By NewsOne Financial Blogger Ryan Mack:

If I gave you $100,000 today how would you spend it?

Before you continue to read, I want you to take a moment and think hard about this question. How would you put that money to work? After you have thought about it, which of the following two scenarios describes the best use of the funds?

Scenario A: Spend $50,000 on a “caddy”, $25,000 for your pinky, and the balance on a “pound of blow”. In twenty years you will have an old pinky ring and a lot less brain cells.

Scenario B: Spend $20,000 on a Honda Accord, $5,000 on a nice vacation, and invest $75,000 in your own portfolio. In twenty years you could have as much as $350,000 (with a very modest 8% return).

For those who chose Scenario A, you have agreed with famous rap star Lil’ Wayne as this scenario was taken from his lyrics in his song “Stuntin’ Like My Daddy”. I listen to rap music, but we must understand that many of the lyrics in this music were written because of their ability to make money…NOT because of their contribution to our intellectual capital as a people.

I personally agree with Scenario B and so do the majority of millionaires in this country. Half of the millionaires in America have never spent over $30,000 for a car in their ENTIRE life (The Millionaire Next Door, Thomas J. Stanley and William D. Danko).

One reason is they are so busy making money that they do not have much time to worry about self image. If you were TRULY wealthy, and like 5% of America who controls 95% of the wealth in America, would you care about what others thought about you? Another more important reason is they understand that as long as they are spending money on items that lose value instead of things that gain value they are less able to maintain and increase their economic status. This is why you will hear stories about Jim Walton, heir to the fortune created by his father Sam Walton (founder of Wal-Mart). He still drives a 15-year-old Dodge Dakota pickup despite being number 23 on the 2007 billionaire’s list. You may have also heard about Ingvar Kamprad, founder of multi-billion dollar enterprise and also a billionaire. He still drives a Volvo which is also 15 years old. Before he attained his fortune, his father gave him a very modest reward for doing well in school and what did he spend his money on…a “modest” furniture company named Ikea which reported revenues of $17.7 billion dollars in 2005.

The question that you should be asking if you do not know and have not asked already is, “What are they spending their money on if it is not consumption?” The opposite of consumption (putting your money into assets that lose value) is production (putting your money into assets that go up in value). Four of the most common vehicles that you can invest your money into are the following:

1. Stocks

2. Bonds

3. Real Estate

4. Entrepreneurship

1. Stocks

BNY's always informative and entertaining Nicholas Colas has a habit of seeing the silver lining, when others only see a putrid and radioactive mushroom cloud. And in this case, we do tend to agree with him... somewhat: when looking at the transformation currently gripping stock markets, instead of taking either extreme, Colas takes the Keith Richards path: adapt and survive (instead of fading away). And in surviving, the market may just return to that “old school” model of stock picking, and thus, fundamentally based stock trading, something which all investors and market participants lament and remember fondly as a bygone era before the Fed decided to take control of the entire capital market. However, where we are far less sanguine, is that for Colas' prediction to come true, it would necessarily (and sufficiently) require the removal of the Fed and its tentacular influence on stocks. And thus the question: can the existing stock market model survive an overhaul in which the underlying economic model reverts back from a central banking primed fiat system, to some "other" form of sound monetary decision making. That, we do not know.

From BNY ConvergEx:

Keith Richards and the "Death" of Stock Trading

Summary: U.S. equity volumes have been in decline since the volatile days of the 2008 financial crisis and October saw some of the slowest days of the year. That’s an outcome, we argue in today’s note, of the slow growth U.S. economy and monetary policies put in place to dampen economic volatility. Yes, segments of the market still create trading volumes higher than a few years ago – high frequency trading and exchange traded funds lead the charge here. But to reignite interest in fundamentally driven trading we’ll either need to see much better economic growth (unlikely) or a significant change in the way money managers operate. There’s plenty of opportunity on that front and such changes would also make for a better functioning capital market.

Back in 1973, the British music magazine New Music Express put Keith Richards on their annual list of “Rockers Most Likely to Die” in the next year. Keith (or “Keef”, as the British press and fans like to call him) remained on the list for ten years straight. During that time he did pretty much everything possible to make that prediction come true, but despite a decade’s epic consumption of heroin, acid, and alcohol as well as sleeping with a loaded pistol, Richards managed to stay above ground. NME eventually gave up and retired his name from consideration, which pretty much means that Keith Richards is immortal. That’s about right, in my book.

Lately it’s felt like U.S. equity trading might replace Keith Richards on that “Likely to Die Soon” list. Consider the following data points:

Trading volumes in S&P 500 names run about 4.5 billion shares/week at the moment, down 10% from the typical rate in January 2010.
Volumes during the early March 2009 lows were 7.5 billion/week for the same names, or 40% higher than current volumes.
We are essentially back to early 2008 volume levels, but October saw some of the lowest volume days of the year. The trend is not the friend of trading volumes at the moment.

There are many root causes for this phenomenon. Here are a few of the major ones:

The lurching volatility of the last three years must have pride of place, of course. Nothing scares away capital like mind numbing volatility.
Sharing the spotlight is the long hangover of the tech stock bubble of the late 1990s, which took major stock indices to unsustainable levels. The S&P 500 is still some 22% below the levels reached in March 2000. Stocks stopped being the 8-11% annual return investment vehicle expected by a generation of market participants. That has encouraged capital of all stripes to look elsewhere for return, as I will touch on in a minute.
All the recent talk of increased savings rates aside, the current period of domestic recession and jobless recovery does little to provide extra capital for investment. As we have noted in previous reports, October saw one of the lowest rates of tax/withholding receipts to the U.S. Treasury since the 2008 financial crisis. There just is not much “extra” money in consumers’ pockets to invest. The same goes for corporations with underfunded pension plans, where holding onto cash is the priority of the day.
Alternative investments to U.S. stocks have performed better. Whether we’re talking about precious metals, rare sports cars, commodities or foreign stocks, investors are always going to be drawn to the “New Highs” list long before considering investments in lagging categories. U.S. stocks fit all too neatly into that latter category, aside from a few high profile technology, consumer and industrial names.

But, like Keith Richards, it is too soon to put U.S. stock trading on the endangered species list.

First of all, part of the problem in considering the current volumes is simply a matter of where you want to start the clock. Yes, against the last two years volumes are down substantially. Measured against the first half of 2007, however, when S&P 500 volumes were closer to 3 billion shares/week the current rate is still respectably higher. If you happen to be a broker/dealer, you have felt the pain of price compression in commissions of course. But overall volumes aren’t that bad.
There are, in fact, growth areas of stock trading over the past five years. There are 20% more exchange traded funds now then at the beginning of 2010, for example. ETF product development is an evergreen process, and I have no doubt that the number of ETFs on offer will double long before major stock indices do the same. After all, they have the flexibility to pursue investment opportunities across almost any asset class. As one famous market commentator likes to say, “There’s always a bull market somewhere,” and the ETF world will invariably create products to track them.
Thanks to significant changes in market structure over the past decade, there many more places to trade stock than in the 1990s, generating large amounts of new volume. Yes, the NYSE and NASDAQ still exist, but there’s also BATS, Direct Edge, Liquidnet, and broker-owned dark pools. As the number of trading venues grows arithmetically, volume seems to expand logarithmically. One popular slam against the old exchange structure was that “Five guys named Vinnie” touched your trade as it made its way to the floor for execution, creating opportunities for information leakage. Now, there are more like 5,000 computers we’ll playfully call HAL constantly involved in 5,000 stocks simultaneously (one of which is the name you are trading). This dynamic has taken overall volumes from the 1-2 billion shares traded daily in the early 2000s to anywhere from 7-8 billion today.

Where things get more problematic is when you consider the future of “old school” single stock trading, where the investment decision to buy or sell is fundamentally based. It is worth remembering that capital markets have two functions:

Incorporate all available knowledge about the fundamentals of an investment into a price for that security.
Provide as much liquidity as possible for those who want to buy or sell so their orders don’t overly distort prices.

Changes to market structure in the last decade mean that liquidity now comes with lots of high frequency trading – up to 70% of all trades according to a variety of sources. At the same time it is hard to argue that HFT brings anything to the party on the other function of capital markets: fundamental price discovery. Even if there are fundamental inputs into certain HFT strategies – high speed reading of news headlines, for example – their seconds/minutes long holding periods don’t reflect any confidence that these decisions have lasting value.

To close out this note I will offer up a list of short list of factors I think will reignite interest in that “old school” model of stock picking and, by extension, fundamentally based stock trading.

Accelerating economic growth. Stock picking is about finding stocks that will do better than their peers by a wide margin. This process justifies everything from active managers’ fees to the institutional allocation of capital to this strategy. The anemic growth we’ve seen in developed economies since the financial crisis doesn’t give as much of a tailwind to excellent companies as faster economic growth would engender. Most fundamental portfolio managers will tell you in moments of candor that much of their performance in good years stems from a few great ideas. Everything else tends to cancel out. The better the economic backdrop, the more chance for those big ideas to generate truly outsized returns.
Less government involvement in the economy. Look at the financial sector for proof of this point. As wrenching as a deeper crisis in this industry might have been in 2008, it would have created a much more dynamic recovery than the “Too big to fail” policy has allowed. Government intervention of all types kept this from happening. The same goes for the current activist Federal Reserve policy of Quantitative Easing. Pumping hundreds of billions of dollars into a moribund economy while keeping interest rates at zero seems to maintain a tired status quo more than it offers better-run companies a chance to excel.
Merger of HFT and fundamental strategies. The current U.S. market structure essentially features three types of players with almost nothing in common. In one camp are the indexers, who allocate capital to passive indexes such as the S&P 500. The second group is active managers, who employ fundamental analysis to find winning investment to buy and underperforming ones to short/underweight. Then there is high frequency trading, which dominates trading volumes but acts more like a market maker than investor.

There is nothing, aside from preexisting investment policies, preventing fundamental managers from incorporating HFT techniques into their own approaches to investment. The cost to trade U.S. equities has fallen close to zero, so trading around existing positions with HFT strategies is a viable area of incremental alpha to traditional managers. Yes, it will up their turnover dramatically, but that is a small price to pay for increased performance in a sluggish market.

Keith and the rest of The Rolling Stones are alive and touring today because they adapted. Fewer drugs, more antioxidants, and a savvy tax strategy (more on that in another note) all contributed to that success story. Better returns through creativity are a hallmark of capital markets as well. Traditional managers will adapt, since it is hard to see how the economic backdrop will change any time soon. Adapt, or as the Stones sang, “Fade away.”

eric seiger

Cee-Lo Sings 'Fox News' Version of 'F--- You' on 'Colbert' (VIDEO)

Cee-Lo Green was forced to revise his popular 'F**k You' single when he appeared on 'The Colbert Report' (weeknights, 11:30PM ET on COM). 'As this.

Wednesday Morning Fly By: NHL and Phantoms News - Broad Street Hockey

Today's open discussion thread, complete with your daily dose of Philadelphia Flyers news and notes... Remembering Pelle Lindbergh: [Flyers Faithful]; Looking at Peter Laviolette's impact on the Flyers: ...

In Hiring Joel Klein, News Corporation Signals Interest in ...

Rupert Murdoch's News Corporation, signaling an interest in the education sector, has hired Joel Klein, the New York City schools chancellor. News Corporation announced Mr. Klein's hiring shortly after it was reported that he was ...

eric seiger

By NewsOne Financial Blogger Ryan Mack:

If I gave you $100,000 today how would you spend it?

Scenario A: Spend $50,000 on a “caddy”, $25,000 for your pinky, and the balance on a “pound of blow”. In twenty years you will have an old pinky ring and a lot less brain cells.

1. Stocks

2. Bonds

3. Real Estate

4. Entrepreneurship

1. Stocks

From BNY ConvergEx:

Keith Richards and the "Death" of Stock Trading

Lately it’s felt like U.S. equity trading might replace Keith Richards on that “Likely to Die Soon” list. Consider the following data points:

Trading volumes in S&P 500 names run about 4.5 billion shares/week at the moment, down 10% from the typical rate in January 2010.
Volumes during the early March 2009 lows were 7.5 billion/week for the same names, or 40% higher than current volumes.
We are essentially back to early 2008 volume levels, but October saw some of the lowest volume days of the year. The trend is not the friend of trading volumes at the moment.

There are many root causes for this phenomenon. Here are a few of the major ones:

The lurching volatility of the last three years must have pride of place, of course. Nothing scares away capital like mind numbing volatility.
Sharing the spotlight is the long hangover of the tech stock bubble of the late 1990s, which took major stock indices to unsustainable levels. The S&P 500 is still some 22% below the levels reached in March 2000. Stocks stopped being the 8-11% annual return investment vehicle expected by a generation of market participants. That has encouraged capital of all stripes to look elsewhere for return, as I will touch on in a minute.
All the recent talk of increased savings rates aside, the current period of domestic recession and jobless recovery does little to provide extra capital for investment. As we have noted in previous reports, October saw one of the lowest rates of tax/withholding receipts to the U.S. Treasury since the 2008 financial crisis. There just is not much “extra” money in consumers’ pockets to invest. The same goes for corporations with underfunded pension plans, where holding onto cash is the priority of the day.
Alternative investments to U.S. stocks have performed better. Whether we’re talking about precious metals, rare sports cars, commodities or foreign stocks, investors are always going to be drawn to the “New Highs” list long before considering investments in lagging categories. U.S. stocks fit all too neatly into that latter category, aside from a few high profile technology, consumer and industrial names.

But, like Keith Richards, it is too soon to put U.S. stock trading on the endangered species list.

First of all, part of the problem in considering the current volumes is simply a matter of where you want to start the clock. Yes, against the last two years volumes are down substantially. Measured against the first half of 2007, however, when S&P 500 volumes were closer to 3 billion shares/week the current rate is still respectably higher. If you happen to be a broker/dealer, you have felt the pain of price compression in commissions of course. But overall volumes aren’t that bad.
There are, in fact, growth areas of stock trading over the past five years. There are 20% more exchange traded funds now then at the beginning of 2010, for example. ETF product development is an evergreen process, and I have no doubt that the number of ETFs on offer will double long before major stock indices do the same. After all, they have the flexibility to pursue investment opportunities across almost any asset class. As one famous market commentator likes to say, “There’s always a bull market somewhere,” and the ETF world will invariably create products to track them.
Thanks to significant changes in market structure over the past decade, there many more places to trade stock than in the 1990s, generating large amounts of new volume. Yes, the NYSE and NASDAQ still exist, but there’s also BATS, Direct Edge, Liquidnet, and broker-owned dark pools. As the number of trading venues grows arithmetically, volume seems to expand logarithmically. One popular slam against the old exchange structure was that “Five guys named Vinnie” touched your trade as it made its way to the floor for execution, creating opportunities for information leakage. Now, there are more like 5,000 computers we’ll playfully call HAL constantly involved in 5,000 stocks simultaneously (one of which is the name you are trading). This dynamic has taken overall volumes from the 1-2 billion shares traded daily in the early 2000s to anywhere from 7-8 billion today.

Incorporate all available knowledge about the fundamentals of an investment into a price for that security.
Provide as much liquidity as possible for those who want to buy or sell so their orders don’t overly distort prices.

Accelerating economic growth. Stock picking is about finding stocks that will do better than their peers by a wide margin. This process justifies everything from active managers’ fees to the institutional allocation of capital to this strategy. The anemic growth we’ve seen in developed economies since the financial crisis doesn’t give as much of a tailwind to excellent companies as faster economic growth would engender. Most fundamental portfolio managers will tell you in moments of candor that much of their performance in good years stems from a few great ideas. Everything else tends to cancel out. The better the economic backdrop, the more chance for those big ideas to generate truly outsized returns.
Less government involvement in the economy. Look at the financial sector for proof of this point. As wrenching as a deeper crisis in this industry might have been in 2008, it would have created a much more dynamic recovery than the “Too big to fail” policy has allowed. Government intervention of all types kept this from happening. The same goes for the current activist Federal Reserve policy of Quantitative Easing. Pumping hundreds of billions of dollars into a moribund economy while keeping interest rates at zero seems to maintain a tired status quo more than it offers better-run companies a chance to excel.
Merger of HFT and fundamental strategies. The current U.S. market structure essentially features three types of players with almost nothing in common. In one camp are the indexers, who allocate capital to passive indexes such as the S&P 500. The second group is active managers, who employ fundamental analysis to find winning investment to buy and underperforming ones to short/underweight. Then there is high frequency trading, which dominates trading volumes but acts more like a market maker than investor.

eric seiger

Cee-Lo Sings 'Fox News' Version of 'F--- You' on 'Colbert' (VIDEO)

Cee-Lo Green was forced to revise his popular 'F**k You' single when he appeared on 'The Colbert Report' (weeknights, 11:30PM ET on COM). 'As this.

Wednesday Morning Fly By: NHL and Phantoms News - Broad Street Hockey

In Hiring Joel Klein, News Corporation Signals Interest in ...

eric seiger

eric seiger

eric seiger

Cee-Lo Sings 'Fox News' Version of 'F--- You' on 'Colbert' (VIDEO)

Cee-Lo Green was forced to revise his popular 'F**k You' single when he appeared on 'The Colbert Report' (weeknights, 11:30PM ET on COM). 'As this.

Wednesday Morning Fly By: NHL and Phantoms News - Broad Street Hockey

In Hiring Joel Klein, News Corporation Signals Interest in ...

eric seiger

By NewsOne Financial Blogger Ryan Mack:

If I gave you $100,000 today how would you spend it?

Scenario A: Spend $50,000 on a “caddy”, $25,000 for your pinky, and the balance on a “pound of blow”. In twenty years you will have an old pinky ring and a lot less brain cells.

1. Stocks

2. Bonds

3. Real Estate

4. Entrepreneurship

1. Stocks

From BNY ConvergEx:

Keith Richards and the "Death" of Stock Trading

Lately it’s felt like U.S. equity trading might replace Keith Richards on that “Likely to Die Soon” list. Consider the following data points:

Trading volumes in S&P 500 names run about 4.5 billion shares/week at the moment, down 10% from the typical rate in January 2010.
Volumes during the early March 2009 lows were 7.5 billion/week for the same names, or 40% higher than current volumes.
We are essentially back to early 2008 volume levels, but October saw some of the lowest volume days of the year. The trend is not the friend of trading volumes at the moment.

There are many root causes for this phenomenon. Here are a few of the major ones:

The lurching volatility of the last three years must have pride of place, of course. Nothing scares away capital like mind numbing volatility.
Sharing the spotlight is the long hangover of the tech stock bubble of the late 1990s, which took major stock indices to unsustainable levels. The S&P 500 is still some 22% below the levels reached in March 2000. Stocks stopped being the 8-11% annual return investment vehicle expected by a generation of market participants. That has encouraged capital of all stripes to look elsewhere for return, as I will touch on in a minute.
All the recent talk of increased savings rates aside, the current period of domestic recession and jobless recovery does little to provide extra capital for investment. As we have noted in previous reports, October saw one of the lowest rates of tax/withholding receipts to the U.S. Treasury since the 2008 financial crisis. There just is not much “extra” money in consumers’ pockets to invest. The same goes for corporations with underfunded pension plans, where holding onto cash is the priority of the day.
Alternative investments to U.S. stocks have performed better. Whether we’re talking about precious metals, rare sports cars, commodities or foreign stocks, investors are always going to be drawn to the “New Highs” list long before considering investments in lagging categories. U.S. stocks fit all too neatly into that latter category, aside from a few high profile technology, consumer and industrial names.

But, like Keith Richards, it is too soon to put U.S. stock trading on the endangered species list.

First of all, part of the problem in considering the current volumes is simply a matter of where you want to start the clock. Yes, against the last two years volumes are down substantially. Measured against the first half of 2007, however, when S&P 500 volumes were closer to 3 billion shares/week the current rate is still respectably higher. If you happen to be a broker/dealer, you have felt the pain of price compression in commissions of course. But overall volumes aren’t that bad.
There are, in fact, growth areas of stock trading over the past five years. There are 20% more exchange traded funds now then at the beginning of 2010, for example. ETF product development is an evergreen process, and I have no doubt that the number of ETFs on offer will double long before major stock indices do the same. After all, they have the flexibility to pursue investment opportunities across almost any asset class. As one famous market commentator likes to say, “There’s always a bull market somewhere,” and the ETF world will invariably create products to track them.
Thanks to significant changes in market structure over the past decade, there many more places to trade stock than in the 1990s, generating large amounts of new volume. Yes, the NYSE and NASDAQ still exist, but there’s also BATS, Direct Edge, Liquidnet, and broker-owned dark pools. As the number of trading venues grows arithmetically, volume seems to expand logarithmically. One popular slam against the old exchange structure was that “Five guys named Vinnie” touched your trade as it made its way to the floor for execution, creating opportunities for information leakage. Now, there are more like 5,000 computers we’ll playfully call HAL constantly involved in 5,000 stocks simultaneously (one of which is the name you are trading). This dynamic has taken overall volumes from the 1-2 billion shares traded daily in the early 2000s to anywhere from 7-8 billion today.

Incorporate all available knowledge about the fundamentals of an investment into a price for that security.
Provide as much liquidity as possible for those who want to buy or sell so their orders don’t overly distort prices.

Accelerating economic growth. Stock picking is about finding stocks that will do better than their peers by a wide margin. This process justifies everything from active managers’ fees to the institutional allocation of capital to this strategy. The anemic growth we’ve seen in developed economies since the financial crisis doesn’t give as much of a tailwind to excellent companies as faster economic growth would engender. Most fundamental portfolio managers will tell you in moments of candor that much of their performance in good years stems from a few great ideas. Everything else tends to cancel out. The better the economic backdrop, the more chance for those big ideas to generate truly outsized returns.
Less government involvement in the economy. Look at the financial sector for proof of this point. As wrenching as a deeper crisis in this industry might have been in 2008, it would have created a much more dynamic recovery than the “Too big to fail” policy has allowed. Government intervention of all types kept this from happening. The same goes for the current activist Federal Reserve policy of Quantitative Easing. Pumping hundreds of billions of dollars into a moribund economy while keeping interest rates at zero seems to maintain a tired status quo more than it offers better-run companies a chance to excel.
Merger of HFT and fundamental strategies. The current U.S. market structure essentially features three types of players with almost nothing in common. In one camp are the indexers, who allocate capital to passive indexes such as the S&P 500. The second group is active managers, who employ fundamental analysis to find winning investment to buy and underperforming ones to short/underweight. Then there is high frequency trading, which dominates trading volumes but acts more like a market maker than investor.

eric seiger

Cee-Lo Sings 'Fox News' Version of 'F--- You' on 'Colbert' (VIDEO)

Cee-Lo Green was forced to revise his popular 'F**k You' single when he appeared on 'The Colbert Report' (weeknights, 11:30PM ET on COM). 'As this.

Wednesday Morning Fly By: NHL and Phantoms News - Broad Street Hockey

In Hiring Joel Klein, News Corporation Signals Interest in ...

eric seiger

Cee-Lo Sings 'Fox News' Version of 'F--- You' on 'Colbert' (VIDEO)

Cee-Lo Green was forced to revise his popular 'F**k You' single when he appeared on 'The Colbert Report' (weeknights, 11:30PM ET on COM). 'As this.

Wednesday Morning Fly By: NHL and Phantoms News - Broad Street Hockey

In Hiring Joel Klein, News Corporation Signals Interest in ...

eric seiger

Cee-Lo Sings 'Fox News' Version of 'F--- You' on 'Colbert' (VIDEO)

Cee-Lo Green was forced to revise his popular 'F**k You' single when he appeared on 'The Colbert Report' (weeknights, 11:30PM ET on COM). 'As this.

Wednesday Morning Fly By: NHL and Phantoms News - Broad Street Hockey

In Hiring Joel Klein, News Corporation Signals Interest in ...

eric seiger

Cee-Lo Sings 'Fox News' Version of 'F--- You' on 'Colbert' (VIDEO)

Cee-Lo Green was forced to revise his popular 'F**k You' single when he appeared on 'The Colbert Report' (weeknights, 11:30PM ET on COM). 'As this.

Wednesday Morning Fly By: NHL and Phantoms News - Broad Street Hockey

In Hiring Joel Klein, News Corporation Signals Interest in ...

eric seiger eric seiger
eric seiger

eric seiger
eric seiger

Cee-Lo Sings 'Fox News' Version of 'F--- You' on 'Colbert' (VIDEO)

Cee-Lo Green was forced to revise his popular 'F**k You' single when he appeared on 'The Colbert Report' (weeknights, 11:30PM ET on COM). 'As this.

Wednesday Morning Fly By: NHL and Phantoms News - Broad Street Hockey

In Hiring Joel Klein, News Corporation Signals Interest in ...

How do I hedge my portfolio while still making money on stocks?

Buy and hold use to be the axiom of all of our fathers. Warren Buffet has made himself into one of the greatest investment minds of all time on that trading philosophy as well. It seems as though in modern times this strategy has not produced the types of results we would have expected.

Over the last ten years the S & P 500 index has gone from 1410 down to 1118. This is nearly a 2% annual average decline. You could have been well ahead of the game by simply burying your money or by putting it into certificates of deposit. This certainly doesn't mean you didn't have pockets within that time you could have taken advantage. Among the flat returns were definitely times of huge market opportunities. The most important question is how do you participate without getting your head handed to you on a silver platter?

The first key to any investment portfolio is that it contains the proper amount of growth and income to balance out your risk tolerance. This simply means the amount of stocks versus bonds. The trouble in today's market is that interest rates are going to rise and that is going to hurt the returns you receive on your fixed income portion. Rising interest rates are also difficult on stocks. So what is an investor to do?

If you as an investor are nervous about rising interest rates you could always lock in a fixed rate with another type of vehicle. Fixed annuities as well as CDs will give you locked in rates for given periods of time. The main disadvantage going this route is the fact that if interest rates do rise, you are locked into these investments until the end of the term. This is considered opportunity cost that may backfire on you. You can also do the same things with individual bonds, although outside of treasuries you will take on some credit risk with each bond and in this economy some may not have the stomach.

If you are a strong believer in the markets over the next few years but still wish to alleviate your risk you have other options. If you have a $500k portfolio of stocks you can hedge them by using protective puts. Puts are stock options that protect your stocks at specific levels in the event of falling prices. A simple analogy is that not hedging your portfolio would be the same as a person driving a $100k automobile without any car insurance. It just doesn't make any sense.

Another hedging strategy one could employ is to short the ETF market. ETFs are exchange traded funds that mimic an index or a particular market sector. By shorting the particular ETF(s) that most correlate to your portfolio you can profit on the downside of the markets, making up for the losses on your stocks.

All in all there is no perfect way to design your portfolio. There are as many ways to construct it as there are stocks in the New York Stock Exchange. The main thing is that you learn the strategies so that you are aware what is available to you. These times are too volatile to simply buy stocks and bury your head in the sand.

eric seiger

Wednesday, November 10, 2010

Stock Making Money

1. Stocks

2. Bonds

3. Real Estate

4. Entrepreneurship

1. Stocks

2. Bonds

3. Real Estate

4. Entrepreneurship

1. Stocks

2. Bonds

3. Real Estate

4. Entrepreneurship

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