Hello again. I know it has been some time since my last post, but I’ve been delving into the market trying to pull some nuggets of knowledge out of the craziness that presents itself before us. As a side note, I hate the word “nugget” when referring to knowledge or information. I’ve noticed that in the workplace, it is often used in this manner. To take it a step further, I find it strange that lingo, phrases and gestures are often adopted by all employees at a given firm. I’ve made it my goal to not fall victim to the brainwash that is apparent at these locations. People at my company, and I’m sure at many other companies, use the phrase “Going Forward”, which sounds so corporate. I prefer “From Now On”.
Anyway, back to business, if you want to call it that. I’m sure many of you are flying high over the recent 1500 point climb by the DOW from its 2009 low. Don’t get too pleased with yourself just yet. If you dumped all of your money in around the middle of March, then slap yourself in the face. That is irresponsible and you will most likely lose money in the long run, because you will stay in too long when the market drops. It would be a good idea now to take some of the profits you have made during this recent rally. The market has risen about 25% in the past month, but do not assume this is a sign of turnaround. There is still plenty of trouble on the horizon, but the one thing you can take solace in is that the worst appears to be over in the short-term.
Typically, the market turns around before the economy turns around. Even though the market has come back in a big way the past 4 weeks, the one problem with it is that it is still volatile. Companies are still reporting poor numbers overall (yes, there are a few that have come through very well, especially Wells Fargo) and the job market continues to decline. Will the market continue to rise, perhaps (in the short-term), but it can also crash back to the previous low as well. All it takes is some big companies coming up short on their quarterly numbers and a larger than expected job decrease and you could see this plane crash into the mountain. The market needs to stabilize first, before you can have warm, fuzzy feelings about the economy. We can’t have the 1%-3% daily swings up and down.
The financial health of the largest banks needs to be accessed before any hope of a recovery in the near future can be established. Yes, Wells Fargo posted a nice profit in the first quarter, but Bank of America, Citi, just to name a few need to show stability and the willingness to start lending again at reasonable levels. Once this happens, the gears will start turning and the economy should start the process of climbing back up out of this hole.
Remember, the market will recover before this process of economic recovery occurs. If you buy incrementally like I have been preaching, then your chance of buying at or near the bottom is much greater and it will help keep your cost per share down as well, thereby increasing your overall return. Make sure you do not take this strategy to the extreme, because you will rack up ridiculous amounts of transaction costs. Most online brokerages charge a flat fee for each trade, so the smaller your dollar amount, the more of a return you’ll need to establish in order to offset the commission costs. Everyone is different and has different goals. Find out what is the appropriate amount of money to use per trade and how often you will be buying. The way I look at it, is that the higher the amount of money you invest per trade, the more frequently you can buy in, because the percent gain you’ll need to offset the commission is much smaller.
I, for instance, use ING Direct, which you can set up auto-trades every Tuesday during the month and four bucks a pop (real-time trades are $9.99 each). I trade in $500 increments (usually). So my net investment is $496. In order to offset the commission charge, I only need to obtain a return of .081% on my investment. If you trade in $100 increments, you would need a return of 4.2% on your $96 net investment to break even. The biggest drain on long-term earnings are commission charges and taxes. Good luck navigating this market. Patience and cash rule!
Anyway, back to business, if you want to call it that. I’m sure many of you are flying high over the recent 1500 point climb by the DOW from its 2009 low. Don’t get too pleased with yourself just yet. If you dumped all of your money in around the middle of March, then slap yourself in the face. That is irresponsible and you will most likely lose money in the long run, because you will stay in too long when the market drops. It would be a good idea now to take some of the profits you have made during this recent rally. The market has risen about 25% in the past month, but do not assume this is a sign of turnaround. There is still plenty of trouble on the horizon, but the one thing you can take solace in is that the worst appears to be over in the short-term.
Typically, the market turns around before the economy turns around. Even though the market has come back in a big way the past 4 weeks, the one problem with it is that it is still volatile. Companies are still reporting poor numbers overall (yes, there are a few that have come through very well, especially Wells Fargo) and the job market continues to decline. Will the market continue to rise, perhaps (in the short-term), but it can also crash back to the previous low as well. All it takes is some big companies coming up short on their quarterly numbers and a larger than expected job decrease and you could see this plane crash into the mountain. The market needs to stabilize first, before you can have warm, fuzzy feelings about the economy. We can’t have the 1%-3% daily swings up and down.
The financial health of the largest banks needs to be accessed before any hope of a recovery in the near future can be established. Yes, Wells Fargo posted a nice profit in the first quarter, but Bank of America, Citi, just to name a few need to show stability and the willingness to start lending again at reasonable levels. Once this happens, the gears will start turning and the economy should start the process of climbing back up out of this hole.
Remember, the market will recover before this process of economic recovery occurs. If you buy incrementally like I have been preaching, then your chance of buying at or near the bottom is much greater and it will help keep your cost per share down as well, thereby increasing your overall return. Make sure you do not take this strategy to the extreme, because you will rack up ridiculous amounts of transaction costs. Most online brokerages charge a flat fee for each trade, so the smaller your dollar amount, the more of a return you’ll need to establish in order to offset the commission costs. Everyone is different and has different goals. Find out what is the appropriate amount of money to use per trade and how often you will be buying. The way I look at it, is that the higher the amount of money you invest per trade, the more frequently you can buy in, because the percent gain you’ll need to offset the commission is much smaller.
I, for instance, use ING Direct, which you can set up auto-trades every Tuesday during the month and four bucks a pop (real-time trades are $9.99 each). I trade in $500 increments (usually). So my net investment is $496. In order to offset the commission charge, I only need to obtain a return of .081% on my investment. If you trade in $100 increments, you would need a return of 4.2% on your $96 net investment to break even. The biggest drain on long-term earnings are commission charges and taxes. Good luck navigating this market. Patience and cash rule!
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