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Stock Market Bubble How to Recognize It

What is a stock market bubble? How a stock market bubble is created? What is the definition?

We are talking about a stock market bubble when the prices of stocks rise fast and a lot over the short period and suddenly start to drop also quickly. Usually, they are falling below the fair value.

A stock market bubble influences the market as a whole or a particular sector. A bubble happens when investors overvalue stocks. Investors can overestimate the value of the companies or trade without reasonable estimation of the value.

How does this thing work?

Let’s say investors are massively buying some particular stock. They become overly eager to buy. How does that affect the stock price? The stock price is going up. The traders notice the growing potential and believe that the stock price will rise more and they are also buying that stock with an aim to sell it at a higher price.

This trading cycle has nothing with the usual criteria related to trade. When this cycle lasts long enough it can extremely overvalue the stock or some other asset, generating a stock market bubble that will burst.

Because a stock market bubble is a cycle defined as speedy increase, followed by a decrease.

We would like to explain this in more detail. When more and more traders enter the market, believing that they also can profit and perhaps go on the double, but we have a limited supply of some stock, it isn’t unlimited. So, on one side we have an enormous number of traders willing to buy a stock, and on the other side is a limited number of particular stock they are interested in. The consequence is that the stock price will rocket. That sky-high price isn’t supported by the underlying value of the company or stock.

Finally, some traders realize that the growing trend is unsustainable and start selling off. Other investors start to follow that and catch on and start draining their stocks, in hopes to recover their investments. And here we come to the main point.

The declining market isn’t investors’ darling. The stock prices are dropping, traders who enter the market too late have losses, the stock market bubble bursts or in a better scenario, deflates.

Actually, we can easily say that behind the stock market bubbles lies a sort of herd mentality. Everyone wants a piece of high returns, it’s logical, right? Well, it continues with a downward run.

What causes it?

When eager investors are pushing the value of the stock, much over its proper value, we can say that we have a bubble. For example, the stock proper value is, let’s say $50 but investors boost it at $150. You can be sure the price will go back to its proper value, soon and extremely fast. The bubble will pop.

A good example is the dot-com bubble of 1999/2000. The markets were cut from reality. Investors accumulated dot-com stocks so wildly. How was it possible when they knew that a lot of these companies were worthless? They didn’t care.

That pushed the NASDAQ to over 5.000 points in a short period. That was the bubble and everything got apart very fast and painful.

One of the most famous market bubbles took place in the Netherlands (former Holland) during the early 1600s. It is the Dutch tulip bulb market bubble or ‘tulipmania’.

What happened?

The speculators pushed the value of tulip bulbs sky-high. The rarest tulip bulbs were worth six times more than the average yearly salary. Today, tulipmania is in use as a synonym for the traps due to extreme greed.

That can happen when someone follows some investor and notices how good it is and suddenly that one decides to do the same. But such copycats are not single individuals in the stock market. There are millions doing exactly the same thing. In a short time, everyone is plunging the money and the market reacts respectively by inflating prices. And eventually, the bubble will burst.

A stock market bubble as positive and negative feedback loops

Whatever has begun to shift stock prices up to become self-sustaining is a positive feedback loop. For example, investors hunting higher growth. When prices increase, investors are selling stocks. The others are buying them to profit on the growth. Someone will ask what is wrong with that. Well, new purchasings are driving the prices up higher and more investors are seeking those profits. The cycle is starting. And it is good but only when this positive feedback loop, as economists call this, comes as a reflection of reality. But when the feedback loop is based on fake data or questionable ideas it can be very dangerous. A great example is the Stock Market Crash of 1929. That was a time of blooming speculators in the markets. Speculators are trading stocks with borrowed money. The loan is paid from profit. When speculators have good trades they can make a fortune. In a different scenario, when they try to limit losses on debt, they can lose the shirt.

The stock prices will go down, the other investors will quickly sell with the same hopes to mitigate losses. The prices will go down further and create a “negative feedback loop” and poor market conditions will bloom. This is exactly what happens when the stock market bubble bursts. The stock prices are going down further as investors try to sell their stocks to cut losses.

Bottom line

As you can see, a stock market bubble happens when investors are buying stocks neglecting the value of the underlying asset. It is caused by a kind of optimism, almost irrationally, despite the rule of thumb: avoid impulsive trading.

The crucial nature of a stock market bubble is that trading can go in a direction that is not in your favor. Optimism can fade. Investors seeking higher profits easily can see their own disaster when the growth starts to slip. Why should they stay in positions any longer? They will not, of course. It is opposite, the selling off will start and the stock market bubble bursts. And it can do it for random reasons. Be careful, you can recognize a stock market bubble when everything is done. Only rare investors are able to anticipate it is coming. Well, that’s why they are successful and rich.

7th 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
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
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
What is Riskier Bonds or Stocks?

(Updated October 2021)

In some scenarios, bonds are riskier than stocks. The main problem is how to run your investments stable but not cutting the growth stocks have to give.

Do you think the stocks are riskier than bonds? Well, stock prices are more volatile than bonds, that’s the truth. Also, bonds are paying fixed income. What else is on the bond side? Well, not much. Maybe these two is all since bonds could be riskier than stocks. The whole truth is that bonds are very risky for the companies, but at the same time, less risky for investors. Speaking about stocks, they are less risky for the companies but for investors, they can be extremely risky.

So, why do so many people think that bonds are less risky? We have to solve this dilemma: what is riskier, bonds or stocks.

The most and least risky investments

There are so many factors that have an influence on how some investment will perform. Honestly, all investments carry some level of risk. Speaking about bonds, they are under the great influence of inflation while stock investors may not feel it so much. Stocks have some other kind of risks, for example, liquidity risk. Such a problem bond investments don’t have.

Firstly, stocks are the riskiest investments, but they also give excellent potential for high returns. Stocks or equity investments cover stocks and stock mutual funds.

Bonds or Fixed Income Investments cover bonds and bond mutual funds. They’re less risky than stocks but generate lower returns than stocks.

The third-place belongs to cash or certificates of deposit, money market funds, Treasury bills, and similar investments. They are giving lower returns than stocks or bonds but carry a little risk also.

What are stocks and bonds?

To understand what is riskier, bonds or stocks we have to make clear what each of them is. There are two main concepts of how companies can raise money to finance their businesses. One is to issue stocks and the other is to issue the bonds.

Stocks and equity are the same. Both define ownership in a company and can be traded on the stock exchanges. Equity defines ownership of assets after the debt is paid off, so it is a bit broader term. Stock relates to traded equity. Equity also means stocks or shares.

In the stock market tongue, equity and stocks are the same.

Stocks

Stocks will give you an ownership stake in the profits of the business, but without the promise of payment. That’s why stocks are riskier. The companies may decide to pay dividends but nothing else is an obligation. While holding the stocks the value of your investment will vary related to the company’s profit. Stocks are also dependent on investors’ sentiment and confidence. Anyway, stocks are safer for companies since they are a sure way to raise the money needed to maintain business. For investors, stocks are riskier since the companies don’t have any obligation to provide any kind of return. If the company is growing and rising profit, investors will obtain capital gains.

Bonds

Bonds are parts of debt issued by companies and transformed into assets to be able to trade in the market. Bonds give fixed interest rates also called coupons to bondholders. The companies have to pay the interest rate before any dividend to stockholders. Otherwise, the bonds go into default. Also, bonds are conversely related to interest rates, meaning, when rates go up, bond prices drop.

Can you see now? How to answer the question of what is riskier, bonds or stocks? For investors, stocks are a riskier investment, for the companies, the bonds are riskier.

Bonds vs Stocks

The majority of investments can be classified as bond investments or stock investments. In stock investment, you are buying an asset and your profit depends on the performance of that asset. If you buy a y a thousand shares of Tesla, your profit is based upon the stock dividend which Tesla pays (if any) and upon the fluctuation of the value of Tesla shares.

In a bond investment, you actually loan money to a company or a government. With a bond investment, your profit is not related to the performance of the company. If you buy a $2,000 bond from Tesla, for example, and the company earns a record profit, your profit will be the same as if Tesla didn’t make a profit at all. But here is the risk involved with the bond investment. What if the company is unable to pay back the debt? You can lose all your investment.

Stock investment is recognized as a higher risk. But risk makes a profit, therefore you will earn a higher return over the long term.

So, what is riskier, bonds or stocks?

Risks and rewards of stocks investments

Stock investments offer higher risks but greater rewards. A lot of things influence that. An increased sales, for example, or market share, or any improvement or development of the company’s business, literally anything can shift the stock price and skyrocket it. So, investors can earn by selling them or by receiving the dividends.

Any company can succeed or stumble. That’s the reason why nobody should invest in just one company. Do you know the saying: Never put all eggs into one basket? But if you hold stocks from several companies you will ensure high returns over the long term.

But, so many investors couldn’t watch the unfortunate events without selling their stocks at a loss.

Well, if you don’t have a stomach for that just stay away from the market or, which is a better choice, diversify your investment portfolio. Add some bonds-based investments, that will help you when the stock market gets rough. Moreover, a well-diversified portfolio will give you a bumper by providing lower volatility and calm play. So, you will not be forced to sell your investments and feel stress while making decisions.

Bottom line

So, do you have the answer what is riskier, bonds or stocks?
Yes, stock prices fluctuate more than the prices of bonds but that doesn’t necessarily mean more risk for the investor. There are a lot of cases when bonds are riskier than stocks.

For example, over a high inflationary period when inflation is surging quickly, the bond price can be damaged, decreased. The inflation will decrease the value of payments, and the bonds will mature less valuable.

On the contrary, stocks can boost their prices during inflation. The companies could raise prices of their products and increase their profits. That would raise the value of their stock, even higher than the inflation rate.

Can you see how the bonds might be riskier investments than stocks?

During the regular economic conditions, stocks could be much riskier than bonds.

Stock prices could sink sharply. Hold! Don’t sell! Wait for a while, wait for a stock to bounce back in price. And you know what, when the stock prices are falling, there is no better moment to buy them and hold. Just pick a well-established company.

The point is that bonds are not always the safest asset. They can be very risky. In some scenarios, stocks can be a much safer choice.

Savvy investors will buy both to diversify portfolios. Of course, how many of each you will hold isn’t set in stone. You can change it over your lifetime as many times as you want to reach your goals and earn a profit.

21st January 2020
Risks Of Investing In The Stock Market And Strategies to Avoid Them

Investing in stocks is a risky game. On some of them, you can have full or partial control.

Risks of Investing in the stock market is a necessary part of investing. If investors want great returns, it is necessary to take great risks. However, the greater risks will not guarantee you will have greater returns. So, additional risks will not always bring you huge returns. But if you are long-term-type investors, you must understand that there will be some periods of underperformance in the investments. And you have to be prepared for that and not panic. If you cannot handle your emotions while investing you are likely to have a smaller chance in the stock market. Taking a risk means to have a higher tolerance for risk. Well, if you are not comfortable with it, you will probably make lower returns. But one thing is in your favor – you will never make great losses.

Anyway, you must understand that there is a necessary trade-off between investment and risk. Greater returns are linked with risks of price changes.

So, it is crucial to decide what is your risk tolerance and you have to do so before you enter the stock market.

What do you want: to protect your initial capital or you are ready for a wild ride with all the ups and downs in the stock market to reach higher returns?
If you can take a low or zero portion of the risk, be prepared that your returns will also be very low. On the other hand, if some investment generates huge returns, think twice is there some high risk you cannot accept.

High-risk investments require to hold a position for a long time, not less than 5 years. Do you have a stomach for that? Why the time matter?

As an investor, you must have the capacity to hold it longer to give shorter-term issues time to fix themselves. But remember, higher levels of risks will not always result in high returns.

There are special risks which investors should be aware of.

What are the risks of investing in the stock market?

We will point on some of them. The risk can be a capital loss. Let’s say you picked up some stock of the company with suddenly poor performing and the market recognizes it as negative. The consequence is that stock price could drop, a lot under the price you paid for them. The stock may even end up worthless. Zero! In such a case, the company’s stock will not trade. Moreover, the company may be delisted.

Further, there is always volatility risk. Stocks are volatile assets, their price may shift significantly in price in a short time. And, also, there is an exceptional market risk influenced by external factors. In such circumstances, the whole market could decline and the stock prices will be affected too. Also, not the whole market has to decline but the sector could. For example, a specific sector may experience downturns. Well, while some will catch the losses but at the same time, such periods are a great chance to buy stocks at a lower price. You see, the stock market is a zero-sum game. You can profit only when some others lose.

Also, the risks of investing in the stock market could come from the nature of the stock. To be honest, the stock price is extremely sensitive to bad news or investors’ sentiment toward some companies. For example, the company issued a poor earnings report or published management changes. The investors may disagree with that and could start selling the stocks.

Very specific risks of investing in the stock market may appear if you try to sell or buy stocks at the wrong time. You must have the right entry but more important, you must have a great exit. The last is the hardest part of the stock market but doesn’t have to be. Check HERE.

As we said, these are just a few risks you can meet while investing in the stock market. The crucial part is to understand what kind of risks you may have with your investments and how you can handle them.

Strategies to avoid risks of investing

Frankly, it’s impossible to entirely avoid risks. What you as an investor can do is put them under control. Actually, you can control your exposure to risks to the agreeable level. The risk you can handle and want to take. For that to do you have to know exactly what are you investing in and identify the possible issues all of these before entering the market and buying a stock. When you identify the risks involved you’ll be able to handle them.

How to manage the risks?

Firstly, define your investment goals, risk tolerance, and limitations, and plan according to what you found. Invest only in a sector that carries a lower risk than you are prepared to take. Go below your possibilities when it comes to risks.

The other solution is a diversified investment portfolio. It will give you good support. Your investment portfolio must contain several different assets. Spread your investments on bonds, utilities, mutual funds, cash, along with the stocks. Never put your whole capital into one single investment.

Combine them, long-term investment, short-term, but be careful about changes in your fundamental investment.

Also, a good decision could be to add derivatives to your portfolio. You can use them as a hedge against the risk. For example, the stock price is dropping, instead of selling them you can avoid losses by shorting futures. Of course, you have to choose futures of underlying assets that match your holdings. The hard part here is the value of futures compared to your stock portfolio. Exchange-traded futures have standard sizes of the contract. Hence, sometimes they will not give you a perfect hedge and you can over-hedge or under-hedge your stocks.

The other stock market risk management possibilities

You can also adopt a maximum portfolio drawdown rule. What does it mean? You have to set limits to the size of the drop in your portfolio value you can allow. In other words, determine how much of your portfolio you can bear to lose. This will decrease your personal ability to make emotional changes at the wrong time.

Keep your focus on stock price, and the value of an investment. Of course, plan ahead. The valuation is actually the heart of long term risk. Smart investors may have the advantage of volatility if they use tactical asset allocation. Follow their example. That will give you a chance to buy more assets when the prices are low but also, to hold fewer stocks when the prices are expensive.

Historical data shows stocks purchased while valuations are low, provide higher returns in the long run. Contrary, buying while valuation is expensive, generates the returns below average.

Bottom line

Risks of investing are part of being in the stock market. Sometimes, you will need to take bigger risks to reach your goals.
Learn the risks of investing in the stock market and do your homework. Make choices that will help you meet your investing plans.
Examine the risk of your investments from time to time. You have to know they still satisfy your risk tolerance.
Once some phrase appeared, we’ll paraphrase it: Be willing for the best, but act like the worst is coming soon.
You must be able to shift fast if suddenly something wrong appears. And, never give up!

13th January 2020
Value Investing Is Coming Back

Value stocks have underperformed since the beginning of 2007. But Goldman Sachs and Morgan Stanley claim that they have great potential.

Value investing is coming back according to data from the last autumn. This granddaddy of all investment types was set up in the first half of the 20th century and it is still actual.

For example last year, value investing has gotten fired by a typical value sector, energy. Last September made value investors satisfied, as returns of winners among cheap stocks outperformed big companies by a wide margin. The value-stock rally was exciting, unexpected, and fabulous. The past 10 years weren’t good for value investing. Actually, the value stocks were underperformed the growth stocks. They had weaker performances than it was the case with growth stocks. Moreover, some fund managers didn’t want to invest in utilities. What a great mistake! Utilities are the value stocks backbone. Their explanation was the value stocks are too expensive. Really? The fact is that utilities had a great performance last year and those managers suffered in a loss.

Why value investing is still a good opportunity?

Historically, they beat Grand Depression, played well during recessions, and inflation periods. Moreover, growth stocks have not become more profitable. So, the value stocks should finally be better. The reason is simple. They are unfairly cheaper. And that’s the point of value investing – finding under-appreciated stocks trading at low prices.

The stock market analysts found that stocks traded with low P/E and P/B ratios can easily beat the wider market. This opinion is supported by the facts.

A historical outlook

At the time of the financial crisis in August 2007, the S&P 500 index has returned 175%. The total return of value stocks in the US market was 120%. The return of growth stocks was fantastic 235%. Let’s go in the past more. Almost 20 years ago, value investors were devastated. For example, in 1999 and 2000 were so bad years for the value investing that some value investors had to step out of the market and retired.

But let’s stay for a while in 2007 and analyze growth investing deeper. What did happen?

That growth-strategy outperformance ended with the fall of the dot-com bubble. Value stocks came out of favor after the 2007 Global Financial crisis. On the other hand, growth stocks are performing remarkably well. Value stocks became unfairly cheap. You can notice that investors are expecting this global trend to continue since the global economic growth is slow. So, value stocks are trading at a discount compared to its more expensive growth peers.

But, is this discount a reason to invest in value stocks? It looks like that because value investing builds up. Slow economic growth caused value stocks to continue to produce stable free-cash flows. Yes, their businesses have slowed, but not damaged. At the same time, some of the growth stocks become extremely expensive. Moreover, the risk of failure in growth stock investing during slow economic conditions has grown.

Value Investing continues to make the headlines and not only in the US but also in Europe. We all can witness an increased number of headlines and publications, most recently, on the coming death of value investing. But now, something has changed.

Value investing is not dead

Timing the market seems to be difficult for investors. The intraday volatility grew over the last year, therefore, investors prefer not to bet as it will hurt long term goals. But this situation is beneficial for value. The value stocks start to outperform.

That will be a major market change. Value stocks’ years-long downtrend begins to turn. For some, it may seem a bit strange because investors in more cases neglect bargains. Everyone is trying to catch the major winners, famous companies, expensive stocks. They prefer to overpay some stock because of excitement. Oh, how wrong they are! But as we said, value stock investing is coming back.

Firstly, value stocks are cheap.

Value investing is the main principle for equity managers. There is long-term potency to buying cheap stocks over expensive growth stocks. Value investing was attractive over the entire history. Why shouldn’t it continue?
No one could say value investing is dead.

Goldman Sachs predicts a new life for value investing

Value investing has been decayed after years of underperformance. But Goldman Sachs says there’s still great growth possibilities in this classic factor strategy. And here are some reasons behind.

Value stocks will come back in favor very soon.

David Kostin, Goldman’s chief U.S. equity strategist explained that during the last 9 years the difference in valuation of expensive and cheap stocks was wider than ever.

Kostin said: “A wide distribution of price-to-earnings multiples has historically presaged strong value returns. However, a rotation into value stocks would require a sustained improvement in investor economic growth expectations, potentially driven by global monetary policy easing.”

The renaissance is coming

Value investing has gone out of favor particularly because the economic expansion gets stretched longer. Value brands continue to falter due to modest GDP.

But this course could start to change for value stocks. In the US an easier monetary policy from the Federal Reserve could increase growth expectations. Also, a rate cut could support the economy additionally. Bankers announced that possibility. Also, we already saw signs of resilience in US value stocks last September. Analysts predict that value stocks could finally enjoy a rebirth in 2020. Value investing means buying stocks that are trading below their value in the hopes of notable profit when the company comes into favor.

By default, value stocks have underperformed since the financial crisis. The investors have shifted into more energetic growth stocks, for example into technology. But last autumn, growth stocks were trading at high valuations and they became too expensive. In the same period, value stocks have shown important strength.

From October last year, the Russell 3000 Value index has dropped 2.4%, and the Russell 3000 Growth index has experienced a worrying 7.1% reversal.

Yes, growth stocks had a bounce, and outperformed value stocks. But there is some rule pointed by Morgan Stanley’s analysts. The markets are in the process of a regime change. That means the investors’ willingness to buy growth stocks will decrease as interest rates rise.

Goldman’s High Sharpe ratio

For investors assured on value stocks comeback, Goldman has selected value stocks with “a quality overlay.” Do you understand what does it mean?

These stocks could easily generate three times bigger returns than the average S&P 500 company with similar volatility. It is Goldman’s Sharpe ratio basket composed of 50 S&P 500 stocks with the highest ratios. This ratio measures a stock’s performance related to its volatility.

Goldman named the stocks with the highest earnings-related upside to consensus target prices. That are Qualcomm, Western Digital, Marathon Petroleum, Halliburton, Facebook, and Salesforce.

Bottom line

Many of the world’s most successful investors hold value stocks. They are buying cheap value stocks and benefit as the companies manage to work better.

For this to work, the stock has to stay cheap, so the company spends money on tremendous dividends and buybacks. The other option is the company be re-valued at a more relevant valuation, meaning more expensive. That is happening when the market recognizes the previous mistake in valuation.

For example, take a look at Altria (MO).

When the evidence about how toxic smoking is, appears to the public and more and more people stopped to smoke, investors had a feeling that cigarette producers will have a problem, the stock valuation was low. Well, something different happened to the company. The fundamentals remained strong. These stocks had good returns and still have.

How is this possible?

The stocks had higher dividend yields and investors reinvesting their dividends. Very good play. Tobacco companies also reinvested. They were buying back their cheap stocks and increased their earnings-per-share and dividend-per-share.

Smart investors know that value stocks can outperform most other factors. Some of the cheapest stocks in the market today are banks, oil companies, and so on. Keep it in mind.

So is value investing coming back? Do we really need to think better what the definition of value is?

12th January 2020
Stocks Reached New Records in the First Five Days This Year

Stocks rose in the first five trading days in January. There is an old tale of the January Effect but is that true or myth?

Stocks reached new records in the first five days of this year. And when stocks play well in the first several sessions in some years like it is in this one, investors like to recall the “first five days” rule. The point is that this rule is, therefore, able to predict the market is often up at year-end. But is this true?

Stock Trader’s Almanac, which analyzes the market phenomenon since 1950, discovered that if the first five days have a good track record it is a good prediction for the whole year meaning it will be well in the stock market.

Actually, it is an old Wall Street “first five days in January” indicator and as we know the brokers are superstitious. They believe if the stock market during the first 5 days of the year reaches record, that represents the potential for the strong performance in the given year.
So, stocks are sending a bullish signal for this year, according to that old indicator. Well, it is a good way of pumping stocks. Bulls in the market do that.

Will the whole year be like this?

But is this a reasonable way to make predictions for the whole year? We think it is an absurd way to estimate valuations.
Yes, stocks reached new records but if you take a serious look at the indicator you will find some drawbacks. Frankly, stocks are overvalued more than ever.

The stocks reached new records

Yes, in the first five days in 2020 but few days will last forever and maybe it’s time to consult the historical data just to compare what could happen next.

According to Dow Jones, historical data shows that the S&P 500 index has completed the year in the same trend as it started it in 82% of presidential-election years. It occurred from 1950 to today every time. In the first 5 days of 2020, the S&P 500 rose 0.7% and if the mentioned historical pattern is correct that should suggest that this year will finish with higher gains.

But be serious. We will need a deeper look at this indicator and on what it shows. Otherwise, you can easily read your horoscope (pay attention to the “sex” section better than “finance”) it will make more sense.

The ‘first five days of January’ indicator

January in the stock market has a strong influence on predicting the trend of the stock market for the rest of the year. The January Effect occurs when investors’ selling off their losing positions at the end of the prior year to realize the tax losses. Usually, these stocks are at a discount during January. And what we have there? Bargain hunters! They step in with their buying pressure in the market.

Statistics show when the S&P 500 rise in the first five trading days, there is around 86% possibility that the stock market will rise in that year. But this indicator isn’t very reliable due to the fact that we cannot find what happens when the gains in the first 5 days in January are below expected or in comparison to previous January or whatever. All we have is data for periods when the January Effect is triggered. But markets exist even without the January Effect. Even more, the markets exist even beyond January.

With a little help of stats, we can see that this effect had good predictions in 31 out of the past 36 years. Stocks reached new records in the first five days of 5 exceptions, 4 were war years and one was a flat market.

So, this was a confirmation of the January Effect.

Statistical answer as confirmation of something different

Let’s use more current data and divide the past 34 years into two sections separated, from 1984 to 2000 and from 2001 to 2017.

Let’s observe the period from 2001 to 2017. Data shows that, for example, the December effect produced an average return of 2.62% or a return of 36.5% during the observed years. But if you take a look at January for the same period, you will find poorer results. The average returns in that month were at 2.48% or 34% pre the whole year.

This seems to be a strong approval for the January effect. Nevertheless, whoever tried to use the January effect, and bought an S&P 500 index fund on January 1 and sold it on January 31, and kept cash for the rest of the year and did it in the next years to the end of 2017 made losses of 0.84% per year.

Stocks reached new records but ignore the January effect.

The using the January effect can be dangerous. This phenomenon is based on limited data and adjustments for confirmation. So, you shouldn’t believe that every time when the stocks reached new records in the first five days of the year were great gains in the market.

The conclusion about the January Effect came from small samples. So, it has low statistical reliability if it has at all. You cannot make a conclusion based on limited data. Yes, some financial press reports will try to assure you how these “five days effect” is important and you will find a lot of catchy titles but it’s fishing and fake news also.

Even the month of January was great for the stocks, what about the other months? If it is the only one-month effect what are you going to do with your investment over the rest of 11 months? Would you make decisions based on superstitions? Cash-out? We don’t think it is a smart investment strategy.

Common sense tells us something different. This isn’t a hypothetical situation, this is reality. Try to figure out why this phenomenon isn’t part of any extremely advanced computer software? Some software, and even not so sophisticated, will be able to identify the phenomenon and profit on it.

The reason is obvious. There is no unusual market’s phenomenons, that’s nonsense. If there is any phenomenon that is simple to be explained to the inexperienced trader or investor you can be sure it isn’t real. It is superstition.

Bottom line

This was another old tale to neglect, just like many others. Who can really believe that the first 5 trading days in January could predict the stock market’s direction for the full year? Yes, this old “indicator” gets much attention every year. As we said, the bulls are trumpeting it right now.

But nothing is that easy, especially the stock market.

If you have a problem to accept all of this, examine what did happen over the last 40 years. You will find that this pattern was a reversal. The fact is, since the 1970s every time when the Dow was down during that mythical period of 5 days in January, the whole year had higher gains.

To be said, any investor who admits the extraordinary influence of this superstition has a lack of knowledge and self-confidence. On the other hand, newspapers and financial reports enjoy cheating people when insisting on this.

We would like to point one thing at the end. The words written above doesn’t mean the stock market will not rise this year. It can do it very well and produce great gains, but what does it have with “First Five Days of January”?

Nothing!

10th January 2020
Leveraged ETFs – How to Trade, Guide, Tips and Strategies

(Updated October 2021)

Two times leveraged ETF is a vehicle calibrated to 200% or double the gain or loss of the price movement

Did you come across something called a leveraged ETFs? What is leveraged ETF and how it is different from other ETFs? We found a lot of questions like these thanks to visitors to our website. We’ll try to make this closer to you especially if you are a beginner in this field.

Let’s take time to jump in and explore these somewhat new securities.

Firstly, leveraged ETFs aren’t for long-term investors.

When you are buying a leveraged ETF, you must know that you have to make short-term trade. As we said, it isn’t a long-term investment. For newbies, a short-term trade lasts from one day to several weeks, not longer. Don’t try to buy a leveraged ETF for a long-term investment.

They became one of the most successful varieties of ETFs in recent times. So, we can easily say that leveraged ETFs are a novelty. However, they can be difficult innovation. Well, they are not either good or harmful, all you need is to know them better to be able to trade. Here are some basics about leveraged ETFs.

Let’s say the traditional ETF tracks one security in its underlying index, 1:1. As a difference, with leveraged ETF, you can strive for a 2:1 or even 3:1 ratio. A leveraged ETFs use financial derivatives to magnify the returns of an underlying index.

Leveraged ETFs are possible for the Nasdaq 100 and the Dow Jones Industrial Average, for example.

Where is the advantage?

Leveraged ETFs can help you to capitalize on the short-term momentum of a particular ETF. The main question is how to add leveraged ETFs into your portfolio?

For example, the trader is assured that a particular stock will drop. And trader is shorting that stock. Besides, shorting stocks are bought on margin and the trader has to borrow the money from the broker. That is leverage.

With leveraged ETF, you don’t need to buy the securities on margin, since it allows you to amplify your returns by multiples of over 1 up to 2 or 3 times. That depends on the ETF product you are trading. The amount of leverage will depend on your experience or temperament. Some less-experienced traders will choose lesser leverage, for example.

But be aware, they are designed to return three times the inverse of the S&P 500 index. So, if the S&P 500 drops by 1%, this fund should rise by approximately 3%. And contrary, if the index rises by 1%, this fund should drop by about 3%.

Leveraged ETFs have the aim to outperform the index or stock they track.

Also, there are inverse leveraged ETFs. They give multiple positive returns if some index decreases in value. They operate the same as normal inverse ETFs but designed for multiple returns.

Leveraged ETFs are not suitable for beginner’s portfolio

Please, don’t make a mistake. Yes, it is fascinating to have amplified returns but you should never add leveraged ETFs into your long-term portfolio. By buying them as a long-term investment you are making a foolish decision. To repeat, leveraged ETFs are not investments, they are speculation. Don’t mislead yourself.

Moreover, the payoff may not be as bright as you predict. So, they are risky. You will have to pay management fees, brokerage commissions, taxes on capital gains.

Leveraged ETF surely has its purpose for short-term investing. For example, you can use it as a hedge to protect a short position. Yet, long-term investors should be careful with leveraged ETFs.

Definitely, when things are going fabulous, leveraged ETFs are excellent investments. Over the first 6 months in 2017, the S&P 500 has returned a bit over 10% but the 3 times amplified leveraged ETF has returned approximately 30%.

But, think about what happens when the market turns down. For example, the S&P 500 falls by 10%. A leveraged ETF tracking the index could fall by approximately 30%. Just think about these figures.

How to make success in trading leveraged ETFs

As experts recommended, start with small if you aren’t experienced enough. When your portfolio becomes larger add more shares. There will be more risks, of course. But you will diversify your trades. Some elite traders recommend starting with an account of $25.000 minimum. Less isn’t recommended due to trading ability and margin rules for smaller accounts. Moreover, a smaller amount may cause conflicts in your decisions. You’ll need space to make them.

Further, trade when the sentiment is low. It is the best opportunity to profit. Set a stop-loss to, let’s say, minus 2% or 2.5%. Follow the trend and enter the winning position. If your profit goes up, sell some of your winning positions. Do it on spikes. If you reach 2% of profit very quickly, sell half of your shares to move stops up to breakeven. This can be a no-lose trade.

Read a lot about ETFs and leveraged ETFs and test some free trials to find the accurate one. Do your own homework, it is the best way.

Always monitor leveraged ETFs on a daily basis. If you have to use a limit order on a position it is reasonable to sell your position since you can’t follow market makers strictly. If you want to turn trade, it is better to trade traditional ETFs. that will give you less profit, but more freedom. For leveraged ETFs, you will need to sit and look at the screen or phone almost all day long. Trading isn’t for everyone, at all. That job can be addictive. Take a break from time to time but don’t give up. If you made some mistakes, keep in mind why, when, what caused them. And learn how to avoid them.

And buy when the ETFs are positive.

Disagreements

The leveraged ETFs are new and still developing, and the disagreements will change as time goes by.

Yes, they will provide you 2 times bigger returns but not always.

The typical fault is that leveraged returns are on a yearly basis. This is false. They provide multiplied returns on a daily basis. So, don’t look at the index’s yearly return of say 2% because the leveraged ETF will seemingly not have a return of 4% per year. Rather take a look at the daily returns during the year. However, something is more important. The multiple returns don’t mean you will have multiple profits. You may have multiple negative returns also.

Leveraged ETFs are high-risk due to their design. Also, some index-tracking malfunctions may occur as well as some other limitations.

Bottom line

These the most attractive ETFs in the market today have a great advantage of using. Traders can overcome some of the risks through diversification and leveraged ETFs are very suitable for that. Still, they are still adjusted for stocks only. Therefore if the stock market falls the ETFs will fall too. Anyway, you can enhance your trades if you spread the risk across other assets besides stocks. It’s easy to find ETFs assets like currencies, bonds, or commodities. That will help you to improve your portfolio diversification buying power (the last mentioned is for really aggressive traders).

Leveraged ETFs are new products but they are providing more choices to manage risks and take profit.

They are a good option but what if you don’t want to enhance your buying power if the bear market is in play? That would require short positions to take advantage of the downside potential in the market. A leveraged ETF could be a great answer in this situation, also.

9th January 2020
Buy More Stocks, And Here Is Why

Your money should stay in stocks as bond yields and savings accounts interest rates are being held down

by Guy Avtalyon

Let’s explain why should you buy more stocks in 2020. The first stock market rally this year started with a lot of momentum. The S&P 500 index had its best year in 2019. The last such good year was 2013.

2019 was really an active year. For all investors, the end of the year was a great opportunity to figure out what happened and how well they were doing. Well, it’s normal to make some mistakes but the point is to find any that has had a great influence on your investments. The most important is that these mistakes didn’t hurt your long-term investing goals and when you figure out what you did wrong you’re able to avoid repeating them.

So, you will be prepared for new investments which is very important.

The beginning of the year is the right time to make plans on how to position your portfolio. Since no visible or specific cause could cause the stock market downturn it is the right time to buy more stocks in 2020.
Actually, buying great stocks at reasonable prices should let us build our wealth firmly in the future.

Let’s take a look ahead to 2020 for stock picks

Many analysts are skeptical about the stock market’s gains will proceed with two-digits percentage, that’s true. So, we can conclude they are expecting volatility. This means the stock prices could go down.

And here is where the opportunity comes.

Cheaper stocks represent a buying opportunity and some investors are waiting for that. Some companies are ready to outperform and continue to grow despite the economy slows.

According to analysts from Wall Street, some well-known companies and brands could be the right choice.

Buy more stocks in 2020 to get profit

Picking stocks can be difficult so let’s see what is our choice for potential opportunities.

Kohl’s (KSS)

Kohl’s has over 1.100 stores and represents the largest U.S. department store chain. For some investors, its stock may look too cheap after the company posted the last quarterly results. KSS trades 20% under its five-year average and 25% below its average price-sales ratio. But the company is expected its revenue to grow 1.8% to $19.3 billion. The earnings would stay at $4.88 per share. But Kohl’s performed something else really great: it generated $10.81 per share in free cash flow last year. Its annual dividend payout is $2.68 per share. Just compare these two figures. The current yield is 5.3%.

Visa (V)

It is one of the most powerful payment companies in the world. The company processed 180 billion in transactions worth $11.6 trillion. Net revenue was up 11% in 2019, and net income increased by 17% year-over-year and is about $12 billion. Remarkably, this large company reported two-digit growth both top and bottom line and a free cash flow yield of 3%.
Some new initiatives should provide steady growth for Visa in the future and allow the company to take advantage of and beat competitors. This stock isn’t cheap but the high-quality is costly.

Apple (AAPL)

It is expected that the demand for Apple’s 5G iPhone will boost the company in 2020. AAPL stock price, according to some analysts could reach $300 in the next 12 months. Well, some are expecting the price to climb up to $440 in the year ahead and after 5 years to increase up to $1427.148. Even if you think the price is “overrated” Apple is confirmed as a good investment. Buy more stocks if you have enough capital to invest in.

Amazon (AMZN)

Amazon’s stock could be a top bet fort he next year. Strong growth in its cloud-computing and advertising businesses is expecting. The analysts are rating the stock as a “buy”. The predicted price could pass a $2,000 target this year. Shares could rise by 34% over the year, which is the experts’ opinion.

Walmart (WMT)

Walmart has been modifying. It has been investing in online. The company could take advantage of the growth in the middle class in China. Yes, Walmart’s market value is 40% of Amazon’s, but the difference is lowering. At the end of last year, the price of WMT stock was $120.440 but the price has been in an uptrend for the past 12 months. The future price of the stock could increase by 23%, said analysts, and predicted to be worth over $200 this year.

Kronos Worldwide (KRO)

This company from Dallas (Texas) produces and sells titanium dioxide pigments for broadly used in auto-industry, traffic paint, appliances, interiors, and exteriors. But the investors’ attention is focused on its revenue. It is expected to grow by 3.4% this year or to $1.8 billion. The earnings should rise $0.88 per share or by 14%.
Despite this growth, Kronos shares trade nearly 40% under its five-year average P/E ratio. The quarterly dividend has increased by 20%. The stock yield is 5.4% at $0.18 per share.

Tesla (TSLA)

Tesla Inc will present its first Chinese made Model 3 sedans publically on January 7, reported Reuters. The deliveries came a year after Tesla build its only plant outside the US. The target is 250,000 vehicles a year. Tesla’s China General Manager Wang Hao said the plant had achieved a production target of 1,000 units a week, which is the production of around 280 per day, and that sales for the China-made vehicle had so far been “very good”. If Tesla’s earnings become firm, thenTesla’s stock could rise amazingly. Right now, Tesla stock trades at $418.33 but analysts are expecting to raise over $720 this year.

Starbucks (SBUX)

Starbucks has a great performance last year. Its shares increased by 37.5%. The company has reported revenue growth, an increase in total net revenues to $26.5 billion and net income grew to around $3 billion. Starbucks ended the past year with 31,256 stores in 82 markets. The company continues to grow in China as well as in the US. Starbucks has clear goals for its expansion. That provides a great level of certainty to investors and they could recognize Starbucks as favorable stock to buy.

Why buy more stocks in 2020?

For stock investors, this year already appears like a happy new year.
Investors buy more stocks for many reasons. For example, capital appreciation could be one of them. Also, dividend payments or the ability to vote and control the company.
Several reasons are behind choosing to buy more stocks in 2020. In this stock market condition, stocks provide the best potential for growth as always.
The beginning of the year is an amazing time to decide where to invest. Since there is no 100% sure way to predict the stock market movements why not invest in assets with the greatest returns?

What could we do instead?

All we should do is to create diversified portfolios and adjust them to the market’s movements, to save a value in down markets. The general suggestion is to not look often at your portfolios. Take your time and read books about investing. You can find plenty of them packed with wisdom.

Traders-Paradise wishes you happy investing in the stock market this year.

2nd January 2020