All Things Financial Planning Blog


Are You an Investor or Speculator?

A Worthwhile Financial Market DiagnosisHow can you tell if you are you an investor or a speculator? Many casual investors buy stocks and assume they are investing, but in reality, they are actually speculating. True investing entails conducting a thorough analysis of a company, determining whether the current price is justified, deciding whether the stock would be a good addition to your portfolio, and repeating the process periodically; speculation is simply buying a stock because you think it’s a good company or you heard a good tip, but you really don’t know how the company makes money, who its competitors are, or in some cases, even what it does. Most people would say they are an investor, but unless you are employing the fundamental analysis discussed below, you may actually be a speculator.


Suppose you believe that the new Affordable Care Act will benefit pharmaceutical companies and you want to capitalize on that potential gain. In a top-down approach, you would first generate a list of all the publicly traded pharmaceutical companies. Then you would compare them among each other using that industry’s metric. If any of the companies are non-US companies, then you need to translate the company’s currency to the US dollar for an equal comparison. Some common comparison metrics include: profit margins, sales, market capitalization, market penetration, debt/equity, etc. In addition, each industry has its own unique metric. For example, airlines use (revenues per passenger miles) and hotels use (average daily rate). Once you have identified the best stock within your filtered list, then you can determine whether the stock price is cheap or expensive versus its competitors.


Suppose you are an avid Facebook user and want to invest in the stock. In a bottom-up approach, you would first obtain financial information for Facebook to understand how it makes money. What are its income sources: advertising, selling products, partnerships? How much of their income comes from each source? Who are its competitors and what do their numbers look like? Keep in mind, just because a company makes a ton of money, it still doesn’t make it a good investment. Facebook made $5 billion in 2012 while Microsoft made $74 billion in 2012, yet Facebook stock trades at almost 143 times the value of Microsoft.

Research Reports

Some investors prefer to rely on research reports prepared by prominent analysts at investment banks. One of the many lessons the recent financial crisis taught us is that investment banks have countless conflicts of interest. There is no shortage of headlines where an investment bank issued research reports where they also did investment banking for the company in question. Unless the research is truly independent and neither the analyst nor their firms have a vested interest in the companies they cover, their assessment of a company is tainted by their firm’s relationship with the company being reviewed.

As you can see, researching individual stocks is very labor intensive whether you use the top-down or bottom-up approach. The analysis doesn’t stop when you buy the stock, you must continue to monitor the company (not just the stock price) to ensure it still meets your criteria. It’s ok to invest in stocks, but investors must recognize that unless they conduct ongoing and thorough analysis, they are merely gambling.

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA


Headlines vs. Markets – A Case Study

Bad-IdeaThe media’s job is ultimately to make money by selling advertising. How much advertisers are willing to pay depends on how widely their message will be distributed. That is measured by how well a television network, magazine or newspaper does at maintaining eyes on the screen or sales at the newsstand. Unfortunately, that often means the more negative a story or the more fear a topic instills, the more exposure it’s likely to receive. This is a common complaint, yet we keep watching.

Going back to my blog from last month, an investor’s job is to earn a return on the money they invest in line with the risk taken. Despite some volatility based on truly unforeseen headlines, the market is much less sensitive to the media and much more concerned with what is actually going on in the companies that comprise a given marketplace than the average investor.

In other words, to get a true sense at what’s going on at the markets, look at the markets, not the guy on TV keeping you glued until the next commercial break.

One quarter does not an investment lifetime make, but I’d like to use the fourth quarter of 2012 as a brief case study in lending some credence to the above point.

Going into the fourth quarter of 2012, it was hard to find much optimism. Most Americans had grown tired of an intensely divided election, Superstorm Sandy devastated the East coast and the fiscal cliff was looming on the horizon. In fact, I’ve spoken with many people who still believe that 2012 was a bad one for the markets.

Let’s look at some of the crises that many “just knew” would sink the markets to end the year and what wound up occurring in reality . . .

  1. Europe’s unemployment rate hits 11.6% signaling more problems for international investors:
    International developed markets were up 5.93% just in the 4th quarter of 2012 (represented by the MSCI World ex USA Index (net dividends))
  2. Greece’s debt and budget woes would continue to keep drag down developed market returns:
    Greece, for the second quarter in a row, led developed markets with a return of 17.87% for the fourth quarter (represented by MSCI All County World IMI Index)
  3. China’s slowing economy meant that emerging markets were in trouble to end the year:
    Emerging markets stocks were up 5.58% for the 4th quarter of 2012 (represented by the MSCI Emerging Markets Index (net dividends))
  4. An Obama re-election spelled doom for the U.S. market:
    The S&P 500 Index finished 2012 up 16% for the year
  5. Those fearing the doom and gloom should take refuge in commodities, specifically gold:
    Commodities ended the quarter down -6.33% with Gold down -5.65%. Commodities overall wound up down -1.06% for 2012 (All represented by the Dow Jones-UBS Commodity Index Total Return)

I want to stress again that this is just a one quarter snapshot. It’s not to suggest that anyone should have invested or sold any of their investments based on the above information. It simply illustrates how strongly our emotions can be pulled by headlines when what actually occurs in reality is a much, much different story.

So, what is an investor to do with this information? Not as much as you might think. It’s less about action and more about awareness. Have a plan, stick to it, be aware of the world around you, but careful of the motivations of those telling the story. Try to separate your concern for local, national and world events from your long term investing strategy.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH


Defining Diversification

In the top few responses most people give when you ask what they know about investing, “it’s important to be diversified” is right up there with “buy low, sell high”. Both statements are true and very important components of investing. My concern is that we hear and say these things so often, we lose sight of what they actually mean. defines Diversification as “a risk management technique that mixes a wide variety of investments within a portfolio.” True, but what the heck does that mean? Can it be any mix of investments? What does it really hope to accomplish? Is my portfolio diverse?

Today my goal is not to sell you on a particular investment strategy or convince you that there is any one way to properly diversify. My hope is to provide some key educational points to enhance your understanding of this important rule of thumb.

As the last several years have shown, investing in the stock market can be a volatile experience. If you invest in stock in one or even a small handful of companies, the value of your portfolio can shift wildly, often it seems for no logical reason. The primary purpose to diversify your investments is to decrease these and other risks.

How does one increase a portfolio’s diversity? Let’s look at a portfolio strictly invested in stocks. The simple answer is to buy a higher number of stocks. The better answer is to buy a higher number of different kinds of stocks. Suppose you own General Motors. Buying Ford might technically make you more diverse, but only slightly so. You still own just two companies, both large, US automakers. Instead, you should look at a vast array of companies differing in size, location and type.

This means expanding your portfolio to large and small companies of all types (often called sectors) all across the globe, avoiding the urge to own more companies in the U.S. than in other parts of the world. U.S. companies make up just 40-50% of global market share. By focusing solely on the U.S., you cut off the opportunity to better diversify and participate in the opportunity for growth in more than 50% of the world’s companies.

I want to stress that none of this is a blueprint for any type of investment strategy. It is simply an effort to help you understand what diversification means. How much diversification, in what areas, and the blend or allocation of different types of assets is a decision that should be made with careful thought and, in most cases, professional advice based on your goals and ability to tolerate risk.

As you approach your personal financial planning and goals, it’s important to obtain at least a basic grasp on the essentials in order to make the most educated decisions possible. There are lots of trusted professionals there to help, but knowledge is always a worthwhile investment.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH

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How to Buy Commodities

You have probably heard that commodities are a great way to protect your portfolio from inflation and offer variety from traditional stocks and bonds; but what are commodities, and how does someone actually invest in them?

Commodities are raw items that are used in the production of goods and are broken up into two segments: hard and soft. Hard commodities are mined (gold, silver, platinum) while soft commodities are consumed (wheat, corn, coffee beans, etc.). There are three ways to own commodities: own the physical commodity itself, buy futures contracts, or buy through a mutual fund or ETF. Owning gold coins is an example of a physical holding, while trading a futures contract is the more advanced investment strategy. However, for most investors, the best way to get exposure to commodities is through a mutual fund or ETF.

Physical Commodities
Buying the tangible commodity is the most cumbersome because you have to figure out where to store it, spoilage (for soft commodities), insurance, and liquidity (ability to sell something quickly). Assume you bought 2,000 bushels of corn to protect against rising food prices and to diversify your portfolio; unless you had a barn (which most of us city-folk do not), you would have to figure out where to store it to protect it from spoiling, and you may even want to buy insurance in case your barn or corn-storage facility burned down. If you decided to sell your corn, you would have to find a buyer that wanted exactly 2,000 bushels of corn and was willing to pay market prices; pretty difficult to do if you are not a farmer. This hassle-full scenario is just for one commodity! Imagine if you wanted to diversify among several commodities, which is the financial sound strategy. All these factors make owning physical commodities too cost and time prohibitive.

Futures Contracts
Futures contracts make it easier to invest in a very specific commodity with minimal cost and without the limitations of owning the physical asset. A futures contract is a standardized agreement between two parties to exchange an asset for a set price and quantity, and on a given day. Futures contracts are traded on the Chicago Mercantile Exchange (CME) and are all standardized. For example, 1 corn futures contract equals 5,000 bushels of corn; 1 coffee contract controls 37,500 pounds of coffee, and 1 gold contract equals 100 troy ounces of gold. Continuing with the corn example from above, you would buy 1 corn futures contract on the CME to protect against rising food prices. If corn prices do rise, your futures contract increases in value; but if corn prices decline, your futures contract decreases in value. At the end of the contract term, you either have to take possession of underlying commodity (rarely occurs) or take an offsetting position in your futures contract. Trading futures is a very advanced investing strategy not suitable for most investors.

Mutual Fund or ETF
Mutual funds and ETFs are the best way for the average investor to gain exposure to a broad basket of commodities, without incurring the risks described with owning the physical asset or buying a futures contract. Mutual funds and ETFs can be easily bought or sold and can also be held in your regular investment accounts (IRAs, some 401ks, or brokerage accounts). Most commodity mutual funds and ETFs are structured as partnerships, which means they require additional tax reporting if held in a taxable account; therefore, investors should carefully review the structure of the commodity mutual fund or ETFs before investing to decide which account it should be invested in to minimize tax consequences.

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA


“Risk Less and Prosper: A Guide to Safer Investing”

A Must Read New Book

Reviewed by Karin Maloney Stifler, CFP®


WARNING:  What you are about to read will challenge your longstanding investment beliefs and practices.


So, how are you feeling about the financial markets these days? Has the white-knuckled ride of the stock market rollercoaster exhausted your patience, if not your resources? Have extreme market declines delayed, downsized, or decimated your dreams for retirement or your children’s education? Do you question whether conventional investment wisdom really works? 

If you answered ‘yes’ to any of these questions, then pause and ask yourself if this is how you want to continue to live and manage your financial well-being. If you’ve had enough of the risky business of conventional investing, then Risk Less and Prosper: A Guide to Safer Investing is arriving just in time to unveil new wisdom to guide your investment decisions.

Co-authors Zvi Bodie, Ph.D. Professor of Finance at Boston University (author of Worry Free Investing) and Rachelle Taqqu, CFA and Principal of New Vista Capital, reveal a smart and safer way to plan for your lifetime goals.

Like Christopher Columbus discovering that the world is not flat, the authors debunk timeworn investment beliefs and practices that expose investors to more risk than ever imagined — and more risk than investors can afford to take. Here’s a sampling from the authors’ view of a brave, new investment world: 

#1 Investment Myth: Financial wellbeing is measured by total wealth. Thus, it is important to take risks in order to grow wealth.

New Investment Truth: Financial wellbeing is measured by the ability to create reliable income to sustain your fundamental standard of living, especially during tough economic times. 

Start the investment decision-making process by defining your goals and the relative importance of each goal. Then craft a safety-first strategy that achieves your basic lifetime needs with as little risk as possible. This strategy matches assets and income with goals, rather than investing assets for the promise of more growth. The benefit of investing safely is to avoid catastrophes and protect your ability to afford your most important goals. The tradeoff is potentially lower investment returns — even negative — inflation-adjusted rate of return, but is as valuable as buying insurance that protects your home in the event of a fire.  

#2 Investment Myth: The longer your time horizon, the more risk you can afford to take. 

New Investment Truth: Your tolerance for risk of losses is determined by many factors, but least of all, your time horizon (meaning how long until you need the money).

The primary drivers of how much to risk includes the relative importance of your goals, the risk and flexibility of your career and income, and your ability to adapt to adverse circumstances. In truth, it’s common for your tolerance for risk to vary for each goal based on how essential and valued they are to you, and to vary based on what’s happening in your life or the world around you. Basically, the more secure your income and career, and the less important the goals, the more able you are to adapt to market risks. Conversely, you may be less able to recover from investment losses if your career and income have stalled and you’re unable or unwilling to reduce the goal — at any age.   

#3 Investment Myth: Stocks aren’t risky in the long run.

New Investment Truth: Stocks are risky over any time horizon — short or long.

“Arguments to the contrary are junk science,” proclaims Professor Bodie. There is a wide range of possible outcomes when investing in stocks over any time period, as we have witnessed from the two stock market collapses in the past seven years. Investors and even the “experts” often underestimate the risk of things going badly. The less able you are to adapt to a worst case outcome (i.e. by working longer and saving more), the less stocks make sense in your strategy, no matter your time horizon.  

Risk Less and Prosper: A Guide to Safer Investing is due on bookshelves by year-end, and is available to pre-order now. Authors Bodie and Taqqu will show you so much more about the brave new investment world in which you can enjoy your life with less financial risk and drama.

karinMaloneyStiflerKarin Maloney Stifler, CFP®, AIF®
True Wealth Advisors
Hudson, OH

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October: A Trick or Treat for Investors

“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” This is a great quote from Mark Twain. As the message states, not only may October be a dangerous month to speculate in stocks, every month carries risk.

What makes the month of October so worrisome for investors is their knowledge of the great stock market crashes that occurred. The crash in late October 1929 was a catalyst behind the Great Depression and the October 1987 crash still lingers in the minds of most investors.

So does the month of October deserve such a bad reputation? The statistical answer is no. A quick look at the historic monthly average returns of the Dow Jones Industrial Average (DJIA) since 1900 shows October does not deserve its bad rap. The award for the worst performing month goes to September whose average monthly return over that period is down 1.1%. October’s average return over that time frame is up 0.1%. The best month: December which was up 72% on average with a positive monthly return of 1.5%.

So why should investors look for a treat instead of a trick in October? By looking at the historic monthly returns of the stock market, an interesting pattern develops. There appears to be a seasonal tendency for the stock market to perform better over successive months than other months. 

The seasonal tendency is straight forward. Split a year into two distinct investment time frames, 5 months and 7 months. With the first time frame, $10,000 is invested in May 1950 and is sold in September 1950; the cash is held until May 1951 when the proceeds are reinvested in the same manner. The other portfolio invests $10,000 in October 1950 and is sold in April 1951, with cash similarly held until reinvested in October 1951. If the pattern of two distinct investment time frames is repeated year after year for 60-years, a dramatic difference in values surfaces.

The $10,000 invested in the 5 months between May and September would have grown to $12,436. Not a great return for 60-years of work. The $10,000 invested in 7 months between October and April would have grown to $606,806. These numbers do not take into account taxes or investment expenses which would lower the overall totals. But with a 4,700% difference in returns between the two investment time frames, it is a pattern worth noting.

So where’s the catch? Not every time frame has worked. The most recent example is the period from October 2007-April 2008 which whould have resulted in a 9% loss and the October 2008-April 2008 would have resulted in a 25% loss. 

While seasonality may give us a “tip” on how the stock market may have performed in the past, remember that any investment involving stocks may be “peculiarly dangerous” at any time.

Ed GjertsenEdward Gjertsen II, CFP®
Mack Investment Securities, Inc.
Glenview, IL

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Why Stocks? Why Peas?

I get the feeling that for many investors who have been on the sidelines though the latest market volatility there has been an “I told you so” moment; when it comes to the advice planners give to invest.

It’s true – they missed out on the nervousness, the rollercoaster ride, and the bad taste in their mouth.

As I’m prone to do, I wanted to write about how investing and the market over the long run isn’t like the casino, as I tend to think many investors equate it to. But, I started to wonder if there are different ways investors relate to the markets. I wondered… are stocks the financial equivalent to peas?

Like listening to our parents to eat our vegetables, many know their advisors are going to recommend investing outside of comfort investments like money markets and CDs, and having part of your money in stocks.

Why do we recommend them? The facts are that stocks participation has led to the growth of wealth above inflation more so than any other investment. They are one of the few investments that ‘does a portfolio good’ in that way; since 1968, small company stocks have provided returns of 6.5% over inflation according to data provided by Fama/French. With the stocks of larger companies, the Fama/French data takes us back to the 1920s and we see a similar result (6.7%).

It won’t always be positive to be sure. The downsides of stocks can last for years (though the downsides are often overstated). The benefits of ownership come over time, like eating healthy food, or anything worthwhile.

Advisors recommend stocks because they are in your interest to have an appropriate allocation. Stocks should be used in moderation, and to the extent necessary.

As advisors, we know the activity of stock investing is one where risks are rewarded; the alternatives, though investors always seek substitutes for market volatility, we can’t say the same about.

When you look at investor reactions to volatile markets, it is to leave stocks, the one asset where volatility may be their friend after a downturn. Even doom and gloom economists like Nouriel Roubini believe stocks are an asset worth owning in the face of possible economic trouble.

Like your parents you know are right, advisors will be here patiently advising to maintain a balanced diet of investments. Many who met with advisors and adjusted their allocations after the 2008 market have already considered the appropriate mix, but if you haven’t yet reviewed your plan with an advisor, do so. Like healthy diet habits, the benefits from a balanced investment plan come years down the road in the way of a stronger retirement portfolio.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI