Yet Another finance secret finance professional won’t tell you (but I will)

So another finance piece, as I write this the U.S. is in an official recession. This piece isn’t about recessions, inflation or politics so you can exhale. We are going to reveal another secret though that finance professionals don’t like to admit. So a quick disclaimer, I am a finance professional. I have been working in the finance and accounting field for over 30 years. This blog is not a finance advice blog; this is my own opinion based on my experiences. Any advice you receive regarding finance should be researched thoroughly by you as an investor and verified through multiple sources.

Now that out of the way here is the opening salvo “When things are good, everyone is a genius.” The last decade up until the pandemic really the stock market overall was pretty good. You had good annualized returns and many people made a lot of money. So being a finance professional and advising people to go into the market wasn’t a genius play. Of course if you aren’t fluent in finance you might have perceived it as such. Interest rates were low for a long time so there really wasn’t anywhere else to go with investing except real estate.

But the secret? Everyone is a genius when things are good, what about when things are bad? What about when you are in a bear market (when indices drop 20% in a calendar year)? The secret is, the real finance geniuses were diversified PRIOR to the bear market. Any finance professional could have told you to put your money in an index fund prior to covid and you would have made fantastic gains. The real economic geniuses advised you to diversify with money spread to commodities, bonds/treasuries, real-estate and precious metals (this is a commodity, but not a traditional commodity).

As an example, what if in 2016 your finance professional advised you to have 15% of your portfolio in “Gas & Oil”? That would look pretty good now wouldn’t it? Same with bonds, treasuries, wheat, gold… you get the picture. The secret here Is diversity of investment result in a wider spread of assets which can absorb declines in any particular sector.

Like it or not, the world still runs on Oil based products.

Now that does mean you would have had less in technologies for the same period and not enjoyed that growth. I concede that, but the savvy investor doesn’t play the short term they play the long term and sustained diversified portfolios over the long haul 10-30 years normally perform as well as a strict stock portfolio. Don’t get me wrong here, I personally believe the majority assets you are investing in should be either growth stock mutual funds or blue chip mutual funds.

100% of a portfolio though?  No, you diversify specifically for bear markets and sharp down turns because they always happen. It’s not a matter of if, it’s a matter of when and how long will it last. For calendar year 22 as of 6.30.22 the markets are down 20.3% now this has come up in July, there is no denying that but you’re still down overall. On top of that we have large inflation numbers devaluing the purchase power of your dollar. So what 1.00 would buy last year now buys .92 that’s an 8% decrease (rough estimate). That isn’t equated well in your portfolios return.

Meaning you made 10% on the stock sale but the money you received purchases 8% less than it did meaning the value of that 10% return to you in real time is a net positive of 2%. Again, the secret here is diversity. Always have part of your portfolio assigned to cash, bonds/treasuries, commodities and that will provide you a decent buffer for the next bear market because this will happen again.

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Commodities – Should you invest?

For the first time in a long time we have inflation to the point where it is materially affecting multiple financial sectors. Bonus tip: Anytime oil prices rise, it affects pricing on nearly all consumer products. We also have the artificial inflation of the stock market due to interest rates being kept at historic low levels for over a decade. On top of that you had the pandemic that decreased production and you had governments stimulate with increase payments to individuals. These two factors alone cause inflation, less products and more money = product price increases.

Now before I get to far into this let me give you the normal disclaimer. I am a finance professional with 30 years of experience. These are my opinions based on years of observation, any decisions you make pertaining to your personal financial choices should be done so with a great deal of research beyond my blog posts.

Disclaimer out of the way, what does all of the reality of the first paragraph mean? It means commodities will increase. Oil, Precious metals, specific produce items wheat as an example. Does this mean they are a good investment? Yes, and no, first the no. Buying them now would break the basic principal of investing and wealth building (buy low sell high), you would be buying at a high, don’t do that.

Yes, because a diversified portfolio is a good thing. If you had gold in your portfolio at the start of the pandemic (3.1.20 roughly) it was trading at 1497.00 US per ounce. 2 years later? 1944.00 US per ounce that’s nearly a 30% return. Oil, wheat, Silver you can go figure it out, they are mostly up. The point here is you are seeing these items increase because the market is changing. The war in Ukraine effects commodities, specifically Wheat as Ukraine is a huge Wheat producer but what happens when markets change (with the many factors listed in this narrative) commodities tend to rise.

There is no sure thing in investing, its always a rollercoaster.

Ideally what you want to do is use the current financial climate as notice on how to diversify your portfolios going forward. Gold as an example, will come down. Should you go heavy into gold when it does? No, you should consider SOME gold though. 2-5% of your portfolio is what I recommend to family & friends buying at a low (I use 3-5 year price averages myself). Wheat will be another one that spikes soon, keep an eye on that.

Overall, commodities are a useful buttress for lower stock values. If you weren’t in commodities prior watch the prices in 2022 it’s going to be a good year to gauge your comfort level with commodities. Just like stocks it’s a gamble, but sometimes when you gamble you win and had you bought Gold (as an example) years ago and stayed with it, you would have a spectacular sell opportunity now to make some great gains.

Always be diligent when investing and don’t close your mind off to any specific sector of the markets. A diverse portfolio that takes a long term view on investments is prudent. Commodities are a big driver in markets (look at oil prices), ignoring them as investments isn’t the smart play. Nor is using a large % of your investing resources and putting that into commodities. It’s a sell position now. Take your gains if you have them and remember the simple phrase “buy low sell high” should always be paramount.

Source for Gold comparison:

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Advanced finance tip – Aristocrat stocks

As I embark on this post I want to remind everyone that any financial advice you read here is my opinion. You should always do your due diligence when it comes to your personal finance. Talk to as many people as possible, read as much as possible and get educated. On this blog you can find many basic finance tips that are basic and require very little in the way of finance knowledge they are common sense based.

This tip is common sense based to, but it is a more advanced approach to accumulating income. Aristocrat stocks is a term used for companies who pay out dividends, with two very important distinctions.

  1. A company is a dividend aristocrat if it increases the dividend it pays to shareholders for at least 25 straight years.
  2. A dividend aristocrat must also be a member of the S&P 500, and some investors may add additional screening criteria.

Source data https://www.investopedia.com/terms/d/dividend-aristocrat.asp

Compounding interest over time is the secret sauce to increased wealth.

The first distinction is the most important, it increases its dividend payouts for at least 25 years straight. These are companies like McDonalds, Exxon, IBM, Walmart, all huge corporations with decades of a track record of sales and growth. These are expensive stocks, they are blue chips, they are some of the most cash flush companies in the world. Some of these companies’ net sales in a year are greater than many countries GDP.

Thus the title “Aristocrat”. So what does this mean for you? As you move into a more comfortable space with your finances you will come to a point where you will want to generate income. Stock growth in of itself isn’t income until you sell the security. Dividends however are payouts you get for just owning the stock. Now why Aristocrat stocks are a “thing” now (they always were, but you see it more now) is due to the fact that interest rates have been so low for decades you cannot earn decent income from banks.

To put it in context, in the 1990’s your range on 6-month Certificate of Deposit was 8.62% – 3.53%. Now that’s a 5% range which is significant. A 6-month CD now? Good luck getting more than .5%. So of course investors have looked elsewhere for securities which gave you a guaranteed return. Believe me if CD rates were 3% or higher we would be discussing that. So we turn to aristocrat stocks. Even during economic down turns, we know places like Walmart, Apple etc. aren’t going to go out of business they are too big.

So investing in single stocks is dangerous, the market could take a down turn and the actual PRICE PER SHARE might go down. In that instance you may actually have a loss of value but you will still get a dividend. Remember Aristocrat stocks are a great means to getting guaranteed income. We used to be able to get this income from CD’s and saving accounts. The downside to this is, many people are in the stock market hence why it is so bloated. Ideally we get back to a reasonable interest rate that enables a good asset mix.

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