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.)
It's about time investors of ail degrees, professionals and dabblers alike, learned the fundamentals of junk bonds.
It's an unfortunate description for lower grade corporate bonds which, when given their decades-long name, “junk,” have been relegated to a status that most investors touch only gingerly.
The truth is, they have a very important investment position for all investors and can be used wisely with minimal risk. If only the media would learn more about them.
They ought to be bought with two provisos: That they be part of fully diversified indexed or mutual funds, and secondly, they be bought with an eye on duration principles, ideally where fund dividends are reinvested. I have written on this subject fully in the past. (See the Earl J. Weinreb Newshole® commentaries.)
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.)
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 Earl J. Weinreb NewsHole® Comments.)
I have often written positively about the use of junk bonds. I have mentioned why they ought to be bought in the form of low-cost mutual funds and indexed ETFs and why their use ought to be arranged in accordance with “duration”principles.
The fact that they are of lower quality is meaningless if their purchase is in the form I mention; you get diversification.
During 2011 and into 2012, the average default rate for this class of bonds was about 2 ½%, low as the range can go as high as 10% at times. But even if the latter rate is reached, the return on such bonds factors in that additional risk. (See the Earl J Weinreb NewsHole® comments.
Always keep this important question in mind, especially when you read financial media headlines and accompanying content. This is in addition to information that you receive in the form of paid advertisements.
Is what you’re reading news, pure investigative reporting, or just public relations placement? Or a mixture of all in varying degrees?
It’s essential that you understand the type of information you’re getting. There will be a slant and informational input that impacts the factual nature of what you will be reading. (See the Earl J Weinreb NewsHole® comments.)
Spotting investment fraud isn’t easy to do. Not if you’re an ordinary investor. And even if you’re a professional.
Yet in instances where average investors are ripped off by Ponzi-scheme advisers, they may be asked to repay alleged “profits” they may have received while the scheme was taking place. Though innocent and unaware of fraud they may be accused by the ensuing bankruptcy trustees of being “willfully blind” about the true nature of the profitable returns they were getting.
But how many investors can really investigate the antics of their advisers? Especially when those advisers had been given clean audit approvals by the S.E.C. in Washington? If the S.E.C. was flummoxed, how can you expect the ordinary investor not to be? (See Earl J Weinreb NewsHole(r) Comments.)
However, the average investor does not have the funds, nor credit to emulate what big investors and hedge funds attempt in the markets.
The ability to borrow the necessary capital would be impossible. Professional have access to the multi-millions in credit for the purpose.
It makes for good fiction reading for most investors who read or tune in. But it does something else. It poorly educates the mass public into thinking about financial strategy. (See The Earl J Weinreb NewsHole(r) Comments.)
They are sometimes referred to as momentum traders. But most are not disciplined and are generally hit-and-miss in their efforts and accomplishments. (See the Earl J. Weinreb NewsHole® comments.)
I have commented on my finance blog in the past about the Volcker Rule, named for the former Federal Reserve Board chairman Paul Volcker, who had suggested it, as part of the Dodd-Frank Act provisions.
The Rule is being vehemently opposed by bankers in the U.S. and Europe because it will reduce essential liquidity without doing what it’s supposedly intended to do, making banks any safer. I have explained why in the past. Especially where it specifically exempts U.S. debt obligations from its provisions, a fact that foreigners have taken dim notice.
Another observation: Paul Volcker has always been an icon for having successfully fought inflation years ago. Why would he want his name to be hereafter associated with this ruling? Even Volcker has questions how the regulators are going about this subject. (See the Earl J. Weinreb NewsHole® comments.)
So read between the lines carefully, as the information most likely will not apply to your age level. Nor, for that matter, your level of risk accommodation.( See the Earl J. Weinreb NewsHole® comments.)
You have sheer stupidity that goes far beyond investment risk, when those with a modicum of investment intelligence have to rely on an investment adviser.
That’s outright foolish; you will be receiving little practical advice in return. Unless you have never heard of unmanaged, indexed mutual funds or ETFS, what sense does it make losing that much of your investment income every year? ( See the Earl J. Weinreb NewsHole® comments.
Corporate disaster is always possible when tipping off creditors and employees well in advance of plant closings. Yet, politicians and their union backers have legislation where employers of a certain size and type must notify employees well in advance of possible close-downs.
Employees would like to know early on if they are to be trained for other jobs. But such action may unduly scare them in the event the plants may be eventually closed.
Financial conditions could be poor, and finances cannot be arranged properly until the last minute. However, once a notification has been made, companies may have already lost employees with which they would have been able to salvage the operation.
Furthermore, once the mandatory plant closing announcement is made, the company’s credit may be permanently damaged. Stockholder values, including pension holders and similar institutions, may be adversely effected.(See the Earl J. Weinreb NewsHole® comments.)
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Investors should consider manager risk, though I personally recommend indexed funds. They are at risk in this way by choosing an investment portfolio that's fully and actively managed.
But what happens if your investment manager leaves or fails to do as well as in the past? That is manager risk and it can't be measured by past statistics alone. ( See the Earl J. Weinreb NewsHole® comments.
Risk evaluation goes beyond statistical numbers, such as standard deviation. That’s a fancy term used by financial pros looking at investment portfolios.
Standard deviation need not concern individual, everyday, non-professional investors. But if you want to know, it’s the return you get from gains and losses you may expect about two thirds of the time over a year.
A well designed portfolio will consider your acceptable risk or 'risk tolerance.' Your investment time objective, age, personal psychology and investment goals are other considerations.
To avoid basic investment risk, seek out low-cost, unmanaged mutual funds or exchange-traded-funds (ETFs), those indexed to foreign and domestic standards you want to emulate. One example would be the S&P 500. ( See the Earl J. Weinreb NewsHole® comments.
It’s evident that most investment advisers are not really certain how many stocks and bonds go into what can be considered a “balanced” investment portfolio. Certainly, an indexed, unmanaged mutual fund or an indexed ETF, will provide sufficient diversification But what about market risk?
What had been a simple assumption prior to the 2008-2009 financial meltdown is now subject to lots of conjecture. That’s due to the fact both stocks and bonds fell in unison at that time. And they are reacting differently now. ( See the Earl J. Weinreb NewsHole® comments.
Yes, luck and chance with regard to time of market entry plays a major role. But allocation of assets and discipline of strategy are more important to investment success, rather than anecdotal accounts of who accidentally struck it rich while buying and selling on personal whim. ( See the Earl Weinreb NewsHole® comments.)
When using the advantages of assets allocation. time-tested research has shown that the bulk of investment success can be attributed to expert asset allocation. The other 10% or so is due to security selection and market luck.
This is a major blow to those who claim they can constantly outsmart each other by artful securities selection and market timing. (See the Earl Weinreb NewsHole® comments).
Further to a previous report on junk bonds: The media helps see to it that the public gets a poor image of lesser-grade corporate bonds, which have gotten the unfortunate status over the years as “junk,” something to be avoided.
Actually, the wise use of these higher-yielding bonds can be helpful, provided you are familiar with the principle of duration, that I have often discussed in these pages. (See the Earl J. Weinreb NewsHole(r) Commentaries.)
The question whether is if it's needed. If proprietary bank trading is long-term, that is, for terms of over 45 or 60 days, it certainly requires little strict regulation.
How does this all affect the average citizen?
It's foolish to get into complicated regulatory restrictions that do lots of damage to the entire global banking system, without any realistic safety or risk enhancement on books of the banks. On the contrary, lots of damage will be inflicted instead.
Big banks are becoming bigger, too big to let fail in a financial emergency. And that causes major risk when government bailouts must be applied.
All the while, smaller banks are being hurt by the cost of regulation and are being put out of business. The consumer and the economy are thereby hurt. (See the Earl J. Weinreb Newshole(r) Commentaries.)
Big banks are becoming bigger, too big to let fail in a financial emergency. And that causes major risk when government bailouts must be applied.
All the while, smaller banks are being hurt by the cost of regulation and are being put out of business. The consumer and the economy are thereby hurt. (See the Earl J. Weinreb Newshole(r) Commentaries.)
Central banks were set up with the idea that it would be best for a country to keep its financial system from undue political influences.
Over time, politicians have let their natural tendency to exert influence produce financial and economic pressures. It generally is harmful to change objective banking independence, particularly during stressful times.
Major global central banks are not doing well with regard to their current national financial crises,
In the U.S., the Federal Reserve Bank, which always has been loosely supervised by Congress, appears to be more under the influence of the White House and its fiscal policy than it had ever been in past administrations.
The Fed now goes more deeply into the American economy than it had before, aside from the additional Dodd-Frank legislation. (See the Earl J Weinreb NewsHole® comments.
The media create analyst and advisory gurus who expound much of the doubtful and expensive investment strategies used.
That advice should be avoided for many reasons having to do with accuracy and the law of supply/demand. Too many investors acting on the same advice bring on herd-like market conditions which sway short-term market pricing against investors.
To discipline this goal of avoiding the adverse effect of media gurus, you have to learn how to eliminate media noise from your life. To do so, minimize the amount of investment comments you read or listen to, and take them all with a grain of salt. (See the Earl J Weinreb NewsHole® comments.
Unmanaged ETFs follow various indexes, and are a low-cost way of diversifying investments. Apart from fulfilling your investment purpose, be sure to buy seasoned funds that have been around for awhile.
ETFs can sometimes be costly to trade. A big buy or sell order can adjust that price. That is, to a premium where the price is higher than underlying assets, or a discount, if the price is lower than the net asset value or NAV of that ETF.
New, smaller ETFs may have this problem, which generally disappear when the fund is around a few years and has grown in size. You can check to see what the stated, recorded amounts of premium or discounts are on average. (See the Earl J Weinreb NewsHole® comments.
Quite a bit of research exists on human investment behavior. Personal psychology has lots 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. I have said there is no one strategy I have found better than any other. What makes for investment success is strict discipline of strategy use.
Furthermore, discipline can be mastered, with proper personalized control over the psychological hazards that beset investors.
I suggest Main Street and Wall Street investors 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 affects the way folks make securities market decisions, by affecting discipline. (See the Earl J Weinreb NewsHole® comments.
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.
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 role in the financial meltdown? And how they had to be overhauled and re-regulated?
Well, lengthy investigations were made, and Congress made its conclusions with the Dodd-Frank legislation.
The upshot? 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 fine-tuning was not earth-shattering after all. (See the Earl J Weinreb comments.)
We know the Japanese economy has been flat and practically dormant for over the past twenty or so years. This has been the case despite huge Japanese government spending, In fact, Japan public debt is now well over 200% of GDP.
Unfortunately, it does not appear their economy will 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 did their’s two decades ago. That is, spend and borrow their way to prosperity they have failed to achieve. (See the Earl J Weinreb NewsHole® comments.
Listening to public comments and opinions of those from all of life, folks know little about finance and banking. Politicians are among this group of the financially ignorant. If they knew more about finance.
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 in helping foment economic distress.
Government excesses, such as poor fiscal policy from the White House and monetary policy from the Federal Reserve, most often produce economic problems, not bankers who become bystanders by necessity and happenstance.
What else succeeds as political ploys when all else fails? Blame bankers! Most folks haven’t a clue to disagree. (See the Earl J Weinreb NewsHole® comments.)
The Card Accountability, Responsibility and Disclosure Act or CARD was created to prevent banks from readily adjusting interest rates to consumers. It was begun in August 1910, and enforced by the Federal Reserve.
Millions of consumers of credit, however, have felt the effects of this creation. They now have been victimized with no such credit because of the practical impossibility of many banks to offer credit to certain risks under the imposed government conditions.
Note: The Federal Reserve has a primary function of keeping a stable dollar and a conflicting secondary job of maintaining full employment under the old Humphrey-Hawkins Act. It should not have to deal with this mess. (See the Earl J Weinreb NewsHole® comments.)
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.
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 avoidance of inflation.
Much of the practical value of media portfolio advice is used merely to fill up space and not to enlighten. (See the Earl J Weinreb NewsHole® comments.)
When you hear 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 poor spending habits will be getting them into the same situation again in a few years. (See the Earl J Weinreb NewsHole® comments.)
