Personal Finance - Part 3 - Investments and Growth Strategies
Plus the Chart of the Week: GOLD
Welcome back to the “Personal Finance - Building Your Wealth Series”.
This is Part 3, Investments and Growth Strategies.
If you like reading The Tobin Report, the only favor I’d ask in return is for you to share this with one or two friends. 👫 Thank you.
Lots to talk about today and a bit longer than normal. I could actually go on and on here…much like when I talk 📢…but I will try to make this as compact and valuable as possible.
In this report:
Developing an investment plan
My rules for investing
Chart of the week: GOLD
I recently met with a friend of mine to discuss his investment portfolio. He had reached out asking for some guidance on calculating his net worth, building a budget and looking at his investments to see where he could improve. This last part is really where I get excited.
I love investing…and love helping others make sense of their investments.
What I discovered in looking at his portfolio was that he was extremely concentrated in just a few investments. I have found this to be so very common amongst many people in the last 2 years. Many are over concentrated in one company or even one sector.
I think the reason for this is because it has worked in the last couple years…almost everything went up. People are used to outsized gains in a short time and they think this will continue.
Well, as we’ve seen in 2022…it has not worked. Many stocks are down 50%, 60%, and 70%+ from their peak. Bitcoin, as an example, is down over 75% from its peak just a year ago. I believe it is going lower from here yet.
This is not to shame my buddy by any means…but this is exactly why he reached out to me.
He needed some guidance on how to structure his investment portfolio and build an investment plan.
He was also looking for some ideas on where to invest.
And since my advisory licenses (Series 7, 63, & 65) have expired, I am no longer licensed to give specific investment advice. (Yes, before becoming a cop 20 years ago, I was a licensed investment advisor for E*Trade Financial).
However, what I did give him was the following…
MY investment plan
MY rules for investing
MY investment portfolio spreadsheet with notes on and the thesis behind each investment that I have spent MONTHS researching and structuring
So what I will share with you today is #1 and #2 above.
If you want #3, reach out. Eric@SouthBayFinancialCoaching.com
This is not to be taken as investment advice so please take this with a grain of salt.
And maybe a glass of whiskey. 🥃
So if you called me and said:
“Hey Eric, I need a little guidance with an investment plan. Can you help me out?”
This is what we’d discuss…
Developing an Investment Plan
Step #1: Assess Your Current Financial Situation
The first step in making an investment plan for the future is to assess your present financial situation. You need to figure out how much money you have to invest. You can do this by making a budget to evaluate your monthly disposable income after expenses and emergency savings.
It’s also important to consider liquidity needs. In other words, how accessible do you need your investments to be. Stocks are more liquid than real estate. If you may need your money in 6 months, for example, real estate may not be part of your plan.
Step #2: Define Your Financial Goals
The next step in making an investment plan is to define your financial goals. Ask yourself why are you investing? Are you looking to finance your child’s college or are you investing for a better retirement?
More broadly speaking, you can define your objectives into 4 categories. Many things, including your age and personality, will affect your objectives.
🎯 Capital Preservation - this is to maintain your current level of wealth, like cash or bonds, generally speaking. Although bonds have NOT preserved wealth very well in 2022.
🎯 Income - provide active income like dividends or cash flowing assets. This is another category where bonds fall into as bond holders receive regular payments.
🎯 Growth - build wealth over long term, like tech companies
🎯 Speculation - high risk, increased volatility, potential for outsized gains…or outsized losses. Bitcoin falls into this category.
👉 You can determine the best investment path for you based on which of these categories your goals and objectives fall into.
Step #3: Determine Risk Tolerance and Time Horizon
The next step in crafting your investment plan is to decide how much risk you are willing to take. Generally speaking, the younger you are, the more risk you can take, since your portfolio has time to recover from any losses. As you get older, you generally shift risk to more conservative assets.
In addition, time horizon must be taken into consideration. Is your time horizon 6 months or 6 years? Investment decisions look very different when looking at these two timeframes. You might LOVE Bitcoin long term. But maybe short term it’s not looking so hot, for example. You wouldn’t put your money in Bitcoin if you needed it back in 6 months in this scenario.
Full disclosure, I own zero Bitcoin. I’m just using Bitcoin as an example.
By figuring out your risk tolerance and time horizon, you can build a reliable asset allocation for yourself. This involves taking your investor profile, figuring out what you should invest in and what percentage of your overall portfolio each investment type should take up.
This is not to say certain portions of your investible capital can’t have different time horizons and risk levels. For example, your IRA might be in mutual funds and a conservative blend of stocks, bonds and cash. Time horizon = 15 years.
However, you may also have a separate account invested in highly speculative assets with the goal of outsized gains. Time horizon = 1 year. However, it is wise to have the mindset that this account could get cut in half due to volatility. This is generally why you would put a much smaller amount of your investable assets into this speculation.
Now the hard part…
Step #4: Decide What to Invest In
The next step is to decide where to invest. There are so many investment options. There are also many different accounts you can use for your investments. Your budget, goals and risk tolerance will help guide you towards the right types of investment for you.
Stocks, bonds, mutual funds
401(k) plans, IRAs, bank savings accounts, CDs
College 529 plans for education savings
Real Estate
Note Investing
Physical assets like gold and silver
👉 Wherever you decide to invest, make sure to diversify your portfolio.
Investing 80% of your money in Google, Tesla, Apple, and Meta is not the diversification to which I am referring. These are all tech companies and generally move in tandem. Diversify across various sectors, asset classes, currencies, physical assets, global markets, etc.
You get the point.
Personally, I am invested in mortgage notes (debt), investment real estate, various sectors in the stock market such as energy & materials, physical metals like gold & silver, and global markets such as Brazil, China, & Russia (Russian assets frozen for now), among other things. I also hedge my portfolio with inverse ETFs when appropriate.
Once you’ve determined how much to invest, I suggest following a few of these rules when it comes to stock market investing.
MY Rules For Investing:
Determine how much you will invest in various investments, then…
Invest this designated amount in batches, not all at once
i.e. if $3,000 to be allocated to Cameco, ticker CCJ, for example (largest uranium producer)…start with $1,000 now, $1,000 if it falls significantly in price, and the remaining $1,000 at a later time
Keep 5%-15% (or more) in cash. Always be ready for opportunities
Diversify appropriately - I own no more than 3% in one company, no more than 30% in one sector.
for example, don’t be 90% in technology or 10% in ONE company
Take profits! This is by far the hardest decision. Don’t be greedy. A 50% profit is better than any loss. If you miss further upside, be happy you made 50%. I’ve seen many people turn amazing profits into a losing position
Some examples of sell strategies:
sell half once it has doubled in value;
sell when your price target is hit;
sell when specific news is announced that affects the company, good or bad
Think like a contrarian - This is MY favorite! When everyone is in one trade, I look elsewhere. For example, I have never owned Tesla because I don’t chase price. I missed that boat in the early days and I’m okay with that. I buy deep, deep undervalued assets that nobody is talking about.
Never fall in love with a company. Be willing to sell when the fundamentals or technicals tell you to sell. Invest like an investor…not a cult follower.
Know WHY you own an investment. Most people have NO idea why they are in a trade. Most people are just following what they hear about at work or from the bartender.
Monitor and rebalance - If you don’t, you’ll miss an opportunity to sell. It might be too late months later.
Macro environment - at least have an understanding of the macro and political environment. Whether you like it or not these determine the direction of an investment.
If you need help with any of this, I’m happy to oblige.
Yes, I just used a word I’ve never actually used in the real world. Get over it. I’m trying to sound intelligent.
Eric@SouthBayFinancialCoaching.com or Ericthyde@msn.com or call me. Whatever works. Good talk.
Chart of the week:
I’m excited to show you the chart pattern breakout I’ve been waiting for: GOLD!
First, I’d like to point out, gold is only down 3% on the year. Yes, 3%. At the time of this writing, tech is down 30% which includes this big rally we’ve seen. Bitcoin down over 65% year to date. S&P 500? Down over 15%.
I’m happy with my gold. And things are just getting started.
Here is the daily chart going back 8 months. You can see price remaining in a down channel until recently. This is called a breakout with follow through. That said, these patterns typically retest the breakout level before ripping higher…meaning price will come back toward the area it broke out…then continue higher. This also coincides with my fundamental analysis, buying season for gold, and a study of institutional positioning in gold.
Producer Price Index (PPI) comes out tomorrow morning so we may see this pullback start as early as tomorrow morning if the report indicates further inflation.
Long term I am very, very bullish gold…short term, I expect serious volatility.
Why is gold breaking out of an 8 month down trend?
#1 reason: The dollar (measured by the DXY) finally rolling over (although not in a straight line)
CPI - Inflation has slowed the rate of ascent - inflation not going away, just the rate of ascent is slowing for now
Gold knows the economy is in the shitter
It’s smelling persistently high (NOT transitory) inflation
It’s sniffing out a slower increase of rates, which means the REAL inflation rate is likely to increase.
The misconception of gold is that it does well in an inflationary period. That’s not the whole story. If rates are RISING in an inflationary period (like they have been all year)…no bueno for gold. But in an inflationary period when rate increases SLOW or better yet, REVERSE…..Gold takes off!
Historically, gold sniffs this out months in advance.
THIS is why gold broke out last week.
How do I feel about copper? I’m not looking to add to any of my copper stocks until we see how the recession shapes up. This might change if China reopens sooner than I expect. For now, I’m holding where I am.
Oil? On the downside is the recession which would bring oil down. The supply side and war situation are positive factors for my investment thesis. I’ve got some positions there so at least I have a seat at the table.
Lastly, my #1 investment thesis for 2023 is still on the table. Uranium. I’m still long and strong.
If you are interested in my portfolio spreadsheet, hit me up.
That is all for now. Thanks for reading.
Eric