Shorting A Stock: Profiting On The Way Down
Shorting a stock is a high risk, high reward strategy. It goes against the market trend. It’s unnatural.
Everyone and their brother wants the market to go up, not the short seller. Shorting a stock is not the popular choice, but there are profits in going against the crowd.
Most of our investments go like this: we buy shares of a stock or ETF. Those shares will rise in value because our research says so. Then we’ll sell, make a cool profit and move to the next investment. That’s the simplified version. Shorting a stock or a short sale is the opposite.
What is a Short Sale?
The SEC defines shorting a stock as:
A short sale is the sale of a stock that an investor does not own or a sale which is consummated by the delivery of a stock borrowed by, or for the account of, the investor. Short sales are normally settled by the delivery of a security borrowed by or on behalf of the investor. The investor later closes out the position by returning the borrowed security to the stock lender, typically by purchasing securities on the open market. Read more…
Build Your Own (Cheaper) Mutual Fund
Two of the biggest arguments against mutual funds are high costs and poor performance. When your mutual fund starts under performing and increasing costs, instead of finding another mutual fund money sink, build your own.
When a mutual fund is started, it’s built around a goal. Something that easily explains to investors how all that money will be invested. There’s a hitch, though. With an active manager you just never know how much they veer off course from that goal. And when they fail, it only costs you more. Which is just one of many limitations.
Costs limit your investment performance. There is no way to cut costs entirely. So we have to focus on keeping it to a minimum. This keeps more money invested and growing over the years.
Then there is the performance issues. Your money has a goal (at least it should have a goal). So you search through all the possible funds to, hopefully, find a few that sync up with your goal and don’t eat away too much of your profits.
It all works out for a while until the cost and performance of those mutual funds don’t live up to expectations. So you look for another fund to put your money in and the cycle starts all over, compounding the costs.
Of course, there is another, cheaper option. Read more…
Beware: ETFs Should Come With A Warning Label
The continued growth of ETFs isn’t going to stop anytime soon. If your 401k doesn’t offer them as an investment option, just wait. It will soon. As the low-cost equivalent to most mutual funds, ETFs are becoming the go to investment of choice for anyone not willing or interested in stock picking and owning individual bonds. But is it a good thing.
One of the benefits everyone, myself included, touts about ETFs is how easy it is to buy and sell them. The soonest a mutual fund share transaction goes through is at the end of the business day, if you’re lucky. With ETFs you can buy and sell them in microseconds and its done. Now anyone can be a trader for a day and the growing number of exotic and specialized ETFs just makes it easier. There in lies the dilemma. Read more…
What Type Of Investment Strategy Should You Use?
People are constantly on the lookout for the perfect investment strategy. That Holy Grail of constant profitable returns. Unfortunately, no strategy is perfect in the sense that it will guarantee good returns. In fact, I’ll argue that only having one strategy limits our ability to invest profitably.
Currently, investment strategies are a popularity contest. The strategy with the best returns last year or the one most recently written about, tends to get the most attention. Good for the strategy and book publishers, but is it best for new investors just starting out? Hardly! Because what works for me may not work for you. Instead, it should come down to your comfort level, knowledge (hopefully), time, and your financial situation.
Trading Strategy
Trading is definitely not for everyone. It’s time-consuming, stressful and short-term oriented. Trading can have a timeline of seconds, days, weeks or a couple of months. But the goal is to reach a target price, sell, and walk away. Traders take advantage of short-term trends, news, and speculation to make fast money.
An extreme example of this, Read more…
The Idiot Proof Portfolio
Investing can be complicated and sometimes you just want to simplify your investing in a way that still gets you a good return while protecting you at the same time. The Idiot Proof Portfolio is a simple low-cost, low maintenance, easy to understand approach to investing. What you eventually decide to do is up to you, but sometimes keeping things simple is the best route for long-term investing.
The fact is most people don’t need a complicated investment strategy. They either don’t have the capital, the know how, or time to make it worth while and they never will. Yet we continue to take on unnecessary investments because someone, somewhere stated that is how it’s done. The arguments usually contain terms like diversification, risk aversion, and cost control all things you’ll get with the Idiot Proof Portfolio.
What the Idiot Proof Portfolio provides is an easier way to understand, manage and invest your money. It’s not sexy or exciting. But it leads to low costs, simplified taxes, less paperwork, easier rebalancing, and just spending less time hassling over your investments. It won’t break any records but it will protect you in down markets and reward you in up markets, as long as you stick to it. Most importantly you’ll know why.
The Idiot Proof Portfolio
The portfolio has a goal of easy maintenance, low-cost, risk control and diversification. Read more…
Goodbye 2011: Best And Worst Market Awards
Part of having a finance blog offers me the opportunity to add my two cents every now and then. With that in mind I’ve come up with the Novel Investor Best and Worst Awards for 2011, relating to stocks and ETFs that may or may not have been part of your portfolio this past year.
In order to come up with the stock list, I eliminated all penny stocks and limited the list to the more well known companies. For the ETF list all leveraged ETFs were eliminated. Something to keep in mind before getting into the winners or losers, these are not investment recommendations and past performance doesn’t equate to future performance so invest at your own risk.
Best Stock of 2011 – Mastercard (MA)
In a time when debt has been the biggest topic in personal finance, Mastercard stock was one of the best performers of the year. Finishing the year up 64%. Thanks in large part to the growing cashless society we’re moving towards. The Fed allowing banks to charge more for debit card fees didn’t hurt either.
Worst Stock of 2011 – Research In Motion (RIMM)
Proof that not keeping up with tech trends is bad. The maker of Blackberry phones has been destroyed with the advances in the smart phone thanks to the Apple IPhone and the growth of Android smartphones. RIMM failed to get on board and has been killed because of it. Starting off January at $58/share and ending the year around $14/share, for a loss of -76%.
My two cents is this company is done. The current smartphone wars will come down to Android and Apple. Very reminiscent of the operating system war of the 90s. Android is the new Windows for smartphones. Hopefully better, but there’s only one real winner in Google.
Best and Worst Stock Award – Netflix (NFLX)
Commission-Free ETFs: Worth The Savings?
The commission-free ETF craze has been a growing trend among brokers for the past few years. With ETFs already a popular alternative to mutual funds, taking advantage of an opportunity to eliminate high commission costs can be persuasive. Your current online broker may already offer commission-free ETFs as an investment choice. But are they the best option?
Commissions Are Relative
Commissions can be the bane, to any portfolio’s returns. Those commission costs have to be made back before any positive returns are realized. A $5 to $10 commission may not seem like a lot of money. But in relation to the investment return you’ll need to break even, it can be very high.
| Invested Amount | $5 Commission | $10 Commission |
| $100 | 10% | 20% |
| $500 | 2% | 4% |
| $1,000 | 1% | 2% |
| $10,000 | 0.1% | 0.2% |
Looking at the table above shows the higher the investment the lower the break even return. For every investment, a commission is paid when you buy an ETF and again when you eventually sell it. If your starting out, investing $100 each month, commissions can destroy any potential returns. Commission-free ETFs offer a compelling option, especially when putting your money to work immediately. Read more…
