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The Markets Reach 4-Year Highs…Now What? Protect Your Investments!

August 23, 2012 by The Other Guy 26 Comments

OG grabs the reins for his usual Thursday rant!

This week, the US equity markets quietly reached a “four-year high,” prompting many (including me) to question the validity of this recent rally. The market is up nearly 26% over the past 12 months. During this same time we’ve had:

– the dreaded “downgrade” of the US debt,

– the Eurocrisis, Spain, Italy, Ireland, and of course Greek near-defaults

yet most people won’t feel much richer if you ask them “how’s the market doing?”.

As a practicing advisor, whenever I hear “lowest ever” or “best ever” or “all-time” anything, I automatically consider the inverse. As CNBC, Fox News, CNN and Bloomberg keep us glued to their networks with fear and greed, I’m left wondering…

So I’ve begun thinking about protection strategies.
Today, lets talk about about a powerful tool: the Put Option.

Wait! Don’t run away! It’s actually a good way to shelter your investments AND it isn’t nearly as difficult as you might imagine. While many option strategies are pure speculation, this one is designed for the conservative investor…the one who wants to insure everything.

Let’s say the S&P 500 closed at 1420. We can go out and buy an S&P 500 index fund that mimics the index, (ticker – SPY). If you look up SPY on any finance site you’ll see today’s closing price and you’ll notice it trades at 1/10^th of the actual index’s price. Since we assumed the S&P closed at 1420, the SPY would close at 142.

Now let’s further assume that you’re okay with day-to-day volatility of a few percent here and there, but you want to prevent the catastrophic loss of 20% or more over a few trading days – the so called “Black Swan” event. What we want to do then is to protect our current account against future loss, or said another way, we want “the ability (or option!) to sell at today’s prices sometime in the future.”

Wouldn’t it be nice to say “I want a do-over” if the market collapses and our funds slide?

The tool that accomplishes this is called a put option and it allows us to do exactly that. We have to pay for this option, so let’s explore what that would cost. It might not be worth the price.

If we pull up January 13 Put Options for $130, we’ll see that we can buy those for $3. January 13 Put Option means that we can sell the options for $130 anytime we want between now and the third Friday in January. This represents about a 9.5% decline from today’s prices and the $3 price per contract means that we’ll lose another 2% to cover the investment.

Here’s how I figure all this out

1) I determine the amount at risk. There are many risks, but in this case we’re talking about stock market risk. If your portfolio is $100,000 and you have 50% in stocks, your amount at risk is $50,000.

2) Next, I decide how much downside I’m comfortable accepting. As we discussed, a 10% decline is tolerable, but a 20% loss is catastrophic. I decide to insure everything below a 10% loss.

(side note – why don’t I just insure it for the current price? The cost to do this is nearly always huge. It’s like insuring your house….having a deductible of 10% is much cheaper than insuring every instance.)

3) Next, I’ll find prices. Using today’s numbers, it would cost me $3 per share to cover everything below a 10% loss.

4) Fourth, I do the math, which isn’t difficult. Don’t let it scare you. My amount at risk is $50,000 divided by $142 (todays SPY price) is 352 hypothetical shares of SPY. Although options are priced per share, they’re purchased per 100 shares. I need to buy four contracts to insure all my amount at risk.

4 (contracts) x $3 x 100 = $1,200 or roughly 2.4%.

5) Now I make my decision, weighing each outcome. Lets list them:

Outcome #1 – the market stays flat or increases through January 2013. If this happens, I’ll forfeit the entire $1,200 paid for the option contracts, but would’ve had the piece of mind. Basically, an automatic 2.4% loss for insurance that I didn’t use.

Outcome #2 – The market declines, but less than 10%. In this scenario, because of my “deductible” amount, I also lose the entire amount invested in the option contracts. Insurance that I didn’t use.

Outcome #3 – The market declines greater than 10%. In this scenario, my total loss is limited to just 10%. If the market goes down 20% over the next several months, I cash in my option contracts to recoup some of those losses at anytime I want through January 2013.

6) Finally, I decide whether to pull the trigger. If so, let’s try to find an “up” day to do the trade to lower your cost a little. If not, I have to be comfortable with my decision and move on.

So now it’s your turn. What outcome would you choose? Would you buy the insurance? What do you do when you start thinking about “protecting” some gains?

Photo: Stock Market Bull – thetaxhaven

A Shaky Earnings Season Might Be Your Wallet’s Best Friend

July 10, 2012 by Average Joe 11 Comments

There’s baseball season, football season, the holiday season and, of course, earnings season. While the first three may fill you with happiness and (in the holiday case) good cheer, earnings season fills new investors with confusion.

Why do I bring this up?

I woke yesterday morning to a nerve-wracking CNBC.com headline: Investors Brace for Shaky U.S. Earnings Season.

What is Earnings Season? Is It Contagious?

The good news: earnings season affects you directly, but not in the harmful way you may think.

Earnings season is the time (quarterly) when the majority of companies that move financial markets with their results declare how well they’ve performed recently. This news is for the prior quarter.

It’s important, when listening to reports about earnings, to listen for any future forecasting and to also determine what might have been the culprit behind a great or lousy prior quarter. If it’s increased sales on the same-old widget the company’s always sold, fantastic! If the company had a one-time mistake, things might still be looking up. If products just aren’t selling or management is quitting, it might spell bad news.

What Do I Need to Know?

Corporate earnings reports drive the stock market. Sure, financial markets respond to other pressures, but over time the stock market is simply a reflection of the economy. So, if you reread the headline above, Investors Brace for Shaky U.S. Earnings Season, what does that really mean?

Based on the information I told you above, it means this: companies didn’t have stellar profits last quarter.

That’s not nearly as shocking a headline, is it? In fact, I’ll bet you already knew that.

Move On, Nothing to See Here…..

Many investors read the CNBC headline above and think: I’ve gotta sell right now! If you’ve read my ramblings before, you’ll know that I think the opposite. I’m looking to buy when prices are low and sell when they’re high.

Here’s what I recommend instead of having a panic attack:

1) Rebalance your portfolio. Here’s how it works: if you’ve determined how much stock and bond exposure you want (among other asset classes), skim off the areas that have done well to fill in non-performing areas. Low markets are ideal times to rebalance because you’ll reaffirm your long term strategy, take gains from performing spots and redeploy in assets you already own that are low today. Smart move. Then, schedule another rebalance six months from now on your calendar.

2) Look for buying opportunities. If you’re interested in investing, shaky markets are a great place to place your first buys. Make your list of stocks to watch. Wait for earnings reports. Read what companies report, and make your move! Don’t make a common mistake and go whole-hog on a “can’t lose” investment. I’ve been involved with too many “can’t lose” things. I also told my dad I couldn’t lose my hair like he did. Glad I didn’t bet on that….

Not excited to make your own stock picks? Read our pieces on how to evaluate mutual funds and how Exchange-Traded Funds work.

3) If you’re nervous, put defensive measures in place. Use stop losses on individual stocks and exchange traded funds. Monitor fund results more frequently and establish a “worst case scenario” strategy. Remember this: never buy or sell everything on one day or at one time. It’s safer to march in slowly and march out slowly. An orderly walk toward the exit beats a panicked race to the door. Often, down markets rebound quickly.

CNBC, like other publications, is in the business of selling advertising. If the elevator is labeled “Up” or “Down” it’ll be a smooth and steady ride, but I’m sure CNBC knows that “Soar” and “Plummet” garner readers…and then advertiser dollars.

My Experience in Landlording 101, or I’m Not Donald Trump

July 6, 2012 by Average Joe 7 Comments

I’ve been renovating my rental property this week and haven’t had enough time to pick a Blog Post of the Week! Instead, you get obscure ramblings from an over-caffeinated blogger….I’ll have a Blog Post of the Week! again next week for you. Have a great weekend!

I Never Wanted To Be A Landlord

When I was an advisor, I’d hear horror stories from my clients with tenants. Early on I learned that I probably didn’t have the stomach for some of the negotiation and strong-arming that it takes to work with tenants. I prefer REITs for my real estate exposure.

But, after my home didn’t sell when we moved to Texas, I realized that I had two choices: short sale or try my hand at tenants. I opted for choice #2. I wasn’t completely green. I’d read extensively about landlord/tenant contracts, strategies and tactics so I could be useful to clients. While “fun” might not be the right word, it’d be educational to try it first hand.

The surprise? I didn’t know how much I’d like it.

I’m no Donald Trump and am still too much of a pushover. I want to be a little more callous with my tenants because they realize they can get away with stuff (and do). An example: my tenant the last three years was late with her rent EVERY MONTH. The good news is that I wrote a $100 late fee into the contract, which she gladly paid EVERY MONTH. I got used to her checks two weeks late and came to enjoy the $1,200 extra income from her.

Lessons Learned From Landlording

Is landlording a word? Probably not (Pages doesn’t think so….), but I’m running with it. That’s the kind of rebel I am.

Don’t rent a furnished place unless you’re okay with everything being ruined OR you write penalties into the contract. None of our furniture matched our new house (of course, that would be made too much sense….), so we left most of the furniture there. My tenant, a school teacher, was excited about getting a home with nice stuff. Imagine my surprise three years later when my sofa, living room chair and desk were all destroyed. She apologized a ton, but no cash exchanged hands.
Bolster your reserves or keep credit handy for surprises. We had a water leak, tree fall down, bathroom fan breakdown and flooding in the basement. If I didn’t have a reserve, there would have been trouble.
Either live close to your rental or find reliable help. There are many people who will collect rent, fix up the house or manage the property, but most aren’t very good (according to my clients who were in real estate). You need great help or have to do as much work as possible yourself. I live halfway across the country from my rental, but have a great handyman, Dave, who is a quick call away, charges reasonable fees and responds lightening fast. To make sure he’s happy, I pay him the SECOND his bill arrives (that’s overstatement, but you know what I mean).
Try to complete each “fix it” project yourself at least once, even if you’re going to find help.
Remember that it’s a relationship with your tenant. My main goal is to have my tenant stay in the house. I’ve tried to make sure the house is well-maintained and I’m accessible so my tenant stays around. That said, I also need to keep up with economics. I’ve looked at rental prices in the area and raised the rent once in the past three years. I was poised to raise it again before I found out she had to move out (through no fault of mine…her son wants her to stay in his house while he’s away on business for two years. I can’t beat “free rent.”)

Are you a landlord? Have you rented from a good or bad landlord? Share your success or horror stories in the comments!

Photos: For Rent: Charleston’s The Digitel

5 Summer Activities to Create Money Savvy Kids: High School

June 26, 2012 by Average Joe 29 Comments

Ah, we made it! It’s most rewarding yet the most challenging to work with high school students on money management.

While these activities are the most fun for parents, high school students are more difficult to engage than younger children.

If you don’t have high school age children yet, you may not know this, but your brains will disappear for about four or five years.

Looking for tips for younger children? Try:

5 Educational Summer Activities For Kids – Early Elementary

5 Summer Activities to Create Money Savvy Kids: Upper Elementary to Middle School

5 Great High School Activities

1) Family book club. Right now, my 17 year old kids and I are reading I Will Teach You To Be Rich by Ramit Sethi. If you haven’t read this book yet, by all means, start now. It contains powerful advice wrapped in easy-to-understand language.

Every day the kids read a chapter. Then, at dinner, we discuss that day’s reading. Sometimes these conversations devolve (“why does a stock go up or down?” “what’s a good Roth IRA investment?”), but I love it. Who doesn’t want to have relaxed conversations about money with a curious 17 year old?

Why I like it: I get to ensure my kids get to college with some clue about money before they arrive. Because I made sure the book was fun and easy to read, and because I don’t preach, we’re able to have great talks about money.

2) Engage kids in the Family Meeting. If you’ve read this blog before, you’ll know that I love the idea of a family meeting. Budgets within a family are more about good communication than about counting pennies. If everyone is on the same page spending each day will be more careful, and life is made up of these little crisp 24 hour periods.

Some people have a violent reaction to this advice. “Show my kid my bills and my savings? That’s none of their business.” You are correct, but lets challenge your assumptions: why is it taboo to talk about your financial situation with others, especially those as close as your teenager.

Boundaries must be drawn. You’ll have to explain what happens when the whole street learns about your finances. But in the bigger picture, if they help you pay the bills, evaluate savings and plan large purchases, you’ll hand them a lifetime of knowledge that they’ll appreciate down the road.

Why I like it: When we began talking frankly with our children about bills and savings, they began to see how tight every month is for the average family. Next year we were planning on going to France for their graduation. The reality of two children in college at once has set in and we’re downgrading the vacation plan to a rental house on Lake Michigan for seven days. No groans from the kids because they understand the math behind the decision.

3) Find a job. I’m not talking about grabbing the local Dairy Queen gig (if I had that summer job I’d weigh about 750 pounds!). I’m talkin’ about helping junior through the process of fighting for a summer internship at a resume-building position. If they’re interested in engineering, try to find opportunities with a large local company. If law or medicine, apply at the hospital, a law firm, or the local doctor’s office.

There’s a ton that junior learns while creating a resume, dressing appropriately and speaking well. The training involved in competing for these positions is a good primer in adult life skills.

Why I like it: By working in a professional environment, high school kids get a first hand look at how business works. Studies have shown that people who work in “real jobs” before college are more likely to do well in the classroom because they know how their learning might apply in the real world.

4) Scholarship hunt. Finding money for college is a full time job. The internet is brimming with opportunities for money, but you have to know who to ask and what scholarships to pursue. Most high schoolers only scratch the surface when it comes to searching for scholarships.

Instead of one-offing each opportunity, we found quickly that many of the scholarship opportunities were similar. My kids could write a couple of basic essays and then modify them to fit each particular offer. Most needed references from teachers and community members. We didn’t just learn about scholarship, we learned about creating systems to efficiently attack more quickly.

Why I like it: By formulating essays and asking for letters of reference, kids learn about the importance of written and verbal communication. They also realize that “going it alone” isn’t usually a good idea. It makes sense to find some powerful friends to help you….AND my kids were surprised that most powerful people want to help.

5) Board games. I’m back with more board games to teach the family about money. This time the games are downright fun for adults. Games such as Acquire can teach simple mergers and acquisitions. Power Grid is a modern-day version of monopoly involving power companies. And, in this year when the politics of the nation are up for grabs, 1960: The Making of a President is a good primer on the campaign process while also serving as a fun way to learn some history.

Why I like it: Board games are a great way to spend time with your kids. Instead of arguing or fighting about curfews and money, you’ll enjoying each other’s company over a communal activity.

How do you teach high school kids about money? Let’s have some more ideas in the comments below!

Photo Credit: Reading: NannySnowflake; Internship: ChesCrowell

Graduation Gifts: What Should You Do With Your Money?

June 14, 2012 by The Other Guy 21 Comments

‘Tis the Season!

Well, not that season, but another highly anticipated one: graduation season. Hundreds of thousands of college and high school graduates are donning caps and gowns, shaking hands, having parties, and most likely cashing checks. The real question is what to do with all of this money?

Let’s break our discussion into two categories: high school graduates and college graduates.

High School Graduates

We’ve talked about it periodically: most kids aren’t taught anything about how to handle money and for some, graduation gifts can be their first experience with large amounts of cash. If there’s not an exact plan, it can blow away faster than the autumn leaves. This is job number one for parents: sit down with your kids and discuss what the plan is with the graduation money. Here are the top 3 things high school graduates can and should do before cashing a single check.

High school graduates entering local church for graduation mass, May 2009 (Photo credit: Wikipedia)

Establish the maximum dollar amount of your graduation gifts that you’ll allow yourself (or your kid) to spend on fun. I don’t have any problem with high school graduates blowing a certain amount. I mean, it is a joyous occasion and high school graduations should have a certain amount of indulgence. But, just like anything finance related, you have to go in with the end in mind. Failing to plan is planning to fail.
Decide what’s going to be set aside to be spent during the first semester of college. Assuming you’re heading to college in the fall, no matter what you think you’ll need from graduation gifts, you’ll want more. Accept and embrace the reality: college will cost more than you think. If you can set aside a couple hundred dollars today for those rainy October weekends far from home, you’ll feel a lot less guilty about skipping the meal plan and ordering a pizza for your roommates.
Take at least 1/3 and either invest it or give it away. Those two options sound like opposites, but they require similar mental acuity. We only give things away when we have an abundance mentality – we only invest if we have a strong faith in the future. Take one or two hours and pick a solid blue chip company, set up an online brokerage account, buy some stock and don’t touch it for 30 years. You’ll thank me later. Oh, and don’t forget to reinvest all your dividends from your graduation gifts! You’ll want those growing, too!

Don’t let this great opportunity for teaching kids about money slip by. There are only a few “found money” times throughout one’s life. Use graduation gifts wisely. Any high school graduate should be able to take this money and use it to get ahead in life.

Next week we’ll talk about what college graduates should do with their “found” money…stay tuned!

How Did You Golf Today? Ask Me About My Portfolio….

June 6, 2012 by The Other Guy 14 Comments

If you’re a subscriber to our podcast, then you know one of the things that I really enjoy is golfing – so it’s not uncommon for people to ask (even if they’re somewhat kidding) “So, how did you golf today?” (Truth be told – pretty bad. I’m usually a mid-80’s golfer, but today I shot a 93. Boo.)

To me, answering the “how’d you golf today” is the same as “What did the market do today?” I don’t like answering either. Trust me – when I golf well, or if the market did exceptionally well today, I’ll let you know.

Golfing and investing are very similar; they both require similar skill sets and disciplines. Last week discussed how you have personal responsibility with your investing plan

– today let’s talk about what to do when you hit a wayward tee shot.

Sometimes even with the best swing, the ball just slices ever-so-gently into the rough (or as was my case today, the bunker). How do you respond? Well, there are two ways: first, you can throw your club, swear at the wind (or the tee box, or your teammate, or whatever) or you can focus on what you need to do to get the ball back in play.

One of the first things I learned about golf, after I gave up the swearing and became semi-serious about it, was to always try to get the ball back in play. If you’re in the bunker, goal #1 is to not have another bunker shot. If you’re in the rough, goal #1 is to get it out of the rough.

Unless you’re pro golfer Bubba Watson and can snap-hook a 7 iron from 185 yards in a playoff hole in the Masters, goal #1 is just to get the ball back in play.Investing and financial planning follow the same logic.Sometimes you hit a crappy tee shot (read: make a bad initial investment, have some external

force impact you financially, etc.) and you can respond only one of two ways: you can throw your statement, complain about how your broker screwed you, whine about how the dude on CNBC lied, or:

you can get back in play.

Sometimes that means you have to punch out of the rough under a tree branch; sometimes you have to layup to the 100 yard marker; either way, don’t get upset – just get back in play.

When you make a poor investment decision that means:

1) Don’t worry first about assigning blame. Worry about correcting the problem.

2) Stay calm. Getting upset isn’t going to help you create better returns later.

3) Once you’ve regrouped, THEN determine what went wrong. Was your broker the problem? Did you not analyze the investment correctly?

You’ll invest much better following these simple steps that I learned from playing golf.

A Chart that Frightens Me: Investing 101

June 5, 2012 by Average Joe 20 Comments

In the past several weeks, I’ve ground my axe on charts that are either misleading or actually say nothing.

Today, let’s counterpoint: I’ll show you a chart that makes sense to me AND fills me with more dread than seeing Aunt Ernestine in a swim suit.

…a rather unflattering swim suit.

I found this chart at FRED, an acronym for Federal Reserve Economic Data. This website is chock-full of charts and graphs direct from the government and financial institutions. And, as a bonus, they’re usually easy to understand.

Bonus!

Here’s the chart I’d like to focus on today, class:

So, if you aren’t familiar with Treasury Inflation-Indexed Notes, don’t start nodding off on me! I’ll have to send Aunt Ernestine over to sit on your lap.

That woke you up.

Let’s explain what the $%!@ we’re looking at here.

As you can see on the header, this chart shows the yield-to-maturity on a 10-Year Treasury Inflation-Indexed Note.

What’s a “Treasury”?

Investments that are simply referred to as a Treasury in the U.S. are products of the U.S. Government. They’re sold at an auction. The amount of the note is fixed (you buy in $100 increments), but the interest rate is what they bid on. If nobody bids, the government will have to pay a high return to lure investors. IF lots of people bid, the government is able to sell the debt for a lower price. Initially, this debt was priced at 1-1/4%. That’s a nice win for the U.S. Government.

As an example, if you have great credit, you do this with credit cards. Instead of jumping on the first credit card offer, you examine the interest rate. If it’s higher than you want to pay, you keep searching. Essentially, you’re pitting “investors” (lenders) against each other for the pleasure of holding your debt.

What’s a Note?

A note is a ten year bond. Once the bond is issued (this one was issued in July of 2010), it’s paid off ten years later.

Do you have to wait ten years to sell your bond? No. You’re allowed to sell early, but you’ll do it on the open market.

The open market conditions produced this graph.

What Does the Graph Show?

This graph DOESN’T show you the price of the ten year bond. Instead, it cuts to the chase. If the bond is sold initially for $100 (called the Par Value), and an investor will give you $105 for it, he should already know that he’s only going to receive $100 when the maturity date comes. Therefore, it’s a simple computation: if you over or underpay, what is the true interest rate you’ll receive?

This chart shows the true rate if you purchased this 10 year note today.

In short: the price is so high you’re guaranteed to lose money.

Ouch.

Why is this Frightening?

If investors are comfortable loaning money to the government, knowing that they’ll lose money, this means that other places to invest money are even uglier.

In short, we can discern:

– There is much constenation about the financial markets now

– Lots of investors feel comfortable losing a little money with the U.S. government

From that I infer that investors think they’ll lose more elsewhere.

Is This An Opportunity?

Clearly, there is less opportunity in Treasury Inflation-Indexed Notes than there is with Aunt Ernestine. However, some investors may think that this means that the panic has gotten so high that there are obvious opportunities elsewhere.

Maybe.

Remember that the majority of traders have more money than you and I. Professional traders work from platforms that spend more money on research than we spend on our homes. If you’re looking for opportunity, it isn’t apparent in this particular graph. You’ll need to look further.

Where Do You Look Next?

This chart leads me to want to see past correlations between the 10 Year Treasury Inflation-Indexed Note market and other financial markets. By viewing these, I might be able to better discern if this is simply panic or something bigger.

Facebook and Morgan Stanley: Who is To Blame?

May 30, 2012 by The Other Guy 15 Comments

Whose responsibility is it when your investment in Facebook or Morgan Stanley declines in value? The company? A broker?

Certainly you’re not to blame.

The current proliferation of lawsuits against these companies makes me ask a straightforward question. Should there be lawsuits against Facebook and Morgan Stanley? (See these articles for more information if you don’t know what I’m talking about: Forbes: Facebook Lawsuits Piling Up.)

I’m reminded of society’s lack of personal responsibility each and every time I drive up the highway to see my mom. I haven’t added all the advertisements up, but there is a certain personal injury lawyer in our town who advertises everywhere. I don’t know this lawyer intimately, but my wife works in the same office building and sees the people who come in and out of the front door. There are all sorts of people trying to sue for anything under the sun. Instead of trying to take over the world, they’ll just take it from someone else, because somehow, they’re “owed” something.

One of my favorite books is The Road Less Traveled by M. Scott Peck, M.D. That book contains my favorite quote from any book:

We cannot solve life’s problems except by solving them. This statement may seem idiotically tautological or self-evident, yet it is seemingly beyond the comprehension of much of the human race. This is because we must accept responsibility for a problem before we can solve it. We cannot solve a problem by saying “It’s not my problem.” We cannot solve a problem by hoping that someone else will solve it for us. I can solve a problem only when I say “This is my problem and it’s up to me to solve it.” But many, so many, seek to avoid the pain of their problems by saying to themselves: “This problem was caused me by other people, or social circumstances beyond my control, and therefore it is up to other people or society to solve this problem for me. It is not really my personal problem.”

This is as true in the investment world as anywhere. As an investor, you must accept responsibility for your own investing decisions. You cannot blame others for your decisions (or indecisions). You won’t help your cause with a “I’m mad I made a bad decision in investing so I wanna sue everyone” mentality. Recent lawsuits against Facebook and Morgan Stanley make me crazy – I don’t believe for a second that if some magical prospectus would’ve fallen from the sky that all these people wouldn’t have bought Facebook stock. There’s all this talk about how Morgan Stanley screwed everyone and how Facebook lied — why didn’t these people do their own research? Take some personal responsibility! I’m pretty sure that had Facebook stock gone from $38 to $75 in one day, Morgan Stanley would not have called all the new shareholders and said “Oops, we priced this incorrectly so we need to sue you to find a more correct price.”

As an investor, you and you alone are responsible for the actions and outcomes of your investing decisions. Whether you have an advisor, a consultant, or are a DIY’er, remember one thing: it’s your money.

Be accountable for it.

Beware Charts, Graphs and Snake Oil

May 24, 2012 by Average Joe 15 Comments

I did away with my Boner of the Week! series that called out stupidity in financial media and blogs because I didn’t want to be that guy. Well, at least not be that guy not every week.

But this site is called the Free Financial Advisor for a reason. My task is to show people the difference between the truth and lunacy; to dole out useful tips that you can apply, sprinkled with my own quirky sense of humor.

Buy the doughnut, the frosting comes free. Bargain!

What I also drag along is a HUGE sense of anger when I see absolute baloney (polite terminology) on the internets.

I fought it as an advisor, and I’ll fight it here for you.

So, this week I’m going to un-bury the Boner of the Week! segment, along with the prerequisite, er, uncomfortable picture. Because I’m too lazy to find a new one, you’re treated to my favorite from the old series.

You’re welcome.

Let’s rant:

A Tip For New Investors:

If someone shows off a chart with a couple squiggly lines and points at them BUT REFUSES TO TELL YOU WHAT THEY MEAN it isn’t “analysis.”

It’s smoke and mirrors.

That’s why I like the DQYDJ blog and ws fired up when PK agreed to join our little podcast. He presents a chart or concept and then explains it. I’m a little smarter for visiting DQYDJ. Check out How Do You Know You’re Ready For Active Investing? Sure, I get PK’s returns, but I also get books to read, a chart on his personal progress and the story of how he began. Good story, good tips, good times.

Onboard?

Don’t try to just show me a chart and tell me “I predicted the financial markets would decline, and see, I’m right.” No reference to how the chart works. No rationale behind the prediction. Just “I’m right. Deal with it.”

Even if the chart is flippin’ brilliant, do you treat financial sites like the circus? Do you come here to see my dogs and ponies? My smoke AND mirrors? Do you want me to flash you a quick glimpse of my 12 inch wealth of knowledge so you can swoon over it?

Hell, no!

Like you, I visit sites for tips and tricks THAT I CAN USE. I don’t want to be shown stuff that I don’t understand.

If you hand me a shovel and I don’t know how to dig, all you gave me was a stick with a funny metal end.

Our “Boner of the Week!” target post (which I no longer point to directly, because that’s not the point of the piece….the point is to help you make better, more informed decisions. If you visited this bloggers site this week, I’ll apologize on his behalf), told us this week that “Mr. Brilliant” called the exact day the market was going to decline. He then advised us to stay out of stocks because it’s a bad, bad time for the market which will correct to (AND THEN HE BESTOWED UPON US THE EXACT RANGE!!!!).

Someone alert Jim Cramer. There’s a new sheriff in town.

Why the hell isn’t this guy working for a huge Wall Street firm or being paid the big bucks by wealthy investors who eat these gurus up? I used to ask my clients this question when they’d bring in what I’d call “miracle fliers” from their mailbox. Some dude telling them that he has all the answers.

I was a good financial advisor. I knew one thing: I didn’t have all the answers. Ta-Da!!!

Oh, my friends, that alone wouldn’t raise my ire. Ready for the next one?

Then he tells us to subscribe so we can find out what stocks we should buy when the time is right.

Thank you, your lordship Mr. Merlin soothsayer.

I don’t want a magical list of stocks. IF I did, I wouldn’t be looking for them on your free internet site.

Here’s what I want: tell me the criteria you used and I want to be taught to use it.

What I’m Railing Against

Did the dude call the market?

Yup. It appears he did.

Could he know how market conditions work?

Yup, he maybe can.

Are you just whining, Joe?

No.

I want this dude to tell me why, not what! A site like this is dangerous because you become dependent on the author. What happens if Mr. Brilliant has a Philly cheesesteak sandwich that doesn’t agree with him tomorrow and his indigestion decides that you should go 100 percent into Zynga stock? Or he tells you that the end of the world is coming and you should sell everything? Would you just follow like a lemming off the cliff?

Don’t follow someone blindly.
Learn to do your homework.

I naturally mistrust when ANYONE tells me they can call the market (after 16 years as a financial pro I saw professional gurus get beaten down by the financial markets time and time again).

One of my favorite stock trading books is called Trading Rules: Strategies for Success’ target=_blank>Trading Rules, by William F. Eng. The basic tenant of the book is that you do yourself a huge favor when you quit pretending you know anything about the financial markets. Once you realize that it’s a freakin’ scary-ass place, you’ll start protecting yourself and making money.

One of Mr. Eng’s fundamental rules: Tips Don’t Make You Money (Rule 7).

William F. Eng is a wealthy trader. I understand his background. I know nothing about wonderboy Mr. “I called it” dude.

Set stop losses. Learn how fundamental analysis works. Explore technical analysis.

But don’t let someone tell you when it’s the time to buy and the time to sell JUST BECAUSE THEY TOLD YOU SO!

They won’t lose the money, you will. And then you’ll be cursing the blogger, who won’t hear you over the dance music he’s playing for the rest of the suckers who hang on every word he says.

Rant over.

High Yield vs. Other Investing Categories in Pretty Pictures

May 16, 2012 by Average Joe 14 Comments

When words don’t work, I’ll emulate my buddy PK at the DQYDJ blog and resort to graphics when explaining your investing options. Since I can’t personally be bothered to create any type of creative chart, I’ll instead use a graph that I received from a friend.

Before we peruse this particular investing chart, I should introduce it, like a big star explains the movie clip:

People worry often about risk when investing. You should. It doesn’t make sense to risk your portfolio without knowing what type of return you’ll receive.

As an example, one of the riskiest investment classes is art. I know and you know that your dogs-playing-poker is probably a timeless classic, but beauty is definitely in the eye of the beholder on that one. Unfortunately, if you paid $10k for your Velvet-Elvis-and-the-Eagle rug, that’s probably considered a capital loss.

Here is the risk/reward profile of high yield vs. other asset classes:

People are generally shocked when they see the risk/reward profile of high yield bonds. Is it true that JUNK BONDS are significantly less volatile than large-cap stocks?

Yup.

High yield bonds aren’t much more volatile than 10-year treasuries (which, ironically, have been more volatile than investment-grade bonds)?

Yup again. I knew people who came to this website are flippin’ brilliant.

Maybe now is a good time to review my posts last week on the topic of high yield bonds:

Off topic: Check out German stocks. Lots of volatility, plus those people wear black socks with sandals. I don’t know what those two points put together says, but it sure feels awkward.

How about you? Does this chart surprise you? Can you see my love affair with high yield? Make you laugh? Improve your outlook on life?