A fun exercise: Stock picking verses indexing

The average person is afraid of investing in individual stocks and 61 percent of millennials say they’re afraid of even getting started. Despite the fact that investing in the stock market has been shown to be the most efficient and effective way of turning money into more money.

Financial website How Much took a look at some popular stocks in 2007 to find out how much a $1,000 investment in each would be worth now, as of October 31.

In the above picture, the blue dots are equivalent to the $1,000 initial investment, so they are the same size for each company. The pink ones represent the current total value of the investment, so each of those varies.

The larger the pink circle, the more your investment is worth,” according to How Much. “If the pink fits inside the blue, then you lost money. The graphic assumes that you took any dividend paid out in cash and did not reinvest into the company by buying more stock.”

Warren Buffett, Mark Cuban and Tony Robbins all agree index funds are a safe bet, especially for new investors, since they fluctuate with the market, stay pretty constant and eliminate the risk of picking individual stocks. However, if you were lucky enough to pick these 15 American stocks, your $15,000 would have been worth $99,291 compared to $26,741 for the S&P 500 (SPY).

What if you missed owning the two top performing stocks Netflix & Amazon? Your total return would have been $34,927 assuming that you didn’t panic during the great recession. There are other household names like Facebook or Visa that could have help you beat index returns.

Keep in mind, it is easy looking backwards! I do remember getting phone calls and emails from formal clients and co-workers looking for advice during the market meltdown of 2008-09. It is hard to do nothing and hold on to your investments when markets are down 35% to 45%!

My point is simple, even with the worse meltdown (2008-09) since the great depression of the 1930’s, you would have still made money investing during the past ten years. Investing in the stock market is still the most efficient and effective way of turning money into more money.

 

 

 

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Gold as a hedge against Trump’s Border Tax

Talk of a “border adjustment tax” has gone from the sidelines to center stage in Washington, which has a lot of people asking: What is it exactly?

Currently, U.S. corporations are taxed on their worldwide profits at 35 percent. The House GOP plan would change that radically. The new tax formula would tax domestic revenue (minus domestic costs) at a much lower rate of 20 percent. The net effect would be one that favors exports over imports.

The change would convert the country’s tax system to a “territorial” system rather than a worldwide tax system. It’s meant to create incentives for domestic production because companies also would no longer be able to reduce their taxable income by deducting their overseas expenditures.

The plan would essentially subsidize exports and lead to a 20 percent tax on imports for corporations.

Retailers are very opposed to a border adjustment tax because a large percentage of the products they sell are imported. The end result is Americans will pay higher prices for consumer goods including imported fruits and vegetables.

Now economists who support the tax say the policy would lead to a sharp rise in the value of the dollar. As a result, retailers’ costs will go down so much that it will be a wash to consumers. However, many CEO’s worry whether the economists are right in that assessment.

In the past, gold and gold stocks have been used by money managers to hedge against inflation, currency risk and world chaos. For years, financial advisors recommend having 5% to 7% of your portfolio in gold or gold stocks.

Unfortunately, we have been living with deflation so gold as an investment has not performed very well over the past five years. The chart below compares three ETFs – gold bullion GLD, large cap gold miners GDX and junior gold miners GDXJ

gold

The border adjustment tax could change all that. It could cause mayhem in world trade, leading to higher inflation and extreme volatility in currency markets. The chart below illustrates the 2017 year to date price movements in the above mention ETF’s

gold-1

The biggest risk to owning gold or gold stocks is if the Fed’s interest rate policy changes and they are more aggressive in raising rates. This could cause the value of the U.S. dollar to increase which would be bad for gold.

Fed watchers believe that the June meeting would be the earliest date for an increase in interest rates. The stock market has only priced in two rate hikes for all of 2017. President Trump’s immigration ban and talk on renegotiating trade deals will be in the news for the next few months making investors nervous.

I am considering three short-term trades in gold

  1. Dollar cost average: Buy 300 shares of GDX  at 24.50, Sell 3 Apr 26 call options for $1.20 & Sell 3 April 24 put options for $1.50 (Total investment = $6540.00 U.S.) 
  2. Covered call: Buy 100 shares of GLD at $116.20, sell 1 April $118 call for $2.25 (Total investment $9,370.00 U.S)
  3. Call spread: Buy 5 GLD April $110 calls for $7.10 & Sell 5 GLD April $118 calls for $2.25  (Total investment =$2,425.00 U.S.)

 

The problem with using options in these trade choices is the VIX that measures volatility is quite low. Having to wait until the April 19 expiration date reduces the profit potential. That being said, I think that the first trade is less risky, if I am wrong on the direction of the price of gold. I would own 600 shares of GDX at an average price of $ 22.90 but could then sell more call options.

Do you own any investments in gold stocks or gold ETF’s?

 

Disclaimer: These are not recommendations, please do your own research before investing.