Wealth Management & Financial Planning

Wealth Management & Financial Planning

Understanding Your Investment Options

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Investing in uncertain times breeds a sense of both fear and opportunity. Between the elections, a Federal Reserve somewhat determined to raise interest rates, and demographic shifts driven by the Baby Boomers entering their retirement years, many diverse factors are influencing today’s economy. For many people, investing is limited to the options offered in their company retirement plans. But for those of you who have IRAs or can do rollovers, the following are some things to consider.

You can do five things with a stock. You can buy it. You can sell it. You can buy a put option that lets you sell it in the future at a specific price. You can buy a call option that lets you buy the stock at a certain price within a certain time. And to make matters more complicated, you can also be a buyer or seller of the put and call options. The fifth thing you can do is to sell a stock “short”, meaning you believe it will fall in value over time.

Within an IRA, you cannot sell stocks short but you can buy exchange traded funds (ETFs) that do sell stocks inside the fund with the intention of capitalizing on their loss. This may sound wrong to some in a capitalistic society, but it is a necessary function of the markets to keep bad companies from growing when they should be shutting their doors.

An interesting study conducted by Blackstar Funds covered more than 8,000 stocks that at some point would have been listed in the Russell 3000 index covering 3,000 of the largest stocks in the country based on market capitalization. According to their research, simply put, stocks don’t perform equally.

Blackstar’s research uncovered that over their lifetime, two out every five stocks actually deliver a losing return. Nearly one out of every five stocks (18.5%) loses more than 75% of its value. The index outperformed more than 64% of the stocks listed in the index because a small percentage of stocks outperformed the index by a very large margin.

Some investors believe that the index is a cheap, simple way to go and in a generally rising market, their view is accurate. Most actively traded stocks have a difficult time beating a diversified index; but that statement only deals with returns and not risk. In 2008, the mac daddy of bad markets, the index shed 38.7% of its value! Such a drastic decline is more than most of us can accept.

We believe that by using a mixture of diversification in sectors of the marketplace that seem to have the best demographic, fundamental and technical support on a risk-adjusted basis, you can outperform the indices over time, especially when you practice taxation optimization. If you can add investments that engage in finding the weaker sectors and stocks and sell them short, you have the ability to survive volatility in changing economic times. Don’t attempt to short stocks on your own, but do learn about your options.

Tax advice provided by CPAs affiliated with Financial Enhancement Group, LLC. Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]

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