Posts tagged ‘broker’

Day Trading Your House

House Day Trade

By several measures, this economic recovery has been the slowest, most-challenging  expansion since World War II. Offsetting the painfully slow recovery has been a massive bull market in stocks, now hovering near all-time record highs, after about tripling in value since early 2009. Unfortunately, many investors have missed the boat (see Markets Soar – Investors Snore and Gallup Survey) with stock ownership near a 15-year low.

But it’s not too late for the “sideliners” to get in…is it? (see Get out of Stocks!*). Milfred and Buford are asking themselves that same question (see Investor Wake-Up Call). Milfred and Buford are like many other individuals searching for the American Dream and are looking for ways to pad their retirement nest egg. The seasoned couple has been around the block a few times and are somewhat familiar with one get-rich-quick strategy…day trading stocks. Thankfully, they learned that day trading stocks didn’t work out too well once the technology boom music ended in the late 1990s. Here’s what the SEC has to say about day trading on their government site:

Be prepared to suffer severe financial losses. Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status. Given these outcomes, it’s clear: day traders should only risk money they can afford to lose. They should never use money they will need for daily living expenses, retirement, take out a second mortgage, or use their student loan money for day trading.

 

Milfred & Buford Day Trade House

Milfred: “Now, Buford, I know we lost of our IRA retirement money day trading tech stocks, but if technical analysis works and all the financial news shows and talking babies on TV say it will make us a lot of cabbage, maybe we should try day trading our house?”

Buford: “Now I know why I married you 60 years ago – it’s that brilliant mind of yours that complements that sexy figure!”

Veteran readers of Investing Caffeine know I’ve been a skeptic of technical analysis (see Technical Analysis: Astrology or Lob Wedge), but a successful investor has to be open to new ideas, correct? So, if technical analysis works for stocks, then why not for houses? The recovery in housing prices hasn’t been nearly as robust as we’ve seen in stocks, so perhaps there’s more upside in housing. If I can get free stock charting technicals from my brokerage firm or online, there’s no reason I couldn’t access free charting technicals from Zillow (or Trulia) to make my fortunes. Case in point, I think I see a double-bottom and reverse head-and-shoulders pattern on the home price chart of Kim Kardashian’s house:

Source: Zillow

Source: Zillow

Of course, day trading isn’t solely dependent on random chart part patterns. Pundits, bloggers, and brokerage firms would also have you believe instant profits are attainable by trading based on the flow of news headlines. This is how Milfred and Buford would make their millions:

Milfred: “Snookums, it’s time for you to pack up all our stuff.”

Buford: “Huh? What are you talking about honey buns?”

Milfred: “Didn’t you see?! The University of Michigan consumer confidence index fell to a level of 81.3 vs. Wall street estimates of 83.0, bringing this measure to a new 4-month low.”

Buford: “I can’t believe I missed that. Nice catch ‘hun’. I’ll start packing, but where will we stay after we sell the house?”

Milfred: “We can hang out at the Motel 6, but it shouldn’t be long. I’m expecting the Philly Fed Manufacturing index to come in above 23 and I also expect a cease fire in Ukraine and Gaza. We can buy a new house then.”

I obviously frame this example very tongue-in-cheek, but buying and selling a house based on squiggly lines and ever-changing news headlines is as ridiculous as it sounds for trading stocks. The basis for any asset purchase or sale should be primarily based on the cash flow dynamics (e.g., rent, dividends, interest, etc., if there are any) of the asset, coupled with the appreciation/depreciation expectations based on a rigorous long-term analysis.

When Day Trading Works

Obviously there are some differences between real estate and stocks (see Stocks & Real Estate), including the practical utility of real estate and other subjective factors (i.e., proximity to family, schools, restaurants, beach, crime rates, etc.). Real estate is also a relatively illiquid and expensive asset to buy or sell compared to stocks. – However, that dynamic is rapidly changing. Like we witness in stocks, technology and the internet is making real estate cheaper and easier to match buyers and sellers.

Does day trading a stock ever work? Sure, even after excluding the factor of luck, having a fundamental information advantage can lead to immediate profits, but one must be careful how they capture the information. Raj Rajaratnam used this strategy but suffered the consequences of his insider trading conviction. Furthermore, the information advantage game can be expensive, as proven by Steven Cohen’s agreement to pay $1.2 billion to settle criminal charges. While I remain a day trading and technical analysis skeptic, I have noted a few instances when I use it.

Whatever your views are on the topics of day trading and technical analysis, do Milfred and Buford a favor by leading by example…invest for the long-term.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds, but at the time of publishing SCM had no direct position in Z, TRLA, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

July 19, 2014 at 6:13 pm Leave a comment

Beating off the Financial Sharks

There is blood in the water and financial sharks will do their best to consume any weak, floating prey. Now, greater than ever, investors are looking for answers in these perilous economic waters, so it behooves investors to arm themselves with the knowledge and questions necessary in dealing with financial predators.

Unlike other professions, like medicine, law, or accounting, the hurdle in becoming a “broker,” “advisor,” “financial consultant,” or other glorified title is much lower than some other professions. Basically, if you pass an exam or two, you are ready to do business and handle the financial future of virtually anybody.

Not all practitioners are evil, and there is a segment of investment professionals that take their craft very seriously. Separating the wheat from the chaff can be very challenging, so here is a list to follow when reviewing the management of your finances:

1)      Experience Matters: Find an advisor with investment experience. Someone who has actually invested money. Don’t partner with a financial salesperson good at shoveling high-cost, high-commission products and strategies. When you fly in a plane, do you want an inexperienced stewardess or veteran pilot flying the plane? If you were ever to need surgery, would you want the nurse using the knife, or a trained, educated surgeon? Your investment future is a serious proposition, but many investors do not treat it that way.

2)      Education and Relevant Credentials Matter: Find an advisor with credible, relevant investment credentials. Not all investment letters are created equally, and interpreting the alphabet soup of financial industry designations can be thorny. Two credentials in the investment industry that rise to the top are the CFA (Chartered Financial Analyst) and CFP® (Certified Financial Planner) designations. Less than 10% of the industry has one of these credentials and less than a few percent have both. An advanced degree like a master’s degree wouldn’t hurt either.

3)      Low-Cost & Tax Efficiency: Find an advisor who uses a low-cost, tax-efficient strategy, including the integration of passive investment vehicles, such as exchange trade funds (ETFs), index funds, and/or individual securities that are invested over long-term investment horizons (read more about passive investing). Not only are low-cost products important, but low-cost activity is vital too – meaning there should be no churning of the account with high commissions or transaction costs.

4)      Find an Advisor Who Eats Cooking: It is important to find an advisor who eats his/her own cooking (i.e., he/she is invested in the same investment products and strategies as the client). Commissions can often be the number one motivation for the advisor, rather than what is best for the client’s future. When offered a new investment product, one way to cut to the chase is by asking, “Oh, that’s great you will make an immediate $10,000 commission off the sale of this product to me, but do you own this same investment in your personal portfolio?” It is crucial to have someone in the bunker with you as you invest.

5)      Fee-Only – The Way to Go: Find a “fee-only” advisor with a transparent fee structure who can honestly answer what fees you are paying. A fee-only investment advisor mitigates the conflict of interests because if the client portfolio declines, then the investment manager’s compensation is also reduced. There is a built-in incentive for the advisor to preserve and grow the client portfolio in accordance with the client’s risk-tolerance and objectives.

6)      Find an RIA (“Fiduciary Duty”): Find out if the advisor is working with an RIA advisory firm (Registered Investment Advisor), which is required by law to have its advisors make investment decisions in the sole interest of the client. Most brokers/advisors/financial consultants (or other euphemism) – working at firms such as UBS, Merrill Lynch, Wells Fargo/Wachovia, Edward Jones, and Morgan Stanley/SmithBarney, have a much lower “suitability” standard in managing client money.

7)      Don’t Become Chopped Liver: Find out how many clients the advisor serves. Some brokers attempt to service a client list of 100 or more (many brokers have hundreds of clients). Typically the highest revenue-generating clients are given service, and the smaller accounts are treated like chopped liver or swept under the rug.

8)      Get References: You will likely not be forwarded bad references, but see if you can get beyond, “Johnny is such a nice broker” talk and find out how the portfolios have performed versus the relevant benchmarks. Getting this data can be difficult, but you can ask the advisor for an anonymous sample of an appropriate portfolio that you would be invested in.

9)      Background Check:  With proper research, investors can become more comfortable with the professional chosen and the status of the firm employing the manager/professional. Several government and professional regulatory organizations, such as the National Association of Securities Dealers (NASD), the Securities & Exchange Commission (SEC), your state insurance and securities departments, and CFP Board keep records on the disciplinary history of the investment and financial planning advisors. Ask what organizations the professional is regulated by and contact these groups to conduct a background check.

Getting all this information may take time, but protecting yourself from the masses of financial predatory sharks is imperative. Compiling data from the checklist will act as a shark cage, helping safeguard you from potential harm.

Remember, it’s your financial future, so invest wisely!

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in UBS, Merrill Lynch (BAC), Wells Fargo/Wachovia (WFC), Ameriprise (AMP), Edward Jones, and Morgan Stanley/SmithBarney (MS). No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

February 9, 2010 at 11:00 pm 4 comments

The Dirty Little Secret Shrinking Your Portfolio

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There’s a dirty little secret in the investment industry and it’s called “fees”. I constantly interact with investors from all walks of life and inevitably the topic turns to fees.  Although they may know the daily price of the Starbucks coffee they buy down to the penny, when I ask them about the hundreds or thousands of dollars they are paying in fees and expenses, I get the proverbial deer in the headlights glare. Who can blame them when they are effectively forced to hire a lawyer to decipher the layers of costs buried in thick legal client documents? These fees and expenses include, but are not limited to, load fees, management fees, 12b-1 fees, trading commissions, soft dollars, surrender charges, administrative charges, bid-ask spread, impact costs along with other kitchen sink charges (enough to make your head spin).

Are the fees worth the price? The short answer is NO. On average 75% of professional managers underperform the benchmarking strategy, which I call the “do-nothing” or passive indexing approach. Standard & Poor’s SPIVA division (S&P Indices Versus Active Funds) discovered the following over the five year market cycle from 2004 to 2008: 

  • S&P 500 outperformed 71.9% of actively managed large cap funds;
  • S&P MidCap 400 outperformed 79.1% of mid cap funds;
  • S&P SmallCap 600 outperformed 85.5% of small cap funds.

Most individuals would be better served by purchasing a diversified basket of low-cost, tax efficient index funds or ETFs (Exchange Traded Funds). Unfortunately, the deafening noise and chest thumping from the ever-changing top 25% of investment managers muddies the waters for rational investment decision makers. Proprietary algorithms, can’t-lose strategies (ala Bernie Madoff), pretty pie charts, and a rosy story explaining a path of future outperformance are typically used as smoke and mirrors to confuse unsuspecting investors into unwanted decisions. For the day-trading addicts, financial intermediaries peddle their unique software in commercials with flashing light and hip music, touting the newest bells and whistles that will catapult the masses into riches.

What’s the solution? Well, if you have the time, discipline, and emotional make-up then you should call the manufacturers of low-cost index funds and ETFs (Exchange Traded Funds) like Vanguard Group, PowerShares or iShares and construct a diversified equity and fixed income portfolio. I recommend rebalancing client portfolios periodically subject to your objectives, constraints, risk tolerance and changing circumstances.

If you don’t have the time, discipline, or emotional make-up necessary to manage your investments, then interview a group of “fee-only” advisors who have no conflicts of interest and subscribe to a diversified, low-cost, tax efficient strategy (for disclosure purposes, Sidoxia Capital Management is a fee-only advisor).

Regardless of portfolio management choices, do yourself a favor and ask your broker/advisor or investment company what you are paying in fees/expenses. It’s your money and you deserve answers, despite the dirty little secret that pervades the industry.

June 17, 2009 at 5:30 am 1 comment


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