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Showing posts from August, 2019

Preparing for a Recession

I was asked the question on Quora: Is there an impending recession in 2020, and if so, how do we prepare for it?

Here's my answer:

While there is a lot of talk about a recession coming in 2020 or 2021 or 2022, no one really knows for sure. Some of this excitement is over the yield inversion, but while all recessions follow a yield inversion, not all yield inversions precede a recession. So it’s a correlation, not a causation.

However, you should always be prepared. I like to think one should hope for the best, plan for the worst. By following basic principles of personal finance, you should be able to get through any recession, or any hard times that may come your way, allowing an event of this kind to be not so bad.
Have a financial plan and follow it. Use a budget. Create a net worth statement. Always use a budget. This is important and a basic step that a lot of people don’t follow.Have a budget and follow it. Did I repeat myself? Yes. It’s that important. How to create a budget.…

What's Happening with the Economy?

Gross Domestic Product Consumer spending was stronger than previously estimated in the second quarter, rising at an annual 4.7 percent inflation-adjusted pace. This pace is a reminder that the strong labor market is underpinning the consumer and helping to offset weakness in global growth and the resulting weakness in domestic manufacturing. Overall GDP was shaved by 1 tenth in the second estimate for the second quarter though still managed a respectable 2.0 percent showing.

The key for the second quarter was consumer spending and so far in the third quarter strength here appears to be solid once again and may well offset uneven readings for other components, whether business investment or residential investment which are two areas where recent indications have been up and down. Jobless Claims Unemployment claims did edge higher in the latest data but remain favorable, indicating strong demand for labor and pointing to another solid showing for the monthly employment report. New clai…

Socialism, Democrats and Recessions

Why Socialism, and Why Now?  (by Victor David Hanson) Today's students romanticize Che Guevara and Fidel Castro because they are clueless about their bloody careers. The Castro government for over a half-century was responsible for the murders of thousands of Cubans and Latin Americans in efforts to solidify Cuban "socialism" throughout Latin America.

When our schools and colleges do not teach unbiased economics and history, then millions of youth have no idea why the United States, Great Britain, Germany and Japan became wealthy and stable by embracing free-market capitalism and constitutional government. Few learn why naturally rich nations such as Argentina, Brazil, Mexico and Venezuela -- or entire regions such as Central America, Eastern Europe and Southeast Asia -- have traditionally lagged far behind due to years of destructive central planning, socialist economics and coerced communist government.

The handmaiden of failed socialist regimes has always been ignoran…

A New New Green Deal

The sub-head on this reads: Bernie Sanders Unveils His $16 Trillion Green New Deal. 

I don't normally cover politics, but when candidates start promoting plans that have dire economic consequences, I think we should all pay attention. I'll list some of his proposals and why they are not tenable.

But first, let's look the progress that has been made and what plentiful energy has done for our Gross Domestic Product and overall well-being. The following two charts show this.

Now that this is out of the way, let's look at Bernie's plan:  No more fossil fuels. “Reaching 100 percent renewable energy for electricity and transportation by no later than 2030 and complete decarbonization by 2050 at latest.”  I don't know what decarbonization actually means, since it's really not a word. I assume it means no use of carbon-based fuels. Also, most studies show that 100 percent renewable for electricity and transportation is not technically feasible in 10 years; we probab…

Investing in Energy: Time to Dip Your Toe?

Warren Buffett: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
Like it or not, oil and gas will be major energy sources for decades to come. Therefore, oil and gas can be good investment from time to time. But we won't ignore alternative energy companies, because these will be an important source of growth as time goes on. So I'll list what I think are the best ways to invest -- and whether it's time to invest or not. I'll focus on ETFs rather than individual companies for diversification and relatively low expense ratios. 
On the surface, the case for energy stocks has worsened in recent months as the escalating U.S.-China trade war and other geopolitical disruptions have heightened concerns about global growth and energy demand.

As my friend Jared Dillon at Mauldin Economics said in this month's ETF 20/20 newsletter:

I will tell you that energy is really, really beat-up here. This thesis that we …

How Credit Card Balances Affect Credit Scores

Is it better to pay off the entire balance on a credit card each month, or to always leave a small balance to carry over?

There is a common myth that carrying a balance on your credit card from month to month can benefit your credit scores, but that is not true. Ideally, you should pay off your credit card in full every month.

Leaving a balance will not help your credit scores. All it will do is cost you money in the form of interest.

The most important factor in credit scoring is always your payment history — whether or not you make all your payments on time. The second most important factor is your utilization rate, or balance-to-limit ratio. The lower your utilization rate, the better for your credit scores.

It's Best to Pay Your Credit Card Balance in Full Each Month

If you are trying to establish a strong payment history, you can do so by making small purchases on your credit card each month, paying the balance in full, and making sure all payments are made on time.

If you cannot p…

Should Your Risk Tolerance Change with Your Level of Wealth?

Basically, accumulated wealth should have nothing to do with your risk tolerance, or risk management. There are two ways to look at this:
Your risk tolerance should decrease as you get older, because you have fewer years until retirement to ride out any bad markets or bad decisions. If you’re in your 20s, you probably should be investing in mostly stocks, which over the long-term have better returns, though from time-to-time bonds can offer very good returns. If you’re in your 60s, you should be in “safer” asset classes, such as bonds and money markets. I’m 67 and I have 25 percent in stocks, 10 percent in bonds (I believe bonds are in a bubble and the face value will go down in the next few years), and the rest in money markets. I’m kind of waiting to see what the market does, as it seems to not have much direction right now. (The S&P 500 is essentially unchanged over the last 12 months. Below is a chart of the SPY ETF, which tracks the index. Each candle is 1 week.)Your risk mana…

What's a "Self-Directed" IRA? Not What it Sounds Like

From time to time, I participate on Quora, providing answers to personal finance questions. This one came across my desk last night: "Is self-directed IRA a good idea?" I'm not sure the person asking this question really understood the question, so I provided this answer:

First, let’s define the difference between self-directed and custodial account. The previous answer would leave you to believe that in a custodial (or custodian) IRA is directed by someone else and this is not necessarily true. It’s a matter of terminology.
Custodial IRA is an Individual Retirement Account that a custodian (typically a parent) holds for a minor with an earned income. Once the Custodial IRA is open, all assets are managed by the custodian until the child reaches age 18 or 21 (varies by state). All funds in the account belong to the child, allowing them to get started early on saving money and reap the benefits of compounded growth. You can open either a Custodial Roth IRA or Custodial Tr…

Are We on Recession Watch?

While the yield inversion was only short lived last week and while yields are ridiculously low, where are we now? There just isn't anything that might bring on a panic-attack. 

Kelly Evans at CNBC, in her noon newsletter today, provided a very astute explanation of what to watch for. Hint: The easy-to-forget credit markets are important! 

You can sign up for her newsletter, called The Exchange, here. I recommend you do. 

Here's a copy of today's newsletter.

With everyone now on recession watch, let's talk about a couple of things to be watching for. A kind of "field guide" to the yield-curve-pocalypse.
There are two main avenues to watch: the real economy, and the financial markets. And you have to watch them both if you want to avoid "false positives." As the old Paul Samuelson line goes, the stock market has predicted nine of the past five recessions. And the economists always just say "there's a 40% chance" of a downturn.

The best leading…

Friends Don't Let Friends Buy and Hold

That's the subtitle to this entire blog, and a basic principle of mine.

Many brokers and some financial advisors are going to tell you to stay fully invested all the time. This is a buy and hold strategy. “Just re-balance your portfolio will do the trick!” This assumes that you have a properly balanced portfolio, which could be something like 70/30, which is 70 percent stocks (equities) and 30 percent bonds. The ratio could be something different, but the principle is the same.

This is bad advice. In fact, this buy and hold advice is so bad it should be criminal. To take a lesson from 2008, if you had done this buy and hold and re-balance crap, both your stocks and bonds would have tanked. You would have suffered losses approaching 60 percent. This is unacceptable. It would have taken the average portfolio nearly 6 years to return to break-even.

Granted, sometimes bonds will provide a safe haven, but not always. And other asset classes, like commodities, can also provide some protec…

Correlation is not Causation

When the 10 and 2 year bond yields inverted yesterday, the markets freaked out. Every recession since 1950 or some ancient time as been preceded by a yield inversion. But on the flip side, not every yield inversion has been followed by a recession. And the recessions, if they do come, come much later, like up to 2 years later. 
So yield inversions do not cause recessions. They are just a measure of imbalance in the bond markets. 

What does cause recessions? A contraction of activity in the economy. Business slowdowns, housing market weakness, a reduction in liquidity, cost of money (credit cycle and Federal Reserve policy), asset bubbles, and a host of other events can cause recessions. It normally takes more than one thing to cause a recession. 

But the U.S. economy -- in most regards -- is still doing just fine. 

Kelly Evans at CNBC (my favorite mid-day newsletter) said this: 
The U.S. data came in strong again this morning. Jobless claims have barely budged; the regional Philadelphia an…

Markets Throw a Tantrum Over Bonds

Time to panic? With the DJIA dropping 800 points in one day, what do we do? Basically, nothing. In fact, you will probably see a small uptick in markets today, Aug 15. 

I've been calling for market weakness since June. I've pointed out that the markets are overvalued, and others like Warren Buffett have large cash reserves right now. 

Even with the 800 drop in the Dow and a 250 point drop in the NASDAQ, the markets are not yet in correction territory. 

But have a plan. 

Here's the chart of the QQQ, the ETF that follows the NASDAQ. And below, I've added a video to Phil Town's take on market crashes. While he says he doesn't really care about correction or crashes, he does in the sense that when markets are down, it's time to actually start buying. 






Three Common Psychological Trading Mistakes

1. The Fear of Missing Out (FOMO)

This one can cause you to 1) Take every single trade you see, even if it's not the strongest set up; and 2) You will oversize your positions. 

2. Revenge Trading

After a trading loss, this trader will throw out the rules and take on crazy trades to make back the loss. Remember, every trader has losses. Keep them small and follow your trade rules and be consistent. 

Helpful hint: Trade smaller position sizes for a while. Focus on the long-term.

3. Gambler's Fallacy

The Gambler's Fallacy is the belief that the chances of something happening with a fixed probability become higher or lower as the process is repeated. People who commit the Gambler's Fallacy believe that past events affect the probability of something happening in the future.

For example, if you flip a coin 10 times and heads comes up the first five flips, if you think that the odds for the sixth flip favors tails, you have succumbed to Gambler's Fallacy. The odds for the sixth…

The YoYo on the Escalator

Price action on stock and other markets tend to act like a yoyo on an escalator. Imagine that you're on the up (or down) escalator playing with a yoyo. The up and down motion of the yoyo is the daily action of prices. The escalator is the trend.  Monday began with the largest year-to-date drop (-767 on the DJIA) in the stock market after the Chinese pushed the yuan to its lowest value compared to the U.S. dollar in more than a decade and equities kept falling from there. At one point in the first trading day of the week, the Nasdaq was down 4.2%.  Things calmed down Tuesday (DJIA +312) after the Chinese central bank signaled it would keep the yuan from falling much further, only for the Trump administration to declare that it considered China to be a currency manipulator. Dovish moves by central banks in Thailand, New Zealand, and India roiled markets. But a rise in U.S. Treasury yields seemed to indicate that recession fears were less than deeply-seated. And indeed, by Friday's …

Baby Boomer Myths

Baby boomers were born between 1946 and 1964. Here's some common facts about these guys. 

Baby boomers have lots of money
At least 30 percent don't have any retirement savings.Fifty-four percent failed to meet the savings benchmark for a successful retirement.The average savings for this generation is $152,000, according to Money Magazine.Baby boomers are less in debt than other generations
The baby boomers are second only to Gen X in total debt load.The average Baby Boomer has $95,000 in debt, according to Experian.Baby boomers have pensions and social security to get them through retirement
Social security alone is not enough to live on, comfortablyPensions, if someone is lucky enough to have on, added with social security, are only meant to supplement retirement savingsThe average social security check is $1,413, monthly. Baby boomers are heavily invested in the stock market
The 2008 financial crisis scared Baby Boomers out of the market after they lost a lot of money.While Baby…

Wealth Is a Result -- Not a Purpose

On Quora, I came across the following answer to the question "How easy is it to become wealthy and successful?" The answer was written by Axel Schultze, and is worth considering -- actually, put some thought into what he has to say.
Success and wealth have absolutely nothing to do with education, experience, circumstances you are born into… About half of the super rich had nothing to start with.Our mindset determines the outcome of our action. If your goal in life is to get rich, the likelihood of getting rich is extremely small. And why should you? And if that would help, everybody on the planet would be rich. BUT - if your goal in life is to solve a problem that very many people have and all you can think of is to find a solution for THEM, you will find that solution and that makes you rich.90%+ will never believe that those who made it all the way to the top, never cared about money. But the wealthy in this world know that wealth is coming with success almost automatically…

It's a Moral Obligation to Pursue What You Find Meaningful

Habits of Highly Successful Traders, Part 2

Continued from Part 1. Trading is different than investing. Simply put, trading is short-term, investing long-term. 

The goal of investing is to gradually build wealth over an extended period of time through the buying and holding (and selling at a appropriate time) of a portfolio of stocks, ETFs, bonds, and other investment instruments.

Trading involves more frequent transactions, such as the buying and selling of stocks, commodities, currency pairs, or other instruments. The goal is to generate returns that outperform buy-and-hold investing. While investors may be content with annual returns of 10 percent to 15 percent, traders might seek a 10 percent return each month. 

Trading is hard work. Don't let anyone fool you. But if you're interested in this, it can be rewarding. However, you must have discipline and be able to follow rules. Most traders blow up their accounts. But the good ones follow certain habits. These habits can work well for investors also.

7. They are willing t…