Paul Mladjenovic

Cheat Sheet / Updated 03-14-2024

Artificial intelligence (otherwise known as AI) can save you lots of money and help you do things that were either costly or a pipe dream only a few years ago — and that includes helping you with investing and financial pursuits.

Article / Updated 10-09-2023

Before you start investing or trading in precious metals, you need to understand the concepts of saving, investing, trading, and speculating; otherwise, the financial pitfalls could be very great. The differences aren't just in where your money is but also why and in what manner. Right now, millions of people live with no savings and lots of debt, which means that they are speculating with their budgets; retirees are day-trading their portfolios; and financial advisors are telling people to move their money from savings accounts to stocks without looking at the appropriateness of what they're doing. Make sure you understand the following terms — knowing the difference is crucial to you in the world of precious metals: Saving: The classical definition of saving is "income that has not been spent," but the modern-day definition is money set aside in a savings account for a "rainy day" or emergency. Ideally, you should have at least three months' worth of gross living expenses sitting blandly in a savings account or money market fund. Although precious metals in the right venue are appropriate for most people, including savers, you need to have cash savings in addition to your precious metals investments. A good example of an appropriate savings venue in precious metals is buying physical gold and/or silver bullion coins as a long-term holding. Investing: Investing refers to the act of buying an asset that is meant to be held long-term (in years). The asset will always run into ups and downs, but as long as it's trending upward (a bull market), you'll be okay. Investing in precious metals may not be for everyone, but it is an appropriate consideration for many investment portfolios. The common stock of large or mid-size mining companies is a good example of an appropriate vehicle for investors. Trading: Trading is truly short-term in nature and is meant for those with steady nerves and a quick trigger finger. There are many "trading systems" out there, and this activity requires extensive knowledge of market behavior along with discipline and a definitive plan. The money employed should be considered risk capital and not money intended for an emergency fund, rent, or retirement. The venue could be mining stocks, but more likely it would be futures and/or options because they are faster-moving markets. Speculating: This can be likened to financial gambling. Speculating means making an educated guess about the direction of a particular asset's price move. Speculators look for big price moves to generate a large profit as quickly as possible, but also understand that it can be very risky and volatile. A speculator's appetite for greater potential profit coupled with increased risk is similar to the trader, but the time frame is different. Speculating can be either short-term or long-term. Your venue of choice could be stocks, but more likely, the stocks would typically be of smaller mining companies with greater price potential. Speculating is also done in futures and options.

Article / Updated 08-17-2023

Stocks are well known for their ability to appreciate (for capital gains potential), but not enough credit is given regarding stocks’ ability to boost your income and cash flow. Given that income will be a primary concern for many in the coming months and years (especially baby boomers and others concerned with retirement, pension issues, and so on), I consider this to be an important consideration. The first income feature is the obvious — dividends! I love dividends, and they have excellent features that make them very attractive, such as their ability to meet or exceed the rate of inflation and the fact that they’re subject to lower taxes than, say, regular taxable interest or wages. Dividend-paying stocks, called income stocks, deserve a spot in a variety of portfolios, especially those of investors at or near retirement. Also, I think that younger folks (such as millennials) can gain long-term financial benefits from having dividends reinvested to compound their growth (such as with dividend reinvestment plans). The basics of income stocks I certainly think that dividend-paying stocks are a great consideration for those investors seeking greater income in their portfolios. I especially like stocks with higher-than-average dividends that are known as income stocks. Income stocks take on a dual role: Not only can they appreciate, but they can also provide regular income. The following sections take a closer look at dividends and income stocks. Getting a grip on dividends and their rates When people talk about gaining income from stocks, they’re usually talking about dividends. Dividends are pro rata distributions that treat every stockholder the same. A dividend is nothing more than pro rata periodic distributions of cash (or sometimes stock) to the stock owner. You purchase dividend stocks primarily for income — not for spectacular growth potential. Dividends are sometimes confused with interest. However, dividends are payouts to owners, whereas interest is a payment to a creditor. A stock investor is considered a part owner of the company they invest in and is entitled to dividends when they’re issued. A bank, on the other hand, considers you a creditor when you open an account; the bank borrows your money and pays you interest on it. A dividend is quoted as an annual dollar amount (or percentage yield), but it’s usually paid on a quarterly basis. For example, if a stock pays a dividend of $4 per share, you’re probably paid $1 every quarter. If, in this example, you have 200 shares, you’re paid $800 every year (if the dividend doesn’t change during that period), or $200 per quarter. Getting that regular dividend check every three months (for as long as you hold the stock) can be a nice perk. If the company continues to do well, that dividend can grow over time. A good income stock has a higher-than-average dividend (typically, 4 percent or higher). Dividend rates aren’t guaranteed, and they’re subject to the decisions of the stock issuer’s board of directors — they can go up or down, or in some extreme cases, the dividend can be suspended or even discontinued. Fortunately, most companies that issue dividends continue them indefinitely and actually increase dividend payments from time to time. Historically, dividend increases have equaled (or exceeded) the rate of inflation. Who’s well suited for income stocks? What type of person is best suited to income stocks? Income stocks can be appropriate for many investors, but they’re an especially good match for the following individuals: Conservative and novice investors: Conservative investors like to see a slow but steady approach to growing their money while getting regular dividend checks. Novice investors who want to start slowly also benefit from income stocks. Retirees: Growth investing is best suited for long-term needs, whereas income investing is best suited to current needs. Retirees may want some growth in their portfolios, but they’re more concerned with regular income that can keep pace with inflation. Dividend reinvestment plan (DRP) investors: For those investors who like to compound their money with DRPs, income stocks are perfect. Given recent economic trends and conditions for the foreseeable future, I think that dividends should be a mandatory part of the stock investor’s wealth-building approach. This is especially true for those in or approaching retirement. Investing in stocks that have a reliable track record of increasing dividends is now easier than ever. In fact, there are exchange-traded funds (ETFs) that are focused on stocks with a long and consistent track record of raising dividends (typically on an annual basis). Assessing the advantages of income stocks Income stocks tend to be among the least volatile of all stocks, and many investors view them as defensive stocks. Defensive stocks are stocks of companies that sell goods and services that are generally needed no matter what shape the economy is in. (Don’t confuse defensive stocks with defense stocks, which specialize in goods and equipment for the military.) Food, beverage, and utility companies are great examples of defensive stocks. Even when the economy is experiencing tough times, people still need to eat, drink, and turn on the lights. Companies that offer relatively high dividends also tend to be large firms in established, stable industries. Some industries in particular are known for high-dividend stocks. Utilities (such as electric, gas, and water), real estate investment trusts (REITs), and the energy sector (oil and gas royalty trusts) are places where you definitely find income stocks. Yes, you can find high-dividend stocks in other industries, but you find a higher concentration of them in these industries. To learn more about high-dividend stocks, and much more about stock investing, check out my book Investing in Stocks For Dummies. Heeding the disadvantages of income stocks Before you say, “Income stocks are great! I’ll get my checkbook and buy a batch right now,” take a look at the following potential disadvantages (ugh!). Income stocks do come with some fine print. What goes up … Income stocks can go down as well as up, just as any stock can. The factors that affect stocks in general — politics, megatrends, different kinds of risk, and so on — affect income stocks, too. Fortunately, income stocks don’t get hit as hard as other stocks when the market is declining because high dividends tend to act as a support to the stock price. Therefore, income stocks’ prices usually fall less dramatically than other stocks’ prices in a declining market. Interest-rate sensitivity Income stocks can be sensitive to rising interest rates. When interest rates go up, other investments (such as corporate bonds, U.S. Treasury securities, and bank certificates of deposit [CDs]) are more attractive. When your income stock yields 4 percent and interest rates go up to 5 percent, 6 percent, or higher, you may think, “Hmm, why settle for a 4 percent yield when I can get better elsewhere?” As more and more investors sell their low-yield stocks, the prices for those stocks fall. Another point to note is that rising interest rates may hurt the company’s financial strength. If the company has to pay more interest, that may affect the company’s earnings, which, in turn, may affect the company’s ability to continue paying dividends. Dividend-paying companies that experience consistently falling revenues tend to cut dividends. In this case, consistent means two or more years. The effect of inflation Although many companies raise their dividends on a regular basis, some don’t. Or if they do raise their dividends, the increases may be small. If income is your primary consideration, you want to be aware of this fact. If you’re getting the same dividend year after year and this income is important to you, rising inflation becomes a problem. Say that you have XYZ stock at $10 per share with an indicated annual dividend of 30 cents. The yield is 3 percent (30 cents @@ds $10). If you have a yield of 3 percent two years in a row, how do you feel when inflation rises 6 percent one year and 7 percent the next year? Because inflation means your costs are rising, inflation shrinks the value of the dividend income you receive. Fortunately, studies show that, in general, dividends do better in inflationary environments than bonds and other fixed-rate investments do. Usually, the dividends of companies that provide consumer staples (food, energy, and so on) meet or exceed the rate of inflation. This is why some investment gurus describe companies that pay growing dividends as having stocks that are “better than bonds.” Uncle Sam’s cut The government usually taxes dividends as ordinary income. Find out from your tax person whether potentially higher tax rates on dividends are in effect for the current or subsequent tax year. Stock dividends or company dividends? The term stock dividend is commonly used in financial discussions about the stock market. However, the reality is that dividends are not paid by stocks; they’re paid pro rata distributions of cash by companies. It may sound like I’m splitting hairs, but it’s a fundamental difference. Stock prices are subject to the whims of market buying and selling — one day the share prices are up nicely; the next day prices go down when that day’s headlines spook the market. Because the dividend isn’t volatile and it’s paid with regularity (quarterly usually), it’s more predictable. I think that investors should be in the business of “collecting cash flows” as opposed to fretting over the ebbs and flows of the market. What does that mean? If a hundred shares of a given dividend-paying stock provide, say, $100 per year in annual dividends, the income-minded stock investor should keep a running tally of annual dividend amounts. That way, they keep investing until they reach a desired income level (such as $2,000 annual dividend income) and feel confident that this dividend income can be relatively reliable and will keep growing as payouts grow from company operations. Lastly, keep in mind that technically a “stock dividend” is actually a pro rata distribution of stock (and not cash).

Article / Updated 08-15-2023

No matter whether you’re just starting your own micro-business or you’ve been working for several years, you want everything to run smoothly and cost effectively. As a micro-entrepreneur, your focus is to meet your target market’s needs while staying ahead of your competition. These free resources can help you. Get a free email account for business use. Email is indispensable for communication, marketing, and other pursuits. You can get free email at Gmail or Yahoo, and other providers. Try Open Office Software Suite. This powerful suite of business productivity tools includes word processing, spreadsheet, presentation software, and other software programs. The software is free and regularly upgraded and refined by open source software developers. Network with LinkedIn. On this site, you can network with other businesses and professionals. You can make lots of valuable contacts, find prospects, and get answers to many of your questions from other professionals and specialists. Market through e-mail. Mailchimp is a free email service to do e-mail distribution and marketing. You can send an email blast for up to 2,000 addresses on your list at no cost, which is perfect for businesses just starting out and needing a good way to manage a list of prospects and customers. Use YouTube. This popular video platform gives you the ability not only to gain information and news (including lots of free how-to videos on a variety of business topics), but you have the ability to create your own videos (ranging from providing content to doing sales and marketing presentations) at no cost.

Article / Updated 08-14-2023

The basics of stock investing are so elementary that few people recognize them. When you lose track of the basics, you lose track of why you invested to begin with. Here's what's involved in stock market basics: Knowing the risk and volatility involved: Perhaps the most fundamental (and, therefore, most important) concept to grasp is the risk you face whenever you put your hard-earned money in an investment such as a stock. Related to risk is the concept of volatility. Volatility refers to a condition in which there is rapid movement in the price of a particular stock (or other security); investors use this term especially when there’s a sudden drop in price in a relatively short period of time. Assessing your financial situation: You need a firm awareness of your starting point and where you want to go. Understanding approaches to investing: You want to approach investing in a way that works best for you. Seeing what exchange-traded funds (ETFs) have to offer: ETFs are like mutual funds, but they can be traded like stocks. I think that every stock investor should consider ETFs as a positive addition to their portfolio strategies. For the details on all of these concepts, and much more, check out my book Investing in Stocks For Dummies. The bottom line in stock investing is that you shouldn’t immediately send your money to a brokerage account or go to a website and click a Buy Stock button. The first thing you should do is find out as much as you can about what stocks are and how to use them to achieve your wealth-building goals. Before you continue, I want to clarify exactly what a stock is. Stock is a type of security that indicates ownership in a corporation and represents a defined portion (measured in shares) of that corporation’s future success. The two primary types of stocks are common and preferred: Common stock: This type of stock entitles the owner to vote at shareholders’ meetings and receive any dividends that the company issues. Preferred stock: This type of stock doesn’t usually confer voting rights, but it does include some rights that exceed those of common stock. Preferred stockholders, for example, have preferential treatment in certain conditions, such as receiving dividends before common stockholders in the event of a corporate liquidation or bankruptcy. Additionally, preferred stock seeks to operate similarly to a bond for investors seeking stable income. Preparing to buy stocks Gathering information is critical in your stock-investing pursuits. You should gather information on your stock picks two times: before you invest and after you invest. Obviously, you should become more informed before you invest your first dollar, but you also need to stay informed about what’s happening to the company whose stock you buy, as well as about the industry and the general economy. When you’re ready to invest, you need to open a brokerage account. After you’ve opened a brokerage account, it pays to get familiar with the types of orders you can implement inside that account. Knowing how to pick winners When you get past the basics, you can get to the meat of stock picking. Successful stock picking isn’t mysterious, but it does take some time, effort, and analysis. And the effort is worthwhile because stocks are a convenient and important part of most investors’ portfolios. Recognizing stock value Imagine that you like eggs, and you’re buying them at the grocery store. In this example, the eggs are like companies, and the prices represent the prices that you would pay for the companies’ stock. The grocery store is the stock market. What if two brands of eggs are similar, but one costs $2.99 a carton and the other costs $3.99? Which would you choose? Odds are that you’d look at both brands, judge their quality, and, if they’re indeed similar, take the cheaper eggs. The eggs at $3.99 are overpriced. The same is true of stocks. What if you compare two companies that are similar in every respect but have different share prices? All things being equal, the cheaper price represents a better buy for the investor. But the egg example has another side. What if the quality of the two brands of eggs is significantly different, but their prices are the same? If one brand of eggs is stale, of poor quality, and priced at $2.99 and the other brand is fresh, of superior quality, and also priced at $2.99, which would you get? You would take the good brand because they’re better eggs. Perhaps the lesser eggs are an acceptable purchase at $1.99, but they’re overpriced at $2.99. The same example works with stocks. A poorly run company isn’t a good choice if you can buy a better company in the marketplace at the same — or a better — price. Comparing the value of eggs may seem overly simplistic, but doing so does cut to the heart of stock investing. Eggs and egg prices can be as varied as companies and stock prices. As an investor, you must make it your job to find the best value for your investment dollars. (Otherwise, you get egg on your face. You saw that one coming, right?) Market capitalization and stock value You can determine a company’s value (and, thus, the value of its stock) in many ways. The most basic way is to look at the company’s market value, also known as market capitalization (or market cap). Market capitalization is simply the value you get when you multiply all the outstanding shares of a stock by the price of a single share. Calculating the market cap is easy; for example, if a company has 1 million shares outstanding and its share price is $10, the market cap is $10 million. Small cap, mid cap, and large cap aren’t references to headgear; they’re references to how large a company is as measured by its market value. Here are the five basic stock categories of market capitalization: Micro cap (less than $300 million): These stocks are the smallest and, hence, the riskiest available. (There’s even a subsection of micro cap called nano cap, which refers to stocks under $50 million, but they’re not appropriate for this article.) Small cap ($300 million to $2 billion): These stocks fare better than the micro caps and still have plenty of growth potential. The key word here is potential. Mid cap ($2 billion to $10 billion): For many investors, this category offers a good compromise between small caps and large caps. These stocks have some of the safety of large caps while retaining some of the growth potential of small caps. Large cap ($10 billion to $200 billion): This category is usually best reserved for conservative stock investors who want steady appreciation with greater safety. Stocks in this category are frequently referred to as blue chips. Ultra cap or mega cap (more than $200 billion): These stocks obviously refer to companies that are the biggest of the big. Stocks such as Google and Apple are examples. From a safety point of view, a company’s size and market value do matter. All things being equal, large-cap stocks are considered safer than small-cap stocks. However, small-cap stocks have greater potential for growth. Compare these stocks to trees: Which tree is sturdier, a giant California redwood or a small oak tree that’s just a year old? In a great storm, the redwood holds up well, whereas the smaller tree has a rough time. But you also have to ask yourself which tree has more opportunity for growth. The redwood may not have much growth left, but the small oak tree has plenty of growth to look forward to. For beginning investors, comparing market cap to trees isn’t so far-fetched. You want your money to branch out without becoming a sap. Although market capitalization is important to consider, don’t invest (or not invest) based solely on it. It’s just one measure of value. You need to look at numerous factors that can help you determine whether any given stock is a good investment. Sharpening your investment skills Investors who analyze a company can better judge the value of its stock and profit from buying and selling it. Your greatest asset in stock investing is knowledge (and a little common sense). To succeed in the world of stock investing, keep in mind these key success factors: Understand why you want to invest in stocks. Are you seeking appreciation (capital gains) or income (dividends)? Timing your buys and sells does matter. Terms like overbought and oversold can give you an edge when you’re deciding whether to purchase or sell a stock. Technical analysis is a way to analyze securities through their market activity (past prices and volume) to find patterns that suggest where those investments may be headed in the short term. Do some research. Look at the company whose stock you’re considering to see whether it’s a profitable business worthy of your investment dollars. Understand and identify what’s up with “the big picture.” It’s a small world after all, and you should be aware of how the world can affect your stock portfolio. Everyone from the bureaucrats in Europe to the politicians in the U.S. Capitol can affect a stock or industry like a match in a dry haystack. Use investing strategies like the pros do. I’m very big on strategies such as trailing stops and limit orders, and fortunately, today’s technology gives you even more tools to help you grow or protect your money. Look outside the U.S. stock market for opportunities. It’s easier than ever before to profit from stocks offered across the globe! Find out more about investing in international stocks through American depositary receipts (ADRs) and international ETFs. Consider buying in smaller quantities. Buying stocks doesn’t always mean that you must buy through a broker and that it must be 100 shares. You can buy stock for as little as $25 using programs such as dividend reinvestment plans. Do as others do, not as they say. Sometimes, what people tell you to do with stocks is not as revealing as what people are actually doing. This is why I like to look at company insiders before I buy or sell a particular stock. This includes insider trading done by Congress. Keep more of the money you earn. After all your great work in getting the right stocks and making the big bucks, you should know about keeping more of the fruits of your investing.

Article / Updated 02-07-2023

Various stocks are out there, as well as various investment approaches. The key to success in the stock market is matching the right kind of stock with the right kind of investment situation. You have to choose the stock and the approach that match your goals. Before investing in a stock, ask yourself, “When do I want to reach my financial goal?” Stocks are a means to an end. Your job is to figure out what that end is — or, more important, when it is. Do you want to retire in 10 years or next year? Must you pay for your kid’s college education next year or 18 years from now? The length of time you have before you need the money you hope to earn from stock investing determines what stocks you should buy. Here are some guidelines for choosing the kind of stock best suited for the type of investor you are and the goals you have. Type of Investor Time Frame for Financial Goals Type of Stock Most Suitable Conservative (worries about risk) Long term (more than 5 years) Large cap stocks and mid cap stocks Aggressive (high tolerance to risk) Long term (more than 5 years) Small cap stocks and mid cap stocks Conservative (worries about risk) Intermediate term (2 to 5 years) Large cap stocks, preferably with dividends Aggressive (high tolerance to risk) Intermediate term (2 to 5 years) Small cap stocks and mid cap stocks Short term 1 to 2 years Stocks are not suitable for the short term. Instead, look at vehicles such as savings accounts and money market funds. Very short term Less than 1 year Stocks? Don’t even think about it! Well . . . you can invest in stocks for less than a year, but seriously, you’re not really investing — you’re either trading or speculating. Instead, use savings accounts and money market funds. Dividends are payments made to a stock-owner (unlike interest, which is payment to a creditor). Dividends are a great form of income, and companies that issue dividends tend to have more stable stock prices as well. Not everyone fits into a particular profile. Every investor has a unique situation, set of goals, and level of risk tolerance. The terms large cap, mid cap, and small cap refer to the size (or market capitalization, also known as market cap) of the company. All factors being equal, large companies are safer (less risky) than small companies.

Article / Updated 12-02-2022

It may not be obvious to many people how disruptive and game-changing factor investing is to the long legacy of hot shot money managers that are to Wall Street what celebrities are to Hollywood. You see, by isolating and identifying key characteristics that define outperforming investments, factor investing puts you on the same elevation as the professional money manager, giving access to a selection process once attributed to managers’ exclusive stock-picking prowess. This holds out the promise of market-beating returns without having to pay high fund manager fees. The entire field of factor research has been a giant pain in the backside for overpriced money managers, even ones who have had market beating runs. In previous decades, a successful fund manager was simply assumed to be performing due to his stock-picking expertise, and many assumed almost god-like status. Bookish academics have inadvertently undermined these market legends by demonstrating that, with very few exceptions, winning stocks shared key factors in common and these factors could be used in advance to pick a winning portfolio. In fact: Currently, factor models can explain up to 95 percent of the differences between active managers, an attribute formerly ascribed mostly to manager skill. Factor investing offers the potential to achieve market beating returns without high manager fees, saving you money! Factor investing put the exclusive tools of professional money managers at your fingertips, but to work, you need to use them efficiently and with discipline. Factor-based (or smart beta) strategies are gaining popularity and market share, competing with index funds (passive returns), and traditional manager (active) returns, as shown in the figure below. Navigating the Factor Jungle More than 300 factors have been discovered in recent years, but not all pass the feasibility test. Here’s how you define a good factor: Did it outperform (make money!) in the past? Will it make money (net of costs) in the future? Why does it work? (The answer to why helps you answer whether it will make you money, and also whether the effect might be already duplicated by another factor that already contains the elements of another factor.) As factor investing gains popularity, it becomes even more important to do your own research and answer these three questions. You would think the academic spotlight now aimed at this field would make things clearer and better defined, and in many ways it is. What surprises new investors is what John Cochrane of the University of Chicago warned is becoming a zoo of factors. Factors are becoming so numerous and exotic that investors are confused by the sheer proliferation of discoveries (one hedge fund claims to use over 80 different factors in its stock pickings!) Keep your strategy simple and focus on the proven factors, and the stocks, mutual funds, and exchange-traded funds (ETFs) that incorporate them. Avoiding the Factor Zoo So why are there so many factors to choose from? There are many reasons, but most of them break down to one of the following: A newly discovered factor works because of attributes that are already integral parts of an existing factor. Or, the factor is really a phantom result of poor statistical analysis and/or outdated or incomplete historical stock price databases. Answering the three questions above helps you determine whether a factor includes the right attributes. Avoiding supercomputer factors Supercomputers crunching numbers can be both a blessing and a curse. The details are beyond the scope of this book, but if you're interested it's worth reading more of what professor Cochrane has written about this. In short, the dangers of data mining and selection bias can cause very smart people to come up with powerful factors that aren't very profitable: Data mining: The process of analyzing dense volumes of data to find patterns, discover trends, and gain insight into how that data can be used. Selection bias/survivorship bias: Caused by choosing non-random data for statistical analysis; for instance, back testing a factor's historical performance against the pool of all existing small capitalization stocks inadvertently eliminates just as many stocks that are no longer trading as they've gone bankrupt or merged. For example, the chart below shows what percentage of stocks that were trading in the past are now delisted versus what percentage are still actively trading. Clearly, any factor would have to have outperformed in the real world that included these defunct stocks and not just when run against a database of currently existing stocks. Seems obvious in retrospect, but many factor discoveries have proven to be based on incomplete or biased databases. Computers are only as good as the data you feed them. A huge number of factors that seem to work on historical data models do not pan out in the real world for various reasons. These factors are the product of powerful computers searching through enough data to find a situation where a new factor looks good by sheer accident and randomness. Of course, you want to avoid these factors because they don’t have the predictive power for the future and won’t bring you success in the future. The risk of using a factor from the factor zoo isn’t just underperformance, but also the trading and management fees it costs you to carry it out. In addition, there's the opportunity cost to you had you done something more effective with your money! Finding investable factors Literally hundreds of factors have been discovered and analyzed in recent years (see the sidebar for some examples). Many of these factors work on paper, but to be useful for you in your investment strategy, factors need to clear a much higher bar. Some factors only work in certain decades, or with a specific sector of the stock market. If a factor can’t duplicate its outperformance in other decades and over long periods of time, it's not really investable. An investable factor also needs to yield enough expected outperformance that it outearns the amounts you pay in costs, fees, and taxes: All portfolios, no matter how efficiently run, have trading and operating expenses, and all investments have a buy/ask spread, meaning that you lose a little money simply transacting a buy or sell when it's needed to follow the rules of any particular factor. Unless you’re holding your portfolio in a tax-sheltered account such as an IRA or a 401(k) (many now offer the ability to trade individual funds and stocks), there are potential tax costs for executing any strategy. You especially need to account for taxes if you’re using a high turnover factor strategy where gains are likely to be taxed at the less favorable short-term capital gains tax rate than the more favorable long-term capital gains rate. When we distill these ingredients to their essentials, some basic rules emerge. These three things make a factor attractive: Doggedness: The factor must show up through different time periods and not just one random decade or period. No one-trick ponies here. You want factors that persist for any investing period, given enough time. Prevalence: The factor must demonstrate an advantage with various different countries and market sectors. Investability (actionable): The factor must be able to be deployed cost effectively (costs include trading fees, taxes, and potentially time/research efficiency for more esoteric factors). Factor outperformance is cyclical, yet hard to time. One factor is always leading the pack and your odds of guessing which one is negligible. Morningstar, a leading investment analytics company, has studied factor investing extensively and concluded that factor investing offers the promise of: Improved absolute returns (more gains!) Improved risk-adjusted returns (gains with less risk and a smoother ride than other approaches!) Extended periods of outperformance followed by droughts (long periods of underperformance relative to whatever cap-weighted index you’re trying to beat) When using factors, you must stick with your strategy to earn the rewards! There will be times when you feel like bailing! It’s best to wait for the historical outperformance of solid factors to materialize. Any attempt to time a factor approach requires skill and probably adds additional headwinds of trading costs and tax inefficiency (unless you're doing it in an IRA or tax-favored account). Even the best factors experience periods when they underperform the market, and these are hard to predict. You need patience to let a factor work for you. You need to stay in it to win it! The key is, of course, to diversify factors in your portfolio.

Cheat Sheet / Updated 11-10-2022

Factor investing helps maximize your odds of being a successful investor in many ways, including helping you control and avoid self-defeating investor behaviors. Understanding the behavioral finance aspect of factor investing, as well as how great investors have dealt with it in the past, can make you an even better investor.

Cheat Sheet / Updated 11-08-2022

Listen to the article:Download audio You're investing in stocks — good for you! To make the most of your money and your choices, educate yourself on how to make stock investments confidently and intelligently, familiarize yourself with the online resources available to help you evaluate stocks, and find ways to protect the money you earn. Also, be sure to do your homework before you invest in any company's stock.

Article / Updated 09-29-2022

A stop-loss order (also called a stop order) is a condition-related order that instructs the broker to sell a particular stock in your investment portfolio only when the stock reaches a particular price. It acts like a trigger, and the stop order converts to a market order to sell the stock immediately. The stop-loss order isn’t designed to take advantage of small, short-term moves in the stock’s price. It’s meant to help you protect the bulk of your money when the market turns against your stock investment in a sudden manner. Say that your Kowalski, Inc., stock rises from $10 to $20 per share and you seek to protect your investment against a possible future market decline. A stop-loss order at $18 triggers your broker to sell the stock immediately if it falls to the $18 mark. If the stock suddenly drops to $17, it still triggers the stop-loss order, but the finalized sale price is $17. In a volatile market, you may not be able to sell at your precise stop-loss price. However, because the order automatically gets converted into a market order, the sale will be done, and you’ll be spared further declines in the stock. The main benefit of a stop-loss order is that it prevents a major loss in a stock that you own. It’s a form of discipline that’s important in investing in order to minimize potential losses. Investors can find it agonizing to sell a stock that has fallen. If they don’t sell, however, the stock often continues to plummet as investors hope for a rebound in the price. Most investors set a stop-loss amount at about 10 percent below the market value of the stock. This percentage gives the stock some room to fluctuate, which most stocks tend to do from day to day. If you’re extra nervous, consider a tighter stop-loss, such as 5 percent or less. Please keep in mind that this order is a trigger and a particular price is not guaranteed to be captured because the actual buy or sell occurs immediately after the trigger is activated. If the market at the time of the actual transaction is particularly volatile, then the price realized may be significantly different.