Market Timing vs Risk Management

Posted on March 19, 2012 by J.Wenger

Question from an investor: “What do you think the market is going to do?”
My answer: “I have no idea…but when it does it, I’ll be ready.”
Question from an investor: “So you’re a market timer?”
My answer: “No…I’m a market observer.”

Interestingly enough, Barry Ritholtz published an article today called Predicting Market Tops vs Observing Conditions that I suggest everyone read. So are you a market timer, a risk manager, or neither?

Market timing is moving money in and out of investments, trying to catch market tops and bottoms. Risk management is the process of moving money in and out of investments based on lowering your risk of loss.

I’m sure you can figure out which camp I’m in today. After the run-up since late December, I’ve been expecting some sort of pull-back. Yet the market keeps going up. Several years ago, I missed out an substantial gains because I “knew” the market couldn’t move higher.

Sources:

Predicting Market Tops vs Observing Conditions
Barry Ritholtz – The Big Picture
http://www.ritholtz.com/blog/2012/03/predicting-market-tops-vs-observing-conditions/

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Managing Your Personal Finances Using Cashflow Diagrams

Posted on March 15, 2012 by J.Wenger

For more a more detailed description of each cashflow diagram, check out my page on organizing personal finances (http://www.invest-safely.com/organizing-personal-finances.html).

If you’re looking for tips on improving your financial health, my page on personal budgeting is a great place to start (http://www.invest-safely.com/personal-budgeting.html)

Posted in Money Management, Personal Finance | Tagged , , , , | 7 Comments

Tax Time – Goodbye Schedule D-1

Posted on March 8, 2012 by J.Wenger

When I first heard that the IRS was getting rid of the Schedule D, there was a fraction of a second when I thought that this might actually mean my taxes would get a little less complicated. Unfortunately, I heard wrong…the IRS only got rid of the D-1 form.

From an investing standpoint, the Schedule D-1 was an extra form for “active” investors. By active, I mean you filled it out if you had more than 4 trades in a year…that was about the max you could fit in the Schedule D.

Out with the old and in with the new. The new form is call “Form 8949″ – Sales and Other Dispositions of Capital Assets”, and it impacts anyone who has capital gains or losses in 2011. Continue reading here…

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Japan 2.0 Chart Pattern Revisited

Posted on March 7, 2012 by J.Wenger

As an investor, I always like to go back and review my thoughts and see if I still agree with myself. Back in August, Barry Ritholtz (The Big Picture) posted a chart comparing the US and Japanese markets, with the following commentary:

Where our Fed stepped up and flooded the system with liquidity, the Japanese central bank did not. Whether that means the US avoided a Japan like decade plus long recession, or merely delayed it, has yet to be determined . . .

I had this to say:

With the sell-off in equities in the month of August, the U.S. markets are now mirroring the Japanese sell-off back in 2000. From a technical analysis perspective, the chart below is creepy. It suggests that US stocks could fall a lot more.

So what does this chart look like today? We’ve had a pretty strong run-up since the end of 2011, so it has to look much better…right? I decided to hack up a screenshot of the comparison posted on Barry’s site with my approximation of where we are today. I used data from the MSCI index (you can find it for yourself here – http://www.msci.com/products/indices/size/standard/performance.html). So the numbers are close, even if my artwork isn’t.

Chart of SPX vs Nikkei Index (10 Year Lag)

It looks like we’re headed in the right direction, but we still don’t know with any certainty whether US stocks continue to rise or if we just prolonged an inevitable fall. Here’s to hoping for the former, but planning for the latter.

Sources:
Japan 2.0 Chart Pattern
The Safe Investing Blog
http://www.ritholtz.com/blog/2011/08/turning-japanese-spx-vs-nikkei-index-10-year-lag-2/

Turning Japanese: SPX vs Nikkei Index (10 Year Lag)
The Big Picture
http://www.ritholtz.com/blog/2011/08/turning-japanese-spx-vs-nikkei-index-10-year-lag-2/

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Cashflow Report – Portfolio Income during February 2012

Posted on March 3, 2012 by J.Wenger

Cashflow Report – Portfolio Income during February 2012.

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Who Is Liable For (Bad) Free Investment Advice?

Posted on February 20, 2012 by J.Wenger

When it comes to free investment advice, you need to have very selective hearing. Why? Because most free investment advice isn’t really free, and ends up costing you way more than it is worth.

The SEC has warned investors in the past about scams involving pre-initial public offerings. People log into social media sites, such as Facebook, Twitter, and Groupon, telling people that they can get them early access to shares of upcoming IPOs. With the upcoming Facebook IPO, don’t be surprised if you see such claims.

While these types of scams can be prosecuted, what about the well-meaning financial website or blog that is trying to share experience? Or what about Jim Cramer and his show “Mad Money”. Should he, or any other investing website, be liable when making a bad call? Or is it buyer beware?

Regardless of whether you like or dislike him, Jim is trying to educate individual investors, which is a great goal. But we’re talking about real money here. George Mannes (money.cnn.com) wrote an interesting article about personal finance writers and their “responsibility” for the advice that they provide.

Since this site is about investing educating, it strikes very close to home. I think that both sides of this debate have valid points and counterpoints. But as George said:

As I have learned from personal experience, if people think I’ve given bad advice, word gets around pretty quickly.

The implication is that having a reputation for making bad calls will cause your following and/or sales to dry up quickly. This may be true, but doesn’t help people who acted upon a bad call and lost money.

In the end, there is no such thing as one-size-fits-all in the financial world. Everyone is different, which is why it is so critical for you to take what you learn and customize it for your personal circumstances.

Remember Safe Investing Principle #1: YOU must be responsible for your financial future. Investigate all the advice you receive (even the stuff you find on my site) and figure out whether you agree, whether or not you want to use it, and then HOW to use it.

I’ll leave you with a quote from Aristotle that seems appropriate:

It is the mark of an educated mind to be able to entertain a thought without accepting it.

    – Aristotle (384 BC – 322 BC)

Sources:

Should personal finance writers be liable for bad advice?
George Mannes – CNN Money
http://moremoney.blogs.money.cnn.com/2010/05/27/should-personal-finance-writers-be-liable-for-bad-advice

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The simplest way to avoid back taxes

Posted on February 13, 2012 by J.Wenger

I published this article back in August 2010, but since it is tax time, I figured it would be good to revisit the topic…

The simplest way to avoid back taxes is to file a tax return. It really is that simple!

For a lot of individual investors, taxes aren’t something that gets much attention until March and April. However, the IRS is always watching, as the subject of an article from the NY Daily News found out recently. The last paragraph contained the one point that all investors should remember.

    “If you don’t file, the IRS assumes that you have 100% profit, that basically it’s as if you bought the stock at no cost.” – Manhattan CPA Marc Albaum

While buying a stock at no cost would be great, that’s probably the ONLY way you could truly afford the resulting tax bill. Until you figure that trick out, stick with filing a Schedule D. Even if you get it totally wrong, you’ll still be better off than that guy!

Sources:

Trader nailed with $172 million bill in back taxes, asks ‘What’s the IRS?’
Bill Hutchinson – Daily News – August 24, 2010
http://www.nydailynews.com/ny_local/2010/08/24/2010-08-24_thought_you_had_irs_problems_failed_daytrader_nailed_with_172m_bill.html

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