Daily Gains Letter

asset allocation


How to Build a Successful Investment Strategy for the New Year

By for Daily Gains Letter | Dec 23, 2013

Investment Strategy for the New YearAnother year is soon to draw to an end. In my final commentary prior to the holiday break, I’m going to talk about something that is often not considered by investors when formulating their investment strategy.

But first, let me talk about my dad. He’s in his early 80s and is the most risk-averse investor I have met. He will invest in bonds, regardless of how they are doing. In high-yielding or low-yielding periods (which we are currently in), he will invest in the safety of bonds and squeeze out any last drop of interest. Yet while his investment strategy has always been status quo, this is not the way it should be. Let me explain.

Your asset portfolio should combine the right blend of equities and bonds as an investment strategy. But you need to be careful in your allocation. Too much in equities, and you’re vulnerable to downside risk; albeit, stacking your capital in stocks over the past four years would’ve paid off. Concurrently, if you’re like my dad and hold too much in bonds, then you miss out on some strong gains.

What you need to do for a well-planned investment strategy is consider the key variables, such as asset allocation, diversification, and small-cap stocks, to add potential return.

In my view, you need to be aware of exactly how much you have slotted in equities and bonds. This is also known as asset allocation, which is key to any prudent investment strategy.

By asset allocation, I am referring to how your investable assets are divided up amongst the three major asset classes: cash, bonds, and equities…. Read More


Three Ways to Prevent Irrationality from Entering Your Portfolio

By for Daily Gains Letter | Oct 21, 2013

Three Ways to Prevent IrrationalityThere’s always something investors are worried about. Recently, we heard about the U.S. government reaching the debt limit, shutting down, and inching close to defaulting on its debt. Investors reacted, and the key stock indices started to slide lower due to concern over what could happen.

Now, with a deal being struck to extend the debt ceiling and budget deadlines, those worries are over, meaning U.S. creditors will get their interest payments and the government will go on operating as usual.

This all brings one very critical question to mind: how can investors save their portfolio from situations like these?

In situations where investors are unsure about what will happen to their portfolio, they can follow these three simple investment strategies. These strategies can help investors not only rationally decide on what to do with their portfolio; but they may even find an investment opportunity as a result.

1. Assess the Situation

Take the recent debt ceiling issue, for example. There were concerns that Congress wouldn’t come to a consensus and the U.S. government would have to tell its creditors that they can’t pay them, causing bond prices to decline and portfolios heavy on bonds to suffer massive losses. But what a lot of investors forgot was that the U.S. economy has gone through similar acts many times before, having passed the debt ceiling 78 times.

The lesson here is that investors need to see whether or not the event/situation they are worried about is going to affect their portfolio in the long run. If it doesn’t—and historically, it hasn’t made much of an impact—they should just wait and see … Read More


The Alternative Asset Allocation Plan Every Investor Needs

By for Daily Gains Letter | Aug 13, 2013

retirementWhen it comes to investing, everyone wants to be in the best performing asset classes. Unfortunately, few, if any, are that good at consistently choosing the top performing asset classes to add to their retirement fund year after year. That’s why diversification is so important.

Riskier investments like stocks provide the best returns over the long term; they also happen to be the most volatile asset. Bonds, on the other hand, are much safer, and, as a result, offer very little when it comes to returns. By combing different types of investment strategies among different asset classes, investors can generate profit and reduce risk levels to meet their retirement goals.

To help minimize the risk of human error, emotions, and uncontrollable outside factors and to maximize long-term performance, investors concentrate on asset allocation—the art of spreading out their money in stocks, bonds, commodities, cash, and, for some, real estate.

The old asset allocation equation used to suggest people keep a percentage of bonds equal to their age in their retirement fund, with the remainder in stocks; a 40-year-old, for example, would park 40% of their investments in bonds and 60% in stocks. But since no two people have the same financial needs, it’s pretty hard to have an asset allocation strategy that works for everyone. The fact of the matter is that it’s up to each individual to find an asset allocation risk level that meets their long-term portfolio needs.

That can be difficult to do in this climate. In spite of weak economic news and high unemployment, the S&P 500 and Dow Jones Industrial Average are hitting new highs. … Read More


How Holding Cash in Your Portfolio Could Mean Opportunities for You When Others Run for the Exit

By for Daily Gains Letter | Jun 6, 2013

interest ratesWhile talking to a friend of mine about general economics and the current market conditions, discussing topics such as where the stock market is headed next since it has gone up significantly and what these low interest rates mean in the long run, he opened the debate to an interesting front: how much cash should an investor have in their portfolio? Is cash any good to hold for investors who are in the market for the long term, saving for their retirement?

One of the most basic strategies to manage a portfolio is to invest the funds into different asset classes, which is referred to as “asset allocation.” The reason for asset allocation is that if one asset class (i.e. stocks) declines in value, the other class (those with a negative correlation to stocks), can rise and minimize the losses. Most often, investors who are saving for retirement allocate their portfolio to stocks and bonds completely—because they tend to have a negative correlation—and not hold any cash at all.

To say the least, investors who hold cash in their portfolio can benefit significantly, and may be able to earn a higher rate of return compared to those who don’t. But before going into further detail, how much cash should the portfolio of an investor actually have?

To assess how much cash an investor should have in their portfolio, they need to look at certain factors, such as how long they are planning to invest and if they need any funds in the short term.

Going back to the discussion with my friend, he, for example, plans to invest for the … Read More


Why Investors Need to Stop Wondering Where the Market Is Headed Next

By for Daily Gains Letter | Jun 4, 2013

Investors Need to Stop Wondering Where the Market Is Headed NextJitters in the stock market—or any other market, for that matter—sometimes confuse investors and make them question its direction. They often ask where the market is headed next, or how the recent events will play out. Even worse, they may completely lose trust in the market and just let their life savings decline as inflation continuously takes its toll.

To say the very least, these are genuine concerns, because their life savings are often at stake and a significant move can wipe out their wealth. The broad market sell-off in 2008 and 2009 was a prime example of this, when investors, unsure about the direction of the market, took a major hit to their portfolio—and missed out on the stock market rally that began in March of 2009.

As a matter of fact, according to the findings of the Federal Reserve Bank of St. Louis, when adjusted for inflation, American households have only recovered 45% of the wealth they lost during the Great Recession. (Source: Derby, M.S., “Households Still Haven’t Rebuilt Lost Wealth,” Wall Street Journal, May 30, 2013.) They are still underwater, despite the key stock indices like the S&P 500 being up more than 100% since then.

The recent market action, which occurred after a few members of the Federal Open Market Committee (FOMC) showed concerns about the steps taken by the Federal Reserve and wanted it to reduce its size of asset purchases, has investors rattled once again. The noise is increasing, and bulls and bears are suggesting where the markets are headed next. Some are calling that the stock market has reached its top, while others … Read More


Key Stock Indices Soaring Higher; Will They Hit the Ceiling?

By for Daily Gains Letter | May 17, 2013

Key Stock Indices Soaring HigherThe stock market rally that began in March of 2009 is gaining attention once again. The key stock indices have surpassed the highs they registered before the U.S. economy was hit with a financial crisis and the ones made at the peak of the tech boom.

With all this, the direction in which the key stock indices are headed next has become a topic of discussion among investors: can they go any higher? Or we are bound to see another market sell-off, like the one we saw in 2008 and early 2009?

When looking at the state of the global economy, things are turning bleak. We have major economies outright worried about their future economic growth. For example, the Chinese economy is expected to grow at a slower rate compared to its historical average; the Japanese economy is still struggling with a recession, and efforts by the Bank of Japan to boost the economy haven’t really showed much success; and the eurozone is witnessing its longest economic contraction, with major nations falling prey to economic slowdown.

But looking at the U.S. economy, it portrays a different image; it appears things have improved. Unemployment is lower and consumer spending has increased since it edged lower in the financial crisis—both possible good signs of a stock market rally.

To no surprise, the noise is getting louder and louder as the key stock indices are moving higher. The bears are calling for the end of the bull market, while the bulls are cheering for the key stock indices and believe that they are bound to go much higher. Estimates are being thrown out; … Read More


Should Investors Play Catch-Up with the Key Stock Indices?

By for Daily Gains Letter | May 10, 2013

Investors Play Catch-Up with the Key StockOn May 7, the Dow Jones Industrial Average closed above the 15,000 level for the first time. This close marked an overall increase in the index of about 15% since the beginning of the year. Other key stock indices did the same, and at the very least, their performance was nothing shy of exuberant.

It may be good news for some, but this rise in the key stock indices leads to one question: if investors missed out on these gains, should they jump into the stock market and take a risk playing the catch-up game?

While this may be the very first option that comes to the mind of an investor who is planning to invest for the long term and hasn’t seen their portfolio perform similar to the key stock indices, they must ask themselves this before taking any action: is it really the most viable option? The answer to this question is very simple: no.

Instead of trying to play the catch-up game due to a significant rise in the key stock indices over a short period of time and taking higher risks, investors need to keep their long-term goals in mind. As I have been saying in these pages; long-term stable growth is far better than volatile gains in the short term.

If an investor believes the key stock indices will continue to rise, they should continue to focus on minimizing their risk. Instead of investing in small-cap, highly speculative companies, they need to look for defensive plays.

Why? As the key stock indices are rising, there is a possibility that there might a correction in prices; … Read More


Three Stress-Free Strategies for a Streamlined Retirement Portfolio

By for Daily Gains Letter | May 9, 2013

Strategies for a Streamlined RetirementWhen it comes to money, more is better. But when it comes to your retirement portfolio, less might be more. With over 8,000 mutual funds and exchange-traded funds (ETFs); roughly 3,000 stocks traded on the NASDAQ, 2,800 on the NYSE, and 3,800 on the AMEX to choose from; and 401(k)s, individual retirement accounts (IRAs), and countless asset management strategies, it’s easy to see how an investment portfolio can get complicated.

And cluttering complicated investment portfolios with too many assets and vehicles can make them difficult to understand. A failure to streamline a complicated portfolio means there could be overlap, which means you could be funneling money into one asset class when it could better serve you elsewhere.

A streamlined retirement portfolio does not mean it gets gutted to the lowest common denominator; it means you know what you’re invested in, ensuring there are few or no redundancies. It also means rebalancing your portfolio’s asset allocation, which will depend on your age, desired outcome, and risk level. Here are three stress-free strategies for simplifying your portfolio while increasing its possibility for success.

Consolidate: While the U.S. Bureau of Labor Statistics doesn’t track lifetime careers, it’s fair to say most Americans have held more than a few jobs before retiring. It’s quite possible, then, that you have more than a few 401(k) accounts. Simplify things by collating all of the old plans into a current workplace plan. If that isn’t an option, roll them into a single rollover IRA.

To make life even less stressful, you could also consolidate your bank accounts, mutual funds, and bonds. Having everything in one centralized account … Read More


Can the Eurozone Crisis Really Make a Dent in Your Portfolio?

By for Daily Gains Letter | May 8, 2013

Eurozone CrisisThe eurozone has sent waves of confusion through the global economy, and investors are concerned about what it could do to their portfolio. To say the very least, investors have all the right to be worried—bulls and bears are creating noise, making investment decisions even more difficult to make.

 

Bears’ Argument

The eurozone is in recession for the second time since 2009.

Back then, the problem was the debt-infested nations like Greece, Spain, and Portugal that swept the region with a slowdown, but now things appear to be different. The strongest nations like Germany and France are showing bleak performance. Similarly, other smaller nations that didn’t even make the news before are now in the headlines—just look at Slovenia and the Netherlands, for example.

Why is this a concern? The problem at the very core is that there are America-based companies that operate in the eurozone. If the region suffers through severe economic slowdown once again, the demand from consumers will decline due to high unemployment. As a result, the U.S. companies will see their sales decline, and eventually, their portfolio will deteriorate.

Bulls’ Argument

To fight this economic slowdown in the region, the European Central Bank (ECB) has taken some major steps. For example, to reduce the risks of the region dissolving, the ECB said it will “do whatever it takes” to save the region. (Source: “Verbatim of the Remarks Made by Mario Draghi,” European Central Bank web site, July 26, 2012, last accessed May 7, 2013.)

On May 2, the ECB announced a cut in its interest rates, lowering them to 0.50% from 0.75%. In addition, while … Read More


How to Wall Street-Proof Your Investment Portfolio for Bull and Bear Markets

By for Daily Gains Letter | Apr 15, 2013

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With the Dow Jones Industrial Average and S&P 500 hitting record highs, many investors may be wondering if it’s time to re-jig their asset allocation, divert more money into the stock market, and take full advantage of the long-in-the-tooth bull market.

Normally, when we consumers go shopping at the mall, we look for deals, and buy when something is on sale. A rational buyer doesn’t put a sale item back, deciding they’d rather purchase it at full price. When it comes to shopping, we are a rational lot.

The same cannot be said for the stock market, especially during a bull market. If there’s one thing a bull market can do, it can give us a false sense of security that leads us to make irrational decisions—two factors best left out of the money management equation.

For starters, when the markets are doing well, we feel optimistic, downplay the risks, and overestimate our stock-picking prowess, regardless of how well-informed we are. Interestingly, depressed people are more realistic about their investments.

The emotional disconnect is one reason why investors do not sell stocks that are performing poorly. Studies show that the pain investors experience when taking a loss is two-times as great as the pleasure we feel when we make money. In an effort to avoid pain, we avoid selling stocks that actively erode our retirement portfolios. Hoping for a rebound, we’d rather deplete our retirement fund than deal with the pain associated with a modest loss. (Source: “Investor psychology: How to avoid over-confidence,” Modern Wealth Management web site, May 9, 2012, last accessed April 12, 2013.)

Where does that leave … Read More


Two Simple Ways to Reduce Your Costs When Trading Stocks

By for Daily Gains Letter | Apr 10, 2013

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Hope for the best and prepare for the worst may be one of the best strategies an investor can employ, especially if they are in the world of investing for the long haul and want to preserve their capital. As I always say in these pages, fluctuations are part of the market—the market will move and react to different news, but you have to make sure that your assets are protected.

Investors can use asset allocation, diversification, and risk management to preserve what they have. But if you add the following types of orders to your investing arsenal, your returns can increase, and you can save a significant amount of money over time.

Limit Orders vs. Market Orders

Consider this: if you are trading a thinly traded or volatile stock and the spread between the selling price and the buying price is significant, what would you do? If you go ahead and buy with a market order, you will certainly get the stock, but the price you get may not be the price you wanted in the first place.

In situations like these, limit orders become very useful. Through this order type, investors provide instructions to the broker to buy or sell a stock at a certain price (or cheaper), rather than getting whatever price is available.

For example, Apple Inc (NASDAQ/AAPL) shares are trading at $425.10. If an investor places an order to buy 100 shares at market price, then they might not get the $425.10—the price could be higher or lower at the time of purchase. In contrast, if an investor places a limit order with a price … Read More


Disconnect Between Economy and Wall Street Widening; Time to Weatherproof Your Retirement Portfolio

By for Daily Gains Letter | Apr 5, 2013

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The disconnect between the economy and Wall Street just gets wider and wider. And no one seems alarmed. Over the last four years, the Dow Jones Industrial Average and the S&P 500 have roared higher in spite of the fact that the U.S. economy is struggling to avoid a double-dip recession.

For the average American, there is no difference between a bull market and bear market. Unemployment remains high, so too does household debt. Gross domestic product (GDP) remains flat, consumer confidence is down, and housing is still fragile.

What’s keeping the bull market afloat? Not retail investors. If it weren’t for the Federal Reserve and the deep pockets of the well-heeled on Wall Street, the current Dow Jones trajectory might look a little different.

What can bring a bull market to a screeching halt? Usually an overheated economy and sense of overconfidence combined with lower unemployment, an accelerated GDP, and high interest rates. All of these ingredients are lacking in the current climate, leading many pundits to believe the bull market has more than enough room to run.

Still, this is not your average bull market, so the tried and true indicators for growth may not hold water. Many believe the current rally is a creation of the Federal Reserve and its opened-ended quantitative easing. The markets are also moving on thin volumes and low volatility. It wouldn’t take much to spook Wall Street and send the markets reeling.

So what could derail the current bull market? History and economics? Historically, the U.S. experiences an economic slowdown every four to six years. The current bull market is now in … Read More


Investors Beware: Dollar Cost Averaging Deadly

By for Daily Gains Letter | Apr 4, 2013

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If the price of a stock or any other financial instrument is headed downward, should you buy more or sell? Investors are faced with this question every single day when they see their holdings decline in value. In situations like these, investors sometimes make a mistake of buying more of something when they should have been selling it—this is often referred to as dollar cost averaging.

At the very core, dollar cost averaging is simply buying a security constantly regardless of the price. The idea behind this method is very simple: investors don’t really have to worry about market timing or getting into a stock at the right price. This strategy can be used as a way to accumulate a security over time.

If an investor buys a stock while it’s going down, their thinking is that the average cost will decrease, and they will be able to profit more once the price rebounds a little—the price doesn’t have to return to the same point it was at before.

Look at it this way; you buy shares of ABC Inc. at $10.00 each. A few weeks later, you find that the price has gone down to $8.00—a 20% decline in value. You go ahead and buy even more shares. Now, if you take the average of the two prices you paid for ABC shares, you will find that your cost is actually $9.00—your cost has gone down by buying the stock at a lower price.

With this comes one question: does buying more when something is falling in price really add any value to your portfolio or reduce the risk? … Read More


Two Questions You Need to Ask Yourself to Determine if Your Asset Allocation Is Effective

By for Daily Gains Letter | Mar 22, 2013

220313_DL_zulfiqarInvestment management is considered to be one of the most critical aspects when it comes to investing for the long term. At the end, the goal is to have enough savings to retire comfortably and be stress-free in your golden years. Proper investment management can help individuals achieve their goals while taking adequate risk.

While there are many techniques a person can employ when it comes to investment management, asset allocation is arguably the most discussed one. The myth among investors is that if they keep a certain portion of their portfolio in a specific asset class and hold it, over time, they can produce the optimal return—for example, 50% of their savings in stocks and 50% in bonds.

Asset allocation, at the end of the day, is simply spreading your savings across different asset classes to reduce risk.

It can certainly reduce volatility in an investor’s portfolio and help shield them from major losses; but unfortunately, it can also hinder performance—and over time, it will affect their end goal. Consider this: you have a portfolio consisting of 50% stocks and 50% bonds. Now, if the bond market declines by eight percent and stocks increase by five percent—what’s your portfolio return? The answer: negative three percent.

Fixed asset allocation doesn’t work! There isn’t a number attached when it comes to asset allocation. It depends on an investor’s risk tolerance and their time horizon. Instead of holding a certain percentage of savings in a specific asset, they should focus on constantly balancing their portfolio. Sometimes, one asset class might have higher risk over the others.

In order to check the effectiveness … Read More