Year: 2020

Robo advisor Portfolio – Start Investing Without Fears

Robo-advisors are becoming mainstream, which is good news for investors who are looking for low-cost advice. Investors may find offers for socially responsible investment portfolios, fully digital financial planning tools.

Basically, the robo advisor portfolio is created by professionals using advanced investment algorithms. These programs enable them to pick investments’ selection that will meet your goals, level of returns you want, risk you are willing to take, etc.

In other words, robo-advisor is an algorithm that manages your portfolio. The benefit is that your money is invested efficiently. That means you have help to minimize your risk and taxes, hence, your rewards will be maximizing.

Robo-advisor can be a great alternative for all of you aren’t DIY types and prefer to rely on an experienced professional. The process is quite simple, all you have to do is to deposit your money into the robo-account. Some will allow you to start at just $500 or less. Based on your answers in questionnaires, for example, investing goals, risk tolerance, when will you need the money, your robo-advisor portfolio will be built. It will pick the assets, usually some low-cost ETFs, and create a suitable portfolio for you.

The robo-advisor portfolio is very popular these days, and it will be even more in the next few years.

Who makes the investment decisions for the robo-advisor portfolio?

Honestly, it is maybe the best way for Millennials that are terrified of the stock market, to start investing. With the robo-advisor portfolio, technology gave the opportunity. By using some robo-advisors you’ll be able to pick your stocks or funds on your own, that is one solution. The other is to allow professionals to build your investment portfolio.

The robo-advisor portfolio is handled by investment experts.

They make investment decisions for you. They can add or remove investment from your portfolio, or adjust exposure to a special asset class. Besides, you will have an automatic rebalancing to keep your portfolio from straying too far away from the allocation targets that are established. Your robo-advisor portfolio will be built to invest in the markets that give the greatest value.

How does a robo-advisor work?

Let’s say it is a service that uses algorithms, invest your money into suitable investments, make adjustments as your circumstances and the market development. And it will be done cheaper than any human professional investment advisor. The truth is that you may choose any asset class to invest in, but the majority of robo-advisors primarily invest in ETFs. Nevermind, it is easy to find one that is good for you in case you would like to invest in something different. Investing through robo-advisors provides you to take hold of your finances without learning about all outs or ins of bonds, stocks, ETFs.

Moreover, your robo-advisor portfolio is built for your personal goals, based on your personal expectations, so suitable only for you.

Robo-advisor helps you handle your investment without the need to ask a financial advisor or self-manage your portfolio. Everything needed is to open a robo-managed account and then add essential information about your investment goals. Robo advisors then use the data to provide asset allocation and build a diversified portfolio.

After that, it makes the changes to the investments required to adjust your portfolio to a target allocation. Some robo advisors are able to sell some assets at a loss to balance gains in other assets.

It is a low-cost software product that provides you to put your portfolio control on autopilot. But you must be well informed to decide whether it is best for your investing strategy.

Advantages of robo-advisors

Making a robo-advisor portfolio can be a great answer for beginners or young investors. Since they lack the financial knowledge it could be easy handling their portfolio online with limited or no human assistance. But it is also suitable for professionals who don’t have sufficient time to manage their investment and rather put their portfolio on “autopilot.”

Robo-advisors are helpful for investors who have a traditional asset allocation with 60% stock and 40% bonds, for example, to rebalance their accounts.

We would like to highlight the main advantages. The lower fees is one of them. For example, you want to invest $10.000. A professional advisor will charge you 1% or $100 every year no matter if your portfolio is going up or down. Moreover, if such recommends you mutual funds, which are costly, and stock trading, well it’s more likely you’ll end up in losses. By having a robo-advisor portfolio you will pay (with the same investment of $10.000) less than 0.50% or a lot below $50 which is a fee for ETFs, for example.

Maybe the main advantage of having a robo-advisor portfolio is that robo-advisors almost never demand a minimum balance. That gives anyone over the age of 18 possibilities to invest. Also, you will get a free automatic portfolio rebalancing. Just count how much you have to pay to some professional investment advisors.

Robo-advisors are accessible 24/7.

Disadvantages

A robo-advisor portfolio isn’t suitable for every investor. For example, some prefer humans. But some robo advisors will offer you live assistance at a higher cost, of course. But that kind of support is completely online, through the web. There is no live person to chat with you. So, if that is what you want, the robo-advisor isn’t for you. Also, investors who need advice on how much to save or how to allocate investments in other accounts would never use robo advisors.

Benefits of robo-advisor portfolio

It provides you to avoid investing errors, for example, emotional trading. That is one of the biggest causes of investors to get poor outcomes. Investors are trading led by emotions. The software will never do such a stupid mistake. The other benefit is that you can automate the whole investment process. Do you have to make changes to your portfolio? Is it time to invest less or more in some sectors? Is the right time to set trades? There is no need to worry about that. The robo-advisor will do all of these for you.

In fact, advisory companies require a tremendous amount to initially invest and you can be faced with a recommendation that isn’t in your best interest. Robo advisors will never do such a thing.

Bottom line

It is more likely that your robo-advisor portfolio will consist of mutual funds rather than stocks since it follows a passive investment strategy based on modern portfolio theory. You know that theory, we wrote about it already, it is about the importance of asset allocation to stocks or bonds.

Robo-advisors will rebalance your investments automatically. That is a nice feature if the balances of your investment change from your initial pick. The software will buy and sell shares to rebalance the robo-advisor portfolio to your favored allocation. For example, you started with a 60% stock and 40% bond asset allocation.

But stocks increased the value and your portfolio percentages grow to 80% stocks and 20% bonds. The software will sell some stocks and buy more bond funds to rebalance your portfolio. You will have your portfolio with a 60% stock and 40% bonds.

Moreover, robo-advisors will sell losing investments and replace them with some others, to offset gains and lessen your tax bill. This strategy for taxable investment accounts is known as tax-loss harvesting. If you are seeking low-cost managing for your investments and alternative to a traditional high fee financial advisor, a robo-advisor can be the right choice for you. Even if you’re a DIY type of investor.

4th February 2020
Asset Allocation: A Method To Use

Before you start with asset allocation you have to choose what kind of investor you want to be. How do you see yourselves, like conservative, moderate or even aggressive investors?

For any investor, filling the investment portfolio with a proper mix of stocks, bonds, cash, real estate, and other investments is critical to financial well-being. This mix is known as “asset allocation.” The tricky part is that you cannot find a unique one that could suit all. Every investor must find own based on risk tolerance, timeline, and financial goals.

But even if you already defined what assets you want in your portfolio, it is still easy to get lost. Well, you want to optimize your portfolios, but you are gathering news every minute. And you are changing your decisions based on them. So, the consequence is that is more likely you have some “confused” portfolio, an assemblage of everything instead of a well-diversified portfolio.

Your portfolio has to be built with the goal of delivering income.

The asset management landscape is changing

First of all, In 2020 we can expect a huge rise in assets. It is predictable that economies in, let’s say, Asia, Middle East or Africa will grow faster than in areas with developed economies.

Extension in assets will be driven by several trends. One of them is the increase of wealthy individuals in those areas. So, we can expect the asset management landscape in 2020 will be changed. What investors have to do? Investors have to adjust their portfolios to new circumstances.

The investors should consider what caused an unusual change of growth and returns last year. Will the same conditions continue into this year? Will global economic growth returning to the trend? What about trade tensions? Is it over? All of this must influence investors’ decisions when building the investment portfolio and asset allocation.

The effect of asset allocation

The purpose of diversification is to avoid extremes. Asset allocation has to provide investors to score high returns, reduce volatility, protect them to have significantly lost capital.

You can accomplish this by asset allocation. All you have to do is to divide your investments into different classes of assets. Spread it into stocks, bonds, real estate, and cash. They will act separately from each other and your investment will be protected. Of course, you can spread your investment into cryptocurrencies, gold, commodities, or something else. Asset classes can be further divided into several sub-sectors.

Asset allocation is extremely important. Some studies reveal that asset allocation has a tremendous contribution to a portfolio’s overall returns. Even bigger than individual stock pick. Economists Paul Kaplan and Roger Ibbotson wrote that more than 90% of a portfolio’s long-term returns were generated by asset allocation. So, asset allocation has an important role in long-term returns.

How to start?

The first important step is to determine the target return. The issue is simply – by how much your portfolio has to grow to match your financial goals. But think about another issue too – what is your risk tolerance. How much risk are you able to take to gain a higher return?

You have to do all of this before choosing the investment strategy. If you are a buy-and-hold type you’ll be able to allow a higher level of risk. You will have periods with lower returns but they will be substituted with periods of higher-than-expected returns. So, it’s easy when you are an investor with a long horizon. But if you are not, if your time horizon is shorter, you’ll favor a lower risk portfolio.

Conservative Investing

Conservative investors tend to hold bonds. Their portfolios consist of 60%-80% in bonds of different maturity dates, different issuers. Well, bonds are not without risk, to be honest. Over the past few years, interest rates are rising and it causes bond prices to fall. The bond market can crash as well as the stock market. Do you remember 1979/1980? By some calculations, investors had losses more than $400 billion in total.

For example, baby boomers. They are inclining to conservative asset allocation. Their portfolios consist of over 70% in bonds. They control about 65% of all bond assets, by the way.

Modern asset allocation

There is something named modern portfolio theory and consequently, modern methods of asset allocation. This means a huge range of asset classes and sub-asset classes into portfolios.

At its core, modern portfolio theory is all about diversifying your asset allocation.

Modern portfolio theory is assumed to help reduce return risk by diversifying into many assets. But the first assumption of this theory is that asset classes are not in correlation. The point is to look at your investment as component parts of a whole. To be more clear, if one asset drops, the other will jump. It is just like a permanent zig-zag. Each investment is a moving gear. According to this theory, investors should balance a potential risk and returns but in the manner on how they might influence the risk and returns of the overall portfolio.

Start investing

Yes, you can do that, you can turn plans into dollars.

Just create portfolios to maximize the anticipated return based on an acceptable level of risk.

Don’t time the market. You have to look at your investment in the long term since the time in the market is very important. Do not let violent fluctuations or volatility disturb you. You are investing with your goal in mind.

Yes, you are more satisfied with less risk and nervous with grown risk. Moreover, you prefer the portfolio with the least risk, but one with the highest return possible and with the lowest risk.

Modern portfolio theory asserts that the risk for individual stock returns has two components: systematic and unsystematic risk. Systematic risk is the market risk and you cannot avoid it. For example, recessions, interest rates, wars are that kind of risk. The unsystematic risk is specific to individual stocks. Management changes, lessening the company’s operations, and similar, are unsystematic risks. You can lower this type of risk if you have a well-diversified portfolio and good asset allocation.

Proper portfolio building is difficult. It isn’t easy.

Asset allocation is portfolio diversification

The goal of asset allocation is to maximize the returns of a portfolio and reduce the risks.

Stocks will give you strong returns over a long time but they are volatile and inclined to periods ups and downs. But the combination of national and foreign stocks is healthy because sometimes one country is overvalued while another country is undervalued.

There are two main approaches to asset allocation.
Strategic Asset Allocation
Tactical Asset Allocation

Strategic asset allocation indicates holding a passive diversified portfolio. Meaning, you will not change your asset allocations based on market conditions. You will hold, add money and re-balance.

If you choose this strategy, you have to build a diversified portfolio of index funds or ETFs. From time to time you’ll re balance it. For example, when one asset class is increasing and another is decreasing in price. All you have to do in order to maintain the same weighting is to sell the increasing one and buy the underperformed assets.

Tactical asset allocation is complex and relates to almost permanent adjusting your weightings to different asset classes. You have to recognize where good risk/reward ratios are in the market.

The benefit is that you can really reduce volatility and increase returns. Though it’s more tending to individual failure, and if you do it badly you will decrease your returns.

Bottom line

Everyone would ask what’s the best asset allocation for a certain age? Here is one simple way to calculate it.

Subtract your age from 100 – that’s the percentage you should keep in stocks. For example, if you’re 40, you should hold 60% of your portfolio in stocks. If you’re 80, you should hold 40% of your portfolio in stocks.

But some advisors would recommend you to subtract your age from 110 or even 120 since people are living longer and longer.

When you choose what kind of investor you want to be whether conservative, moderate or even aggressive, it is time to focus on the asset allocation method. Spread it into allocations over particular investment categories: large, mid, small, and foreign stocks.

Balanced asset allocation in your portfolio is the right way to become a successful investor.

3rd February 2020
UGAZ Stock and DGAZ Stock The Differences and Relations

The principal objective of UGAZ is to increase the daily performance of UNG by 3 times. The main objective of DGAZ is to produce profits from the losses in the UNG fund.

For everyone who wants to trade UGAZ stock and DGAZ stock the essential part is understanding the nature of them.

First of all, there is no dilemma should you invest in or trade UGAZ stock and DGAZ stock. There is no such thing as investing in UGAZ stock or DGAZ stock. Forget them if you are an investor, they are not for a long haul. The expense ratio is 1.65% so it is more likely that you will have zero chances to be profitable if you try to invest in them. Let’s say this way, according to historical data, over a period of one year they had a negative return of almost 56% and the negativity is increasing as times go by. For three years, for example, you can lose around 90% of your investment.

So, to summarize, UGAZ stock and DGAZ stock is for short-term trading.

Catch the trends

Trading UGAZ stock and DGAZ stock can turn into a profitable project since you can efficiently track the supply and demand. So, it isn’t hard to catch the trends and make a fortune. Maybe not quite a fortune but a lot of money for sure.

Remember one extremely important thing linked to UGAZ stock and DGAZ stock trading: there is an extremely high risk involved. No one will recommend you trade them but still, there are so many traders doing so.

How to trade UGAZ stock and DGAZ stock?

Okay, let’s look into the Natural Gas Sector. For that, we have to get into UNG, which is the United States Natural Gas Fund. It is an ETF composed to give investors exposure to natural gas and it is a highly volatile fund to trade. If you don’t have a stomach, forget the profit gained from this trading. Modern portfolio theory says that UNG is a fantastic solution for traders who are 100% sure that natural prices are able to rebound. Anyway, traders have to track the prices of natural gas, weather reports (that will give you a view into supply and demand). Don’t be confused!

Cold weather suggests an increased demand for natural gas, hence the rising prices.

Is UGAZ an ETF?

There is a lot to misunderstand energy ETFs and ETNs (exchange-traded notes).

The main energy ETFs are The United States Natural Gas Fund (UNG) and The United States Oil Fund (USO). And there are leveraged energy ETNs that tracking natural gas prices. These cover the VelocityShares 3X Long Natural Gas ETN (UGAZ) and VelocityShares 3X Invest Natural Gas ETN (DGAZ).

Let’s make clear what is an energy ETF. It couples investments in oil, natural gas, and alternative energy. So, it isn’t hard to diversify your energy investment portfolio.

Supply and demand have a great influence on crude and natural gas prices. Their prices tend to fall when the supply is bigger than demand. When we have more supply than demand in the market, the prices will rise.

Politics and crises also can affect these prices. Any uncertainty on the political field such as wars, governmental changes or even tensions will send the crude oil price higher.

We mentioned the weather. The crude oil and natural gas prices will go higher when temperatures could cause a spike in price. But also, when the over the warm periods, when we have an increasing demand for cooling, the price of natural gas can rise.

How to trade UGAZ and DGAZ

Both UGAZ and DGAZ strictly watch UNG stock.

The principal target of UGAZ is to increase the daily performance of UNG by 300% or 3 times. For example, if UNG price raises 1%, UGAZ will manifest a daily gain of 3%. It is better to trade UGAZ when there is bullish sentiment on UNG.

The main objective of DGAZ is to produce profits from the losses in the UNG fund. DGAZ increases the losses by 300% inversely. For example, if UNG price drops by 1%, DGAZ will bring you a profit of 3%. Trade DGAZ when there is a bearish sentiment on the UNG fund.

It is obvious that UGAZ and DGAZ have 3:1 leverage. Great, because that might boost your profit. But, keep in mind, that profit is in direct proportion with the risk.

Trading UGAZ stock and DGAZ stock means to pay attention to the UNG fund. It is the prime ETF that handles UGAZ and DGAZ as leveraged ETFs. That will provide you a view into the direction that this market is going. You have to evaluate should you trade UGAZ or DGAZ because they will give you a profit for opposite moves.

UNG is really a difficult exchange-traded fund.

Firstly, natural gas is a very volatile stock. Further, UNG isn’t directly related to natural gas in the physical sense of it.

Moreover, it doesn’t pay dividends. It uses future contracts and OTC exchanges to detect the natural gas price. Despite the fact that UNG may not be a good investment, UGAZ and DGAZ may be a good fit. How is that? As we said before, UGAZ stock and DGAZ stock are not suitable for long-term investing. And since you will hold your position for a few days or less, you are not interested in dividends and moreover, if the UNG fund has long-term decline, that will not affect the short-term volatility.

How all of this work?

ETNs provide tripled leverage for one trading day. Let’s say the natural gas price increases by 3%, UGAZ will grow by 9% and DGAZ inversely will drop by 9%. That’s why trading UGAZ and DGAZ stock is for short-term traders only. If you plan to invest in them for the long-term, your chances to make a profit are zero.

Think about UGAZ and DGAZ as up-gas and down-gas. When the natural gas price is going up, it will like UGAZ. Hence, when the price is going down, you will profit from trading DGAZ. Simple!

Real-life example

On January 30, DGAZ traded $285.20 which was $18.88 more from the prior trading day. DGAZ stock rose by 6.62%.

It rose from $267.50 to $285.20 and gained 3 days in a row. Will it succeed to continue gaining or take a break for the next few days? We’ll see. Maybe the best example of how this stock is volatile shows the fact that during the trading day the stock oscillated 8.08%. A day low was at $271.09, a day high was at $293.00. In six of the past 10 days, the price up by almost 44%. But volume fell by almost 20.000 shares and it can be a sign that something is going to change in the next days. Falling volume is always a signal of such occasions.

The price of natural gas went lower over the past 3 months, above the 5-year average. Increasing sellings are noticed in the futures market. The current data was not bearish, but the market reacted negatively.

That is how UGAZ stock and DGAZ stock work.

Can you short UGAZ stock?

You can always go short with the leveraged ETF pairs. A popular strategy over the years has been: short both sides of a paired leveraged ETF or ETN, and get the cash. The point is to short the long position on leveraged ETF and short leveraged ETF for the same sum. After that, just watch how volatility can benefit you.

For instance, if we examine imaginary the leveraged ETFs associated with natural gas and we see one is down almost 55% over the last 12 months, while the other has fallen 75%. A trader can short both sides for, let’s say $10,000 each, they easily could find themselves up to $12,900 off the $20,000 total short position. That’s a pretty good gain.

This is true most of the time. But you have to guess the right time frame. Of course, it is always a matter of how fat your account is. Everyone who can stay in the game long enough will be a winner. But it is a big challenge.

Shorting both sides isn’t an easy money way. Shorting makes sense only if you do it with a small part of your portfolio and you have a lot of cash. In any other case, it can be extremely dangerous when shorting both sides of a leveraged ETF.

31st January 2020
The Black Swan Event – Is it Coronavirus?

No one can predict the Black Swan event, but this coronavirus is a danger in many ways.

The question could coronavirus be the Black Swan event for the stock market, started with the increasing number of infected people. But this reason isn’t the only one that generates this question. Numerous companies temporarily shut down their operations in China. According to CNBC, General Motors’s spokesman sent an email that stated the company said to its employees that it will keep its factories in the country shut through Feb. 9. General Motors is the largest U.S. automaker in China. Also, Starbucks temporarily shut down almost half of the existing locations in the same country. Moreover, if the infection progresses, the company will close more without hesitation, said its CEO, Kevin Johnson. Google is another large company that temporarily closed its offices, and Microsoft employees in China will work from home until Feb. 9. Amazon and Google have restricted employees to travel to China. Also, many airline companies slashed or stopped their flights to China. All due to government-imposed travel bans in China.

Markets reaction

Markets are reacting to the potential consequence of the coronavirus blast.
Global markets sold off on Monday but started to stabilize on Tuesday. The stocks are still close to record highs reached recently. But the comparisons with the 2003 SARS is out the question. Though, everyone makes them.

Could coronavirus be the Black Swan event for the markets?

Let’s say this, in 2003 China growth was reduced by 1 percentage point. But the growth rate of China’s economy since 2003 increased and China has a bigger role in the worldwide markets today. Maybe the markets shouldn’t be so careless this time.

The coronavirus could have a far more serious impact on the world economy than the SARS epidemic in 2003. At the end of 2002, the Chinese GDP was estimated at around $1.5 trillion, 4% of global GDP. In 2019, the Chinese GDP was $14.3 trillion and above 16% of global GDP. In the time of the SARS epidemic, China just joined the World Trade Organization. That’s the main difference.

Influence on the global economy

According to some estimates, today even a small downturn in the Chinese economy can cause volatility in the global oil market and global trade, for example.
Firstly, the number of tourist and business trips to China is already declining. Further, China’s GDP growth rate could decline by 0.5% to 5.6 percent this year, as a result of the outbreak of the virus corona epidemic, according to some experts.
As we can see, the coronavirus has already impacted the world’s commodity markets, including the oil market.

The price of Brent crude oil has fallen 14% since the beginning of this year, largely due to news from China and continues to decrease.

But could it be a Black Swan event?

The coronavirus is an understandable concern to stock market investors. Since the stock market is overbought and in such a condition, it can be extremely unsafe and vulnerable. Some investors are convinced that the coronavirus epidemic could cause the Black Swan event in the markets. Moreover, they started to buy on dips thinking that this event is temporary and will not live for a long time.

We all hope so since medical science has dramatically advanced and the virus could be contained. But who can predict what is going to happen in the markets? The Black Swan event could happen or not. There is a 50/50 chance, in fact.

Investors should be realistic. The coronavirus can be a seasonal event and by spring it can be contained. But as we said, even such a small and short-term event may cause changes in the stock prices. Of course, when the number of cases is increasing, the stock market is decreasing. The main problem to the market is that this virus appeared in the time of bullishness in the stock market. This is a critical point.

It can be the Black Swan event for the Asian market

Asian markets fell Thursday, January 30. The reported number of coronavirus infected increases every minute. That makes difficulties for the global economy. Hong Kong’s Hang Seng Index (HSI) had its worst day since August this year on Wednesday, January 29. The index lost 2.1% and it already has fallen over 5% in January.

Japan’s Nikkei 225 sunk by almost 2% on Wednesday. South Korea’s Kospi fell 1.5%. But Taiwan is the biggest loser among the Asian markets, Taiex fell 5.5%.

So, the virus can really disrupt China’s and Asian economy. How far it will spread? Will it affect the global markets?

Several circumstances could lead coronavirus to affect asset prices on a global level. On Monday, January 27, the US stocks dropped significantly gaining a new low record since October last year. The fear is rising. Investors are moving their holdings from risky stocks to safe havens. The coronavirus affected the global markets. Is it a Black Swan event? The risk is high and also the possibility. The influence of coronavirus on global stock markets is than SARS could ever do.

How is it possible the coronavirus affects markets so quickly?

First of all, the news is spreading very fast creating reasons for turbulent market moves. The virus’ is spreading over the world fast and leads to market downswings. The global supply chains are interconnected tighter than ever. The trade networks are complex and, at the same time, vulnerable. So, some kind of domino-effect is very possible. If the coronavirus spread extensively that will influence the companies based in China.

Also, if the coronavirus continues to spread, it could reflect in stock prices. Well, one of the biggest global economies is affected already.
JPMorgan decreased its GDP estimate for China on Wednesday, indicating a “demand-side shock” caused by the coronavirus.

Thus, the positive 2020 economic predictions can be undone very easily due to coronavirus.

30th January 2020
Volume Weighted Average Price (VWAP) – All Calculation, Practices, and Mistakes

Volume Weighted Average Price is an indicator that takes into account both stock price and trade volume.

For all of the indicator followers, Volume Weighted Average Price is a very important indicator. VWAP (Volume Weighted Average Price) is quite simple to calculate. Traders are using Volume Weighted Average Price to check if the price at which they traded was good or maybe the price was not and they made a wrong trade. Also, intraday traders will use Volume Weighted Average Price as a kind of indicator. As a contrast from the moving average, VWAP provides traders to get price points of interest, to estimate relative strength, and recognize best entries and exits. They will buy when the price is above the VWAP.

What is the Volume Weighted Average price exactly?

Окаy, let’s say you have to compare two obviously good stocks. What you have to do? The answer is logical, you have to check its price trend and the trading volume. Checking the price is reasonable, but why would you check the volume?

Well, the volume is important because it shows how many takers the stock has. Who would like a stock with a few traders? No matter if you think the price is reasonable, you would like to know the volume. Therefore, the VWAP was designed to give traders an insight into the stock price and volume. These are very important info that provides every investor should make a decision whether to buy or not a particular stock.

The formula for calculating VWAP is

VWAP = (Cumulative (Price x Volume)) / (Cumulative Volume)

It will show you the average price that investors have paid for that stock during the trading day. So, you will know how other investors are positioned. Moreover, this measure is used by algos also. They use it to scale into positions. By using it, the algo can break up its position size into segments so as to reduce its impact on the market.

Well, the philosophy of how VWAP is used can lead to various types of trading systems.

VWAP calculation

It is done by charting software and reveals an overlay on the chart representing the calculations. This design is in the form of a line, similar to the moving average. How to calculate that line?

You have to determine your time frame, for example, 1 minute.

Find the typical price for all periods in the day. You can calculate the typical price when adding the high, low and close prices and that sum you have to divide by 3.

The formula is

(H+L+C)/3

H – high
L – low
C – close

It’s not finished yet. The number you got as a typical price now multiply by the volume for the chosen period.

TP x V

TP – typical price
V – volume

Now, you will need a cumulative TPV. You will attain this by constantly adding the most current TPV to the earlier values. The exception is the first period from obvious reasons, there was no prior value. This number is becoming larger as the day is coming to an end.

Calculate VWAP based on your data and use this formula:

cumulative TPV/cumulative volume

This will give you a volume-weighted average price for each period. Now, based on this data you can create the line that covers the price data on the chart.
It is better to use a spreadsheet to track the data in case you are doing this manually.

Time to buy according to VWAP

The best time to buy a stock is when the price goes above VWAP. It is a sign that buyers are in control and the majority of intraday positions are in profit. But if the stock price is below VWAP it means that traders have bad trades and losing money on them.

The Volume Weighted Average Price unlike other technical analysis tools, it is best adapted for intraday examination. It offers a good way to identify the underlying trend of an intraday. So, as you can see, when the stock price is above the VWAP, that means the trend is up. Contrary, when the stock price is below the VWAP, that means that the trend is down.

But remember, indicators are using past data to calculate the average. Every indicator starts to calculate at the open and stop to calculate at the close. And as you come closer to the end of the day, the indicator will have more lags. In intraday charts that use very short time frames, you have hundreds of periods in a single day.

Use Volume Weighted Average Price as trend confirmation

We have already said, VWAP provides traders info related to volume and price. But, it will help traders to confirm the appearance of trends that might be rising or going down over the day. For example, you see in the chart VWAP is rising despite the swings in the closing price. You can be sure that there are less sellers than buyers for that stock.

Thus, a rising VWAP indicates a bullish period, while a decreasing VWAP indicates a bearish period.

It can be a trade execution strategy

VWAP is helpful for institutional investors as they need to buy or sell a huge amount of shares but they want to avoid a spike in the volume. They don’t want to attract attention and influence the price.

For example, some institutional investors want to buy 10.000 shares of some companies. If such an investor sets the buy order of 10,000, the consequence will be a spike in the price in the moment of filling the order. So, when other investors recognize that big demand, they would also like to buy the same stock and at a higher price than the bid price of an institutional investor. Of course, traders would sell the stock back at a much higher price. That’s how the stock price rises in a particular case and dramatically increases the “ask” price of the stock. As we mentioned before, some software is able to divide these huge amounts of shares into smaller blocks and execute the trade and not let the closing prices go far from the VWAP. It is important to keep the closing price as much as possible near to the VWAP.

Bottom line

As we explained, VWAP is a lagging indicator. So, don’t try to use it for more than for one-day frame, because it will not show you the right trend. It is good for intraday trading. Also, when the stock or, in some cases, the overall market is bullish, you will not be able to find crossovers for the whole day. So, you will have poor data. By the way, VWAP isn’t able to give you much historical data.

The VWAP provides valuable information, more than the moving averages. Also, it isn’t a tool for a long term investor.

29th January 2020
Coffeehouse Portfolio The Lazy Portfolio

This is another in a series of lazy portfolios and one of the most popular. There is no single “coffeehouse portfolio” and an investor can adjust the basic version to own needs and investing goals.

This lazy portfolio, Coffeehouse portfolio, that financial advisor Bill Schultheis made famous in his book “The Coffeehouse Investor” is so simple.
The Coffeehouse portfolio is built of 7 funds. The basic version starts with the composition of 60/40 stock/bonds. The fixed income part is put into a bond fund (you have to choose). The 60% in stocks is divided equally between six index funds. That index funds are a large-cap value fund, a small-cap fund, a small-cap value fund, a foreign fund, a REIT fund, and a large-cap fund.

“Investing should be dull,” said Nobel economist Paul Samuelson. Yes, some would say the same. But we have to be honest. This kind of portfolio maybe isn’t suitable for some Millennials experienced in investing. The Coffeehouse portfolio is too much dull. On the other hand, it is good. All you have to do is to set it up and live your lives.

And this discovery is amazing.

You can hear investors saying the same thing again and again: You need some simple but well-diversified portfolio. You don’t need more than several funds (4, 5, 9 whatever), but pay attention, as you are a novice, they have to be low-cost and able to create winners during both bear and bull markets.

That’s the point with lazy portfolios. There is no active trading, no market timing, and of course, no commissions. Moreover, they are simple. Well, someone may ask what happens with assets absent from such a portfolio. Forget it! You don’t care!

How to structure Coffeehouse portfolio

It is quite simple, as we said and here is one example:

10% Vanguard 500 Index
10% Vanguard Value Index
10% Vanguard Small-Cap Index
10% Vanguard Small-Cap Value Index
10% Vanguard REIT Index
10% Vanguard Total International Index
40% Vanguard Total Bond Market Index

Or

10% Large-Cap Stocks
10% Small-Cap Stocks
10% Large Value Stocks
10% Small Value Stocks
10% REITs
10% Total International Stocks
40% Bonds

As you can see in this portfolio, it is massive on the REITs, is slight on international stocks, and misses diversity on the fixed income side.

Roll the dice

Basically it is a “slice and dice” portfolio. So we can say it isn’t a “total market” example of the portfolio. A total-market portfolio consists of 1/3 equal parts of a total bond market index, total stock market index, and total international stock market index. But this “slice and dice” portfolio seeks to benefit from the higher returns. There is a higher risk when investing in value stocks and small stocks. And, as you can see, this portfolio has a massive collection of both small, and value stocks.

The 60% piece of the Coffeehouse portfolio represents 6 different funds that cover a different part of the market. That is a really good part of this portfolio since it is adding to the diversity.

The rest of the 40% of the portfolio is a total bond fund that includes the whole of the bond market.

It is recommended to rebalance the Coffeehouse portfolio every year. That secures that the asset allocation percentages are held at the accurate amounts. But it can be an individual decision for every investor, there are no rules what is the accurate amount.

Modifications of this lazy portfolio

As you can see this portfolio holds more bonds. It is more than some average investors would like to hold, especially if you are young. To make a comparison, the target-date funds, for instance, for Vanguard hold 10% bonds until investors are 45. We found some of the Trinity University studies and one shows that even investors in retirement should own 50/50 portfolios or even more aggressive.

Honestly, the Coffeehouse portfolio favors small-cap and value stocks. And do it with reason. Historically they have had higher returns and which means higher volatility too. But you can tweak the portfolio.

How to adjust the Coffeehouse portfolio

One method is to reduce your exposure to bonds (for example you could hold 10% of them) and split the rest of the portfolio equally into six funds. In this way, you’ll have a much more aggressive portfolio if you like that. But keep in mind, that is riskier at the same time and you must know how much risk you are able to handle.

Why not invest in the Coffeehouse portfolio

Firstly, for some investors, this portfolio hasn’t enough international exposure. It holds only 10% of Total International Stocks. Secondly, the 40% bond allocation will reduce your returns, you can be sure. Also, rebalancing can be expensive. There are too many funds to set them up.

For young investors, it isn’t so easy to just buy and hold. What if the prices are going up and down frequently? How to stay calm and do nothing? That’s the tricky part of any lazy portfolio.

Also, as we said above, the Coffeehouse portfolio can be too conservative for some investors. Where has the excitement of investing gone? Yes, you can adjust the portfolio as we described but still. Hence, to be honest, the one size that suits all methods sometimes don’t work for everyone. Especially if you prefer to be a more aggressive investor.

Why invest in this portfolio

Allocation on the value stocks is an advantage. The value stocks have outperformed growth stocks for 20%, according to historical data. Also, since this portfolio holds 20% small-cap stocks, it is good because they have outperformed large caps. Historically speaking, of course. By being a lazy portfolio and holds 40% in bonds, the Coffeehouse portfolio is less risky.

Bottom line

A creator of this portfolio is Bill Schultheis. He wrote a book about dullness investing. He had found that when you simplify your investment decisions, you end up with better returns.

His book “The Coffeehouse Investor” explains why investors should stop holding top-level stocks or mutual funds, and stop attempting to beat the stock market. Instead, keep stick to three clever principles:

1) There is no free lunch
2) Never put all eggs in just one basket
3) Save for rainy days

Sure, there is one more. Don’t pay too much attention to daily ups and downs in the stock market. It can ruin your life. But with investing in the principle buy-and-hold, with an annual rebalancing of your portfolio, it is more likely that you will build your wealth. There’s nothing wrong with adjusting the CoffeeHouse portfolio. It’s more important that you stick with your plan. The weighting of your allocations is less important but has to be reasonable. And a note for newbies, sometimes it is smarter to be a bit conservative especially in the stock market.

And here is a bit of statistics. Behavioral finance professors Brad Barber and Terry Odean discovered: “The more you trade the less you earn.” Buy-and-hold investors are doing better than traders. Active traders can lose a lot of money paying transaction costs and taxes.

The truth is that active traders can turn their portfolios over for more than 250% per year, but their returns can be just like 11% after paying tax. Opposite, buy-and-hold investors can turn their portfolios over a bit around 2%, making around 18% returns.

Finally, this is just one of the numerous approaches to investing. You are the one who has to choose. It’s all up to you.

28th January 2020
The Barbell Portfolio – Strategy Of A Balance

The barbell portfolio holds only short term and long term bonds and generates fixed income. A flattening yield curve situation is the best time to use this strategy, while a steepening curve is harmful to the strategy.

The barbell portfolio was invented by bond traders. The strategy means to hold safe short-term bonds and riskier long-term bonds. Put them together and that is the barbell portfolio. This also means that you are betting on both sides. But your barbell portfolio gives you protection since you have extremely safe short-term bonds. Yes, they will provide you with less profit but the profit is compensated from the other side of your portfolio – by long-term bonds that are extremely risky but provides a great profit.

Building a barbell portfolio, you will give your investments a balance that can run you through different circumstances, even extreme ones. The barbell portfolio is a very simple investment allocation actually. But the barbell portfolio is heavily weighted on two ends, just like a barbell. This concept is easy to understand and we want to explain it by using bonds. You can create this kind of portfolio with cash and stocks, also it can be a nice substitute to a 60/40 stock/bond portfolio.

How to structure barbell portfolio

Let’s say the short-term bonds are risk-free. But you will not earn a lot by holding only them. To have a profit you must add something riskier to your portfolio. So, you can do it by holding long-term bonds. You see we are not considering mid-term bonds. There are long-term bonds to provide the yield to your portfolio.

Yes, they are the riskiest but also give the highest returns.

The idea of this kind of portfolio is to bypass and avoid the risk on one side of the barbell portfolio and to do it as much as possible but to put more risks with long-term bonds.

For every investor, the risks diversification is one of the most important parts. So how to do that with a barbell portfolio? For example, you can build it if one half of your portfolio is in bonds with 5 years maturities and the rest is in bonds with 15 years maturities. The point is to put weight on both ends of your portfolio. But it hasn’t to be equal weight. it can be turned in one direction or another. Of course, it depends on an investor’s vision and yield demands.

You have to pay attention to the bond barbell strategy. It isn’t a passive strategy. You will need to monitor short-term bonds and adjust them frequently. Also, the other end with long-term bonds should be adjusted from time to time because of their maturities shorten. Some investors will just add new bonds to replace the existing.

Barbell Investing

It is all about aiming to balance risk in your investment portfolio. For example, if you put bonds on the left end of the barbell portfolio you might be faced with rising interest rates. So, the value of the bonds could decline. In order to balance the weight, you can replace them or part of them with, for example, with dividend-paying stocks, or some other ETFs. This left side has a great role. It has to protect your wealth so the savvy investor will always choose low-volatile and low-risk assets for the left end.

The right side’s role in your barbell is to give you high profits. That is your financial goal. So you can add some aggressive stocks there instead of long-term bonds.

The barbell strategy is actually a simple investment allocation. Two ends, two sides of your portfolio are designed like opposite ends. What you have to do is to allocate your capital between safe and aggressive sides. Some experts recommend holding 80% treasury bonds and 20% stocks.

Some may ask why to diversify like this. Here is why. Let’s say you have invested 100% in different stocks. Yes, you have a diversified portfolio but you are, at the same time, 100% exposed to downside risk and you are at risk to lose all your capital invested.

But if you build a barbell portfolio with 80% bonds and 20% stocks your downside risk can arise on your risky part of the portfolio. That is 20% of stocks. But the point is that the majority of your portfolio will be in safe investments. Moreover, bonds will give you interest too.

Why use this strategy?

Because it can lower risks for investors. At the same time, it can provide exposure to higher yield bonds. Higher yields will compensate for the higher interest risk rate. So that is the first benefit. This strategy allows investors to have access to higher yield long-term bonds. The other benefit is that this strategy reduces risks because the short-term and long-term bonds’ returns favor being negatively correlated. In other words, when short-term bonds are doing well, the long-term bonds will have difficulties. When you hold bonds with different maturities it is more likely to have less deadfall risk. Let’s say when interest rates grow, the short term bonds are rolled over and reinvested. Of course, at a higher interest rate. That will compensate for the drop in the value of longer-term bonds. Opposite, when interest rates are lower, the value of the longer-term bonds will grow. Simple as that.

But remember, it’s so important to manage the weight of both ends. And to do it actively. The contrary will never produce long-term returns. If you notice that the assets on one end of your barbell portfolio somehow look expensive you have to change it and balance by leaning toward less expensive assets on the other end. Well, if the prices are expensive on both ends, you will need to reduce overall portfolio risk.

Is there any risk?

Yes, interest rate risk no matter do you hold both long term and short term bonds. If you buy the long-term bonds while the interest rates are low they may lose value quickly when the interest rates increase.

An additional risk of the barbell strategy comes from the investors’ limitation, this portfolio doesn’t include intermediate-term bonds so you will not have exposure to them. And we all know that intermediate-term bonds give better returns than short-term bonds. Yes, they are riskier but not too much. In comparison with long-term bonds, intermediate-term bonds will offer a bit lower returns. That is the downside of the barbell portfolio because you don’t have an opportunity to earn on these returns.

Well, the main risk of the barbell strategy lies in the longer-term bonds. They are more volatile than their short-term bonds. As we said, you will lose if rates rise and you choose to sell them prior to their maturity date. If you keep the bonds until the maturity date, the fluctuations will not influence negatively.

The worst scenario for the barbell is when long-term bond yields are rising faster than the yields on short-term bonds. That is the steepening yield curve. The bonds that make up the long end of the barbell drop in value. So, you may be forced to reinvest the profits of the lower end into low-yielding bonds, to balance the portfolio.

But the flattening yield curve, if yields on shorter-term bonds rise faster than the yields on longer-term bonds you will earn. That is an advantageous part of the barbell strategy.

Bottom line

The benefits of the barbell investing strategy are numerous. Firstly, you will have a better diversification of your investments. Also, you will have more potential to reach higher yields with less risk. If interest rates are falling all you have to do is to reinvest at lower rates when the maturity date of that bond comes. In case the rates are rising, you will have the chance to reinvest the profits of the shorter-term securities at a higher rate. Since the short-term bonds mature frequently, that will provide you the liquidity and adaptability to solve emergencies.

27th January 2020
Black Swan Investing Strategy To Reduce The Risk

Predicting when the next black swan event will happen is the mission impossible. But you can create a portfolio created to reduce the risks related to black swans.

Black Swan investing isn’t quite a strategy, it is more a trading philosophy. Actually, it is a method of predicting the occurrence of black swans. The black swan is an unplanned, unexpected event in the markets. Such events come as a sudden blow and may influence the market. But black swan also can have both a positive and negative impact and we are going to discuss them here.

An example of a negative black swan is the crisis of 2008.

Black Swan investing is a trading philosophy based completely on the probability that some accidental event will hit the markets. To avoid losses caused by a black swan, traders who are trading based on black swan strategy always are buying options, never sell. They never estimate will the market go in one or another direction, up or down, they are buying. These traders are actually betting on the chance the market will move both up and down.

Protection of investments

Behind that behavior is investors’ need for insurance for their portfolio to protect against another black swan event like it was financial crisis 2007-2009.

They are afraid of is losing money as they did at the time of the crash. But losing money is a risk that you have and can determine. The black swan is a risk that you can not determine or predict. How can you plan some sudden and hidden events ahead? Hence, we can’t hedge out the risk of secret and unknown events. All we can do is analyzing past events.

The black swan investing theory is based on an old saying that presumed black swans did not exist. Nassim Nicholas Taleb developed black swan theory but in his book The Black Swan he also recommended traders to fire their advisors claiming that they don’t know enough or know a bit about investing. Brave claim indeed. His belief in the incompetence of financial advisors is based on their disregard for Black Swans.

Is it possible to predict the next event?

It sounds like an impossible task because it is. As we said, how can you predict something unknown? But what you can do is to build a well-diversified portfolio to reduce the risks. Also, now you have this tool to determine when to exit your trade and avoid money losses. Moreover, you can determine when to do that in profit.

Yes, your portfolio can be structured to reduce risks linked to black swans.

Positive or negative black swans

Okay, you would like to know how to invest for positive or negative black swans. So, first of all, you have to understand how not to depend on catastrophic predictions. Let’s say, you invested with the belief that the stocks will grow forever. Also, you are pretty much sure that the financial crisis will never come, or the company will never bankrupt. Well, something has to be changed in your beliefs. The truth can be very painful for you at this very moment. Stocks will not rise all the time. Not even in the next 20 years or even five. They will go up and down.

The main point of black swan investing is to profit from unpredictability. But such events come suddenly, they are surprising, so how can we invest in it? We cannot do it directly. All we can do is to be ready for them, meaning to be exposed to such exceptional but extremely impactful events.

How to expose to a positive black swan

How to do that? How to take advantage?

If you follow Taleb’s definition it is quite clear what to do to positive events. If you can seek exposure to something you can not predict, then seek out exposure that is unrestricted to the upside. Well, there is no need to know will some event come or not, or when it is going to happen. All you have to do is to detect exposures that have the potential to blast if meet the proper conditions.

Exposure to positive black swans may sound a bit esoteric. Some investors that are practicing a black swan strategy like to say that it is necessary to build a portfolio that is able to “invite” positive events, amazing and unexpected. We don’t have material proof that it works.

Their idea is to give a portfolio a chance by setting up limited sums of money or scale it up. If it works, it’s okay. If it doesn’t work, just give up and risk later.

This stands in firm contrast to traditional investing advice.

Behind this idea

For any trader who wants to implement the black swan investing strategy, it is necessary to create a barbell portfolio. This kind of portfolio was created by bond traders. This strategy requires owing safe short-bonds on one side of the barbell, and on another side to balance the weight of investments, riskier long-dated bonds.

By building a barbell portfolio, you’ll have very safe investments on one end and notably risky investments on the other end. The safe investments virtually don’t have risk. They will survive even a black Swan. The risky side of the portfolio opens it up to the endless upside. This kind of portfolio advances despite any circumstances in the market. That’s according to Taleb.

Black Swan investing

Since black swan traders never sell and they are counting on the crash, they are buying out-of-the-money options.

But one question arises. Can any empirical evidence account for black swans? We are afraid the answer is no. So, we cannot predict the market. Why there are still people trying that? Because we all need progress in this field. Yes, we have algos, AIs, learning machines, automated trading, etc. But yet, no one can predict the market. And it is a great challenge. By fair, that moment isn’t so far from us. One day someone will find some formula for that. Frankly, how many people were able to predict all possibilities of the internet? A very small number. Today it is part of our daily lives.

Yes, we truly believe that one day, somewhere, someone will find a way to predict market movements. Meanwhile, there is no need to give up from investing because of the lack of unreachable knowledge. Just work with what you have and know. That would be enough. At last, it was enough for the past 200 years.

Pro tip: Develop an efficient portfolio on a demo account first; (1) Examine how well it guards you from random Black Swans (2) optimize (3) only then risk real funds.

Bottom line

Banks are a negative black swan business. The upside is inadequate and the downside is complete. The examples of positive black swan investing biotechnology stocks, venture capital, publishing, etc.

The venture investor that invested in Uber in its beginning was exposed to a positive black swan, but today would be more exposed to a negative black swan with the same investment.

The key principle in black swan investing is to find extremely aggressive as unreasonable as possible assets. Hence, when you find that chance, take it.

26th January 2020
Insider Trading Is It Legal At All?

Insider trading can be legal or illegal depending on if the information used is public.

By Guy Avtalyon

Insider trading means that someone buys or sells stock based on information that is not freely available to the public. An insider could be someone from the management or simply someone who has access to non-public information. Insider trading can be legal or illegal depending on if the trade is executed on the information that is available to the public or not.

To be honest, everyone likes inside information and rumors. The problem is that most of the time they are just useless gossip. Still, we are all seeking the inside information and have something that is unknown to the majority. If it is possible, to no one.

When it comes to trading, this method of playing based on inside information is seen as insider trading. And it can be legal. Well, in some cases.

What is insider trading

Insider trading is trading based on information that is not accessible to the public. In most cases it illegal but in some specific cases, it is perfectly legal.
Insider trading is illegal when info is received from the insider and traded by traders who received that info and do it before info becomes known to the public. Insider will always give you a hot tip. But is it trustworthy? How will you know that?

That is a crucial difference for insider trading. To make insider trading, the secret information being given must be issued by an insider.

How to recognize the right insider?

Such has access to important non-public information about a company. Usually, it is some from the high-level executives, that have almost all the information about the company’s operations. Well, not all of the high-level management recognize the fiduciary interest and put it ahead of its own. Also, an insider very often owns a big stake in the stock.

In insider trading, an insider can be a trader who acts based on inside info that is not public data.

A legal insider trading

That is a completely different story.

According to the US Securities and Exchange Commission, insider trading can be legal but under some circumstances. For example when a CEO of some company purchases stock of the company he is obliged to report to the Securities and Exchange Commission. Also, legal insider trading is when workers exercise their stock options and buy shares of stock in the company that they work for.

How does illegal insider trading work?

Illegal insider trading is different than legal insider trading. But when it is in violation of the law?

For example, a friend of the CEO of a company heard that his friend could be accused of fraud soon. That info he uses to short shares of his friend’s company because he had the info about bad news that will occur in the future and that will cause the stock price to go down.

The other example is, let’s say, a board member of a company and woman. She knows that the merger is going to be declared in the following days and she assumes the company’s stock price will go up after that. What she is doing? She is buying more shares but not always in her name. Such can buy shares in her husband’s name or parents. That is illegal insider trading.

We are pointing only a few examples of illegal insider trading that may occur. Don’t do that, you may end up in prison.

Does insider selling suggest it’s time to sell?

Acts speak louder than words could ever do. Management is motivated to tell you why should you have to buy the shares of their company. But the insider will tell the true story about the company’s worth. A trend of selling or buying among insiders could give us a clue about the company’s future in the market.

The information that insiders are selling their stocks might give some benefits. Traders may use them to estimate where a stock’s price might go and how insiders price a stock since they have better insight. But remember all data must be public and available.

Anyway, be careful, it isn’t a precise formula. Think about the drawbacks too.

It will take you time and energy to find trends. Moreover, insiders are not always right. Don’t blindly believe in them because they might have some special reasons to sell or buy. And finally, you will get only a small part of large info and that may confuse you, so you may make a bad trade.

Where to find insider info

Speaking about the US stock markets, insiders are obliged to file SEC forms created particularly for insider stock trade reporting. But still, take your time to examine insider trades before you enter your buy or sell positions. Insiders’ information isn’t everything you need to make the right investment decision. You’ll need more.

The SEC made the EDGAR system to provide public access to the insiders’ activity. You can find it on the NASDAQ website. The point is to have the same data from a minimum of two insiders’ sources. Never rely only on one.

How to use insider information

Okay, your search gives you several reports on the company.

So, you can examine the data and find a trend. If your search of insider list displays buying actions, that should be a signal that the company’s management thinks the stock price will go up and want to profit from it as stockholders. But if you see that there is a lot of selling it is usually a sign that the stock price will go down. Insiders will always try to sell before stock prices drop. Anyway, it is only one info and you shouldn’t rely on just one. While you are looking for insider information try to read annual reports, statements, etc. Find other sources to support what you found as an insider trend. Then, you’ll be able to make a proper investment decision.

When you see the executives getting stock option grants and then selling a large part, you shouldn’t be worried. But if you see massive selling and without a visible cause, it’s time to think. Think because you have two options. One is to be a part of the crowd and sell your share or take advantage and buy a share at a bargain. And add to your portfolio to diversify it better.

Famous insider trading cases

The Wall Street Journal writer R. Foster Winans was sentenced to 18 months in prison in 1985 of giving information about stocks he was planning to write about. Two stockbrokers made about $690,000 thanks to his insider information. They were also sentenced.

Ivan Boesky paid $100 million to the Securities and Exchange Commission to compensate insider-trading charges that he made. He earned $50 million in illegal profits. Boesky pleaded guilty and was sentenced to 3½ years in prison in 1987.

Martha Stewart was sentenced. The problem was about her sale of ImClone stock based on a tip that she received from a broker at Merrill Lynch. She was sentenced to 10 months (prison and home confinement). Her stockbroker was also sentenced.

Also, a football player Mychal Kendricks was accused of insider trading after trading based on information he received from a friend. Friend? Yes, a friend who was a broker with Goldman Sachs.

And many others but don’t follow these examples, please. It’s too risky as you can see.

24th January 2020
Diversification Is Important to Your Investment Portfolio

When stock prices drop, bond prices increase. A portfolio that holds stocks and bonds plays better than the one that holds only stocks.

Diversification means to spread the risk across different types of investments. The main purpose of diversification is to enhance your chances of investment success. In other words, you are betting on every one.

Diversification is very important in investing because markets can be volatile and extremely unpredictable. If you diversify your portfolio, you will reduce the chance to lose more than you are prepared to.

And that is exactly what you would like in investing: to spread your capital among different assets. So you’re not relying on a single asset for all of your returns. The key advantage of diversification is that it provides you to minimize the risk of losing the capital invested.

What is diversification?

Diversification means building a portfolio of your investments in a way that the majority of the assets will have a different reaction to the same market performance. For example, when the economy is growing, stocks will outperform bonds. In opposite circumstances, bonds could play better than stocks. Hence, if you hold both stocks and bonds, you will reduce the risks in your portfolio from market swings.

Let’s make this more clear. What do you have in your pantry? Only beans? Of course not! When you went to the grocery you bought everything you need for the week or month ahead. The same should be with your investment portfolio. It should consist of various assets. But not too many. Too many assets mean you will not be able to follow their performances. If you are fresh in the stock market, maybe a two-fund portfolio is a good choice for you. More about this you can read HERE.

Think of these various types of groceries as the different areas, techniques, and areas available to you as an investor. If you have a variety of assets, you’ll be better protected. In the situation when one of your assets is hit by the risk you will still have the others that can give you a profit.

Reasons for diversification

Even the explanation is so simple you can still find so many investors that play on one card. You may ask how some really smart guys could avoid diversification and put all eggs in one basket? We couldn’t find the proper answer because the benefits are so obvious.

By diversification, investors lower the overall risk. It is logical how this works. When you spread your investments in various classes (diversifying them) you have more chances to avoid the negative influence in your portfolio. For example, let’s say you invested in stocks only and you hold a stock of just one company. Yes, we know you like it, it is a good company, famous, well-run. But if suddenly something unpleasant hit it and the stock price drops, let’s say, for 30%, how that occasion will influence your overall portfolio? You will lose 30% of your portfolio. But let’s consider the other situation. Let’s say that stock makes up a modest part of 5% in your portfolio. So, how much of your overall portfolio you will lose now? Can you see where is the benefit of diversification? It lowers the risk. Even during economic downturns, you will still have good players in your portfolio. Hence, if you have bonds and stocks added to your portfolio, it is more likely that even one of them will run well during particular circumstances. Bonds will play better when the economy is decreasing, but when the economy is growing, stocks will outperform bonds.

Diversification and investment strategy

You can find various investment strategies but two are most popular: growth and value investing.

Value investors tend to consider the strength of a company and its management. They would estimate if the company’s stock price is undervalued based on its true worth.

On the other side, growth investors would estimate how fast the company is growing, could its new products stimulate future earnings, etc.
By taking just one strategy you can miss out on the benefits of the other. But if you spread your investments on both of these strategies, it is pretty sure that you’ll be able to enjoy the benefits of each.

Influence of “home country bias”

Well, it is completely natural that investors are more attracted to their own state markets, the national industry. That’s how we come to the “home country bias” in investing. Of course, it is a natural tendency. But it can be a problem too. “Home country bias” can limit your investments to the offer from domestic markets. But what is needed for profitable and successful investing is to step out of your comfort zone. Foreign markets can be profitable also. What you have to do as an investor is to add some international fund or company to your portfolio. It is good protection and well-done diversification. Diversification across international markets will protect your investments if the domestic economy downturns (no one wants that, of course) or during the recession in your country. Several years ago we heard one of the investors saying it isn’t a patriotic gesture. Well, we have to say, investing isn’t an act of patriotism. It is all about profit.

Produces more opportunities

Eventually, diversification produces more opportunities if you make smart choices that deliver balance to your investment portfolio.

For example, you only invest in stocks. But suddenly some great opportunity occurs to invest in, for example, bonds. What will you do? Refuse to invest in bonds because you are not comfortable with them and risk to miss potential profit? We don’t think it is a smart idea. Never miss the opportunity to earn more, that isn’t in the nature of investing. Admit, you will never miss this opportunity to invest in bonds if you have a diversified portfolio. So, diversification gives you more opportunities to invest.

Protect and improve your finances

It is important to understand all the benefits of diversification. It isn’t hard to do. Actually, it is very simple. You have to read more, learn and be patient. If you diversify your investment portfolio you will have a chance to build stable finances over time.

How to diversify your portfolio

Firstly, never be too much invested. You will not be the winner if you own hundreds of assets. Okay, let’s say this way. Your portfolio is your team. And, as in every team, each part plays its role. No coach will put all players in one position. It’s stupid. Plus, how such a team will win anything? Of course, zero chances!

The point of diversifying is to hold investments that able to work separated tasks on your team.

Every single part of your portfolio should have a different role. For example, if you prefer stocks, diversify your portfolio to S&P 500 (that would provide you exposure to large-caps) and add some small-caps.

If you have a bond portfolio diversify it across short and long bonds, or higher-quality bonds, etc. That will reduce the risks. Or just add alternative investments in your portfolio. For example, private equity, hedge funds, real property, venture capital, commodities, etc.

Bottom line

How will you know you’re diversified? A well-diversified investment portfolio will never move in the same trend and at the same time. You must have one thing on your mind: you are the manager of your portfolio. Also, it is almost impossible for all investments to grow all the time. It is 100% sure that some of your positions will be lost, will lose you money. When that happens you will need the other holdings to balance that fall.

Diversification guards you against producing an undesired risk to your capital. Anyway, it is too risky to put all your money into one single investment. The key to diversification is to spread your money across asset classes and to allocate within classes. That is a smart approach.

23rd January 2020