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Sound Advice: March 3, 2021

Ka-Ching   Ka-Ching was the sound made by old-fashioned, mechanical cash registers before electronic terminals took over.   These days, it’s a term used to refer to lots of money. For investors, the critical question is what lies ahead for the stock market, not in the next few weeks, but in the next few months or years.   That depends on where the economy is headed.   Over extended periods, the path is upward, though there is always slippage along the way, sometimes relatively minor and at other times quite nerve-wracking. The driving force behind the economy is consumer spending, which typically accounts for about 70% of the U.S. Gross Domestic Product.   Consumer spending peaked at $13.4 trillion in the fourth quarter of 2019, plunged to $11.9 trillion two quarters later, then rebounded to $13.0 trillion in the most recent quarter. What lies ahead?   A further rebound. During the closing months of 2020, consumers started to loosen their purse strings, but there’s a long way
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Sound Advice: February 24, 2021

Pullbacks “R” Us The long-term trend of the stock market is up.   Period.   To reinforce that statement, take a look at the closing levels of the Dow Jones Industrial Average over the last 100 years: The average annual rate of return over this period was 10.5%.   That was before inflation, which averaged about 3.1% a year.   The real return, net of inflation, was 7.4% a year. The advance has not been straight up.   Quite the contrary.   A study by JPMorgan (see below) found that although the market advanced in three out of four years, there was an average intra-year drop of 14.3% during the period measured (1980-2021). At current Dow levels, that would be a reduction of 4,500 points. Nearly half of the pullbacks were less than 10%; five were more than 30%.   In all cases, stocks recovered and continued to climb. Over extended periods of time, equities have delivered the highest average annual rate of return of all asset classes.   Along the way, however, there have been substan

Sound Advice: February 17, 2021

The Impact of Psychology: Beyond The Numbers However much analysts attempt to parse corporate data and extrapolate into the future, the reality is that this is a fruitless quest.   Whether one’s goal is divining a reasonable price for an individual stock or the stock market as a whole, the hitch is the same.   Over time, there is a distinct correlation between changes in company fundamentals and the values given to those fundamentals, but at any given time there is frequently a disconnect between what one might consider fair value and the actual market price.    On occasion, there may be parity between the two, though more often than not the market price will be above or below the level that might otherwise be viewed as normal. The variances are largely explained by attitudes toward the future.    At times when prospects are rosy, investors tend to be generous with their valuations and stock prices may rise well above benchmarks considered reasonable.   Conversely, when times ahe

Sound Advice: February 10, 2021

It seems as if there are as many investment websites as there are grains of sand on the beach. Each of them trumpets the merits of its own approach, yet the overwhelming majority are either lacking in substance or credibility. There is more than enough hard information available for investors to make intelligent decisions. The problem is that there is so much information that it can become difficult to sort through and decide what is truly important. There is, in addition, widespread duplication of data, though it is not uncommon for the same data series to vary from site to site. There may be even greater variation when considering forward-looking data, which in most cases is anything but reliable. What is most useful is data about recent company trends in revenues, earnings, borrowings, valuations, and relative strength. Less useful, or perhaps to be taken with a grain of salt, are analyst recommendations (Buy, Hold, Sell). Neither these nor target prices should be taken seriousl
  SOUND ADVICE: February 3, 2021 Hedge Funds: One way to get clipped And then there are the hedge funds, which are completely different animals. These are the funds that have been conjured up for wealthier investors and promoted with an expectation that their results will be indifferent to meanderings of the markets frequented by the investing public. For the privilege of participating in these hallowed vehicles, one must meet specified income and asset levels.   Also, one must agree to pay fees that typically range in the area of 2% annually along with additional compensation to the managers of 20% of the profits that may be generated. That’s a stiff price to pay for dismal performance. Hedge funds follow numerous strategies, many of which are so arcane that it would not be unreasonable to believe that even the managers themselves have no understanding of what they are doing. For the most part, their approach is to make big bets and hope those bets pay off. As with the more

Sound Advice: January 27, 2021

Finances: Not for Men Only If you are a spouse, a single career woman or perhaps divorced or widowed, it's more than likely that you have little familiarity with matters of financial planning.   After all, money is stuff for men to handle, right?   Unfortunately, that's absolutely wrong. I remember more than a few occasions over the years when I've met with women whose first question was "What do I do now?"   In some cases, the question came from women who were successful in their chosen careers, but largely uninformed about how to handle the assets they had accumulated.   In others, it came from those who were now on their own due to failed marriages or the passing of a spouse.   Whichever the reason, the reality is that financial planning is not a club that's exclusive to men. Although this is not a new suggestion, it's one that hasn't been given sufficient attention, which is why more than a few women still feel uncomfortable dealing with fina

Sound Advice: January 20, 2021

The problem with most investment accounts Most people are not equipped to handle their own investments.   Everyone is looking for substantial rewards, but most of us ignore the fact that greater potential for reward means more risk is involved.   How do you limit risk? By diversifying.   But that's usually the hitch.   Just because you own a half dozen mutual funds or stocks doesn't mean your portfolio is diversified.   More often than not, it will mean just the opposite if the underlying holdings of the funds you hold are similar, which they often are.   That's frequently the case with stocks, too.   If you hold a dozen stocks in related industry sectors, that will magnify, not lessen, the overall risk. The goal of diversification is to hold a variety of securities that don't all move in the same direction.   Equities do well sometimes and are extremely disappointing in others.   During periods when interest rates area being reduced, bonds do well.   When rates a