- Where might the market be headed in the month of February?…And one dividend value stock that is currently bucking the market’s trend.
- How to reduce your investment research time with the use of ETFs.
- A guest post on the real cost of cable television.
- An updated portfolio performance table.
My Take: For most investors the majority of the continent of Africa remains a mystery. A largely backwards land that has yet to fully recover from the fallout of Colonialism is often what colors the general perception of the land. Consequently, most investors give little to no thought of even considering Africa as a land of investment opportunity.
Regions, industries or companies that are shrouded in mystery can be great investment opportunities. Gaining a position in an investment before the rest of the world wakes up to its potential is what being a successful investor is all about. This is why I highly recommend dedicating a small amount of time to the two interviews transcribed in the links above. Both are recent interviews with fund manager Larry Seruma.
Part of being a fund manager for a particular region comes the responsibility of being very well versed in a variety of regional dynamics. Such a manager is not focusing on a specific industry that resides in a region. No, the manager is focusing on the entire region. Therefore, they should have a good grasp of both macro and micro trends. This is very helpful for an investor that wishes to become acquainted to what the region has to offer in terms of investments.
Africa is in a unique situation because it still is largely undeveloped compared to the rest of the world, yet there are parts that are more developed than what the average perception is of the region. Anytime perception conflicts with reality you have an investing opportunity. Whether the reality is better or worse than the perception, eventually perception will give to what is the reality. If you can see through the errors in the general perception, then you’re ahead of the game.
Don’t ignore Africa as a region where you may want to focus some of your investment research. In the long-term, the investments made today could pay off handsomely.
I’m linking to an interview with Marshall Berol and Craig Valdes of the Encompass Fund. They were interviewed by The Energy Report recently about their thoughts about a number of energy/resource related topics. The fund they manage has performed well over the past few years. I’d highly recommend this interview. It will help you understand the energy landscape better through the eyes of two experts in energy investments and you will come away with a handful of specific investment ideas. Oil, natural gas, coal, nuclear and potash are discussed.
Leveraged ETFs have been around a while and continue to grow in the variety. For investors looking to use leverage without the use of a margin account or purchasing specific derivative instruments, leveraged ETFs might be a viable alternative for you and your portfolio. Though an easy way to position yourself to maximize market returns, ETFs are not without downside. Do the benefits outweigh the costs? Should you consider leveraged ETFs in your portfolio?
One of the main considerations you must make as an investor is how much return do you need or expect from your investments? If you decidedly wish to beat the market, then leveraged ETFs will be an alternative to consider. Not everyone is committed to stock selection. Many seasoned investors will simply invest based on their conviction that this is either a bull or bear market. Therefore, such an investor would have an even greater inclination toward leveraged ETFs.
Leveraged ETFs are able to maintain their 2x, 3x, or 4x exposure to the market through the use of derivatives, such as index futures, equity swaps and index options. The way that a leveraged ETF is constructed calls for constant re-balancing (daily). By re-balancing I mean that the ETF must adjust to keep the exposure the fund seeks to achieve.
To illustrate the point of re-balancing, suppose that I have a fund with $1,000 in assets and $2,000 in index exposure to the S&P 500 (2x leverage). If the index rises 1% on a given day my assets rise to $1,020 (I reflect a 2% gain since the fund is leveraged twice the market), but I must re-balance so that my exposure increases to $2,040 for the next day of trading. This is a constant process that must go on.
The process described above is a simplified example, but it should be obvious that such constant re-balancing is going to cause leveraged ETFs to incur larger maintenance/management fees than un-leveraged ETFs. Fees will vary per ETF, but on average be prepared to be hit with much higher fees than what you’d receive from a plain vanilla index ETF.
As a result of their nature, leveraged ETFs are going to work best for you if you’re able to get in on the floor of a market rally. It gets back to the basic idea of compounding. Day after day increases in the market’s price is going to compound just as any other investment you have does. If the market is flat and going to get nowhere all your going to get hit with are high maintenance fees or, if the market goes against you, your portfolio will be severely rocked.
In conclusion, I am of the opinion that leveraged ETFs are a good tool, when used correctly. These investment tools are not something that should be used by investors looking to buy, hold and ride out the market. Investors that have strong opinions about which way the market or a particular industry is heading in the near-term would be a best fit for leveraged ETFs. They’re particularly valuable for those investors that do not wish to establish margin accounts and directly engage in the purchase of derivatives.
If you feel that your sense of general market movements is keen, then give leveraged ETFs a look. You will find ETFs that are leveraged for both market appreciation and depreciation. It doesn’t matter if you’re a bull or bear, the leveraged ETF universe has a product for you.
Resource: List of Leveraged ETFs
If you missed it this weekend, I’m linking to Barron’s mid-year roundtable article from this past weekend’s edition. I feel that this year’s group discussion at mid-year is particularly helpful, since we’re currently down from where we started at in the beginning of the year. Therefore, this could potentially be a window of opportunity for your portfolio to finish the year strong. A little guidance from a few market experts might help, too.
For those unfamiliar, the Barron’s roundtable is an annual event, which brings a number of notable investors together to discuss what they see in the year ahead and what stocks, funds, commodities and other investments they are bullish or bearish on. The mid-year meeting provides greater insights into what has changed or remained the same from their forecasts from January.
I find this annual roundtable group very helpful for the individual investor. For one, it helps investors get a sense of what the ‘pros’ are thinking about and what they are attracted to. Secondly, it’s a point at which you can start branching off in your research. By this I mean that you may come across ideas that lead you to consider other related investments.
Comprehensive lifestyle changes including a better diet and more exercise can lead not only to a better physique, but also to swift and dramatic changes at the genetic level, U.S. researchers said on Monday…READ MORE.
My Take: I’ve linked to the story above not only because it’s very interesting and can have profound implications if true, but because your quest to be a successful investor should not harm your health and/or life. If external stimuli have such an impact on us that it can cause certain genes to activate or deactivate, then you seriously need to consider how the management of your portfolio is effecting your own self.
I don’t talk about this topic all that much because the management of my investments is not all that stressful to me. I’ve lost a lot in a day and I’ve made a lot in a day, yet at the end of the day nothing was final. I try my best to keep things in perspective. Any investor that has been in the game long enough has stories where they’ve lost of a lot or where they’ve made a lot. No one is immune.
If your nerves do not allow yourself to relax and not get too carried away with a large change in portfolio value, I would not necessarily advise that you give up on self-directed investing. I would recommend that you stay out of individual stocks and gravitate toward fund investing. Basic exchange traded funds (ETFs) exist that mirror broad based indexes, such as the S&P 500 and the Dow.
When you invest in a broad based index that is made to represent a large swath of the economy you are really betting that economic development will be positive in the future. When investing in these funds you can rest assured that one corrupt accountant, a dry well, or a plant shut down is not going to derail your portfolio. It would take an event or a series of events MUCH greater than any of those events.
The bottom line is that you should put your health before your portfolio. If investing is causing your to lose sleep or some other negative problem, then try what I recommend above. Matching the market is not a bad thing at all…historically it has been a pretty consistent path to steady wealth creation.
I typically invest in individual stocks, but I do hold a couple ETFs. Instant diversification has its pluses, especially when you’re looking at a more passive investing approach. With that said, if you are going to invest in a fund whether it be a mutual fund, exchange traded fund (ETF), closed-end fund (CEF) or some other variety of fund, it is very important that you look at the fund’s performance against the index it is attempting to match or beat.
If you’re investing in a managed fund, like a mutual fund or a CEF, you’re going to pay a fee for a team of fund managers to trade and/or use a variety of financial instruments for you. The goal is to use the team’s expertise and skill to bring you superior market returns. To hear more about this visit a previous blog entry here.
Clearly you do not want to pay a management fee to a company that under-performs against their index. If they can’t meet their benchmark, then you might as well buy the index or a low cost ETF that simply looks to match the index. How do you know whether or not a fund is performing well against its index?
In today’ investment world you’ll be told a million different things. You may see a variety of Lipper Leader scores, which are supposed to guide you to making the best investment decision or you may read a variety of literature that attempts to sell you how the fund is made for success. Don’t get confused by this wall of information. It doesn’t take a finance degree to figure out if you’re looking at a fund with a good track record.
I’m going to use the Dow 30 Enhanced Premium & Income Fund (DPO) for this example. It’s a Closed-End fund, which means it trades like a stock.
Here I am individual investor looking at DPO…should I invest in it? Well where do I start?
First, what exactly is this? It’s a fund that holds the 30 stocks that compose the DOW, plus the managers are using financial instruments like options to gain some additional exposure and hopefully come out further ahead than if it was just the DOW 30. Okay, so they’re going to invest in the Dow Jones Index and use some fancy finance tools to leverage and hopefully beat the market.
Second, how much is this going to cost me? I understand the trading fee, which I would pay for any other stock, so I don’t concern myself much with that. What does concern me are the management fees. What am I going to incur to simply hold this investment annually? I look at fund data and see that annual management expenses will be .88% and other expenses will be .21%. Therefore, I’m going to be out 1.09% of my initial investment annually, if I invest in DPO.
Third, before I look to compare performance of the fund to performance of its benchmark index I’ll look at its dividend payout and see what the current yield is. It turns out that DPO has a yield of 8.57%. On face value that catches my attention. I like high yields so I’m interested, but also a little cautious. I’ll look at the index DPO is up against (The Dow) and see that the Dow is paying about 2.33% in dividend yield. Therefore, DPO is about 6.24% higher.
Fourth, I’ll glance at the Net Asset Value figure to see whether or not this fund is trading at a premium or discount to its actual value of investment holdings. DPO is currently showing a 3.03% premium. (I like it best when the company selling the fund actually provides a chart to show NAV in terms of history. Then I can see whether or not this premium or discount is high or low in historical terms).
Lastly, now I’m ready to see how this fund has stacked up against its index, the Dow Jones Industrial Average. I’ll compare DPO against ^DJI and look at multiple years (FYI…You can do this very fast and easily through the Interactive chart feature on Yahoo! Finance).
Here is what I see in terms of DPO’s performance compared to the Dow in terms of stock price appreciation.
2011 YTD: +8%
From the start of 2011 until today the DPO fund has been handily outperforming the Dow Index. It is not only beating it in terms of price appreciation, but its yield is vastly superior. From 2010 to present and from 2009 to present the fund underperformed in price against the DOW, but it would have made up that ground with its superior dividend yield. We’ll call ’09 and ’10 a wash. In 2008 the fund go creamed. My guess is that the managers were hammered hard when the market took a steep down-turn in the latter part of the year and the leverage that they were using came back on top of them.
In summary this is what I see: A fund that seems to be able to match or beat the market in normal market conditions and a fund that will take additional trauma if markets move south fast. The dividend yield of DPO has a positive variance of 6.24% compared to the dividend yield you would earn if you just held a Dow Index fund, but in reality you need to subtract the 1.09% management fees, too. With the management fees your positive variance is 5.15%.
Should you buy this fund or buy a low-cost fund that is designed to mirror the Dow? I would say that it really depends on your needs.
Again, there are many more funds and indices than the 2 considered here, but think about it in terms of what’s going to benefit you most. If you hold that both these funds are going to bring comparable returns in the future, then do you need a quarterly distribution or not? DPO is going to beat the regular index all day long in terms of distribution, but what are you going to use that for? If you don’t have any need, then maybe your quest for a high-yield is misguided in this situation. Maybe it’s the index that’s going to be better positioned for you as an investment in the long-run.
(Note – Information about DPO was mainly found via the fund’s website…I’d recommend doing the same for other specific fund research.)
The best way to profit from a hedge fund may be to start one. In the meantime, consider a proxy that mirrors hedge-fund strategies at a fraction of the cost…READ MORE.
My Take: If you pay the slightest bit of attention of mainstream news the past few years, you have heard about hedge funds and hedge fund managers. Take a few minutes to get a better handle on some of the perceptions of hedge funds that aren’t compelely true. Nick Vardy does a nice job of providing an overview in the article linked within this post.
Dividend distributions are great, but what do you do once the money has settled in your account? Investors that do not automatically reinvest their dividend income back into a stock/fund need to have a plan. Without a plan you’re looking at the accumulation of idle funds (money).
A problem many smaller investors have when it comes to dividend distributions is that their total dividend dollar value is small. Maybe you receive $300 per quarter. Investing in a stock with a $7-$14 buying and selling commission may not seem very practical with such a small amount of money. Why? Well, if you buy in and sell a stock at $7 per trade your commission fees along will account for nearly 5% of the investment’s value!
What is a small investor to do? Clearly, you do not want to simply let your money sit idle, even if it’s a small amount of cash. My advice would be to explore the world of no transaction fee ETFs. Yes, no transaction fee.
These no-fee ETFs typically carry very low annual expense ratios, as well. They’ll give you a place to put your money in diversified fund rather than letting your money sit idle.
If you’re a member of Scottrade, take a look at the following Morningstar ETFs. All of these funds do not have a trading fee.
- · Focus ™ Morningstar US Market Index FMU
- · Focus ™ Morningstar Large Cap Index FLG
- · Focus ™ Morningstar Mid Cap Index FMM
- · Focus ™ Morningstar Small Cap Index FOS
- · Focus ™ Morningstar Basic Materials Index FBM
- · Focus ™ Morningstar Communication Services Index FCQ
- · Focus ™ Morningstar Consumer Cyclical Index FCL
- · Focus ™ Morningstar Consumer Defensive Index FCD
- · Focus ™ Morningstar Energy Index FEG
- · Focus ™ Morningstar Financial Services Index FFL
- · Focus ™ Morningstar Healthcare Index FHC
- · Focus ™ Morningstar Industrials Index FIL
- · Focus ™ Morningstar Real Estate Index FRL
- · Focus ™ Morningstar Technology Index FTQ
- · Focus ™ Morningstar Utilities Index FUI
The world’s largest bond fund began betting against the United States last month by taking short positions on its debt on expectations the nation’s shaky finances will drive interest rates higher and imperil its triple-A rating…READ MORE.
My Take: PIMCO is the ‘largest bond fund’ referenced above. As you may know, Bill Gross the Chief Investment Officer of PIMCO has expressed his concerns over excessive government debt in the U.S. for a while now. If the article is correct, Gross is now putting his money where his mouth is (in figurative terms).
I think Gross is of the opinion that big cuts to defense, medicare, medicaid and social security are very unpopular with the majority of Americans. Big cuts throughout these programs are not likely to be something that a politician can help get re-elected. If this is true, then the drive to make sufficient cuts in the budget are likely to be to weak willed to control the tide of government debt.
As government debts increase more Treasuries will need to be purchased. More debt will make the U.S. look more risky to investors, which will require a larger interest rates to be offered to attract buyers.
We live in very interesting and challenging times.