Advanced Investing

How to Benefit from Cyclical Investment Markets-MBA Lecture Recap

How to Benefit from Cyclical Investment Markets-MBA Lecture Recap

By in Advanced Investing, Economics, Investing, Mutual Funds, Stocks | 10 comments

Can You Benefit from Cyclical Investment Markets? In today’s market, a short term interest rate of 1% is highly coveted and difficult to find. The annualized 10 year total return on the S & P Market index of 7.60% during the last ten years is 2% below the historical returns of the 1928-2014 time period. In spite of the juicy market returns of the past 3 years, you may wonder, where are the average stock market returns of 9%? What happened during the first decade of the new millennium to bring down returns and can you benefit from cyclical investment markets? Here’s a taste of some of the global events that impacted stock market prices: Recession Mortgage Meltdown  Sub Prime Lending Crisis European Debt Crisis 911 Wars in the middle east Growth of China as a major world competitor There are always outside forces that play on our economy and investment returns. These forces are called systematic or market risk. This risk is unavoidable and plagues all market participants. No matter how diversified your portfolio is, you cannot avoid systematic risk. Read more; Is Buy and Hold Finished?>>> What is an investor to do about the cyclical investment markets? In reviewing the stock market returns from 1928 to 2014 one could assume that rates went smoothly upward at 9.6% per year. Actually, that average hides a bumpy road. Returns on stocks over that time period ranged from annual double digit losses to annual double digit gains. Growth in investing is fraught with ups and downs. Not unlike life itself. Click here for Free micro book-How to Invest and Outperform + Wealth Tips Newsletter Is There a Pattern to Economic Growth and What it Means for You? Economic growth typically follows a path that looks a bit like a roller coaster, with gradual increases, leading to a high point of strong economic growth, followed by slowing GDP and usually a recession. This type of growth is certain, where the mystery comes in is the “when”. Cyclical growth is a given; but when the trend changes is unknown.   This pattern means several things to investors. Investing is a long term endeavor. Don’t even think about investing any money you will need within...

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MBA Class; Use Net Present Value to Make Investment Decisions

MBA Class; Use Net Present Value to Make Investment Decisions

By in Advanced Investing, Asset Allocation, Investing, Mutual Funds, Retirement | 15 comments

Investing Solutions (part 3) Welcome to Investing Solutions Week at Barbara Friedberg Personal Finance. Don’t miss parts 1 and 2. Investing Solutions (Part 1); Why You Must Start Saving Now Investing Solutions (part 2); Six Investing Solutions Six Dangerous Investing Myths I’m in the midst of teaching a Corporate Finance class for MBA students at a local university. Some of the concepts, although rather complicated, have important real world applicability. an extremely important concept is, how to use net present value (NPV). It is a method to put a dollar amount on future cash payments. It’s great if you win the lottery and want to determine whether to choose the lump sum payment or monthly option. Or what if you or your folks want to determine the present value of their monthly social security or annuity checks.    When reading one of my favorite blogs, Consumerism Commentary, Luke had to decide whether to take a lump sum payment of his retirement account or monthly payments for the rest of his life. After reading the article, I was curious about which choice would lead to a greater present value for Luke. Here’s how to use net present value to decide whether a lump sum or annuity payment would be worth more. Here was Lukes’s situation: He could receive a lump sum payment of $18,000 or $65 per month for the rest of his life. Before I tell you which one he chose as well as the alternative most of his readers recommended, I’m going to introduce you to a systematic way to decide whether to take a lump sum payment or an annuity. Read more: Should I Invest in an Annuity?>>> How to Calculate and Understand Net Present Value You need to make an assumption before figuring out which alternative is better. The assumption is this; what percent return do you think you can get on your investment? I chose 7% because historically, an investment portfolio containing about 65% stocks and 35% bonds approximates a 7% return.  To calculate how much a regular payment which continues indefinitely is worth today, all you need is this perpetuity formula: Annual cash flow/Interest rate = Present Value If Luke were to receive $65 per month, then he gets $65 x 12 or $780 per...

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Is Buy and Hold Finished? Read What Hulbert Says About Market Timing

By in Advanced Investing, Asset Allocation, Automatic Saving, Bond, Investing, Mutual Funds | 15 comments

Market Timing versus Buy and Hold Investing; The Gloves are Off Is it wrong to delight in “proof” that my investing practice and writings are correct? Mark Hulbert, long time author of the Hulbert Financial Digest and Wall Street Journal (WSJ) columnist asked, “Can Market Timers Beat the Index?” in the July 20, 2013 week end edition of the Journal. He answered this frequently attempted practice with raw data! Who is Mark Hulbert? First, some background on Mark Hulbert. He empiricallly evaluates the trades recommended by 200 prominent newsletter authors. You know who they are, the investment scions who purport to know what holdings to buy and sell and when, in order to beat the market. These investment gurus sell investors their recommendations in published newsletters. Hulbert evaluates their recommendations with back testing and reports who offers the best advice during each period. In the above referenced WSJ article, Hulbert calls out Bob Brinker’s Market Timer. Brinker successfully counseled his readers when to sell their stock holdings in January, 2000. Those who followed his advice about when to exit and next when to get back in (October, 2002) missed the bear market at the beginning of the century. So you think, this must be the man to watch. Unfortunately, Brinker completely missed predicting the 2007-2009 bear market. You already see where this is going. It’s not easy to consistently time the market. Click here for Free micro book-How to Invest and Outperform + Wealth Tips Newsletter If you are still interested in market timing and want to know which newsletter will bring you riches, ask Mark Hulbert, or better yet, subscribe to the Hulbert Financial Digest. What is Investment Market Timing? Market timing is an investment strategy which advocates buying and selling securities based on external signals in an attempt to attain market beating returns. The factors to observe could include technical signals such as the 30 or 90 day moving average of a stock. Fundamental metrics, such as the price earnings ratio (PE) could also be used in market timing. For example, when the PE ratio or Shiller PE surpasses its historical average a market timer might believe that his stock investments are becoming overvalued and decide to...

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How to Measure Investment Risk & Protect Against it

How to Measure Investment Risk & Protect Against it

By in Advanced Investing, Asset Allocation, Bond, Economics, Investing, Stocks | 9 comments

Investing is Risky The Investments class I teach at a local university focuses on investing risk and return. We talk about the risk that you’ll lose money if you invest and your stock and bond funds decline in price. There’s also the risk that your purchasing power will erode from inflation. According to a recent Fortune-CNN article food prices increased 2.6% last year. Although, in my region, it seems as though the food increases were quite a bit more. Although the CPI (consumer price index) reported a seasonally adjusted increase of 1.7%, your personal inflation rate varies based upon the region where you live and what you buy. So how do you measure investment risk and protect yourself? What is Investment Risk? Standard deviation measures how much your investment returns deviate from the average. In reality, investors care about the negative returns, not if you have a year with exceptionally high investment returns. Investors measure risk by the percent their investment portfolio drops in value. Here’s how to measure your portfolio returns. Mathematically, find the difference between the beginning and ending value of your portfolio. Next, divide the results by the beginning value of your investments. For example, if your portfolio was worth $10,000 on January 1 and on December 30 of the same year it’s value was $9,000, you lost 10%. That’s an example of investment risk, and how to calculate. $9,000 – $10,000/$10,000 = -10% Systematic or Market Risk Market or systematic risk is unavoidable. A natural disaster will trounce investment returns across the board. Systematic risk also includes the cyclical recessions that hurt all market returns. You cannot avoid market risk. Unsystematic or Firm Specific Risk Firm specific or unsystematic risk applies to an individual firm. When Lehman Brothers experiences an accounting scandal or misses earnings, the stock price falls. This firm specific risk only impacts an individual company, not the entire market. This risk can be diversified away. Hold a broadly diversified portfolio and firm specific risk is eliminated. Protect Your Portfolio Against Investment Risk Investment markets and the economy are cyclical. There are cyclical booms and busts in both. Since no one can predict the future, you need to expect that at one time or...

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Would You Invest in a 100% Muni Bond Portfolio?

Would You Invest in a 100% Muni Bond Portfolio?

By in Advanced Investing, Asset Allocation, Bond, Investing, Reader Question | 0 comments

Is a 100 Percent Municipal Bond Portfolio Superior to One of Diversified Investments? The recent “reader question” article, “Should I Invest in Bonds Even Though I Might Lose Money?” garnered some fascinating investing conversation. Among the thoughtful comments, one in particular stood out, because it was contrary to the typical investing viewpoint. Randy C.H. responded, “Stocks, Never. Short term bonds? Not for me. Go to FMSbonds.com and READ!!! Buy short term ONLY if you have a need at a specific date. I bought municipal bonds to mature for and during my daughter’s college. Other than that I bought and buy (since 1984!) LONG term triple exempt Municipal Bonds. The interest rates are MUCH higher and then: BUY AND HOLD. They have made me rich. My coworkers lost nearly half of their retirement funds in 2001 and again in 2008. (Plus they will get to pay taxes and more taxes.) My bonds kept growing, some at 11.25% compounded semiannually. ZERO COUPON bonds grow and grow and for up to 30 years. No reinvestment required and no tax to pay.” First, let’s take a look at interest rates in a historical context:     Randy started investing in municipal bonds when interest rates were in the low double digits. Imagine that you purchase a 10, 20, or 30 year zero coupon bond at previous historically high interest rates and you’ve locked in that high return for many years. As Randy mentioned, he has bonds paying 11.25%. The zero coupon bond means that you face no reinvestment risk because the bond is bought at a discount. Zero’s allow the investor to reinvest all of the coupons at the stated interest rate. In contrast, with coupon bonds, when the coupon or interest payment is paid, the investor must reinvest the proceeds and if interest rates have declined since the bond was issued, the investor is faced with lower future returns. Randy hit on a goldmine strategy from 1984 to 2007. Ten year treasury yields were significantly above the 5 percent long term average yield. And according to Dan Seymour of The Bond Buyer.com in “Muni-Treasury Relationship Trouble”,  “For the 20 years ending in 2007, the yield on 10-year triple-A munis averaged around 80% of...

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Prosper Review – Where to Get a High Return On My Cash?

Prosper Review – Where to Get a High Return On My Cash?

By in Advanced Investing, Debt, Investing, Make Money | 34 comments

Prosper Loan Investment Returns-Where to Get a High Return on My Cash? Since October 2011, I’ve invested in Prosper Loans. This is the fourth update of my experience investing in Prosper loans. In October, 2011, I decided to take a small percent of my investment money and lend it to Prosper borrowers through the Prosper Marketplace. Prosper borrowers must meet minimum credit score ratings and go through a vetting process. These borrowers typically want to borrow money for short term needs such as debt consolidation, homeowner remodel, or business expansion. The borrowers are graded according to credit worthiness from AA to HR. Typically, the lenders return varies based upon the percent of loans in their portfolio from each specific credit grade. For example, if you had a portfolio of all E rated loans, then you could expect a return of 12.51%. Whereas, if you were a more conservative lender and only lent to the AA borrowers, you average would be approximately 5.21%.  As you would assume when considering ‘Where to get a high return on my cash‘, the lower quality lenders; C, D, and E have higher returns because they are riskier borrowers with a greater chance of default. That said, lending to others through Prosper is increasing my income as I serve as a banker to those who need money to build their businesses, pay off debt, or for other short to medium term uses. Caveat; this type of investment has a greater risk and may be considered a speculative investment. Investors! Earn great returns with Prosper.com peer-to-peer lending Why I Invest in Prosper Loans I believe in the concept of peer-to-peer lending directly to borrowers in need. I diversify my investments across many loans, in order to reduce the risk. And, I want to get a high return on my cash! At present I have 1,108 notes and of those notes, 35 are past due. That’s about 3% of the total. Fortunately, when Prosper approximates the return, they take into account the default rate.   By diversifying across many loans, if a borrower defaults on her loan, it’s only a small loss to me. As in any riskier investing endeavor, with higher rewards, the lender also expects more losses....

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