Posts Tagged Personal Finance

WITH TRUMP’S BLESSING, WALL STREET APPEARS TO BE WRITING THE SCRIPT TO DE-REGULATE ITSELF!

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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NICHOLAS KRISTOFF’S OPEN LETTER TO TRUMP VOTERS

NOTE:  This is an open-letter that Nicholas Kristof wrote, in his regular NY Times column, to awaken all Trump Voters:

Dear Trump Voters,

You’ve been had. President Trump sold you a clunker. Now that he’s in the White House, he’s betraying you — and I’m writing in hopes that you’ll recognize that betrayal and hold him accountable.

Trump spoke to your genuine pain, to the fading of the American dream, and he won your votes. But will he deliver? Please watch his speeches carefully. You’ll notice that he promises outcomes, without explaining how they’ll be achieved. He’s a carnival huckster promising that America will thrive with his snake oil.

“We’re going to win, we’re going to win big, folks,” Trump declared Friday at the CPAC meeting, speaking of his foreign policy.

Great! Problem solved. Next? He then outlined his take on drug trafficking and what will surely be his outcome:
“No good. No good. Going to stop.” Wow! Why didn’t anyone else think of that?

Similarly, all looks rosy for tax outcomes: “We’re going to massively lower taxes on the middle class,” Trump said. But that seems like a classic shell game.

The Tax Policy Center estimated that Trump’s tax plan (to the extent that there is one) would hugely increase the federal debt and give middle-income households an average tax cut of $1,010, or 1.8 percent of after-tax income — while the top 1 percent would save $214,690, or 13.5 percent of after-tax income.

Trump made more than 280 campaign promises as a candidate, and a few — such as infrastructure spending to create jobs — would be sensible if done right. But there still is no infrastructure plan, and The Washington Post Fact Checker is tracking 60 specific campaign promises and found only six cases so far of promises kept.

It’s still early, and Trump has nominated a smart conservative to the Supreme Court and followed his campaign line on issues like barring refugees.

But while you voted for Trump because you put faith in his gauzy pledges, I bet he will do no better with campaign promises than with marriage vows.

Health care will be one of the greatest betrayals. On Friday, he described his plan: “We’re going to make it much better, we’re going to make it less expensive.”

Yet the steps that Republicans seem likely to take on health care will hurt ordinary Americans.

For example, Trump seems poised to weaken the contraception mandate for insurance coverage and curb funding for women’s health clinics. The upshot will likely be more unintended pregnancies, more abortions, more unplanned births — and more women dying of cervical cancer.

The biggest Trump bait-and-switch was visible Friday when he talked about giving Americans “access” to health care. That’s a scam his administration is moving toward, with millions of Americans likely to lose health insurance: Instead of promising insurance coverage, Trump now promises “access” — and if you can’t afford it, tough luck.

This promise of “access” is an echo of Marie Antoinette. In Trump’s worldview, starving French peasants wouldn’t have needed bread because they had “access” to cake.

Many of you voted for Trump because he campaigned as a populist. But instead of draining the swamp, he’s wallowing in it and monetizing the presidency. He retains his financial interests, refuses to release his taxes or explain what financial leverage Russia may have over him, and doubled the fee to join Mar-a-Lago to $200,000.

The greatest betrayal of all will come if, as some of his advisers recommend, he “reforms” and tears holes in some of the big safety net programs like Medicaid, Social Security or Medicare. Medicaid is particularly vulnerable.

Trump howls at the news media, not just because it embarrasses him, but because it provides an institutional check on his lies, incompetence and conflicts of interest. But we can take his vitriol: When the time comes, we will write Trump’s obituary, not the other way around.

Let’s not get distracted by his howls or tweets. What’s most important at this moment is not Trump’s theatrics, but the policies he is putting in place in areas like health care and immigration that will devastate the lives of ordinary Americans.

Trump’s career has often been built on scamming people who put their faith in him, as Trump University shows. Now he’s moved the scam to a much bigger stage, and he boasts of targeting Muslims, refugees and unauthorized immigrants.

Please don’t cheer, or acquiesce in these initial targets. The truth is that among the biggest losers from Trump policies will be you Trump voters, especially those of you from the working and middle class. You were hoping you’d elected a savior, and instead Donald Trump is doing to you what he did to just about everyone who ever trusted him: He’s betraying you.

The sooner you recognize that, the sooner you can fight back and push for policies that will protect your health care and Social Security, defend the integrity of our election system and protect your own interests. You have a false savior, and you will have to turn on him to save yourselves and our nation.

Note from Mr. Kristoff:  I invite you to sign up for my free, twice-weekly email newsletter. Please also join me on Facebook and Google+, watch my YouTube videos and follow me on Twitter (@NickKristof).

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HOW MIGHT YOU BETTER UNDERSTAND YOUR STOCK PORTFOLIO?

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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BACK TO THE SAUSAGE FACTORY, with MR. DONALD TRUMP?

Among the various financial woes that led America to the edge of the Financial Abyss, nothing hits home more directly than the Housing Crisis.  If not your home, then your neighbor’s!   To better understand that, let’s take a trip to the Sausage Factory.  The raw meat goes in one end, and reengineered sausages come out the other.

Interest rates had been declining since 2006; however, the Fed lowered them to barely above zero in 2008.  Consumers took advantage of low loan rates, especially for home mortgages.  Banks began to hire commissioned salesmen to pump-up profits during the housing boom.  Also,  by packaging mortgages, regardless of credit quality, the risk would be sold-off in what are called mortgage “pools”.

Banks sold huge pools of mortgages (up to hundreds of millions of dollars worth) to Fannie Mae and Freddie Mac, the government-sponsored agencies, and received their money back.  Fannie and Freddie, while caring little about credit quality themselves, just slapped their guarantees on the pools, and sold them to investment banks.  The banks, in turn, sold Mortgage-Backed Securities—bonds really—using the underlying stream of mortgage payments as collateral.

At this point in the sausage-making process, the secret ingredient was needed, “credit ratings”.  Moody’s, S & P and Fitch are the major rating services, and their ratings assure marketability, with the coveted “AAA” enabling the highest prices.  Since the rating fees are paid by the investment banks, the profit motive, no doubt, influenced the ratings.  The top rating was almost automatic, lest the banks shop the competition for the highest credit rating.

The last step along the sausage factory production process was the banks’ slicing and dicing area.   Most investors didn’t want to invest over a 30 year term, and to be paid from a fluctuating cash flow.  So, the banks grouped the first year’s cash flow from the entire mortgage pool, and used that to collateralize one-year mortgage-backed securities.  That process was repeated for each of the successive one-year cash flows

Everything was humming along smoothly:  interest rates remained low; home buyers were signing their names to anything; housing “flippers” were even boosting the home prices higher; mortgage originators were hauling-in the huge profits; Fannie and Freddie collected their fees; ditto for the rating agencies; investment bank stock prices spiked; and the investors were pleased with their returns.  And then, suddenly, the gravy train stopped!

Housing prices started falling; homeowners defaulted; the excessive supply of bonds outpaced the demand, and everyone along the way had no one to pass the mortgages on to.  The originating banks, Fannie and Freddie, and the investment banks all had trouble financing the mortgages that were in their possession when the bubble broke!  Remember that this was not the only toxic asset effecting our economy, and most specifically, the lack of liquidity was systemic throughout the banking system.

That meant that the banks could neither extend credit to each other, nor to businesses or individuals.  Consumer spending nose-dived, lay-offs increased and foreclosures continued to surge.  Fannie and Freddie had to be taken-over by the Treasury, AIG Insurance Co. was a basket case, GM and Chrysler had to be bailed-out, and so on…

President Obama signed the Dodd-Frank Act into law in July of 2010.  That legislation was designed to rein-in the banks, and to ensure that a similar systemic banking crisis doesn’t occur again.  Donald Trump, however, wants to repeal Dodd-Frank, which might take us back to those days, of not just a housing bubble, but a systemic Banking Crisis, as well.  So tell me, now that we’ve seen what might potentially lurk, in and around, Donald Trump’s Sausage Factory, do we really want to go back there again?

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WHY I DUMPED MY APPLE STOCK—THE CONCLUSION!

Aside from Trump-proofing our investment portfolio, my more overriding concern in re-arranging it, was to simplify it!  Although my Wife and I discuss our finances openly, and we talk about our investments frequently, I want her to be more involved, and have a deeper understanding of how we are doing, and what we are doing—on a regular basis.

In a recent post, I pointed-out that I had shifted the Asset Groups around, as follows: Individual Stocks from 42%, down to 16%; stock ETFs (exchange-traded funds) from 18%, increased to 33%; Mutual Funds remained even, from 37% to 34%, and Cash increased from 6% to 16% (plus, we have a little more outside).

The more realistic way to understand those changes, however, is as follows:  stocks—both individually, in ETFs and two mutual funds—have hardly been changed; because, two of the three mutual funds (8%), are stock mutual funds.  A global bond fund represents 25% of the total portfolio, for balance.  And, cash has increased by ten percent.  But, why’d I shift stocks around, rather than convert them to bonds, other securities or cash?

I believe that major indices, such as the Dow Jones Industrials and the S & P 500, are an easier concept for my Wife to feel comfortable with.  Investing in ETFs is basically just accepting the “law of averages”.  For instance, a particular ETF just tracks all of the securities in the particular index, and that includes both the good and the bad ones.  In effect, you can’t go wrong if you match the market, so to speak!

Most indices are weighted, so that each security’s proportion is based on the relative size of the various companies.  Apple, Inc., the largest component in the S & P 500, accounts for 3.25%, while the smallest represents just a tiny fraction of one percent of the index.–and the ETF.  We will still monitor the ETFs so that one or two stocks don’t grow out of proportion, as to make the index meaningless.  Similarly, the same can be said for the component companies of any one industrial sector, and such monitoring would be across all the investment groups.

Yale Professor Robert Shiller won the 2013 Nobel Prize in Economics, for his empirical research on Efficient Markets.  Shiller concluded that the markets are inefficient, and that various external factors often effect the outcome.  Accordingly, he recommends investing in stock indices, since very few investors have ever beaten the market. An article about Shiller’s Nobel win, and ETFs, is linked, as follows: https://www.thestreet.com/story/12069744/1/index-investing-wins-the-nobel-prize.html

Using ETFs reduces the need to analyze each stock; however, we will monitor the indices, as noted above.  Besides the sector weightings, I will probably modify the relative amounts in the various ETFs by company size, from time-to-time. And at some future date, we might decide to sell the remaining four individual stocks and/or the stock mutual funds.  Now, my toughest sales job awaits me—selling this idea to my Wife!

NOTE:  I have linked a post that I wrote some time ago, which hopefully, will be of value to readers who are unfamiliar with ETFs: https://thetruthoncommonsense.com/2012/05/12/which-is-better-etfs-or-mutual-funds/.

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WHAT’S BEHIND THE FED’S INTEREST RATE CURTIN?

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!

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WHY I DUMPED MY APPLE STOCK A WEEK AGO MONDAY!

FULL DISCLOSURE:  I do not provide specific investment advice on this blog; however, I did sell all of my Apple stock last Monday.  Now, I did this for my personal reasons, and I certainly am not suggesting that you should consider selling the stock, as well.  Apple is still a great and admirable corporation, and I might even buy some back in the future.  I believe, however, that the manner in which I approached that decision might be of interest to some readers.

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I came to my conclusion, to re-shuffle my portfolio, oddly enough, while lying on a hospital gurney, waiting for a very simple procedure.  At the time, I realized that I wanted to have a bit more liquidity until I knew more about who would be on Trump’s Financial Team, and what his final agenda might be.  At least, he would still have to go through Congress, once he takes Office, and prior to making any devious moves.

In September of 2008, President George W. Bush told the nation that we were looking into a financial abyss.  The markets were a little skittish, as they always are during a Presidential hand-over; but, the anxiety was quite a bit worse due to the  financial crisis.  

Luckily, the transition from Bush’s Team to in-coming President Barack Obama’s went smoothly.  The next Treasury Secretary, Timothy Geithner, was merely moving over from the Fed-New York.  So,  everyone involved were experienced hands, and known quantities–both domestically and globally!

My concern this time around stems from Trump’s lack of policy knowledge, his unpredictability, and many of his ideological views that just do not stand-up to the “smell-test!”  His vow to impose tariffs on imports from Mexico and China would result in counter-tariffs on our exports to those countries.  Additionally, such Protectionism could lead to higher prices, an economy weakened by reduced consumer spending, and significantly higher unemployment.  In fact, that outcome would certainly work counter to Trump’s promise to bring the jobs back!

As the world’s largest corporation (by market capitalization), and one that assembles its iPhones in China, Apple would certainly be at the top of Donald Trump’s list of companies to harass.  I also sold a much smaller amount of First Solar since his preference to ignore the value of new technology will probably harm the overall Renewable Energy Industry.

As I liquidated Apple, I shifted some of the proceeds into Sector SPDRs, which are ETFs that invest in just the corporate components of one particular sector (i.e,. Energy, Health Care, Telecom, Utilities, etc.) within the S & P 500 Index.  ETFs trade like stock; however, when an investor buys even a narrowly-defined sector, they get the strong companies, along with the weak.  I have linked the inter-active web site, which enables the reader to check the performance of a particular sector at various time-frames.  The link is as follows:  http://www.sectorspdr.com/sectorspdr/tools/sector-tracker.

For instance, I believe that the Energy SPDR, which is composed mostly of oil, gas and coal companies would benefit by having less competition from renewables, under Trump.  Health Care, with Trump’s threat to repeal “Obamacare”, is one to watch, since we do not know what, if anything, will replace it.  Telecom might prosper from the elimination of “Net Neutrality”; but, Utilities would be harmed if his protectionist trade policies result in higher inflation, and rising interest rates.

I tend to consider myself to be a Macro-Investor. There are so many extraneous factors that impact the financial markets, which many investment professionals either ignore or simply do not understand.  But the markets can be effected by trade policy, global political alliances, health care pandemics, and cultural discrimination, among other things.  In essence, financial markets do not exist in a vacuum.

NOTE:  If you have any questions about this post, just leave a Comment below.

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