Diversification of Your Securities

Studies show approximately how many securities issues need to be in a portfolio for practical diversification. The futility of the attempt becomes evident when you realize that this pursuit is actually a vague effort for most investors.

Diversification to overcome risk varies by investor needs and characteristics. It has relatively little to do with the number of securities in a portfolio,whether there are thirty or 100 or more invested.

Moreover, investors also tend to seek diversification by purchasing several mutual funds. However, in doing so, they may be duplicating a good amount of their portfolios. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Inflation Effects on Corporate Bonds

Worrying about corporate bonds you own and the specter of inflation? What will happen to the value of the bonds when interest rates go up?

You get that protection in the form of diversified, low-cost bond funds with shorter duration, that reinvest their income.

I constantly refer to duration, which the financial media unfortunately and ignorantly tends to overlook.

The duration should match the period you intend to hold the bond funds. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Converting a 401 (k)

     What do you do with your 401(k) when you change jobs?

    You have several options with your 401 (k) retirement plan:

    You can roll your money over into your new employer’s plan, if they allow you that privilege.

    You can keep money in your old employer’s plan, if permitted.

    You can roll your money into traditional IRA plans. Check your other options, especially because some may apply more specifically to your financial and family situation. Those regulations change from time to time.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Know How to Use Wall Street

I always have made this distinction about Wall Street: It’s simultaneously an investment community and a constant-trading medium. Both are essential.

But trading aspects can go to extremes. When extreme actions occur, there can be potential danger. It is thus essential that the average public understand how Wall Street operates.

I have found from experience that the average investor does well by avoiding trading extremes. That’s possible by sticking to a disciplined, favorite strategy and then forgetting daily market prices. You don’t need constant financial news, unless your investment strategy calls for it. Relatively few strategies do.

Short-term, in-and-out, frenzied trading by the pros is their game, not yours. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Trying to Pick Stock Winners?

It is harder to pick stock winners than you may think from perusing the financial media. Yes, everyone believes they can, but after all the effort, how many successful picks can you really find?

You hear about big stock winners but how many securities lottery winners are available? How many are recognizable early on? It’s always easy to find those who did well-- after the fact.

Furthermore, when you look at these relatively small numbers of winners, you find that they had their periods of struggle. The profit numbers look excellent only after years of market ups and downs. How many investors had the stomach to buy those stocks at their lows and hold on to them to their highs?

None of the successful securities had gone up in a straight line. Most hit bad cycles when the original holders deserted ship and sold.

Market psychology is always a serious factor that dictates the lack of discipline required of investors. Most take what profits they see on the way up, and run. So the odds of achieving huge winnings are even steeper.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Understanding Investing Moods and Sentiments

Moods are relatively long-lasting emotions. Sentiments are shorter-term. They can affect how stock market cycles react and can precipitate booms and busts.

That is because cycles can easily grow into the fully grown varieties. It is the way minor bear markets start and deeper recessions fester. Given enough impetus and human error, financial meltdowns will eventually occur. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Short-Term Investing Trap

There are two kinds of investors. Traders who need daily quotes which can often be unrealistic. And long-term investors who get misled and potentially hurt, should they wander occasionally into short-term transactions without knowledge of the game they’re in.

Long-term investors who let themselves be guided by volatile daily quotes can always be in for a rocky ride where the odds are tipped against them.

They have obviously lost their strategy and discipline. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Inept Securities Analysts

My comments for efforts of the so-called fundamentalist securities analysts who evaluate individual companies, seeking investment opportunities. Distinguish those fundamentalists from technical analysts.

It’s important that you make the distinction; one is involved solely with the operations of the company. The technician has little to do with how the company is run, but primarily with the movement of its securities or the overall market.

To complicate matters most of the time, too many analysts confuse their observations with both points of view. That shows a lack of discipline, which I’ve found is the prime reason most investors, pros and amateur, never get optimum odds. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

ETFs are Different

Exchange-traded funds, or ETFs, differ from mutual funds, in that they are traded on exchanges.

From time to time, their securities may be lent for purposes of short selling, It’s a source of added income. The stock-lending profits of such ETF funds can be substantial.

A question on behalf of their stockholders: Do earnings from lending to short sellers go back to shareholders of the ETF, or to its managers?

In some funds, almost all go to the shareholders, while as little as half may be returned to others.

Check your ETF investments, to see how your managers treat such earnings.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Preventing Financial Meltdowns

Further to my previous blog with regard to the short-term psychology that permeated the entire useless, extraordinarily expensive, government bailout philosophy, whereby bank and investment company net worth figures were daily devalued to so-called “toxic” levels:

There were defenders on Wall Street for this sham. Some insisted that standard accounting rules were to be defended as if they were cast in stone. After all, the rules became a boon for Wall Street short sellers and the avalanche of traders that make up the financial community, The folks to which the media give far too much attention.

Ever-lower values were thereby created for securities with little or no true market with which to establish real values. And it produced volatility that made for tremendous trading profits among short-term traders who predominate the scene.

This created havoc among all other small and large investors in pension and institutional funds, who look to the long-term and are not interested in daily or even weekly pricing. All true investors got run over by this mark-to-market onslaught.

Along with the economy.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Financial Meltdowns Because of Mark-to-Market

Refer to my past  blog comments about short-term trading, with its effects on investment odds, and also financial meltdowns:

They usually have to do with pros, even governmental “experts” reacting to problems, usually in a panic mode.

I feel the 2008-2009 financial rescuers, who had come from the financial community, were attuned only to the short term, and thus could not see how caution, by avoiding panic, would overcome our financial problems. They never envisioned the danger of acting in haste.

One major example: The value of collateralized debt obligations, CDOs. or their derivatives, were “marked-to-market,” under so-called fair value accounting. The latter is part of the Generally Accepted Accounting Principles (GAAP) rule in place since the 1990s.

But that rule could easily have been suspended for the emergency. CDOs are not usual items that accountants measure in balance sheets.

As a result, bank and investment company net worth figures were daily devalued to so-called “toxic” levels. Those levels were actually a fiction, brought on by an illiquid market, where true fair value was impossible to determine. The rescuers were blinded by their own personal and business backgrounds.

That short-term psychology permeated the entire useless, extraordinarily expensive, bailout philosophy. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Short-Term Securities Traders

Short-term securities traders will no doubt disagree, but then they have no time to really check independent research that confirm my position.

Short-term, in-and-out, frenzied trading by the pros is not an investment odds enhancer. It’s even what helps foster financial meltdowns once they get underway.

It’s the segment of Wall Street conventional thinking that average, Main Street investors ought to avoid even during normal markets.

Stick to the more long-term medium that Wall Street can offer individuals and institutional investors who can disregard their conventional short-term instincts.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Financial Recovery

I previously commented that much of the lack of success in financial bailouts can probably be attributed to the fact that our experts come from a community attuned to short-term. 

On Wall Street, the long-term is a few weeks, despite the grandiose talk of planning used in marketing literature. This short-term psychology is evident in the manner by which bailout efforts are undertaken during financial emergencies.

Often that error is enforced by government in the form of strict regulation that is actually a reaction to the very short-term panic that such regulation supposedly has  developed to suppress.

Potential solutions in the 2008-2009 financial meltdown probably would have worked over the longer term, had panic not arisen. These are never successful for short-term markets that regulation overlooks.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Financial Bailout Efforts

As I have often mentioned, referring to booms and busts and the role of quants in attempting to prevent them, I see a weakness in math models, It happened with the LTCM breakdown and was a factor in the sub-prime crisis.

There is a common thread among financial breakdowns. They have to do with how the financial community reacts to problems. They panic. Our “experts” who come to the rescue are from the financial community, attuned only to the short term and cannot see how caution, and avoiding impulsive action can overcome the danger of acting in haste,

There was a human error in these past “rescue” instances, other than in mathematical calculations. It had to do with the need for bailout haste.

Has anyone ever questioned the fact that experts we have relied on are all attuned to the short term in their professional areas of expertise?(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Noise From Wall Street

Wall Street noise, comprised of a constant banter of news and chatter, dispensed by the media in all its forms, is essentially short term.

Moreover, much of that tremendous clutter is disseminated by Wall Street habitues pushing their wares at the public. That’s understandable, also.

But all such commentaries and recommendations tend to rail against long-term strategy because turnover is the wherewithal, that the financial community makes it real money on.

Keep that in mind, when you invest. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Methods For Preventing Financial Meltdowns

Vaunted mathematical models have done poorly in preventing financial meltdowns.

Example: The LTCM debacle of 1998 and the sub-prime mortgage disaster of 2008. 

Could they have been prevented or even mitigated?

Preventive math models were made up by top researchers, mathematicians, and “quants,” who figured they had anticipated all cyclic contingencies.

Yet, bond markets fell apart despite the calculations. Afterward, the quants found they should have looked at contingencies even further back than they had.

But I see a weakness in math models, no matter how much research is done. It happened with the LTCM breakdown and was a factor in the sub-prime crisis.

There is a common thread between the two breakdowns which has to do with how we react to problems in a panic. Our “experts” who come to the rescue are from the financial community, attuned only to the short term and cannot see how caution, and avoiding panic can overcome the danger of acting in haste,(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Dodd-Frank Can’t Avoid Market Bubbles

Wall Street will never avoid bubbles. No matter how many layers of supervision the statist politicians in Washington lay on.

Particularly because of the cozy relationships in the financial community, you have continual, irrational optimism and the other extreme, pessimism, which occur in chronic cycles.

That volatility of psychology affects earnings estimates and market moods and sentiments. It cannot be stopped by fiat. And it is responsible for booms and busts. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.

Why Invest in a Hedge Fund?

 Hedge funds try to make up for their enormous fees by using either esoteric investments or excessive leverage. They use huge amounts of investor capital to achieve this advantage that average investors cannot muster.

They can get into situations such as short selling and derivatives and unusual techniques. They get involved with leveraged buyouts and exotic ventures that vary, for instance, from the film industry to buying life insurance settlement funds.

But then, risks are much higher. Too high, in relation to the potential gains. The hedge funds really do not compensate their investors for exorbitant risk, as they do their fund managers for their efforts.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Securities Prospects

Independent analytical outfits who are able to do a better job at securities research are hard-put to find clients among the financial professionals who are willing to buy a decent analytical product from them. Many left the business. 

Why?

    The average analyst will correctly tell you that stocks have risen, on average, about 10% over the long-term. But that has been in the past. Unless interest rates in the future remain extremely low, chances are that the future stock market will not earn this past figure. Some researchers have projected an average return of only 6%, and much less for the future.

    True, some financial academics claim that price earnings ratios for stocks are relatively low and this bodes well for the future of the stock market. My investigations over the years have told me that price/earnings are a terrible measuring tool. What is a high or low P/E is simply too relative and too dependent on other important factors, including interest rates.

    And let’s not forget the specter of future inflation because of our extraordinary budget deficits.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Employees and Their Retirement

Employers usually just contribute retirement funds each year, and the employee takes responsibility for his or her investing.

Employer contributions are in the form of 401 (k) s. (In the past, the employer would be responsible for the management of the funds.) The employee today can add personal investments to what the employer contributes.

The bottom line: The employee today has to bear the investment responsibility.

So, it’s important that you pay attention to a viable mix of possible low-cost, diversified investment tools. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Why is Disciplined Strategy Important?

I have investigated the discipline of strategy use. Discipline is much more essential than strategy usage; poorly done it upsets the market timing plans of the overwhelming majority of investors, professionals as well as just amateurs.

Iron-clad discipline must be part of each strategy. The reason to buy a security has to be an integral part of the eventual reason to sell. That’s discipline. But it isn’t easy to maintain when you’re a Main Street investor having to contend with media noise.

That consists of the usual panoply of opinions, most of which are broker, “adviser,” or salesmen-oriented. inaccurate or biased. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

What Type of Gold?

I’m not a big gold enthusiast but this is for those who insist on its purchase at all odds, at all times:

Purveyors of gold investments often sell one type without discussing various other forms that you can buy. Or whether everyone ought to be buying gold, even with inflation looming. The public never gets full information, nor the pros and cons of gold ownership.

After all, gold can be in bullion or bars, or coins. And if the latter, they can be rare, or bought just for content. In either instance, they must be stored for safety, and preferably insured. Furthermore, gold values can be had in mining shares or in the form if mutual funds or ETFs.

There is lots of confusion, and the fear of not getting it exactly right. And I haven’t even gotten to whether gold pricing can become a bubble. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

There Are Stock Losses Galore

  

     It is harder to pick stock winners than you may think from reading some of the financial media. Yes, everyone believes they can pick winners, when you read what the advisers, analysts and other stock touts have to say.

    But after all their effort, how many real winners do the media really find? You hear about big stock winning predictors in the media. But with every investigative effort, we discover there are far, far more losers. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Why Invest in TIPS?

TIPS are bonds issued by the federal government through a bank, broker, or the Treasury, for five, ten and twenty year maturities. Their value grows to the extent of inflation. TIPS also are bought in mutual funds and ETFs.

Investors seek inflation protection more than interest, which is relatively low right now. With little current inflation, returns are insignificant. 

Potential inflation makes for their investor attraction.

State and local taxes do not apply on U.S. Treasury obligations. However, additional interest paid because of inflation will be subject to federal taxes.

But why buy them? I have never considered TIPS a valid bond inflation advantage, despite the mass of what I feel is publish-by-rote-publicity that TIPS receive in the financial media.

Moreover, you can get inflation protection elsewhere. Even with other bond funds, yielding much higher returns. The public has to learn how to use principles of “duration” which the media is remiss in ever fully explaining, (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

My Comments as an Independent Financial Writer

 Many authors of how-to financial books are tied into Wall Street in some way. If they are not procuring their own advisory accounts, they are selling them for others. From only one point of view when there are pros and cons to every investment strategy I’ve ever investigated.

These authors could be offering the reader investment suggestion or brokerage services, whatever sells, once they get known through the book they have authored. They rarely cite actual independent research they have done or the reputable work of those without an axe to grind.

It’s fine to be a financial author with financial theories. Where’s the real research? (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Market Timing Assures Problems

I often discuss the foolishness of attempting to time buying and selling securities. Occasionally, investors can luck out in such efforts. But this success can only be accidental; most timers never get out at the highs they claim, nor back into the market in time.

They get media play, but check independent research and you find the market timers are generally not the success they purport to be. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Choosing Trading Strategies

The purpose of my investigations of thousands of independent studies of strategies and investing techniques has helped me delve into ways to simplify investment techniques and permit a more successful approach to trading and investing.

    Not all the panaceas that you usually read and hear about are as they are reported by the media.

    I have found from experience that the average investor, as opposed to pros, does well by avoiding trading extremes. That’s possible by sticking to a disciplined favorite strategy and then forgetting daily market prices. You don’t need constant financial news, unless your investment strategy calls for it. Relatively few strategies do.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Stock Average Returns Can Mislead You

This is what I often say about realistic stock potential:

They have returned about 7% above the rate of inflation for the past two hundred years. And in twenty year periods, they have outperformed bonds about 90% of the time. Yet, that figure is misleading.

These statistics conceal important facts. Someone who had invested at the market peak in 1929 would have had to wait until 1998 to reach a return of 10% on their money. (That would include dividends.) This is an after-inflation yearly return of 7%. Actual returns will differ greatly, depending on the time you actually begin investing in the market.

An S & P 500 investor from 1929 through 1949 received an after-inflation return of about 4.5%. An S & P 500 investor starting in 1932, and holding on until 1951, received an after-inflation annual return of about 10.8%. That works out to over 6% more per year. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Use of Disciplined Strategy

The Dow Industrial Average contains some of the largest, soundest companies, and cannot be considered speculative. Yet, the market all the time will be highly volatile. So, added pressures exist for tempting frequent buying and selling.

This may be great for professionals who make up 80% and more of the market, but it can be disastrous for average investors subject to the influences that induce market timing.

The solution? Disciplined strategy.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Helping Your Investing Odds

  My aim has always been to increase the odds of success for all investors. Investing need not be a toss-up type of game where an investor has to outsmart someone else in order to win more often than not. All you need for investment success are better odds, not surefire winners.

           

What is therefore needed to accomplish all that is a special discipline. That means a strict avoidance of the media and Wall Street/financial industry distractions and noise. The latter constantly bombard the investor from all sides.

           

Knowing why and how to avoid these distractions, along with how to cope in the jungle-like investment environment or “noise” are the keys to investment success.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Investment Strategies Should Be Simple

 Investment strategies should be tailored to individual preferences and needs. What tips the odds for each investor is the discipline employed in the use of strategy. 

Every investor has built into the purpose for the purchase of a security, the reason to sell it. Discipline from the original intent guides that sale.

                       

Most importantly, strategies cannot be intermingled. You sell a stock when the purpose for which you bought it no longer holds. But there must have been only one purpose. If it was excellent earnings growth and that stopped , then sell.

                       

Note; Low price earnings is too nebulous, vague and variable, to be a disciplined strategy.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)