Money Clinic: Why are You Buying?

Starved for yield, many investors are being forced to choose investments by matching expected yields with their income needs, while ignoring riskiness and overvaluation. I can understand the rationale behind those decisions. This long-running bull market has been fueled by a lack of good investment alternatives, not necessarily by great fundamentals.

However, you should be buying investments that meet your criteria for growth and that interact well with your other assets. You don’t have to follow the crowd. Remember, the purpose of the money dictates where you should put it.

Investors who are stampeding into expensive stocks through passive index funds are forcing prices higher because these funds must keep buying stock. Furthermore, cash is not a viable option for a lot of equity mutual fund managers because they need to keep up with returns on index funds for fear of losing their jobs. In other words, this market has turned many professional money managers into buyers that need to keep up the pace with what’s hot…until it’s not.

In theory, the fees you are paying your money manager would be worth it if they sell their shares before the index funds. Unfortunately, that is not their mantra. Besides, they don’t have a crystal ball that tells them when to sell.

I am not saying that you should sell all your holdings. I am suggesting that you consider taking some profits off the table so you can redeploy when valuations aren’t as stretched and the “herd mentality” isn’t so prevalent. Perhaps you can put on a hedge for some protection.

Financial Institutions want you to buy, buy, buy. Oh, and they want you to hold on through thick and thin. I am just throwing caution in the wind since I know that remaining fully invested in the financial markets without a thorough understanding of how the big boys play the game might leave you in the dust when the selling does happen – and eventually, it will.

It is usually the investor who gets stuck holding the bag and since Halloween is approaching, I am just making you aware that there is some bad candy out there and you don’t have to buy it.

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Money Clinic: It’s not about AGE

Many people set a target for entering retirement at a certain age. It usually revolves around a Social Security timeline. For example, you can begin collecting Social Security benefits early at age 62, so that becomes your target retirement date. Or, perhaps you would like retirement to coincide with the age you are eligible for Medicare. These are age-based retirement goals.

While I cannot condemn anyone for having goals and setting target dates to achieve them, I do know that wealthy people (the group we want to emulate) base their actions on whether they are “financially capable” of maintaining their standard of living.

This means that your goal should be “asset-based”. It is critical that you develop a retirement plan that details the types of income you’ll be relying on to fund your retirement. Will you receive Social Security income? Pension and/or annuity income? Rental income and dividends?

Once you calculate your income sources, your goal becomes much clearer because you simply determine the nest egg that you’ll need to accumulate to provide the income you desire.

Of course, do not forget to factor-in six months’ worth of emergency funds in a liquid savings account. It is also a good idea to have a separate savings account that is dedicated to major purchases and other short-term expenditures.

Don’t forget about Inflation

While most retirees begin to invest more conservatively in retirement, wealthy people understand that they still need to grow their assets to keep up with inflation. Since most sixty-five-year-olds have three decades to continue to make their money work, it is important to have assets that have growth potential.

Furthermore, people that have multiple income sources usually can withstand a little downward pressure on asset prices due to normal market corrections.

One way to play it safe if you are taking withdrawals each year is to choose to skip taking raises in years following negative years in your portfolio. On the other hand, if your portfolio increases, you can give yourself a raise!

It is also very important to be mentally prepared for the transition to post-career life. It is not uncommon for wealthy people to continue to work in retirement. Staying active socially and maintaining a healthy lifestyle are critical factors in retirement.

Most of the successful retirees that I know have learned to keep things simple. They are not active day-traders and they don’t over-complicate money matters. They are also good about ignoring the distractions in the media about the impact of current events on their portfolios. It is important to stay disciplined and not get consumed with what other people are doing since that has no impact on your financial situation.

In the end, the rich may do a lot of things different but everyone has the same opportunity to use the same strategies they use to build and protect their hard-earned money. You too, can have a retirement that enables you to be financially secure if you base your plans on what it takes to be financially capable and not on any particular age you need to reach your objectives.

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Money Clinic: Trading vs. Investing

Trading and Investing are two very different methods of attempting to profit in the financial markets.

It can be argued, however, that trading can also be part of the process of investing and can sometimes be used to boost returns over the long run.

The goal of investing is to gradually build wealth over time through the buying and holding of a portfolio of different types of investments. Investments are often held for a long time, with the hopes earning compound interest, dividends and stock splits along the way.

While markets inevitably fluctuate, many investors hold on through the ups and downs and over long periods of time, have usually been rewarded.

Trading, on the other hand, involves the more frequent buying and selling of stock, commodities, currency pairs or other instruments, with the goal of generating returns that can potentially outperform buy-and-hold investing. When you mark something as a trade, you are looking for anomalies in the markets that you can take advantage of to make a profit. Trades are also very heavily driven by news items and susceptible to misinformation.

I always used to like trading around my long-term holdings. If I held a long position in a certain stock long-term and I thought there was a short-term pop on the horizon, I would purchase more shares for a trading position or sometimes pick up another stock in the same sector for a trade. This allowed me to have the action but not do anything with my long-term position. Once the reason for the trade was complete, I would liquidate the trade while continuing to hold my core holding.

If I thought the market was going to correct but I didn’t want to sell my long-term position, I would put on a hedge on the overall market while keeping my stock investment. When it worked, I was able to use profits from that trade to purchase more of my long-term position at a discount.

You can even make trades with your long-term position if it makes sense. Suppose you bought 1000 shares of a stock that moved up much faster than you thought in the short-term. It would certainly make sense to earmark a few hundred of those shares for a short-term trade by using a trailing Stop Loss Order to protect some of your profits and create some cash to buy back in at lower levels.

It is critical that you do not turn a trade into an investment. This is a mistake that costs many investors a lot of money. It happens all the time. You buy a stock because you hear a new product is coming out and the price of the stock goes up and you decide to hold on to it. Or, it goes down because the news was already priced-in or maybe the product isn’t very good. You hold on to the stock thinking that it will rebound or go higher. Usually, the trading profit disappears, you get stuck with a loss and holding the position takes your trading capital off the table. Now you can’t use this money to make other trades.

Once the reason for making the trade disappears, the trading position must be liquidated because the reason you made the trade no longer exists. Good traders often use a protective Stop Loss Order to automatically close out losing positions at a predetermined price level. If you are going to make trades, you must always have capital available to make the trades!

Do you really have time be an active trader?

If you are an active trader, you need to be available when the markets are open. Also, be prepared to spend 15-40 hours a week doing research on your trades. In comparison, your typical long-term investor rarely spends more than 3 hours a week doing research.

Traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups. While this reduces research time in the long run, there is definitely a learning curve while you are getting started.

If you are just making a short-term hedging bet against the market, your research time is somewhat reduced and you can often place a Limit Order before or after market hours. I always used Limit Orders when I bought or sold positions, especially with trades, because it allowed me to target a certain price I wanted and if it couldn’t execute, the trade wouldn’t go through. You never want to be held hostage by the market.

While trading and investing are two totally different methods of making money, they can sometimes be used together with great success. The key takeaway to remember is to never turn a trade into an investment because it almost always results in failure.

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Money Clinic: Human Capital is Part of Your Balance Sheet

While it is not surprising that most financial advisors focus primarily on a client’s portfolio, the reality from the holistic financial planning perspective is that the household balance sheet includes more than your financial accounts. Since most advisors focus on selling you a financial product, they often neglect to recommend changes to your portfolio based on the amount of human capital you have available.

It is important to realize that asset class and sector exposures of your portfolio should be adjusted around the risk/return characteristics of your job and your employment situation.

For instance, while an individual’s human capital is a significant asset throughout the working years, its value is not always steady. If you work at a job that isn’t very stable, you are already incurring a certain amount of risk to your overall portfolio so you better make sure to work on building your short-term savings and not overfund your retirement plan. Furthermore, investing in risky assets can kill your portfolio if you have to sell at a time that you need money during a layoff. On the other hand, more aggressive investments can be an appealing diversifier for someone who enjoys stable employment.

If you are coming close to retirement, you need to build up a solid emergency account and a slush fund to use for income while you are waiting for your retirement account to begin producing income. Also, you may want to allocate your assets a little more conservatively so a huge market correction doesn’t cause you to delay retirement. Reducing your debt load (especially high-interest credit cards) also works favorably on your overall allocation. I’ve seen people reduce their retirement contributions as they were 6 months out from retirement and plow that money on high-interest debt and it worked wonders. Talk about making guaranteed return on your investment!

If you are already in retirement and receiving Social Security (which is a bond-type) investment, there is nothing wrong with having some stock exposure to round out your portfolio, especially since stocks tend to be a solid investment to keep pace with inflation since life expectancies are increasing.

Effective asset allocation of the entire household balance sheet should always take the human life value into account, and you must adjust your investments accordingly.

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Money Clinic: How to Reduce Your Credit Card APR

Getting out of debt can be much easier if you can negotiate a lower APR (Annual Percentage Rate) on your credit card balances and work on paying down your principal. Making the same payment on a credit card that has a lower rate will help you do just that.

So, how do you get a lower rate?

Just ask!

First, go get your latest credit card statements. Your Annualized Percentage Rate (APR) should be listed at the very top or the very bottom of the statement. If you can’t find it, call your credit card company and simply ask them what your APR is.

Next, do an online search of your credit cards (using each card’s exact name) and compare the interest rate you are currently paying to the rate each of your card companies is offering to new customers. Also, take a look at what other card companies are offering as incentives to open new accounts. Don’t forget to see what perks these companies are offering such as: gas perks, airline perks, or even cash-back programs. This is the type of information you want to know before you get on the phone to ask your credit card company for a lower rate.

Before you start calling your credit card companies, determine what category your credit score should qualify you for. If your credit is bad, you can’t expect to qualify for a prime or preferred rate. On the other hand, if your credit score is good (or has improved), you shouldn’t be paying a sub-prime rate.

When you call the credit card company, you know that you’ve done your homework there’s no reason for you to be afraid to ask for a better deal. Sometimes, the first person you speak to is going to say, “Sorry, I can’t help you.” This is what the first tier of customer-service representatives are generally trained to say. If this happens, simply respond by saying, “Well, then let me speak to someone who can help me. Please connect me with your supervisor.”

If they say that no one is available right now, don’t accept this. Instead, tell them you want their name and ID number, so you have a record of whom you spoke with. Then insist they put a supervisor on the line immediately.

Once you have a supervisor on the line, explain your situation. Start by going over your current rate, tell them your credit score, and ask if you can get a lower rate. Compare your rate to what competitors are offering and ask if they would be willing to work with you to give you a better deal.

I have been able to shave 3-5% on my APR with a first-line customer service representative who explained they have a special offer for seven months. Wow! I wonder why didn’t call me to tell me about it! I’ve also had to get the supervisor on the phone and negotiate a lower rate too. Yes, there are sometimes a few hoops to jump through but it always worth it.

If you get a time-specific offer, make sure to mark your calendar to check back and renegotiate. Oftentimes, your credit score will have increased and you are entitled to a better rate.

Sometimes, you just can’t get a deal. That’s when it really makes sense to find another card company that does have a special deal – maybe even a 0% transfer option. I’ve done this before to get a break on a partial balance and it really helped me get my debt restructured and I saved a ton of interest.

If your credit score isn’t great, you might be able to restructure your debt to make it more manageable. Many credit card companies will review your situation, and based on the circumstances, they may decide to work with you to restructure your debt. This restructuring can include lowering your interest rates to zero for a period (usually six months to a year), lowering your minimum payments, suspending over-the-limit penalties or annual fees — or all the above.

Remember, credit card companies are NOT going to call you with special offers or to make sure you are paying the lowest rates available. It’s up to you to do your homework and have the courage to call.

Believe me, it’s worth the time and effort to do it.

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