Recently IndexUniverse.com Assistant Editor Heather Bell spoke with William F. Sharpe, the recipient of the 1990 Nobel Memorial Prize in Economics for the development of the Capital Asset Pricing Model [CAPM]. Dr. Sharpe is the STANCO 25 Professor of Finance, Emeritus at Stanford University and the founder of Financial Engines, Inc., a provider of investment advice and managed accounts to defined contribution plans. He is also the creator of the Sharpe Ratio.
Index Universe [IU]: Can you tell us a little bit about your recently published book Investors and Markets: Portfolio Choices, Asset Prices, and Investment Advice?
William F. Sharpe [Sharpe]: I was invited to give some lectures at Princeton University and turn that into a book. I decided this would be a good opportunity to think about equilibrium and capital markets and what that means for investors and investment strategy and policy. What did I think I had learned, not only in the mean variance days of the capital asset pricing model and Markowitz, but also from all the things that people have done since then? I wanted to bring it all together. That seemed like a great undertaking; little did I realize where it was leading.
In the course of working on the lectures, I leaned more and more toward writing a simulator and just going back to first principles. The premise was that you had people coming together and trading with each other until they didn't want to trade anymore. What could you say about the outcome and prices and risk and return? I started writing this simulator, and it became a lot of fun but a lot of work.
In the old days, we made a lot of simplifying assumptions. Harry Markowitz decided to assume people care only about the mean and the variance of portfolio returns. And I thought if that were true, we should figure out what we could say about equilibrium, risk and return, and the CAPM.
In this setting, I asked if people care about something other than the mean and variance of portfolio returns, and what if return distributions could be anything? What's left? What can we say about how prices are determined? And more importantly, once you've got prices determined in a competitive market, what does that imply for what we ought to do with our money when we invest?
I also wanted to make it accessible, and I wanted to try to show academics in particular that this in many ways was a better way of teaching finance than the traditional way—in some ways simpler and certainly more general and potentially more fun—and push the notion of simulation as opposed to analytic closed-form mathematical models as an interesting way to look at things and make them seem more plausible.
IU: How should investors approach asset allocation?
Sharpe: The first thing you have to do is figure out what your objectives are. This isn't trivial: What are you trying to accomplish? What are your preferences for risk and return? What are your needs for things like liquidity?
Second, you have to figure out what your pre-existing sources of risk and return are. Do you own a house? If so, where is it and what risks are likely to impact its value? What about your job and other assets that are not in the portfolio?
One of my favorite diatribes is, "How can you possibly do your asset allocation without looking at the market values of the asset classes out there today?" That's probably the most valuable information you can get as to the future prospects of those asset classes, and what astounds me is the fact that many people—many of them very sophisticated—do asset allocation without even checking to see what the relative values of the outstanding shares in, say, European securities, U.S. securities, emerging markets, etc., are.
IU: Should investors index?
Sharpe: I think that indexing covers a multitude of sins, but I also think indexing is a good idea for a nontrivial part of your money. I'm not saying you have to index everything, but I'm a big proponent of indexing. It also has to be cheap indexing. There are index funds that egregiously charge 100-plus basis points, which is insanity.
IU: Are there asset classes where it makes sense to go with active management or is across-the-board indexing a good way to go?
Sharpe: Whenever you're doing active management, you have to think of it as you're betting your manager is enough smarter than the average active manager in that sector to overcome all the added costs. You could make the argument that if a sector is really well researched and there are a lot of people trying to find mispriced securities, the chance of finding an active manager that can cover costs and provide a net alpha is much smaller than in an area which is under-researched and under-examined. A number of consultants used to advise indexing the big markets and going active in the little ones or the obscure ones. Nowadays, however obscure the market is, there seem to be a lot of people studying it, so that game is a little harder to play, I think.
IU: Do you think fundamental indexes are a valid way to represent the market?
Sharpe: No. I love the way you stated it because I can answer it unambiguously. There are so many shares of IBM and so many shares of General Motors and so many shares of Little Widget Manufacturing, and to represent the market you buy 1% of the shares of IBM and 1% of the shares of General Motors and 1% of the shares of Little Widget Manufacturing—and then you've represented the market. Anything else can't represent the market, because when you add it up, you don't get the market. If you want to represent the market and if you want a return equal to the return on all the money invested in that market, you're going to own the same proportion of the shares outstanding of every security in the market period. A fundamental index is going to get a different return: If it is value-tilted, as most of them are, you're going to win when value stocks do better than growth stocks, and the index fund people will get the market's performance.
If you beat the market, some dummy somewhere who has taken the other side of your trades is going to be beaten by the market before it balances out. There's no magic in it: Basically, for everybody who overweights small cap or value, somebody else is going to be underweighting those relative to the market cap, and the index fund people are going to be fat and happy in the middle. You can call it whatever you want to call it, but it is a deviant position from the market, and if it beats the market, somebody else is going to get beaten by the market. It's that simple. But this sophistry that it's more representative of the market makes no sense at all, unless you suspend all the rules of logic.
IU: How important is international diversification?
Sharpe: I'd have to say probably less than it used to be. I think what we're seeing is a lot more correlation of markets around the world, and it makes a lot of sense. We've got much more integration of trade, and we've got much more integration of financial markets. In some ways, if you buy shares in all the companies that are headquartered in the U.S., then you've got probably a more global portfolio than if you'd done that 25 or 50 years ago. The benefit of having companies headquartered in different countries in your portfolio is probably less than it used to be, but that is not to say that it isn't there and it isn't worth doing.
IU: Do you think commodities have a place in the average portfolio?
Sharpe: Probably, but there are a couple of caveats. When you buy publicly traded equities, you're getting commodity exposure. Sometimes it's as an input, sometimes as an output. When you buy some of the energy companies, you're getting exposure to oil. Sometimes the companies are hurt more when oil goes up; sometimes the companies are helped when oil goes up. But it's not as if you don't have commodity exposure in a traditional equity portfolio.
Also, if you look at the value of the commodity exposure that maybe you don't have in your portfolio, that may not be a huge amount of market value. Things that don't have much market value—if they have low correlation with other assets and are therefore desirable on the risk front—in an efficient market would also not have particularly high expected returns.
IU: What do you think of ETFs?
Sharpe: In general, I think they're a great idea to the extent that they can provide a real index fund that makes sense and do it at least as cheaply as a traditional open-end mutual fund. I have nothing against them.
But I'm with Jack Bogle on the fact that people use them as trading vehicles. It's just obscene what the turnover is of ETFs. Of course, it's also these wildly narrow ETFs, short funds and tiny little sectors. What's that all about? You could say that they allow you to customize your funds so they complement your job, your house, your mortgage, etc., and maybe there's some of that. But I think, as with anything else, here's a good instrument for "investing" that a lot of people are using to make bets.
IU: Are people saving enough for retirement?
Sharpe: Many people are not saving enough. You have to start with what you think you are going to get from public programs like Social Security and Medicare. Then you have to work your way back to what you've got to provide on your own. Everyone who looks at the financial situation of the entitlement programs in this country realizes that somebody is going to have to put more money into this system or somebody is going to have to get less money out of the system.
You start with the publicly financed part of your lifestyle in retirement, and then you have to look at what you have to provide to complement that to provide for a sensible lifestyle after you retire. If people continue to put aside as little in their individual savings and in their 401(k) plans as they are now doing, then you come to the conclusion that they're either going to have a miserable retirement or they're going to work a lot longer than previous generations worked—or they're going to have to figure out a way to die sooner.
At Financial Engines, when we see what people are doing in terms of their investment strategy and their current savings or 401(k) plan, we sometimes show them if they keep doing what they're doing, the chances that they'll have a retirement with, say, more than 50% of their pre-retirement real income are 31%.
Once they see the implications of what their current course is, many will choose to save more. That's a pretty direct indication that many people are not being counseled or given good projections of the range of outcomes.
Saturday, May 17, 2008
Friday, May 16, 2008
Learn the Best Times of the Day for the Best Trades
By Kunal Vakil from TradingMarkets.com
Developing a trading methodology and rigidly following your money management rules represent only part of the struggle in becoming a successful day trader. Equally important as the question of "how" is "when." You may have very proficient trading systems and be able to follow your rules, but understanding when to place trades can take your game to the next level. As an active trader, you need to be aware of these different time zones as some of them may be more prone to generating legitimate breakouts and breakdowns while others may be more conducive to range-bound trading.
I want to cover the market dynamics that occur during the different segments of the trading session. Remember, make the game come to you; do not chase the game. Most trading systems will work better in either trending or range-bound markets, but not both.
The Opening Bell - 9:30am to 9:50am
Exercise caution during this time frame; it is the most volatile trading period of the day. Unless you are an extremely talented day trader, it is best to stay out of the market and wait for the imbalances created from overnight news or earnings releases to settle down. The extreme nature of the volatility renders many technical indicators useless. In most cases, volume will also be the highest of the day during this time, and price swings will make it very difficult to set appropriate stop-loss orders.
The Morning Reversal- 9:50am to 10:10am
The first reversal zone of the day begins at around 9:50am and lasts for about 20 minutes. Day traders need to pay close attention to this time frame; many traders will put on continuation trades, or buy stocks which set new 30-minute highs and short stocks setting new 30-minute lows. Other traders may look to buy stocks that have had small retracements after a large morning gap and short stocks that have had minor retracements off strong gaps to the downside.
Once the dust has settled from the opening bell, you will be able to more clearly see what the traders in this security will want to do. Volume will drop off a little bit compared with the opening 20 minutes but will still be very high during this time. This time period is my favorite for trading as the price stability returns to the market but volatility is still present for profitable trading. In strongly trending markets, reversals may be small or non-existent. This can especially be the case when an index gaps higher on the open and continues to break to new highs during this time period.
Low Risk Trading - 10:10am to 10:25am
During this day-trading time zone, volatility shrinks again and you want to look for clues in the Dow, S&P, and Nasdaq as to the direction that the market wants to take. This is an opportune time for bigger traders to move the market the way they choose. Keep a close eye on the time and sales window of the stocks you are tracking and look for an indication of strong buying or selling to help you gauge the direction of the next move.
Which Way Will You Go? - 10:25am to 10:30am
By this time, the markets will be settled for the most part and most of the day's volatility will have passed. There may have been a few reversals in the first hour, but during this small zone many traders will cash out of profitable positions and finish the day while others will position themselves for the next move in the market. Consolidation and preparation for the next move describe this time period. This can last until lunchtime.
Final Move of the Morning - 10:30am to 11:15am
This time zone will be the final major time zone as far as morning trading is concerned. This time zone is safer in relation to the other zones in that technical indicators such as the slow stochastic or RSI will have a more pronounced effect than in some of the earlier time zones. Be careful near the end of this range as it leads right into the lunch hour, which can start early or start late. A general rule of thumb is that the more volatile the preceding day-trading time zones are, the greater the chance that this move will extend further into the 11 o'clock hour.
Take a Break & Take Lunch - 11:15am - 2:15pm
Lunchtime trading can be a tough trading environment. False breakouts and choppy sideways moves characterize this time period. If you must trade, tread lightly in this time zone until you develop consistency. Also, please let me know how you do it! The risk-to-reward ratio is very high here. Volume will fall out of the market as floor traders and other institutional traders will take their lunches. Don't let this time zone turn profitable morning trading into a loss.
Back to Work - 2:15pm - 3:00pm
Traders will work their way back into the market during this timeframe. For the most part, trends have been established and trading during this timeframe will provide you with opportunities where the use of technical indicators is applicable. Remember, the CME closes at 3:00pm so you will see a pickup in volume due to some of the bond traders coming into the equity and futures markets. Keep in mind, a low volatility morning session usually portends low volatility during the afternoon. Stay cautious in this situation.
It's GO Time - 3:00pm - 3:10pm
Bond market closes and bond traders will flood the equities markets; watch for sharp moves in either direction. Moves can be fast and large.
Use Caution & Stay with the Trend - 3:10pm - 3:25pm
During this day-trading time zone, use caution as you are approaching the 3:30pm timeframe, which tends to produce a reversal or a stall of the prior trend. During this zone, you want to stay with the trend that has been established from the 2:15pm and even 3:00pm timeframe but don't get attached to the positions.
Portfolio Re-balancing - 3:30pm - 4:00pm
I tend to recommend traders not trade during the last half-hour of the day. There are many funds and institutions rebalancing their portfolios, and it can get a bit tricky. If you're day trading, you only have 30 minutes max to get out of your trade and I don't like working under that type of pressure. If your an action junkie or like putting on very short term trades, the volatility is there for you do so.
Conclusion
As you can see, the chart setup or systems that you look at are not the only factors in putting a day trade on. Remember, day trading is not absolute; it is a game of odds. Your job is to put the odds in your favor and by using the different day trading time zones, your trading will become more consistent and profitable.
See you at the top.
Kunal Vakil is the co-founder of www.mysmp.com (My Stock Market Power) which provides free trading articles and videos to investors covering a broad range of trading topics. Prior to becoming a full time day trader, Kunal designed bond trading systems for one of the largest secondary mortgage market participants and provided management consulting services to many top financial services companies.
Developing a trading methodology and rigidly following your money management rules represent only part of the struggle in becoming a successful day trader. Equally important as the question of "how" is "when." You may have very proficient trading systems and be able to follow your rules, but understanding when to place trades can take your game to the next level. As an active trader, you need to be aware of these different time zones as some of them may be more prone to generating legitimate breakouts and breakdowns while others may be more conducive to range-bound trading.
I want to cover the market dynamics that occur during the different segments of the trading session. Remember, make the game come to you; do not chase the game. Most trading systems will work better in either trending or range-bound markets, but not both.
The Opening Bell - 9:30am to 9:50am
Exercise caution during this time frame; it is the most volatile trading period of the day. Unless you are an extremely talented day trader, it is best to stay out of the market and wait for the imbalances created from overnight news or earnings releases to settle down. The extreme nature of the volatility renders many technical indicators useless. In most cases, volume will also be the highest of the day during this time, and price swings will make it very difficult to set appropriate stop-loss orders.
The Morning Reversal- 9:50am to 10:10am
The first reversal zone of the day begins at around 9:50am and lasts for about 20 minutes. Day traders need to pay close attention to this time frame; many traders will put on continuation trades, or buy stocks which set new 30-minute highs and short stocks setting new 30-minute lows. Other traders may look to buy stocks that have had small retracements after a large morning gap and short stocks that have had minor retracements off strong gaps to the downside.
Once the dust has settled from the opening bell, you will be able to more clearly see what the traders in this security will want to do. Volume will drop off a little bit compared with the opening 20 minutes but will still be very high during this time. This time period is my favorite for trading as the price stability returns to the market but volatility is still present for profitable trading. In strongly trending markets, reversals may be small or non-existent. This can especially be the case when an index gaps higher on the open and continues to break to new highs during this time period.
Low Risk Trading - 10:10am to 10:25am
During this day-trading time zone, volatility shrinks again and you want to look for clues in the Dow, S&P, and Nasdaq as to the direction that the market wants to take. This is an opportune time for bigger traders to move the market the way they choose. Keep a close eye on the time and sales window of the stocks you are tracking and look for an indication of strong buying or selling to help you gauge the direction of the next move.
Which Way Will You Go? - 10:25am to 10:30am
By this time, the markets will be settled for the most part and most of the day's volatility will have passed. There may have been a few reversals in the first hour, but during this small zone many traders will cash out of profitable positions and finish the day while others will position themselves for the next move in the market. Consolidation and preparation for the next move describe this time period. This can last until lunchtime.
Final Move of the Morning - 10:30am to 11:15am
This time zone will be the final major time zone as far as morning trading is concerned. This time zone is safer in relation to the other zones in that technical indicators such as the slow stochastic or RSI will have a more pronounced effect than in some of the earlier time zones. Be careful near the end of this range as it leads right into the lunch hour, which can start early or start late. A general rule of thumb is that the more volatile the preceding day-trading time zones are, the greater the chance that this move will extend further into the 11 o'clock hour.
Take a Break & Take Lunch - 11:15am - 2:15pm
Lunchtime trading can be a tough trading environment. False breakouts and choppy sideways moves characterize this time period. If you must trade, tread lightly in this time zone until you develop consistency. Also, please let me know how you do it! The risk-to-reward ratio is very high here. Volume will fall out of the market as floor traders and other institutional traders will take their lunches. Don't let this time zone turn profitable morning trading into a loss.
Back to Work - 2:15pm - 3:00pm
Traders will work their way back into the market during this timeframe. For the most part, trends have been established and trading during this timeframe will provide you with opportunities where the use of technical indicators is applicable. Remember, the CME closes at 3:00pm so you will see a pickup in volume due to some of the bond traders coming into the equity and futures markets. Keep in mind, a low volatility morning session usually portends low volatility during the afternoon. Stay cautious in this situation.
It's GO Time - 3:00pm - 3:10pm
Bond market closes and bond traders will flood the equities markets; watch for sharp moves in either direction. Moves can be fast and large.
Use Caution & Stay with the Trend - 3:10pm - 3:25pm
During this day-trading time zone, use caution as you are approaching the 3:30pm timeframe, which tends to produce a reversal or a stall of the prior trend. During this zone, you want to stay with the trend that has been established from the 2:15pm and even 3:00pm timeframe but don't get attached to the positions.
Portfolio Re-balancing - 3:30pm - 4:00pm
I tend to recommend traders not trade during the last half-hour of the day. There are many funds and institutions rebalancing their portfolios, and it can get a bit tricky. If you're day trading, you only have 30 minutes max to get out of your trade and I don't like working under that type of pressure. If your an action junkie or like putting on very short term trades, the volatility is there for you do so.
Conclusion
As you can see, the chart setup or systems that you look at are not the only factors in putting a day trade on. Remember, day trading is not absolute; it is a game of odds. Your job is to put the odds in your favor and by using the different day trading time zones, your trading will become more consistent and profitable.
See you at the top.
Kunal Vakil is the co-founder of www.mysmp.com (My Stock Market Power) which provides free trading articles and videos to investors covering a broad range of trading topics. Prior to becoming a full time day trader, Kunal designed bond trading systems for one of the largest secondary mortgage market participants and provided management consulting services to many top financial services companies.
Thursday, May 15, 2008
From the S&P to Tiffany: Big Plans? Start Investing Now
By Scott Rothbort at thestreet.com
This month, many a college graduate will have completed the academic aspect of his or her life and will soon move on to the "professional" phase of life. Whether you're a recent graduate or know a college grad, let's take a look at how to invest upon entering the labor force, with a few big-budget plans in mind.
Your Wedding
I am now about to tell you something which will no doubt in my mind, rip the heart out of young brides to be. At the same time, it will be among the best financial advice that any young couple will ever receive.
Imagine buying that dream car you always wanted. You scrapped and saved $50,000 for this heavenly vehicle. You paid for it, drove it out of the show room, motored around for four hours and then proceeded to push it off of a cliff.
Now imagine doling out $50,000 for a four-hour wedding reception. After the four-hour party, other than a good meal, some photographs and probably useless wedding gifts, all that you have managed to do was toss $50,000. However, perhaps you will receive some nice cash gifts.
It is about this time that I get the horrific looks and emotional pleas, explaining to me how special a wedding is. I am usually told that I am devoid of romance. My response is that with more that 50% of marriages doomed to failure, there is no correlation between the amount of money spent on a wedding and the success of the marriage. Long term, what really counts, is not the money you put into your wedding day, but the money (and everything else) you put into the actual marriage.
Now, if you can get over the wedding issue, then Bar Mitzvahs, anniversary parties, sweet sixteen parties and other big-budget social events will be financially easier to navigate.
Despite my admonitions of spending too much on weddings, people will continue to do so. That said, how can you invest in the engagement and wedding market? Here are a few ideas:
Jewelers: Take a look at Tiffany (TIF) which not only sells diamond rings, but is also a big destination for bridal registry. If you want to profit off of the less upscale market, research a a mall-based jeweler, such as Zales (ZLC) or Web-based jeweler, such as Blue Nile (NILE).
Caterers: While most weddings take place at local catering halls, religious houses of worship or private clubs, many hotels are in the wedding catering business as well. If you're interested in this investment theme, then investigate Marriott International (MAR) or perhaps Starwood Hotels & Resorts (HOT).
Flowers: What would a wedding be without flowers? Maybe FTD Group (FTD) has the right investment assortment for you.
Your Wheels
Rather than buying a $50,000 dream car, you might want to save and invest for your dream house instead. So before you blow your hard earned money on a car, consider these two points:
Leasing an automobile is expensive and is a short term solution because most leases have finite life spans, which are far less than the average life span of a car. Only in certain circumstance, such as when the car lease is in the name of a business, will leasing a car make sense because of the inherent tax benefits.
I believe buying an automobile is the correct financial decision. This big question: Buy a new car or a used one? This is a judgment decision of which there are pros and cons to each side. A new car is more expensive, but gives the owner the peace of mind that the car is in factory condition. A used car is less expensive, but could have problems associated with wear and tear or damage from the prior owner.
A happy middle ground is to purchase a factory authorized used car, which includes warranties that are not available from a typical used car dealer.
In the terms of investing in the auto market, I would not point you in the direction of any domestic or international auto-makers. However, on the basis of some research that some of my students at the Stillman School of Business at Seton Hall University performed last semester, there are two stocks in a related industry that are intriguing:
Advance Auto Parts (AAP): This company sells automotive replacement parts. With more used cars on the road and as new car sales decline, companies like Advance Auto Parts will benefit from increasing part sales. Advance Auto Parts has had a solid record of low double digit earnings growth.
CarMax (KMX): CarMax is the largest retailer of used cars in the United States. If the public is not buying new cars, then they are buying used ones. However, when you consider investing in CarMax, be careful. In addition to selling used cars, the company is also involved in auto loans, through its financing arm. Given the current state of the credit markets, especially asset-backed securities , the auto loan part of CarMax's business could be problematic.
Your House
There is a very simple maxim that I will pass on to you. A house is a place to live. Unfortunately, too many people got caught up in the housing madness of the 2000s and thought otherwise.
Many homeowners simply do not have a detailed enough understanding of the costs of home ownership -- above and beyond mortgage payments.
In recent years, people were buying overvalued homes with no money down. This varied dramatically from the typical down payment requirement of 20% for a conventional mortgage. My wife and I put down 40% on our first home, which we purchased not long after we got married.
How did we accomplish that while still in our twenties? Here is how we did it:
We saved a lot of money from not having an extravagant wedding. Our wedding was at a nice suburban caterer and cost a little over $5,000. However, our guests were very impressed with the affair and thought it cost much more than that.
We both saved money from working hard for seven years.
Personally, rather than spend money received from a grandparent on frivolous goods and services, I started to invest at an early age.
Now what can you do to afford that dream home?
Let's make a few assumptions: the house will cost $300,000, you will put down 20% ($60,000) and you plan to buy the house in eight years.
Now let's say that you can get a 6% return on your invested money per year. With the average return of the S&P500 over the long term at about 9%, you can earn 6% with a blended portfolio of fixed income investments and the market return, which can be earned in an index fund or an ETF like the SPDR Trust (SPY). Assuming this 6% target rate of return, you would have to invest $488.49 every month to earn that down payment in eight years.
Whether your goal is to accumulate enough money for your own home or any another big-budget dream, there are ways to accomplish your financial objectives. The key steps:
1. Start saving and investing money as early as possible.
2. Avoid costly expenditures that will not yield any future benefit.
3. Take advantage of savings and retirement plans (see TheSreet.com's Retirement section and BankingMyWay.com)
Editor's note: For more on weddings, don't miss "Wedding Loans: Till Death Do You Owe."
This month, many a college graduate will have completed the academic aspect of his or her life and will soon move on to the "professional" phase of life. Whether you're a recent graduate or know a college grad, let's take a look at how to invest upon entering the labor force, with a few big-budget plans in mind.
Your Wedding
I am now about to tell you something which will no doubt in my mind, rip the heart out of young brides to be. At the same time, it will be among the best financial advice that any young couple will ever receive.
Imagine buying that dream car you always wanted. You scrapped and saved $50,000 for this heavenly vehicle. You paid for it, drove it out of the show room, motored around for four hours and then proceeded to push it off of a cliff.
Now imagine doling out $50,000 for a four-hour wedding reception. After the four-hour party, other than a good meal, some photographs and probably useless wedding gifts, all that you have managed to do was toss $50,000. However, perhaps you will receive some nice cash gifts.
It is about this time that I get the horrific looks and emotional pleas, explaining to me how special a wedding is. I am usually told that I am devoid of romance. My response is that with more that 50% of marriages doomed to failure, there is no correlation between the amount of money spent on a wedding and the success of the marriage. Long term, what really counts, is not the money you put into your wedding day, but the money (and everything else) you put into the actual marriage.
Now, if you can get over the wedding issue, then Bar Mitzvahs, anniversary parties, sweet sixteen parties and other big-budget social events will be financially easier to navigate.
Despite my admonitions of spending too much on weddings, people will continue to do so. That said, how can you invest in the engagement and wedding market? Here are a few ideas:
Jewelers: Take a look at Tiffany (TIF) which not only sells diamond rings, but is also a big destination for bridal registry. If you want to profit off of the less upscale market, research a a mall-based jeweler, such as Zales (ZLC) or Web-based jeweler, such as Blue Nile (NILE).
Caterers: While most weddings take place at local catering halls, religious houses of worship or private clubs, many hotels are in the wedding catering business as well. If you're interested in this investment theme, then investigate Marriott International (MAR) or perhaps Starwood Hotels & Resorts (HOT).
Flowers: What would a wedding be without flowers? Maybe FTD Group (FTD) has the right investment assortment for you.
Your Wheels
Rather than buying a $50,000 dream car, you might want to save and invest for your dream house instead. So before you blow your hard earned money on a car, consider these two points:
Leasing an automobile is expensive and is a short term solution because most leases have finite life spans, which are far less than the average life span of a car. Only in certain circumstance, such as when the car lease is in the name of a business, will leasing a car make sense because of the inherent tax benefits.
I believe buying an automobile is the correct financial decision. This big question: Buy a new car or a used one? This is a judgment decision of which there are pros and cons to each side. A new car is more expensive, but gives the owner the peace of mind that the car is in factory condition. A used car is less expensive, but could have problems associated with wear and tear or damage from the prior owner.
A happy middle ground is to purchase a factory authorized used car, which includes warranties that are not available from a typical used car dealer.
In the terms of investing in the auto market, I would not point you in the direction of any domestic or international auto-makers. However, on the basis of some research that some of my students at the Stillman School of Business at Seton Hall University performed last semester, there are two stocks in a related industry that are intriguing:
Advance Auto Parts (AAP): This company sells automotive replacement parts. With more used cars on the road and as new car sales decline, companies like Advance Auto Parts will benefit from increasing part sales. Advance Auto Parts has had a solid record of low double digit earnings growth.
CarMax (KMX): CarMax is the largest retailer of used cars in the United States. If the public is not buying new cars, then they are buying used ones. However, when you consider investing in CarMax, be careful. In addition to selling used cars, the company is also involved in auto loans, through its financing arm. Given the current state of the credit markets, especially asset-backed securities , the auto loan part of CarMax's business could be problematic.
Your House
There is a very simple maxim that I will pass on to you. A house is a place to live. Unfortunately, too many people got caught up in the housing madness of the 2000s and thought otherwise.
Many homeowners simply do not have a detailed enough understanding of the costs of home ownership -- above and beyond mortgage payments.
In recent years, people were buying overvalued homes with no money down. This varied dramatically from the typical down payment requirement of 20% for a conventional mortgage. My wife and I put down 40% on our first home, which we purchased not long after we got married.
How did we accomplish that while still in our twenties? Here is how we did it:
We saved a lot of money from not having an extravagant wedding. Our wedding was at a nice suburban caterer and cost a little over $5,000. However, our guests were very impressed with the affair and thought it cost much more than that.
We both saved money from working hard for seven years.
Personally, rather than spend money received from a grandparent on frivolous goods and services, I started to invest at an early age.
Now what can you do to afford that dream home?
Let's make a few assumptions: the house will cost $300,000, you will put down 20% ($60,000) and you plan to buy the house in eight years.
Now let's say that you can get a 6% return on your invested money per year. With the average return of the S&P500 over the long term at about 9%, you can earn 6% with a blended portfolio of fixed income investments and the market return, which can be earned in an index fund or an ETF like the SPDR Trust (SPY). Assuming this 6% target rate of return, you would have to invest $488.49 every month to earn that down payment in eight years.
Whether your goal is to accumulate enough money for your own home or any another big-budget dream, there are ways to accomplish your financial objectives. The key steps:
1. Start saving and investing money as early as possible.
2. Avoid costly expenditures that will not yield any future benefit.
3. Take advantage of savings and retirement plans (see TheSreet.com's Retirement section and BankingMyWay.com)
Editor's note: For more on weddings, don't miss "Wedding Loans: Till Death Do You Owe."
Survived The Finals!!!
This place has been deserted for the past month while I was buried under tons of deadlines to meet ... I'm glad that I've survived all of that and am ready to add posts regularly again.
During the past few days I've been thinking over this blog and want to classify my future posts into three major aspects: fundamental analysis, technical analysis, and quantitative analysis. Articles on financial planning and bond markets will also posted as my interests expands but won't be the mainstream here. My goal is to post ideas of others here and gradually (and hopefully) to start writing my own ideas down sooner than later.
During the past few days I've been thinking over this blog and want to classify my future posts into three major aspects: fundamental analysis, technical analysis, and quantitative analysis. Articles on financial planning and bond markets will also posted as my interests expands but won't be the mainstream here. My goal is to post ideas of others here and gradually (and hopefully) to start writing my own ideas down sooner than later.
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