Time in the market beats timing the market

Investing is relatively simple if you really think about it.

First, you take a quick cursory look at the basket of available stocks out there – let’s round up and say there are currently around 9000 stocks trading on U.S. stock exchanges. Each of these stocks represent an equity stake in a vast variety of different companies.

Some of these companies are traded on large stock exchanges that are monitored heavily by the financial world and require filing of regular audited financial reports while others trade over the counter on the pink sheets system which has no regular filing requirements. These companies may be large-caps, mid-caps, small-caps, micro-caps and even nano-caps depending on the value of the company in question.

These companies produce products or offer services or try to create the next big thing that will forever change the world or at least some of them do those things. Others are probably just wasting away tons of money and resources on products and services that will be outclassed by the hundreds of other companies vying for market share in the same industry. Companies are born and die almost every day – values explode and crater every day based on market sentiment, financial performance, industry headwinds and a dozen other factors that may or may not be public knowledge today.

And all you have to do as an investor is wade through this jungle of options and figure out which of these companies, large or small is currently under priced by the ever moving force known as the marketplace and pick it up at a low price before everyone else gets in and sends the price soaring into the atmosphere making it overpriced. Then you sell, make your hearty profit and repeat the process one more time and then again and then again and then again and then again.

Sounds easy right? It’s such a simple formula, buy low then sell high, rinse and repeat. Investing is relatively simple if you really think about it but the reality here is much more complex.

There are three truths to the stock market as far as I see it. History has vetted these and we can see them in action almost every day. They are; Continue reading “Time in the market beats timing the market”

My investing strategy part 1

I wanted to start this blog to remind myself of my original goals and as a quick way to track my progress. As I’ve mentioned before, I studied finance and spend a good amount of time tracking the markets and doing security analysis. It’s a hobby of mine and something that I like to share with others and this seems like the perfect avenue to foster discussion regarding my ideas and strategies. I think investing is one of those interesting realms of study where divergent opinions exist and are often given equal weight depending on what you happen to believe.

It is hard to make sense of that sometimes because you’ll look at the financials of a stock or even the market as a whole and think it is quite attractively priced. You’ll do some additional research and find a dozen financial analysts saying the same thing but also a dozen other guys saying the direct opposite. It’s odd and concerning when you see something like that considering this is your money and your future that we’re talking about here. I guess what I’m trying to see here is that the valuation of a specific company or even the market as a whole is relatively subjective and not always guided known information. There is an element of randomness that makes objective analysis of a stock quite difficult. This randomness can be anything from current events affecting the value of companies, or information that is not known by anyone including you at the time of your analysis. Take a look at a company like Valeant which recently has dropped nearly 70% in the last three months after some information that questioned the validity of Valeant’s accounting came out. This is a stock that was a hedge fund darling and even they didn’t see that coming simply because the information they looked at when they did their due diligence didn’t tell the whole story. The stock ran up from the low 140s to a peak of 262 before falling off a cliff into the low 100s after that information was revealed. Despite the backing of Bill Ackman, a prominent hedge fund manager and activist, the stock has continued to drop into the 70s

Now were there people that made a lot of money off of VRX(stock ticker for Valeant)? Yes, I’m sure there were – there are people who bought well below the $260 high and sold off somewhere around there but are those people just amazing traders or were they just lucky to get out before the dagger fell? Just like there were people who likely saw the meteoric rise from the 140s into the 200s and bought somewhere around the high and then were left stranded as the stock saw a free fall into the 70s.

Now it’s true that the stock may be priced attractively now if we look back at this five years from now and those who bought near the highs may get their money back but it’s also possible that the stock will continue falling. If you read the news today, you’ll see stories about how some hedge funds are seeing this as an opportunity and buying more while others are selling even though it might mean a paper loss for them. Two conflicting strategies from companies that manage more money than I will likely see in my lifetime. What’s the deal? I’ve done some research on Valeant myself and I can’t see any reason to get into it with what we know right now – the information provided by the company didn’t really answer all the questions and their business model doesn’t appeal to me anyway as they’re a predatory RX firm that buys up drugs and often spikes prices – a business model that may see additional scrutiny from our government in the future. That doesn’t seem like a recipe for success to me but some hedge fund managers disagree and are eager to pour more money into it. They must think that the sinking ship has enough people bailing buckets of water out of it and that now is the prime time to buy. Maybe they’re right, maybe they’re not but it seems to me like there’s no clear answer here so I’m staying out of it all together.

On top of that, Valeant shows the fickleness of the marketplace and the emotional response that the market can generate when a stock moves one way or the other. If you watched or read anything about the stock market in the past few weeks, you’ve probably heard about Valeant. Some people saw this 70% crash as a fantastic buying opportunity while others spoke about how the company was doomed and headed to 0 because of accounting fraud; think Enron 2.0 if you will. Now I can’t speak for other individual investors but I know that if I bought in at $250 and saw my investment shrink down $100 in a matter of weeks, I’d be pretty worried. If I continued to see it shrink day by day into the 70s, I’d likely consider getting out because $70 is still better than $50 and even better than $0 if it goes that way. Such big losses are difficult to stomach when they come in such a short term and human emotion often triumphs over reason when we’re dealing with such wide swings. It’s quite likely that if I saw my investment plummet by half, I’d want to get out fearing additional loses. Now what if VRX rises again in the future to a high of $350? I’d have missed out all that gain and feel like a fool but what if it plummets all the way down to $20, I’d have made the smart decision to sell. What would you do in this situation?

There is a reason that most individual investors under perform the S&P 500 when you look at long term returns and I believe a good part of that reason is situations like these. Most people, myself included, simply don’t have the emotional fortitude to stomach short term fluctuations in individual securities and will often made poor decisions during periods of growth and recession respectively. If stocks are falling, they’re often selling because they don’t want to lose money and if they’re rising then they’re often buying because they don’t want to miss out on the gains. This seems like a good idea on paper but if you’re selling when stocks are falling, you’re selling well below the market top because it takes some time for an actual trend to be established. The same applies the other way around, if you’re buying when the market is rising, you’re often buying well above the market bottom. That’s why according to a 2014 study by Dalbar, a financial research firm in Boston, individual investors have under-performed the S&P 500 by 7.4% annually. That’s a 3.7% return for the average investor versus in the past 30 years versus an 11.1% return if you just put your money in the S&P 500 30 years ago. Now this study is not a 100% perfect comparison as the investor return doesn’t assume a straight line 30 year investment period but accounts for investments and withdrawals during that period but it does show a trend that presents itself in other studies. As I talked about in my last post, most investment professionals don’t even beat the market with up to 85% of people who do this for a living failing to beat their benchmark.

And that my friends sums up my main strategy when it comes to investing.

Time in the market beats timing the market. You can read more about what that means in my last post but this is something I truly believe and something that makes up the backbone of my investing strategy when it comes to stocks.

In simple terms for those who want an easier approach to investing, it means putting your money in the market now and not just into any individual stock but a low cost fund that tracks the whole stock market and you’re most likely to do better than 90% of the people out there. There’s a bit more to it than that including using any tax advantaged accounts you have access to and developing an asset allocation between stocks, bonds and other investments that suit your risk profile and retirement timeline but we can talk about that in future posts.

For others who find it fun to dabble in the world of investing research and are willing to take on a bit more risk, there’s more aggressive asset allocations, individual stock investing and tilting towards riskier small or mid-cap stocks over the large-cap centric total market portfolio.

I fall into that second category and my next post will lay out my long-term investment plan and what strategies I utilize to maximize my returns while limiting my risk as much as possible. Hopefully, I’ll have that up in a day or two and can do my first portfolio analysis this weekend.

Like I said in my first post, I’ve gotten lazy recently and it’s not only when it comes to how much I’ve been saving but how well I’ve tracked my portfolio. It’s been a while since I’ve taken a deep dive into my portfolio and I’m excited to see if I’m still within my asset allocation parameters or if I need to change anything up.

Talk to you all soon.

Please check out the next post in the series right here!

My investing strategy part 2

My early retirement dreams started when I first got out of college. I was lucky enough to find a job after the 2008 stock crash that had a relatively solid starting salary of 45000 which didn’t go a long way in my state but was enough to start putting some money away. I knew back then that the work until 65 in a corporate job lifestyle wasn’t for me and I wanted some flexibility to do something else before than if I wanted to so that’s where my journey stared.

I had a background in finance and had read a good deal about retirement planning back then coming to the same conclusions that I still hold now.

I believe that active trading while sometimes very profitable was hard to pull off consistently and in the long term often fell behind passive investing in terms of total return. Based on that philosophy I developed an asset allocation plan back in 2008 that I still mostly stick to today.

Continue reading “My investing strategy part 2”

My investing strategy part 3

Taxes are probably the most important part of your retirement plan. Your tax strategy is possibly even more important than your asset allocation and like the asset allocation, there is no one size fits all approach. There is however a relatively similar path that most people should follow in order to maximize their returns and minimize their tax impact. The below lays out how you should be investing your money in order to do just that. There are exceptions to the below rules but we’ll talk about those later.

Note that I do not mention a savings account in the below strategy. However, I am a firm believer that you should keep 4-6 months living expenses in a safe savings account that you can access at any time. Job loss and unforeseen expenses happen and you’ll be glad to have that buffer when they do and you won’t have to liquidate any of your stock position creating taxable gains or potentially selling during a down turn. Continue reading “My investing strategy part 3”

My investing strategy part 4

We talked about the tax advantaged part of my investing strategy but we also need to cover what I’m doing with any money that’s not flowing into tax-advantaged accounts.
First of all, let’s make one thing clear and that is that I think the tax-advantaged accounts are a must when it comes to saving for early retirement. There are certainly downfalls to tax-advantaged accounts when it comes to an early retirement strategy and most of them come with the hoops you have to jump through to actually get access to your money before you’re old but the benefits far outweigh those downfalls. The ability to save on taxes now and manage your own tax strategy later(potentially paying less in taxes later or paying no taxes later if you go Roth) is huge as is the tax-free growth aspect of it all. Invest more money because you’re not paying taxes on it, pay no taxes on the growth and then potentially pay less taxes when you take it out? You can’t pass that up.

However, it’s also true that tax-advantaged accounts will eventually cap out for most people and that’s where taxable accounts come into play. With these guys, you’ll be paying taxes on any transactions I make and will also pay taxes on the dividends that are paid out but have the flexibility to access this cash at any time which is huge when it comes to early retirement.

The main problem you’ll be dealing with when it comes to taxable investing is actually paying attention to your taxes and making sure to minimize them.

In my case, when I’m trading things in my 401k or IRAs, I can make changes any time I want because there are no tax implications. I can re-balance every 6 months if I want to because I don’t have to pay any taxes on the capital gains that may arise from that transaction. I don’t have to care whether my dividends are qualified or not or whether they’re taxed as income(bonds). Basically, I don’t have to take into account tax-efficiency at all when investing in tax-advantaged accounts.

That freedom goes out the window once I start investing in taxable accounts because taxes do matter there and they do into your annual return. In my mind asset allocation is the biggest factor in your overall return but taxes and maximizing tax efficiency is a close second.

Continue reading “My investing strategy part 4”

Time to get cracking

My goals are simple

1. Save as much as possible
2. Enjoy life right now
3. Reach financial independence and the flexibility that comes with it by the time I’m in my early 40s

Yes, I’m one of those guys – the guys who blog about their journey to early retirement but I think my path there will be quite different. I read a lot about early retirement and visit blogs and forums that discuss in a lot of detail because one day I want to get there myself but I often find myself wondering if that lifestyle is for me. What type of investor and early retiree am I?

There’s the very frugal people who somehow manage to rent a place for $350/month and live on a budget of $600 total while seemingly subsisting entirely on a diet of rice and beans and hot sauce. These are the guys who will tell you they don’t want to spend $20 for a ticket to a concert because if they just invest that today in a dividend stock and let it compound for 30 years, it’ll be worth $150 and generate $6 in annual dividend income. Great, if I wait 30 years I can finally get myself a free ticket after waiting 3.3 years for my dividend income… or I could go to the concert and have an experience of a lifetime. It’s a trade off for sure and some people certainly future potential that money may have more than the experience they could have now but I’m just not wired that way. That’s not to say that I’m a spend-spend-spend type of person but I do enjoy a nice meal out with my girlfriend once a week, I do enjoy seeing a show with friends once a month and I value these things more than I value what the money spent on these things could mean for me in the future.

Yes these frugal types manage to save about 90% of their income while busting their ass at work and projects for 10 years and retire early in their 30s on a budget of 30k/yr or more depending on income and lifestyle. It’s impressive, it’s what they want to do and I applaud them for it. Sometimes, I’m even a bit jealous that I’m not wired that way as when I, now 31, sit in a cubicle on the 16th floor of an office building in random expensive city, USA and wonder if I should have done less and saved more. I could be sitting and home and working on my passion projects by now with my portfolio generating the 30-50k needed to cover my expenses but in the end the reality of my life sets in and I think about how much I’d have to give up to get there.

These guys must not live anywhere near where I live because a dumpy one bedroom apartment around here runs about $1000 before for rent alone. Yes, I could move to a much lower COL area and maybe take on room mates for the next 10 years and limit my spending to a third of what it is now and I could probably get there but would I want that kind of lifestyle? I happen to live in one of the top 10 expensive states in the US and I like it here. My family lives here, my friends live here, it’s safe and beautiful and close to major metropolitan areas with tons of things to do and culture to digest and delicious food to eat. It’s full of great people to meet and talk to and sure those things all probably exist in areas that are significantly cheaper than here but this is where my father settled the family when he brought us over from Europe to the US in search of a better life and this is where I live.

It’s expensive, it’s not the best place to be if you want to retire early but I love it and I don’t want to move.

Looking at some of these lifestyles, I can also see that these guys are way more frugal than me in other areas. I don’t live an excessive lifestyle by any means. This blog entry is being written on an old ass ASUS PC that is long due for an upgrade but it still works so why upgrade? I have iPhone 5s that won’t be upgraded until it dies and which replaced an old Nokia that I used way past its life cycle and way past a time where it was socially acceptable to have a phone where one had to text by pressing the numbers multiple times. The point here guys is that I’m not spending money like crazy but I do like certain things which make this type of lifestyle hard for me.

I’m a guy who likes his food, steaks and high quality meats and cheeses are my money’s Kryptonite. Visits to high end restaurants aren’t daily occurrences by any means but food is a passion of mine and spending money there doesn’t bother me as much as some others. I also spend quite a bit more than the average potential early retiree on rent when you look at my income simply because of where I live – it’s not something I can control readily and while I could easily downgrade a bit from my current place or find a roommate or two or three, I place a high premium on personal space and personal time so that’s out of the question.

The problem with all these things is that I’m saying – nope that can’t change, this can’t change and that isn’t getting me anywhere.

I was looking over my financial statements last week, more specifically my 401k contribution for the year which in years past has been near or at the maximum and saw that YTD, I’ve only contributed $7000 this year with only a few pay periods left. That’s not good guys and it’s far below where I need to be in order to reach my goal of retiring in my 40s.

How did this happen? I can tell you that I started work in 2008 when the economy was in the dumps with a yearly salary of 45k and I contributed more that year than I did all of this year at a salary even though my salary has nearly doubled since then. I looked at that 401k YTD contribution and asked myself how I’ve gotten away from my initial plan and how my savings rate has declined year over year as my salary grew.

And the answer is lifestyle creep. I live in a more expensive apartment now, I go out more often than I did then and I do other things that I wasn’t doing back then because my mentality back then was different than it is now. I was more concerned about retirement in 2008 than I am now even though I’m closer to it now than I was back then; even though the path back then was more muddled than it is now and that needs to change. I need to get back to the type of person I was in 2008 and work on improving my savings rate back to where it was back then. If I could nearly max my 401k a few years ago when I was earning thousands of dollars less than I am now, why aren’t I maxing it this year too?

These are the types of decisions and choices that are going to haunt my financial future and while I’m never going to the be the type of ultra frugal person I’ve spoken about earlier, I really need to take a good hard look at what I’m doing to reach those goals I’ve laid out in the beginning because I think I’ve begun to lose track of that. And in the end, that’s what lead me to start this blog.

I want something that will force me to be accountable for my budget and my savings and this is the perfect vehicle for that. I’ve lost track of my spending habits and my saving habits have suffered as a result. If I want to actually have financial independence in my early 40s then I need to do more than just save 7-8k a year in my 401k and max my ROTH. I need to take full advantage of the tax saving options available to me in order to maximize my ability to get there. Not to say that saving 7-8k per year plus some one top of that is a small feat but if I want to retire early then I have more work to do than that.

And so this is it – this will be about my journey to get there. I hope to track everything here, my income and expenses and my investments and growth through the months and years that are coming.

I’m a passive investor by nature with most of my money in index funds but I still think that individual stocks have a place in my portfolio I can buy them at an attractive valuation. The end goal here is to get enough money, enough of a safety net 10 years from now in order to passively retire and move on to other passions. And that can come through a variety of avenues, whether they be index fundings tracking a basket of stocks or bonds or REITs or even individual stocks. I’ll write about my journey to that goal here – write about my progress and write about anything that I feel is important in my journey there.

I’ll also write about individual stock analysis as that’s one of my passions. I work in the insurance industry as a profession but I studied finance and have a background in it so if I’m looking into a stock and deciding whether or not I should make it a part of my long-term portfolio, I’d like to let you know about it and include you on my journey if you happen to come across this tiny blog and feel like it’s worth reading.

And hopefully by the time I’m 40 or 42 or whenever it happens, this blog will be a testament to my journey as I sit at home on a tuesday morning without a job to go to – the dream of many people my age.

That’s not say that I won’t earn any money in my 40s, I have some passive income hobbies right now like writing that generate some additional income beyond my salary and I plan to continue that and add to it as I age but it’s these investment decisions that I make now that will be the backbone of my income generation in the future and will be the decisive factor of whether or not I can quit my 9 to 5 job earlier than most people. My hope is that I can and today is the day I get serious about it again. I think I’ve gotten a good start during the early part of my career and have a good portfolio already but I can’t afford to get lazy now. Today is the day that I start to get serious about saving again and when I look back at this day 10 years from now, I know that I’ll be happy I made this decision now.