Posts Tagged Investing
SINCE PEOPLE LIVE LONGER TODAY THAN IN PREVIOUS GENERATIONS, OUR MONEY WILL NEED MORE GROWTH IN ORDER TO LAST AS LONG! (Part Two)
This is the second part of yesterday’s discussion. Since life expectancy has gradually lengthened over the past decades, retirees, or those soon to be, should not be too conservative with their investments. Forty years ago, the rule of thumb was that the bond portion of your portfolio should approximate your age. But, that’s no longer the case; because, people live longer, and they must retain their purchasing power.
Today, if a person lives to be 65 years old, thy have a reasonable chance of living past 80, on average. That means that you will have to stretch the money you have set aside, to supplement Social Security and pension, if any, over a greater length of time. Also, as all seniors know, Health Care Inflation is a good bit higher than the normal Consumer Price Index. Besides investing more in stocks, consider those industries where the growth has been more consistent.
As you can see in the Break-down of the S & P. Index by industry, the three largest “industrial sectors” are: Information Technology; Financials and Health Care. Also, as noted in Part One, five of the ten largest companies in the index are in the IT/Technology Industry, with only two—Apple and Microsoft—being just over 40 years old. All the others are much younger.
Now, let’s assume that your current portfolio is nicely balanced, between stocks and bonds, and the percentage invested in the various industries matches the S & P reasonably well. Now, consider how your life has changed from some years ago: less trips to the bank, since you use an ATM at the supermarket and on-line banking; keep up with friends and family by Email; order prescriptions and other things on-line; changed a doctor’s appointment on their web site; greater use of cable network or shows on-demand, etc. In that sentence, I specifically cited IT/Technology and Health Care products. And, that’s just the beginning!
Medical science and the overall Health Care industry have made strides in developing new medicines, hospital equipment and other health care needs. Sure, they’re expensive, and Congress hasn’t been helping with the cost; but, so what if it keeps you around longer? Do you have any other options?
IT/Technology and Health Care seem to have been consistently good performers over the years. (I will show you an interactive chart on this.) The Financial Industry, the second largest industry, has not been as consistent. Besides being somewhat volatile, it has to deal with the booms and busts of both the domestic and global marketplace, and it rightfully must he heavily regulated. And, don’t forget its role in The Great Recession (4Q07-1Q09).
A certain portion of the other seven industries do belong in your portfolio, and how much depends upon your risk tolerance. Consumer discretionary, and the like (retail), are being sucked dry by Amazon. Boeing comes out with a new jumbo jet every fifteen years, or so. Coke and Kellogg’s haven’t transformed, other than new marketing jingles. And the last four display their relative importance to the economy by their place at the bottom of the list.
Index Break-down by Industry Size
Information Technology 22.26%
Health Care 14.49
Consumer Discretionary 12.27
Consumer Staples 9.05
Real Estate 2.91
Now, suppose that you wanted to enliven your portfolio—adding a bit more growth to match your longevity—exchange-traded funds (ETFs) are securities that duplicate a particular stock or bond index. Sector SPDRs are the oldest brand of ETFs, and the company offers one that would only: include those companies in the S & P 500 Index, or those that are in any of the individual industries. For instance, add a slice of IT/Technology (SYMBOL: XLK) and/or Health Care (XLV). Or, someone else might prefer Financials (XLF), or one or more of the others.
On the Sector Tracker interactive site, you can check the performance of the various Sector SPDRs over various time frames (small white boxes toward the top). On the Sector SPDR web site, you can select any of the sectors by just clicking on the blue box, in the upper left. From there, you can down load the Prospectus, the Fact Sheet—which I find quite helpful—and other literature on each ETF. I have attached Fact Sheets for the IT/Technology and Health Care SPDRs.
Be sure to do your homework, consult with whomever you generally ask for investment advice, and give some serious consideration before adding these, or other, ETFs, and by how much. Leave a Comment if I can be of any help. Check your portfolio regularly, if you can, to monitor whether it still meets you needs, as structured!
NOTE: This recent article, from the NY Times, provides more information on ETFs; however, the focus is on the BlackRock Funds’ iShares (ETFs). BlackRock is the world’s largest money manager.
SINCE PEOPLE LIVE LONGER TODAY THAN IN PREVIOUS GENERATIONS, OUR MONEY WILL NEED MORE GROWTH IN ORDER TO LAST AS LONG! (Part One)
Traditionally, people have been advised to have a balance, between stocks and bonds, in their retirement funds, with the bond component gradually increasing over time. And that hasn’t changed; but, the rate at which bonds increase should be somewhat slower today. Over the past decade, inflation has been virtually nonexistent; however, it will return at some point and, as most senior citizens know, health care inflation never really went away!
This post is intended to lay the groundwork for my next one, which will offer some ideas as to how to include a more growth-oriented component to your portfolio. It is not meant to offer investment advice, per se, but to provide some ideas as to a forward-thinking way of adding to the growth in your portfolio.
These ideas are primarily intended for the hands-on, fairly open-minded investor. Before you act upon them: study them; confer with whomever you see investment advice from and, if you do act, perhaps do so gradually!
Let me explain the stock market through the Standard and Poor’s 500 Index, which is composed of 500 large company stocks. Since there are 4,333 publicly traded stocks in the U. S.—between the exchanges and the rarely traded “Pink Sheets”—the 500 stocks in the S & P, at 11.5% of the total, is a substantial statistical sample. The stocks represent ten different industries, as cited below:
Index Break-down by Industry Size
Information Technology 22.26%
Financials 14.55 Health Care 14.49
Consumer Discretionary 12.27
Consumer Staples 9.05
Real Estate 2.91
The stocks represented in most indices are weighted, according to their “equity capitalization,” or relative market value. Please note that the ten largest companies, in the S & P 500, represent 18.85% of the whole Index, and five of the top ten are in Technology:
Ten Largest 10 Companies:Apple Inc. 3.61%
Microsoft Corporation 2.56
Amazon.com Inc. 1.85
Facebook Inc. Class A 1.72
Johnson & Johnson 1.72
Exxon Mobil Corporation 1.65
JPMorgan Chase & Co. 1.56
Berkshire Hathaway Inc. Class B 1.55
Alphabet Inc. Class A 1.33
Alphabet Inc. Class C 1.30
Total for Top 10 Holdings 18.85%
Over the years, most investment advisors have shown clients the Break-Down by Industry and, perhaps, suggested a little more (“overweighting”) or a little less (“underweighting”) in several of the industries. Those incremental changes, never more than a percent or two, were mostly to show that the advisor added value; but, in the long run, the recommended strategy was pretty much to maintain the status quo!
Let me emphasize the preponderance of Technology in the S & P 500 Index of the largest companies in the nation, and keep in mind that only Apple and Microsoft are over 40 years old, and just barely–while the rest are much newer companies. And, while Amazon is considered a Retail company, it owns a robotics company, and it is also the largest source of cloud computing—two of the hottest areas within the technology sector.
The Technology and Health Care industries have consistently been two of the best performers in the Index. The Financial industry is the second largest; however, it has to deal with: the ups and downs of the domestic economy, it must rightfully be heavily regulated, it also has to function within the overall global marketplace and, for the most part, the financial sector adds very little to the overall economy!
In my next post, I will suggest why the investor, who is willing to take-on moderate risk, should consider adding more Health Care and Technology to their investment portfolios.
NOTE: Noted Wall Street analyst, Dick Bove, warns that bank stocks are merely trading on momentum–sort of a follow-the-leader–rather than any really sustenance.
Today, the Federal Reserve announced that it was raising the “Fed Funds Rate”, which is the intra-bank lending rate that banks charge one another. The increase was made after one of the eight yearly Federal Open Market Committee Meetings, which are generally attended by all seven members of the Federal Reserve Board, as well as the twelve regional Federal Reserve Bank Presidents, from around the country. While still low on a historical basis, the rate has risen by just 0.25%, to a range of 1.00-to-1.25%.
At the two-day meeting, the FOMC reviews many economic statistics, from each of the 12 regions, with an emphasis on Employment and Inflation in each. Following the meeting, Fed Chairwoman Janet Yellen announced that the labor market continues to improve, and that inflation is expected to soon approach the Fed’s two percent target rate.
Donald Trump has been trying to prod Ms. Yellen not to raise rates again, and several journalists have been reporting that some homeowners have had trouble with the last increase mortgage payment increase. Many retirees, however, have been clamoring for higher CD rates, since they need the higher income to live on. Although the Fed doesn’t set mortgage, consumer loan or CD rates, any adjustments to the “Funds Rate” generally do have some impact, across the interest rate spectrum!
Over the past 40 years that I have been involved specifically in the bond market, interest rates had never been anywhere near as low as they are now; that is, until ten years ago! To an extent, such very low rates had added to The Great Recession (4Q07 to 1Q09), since banks found ways to encourage mortgage re-financing and consumer lending to people who should not have qualified for the loans. Then, once the money was spent—on real estate and merchandise that they couldn’t afford—all they had left were big, big bills!
But, let’s consider today’s rate hike in terms of the Fed’s Dual Mandate—Maximum Employment and Stables Prices, along with Moderate Long-Term Interest Rates. The amount of necessary monetary stimulus dwindles as the labor market recovers, and if the rates remain depressed for too long, that could cause the economy to overheat, and inflation to overshoot the two percent target.
When rates are still extremely low, as they currently are, the Fed also has little ammunition to respond to another banking crisis, or a foreign currency crisis, such as occurred during the 1990s, both in Latin America and East Asia. This is why today’s rate increases makes perfect sense, as is the anticipated one more this year.
As always, the Fed doesn’t act on a rigid schedule regarding changes in monetary policy. Rather, it is constantly reviewing the updated data, keeping in constant touch with other central banks and considering its options. Ultimately, the Federal Reserve makes decisions on a meeting-to-meeting basis; however, it can act sooner, when necessary!
Last Friday, the NASDAQ opened down by over three percent, and it remained that way, also closing the day around that amount. The Technology ETF (Symbol: XLK), which tracks the technology “components” (corporations) within the S & P 500 also remained down by three percent through the close of the day. Since there weren’t any other market sectors exhibiting similar turbulence, and economic and geopolitical news wasn’t out of the ordinary, I just assumed that the sudden drop was due to some investors taking profits.
On Monday, while the NASDAQ and Tech ETF opened down by over three percent again, both began to recover in the late morning. Although they still closed down again that day, the momentum had definitely shifted positive. And, I believe that that was confirmed today, when they both opened up by around one-half percent, and closed at a positive 0.73%
The inter-active chart on the Sector SPDR website displays the performance of all ten industrial sectors, represented within the S & P 500. You can compare different time-frames, by clicking across the top of the Sector-Tracker Chart. Until Friday, the Tech Sector had led, or almost led for every time-frame represented; however, the recent two-day drop, pushed it back for one-month or less. I still remain heavily weighted in Tech, and I regard other investors taking profits as positive for the sector.
Technology represents approximately 22% of the S & P 500, and is roughly 50% larger than the Financials, the next largest sector. While Amazon might be forcing some retailers to downsize, and alternative energy might be eating into the fossil fuels, I just don’t see that happening to technology. It has become integral to our vey way of life. And, as we rely more, and more, on Technology, what could replace it—but newer technology?
WILL DONALD TRUMP AND TREASURY SECRETARY STEVE MNUCHIN PROCLAIM THE NEW 21st CENTURY GLASS-STEAGALL ACT, BUT ONLY METAPHORICALLY?
The Banking Act of 1933, commonly referred to as the Glass-Steagall Act, ushered in various reforms, to assist the Nation’s Recovery from The Great Depression. “Glass”, which was part of (new) President Franklin D. Roosevelt’s “New Deal”, broke-up the Banking Industry, and created Federal Deposit Insurance. It was made permanent in 1945.
Prior to “Glass”, companies could engage in both commercial and investment banking, which meant that risky securities actions might jeopardize clients’ deposits, and there wasn’t any deposit insurance either. In the mid-1980s, however, many of the banking restrictions were lifted, and mostly larger banks transformed themselves into Financial Services Supermarkets. Also, making “banking” even more precarious: the number of products and financial institutions, has frown considerably since the 1930s.
In October of 2008, President George W. Bush bestowed many billions of dollars on the largest banks, in order to enhance liquidity within the banking system. Unfortunately, that action was interpreted, by many, as conveying an explicit Federal Government Guarantee of what became to be called the “Too Big to Fail” banks. That general assumption merely led to an even higher concentration of financial business, on the few, but same, largest—or Too Big to Fail Banks. Thus, the solution worsened the problem!
Following The Great Recession (4Q07-to-1Q09), President Barack Obama signed the Dodd-Frank Act into Law, in July 2010. Dodd-Frank reined-in the banks, required required high equity capital standards, and was intended to separate the investment risks from consumer deposits. The GOP, however, has sought to repeal Dodd-Frank ever since!
Treasury Secretary Steven Mnuchin, who is Donald Trump’s lead-man on banking laws, has been suggesting that he might propose a “21st century version of Glass-Steagall”. Donald Trump has also been saying the same thing! Today, Senator Elizabeth Warren called Secretary Mnuchin to task, at a Senate Finance Committee Hearing, as linked from CNBC-TV. She noticed that he had been avoiding the question of whether, or not, the Trump Regime would break-up the banks.
Finally, Secretary Mnuchin realized that he had to answer the question, and his response was still quite convoluted: “it’s a complex issue”; “not a good thing”. and finally “NO!” He stammered when she asked him how they could be considering a “21st century version of Glass-Steagall—a law which specifically broke-up the banks—with one that would not.” Mr. Mnuchin suggested that he would bring a team from the Treasury Department to brief the Senator’s Staff.
Secretary Mnuchin seemed to be avoiding answers from most of the Senators on the Committee—especially the Democrats—as he offered to provide briefings, similar to those offered Senator Warren, to a number of other Senators. Surely, the Secretary of the Treasury should be expected to appear before the primary Senate Committee, which regulates his office—and be totally prepared! And it should be obvious to most Americans that, so soon after the 2008 Banking Crisis, that the status of the Banking Laws would be Question Number One, Two and Three!
NOW MIGHT NOT BE THE TIME TO SELL, IN THE STOCK MARKET, UNLESS YOU KNOW SOMETHING THAT WALL STREET DOESN’T!
Today, the Dow Jones Industrial Average dropped by 1.79%; but, it’s still up 4.27% above the 2016 close. Similarly, the S & P 500 closed down 1.82%, and is still up by 5.28% for the year. And NASDAQ, which lost the most, some 2.57% today, is still up by 11.57% on the year.
It’s important to remember that the financial markets never go straight up, or straight down. There appears to have been talk around the markets lately, that some degree of “correction” (a sell-off) was necessary to calm the volatility. So, perhaps the political angst provided just the spark to settle the market! If there is any volatility in the early U. S. market trading on Thursday, it will probably be a combination of Sellers, who weren’t paying attention on Wednesday, and Buyers looking to pick-up a few potential bargains.
Jeremy Siegel, Economics Professor at the University of Pennsylvania, literally wrote the book about “Stocks for the Long Run”, is a perennial stock market Bull. Today, he said, in an interview on CNBC-TV: “If Donald Trump resigned tomorrow I think the Dow would go up 1,000 points,” Professor Siegel’s stated rational is that the market has been rallying on the Republican Agenda, and not the Trump Agenda.
I wouldn’t try to project how the stock or bond market would adjust to such a situation, especially when we don’t know how ugly it might get. Also, if Donald Trump were to be ousted, the degree to which the Trump Republican Party continues to remain comfortable with him at the helm, might reveal whether or not it will continue to maintain it majority—or even its relevance to the average American.
NOTE: Welcome to my readers from Austria and the Netherlands.
Many people assume that there are just two types of national economies, “Developed” or “Developing”. But that is certainly not the case, at all. There are still nations, mostly in Africa, where people subsist on just a few dollars per day. Such economies haven’t even begun to develop!
And other people have observed the rising tides, year-by-year, and realize that their homes, and their towns, will be inundated, within a decade or so. I will try to explain more of this, in future posts—from personal observation and study—about why some nations are evolving, and others are not.
There are three main categories of market development:—Developed, Developing and Frontier. A brief explanation is follows:
Developed Markets: are the easiest to identify, since they are the generally some of the largest economies; have attained a certain level of industrialization; posses reasonably large and efficient stock, and oftentimes bond, markets, and a stable currency.. Relatively high levels of education prevail, thus enabling a more capable labor force. As you can, the top investments in rude many global companies.
Developing Markets display economic advancement in the above-cited categories; however, they might be more advanced in some areas, and less so in others. Because there is more risk in less-advanced economies, home-grown large corporations are scarce, due to the more elementary capital structure, and a shortage of foreign investment. At least here, there are a few names of corporations that you are familiar with.
Categorization is somewhat judgmental, since South Korea is considered “developing” by some indexers; however, it is home to some of the world’s largest corporations, has a per capita income of 79% that of Japan, a highly educated labor force, and its per capita GDP is expected to surpass that of Japan and France perhaps by around 2020.
Frontier Markets are a catch-all category for nations that generally have: poorly-functioning economies; stock and capital markets, if any, are inefficient; most economic functions take place at the village level, often by barter; central governments are usually dysfunctional; and education is minimal. I doubt there are any familiar corporations in this group.
I have linked Fact Sheets of an ETF for each of the three categories. The iShares
ETFs have some of the highest trading volume; which, I believe makes them more liquid. Also, by using the same company’s ETFs, at least for my purposed in this post, the companies, countries and industries represented would be in the same location on the Fact Sheets.
NOTE: There are other ETFs, as well as actively-managed mutual funds, which would provide a range of investments in the same market categories. Please compare the various options in the event that you invest overseas.