Tag Archives: stock market

Investing – To Hold or Follow the Crowd?

The last few months had been a huge roller coaster ride when it comes to investing in stock markets. The increase in Covid-19 infection rate together with the economic conditions have such profound effect on the stock market that making a profit is a hit or miss.

Investing in stock market has its own inherent risk. One one hand you can earn some great money if you made the right choice. On another hand you can easily lose everything if you made the wrong choice.

If you follow my earlier posts, my investment strategy is a mix. I have a diversified portfolio to reduce the risk of losing all my investment. Besides investing in well known stable companies, I also invest in bonds and stocks. I only invest less than 30% of my assets in volatile stocks.

Here is what I noticed on my portfolio for the last 2 months. The stable companies such as Microsoft or Apple continue to do well. Stocks that pay dividends are also stable and had very little volatility. In fact I did not lose any values on these stocks, bonds and ETFs.

On the other hand, the stocks that go up and down the most are those that do not fall into any of the categories I noted above. Stocks such as meme stocks or those that do not pay dividends. Some of the stocks that I own are Pinterests, Snapchat and pharmaceutical companies. These stocks continue to lose value as more investors continue to buy and sell at higher volume. In total, my portfolio for this portion of the stocks did not do as well as I hope.

Luckily I diversified my portfolio that the risk for it to lose is minimal. In fact, I learned that by holding onto the stable stocks, I continue to make capital gain on them. Unfortunately, some of the value was negated by the volatile stocks.

Here is what I learned since I started investing actively. Sometimes it is safer and more profitable if you just invest in stable stocks and hold them forever. The value of these stocks continue to increase while stocks that are being bought and sold tend to lose value at a higher rate.

If you are interested in investing stock market, I highly recommend that you do some research on the stock market and the companies that you plan to invest in. Do diversify your portfolio to minimize the risks and finally if you want to “follow the crowd” do put only a small percentage of your portfolio on risky stocks.

Should Stock Speculation be Reigned In?

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In the past week there were a few anomalies in the stock market. Beside the “normal” increase in stock prices for a number of stocks after the inauguration of President Biden, there were a number of stocks shot up in prices that are out of the norm and shouldn’t have happened.

The 2 stocks that particular interesting are GameStop (ticker: GM E) and AMC Entertainment (ticker: AMC). GameStop stock price shot up by almost 700% in a week time while AMC Entertainment went up by 430%.

I’m not here to trying to understand or find out the cause of the price increase. If I have to guess, there is a lot of speculating of the stocks and through social media they are a lot more buyers jump on the band wagon and start trading these 2 stocks. There were a lot of short sellers that artificially increased the stock price beyond their value.

There is nothing wrong for any stock price to go up or down. However, if we dig further on GameStop, it is bleeding badly since the beginning of the pandemic. On top of closing 300 stores permanently it is impossible for the company to be valued at its current price. A year ago GME stock price dropped to $2.57. As of today, it went all the way to $380.

The stock price of AMC Entertainment is also the same. The lowest price of its stock dropped to less than $2 and it went all they way to $20. AMC is especially hit hard by the pandemic as more and more people skip the theater and stay at home. It is unlikely we will see AMC to increase its business anytime soon. The company even warns that it may run out of cash early this year.

The problem with these two anomalies is because of a lot of speculation of investors who are gaming the market. There is nothing wrong in making money off the market, but there should be a limit. That’s where the regulators come in. There are many controls in place set by the regulators to ensure the market is viable and not being abused. All the licensed brokers and companies have surveillance in place to prevent abuse. The trading apps such as RobinHood and Trading212 are uncharted territories for the regulators.

These anomalies will definitely raise a lot of red flags with the US regulators. I can assure you that there will be a lot of investigations in the upcoming weeks and there will be regulation in place by the end of the year to prevent this from happening again.

When I told my son that it is wrong to speculate. He asked me a good question. How are the GameStop and AMC different from Tesla? Tesla is trading at its highest and that made Elon Musk the richest person in the worth. If you dig further in the balance sheet of Tesla, it has yet to make money and consider its stock price compare to its valuation, Tesla stock is way overpriced.

I guess the question is should the regulators reigned in investors from speculating on stocks? If yes, at what threshold without stifling the market? I work in Internal Audit function of one of the largest bank in the world and this will be interesting to see in the few months. And how the market will react if the regulators start clamping down on such behavior.

All I can say now is as always the stock prices for these two stocks will right themselves up according to the market. In other words, their prices will drop according to their value. If you bought these 2 stocks, I recommend that you sell them before you start losing money.

It is unfortunate that a few bad apples take advantage of the market and hurt the rests of us who are honest investors. Let me know what you think?

Should You Take Risk?

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A Wall Street sign is pictured outside the New York Stock Exchange in the Manhattan borough of New York City, New York, U.S., October 2, 2020. REUTERS/Carlo Allegri – RC2HAJ9BI6XP

The US economy, including the world’s are at a free fall because of the pandemic. Prior to the Covid-19, the US economy started to recover until we had an inept President. One of the results of all these is the interest rate, which is perhaps the lowest we have ever seen and will remain so for a long time. What this means is that it is cheaper to borrow money. On the downside, if you have money saved in any savings accounts, you are unlikely to get any interests from the banks.

What the pandemic has taught us is that we need to keep at least 3 months in a savings account for rainy days. However, the pandemic continues to go strong in every parts of the world. Some experts believe the old belief that having 3 months of cash to cover the cost of living is no longer enough. Now we need at least 6 to 9 months saved.

The question is where do we save the money. Saving the money under the carpet is a bad idea for obvious reason. Saving the money in the bank is the best choice. However, with the interest so low even the highest yield saving account could hardly pay any interest at all. How do we continue to generate passive income, in this case interest, that will help us to have a peace of mind in case we ever need that kind of money at times of need?

I was reading the December 2020 Kiplinger issue and one of the article suggests that we should adjust our investment portfolio and put more in stocks. If you read my earlier posts we need to be aware of the risk tolerance that we are willing to take. We should be more conservative by spreading our risk between bonds, ETFs and stocks. However, with the interests so low bonds hardly pay any dividends. Should we take more risks by divesting bonds and put more in stocks?

If you follow the stock market today (as of January 2021) it is doing the opposite from what the economy is telling us. There are more and more Americans filing for unemployment and there are more and more companies shutting down because of the Covid-19. Why is the market still going up? The stock prices for many stocks are perhaps at their highest we seen in the past decade.

Investing more in stocks become more intriguing because for the past year they continue to shoot up at an unprecedented pace. After Apple stocks split, it’s price continue to go up at a steady pace. Elon Musk because the richest man in the world as Tesla stocks went up by 100% after it splits its stocks. Now experts are saying we are at the cusp of market bubble.

The Kiplinger magazine is one of the magazines that I read every month and I’m surprised that it would suggest its readers to invest more in stocks at the time like this. Is there any truth or rationale for taking such a drastic step? As I ponder this question, I totally agree given what we know of the stock market today. As an example, I helped my wife to invest in stocks using Robinhood. Since October 2019, her portfolio increased by 63%, which is crazy.

Regardless, I will continue to take careful step when it comes to investing. While I have enough cash to cover my living expenses for the next 8 month, I continue to take a conservative approach and leave my portfolio unchanged. My portfolio is made up of 40% bonds and ETFs, 30% on reputable stocks that pay dividends and the remaining 30% of “play” money where I use it to flip. My strategy has been successful in that I am able to increase my portfolio by about 70% since I started investing in 2017.

Let me know if you will subscribe to the thought that investing in stocks better today? Or are you willing to take the risks in hopes that the stock market will continue to go up?

Right Mix of Investments

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The app Robinhood has helped many new investors to monetize stocks. Previously stock investment was only for the rich and the wealthy because most brokerage firms required a minimum assets to open an account. Additionally, there is a fee for each transaction. Unless the transaction would generate a positive spread there is no reason for anyone to buy and sell stocks.

Recently Robinhood was put on the spotlight because there were a number of news how some investors took too much risk and lost a lot of money. The worst news was a 20 year old committed suicide because he thought he lost $730 thousands from betting on options. Investing in stocks are risky. Anyone who want to invest in stock needs to understand the risk and each investor needs to know his/her risk tolerance.

There are a number of experts who continue to point out that to minimize losses in stock market is to diverse their holdings. For new investors, they need to at least have a basic understanding how stock market works and what are some of the investment vehicles that are available to them in the open market. The question is what is the right mix of investments for a new investor?

How Much Risk

There is no clear answer on what is the right mix of investments because everyone is different. There are some who has a lot of liquid assets and willing to bet all. On the other hand, there are some investors who want to dip their toes in the water and would not take any risks. I have been investing in the open stock markets for over 3 years and majority of my assets are in the traditional retirement income of which I have no control over what to invest in. I learned to understand how much risk I am willing to take and that in turn helps me to understand what mix of investments that works for me. Below are some guidelines that I hope you find helpful.

Understand Your Financial Standing Before Investing

Although investing in stock has become easier for the mass, it is still not for everyone. The type of people who should be discouraged from investing are those who are having difficulties in earning enough to make ends meet and those who have high debt. Investing involves taking a large sum of funds and put it in a basket that could lose value.

Before an investor start investing, the person should take stock of his financial status and determine if he has the means to invest the money otherwise meant for sustenance. In 2018, the Federal Reserve Board did a study and found that 40% of Americans do not have $400 in the bank for emergency. The rate today could be higher due to the pandemic. A lot of Americans borrow from their credit cards to meet daily needs, including investing in stocks. There was an article in July 2020 of how an investor started investing by borrowing from credit card and with devastating results. Investing in stocks is risky and there is a likelihood that you could lose value. No only you could not recoup your investment you are now liable for the money that you borrow.

Separate Asset into Categories

Investing in stock market is similar to gambling, but legally. Like all gambling, you could win all and you could lose all. To minimize the risk of losing all, it is advisable not to put everything in one bucket; experts call it diversification. As noted earlier, majority of my assets are in retirement account. I only have 10% of my asset invested in open market. Additionally I further diversify my investment to further minimize the risk and maximize the return. To achieve this I categorize my holdings into 3 categories and I also put in how much percentage I own.

Long Term Investment (15%) – These are the bonds and index funds that are stable. While the returns are minimal, the likelihood of them losing value is reduced due to the fact that they are consolidation of multiple stocks.
Capital Generates Passive Income (60%) – These are stocks of companies that are reputable and in good financial conditions. These companies remain to be profitable and are not likely to be at risk of default. The stock prices continue to be in the upward trend. Additionally, these stocks pay dividends, which is a type of passive income.
Play Money (25%) – I consider these stocks that are volatile and likely to lose value easily. However, volatility is also positive because to generate the spread is by buying low and sell high. These are the stocks that I will trade. These stocks to not pay dividend.

How Much Are You Willing to Lose

In an ideal world, we want to make money from stocks. However, stock markets go up and down. Hence, there are chances that one could lose money from stocks. Before anyone starts investing, he should set a limit of how much money he is willing to lose. Knowing the limit will minimize the risk of losing it all. The important question to ask is what sacrifice will you be making if you lose the money you invested.

Learn When to Quit

One of the important things I learned for the past year is know when to “sell” the stock. A profit is only realized when the stock is sold. On the other hand when the stock price falls below at a certain level, it makes sens to sell it before it goes any further. I learned the hard way when the Luckin Coffee stock that I owned continued in a downward spiral that there was no way for it to recover. I was holding to the hope that it would go up. Unfortunately that did not happen and the stock was subsequently delisted from Nasdaq. I lost over $900 when I finally sold the stock before its value dropped to $0.

One of the biggest challenge that I face is what happens when the stock prices of the company continues to go up? The premise in a stock market is buy low and sell high. However, I tend to hold on to these stocks especially if they are from reputable companies and they pay dividend.

Is there a right mix when it comes to investing in stocks? Yes, and it depends on one’s preference and how much risk is he willing to take. Before taking a big step in investing, it is also really important for the investor to understand his current financial status.