Why You Should Avoid Speculating in Futures, Options, and Speculative Stocks

It’s happened to me.  It will happen to you.

Your investment program is going along quite nicely.  You’ve made some nice gains on stable blue chip company stocks.  But it has gotten boring and it feels like something is missing.  You hear about people making a killing on speculative stocks.  Maybe even heard it on CNBC or some other “trusted” financial channel how some trader managed to score big on some futures trade.  You don’t want to wait 25 years to get rich.  You want BIG profits now!  So you create room in your portfolio by venturing into the options and futures markets.  You buy gold because, hey why not?  Everyone is doing it and it can only go higher from here! 

In short, you stray from your investment approach, to roll dice. 

Big mistake. 

Making money consistently in the futures and options markets is difficult because you have to be right about the investment and the timing.  Buying stocks is an easier way to make a buck.  As long as you’re right on the stock, your timing need not be perfect.  You can wait until your reasons for buying the stock pan out.  When you buy options and futures contracts, the clock starts ticking immediately.  You can’t afford to be patient, hoping your investment thesis comes to fruition.  With options, you have at most nine months for your idea to develop.  That’s not a long time.  Most options expire worthless.  You shouldn’t think yours will be any different. 

Buying initial public offerings (IPOs) usually is another losing game for individual investors.  The problem with buying IPOs is that the best IPOs are not available to individual investors.  All those Internet IPOs you read about that went from $10 to $60 were never available at the $10 price for individual investors like you and me.  Only the best customers of the of the investment firms taking the company public get a piece of the best IPOs.  Oh sure, you can buy the stock after it goes public and has already jumped 300%.  That’s a bad idea, since many IPOs return to their initial offering price over time.  And if you are ever approached by a broker who wants to sell you shares in the next “hot” IPO, run for the hills.  Any IPO in which that’s offered to you and me is just junk that none of the big guys want.  We consider IPOs to be in the “Speculative Stocks” category since most of them have earnings that are hard, if not impossible, to determine.  

10 Things to Avoid in a Company Plan

Before this gets too winded, I’ll get right to the point.  There’s a lot to cover in this rainy day in Maryland.

1.  Don’t put all of your clothes in one suitcase!  You’ve heard of the same analogy with eggs being in one basket, but honestly, no one harvests eggs anymore and if they do, they usually don’t put it in a basket.  When you travel, you wouldn’t bring ALL of your clothes, some women may not agree but, that just doesn’t make sense. The same principle applies here.  Never invest all of your money in one stock (especially company stock), mutual fund, bond, or guaranteed investment account (avoid at all costs – this is where scammers thrive).

2.  Diversify simply.  All you really need is a growth stock fund, an international fund, and an aggressive fund (sector funds like technology, healthcare).  Keep it simple, but remember nothing is safe in a downturn (except cash or money market funds – although, inflation is its greatest enemy).

3.  Forget about bonds.  In most cases, bonds make sense.  They do not in a tax deferred plan.  You want to grow your principal, not your income.  And putting money in bonds isn’t the safer alternative, either.  Let the free company matching go toward the purchase of other funds that benefit from dollar-cost-averaging. 

4.  Stay put.  Most plan managers allow you the ability to switch from fund to fund through phone or their website.  Take a close look at your allocations once a year in January and plan to re-allocate (usually at no cost).

5.  Look at fees.  All similar index funds have one important difference: their fees or expense ratios.  The lower the expense ratio, the higher the return in index funds.  It’s pretty basic, but they’re all the same.  If they’re not – there’s a mathematical computation error going on within the fund management, and you should avoid those funds, too. 

6.  Forget historical returns.  The funds within your plan are chosen by your HR department and they’re typically clueless about fund performance and how it all works.  So, they end up finding the high-flyers of recent past and they expect these funds to perform just the same.  However, mutual funds depend on the market’s growth to continue producing positive returns and plan participants see the previous growth and they get in at the peak. 

7.  Do the paperwork yourself.  In my previous job, we had a dedicated team of HR people who filled out the forms for the employees, so that all they have to do is sign on the dotted line (though it’s a solid line nowadays).  If you do it yourself, you’ll have a much better understanding of the restrictions and anything else on the fine print.  If you run into trouble, pick up the phone and call the account provider.  They’d love to hear from you, after all it’s your money they’re after!

8.  Open as many accounts as you can.  If you fund a Roth in addition to your company plan (and your gross adjusted income is less than $167,000 for joint filers), go for it.  In fact, I know a wonderful company that can help do this for you.  It’s all compounding tax-deferred and that’s what you want.  The more the merrier is all I’m saying!

9.  Keep and review all statements.  Keep statements in a folder.  See how they’re doing once a year, although you’ll get one per account every quarter.  Also keep in mind that you can deduct the custodial fees if you itemize on your taxes. 

10.  Keep contributing until you die!  Okay, maybe not to that extreme, but as long as you’ve got your company matching, you’ve got free money rolling in.  It’s so easy to forget about that Roth or conventional IRA once you set it up.  If the $5,000 (or $6,000 if you’re over 50 years old) is too much at one time, break it up into smaller portions; that’s $416.66 a month.

It’s Your Money, You Are The Boss!

Are you the kind of person who would, if bumped in a theater lobby by someone rude, say, “Excuse me” or “I’m sorry,” when it’s not your fault?

I believe that you should be a squeaky brake disc, that you should be a strong advocate with your doctors, lawyers, and especially with your money managers.  I have spoken to people (some friends, some just strangers met on LinkedIn) who also have money with a hedge fund manager.  They cannot read their statements, which seem to be purposefully incoherent.  They seem to be ‘okay’ with this notion that they don’t need to understand everything and that it adds to the mystique of it all.  They’re reluctant to ask for explanations, not wanting to seem unsophisticated.  I say that if someone who wants to manage your money cannot explain his or her philosophy in a simple paragraph, then you shouldn’t let him or her manage that money.  And if those who do manage your money cannot simply explain their own statements to you, then you are probably headed for a sad experience.

It’s your money; always remember that.  Money managers tend to think that, once the funds are deposited, it’s their money and the clients are nothing more than an annoyance.  Cure them of this notion.  Call them once a month or at least visit the brokerage site to see how your funds are doing. 

As a growing company, we believe that the best ideas come from clients, from their interaction with the world and that we want them to check in if they have any bright ideas that could help produce superior returns. 

Investing for Your Children’s Future

There are a million ways to the truth in money management, and no such things as the “Holy Grail.”  And if you’re raising children and facing serious tuition prospects in the near future, here are a few guidelines to follow.

Of course, college education today can cost as much as $40,000 annually.  And that’s before you buy books, much less the computer-related fees that are standard in higher learning today.  If you take the route into private education earlier, at the high school level, the costs are still mind-boggling.  Boarding schools can charge more than $24,000 a year.  And because many parents are in a dual income (professional) household, preschool and private grammar schools can set you back $15,000 a year or more. 

I believe in a three-part practical approach to investing for a child’s education.  Start with U.S. Treasury zero coupon bonds.  These bonds pay no interest in cash.  You can buy them at a discount, say, 30 cents on the dollar.  They mature at face value in a specified time frame.  This way you can target maturities to match your requirements like, maturities to coincide with freshman year in college, and so on. 

Currently, money doubles in these instruments in 11 years so that $5,000 automatically becomes $10,000 in October, 2020.  This works out to be about 5.9% annually.  Not so hot, you say?  Perhaps, but it makes sure that part of the tuition is taken care of automatically, and you don’t have to suffer through the sometimes (if not more often) negative bias of the stock market. 

The second part of investing for children’s education involves periodic purchases of a good growth mutual fund.  Such can be found through Rydex and CAM Trading.  And money should probably be systematically added to the fund so that you can take advantage of dollar cost averaging (putting similar amounts in monthly or annually, often when prices are lower and more shares can be bought).  Any financial website can provide you with historical returns of all the mutual funds they carry.  The earlier in a child’s life you start this program, the better it will work. 

The last part is the most aggressive part, and like the growth-oriented mutual fund, it requires patience and discipline.  It involves hiring a professional investment management firm where your money can take advantage of both the ups and downs of a cyclical market. 

Put your plan into action.  The earlier, the better.  Invest at the same time each year, like a child’s birthday, or during the holidays.  It makes it simpler to remember and becomes automatic.  It also helps you stay discipline and patient. 

Should You Sell Your Gold?

With news of gold prices hitting $1,350 an ounce – buyers of all kids are eager to get their hands on all that glitters.  That includes the contents of your jewelry box.  Gold-party organizers, jewelers, mail-in companies and even kiosks at the mall want to pay for what you’ve got. 

While it’s easy to be dazzled by visions of quick cash, some (if not most) individuals and firms might take advantage of your enthusiasm.  So, here are a few tips to make sure you get the best deal when selling your metal.

1.  Know what its worth.  Buyers can offer widely different amounts for the same pile of earrings.  I found a simple formula for determining your gold’s worth:  Weight in Grams (use your kitchen scale) x Current Gold Market Price / Divide by one of these (10k = 74.8, 14k = 53.2, 18k = 41.5, 24k = 31.1).  Then multiply by 0.50 and 0.80 to get a fair price within that range. 

2.  Ignore the mail-in buyer ads that are blanketing the airwaves.  When you send off a piece of jewelry, you’re unlikely to go through the hassle of getting it back in order to compare prices.  As a result, these mail-in companies are able to low ball because they know they have a captive audience.  You might be better off shopping your gold around traditional jewelers, coin dealers, pawnshops, even gold parties.  Remember, just because you go into a store and ask what they’ll pay doesn’t mean you have to sell on the spot.  You should think about it first.  Also, there are some advantages to selling to jewelers as you may be able to get money for diamonds in the piece, generally if they’re at least 0.25 carat. 

3.  Consider a trade-in.  You might get a better deal if you’re willing to trade up your jewelry.  If you’re interested in a swap, visit at jeweler who sells pieces you’d like to wear.  And when someone admires your new ring, you can say, “Oh this old thing?”  (Literally).