIPS, GIPS2013, Individual Investing, interest rates, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investments, math, Modern Portfolio Theory, MPT, NailedIt, NASDAQ, personal finance, portfolio, risk, statistics, stock prices, stocks, volatility, Warren Buffett, Yellen

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I am happy to announce that I have published another book on Amazon.com.  The book is another installment in my A New Paradigm for Investing series.  In this particular book, I focus on the use of Modern Portfolio Theory (MPT) as the primary tool by Financial Advisors to recommend portfolio allocations.  The theory is over 50 years old, and most of its assumptions have been shown to be less and less useful.  I explore the reasons why in my text.  I have tried to write in such a manner that you do not need a degree in mathematics or statistics to understand its contents.  Futhermore, you do not need to know about the intricacies of MPT in order to follow my logic.  You would find the same information in a college textbook but in a condensed format.

Note that this book is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Amazon.com prime members can borrow the book for FREE. I have provided a link below to make it easier.   My email address is latticeworkwealth@gmail.com should you have any questions/comments/feedback.

The book is:

1)      A New Paradigm for Investing:  Is Your Financial Advisor Creating Your Portfolio with a 50 Year-Old Theory?:

http://www.amazon.com/New-Paradigm-Investing-Financial-ebook/dp/B00FQQ0CKG/ref=sr_1_1?s=books&ie=UTF8&qid=1381520643&sr=1-1&keywords=a+New+paradigm+for+investing+by+William+Nelson

I would like to thank my international viewers as well.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would recommend following for the content and insight):

Followers on @NelsonThought:

The Wealth Report @wsjexperts – #wsjexperts

The Royce Funds @RoyceFunds

Research Magazine @Research_Mag

Barron’s Online @BarronsOnline

Vanguard FA @Vanguard_FA

Cleveland Fed Research @ClevFedResearch

Pedro da Costa @pdacosta

Muriel Siebert & Co. @SiebertCo

Roger Wohlner, CFP® @rwohlner

Ed Moldaver @emoldaver

Sylvia Maxfield @sylviamaxfield

The Shut Up Show @theshutupshow

Berni Xiong (shUNG) @BerniXiong

Followers on @LatticeworkWlth:

Euro-banks @EuroBanks

Direxion Alts @DirexionAlts

Charlie Wells @charliewwells

AbsoluteVerification @GIPStips

Investment Advisor @InvestAdvMag

Gary Oneil @GaryONeil2

MJ Gottlieb @MJGottlieb

Bob Burg @BobBurg

Melody Campbell @SmBizGuru

TheMichaelBrown @TheMichaelBrown

Phil Gerbyshak @PhilGerbyshak

MuniCredit @MuniCredit

D.J. Rob-Ski @DJRobSki

A New Paradigm for Investing Available on Amazon.com

06 Sunday Oct 2013

Posted by in asset allocation, Bernanke, bonds, business, Charlie Munger, Consumer Finance, Education, Fed, Fed Taper, Fed Tapering, Federal Reserve, finance, financial planning, GIPS, GIPS2013, Individual Investing, interest rates, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investments, math, NailedIt, NASDAQ, personal finance, portfolio, risk, statistics, stock prices, stocks, volatility, Warren Buffett, Yellen

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I am happy to announce that I have published two books on Amazon.com that are available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Please feel free to check out the titles below.  I have provided links to make it easier.   The books explain how to select a Financial Advisor, and I provide a list of five books which can help you learn more about investing, respectively. I explain issues about investing as an individual in plain language and without the jargon normally associated with the financial markets. Please feel free to contact me should you have any questions/comments/feedback. My email address is latticeworkwealth@gmail.com.

The books are as follows:

1)      A New Paradigm for Investing:  Can Your Financial Advisor Answer These Questions?:

http://www.amazon.com/New-Paradigm-Investing-Financial-ebook/dp/B00F3BDTHW/ref=sr_1_1?s=books&ie=UTF8&qid=1381107823&sr=1-1&keywords=A+New+Paradigm+for+Investing+by+William+Nelson

2)       Spend 20 Hours Learning About Investing to Prepare for 20+ Years in Retirement

http://www.amazon.com/Learning-Investments-Prepare-Retirement-ebook/dp/B00F3KW9T2/ref=sr_1_1?s=books&ie=UTF8&qid=1379183661&sr=1-1&keywords=William+Nelson+Spend+20+Hours

The first book listed is normally $9.99 but available for a limited time at $7.99.  The other book is normally $2.99, but I dropped it down to $0.99 for the rest of October 2013.

I would like to thank my international viewers as well.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would recommend following for the content and insight):

Followers on @NelsonThought:

The Wealth Report @wsjexperts

The Royce Funds @RoyceFunds

Research Magazine @Research_Mag

Barron’s Online @BarronsOnline

Vanguard FA @Vanguard_FA

Cleveland Fed Research @ClevFedResearch

Pedro da Costa @pdacosta

Muriel Siebert & Co. @SiebertCo

Roger Wohlner, CFP® @rwohlner

Ed Moldaver @emoldaver

Sylvia Maxfield @sylviamaxfield

The Shut Up Show @theshutupshow

Berni Xiong (shUNG) @BerniXiong

Followers on @LatticeworkWlth:

Euro-banks @EuroBanks

Direxion Alts @DirexionAlts

Charlie Wells @charliewwells

AbsoluteVerification @GIPStips

Investment Advisor @InvestAdvMag

Gary Oneil @GaryONeil2

MJ Gottlieb @MJGottlieb

Bob Burg @BobBurg

Melody Campbell @SmBizGuru

TheMichaelBrown @TheMichaelBrown

Phil Gerbyshak @PhilGerbyshak

MuniCredit @MuniCredit

D.J. Rob-Ski @DJRobSki

Quick and Effective Way to Learn about Investing in Stocks and Bonds

21 Wednesday Aug 2013

Posted by in bonds, business, Education, finance, interest rates, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investments, stocks, Warren Buffett

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With the advent of the Internet and a plethora of financial news publications and television networks, there is an amazing amount of information available on investing and investments.  With that being said and obvious, why would you even read this?  Well, as I have said before, knowledge is power!  Now take a look at that cliché again but more closely.  Could you substitute the word information for knowledge?  Would it mean the same thing?  I am hoping you say that the answer is a resounding No.  Having access to information and having a lot of facts can be a detriment in some respects actually.  Is that how it feels with individual investing from your perspective?  You could spend months searching terms on the web, going to mutual fund websites, reading academic studies, keeping up with the current market moving news, and researching individual companies.  Would that really help you?  If you are waiting for someone to divine some wisdom for you in terms of when to invest and what to invest in, you will be waiting for many, many years.  Knowledge is taking information and constructing a framework that is actionable.

My recommendation to you is to read the following information in pieces.  Pick one or two items off the list to read per day. You can feel free to skip certain numbers if you are familiar with the concept already.  Let’s begin our discussion.

1)      How the Current News Affects Your Investments:

 

Learning how to invest in the financial markets can feel very overwhelming. Especially when you are retired or going to retire soon.  If you need to live on your “nest egg” and do not want to work again, where do you even begin?  I suggest that you never make rash decisions and adjust your entire portfolio based upon one day’s news.  For more information about that concept, please refer to this link:  https://latticeworkwealth.com/2013/08/04/todays-news-should-prompt-you-to-adjust-your-entire-investment-portfolio/.

 

2)      Do I Even Have Enough Money to Make Investing Worthwhile?:

 

The short answer is YES.  The funny thing is that if you leave these decisions in the hands of a financial professional you will be spending hundreds of thousands of dollars.  If you have a 401(k) or 403(b) retirement plan, this matters to you as well.  For information on how investment advisory and asset management fees add up, please refer to the following link:  https://latticeworkwealth.com/2013/07/11/is-learning-about-investing-worth-it-how-about-224000-or-320000-worth/.

 

3)      Learning About How to Create a Simple Model Investment Portfolio:

 

How should you allocate your investments?  Which asset classes or sectors are the best to choose from?  Before you can tackle that issue, you should look at more general portfolio construction concepts.  You can find the link here:  https://latticeworkwealth.com/2013/07/16/how-to-create-an-investment-portfolio-and-properly-measure-your-performance-part-1-of-2/.

 

4)      You Need to Properly Assess Your Risk Tolerance:

 

 If the stock market goes down 10% and you are so nervous that you sell, you probably should not invest in stocks at all.  You have a very low risk tolerance and will not sleep well.  The most important thing to learn here is that gain and losses are not proportional.  In fact, if you view the financial markets in that way, you probably should NEVER have more than 50% of your portfolio in stocks.  If you are worried about a bear market occurring (bear market is defined as a 20% or more drop), you probably should either not have any stocks or invest NO more than 20% of your money in the stock market.  For more information about how stock market fluctuations affect your investment portfolio, please go to this link:  https://latticeworkwealth.com/2013/07/08/double-edged-sword-of-the-power-of-compounding/.

 

5)      Differences Between Active and Passive Investing:

 

Once you understand how different annual returns affect the value of your portfolio, you can start learning about how well you are doing and how to set a realistic target return for your portfolio.  The first thing to do is to learn about the difference between active and passive investing.  There is a third, emerging category which too many say is passive investing.  It is called enhanced indexing.  For a longer discussion of the difference between active and passive investing, you can refer to the following:  https://latticeworkwealth.com/2013/07/05/difference-between-active-and-passive-investing/.

 

6)      Measuring How Well Your Investment Portfolio is Performing:

 

I would never assert that active or passive investing is better. However, I will say that you need to ensure that your chosen investing approach is working.  If you are choosing an active approach, your investment portfolio should be beating the market over the long run.  If it does not, why would you spend all the time searching for ways to beat the market? Refer to this link to understand more about how to properly measure the investment performance of your portfolio:  https://latticeworkwealth.com/2013/07/19/how-to-create-an-investment-portfolio-and-properly-measure-your-performance-part-2-of-2/.

 

7)      Investing in Individual Stocks and Bonds Should Be Left to Professionals:

 

If investing is starting to sound boring, it can be in a certain sense.  If you are looking to make 100% per year by buying stocks, you are going to be sorely disappointed.  It can seem so easy when you watch TV shows.  You also can lose a lot of money though.  The real pros spend hours upon hours learning about a particular company prior to buying the stock.  How much time?  Probably more than you would imagine.  Refer to this article:  https://latticeworkwealth.com/2013/08/09/you-purchased-a-stock-now-what/.

 

8)      Does Hiring a Financial Professional Make Sense:

 

After reading all this information, it may seem like it is better to let a financial professional manage your money.  If you are going to a financial professional to seek advice, you should know why you are going.  What can’t you do yourself?  Here is a unique way to think about this topic:  https://latticeworkwealth.com/2013/08/07/are-your-financial-advisors-fees-reasonable-here-is-a-unique-way-to-look-at-what-clients-pay-for/.

 

9)      List of Questions to Ask Any Financial Professional:

 

If you still think that going to a financial professional is the best option for you, I will not fault you for that.  What types of questions should you ask?  Here is a suggested list of questions:  https://latticeworkwealth.com/2013/08/12/important-list-of-questions-to-ask-when-selecting-a-financial-advisor/.

 

10)   Learn How a Financial Professionals Start in Investing Field Can Bias Them:

 

You will find that most financial professionals are biased based upon the time when they first started the profession.  Therefore, their advice might be “stuck in time” so to speak and not apply to your situation.  For a more detail explanation of this idea, you can refer to this post:  https://latticeworkwealth.com/2013/08/18/before-you-take-any-investment-advice-consider-the-source/.

 

 

11)   Understanding Why You Have Some Advantages over Institutional Investors:

 

You have different experiences and expertise in everyday life.  You can be more objective when it comes to investing and how the financial markets work.  Want to learn more:  https://latticeworkwealth.com/2013/08/11/why-did-i-choose-to-include-latticework-in-my-investment-firms-name-well-because-of-charlie-munger-of-course/.

 

12)   Learn That You Can Survive as an Individual Investor as Interest Rates Rise:

 

Do you keep hearing that higher interest rates are going to wreak havoc on the financial markets now and for years to come?  Should you not start investing until interest rates stabilize?  What if interest rates are going to continue to rise?  These are important questions, and I try to answer this question in the following post:  https://latticeworkwealth.com/2013/08/14/what-can-investors-do-in-a-rising-interest-rate-environment/.

You have finally reached the end of the list.  Do you feel smarter?  I sure hope you do.  My goal was to provide you with a framework to start your quest.  If you would like to learn more, I have a recommended reading list.  It will most likely take you 20 hours or so to read these books.  However, if you can save hundreds of thousands of dollars, would you say it is worth it?  Remember you are likely to live for over 20 years during your retirement years.  Here is the list:  https://latticeworkwealth.com/2013/07/23/spend-20-hours-learning-about-investments-to-prepare-20-years-of-retirement-2/.

Please feel free to send me your comments or other questions at latticeworkwealth@gmail.com.  You can post them directly on my blog as well.

Do you want to learn about investing in stocks and bonds but don’t know where to start? Here’s a roadmap.

20 Tuesday Aug 2013

Posted by in bonds, business, Education, finance, interest rates, investing, investing, investments, stocks, bonds, asset allocation, portfolio, investments, stocks, Warren Buffett

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With the advent of the Internet and a plethora of financial news publications and television networks, there is an amazing amount of information available on investing and investments.  With that being said and obvious, why would you even read this?  Well, as I have said before, knowledge is power!  Now take a look at that cliché again but more closely.  Could you substitute the word information for knowledge?  Would it mean the same thing?  I am hoping you say that the answer is a resounding No.  Having access to information and having a lot of facts can be a detriment in some respects actually.  Is that how it feels with individual investing from your perspective?  You could spend months searching terms on the web, going to mutual fund websites, reading academic studies, keeping up with the current market moving news, and researching individual companies.  Would that really help you?  On any given day, you can find financial market professionals telling you that the stock market is poised for a huge correction, a lot of upside, or will trade sideways for the foreseeable future.  If you are waiting for someone to divine some wisdom for you in terms of when to invest and what to invest in, you will be waiting for many, many years.  Knowledge is taking information and constructing a framework that is actionable.  For those of you who have been reading my posts regularly, you may still want to read on because I will try to provide some structure around my past commentary.

My recommendation to you is to read the following information in pieces.  Pick one or two items off the list to read per day.  It will take you a week or so to digest all the material.  I encourage you to go back to a number if it does not make sense at first.  You can feel free to skip certain numbers if you are familiar with the concept already.  Let’s begin our discussion.

1)      Learning how to invest in the financial markets can feel very overwhelming.  I used to work on Wall Street, and I felt that same way and I lived it every day.  When you are just starting out, I cannot imagine how it must feel.  Especially when you are retired or going to retire soon.  I started in 1987, so it is hard to think back that far and truly remember.  If you need to live on your “nest egg” and do not want to work again, where do you even begin?  Remember I mentioned that finding information about the financial markets, different investments, ideas about portfolio construction, investing strategies, withdrawing funds during retirement, or accumulating wealth is quite easy using your PC or smartphone.  The problem is that, since we live in a 24/7 news-driven society and investment world, the advice provided on any given day will change.  That is why I suggest that you never make rash decisions and adjust your entire portfolio based upon one day’s news.  For more information about that concept, please refer to this link:  https://latticeworkwealth.com/2013/08/04/todays-news-should-prompt-you-to-adjust-your-entire-investment-portfolio/.

 

2)      Since investing in the stock market seems so intimidating and can feel like gambling, why would you even consider learning about the financial markets?  The funny thing is that if you leave these decisions in the hands of a financial professional you will be spending hundreds of thousands of dollars.  Well, you might say that I do not have millions of dollars, so that does not apply to me.  The financial services industry sure makes it seem that way.  However, are you making $40,000 a year and saving 5% of your paycheck in a 401(k) or 403(b) retirement plan?  That equates to investing $2,000 per year.  If your answer to that question is yes, then the hundreds of thousands of dollars applies to your as well.  For information on how investment advisory and asset management fees add up, please refer to the following link:  https://latticeworkwealth.com/2013/07/11/is-learning-about-investing-worth-it-how-about-224000-or-320000-worth/.

 

3)      Once you start to think about the money you stand to earn from investing in the financial markets and by avoiding excessive fees, I am hopeful that you will be motivated to learn more.  The next thing to consider is what types of investments you would like to purchase.  Essentially the question is how to build an investment portfolio.  How should you allocate your investments?  Which asset classes or sectors are the best to choose from?  Before you can tackle that issue, you should look at more general portfolio construction concepts.  You can find the link here:  https://latticeworkwealth.com/2013/07/16/how-to-create-an-investment-portfolio-and-properly-measure-your-performance-part-1-of-2/.

 

4)      Before you go any further, you need to learn how to assess your risk tolerance.  Your risk tolerance is just a fancy way to characterize your willingness to experience financial losses.  The stock and bond markets are volatile.  If the financial markets only went up, there really would not be too much of a story to write here.  In order to earn higher returns, you generally need to be able to accept higher risks.  The most important thing to learn here is that gain and losses are not proportional.  The proper term is symmetrical.  What do I mean by this?  If your stocks go down 50%, they need to go up 100% for you to break even.  It works for smaller amounts as well.  So if your stocks go down 10%, they need to go up 11.1% before you have the same amount of money.  If you are listening to the commentary on the financial news stations or reading “dire” predictions in the newspapers about a 10% drop in the stock market being very possible and probably, what will you do?  If you want to avoid that drop and could not bear to not sell before that decline, you have a very low risk tolerance.  In fact, if you view the financial markets in that way, you probably should NEVER have more than 50% of your portfolio in stocks.  If you are worried about a bear market occurring (bear market is defined as a 20% or more drop), you probably should either not have any stocks or invest no more than 20% of your money in the stock market.

 

Have you ever heard that from your financial professional?  Probably not.  The reason you need to set a realistic risk tolerance is that it will save you a lot of money down the road.  Now it is not simply that you will be taking the chance of losing nearly 40% as in 2008.  The problem is that investing is much too emotional the lower your risk tolerance.  For example, many individual investors sold all of their stocks toward the end of 2008 and beginning of 2009.  In fact, many wealthy investors still have 30-40% of their portfolio in cash today.  The S&P 500 bottomed at 666 in March 2009 and now trades around 1650 as of August 20, 2013.  If you get back in today and sold then, you missed out on over 100% of gains, and you are setting yourself up to sell again if the market goes down more than you are comfortable.   Most people know that you should “buy low and sell high” intellectually. However, the average investor will “buy high and sell low” in practice because emotions take over during periods of market volatility.  For more information about how stock market fluctuations affect your investment portfolio, please go to this link:  https://latticeworkwealth.com/2013/07/08/double-edged-sword-of-the-power-of-compounding/.

 

5)      Once you understand how different annual returns affect the value of your portfolio, you can start learning about how well you are doing and how to set a realistic target return for your portfolio.  The first thing to do is to learn about the difference between active and passive investing.  Active investing is selecting individual stocks and bonds that are likely to do better than the market.  Passive investing is selecting different types of stocks and bonds in different categories and then building a portfolio.  There is a third, emerging category which too many say is passive investing.  It is called enhanced indexing.  Enhanced indexing is really a hybrid approach.  You select certain stocks or bonds within an index based upon certain qualitative analysis.  Enhanced indexing is not passive and is not active.  The most common mistake is to confuse it with passive investing.  Once you start selecting specific securities, you are essentially being an active investor.  For a longer discussion of the difference between active and passive investing, you can refer to the following:  https://latticeworkwealth.com/2013/07/05/difference-between-active-and-passive-investing/.

 

6)      I would never assert that active or passive investing is better.  You have to learn more about investing in order to make that determination.  However, I will say that you need to ensure that your chosen investing approach is working.  If you are choosing an active approach, your investment portfolio should be beating the market over the long run.  If it does not, why would you spend all the time searching for ways to beat the market?  You could just throw your hands up and simply choose to invest your money in all the stocks or bonds in the various indexes.  So how do you measure your investment performance?  It is not as simple as comparing the performance of your stocks to the S&P 500 index and bonds to the Barclays Aggregate Bond index.  That might have been the way to do so twenty years ago, but the “smart” money does not do that anymore.  Think of it in this manner:  will an Olympic sprinter beat the faster runner in your neighborhood?  Probably.  Will the fastest runner in your neighborhood beat the fastest person in my neighborhood if they run the same distance?  Now that is a much harder question to answer.  Refer to this link to understand more about how to properly measure the investment performance of your portfolio:  https://latticeworkwealth.com/2013/07/19/how-to-create-an-investment-portfolio-and-properly-measure-your-performance-part-2-of-2/.

 

7)      If investing is starting to sound boring, it can be in a certain sense.  If you are looking to make 100% per year by buying stocks, you are going to be sorely disappointed.  It can seem so easy when you watch TV shows.  Why didn’t I buy NetFlix (NFLX) or Best Buy (BBY) a couple of months ago?  I could have doubled my money and then some.  You also can lose a lot of money.  I used to own Best Buy five years ago.  I purchased the stock at an average cost over $40.  The stock is up around 180% in 2013, but it is down more than 20% from where I bought the stock over five years ago.  If I had not sold my stock in Best Buy, I would still be losing money.  So even with the winners of today, you can lose money in the future.  Additionally, it is not as easy as it seems to pick individual stocks.  The real pros spend hours upon hours learning about a particular company prior to buying the stock.  How much time?  You can take a sneak peek, but I will warn you that you will most likely be asleep long before you reach the end of this article:  https://latticeworkwealth.com/2013/08/09/you-purchased-a-stock-now-what/.

 

8)      After reading all this information, it may seem like it is better to let a financial professional manage your money.  I mean you have many other things to do with your limited leisure time.  With that being said, you need to understand what you are really paying for.  If you are going to a financial professional to seek advice, you should know why you are going.  What can’t you do yourself?  Here is a unique way to think about this topic:  https://latticeworkwealth.com/2013/08/07/are-your-financial-advisors-fees-reasonable-here-is-a-unique-way-to-look-at-what-clients-pay-for/.

 

9)      If you still think that going to a financial professional is the best option for you, I will not fault you for that.  No matter how much time you spend learning about investing, there will always be uncertainty and more questions.  However, you need to have a plan of attack when interviewing any Financial Advisor.  What types of questions should you ask?  Here is a suggested list of questions:  https://latticeworkwealth.com/2013/08/12/important-list-of-questions-to-ask-when-selecting-a-financial-advisor/.

 

10)   Another important thing to keep in mind once you start to feel comfortable with a financial professional is that you should get to know their background.  I am not referring to the number of years they have been investing or their educational credentials or professional designations.  You will find that most financial professionals are biased based upon the time when they first started the profession.  Therefore, their advice might be “stuck in time” so to speak and not apply to your situation.  For a more detail explanation of this idea, you can refer to this post:  https://latticeworkwealth.com/2013/08/18/before-you-take-any-investment-advice-consider-the-source/.

 

 

11)   The other thing to remember, and sometimes the most important, is that you have an advantage over most financial professionals.  You do not follow the markets daily.  Plus, you have different experiences and expertise in everyday life.  You can be more objective when it comes to investing and how the financial markets work.  You can choose to be like Warren Buffett’s trusted advisor, Charlie Munger.  Want to learn more:  https://latticeworkwealth.com/2013/08/11/why-did-i-choose-to-include-latticework-in-my-investment-firms-name-well-because-of-charlie-munger-of-course/.

 

12)   Do you keep hearing that higher interest rates are going to wreak havoc on the financial markets now and for years to come?  It is a common topic, especially since most asset managers believe that interest rates have bottomed earlier this year and are headed higher over time.  We had 30+ years of interest rates going lower.  It was bound to happen that interest rates would inevitably go up at some point.  Should you not start investing until interest rates stabilize?  What if interest rates are going to continue to rise?  These are important questions, and I try to answer this question in the following post:  https://latticeworkwealth.com/2013/08/14/what-can-investors-do-in-a-rising-interest-rate-environment/.

You have finally reached the end of the list.  Do you feel smarter?  I sure hope you do.  My goal was to provide you with a framework to start your quest.  If you would like to learn more, I have a recommended reading list.  It will most likely take you 20 hours or so to read these books.  However, if you can save hundreds of thousands of dollars, would you say it is worth it?  Here is the list:  https://latticeworkwealth.com/2013/07/23/spend-20-hours-learning-about-investments-to-prepare-20-years-of-retirement-2/.

Please feel free to send me your comments or other questions at latticeworkwealth@gmail.com.  You can post them directly on my blog as well.  If there are questions beyond the scope of this discussion, I will certainly address them in a future post.  I encourage you to take a look at some of my prior posts as well which are not included in this discussion of how to begin your “career” as an individual investor.