Saturday, October 14, 2017

Ignorance is your worst enemy

My friend’s friend used a financial planner. The financial planner bought an annuity and a front-load fund for her. Obviously, it is for the planner’s advantage. The annuity commission could be as high as 10%. How many times I told my friends not to buy annuities except for rare conditions? The annuity is written by the company who issues it and obviously for their advantages not yours!

The front-loaded fee could be 1 or 2%. The ‘planner’ could sell it next month to get another 1 or 2% commission until your investment goes to zero. If you have to use a financial planner, use the one for fees, not letting them selling their products to you. There are many cases of “pennies smart and pound foolish”. Sigh!

Alternatively, just buy an ETF such as SPY that simulates the market and time the market as described in this book. From 2000 to 2010, you only switched to cash 3 times, two correctly and one false alarm (more frequently after 2010). False alarms usually do not cost you much as it would tell you to reenter the market shortly.

Wednesday, October 11, 2017

Why we invest?

Personal reasons

You need to learn investing sooner or later in life. You need to take risk. Compare the returns of the following assets: cash, CDs, treasury bills, bonds, real estate and stocks. We start with the risk-free investments and end with the riskiest. It turns out the average returns to be in the opposite order. Cash and CDs are not risk-free as inflation eats our profits. For example, the real return is negative for the2% return in a CD and a 3% inflation rate is 3% and you have to pay taxes for the ‘returns’. Our capitalist system punishes us for not taking risk.

They are two kinds of risk: blind risk and calculated risk. If you buy a stock due to a recommendation from TV or tip, most likely you are taking a blind risk. It would be the same in buying a house in a decaying neighborhood. When you buy stocks with a proven strategy with exit strategy, you are taking a calculated risk.

With so many frauds and poor management, do not trust anyone in investing. If you buy a market ETF and use my simple market timing, you should have beaten the market by a wide margin from 2000 to 2017 (as of this writing). The average hedge fund return is TERRIBLE if you include the closed ones and their hefty fees.

My personal reasons

After college, my bank account was negative but I was glad I did not have any loans. So, saving is always important to me.

I have been investing since my first job after college. I had been busy in my job and family and did not pay a lot of intention to investing. The market has been rising steadily even after the market plunges. Hence, it is no brainer in making money in the market. I started rotating sectors in 2000 since my job did not allow me to trade stocks without a lot of restrictions. It was doing great.

I moved all my risky sectors to ‘traditional’ sectors in April, 2000 (cash could be far better). I moved back to value stocks in 2003. I did missed 2007 due to my false security from the good profits in energy stocks. However, I moved back to stocks in March, 2009. As a retiree I was very conservative today and missed part of the bull market from 2010 to today.
In my early retirement, I read hundreds of investing books and conducted thousands of strategy simulations. Some strategies and/or metrics used to work previously do not work in today’s market.

I believe “buy and hold” is dead after 2000. My books outline how we adapt the strategies for today and future markets that are always changing. My children are not interested in investing and hence I do not withhold any secrets as most other book authors do. Do you blame them?

Social reasons

“Counting money (pennies in my case) with the filthy and smelly hands dripping with blood (hopefully others’) from the market”.

It is just a joke and investors serve an important role for the society. With my frugal life style, I do not have to invest and/or write books. It is my hobby and fun to kill time. I can still contribute to the society in my life after retirement.

If we do not invest, where can the startup obtain financing?  All the life-saving drugs need heavy financing. Many investments are not risk-free. Being social conscious, I try to stay away from sin stocks such as tobacco companies. There are many social funds also promote their agenda that are available to us.

Investors can punish the mismanaged companies by selling their stocks. Many times they are good as a warning to the management.

Traders can take advantage of the market. It is cruel to talk about making money in natural disasters such as hurricanes. Some sectors such as construction would benefit. If you feel guilty, just donate some of the profit to the victims. Donating appreciated stocks as of this writing gets the biggest bang for the money.

Buffett, Gates and Zuckerberg are the few camels that go thru the eye of a needle. The majority of us just pay our share of taxes plus some donations. They are far better than the able poor. When the food stamp recipient ahead of me carries a luxury handbag and buys the better cut of meat, I feel our welfare system needs major repairs.