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Investing


Neil Irwin at the New York Times points out that all asset classes around the world are expensive compared to their historical prices. If that’s the case, is there any investment class available that has the potential to provide great returns over the long-term?

Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors…

But frustrating as the situation can be for investors hoping for better returns, the bigger question for the global economy is what happens next. How long will this low-return environment last?

The personal finance world operates on the assumption that the last century or so, minus the last decade, is a good reference for stock market expectations going forward. And depending on who you ask, that’s a return of 10 percent, 8 percent, or 6 percent. Regardless of the number, you’d have to go far outside of the mainstream to hear advice for the average investor that is something other than, “Invest mostly in a broad stock market index fund and don’t touch it for the best chance at getting historical returns.”

And this is the same assumption I’m living with. It’s why my investments are mostly in stock market index funds, though I’ve added some bond funds because it made sense to temper the risk of stocks and take advantage of tax advantages. But if my investments don’t end up appreciating over the next several decades, where will I be? Not so much better off than I am today, and if inflation erodes the value of my money (stored in these assets) faster than the values appreciate, then I’ll be worse off.

But what are the alternatives? Not investing my portfolio, keeping my money in cash form, there’s no doubt inflation will erode the value. At least invested, I have a fighting chance.

While the average investor is said to be better off investing in broad index funds, professional investment managers dealing with corporate cash look for undervalued opportunities. Not only are they not finding anything undervalued, but everything is overvalued. A company wants to reinvest in itself by building factories or property, for example, but it won’t if everything is overpriced, and they expect the company won’t get a good return on that investment.

If these professional investors with millions or billions of dollars to invest can’t come up with any good options, how is the average investor supposed to succeed?

Change your expectations.

There’s nothing magical about the 8 percent long-term annual return on the stock market. Most investors don’t see that return, anyway, because their behavior gets in the way. Even if the next hundred years was as promising for corporate performance as the last hundred years — the century in which the United States became a global economic power, the winner of the second World War, and the standard-bearer for the world (in its own mind, anyway), most Americans wouldn’t see the same kind of personal performance that financial planners advertise.

The kind of growth the United States saw in the twentieth century just doesn’t seem sustainable. Thinking globally, there still seems to be a lot of potential. But the economy in the United States has just become too expensive for the growth to happen here. I think that’s well understood, and people are looking internationally for growth opportunities, but this seems to be the point — it’s too expensive everywhere.

So maybe we just have to assume that long-term growth will be around 4 percent annually over the long term. No one wants to take this assumption because it causes problems with just about every financial planning model out there. Your “safe withdrawal rate” of 4 percent will fail, and inflation is a bigger risk.

The good news is that just doing something has to be better than doing nothing. If you invest 10 percent of your income into a stock market index fund for the long term over the next couple decades, it may only return an annual 2 percent, 4 percent, or maybe 6 percent. Well, there’s still the possibility of returns being higher. But even if they’re not, you’ll still be better off than those who have done nothing at all.

Start really thinking about the future.

The most promising way to make a future is to make it yourself. What are the biggest problems human existence will be facing in the next century? How can these problems be addressed? Apparently, there are enough people who believe that the availability of potable water is one of the problems humanity will face in the future. Scientists, including kids taking on middle school science experiments, are coming up with more efficient methods for cleaning water. It currently takes a lot of energy to turn ocean water into drinking water, and in areas of the world that don’t receive much rain, potable water is needed. This could lead to the growth of an industry in the next hundred years.

As the will for government spending continues to disappear, people will have to look to corporations to lead the way without government support. We may not get much from NASA in the next era, but private companies led by people who see some potential will pave the way for technological investment. The Internet is a product of twentieth century government funding, but that’s something that would never exist if the impetus was under today’s political climate. The next Internet, and by that I mean a world-changing technology, is going to be an opportunity that comes about only if the market deems it potentially profitable. And to take this further, the best opportunities will not be available to everyday investors; venture capitalists stand to gain from much of the potential economic growth of the next century.

We hear about the latest billion-dollar sale of technology companies, but most of these are backed — and therefore owned — by venture capitalists. So the smart kid who dropped out of college because he had a germ of an idea but pitched his business to venture capitalists will certainly see some financial benefit when he eventually exists the business, but it’s those who provided the capital who stand to win the bulk of the financial rewards.

So as much as I dislike the idea that average investors can now participate in angel investing through syndicates (because this is generally risky and sophisticated, and most investors don’t have enough wealth to manage risk and aren’t very sophisticated), this type of investing may be the only opportunity to see growth in the next decade. Angel investors take on risks, and usually they mitigate risk by diversifying across a large number of start-up businesses. These start-up companies may never see a time in which their stock is offered to the general public — or if they do, it will be after the initial investors take advantage of the early, most profitable period of growth.

Thinking about the needs of the future could give you insight not so much into where to invest, but where to spend your time. Or your life’s work. This may be more personally profitable than trying to invest 10% of your income into a certain industry or asset class.

Unfortunately, we have no way of predicting the future. Even the best minds have trouble coming up with what an industry will look like ten years from now. The automobile has lasted a hundred years. It’s probably a good bet that automobiles will be around for at least a few more decades. But after that, what will they look like? How will they be operated?

Google is betting on driverless cars. Tesla thinks the future is in purely electric vehicles. The traditional manufacturers and companies involved with the oil industry are the slowest to move. Will cars fly, like in Back to the Future? Probably not in 2015, but what about 2080? Someone is going to be right, and lots of people are going to be wrong. Those who are right will be the investors who experience the growth that is remembered — those who are wrong will be forgotten about and not included in historical accounts of a market. (That’s survivorship bias.)

Of course, there’s always a chance that no amount of planning will make a difference. Doomsday scenarios exist, even if they’re unlikely. Nature may change our ways of life in ways that we haven’t sufficiently planned for. But you can’t assume things that seem impossible. The best we can do is plan with the only understanding we have of the world today.

This may not solve the problem. Chances are good that people have already thought about what you see for the future, and that’s why professional investors can’t find any good, potentially profitable opportunities today. But if you take your ideas and start building something of your own, you’re creating your own value. Even if you don’t give birth to a new industry (kudos if you do!) you’ll be building value for yourself over the long-term, probably far better than an investment in any particular asset class will do for you.

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Through the end of the second quarter, the S&P 500 has climbed 6.22%. That’s a nice increase, and the stock market’s performance has provided me impressive gains on paper in my overall portfolio. The bulk of my investments are split between tax-efficient bonds and a stock market index in my non-retirement accounts, and despite losses on paper in January and March, between dividends and market gains, I am satisfied with my financial situation.

But I am at the point right now — between projects — where I may decide to start drawing upon the income from my investments for expenses occasionally. I’ve mentioned this before. My plan has been to leave my investments untouched as much as possible, and I’ve been able to do that so far except for taxes and a few other expenses related to selling my business. I’ve relied on other income from working — mostly writing, coaching, and to a lesser extent speaking — to meet my needs for living day-to-day. But this has brought upon the need to be a little more frugal than I had been while I was receiving income from my business.

While the bulk of my investments have been performing well, it’s a little harder to look at my investments in the “Grow Your Dough Throwdown” As readers know, at the beginning of 2014, I and a number of other financial writers and bloggers invested $1,000 to track our progress throughout the year. Each participant was able to choose where and how the money would be invested, and I chose ShareBuilder and the buy-what-you-use philosophy. I invested in five stocks (or their analogues) based on products I use every day: Microsoft, Canon, Honda, Samsung, and Google.

You can review my previous articles about the Grow Your Dough Throwdown: initial purchases; review at the end of February; first quarter review; and review at the end of May.

So because I chose ShareBuilder, and I purchased six different investments, I paid a transaction fee of $6.95 six times. That’s an automatic loss of $41.70 before even taking a losing January into account. And while the stock market has shows this great return through the first half of the year, my investments have still not broken even when considering the transaction fee a loss (which it should be).

Continue reading this article to see the investment results as of June 30.

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CNN is sounding the alarm bells. The “Fear and Greed Index,” which is a strange measure of market sentiment, has passed the threshold into the “extreme greed” level.CNN is sounding the alarm bells. The “Fear and Greed Index,” which is a strange measure of market sentiment, has passed the threshold into the “extreme greed” level.

That’s one week after the level has been on the opposite end of the spectrum, “fear,” for several weeks.hat’s one week after the level has been on the opposite end of the spectrum, “fear,” for several weeks.

The editors at CNN devised the index by looking at seven factors in stock market prices, including the value of the S&P 500 index versus its 125-day maximum and other measures of price relative to recent history, demand for junk bonds, and the perceived benefit of stock investing versus Treasury bonds.

Here is what you can expect from the index:

When the S&P 500 (SPX) plummeted to a three-year low on Sept. 17, 2008 – the height of the financial crisis — the Fear and Greed index sank to 12. The index gained some ground to 28 before stocks finally bottomed out on March 9, 2009 and the latest bull market began.

This particular index is a volatile measure of the stock market, and using the index to inform investment choices is probably a bad idea. It’s easy to fall into the trap of timing stocks. While the greed index is high today, buy-low-sell-high logic seems to indicate that now would be a good time to sell. You can use the same logic to rationalize selling stocks now, with the S&P 500 above its 125-day moving average.

Unless you’re willing to accept a lot of risk or are playing with a small portion of your portfolio, you’re better off ignoring these indicators and holding onto stocks for the long term. You’re too liable to make mistakes when timing your investments, and the biggest problem would be getting “back into the market” before the increases in the stock market following dips — the same increases that justify long-term investing in the stock market in the first place.

I seem to have a good job of ignoring the market recently. I had no idea where the stock market was until I started looking at my portfolio for my monthly review. And this year, I’m participating in the “Grow Your Dough Throwdown,” a friendly competition among financial writers who all agreed to invest $1,000 of their own money at the beginning of 2014 and track their progress following a chosen investing philosophy.

At the beginning of the year, I invested $1,000 across several stocks or their equivalents, including Microsoft, Canon, Apple, Samsung, and Honda. I invested a small remainder in an index fund to round out the $1,000 investment. I included the transaction fees in this investment, which resulted in less money available for the actual investments from that $1,000.

Those fees. Five months into the year, and I still haven’t broken even because of those ShareBuilder fees. At the same time, the stock market as a whole, even the securities I chose, are performing better than my investment would have anyone believe. Because of those fees.

Here is my latest report. Here is my latest report.

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Two years ago I wrote about how I was “winding down”, whatever that means, after selling Consumerism Commentary, in the sense that I was looking to involve myself in new projects. I was considering, among other things, investing a portion of my assets in start-up companies. In fact, I signed up for a service called AngelList that pairs potential investors with visionaries looking for capital.

I never took the next step. Although I continue think it’s a good idea to diversify my portfolio across a variety of investing possibilities, I’ve maintained a mix almost exclusively of stock and bond index funds. Several potential investment opportunities came to me from friends, but in the end, each opportunity didn’t progress to the final stage. I’m not so sure investing with friends is such a good idea anyway.

But what about with strangers? Can you pick a company from a list and be comfortable investing in it? Can you receive a pitch from a colleague, research the company’s potential, and feel confident enough to hand away your cash?

It’s risky. And it’s a risk I’m not willing to take. Despite the self-help industry’s promises for hopeful entrepreneurs, most new businesses fail. Forbes claims that the percentage of failed new businesses is eight out of ten. Entrepreneurs don’t mind; those that risk their investors’ money more their own simply try again, and keep trying (and losing their investors’ money) until they succeed. There may be many entrepreneurs who risk their own money, and certainly no entrepreneur wants to waste time with a business that has no path to success, but the investors suffer the financial losses.

As a result of this record of failure for new businesses, advisers recommend that investors wishing to add start-up companies to their portfolio diversify their total pool of cash set aside — which should be just a small portion of someone’s overall assets — into twenty or more companies. The one or two that succeed will partially offset the other failures. This, of course, gets lost in the headlines.

If you follow start-up investing news, you might hear about a successful start-up investor who made $5 million from an initial investment of $100,000, but if this investor had twenty different $100,000 investments, all of which failed except for the one, it really took an total investment of $2 million to return the $3 million profit. That’s not bad, but not as good as the headline implies. And a good number of people have $50,000 to invest; a significantly smaller number have $2 million.

On the HBO program Silicon Valley, an eccentric venture capitalist is investing in the lead characters’ start-up company. The tech entrepreneur is surprised when he discovers that not only is the investor placing his bets on a dozen competing companies, but he didn’t even consider this entrepreneur’s achievements thus far impressive. The way to succeed with angel investing is to hedge your bets, and for someone without a fortune to invest across so many companies, the risk is too great.

The first investment opportunity of the two I mentioned above involved a company that a friend and I were planning to establish. The idea was something we both believe could have a big future, and we would be entering as partners. It would have been a full-time job for the both of us, but it was in an exciting field, at a time where the market was (and probably still is) perfect for this type of business.

But my friend and potential partner in this endeavor also already runs his own business. I think he was growing a little frustrated with the lack of growth opportunities in that business and was looking for something else to start. His primary business began picking up, from what I can tell, and our discussions regarding this new business stopped.

The second opportunity was incidentally with the same friend. It involved the expansion of his existing business into a new area, one he felt offered significant potential. I was skeptical in the beginning but allowed his team to pitch me. In the end, I didn’t invest — the money I had set aside in cash was used for something else, and it didn’t seem like it would be a good choice to sell stocks and bonds to risk a portion of my invested assets. They ended up getting a loan from a bank rather than giving away equity to an investor. That was probably a better decision for them in the first place.

While I would have been given equity in the new company created out of that second opportunity, we would need to go through the process of agreeing on a valuation for nothing more than a hypothetical business based on assumptions about what this company might be able to achieve. Comparing the two opportunities, the first is better, because I would be directly involved in the day-to-day management. It’s more of a commitment, but in return for more control of how the company — and my investment of money and time — performs.

But that’s not angel investing. Now that more people can become angel investors, potential investors are lining up to accept risk in the hopes of being a part of the next Instagram. I think this is a sign of a bubble in the tech industry, but that doesn’t mean there aren’t some great opportunities out there. But as usual, the opportunities are better the more money you have. Even if you pool your resources with other investors, you will generally be on the losing side of an investment negotiation.

So stop and think before you invest in start-up companies.

Do you really have enough assets to invest in risky companies? You need to be an accredited investor to invest in certain circumstances. That requires investable assets of $1 million (not including primary home) or an income of at least $200,000 each of the past two years. You do not need to be accredited to create a private investment arrangement; accreditation is only for companies that are raising capital publicly.

But just because you’re accredited does not mean you should be investing in start-up companies. Let’s say you do have an investable net worth of $1 million. If you’re, say, 40 years old, you may want that nest egg to keep growing so you can afford to retire. You’ll still want to keep that invested mostly in a stock market index fund. When it comes to adding some risk by investing in unproven companies, you may want to risk only 5 percent of your net worth.

That leaves you with $50,000 to invest as a would-be venture capitalist. Spread that across twenty companies to properly diversify your investment, so you have a much higher chance on winning with at least one investment, and you’re left investing $2,500 in each company. That doesn’t buy you much leverage.

Do you really know the industry in which you’ll be investing? I recently wrote about a war between consumers and creators. Creators are the salespeople who turn a profit by manipulating — whether with friendly or malicious intent — the consumers. It’s not much different with investors and entrepreneurs. Entrepreneurs want capital from investors, and they want to give as little of their company away for as much capital they can get. Investors are on the other side of the negotiation, looking for as much control over the company for as little investment as possible.

That’s a gross oversimplification of the situation, but it’s the general, implicit concept behind negotiations. If you, as an investor, are less familiar with the industry than the entrepreneur, the entrepreneur will use that void to his or her advantage. You must research the company, the industry, and the market before making any deal.

This is a far cry from buying shares of stock on a stock exchange because these companies have, in theory, been properly vetted. Your investment is relatively liquid so you can sell at almost any time if things aren’t going the way you planned. Investment bankers and the company have already determined the valuation of the company. As an investor in a private start-up, the typical financial industry assurances around your investment don’t exist.

Given these drawbacks and hurdles to angel investing, I’m confident that it’s not for me at this time. What about you? Would you invest a portion of your assets in a start-up company? How big of a net worth is necessary for angel investing to make sense?

Photo: Flickr

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Buying and Selling Stocks Is Often a Losing Strategy

by Luke Landes
Grow Your Dough Throwdown - March 2014

After three months, my $1,000 investment portfolio, nicknamed “Feemaggeddon,” is lagging. This portfolio is part of an investing challenge, the “Grow Your Dough Throwdown.” It’s a lighthearted competition featuring several top financial bloggers. I have two goals with this portfolio. The first is to test a specific popular investing philosophy. Among those who offer advice ... Continue reading this article…

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Grow Your Dough: My Investing Results as of February

by Luke Landes
Grow Your Dough February

As I mentioned at the beginning of the year, I’m participating in an investing competition — well more of just a game than a competition — with several other writers and bloggers this year. The premise of the game is to start the year with $1,000 invested in discount brokerages of our choice, and track ... Continue reading this article…

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Should You Open an IRA With Your Bank? Ally Bank Offering $250 Bonus

by Luke Landes
Cash

It’s easy for me to look back in time and analyze the faults of my twenty-two year-old self. If only I had started saving and investing sooner, I’d be in a better financial situation. My younger self would assume I had forgotten what it was like for me during that time period, when I had ... Continue reading this article…

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Grow Your Dough Throwdown

by Luke Landes
Throwdown-Dec2013

I’ve joined a number of other financial writers in the “Grow Your Dough Throwdown,” a stock market competition. At the beginning of 2014, each of us will invest $1,000 in the stock market through a discount brokerage. We can trade as often as we like, and publicly track our investments throughout the year. It’s similar ... Continue reading this article…

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401(k) Contribution Limits for 2014

by Luke Landes
401k

After two years of increases, the IRS is not adjusting the retirement savings opportunities for American taxpayers this coming year. From 2009 through 2011, the maximum contribution to retirement accounts — 401(k) accounts, 403(b) accounts, most 457 plans, and Thrift Savings Plans, was $16,500. In 2012, this amount increased to $17,000. After considering inflation and ... Continue reading this article…

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The Myth of Early Retirement for the Middle Class

by Luke Landes
Is early retirement a myth?

Financial independence has become an important topic for me over the course of my adult life. It’s been a progression. First, I discovered the concept of spending less than I earn — simple mathematics but a behavioral change — and how that, in addition to making better choices, could eventually lead to financial independence through ... Continue reading this article…

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Should Millennials Trust the Stock Market?

by Luke Landes
Should millennials trust the stock market?

First impressions often form the basis of how a young person perceives an object for the remainder of that person’s life. The object in question could be another person, a business, an industry, a group of people, or even a part of society. Deeply-seated beliefs are entrenched during several stages of formative development. Psychologists point ... Continue reading this article…

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IRA Balances At Five-Year Highs: Time for a Retirement Check-Up

by Luke Landes
IRA balances at an all-time high

Thanks to the stock market’s upward trend since the recession (if the trend hadn’t been upward, we couldn’t say “since the recession”), policy changes that allow investors to convert traditional IRAs to Roth IRAs without limit other than the income tax bill, and perhaps even younger savers inspired to plan for their retirement by saving ... Continue reading this article…

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Variable Annuities Customers Facing Benefit Reductions

by Luke Landes
Money - Variable Annuities

When people find out I’ve been writing a blog about personal finance for ten years — yes, it seems crazy, but the tenth anniversary of Consumerism Commentary is Tuesday — they recognize it is an opportunity to share their financial troubles and triumphs. I’m a good listener. For the most part, I am happy to ... Continue reading this article…

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School Gives Club of Teens $100,000 to Play in the Stock Market

by Luke Landes
Teens investing

For many children, one primary exposure to just a piece of financial literacy is the Stock Market Game. The public elementary school I attended pitted a hundred or so fourth-graders against each other. After a few months, the student with the highest overall account value, not taking fees or expenses into account like the real ... Continue reading this article…

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How to Close an E*TRADE Investing Account

by Luke Landes
How to close an E*TRADE investment account

Yesterday, I was motivated to further clean up my excess financial accounts. After a long delay, I moved my main accounts into a revocable living trust, a legal entity I created earlier this year to keep my finances in the best order possible. As I visited Wells Fargo yesterday to move my primary checking account ... Continue reading this article…

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4 Types of Retirement: Which Will You Choose?

by Luke Landes
Which retirement will you choose?

While every situation is different, there are only a few types of retirement for those of us in the working class. Before I get to the retirement concept, here’s what I mean by “working class.” The working class includes those who need to survive by trading their time and effort for an income. They could ... Continue reading this article…

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Four Excuses Prevent You From Investing

by William Cowie

This is a guest article by William Cowie, who writes at Bite the Bullet Investing. While I considered myself a late bloomer in the world investing, not doing much with my money besides spending it until I was about twenty-eight, William started much later in his life. In this article, William describes how certain attitudes ... Continue reading this article…

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Are Financial Planners Hurting Investors Approaching Retirement?

by Luke Landes

If you’ve watched the financial industry over the course of the last decade, you’ve probably noticed some important contradictions. It’s a good indication that taking generalized investment advice and applying it to your own situation is not a smart idea. Anyone who retired at the height of the recession is going to understand exactly what ... Continue reading this article…

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Check Your 401(k) Fees: Invest in Index Mutual Funds

by Luke Landes
401k

A few years ago, new regulations mandated that 401(k) retirement plan administrators change quarterly statements to include more information about expenses about each fund in which the employee is invested. This was a good move. I have mixed feelings about 401(k) plans. Today’s world of employment is different than that from a generation ago. For ... Continue reading this article…

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Accurate Prediction Market Intrade Shuts Down

by Luke Landes
Stop

I’ve mentioned Intrade here. Intrade, until recently, was an open prediction market. People from all over the world could place money — bet — on circumstances they expected to be true some time in the future. It was used to great effect during the recent presidential election here in the United States. Even as the ... Continue reading this article…

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