Can You Predict a Stock Market Crash?

Posted on by July 28, 2016
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What is a Stock Market Crash?

The stock market declines or advances on a regular basis. Some of these swings back and forth are large.  A market crash refers to major decline in stock prices. It happens every few years. The market will go down in price and continue to go down until equilibrium is reached. The market is a big auction. Occasionally, there will be less buyer excitement than seller excitement. The reason could be anything. Fear and greed are the basic emotions of the market. The prices will continue dropping until the point where there are equal buy orders and sell orders.

Can You Predict When a Market Crash is Going to Occur?

The market can not be predicted. At some point, there will be a market crash. That fact is guaranteed. There is no way, however, to determine whether that crash will be next week, this year, next year, etc. Even as it crashes, you do not know that it is a market crash. It could just be a correction.

The other direction is also impossible to predict. You can not determine the start of a market recovery.

Think of the market as being in a car looking out the rear window. You can see where the car has been but not where it will be.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Why Buy Bonds When Stocks Have a Higher Expected Return?

Posted on by July 28, 2016
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It is true that stocks have a higher expected rate of return over long periods.  It is not true for each period.  Stocks will sometimes do better and sometimes worse than bonds. 

The fluctuation is risk.  If bonds are steady (they actually are not but lets assume so for this question), the back and forth of stocks is risk.  Finance people measure this roller coaster using standard deviation.  How scary do you want your roller coaster to be.  Adjusting the ratio of stocks vs bonds changes the total portfolio risk.

Not all risk levels are appropriate for all investors.  My 92 year old mother in a retirement home can not wait for a market recovery if there is a down fluctuation.  The money is necessary now.  I have her portfolio at about 2/3 short term bonds.  I am in my late 50’s.  I can handle much more fluctuation as I have many more years left.  I have my portfolio at about 40% short term bonds and 60% stocks.  I would have a young adult at nearly all stocks.

More risk means more profit but not necessarily when you want it to be there.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Can You Predict Future Stock Prices?

Posted on by July 28, 2016
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Predicting future stock prices is theoretically impossible. The market is essentially efficient, meaning that all publicly available information is almost instantly reflected in the stock price. Anything you read or study about the company can not be used to predict.

There are exceptions of course. Inside information (illegal) would give you an edge over the rest of the public. Thinly traded issues might also take a little longer to price adjust since fewer traders are following the news.

In my view, the biggest exception concerns speculative greed bubbles and fear pits. The group will sometimes begin pricing in irrational expectations. People get a herd instinct and overreact. On the greed side, you commonly see this with technology companies, particularly new age stuff. No company profits or even a prospect of one and stock prices keeps going up. On the fear side, people run screaming away. Look at fossil fuels for example.

Just because there are bubbles and pits does not mean you can use them to trade. If you are in the middle of the storm, how do you know if the storm is going to get worse and when it will end? Is the coal industry in a fear pit and will eventually recover? Or is it dead? How brave are you?

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Historically how did the wealthy invest their money?

Posted on by July 28, 2016
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The wealthy have invested their resources for thousands of years, likely since before history was recorded. There are references to investment management in biblical sources. The Talmud has a portfolio allocation (1/3 cash, 1/3 real estate, 1/3 business).

Some of what you could invest in was in old times different than now. Some is the same. Before very recent times, there was no stock market for example. Also, there may have been legal restrictions preventing certain ownerships. Even now, many countries do not allow land ownership (China) or restrict it (Mexico).

Real estate, jewels in some cultures, and business investments were all common choices. In more recent centuries, insurance contracts were used.

The most common choice, almost universal across all cultures, was education. This choice has always been highly effective at transferring wealth. The wealthy made sure their children had the best possible education. It may have been with private tutors. The method is not the point. Education for the next generation was and still is a significant use of resources. The next generation then start life with skills and some power. Add the parents’ connections and some power becomes a lot of power.

Your wealth is not just your home, cash, investments, etc. It is also the present value of your future earnings. Education, connections, and resources (and some luck) create the future potential. Always has been, always will be.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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What is a Mutual Fund?

Posted on by July 28, 2016
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In case you missed my newsletter I would like to define a mutual fund again. If you like you can see my other definition posts on stocks and bonds.   

A Mutual Fund is a legal entity where the manager collects money from other people and invests that money in multiple stocks, bonds, and other securities. Those people who the manager collected money from own shares (percent ownership) in the mutual fund. The main benefit of a mutual fund is diversification. It is basically a fancy version of the expression ‘don’t put all your eggs in one basket’. So if one of the stocks or bonds in the fund fails, there are other stocks/bonds to make up for it. I want to tell you a story. You’re walking down the street with a basket full of eggs. The eggs represent your money; the basket represent a security. Suddenly the bottom of the basket breaks and all the eggs come crashing to the ground. All of them are completely destroyed. You’re really sad because you were planning on making yourself an omelet. Now what if you had a second basket and you had some of your eggs in that basket? You originally had the exact same total number of eggs, it’s just split up between multiple baskets. Now even after one basket broke you still have some eggs to bring home. A mutual fund is essentially a large collection of baskets that your eggs are split between. Imagine a basket full of other baskets.  

The typical mutual fund has 2 major types of fees that the shareholder has to pay. The first fee is the management fee which is some percentage of the fund’s market value. This fee can be very significant and should be carefully considered. If the management fee is 2%, the portfolio has to go up in value 2% in order for you to break even. The second fee is a commission (or load). A fund can be front-loaded, back-loaded, or no-loaded.

In a front-loaded fund, the manager removes part of your invested money before they buy securities. For example: Susan invests 100 dollars into a front-loaded fund. The fund pockets 5 of those dollars, and the remaining 95 dollars is invested into the stock or bond markets. In a back-loaded fund, the manager removes some of the proceeds when you sell your shares. However, the amount they take out decreases the longer you’ve held the shares. For example: Susan sells within one year of purchase $100 worth of shares of a back-loaded mutual fund. The fund pockets 5 dollars and you are given 95 dollars. If Susan sells within 3 years of purchase $100 worth of shares, the fund pockets 2 dollars and you are given 98 dollars. A no-load fund does not charge a load. These funds are often called index funds. A fund can only be one type of load (front, back, or no).

The shareholder in addition to the management fee and load may be required to pay for additional fees such as transaction costs. You need to be careful when you invest in mutual funds due to these fees. For example: You invest 100 dollars into a mutual fund that is front-loaded (at 5%) and there is a management fee (at 2%). The value of the stocks the fund is invested in goes up 6%, but you end up losing money due to all your gains being eaten up by the fees. Imagine fees as a snowball that is rolling down a snowy mountain. The snowball over time gets larger and larger. Eventually it gets so large it crushes you.  

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Quick Advice

Posted on by July 28, 2016
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Advice #1: Be skeptical of people that make you big promises. I’m not saying that extraordinary claims can’t be true but there is a lot of dishonesty in the financial industry. Be a prudent shopper.

Advice #2: Always be aware of how a service provider makes money. They will always have a bias towards the actions that make them the most money, even if they’re not in the best interest of the client. Depending on their honesty and/or fear of legal reprisal they might not hurt the client to make more money but a potential conflict of interest exists nonetheless. Always try to work with people whose goals coincide with your own.

Advice #3: Don’t spend more money than you have. If you can’t afford it don’t buy it. Recordkeeping is wonderful and essential. Know exactly what you have. If you then figure out exactly what you need, you can plan for the future. Figuring out how to convert what you have into what you need is a key part of financial planning.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please leave a comment or contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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Do you agree with the advice I gave? Do you have life examples that proves my advice right or wrong?

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June 2016 Investment Newsletter: What is a Mutual Fund?

Posted on by July 28, 2016
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June 2, 2016

Investment Newsletter for the end of May, 2016

The market this month continued its very slow upturn.  Almost all portfolios were up this month.

Last month, I started rehashing some basic education.  Today, I want to discuss mutual funds.  I always ask in client meetings about definitions.  Very few clients understand a mutual fund.  Congratulations to you if you passed.

A mutual fund is simply a collection of things.  Rather than buy 30 different stocks, I pay someone to buy and assemble them into a basket of stocks.  It could be a basket of stocks, a basket of bonds, a basket of new startups, a basket of anything.  I then buy a piece of the basket.  The main benefit of a mutual fund is diversification. It is basically a fancy version of the expression ‘don’t put all your eggs in one basket’. So if one of the stocks or bonds in the fund fails, there are other stocks/bonds to make up for it.

A second benefit is that it allows smaller players to own wide sections of the market.  A mutual fund might have hundreds of stocks within it.  Unless you had substantial wealth, it would too expensive to research, trade, and allocate portfolios across hundreds of holdings.  You would also have potentially thousands of trades, many only a few shares at a time.  The commission cost would overwhelm any potential gain.

Mutual funds usually have a declared style.  The style would be the kind of thing they invest in.  Small Cap Value, Emerging Market, International Bonds, etc. are examples.  A S&P 500 fund would hold the stocks that make up the S&P 500.  The fund would attempt to weight the holdings in the same way as the stocks are weighted in the S&P 500.  Other mutual funds may have style based on a person.  The Daniel Dollinger is a Superstar Fund would not use categories.  Daniel Dollinger would use his magnificent judgement across all categories.  Of course, I have no such fund and I do not believe there are superstars – just super marketing.

The typical mutual fund has 2 major types of fees that the shareholder has to pay. The first fee is the management fee which is some percentage of the fund’s market value. This fee can be very significant and should be carefully considered. If the management fee is 2%, the portfolio has to go up in value 2% in order for you to break even. The second fee is a commission (or load). A fund can be front-loaded, back-loaded, or no-loaded.

In a front-loaded fund, the manager removes part of your invested money before they buy securities. For example: Susan invests 100 dollars into a front-loaded fund. The fund pockets 5 of those dollars, and the remaining 95 dollars is invested into the stock or bond markets. In a back-loaded fund, the manager removes some of the proceeds when you sell your shares. However, the amount they take out decreases the longer you’ve held the shares. For example: Susan sells within one year of purchase $100 worth of shares of a back-loaded mutual fund. The fund pockets 5 dollars and you are given 95 dollars. If Susan sells within 3 years of purchase $100 worth of shares, the fund pockets 2 dollars and you are given 98 dollars. A no-load fund does not charge a load. These funds are often called index funds. A fund can only be one type of load (front, back, or no).

You need to be careful when you invest in mutual funds due to these fees. For example: You invest 100 dollars into a mutual fund that is front-loaded (at 5%) and there is a management fee (at 2%). The value of the stocks the fund is invested in goes up 6%, but you end up losing money due to all your gains being eaten up by the fees.   

The funds I have you in have very low management fees and no loads.  I trade with Schwab which is on the lower end of commission rates. 

Yours Truly,

Dan

Daniel Dollinger CPA CFP®

Contact me if you would like me to send you all my previous newsletters. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

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What is a bond?

Posted on by July 28, 2016
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In this post “what is a bond?” I’m going to define a bond, the secondary market, and a major way interest rates are determined. If you missed my earlier post on stocks, please click here.

What is a bond?

Borrowing Money=Issuing a bond

People often think a bond is some complicated thing and that misconception is not helped by people who talk about par values and purchasing debt. A bond is simply a loan. When someone purchases a government bond, they are loaning the government money. At some point in the future, the government has to pay you back the principle (the par value) and some interest on top of that. Anyone can issue a bond, which is simply a contract. If you ever borrowed money from a friend and there is some physical or mental record that states you need to pay your friend back then you issued a bond. That is the primary market.

What is the secondary market?

The secondary market is when people purchase other peoples’ loan contracts. Let say Bob lends Frank 100 dollars, and Frank says he will pay Bob 150 dollars in 5 years. That deal is sealed by a contract. Now George offers Bob 105 dollars to buy that contract. So in 5 years Frank will have to pay him 150 dollars. If Bob agrees to the deal that is a secondary transaction. There are multiple reasons that Bob would agree to the deal. Maybe he needs money right away or he thinks Frank is going to refuse to or be unable to repay the loan.

How are interest rates determined?

If the lender thinks someone is a deadbeat, they’ll demand a high interest rate.

The risk of default is the main reason why different bond issuers have different interest rates. If you lend money to the government, it is very likely that they are going to pay you back. That likelihood means that the government doesn’t need to incentivize you with a higher interest rate when they announce the terms of the loan. On the other hand, let’s say we have some guy who launched a company out of his basement. He’s an idiot, he’s losing money, and you think he’ll go out of business in a month. In order for you to be willing to lend money to him, he has to incentivize you with a really high interest rate. An interest rate is simply a way to compensate the lender for taking higher risk.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please leave a comment or contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

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Did my explanation make sense? Do you agree or disagree with what I said?

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What is a stock?

Posted on by May 2, 2017

In this post “what is a stock?” I am going to define what a stock is and I’ll explain how its price moves.

What is a stock?

Think of the company as an apple. A share of stock is simply taking a bite.

A stock is a unit of ownership in a company. Let’s say you start a company all by yourself. You own 100% of the shares. Next let’s say you need money so you split your company into 100 pieces (shares) and sell 25 shares on the stock market. You now own 75% of the company, and people on the stock market owns the other 25%. So you now collect 75 cents on every dollar the company earns and the people in the stock market collect the other 25 cents (via dividends).

How do Stock Prices Move?

Think of a market where the apple is being sold. Buyers and sellers have a different perception of how good the apple tastes. So a lot of haggling occurs.

The reason why stock prices fluctuate is that different people have different perceptions of how much your company is worth. For example: Mary might think your company is worth 50 dollars a share, and Tony might think it’s worth 100 dollars a share.

If the price is currently 75 dollars a share, Tony will buy as many shares as he can because in the future he thinks he will be able to resell the shares for 100 dollars for a 25 dollars per share profit. All that buying will cause the stock price to move up (the price will continue to move up as long as someone is willing to pay for it). If someone is willing to buy a product from you for 80 dollars, why would you ever sell it to them for 75 dollars?

In this example Mary would sell any shares she has and wouldn’t buy any more. That selling pressure will drive the price down. If no one wants a product the product gets discounted down to incentivize someone to buy. The battle between the upward and downward forces explains the price fluctuation within the stock market.

Fee Structure

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my explanation make sense? Do you agree or disagree with what I said?

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The Two Faces of Risk

Posted on by June 10, 2016

August 3, 2014

Investment Newsletter for the end of July, 2014

July was a bad month.  In fact, the last two months have not been good.  The market as a whole was down and your portfolios were down accordingly.  So what does this fact mean?  What do we do now?

Risk has two faces.  One face is the up periods.  The other face is the down periods like July.  You cannot have the up periods without the down periods.  They go together.  Think of risk as fluctuations above and below an average point.  Without risk, you have no bad months and no profit.

I cannot say if this down period is the start of a major slide, a temporary reset because the next gain, or a sidewise stumble that does not mean a darn thing.  Trying to time the market is impossible and usually wrong.  Trading commissions and market emotions are a bad combination.  You tend to buy when everyone is feeling greedy (market top, wrong time to buy).  You tend to sell when everyone is feeing fear (market bottom, wrong time to sell).  The broker (the casino) gets a paycheck every time you trade.  The broker’s revenue is many times larger than the stated commission.  They make money on trades several ways that are not called commission.

Sticking to the plan suppresses both commissions and emotions.    Several months ago, clients were beating on me to be more aggressive.  They wanted more stocks funds and less bond funds.  The market had a taste of greed.  I held the clients back telling them to hold to the plan. I told them increasing risk would increase the loss in bad times.  They acquiesced not because they were happy about my recommendation but because they trusted me (thank-you by the way).   Funny, no one contacted me this month telling me to increase their risk.  I have been contacted, however, by people feeling fear.

So what am I going to do now?  I am sticking to the plan.  I am looking at all portfolios to see if they need to be rebalanced.  I suspect that at this point, most portfolios are close to the allocations we agreed upon.  If the market goes down much more, I will rebalance to the agreed allocation.  What that means to you is that I will buy more stocks when market is very down and very frightened.  Rebalancing is facing into the emotional wind and spitting.  This discipline yields exceptional profits.   I will not rebalance unless the difference is significant.  I am not interested in Schwab making more revenue.  I am interested in you making more profit over time.

Please contact me with any concerns or changes in your situation.  I answer tax, accounting, or investment questions with all my heart.  If you have a question, probably most of you have a similar question.  If you have an idea for me to write about, even better.

Thank-you for your trust and your business.

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