Posts Tagged Investment Primer
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.
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 consistent growth has been.
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 bond, 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 on 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; but, so what if it keeps you around longer? Do you have any 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, that are in any of the particular industries. For instance, add a slice of IT/Technology (SYMBOL: XLK) and/or Health Care (XLV). Or, someone else might prefer Financials (XLF), or some 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 due your homework, consult with whomever you seek investment advice, and give some serious consideration before adding these 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!
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 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 the: 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 they 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 been the two consistently 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 has to respond to the booms and busts of the 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.
As is often the case, during the Global Financial Melt-Down, which began in 2008, excess global cash flowed to the US Dollar. The dollar is widely perceived as the strongest reserve currency, and the US Economy as, by far, the most liquid. Some cash did flow to other reserve currencies—the Euro, Pound Sterling and Yen–as well. But, when it comes to significant market swings, the US is the only economy that can accommodate large currency movements, both on the in-flow and the out-flow.
In the intervening eight years, since the Recovery began, a large portion of that flight money has recently been transferring–both to other currencies, and other markets. In this blog post, I would like to suggest a somewhat simplified process for investors to add one more element of diversification to their investment portfolios—global investing.
Regardless of where you live, most people have their money primarily invested in their home country. They are more familiar with the companies, and to negate any concern for foreign exchange risk. But, it is worth noting that the European and U. S. economies each have only 25% of the world GDP. So, by diversifying the geographical range of securities, the overall investment risk can be reduced.
There has been a huge shift of investment transactions, at least in the U. S., out of actively-managed securities, and into either exchange-traded funds or indexed mutual funds. Some $1 Trillion has been added, mostly to ETFs, over the pst year alone.
Since ETFs are based on indices that rarely change, the expenses are quite minimal. Also, a number of economists have demonstrated that the stock markets are quite irrational. So, why pay to beat the markets when few managers do so, at least not on a consistent basis.
Diversification is one of the most basic concepts of portfolio investing. Distribute the risk among different types of securities: stocks and bonds; large companies versus small; both dynamic “Growth” as well as more stable “Value” companies; and invest in securities in, at least, several different industries. Global investing just adds one more dimension in the overall diversification process.
Although I have readers from a number of different countries, the overwhelming number are from America. Since ETFs are available on the stock markets of many nations, foreign readers may modify these idea, as you wish. My basic approach is still to suggest adding that global dimension to your existing portfolio. Also, even though you might only care to expand your focus, say to your local region, the benefits will still ensue.
I would first consider some type of global developed markets ETF, such as one that replicates the EAFE (Europe, Australia and the Far East) Index (Symbol: EFA). I have also added a Pacific-excluding Japan Index (EPP), since that is the fastest growing region of the world. And then, I have added a Diversified Developing Markets ETF (EEM). You might prefer different ETFs for these ideas, prefer to add more to Europe or Latin America, or individual countries.
To research for yourself, and I hope that you do, I would suggest two web sites as places to start. Obviously, there are many more ETFs and many more web sites. Those two sites are: iShares, by BlackRock, and Stock-Encyclopedia, which provides a wealth of knowledge on exchange-traded funds. Whatever you do, be sure to check the “Fact Sheet”, which provides a good summary, and get used to checking the ones that you do invest in, on a regular basis.
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.
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.
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: https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135. 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!
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 reliable 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. For instance, perhaps 80-85% of stock trading is computerized; so, what you might see on television is mostly a charade, rather than “The Floor”. on which the real action takes place. 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.