#1 Intro Deeper Dive

I really don’t want to preach but if you’re reading this, you’re ready for help and that’s a great first step. Having three months salary and insurance seems like a lot but even that is not enough. Living paycheck to paycheck is not living. Everyone’s situation is different but the one commonality is, here in America, we control our own destiny.
A socialist will look at a mansion and think no one should be able to live like that. A capitalist will see that same mansion and think everyone should be able to strive towards it. My point here is, if you think the government will dig you out of poverty, you will be sorely mistaken. Look around. When has government ever solved a problem?
The answer is for each of us to be responsible for ourself. Yes, when you get on your feet, give something back to charity but we are the only ones who can dig us out of whatever hole we’re in. No matter how hopeless life seems, there are options for those who choose to pursue them.

Step 1 Assess the situation without emotion or blame. Either there’s not enough income or there’s too much outgo.
Step 2 Consider your options. This might mean getting another job or cutting a credit card in half or both. Even people who earn huge salaries can wind up broke if they don’t watch where the money goes and have a plan for the long haul.

The economy, like many things, moves in waves. When the job market is strong, leverage that to better position yourself. Staying in a dead end job leads to a dead end. If you want the government to raise the minimum wage, employers will simply raise the price of their product to pay for it. Prices will rise across the board and then the new minimum wage will not be enough. It’s a vicious cycle. The answer is to do what’s best for you and not wait for anyone else to fix your problem.
One last word on credit cards. The only credit card you should have is one where you pay the balance in full every month and pay no charges. They will even pay you a percentage of what you buy with it. Credit companies make huge profits on people who pay only the minimum. Don’t be them.
One last word on careers. It’s highly unlikely you will be hired as CEO even though you’re obviously qualified. Start at the bottom and show your new employer what you have to offer. Here’s where the magic starts. Avoid being typecast as an entry level employee. If promotions don’t come fast and furious, jump over to the competition. Companies love hiring from each other. You’ll always be valued for your experience by the other firm to a greater extent that the current one. Companies also seem to love people who are willing to relocate. If you are open to new locations, your upside potential will increase dramatically.

Digging Deeper Introduction

I would like to thank The Beachside Resident again and again for helping me to launch this project with their support and encouragement. Also, a big thank you to my son, Jason for the idea of creating this website. Without his technical skills, none of this would be possible.

The Beachside Resident was great from many angles but the one drawback was the limited space. I was capped around 350 words per article. As a result, the monthly column was brief and I often felt there was more to add.

In this ‘Digging Deeper’ series, I will take each topic, in order, and expand on the thoughts that were initially presented.

My singular goal is to help anyone who reads this to be a better investor and achieve greater success through a better understanding of the markets.

Questions can be sent to spacecoastmoneytalk@gmail.com

Free investing seminars are offered through the Cocoa Beach and Cape Canaveral Public Libraries. Schedules can be found on their respective websites.

Stay tuned…

 

 

Closure

We’ve come full circle. We spent the last year talking about stocks, mutual funds, etf’s, and bonds. We discussed how to build a balanced investment portfolio and then ventured over to the dark side with options. A common tool used by investors and traders alike is technical analysis or charting.

Most anyone can look at a chart and spot a trend. However, there a wealth of information if you know how to look deeper. Part science, part art, technical analysis can help prevent mistakes when both buying and selling. Today’s financial websites will even analyze the chart for you. You just have to know what to ask. No math, no mess.

The beauty of charting is its indifference. No emotion and all news/public sentiment is already priced in.

I could go in depth and drag this out another year buy nobody wants that. You can find excellent books on the subject at any library or bookstore and I will be covering the topic during my seminars.

True story: A farmers favorite mule fell into an abandoned well. When the farmer found out, he tried and tried but could not get the mule out. He decided the humane thing would be to bury him in the well. As the dirt fell on the mules back, he would shiver and it accumulated on the floor. Soon, he was up to his knees it dirt. One leg at a time he stepped out and stayed on top of the dirt pile. This continued until he was high enough to jump out of the well. Moral: When life piles on the dirt, shake it off and step up.

I would like to thank the staff at The Beachside Resident for their encouragement, support and patience to make this column happen. I’ve had a blast writing it. I hope you enjoyed reading. Peace.

Investing seminars now at Cocoa Beach Library
Send questions and comments to: spacecoastmoneytalk@gmail.com.

Beachside Resident #13 Options pt. 3

In the last couple issues, we established that options are contracts to buy or sell a stock at a specific price and are good until a specified time. Because of the time deadline, the value of a contract will erode away until all time has expired. In order for the option to increase in value, the underlying stock price needs to outpace the decay. Seriously, are you still with me?

Because of this decay, I made the case to not buy options (calls or puts). Under certain conditions however, it might make sense to sell options. This is where you might want to put your tin foil hats back on. With a disciplined and focused mindset, there are two possible plays.

1) If you own stock bought for $25 per share that currently trades for $27, you could agree to sell it for $30 per share and get paid to do it. You must be indifferent to selling the stock. If it goes to $50 per share you’re still obligated to sell at $30. This is not a get rich quick scheme. It’s a way to generate a little income from your portfolio.
This strategy is called a Covered Call.

2) If you plan to buy XYZ stock currently trading at $25 a share, you could sell a put option that would allow the buyer of that put to sell you the stock for $24 a share. If you like the stock at $25, you should love it at $24 and get paid to buy it. The risk is if the stock tanks to $10 share, you still must pay $24 but you were going to buy it anyway, right? Your broker will require a cash balance to be held in case the option is exercised. This strategy is called a Cash Secured Put.

How can you sell options you don’t own? Think of it as selling an obligation to buy or sell. It’s very possible the option expires worthless in which case you keep the cash you were paid and do it again.

Investing seminars now at Cocoa Beach Library
Send questions and comments to: spacecoastmoneytalk@gmail.com.

Beachside Resident #12 Options pt. 2

Last month, we looked at options and covered the basics. Time for some fun. Grab your tinfoil hat and galoshes. We are going on a dark journey. Rarely talked about, in back alleys it’s whispered only in hushed tones…shhh…time decay.

All options have an expiration date. You have the right to exercise your option until that date. Time decay is simply time running out as that date draws near. Want a visual? Imagine a handful of sand. Imagine sand slipping through your fingers as you near the deadline.

If the option expiration is a year away, it will have a lot of time value. If it expires in two days, not so much. Options are priced to fail. Based on the volatility of the stock and the amount of time to expiration, most options whither away worthless much like the handful of sand. What this means to you is, if you buy a call option because you’re sure XYZ stock price is going to soar, that expected bump is already priced into the option.

If you’re still reading, it’s now safe to take off your hats. The bottom line is, it’s really hard to make money buying options. It’s gambling. The stock not only has to move in the direction you think but it has to outpace the time erosion. Even if you’re right, you could still lose. Visual? Think jumping in a river and trying to swim upstream.

If you read between the lines, you know where I’m going with this. If buying options is dangerous, what about selling options? There’s risk in everything. If you never trade options, that could be a good thing. However, if you do, why not let time erosion work in your favor? Think downstream.

I will soon be hosting investment seminars at the Cocoa Beach Library. Check with them for time and date.

Send questions and comments to: spacecoastmoneytalk@gmail.com.

Beachside Resident #11 Options pt. 1

“I was born with nothing and I still have most of it left.” Option players are similar to compulsive gamblers. With varying degrees of experience, most will walk away with less than they started with. There are ways to use options in a positive manner but we’ll save that for now and start with the destructive side because it’s more fun.

Let’s start with some basic terms. As usual, I’ll save the more in-depth stuff for the web site. Options are contracts that rise and fall in value based on the value of an underlying asset. There are two types of options, calls and puts. Every option has an expiration date.

Calls are a contract to buy, meaning if you have one call option to buy XYZ stock, you have the right to buy XYZ at a specific price until some future date. So imagine you spent a couple hundred dollars and bought this contract that guarantees you can buy 100 shares of XYZ for $25. Later that day, XYZ announces a new product will make them tons of money. The great news drives their stock price from $25 per share to $50. The stock doubled in price but the call option you bought for $200 is now worth $2500. Giddy up.

Put options are a contract to sell and perform the opposite of calls. The value of a put will go up if the underlying stock goes down. It’s like skating on the other side of the ice.

The appeal of options is obvious. Investment loss is limited to the original cost, in this case $200. Potential gain is enormous as illustrated. But alas, there’s a hook.

Options are priced to fail. If this is doesn’t scare you away, read it again until it does. The most likely outcome is the stock will wiggle around and go nowhere and the option expires worthless. Maybe you’re out $200. Maybe you bought 10 contracts and you’re out $2000. Either way, it’s a 100% loss.

Don’t buy options. Calls or Puts.

Send questions and comments to: spacecoastmoneytalk@gmail.com.

Beachside Resident #10 Fees and Other Random Rants

To make a good impression, an advisor takes his potential customer down to the local marina. He points to a yacht and says “This one’s mine”. He gestures further down at a bigger boat and then a monster on the end and proudly announces “There’s my managers boat and our directors power yacht”. Clearly impressed, the potential customer asks “Where are your clients boats?”.

Some jokes are funny because they’re true. This one is sad because it’s based on truth. Advisors who work through banks, insurance companies and big brokerage firms do not build wealth. They feed off it. If they’re telling you what to buy and you really don’t understand, that should be a huge warning flag. There’s nothing wrong with asking questions to understand your financial security.

One last thing on sales, avoid annuities, loaded mutual funds, reverse mortgages and precious metals from TV ads. If you already have one or more of these don’t rush to sell. It might cost you even more to get out. Get independent help. I’ll leave more information and specifics on my website. ’nuff said.

This months column marks a turning point in our discussion. We have covered the markets and various investment types then built a typical portfolio using the asset allocation model. In short…the way it should be done.

In future issues, we’ll dive into the way it shouldn’t be done. I’m specifically referring to day trading, charting and options. Better you learn about it here than from someone trying to sell you something.

Send questions and comments to: spacecoastmoneytalk@gmail.com.

Beachside Resident #9 Fixed Income (Bonds)

Last, but not least of our asset classes is Fixed Income. Before interest rates started stinking up the place after falling to near zero, fixed income products were popular with seniors as a safe and steady source of income. As with most investments, they go by many names but bottom line, we’re talking about debt. If you buy a bond, you’re loaning someone money.

A corporate bond is a loan to that corporation and any risk is based on that company’s ability to pay the interest and eventually repay the principle. A Treasury bond is a loan to our government and is about as risk free as you can get depending on how you feel about our country. Local governments can issue municipal bonds and these come with special tax benefits. Check with a tax specialist for specifics.

There’s a direct, inverse relationship between interest rates and bonds. For example, if you have a bond that yields 2% and interest rates start to climb, your bond will lose value. When other bonds are yielding 4%, your bond will look like a Yugo with three flat tires and no engine. You might resolve to hold it until maturity just to get your investment back.

When interest rates go back up (and they will), that’s the best time to buy bonds. Then, when interest rates start to come back down (and they will), your bond will increase in value in addition to all the juicy interest you earn while holding it.

Commissions to buy a bond are buried in the price. I’ll explain further on the website. As with anything else, the discount broker can sell you the same bond for less but they won’t hold your hand.

Is there a caboose to this train of thought? Yes. Don’t buy bonds right now unless you’re prepared to hold it for the duration which could be as much as 30 years.

With interest rates on the rise, consider a bond ladder if you build a bond portfolio. This is nothing more than a series of bonds with different maturities. Instead of locking in one rate for 30 years, they will mature at different times and hopefully yield better returns as interest rates rise. The two benefits are diversification and no market risk so long as you hold until maturity.

In other news, let’s talk to our elected peeps about fixing the Indian River before it’s too late. Maybe get a little crazy and talk common sense water management.

Send questions and comments to: spacecoastmoneytalk@gmail.com.

Beachside Resident #8 Index Funds

In the January issue, we used index funds to build a portfolio but never really defined what that means. Let’s do that now.

A common question from the beginning of time has been “How’d the market do today?” Originally, the answer was “How the hell would I know?” Then someone came up with the idea of an index or, a number of stocks that when grouped together might represent the market. Some early examples are the Dow Jones Industrials or the Dow Jones Transports, etc. Standard and Poor’s got into the mix with the S&P 500 index. It covered most of the market by using the 500 largest companies in America. Today there are hundreds of indexes covering everything.

Before, during or after this time, another bright idea was to group different stocks together to create an easier way to invest and mutual funds were born. A mutual fund can consist of stocks, bonds, options or just about anything.

It was only a matter of time before someone stuck their chocolate into someone else’s peanut butter and voila! Index Mutual Funds.

Exchange Traded Funds (ETFs) soon followed offering an alternative to Mutual Funds. Either one will work when building a portfolio. The web site listed below will provide more detail if you’re not sure which one is best for you.

The bottom line is watch out for expenses. If your mutual fund is a “loaded fund”, that’s a fee paid to your advisor. Some are paid when you buy, some when you sell and some bleed you out for the duration that you hold it. “No Load” mutual funds are what to ask for and demand from your broker. They’re very common. Both kinds of funds will have annual fees called an Annual Expense Ratio. The smaller the better.

Send questions and comments to: spacecoastmoneytalk@gmail.com.

Beachside Resident #8 Mutual Funds Supplemental

In the January issue, we built a portfolio using index funds but did not stop to explain. For our purposes, a fund is a collection of investments. They come in a variety of styles but we will focus on the two most common: open end mutual funds and exchange traded funds (ETFs). An index fund is one that invests in the same components of an index, like the S&P 500 for example.

Let’s set ETFs aside for now and look at mutual funds. A mutual fund is a pool of money that is managed by a fund manager. Shares of the fund are bought directly from the fund. When sold, they’re sold directly back to the fund. The shares are valued every day at the close based on the investments held to determine the price per share. The share price is called NAV or Net Asset Value. This is the price the shares can be sold for. It the fund is a no load fund, they can be bought for that same price. If a fund has a load (commission), it will show a POP price. Discount brokers will say there’s no statistical evidence that paying the load leads to better results so why pay the fee? Advisors who sell loaded funds will have a different story.

All funds will have an annual charge that’s used to pay management fees called an expense ratio. A fund’s focus is supposed to be evident in its name. If a fund is managed to play the market it will have higher fees. Sometimes these funds beat the indices and sometimes they don’t. Comparing their return of the last 5 and 10 years is a good indication but doesn’t guarantee anything. One of the advantages of using index funds is the lower fees. Index funds won’t outperform or underperform the market. They are the market.

For the portfolio we built, the index funds are easy and straight forward. The name of the fund should clearly describe its focus. For the more adventurous, managed funds come in a variety of flavors that can focus on a specific industry and/or theme. Some funds will use derivatives to magnify the markets. Stick with the index funds. They’ll get you there with much less drama.

Market risk is everywhere. It can be diluted with diversification.

Send questions and comments to: spacecoastmoneytalk@gmail.com.