Investing Articles

Article / Updated 04-25-2023

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 04-25-2023

Momentum investors (speculators) lean toward technical analysis instead of fundamental analysis when choosing which stocks to buy, when to buy, and when to sell. Investors who rely on technical analysis spend most of their time looking at charts to spot patterns in an attempt to predict the future movement of a stock’s price. Upward momentum With momentum investing, you basically want to buy stocks that show sustainable upward momentum and sell them before the price starts to trend downward. The key word here is sustainable, which means you’re looking for a pattern that you have reason to believe will continue for the foreseeable future. One way to identify a stock with sustainable upward momentum is to look at its 50-day and 100-day simple moving averages in relation to one another. A simple moving average (SMA) shows the change in a stock’s average price over a certain number of days. For example, to calculate the five-day SMA of a stock for a given day, you total the stock’s closing prices over the past five days and divide by five. To calculate the 50-day moving average, you total the stock’s closing prices over the past 50 days and divide by 50. To create an SMA chart, you calculate the SMA for the desired period (for example, for each of the past 50 days) and plot those points on a chart, as shown. You end up with a line or curve that smooths out the daily fluctuations in the share price (which reduces the “noise”) to make the stock’s overall momentum clearer and easier to visualize and understand. The good news is that you don’t have to calculate simple moving averages and chart them. Nearly every online broker features moving average charts as part of its service. I explained how to calculate the SMA and create a chart just so you would have a clearer understanding of how this investment strategy works. As a momentum investor, you look for times when the short-term upward trend is strong enough to trigger a positive shift in the long-term trend. The most common way to spot such a shift is to chart a stock’s 50-day and 100-day moving averages and look for points where the two lines cross. When the 50-day SMA line moves from below to above the 100-day SMA line (see the following figure), this is a sign that the short-term trend may be strong enough to trigger an upward shift in the long-term momentum — a buy signal. However, if you look at enough of these moving averages charts, you start to notice that this technique doesn’t always work. You’ll notice plenty of instances where the 50-day SMA line moves from below to above the 100-day SMA line that corresponds with a sell-off. Likewise, you’ll notice plenty of instances where the 50-day SMA line dives down below the 100-day SMA line corresponds to an upward shift in share price. In other words, don’t blindly follow this technique. Momentum investors may examine the SMA over longer periods or use other types of charts to gauge a stock’s momentum and identify buy and sell opportunities, but this basic method enables you to wrap your head around the concept and try it if you so desire. Be careful buying into an apparent rally, because short sellers can quickly inflate a stock’s price when they exit their positions in anticipation that the stock price will soon tank. Downward momentum After buying a cannabis stock with upward momentum, your next decision is when to sell it. At this point, monitoring the stock’s SMA is even more important, because at any time in the future, the trend can flip from upward to downward. You want to sell your stock as close to the stock’s peak as possible, and as you feel comfortable doing. As is commonly said among investors, “Pigs get fat, and hogs get slaughtered.” Don’t be too greedy when deciding the right time to sell. If you’re unsure whether a stock has peaked, consider cashing out your principle (the initial amount you invested) and riding to the top with your gains (the remaining shares). As you become more familiar with cannabis stocks, you may want to consider taking bigger risks. Deciding when and how much to sell depends on your personal risk tolerance and how much you can afford to and want to gamble. Now, instead of looking for points where the 50-day SMA moves from below to above the line for the 100-day SMA, you want to watch for when that 50-day line crosses down from above to below the 100-day line (see Figure 13-3). How far that 50-day line dives down before you pull the trigger is up to you, but if you want to remain true to this strategy, the sooner you sell, the better.

Cheat Sheet / Updated 04-13-2023

An exchange-traded fund (ETF) is something of a cross between an index mutual fund and a stock. It’s like a mutual fund but has some key differences you’ll want to be sure you understand. Here, you discover how to get some ETFs into your portfolio, how to choose smart ETFs, and how ETFs differ from mutual funds.

Cheat Sheet / Updated 04-12-2023

Make the most of fundamental analysis by getting familiar with financial statements and investment terms as well as knowing the best places to find fundamental data.

Cheat Sheet / Updated 04-12-2023

Stock investing can be exciting, but it shouldn’t be a rollercoaster ride for Canadian investors. If you know how to read company reports and what financial measures to review, you’re more likely to pick a winning stock. Staying up to date on market conditions ensures you’ll know when it’s best to buy or sell.

Article / Updated 03-22-2023

Investing in rental real estate that you’re responsible for can be a lot of work. Think about it this way: With rental properties, you have all the headaches of maintaining a property, including finding and dealing with tenants, without the benefits of living in and enjoying the property. Unless you’re extraordinarily interested in and motivated to own investment real estate, start with and perhaps limit yourself to a couple of the much simpler yet still profitable methods discussed here. Find a place to call home During your adult life, you need to put a roof over your head. You may be able to sponge off your folks or some other relative or friend for a number of years to cut costs and save money. If you’re content with this arrangement, you can minimize your housing costs and save more for a down payment and possibly toward other goals. Go for it, if your friend or relative will! But what if neither you nor your loved ones are up for the challenge of cohabitating? For the long term, because you need a place to live, why not own real estate instead of renting it? Real estate is the only investment that you can live in or rent to produce income. You can’t live in a stock, bond, or mutual fund! Unless you expect to move within the next few years or live in an area where owning costs much more than renting, buying a place probably makes good long-term financial sense. In the long term, owning usually costs less than renting, and it allows you to build equity in an asset. Think carefully before converting your home into a rental If you move into another home, turning your current home into a rental property may make sense. After all, it saves you the time and cost of finding a separate rental property. Unfortunately, many people hold on to their current home for the wrong reasons when they buy another. Homeowners often make this mistake when they must sell their homes in a depressed market (such as the one that existed in many areas in the late 2000s). Nobody likes to sell their home for less than they paid for it, so some owners hold on to their homes until prices recover. If you plan to move and want to keep your current home as a long-term investment property, you can. But turning your home into a short-term rental is usually a bad move for the following reasons: You may not want the responsibilities of a landlord, yet you force yourself into the landlord business when you convert your home into a rental. If the home eventually does rebound in value, you owe tax on the profit if your property is a rental when you sell it and you don’t buy another rental property. You can purchase another rental property through a 1031 exchange to defer paying taxes on your profit. Real estate investment trusts Real estate investment trusts (REITs) are entities that generally invest in different types of property, such as shopping centers, apartments, and other rental buildings. For a fee, REIT managers identify and negotiate the purchase of properties that they believe are good investments, and then they manage these properties, including all tenant relations. Thus, REITs are a good way to invest in real estate if you don’t want the hassles and headaches that come with directly owning and managing rental property. Surprisingly, most books and blogs that focus on real estate investing neglect REITs. Why? I’ve come to the conclusion that they overlook these entities for the following reasons: If you invest in real estate through REITs, you don’t need to read a long, complicated book on real estate investment or keep coming back to a blog. Therefore, books often focus on more complicated direct real estate investments (where you buy and own property yourself). Real estate brokers write many of these books. Not surprisingly, the real estate investment strategies touted in these books include and advocate the use of such brokers. You can buy REITs without real estate brokers. Blogs and websites aren’t much better as they are often run by folks selling something else like a high-priced seminar or other direct investment “opportunity.” A certain snobbishness prevails among people who consider themselves to be “serious” real estate investors. These folks thumb their noses at the benefit of REITs in an investment portfolio. One real estate writer/investor went so far as to say that REITs aren’t “real” real estate investments. Please. No, you can’t drive your friends by a REIT to show it off. But those who put their egos aside when making real estate investments are happy that they considered REITs, and have enjoyed annualized gains similar to stocks in general over the decades. You can research and purchase shares in individual REITs, which trade as securities on the major stock exchanges. An even better approach is to buy a mutual fund or exchange-traded fund that invests in a diversified mixture of REITs. In addition to providing you with a diversified, low-hassle real estate investment, REITs offer an additional advantage that traditional rental real estate doesn’t: You can easily invest in REITs through a retirement account (for example, an IRA). As with traditional real estate investments, you can even buy REITs, mutual fund REITs, and exchange-traded fund REITs with borrowed money. You can buy with 50 percent down, called buying on margin, when you purchase such investments through a non-retirement brokerage account.

Article / Updated 03-22-2023

Even though your home consumes a lot of dough (mortgage payments, property taxes, insurance, maintenance, and so on) while you own it, it can help you accomplish important financial goals: Retiring: By the time you hit your 50s and 60s, the size of your monthly mortgage payment, relative to your income and assets, should start to look small or nonexistent. Lowered housing costs can help you afford to retire or cut back from full-time work. Some people choose to sell their homes and buy less-costly ones or to rent out the homes and live on some or all of the cash in retirement. Other homeowners enhance their retirement income by taking out a reverse mortgage to tap the equity that they’ve built up in their properties. Pursuing your small-business dreams: Running your own business can be a source of great satisfaction. Financial barriers, however, prevent many people from pulling the plug on a regular job and taking the entrepreneurial plunge. You may be able to borrow against the equity that you’ve built up in your home to get the cash you need to start your own business. Depending on what type of business you have in mind, you may even be able to run your enterprise from your home. Financing college/higher education: It may seem like only yesterday that your kids were born, but soon enough they’ll be ready for an expensive four-year undertaking: college. Of course, there are alternatives. Borrowing against the equity in your home is a viable way to help pay for your kids’ higher-education costs. Perhaps you won’t use your home’s equity for retirement, a small business, educational expenses, or other important financial goals. But even if you decide to pass your home on to your children, a charity, or a long-lost relative, it’s still a valuable asset and a worthwhile investment. The decision of if and when to buy a home can be complex. Money matters, but so do personal and emotional issues. Buying a home is a big deal — you’re settling down. Can you really see yourself coming home to this same place day after day, year after year? Of course, you can always move, but doing so, especially within just a few years of purchasing the home, can be costly and cumbersome, and now you’ve got a financial obligation to deal with. The pros and cons of ownership Some people — particularly enthusiastic salespeople in the real estate business — believe everybody should own a home. You may hear them say things like “Buy a home for the tax breaks” or “Renting is like throwing your money away.” The bulk of home ownership costs — namely, mortgage interest and property taxes — are tax-deductible, subject to limitations. However, these tax breaks are already largely factored into the higher cost of owning a home. So, don’t buy a home just because of the tax breaks. If such tax breaks didn’t exist, housing prices would be lower because the effective cost of owning would be so much higher. I wouldn’t be put off by tax reform discussions that mention reducing or even eliminating home-buying tax breaks — the odds of such changes passing are slim to none. Renting isn’t necessarily equal to “throwing your money away.” In fact, renting can have a number of benefits, such as the following: In some communities, with a given type of property, renting is less costly than buying. Happy and successful renters I’ve seen include people who pay low rent, perhaps because they’ve made housing sacrifices. If you can sock away 10 percent or more of your earnings while renting, you’re probably well on your way to accomplishing your future financial goals. You can save money and hopefully invest in other financial assets. Stocks, bonds, and mutual and exchange-traded funds are quite accessible and useful in retirement. Some long-term homeowners, by contrast, have a substantial portion of their wealth tied up in their homes. (Remember: Accessibility is a double-edged sword because it may tempt you as a cash-rich renter to blow the money in the short term.) Renting has potential emotional and psychological rewards. The main reward is the not-so-inconsequential fact that you have more flexibility to pack up and move on. You may have a lease to fulfill, but you may be able to renegotiate it if you need to move on. As a homeowner, you have a major monthly payment to take care of. To some people, this responsibility feels like a financial ball and chain. After all, you have no guarantee that you can sell your home in a timely fashion or at the price you desire if you want to move. Although renting has its benefits, renting has at least one big drawback: exposure to inflation. As the cost of living increases, your landlord can keep increasing your rent (unless you live in a rent-controlled unit). If you’re a homeowner, however, the big monthly expense of the mortgage payment doesn’t increase, assuming that you buy your home with a fixed-rate mortgage. (Your property taxes, homeowners insurance, and maintenance expenses are exposed to inflation, but these expenses are usually much smaller in comparison to your monthly mortgage payment or rent.) Here’s a quick example to show you how inflation can work against you as a long-term renter. Suppose you’re comparing the costs of owning a home that costs $200,000 to renting a similar property for $1,000 a month. (If you’re in a high-cost urban area and these numbers seem low, please bear with me and focus on the general insights, which you can apply to higher-cost areas.) Buying at $200,000 sounds a lot more expensive than renting for $1,000, doesn’t it? But this isn’t an apples-to-apples comparison. You must compare the monthly cost of owning to the monthly cost of renting. You must also factor the tax benefits of home ownership in to your comparison so you compare the after-tax monthly cost of owning versus renting (mortgage interest on up to $750,000 of mortgage debt and property taxes up to $10,000 worth per year when combined with other state and local taxes are tax-deductible). The figure does just that over 30 years. As you can see in Figure 10-1, although owning costs more in the early years, it should be less expensive in the long run. Renting is costlier in the long term because all your rental expenses increase with inflation. Note: I haven’t factored in the potential change in the value of your home over time. Over long periods of time, home prices tend to appreciate, which makes owning even more attractive. The example in Figure 10-1 assumes that you make a 20 percent down payment and take out a 4 percent fixed-rate mortgage to purchase the property. It also assumes that the rate of inflation of your homeowners’ insurance, property taxes, maintenance, and rent is 3 percent per year. I’ve assumed that the person is in a moderate federal income tax bracket of 24 percent and about half their mortgage interest and property taxes are effectively reducing their tax burden. In the absence of having enough such deductions to be able to itemize deductions, federal income tax filers now qualify for larger so-called standard deductions. If inflation is lower, renting doesn’t necessarily become cheaper in the long term. In the absence of inflation, your rent should escalate less, but your home ownership expenses, which are subject to inflation (property taxes, maintenance, and insurance), should increase less, too. And with low inflation, you can probably refinance your mortgage at a lower interest rate, which reduces your monthly mortgage payments. With low or no inflation, owning can still cost less, but the savings versus renting usually aren’t as dramatic as when inflation is greater. Recouping transaction costs Financially speaking, I recommend that you wait to buy a home until you can see yourself staying put for a minimum of three years. Ideally, I’d like you to think that you have a good shot of staying in the home for five or more years. Why? Buying and selling a home cost big bucks, and you generally need at least five years of low appreciation to recoup your transaction costs. Some of the expenses you face when buying and selling a home include the following: Inspection fees: You shouldn’t buy a property without thoroughly checking it out, so you’ll incur inspection expenses. Good inspectors can help you identify problems with the plumbing, heating, and electrical systems. They also check out the foundation, roof, and so on. They can even tell you whether termites are living in the house. Property inspections typically range from a few hundred dollars up to $1,000+ for larger homes. Loan costs: The costs of getting a mortgage include items such as the points (upfront interest that can run 1 to 2 percent of the loan amount), application and credit report fees, and appraisal fees. Title insurance: When you buy a home, you and your lender need to protect yourselves against the chance — albeit small — that the property seller doesn’t actually legally own the home you’re buying. That’s where title insurance comes in — it protects you financially from unscrupulous sellers. Title insurance costs vary by area; 0.5 percent of the purchase price of the property is about average. Moving costs: You can transport all of your furniture, clothing, and other personal belongings yourself, but your time is worth something, and your moving skills may be limited. Besides, do you want to end up in a hospital emergency room after being pinned at the bottom of a staircase by a runaway couch? Moving costs vary wildly, but you can count on spending hundreds to thousands of dollars. (You can get a ballpark idea of moving costs from a number of online calculators.) Real estate agents’ commissions: A commission of 5 to 7 percent of the purchase price of most homes is paid to the real estate salespeople and the companies they work for. Higher priced homes generally qualify for lower commission rates. On top of all these transaction costs of buying and then selling a home, you’ll also face maintenance expenses — for example, fixing leaky pipes and painting. To cover all the transaction and maintenance costs of home ownership, the value of your home needs to appreciate about 15 percent over the years that you own it for you to be as well off financially as if you had continued renting. Fifteen percent! If you need or want to move elsewhere in a few years, counting on that kind of appreciation in those few years is risky. If you happen to buy just before a sharp rise in housing prices, you may get this much appreciation in a short time. But you can’t count on this upswing — you’re more likely to lose money on such a short-term deal. Some people invest in real estate even when they don’t expect to live in the home for long, and they may consider turning their home into a rental if they move within a few years. Doing so can work well financially in the long haul, but don’t underestimate the responsibilities that come with rental property.

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.

Cheat Sheet / Updated 01-06-2023

Hedge funds use pooled funds to focus on high-risk, high-return investments, often with a focus on shorting — so you can earn profit even when stocks fall.

Cheat Sheet / Updated 12-12-2022

Successful real estate investing requires smart decisions. To start investing in real estate quickly and easily, ask a few important questions, discover different ways to invest in residential property, and build an effective real estate team.