The Top 10 Economic Indicators: What to Watch and Why

Posted on October 2, 2012 | Investing

Economic reports and indicators are those often-voluminous statistics put out by government agencies, non-profit organizations and even private companies. They provide measurements for evaluating the health of our economy, the latest business cycles and how consumers are spending and generally faring. Various economic indicators are released daily, weekly, monthly and/or quarterly.

While it is important to keep a pulse on the economy, few analysts or economists wade through all of these massive volumes of data.

Which reports are worth it—and why?

Here’s a primer on 10 of the most common and vital economic indicators. Even if you don’t follow these reports yourself, it is helpful to know where the “experts” are drawing their opinions from. If you do peruse these reports, remember that data can change rapidly, and that broad trends are not judged by one isolated economic data point.

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The Psychology Behind Common Investor Mistakes

Posted on September 27, 2012 | Investing

Behavioral finance, a relatively new area of financial research, has been receiving more and more attention from both individual and institutional investors. Behavioral finance combines results from psychological studies of decision-making with the more conventional decision-making models of standard finance theory.

By combining psychology and finance, researchers hope to better explain certain features of securities markets and investor behavior that appear irrational. Standard finance models assume that investors are unbiased and quite well informed. Investors are assumed to behave like Mr. Spock from Star Trek, taking in information, calculating probabilities and making the logically “correct” decision, given their preferences for risk and return. Behavioral finance introduces the possibility of less-than-perfectly-rational behavior caused by common psychological traits and mental mistakes.

Six common errors of perception and judgment, as identified by psychologists, are examined in this article. Each has implications for investment decision-making and investor behavior. An understanding of the psychological basis for these errors may help you avoid them and improve investment results. And in some cases, market-wide errors in perception or judgment can lead to pricing errors that individuals can exploit. Understanding the psychological basis for the success of momentum and contrarian strategies can help investors fine-tune these strategies to better exploit the opportunities that collective mental mistakes create.

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The First Step

Posted on September 26, 2012 | Investing

Let’s suppose you are relatively new to your 401(k) plan. And like many new investors, you’ve started to read through investing guides that stress the importance of asset allocation—not only among the major categories of stocks and fixed-income investments, but also within categories such as large stocks, small stocks and international.

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How to Set and Revise Realistic Price Targets for Your Stocks

Posted on September 25, 2012 | Investing

An investor over time attaches some validity to his or her initial price objective, meaning that modifying that expectation becomes difficult for reasons totally contained only between one’s ears.

But stocks go where they want to, despite what any participants think is justified and despite what investors might wish would happen. Investors unable or unwilling to let go of original price opinions are doomed to lose, either through losses in positions that never come back, and/or from better opportunities elsewhere that have been lost.

There are two primary ways that investors get into trouble when setting price objectives:

The initial idea, including the selling-price objective, may have been wrong from the start.
If correct at first, the original idea can become outdated and, therefore, inaccurate as subsequent events transpire.
How, then, does one develop a realistic price target?

As we shall see in this article, selling-price targets should be based on logical analysis, which includes several dimensions and several elements. Hope, an emotion, is absolutely not a valid part of investment decisions (to buy, sell, or hold), and should never play any part in setting a realistic exit target. Price goals based even in part on a position’s original cost basis should be avoided, since they are based on the hopes of not losing money and of being able to feel happy or smart. That being said, however, investing is an art rather than a science, so investors should work diligently to do well, but not agonize over the impossibility of achieving perfect results.

Three Key Elements
Price objectives, both when set initially and when reconsidered later, should have three elements:

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Dividend Safety Signs and Warning Flags

Posted on September 20, 2012 | Investing

Many investors have sought shelter from the stock market storm in more mature dividend-paying companies, since the income from these firms provides at least some positive return in an otherwise bleak environment.

But the economic downturn has tested even the most mature and stable firms, with some forced to cut dividend payments. Others have managed to maintain current levels for the time being, but could be forced to make cuts in the future.

What signs can you look for that indicate the safety of a company’s dividend payment stream?

Investors in dividend-paying stocks typically seek stocks that are paying steadily increasing levels of dividend income, and have the cash flow and financial resources to continue to pay the dividends. There are a number of financial ratios and indicators you can use to evaluate this; the most common are listed below.

While these safety signs and warning flags are applied at the individual firm level, you should keep in mind that even the most well-managed company can be overwhelmed by changing winds within an industry. When you are evaluating a stock for its dividend payments, make sure you don’t lose sight of the bigger picture in terms of the environment in which the firm is operating.

Clearly, dividend-seeking investors need to evaluate the dividend payments themselves, how steady they have been and how much you are paying for them.

A dividend stream may be important to you, but a critical question is: How much is the market demanding for that stream of payments?

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Outrageous Advertising: A Survival Guide for Investors

Posted on August 27, 2012 | Investing

I am continually mystified by individuals’ gullibility in the face of exaggerated investment performance claims. Investors who are nobody’s fool when it comes to outrageous advertisements in other areas of their lives suddenly become naïve when confronted with equally outrageous investment performance claims. It doesn’t make sense.

For example, most of you wouldn’t give the time of day to a used car salesman who told you that an old car had only been driven to church on Sundays. Yet many of you not only gave the time of day, but actually paid good money—to refer to a successful ad campaign of several years ago—to an investment newsletter that claimed that in 13 years’ time it had turned $10,000 into more than $40 million.

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I Savings Bonds

Posted on August 9, 2012 | Investing

The fixed rate of return is determined when the bond is purchased. The variable rate is calculated semiannually based on the inflation rate.

The variable rate on an I Savings Bond is determined using the Consumer Price Index for Urban Consumers (CPI-U) for the months of May and November of each year. Fixed rates and semiannual inflation rates are combined to determine composite earnings rates. An I Bond’s composite earnings rate changes every six months after its issue date.

Fixed and variable rates for I Savings Bonds issued over the last 10 years are posted on the Treasury Direct Web site (www.treasurydirect.gov).

What if the value of the CPI is falling?

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The Dividend Puzzle: The Relationship Between Payout Rates and Growth

Posted on August 6, 2012 | Investing

In one of the most surprising research developments over the last four decades, Robert Arnott and Clifford Asness published an article in the January/February 2003 issue of the Financial Analysts Journal entitled “Surprise! Higher Dividends = Higher Earnings Growth.”

The controversial 2003 research by Arnott and Asness was further affirmed by Ping Zhou and William Ruland in the May/June 2006 issue of the Financial Analysts Journal.

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You CAN Lose With Bonds

Posted on July 26, 2012 | Investing

Stocks are risky because stock prices go up and down all the time—sometimes wildly so—and if you have money invested in stocks, the value of your original investment can drop substantially.

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Dividend Safety Signs and Warning Flags

Posted on July 19, 2012 | Investing

Many investors have sought shelter from the stock market storm in more mature dividend-paying companies, since the income from these firms provides at least some positive return in an otherwise bleak environment.

Clearly, dividend-seeking investors need to evaluate the dividend payments themselves, how steady they have been and how much you are paying for them.

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