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.

Continue reading “My investing strategy part 1”

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”