Monday, March 4, 2013

Investing in an up market

This has been modified from an earlier financial blog. I am no expert. Conditions change, we each have to do all your own thinking, but in October 2012, the market was up and bonds were fairly down. According to the universal wisdom, Bonds and CDs tend to be safer than equities, but they often do not reward as much in the good times.

I like CDs when I am getting subpar interest because there are two safety nets; first the bank has to fail and, second, FDIC would have to fail (and if that happens, I have bigger problems than my lost investment.) However, because it is such a safe investment, a CD tends to have a low interest rate most of the time. My thesis is that if I invest a thousand dollars in equities and earn 20 percent on that investment in an "up" market and then move it to a CD at two percent, I can think of my interest as an average of 20% and 2% and I have a much better and safer deal. Pssst: be sure and hold that equity for at least a year to avoid a potential 35% capital gains tax. Speaking of tax, if you invest with discipline, you will start to earn money. And the various governments will want to tax you on that money. You will have to do your homework, but in many states they do not tax money earned on municipal bonds from that state. Not being taxed can make a 4% return sound a lot better.

6/18/12, this strategy has really been working out for me. Since I have started doing this, there have still been no decent returns anywhere outside the stock market.
  • We "average" into the market, making some investment at least once a month with money budgeted for that purpose that we can tie up for at least five years. We are patient, except for times the market is screaming upwards, we we try to buy with limit orders
  • We begin with broad ETFs, because they should not go bankrupt; we favor ETFs that pay dividends
  • When we buy individual equities, we realize we are investing in a company, we have a thesis and we have a way to know things about that company
  • The majority of our investments are for the long haul, statistics clearly show the more we buy and sell, the less likely we will grow our portfolio
  • Not every equity will be a 30% return in the short term, but from time to time we look at an equity that we bought and did well, sell it as profit taking, and invest the principal and the profit in a safer alternative like a Municipal Bond or a CD. We do this because we know we should have a diversified portfolio and no same person would buy a multi-year CD at 1% interest at a time when there are potential inflationary pressures two or three years in the future. However, if we made 30% profit and use that money to buy the safer investment, we are protected from inflation. 

  • 10/3/12 The strategy is still working out for me. A couple of speed bumps I have run into. Since I am buying into the market using "averaging", I didn't buy all of any position at one time. So, now at profit taking I have a longer delay. There are a couple positions I would like to close, but while I opened the position much longer than a year ago, I have been adding to it and have to choose between not taking my profit now or paying some capital gains.

    5/1/13 Wow! Talk about an up market! At this point I am slowing way down on putting new money into the stock market, though I still open positions with worthy companies and will look closely at a bit more profit taking and putting that money into a wimpy yielding Municipals that are short term focused. 

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