With the end of the year fast approaching, there’s no better time to review your portfolio’s performance and, if need be, take some steps to ensure that your returns for 2014 are the best they can be. One simple, cost-effective way to do that is to subscribe to a market service.
If you’re like the average investor today, you own a mixture of asset classes, which might include CDs, money market funds, T-bills, bonds, mutual funds, and ETFs, all of which are managed by third parties and are passive by their nature. But it’s often the performance of the individual stocks in your portfolio — the assets manage — that weigh most heavily on your overall returns. However, unless you’re a full-time investor, it’s hard to find the time to do the work and analysis needed to discover those winning stocks — and to do it on a consistent basis. This is where a market service comes in.
These services usually fall into two categories — trading or investing — and could be considered Cliffs Notes for the market, but without the stigma. They’re essentially subscription services, usually ranging from $49 to $99 a month, which deliver distilled market knowledge right to your inbox or RSS feed. The difference between these services and a traditional investment service or newsletter is that they aren’t the recommendations of a faceless research department from a large brokerage or investment bank. This new generation of market services are produced by individual traders and investors who are more accessible, accountable and transparent than ever before.
With the advent of the Internet, and then even more so with the explosion of social media, full-time traders and investors began to realize that they could monetize the work that they were already doing. This often involves spending 40 hours a week, or more, watching every movement of the markets (remember, futures, currencies and international markets are open around the clock), and looking at hundreds or even thousands of charts in order to find the best opportunities to make money. By offering the fruits of their labor to the public for a fee, they’re able to create a new revenue stream that’s not dependent on the markets and that helps to smooth out their equity curve.
So for the price of admission, you usually get a nightly watch list of potential investment candidates, complete with analysis and strategy suggestions. Most services will also have regular blog posts covering market education. In addition, many services offer live chat rooms during market hours where you can communicate with the service’s author and watch him make trades in real time, as well as interact with other like-minded traders and investors. This is an excellent way to exchange ideas about the markets and oftentimes end up with a virtual mentor who can help you improve your performance and returns.
Though purists may claim that this isn’t “true” investing — that you’re being “given the fish” instead of “learning how to fish” — that’s not the case at all.
Technology has allowed us to streamline and optimize almost every aspect of our lives. Why should investing be any different?
All you’re doing when subscribing to a market service is making the process of finding great stocks more efficient by allowing someone who already does it — and probably does it better than you — do the heavy lifting for you. In the end, the decision to buy or sell a stock — and how you decide to manage your positions — is up to you. You have the final discretion and responsibility. But you’ll also have a narrower, more focused, and more vetted pool of candidates to start from. That advantage in 2013 might have made the difference between being in IBM (IBM), which is down 1.9 percent for the year, and being in 3D Systems (DDD), which is up 158 percent.
Unfortunately, the world of trading services is not without its “get rich quick” types or its scam artists, so you have to do your due diligence before choosing a service. A good place to start when trying to find a quality service is in an active community like StockTwits. There it will become quickly apparent which services are worth their salt and which ones are blowing hot air. Most legitimate services will also offer a trial period where you can test them out for free to see how their performance is and if their investment style fits your own.
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Warren Buffett is a great investor, but what makes him rich is that he’s been a great investor for two thirds of a century. Of his current $60 billion net worth, $59.7 billion was added after his 50th birthday, and $57 billion came after his 60th. If Buffett started saving in his 30s and retired in his 60s, you would have never heard of him. His secret is time.
Most people don’t start saving in meaningful amounts until a decade or two before retirement, which severely limits the power of compounding. That’s unfortunate, and there’s no way to fix it retroactively. It’s a good reminder of how important it is to teach young people to start saving as soon as possible.
1. Compound interest is what will make you rich. And it takes time.
Future market returns will equal the dividend yield + earnings growth +/- change in the earnings multiple (valuations). That’s really all there is to it.
The dividend yield we know: It’s currently 2%. A reasonable guess of future earnings growth is 5% a year. What about the change in earnings multiples? That’s totally unknowable.
Earnings multiples reflect people’s feelings about the future. And there’s just no way to know what people are going to think about the future in the future. How could you?
If someone said, "I think most people will be in a 10% better mood in the year 2023," we’d call them delusional. When someone does the same thing by projecting 10-year market returns, we call them analysts.
2. The single largest variable that affects returns is valuations — and you have no idea what they'll do
Someone who bought a low-cost S&P 500 index fund in 2003 earned a 97% return by the end of 2012. That’s great! And they didn’t need to know a thing about portfolio management, technical analysis, or suffer through a single segment of "The Lighting Round."
Meanwhile, the average equity market neutral fancy-pants hedge fund lost 4.7% of its value over the same period, according to data from Dow Jones Credit Suisse Hedge Fund Indices. The average long-short equity hedge fund produced a 96% total return — still short of an index fund.
Investing is not like a computer: Simple and basic can be more powerful than complex and cutting-edge. And it’s not like golf: The spectators have a pretty good chance of humbling the pros.
3. Simple is usually better than smart
Most investors understand that stocks produce superior long-term returns, but at the cost of higher volatility. Yet every time — every single time — there’s even a hint of volatility, the same cry is heard from the investing public: "What is going on?!"
Nine times out of ten, the correct answer is the same: Nothing is going on. This is just what stocks do.
Since 1900 the S&P 500 (^GSPC) has returned about 6% per year, but the average difference between any year’s highest close and lowest close is 23%. Remember this the next time someone tries to explain why the market is up or down by a few percentage points. They are basically trying to explain why summer came after spring.
Someone once asked J.P. Morgan what the market will do. "It will fluctuate," he allegedly said. Truer words have never been spoken.
4. The odds of the stock market experiencing high volatility are 100%
The vast majority of financial products are sold by people whose only interest in your wealth is the amount of fees they can sucker you out of.
You need no experience, credentials, or even common sense to be a financial pundit. Sadly, the louder and more bombastic a pundit is, the more attention he’ll receive, even though it makes him more likely to be wrong.
This is perhaps the most important theory in finance. Until it is understood you stand a high chance of being bamboozled and misled at every corner.
"Everything else is cream cheese."
5. The industry is dominated by cranks, charlatans and salesmen
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