Sound Advice

Why You Can’t Beat The Market Indexes Investors often find it challenging to consistently outperform the Standard & Poor's 500 Index (S&P 500) due to several key factors rooted in market efficiency, diversification, and the nature of active management. First, the S&P 500 represents a broad cross-section of 500 large-cap U.S. companies, chosen based on various criteria including market capitalization, liquidity, and sector representation. This index is widely regarded as a benchmark for the U.S. stock market's performance. For investors attempting to beat this index, they face the daunting task of not only selecting individual stocks that can outperform but also doing so consistently over time. Market efficiency plays a crucial role in this challenge. The efficient market hypothesis suggests that asset prices reflect all available information, making it difficult for investors to consistently find mispriced stocks or predict future price movements accurately. A...

Think You’re Diversified?  Think Again Far too often folks think that buying a bunch of mutual funds will give them the diversification they need, but the reality is that most mutual funds are first cousins of lemmings.   As mutual funds gain popularity, their assets increase.   As their assets increase, the universe of stocks they can buy shrinks. Why is that?   Because the size they need to buy increases. When a fund has only $100 million in assets, it typically will have individual commitments of $1-3 million.   At that level, the choice is either a sizable commitment in a smaller company or a relatively small piece of a larger company.   But when a fund has $10 billion in assets, each of its commitments will be on the order of $100 million or more.   That will eliminate many smaller companies simply because the fund would end up being a major shareholder of those companies. As funds grow, the choices of stocks are fewer and the likelihood o...

How A Good Financial Adviser Can Help You Good, qualified financial advisers are not magicians, but they can certainly provide assistance in many dollars and cents areas where most folks these days tend to be largely uneducated.   The main focal points are budgeting, investments, insurance, education planning, retirement planning, and estate planning. The first task in the process is selecting an adviser.   Those who call themselves advisers greatly outnumber those who actually are qualified advisers.   Although there are dozens of alphabet soup combinations that can be used to follow an adviser’s name (some of which can be bought for less than the cost of an evening meal), those that are most valuable are CFP (Certified Financial Planner) and CFA (Chartered Financial Analyst).   Both require extensive study and testing.   CFP tends to cover the broad range of financial topics facing most people.   CFA leans toward detailed analysis of investments. Le...

What You Need To Know About Dividend Stocks At first glance, the appeal of stocks paying generous dividends is the sense that there will be a dependable flow of income while holding them.   Well, as you might suspect, there’s a lot more to think about before buying. Stocks that pay generous dividends are typically those of mature companies with moderately growing profits.   When dividend yields are above average, the price-earnings ratios are usually low, i.e., their valuations relative to ongoing gains are relatively low. The reason for the low valuations is that investors do not expect the rate of yearly progress to change much. The polar opposite of dividend stocks (which are also known as value stocks) are high growth companies that offer little or no payout with their shares.   If all dividend stocks and high growth stocks would perform in line with expectations, the high growth stocks as a group would outperform the dividend stocks.   But the actual res...