On February 28, 2024, the cryptocurrency world witnessed a significant event as Bitcoin, the leading digital asset, surpassed the $60,000 mark for the first time in over two years. This milestone signifies a remarkable comeback for Bitcoin, which had faced a significant decline and vicious bear market, specifically in 2022, which was additionally marked by industry scandals and a significant loss of confidence.
The recent surge can be attributed to several factors, including:
Increased Demand: The launch of new U.S. spot Bitcoin exchange-traded products (ETPs) is believed to have attracted fresh capital into the market, fueling the rally. These ETPs allow traditional investors to gain exposure to Bitcoin without directly owning the underlying asset.
Optimistic Sentiment: A growing sense of optimism surrounds the digital asset space, with many enthusiasts believing that Bitcoin’s adoption is expanding beyond its dedicated community. This positive sentiment is contributing to the current price increase.
Approaching Halving: The upcoming halving event, scheduled for later in 2024, is also believed to be playing a role in the price rise. Halving refers to the periodic event where the reward for mining new Bitcoins is cut in half. This event historically leads to a decrease in supply, which, according to economic principles, can drive up prices.
The current rally marks Bitcoin’s biggest monthly gain since December 2020, with the price surging over 40% in February alone. This impressive performance stands in contrast to the broader stock market, which has witnessed more modest gains.
As Bitcoin continues to break barriers, it remains to be seen whether it can sustain this momentum and continue its parabolic run. At the same time that Bitcoin is making its break above $60,000, Ethereum (ETH) is crossing above the $3,400 mark, climbing an astounding 15%+ in the last 5 trading days alone.
Investing can be a powerful tool for building wealth and achieving your financial goals. However, navigating the complicated world of the securities industry, or real estate, or bonds, ETFs, mutual funds, etc. can be overwhelming, especially for beginners. To set yourself up for success, it’s crucial to avoid common mistakes that can hinder your progress.
In this article, we’ll explore some of the most frequent investing pitfalls and provide actionable strategies to overcome them:
Mistake #1: Lack of Planning and Goal Setting
The Problem: Diving into investing without a clear plan is like driving without a destination. You might stumble upon some interesting opportunities, but it’s unlikely you’ll reach your desired outcome.
Once you’ve identified your goals, set realistic expectations for the amount of time and money required to achieve them. Research average historical returns for different asset classes and use online calculators to estimate potential future growth.
Actionable Tip: Dedicate time to creating a financial plan. This can be a simple document outlining your goals, investment timeline, risk tolerance, and asset allocation strategy.
Mistake #2: Chasing “Hot Tips” and Emotional Investing
The Problem: Social media and financial news are often filled with “hot tips” promising quick and easy returns. This can lead to impulsive decisions based on emotions like excitement, fear, or greed, often resulting in poor investment choices.
The Solution: Recognize that sustainable wealth creation is a long-term game. Don’t chase get-rich-quick schemes or blindly follow others’ recommendations. Instead, conduct your own thorough research, understand the underlying fundamentals of the investments you consider, and remain disciplined in your approach.
Actionable Tip: Develop a habit of independent research. Utilize credible financial resources like annual reports, industry publications, and reliable financial websites before making any investment decisions.
Mistake #3: Failing to Diversify
The Problem: Putting all your eggs in one basket is a risky proposition. If that one investment performs poorly, your entire portfolio can suffer significant losses.
The Solution:Diversification is the key to mitigating risk and protecting your capital. Spread your investments across various asset classes such as stocks, bonds, real estate, and commodities. Within each asset class, diversify further amongst different sectors and companies. This helps to ensure that the negative performance of one investment is offset by the positive performance of others.
Actionable Tip: Consider investing in low-cost index funds that offer instant diversification across a broad range of stocks or bonds. These funds typically come with lower fees and offer a passive investment approach, making them suitable for both beginners and seasoned investors.
Mistake #4: Ignoring Risk Tolerance
The Problem: Every investor has a unique risk tolerance. Some are comfortable with the volatility that comes with investing in stocks, while others prefer the stability of bonds. Ignoring your risk tolerance and investing in assets that are too risky for your comfort can lead to anxiety, emotional selling decisions, and potentially lower returns.
The Solution: Before investing, honestly evaluate your risk tolerance. Consider factors like your age, financial goals, time horizon, and emotional response to market fluctuations.
Actionable Tip:Invest according to your risk tolerance. Younger investors with a longer investment horizon can generally handle more risk and invest in growth-oriented assets like stocks. Conversely, individuals nearing retirement may prioritize income and capital preservation, favoring bonds and other less volatile investments.
Mistake #5: Reacting to Market Fluctuations and “Timing the Market”
The Problem: The stock market is inherently cyclical, experiencing periods of both growth and decline. Investors who panic and sell their holdings during market downturns can lock in losses and miss out on potential recovery. Additionally, attempting to “time the market” by buying low and selling high is notoriously difficult and often leads to missed opportunities.
The Solution: Maintain a long-term perspective and avoid making emotional decisions based on short-term market movements. Remember, market fluctuations are normal and should not derail your long-term investment strategy.
Actionable Tip: Develop a disciplined investment plan that outlines your investment strategy, asset allocation, and rebalancing schedule. Stick to your plan through market ups and downs, and avoid the temptation to make impulsive decisions based on short-term market noise.
Conclusion:
Investing can be a rewarding journey, but it’s crucial to be aware of the potential pitfalls. By avoiding the common mistakes highlighted above, setting realistic goals, and adopting a disciplined approach, you can significantly increase your chances of achieving your financial aspirations. Remember, investing is a marathon, not a sprint. Be patient, stay agile, and consult with a financial advisor or other professional if needed.
Unit Investment Trusts (UITs) are a type of investment vehicle that pools money from multiple investors to buy a fixed portfolio of stocks, bonds, or other securities. UITs are managed by a professional money managers or a team of managers. By understanding the mechanics of Unit Investment Trusts, you will have a deeper understanding of a unique investment vehicle that is not as common as the traditional stocks, bonds, or ETFs.
Here are some key characteristics of UITs:
Fixed Portfolio: UITs typically have a fixed portfolio of securities that are selected according to a specific investment objective or strategy. Once the securities are selected, they generally remain unchanged throughout the life of the trust.
Closed-End Structure: UITs are structured as closed-end funds, meaning that there is a fixed number of units or shares issued at the outset. Investors can buy or sell these units on the secondary market (publicly traded market), but the fund itself does not issue or redeem shares after the initial offering period.
Income Distribution: UITs may distribute income generated from the underlying securities, such as dividends from stocks or interest from bonds, to investors on a regular basis.
Limited Active Management: While UITs may be actively managed, they typically have a more passive investment approach compared to actively managed mutual funds. This means that the portfolio may be less actively traded, leading to potentially lower expenses for investors.
Defined Term: UITs have a defined lifespan, which is predetermined at the time of creation. At the end of the trust’s term, the securities are sold, and the proceeds are distributed to investors.
UITs can offer investors a way to access a diversified portfolio of securities with professional management, often at a lower cost compared to other types of actively managed funds. However, it’s essential for investors to carefully consider the investment objectives, risks, and fees associated with UITs before investing.
Types of Assets: UITs can invest in a variety of assets, including stocks, bonds, real estate investment trusts (REITs), and other securities. They may focus on specific sectors, geographic regions, or investment styles, providing investors with a range of options to suit their investment objectives and risk tolerance.
Passive Management: While some UITs may be actively managed, many follow a passive investment strategy, often tracking a specific market index. This passive approach aims to replicate the performance of the chosen index rather than attempting to outperform it through active trading.
Distributions: UITs typically distribute income generated from the underlying securities to investors in the form of dividends or interest payments. These distributions may be made on a regular basis, such as monthly or quarterly, depending on the investment strategy of the trust.
Tax Considerations: Like other investment vehicles, UITs have tax implications for investors. Dividends and interest payments received from UITs are generally taxable to investors in the year they are received, unless held within a tax-advantaged account such as an IRA or 401(k).
Liquidity: While UITs are structured as closed-end funds, meaning that they have a fixed number of units and do not continuously issue or redeem shares like open-end mutual funds, investors can typically buy or sell units on the secondary market through a brokerage firm. However, liquidity in the secondary market may vary depending on factors such as demand for the UIT and market conditions.
Fees: UITs charge fees for their management and administration, which are typically deducted from the assets of the trust. These fees may include a sales charge (also known as a load), management fees, and other administrative expenses. It’s essential for investors to understand the fee structure of a UIT and how it may impact their investment returns.
And here are a few more points to consider about Unit Investment Trusts (UITs):
Termination Date: UITs have a predetermined termination date, which marks the end of the trust’s life. At this point, the trust will typically sell off its underlying assets and distribute the proceeds to the investors. It’s important for investors to be aware of this termination date, as it can affect their investment strategy and timing.
Redemption Features: While UITs are generally considered closed-end funds, some may offer limited redemption features. For example, some UITs may allow investors to redeem their units before the termination date, typically at the current net asset value (NAV) of the trust, minus any applicable fees or charges. However, redemption options may be subject to certain restrictions and may not be available for all UITs.
Risk of Principal Loss: Like any investment, UITs carry the risk of loss of principal. The value of the underlying securities held within the trust can fluctuate due to various factors such as market conditions, economic trends, and issuer-specific events. Investors should be prepared for the possibility of a decline in the value of their investment, particularly in the short term.
Diversification Benefits: UITs often provide investors with built-in diversification, as they typically hold a diversified portfolio of securities. This diversification can help reduce the overall risk of the investment by spreading exposure across different asset classes, industries, and geographic regions.
Comparison with Mutual Funds: While UITs share some similarities with mutual funds, such as pooled investment management and professional portfolio management, there are also key differences. For example, mutual funds are typically open-end funds, meaning they continuously issue and redeem shares at their current NAV, while UITs have a fixed number of units and do not continuously issue or redeem shares.
Transparency: UITs are required to provide regular disclosure of their holdings and performance to investors. This transparency allows investors to assess the composition and performance of the trust’s portfolio and make informed investment decisions.
Overall, UITs can be a valuable investment option for investors seeking exposure to a diversified portfolio of securities with a fixed investment strategy and professional management. However, it’s important for investors to carefully consider the risks, fees, and other factors associated with UITs before investing. Consulting with a financial advisor or investment professional can also help investors make informed decisions based on your individual financial goals, objectives and risk tolerance.
The fourth-quarter earnings season is winding down, with more than a third of reports surpassing estimates. Positive earnings forecasts from companies like Block and Carvana led to significant stock jumps.
However, market analysts are noting a shift from the dominance of tech giants like Microsoft and Apple, highlighting signs of a broader market rally. The S&P 500 equal-weighted index is approaching record highs, indicating increased participation across various sectors beyond tech.
Analysts view this as a healthy development, suggesting a more diversified market landscape beyond the influence of a few mega-cap stocks. The trend signals potential for broader market gains and a departure from recent years’ performance patterns.
Despite concerns about market concentration, experts remain optimistic about the market’s resilience and its ability to adapt to changing dynamics, pointing towards a potential turning point in market breadth.
The fourth-quarter earnings season is winding down, with more than a third of reports surpassing estimates. Positive earnings forecasts from companies like Block and Carvana led to significant stock jumps.
However, market analysts are noting a shift from the dominance of tech giants like Microsoft and Apple, highlighting signs of a broader market rally. The S&P 500 equal-weighted index is approaching record highs, indicating increased participation across various sectors beyond tech.
Analysts view this as a healthy development, suggesting a more diversified market landscape beyond the influence of a few mega-cap stocks. The trend signals potential for broader market gains and a departure from recent years’ performance patterns.
Despite concerns about market concentration, experts remain optimistic about the market’s resilience and its ability to adapt to changing dynamics, pointing towards a potential turning point in market breadth.
As of Monday afternoon on February 26, 2024, at approximately 1:00 p.m. ET, the major indexes, including the Dow, Nasdaq and S&P 500, were roughly flat, holding onto their gains for the previous week.
To finish the day, the S&P 500 slipped 19 points to finish -.38%, while the Nasdaq Composite finished down 20 points, or just -.13%. The Dow, on the other hand, finished down 62 points or -.16 percent.
Thus, the market continues to show resilience, and it will be interesting to see how things unfold here in the coming weeks and months.
In the investment world and financial industry, understanding the language of the stock market is important to having a solid understanding and education of what you are investing in, and why.
For complete beginners to the stock market, the large amount of of terms and jargon can seem daunting, but fear not. In this comprehensive guide, we will demystify common stock market terminology, in the hopes of empowering you to navigate the financial industry and your investment portfolio(s) with confidence.
Section 1: The Foundation of Investing
What is the Stock Market?
The stock market serves as a platform for buying and selling shares of publicly traded companies. It provides liquidity, and additionally facilitates the transfer of ownership from sellers to buyers. Understanding the mechanics of the stock market, therefore, is essential if you are looking to grow your wealth over the long run. It will give you the confidence you need to invest your money in something you feel comfortable with, even if you are consulting with a financial advisor or other investment professional.
Why Invest in Stocks?
Stocks offer the potential for significant returns over the long term, which can potentially outpace other traditional investment vehicles like bonds or savings accounts. Additionally, investing in stocks allows you to participate in the success of individual companies, along with economies across the globe.
Section 2: Core Concepts in Stock Market Jargon
Stock
A stock represents ownership in a company. When you purchase a stock, you become a shareholder and are entitled to a portion of the company’s profits and assets. Stocks are typically classified into two categories: common and preferred.
Market Capitalization
Market capitalization, or market cap, is a measure of a company’s total value in the stock market. It is calculated by multiplying the current price per share by the total number of outstanding shares. Market cap categories include large-cap, mid-cap, and small-cap, each representing companies of varying sizes.
An example of calculating market cap could be a company with 1 million outstanding shares, that has a current share price of $50 per share. In this case, we simply multiply 1,000,000 x $50 and we get a market cap of $50,000,000.
Dividends
Dividends are payments made by a company to its shareholders out of its earnings. They are typically distributed on a regular basis, often quarterly, and represent a portion of the company’s profits. Dividend-paying stocks are favored by income-seeking investors, providing a steady stream of passive income.
Earnings per share (EPS) is a key financial metric that measures a company’s profitability on a per-share basis. It is calculated by dividing the company’s net income by the total number of outstanding shares. EPS is used by investors to assess a company’s financial health and growth potential.
Section 3: Analytical Tools and Indicators
Price-to-Earnings Ratio (P/E Ratio)
The price-to-earnings ratio (P/E ratio) compares a company’s current stock price to its earnings per share. It is a commonly used valuation metric that helps investors gauge whether a stock is overvalued, undervalued, or fairly priced relative to its earnings.
Volatility
Volatility measures the degree of variation in a stock’s price over time. Highly volatile stocks experience significant price fluctuations, while low volatility stocks have more stable price movements. Understanding volatility is crucial for managing risk and setting appropriate investment strategies.
Beta
Beta measures a stock’s sensitivity to market movements. This metric often uses the S&P 500 as a standard benchmark, at least in the United States. A beta greater than 1 indicates that the stock is more volatile than the market (or S&P 500), while a beta less than 1 suggests lower volatility. Beta helps investors assess the risk associated with a particular stock, relative to the broader market.
Section 4: Risk Management Strategies
Diversification
Diversification involves spreading investments across different asset classes, industries, and geographical regions to reduce risk. By diversifying your portfolio, you can mitigate the impact of individual stock or sector-specific fluctuations and improve overall stability.
Stop-Loss Orders
A stop-loss order is a risk management tool that automatically sells a stock when its price falls below a specified threshold. It helps investors limit potential losses, and protect their investment capital during market downturns or unexpected events.
Dollar-Cost Averaging
Dollar-cost averaging is an investment strategy that involves regularly investing a fixed amount of money into the market over time, regardless of market conditions. This approach allows investors to purchase more shares when prices are low, and fewer shares when prices are high, ultimately reducing the average cost per share over time.
Section 5: Additional Stock Market Terminology
1. Bull Market
A bull market refers to a period of sustained optimism and rising prices in the stock market. Investors are generally optimistic about the economy and future prospects, leading to increased buying activity.
2. Bear Market
Conversely, a bear market is characterized by a prolonged period of pessimism and falling prices. Investors are typically cautious or negative about the economy and future prospects, leading to increased selling activity.
3. IPO (Initial Public Offering)
An initial public offering (IPO) occurs when a private company becomes publicly traded, offering its shares to the general public for the first time. IPOs are often accompanied by significant media attention and can present opportunities for investors to participate in the early stages of a company’s growth.
4. Blue-Chip Stocks
Blue-chip stocks refer to shares of large, well-established companies with a history of stable earnings and dividends. These companies are typically leaders in their respective industries and are considered relatively safe investments.
5. ETF (Exchange-Traded Fund)
An exchange-traded fund (ETF) is a type of investment fund that trades on stock exchanges like individual stocks. ETFs typically track a specific index, sector, commodity, or asset class and offer investors exposure to a diversified portfolio of assets with lower fees compared to traditional mutual funds.
6. Mutual Fund
A mutual fund is an investment vehicle that pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Mutual funds are managed by professional portfolio managers and offer investors the opportunity to access a diversified portfolio with relatively low investment amounts.
7. Market Order
A market order is an instruction to buy or sell a security at the current market price. Market orders are typically executed quickly but may result in a slightly different price than expected, especially for stocks with low liquidity or high volatility.
8. Limit Order
A limit order is an instruction to buy or sell a security at a specific price or better. Unlike market orders, limit orders ensure that the trade is executed at the desired price or better, but there is no guarantee that the order will be filled if the specified price is not met.
9. Dividend Yield
Dividend yield is a financial ratio that measures the annual dividend income received from an investment relative to its current market price. It is calculated by dividing the annual dividend per share by the current market price per share and is expressed as a percentage.
10. Market Index
A market index is a measure of the performance of a specific segment of the stock market, representing a basket of securities from a particular market or industry. Common market indices include the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, each tracking different segments of the U.S. stock market. Included with these market indexes are index funds, which is a convenient way to access the stock market, typically for a very low cost.
Conclusion
Navigating the stock market can be intimidating, especially for beginners. However, by familiarizing yourself with key terminology and concepts, you can build a solid foundation for successful investing. Remember to conduct thorough research, diversify your portfolio, and stay disciplined in your investment strategy. With patience and persistence, you can achieve your financial goals and secure a brighter future. Happy investing!
Diversification is a cornerstone principle of sound investing, yet many investors overlook its importance or fail to fully understand its potential benefits. In this comprehensive guide, we’ll dive into the art of diversification, exploring its significance, strategies for implementation, and the key role it plays in building a resilient investment portfolio.
Understanding Diversification
At its core, diversification involves spreading investment capital across a variety of assets to reduce risk exposure. The rationale behind diversification is simple: by allocating funds across different asset classes, industries, geographic regions, and investment vehicles, investors can minimize the impact of adverse events affecting any single investment. This spreading of risk helps to smooth out fluctuations in portfolio value over time, potentially enhancing long-term returns while mitigating downside risk.
The Significance of Diversification
Diversification is often referred to as the only free lunch in investing, since it allows you the ability to achieve a more favorable risk-return profile, without necessarily sacrificing potential returns. By avoiding over concentration in a single asset or sector, investors can protect themselves from the negative consequences of such events, including economic downturns, industry-related setbacks, or geopolitical instability.
Strategies for Diversification
Asset Allocation: One of the primary methods of diversification is asset allocation, which involves dividing investment capital among different asset classes, such as stocks, bonds, real estate, and cash equivalents. The optimal asset allocation will depend on factors such as your specific investment goals, risk tolerance, and time horizon.
Geographic Diversification: Investing in assets across various geographic regions can reduce exposure to country-specific risks, including political instability, regulatory changes, or currency fluctuations. Global diversification allows you to potentially tap into a broader range of growth opportunities, while additionally spreading your risk across different economies.
Sector Diversification: Within equity investments, diversifying across different industry sectors can help mitigate the impact of sector-specific risks. For example, while technology stocks may offer high growth potential, they may also be more susceptible to market volatility. By diversifying across sectors including ones like healthcare, consumer staples, and industrials, you can balance risk exposure, and potentially enhance your portfolio stability.
Investment Vehicle Diversification: Beyond traditional stocks and bonds, you can diversify your portfolio(s) by incorporating alternative investment vehicles, such as exchange-traded funds (ETFs), mutual funds, real estate investment trusts (REITs), and commodities. Each investment vehicle offers unique risk-return characteristics, providing additional avenues for diversification.
Monitoring and Rebalancing
While diversification is a powerful risk management tool, it requires ongoing monitoring and periodic rebalancing to maintain an optimal portfolio allocation. Factors including broad market fluctuations, changes in economic conditions, and shifts in investor preferences can cause portfolio weights to deviate from their target allocations over time.
By reassessing your portfolio holdings and adjusting the target asset allocation as needed, you can help ensure that the portfolio remains aligned with your specific investmentgoals, risk tolerance, & objectives.
Conclusion
In conclusion, mastering the art of diversification is essential if you are seeking to build a resilient and robust investment portfolio(s). By spreading risk across different asset classes, geographic regions, sectors, and investment vehicles, you can enhance the stability of your portfolio(s), while mitigating downside risk, and potentially improving long-term returns.
While diversification does not guarantee protection against losses or eliminate of the many different types of investment risks, it remains a cornerstone principle of sound investing, along with a valuable tool for navigating the complexities of the financial markets. By incorporating diversification strategies into your investment approach, you can position yourself for greater financial security and success over the long-term.
In the ever-shifting sands of the financial markets, where trends change faster than a TikTok dance, value investing stands as a potential opportunity of stability and long-term wealth creation.
Warren Buffett is probably the best example of utilizing this strategy effectively, which focuses on identifying undervalued companies with strong fundamentals, and patiently waiting for their intrinsic value to be recognized by the market.
While Buffett’s approach might seem a bit intimidating at first, this guide is your roadmap to unlocking the secrets of value investing in 2024 and beyond, even if you are a complete beginner.
Understanding Value Investing: Beyond the Hype
Before we dive headfirst into value investing, let’s discuss a common misconception: value investing is not simply about buying cheap stocks (stocks that have sold off significantly). Instead, it’s about identifying companies whose intrinsic value (based on their financials, assets, and future potential) significantly exceeds their current market price.
Think of it like finding a hidden gem among a pile of pebbles. You see the potential that others miss, and patiently wait for the market to catch up, rewarding you handsomely in the process.
Why Value Investing in 2024?
Value investing is a tried and true investment approach that has worked successfully for countless investors, including the Oracle of Omaha himself. Here are some primary considerations when it comes to investing in value stocks for 2024 and beyond:
Market Volatility: The market is susceptible to corrections, especially after periods of rapid growth and expansion, like we saw during the 2020-2021 bull market. Value stocks, with their focus on fundamentals, tend to be less volatile, offering stability during turbulent times.
Undervalued Opportunities: The focus on short-term trends and hype can lead to undervalued companies being ignored. Value investors can capitalize on these inefficiencies by identifying companies with strong fundamentals, which are trading below their intrinsic value.
Long-Term Focus: Value investing encourages a long-term perspective, aligning with the goals of many individual investors who are seeking to build wealth over time.
The Warren Buffett Way: Timeless Principles for Beginners
While replicating the level of success of the Oracle of Omaha might be a tall order, his core principles serve as valuable guidelines for any aspiring value investor. These include:
Focusing on Intrinsic Value: Don’t be swayed by market trends or short-term hype. Analyze a company’s financials, assets, competitive advantages, and long-term growth potential to determine its true worth.
Invest in Businesses, Not Stocks: Think of yourself as buying a piece of a business, not just a piece of paper. Understand the company’s operations, management, and competitive landscape before investing.
Embrace the Margin of Safety: Don’t overpay, even for the ‘best’ company. Aim for a significant margin of safety between the purchase price and your estimated intrinsic value, providing a buffer against unforeseen events.
Be Patient and Disciplined: Value investing is a marathon, not a sprint. Be prepared to hold your stocks for the long term, weathering market fluctuations with discipline.
Now, let’s equip you with some additional insights/information that may help you with your value investing journey:
Develop Your Research Skills: Utilize online resources, financial databases, and company filings to conduct thorough research on potential investments. Don’t rely solely on hearsay or financial news snippets, but instead do detailed research on the stocks you are thinking about potentially buying.
Seek Guidance from Mentors and Communities: Consider connecting with experienced value investors, online forums, or investment clubs to learn from their experiences and share insights with each other.
Start Small and Gradually Scale: Consider starting with smaller investments in companies that you thoroughly understand. As you gain confidence and experience, consider gradually increasing your portfolio diversification.
Stay Informed but Avoid Information Overload: Keep up with relevant financial news and analysis, but avoid getting bogged down in the daily noise. Focus on understanding the bigger picture and long-term trends.
Additional Considerations:
In addition, consider some of the following as it relates to different types of value investing strategies, while most importantly, considering your own investment goals & objectives as it relates to these strategies:
Deep Value Investing: Focuses on companies facing temporary challenges that obscure their underlying value, potentially offering higher rewards, but also carrying greater risks. Ensure you are conducting in-depth research to understand the nature of the challenges, and assess the company’s ability to overcome them. Patience, along with a strong stomach, will be very important with this strategy.
Contrarian Investing: This involves investing in companies out of favor with the market, which requires strong conviction and the ability to think independently. It requires an ability to be prepared to face criticism, and resist the temptation to ‘follow the herd’. It also involves conducting thorough research to identify companies with solid fundamentals, and potential catalysts that could trigger a revaluation by the market.
Activist Investing: This involves engaging with companies to unlock their potential, which requires significant research, a long-term commitment, and a deep understanding of corporate governance. This strategy is best suited for experienced investors with substantial resources. An example of an activist value investor would be someone like Bill Ackman.
Conclusion
Value investing can be a good investment strategy for the long-term investor who is dedicated, patient, and interested in continuously learning and adapting to the market. Embrace setbacks as learning opportunities, and avoid the allure of quick fixes and get-rich-quick schemes.
Remember, even the great Warren Buffett faced challenges and setbacks throughout his career. By staying true to the core principles, honing your research skills, and managing risks wisely, you can embark on your value investing journey, potentially uncovering hidden gems in the market, and building long-term wealth in the process.
Cryptocurrencies like Bitcoin have exploded in popularity in recent years. With their extreme price volatility, along with their high upside potential, cryptocurrencies can be both an exciting, along with a high-risk investment choice. If you’re new to the crypto/blockchain world, getting started investing or trading these digital assets may seem daunting. This guide aims to walk you through everything you need to know, step-by-step, in terms of making your initial entry into the cryptocurrency markets.
Step 1: Do Your Research
Before choosing any cryptocurrency to invest in, it’s essential to do thorough research. There are thousands of cryptocurrencies out there, and not all of them are created equal. Beyond the “flagship coins” such as Bitcoin and Ethereum, there are many other types of coins out there called “altcoins”, which include coins such as Litecoin, Cardano, Polkadot or Solana.
You can learn more about the different cryptocurrencies and altcoins out there, including crypto white papers. Check out the specific technology and potential use cases of the coin, along with any potential partnerships. Pay attention to market capitalization as an indicator of stability and growth potential. Following crypto thought leaders and news sites can help you identify promising investment candidates.
Step 2: Choose a Cryptocurrency Exchange
Crypto exchanges are online platforms that allow you to buy, sell and hold digital currencies. Some of the largest exchanges include giants such as Coinbase, Gemini and Crypto.com, which have become popular due to their easy to use and intuitive interfaces.
When selecting an exchange, consider factors including the security practices, fees, available crypto assets and payment methods. Many exchanges have educational resources on crypto and blockchain, and even offer bonuses to help you get started. You will need to provide personal identification verification to register for any reputable exchange before transacting on the platform.
Step 3: Funding Your Exchange Account
You’ll need to connect a traditional payment method in order to fund your account, and purchase cryptocurrencies. Exchanges typically accept many different types of credit cards, debit cards, bank account transfers and services like PayPal.
Processing times and transaction fees differ widely across platforms. Bank transfers are generally cheaper, but slower at 1-5 business days, while debit/credit card purchases are fast but may have higher fees, perhaps around 4 or 5%.
Step 4: Execute Your First Crypto Purchase
Once your account is funded, it’s time to officially buy your first crypto coin (or coins)! Consider starting very small, especially as a beginner. Due to the highly speculative nature of cryptocurrencies, it is generally recommended not to invest more than 5% of your overall net worth or investment portfolio(s), due to the extreme risk and volatility of the asset class (especially as a beginner).
When it comes to actually purchasing the crypto coins, after you have done your research and found a coin (or coins) you wish to buy, it’s often as simple as visiting your exchanges website and entering in your chosen cryptocurrency on your exchange account’s buy/sell screen.
Then, simply enter the quantity of coins or dollar amount you wish to purchase, and complete the transaction. Congratulations, you are now officially an investor/trader/hodler of crypto!
Secure Storage Solutions
Once you buy crypto on an exchange, it’s typically stored in your exchange-provided wallet automatically. However, for enhanced security, many experts recommend withdrawing to a private crypto wallet, which is unconnected to any centralized entity.
Every wallet has a unique key, which is needed to access your holdings, so security here is crucial. Popular “hot wallet” software options include Exodus and MetaMask, while offline “cold storage” hardware wallets like Trezor and Ledger offer additional protection.
Long-Term Investing vs. Short Term Trading
Now that you’ve officially made your first cryptocurrency purchase, it’s time to decide on your specific time horizon & strategy.
Will you take a passive HODL approach – which is crypto community jargon for “holding onto cryptocurrency for price appreciation over a long period of time”? Or will you pursue a more active trading approach, perhaps attempting to time buys and sells to try and intraday volatility into profits?
New entrants to the crypto market may try a variety of strategies, including day trading, swing trading, and the all famous “HODL” strategy, which is holding onto crypto for a longer period of time, in the hopes of benefiting from longer term trends in the cryptocurrency markets.
This brings up another important consideration, which is that like the business cycle, the crypto market has experienced large booms and busts in recent years, which has resulted in significant price volatility and major price fluctuations for many of the most popular coins.
This can be both a significant risk, but can also present a tremendous opportunity for large profits, if you are an experienced crypto “HODLER”.
All of this being taken into consideration, the idea of never taking profits, especially in the extremely volatile world of cryptocurrencies, can be dangerous, due to the missed opportunities and the resulting collapse of the coins value.
For example, if you end up “HODLing” a crypto coin that skyrockets 1500% from where you bought it, but you don’t sell, there’s a good chance the same crypto coin could sell off significantly from the peaks several weeks or months later, which means you may have lost a significant amount of the profits you had “on paper”.
This is the classic “parabolic spike and collapse” that is often seen on cryptocurrency charts, (including the one below), where a short lived price movement is seen, only to result in a significant decline of the coin after the move subsides (often in the weeks and months that follow).
Special Note: The chart above, courtesy of Google charts, shows the cryptocurrency Dogecoin (DOGE), as it skyrocketed from a low of about .003 (3/10ths of a cent) in December 2020, and hit over .60 cents per coin by May 2021, in the bull market, crypto mania which occurred during this period. This represents a total return of over 19,000% within approximately a six month period, but timing such an event would be paramount to realizing significant profits. Thus, the thrill and mania that can occur in the crypto markets can often result in significant volatility, which creates opportunity, and it also creates risk.
Expanding Your Cryptocurrency Portfolio Over Time
As you become more comfortable, consider diversifying into additional digital assets. DYOR (Do Your Own Research) always applies when evaluating new potential altcoins which may offer high return potential, or real-world utility.
Additionally, keep in mind that as can be seen from the chart above, timing your specific entry and exit points will be paramount to a successful cryptocurrency trading and/or HODLing strategy.
Following a structured vetting process before throwing money at any coin, based on the fundamental knowledge you’ve built, along with a well-rounded technical analysis approach when it comes to your specific entries and exits, will be important to significantly improving your chances of success.
Putting this all together, the research you’ve done on the specific coin(s) you plan on buying is very important, due to knowledge being power and the more knowledge you have about what you are putting your money into, the more comfortable you will feel, and your decision making process overall will be more rational, and based less upon fear & greed.
Continuing Education
The open, peer-to-peer nature that defines crypto & blockchain depends on transparent access to information. As such, consider committing to ongoing learning & education of the market, by following some of the prominent minds and figures in the industry, signing up for email newsletters, and exploring how blockchain intersects with your interests.
Consider joining local groups or attending conferences (if available) to connect with fellow blockchain and crypto enthusiasts in person. As you advance, consider other possibilities such as yield farming, staking, providing crypto lending liquidity, and exploring investments in blockchain infrastructure companies or funds.
And there you have it! A beginner’s guide for tapping into the extremely volatile and risky, yet potentially lucrative and exciting world of the cryptocurrency markets. Remember to consider starting small, building foundational knowledge, and managing risk as you navigate your entry into this rapidly evolving landscape.
Crypto assets remain highly speculative, so never invest more than you can afford to lose! Additionally, cryptocurrency investing is not for everyone, and it is important to consider your own investment goals & objectives in the context of investing in these coins.
Over the past week, the U.S. stock market showcased a blend of resilience and volatility, reflecting a complex landscape shaped by economic data, corporate earnings, and geopolitical events. The narrative of the market’s performance can be digested by examining the movements of its major indexes, along with the underlying factors that may be currently influencing investor sentiment.
Market Overview
This week, the Dow Jones Industrial Average (DJIA) slipped 28 points, down .07%, while the NASDAQ Composite dropped approximately 205 points, down 1.28% for the week. The S&P 500, on the other hand, finished down 21 points, or 0.42% on the week, while still maintaining its recent break above 5,000. This movement underscores the market’s cautious stance amid ongoing economic uncertainties, along with anticipations surrounding monetary policy adjustments.
Economic Indicators and Corporate Earnings
The stock market’s performance has been significantly influenced by the latest economic data, including corporate earnings results. Investors are sifting through recent updates, trying to gauge the health of the economy, with particular attention regarding inflation trends, consumer spending, and employment figures. Of course, Federal Reserve policy weighs heavily on investor sentiment, with many analysts predicting that the Fed will cut rates multiple times in 2024.
Corporate earnings, on the other hand, have offered a mixed bag of results, with some companies surpassing expectations, and others cautioning about future challenges. These elements, combined with the ongoing mania surrounding artificial intelligence or AI, and certain growth stocks falling back into favor. All of this has played a pivotal role in terms of shaping market sentiment recently, which has driven sector-specific movements and ultimately all time highs, with at this point minor retracements for the major indexes.
Looking Ahead
In summary, the past week in the U.S. stock market has been marked both by cautious optimism, along with a focus on specific economic and corporate signals and data. As the market continues to adapt to evolving economic narratives, investors remain vigilant, ready to pivot in response to what could potentially lie next for global markets.
In the world of financial markets and the wealth management sphere, the options wheel strategy stands out for its potential to generate cash flow on a consistent basis. This strategy is ideal for those who are new to options trading, and for retirees who want to generate regular cash flow on their portfolio, perhaps from blue-chip dividend stocks.
In this guide to the options wheel strategy, we will dive deep into the intricacies, covering essential components such as covered calls and cash-secured puts, and how to potentially enhance your returns with dividends.
Understanding the Basics
Before we dive into the mechanics of the wheel strategy, let’s establish a brief foundational understanding of options trading. Options are financial derivatives that give buyers the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price (strike price) before a specified date (expiration date).
As an example, let’s assume that you are interested in buying XYZ stock, but you don’t actually want to put up all of the money to purchase XYZ stock at the moment. You are looking to buy 100 shares of XYZ, but it is trading at $100 per share, which means you would need to give up $10,000 to purchase your 100 shares.
In this case, if you were perhaps on the fence about rather or not you wanted to fork $10,000 over to buy all 100 shares, you could instead buy a call option while you make your final decision, which would give you the right, but not the obligation, to buy XYZ stock at an agreed upon price, which is $100 per share in this case. On the other side of this trade, you have the seller of the option, who is interested in collecting a premium, and is hoping in the process that XYZ stock stays below $100 per share.
In a nutshell, this is how options trading works. For more information on options trading for beginners, check out this resource. Additionally, keep in mind that with the options wheel strategy, we will not be buying options, but rather selling them.
The Wheel Strategy Overview
The wheel strategy is a systematic approach that involves three main steps: selling cash-secured puts until you get assigned the stock, and then turning around and selling covered calls until the stock is called away. This strategy is designed to generate regular income through the premiums that are generated when you sell the options, in a repeating “wheel” like fashion (over and over again).
In some cases, which we will discuss several paragraphs from now, you can even possibly collect dividends while implementing this strategy, perhaps against a portfolio of dividend aristocrats.
It also involves choosing a price that you would feel comfortable owning the stock at, and many times this strategy is completed by purchasing a stock at a discount to the current market price. The put option you sell then gives the buyer of the option the right (but not the obligation) to sell the stock to you at the strike price, and in return, you collect a premium for doing so.
The “cash-secured” part means that you have set aside enough cash to purchase the stock if the option is exercised. For example, if you sell a put option with a strike price of $100, you need to have $10,000 in your account, as you’re committing to buy 100 shares at $100 each if the option is exercised. The premium for selling the option on this $10,000 in collateral, is to compensate for the potential risk that by the expiration day, the stock price could fall below the strike price.
For example, if XYZ stock is currently trading at $103, and you decide to sell a $100 put option with an expiration date one month out (let’s say March 15th, since today is February 15th), then you would collect a premium, and in this case, we will say the premium you receive from selling the put option is $300.
However, this $300 premium is to compensate for the potential risk that come the expiration date of March 15, the stock price may have fallen below the strike price of $100, perhaps to $95, $90 or even lower. Either way, you would collect the premium for selling the option, and be on the hook for purchasing the 100 shares at the $100 strike price.
If the stock price drops below the strike price before the expiration day and your put option is exercised, you would then end up buying the stock at the strike price. Once you own the stock, you can benefit from any dividends it pays, which would add an additional income stream to your portfolio. Selecting dividend-paying stocks, therefore, instead of stocks that do not pay dividends, can add an additional layer of effectiveness when it comes to maximizing cash flow from wheel strategy.
Step 3: Selling Covered Calls
After acquiring the stock, the next phase is to sell covered call options. A covered call involves selling a call option on a stock you already own. This gives someone else the right to buy your shares at an agreed upon price (once again, the strike price) within a specified time period.
As with selling puts, you collect a premium for selling the call option. Typically, the strike price on the option you sell, will be of an equivalent or greater price than of the cash secured put option that you sold.
This is to ensure that you don’t end up selling your shares for a loss, and worst case, if you were to perhaps sell a cash secured put at $100, and then turn around and sell a covered call at $100, you would break even on your shares, even if both options are exercised. Thus, you collect both premiums in the process, and come out ahead either way.
To summarize, the goal for the covered call trade would be to set the strike price equal to, or above the value of the strike price for the put option you sold, with the main focus of ensuring that you always receive a premium (or cash flow) in the process.
Integrating Dividends for Maximum Cash Flow
Including dividend-paying stocks in your wheel strategy can potentially further increase the amount of cash flow you receive. When selecting stocks, consider those with a consistent dividend payout and a history of financial stability. Dividends can provide a regular income source while you own the stock, which complements the premiums collected from selling options.
The key when attempting to collect dividends and implement the wheel strategy, is to consider both the ex-dividend day of the stock (must own the stock one day before the ex-day to receive the dividend), and the expiration day of the covered call option that you sell. With American style options, for example, the buyer of the option can technically exercise the option any time before expiration.
Therefore, if you sell an XYZ covered call for a March 15th expiration, and the stock is trading at $105 with two weeks to expiration, the buyer of the option may very well send your broker an exercise notice, and you would be on the hook for selling your shares at the agreed upon strike price. However, if you owned the stock one day before the ex-dividend date or sooner, you would still receive the dividend, even if your shares get “called away” and the dividend has not actually been paid yet.
This makes for an interesting situation, as there are many factors to consider in terms of implementing cash secured puts, covered calls and dividends combined, but if you perform this strategically and with intent, it can be done in some cases, which can help you to obtain additional cash flow from your portfolio.
Risk Management and Considerations
While the wheel strategy can generate regular income, it is not without risks. Key considerations include:
Stock Selection: Ensure you choose stocks you are comfortable holding long term. Market downturns can leave you holding stocks for longer than anticipated.
Volatility: High volatility can often result in increased option premiums due to the higher implied volatility, but also the risk of significant stock price movements.
Assignment Risk: Be prepared for the possibility of assignment at any step, which can impact your cash flow and investment strategy.
Capital Requirement: Cash-secured puts often require significant capital up front, which is equivalent to the amount of shares you are purchasing (in 100 share increments), and you must be prepared to purchase the stock if assigned at the strike price.
Tips for Success
Start Small: Consider starting with stocks that require less capital, which means you won’t have to put up as much money to begin with. For example, instead of XYZ stock at $100 per share, consider ABC stock at $20 per share, especially if you are brand new to this strategy, and don’t want to risk a lot of money.
Stay Informed: Keep on top of market trends, along with company-specific news even, that can impact stock prices.
Diversify: Don’t rely on a single stock or sector and ensure you build a well-diversified portfolio to mitigate risk.
Patience: The wheel strategy is a marathon, not a sprint. Consistency and patience are key to realizing its benefits.
Conclusion
The options wheel strategy offers a structured approach to generating regular cash flow, through a combination of option premiums (and potentially dividends if you choose to implement the strategy this way). By carefully selecting stocks to purchase and managing risks effectively, you can potentially enjoy a steady income stream. Remember, while the wheel strategy can be rewarding, it’s essential to understand the risks involved and proceed with caution while remaining in line with your specific investment goals and objectives.
