Personal Investing

I have mentioned in prior blogs that it is important to have International exposure as part of your asset allocation.   What about China and what is currently happening in their market?

China has grown very rapidly and the government is smart to step in and slow down their growth.  China reported a 10.7% growth in the fourth quarter of 2009 and their government is concerned that continued growth at these levels will increase inflation expectations and risk having a bubble in property prices, which have risen the fastest in two years.

One solution is to reduce the amount of lending.  This is accomplished by increasing the banks reserve rates, which requires the banks to set aside more cash, therefore less money goes into the economy.  Large lenders now have to hold 16.5% cash for their reserve rate and smaller lenders reserve rate is 14.5%.  

China should be a long term investment and taking advantage of the recent dip in price may be worthwhile.  Remember the discipline rule, sell appreciated amount and leave original position in portfolio.   

The stock market is made up of ten major sectors also referred to as economic sectors.  An economic sector is an area in which businesses share the same or related products/services.  The businesses in same sector tend to have relatively high correlation in their earnings.  The ten major sectors are:  Consumer Discretion, Consumer Staples, Energy, Financials, Healthcare, Industrials, Technology, Basic Materials, Telecommunications and Utilities.

To know which business to select from each sector as your investment may be difficult; therefore using the sector approach may be best.  The sector approach consists of purchasing each of the ten sectors listed above.  The next step is to know what percentage of your portfolio should be invested in each of the sectors.  The current economy projections should assist with determining which sectors of the market will provide the highest growth.  Once you have the parameters established, you can begin investing. 

Best of luck in the current year, 2010.

As this year comes to a close, you have the chance to make many decisions that affect your personal investments in the year ahead.

Year end is a time for harvesting some losses to offset any capital gains incurred.  Or, if you have a large loss carry over from previous year incurring some capital gains may be appropriate.   Reduce large concentrated areas of the market or trim low cost basis stock.  Have a strategy to manage your tax liability.

If your investments are individually invested, not in mutual funds, this approach is easier.   The mutual fund companies have already incurred their capital gains or losses for you.

Review your asset allocation to make sure you have the appropriate strategy in place for next year.    Have your goals changed and did your investments provide you with enough income?

Should you make year-end gifts to reduce your estate taxes?  You may gift up to $13,000 per person.

Should you convert part or all of your traditional IRA to a Roth IRA?  You can read more on this topic from one of my earlier blogs.

This is a good time to review your investment and financial plans and make sure you begin the New Year with the appropriate strategy.

Happy Holidays! 

We hear the term “GDP” often but what does it really mean?  Gross Domestic Product (GDP) is used as an indicator to determine the health of the economy.  GDP is reported every quarter and it includes consumer spending (which represents 2/3 of total GDP), government spending, business capital spending and total net exports.  All of this information helps determine what direction the health of the economy is going.  Meaning, if we have a negative GDP, which we did earlier this year, the economy is not doing very well.  A positive GDP shows growth, but at what level.   The most recent quarter GDP reported was revised to 2.8%.  This was a good number considering the unemployment rate of 10% and higher than the previous quarter.

We want to see steady positive GDP numbers to ensure the economy is recovering and therefore healthy.  GDP is an indicator used for future direction of the overall market.  It impacts the overall market because most of the GDP is driven from consumer spending, which reflects in the stock prices of those companies.  Typically, when the unemployment rate begins to go down, consumer spending will rise. This will strengthen the markets and the GDP will reflect positive growth.

Dividends are a form of profit distributed from the company to the shareholder.  A dividend is a cash payment from the invested company’s earnings, profit.  Dividends were not very important in the past because stocks were returning high double-digits.  During that time no one was concerned with getting a 2-3% dividend when you could capture the growth stocks high returns. Example.. the dot com era.  In today’s economy, dividends are more attractive and make more sense.

Today, more companies are paying dividends due to the lower returns and investors’ demand of getting paid something for taking the risk.  If the stock price goes down you still get paid the dividend.  Having a growing dividend can be a sign that the company’s management believes the growth can be sustained.  This is good.

When a company reduces or eliminates a dividend it is a sign that the company is struggling to make a profit.  This is not so good and may not be a wise investment.

A regular distributed dividend can be looked at as sustainable income for the investor.  Best of all, the cash in your hand is proof that the earnings are really there, and you can reinvest or spend them as you see fit.

The U.S. dollar is measured by its exchange rate, which compares its value to foreign currencies.  Exchange rates change daily.

The dollar has lost 16% in value from various currencies since March of this year.  A weak dollar favors U.S. exports, boosting economic growth.  It makes U.S. produced goods cheaper and more competitive than foreign produced goods.

A weak dollar benefits international investments.  Holding company stock that has revenue generated from both U.S. and international is a benefit.  Holding international bonds in your portfolio is a benefit.

However, a weak dollar also leads to higher oil prices.  Oil is priced in dollars and oil producing companies may raise the price of oil to maintain profit margins in their local currency.

Know how the dollar can impact your portfolio.

A bond held in your portfolio offers an income stream and stability.  However, interest rates on bonds change and it is important to understand this.

Interest rates control the flow of money in the economy.  High interest rates curb inflation, and slow down the economy.  Low interest rates stimulate the economy, but may lead to inflation.  It is important to know whether interest rates will increase or decrease to assist with your bond portfolio strategy.

A bond ladder allows you to manage your cash flow by having a bond mature every year up to ten years.  In a low interest rate environment, you may not want to go out ten years when building your bond ladder, therefore you can create a shorter time frame, say five years.  This is because you do not want to lock in low interest rate bonds for a long time, especially if you believe interest rates will increase sooner than later.

Spread out your bond maturities so you may take advantage of the ever changing interest rates.

A bonds credit rating assesses the credit risk of a company’s debt they issue.  This is similar to an individual’s credit score.

Three major credit rating agencies that assign these ratings are Moody’s, S&P and Fitch.  These agencies are paid by debt issuers to rate their credit risk on a scale that directly impacts the cost of selling debt.

The higher the rating, the safer the bond is.   AAA is the highest, reflecting the solid financial position of the debt issuer, where C is the lowest and in between there is non- investment grade starting at B.

During this past year these rating agencies have lost some confidence from investors for assigning high ratings to risky mortgage securities that later failed.  This has resulted in questioning of the real value in the ratings today.

Some companies like Pfizer, who has taken on $22.5 billion in debt as part of the acquisition deal of Wyeth, in order to have future growth, sacrificed their top rating.  General Electric and Berkshire Hathaway Inc. lost the AAA rating after financial losses hampered their performance.

The highest rating might just be so last year.  The cultural change could be that the use of debt to grow business or reward shareholders is more of an allure than the credit rating.

As an investor, you should know your investments and their financial stability.  Your own research on the health of a company along with guidelines from others should direct your investment choices.  Some are comfortable holding non AAA rated bonds, which may provide higher income. 

I have outlined three types of market recovery shapes below.  These shapes represent the general shape of a chart used to view the economic measures that gauge the health of the economy.    This translates into how fast or slow you will return to profitability in your investment portfolio.

U-Shaped recovery:  This type of recovery indicates a gradual rise back to previous peak of market.  This market recovery shape will take the longest.

V-Shaped recovery:  This type of recovery indicates not only the sharp decline but a sharp/fast rise back to previous peak.

W-Shaped recovery:  This type of recovery indicates two V-shapes, where the middle section could be a bear market rally or from additional negative economic news.  This type of recovery is the most volatile.

I believe we are currently viewing a U-shaped recovery.  While the stock market has performed well year to date, the economic conditions will continue to improve at a slower pace. 

A merger is when two companies become one.    The decision is usually mutual and stockholders are offered securities in the acquiring company in exchange for the surrender of their company stock.

An acquisition is when a company buys most, if not all, of the target company’s ownership in order to have control of the target company.  An acquisition can be either friendly or hostile, depending on the offer price made for the target company.  Premium prices are offered as an enticement to sell and prove the targeted company has growth potential.

Both mergers and acquisitions are made as part of a company’s growth strategy.  It may be beneficial to take over an existing firm’s operations compared to expanding on its own.

The appetite for mergers and acquisitions has increased lately.  This is a positive sign for many companies who have the management skills to incorporate these strategies and add growth to their bottom line.

If you hold the targeted company of an acquisition you will have a nice return in your stock.