Categories
finance investing

COVID-19: Have We Reached the Stock Market Bottom?

You’ve likely heard the advice, “Buy stocks now, they’re cheap.” 

While generally, yes, you want to “buy the dip,” because buying anything of value on sale is great! Why pay more when you can get the same thing for less?

Those of us around during the 2008 recession know how bad things got then, but over the last few months we heard more about how much money people made when they bought their investments at the deepest parts of the recession, when everything of value was much cheaper.

The big companies were bailed out, and most American companies not only survived, but did much better in the years following the recession.

Is This Time Different?

What was different during a recession caused by a debt-bomb is there was nothing stopping from businesses from resuming operations, nothing stopping an American out of work from going to their neighbor’s house and offering to shovel snow for twenty bucks.

While times were rough in 2008, there were no state or national quarantines. Companies burned through cash, but had options to curb the bloodletting.

This time, under quarantine, companies are burning through cash and are told they cannot even resume operations in some cases. Who knows how many companies will go under from not having a hint of cash flow for weeks or potentially months. 

This time could be different.

I am not advising against investing, just being cautious and making sure any companies you are considering can last a few months worth of cash burn without having any inflow.

This is a critical time, and having cash on hand may be a more stable plan than investing in companies that have no hope of getting you a return on capital for possibly months.

So Have We Reached the Bottom?

Stock prices will continue to be volatile for maybe many months. No one can say when the volatility will stop until the threat of the virus has let up. Unfortunately, they go hand in hand.

If the headlines get worse and not better, the market will dip further and further as more people retreat to cash for fear that mainline American businesses do not have the proper emergency funds to last a prolonged stop to operations.

Read the headlines, stay safe, and think critically. If the virus begins to subside and businesses are allowed to begin reopening their doors, cash flow can resume, and the thoughts of a national recession– or worse, depression– will also dissipate. 

At that time, stocks will likely still be undervalued and you can have your pick.

But what do you think? Will this be long-lasting, or do we have nothing to fear?

Sound off in the comments below.

 


This article is not meant to constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.

Categories
finance investing

Should You Change Your Investing Strategy Because of the Coronavirus?

Big changes have unfolded over the last two weeks, and with those changes, came questions of recession, depression, or perhaps just a general market correction.
These changes have made a lot of us question our investing strategy; many of us are wondering how bulletproof the mutual funds or stocks we’ve chosen are, now that the world seems to be crashing down around us.
You may be wondering if you should move money into safer assets, like bonds or cash, or you might be wondering if you should switch to other, seemingly undervalued assets now that they’re “on sale.”
These are the wrong questions to ask.
It’s never a bad idea to evaluate your investment plan. It is, however, not a good idea to completely switch your investment strategy during a major market downturn while tempers run high and emotions cloud good judgment.
The selling price of all assets decrease during a recession or general market correction. During a correction is not the right time to wonder if you’ve fairly priced the assets you’ve bought and the soundness of your investment decisions.
You want to come up with your bulletproof plan before the proverbial sh*t hits the fan.
But to get to the specifics, if you sell your investments now because you’re feeling defeated, you’ll likely sell close to the bottom of the fair market value for stocks during the downturn.
If you have a home, you try not to sell it during the deepest parts of a recession because you will get far less for it than if you sell it during a time when real estate prices are up.
To stick with the real estate scenario, the fair market value of your home changes as quickly and as drastically as any stock, but this change is invisible because there is no ticker telling you at any given time what someone is willing to pay for your home.

Selling your investments now is exactly like selling your home because you get scared because someone made a low offer to buy it.

If you’re not sure what to do, meet with a financial professional and review your options.
Do not make any rash decisions. And work on creating a plan bulletproof enough that during the next downturn, you feel confident enough about your investments you don’t even reconsider it.


This article is not meant to constitute legal advice. For help regarding your specific situation, please consult a local professional.

Categories
investing Stocks

What is a Balance Sheet? – “How to Price a Stock”

Welcome to part 1 of our series in How to Price a Stock. 

If you’re here, it likely means you’re interested in learning not only more about investing, but companies in general and how to find their true value.

One of the first financial statements we look at in trying to price a stock is the balance sheet. The balance sheet generally gives us the financial strength of a company at any given point in time. The balance sheet works as a “financial snapshot” of a company.

From the balance sheet, we can see three important things: the Assets that it owns, the Liabilities that it owes, and the difference between these two numbers, the Equity. The Equity in this situation works much like the equity you have in your home. 

As you pay down your debt, the equity you have in your own will generally increase because your equity is the difference between the fair market value of the house (your asset) and the amount still owed on the house (your liability). Looking at a balance sheet, it works much the same way. 

There are two ways to increase the equity of a company, increase its assets, or pay down its debts. Looking at which of these options a company chooses, gives us insight into its management, operational capabilities, and its general ability to be strategic or profitable.

If a company can pay down debt at the same time it increases the value of its assets, it generally is in a more strategic position than companies handling their situation by only doing one or the other.

A balance sheet will generally be set up as follows:

Balance Sheet
as of December 31, 2019
Assets
Cash $1,000.00
Accounts Receivable $2,000.00
Inventory $5,000.00
Equipment $10,000.00
Total Assets $18,000.00
Liabilities
Accounts Payable $2,000.00
Loan Payable $5,000.00
Bonds Payable $5,000.00
Owner’s Equity
Stockholder’s Equity $6,000.00
Total Liabilities and Owner’s Equity $18,000.00

 

Note that the Assets balance to the total of the Liabilities and Owner’s Equity. Hence, the term Balance Sheet. 

Grasping the concept of a balance sheet is one of the first and most crucial concepts on the path to being able to do any kind of financial analysis and understanding a company’s capital structure (where it gets its financing from).

From here, we will be looking at what to do with the information from the Balance Sheet and why we should even care about it.

 


This article does not constitute financial or legal advice. For help regarding your specific situation, please consult a local advisor.

Categories
Equity Securities

Is Value Investing Still Relevant?

When we look at what kinds of companies to invest in, we all have different ideas in mind on what makes a company worthy of receiving our money. 

We might look at things like profitability metrics, whether or not the company has strong leadership, or perhaps we care about whether the company shows any kind of social consciousness. 

No matter what we look for in a company to invest in, we want to make sure we are getting good “value” for our money. 

Robert writes in, “Mike, thanks for the insight as always. After reading the headlines the past few weeks, and seeing how the market acts, it makes me wonder if trying to find a good value stock is worth it, or if I should just buy the S&P 500 indexes and let it ride. Hope you can give some good pointers here. Thanks.”

No matter what we are buying, we are making sure we are trying to get “value” for our money. Even if you are buying the S&P 500 index funds, you are still trying to buy value and hoping you will get more money than you started with. The only difference in classic value investing is how you go about doing it.

In classic value investing, you are trying to put a price tag on what a company is worth based on different things, like annual cash flow or book value. From there, you compare the price that you believe a company is worth to the price that it is currently trading at. 

If you can buy the company for less than what it is trading at, then you are receiving it at a good value, in theory.

The idea of value investing has a few celebrities that champion it, most famously Warren Buffet. He has become famous for making a lot of money using theories taught by his teachers, Benjamin Graham and David Dodd.

Some of these theories include things we have mentioned, like cash flow analysis, and also analyzing the margin of safety of your investment.  Essentially, you want your potential investment to be so undervalued by your analysis that if you are wrong, it will lessen the blow.

Now, you might be wondering how one might value a company based on its cash flow, book value, or profitability. We will dive into this question in future posts as part of our “How to Price Stocks” series.

For questions on this topic, please leave a comment below.



Thank you for reading. This article should not constitute legal advice. For help regarding your specific situation, please consult a local advisor.

Categories
Budgeting family finance

Should I Pay Off Debt and Invest at the Same Time?

We all want to pay off debt. And we all want to put more money into our retirement plans (401k’s, IRA’s, etc.). But do these two things conflict?

They shouldn’t. They’re both working towards the same goal: a better financial future for yourself.

So Do I Invest While I Pay Off Debt?

We hear the argument made all the time: “Why would I pay off debt at 3-4% interest when my investments make an average of 6-7% every year? I can make the minimum payments on my debt and invest and come out ahead.”

Look, we get that you can crunch the numbers. But this is personal finance. And it is important to remember that nothing in personal finance makes mathematical sense. Personal finance is almost entirely psychological, not numerical. And that statement alone is enough to make a person with a finance degree cringe.

If we made personal financial decisions based on what made numerical sense, we wouldn’t have debt in the first place.

So I Shouldn’t Invest While Paying Off Debt?

Yes. Saving and paying off debt are conflicting goals. This has nothing to do with the numbers making sense or that both of these actions help work toward your future.

They conflict because you can only do one thing aggressively at a time. If you try to pay off your pile of student loans at the same time you are trying to grow your investment portfolio, you will lose your mind. You will get burnt out and give up.

It is so important to feel small victories when working on yourself financially, just like it’s important to have small victories when dieting or exercising. This is where the psychological side of personal finance comes into play.

The balance in your 401k won’t matter when you have hundreds of thousands in student loan and credit card debt. The stress will pile up from the debt and your IRA won’t be there to comfort you until you turn 59 ½.

But what do you think? Have you gotten out of debt at the same time you invested? Do you think it’s more beneficial to focus on paying off debt before investing in mutual funds?

 


This article is not intended to be financial, tax, or legal advice. For help regarding your specific situation, please consult your local professional.

Categories
Business finance Taxes

Do I Get A Tax Deduction for Saving Into My 401K?

The government wants to help encourage its citizens to save for things it thinks are beneficial, such as: retirement, healthcare, and college. And one of the ways it does this is by making certain plans and savings vehicles “qualified.”

All that the term “qualified” means is that the savings vehicle is tax advantaged in some way. These include things like Health Savings Accounts, Individual Retirement Accounts, and yes, your employer’s 401k.

So What Kind of Advantage Do I Get for Saving Into My 401k?

Aside from saving money for retirement and letting it grow, you do get other advantages. Money going into a normal 401k goes in pre-tax. This term means that the money going into the account is excluded from income subject to federal income tax.

So the Money Goes in Completely Untaxed?!

But this does not mean that the money is not taxed at all. This only means it is not federally taxed when it initially goes into the account.

The money is still taxed by Social Security, Medicare, State, and local taxes. You only get to exclude this money from your income subject to federal income tax. This distinction is incredibly important to make, however it does not delegitimize how impactful saving into a retirement account can be.

On top of these taxes hitting the contributions to a 401k, the distributions in retirement are then taxed at your federal income tax bracket.

So How Much Can I Save Into My 401k Every Year?

You can save the lesser of your earned income at a given employer or $18,500 for 2018, every year in your 401k. It is important to note that only wages can be saved into a 401k as contributions.

The only other money going into a 401k account can be from rollovers from a different qualified plan, such as an IRA or a 401k or 403b at an old employer.

 


This article is not intended to be legal, financial, or tax advice. For information regarding your specific situation, please consult a local professional.

Categories
finance

Will Robo Financial Advisors Replace Humans?

The day may come when robots take every job from every human.

Unfortunately for us, that day is a long way off, and that means we’ll be spending the next few decades working.

And that’s no different for financial advisors.

Probably.

You see, with the rate of change and innovation in automation, it’s hard to predict anything about when a job will be replaced completely by robots. But there are a lot of factors we can look at to help determine when at least parts of a job will be taken over.

And a huge part of this is looking at how much of a job needs a human touch. For example, the more client-facing a job is, the more necessary it is to have a human touch and the more immune that job is from automation.

Even though many aspects of a financial advisor’s job are reviewing portfolios and checking a client’s financial health, a lot of it is also searching for solutions to client problems. And it is possible for a robo-advisor to do much of this, but it’s also possible for Amazon to recommend products to me.

But reading a review from an unbiased user or hearing an enticing pitch from a consultant is more likely to persuade me to use a product or service. So much of a client relationship manager’s job is done off the computer and is geared toward building that personal relationship.

And a financial advisor’s main concerns rest with helping their clients with complicated situations. Many computer software solutions can give advice also, but there’s so many nuanced aspects of a client’s financial life that a human can assess that a computer can’t.

However, there is a massive prospect for human advisors to adopt their autonomous counterparts as co-workers. Humans eventually need rest, but a robo-advisor can help answer a client’s questions online at any time, even when the advisor is off the clock or sleeping.

As long as a financial advisor’s job consists primarily of helping clients solve real problems with real money, it should be safe to say that your local financial advisor should have job security.


This page is not meant to constitute financial advice. For information regarding your specific financial situation, please consult your local financial advisor.

Categories
finance Taxes

Are My IRA Contributions Tax Deductible?

Most of the benefits of an IRA come into play during retirement, seeing as this is when you can start drawing money from the account. You can contribute to an IRA your entire working life but the key benefit of one only comes into play when you’re done working.

But that doesn’t mean there’s no benefits to contributing to an IRA when you are working.

So what are the benefits of contributing?

Those holding and contributing to a Traditional IRA can deduct their contributions to it from their taxable income. The person contributing can put in a maximum of $5,500 a year (indexed for inflation), and can deduct that amount from their taxable income.

Because you are deducting your contributions from your income, it means you are paying with before-tax dollars. This makes the growth more substantial in the account since you can put more into it without it being taxed in advance.

What if I have a Roth IRA?

Unfortunately for those contributing to a Roth IRA, you cannot deduct contributions from your income for tax. These contributions are made using after-tax dollars, meaning the growth in the account will be less substantial.

So why would I contribute to a Roth IRA?

Just because you can’t deduct the contributions to a Roth IRA from your income doesn’t mean this type of account doesn’t have any benefits.

Because you are paying into a Roth with after-tax dollars, you receive the distributions from the account tax free. This means that you pay tax to have the contribution entered into the account, but it grows completely tax free.

What you see in the account is completely yours, not the government’s.

So should I contribute to a Roth or Traditional IRA?

The answer to this question is going to come down to your income goals, your expectations of the growth in the underlying investments in the account, and whether you would rather save money on tax now or in the future.

A good alternative to choosing a Roth or a Traditional IRA is to choose both, which is something we will cover in a later post.

 


Disclaimer: The information on this page should not be construed to be financial advice. For advice regarding your specific situation, please contact your local financial advisor.

Categories
finance

What Is A Fee-Based Financial Planner?

A few different developments have been occurring in the financial advice and services field, and one of those developments is the rise of the fee-based advisor, as opposed to the older style of commission-based sales.

The rise of fee-based and fee-only advisors is caused by the backlash of consumers and people seeking the help of financial professionals, who in the past have been known to sell products that they were getting commission on, potentially causing a conflict of interest. These financial products were not always the best investments for the clients, however they were giving a healthy commission to the advisor recommending them.

The trend has been happening rapidly over the past few years, with the amount of financial advisors adhering to the fee-based or fee-only structure expecting to rise by about 60% from 2015 to 2019.

The reason for the trend is the growing distrust toward financial professionals due to the recent stock market crashes, concerning practices, and the general view of financial industries. There is a lack of trust toward professionals that handle money, and a large amount of that distrust is caused by dishonest financial advisors that would give in to the urge to sell products that were not right for the client.

The fee-only and fee-based model of financial advice eliminates these problems in that the fee paid by the consumers eliminates the need for a commission on pushing products, therefore allowing the financial advisor to give a holistic view of the client and recommend products that are best for the client, and not necessarily for the commission for the advisor.

Because of the backlash by consumers seeking financial help, the government has recently stepped in and passed a fiduciary rule forcing advisors to act as a fiduciary to their clients. What this means is that the advisor would be forced to act in a client’s best interest, not in the best interest of the advisor. This would essentially force all advisors to follow the fee-based or fee-only revenue model.

It is worth noting that just because an advisor relies on commission does not mean that advisor is untrustworthy or that he or she won’t recommend the best product for your situation. But in many cases, it’s also best for the advisor for them to act as a fee-based fiduciary so the client will not suspect them of doing something that is not in their interest.

Becoming a fee-based advisor can help break down the barrier between advisor and client and help them to build a better relationship.

What’s your opinion of advisors that rely on commission and those that work on fee-only advice? Let us know in the comments.

 


Disclaimer: The content of this page is not meant to be financial advice. For specific information regarding your situation, consult your local financial advisor.

Categories
Equity Securities

What is Treasury Stock?

When a company decides it needs to raise more money, it has a few ways of doing so. Aside from just increasing its profits, the company can either take on debt or issue more stock to new or existing shareholders to meet its cash flow needs.

But what happens when a corporation decides it doesn’t want more shareholders? What happens when a corporation decides it wants less shareholders?

When a corporation decides it wants less shareholders, for any reason, it can buy back stock from existing shareholders. The stock that the corporation buys is held in its treasury, therefore denoting it the name Treasury Stock.

What Rights, if any, Does Treasury Stock Have?

Because it is owned by the corporation and it no longer is in the hands of the shareholders, treasury stock loses a lot of the privileges and rights that it was granted when it was common stock. It no longer has voting rights and does not pay a dividend.

The reason being is, if it did pay a dividend, it would just be the corporation paying money back to itself.

What Happens to Treasury Stock?

The stock that a corporation buys back can be held, retired, or resold.

The reasons for buying back stock are endless. It may be that the corporation wanted to reduce the number of shareholders to take the company private, or perhaps the price of the stock dropped to a sufficient level that the company thought it would be a good move to buy the stock now for cheap and then attempt to resell it later when the prices rise again.

It’s always important to note when treasury stock is listed on a company’s financial statements, as it may indicate the corporation is readying itself for a strategic move, or is perhaps indicating its intentions.

 


Disclaimer: This information does not constitute financial advice. For specific information concerning your financial situation, please consult your local financial advisor.