Posts Tagged Investment Primer


Wall Street seems to have gotten its fingerprints all over Donald Trump’s plans to Repeal Dodd-Frank, and just eliminate the Department of Labor’s “Fiduciary Rule” outright.  “Dodd” was passed to rein-in the Banks following The Great Recession (4Q07 to 1Q09).  The Fiduciary Rule, on the other hand, applies specifically to Qualified Retirement Plans (IRAs, 401(k)s, 403(b)s, etc), and it requires financial professionals to place the clients’ interests ahead of the firm’s, and their own.  Shouldn’t that rule apply to all securities accounts?

Back in November, I wrote about giving our combined personal investment portfolio its first major overhaul ever, because: I have on-going concerns about what havoc Donald Trump might wreck on our Economy; and I wish to simplify our portfolio, in the event that my wife and daughter might have to take over managing it at some point.  And given Trump’s continued irrational behavior, these concerns still seem as relevant as ever.

Yale Economics Professor Joseph Shiller won the Nobel Prize, in 2013, for his empirical analysis of asset prices.  Shiller concluded that the market is inefficient, and he has suggested that passive index funds can do just as well as actively-managed ones, but without the higher management fees.  Warren Buffett, in his Letter to Berkshire Hathaway Shareholders, concurred, suggesting that an S & P 500 index fund, possibly with other stock exchange-traded funds, plus individual bonds or a bond ETF, would perform better in the absence of the management fees.  John Boggle, founder of Vanguard Funds, agrees.

In May of 2012, I wrote a post, comparing mutual funds and ETFs.  It provided a brief, but general comparison between actively-traded mutual funds and ETFs.  Given what is happening now; however, I believe that the Advantage has certainly shifted in favor of ETFs.

Here are some sources for learning more about ETFs:

The CNBC (financial channel) web site provides news, plus market statistics.   On the “Markets” drop-down box, the various global markets can be checked in real-time.  At the bottom of the drop-down, go to “ETFs” for a list, prices, performance, and trading volume of the most popular ETFs, with the Sector SPDRs just below them.

Then go to the State Street web page for SPY, and that company also distributes the Sector SPDRs.  On the SPY page, a Fact Sheet can be viewed, as well as other literature.

On the Sector SPDR page, there are Fact Sheets for each of the sector ETFs, performance and a list of all of the stocks, within each of the sectors of the S & P 500. There also is a Sector Tracker, which provides historical performance, for each sector, across various time-frames.

iShares provides a range of mostly overseas ETF, either globally, by region and for many individual countries. Some of the iShares ETFs that I used, when I wanted to put money into various overseas markets, are as follows: EFA for the EAFE (Europe, Australia and there Far East) Index of industrialized markets, EEM, for Diversified Emerging Markets, or EPP for Asia-Pacific, excluding Japan), among others.
Lastly, check the Stock-Encyclopedia ETF Guide to research any ETF, to include Fast Sheet and other research material,

There are hundreds of ETFs on the market.  If your advisor suggests one, be sure to have him/her explain why that (those) particular one(s) would be suitable for your needs.  I would suggest shying away from ETFs that invest in commodities and foreign exchange, because those markets are more oriented toward institutional investors.  Similarly, be aware that ETFs that double or triple the upside of an index, will similarly increase the risk on the downside.

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Psychologists suggest that a good way to understand a somewhat complex idea—especially for those over 50—is with charts and graphs.  For stocks, however, there is a three-dimensional object that surely you have seen—probably threw it down, like me!  The Rubik’s Cube!  Now, I’m not suggesting that you solve it; rather, just picture it!  But, the six-sided cube, with three smaller blocks on each edge, meets our needs perfectly.

Consider the green (or any color) face of the cube.  Large, Medium and Small companies are represented by the top, second and third rows across, respectively.  You will undoubtedly see the term “Cap” after one of those sizes, from time-to-time, which refers to the amount of capital that the various companies have to work with.

The left-hand column includes “Value” stocks, which are generally more mature and somewhat more stable.  “Growth” stocks are represented by the right-hand column, and are normally newer, and more volatile, but not necessarily to any dangerous extent.  “Blend” companies, listed down the middle, have some of the characteristics of both value and growth.  So, a large-cap value company would be represented by the upper left-hand block in our visualization, and a small-cap blend would be in the middle block on the bottom row.

For the investor who wishes to keep things simple, and doesn’t want to invest in individual stocks or bonds, Exchange-Traded Funds are a good option.  ETFs tend to replicate all of the securities in a particular index, for instance:  the Standard and Poor’s 500; stocks of one industry; foreign securities, etc.  Most securities firms offer a wide range of ETFs for you to choose from.  I have found two companies especially helpful:  Sector SPDRs, for adding greater weight by replicating just the component securities of a particular industrial sector of the    S & P 500; and iShares for a wide range of Foreign securities, on a Regional, Country or Global basis.  ETF Tracker, although not a distributor of ETFs, is a good source of information.

Investors shouldn’t place all of their money in companies of just one type—large or small, value or growth.  Similarly, it can be risky to bet it all in one Industrial Sector, such as: Energy; Health Care; Technology or Utilities.  In fact, a good way to suffer a big loss is to invest only in: industries that did well last year, figuring that that trend will continue; industries that suffered last year, expecting a turn-around; or industries that you know well.  And never, ever go whole hog, by investing heavily in the industry that you earn your living in!

Remember that the Rubik’s Cube is three-dimensional. But, let’s extend that third dimension—the depth, perhaps—out to include, say, nine or ten blocks.  That would compare to the approximate number of basic industries in our Economy.  Diversify among, at least a range of sectors, but you don’t have to invest in every one, in order to diversify. If you prefer. you need not invest in individual stocks.

I would also suggest considering a fourth dimension, which you may or may not feel comfortable in doing–Overseas Securities.  Research material is in short supply for many individual Global (U. S. and Foreign) or just Foreign Securities.  Besides Mutual Funds, Exchange-Traded Funds might be a good alternative–both for Domestic and Foreign Securities–for the investor who wants to keep things simple.

Whether you are interested in investing in individual securities, mutual funds or ETFs, be sure to check the web site(s) of securities firm(s) you deal with, or with particular mutual fund companies.  It’s important, when you consider investing in mutual funds that you know the details:  how they have ranked in their respective categories; what their investment goals are; big mutual funds often become more of an index fund, but with much higher prices;  and how long the investment manager has been working on that fund.

The Bond Market is quite difficult to explain, at least in a scatter-shot approach, such as a blog post.  And, unfortunately, most brokers don’t understand the bond market, since it doesn’t have the pizzazz that the stock market does.  Over the years, however, I have written a number of blog posts on the Fixed Income market, which you can read by clicking on the “Investing” Tag, at the right.

NOTE:  As always, if you don’t find what you’re looking for, send a Comment, which I will try to respond to.

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Today, the Federal Open Market Committee raised the “Fed Funds” rate, by 0.25%, to a range of 0.50%-to-0.75%.  The Fed does not actually set the rates, per se; rather the Fund’s rate is merely a target range in which our central bank suggests financial institutions lend money to one another—generally on an overnight, or very short-term basis.  In this manner, it more or less, nudges rates, which are sometimes reflected throughout the maturity range (three months to 30 years), but sometimes not.

Besides the Federal Reserve Board, which is an arm of the Federal Government in Washington, there are also twelve regional Federal Reserve Banks.  Each of them are privately owned, have their own Boards of Directors, and regulates the banks in their respective Districts.  As you will see in the linked “Rube Goldberg” article, from the New York Times, the Federal Reserve Bank (FRB) of New York actually implements the monetary policies that the FOMC makes. The light-hearted link is as follows:

The Times article was initially published after the FOMC meeting last December, which was the last time that the Fed raised the Funds Rate.  Today’s rate hike was widely expected, since Chairwoman Janet Yellen had recently mentioned its likelihood, at today’s meeting.  The reason that the stock Market immediately plummeted, however, was the inclusion in Mrs. Yellen’s usual after-meeting statement, which suggested that the Fed would probably raise rates three times in 2017.  But, pending changes in various economic metrics, those increases may or may not actuality happen.

Generally, a rate increase signals the Fed’s belief that the economy is improving, while a decrease suggests weakness.  The financial markets, however, tend to be quite fickle.  After 39 years of following the bond market quite closely, I look at the Funds Rate, and recall it being mostly in the four-to-five percent range.  During the early ‘80s, the Fed Funds rate reached a historical high of 20%, as noted in the linked The Balance article: So, even if the rate did increase three times, assumedly to a range of 1.25% to 1.50%, that wouldn’t be overwhelming; but, let’s see what happens.

As I’ve suggested many times in this blog:  financial markets have trouble dealing with Uncertainty; and everything should be taken into context. One other reminder would be:  Don’t try to get ahead—anticipate without reason—of the market!

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When fellow bloggers visit my site, I generally visit theirs; and I have sometimes found them worth following, at least, from time-to-time.  Blogs that describe cooking, working for social causes, mental health issues among returning veterans, etc, can be both interesting and helpful.  Also, they are generally not in a position to be harmful to the reader.  Investment ideas, however, should clearly be presented—and read—as being for general information purposes only, and readers should be cautioned to seek their own specific advice!

No physician is going to treat you without having a detailed knowledge of your medical history—past, present and family.  Likewise, an experienced financial advisor would not offer investment advice without knowing about: your family situation; financial picture; risk-tolerance; long-term goals; etc.  But, when someone accepts even perceived “advice” on specific securities or financial strategies, from on-line blogs, TV “Informercials”, media articles, that information could truly be harmful.

Twenty years ago, “day-trading” was all the rage among investors who didn’t wish to learn before they plunged into the stock market.  They spent the day (sometimes giving-up their jobs) buying and selling the same stocks (and settling accounts before each day’s market close), without knowing much about the companies—just the ticker symbols!  Were they profitable, had experienced senior management, market leaders in their industries, etc?  Just don’t bother them now with the facts!  But, that craze has since gone the way of the Dutch Tulip Bubble of 1637.

Lastly, the Investment Marketplace today has changed significantly from when I joined it, in 1973.  Our financial institutions have changed, American Industry has shifted from manufacturing-to-service-to digital, there are many more public companies and investment vehicles, and the whole world has gone global! And,  don’t forget the significant jump in the volume and speed of information—credible or not—on a 24/7 basis.

This warrants a suitable comprehension of today’s marketplace within a proper historical context.  Some things have changed, and others have not.  But remember: there are no short-cuts to investing!

NOTE:  There are a number of investment-related posts on this blog. Just click on the Investing or Investment Primer tags (to the right), and scroll through.

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Investors sometimes panic when they check the price-per-share of their stocks or mutual funds. Today, May 13 (with May 15 being a Sunday), I checked one of my stocks and, of course, a dividend was paid.  So, now I own a few more shares at a slightly lower price. Other investors may opt to receive the dividend in cash, and either have it deposited to one of their accounts, or have a check mailed, depending upon your securities firm’s options.

Dividends of both stocks (including ETFs) and mutual funds, at least those that pay them, are usually on a regular cycle, which oftentimes begins on February 15 (and May, August and November); however, dividends can be paid-out in any cycle that the corporation or fund company wishes.

Additionally, companies are not required to pay dividends.  In fact they may skip a payment, the amount may change, or they may even stop paying them. But, when they are paid—whether in cash or additional shares—that would be a taxable event, unless the securities are held in a tax-deferred account, such as an IRA or 401(k).  New corporations (but usually not mutual funds) might not pay dividends if they believe that they can serve the shareholders’ interests better by re-investing the same available cash back into the company.

There is one other twist, regarding mutual funds, that often causes considerable anguish to shareholders.  U. S. Securities Laws, which were written back in the 1930s, permit mutual funds to merely pass income through to their respective shareholders and, thus, not be taxed themselves.  This is how partnerships generally operate.

Since quarterly stock dividends might only be a fraction of a percent at any one distribution date—but several percent when annualized—they often hardly move the needle.  Capital gains distributions, however, either long-term or short, can be much larger.  The fund companies generally try to balance-out their capital gains and losses, so as to reduce the tax-impact on their investors.

Those 1930s securities laws require that the bulk of capital gains be distributed in the year realized, or the IRS might begin to tax the fund directly.  Another problem with this scenario is that the shareholders who own the mutual fund(s) now might not even be the ones who owned it, and thus benefitted, when the securities’ market value ran-up.  In fact, many investors saw the market value of technology-heavy funds they owned start to drop precipitously when the Dot-Com bubble started to burst in 2000.

Accordingly, fund managers had to liquidate stocks, both to pay-off liquidations, and to avert seeing the market values decline even more.  During that mostly NASDAQ decline, many investors ended-up paying taxes on mutual funds that they had actually lost money on.  They got in after the big run-up; but, they were the ones left owning the shares when the managers had to liquidate.  And of course, the managers decided to sell their better-performing securities, so as not to irk the investors even more.

It would be quite useful to understand your securities firm’s web site, which should enable you to check your overall portfolio value, number of shares owned of each security, note any recent dividends or capital gains received, etc.  You should also be able to review past statements, account activity, confirmations of securities bought and sold.  In fact, if you have multiple accounts at the same firm, you should be able to group them, in order to review your total portfolio at one time, rather than skip from account to account.


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Hall of Fame baseball player Yogi Berra was affectionately known for his “Yogiisms”: sayings that sounded dumb at first, but had some street smarts behind them.  And one of the best known Yogiisms is: “It ain’t over ’til its over!”  And that expression certainly has relevance for the topic in question.

The Dow Jones Industrial Average dropped to just over 15,500 in February.  It has rebounded lately and on Monday, it closed at 17,074, which represents a recovery of 1,571 points, or 10.13%.  But, Yogi’s point was, its unwise to say that the worst is over yet.  Its important to keep in mind that there was an even greater market plunge last August. But, after recouping a great deal of that loss, another steep drop on the market roller coaster began again late last year.

Let me suggest, once again, that nothing much has changed!  China is still economically and politically inept?  The strategic confrontations with China, Iran and Russia still continue. With regard to Global Climate Change, China may be cheating, and the U. S. continues to stick its head in the sand.  Even good news, the fact that the U. S. economy is mostly stable, the impact of weak global markets, and the unhealthy strength of the U. S. Dollar, continue to overwhelm it.

Currently, the markets are fueled mostly by emotion, rather than by any rational thought.  And within that context, investors seem to always be moved by fear and greed.  To an extent, that causes greater volatility, further encouraging some people to buy and sell securities at the wrong time.  That means selling after the “correction”  (a 10% decline) was well under way, and investing during the later stages of the recovery.

Novice investors, especially those who invest in mutual funds, complain that their retirement accounts don’t match the published returns of the very funds that their money is invested in.  For the most part, those returns are lower; because, they trade in and out of the markets—and into and out of cash at random. That’s the problem with trading based on emotion.

Over the years, I have generally suggested that, if an investor feels compelled to make changes, especially if not sure of what they are doing, that they just “tweak” their portfolio—making subtle changes along the way.  At the same time, be sure to review your portfolio, from time-to-time, and make sure that you are still comfortable with the securities that you already own.

NOTE:  I generally do not try to offer specific advice through this blog; because, I don’t know any visitors’ personal situation, time-horizon, personal preferences, etc.  But for a general example, let me suggest the few changes that I have made over the past two years.

I have done very little trading, either this year or in 2015.  (perhaps that means that I am quite comfortable with what we are invested in.)  When the market was down, I invested part of the cash that had built-up in my wife’s and our grandson’s account.  I sold a utility industry mutual fund, which will probably not perform well when interest rates begin to rise, in order to raise cash for the mandatory withdrawals from my Traditional IRA, which I will do this year.


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A little curiosity and some education goes a long way!  Several decades back, most investors understood the stock and bond markets.  They realized the importance of balancing a portfolio among the various stock industrial sectors, and for owning a combination of stocks, bonds and cash.  Market volatility, on both the upside and down, were generally understood, and expected from time to time.  But, since the advent of the various personal retirement programs, all that has changed.

Approximately 40 years ago, with the introduction of IRAs and 401(k)s, and the like, many first-time investors began to pour money into the financial markets, and oftentimes through regular monthly contributions to mutual funds.  Over time, those accounts grew larger.  Unfortunately, many of the individual investors failed to ever properly understand what they were getting into.  Employer-sponsored plans generally don’t provide investment advice, and many securities firms fail to properly educate their clients, as well.

Are the markets going to continue their recent slump or might they be preparing to recover?  As usual, you never really know for sure.  But, I would recommend, especially for new investors, to tune-out some of the market commentaries in the media.  Last August’s market decline was, perhaps, worse than this year’s slump; but, slow, eroding drops often take longer to recover than ones like last August, when a sharp decline was followed by a quick recovery.  Either way, market volatility is always hard to take.

Commentaries that dwell on the fact that January’s decline was the worst beginning for a new year, since (you name it) is a meaningless point.  There is no difference between a ten percent drop in August, versus one in January/February, or any other time of the year. Likewise, there is nothing radically different between a ten percent “correction” (decline) in the Standard and Poor’s 500 and one of, let’s say, nine or twelve percent.  In fact, since most portfolios do not mirror the S & P 500, or any other one index, your primary concern should be: How much did your own portfolio drop?

I believe that the long-term Market Recovery, which began after The Great Recession ended, in early March of 2009, at least in the U.S, might have advanced too far and too fast.  Remember that Europe and Japan remained in doldrums at that time, developing markets began to suffer and then, over the past couple of years, commodity-dependent economies fell into a tail-spin.  Global trade declined sharply and all the while, overseas cash helped keep the U. S. economy and markets afloat.

Many investors are always reminding themselves that they really do need to learn more about what goes on in the financial markets, especially after every significant downturn. That is somewhat like telling yourself that you really do need to have your troublesome car battery checked, that leaky toilet fixed or shed a few pounds.  Many people just never seem to do so.  But, with regard to your investment portfolio, what comfort does that continued uncertainty provide for your long-term retirement plans?

For a greater understanding of investment basics, you might read the following linked blog posts.  Additionally, for can click on the Investing or Investment Primer hashtags (on the right).

“Investment Primer—Balancing your portfolio (Equities)”:

“Investment Primer—Think of your portfolio as one big pie,. with multiple pockets”:

“Investment Primer—Basic tools for your investment journey”:


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