Posted: June 22nd, 2009 | Author: Joe | Filed under: Investing | Tags: Alternative Energy, Bonds, Pharma, Stocks | 2 Comments »
Remember that old adage, “If you can’t beat them, join them”?
Well, a lot of people have come around to that line of thinking when it comes to the stimulus and bailout madness gripping Washington D.C. these days. Hey – we’re paying for it, why not profit from it, right?
Well, profiting from it may not be as straightforward as it seems…
Bonds.
Freddie and Fannie, not ‘private’ banks.
Avoid banks, since their profitability is suspect for the foreseeable future. Instead, buy Fannie and Freddie since they are directly backed (controlled) by the federal government whereas the banks are managed through TARP. Best buy for Freddie Mac and Fannie May Debt bonds is Vanguard Short-Term Federal Fund (VSGBX) This fund has beaten 89% of its peers over the past 3 years with returns of 6.3%.
Munis, not Infrastructure.
It’s easy to see why many investors would be tempted to buy infrastructure bonds, since much of the press surrounding Obama’s stimulus spending has been focused on infrastructure spending on roads and bridges. But the problem is that many states are deeply in the red and much of the stimulus spending will only offset the construction costs and not produce any real return. A better stimulus play is to invest directly in municipal bonds. Municipalities are getting a quarter of the stimulus on top of a federal bailout. The effect is to prop up the repayment of the municipal bonds, which have been yielding quite high lately. Best bet here is the diversified Vanguard Intermediate Term Tax Exempt fund (VWITX)
Stocks.
Big Pharma, not Health-Care IT.
Much has been made of the increased spending in the push to modernize hospital record processing and the like, resulting in a rise in the price of health care IT stock. At the same time, shares of big pharma companies like Pfizer, Merck and Johnson and Johnson have been hammered due to the fears that the Obama administration will seek to severely curtail their profitability. The result is over sold stocks of solid companies – just don’t expect eye popping returns for the next 4 years. Best play here is the iShares Dow Jones US Pharmaceuticals (IHE)
Old Energy, not Green energy.
The green energy market is over populated with tiny companies all competing for the Stimulus funding, so it’s going to be difficult to pick the winners. And that’s if green energy becomes profitable! The better play is fossil fuels, for 2 reasons – 1) They’re oversold, 2) they will likely be the ones to profit once green energy becomes sustainable.
They’re oversold for the same reason big Pharma is oversold – perception that Obama and the Democrat control congress will seek punitive measures on oil companies. This may or may not come to pass, but it is likely these stocks have been beat up too much. The other reason is what my post Why Investing in Alternative Energy Companies is a Bad Idea is all about.
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Posted: June 9th, 2009 | Author: Joe | Filed under: Investing | Tags: index funds, Investing, Stock Market, Stocks | 4 Comments »
I just saw an interesting article on Investopedia.com titled, “5 Reasons To Avoid Index Funds” Well, I thought it was interesting because of the title. Much of the blogosphere and many professional investors recommend index funds for the average investor, so why avoid index funds?
Here’s a break down of the list of why you should avoid index funds and along with my problem with each item.
5 reasons to avoid index funds
1. Lack of Downside Protection
“Investing in an index fund, such as one that tracks the S&P 500, will give you the upside when the market is doing well, but also leaves you completely vulnerable to the downside. You can choose to hedge your exposure to the index by shorting the index, or buying a put against the index“
I can’t really argue too much with the first part, but is that a reason to avoid index funds?
It’s the second part (in bold) that goes off the rails for me. If you’re hedging with an index fund using puts and calls, then you’re not really using the index fund for what it was designed for anyway. The point is that index investing is simple, and doesn’t require some esoteric wall street mumbo jumbo.
Besides, there’s an easier way to limit the downside. Using stop loss and market orders you could buy index fund ETF’s and avoid much of the carnage caused in wall street last fall.
2. Lack of Reactive Ability
“[a] sector may be a compelling value, but in a broad market value weighted index, exposure to that sector will actually be reduced instead of increased. Active management can take advantage of this misguided behavior in the market.”
This sounds a lot like “index investing doesn’t let you actively manage the fund”. I mean, that’s true, but it’s also the point of an index fund! Again, not really a reason to avoid index funds.
3. No Control Over Holdings
“If an investor buys an index fund, he or she has no control over the individual holdings in the portfolio.”
Yup. That’s the point. This is a lot like saying people should avoid index funds because they aren’t individual stocks. ANd what about mutual funds in general? Investors have no control over their individual holding either. Should people avoid mutual funds too?
4. Limited Exposure to Different Strategies
“If you conduct research, you may be able to find the best value stocks, the best growth stocks and the best stocks for other strategies. After you’ve done the research, you can combine them into a smaller, more targeted portfolio. You may be able to provide yourself with a better-positioned portfolio than the overall market,”
Again, index investing doesn’t allow you to actively manage the index. If you’re looking to run your own portfolio, then do it. This isn’t a reason to avoid index funds if you’re looking for a simple, passive portfolio.
5. Dampened Personal Satisfaction
“…you will lose the satisfaction and excitement of making good investments and being successful with your money”
If you’re an investor and you’re looking for the thrill of trading stocks, you’re not going to be investing in an index fund.
The problem here seems to be a misunderstanding of index investing. Maybe the writer is too close to wall street and caught up in that atmosphere. I dunno. The point of the article should be why you might want to invest in an index fund, and when you wouldn’t. Instead, the article seems to imply that all investors should avoid index funds, regardless of their goals and style.
Index investing should not and cannot replace active investing as many have implied. Index investing is a passive method for people who either can’t fathom stock investing or choose not to expend the time and effort required to take part in the stock market actively. This is the same position espoused by the likes of Warren Buffet and Jim Cramer – leave active investing to the pros, and don’t avoid index funds.
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Posted: April 28th, 2009 | Author: Joe | Filed under: Investing, Reviews | Tags: Investing, Stocks | 1 Comment »
I’ve been a ShareBuilder member since 2005. Before I joined, I did a mountain of research for discount brokerages that matched my criteria. I was new to investing, and didn’t want to get bogged down into a quagmire of fees. My criteria was simple:
- Member of FINRA/SIPC (like FDIC for investment companies)
I basically wanted something to buy and hold stock whenever I had the extra cash to do so… i.e. not an automated venture.
Not only did I visit each website and scour their available online info, I went trolling through forums and news groups to see what other people were saying. Eventually I had narrowed my selection down to 2 choices: ShareBuilder and FOLIOfn. I didn’t want to back a losing horse, so when I started seeing a lot of chatter about FOLIOfn being on financially unsound footing, I decided to go with ShareBuilder.
In the end, FOLIOfn did not fold, and I could have gone with them but that’s hindsight.
ShareBuilder offers 3 plans to choose from
Here’s a quick breakdown of features associated with each plan:
BASIC:
- No Account Minimums
- Automatic Investment Plan
- Real-time Trades
- Mutual Funds
- Express Funding
- Investment Guidance
- Options Trading
- Margin Borrowing
- Research Tools
- Gain & Loss Tracking
Standard:
- BASIC PLUS:
- Included Automatic Investments
- Discounted Margin Rates
- Stock Grades
Advantage:
- Standard PLUS:
- Stock Reports
- Strategy Reports
- IPO Priority Notification
Well, since the basic fit my main criteria, I chose that and haven’t looked back since. The best part is that it doesn’t cost me a dime unless I buy or sell a stock! Which brings me to the next important feature – Price!
How Much Does It Cost?
Basic:
- $4 to buy
- $9.95 to sell Market, Limit and Stop Orders
- Phone trades: $29.95
Standard: ($12/month – 1st month free)
- 6 free buys per month
- $2 to buy after the 1st 6.
- $9.95 to sell Market, Limit and Stop Orders
- Phone trades: $29.95
Advantage: ($20/month)
- 20 free buys per month
- $1 each thereafter
- $9.95 to sell Market, Limit and Stop Orders
- Phone trades: $29.95
All levels offer Margin Borrowing, with the Standard package giving a 0.25% discount and the Advantage a 0.5% discount in the margin rate. All levels also include PortfolioBuilder. PortfolioBuilder is a general guide to take the user through risk tolerance and gets them to focus on what they’re investing for. I haven’t used this feature much, since I’ve educated myself prior to joining on most of what it provides.
Since I joined ShareBuilder, they have been acquired by ING. This actually makes me very happy since I believe ING is a very stable company, and have also been a member of their Orange Savings and Electronic Checking accounts for years. Since ING owns ShareBuilder, transfers to or from ING accounts are free AND instantaneous! No waiting 3 days for the transfer to be completed.
There’s also no cost to reinvestment dividends – you can create your own DRiPS!
If you’re interested in joining ShareBuilder, you can get $25 free when you open an account using one of the promo codes below:
ing sharebuilder promotion code
ing sharebuilder promotion code
ing sharebuilder promotion code
ing sharebuilder promotion code
ing sharebuilder promotion code
NOTE: If they have stopped working, please let me know so I can get some fresh ones!
These promotional codes are similar to the ING direct savings account referral codes
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Posted: January 22nd, 2009 | Author: Joe | Filed under: Investing | Tags: Investing, Jim Cramer, Stocks | 1 Comment »
I’ve covered Cramer’s tips for detecting individual stock bottoms and overall stock market mega-bottoms, but there’s one last type of stock market bottom: the Sector Rotation Bottom.
A sector rotation bottom is when an entire sector of the stock market falls out of favor and hits bottom. Like total market mega bottoms, sector rotation bottoms are cyclical, and like individual stock bottoms, sector rotation bottoms happen in good times and in bad, only they happen to different sectors at different times.
Sector rotation bottoms are often brought about by macro-economic conditions such as the Federal Reserve tightening or loosening the money supply. When the fed raises interest rates, consumers spend less, and the economy tends to slow down. As a result of the decrease in discretionary income, the kitchen counter and medicine cabinet stocks will out perform discretionary stocks. The so called kitchen counter and medicine cabinet stocks are companies like Kellogg, Proctor and Gamble, Johnson and Johnson – companies that make the products commonly found in, you guessed it, medicine cabinets and kitchens. People need these products whether the economy is good or bad.
The flip side to this is when the fed cuts interest rates, thus spurring greater borrowing and increased spending. When consumers are flush with cash, discretionary stocks do well. These are automobile manufacturers, technology and retail stocks.
The trick is to spot the point at which the cycle will change, like the flip of a switch. This is tricky because it’s essentially market timing, which doesn’t really work that well. Cramer recommends buying at the beginning of the cycle because so many people now anticipate the fed’s moves ahead of time.
If the market timing aspect makes you wary, as it does me, you may consider a modification. For instance, buy the household stocks when times are good, and hold them until times turn bad and other investors bid the price up as they pile in. This should give you larger margin for error. Or, maybe look for individual stock bottoms within an out of favor sector.
If you’re interested in more details, check out Jim Cramer’s Real Money: Sane Investing in an Insane World.
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