Investing

INTRO. Throughout my career, I never met anyone who was not interested in investing. And, I never met anyone who didn't have an opinion about it either. Of course, those opinions ranged from conversations over the bushes or fence with the neighbor to well thought out research or practical experience. My experience comes from both ... I never turned a deaf ear to anyone with an opinion or idea plus I've helped clients invest millions of dollars over the years. With that being said, the vast majority of my expertise borders on the "what not to do" instead of "what to do." Allow me to elaborate by using this comparison. I've heard it said that Thomas Edison was quoted as saying, "I've discovered 1,000 ways on how to NOT make a light bulb." Well, I've discovered a thousand ways on how NOT to invest money. I've also managed to scrape together a few that actually work. I'm going to discuss each beginning with probably the most successful and basic of all methodologies and work my way up to other methods that will work if one is willing to put in the time and personal management. At the end, I will top it off with graphs and commentary on things that I currently keep tabs on and actually do. Some of these I will also post on my Facebook page.

Since we're discussing investing, the terms "market" or "stock market" will come up. This is just jargon referring to either the Dow Jones Industrial Average (DJIA) or the Standard and Poor's 500 (S&P 500). Both of these are actual references to a group of stocks. The DJIA refers to a group of 30 blue chip stocks that the industry considers leaders and indicative of the current overall performance of the thousands of stocks listed on the U.S. primary stock exchanges. The S&P 500 follows the same lines, includes 500 stocks, and is my preference of reference. Why are these used? Well, they are reference points/standards/benchmarks of performance. To determine how well your investments perform, you have to compare it to some sort of established and widely accepted benchmark, right!

So let's begin. For starters, do you know of anyone who plays the lottery? Well, maybe all it takes is a glance in the mirror. The big thing nowadays is the multi-state PowerBall. I remember a few months ago that it was getting close to a $Billion; I even bought a ticket. Why? Probably for the same reason everyone else does. Of course, many years ago I calculated the odds of winning. I don't remember the exact odds other than it was an asrtonomical amount, and that thought kept rolling around in my mind as I was paying the clerk. So I just basically made a donation to a completely worthless cause. I think I've even read somewhere that the vast majority of people who play the lottery are actually the ones who really can't afford to part with the money. I don't know if that is factually correct, but if I were to bet on the odds of it being true, I'd probably hit paydirt.

If you're 40 years old and spend, say, $25 a month on lottery tickets, what are the odds of it helping you become financially independent? Probably zero! What if instead you invested into a growth mutual fund until age 65? What are the odds of it helping you become financially independent? Probably 100%! By how much? Well, here's some outcomes at various growth rates: 4%-$24,988; 6%-$32,919; 8%-$43,864; 10%-$59,008. How about someone younger, say, 25 years old? Here's the numbers: 4%-$57,015; 6%-$92,857; 8%-$155,434; 10%-$265,556. Now you may be thinking, "So what!" Well, the fact is that you will either be 65 one of these days or dead ... those are your only two options. So, if you still don't get it, then take this paragraph to anyone whom you perceive as "old" and ask them for their opinion as to what you should do ... really.

Here's some thoughts for you to ponder as you continue to read. By following some simple rules and simple habits discussed below, you will provide yourself and your family two things. First, the odds of winning will be closer to 1:1 instead of millions to one. Second, for each rule/habit that you regularly do, it could be worth at least $100,000. So, let's continue.

CREDIT SCORE. Here's an idea that most people never, never, never consider ... a good credit score. Now you may be wondering what a good credit score has to do with investing. Well, everything! We live in a credit-driven society ... everything evolves around it. When was the last time you paid cash for a home, car, boat, vacation, college education, etc.? Many times we pay for daily/weekly basic necessities (gas, groceries, bills, etc.) with cash or check, and sometimes we don't. Usually without exception, however, pricier items are paid for with credit. Please take special note of this -- the interest rate charged for many items depends upon your credit score. I'll refer to this interest rate as "The Cost of Credit." The Cost of Credit on every loan you make and credit card you use is based on your credit score. Did you know that the current trend in our society is to expand the impact of your credit score upon other things such as your ability to qualify for certain jobs and insurance, for example. But, let's keep this simple and just deal with the things that we know affect everyone, loans and credit cards.

Here's some facts that we're all familiar with: you will probably have a mortgage for most of your life; you will finance multiple vehicles during your lifetime; you will use a credit card for most of your life. It's also a known fact that if you have bad credit, aka low credit score, your interest rate will be higher than if you have a good credit score. Given all that, I performed various analyses many years ago to get an idea of the "cost of credit" difference between bad credit and good credit. I made multiple assumptions using differing credit scores and the resulting applicable interest rates and analyzed it from an investment perspective. It opened my eyes to the fact that maintaining good credit throughout my lifetime was the equivalent of having $100,000 or more at retirement. This is not rocket science. Just call your banker right now and discuss various loan options (home, car, trailer, etc.) and credit card and the applicable interest rate given various credit scores. Of course, you'll need to know your Score to do this. Do your own number crunching until your retirement age and you'll be amazed at what bad credit will cost you or how much good credit will save you. Bad credit will cost you more than good credit - it'll take more money out of your pocket resulting in less money to invest making you poorer when you retire. Right now, start today, "doggedly" rebuilding your credit. You need to have the same attitude about building up your credit as a "body builder" does with his or her body. You need to protect your credit as you would protect your family. No joke!

GREAT RECESSION OVERVIEW. Before we get into some of the various investing methodologies, let's take a quick snapshot (below) and review of the Great Recession from its beginning till the market peaked at 18312 on May 19, 2015. The DJIA previously peaked at 14165 on October 9, 2007 and bottomed at 6547 on March 9, 2009, a 54% decline. Most folks held on; others got out at or near the bottom. For those that held on, it was March 7, 2013 before they recouped their losses. For those that got out at or near the bottom and then got back in, it was a long time after the market was in a full-swing recovery mode. Why the late sell-off/buy-in? These folks were brow beat, their fortunes and futures trashed and they became emotional investment wrecks because they had no established plan on how to handle the good, bad and ugly of investing - they were shooting from the hip.

From the Great Recession's trough of 6547 to the subsequent peak of 18312, that's an impressive 180%. If you had the knowledge available to you that I'm providing and applied the principles herein, oh my! Obviously timing is never perfect and you wouldn't hit everything right, but following these simple principles that I'm sharing with you would have prevented you from suffering most of the bad and reaping most of the good. This is neither magic nor rocket science, just good sound investing principles.

Dow Jones Industrial Average

DOLLAR COST AVERAGING (DCA). During my career and in regards to investing, I basically had two types of clients: those who had already acquired their wealth and wanted my help in managing it, and those with whom I helped acquire wealth. In the first instance, the wealthiest client I had was one whom had just retired. He acquired his wealth by investing out of each paycheck, which is called DCA. In the next instance, my wealthiest client was one who was still working and we began a payroll DCA plan. Over the years, whenever this client paid off a bill, the DCA was increased by the same dollar amount. So, other than inherited wealth and just dumb luck, all of my clients accumulated their wealth a little at a time. This is a time tested methodology that never fails.

For most of us, our lives revolve around the paycheck. If we buy anything, accumulate wealth or go on a vacation, it is all done through the paycheck. Your financial success or failure in life will depend on how well you manage your paycheck. So, if you want to have a 100% success rate with 1:1 odds, then meet with your payroll clerk and immediately start a payroll deduction plan. If your employer doesn't have such a plan available or if you're self employed, do it via your checking account. The maximum allowable amount is preferable, but any amount will suffice just to get started. After awhile, you will become accustomed to 'never missing' the amount, so increase it. When any debt is paid off, never do nothing ... always increase your DCA contribution by the same amount. My suggestion: make your DCA as rigid as an addiction.

DOLLAR COST AVERAGING - DOWN. This is a different twist from DCA and it requires one to be cognizant of market conditions, mainly current trends and corrections. Now, given the fact that corporate economics evolve around profits, we know that in a perfect world the trend of the market would always be upward, or bullish. But, we know that's not the case. So, trends are either upward (bullish) or downward (bearish). In a bullish market, it never goes straight from the bottom (trough) to the top (peak). In a bearish market, it never goes straight from the top (peak) to the bottom (trough). There are always reversals, which are generally called corrections or retracements.

In this different twist of DCA, you can compound your returns by participating in the trends and corrections. In a bullish trend, increase your investment at the trough of the correction. For example, let's say you're investing $100 a month in a DCA plan. At any "significant" trough, say a correction of 33% or more, make a one-time additional investment of another $100 or more. Although a DCA plan will probably be invested in one of more mutual funds, I'm choosing Exxon Mobile as my example.

Exxon Mobile

Let's look at another example that I currently participate in, Wal-Mart. Although this is an example of me buying stock to build my portfolio, the same principle applies if it's buying mutual fund shares in a DCA plan. If you'll notice, this is a live representation of what I actually did, which was right before the trough of the correction. I bought in at $58.83 after a 33% decline and the trough was $55.54. You may be wondering how I got it so close. There's three things that were taking place. The first is that the end of the Flag pattern that had been forming would have been around my buy-in price. Second, a "recognized" Fibonacci Retracement ratio (look it up) would be in the ballpark. And, third, which was the real kicker for me, was that there had just been a big sell-off at the end, or at least what I perceived as being close to the end, of a current correction in an upward trend, which usually results in some sort of "bouce" afterwards. You may be thinking, "What if WMT kept dropping?" No matter, it was still a good purchase. If it kept going down, I would have continued with my strategic buying. What about the trend? By all accounts, it's still upward. Again, it's a moot point because it still coincides with my philosophy of increasing purchases with downward corrections whether stocks or mutual funds.

Wal-Mart

What about downward or bearish trends. As already mentioned above, I like increasing purchases when things turn sour ... the more frantic and chaotic the market becomes, when consumer confidence heads south, when everyone starts to exit the market en masse, then the more excited you should get. During bearish trends, normal or abnormal, always continue your DCA program. In addition, you may want to make additional purchases at predetermined drops in price. For example, decide beforehand that if your DCA plan is $100/month, then you will make an additional $100 investment every time the price drops 10%, 20%, 30%, etc. Or, for each 10% drop in price, you'll double your additional commitment, for example, invest an additional $100 after a 10% drop, then $200 after a 20% drop, then $400 after a 30% drop, etc. Determine a plan that works for you, one that you can sleep at night with, one that won't impoverish you along the way or deplete your savings/cash reserves/emergency fund or cause a disruption in your other financial planning endeavors.

DOLLAR COST AVERAGING - LUMP SUM STYLE. Here again is yet another twist of DCA that takes place over one's lifetime. Here's how it works. You create a monthly DCA savings plan, an amount of your choosing and financial comfort, which is specifically earmarked for periodic lump sum investing. The first question is, "Where does one invest?" That's the easiest question to answer ... you pick the mutual fund(s)/stock(s)/bond(s) etc. that you have an interest in plus it also meets your investment parameters and goals. The second question is, "How much does one invest when an opportunity pops up?" Well, it can be whatever you want. However, I'd suggest something methodical and thought out. The last question is, "When do I invest?" For a bullish trend, at the trough of a correction. For a bearish trend, at the trough of a correction. Wait a minute, I just said the same thing ... the trough. That's correct. For bullish trend corrections, the trough is at the end of a correction. For bearish trend corrections, the trough is at the beginning of a correction.

So, how does one know there is a correction going on or a change in trend (bullish to bearish or bearish to bullish), or even whether the trough has been or is about to be reached? Short of a dependable crystal ball, this type of investing requires a serious time commitment and a type of "trigger" system. Now, there's lots of triggering systems to use, from complex to simple. If you''ll notice, I said trigger, not timing. In reality, both can be used to accomplish the same desired results. However, I personally don't believe one can actually "time" the market as such a system is purported to do, or at least is perceived to do. I like to think of it in terms of a simple method one can use to assist in decision-making. For example, I like to use a Moving Average, such as the "250-Day Simple Moving Average of the S&P 500 Index," versus Current Pricing in making stock-based mutual fund decisions. As a matter of fact, I can use any number of days depending upon the volatility of the mutual fund that I'm following to give me the best results. I will be discussing this more later.

Below is a graph of Newmont Mining (NEM) showing a historical snapshot of exactly what we're talking about. You may want to glance over the graph/notes before continuing because there's a lot of stuff on there. The graph is showing a bearish trend with five (5) price points (PP), that is, places to do lump sum investing. Although we have the privilege of seeing things after the fact, I'll discuss how these price points can be determined and acted upon while this is taking place. I'm using a combination of two indicators to determine the "when." The first indicator is the curvy line, which is a simple 50-day moving average (50-DMA). Why did I use 50 days instead of 40, or 60, or 100? Well, the best performing time span can only be discovered by trial and error. Because of price movements and volatility, a time span that works great on one stock/mutual fund may not work best on another. The second indicator is using Fibonacci Retracement (FR) ratios. Actually I'm using my own personal rendition of FR and ratios without displaying the FR graphic. So, if you're a FR guru, don't criticize me because I used a creative license to stray out of the normal bounds of usage. The point is, you can use any indicator(s), whether industry accepted or your own creation, to formulate a "buy-in" trigger.

Each PP is at a trough. Afterwards, the current price significantly closed above the 50-DMA, which is confirmation that this is a valid PP for buy-in purposes. However, if you had "preset" ratio triggers, you may have bought in prior to getting this confirmation. Still confused? Let me continue with more elaboration. Let's take a look at "Price Point #1: $40.24" (PP1). The previous peak was $66.13 and previous trough was 46.20. The percent/ratio decline from the previous peak was 39%. The percent/ratio decline from the previous trough was 13%. I'll refer to this ratio combo as 39/13. Above I referred to having preset ratio triggers. What if you had a trigger of 35/10? Well, you would have met your trigger and bought in prior to the exact bottom of the trough price of $40.24. What if your trigger was 35/10 with confirm? You would have bought in after the exact bottom of the trough price of $40.24 and after you received confirmation when the current price closed significantly above the 50-DMA. I hope you can see how this method plays out and the vast number of simple options you can create to build a portfolio. For grins, here's the rest of the PPs and ratio combos - PP2: 52/36; PP3: 36/19; PP4: 34/15; PP5: 43/12.

You can also divert from the prior examples, say, only use a ratio trigger based solely on the percent decline from the previous trough, with or without confirm. Why? Concerning importance, declines based on a previous trough is much more important than being based on the previous peak. Otherwise, it defeats the purpose of this methodology of lump sum purchases at declining prices.

Newmont Mining

SELLING STOCK OPTIONS. Buying and selling stock options can be very rewarding, but they are quite different. The most rewarding - and riskiest - is buying options, which I will not be discussing and is not recommended for the vast majority of investors. Selling stock options, on the other hand, is a possibility for those that want to put in the time to learn the pros and cons. I periodically sell stock options as an additional income stream, but I am also very choosy on the options and underlying stock that I pick. If you choose to do this, learn it very well, proceed cautiously and use only a small percent of your invest-able cash but yet be well-financed.

MARKET PRESENCE - IN or OUT. The masses invest in mutual funds - you probably do so too. The industry refers to these as passive investors, that is, they don't take an active role in how their money is invested. They assume all is well, periodically take a glance at a statement, assume the mutual fund will perform as expected and that the end results will produce the desired effects when the time comes. This has pretty well become the standard in investing. Is there anything wrong with being a passive investor? Certainly not. Is there a better way? Duh, of course, but there are trade-offs ... you'll make more money as an active investor but it'll take more of your time. The extent of that trade-off is a personal choice. Mine is determined whether or not the fish are biting and whether it's hunting season.

Here's just one method that I currently use to help me make one decision and one decision only about my stock-based mutual funds and retirement plans, "Should I stay invested or should I exit the market and go into a safe haven such as a money market fund?" With this simple and little-time-required method, I really don't care what the market does - it keeps me in when the market is doing well, it gets me out when it's not, and it gets me back in when it starts to do well again. From this perspective, it's irrelevant if the market goes up or down. When I take action based on this, I will post it on Facebook.

Here's how it works. My preferred indicator is the broad market index, the S&5 500 Index, along with a 250-Day Simple Moving Average (250-DMA). Why do I use 250 days instead of, say, 200 or even 300? Well, after looking at various scenarios, 250 days gives me the frequency, or lack thereof, that keeps me in/out at my comfort level. The 200 day average, for example, requires me to follow it more closely and there's a higher tendency to get whipsawed, which I really don't like and try to avoid. The 300 day doesn't seem to be "sensitive" enough for me. So, when the current price closes below the 250-DMA, I get out and put my money into a safe haven such as a money market account. When the current price closes above the 250-DMA, I get back into the market. Now, am I Johnny-On-The-Spot? Sometimes yes and sometimes no. It just depends if it appears to be a decisive move or not. I do get whipsawed and have to make short-term reversals, but that's part of it. You'll see (below) the graph going all the way back to the market's peak just before the Great Recession along with "In/Out" markers.

Who knew the Great Recession was coming? God did. Did He tell you or me? Well, I don't know about you but I can assure you I'm not on His call list. I'm guessing there were trillions of dollars lost. Some investors recouped by holding on. What else are you going to do when the market falls off the grid? If you were one of those who just held on for the roller coaster ride, here's some interesting facts. The market peak prior to the crash was on October 9, 2007 at the price of $1565.26. You had to wait for five (5) years, five (5) months, and 24 days until April 2, 2013 to break-even.

Not knowing what to do because there was no end in sight and no plan, some investors panicked and got out at or near the bottom price of $666.79 on March 6, 2009, a 57.4% loss. For those investors, what would it take to break-even again by April 2, 2013 just like those that held on? A gain of 234.75%! Holy Moly! Well, we know that never happened. That wealth is permanently gone for those folks; they will never recoup those losses during their lifetime.

What if you were using the chart below or another of your choosing? Well, if you choose to use some sort of indicator, just be sure it has been tested, has a good track record and it meets your needs. Assuming you had used the 250-DMA, I took all of the prices at the In's and Out's and calculated the outcome from the peak on October 9, 2007 to the subsequent break-even point on April 2, 2013. Your outcome would have been an additional gain of 34% or an additional simple annual yield of 6.18% since I excluded compounding, interest and dividends. Here's another way of looking at it. Consider the market price as dollars in your pocket. You would have started with $1,565.26 and ended up with $2,100, a gain of 34%. However, I think the greatest advantage was the peace of mind, comfort, lack of anxiety and worry that such a system brings.

Standard & Poor's 500 Index

PONDER CURRENT EVENTS. It is Saturday, June 25, 2016 and I'm adding this section because Brexit - England exiting the European Union (EU) - took place two days ago (Thursday) after trading hours and crap hit the fan on Friday. On Thursday, I think investors "assumed" England would never exit the EU because the DJIA closed up 230 points. But, reality and uncertainty hit on Friday and it closed with a 610 point loss. So, it seemed appropriate to briefly discuss upcoming events that may have worldwide consequences. In reference to Brexit, unless you live in a cocoon or desert island, you probably heard about it taking place. But, you probably gave no more consideration to it than what you were going to eat for dinner on Thursday evening. If you woke up on Friday morning and saw the market tanking, well, you were too late to move your mutual funds to a safe haven because mutual fund companies won't fulfill any requests until after the market closes. Why did the markets of the world tank? Easy, because of the EXTREME uncertainty that lies ahead!!!

Here's the point: active money management demands that you "ponder" upcoming events to discern whether or not they will affect your investments. What do I mean by ponder? Well, think about what the possibilities are and how they may affect your investments, ask others about it, call your broker or financial advisor and get their feedback, etc. Don't be oblivious to what takes place domestically or internationally that may impoverish you! If you already have a good plan in place like I discuss under this section, then there's not much else to do. Or, is there? If you allow things to play out and just allow your strategy to kick in as things unfold, then you'll probably do just fine. However, events such as Brexit are a different creature: who knows how it'll affect the markets and economies of the world ... this has never happened before; who knows how long it'll take the markets to adjust; no one knows the extent of the repercussions; normalcy in making trading decisions based on fundamental, technical or other forms of analyses may be out the window for the near future, displaced by unpredictable market swings and investors getting whipsawed much like we saw during the trough of the Great Recession; etc., etc., etc. Or, Monday rolls around and everything will be business as usual.

So, here's a healthy and easy way to conclude what to do. Either keep your strategy in play, or, if you're totally unsure and uncomfortable with any consequence, just stay on the sidelines (exit). Now why would I suggest this if you have a great working strategy in place? The whole purpose of any strategy is to preserve your investments. If the markets did not react to Brexit as they did, then you could just jump right back in. That's what many investors did just before the year 2000 rolled around. However, if the markets go into shock as they did, well, you're out of harm's way and you can just go fishing and not worry about it. When all the dust settles and normalcy returns, allow your strategy to determine when you get back in.

PERIODIC INVESTMENT OPPORTUNITIES. Every once in awhile, I'll come across an investment that I perceive is about to do something significant, based solely on my technical charting. I may or may not invest in it, but I will nevertheless share and explain what I'm seeing on Facebook. Here's my disclaimer: "You are strongly advised to consult with your financial advisor if you are contemplating investing any money into any investment opportunity that I share." Even less frequently I come across what I perceive as an "exceptional" investment opportunity. Although time does not permit me to look for them as a matter of practice, I do periodically come across them as a result of my usual investment management routine. I will share everything I know about the investment, graphs, my interpretation thereof, how one may potentially profit from it and the trade-offs.

To illustrate what I'm talking about, here's some recent examples.

Investment Example #1 - Shanghai Stock Market Index

Shanghai Stock Index

The Shanghai Index can be compared to the U.S. Dow Jones Industrial 30 Index. What you see is a downward sloping Pennant shape in the price movement of the $SSEC Index. Pennants are typically formed during short periods, a consolidation of price movements as the upper and lower trend lines converge, and then the price ultimately breaks out in the same direction before the Pennant began. This one began in July 2010 and ended in July 2014.

Take notice of the price movement between October 2013 and July 2014. This price movement (consolidation) was much more narrow and it was at the top half of the overall trading range. Every "technical" bone in my body told me this was going to break to the upside, which it did on July 23, 2014 with a closing price of 2078.49. It peaked on June 12, 2015 with a closing price of 5166.35, a gain of 148.56%.

Investment Example #2 - U.S. Dollar

U.S. Dollar

Prior to this Pennant formation for the U.S. Dollar, it had been in a decline. After breakout, the price went in the opposite direction - upward - which is not the norm and contrary to typical Pennant behavior. This formation started in November 2005 and ended in September 2014. The clue that gave some insight into its intended direction began in January 2012 when its trading range became narrow, trading in the upper half of the trend, and went completely sideways until it broke upward on September 5, 2014 with a closing price of 83.80. It hit a high of 100.04 on March 16, 2005, a gain of 19.38% or annualized gain of 37.04%.

Now you may be thinking, "That's nothing to brag about." Well, I guess it just depends on your perspective. The good news is that this may not be the rest of the story. I'll keep watch and do an update in the months to come to see how it all plays out. If you'll notice, the price movement has gone sideways since March 16, 2005 in what some call a Flag pattern. In a typical Flag pattern, the Flag part (consolidation) is at half mast. The bottom half of the pole is the price movement from breakout to the Flag. The top half of the pole is the price movement above the breakout. Oh wait, that hasn't happened yet! So, if technical analysis holds true, we've only reached half of our gain on this investment and the Index could move into the 109 price range.

Investment Example #3 - Euro

Euro

The Euro is the exact opposite of the Dollar, so no analysis of this is needed.

Investment Example #4 - McDonalds

McDonalds

I'm going to call this formation a Reverse Pennant or Expanding Pennant. In a typical Pennant, the trend lines converge. In this formation, they diverge. And, in keeping with Pennant theory, the trend prior to this formation had been upward, and as you can see it continued upward. It started to reveal its intention in March 2015 when the consolidation tightened in the upper half of the trading range until it broke out and upward on October 5, 2015. What confirmed and secured the breakout was the massive "follow-up" trading volume.