Austinomics

Feeding the pig (part one)

It has been quite some time since I’ve written a blog post on personal finance. Indeed the last one came on November 18, 2013. Well now that I am out of school and working 40 hours a week for the next 40ish years of my life, it is indeed time to get serious about investment, retirement, and saving some money. I’ll be using my tax return from Uncle Sam to kick start my portfolio. By the way, the average tax return is about $3000 currently. If we assume that grows at 1% per year, and you were to put that tax return away in an investment account that yields 6% a year by the time you retire (say your working career is 40 years) you will have over $500,000. A lot of people like to spend that “free money” on disposable goods, but hopefully those numbers make you reconsider what you do with that check from the government. Anyway… back to the original topic of this post. What I’m doing with my money. This blog is part 1 of 2. Part 1 is mostly background finance information that should hopefully be useful and interesting to those without a finance education. Part 2 will be about my chosen equities (asset allocation) and why I chose them.

I highlighted my dismal stock portfolio a few years ago and since I’ve taken a few finance courses (in fact, I even minored in finance!). It’s safe to say that this time around I will not be purchasing just a few stocks. In fact, to achieve maximum diversification, I would need a pool of about 30 stocks. But I don’t have the time to research individual stocks nor do I have the money to purchase 30 stocks without parts of my portfolio being seriously overweight. So what’s a young man gotta do to get a good pool of equities? Exchange Traded Funds.

Exchange Traded Funds (ETF) have been around since the 1990’s. They are a group of equities (stocks, bonds, or both) sold as one share. But unlike a normal stock, you’re not buying into a share of one company, you’re buying into a group of companies. The advantage of this is it allows investors to achieve greater diversification than selecting individual stocks. Common ETF’s track entire stock market indexes. For example, if you purchase an ETF that tracks the S&P 500 you are essentially purchasing a little bit of every company that is listed in the S&P 500. You could also purchase an ETF that contains just technology companies, healthcare companies, foreign companies, etc. ETF’s are bought and sold on the open market just like any other stock – therefore you and I can purchase a group of ETF’s and achieve a well diversified portfolio with little help from a finance friend. So is there a compelling reason as to why you should or shouldn’t purchase a group of ETF’s yourself and never hire someone to manage a portfolio account for you? Absolutely. Financial managers aren’t really that much better than you or I when it comes to selecting individual stocks. In fact, only about 25% of them beat major indexes every year. So if you were to purchase an index tracking ETF such as SPDR S&P 500 index you would beat 75% of financial professionals every year. The expense ratio on the SPDR fund is .09, meaning purchasing the index cost you $9 for every $1000 invested. Not a bad deal.

While purchasing ETFs is great, it doesnt tell the whole store. We need to know more about understanding our assets as part of a larger portfolio. Here are two terms I’ll talk about a lot in part two and briefly go over here: Asset allocation and rebalancing. The name asset allocation pretty much is its own definition; it is deciding how much cash, bonds, stocks, etc. make up your entire portfolio. Going hand in hand with asset allocation is rebalancing your portfolio. Unfortunately nobody yet has a time machine so we can’t know exactly when to sell stocks (at their highest price) or when to buy stocks (at their lowest price), but rebalancing your portfolio on a regular basis is the next best thing. Allow a quick example: Say on January 1st you have $100 to invest. You put $30 in small US companies, $50 in large US companies, and $20 in international companies. Your asset allocation is 30% small companies, 50% large, 20% international. On June 1st, your small and large US companies have done really well, growing to $40 and $85, but your international companies have lagged behind and stayed at $15. Your asset allocation is now 29%, 61%, and 10%. The idea is to always keep your asset allocation the same, so therefore in order to get back to the original allocation of 30, 50, 20, you will need to sell some of your large US companies and reinvest those profits into the small and international companies. Overtime rebalancing your portfolio has a huge effect. The Wall Street Journal published a short article on this in July, and there are many academic examples studying this.

Okay – so that’s some background information on what I’ll be talking about in my next blog. I promise it won’t be a year and a half before I get to it.

16 thoughts on “Feeding the pig (part one)

  1. Etfs interesting . Where can I invest in some snowy snow cones . Also did u ever watch evan get killed .stop the fight!

    1. Ha! Snowy’s snowcones… not sure you would want to invest in that now. 😉 What are you up to these days?

    1. I looked him up on YouTube a few months ago and saw his last fight highlights. It looked pretty rough to say the least.

      1. Not up to much. Sorry for a delay in speaking to you, but I pretty much knew what you said when you had texted me last. Still shocked. I’m still workin on a&m . Econ there is a pain. But I should finish within year.

  2. Not up to much. Still finishing school. Economics isn’t my thing hehe. Meant to talk to you sooner but pretty much knew when you texted what it meant … You had mentioned talking stocks. I have Dreamworks for the late January movie Kung fu panda 3 . In my opinion will go up to 25-35$ a share from the current 19-20$ in 6-9 months. Each Kung fu panda film has made about 650 million and in China they love pandas. Could easily top 700-800 million. Also Netflix deals and new shows will only help. Haven’t been doing much else- lovin being an uncle. Hehe I’m dressing her as Princess Leia for new Star Wars film.

  3. Thank you for the nice comments.You have to fiurge that at some point a trend will end. So, you may have had to take a loss on a trade or two in April. Losses are just a part of the game (a business expense).You also have to fiurge that just because the market fell, it doesn’t necessarily mean that the stocks that you were in fell as well. You may have been able to get out with a small profit.It wouldn’t be long before you fiurged out that you needed to switch from the long side to the short side.

  4. They also say toy companies will be big hehe Dreamworks hit 25 already so it was 4 months not 6. I’m now in Mattell actually. .38 cent dividend is nice 24.5$ a share hello Barbie so far top sales for girls . I will go back to Dreamworks after X mas or so as long as it’s 25$ or less to buy and I’ll hold til movie release to 32$ my Mattell target price is 26-28$ in next month. I also like Ibm at 130s I think 150$ is what it will be in next 6 months or so

    1. Good call on DreamWorks. Don’t know much about Mattell; but it would be my guess that some of the more conventional toy companies would struggle unless they start incorporating a lot of technology in their toys. Hard to compete when mommy or daddy just hand a kid to a phone to play on. I like IBM for their dividend. A yield of almost 4% is solid and even though the stock price has been depressed in recent years, I’m confident they’ll right the ship, they always do.

  5. I like etfs and all but they are so much more finicky to understand. individual companies I feel are a bit more basic as far as just knowing products or various things.

    1. ETFs have certainly gotten more confusing in recent years. Many of them are borderline mutual funds with the way they track extremely strategy driven indexes. As far as the analysis of determining whether or not it’s under/over priced, you can do that the same way you do individual stocks.

  6. I’m only in toys for holiday season. mattell has an AI.barbie- hello barbie unfortunately can be hacked to spy on kids hehe. but toy sales will top 20 B this year cuz star wars. twtr, ibm, kmi, are my next 3 thoughts. twtr for 2016 olympics (soccer cups drove twtr stock from 30s to 50s. ) I might get Us Steel too idk. oil should bottom someday.

  7. See thing about Dreamworks they have 1-2 films per year if it’s a hit stock soars bust stock collapses , Kung fu panda is like 150 million budget it so but the 600-700 million they make is huge for them . The problem for Dreamworks is making original films . I expect them to rise back in next few months again to 28-30s because that film will be a hit . Atleast in China probably 150 million . Up from Kung fu panda 2s 97 million. But first I’m playing Christmas and Star Wars/Barbie Mattell owns rights to vehicles and hot wheels Star Wars. Barbie has already been claimed as #1 girls toy last year it was frozen.

  8. I sold my mattell and im in dreamworks again holding to like february- march. I think it goes 28-32 still . also im getting like 50 shares of twitter I think that can potentially go up 10$ or so $30-40 reasonable value . kmi is a speculation play for me largest pipeline in North America, high dividend . Idk.

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