Risk

    After having served on the Board of Directors for a local credit union for the past few years, I have learned much more about risk and how to manage it. Financial Institutions are in the business of risk, so they must be able to effectively identify and manage many different types of risk. Loaning money to strangers is about the riskiest business I can think of, so lenders must have a whole department devoted to mitigating risk. The recent increase in volatility in the stock market has also increased the risk of holding stocks. This is true even if you hold mutual funds or annuities that have a stock component. Since I am no longer in the accumulation stage of my life, I am more sensitive to the market risk than I used to be when I was working. I can no longer afford to have such a long term perspective as a younger person would. One type of risk that I am currently attending to is concentration risk. Even though I happen to like the prospects of the financial sector, I have come to realize that I am too heavily concentrated in bank stocks and other financial companies. I have taken steps to reduce my exposure to this sector by placing some sell orders (limit) just this morning. Just because this market is in correction mode doesn't mean that there aren't days of strength that I can sell into. In order to be tax efficient, I have also placed some sell orders of some positions that just aren't working out. Remember, any capital gains taken in a given year can be offset with capital losses to minimize your tax burden. Any excess capital loss over $3.000.00 must be carried-over to following tax years, where it can be used to offset gains and income. I try to match any gains with losses to achieve a near zero reportable gain where possible. The proceeds of these sales will be split between safe fixed income investments like CD's and some stocks on my wish list. I still like some technology stocks and also some defense related issues. There are currently some very attractive valuations on leading chip stocks due to the market sell-off. In conclusion, check your portfolio for excess concentration in any sector, diversification is the key for mitigating risk.

RIDIN THE STORM OUT

    Reo Speedwagon recorded this song in 1981 and the tune is still bouncing around in my head. With the volatility that we've seen lately in the stock market, many investors are wondering where they can hide to ride out the coming storms in financial markets. The answer is that it depends on many things like: your age, your risk tolerance, where your money is located ie. IRA, 401K, your tax situation, and so on. If you are 20 years away from retirement and are still building up your retirement account in an IRA or other retirement account, you should do almost nothing. Think of the increased volatility as a chance to buy good stocks a little cheaper. I doubt that the current economic climate will affect your portfolio 20+ years from now. If you're closer to retirement, like 5 years or so, then you should be thinking of derisking your portfolio by adding safe income producing assets like Cd's to the mix. I still don't like bonds because the increasing interest rate environment will create a capital loss if a sale is necessary. Most retirement plans within 401K's have a fixed income option, it doesn't pay much but it does provide safety during market downturns. Given the current level of interest rates paid to investors for fixed income products, dividend-paying stocks with reasonable valuations are still the best choice for most investors. A dividend yield of 4-6% is available on some blue chip companies in the utility sector, communications sector and some mature tech names. For those who are already retired, income often trumps growth as an investment objective. Building a laddered CD portfolio that is FDIC insured can create income and provide peace of mind. As rates increase, maturing CD's are reinvested at higher rates. I have just completed my taxes for 2017 and am reminded what a pain the K1 tax reporting for MLP's can be. Even tax software doesn't handle this task very well. After over 10 years of doing this, I still feel incompetent. That being said, MLP's provide excellent income, sometime tax-free, and are an excellent estate planning tool. I won't go into details here but most brokers can explain how they work. Another option is REITS this stands for RealEstate Investment Trusts. They are stocks that hold realestate assets that produce income. The income is then distributed to investors at a rate established by statute. Exposure to both REITS and MLPs can be achieved through ETF's and mutual funds. Finally, market volatility gives investors a chance to buy some stocks that are currently being taken to the woodshed.and whooped like Facebook is currently. I have recently placed a limit order for FB that is much lower than the current price. I believe that a P/E ratio of 17x is reasonable for the stock after the breach of trust and the mismanagement of the scandal. The limit price is easily calculated by using the methods described in my post from 11/19/2016 "More on the P/E ratio".

Change The World

     In past posts,I have described how investing is highly individualized. Every investor has unique needs that can be met by using a targeted approach with their asset allocation. There is also a way to achieve your investment goals while supporting your environmental, social and governance (ESG) agenda. I personally feel that tobacco is one of the most damaging products openly sold to American citizens. Tobacco related illnesses cost all tax payers millions of dollars each year not to mention the people who die from smoking every year. My solution to the problem of big tobacco companies who knowingly sell death is to avoid buying their stocks. I could have profited handsomely over the past 40 years by holding Phillip Morris but I decided to stick to my convictions by investing elsewhere. I also include producers of alcoholic beverages in my list of sin stocks to avoid. I realize that I look like a hypocrite because I enjoy my cocktails and an occasional cigar as much as anybody but I refuse to profit from the sale of these products. Recently, the worlds largest asset manager, Blockrock, has taken steps to address the problem of gun violence after the slaughter of 17 kids in Parkland Florida. Blackrock holds a significant stake in several major gun makers. With already distressed stock prices, the gun makers cannot afford to ignore such a major stock holder. Other asset managers have also joined the effort to reform the gun industry by threatening to divest their holdings unless action is taken to reduce violence. Unlike my puny effort to reform big tobacco, I'm sure that the large asset managers have the attention of the gun industry. How can the individual small investor aid in the effort to improve society? Pay attention to the holdings in your mutual funds and ETF's. Most financial sites post a list of the top 10 holdings of each fund. If you see any stocks that produce products that you find offensive, then don't buy. It can take a lot of time and trouble to research your retirement accounts and other investments but there is an easier way. Most large asset managers now offer some socially responsible investments (SRI) for clients. The long term performance is pretty good also; the MSCI KLD index for socially responsible investing has returned 10.46% per year vrs 9.93% for the S&P500 index since 1990. Money talks so when large asset managers and pension fund managers hear from participants that they care about (ESG) investing, then we can change the world.

Why Dividends Are Important

     Here we are in the midst of a stock market correction. It's a scary time for working people who are worried about their retirement funds. For nine years we have gotten used to seeing steady gains in the value of our 401k's and IRA's. The next statement from your broker may shock many savers into panic selling or even a more disastrous move into the bond market via bond mutual funds. I believe in a "buy and hold" strategy for stocks for the most part. The stocks I want to hold for the long term are companies that have strong, established businesses that pay an attractive dividend. A dividend of only 2-3% may not seem too impressive now, but in the long run it can be a significant portion of your total return. If you look back at the total return of the Dow Jones' 30 stocks for 100 years, the total  return is 9.4%. Of that, about half is price appreciation and about half is dividend yield. Therefore, without dividends, your return would be about half as much. When a company increases it's dividend on a regular basis, your investment yield increases as you hold the shares. Remember, your investment yield is based on the amount you have invested and not the current price of the shares. Market pundits call a 10% decline in stocks a correction and a 20% drop is a bear market. We are not in a bear market yet. The average bear market lasts about 10 months but several have lasted over 20 months, one in 1973 and another in 1980. It's not likely that during these down markets that you will see any price appreciation of your portfolio but that portion of total return from your dividend is likely to be intact. Many companies are loathe to cut a dividend that has been paid to shareholders for many consecutive years. When I look at the fixed income universe for attractive and safe places to put my money, I don't see anything that compares to dividend-paying stocks with good long-term records of paying dividends.

What Goes Up....

          It's happening. This stock market is finally correcting. Everyone knew it would, we just didn't know when. At the time of this post, the Dow Jones Industrial index is off about 8%. I personally think there is more pain to come, possibly up to a 20% haircut or more. At times like this, all stocks are at risk of being punished. The latest good earnings report is ignored, the future expected earnings are ignored, rational decisions are not being made. Just like leaving a crowded movie theater, everyone wants to get to the exit at the same time. What should the long term investor do at a time like this? I am looking over my portfolio for positions that I want to add to. As my readers should know by now is that when I have bought shares recently, I have only bought 1/3 to 1/2 of what I wanted. That way I can take advantage of lower prices to fill out my positions. It's also a good time to consult your annual forecast and begin to position yourself according to your prognostications. You DID make a forecast didn't you? If not, it's not too late. It only takes about an hour and could make you thousands of dollars. Some of the new positions that I want to add to my portfolio includes at least one FANG stock and one defense related company like Lockheed Martin. These issues have been just too rich for my blood so I'm looking for a more attractive entry price. Having cash on the sidelines at a time like this gives me peace of mind and ammo to gun for bargains. There is one group of investors who are dancing in the streets right now- they are the short sellers. As described in my post "the short sale", these guys profit from a declining market. They have had a long dry spell so I hope they are happy now. At some point, short sellers will have to "cover" their positions which will help end the slide. That means that they will have to buy the shares that they had borrowed and sold. This short covering plus bargain hunters, will eventually put a floor under stock prices. In my opinion, what really spooked this market is the fact that the yield on the 10 year treasury bill got too close the that 3% point. It reached about 2.84% before the sell-off. One major fear of wall street professionals is what is called an inverted yield curve. It almost always predicts a recession. Basically, an inverted yield curve is when short term rates are higher than long term rates. Buying a 30 year bond is riskier than buying a 10 year instrument and thus should yield more. In conclusion, this sell-off is long overdue and actually healthy for the market. Stocks had simply gotten ahead of themselves and this shake-out will help determine their fair value.

Stocks, Bonds, and Interest Rates

     I should have posted this a long time ago. I want  to explain what a stock is and how it is different from a bond and how interest rates affect both. First, a share of stock is actually ownership in a company. If you have one share of Intel, you own the company along with 6.8 billion other shares. Your percentage of ownership is so small, I don't even have a calculator to figure it, but that dosen't mean you won't make money by holding the stock. In contrast, owning a bond issued by Intel, is simply you making a loan to the company for a predetermined amount of interest paid to you. Which investment is better? The answer is dependent on many factors including your investment objectives. Regular readers of this blog know that I am not recommending the purchase of bonds at this time. The reason is that in a period of increasing interest rates, the principle of your bond investment WILL decrease in value if you sell it before maturity. Just like stocks, bonds offer investors the opportunity to lose their investment dollars. FYI, the total value of the U.S. bond market is about 40 trillion dollars, in contrast, the total value of the U.S. stock market is just 20 trillion dollars give or take a trillion or two. So the bond market is twice as big as the stock market. On a daily basis, bonds trade about 700 billion dollars a day while stocks only trade about 200 billion dollars. Bonds come in all shapes,sizes, and flavors: Muni bonds-issued by states, cities and counties (these are free from federal taxation), corporate bonds-issued by companies to raise money for operations, government bonds-issued by Uncle Sam to finance the huge budget deficit, and individual agencies of the U.S. government to finance operations. There are too many details of each type for this forum, but I would be glad to answer any questions on any if I can. There is a time for stocks and a time for bonds, and a time for safe investments that avoid them both. I still like stocks at this point for reasons explained in previous posts. Bonds had a long and profitable run for about 20 years but that ended after the financial crisis in 2008. I want to hold bonds during a period of DECREASING interest rates which we are not in now. Therefore, I have sold most of my bonds except the ones that I plan to hold to maturity. I have also sold any mutual funds that are "balanced" because they have a bond component which could cause losses in the future. As for interest rates, I only keep a close eye on the 10 year treasury, it is currently at 2.74%. The stock market is getting jittery because this rate is increasing rapidly. In my opinion, the 3% range will spell trouble for stocks because it makes fixed income investments like CD's attractive to investors. That's why I own both CD's and stocks. I sleep better knowing I have deposits in the local Credit Union that are safe and sound and also have stocks that can benefit from Trump's tax cuts to corporations.

HASH

     I used to eat a lot of hash as a kid. It was leftover meat diced up with some potatoes, carrots and onions added and heated up. We added some ketchup to get it down and keep it down. I have some leftover crap on my mind that I wanted to lump together just to get it out of the way. First of all, some people have called and expressed disbelief at how fast this stock market is going up. The worry is that it will turn suddenly and create losses fast. My take is that there are valid reasons for the rapid run-up in stocks. The new tax package is the main reason for an overall repricing of stocks. The tax reduction to 21% for most companies will flow right to the bottom line, increasing earnings. Higher earnings means a higher stock price may be justified. What will the companies do with this windfall? Many have already given employees bonuses and hourly wage increases, but that is just a drop in the bucket compared with the large increases in earnings yet to come. The really big deal is that many companies will increase their already large stock buy-back programs. This is where they go to the market and buy their own shares, thus reducing the number of outstanding shares available to investors. The net effect is that the fewer shares will have a higher EPS (earnings per share), AND like any commodity, there will be a shortage of shares for investors. When the supply goes down, the price goes up, that's just econ 101. Jim Crammer is already hammering on this point on his tv show Mad Money, especially concerning the large bank stocks, which have been buying back their shares by the billions of shares for years. Some high quality industrial companies also have restricted the supply of their stocks, like Caterpillar, 3M, Honeywell, and Ingersoll Rand. Some people, like my wife, thinks this whole thing will end badly. This is why we are moving her retirement accounts into one rollover account where we can react quickly in case we want to bale out. Money moved out of the traditional retirement accounts is usually liquidated upon transfer, so that gives us an opportunity to take a more conservative position with her money, like buying some CD's which have yields approaching 3%. I also wanted to comment on the types of stocks that people ought to be buying now. As I confessed in my last blog, I have held on to some "buggy whip" type companies hoping that they would come back,(ain't going to happen). Look to the future for your new investments with an eye for value. I just read Barons magazine's Roundtable discussion and saw several stocks recommended that I had previously mentioned in my blog. Micron Technology (MU) has a bright future, Lam Research (LRCX) makes the equipment that Micron and others use, so does Applied Materials (AMAT). The future is digital, so that is where your investments should be too. For reasons discussed earlier, Financials are also on my buy list. If individual stocks are not your thing, consider using ETF's (exchange traded funds) for diversification and sector exposure. I like the (XLE), (XLF) and the (XLK). I'll let my readers hash out the details.