Tag Archives: etfs

Whatever You Do, Avoid Major Mistakes

As we all well know, the surest way to derail a reasonable investment plan is to make a major mistake. Avoiding major mistakes begins with identifying multiple reasons to invest and is bookended with diversification. When wishful thinking overtakes a thoughtful approach to investment decision-making it is time to step back. I can’t imagine any investor – no, not even Warren Buffett – who hasn’t occasionally banged their head on the wall grumbling, ‘Why the #@&% did I do that?’ The last decision that I regret was getting over-concentrated in chemical companies not fully appreciating that they could get hit by declining petroleum prices. Fortunately, I caught myself early but the mistake set back my returns somewhat; arghhh. Buy for Multiple Reasons Five weeks ago in my first article on Seeking Alpha, I said, “[A] strategic approach to investing, combined with fundamental and technical analysis, has served me well; it holds the potential for alpha-level returns.” Well, the inverse of reward is risk and that is why this philosophy also points to the three levels of protection I seek in every stock I own. I buy for multiple reasons believing that I can be wrong on any one but that it is unlikely that I will be wrong on most or all: Invest into big, developing, scientific, socio-economic, and political patterns and trends that have not yet been reflected in the price of related equities. Trends like the 2014 Congressional shift and escalating global tensions that pointed the way to the end of sequestration and increased military spending with all the promise that holds for major defense contractors. Find companies with fortress fundamentals including rising revenue or the promise thereof, solid margins and earnings, strong cash flow from operations right on down to free cash flow, and a great balance sheet. Guard against overpaying technically. I am not a chartist and, frankly, I think a lot of it is voodoo. That said, there are a lot of institutional analysts and investors out there following this blip or that, interpreting tops and bottoms, fixated on second derivatives, you name it. Like it or not, good investors must be attentive to such things and so I always touch base with a technician before making any move. Think Broader about Diversification The other bookend of protection is diversification and this means more than simply owning a bunch of different investments. It means diversifying by industry sector, instrument type, and geo-politically. Industry sector diversification is fairly obvious. Anyone who was heavily into oil/gas and ores/metals over the last year got crushed. I myself have unrealized losses on two positions I hold in major integrated petroleum companies. However, those paper losses are relatively small because of the downstream/retail operations of these firms. In other words, the two oil firms I hold are diversified themselves. The setback is not enough to pull them under or to sink my alpha-level performance what for the decisions I have made in other sectors. The same cannot be said for investors over-exposed to shale production or deep sea drilling. As to instrument type, I am less disciplined. I sit on a 12-month supply of cash, own a house and a piece of a farm, and have directed that my charitable donor-advised fund be split 50:50 between equities and bonds. But that aside, today I am a stock guy; I do not hold bond or bond-proxy investments including preferreds or REIT’s. Occasionally, I will buy an option to gain leverage on a strong hunch, but not often. Competent financial advisors recommend a mix of products and it is well to follow their advice. For myself, if interest rates were nearing the end of a secular up-turn, I would plow money into bonds and bond-proxies, but not now. I have made a conscious decision not to diversify at this time into those types of investments. I am, however, a big believer in geo-political diversification. With some exception, most Seeking Alpha contributors and commentators are fixated on US investments. In general, they avoid discussing foreign bond or equities including in the form of ADR’s. Take five minutes to do a quick scan of the articles now trending on Seeking Alpha and you will see what I mean. This is unfortunate because just as individual investments, industry sectors, and instrument types go up and down, so do countries. Indeed, if the Fed finally raises interest rates it will have a deleterious effect on almost all US investments. However, the move could be very positive for some foreign investments including companies that heavily export to the US. I own such companies as a part of my diversification strategy; I am especially partial to transnational companies. Therefore, one way to avoid major mistakes is to diversify beyond just individual investments along vectors. Here are the number of stock positions I hold by sector x country. As you can see, my investments cover 9 industries with fully one third of my holdings in companies headquartered outside the United States (the number of positions I hold are proportional to the dollar amount of my holdings): Sector # Positions U.S. U.K. France Switzerland Japan Ag/Food 3 3         Autos 3         3 Defense 4 4         Energy 2 1 1       Financials 5 2     3   Pharma 6 5   1     Other Mfg. 2 2         Tech 2 2         Water 2     2     Total 29 19 1 3 3 3 In passing, I’d like to mention what I will call “crosstab risk management”. This topic interests me from my days doing business in the old Eastern Europe financing the likes of East Germany, the Deutsche Demokratische Republik. The DDR in the 1980’s was a financial disaster; I recall a business lunch at the Deutsche Aussenhandelsbank in which we were served toast, lard and charged water. Still, we did good safe business there because we confined our investing to short-term trade finance – bankers’ acceptances – as we did with other Comecon and Latin American “LDC” (lesser developed countries) at the time. In other words, we carefully selected a specific instrument type to apply to these very difficult geo-political circumstances. There are other special types of risks that also interest me. As but one example, dating back to my days financing commodity companies, I became very interested in counter-party risk which equates to default risk as defined by the inability of a party to live up to its contractual obligations. This type of risk can wreak havoc on highly-leveraged commodity production and trading companies because it can ricochet through the system with breathtaking speed. Its discussion is outside the scope of this article. However, given serious dislocations among shale frackers and smaller mining companies, investors in those sub-sectors would be well-advised to study-up on counter-party risk. Step Back When It’s Time Denial is the hope or dream that something is right when it is really wrong. One of the great setups for this is in the analyst or pundit who says, ‘It has already lost all the value it’s going to lose; it’s time to jump in!’ Newsflash: Just because a stock has lost 50% of its market cap doesn’t mean that it can’t lose another 50% of what’s left. Anyone who wants to see a perfect example of this need only review past articles and comments on SA about North Atlantic Drilling Company (NYSE: NADL ). Here is stock that in just over a year lost 90% of its value 50% at a time. National Bank of Greece (NYSE: NBG ) is another striking example. When wishful thinking begins to overtake a thoughtful approach to investment decision-making, it is time to step back. It’s time to take a zero-based approach to your holding(s) and diversification strategy. If nothing has really changed, stay the course. If things have changed materially, sell, take your lumps, move on, and don’t look back. This is the same philosophy that accomplished executives take with M&A’s gone bad. Which brings me to a final word on reward. People have a right to ask, ‘How can you possibly generate alpha-level returns from spreading yourself across 29 positions?’ It’s a good question and one I’ve asked of other contributors on SA who have offered no evidence that they generate even beta-level returns across their spectrum of ideas. I offer this answer: I’m not really spread all that thin. I focus first on potentially large developing patterns and trends and only then search out stocks to capitalize on them. So, I’m really investing in fewer big ideas. This is a lot different than a random walk or buying fund shares. On the other hand, if you don’t have the time, interest or expertise to take a more focused approach to portfolio management you’re better off finding someone who can including in the form of fund managers. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

In Search Of The Rate-Proof Portfolio

After October’s better-than-expected employment report , a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall. In response, U.S. interest rates have been on the rise in recent weeks, with Treasury yields reaching their highest levels since July earlier this month, according to Bloomberg data as of November 13. Remember that bond prices fall as yields rise. While the long-term rise in rates is likely to be contained due to numerous factors, I expect rates will continue drifting higher even if the Fed doesn’t hike its fed funds rate next month. The central bank has made it clear that its first rate hiking cycle in nearly a decade is coming sometime soon , whether that’s December or next year. So, it may be a good idea to start preparing your portfolio for the upcoming rate regime change , one where rates are expected to moderately increase and remain below historical averages. While there’s no such thing as a fully rate-proof portfolio, there are some simple moves you can make now to help better insulate your investments from rising rates. Here are a few ideas to consider: Focus on U.S. stock market sectors that appear well-positioned for a rising rate cycle. Two sectors worth considering: U.S. technology and U.S. financials (excluding rate-sensitive REITs). First, they’re cyclical sectors which tend to outperform when the economy is strong, as is typical in a rising rate environment. In addition, technology companies may be poised to outperform other sectors amid higher rates, in large part due to their large cash reserves and strong balance sheets. With limited debt financing, they may be less vulnerable than debt-laden firms due to the higher borrowing costs that result when rates rise. As such, this sector has the potential for sustainable growth and continued shareholder friendly policies even as rates increase. Meanwhile, for some financial institutions, such as banks, higher rates could mean higher profits. In a rising rate environment, banks can potentially improve their net interest margins, as the difference between what they make from lending (their revenue) and what they pay for deposits (their costs) may increase. It’s no surprise, then, that according to Bloomberg data as of November 13, the performance of U.S. bank stocks has closely tracked the two-year U.S. Treasury yield, a proxy for investors’ expectations of short-term interest rates. Currently, as the data show, both measures are trending higher. You can read more about the case for these two sectors in my recent post, ” 2 Sectors to Exposure When Rates Rise .” Consider new sources of income . One such income source to consider: exposure to companies that have the potential to sustainably grow and increase dividends over time. So-called “dividend growers 1 look more reasonably priced than their high-dividend paying counterparts , according to Bloomberg data, and thus, could potentially outperform high dividend stocks in a rising-rate environment. A dividend growth strategy may also offer more exposure to cyclical sectors that have the potential to grow alongside the economy. Seek a better balance of risk and return . In other words, when it comes to preparing your bond portfolio for rising rates, consider reducing interest rate exposure while focusing on credit exposure. Shortening the duration of your bond portfolio can potentially help manage losses due to rising interest rates; low duration can potentially mean less volatility or price risk. At the same time, corporate bonds typically provide the potential for additional yield over Treasuries, so exposure to this asset class can be a way to generate income to help offset some of the impact of rising Treasury yields. For more on these two fixed income strategies, check out my recent post on ” Ideas for Your Bond Portfolio When Rates Rise .” I can’t guarantee that the above investing ideas will make your portfolio rate-proof ; however, these strategies can potentially help you reduce the negative impact of rising rates as well as help capture the opportunities presented by the new rate regime. Learn more about these strategies for rising rates, and the exchange-traded funds (ETFs) that can help you put them into action, at iShares.com. Funds that can provide access to these strategies include the iShares U.S. Technology ETF (NYSEARCA: IYW ) and the iShares U.S. Financial Services ETF (NYSEARCA: IYG ), which can provide exposure to the U.S. Tech and U.S. Financials ex-REITs sectors, respectively. Meanwhile, the iShares Core Dividend Growth ETF (NYSEARCA: DGRO ) is one way to access dividend growers, and ETFs, such as the iShares Floating Rate Bond ETF (NYSEARCA: FLOT ) and the iShares Ultrashort Duration Bond ETF (BATS: NEAR ), can help you shorten your duration, while the iShares 1-3 Year Credit Bond ETF (NYSEARCA: CSJ ) is among the funds that can aid you in gaining credit exposure. [1] a subset of dividend-paying stocks with the S&P 500 Index that increased their dividends anytime in the last 12 months. This post originally appeared on the BlackRock Blog.

3 Mid-Cap Blend Mutual Funds To Add To Your Portfolio

Blend funds are known as “hybrid funds”. Blend funds aim for value appreciation by capital gains. They owe their origin to a graphical representation of a fund’s equity style box. In addition to diversification, blend funds are great picks for investors looking for a mix of growth and value investment. Meanwhile, a mid-cap blend fund is a type of equity mutual fund which holds in its portfolio a mix of value and growth stocks, where the market capitalization of the stocks is generally between $2 billion and $10 billion. Below, we will share with you 3 top-rated mid-cap blend mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) , as we expect these mutual funds to outperform their peers in the future. To view the Zacks Rank and past performance of all mid-cap blend funds, investors can click here to see the complete list of funds. Hodges Fund No Load (MUTF: HDPMX ) invests in common stocks of companies of any market capitalization, including medium-sized companies. It may also invest in money market instruments. The fund purchases put and call options on domestic traded stocks or security indices. It also sells options and write “covered” call options. It seeks long-term growth of capital. The fund has a three-year annualized return of 19.1%. As of September 2015, HDPMX held 41 issues, with 12% of its total assets invested in Texas Pacific Land Trust (NYSE: TPL ). Vanguard Strategic Equity Fund Investor (MUTF: VSEQX ) seeks long-term capital growth. It invests in both small and medium-sized companies that are believed to have strong growth prospects and reasonable valuations compared to its peers. The fund’s advisor applies a quantitative process to assess all the securities in its benchmarks, including the MSCI US Small and Mid-Cap 2200 Index. A large portion of its assets are invested in equity securities. The fund has a three-year annualized return of 19.7%. VSEQX has an expense ratio of 0.27%, compared to a category average of 1.15%. ClearBridge Mid Cap Core Fund A (MUTF: SBMAX ) invests a major portion of its assets in equity securities of medium-sized companies. The fund may invest a maximum 20% of its assets in equity securities of companies other than medium-capitalization companies. It may also invest up to 25% of its assets in securities of foreign issuers. The fund has a three-year annualized return of 17.2%. As of September 2015, SBMAX held 67 issues, with 2.46% of its total assets invested in Mednax Inc. (NYSE: MD ). Original Post