Important Investment Psychology

                       

Lots of research exists on human investment behavior. Personal psychology has much to do with the way securities markets operate.

                       

I have mentioned in past comments, my studies and evaluations of over

1,600 investment strategies, and their pros and cons. In addition, I have

always said there is no one strategy I have found better than any other. What makes for investment success is strict discipline.

                       

Furthermore, discipline can be mastered, with proper personalized control over the psychological hazards that beset investors.

                       

Main Street and Wall Street investors should look at the

work done by Kahneman and Tversky on investing behavior. It will provide a glimpse of how investors think, often to their disadvantage.

                                           

Psychology does affect the way folks make securities market decisions, by affecting the discipline I suggest. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

                   

Average Securities Returns

                       

Stocks 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.

                       

However, 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.

Luck and chance with regard to time of market entry plays a major

role, so be mindful of the danger of relying on averages.

Investors are lulled into complacency with the false knowledge acquired about “average” returns. They hear what securities have earned on average going back years, and they then project the figures into the future.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Japanese and U.S. Economies

                       

                                                   

We know about corporate growth of Hitachi and a few other giants, but the Japanese economy has been flat and practically dormant for

twenty odd years. This has been the case despite huge Japanese

government spending, In fact, Japan public debt is now over 200% of GDP.

                       

Unfortunately, their economy will not recover anytime soon.The problem for the U.S. is that the administration has been on a path to “stimulate” the American economy, much the same way the Japanese have done.  That is, spending and borrowing their way to prosperity that they have failed to achieve.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Derivatives Are Back

 

                       

Remember the big noise about derivatives, such as interest rate swaps

and credit default swaps? Along with their connection with subprime

mortgages and collateralized debt obligations? With their alleged role in the financial meltdown? And how they had to overhauled and re-regulated?

                       

Lengthy investigations were made, and Congress made its conclusions with the Dodd-Frank legislation.

                       

Draconian regulation was not necessary after all. The derivative markets continue to operate pretty much as they had before the ruckus that had

little to do with derivatives as investment instruments.

The resulting  fine-tuning was not earth-shattering. .(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Are Bankers Greedy?

                       

Listening to public comments and opinions from all walks of life, most folks know little about finance and banking. Politicians on the left are among this group of the financially ignorant. If they knew more about finance, they would not be intellectually on the left.

                       

Thus, it’s entirely understandable that bashing bankers is fashionable, especially during tough economic times. Finding scapegoats is handy. It makes up for any guilt politicians may have when fomenting economic distress.

                       

Government excesses, such as poor fiscal policy and monetary policy from the Federal Reserve, most often produce economic problems, not bankers who become bystanders by necessity and happenstance.

                       

What succeeds as political ploys when all else fails? Blame bankers! Most folks haven’t a clue with which to disagree. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Media-Slant Investing Advice

                

                       

Giving advice on investment portfolios without regard to a client’s age, family condition, and needs, is ridiculous. Everyone has a different investing time horizon and current and future income needs. Those factors affect the choice of securities. In turn, they influence the percentage ownership and type of stocks or bonds to be held. And where bonds are chosen, the “duration” of the bonds used is essential.

                       

I would strongly advise everyone to be fully aware of what duration is and how it works. Very few media pundits write on the practical use of bond duration and its adaptation to take advantage of inflation, rather than the mere avoidance of bonds amidst inflation.

                       

Much of the practical value of media portfolio advice is, unfortunately, used to fill up space and not to enlighten. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Credit Card Debt Reduction Facts

                       

When you see a credit card balance reduction ad, two points will probably never be mentioned about credit card use.

                       

One: you pay income tax on any amount of debt you have reduced. Therefore, cutting that balance is not as simple as it may appear. Reduce your balance by $4,000 and it’s as if you had a taxable gain.

                       

Two: you have hurt your credit standing by resorting to such debt reduction. This may not bother you at first, but it may eventually cost you.

                       

Another point: How many folks who have so much credit card debt, that they have to resort to drastic measures, are actually permanently getting out of debt?

                       

You can be sure their spending habits will be getting them into the same situation, in a few years.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

                   

               

           

       

Unneeded, Expensive 12b-1 Mutual Fund Fees

                       

Most funds no longer charge 12b-1 mutual fund fees but they are still

around. These were originally permitted by the SEC to allow the marketing expense for new investors.

                       

They represent a small sales load that adds up over the years.

                       

The 12b-1 charges originally were used to pay fees for the distribution of

funds by brokers. But they still persist even when brokers are not involved, but are still  ostensibly used for sales and marketing efforts.

                       

Avoid mutual funds that charge them. Those fees become significant deductions from your accumulated holdings over the years.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

           

More on High Frequency Trading Costs

                   

In addition to our previous blog: Transaction cost arises from the fact that a fund's huge trades can drive prices up or down by tipping the balance of supply and demand. High-frequency trading has helped reduce "market-impact" cost by making it easier to break big trades into many little ones while transacting them very quickly,

                       

Trading costs from spreads and market impact have been cut in half over the past decade, From 0.5% of the trade amount for big company stocks to 0.25%. For small stocks, trading costs have dropped from 1% to 0.5%. In addition, high-frequency trading helps bring out hidden liquidity.

                       

The positives seem to outweigh the purported negatives. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

High Frequency Trading at Funds

                       

Small investors benefit from a reduction in trading costs. High-frequency trading helps, despite much of the notoriety it’s getting in the media.

Among costs are the bid-ask spread. A wide spread means the fund must pay significantly more to acquire or sell a stock.

                               

High- frequency trading has reduced this cost by narrowing spreads, Generally, wide spreads are seen as inefficient, with buyers and sellers having difficulty agreeing on an accurate price. Narrow spreads mean the market is working better. (See the Earl J Weinreb NewsHole® comments and @BusinessNewshole at tweeter.)

Transferring Credit Card Balances?

                       

Should you get offers from credit card companies to transfer your current outstanding balance to another card because of lower charges, you may be easily tempted. Especially if you have good credit, and those tempting offers are frequent.

You may be hurting your credit score, should you take the bait.

                       

When you make lots of credit card transfers it appears you may be

applying for fresh credit.That tends to hurt your credit card score. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Investments Overseas

  

                       

Investing overseas is done for diversification. The investor wants the benefits of growth opportunities that are to be gained globally. Perhaps those prospects appear to be better than those domestically.

                       

Remember, currency moves are always involved. Will the dollar be getting stronger or weaker? If the dollar gets weaker, such investments become more valuable as translated currency works in favor of the U.S. investor. (Travel overseas becomes more expensive.)

                       

However, should the dollar get stronger, the reverse is true. Investments become less valuable as translated currency works against the interests of the U.S. investor.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Using Maximum Credit Card Allowances

                       

It may be necessary to take down the maximum amount of credit your credit card permits, but it does not help your credit score. Therefore, do so only in an emergency. It’s nice to know that your credit permits you a certain liberty, but don’t take extreme spending binges.

                       

Of course, if you don’t use your card at all, or only occasionally, you may be dropped or the maximum available credit reduced.

                       

That’s because credit card companies are sensitive about account activity. Despite public misinformation, credit card companies are always writing  off lots of bad debt. Use credit cards intelligently.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)