Investment Vehicles Articles

Article / Updated 09-15-2022

Bond investing has a reputation for safety, not only because bonds provide steady and predictable streams of income, but also because as a bondholder you have first dibs on the issuer’s money. A corporation is legally bound to pay you your interest before it doles out any dividends to people who own company stock. If a company starts to go through hard times, any proceeds from the business or (in the case of an actual bankruptcy) from the sale of assets go to you before they go to shareholders. However, bonds offer no ironclad guarantees. All investments carry some risk, such as tax risk. When comparing taxable bonds to other investments, such as stocks, some investors forget to factor in the potentially high cost of taxation. Except for municipal bonds and bonds kept in tax-advantaged accounts, such as an IRA, the interest payments on bonds are generally taxable at your income-tax rate, which for most people is in the 25 to 28 percent range but could be as high as 35 percent . . . and, depending on the whims of Congress, may rise higher. In contrast, stocks may pay dividends, most of which (thanks to favorable tax treatment enacted into law just a few years back) are taxable at 15 percent. If the price of the stock appreciates, that appreciation isn’t taxable at all unless the stock is actually sold, at which point, it’s usually taxed at 15 percent. So would you rather have a stock that returns 5 percent a year or a bond that returns 5 percent a year? From strictly a tax vantage point, bonds lose. Paying even 25 percent tax represents a 67 percent bigger tax bite than paying 15 percent. (Of course — getting back to the whims of Congress — these special rates are also subject to change.) Tax risk on bonds is most pronounced during times of high interest rates and high inflation. If, for example, the inflation rate is 3 percent, and your bonds are paying 3 percent, you are just about breaking even on your investment. You have to pay taxes on the 3 percent interest, so you actually fall a bit behind. But suppose that the inflation rate were 6 percent and your bonds were paying 6 percent. You have to pay twice as much tax as if your interest rate were 3 percent (and possibly even more than twice the tax, if your interest payments bump you into a higher tax bracket), which means you fall even further behind. Inflation is not likely to go to 6 percent. But if it does, holders of conventional (non-inflation-adjusted) bonds may not be happy campers, especially after April 15 rolls around.

Article / Updated 09-14-2022

Bond investing has a reputation for safety not only because bonds provide steady and predictable streams of income, but also because as a bondholder you have first dibs on the issuer’s money. A corporation is legally bound to pay you your interest before it doles out any dividends to people who own company stock. If a company starts to go through hard times, any proceeds from the business or (in the case of an actual bankruptcy) from the sale of assets go to you before they go to shareholders. However, bonds offer no ironclad guarantees. All investments carry some risk, such as downgrade risk. Even if a bond doesn’t go into default, rumors of a potential default can send a bond’s price into a spiral. When a major rating agency, such as Moody’s, Standard & Poor’s, or Fitch, changes the rating on a bond (moving it from, say, investment-grade to below investment-grade), fewer investors want that bond. This situation is the equivalent of Consumer Reports magazine pointing out that a particular brand of toaster oven is prone to explode. Not good. Bonds that are downgraded may be downgraded a notch, or two notches, or three. The price of the bond drops accordingly. Typically, a downgrade from investment-grade to junk results in a rather large price drop because many institutions aren’t allowed to own anything below investment-grade. The market therefore deflates faster than a speared blowfish, and the beating to bondholders can be brutal. On occasion, downgraded bonds, even those downgraded to junk (sometimes referred to as fallen angels), are upgraded again. If and when that happens (it usually doesn’t), prices zoom right back up again. Holding tight, therefore, sometimes makes good sense. But bond ratings and bond prices don’t always march in synch. Consider, for example, that when U.S. Treasuries were downgraded by Standard & Poor’s in 2011 from an AAA to an AA rating, the bonds did not drop in price but actually rose, and rose nicely. Why? In large part, it was because of the credit crisis in Europe and the realization of Japan’s rising debt. In other words, although the United States appeared to be a slightly riskier place to invest vis-à-vis other nations, it actually started to look safer.

Cheat Sheet / Updated 09-01-2022

If you want to invest in bonds, you need to know how to read the bond ratings that the big three rating companies use and how to figure whether a taxable or tax-free municipal bond is the better investment. Knowing the right questions to ask about a bond can save you money, and you can find answers to many of those questions on the Internet.

Article / Updated 08-17-2022

Buying and selling an exchange-traded fund (ETF) is just like buying and selling a stock; there really is no difference. Although you can trade in all sorts of ways, the vast majority of trades fall into these categories: Market order: This is as simple as it gets. You place an order with your broker or online to buy, say, 100 shares of a certain ETF. Your order goes to the stock exchange, and you get the best available price. Limit order: More exact than a market order, you place an order to buy, say, 100 shares of an ETF at $23 a share. That is the maximum price you will pay. If no sellers are willing to sell at $23 a share, your order will not go through. If you place a limit order to sell at $23, you’ll get your sale if someone is willing to pay that price. If not, there will be no sale. You can specify whether an order is good for the day or until canceled (if you don’t mind waiting to see if the market moves in your favor). Stop-loss (or stop) order: Designed to protect you should the price of your ETF or stock take a tumble, a stop-loss order automatically becomes a market order if and when the price falls below a certain point (say, 10 percent below the current price). Stop-loss orders are used to limit investors’ exposure to a falling market, but they can (and often do) backfire, especially in very turbulent markets. Proceed with caution. Short sale: You sell shares of an ETF that you have borrowed from the broker. If the price of the ETF then falls, you can buy replacement shares at a lower price and pocket the difference. If, however, the price rises, you are stuck holding a security that is worth less than its market price, so you pay the difference, which can sometimes be huge. For more information on different kinds of trading options, see the U.S. Securities and Exchange Commission discussion.

Article / Updated 08-16-2022

Using these resources will help you keep up to date on major events that move commodities markets. Although not all of these resources deal specifically with commodities, they are indispensable sources of information because they help you get a sense of where the financial markets are heading. The Wall Street Journal For daily intakes of financial news, nothing beats The Wall Street Journal. If you want to be a successful trader, you need to keep abreast of all the information that’s worth knowing. The Journal does a good job of presenting solid analysis and in-depth coverage of the day’s main events. Its coverage of the commodities markets in its online edition is actually fairly extensive, with interactive charts and graphs for both cash prices and futures markets. Also, keep an eye out for the section “Heard on the Street”. It includes a wealth of information to help you develop winning strategies. Bloomberg The Bloomberg website at is one of the best sources of raw information and data available to investors. Visiting this site once a day keeps you up on important developments in the markets. The website’s commodity section contains comprehensive information on all the major commodities, including regular price updates on the futures markets. If you trade futures, this is an indispensable resource. Nightly Business Report Tune in every weeknight to your local PBS network to watch NBR’s Paul Kangas, Susie Gharib, and the gang analyze the day’s events. Their special features are insightful, and the market analysts they bring in are usually knowledgeable about the issues at hand. Plus, it’s commercial free! Check your PBS station for local listings. Morningstar Morningstar has a plethora of information on the latest mutual funds, exchange traded funds, and other investment vehicles popular with investors. If you want to invest in commodities through a managed fund, make sure you consult the Morningstar website. Yahoo! Finance Yahoo! Finance includes many different sources of information all conveniently located in one site. You have market analysis updated on an hourly basis, regular news alerts, and one of the best chart services on the web. If you’re considering investing in companies that produce commodities, Yahoo! Finance is your one-stop-shop to get information on the stock’s technical performance as well as its fundamental outlook. Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is the federal regulatory body responsible for monitoring activities in the commodities markets. Before you do anything related to commodities, make sure you look at the website. Before you invest, you need to know your rights as an investor and the CFTC is the best source of that information. Also make sure to check out their very comprehensive glossary. The Energy Information Administration The Energy Information Administration (EIA) is part of the U.S. Department of Energy and is the official source of energy statistics for the U.S. government and your number one source for information on energy markets. They cover everything from crude oil production and consumption to gasoline inventories and natural gas transportation activity. If you want to invest in energy, make sure you check out their Country Analysis Briefs, which give an overview of the global energy supply chain country by country. Stocks and Commodities Magazine If your desire is to become a serious commodity futures trader, then Stocks and Commodities magazine is a must read. Its articles include market-tested trading strategies to help you place and execute trades. Oil & Gas Journal The Oil & Gas Journal is a subscription-based magazine that features in-depth articles about the energy industry. If you want to trade the energy markets, make sure to read O&G. National Futures Association The National Futures Association (NFA) is the industry’s self-regulatory organization. If you are interested in investing in the futures markets, check out the website before you start trading. Specifically, make sure to check out the database of registered investment advisors if you’re going to go through a manager. NFA has comprehensive information on all managers through its Background Affiliation Status Information Center (BASIC) service.

Article / Updated 08-16-2022

Here’s how you start thinking about how to achieve your investment goal, whatever it may be. You may be saving and investing to buy a new home, to put your kid(s) through college, or to leave a legacy for your children and grandchildren. For most people, however, a primary goal of investing (as well it should be) is to achieve economic independence: the ability to work or not work, to write the Great (or not-so-great) American Novel… to do whatever you want to without having to worry about money. For now, the pertinent question is this: Just how far along are you toward achieving your nest-egg goal? Estimate how much you’ll need Please think of how much you will need to withdraw from your nest egg each year when you stop getting a paycheck. Whatever that number is ($30,000? $40,000?), multiply it by 20. That is the amount, at a minimum, to have in your total portfolio when you retire. (Or even 25 times, preferably.) Now multiply that same original-year withdrawal figure ($30,000? $40,000?) by 10. That is the amount, at a minimum, to have in fixed-income investments, including bonds, when you retire. We’re assuming here a fairly typical retirement age, somewhere in the 60s. If you wish to retire at 30, you’ll likely need considerably more than 20 times your annual expenses (or else very wealthy and generous parents). Assess your time frame Okay. Got those two numbers: one for your total portfolio, and the other for the bond side of your portfolio at retirement? Good. Now how far off are you, in terms of both years and dollars, from giving up your paycheck and drawing on savings? If you’re far away from your goals, you need lots of growth. If you currently have, say, half of what you’ll need in your portfolio to call yourself economically independent, and you are years from retirement, that likely means loading up (to a point) on stocks if you want to achieve your goal. Vroom vroom. If you’re closer to your goals, you may have more to lose than to gain, and stability becomes just as important as growth. That means leaning toward bonds and other fixed-income investments. Slooow down. For those of you far beyond your goals (you already have, say, 30 or 40 times what you’ll need to live on for a year), an altogether different set of criteria may take precedence. Factor in some good rules No simple formulas exist that determine the optimal allocation of bonds in a portfolio. That being said, there are some pretty good rules to follow. Here are a few: Rule #1: You should keep three to six months of living expenses in cash (such as money market funds or online savings bank accounts like EmigrantDirect.com) or near-cash. If you expect any major expenses in the next year or two, keep money for those in near-cash as well. When you read near-cash, think about CDs or very short-term bonds or bond funds. Rule #2: The rest of your money can be invested in longer-term investments, such as intermediate-term or long-term bonds; or equities, such as stocks, real estate, or commodities. Rule #3: A portfolio of more than 75 percent bonds rarely, if ever, makes sense. On the other hand, most people benefit with some healthy allocation to bonds. The vast majority of people fall somewhere in the range of 70/30 (70 percent equities/30 fixed income) to 30/70 (30 percent equities/70 fixed income). Use 60/40 (equities/fixed income) as your default if you are under 50 years of age. If you are over 50, use 50/50 as your default. Tweak from there depending on how much growth you need and how much stability you require. Rule #4: Stocks, a favorite form of equity for most investors, can be very volatile over the short term and intermediate term, but historically that risk of loss has diminished over longer holding periods. Over the course of 10 to 15 years, you are virtually assured that the performance of your stock portfolio will beat the performance of your bond-and-cash portfolio — at least if history is our guide. It shouldn’t be our only guide! History sometimes does funny things. Most of the money you won’t need for 10 to 15 years or beyond could be — but may not need to be — in stocks, not bonds. Rule #5: Because history does funny things, you don’t want to put all your long-term money in stocks, even if history says you should. Even very long-term money — at the very least 25 percent of it — should be kept in something safer than stocks.

Article / Updated 08-03-2022

The vast majority of bond offerings are rather staid investments. You give your money to a government or corporation. You receive a steady flow of income, usually twice a year, for a certain number of years. Then, typically after a few years, you get your original money back. Sometimes you pay taxes. A broker usually takes a cut. Beginning and end of story. The reason for bonds’ staid status is not only that they provide steady and predictable streams of income, but also that as a bondholder you have first dibs on the issuer’s money. A corporation is legally bound to pay you your interest before it doles out any dividends to people who own company stock. If a company starts to go through hard times, any proceeds from the business or (in the case of an actual bankruptcy) from the sale of assets go to you before they go to shareholders. However, bonds offer no ironclad guarantees. First dibs on the money aside, bonds are not FDIC-insured savings accounts. They are not without some risk. For that matter, even an FDIC-insured savings account — even stuffing your money under the proverbial mattress! — also carries some risk. Interest rates go up, and interest rates go down. And whenever they do, bond prices move, almost in synch, in the opposite direction. Why? If you’re holding a bond that pays 5 percent, and interest rates move up so that most new bonds are paying 7 percent, your old bond becomes about as desirable to hold as a pet scorpion. Any rational buyer of bonds would, all things being equal, choose a new bond paying 7 percent rather than your relic, still paying only 5 percent. Should you try to sell the bond, unless you can find a real sucker, the price you are likely to get will be deeply discounted. The longer off the maturity of the bond, the more its price will drop with rising interest rates. Thus long-term bonds tend to be the most volatile of all bonds. Think it through: If you have a bond paying 5 percent that matures in a year, and the prevailing interest rate moves up to 7 percent, you’re looking at relatively inferior coupon payments for the next 12 months. If you’re holding a 5 percent bond that matures in ten years, you’re looking at potentially ten years of inferior coupon payments. No one wants to buy a bond offering ten years of inferior coupon payments unless she can get that bond for a steal. That’s why if you try to sell a bond after a period of rising interest rates, you take a loss. If you hold the bond to maturity, you can avoid that loss, but you pay an opportunity cost because your money is tied up earning less than the prevailing rate of interest. Either way, you lose. Of course, interest rate risk has its flip side: If interest rates fall, your existing bonds, paying the older, higher interest rates, suddenly start looking awfully good to potential buyers. They aren’t pet scorpions anymore — more like Cocker Spaniel puppies. If you decide to sell, you’ll get a handsome price. This “flip side” to interest rate risk is precisely what has caused the most peculiar situation in the past three decades, where the longest-term Treasury bonds (with 30-year maturities) have actually done as well as the S&P 500 in total returns. The yield on these babies has dipped from over 14 percent in the early 1980s to just a little over 3 percent today. Hence, those old bonds, which are now maturing, have turned to gold. Will this happen again in the next 30 years? Not unless long-term Treasuries in the year 2042 are being issued with a negative 8 percent interest rate. Of course, that isn’t going to happen. More likely, interest rates are going to climb back to historical norms. Interest rate risk has perhaps never been greater than it is today. You would be foolish to put your money into 30-year Treasuries and assume that you are going to get 11.5 percent a year annual return, as some very lucky investors have done over the last 30 years. Chances are, well . . . anything can happen over 30 years, but keep your expectations modest, please.

Article / Updated 08-03-2022

The vast majority of bond offerings are rather staid investments. You give your money to a government or corporation. You receive a steady flow of income, usually twice a year, for a certain number of years. Then, typically after a few years, you get your original money back. Sometimes you pay taxes. A broker usually takes a cut. Beginning and end of story. The reason for bonds’ staid status is not only that they provide steady and predictable streams of income, but also that as a bondholder you have first dibs on the issuer’s money. A corporation is legally bound to pay you your interest before it doles out any dividends to people who own company stock. If a company starts to go through hard times, any proceeds from the business or (in the case of an actual bankruptcy) from the sale of assets go to you before they go to shareholders. However, bonds offer no ironclad guarantees. All investments carry some risk, such as reinvestment risk. When you invest $1,000 in, say, a 20-year bond paying 6 percent, you may be counting on your money compounding every year. If that is the case — if your money does compound, and you reinvest all your interest payments at 6 percent — after 20 years you’ll have $3,262. But suppose you invest $1,000 in a 20-year bond paying 6 percent and, after four years, the bond is called. The bond issuer unceremoniously gives back your principal, and you no longer hold the bond. Interest rates have dropped in the past four years, and now the best you can do is to buy another bond that pays 4 percent. Suppose you do just that, and you hold the new bond for the remainder of the 20 years. Instead of $3,262, you are left with $2,387 — about 27 percent less money. This is called reinvestment risk, and it’s a very real risk of bond investing, especially when you buy callable or shorter-term individual bonds. Of course, you can buy non-callable bonds and earn less interest, or you can buy longer-term bonds and risk that interest rates will rise. Tradeoffs! Tradeoffs! This is what investing is all about. Note that one way of dealing with reinvestment risk is to treat periods of declining interest rates as only temporary investment setbacks. What goes down usually goes back up.

Article / Updated 08-02-2022

Some people are better at bargain hunting than others. What usually separates the clueless from the pros is that the pros know what something is worth. The same is true for finding bargains on Wall Street. You need to know what a stock is worth, and low price isn’t always a bargain. Value investors hunt for bargains, but they buy only after performing some careful research and crunching the numbers. When you spot a stock that seems to be underpriced, ask the following questions to determine whether it’s a real buy: Is this stock down due to market conditions? If the broader stock market is down, possibly due to an economic slowdown or recession, chances are good that most other stocks are down too. If the share price falls but the company’s fundamentals remain strong, this stock may be the bargain you’ve been looking for. (If the market is up but the stock is down, the stock isn’t necessarily a loser. The drop in share price may be an anomaly representing a good buying opportunity. Ask more questions.) When market conditions turn sour, a rational reason for indiscriminate selling is when investors experience a liquidity crisis. Desperate for cash but unable to sell their worst money-losing investments, investors in this situation sell what they can, typically their most liquid stocks and bonds. Often these may be their best investments, but the need for cash forces them to sell. This scenario provides a bargain for the value investor. Is this stock down because of sector news? If bad news comes out of one stock in the sector, traders may flee from stocks in the same sector. If a good company’s stock takes a hit because of another company’s misfortune, that’s a bargain waiting to happen. Is the stock down because it’s not in a sexy industry? At the peak of the tech bubble, anything that wasn’t a technology stock (pretty much anything that functioned as a part of the economy prior to 1980) was considered out of fashion, and their stock prices fell as a result. However, they continued to post earnings and revenue growth. The industrials, manufacturers, food processors, and other standard bearers became value stocks in the late 1990s. Value investors were rewarded for their patience and conviction when the tech bubble burst and investors returned to more traditional companies. Is this stock down because of problems specific to this company? If investors have fled for good reason, sell shares in the company if you own them or avoid buying if you don’t. However, keep in mind that the market tends to overreact and that some negative news can be very short-lived, especially if it’s not true. A passing bit of bad news can trigger a good buying opportunity, but if the news points out fundamental problems in the company’s success or operations, watch out. Be wary of the following: Declining sales or earnings Excessive debt Little or no cash flow Scandal Illegality, such as falsifying documents or insider trading If this stock has a lot of issues, the beautiful thing about the stock market is you don’t have to hang around. Money can stagnate or even rot in a dead stock, but if you sell and put the money into a true value stock, you may be able to recoup some of your losses.

Article / Updated 07-19-2022

Gold is a finite element (literally — it’s the symbol au on the table of elements) and has all the necessary qualities needed as money. It’s durable, portable, and divisible. It’s malleable enough to turn into coinage. It doesn’t decay or tarnish and is indestructible. In ancient times, it became an ideal medium of exchange and a store of value ever since. In short, it’s nearly an ideal form of money, especially when compared to other forms of money (such as paper and digital currencies). When you juxtapose gold against modern world currencies, such as the U.S. dollar, the euro, the British pound, and the Japanese yen, you come away with some compelling points. The following figure provides a snapshot of gold’s price performance since the beginning of this century (as of the first trading day in January 2000). Gold began in early 2000 at a price of $288, and when you measure its performance with the price in mid-2020 (June 30, 2020) — $1,817.50 — you get a 531 percent total gain (sweet!). But how well did gold do against other conventional investment assets? Take a look in the following sections. Gold versus the financial world in general So how did gold stack up versus the titans of the financial world? Gold’s “Tale of the Tape” Asset Price Jan. 2, 2000 Price June 30, 2020 Total Gain/Loss Dollar Amount $ Total Gain/ Loss Percentage % Gold $288.05 $1,817.50 $1,529.45 530.97% Silver $5.29 $18.58 $13.29 251.22% Dow Jones Industrial Average (stocks) $11,501.85 $25,812.88 $14,311.03 124.42% Nasdaq (Stocks) $4,186.19 $10,063.67 $5,877.48 140.40% S&P 500 (Stocks) $1,455.22 $3,100.29 $1,645.07 113.05% Average Savings acct* $100 $120.50 $20.50 20.5% Inflation** $1.00 $1.53 $0.53 more 53% * Assuming a savings account balance of $100 for comparison purposes. ** Inflation rate for the sake of comparison. What would $1.00 buy in January 2000, and what would it cost to buy that same item in June 2020? (source: www.bls.gov/data/inflation_calculator.htm) Well, well, well. The table speaks volumes about the past 20-plus years. How many people knew that gold — a dead rock — outpaced the stock market so dramatically?! Time to break it down: Gold crushed it! Generating a gain of more than 530 percent is awesome — who would have thunk it? It beat everything by a country mile. Our companion metal, silver, came in second place with a 251 percent gain — not too shabby! Next comes the primary stock indexes. Nasdaq came in at 140 percent, then the Dow Jones (DJIA) at 124 percent, with the S&P 500 index coming up at 113 percent. The savings account is there for those folks too skittish at investing and playing the safe route. But safety often means that you settle for a much lower return. In this case, you’re getting an average of 1 percent per year, ending up with 20.5 percent. And it didn’t beat inflation. Inflation — our yardstick and the nemesis of savers everywhere — was up 53 percent for the same time frame. The amazing thing is that the general public barely noticed the blistering performance of gold (and silver, too) during that time frame. The question is, how high can gold go once the general public starts to participate? Gold versus stocks versus currencies You see in the prior section how gold was the 800-pound gorilla in the battle royale versus other mainstream investment vehicles, but it’s important to measure gold versus its primary competitors such as stocks and currencies. In this, you’re comparing “apples to apples.” When you’re comparing gold to stocks, for example, I don’t advocate that you should be 100 percent in one or another. I could put on my “stock hat” and make a strong case for stocks in some economic conditions (such as the 1980s), and I could put on my “gold hat” and make the case that gold is superior in other conditions (such as 2020–2025). The bottom line is I think both stocks and gold are important and needed in your portfolio. The only thing is that you rebalance the percentages of your portfolio between regular stocks and gold-related investments. You keep more in stocks when times are good for stocks and more in gold when times are good for gold. But always have something in gold (say 2 to 5 percent of your investable assets at a minimum), even when it’s not doing as well because it excels as a hedge and a backup form of “portfolio insurance.” Sometimes you don’t see the market crash or financial crisis coming, and afterward you’ll be glad you were diversified and had some gold and/or silver on hand. Gold plays an important role as money and as a hedge against the issues of government-issued money, which is also referred to as fiat money. As this article is being written, all the major currencies — the U.S. dollar, the euro, the British pound, the yuan, the Japanese yen, and other currencies — are losing their value (depreciating) slowly but surely. Some currencies are rapidly losing their value such as those in Venezuela, Zimbabwe, and Argentina (more to come!). The main reason currencies lose their value is because they can easily be overproduced by the country’s central bank and typically at the behest of the country’s political leaders. Because paper currencies are easily inflated, each unit of currency (dollar, euro, yen, and so on) loses value — not so for gold. As the data from the World Gold Council (WGC) confirms, the mining of gold typically adds about 2 percent to the above-ground global supplies of gold. It’s very difficult to extract it from the earth, which is part of the reason gold can retain its value versus central bank–issued currencies. You can use this article to find out how gold stacks up as a tangible investment amidst all the investment choices available today. Part of what makes “money” retain value is scarcity. If it ceases to be scarce and easily created (usually leading to overcreating it), then this leads to its diminishing value. Some gold experts even make it a big point of their speeches that a paper/digital currency will always revert to its intrinsic value, which is “zero.” Gold, meanwhile, outlived every currency in the past two millennia and likely will do so in this millennium.