Stocks

It’s time to sell your losing stocks held in taxable accounts

Most people saw nice returns this year if they stayed with their portfolio that lost heavily last year. However, you may still have some losers within your portfolio that you should now sell in order to take advantage of losses to offset capital gains. For example, let’s say within your portfolio of 10 different company stocks, you had 8 winners which posted gains, while the other 2 may lost money. If you sell those losers now, you can take those losses against your capital gains for the year, thus decreasing your tax liability. You can deduct up to $3,000 if married or $1,500 if filing separately and or individually. Anything over and above that loss threshold you can carry over and claim on your subsequent year’s taxes.

It doesn’t make sense to do this for just any losing stock, especially if you feel the investment is a good one. Truly, you only want to do this if your quite certain the investment was a bad one.

Not to mention, current capital gains rates are at 15%, it’s certainly possible with the new administration that these rates will increase over the next several years, thus enabling you to take excess losses against gains over the next few years.

Diversification is more than just owning different stocks

I spoke with a friend of mine this past weekend, well he’s actually a coworker – but he moved states with the company, so I no longer work with him. One thing led to another and we were talking about how well the company is doing, and that’s when he chimed in about his stake in the company. He has been allocating 90% of his contributions (and the company match) to our company stock. I couldn’t believe my ears. He assured me though, he was diversified. He then proceeded to tell me he had a number of other stocks, and so he was diversified. The problem is, diversification is more than just owning a number of different stocks, it’s allocating your dollars across a number of stocks. Just because you have 10 different stocks doesn’t mean you’re diversified. Let me explain better below:

Poorly diversified portfolio of 10 different holdings ($10,000 investment – assuming all investments carry equal risk):

Stock A: 20 Shares, $500

Stock B: 2000 Shares, $1000

Stock C: 1500 Shares, $500

Stock D: 250 Shares, $100

Stock E: 1200 Shares, $400

Stock F: 300 Shares, $900

Stock G: 500 Shares, $1100

Stock H: 20 Shares, $500

Stock I: 15 Shares, $500

Stock J: 2500 Shares, $4500

Why is this bad? You’ve got $4500 in one company, or 45% of your investment dollars in one place. Your portfolio is too heavily dependent on one company. You should have no more than10% of your portfolio in any given investment or industry or company, etc.

Below is an example of a properly diversified portfolio ($10,000 investment – assuming all investments carry equal risk).

Stock A: 20 Shares, $1000

Stock B: 200 Shares, $1000

Stock C: 1500 Shares, $1000

Stock D: 250 Shares, $1000

Stock E: 1200 Shares, $1000

Stock F: 300 Shares, $1000

Stock G: 500 Shares, $1000

Stock H: 20 Shares, $1000

Stock I: 15 Shares, $1000

Stock J: 2500 Shares, $1000

Now, this is simplified, but the idea is to spread your risk, so if one investment is doing bad, chances are another will offset that down stock.

Also, there are numerous reasons why it’s a bad idea to invest so heavily in your own company,check it out here.

Making sense of a companies’ P/E ratios is easier than you think

Jeremy Siegel, Ph.D, wrote over on Yahoo finance yesterday “What’s the Stock Market Worth Now?” In the article, he takes a look at a well known financial ratio, the P/E (P-E) or Price to Earnings ratio. He surmises that there is still great upside potential to the market as P/E ratios are historically low.  He also does a fairly good job explaining the difference between operating earnings and GAAP reported earnings and explains which number is more meaningful to look at ( I won’t get into this discussion as the difference in the two numbers on average is minimal). As mentioned, he looks at how current P-E levels relate to historical levels and provides insight as to what he thinks this will mean to the markets in the short and long term. Below, I will do my best job to explain what P/E ratios should mean to you and provide an example of how to evaluate them.

First, let’s discuss P-E ratios. It’s really quite simple, this ratio looks at the price of the stock compared to how much they’re earning. What does this tell you? By itself, very little. But if you compare a P-E of one company to it’s peers and or the industry and to historical levels, you can get a better idea if the stock price is over or under valued and how much people are paying for the earnings.

“Over the past century, stocks have been valued, on average, at about 15 times annual earnings, a number called the price-earnings ratio, or P-E ratio. This implies that annual earnings on stocks have averaged 1/15, or 6.7 percent of the stock’s price. Another way of looking at this is that the average dollar invested in the stock market has earned 6.7 percent, which is called the earnings yield and is the reciprocal of the P-E ratio. Since earnings derive from real assets (factories, inventories, copyrights, etc.), the earnings yield represents the average real return to stock investors. This is why lower P-E ratios imply higher earnings yields and better returns for investors.”

The Price to Earnings (P/E) Ratio is an indicator of a company’s expected growth in earnings. The P/E Ratio is calculated by dividing the most recent close price of a stock by its most recent reported Earnings Per Share (EPS) value. There are many different variations of the P/E calculation though – some use projected earnings to calculate a “forward” looking price to earnings, while others may use a trailing or past average of earnings to calculate the P/E ratio.

Investopedia explains Price-Earnings Ratio – P/E Ratio
In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn’t tell us the whole story by itself. It’s usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company’s own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

The P/E is sometimes referred to as the “multiple”, because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of  current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

Let’s evaluate Wal-mart and its competitors for an example.

In the above example, the p/e ratio looks at the price of the stock compared to its previous 12 months of earnings reports averaged.

So, people purchasing Wal-Mart stock are willing to pay about $15.81 per $1 of earnings. Compare that to Amazon, where people are paying $78.41 per $1 of earnings. What does this tell you? What’s the better buy according to their P/E ratios?

At first glance, you may be inclined to think that Wal-Mart is the much better deal. Heck, it costs nearly $60 less to earn the same $1. So why is Amazon so high? That’s the problem with using only one ratio – it doesn’t tell the entire picture. The truth is, speculation on future earnings of Amazon is showing that people expect their earnings to increase in the future, while Walmart may not be slated to grow as fast. So, it’s important to consider future earning potential when evaluating the current p/e ratio of a particular company or industry. After weighing the future predicted earnings against the past, you can determine which stock is the better value. Do you want to go with a potentially less risky/less rewarding stable stock such as Walmart – or with a stock such as Amazon that may be priced a bit high – but has the potential to really do well. This is a question only you can answer.

When will the market peak? Do you have an exit strategy?

Yep, that’s the million dollar question everyone wants to know. But who knows the answer. Towards the end of last year I put out a recommendation to buy, buy, buy. Today, however, I am changing my tone. I believe (take it for what it’s worth) the market is nearing it’s peak as far as the next couple of years are concerned for multiple reasons of which I will discuss below. Clearly, I am not saying that there is not the potential that the markets can and will go higher, I’m saying it’s only a matter of time now before they contract again.

• Fundamentals are no longer supporting stock prices, they seem driven by speculation that can’t last forever. There is only so much cost a business can cut before less sales undermine profits.
• Interest rates will increase before long, stocks will become more expensive
• Gold prices are in for a rude awakening, there may still be some short term gain – don’t expect it to last forever
• Still too much uncertainty in real estate, prices still haven’t stabilized
• People aren’t spending like they used to. People are cutting back on credit card purchases and this means poor retail sales in the future.

Above are only a few main points in my belief that there will soon be a correction. There are many more reasons besides those. What’s your exit strategy? Have you developed one?

The best gift you could give or buy for a child is an investment or savings account

Year after year kids receive toys and clothes for their birthdays. Year after year the toys are destroyed and or pile up and most even go unused after just a few days, and they grow out of clothes and or drop them because they’re no longer trendy (in a quickness). Instead of wasting anymore of your money on crap from China, you should seriously consider starting them their very own custodial investment account or even a simple savings account. You can start one for any child, even if the child is not your own. That doesn’t mean you can’t still buy them some small kind of toy, and take the remainder of the money to invest in their future to help them out with college or buying their first home, or whatever they might need. It’s the perfect gift for your nephew or niece and especially your own kid. Many people help out the needy too – and buy them toys – why not help them with their future instead? Allow the power of compound interest to work over the years by getting them started young.

You don’t have much time?

Don’t worry – the process literally took me about 2 minutes to create an custodial account for each child. So, instead of jumping in the car, driving to the mall or store, dealing with the crowds, waiting in line to checkout – you can do this all in your underwear at home. What’s more you ask? Each birthday or special occasion, you can simply deposit more in their account with a simple click. They can watch their investment savings grow before their eyes.

Note: There is a waiting period until the account is approved, but with Tradeking, my account was approved in under 10 minutes. In addition, if you choose to fund your account via check – you’ll have to send them a copy of a voided check and a copy of your license. After they recieve this by fax or mail, it takes them 2-3 business days to allow you free transfer of your money from your bank account to your investment account.

What’s so great about this gift?

Not only is this gift something that will help the kid well into their future, it also helps teach them something most parents have a hard time doing, money management. By providing them the account, they can take future birthday or holiday money and deposit it in their account, and share responsibility in creating a plan for their future. They will also develop an understanding at a very young age in the power of saving and investing. It’s the perfect way to teach the children you care about how to prepare for life financially. Too often, kids don’t learn until it’s too late. This will help propel you to take the time with them to explain the importance of being smart with their money – and how a penny saved is a penny earned. Moreover, you can teach them about goals and the value of money. Too often kids don’t understand why it’s better to save than spend. You can take the opportunity now to not only buy them the best gift ever, but to invest in their mind and teach them financial independence.

You don’t even know about investing so how can you teach them?

The great thing about this gift too is that maybe you’ve no clue where you’re going yourself. Tradeking offers easy to understand investment lessons to help you get started in very little reading (you could also start with my basic investment lessons – shown above too on the main toolbar). You could take this opportunity to kick start a plan for yourself. But back to helping your child with investing, they offer plenty of advice in making simple selections for the child based upon the kids age, etc. So have no fear, you need to know nothing to pick something for the kid or even yourself if you choose to get something going for yourself.

You’d be silly to not get started now, don’t wait until this offer expires!

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