Market Trends
What are "market trends" and how should they impact my trading decisions?
Market trends are really just fads that are going on in the marketplace. It's really something for the media to grab a hold of and talk about, as they're always looking for a story. Market trends should really not affect our long-term investment strategies at all. Our investment strategies should be governed by academic research and well proven strategies, not the fad of the day.
What are the pros and cons of online trading?
The pros and cons of online trading from a true investment standpoint are based on the fact that online trading is just another avenue to go purchase a security. The advantage of investing online is that you are bypassing having a human there, which is a more expensive process. Many brokerage firms have both options: you can trade directly online or you can trade through a person. Usually, when you trade online you are going to trade for a lower cost. The potential risk with that is that you might be making an error in that trade. You might not fully understand how you should be making a trade, so having a person there can make sure the trade is executed properly.
Should I invest in foreign companies?
When it comes to thinking about investing in stocks in foreign companies, we want to stand back for a quick moment and ask, "What's our overall goal? What's our strategy? What are we trying to accomplish?" What foreign companies are going to provide for us is a form of diversification, meaning what affects the US stock market might not be effecting the market in Europe or Asia. Foreign companies are going to be going up and down at different times. That dissimilar price movement is really what we are looking for in asset allocation. The answer is absolutely, invest in foreign companies, if you have a long-term investment strategy and equities are part of that strategy. Foreign equities provide a lot of diversification to your portfolio.
What is "liquidity"?
When we are talking about liquidity from an investment standpoint, we are usually concerned with how quickly we can get our money back. If you are buying in stocks, CDS or bonds, you can usually be selling those assets immediately. Those would be liquid assets. There is another aspect of liquidity, though, that people might think about: "How quickly can I sell my investment and expect to get what I paid for my investment back?" While you can sell a stock immediately, stocks are volatile and they do go up and down. It's possible that if you need your money back right away and it is in a stock, you may be getting less than you paid. It is liquid in the sense that you can sell it immediately, but it might not be liquid for the sense that when you sell it you are actually going to get back what you paid for that stock.
What percentage of my money should I keep in cash?
When it comes to the amount of your money that you want to keep in cash, there's a lot of different rules of thumb out there. It's a very difficult question to answer in a broad sense; it's really unique for an individual. One of the common rules of thumb might be three or six months worth of expenses in cash. What you're doing is providing a cash safety net for yourself in case you were to become laid off or change jobs. However, there are a lot of ways in today's society to gain access to money in a very inexpensive manner. Margin could be a perfect example of that. Instead of keeping a certain percentage of your money in cash, earning very low rates of interest, you might be able to give yourself a margin loan for that short period of time when you're out of work and the net cost to you is probably going to be less. For the most part, you are not going to have this money sitting in cash that you may not need for three, four, five years, so that money is really never working for you. A margin loan, access to a home equity loan, or even you putting some expenses on low interest rate credit cards could really bring you through that period, and the net cost would be much lower to you than having a lot of money sitting in cash and not working for you.
What is "tax loss selling"?
Tax loss selling is the process of what we call realizing losses in investment. In our tax code, you can deduct investment losses that you're going to have. If you invest in a portfolio of stocks and some of those stocks lose money, you could sell those stocks, take that investment loss, on your tax return. When does tax loss selling make sense? There's a few factors to it. One is the amount of the loss needs to be worth it from a tax perspective for the cost of placing those trades. You're going to have to sell that security, and then we'd assume eventually you would go back into that security in more than 3 days.
Should I follow advice of the TV and magazine investment experts?
When it comes to the advice that you're going to see on the television and on magazines we need to keep in mind a couple issues. One is that they're mass-marketing this advice, and so it's very general. Does that specifically apply to you? You need to really make sure that it does. And so while someone may talk about ‘Here's a great investment', and they might be correct – it might be a great investment, but it might not be a great investment for you and for your overall investment strategy, so that's an important thing to keep in mind.The other thing is you always need to stand back and wonder what's the motivation behind the advice that's coming, and are the people that are giving this advice really working with individuals to have them understand how it works? This isn't a science, investing. It's as much art as science. And to understand the art you really need to work with investors on a constant basis.And so while I'll see a lot of good advice that is given out there, many times it just doesn't really apply that well in the real world.
What are the key facts investors should know about investing in stocks?
When it comes to investing in stocks, one of the main things to consider - as with most investment strategies - is, "Why am I investing? What is the purpose of this investment? What are the goals?" When it comes to true investing with stocks, you want to be very diversified. You want to eliminate the risks associated with an individual company by owning many companies. That's another important factor to keep in mind when investing. Once you have done that, since the individual stocks become less important to you, you are looking at broader asset classes. That's what you want to focus on when building a stock portfolio: how much large cap stocks versus small cap stocks, versus value, versus growth, versus foreign equities, versus real estate equities. Investing is really about building an overall diversified allocation of stocks.
What are the top mistakes people make when investing in stocks?
The most common mistakes that people make when investing in stocks is not understanding why they're buying into that individual company and how it relates to their overall portfolio. We're talking about investing and not a speculative strategy, and that means we're going to have many securities in our portfolio, broadly diversified amongst countries and asset classes. As a result of that, this individual stock isn't going to matter or at least it shouldn't matter with regards to our portfolio. So when investing in stocks the top mistake people make is tending to over-consider their portfolio when buying stocks and here's where the big mistakes really happen, through all the hype, through the sales pitches, that we like this company, we shop there, it feels good to us, it's got to be a great company, whatever it might be that makes us want to own it, etcetera. But back to the issue of our overall portfolio - in a well diversified portfolio, individual securities do not matter.
