I am largely a fundamental investor with the long term time horizon that fits such investing. I however am also a believer in using some more speculative investing for a portion of a portfolio if it fits the risk profile of an investor.
If you are not comfortable with the risk of an investment most of the time you shouldn’t make that investment. There is a bit of a conflict, for example, where an investor is scared of any loss from say an investment in a stock market index and trying to save for retirement on a median level income. It is nearly impossible to save for retirement without investing in stocks if you are not already rich, so as with most investment advice there is a bit of difficulty at the extremes but in general investors shouldn’t take on risk they are not comfortable with.
For experienced investors with a high level of financial literacy more speculative options can have a useful role in a portfolio. Though you should realize most people fail with speculation, so you have to be realistic about your prospects. I have used speculative investments including naked short selling, leverage (margin) and options.
Spread betting is another speculative strategy that can play a part in an investment portfolio. Spread betting is not allowed in the USA (with our highly regulated personal investing environment but is available in most other countries). They are somewhat similar to binary options (which are allowed in the USA) and to futures contracts (they are not the same, just those are comparable to get some idea of how you would use them in a portfolio).
Spread betting really is a bet on what will happen. You don’t buy a financial instrument. You place a bet with a company and if the prices move for you and you close the position with a gain they pay out a gain to you and if you close out the position with a loss your capital held with them is reduced by your loss amount.
Since the price to control a position is much less than the notional position size there is a large degree of leverage which increases the affect of gains and loses. Since positions can move against you and must be settled if the loss exceed your deposit with the company you are trading with having a substantial cash cushion is the way I would use such a speculative account. If I decided I could afford to risk losing $5,000 I would deposit that amount.
My purchases would about 10% of the capital in the account (so $500 at first). If that is leveraged at 20 to 1 (just requiring 5% down on margin), that would make my effective leverage just 2 to 1. But if I added other positions that would increase my leverage, say 2 more purchases and my leverage would be 6 to 1.
The way I have managed the speculative portion of my portfolio is to fund it and then pull off part of the gains to my long term portfolio and retain part of the gains to build my speculative account. It isn’t really quite that clear as I have different level of speculation in my portfolio. Options are speculative but have a limit of 100% loss. Selling stocks short (naked shorting) is speculative but has theoretically unlimited losses. Using margin on regular stocks has the potential to lose more than you have invested though most of the time you should be stopped out before the losses are too much beyond your entire account value.
So I don’t really have a clear cut speculative portfolio but I roughly follow that procedure. I have added to the speculative portion when I have had very large gains in a particular portion of my main portfolio.
Another factor with spread betting, shorting and options is that they can actually be used to reduce the risk of your overall portfolio using certain strategies. If you believe there is a risk for a market downturn but don’t want to sell any of your stock holdings you can use spread betting to create a position that will gain if the market declines. That gain then will offset the likely loss on your stock positions thus reducing you risk in a market decline.
Of course, if you do that and the market moves up you will create a loss on you spread betting position that offsets your gains on your stock positions. You could also bet against specific stocks that you think will decline more in a market decline and seek to increase your return of course that has risks (including the market declining along with your stocks but that stocks you bet against could move against you anyway). I have used this strategy with selling stocks short occasionally.
See this site for a bit more on the details of spread betting. An additional risk to consider with spread betting is you need to find a company you trust to be around to pay off your gains. You would want to examine the safety of your funds and that (in the UK) the account is covered by the Financial Conduct Authority (FCA) and complies with the FCA’s Client Assets provisions (and in other countries they have similar coverage). To be safe you should consider whether holding more than the covered amount is wise in your account. The last 10 years have provided examples of the riskiness of financial companies going out of business; that your funds wouldn’t be accessible is a risk that must be considered.
Most popular posts on the Curious Cat Investing and Economics blog in 2014 (by page views).
- Top 10 Countries for Manufacturing Production in 2010: China, USA, Japan, Germany… (posted in 2011)
- Manufacturing Output as Percent of GDP from 1980 to 2010 by Country (2012)
- Government Debt as Percentage of GDP 1990-2009: USA, Japan, Germany, China… (2010)
- Nuclear Power Generation by Country from 1985-2010 (2012)
- Manufacturing Output by Country 1999-2011: China, USA, Japan, Germany (2013)
- Monopolies and Oligopolies do not a Free Market Make (2008)
- USA Individual Earnings Levels: Top 1% $343,000, 5% $154,000, 10% $112,000, 25% $66,000 (2012)
- The 20 Most Valuable Companies in the World – Apple, Exxon, Microsoft, Google… (2014) (
- House of Cards – Mortgage Crisis Documentary (2009)
- Iskandar Malaysia Economic Development Zone
- Oil Consumption by Country 1990-2009 (2010)
- Stock Market Capitalization by Country from 1990 to 2010 (2012)
- Cockroach Portfolio (2014)
- Global Stock Market Capitalization from 2000 to 2012 (2013)
- 11 Stocks for 10 Years – November 2014 Update
- Oil Production by Country 1999-2009 (2011)
- Chart of Largest Petroleum Consuming Countries from 1980 to 2010 (2011)
- Delaying the Start of Social Security Payments Can Pay Off (2014)
- Chart of Global Wind Energy Capacity by Country 2005 to 2013 (2014)
- USA Health Expenditures Reached $2.8 trillion in 2012: $8,915 per person and 17.2% of GDP (2014)
Related: 20 Most Popular Post on Curious Cat Science and Engineering Blog in 2014 – 10 Most Popular Posts on the Curious Cat Management Blog in 2014 – Most Popular Posts on the Curious Cat Management Comments Blog –
The Center for Retirement Research at Boston College is a tremendous resource for those planning for, or in, retirement. The center created the National Retirement Risk Index (NRRI) to capture a macroeconomic level measure of how those in the USA are progressing toward retirement.
Based on the Federal Reserve’s 2013 Survey of Consumer Finances the Center updated the NRRI results (the entire article is a very good read).
The lower the risk number in the chart the better, so things have not been going well since the 1990s for those in the USA saving for retirement.
As the report discusses their are significant issues with retirement planning that defy easy prediction; this makes things even more challenging for those saving for retirement. The report discusses the difficulty placed on retirees by the Fed’s extremely low interest rate policy (a policy that provides billions each year to too-big-too-fail banks – hardly the reward that should be provided for bringing the world to economic calamity but never-the-less that transfer of wealth from retirees to too-big-to-fail banks is the policy the Fed has chosen).
That exacerbates the problems of too little savings during the working career for those in the USA. The continued evidence is that those in the USA continue to spend too much today and save too little. Also you have to expect the Fed and politicians will continue to make policy that favors their friends at too-big-fail banks and hedge funds and the like. You can’t expect them to behave differently than they have been the last 50 years. That means the likely actions by the government to take from median income people to aid the richest 1% (such as bailing out the bankers with super low interest rate policies and continue to subsidize losses and privatize their winning bets) will continue. You need to have extra savings to support those policies. Of course we could change to do things differently but there is no realistic evidence of any move to do so. Retirement planning needs to be based on evidence, not hopes about how things should be.
Related: How Much of Current Income to Save for Retirement – Save What You Can, Increase Savings as You Can Do So – Don’t Expect to Spend Over 4% of Your Retirement Investment Assets Annually – Retirement Planning: Looking at Assets (2012) – How Much Will I Need to Save for Retirement? (2009)
The 10 publicly traded companies with the largest market capitalizations.
|2||Exxon Mobil||USA||$405 billion|
|5||Berkshire Hathaway||USA||$337 billion|
|6||Johnson & Johnson||USA||$295 billion|
|7||Wells Fargo||USA||$270 billion|
Alibaba makes the top ten, just weeks after becoming a publicly traded company. The next ten most valuable companies:
|11||China Mobile||China||$240 billion*|
|12||Hoffmann-La Roche||Switzerland||$236 billion|
|13||Procter & Gamble||USA||$234 billion|
|14||Petro China||China||$228 billion|
|15||ICBC (bank)||China||$228 billion**|
|16||Royal Dutch Shell||Netherlands||$227 billion|
|19||JPMorgan Chase||USA||$224 billion|
Petro China reached to top spot in 2010. I think NTT (Japan) also made the top spot (in 1999); NTT’s current market cap is $66 billion.
Market capitalization shown are of the close of business today, as shown on Yahoo Finance.
According to this March 2014 report the USA is home to 47 of the top 100 companies by market capitalization. From 2009 to 2014 that total has ranged from 37 to 47.
The range (during 2009 to 2014) of top 100 companies by country: China and Hong Kong (8 to 11), UK (8 to 11), Germany (2 to 6), France (4 to 7), Japan (2 to 6), Switzerland (3 to 5).
Related: Stock Market Capitalization by Country from 1990 to 2010 – Global Stock Market Capitalization from 2000 to 2012 – Investing in Stocks That Have Raised Dividends Consistently – The Economy is Weak and Prospects May be Grim, But Many Companies Have Rosy Prospects (2011)
A few other companies of interest:
Facebook, USA, current market cap is $210 billion.
Pfizer, USA, $184 billion.
Toyota, Japan, $182 billion.
This is potentially a real risk to Google. The odds of such a huge success it decreases Google’s profits are tiny (I think). But there is a real risk that the increase in Google’s profits going forward are materially affected by a well done competitor to Adsense.
Adwords is Google’s platform for buying ads. Those ads are then displayed on Google’s websites and on millions of other websites. Other websites can host ads via the Adsense program. It seems to me what is really at risk is better seen as Adsense business. The business on Google’s own websites is not at risk (Google’s profit from its sites are double I think all the other sites [via Adsense] combined).
If Amazon took away 10% of what Google’s Adsense business 4 years would have been that is likely material to Google’s earning. Not huge but real.
Even losing the ads on Amazon’s web site is likely noticeable (though not a huge deal, for Google, for many companies it would be significant, I would guess).
There is even the potential Google has to reduce their profitability, on Adsense, to compete – giving web sites a better cut of revenue.
Hedge funds seek to pay the managers extremely well and claim to justify enormous paydays with claims of superior returns. Markets provide lots of volatility from which lots of different performances will result. Claiming the random variation that resulted in the superior performance of there portfolio as evidence the deserve to take huge payments for themselves from the current returns is not sensible. But plenty of rich people fall for it.
As I have written before: Avoiding Hedge Fund Investments is One of the Benefits of Being in the 99%.
This is pretty well understood by most knowledgeable investors, financial planners and investing experts. But funds that charge huge fees continue to get away with it. If you are smart you will avoid them. A few simple investing rules get you well into the top 10% of investors
- seek low fees
- diversify – pay attention to risk of portfolio overall
- limit trading (low turnover)
- use tax advantage accounts wisely (in the USA 401(k)s and IRAs)
From a personal finance perspective, saving money is a key. Most people fail at being decent investors before they even get a chance to invest by spending more than they can afford and failing to save, and even worse going into debt (other than to some extent for college education and house). Consistently putting aside 10-20% of your income and investing wisely will put you in good shape over the long term.
Brett Arends writes about the investment portfolio he uses?
It’s 10% each in the following 10 asset classes:
- U.S. “Minimum Volatility” stocks
- International Developed “Minimum Volatility” stocks
- Emerging Markets “Minimum Volatility” stocks
- Global natural-resource stocks
- US Real Estate Investment Trusts
- International Real Estate Investment Trusts
- 30-Year Zero Coupon Treasury bonds
- 30-Year TIPS
- Global bonds
- 2-Year Treasury bonds (cash equivalent)
This is another interesting portfolio choice. I have discussed my thoughts on portfolio choices several times. This one is again a bit bond heavy for my tastes. I like the global nature of this one. I like real estate focus – though as mentioned in previous articles how people factor in their personal real estate (home and investments) needs to be considered.
Related: Cockroach Portfolio – Lazy Golfer Portfolio – Investment Risk Matters Most as Part of a Portfolio, Rather than in Isolation – Looking for Dividend Stocks in the Current Extremely Low Interest Rate Environment
Delaying when you start collecting Social Security benefits in the USA can enhance your personal financial situation. You may start collecting benefits at 62, but each year you delay collecting increases your payment by 5% to 8% (see below). If you retire before your “normal social security retirement age” (see below) your payments are reduced from the calculated monthly payment (which is based on your earnings and the number of years you paid into the social security fund). If you delay past that age you get a 8% bonus added to your monthly payment for each year you delay.
The correct decision depends on your personal financial situation and your life expectancy. The social security payment increases are based on life expectancy for the entire population but if your life expectancy is significantly different that can change what option makes sense for you. If you live a short time you won’t make up for missing payments (the time while you delayed taking payments) with the increased monthly payment amount.
The “normal social security retirement age” is set in law and depends on when you were born. If you were born prior to 1938 it is 65 and if you are born after 1959 it is 67 (in between those dates it slowly increases. Those born in 1959 will reach the normal social security retirement age of 67 in 2026.
The social security retirement age has fallen far behind demographic trends – which is why social security deductions are so large today (it used to be social security payments for the vast majority of people did not last long at all – they died fairly quickly, that is no longer the case). The way to cope with this is either delay the retirement ago or increase the deductions. The USA has primarily increased the deductions, with a tiny adjustment of the retirement age (increasing it only 2 years over several decades). We would be better off if they moved back the normal retirement age at least another 3 to 5 years (for the payment portion – given the broken health care system in the USA retaining medicare ages as they are is wise).
In the case of early retirement, a benefit is reduced 5/9 of one percent for each month (6.7% annually) before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month (5% annually).
For delaying your payments after you have reached normal social security retirement age increases payments by 8% annually (there were lower amounts earlier but for people deciding today that is the figure to use).
Lets take a quick look at a simple example:
Dylan Grice suggests the Cockroach Portfolio: 25% cash; 25% government bonds; 25% equities; and 25% gold. What we can learn from the cockroach
Government bonds protect against deflation (provided your money’s invested in solid government bonds and not trash). Equities offer capital growth and income. And gold, as we know, protects against currency depreciation, inflation, and financial collapse. It’s vitally important to maintain holdings in each, in my opinion.
The beauty of a ‘static’ allocation across these four asset classes is that it removes emotion from the investment process.
I don’t really agree with this but I think it is an interesting read. And I do agree the standard stock/bond/cash portfolio model is not good enough.
I would rather own real estate than gold. I doubt I would ever have more than 5% gold and only would suggest that if someone was really rich (so had money to put everywhere). Even then I imagine I would balance it with investments in other commodities.
One of the many problems with “stock” allocations is that doesn’t tell you enough. I think global exposure is wise (to some extent S&P 500 does this as many of those companies have huge international exposure – still I would go beyond that). Also I would be willing to take some stock in commodities type companies (oil and gas, mining, real estate, forests…) as a different bucket than “stocks” even though they are stocks.
And given the super low interest rates I see dividend paying stocks as an alternative to bonds.
The Cockroach Portfolio does suggest only government bonds (and is meant for the USA where those bonds are fairly sensible I think) but in the age of the internet many of my readers are global. It may well not make sense to have a huge portion of your portfolio in many countries bonds. And outside the USA I wouldn’t have such a large portion in USA bonds. And they don’t address the average maturity (at least in this article) – I would avoid longer maturities given the super low rates now. If rates were higher I would get some long term bonds.
These adjustments mean I don’t have as simple a suggestion as the cockroach portfolio. But I think that is sensible. There is no one portfolio that makes sense. What portfolio is wise depends on many things.
Amazon Prime is in some ways is similar to Costco’s membership fees. Costco make the vast majority of their profit on membership fees and largely breaks even otherwise.
Amazon reported earning that were once again very short on earnings given how successful the company has been. Net income increased to $239 million for the 4th quarter (which is by far Amazon’s most profitable quarter since it includes the Christmas buying season) from $97 million last year.
Amazon Prime costs $79 a year (in the USA) and provides free 2 day shipping and access to their streaming video content. Amazon doesn’t disclose the numbers of prime members (that I can find anyway) but educated guesses seem to say 20 million (or more). That would be $1.6 billion a year.
Amazon’s net income for the full year was $274 million. Fees for Prime customers were $1.6 billion (at 20 million members). Amazon is considering raising the Prime price to $99 or $129 a year (25-50%).
While not directly comparable to Costco it is similar. Both are running much of their business just to break even (or at a loss) and Costco manages to take membership fees as profit (along with a very tiny profit on everything else) while Amazon doesn’t even come close to running the rest of their business at break even.
Now you can look at the two fees and say it isn’t the same. Amazon has to pay for shipping on each of the purchases etc. Still it is an odd strategy of charing customers an annual fee and then providing them services almost like a co-op that runs at break even for members.
I really like lots of what Jeff Bezos does. He goes even farther than I do at prioritizing long term benefit over current profit. I can’t think of any other leader that does that and he isn’t really close to me in how far he goes.
Beyond that long term thinking he is much more sensible about financial figures than the extremely over simplified (and even often just wrong) ideas spouted by other CEOs and CFOs. The quarterly report release form the company starts with:
Bezos understand (and makes sure that the company explains) that operating cash flow is a much better measure in many ways than earnings. Bezos is willing to take many actions to bolster long term gains which often hurt current earnings (and also cash flow though he is less willing to drastically undermine cash flow).
Reading reports from Amazon over the years you get the feeling of reading reports from Warren Buffett. The thinking behind the reports both make is very rare among the rest of the senior leadership of our large corporation (who sadly take huge paychecks while providing mediocre leadership or often worse than mediocre).
I love the prospects for Amazon, as a company. I continue to be frustrated by the price of the stock – it is priced so highly it is difficult for me to justify buying. I do hold it in my paper sleep well portfolio, but I am definitely worried about the price. But I see very little else nearly as compelling and on balance find it an attractive, though risky, investment. I see Apple as an extremely good buy at these prices. I see Google more similar to Amazon – very nice prospects but also a very richly priced stock (though I think much more reasonably priced, all things considered, than Amazon).