CIGX, LLC, investment counsel, offers financial planning services, including retirement planning, college planning, investment planning, and insurance planning. We take a broad and thorough approach to your financial future. The process begins with data gathering, such as asset...Read More
CIGX, LLC, capital management, offers the global strategies model portfolio series. These model portfolios range from conservative to aggressive and use a macro-economic, a.k.a top-down, fundamental analysis approach to asset management. Emphasis is placed on diversification,...Read More
When we talk asset management, most of my conversations focus on what
to buy, and sometimes when to buy it. These are difficult decisions
to reach. However, We never talk about when to sell an investment.
The sale of a security is at least as important as the purchase, since
the sale completes the transaction and is the only time we know if we
made or lost money. This decision is even more difficult to reach.
The sell decision is mired in complexity. Behavioral finance is
trying to ascertain the reasons for the difficulty in making the sell
decision. The research shows that everyone gets it wrong at least
some of the time. Everyone. Individual and professional investor
alike. In the July 2014 AAII Journal, Jack Schwager addresses the key
elements of investment failure. In essence, our emotions interfere
with our ability to stay objective. For example, most investors hold
on to a losing security for the hopes of recouping those losses, yet
they sell early when they make a winning investment.
At CIGX, we consider a variety of factors in our sell decision. We
consider the status of the overall economy, including trade and
investment, consumer spending, debt and interest rates. We also look
at corporate profits, earnings growth, and dividend programs.
Finally, we do look at minimizing losses and taking gains when
appropriate. We sell a security when the growth prospects are no
longer there. We may sell a security when earnings no longer meet
expectations, or when a dividend is canceled. A change in management
warrants close monitoring.
The are other reasons to sell. A better opportunity has arisen and a
security has to be sold to enable the preferred investment. The
investor’s need for cash is another reason to sell. Cash is an
important asset class and securities may have to be sold to rebalance
the portfolio. Finally, taxes may impact the sell decision. While we
would never not make money to avoid taxes, we could harvest losses to
reduce taxes or sell to avoid moving into the next tax bracket, which
may negate those gains.
In my experience, the budget, is the single most difficult part of the financial planning process. Everything we do in financial planning is based on it, and yet, it is nearly impossible to derive, let alone maintain.
The first problem with budgeting is that top line. We often mis-characterize our income. When business owners tell me how much money they make, we clarify if we are talking about revenues or net income, or something in-between. When we talk about salary, we always talk about “gross” salary. We say, “I make 50k or 100k a year”. We can start there, but then taxes and other payroll deductions need to be accounted for in the budget.
The other problem is that expenses are difficult to predict. We all have unexpected expenses that ruin our budget every month. But, it is still better to have a budget than not. It is difficult to make, let alone reach goals, when you don’t know where your money is going. Taking a step back let’s you know what you are prioritizing today and allows you to change those priorities for tomorrow. Even if you start with one line on your budget, titled miscellaneous, and then put your entire income in that line, it is a start.
Then, specify your fixed costs of rent/mortgage, car note, insurance. Your utilities and groceries are variable and can be managed. However, they still fall within a range. I take the highest amount in utilities I have ever paid, and that is my utilities budget. Then I work hard to keep my utilities as low as possible. Groceries work the same way. It is a fixed cost. You have to eat. But it is also a variable cost. We can buy less or buy differently. We can use coupons. I have a cap on my grocery expenses. When we hit the max, we get very creative in the kitchen, but I don’t go back to the grocery store until next month…. Some essentials excluded.
Importantly, for many of us, savings and investments are not a part of the budget at all. The planner’s job then is to carve out a small piece to put towards savings and investments to help create financial security. In an ideal world, we would figure out our saving and investment targets first, and then figure out how much house and/or car we can afford. In other words, remember to pay yourself first in the form of savings and investments. A wise saying comes to mind: “a penny saved is a penny earned”.
Bitcoin has been in the news lately, but the anchors themselves ask after every bit, why is this in the news, since it only concerns a few people and has nothing to do with the greater economy. Well, Bitcoin is relevant, and is an important issue for the general public.
Economic activity started with the barter system. Individuals would agree to trade two cows for four goats or whatever. Generally speaking, currency is any medium of exchange, meaning cows and goats could be currency.
However, modern currency, those bank notes or coins that we use today, derive from the receipt system in ancient Egypt. In ancient China and the ancient Middle East, various negotiable instruments were created to facilitate commerce. The problem with this was that there was no legal framework with which to regulate printing and acceptance of currency. This would lead to bubbles and huge fluctuations in the value of the currency.
Enter “Specie”, which required currency to be convertible into a fixed hard asset, usually gold or silver. You could on demand exchange your cash for gold or silver coins. The use of gold as currency began in Asia minor. In Europe, silver was used, and in Scandinavia, it was copper. Again, this form of currency did not work. It was not economically feasible to allow exchange and currency value fluctuated drastically based on the constant change in reserves.
The gold exchange standard allowed countries to peg their currency to the value of gold or silver. This gold exchange standard lasted from the early 1800’s to the early 1900’s. World War I caused a run on the banks in Britain, forcing abandonment of the gold standard and leading to severe inflation. While many countries attempted to return to the gold standard, the great depression resulted in its permanent demise.
“Fiat” money was introduced. Countries could print money that was backed simply by the monetary authority. Monetary policy, the ability to print money not backed by a hard asset, was used throughout Europe and North America to end the depression by inflating asset prices.
However, Fiat money has problems of its own. Rather, monetary policy does. John Maynard Keynes is reported as saying: ”By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily, and while the process impoverishes many, it actually enriches some” (Keynes, John Maynard, “Economic Consequences of the Peace (1920)).
A brief return to the gold standard was attempted in 1944, when the US agreed to a fixed value of $35 per troy ounce of Gold. Other currencies were pegged to the US dollar, and the US dollar became the world’s reserve currency. However, this ended abruptly in 1971 when President Nixon ended the international convertibility of the dollar to gold.
Since then, all currency around the world has been fiat money, and today, no country uses the gold standard. Fiat money has no intrinsic value and is backed solely by the full faith and credit of the authorizing country and its empowered central bank. Fiat money can also be created by non-governmental groups or communities to facilitate trades that would not otherwise be possible. One immediately thinks of illicit trades, but the points and credit systems for airlines, credit cards, and other services are a type of currency.
Enter Bitcoin: “Bitcoin is a peer-to-peer payment system and digital currency, introduced as open source software in 2009 by pseudonymous developer Satoshi Nakamoto” (Wikipedia). Bitcoins have gained popularity globally, and not just in illicit circles. While there is a speculative element to the use of bitcoins, it does have supranational uses, making transfers of funds easier across countries. It also has value as a set currency. Unlike national currencies, Bitcoin’s money supply is predefined by the protocol. The total supply of bitcoin is capped at 21 million, with 25 bitcoins created every ten minutes (Id.). While the current protocol will not work, a modification of the protocol could result in a true extra-national hard currency that cannot be manipulated to weaken the currency, inflate asset prices, or in other ways manipulate what could be sound economic principles. That would result in a universal single currency that would level the global economic playing field.Read More