Yield Curve Fears on the Horizon? From #RealInvestmentAdvice

I recently came across the website RealInvestmentAdvice.com and their discussion on the yield curve flattening.  I also read the Investmenthouse.com and their discussion on the FED always overshooting interest rate hikes.  This weekend’s newsletter from Investmenthouse.com even referred to the FED member’s justifications towards the flattening that the yield curve is no longer accurate; this time it’s different; etc.  It appears we will be a victim of the fed again.

There are two factors at work with rate hikes, one is size (25 basis points, versus 50 basis point rise) and time.  My question, if we know there is data showing a softening and there could be a need to postpone (versus withdrawl) and planned rate hike, what’s the harm?  I believe the fear is the market will react to that and they fear a selloff.  That is not the FED’s mandate however.  Just like previous presidents, secretaries of state, and congress, there has been very little decisive action, unless there is maximum pain in not making that decision.  Hopefully, the FED takes a play out of President Trump’s playbook and decides to be proactive versus reactive.

For reference, as of this writing, the 2/10 yield curve is sitting at .21 and heading for inversion.

For more on this from an excellent article, head over to:  http://realinvestmentadvice.com/dont-fear-the-yield-curve/

The Need for More – Diderot Effect from Medium

Diderot Image

What a great article.  I want to bring good things to my readers and this is one I came across which outlines why people buy things they don’t need and feel they need more.

The advice is sound and I feel an ackowledgement this happens to all of us is important.  I would add one more factor to this whole buying “Stuff” thing.  I think everyone has a couple items that are their weakness.  For me it’s Tech and Computers.  I always feel I need the best-of-the-best and then need all the accessories, too.  Some I use, some I don’t.

I would add to the article to use Pareto’s law to identify the top few things that are your “weakness” and train yourself to minimize purchases, skip a generation of new and learnt to make due.  If not for the cost savings, perhaps for your emotional well-being.

Read more at:  The Diderot Effect: Why We Want Things We Don’t Need — And What to Do About It

Setup a Watchlist from a Scan in ThinkorSwim (TOS) From TDAmeritrade (Revised)

In this video we explain how to convert a scan into a watchlist on the think or swim platform from TD Ameritrade. This can be useful if you want to limit your underlying stock or ETF decisions based on a smaller group of stocks that have certain guidelines in common, for example, average trading volume.

The video shows an average trading volume scan and how I converted it into a watchlist. Additionally, I show how to customize the columns on the watchlist. I have found this is an easier process to find stocks of interest than to use the scan tab for my basic trading guidelines. This is the perfect way to find high IV rank stocks quickly.

This video was previously posted on Selltheta.com, however, we’ve consolidated our posts to reside on ChristianMeadows.com.  Instead of forums, please feel free to post a comment below and we’ll try answer your questions.

 

 

Five Things Your Broker Won’t Tell You About Options

ES on 041918

Before we get started, please understand this article is to orient you to the opportunities.  This is in no way a “How to” guide, as there are more dynamics at work.  The goal is to hope you will learn more about options.

  1. Options allow you to limit your risk

Options are a unique vehicle for investing in that you can pair two different options and limit your risk directionally. This is called spread trading. For example, if you are bullish on the stock market, you may sell a put lower than the market and then by one of few strike prices beneath the option you sold. What this is allows is for you to profit by selling an option but also protecting the risk if the trade goes against you. Here is an example, if the $SPY is at $265.00:

Sell 1 put at the $245 strike, approximately 45 days out for $1.78
Buy 1 put at the $240 strike, at the same expiration for $1.30

The potential profit is $48 dollars, and your risk in the trade is $452.00.  That is a 10% return for 45 days.  Now, this is somewhat oversimplified, but bear with me.   The market is currently at $265 and your short strike is $20 below the market.  That equates to 200 points on the S&P 500 index.  That means the market has to go down that much, and stay down, at the time of expiration.  What are the odds of that happening?  About 16%.  You have an 84% of the market staying above that amount.

There are many places to learn more about how to trade vertical spreads. You will have to invest some time and effort, but as you can see in the example above there is profit to be made. If you make 10% every 45 days (not that I recommend holding these options to expiration), you wonder why people invest a lot more, have a lot more risk, only to make about 8% per year which is the average S&P gain over time.

  1. Options allow you trade without direction

Option traders can also trade without bias as to the direction of the market. One of the simplest trades involves two short vertical spreads as I explained under header number one. To make this a nondirectional trade, one would simply add a short call spread at the same time they traded the short-put spread. This is called an iron Condor. Here’s the trade you would add to the trade we talked about above to complete your iron Condor trade:

Sell 1 call at the $275 strike, at the same expiration for $1.69
Buy 1 call at the $280 strike, at the same expiration for $0.77

Your profit on this trade is $92.00.  Add this amount to your $48 in the example above and your potential profit is $140.00.  Now the interesting part is the risk on your short put vertical and the short call vertical is the same risk.  Why?  Because the market can be up at expiration, or down at expiration, but it can’t be both.  Therefore, your risk in the trade is now $360.00.   This is where the magic happens.  Now your profit is $140, your risk is $360 and your return is 39% (rounded).

If your underlying stock stays between $245 and $275, you make money.  Without getting into the nitty-gritty, you can see the potential for profit is great, with no bias towards direction.  This is not to say you will profit, because there are other factors at play with options.  Volatility, interest rates, time to expiration, etc.  For the other benefit of this type of trade, let’s move to #3.

  1. Options Allow you to profit in your sleep

Options which are sold gives the seller the benefit of positive theta. Theta is one of the option Greeks which everybody should know about. Positive theta of say, one dollar, would yield you approximately one dollar a day, or $30 per month. If you own a stock that you’re holding anyway, why not write a call against it and make that money each month? There’s quite a bit to options trading and a lot of people will tell you that is more risky than stock. Let me pose a question. If you were long stock that you purchase for $10, you would have $1000 a risk if you owned 100 shares. If you were to make $30 per month for 12 months, you would profit $360 on your covered calls. All things being equal your risk would only be $640 at the end of your first year. After two and half years roughly you own the stock for free. If you made $30 a month for the rest of your life, you can easily see that positive theta has many benefits even if you are a buy and hold stock purchaser.

 

  1. Options can insure your portfolio (and other things!)

Many people use long puts to ensure portfolio against downside movement. This is a good strategy if you’re worried about a short-term event, say a few days. The problem is if you’re worried about an event so is the rest of the world. Concern about the event could increase the volatility and thus the price of the option. Once the event ends, the volatilities deflated in the option becomes very cheap. This makes insurance using options a little more expensive. Buying long puts creates negative theta, which means you’re losing money each day. This is not the best strategy, you options traders and stock owners should be aware of the possibility of insuring your portfolio.

 

  1. Options can simulate stock purchases (for much less!)

Most people do not know the you can simulate a long stock purchase for much less than the cost of ownership of that stock. This is done by buying a long call and selling a short put.  If you were to purchase of Twitter by now at approximately $31, a $30 strike long call and short put it would cost about $220 and hundred shares in equivalent stock. Because you have a short put your risk is a little higher in that the margin would be around $1000. Your risk in the underlying stock would be $3000. Therefore, you have about a 60% reduction in risk. There is more to this and that this is also a negative theta training, however, if you expect a short move to the other side in a stock, this may be a way to make that play with last investment.

The intention of this article is not to make options traders out of everybody, but to make everybody aware of some of the benefits of options. There is much more to options and can be covered in a single blog post. There are many ways to learn options, one of the best however, is to watch TastyTrade. I would love to make the videos myself, the wife created the wheel and somebody’s doing such a good job of it now.

Please understand that options involve risk, just as stock purchases. Please read the OIC’s document characteristics and risks of standardized options for more information.

#Delta for #Value and #Retirement Investors

Account Showing Beta Weighting to the $SPX

But First, an Explanation

Before I get started speaking about Delta I want to correlate what I’m about to talk about to another aspect of life. Most of us learned to drive when were about 15 or 16 years old. We get the basics, we get formal education, and we learn mainly from our parents how to be good, defensive drivers. Most parents do not teach and do not know how to teach their children to be racecar drivers. However, we can all agree that racecar drivers are probably a cut above the average driver from the standpoint of understanding the dynamics and physics of speed. If a parent is a racecar driver, the child that he’s teaching most likely will have a better understanding of the dynamics that the parent knows. The discussion in this article is really designed to learn the best tactics that a racecar driver will know and apply it to every day driving. Replace that with stocks and options and you’ll understand my goal in explaining this to the average value investor.

What is Delta? A little-known concept know by retirees, those wanting to retire, and value investors is the concept of Delta. Delta is an option Greek that measures the options movement in relation to the price of the stock. Therefore, if an option has a delta of .5, it would move up $0.50 for every one dollar in the stock’s price move.

What is Delta?  Why should I be concerned?

Every stock has a Delta of 1.0 for every share you own. So, if you own 100 shares of Apple you have a Delta of 100 and Apple stock. Generally, people investing in their retirement accounts are usually only long stock. When you are invested in long stock alone your portfolio Delta is always long the number of shares you own.

Unfortunately, most people do not know what Delta is nor do they know why they need to understand Delta. In retirement accounts, it is often hard to hedge against a down market with long stock. Many will balance with value plays like consumer staples, energy, or some other hedge against a down market. With a better understanding of Delta you can have a better understanding of what you need to do to protect against a down market.

What is my delta?

As I explained before, every stock has a Delta value of 1.0.  You may ask, how you reconcile a Google stock ($GOOG) valued at $1100 in relation to a silver index fund ($SLV) valued at $15. This is where the concept of beta weighting comes in.

Beta Weighting

Beta weighting is simply the value of a stock in relation to another stock or index. Using the example above, Google has a beta weighting of 1.36, which means Google will move $1.36 for every one dollar move in the $SPX. $SLV on the other hand has a beta weighting of .176, which means again the stock will only move about $0.17 for every one dollar move in the $SPX. The $SPX, or S&P 500 index is one of the more broad indexes. To gauge the overall market against the $SPX seems the most reasonable, especially for a retirement account.

By the Numbers, How to Hedge Delta Risk

probably the easiest way to create a true hedge of Delta risk is to know exactly what your risk is by the use of beta weighting. Not every platform offers beta weighting. Generally, to get beta weighting information you must have an options trading platform. You can use an options trading platform even if you only trade stocks. Two good trading platforms are TD Ameritrade (please click here, as we get a finders fee and you help us produce good content) and TastyWorks (again, click here to help us out). If TastyWorks does not have beta weighting when you read this, they will shortly.

Many people are limited to the account type in Brokerage of their employer. For example, in my retirement account I cannot use either the brokerages listed above. However, do not fear as you can often approximate Delta risk or more simply use some tech simple technical indicators to hedge off that risk. In my retirement account, I will start buying long stocks that are either reverse ETF’s, or long volatility. As of this writing, I prefer $TZA which is an inverse Russell 2000 stock; $SDS, which is an inverse S&P ETF; and $VXX, which is a long volatility product. Please stay away from ultra short products, 3X products, and products that are cash settled. If you don’t know what these are, perhaps stick to the indexes and products mentioned above. When a stock market goes down $TZA will probably out perform in the short term, followed by $VXX. $VXX will outperform at the market bottom. $SDS will most likely hedge against a long-term down move.  Be aware all these products do lose money if they’re held too long on an up move. Market timing is almost impossible, so the best way to hedge is to actually hedge. By this, I mean you should buy a small amount of shares of these hedging products when you feel the market is topping. If the market continues to be go up, simply by a few more shares over the days, weeks, and months. Please be careful not to buy too much. I’m suggesting the use of these products as a hedge, not as a directional investment. If you must use these products as a directional investment to the short side, consider using an options strategy, if your Brokerage allows.

The screenshots below compare the same portfolio at the same time with no beta weighting (left) and with beta weighting against the $SPX (right). You can see the extreme difference in looking at the same portfolio through a different lens. When you beta weight your deltas and get close to zero from a portfolio standpoint, you are lowering your directional risk to one side or the other. If the market were to go down and you had positions in the hedge products I mentioned above, you would sell these products when the market bottoms, or what you think is the bottom. If you make 15% – 25% I would recommend edging out or selling your hedge entirely. Remember, bulls make money, bears make money and pigs get slaughtered. If you think the market has further to run down then maybe keep a portion on the table but take the rest off. The beauty of the strategy is you now have your hedged money in cash to invest in long positions that pay dividends or you can write calls against (covered calls).

Account Showing Beta Weighting to the $SPX
Account Showing Beta Weighting to the $SPX
Account Showing NO Beta Weighting
Account Showing NO Beta Weighting

 

 

 

 

 

 

 

 

 

 

 

 

If you have any questions, please feel free to comment below and I will answer them best I can. In the meantime please also consider using PocketSmith for your accounting. It is the best product I’ve ever seen and want to support them. By clicking on the banner below you support our blog and the information we provide.

The Unconventional Guide to Retirement Savings

Tastyworks Homepage

Expanding Ideas on Investments

In a world where we’re told to ‘play it safe’, I’m here to suggest something a little more robust.  After all, life involves risk.  I wrote an article about low risk versus high risk and the benefits to taking on a little more risk.  I would also offer that if you’re younger you should take on more risk.  The items below are probably more risky than a bond fund in your 401K, however, they probably also offer more income and dividends.  This article will cover some unconventional investing products.   Regardless of your risk tolerance, you should read up on risk in exchange publications, such as

Unconventional Investment Number One: Closed-End Funds

Closed end funds are very similar to mutual funds, except they trade like stocks. The benefit to the investor is that you can get in and out easily, and benefit from appreciation of a limited number of shares. Mutual funds generally do not limit the number of shares available, but expand as people invest more money and shrink if they invest less. Because closed-end funds have a finite number of shares the stock’s price will go up if demand goes up. This is the same thing that causes stock prices to go up. There is another dynamic with closed-end funds which is net asset value, or NAV.  net asset value is the cost of the underlying stocks or products the closed-end fund invests in. For example, if the closed-end fund invested in a stock that is worth $10 and the price of the closed-end fund is nine dollars in theory you would make one dollar just by buying the closed-end fund versus the underlying stock.

Closed-End Funds

Many closed-end funds offer very high dividend yields. I would caution you to invest only in the highest dividend funds, as many of these actually deplete shareholder value to pay the dividends. I would recommend doing some due diligence and looking at closed-end funds that offer underlying stocks that you may invest in on your own. One way to determine this information is to go to the website CEFconnect.com and look at the fund information. The site will let you look at dividend yields, distribution dates, investment information and the fund’s mission. You can also use their screener function to find fund opportunities. I like to invest in funds we use a covered call strategy, is that is generally how they’re making their money. This is a option trading strategy that I would do on my own, however, is generally not allowed in a company 401(k). This is somewhat of a work around to earn income on covered calls without doing the work yourself.

Unconventional Investment Number Two:  Covered Calls and Naked Puts

Option trading is another somewhat unconventional investing practice.  Although they are becoming more mainstream, there is still a lot of mystery.  Although they can be risky, the covered call and naked put are safer than buying stock outright.  Both offer cost reduction to the purchase, or potential purchase of a stock.  This is not the article where I will get into the nuts and bolts, but if you stick to these two options strategies, you cannot be worse off than buying stock.

A covered call is essentially buying a stock and then selling someone the right to buy at from you at a price higher than you paid.  They will pay you a premium for this.  As an example, if you were to buy Twitter today $TWTR for $24.32 (Price as of Close on 1/5/18), and sell a February 16, 2018 call against your 100 shares for $TWTR at the $26.00 strike for $1.13, two things would happen.  The stock closes on February 16 for less than $26 and you keep the $1.13 (times 100, less commission), or about $110.00.  You can then put on a similar trade for March.  If the stock closes in February above $26.00, you would get the $1.13 plus the $26 sale price for your stock, netting you $2.81 ($26+1.13-24.32=2.81).  Also if the stock went down to $23.19, you could sell it and break even, as the $1.13. collected offers you a 1.13 cost reduction.  Do this 24 months and you own the stock free and clear!  This may seem confusing.  It may seem intriguing.  If it is either to you, please learn more.  I will post more about these trades in future articles.  You can also visit our partner site, www.selltheta.com for more information.

Similar to the covered call is a naked put.  With a naked put, you sell someone the right to ‘put’ or sell the stock to you at a certain price.  Let’s use the $TWTR trade at $24.32 on 1/5/18 (today).  If I was bullish on $TWTR, I could sell a put contract for the $24 strike price for February 16, 2018 expiration.  The contract price is $1.55, therefore, someone would pay $155 less commissions to sell me the stock.  On February 16, 2018, two things could happen.  The price of the stock would be over $24, in which case I do not buy the stock and I keep the $155.  Or, the stock is below $24 and the contract owner would put the stock to me, which I was going to buy anyway, right?  My investment in the stock is $24-1.55, or $22.45.  I could then sell a call against the stock I own (See covered call above).  Essentially, you can trade around a stock you like, or choose a different stock each month.

There are more issues you need to be aware of like assignment risk, dividend risk and volatility.  Again, if this is intriguing or confusing, you owe it to yourself to learn more.  If you are interested in a great brokerage account for options and stock trading, visit TastyWorks

Unconventional Investment Number Three:  REITS & MLP’s

REITs are “Real Estate Investment Trusts” and are managed in a special way.  They generally hold real estate or derivatives (Notes, Loans, etc.).  REITs require that 90% of the profits be returned to the investors.  Generally, well managed REITs can pay high dividends.  Please contact a tax advisor or do some research, as they can often times be treated differently under the tax code.

MLP’s or “Master Limited Partnerships” are investments in a specific project(s) and are also treated differently under the tax code.  Many oil wells and natural resource projects are offered as an MLP.  Be careful, as fraud does exist in the MLP and to some degree, REIT market.  Some of these are set up to collect money from investors as the first priority and managing the asset as a secondary task.  This will almost certainly result in a bad deal for the investors.

To find either of these products, I would recommend www.dividend.com or www.finviz.com.  Dividend.com has a premium service with a ranking structure for dividend paying stocks of all sorts.  This might be a good option if you are not sure of what to look for in financial statements.  Remember, Enron looked like a magnificent company on paper, so even “The best” might involve risk.

Unconventional Investment Number Four: Delaware Statutory Trusts (DST’s)

In the early 2000’s, when investments in real estate were hot and there was not a lot of inventory for small investors trying to find single family homes and apartments, there were TIC’s.  A TIC, or Tenants in Common is a type of legal structure to hold real estate.  A TIC investment means that two people (usually not married), could invest in a property equally and if one passed away, their interest would go to the decedent’s heirs.  Whereas many married couples hold their primary homes and other real estate in Joint Tenancy.  The TIC structure became popular in allowing small investors the ability to invest in commercial property or bigger properties with other investors.  When the real estate market tanked, so did many of these investments.  Mainly, the management companies were guaranteeing a certain amount of income for the investor and any improved income would go the management company.  It was a great idea, however, the depth and pain of the downturn in 2007 was unbearable for many of these companies and their investments.  During this market downturn the Securities and Exchange Commission deemed these investments a securities trade and subjected future investments to SEC rules and guidelines.  Needless to say, I would reserve TIC investing for people you know and even then, only with a contract.

Enter the DST or Deleware Statutory Trust.  Another structure for investing in real estate, a DST has a lot of the same features as a TIC, but is still legal.  The investment simply comes down to how good is the underlying property or asset AND how good is the management of that asset.  My concern would be with a DST is you have some of the same problems a TIC has, you are investing with others you probably don’t know; you have little control over your investment; exit strategies for the company may be different than your personal exit strategy, etc.  These types of investment are for savvy, accredited investors and should be utilized with caution.

Unconventional Investment Number Five:  Checkbook IRA

Since were talking about unconventional investing in a retirement account, I would be remiss if I didn’t mention a checkbook IRA.  This type of structure allows you to have retirement funds which are tax deferred in an IRA account where you can write checks to make investments.  The investment and income received go to the IRA account and withdraws for income/living follow the current guidelines of IRA disbursements.  Research this if you are interested in investing in real estate, gold, etc. in your IRA account.  If you are interested in a Checkbook IRA, there are several offering these services.  I will add IRA Accounts offering ‘checkbook’ services below.

Selfdirectedira.org

Conclusion

As I wrote about these investment types, I also cautioned you where I could.  Many of these pitfalls I’ve already gone through myself, some I’ve learned from others, but mostly from my own mistakes.  If you are considering these investments, please seek to understand them better and become an expert.  If you have questions, I’ll try to answer in the comments section.  Understand that just because I brought up an investment does not make it good or bad.  It’s just an attempt to expose you to alternative investments.  Due diligence and starting small are good ways to understand your investment.  As an example, many options trades can be done for a few hundred dollars.  The risk is low compared to the understanding and learning gained.

How to Keep a #Windows Machine Running Like a Mac!

Advanced System Care 11

Best Product for Windows Computer Maintenance

One of my favorite products for cleaning a computer, specifically a Windows machine, running in tip-top shape is Advanced System Care.

 

Advanced System Care, from IObit.com, is an all-in-one solution for keeping your computer running at peak levels. It offers features such as malware protection, malware removal, spyware protection, spyware removal, and tune-up options like memory, disk, and file structure.  The product also optimizes hard drives, keeps system memory clean and stable and removes infections of all sorts.

 

This is not to say you should not have an antivirus, you do. However, I found that the standard Windows Defender works great alongside Advanced System Care.

System Setup

Advanced System Care is easy to install and easy to set up. Below are settings that I recommend to you keep your computer tuned-up automatically, without any issues whatsoever.

 

  1. Enable all advanced system care functions except CPU monitoring.
  2. Go through each setting and make sure anything “Auto” is turned on.
  3. Be careful of anything marked “Secure File Delete” or the like, unless you are a CIA agent or something!  If you are concerned about deleting files, then use it, just understand that deleted is now deleted FOREVER!

 

The cost of Advanced System Care is approximately $30 for 3 licenses, per year. They do offer three license packs, occasionally for around $30. Below is a link to a three pack offer just for my viewers.

 

If you have a computer that runs all the time, such as a desktop, the auto-clean should work fine.  For laptop users who turn their computer off when not in use, may have to tune up the computer manually, every now and then.  You just open advanced system care and choose “Scan”, which is a large button in the center of the interface.  If you are ready to turn off the computer after the scan, simple choose “Fix and Shutdown”.  Choose other options for what suits your situation.  Some cleaning (i.e. registry) requires a reboot.  If you’re taking the time to scan, it’s probably a good time to reboot your computer, anyway.

 

I have been using Advanced System Care for years.  My computer almost never is exposed to malware and I rarely have problems.  I’ve installed it on parent’s computers, friends and neighbor’s computers, as well.  If you’re the local tech-guy (or gal) for your tribe, perhaps get people started on Advanced System Care.

 

On this blog, I try to only recommend things I use and enjoy in life.  Some things may be “One of the best” I’ve used, so I’ll recommend as a comparison.  For this product, it is simply the best I’ve used and kept my computer running issue-free for years.  In fact, I bought a MacBook Pro in 2015.  Although, it seems to be a great product, I’ve since gone back to Windows only.  Why?  Because, I just don’t have the issues on the PC of yesteryear.

 

If you have any questions about advanced system care, installation, or use, please comment below.

Click on the link below to buy:

Advanced System Care 3 Pack License

For More Information on IOBIT.com or their products:  Click Here

#Amazon #Echo (2nd Gen) as TV Bluetooth System

Amazon Echo

Not a Bad Way to Bluetooth

About a year ago, I realized I needed a speaker in my office that brought the sound inside the office.  The TV in the office is setup near the door with the speakers on the back of the TV.  The sound just kind of went into the hallway.  This made it hard for me to hear and easy for my wife, who’s office is just on the other side of the hallway.

Enter Echo.  I bought an Echo and set it up as a bluetooth speaker to the TV.  Now the speaker is solidly inside the room.  I used a bluetooth transmitter tied to the TV to the Echo, which does have a slight delay.  My TV has an adjustment, but there is still a slight difference.  I don’t notice it, but my wife does.  So proceed with this setup with caution.

In addition, I love setting alarms with Echo.  I also listen to music, but usually through a Roku, since the TV is already on.

This works for me and may not for you, but it is a pretty good setup.

Amazon Echo and Bluetooth Transmitter on Amazon:

InvestmentHouse.com: A Great Macro #Economic Newsletter

InvestmentHouse.com Newsletter Page

Macro Economic Weekly Views

On another site I own, SellTheta.com, I’ve made several posts about InvestmentHouse.com and their weekend newsletter.  I wanted to bring it to this user base, since I talk about investments, retirement and the economy on this site, as well.  The newsletter does a great job of giving you a debrief of the previous weeks action and economics, as well as a glimpse in the future.  I also enjoy their occassional rants on economic policy from the governments and how they are counter-productive.  Those have settled down since Trump became president, as most economists are agreeing with the course of the President’s policies.

Each weekend, usually sometime on Sunday morning, they send an e-mail, or you can go to the page:  http://www.investmenthouse.com/frblog.php and read up.  I usually read the summary closely, News/Economy, the bulls vs. bears (An Indicator of Money Flow & Buyers), and Monday’s sections pretty closely.  Since I watch the market during the week, I really don’t need to know the action.  If you are a long term investor, this would be the one newsletter I use to catch up.  For more active investors, this is probably the only newsletter you need to get a handle on the long-term economics of our markets.

Below is a small sample of a weekend newsletter:

MARKET SUMMARY

– The tax reform dance: market drops, rallies based upon a few senators
– Stocks surge back with even NASDAQ punching a new high ticket
– FAANG trying to rejoin leadership, small caps as well
– Economic data back and forth but trending higher ahead of a very busy data week.
– Rally toward yearend may have just caught on for all indices.
– Just when you thought the tax cut news was all baked into the market you get a couple of ‘no’ votes crossing over to ‘yes,’ even Korker’s, and you get a
market recovery, indeed, surge. Thursday RUTX and SP400 sold off on renewed worries the bill would fail when Marco Rubio and Mike Lee were said to be a
‘no’ and a ‘leaning no.’

NEWS/ECONOMY

On a week of back and forth economic news the market showed a lot of back
and forth itself, but the major indices did not give up their trends.

OTHER MARKETS

Bulls and Bears: Pretty large drop though still easily over 60 for the
bulls. That is still in the overly optimistic range and of course the surge
Friday will bring them around again to the upside. This is a warning
indication, but not a great timing device.

Bulls: 61.9 versus 64.2

Bears: 15.2 versus 15.1

MONDAY

Fed hiked rates as expected, has a gentle upward slope as expected, lots
more data to come in the week ahead: Housing starts, Existing Home Sales,
GDP third, Philly Fed, Leading indicators, Personal income and spending,
Durable Goods Orders, New Homes, Michigan Sentiment. A veritable data dump.
Overall the economic data is up and down but trending up.

For the last complete InvestmentHouse.com Newsletter, head over to their website and sign up for their free newsletter: Investmenthouse.com

Low Risk Vs High Risk: Who Wins?

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Low Risk VS. High Risk:  What’s Better?

Today, I want to talk to about low risk versus high risk investing. I want to tell you story about a conversation I had with a friend, where he was insistent on making 4% on his money in his 401(k) as the safest way to invest. I was trying to explain to him the risk of taking too little risk. I suggested he might be better off trying to earn more dividends on that money.

I’ll take you through the conversation we had. Hopefully, I can explain my point of view to you, the reader. Before I begin, it is a good idea to understand that all investing involves risk. I am not telling you to invest in any product, but just making you aware of something you’ve been told is good for years. Of course, I don’t want to lose money, nor do you. However, everything involves risk, including just waking up in the morning! Even low yield investments involve more risk than the investor realizes. I’ll explain that later.

To summarize our conversation, he wanted to make 4% instable products, such as bonds, notes, and government debt type instruments. I was interested in earning a higher yield, closer to 12% investing in products like REITs, closed-end funds, and maybe index funds.

In the accompanying video, each of us started off with $100,000. 4% Guy’s hundred thousand dollars at 4% per year yielded $148,024. 12% Guy starts with $100,000 and earns 12% a year for 10 years and yields $310,584. That would be an approximate 209% increase over the 4% guy, which in this instance is a no-brainer.

However, you know, the discussion was what is better a higher risk or lower risk? We changed the scenario and asked if 12% Guy’s investments took a hit. We thought maybe, as an example 12% Guy takes a haircut on his investments when the stock market goes down. Let’s look at that. We took the 12% Guy and in the example, he takes a 50% loss on his investments in one of the ten years. For simplicity sake, we used year number five. Keep in mind, different things would happen between years one and 10 depending on what year the loss occurred. Going back to the slide in the video before if you took the loss at year two, you end up with $60,000 so it would take you longer at 12% to get back your loss. If you took it at $277,000 in year nine. You’d be at what 130 something thousand dollars, you’re going to make that back in the next year so it does have the same bearing. For the demonstration in the vide, were going to just do it in the middle of the 10 years at year number five and a 50% loss.

Now it’s not very common to take a 50% hit in one year, but this is just to show you an example. In real life, the 50% hit could be distributed over two or three years, as happened in 2006-2008, the likelihood of this happening is possible, but it’s more apt to be 10-20% loss over a couple years.

The 4% guy still earns $148,024 in the end. However, in year five. For 12% guy, we cut the four year income in half and then started again down the years. The 12% Guy still earned $155,291 by the time it was all over, which is still 4.9% over the 4%. In this case, the risk is actually still lower by earning a higher yield. Now when you earn a higher yield, you want to do it safely. If you make bad investments, just trying to seek yield alone, you could easily get more than a 50% loss in your in your principal. Still be careful with what you invest in.

I’m currently invested in REITs and closed-end funds, and some other high yield instruments. I also have things that hedge off risk to the downside sitting in my 401(k) and I’ll explain that to you in future videos.

In closing, 12% guy won either way. I explained that a 50% haircut earlier in the ten year example, may cause a bigger loss and take the 12% Guy below the 4% Guy. You’re still in the game, however, and of course you can have losses in multiple years to more than 50%. This is true for either of us. Losses in multiple years is quite possible for both. Learning to hedge the risk to the downside will go along way, WHEN this bull market is over.

I wanted to bring up is the 4% Guy is also taking a bigger hit on inflation. A Consumer Price Index, CPI, of say 3% and an earnings of 4% really is not netting you much money. The 12% guy wins big in an inflationary environment. Now, just because we’ve been in a non-inflationary environment since about 2006 2007 doesn’t mean that it’s not going to happen again. In fact, I think were on the precipice of inflation and that’s why the Fed is raising interest rates and as of this recording on December 15, 2017. The Fed just raised interest rates another quarter point in the December meeting. Were in that window where they have to start regulating inflation with increased interest rates. That will become a bigger factor for the 4% guy moving forward.

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