Too many New ETFs?

There are new ETFs slated to open throughout the year and with the approval of the ‘alpha’ ETF format the numbers could grow even larger. Chances are you should ignore most of them. The streamlined approval system proposed by the Securities and Exchange Commission could expand the numbers faster. The challenge for you and me as investors is the evaluation process. Much like the daunting issue facing investors when it comes to mutual fund research the ETF marketplace is becoming just as crowded and confusing. It is a shame we have allowed something that provided simplicity to take on complexity. This could make the process time-consuming and difficult for the average investor.

The big issue is how much better will you and I as investors be served by all these new products? This is not an unusual phenomenon in the financial services industry. In 1983 there were 893 mutual funds and most investors thought that was too many. Today there are more mutual funds than individual stocks listed on the New York Stock Exchange. The assets have ballooned to more than $3 trillion. Those assets are regularly under attack by various products being developed throughout the industry. From my perspective we haven’t mastered the regulation on mutual funds and they have been around a lot longer than ETFs. Opening the door to everything imaginable will only make the task more difficult.

Many of the new products are designed on theory or hypothetical scenarios. The test for many will be that reality stands somewhere in-between theory and hypothetical. While these may work looking backwards, they will need adjustment as reality is determined. This leaves me not wanting to necessarily be the guinea pig for the process. I am willing to let them establish themselves first and then make any determinations from there. It is important to remember as an investor – it is your money. The job of the financial institutions is to get you to give it to them. They want your money for as long as possible, so they can make as much as possible in fees. I am all for everyone making money, especially me. Therefore, keep the focus on what you are trying to accomplish with your portfolio in relation to your financial goals. If these new products work to fill that void great otherwise, next.

Historically ETFs have been index funds which trade similar to stocks. This has made them attractive to investors as they allow intraday access for trading and investing. Lower fees have been an additional plus for ETFs, but many of the index mutual funds have negated that advantage with recent developments. I like the structure of ETFs for building a portfolio and knowing exactly what you own due to the transparency of the structure. This is not true of mutual funds, they disclose holdings periodically and generally at least 30 days in arrears. Thus, the transparency is clouded by the delay. The index ETFs allows you the ease of investing your money in the sectors of the market where your research leads you. This is the reason behind SectorExchange.com, allowing you the investor to determine which pieces of the market are moving and then capture them through the use of ETFs.

Investing overall is a challenge due to the shear size and number of products in the financial services arena, not to mention the differences of opinions as to which bests suits each need. I have found in my years of experience in dealing with both my own money as well as those of investors, that simple is usually better. KISS – Keep It So Simple, You Can Do It!

Inflation – Real or Not?

Consumer Price Index (CPI) was announced recently and the data showed no change for the month of February and 2% for the year over year data. While this was pleasing to Wall Street it seemed a little odd to me. In fact it got me to thinking about how the last time I went to the gas station the price of regular unleaded gas was $3.25 per gallon. That same gallon of gas one year ago was $2.20 per gallon. That would equate to an increase of 47.7% according to my calculator. A 2% increase would be $2.24 per gallon? While I am not trying to question the government calculations or how they come up with these statistics, I am asking to live in the country they got the data from.

Inflation has impacted everyone at every level of their daily lives. When I was in high school and passed my test to receive my drivers license (1975) gasoline was $0.32 per gallon. Of course, when my oldest daughter got her drivers license it was $2.10 per gallon. This made me remember all the times my dad ranted about how cheap things were when he was a kid. I now find myself in the same boat with my children. Inflation is real and impacts us slowly over time or does it? The additional challenge is if you are retired; what you thought would be plenty of money to last you the rest of your life, isn’t? This is the real world. I hear more and more retirees say they can’t live on what they have. In other words, what they thought would be plenty of money, no longer is enough. This is a real problem and unfortunately one without many solutions.

So why am I bringing up this depressing topic? So you and I can think long and hard about what we need to do to avoid this situation. When I learned about inflation and all the ramifications of this disease in college it was always talked about in average rates of growth over long periods of time. In other words, it would be stated that for the last 30 years inflation has averaged 3% per year. What I have since realized is inflation doesn’t quite work that way in reality. What it does is creep up on you and then explodes over a short period of time. If we were to look at the 50’s and 60’s there was virtually no inflation. In fact in the 50’s we had disinflation. But, then along comes the period of 1973-78 and boom big inflation. This is similar to what is happening now. The 90’s were a low inflation period and so was the period 2000-2005, but then we hit this cycle and boom—big inflation. That would explain our present situation. The next big impact of inflation is happening right before our eyes. Property taxes have more than doubled in the last three years. Gasoline is up nearly 60%. Milk is up more than 100% and the list goes on. My point here is simple; we are all going through the next phase of sticker shock in this country. The challenge is how long will it take wages to catch up? They will catch up eventually making it easier to afford today’s lifestyle, but how long will it take. The challenge is the two don’t increase at the same rates during the same periods. This creates adjustment periods similar to what we are in now. The end result is we have to make adjustments by cutting back on spending. Wow – could that be a recession?

This leads me to the conclusion that it is not so much the recession that determines what consumers spend, but hyper periods of real inflation (real cost of goods) that leads to slower economic periods and less consumer spending during the adjustment phase. It is also interesting to note the two hardest hitting periods of these hyper inflationary periods both coincided with escalating energy costs. Maybe it isn’t a coincidence that the Fed takes energy and food cost out of the Consumer Price Index?

So as we look forward for ideas of how to best invest our money in order to have enough to last us a lifetime, we need to take this into consideration. In fact, we need to look at what is on the horizon now as we invest our money. It is important to look at energy prices. Are they leveling or receding in price? If not, then look for more of what we have been experiencing at the consumer level with the real cost of living moving higher and impacting the amount of discretionary income the consumer has to spend. We won’t be out of the woods until this happens. It took major tax cuts and capital incentives last time this happened to put the economy back on its feet. So far it doesn’t look like Washington is going to do any of that type of cutting in the near term. In actuality, we are going to let the last tax cuts expire in 2010 which means a tax increase to many taxpayers. This could exacerbate the situation further. It is all about the economy and we need to watch this closely looking forward in order get the most out of our investment portfolio versus blindly believing it will get better soon. It may not; so pay attention and watch for developments to give you insight into what is on the horizon economically for the U.S. markets. If you are one of the retired individuals I referred to earlier you may need to change your approach in order to attain the lifestyle you want. Stay tuned as this is getting interesting.

SectorExchange.com

The Trend is Your Friend

Why do trends matter? Why spend your time looking at or studying trends? It is for the simple fact that money tends to follow trends. In economics you are taught about trends and their impact on capital. It is no different in looking at the stock market. Pictures are worth a thousand words is the phrase made famous by Kodak. The same could be said for looking at charts in relation to stocks or sectors of the market. Pictures don’t lie. If we were looking at a picture of the NASDAQ from 1999 through 2000 we would see an uptrend which hit a top and then breaking that trend starting a new trend to the downside. That analysis alone would have said get out of the way saving the downside pain that followed. Thus, visualizing the markets is a vital part of the investment process. It alerts you to changes in the supply/demand equation and should lead you to study and review fundamental data and assumptions. This visualization permits us to examine and monitor several sectors of the market at a time. In other words it becomes time efficient. This is important due to the sheer size of the market overall. Trends matter because they reflect the value given to a specific stock, sectors or market overall. This would lead us to the conclusion the market is always right. Too often as investors we believe the market is wrong. In other words we are right and the market is wrong. This is hard to believe since the market has no emotions or reasoning in order to develop an opinion. Could it be we, the investors, are out of sync with the market? “Don’t fight the tape” is a common phrase among investors so if you own a stock and the market is going down and taking your stock with it, the market isn’t wrong, your opinion is wrong. The trend of the market is a compilation of votes cast by shareholders everyday. They make a decision to buy, sell or hold. The universal sum of those decisions is what will decide the direction or trend of the market over time. Therefore, if you are out of sync with the trend it doesn’t matter how right you think you are. My resulting conclusion is I would rather be right for the wrong reason, than wrong for the right reason, right? If trends are that important then a fair amount of our time should be spent on trend analysis. If trends can be seen then they can be acted upon. An example I like to look at is Starbucks. Who would have believed this would have become a nationwide trend? If you were to look at a chart of the stock you would have seen the trend developing based on the rising stock price. If fundamentally stocks rise over the long term because they make money for shareholders, then Starbucks is and was successful in developing a new trend for selling coffee. Had we noticed and bought into the trend we would have done very well as an investor. Stocks are the one way we can be a trend watcher and benefit from someone else’s brilliance. Let’s break trends down into three timeframes to make communicating about them easier. First there is the long term or major trend. This is determined by the time period of say six months to several years. These are the trends investors look at primarily due to their long term time horizon for investing their money. Second is the intermediate trend. This is determined by a time period of one to six months. Often investors refer to this as a correction period in a major trend. It could be also a trend within a trend. These trends offer different types of investment opportunities for those who track them. Long term investors use them to take advantage of ‘dips’ and add to their already existing long term positions. You can also trade these intermediate trends exclusively as your approach to managing your money. Third is the short term or minor trend. The timeframe determining this trend is days to weeks, but generally less than one month. This can be referred to as a correction or consolidation of a longer term trend. Short term traders use these trends for buy and sell signals. Intermediate or long term investors could use these trends to add to positions short term or play off their longer term positions. This explanation is oversimplifying the trend process, but it gives you a good starting place for watching and tracking trends. Trends help you answer some of the most commonly asked questions about the market or stocks. If the intermediate trend is down and the question is “Should you buy?” then you can now answer the question simply – no. In a downtrend the question is, are we at the bottom? Has the trend changed? If not the answer is no; if it has the answer is yes. Wow, this could really simplify the process for many of us. Remember the trend is your friend and until it is in your favor why fight it? The key is to spot the trend and be in unison with it. Keep it simple. You can make trend analysis as simple as you like or you can introduce supporting variables such as stochastic and MACD to make it more complex. The beauty of this is you are in control of your strategy. It is not a matter of what is right or wrong; it is a matter of you developing what you want to use to make your trading/investing right for you in managing your money. It is important to note though that the more variables you introduce into the equation the more challenging the process becomes as well as demands on time management. Too many variables can also make it difficult for the stars to align and make the analysis useful. From my view, KISS (keep it simple …) is always better and makes it easier for me to take action. Add variables that add value rather than stress. Focusing on entry, exit, targets and stops is more valuable than finding the absolute top or bottom. These variables keep you out of trouble both short and long term and more importantly keep you in tune with the trend. Remember, ‘the trend is your friend.’