I Want To Grow My Money...Why Would I Need Any Income Investments?

But I’m looking to grow my money. Why would I want income investments in my account?”

This is a common question I get from Wela clients as we talk through the process of developing a retirement savings portfolio to meet their particular objectives. It’s a great question that makes sense. And here’s the answer.

When we think about saving for retirement, we often visual our efforts as growing something -- a “nest egg” that expands with every deposit we make in our retirement account.

But a well-crafted retirement strategy is actually more like a machine than an incubator. It has several moving parts that work together to leverage your contributions and move you towards your goal. The twin motors in that machine are growth and income investments, which work together, with each taking the lead at different times in the journey to and through retirement.

Income investments

Income investments

Growth stocks are shares in companies that currently prioritize expansion and increased market share. These businesses pour most of their profits back into operations, and thus don’t pay dividends. Netflix and Amazon are good examples. If/as a growth company expands, investors benefit from the steady, sometimes dramatic, rise in value of their shares. Growth stocks are what people talk about at the office coffee machine. “Yeah, I bought Acme Corp at $10 a share five years ago and just sold it for $71.”

Income stocks are boring by comparison. They tend to be established companies in mature industries – think Proctor & Gamble, Apple, Disney – that are unlikely to show dramatic growth in share price. Instead they just ton the revenue and pay their shareholders a regular dividend.

Related: Income Investing - Cut Through The Clutter

Bonds, which are essentially a loan to a business or government, are another source of income, as owners of the bond receive regular interest payments. Investors can also receive income from alternative investments, including real estate investment trusts, preferred stocks and shares in pipeline and energy storage companies. All of these assets are traded on open markets like stocks and bonds.

So, let’s assemble Wela’s version of the retirement investment machine. It consists of three buckets based on the above – stocks, bonds and alternative investments – designed to grow your money while providing diversity to protect you from market volatility.

Stocks – During most of your working career, your portfolio should contain mostly shares in growth companies. Ideally, these stocks will significantly appreciate in value over the years and decades, providing a nice profit when you liquidate them in retirement.

But you should also hold some income stocks to provide diversification and stability. The dividends these shares pay can be reinvested in your portfolio, turbo-charging your growth.

Related: How To Build Your Investment Portfolio To Meet Your Retirement Needs

When you retire, we recommend shifting your focus to income stocks. You can continue to reinvest their dividend income, or use it to help fund your lifestyle. Income stocks also tend to be less volatile than growth shares and thus offer the stability you want in retirement.

Bonds – Contributions to this bucket are invested in a diversified range of bonds – Treasury municipal and corporate – that will provide a steady stream of interest income while protecting your principal.

Your portfolio should hold a greater percentage of bonds (as opposed to stocks), as you get closer to retirement. We recommend, “owning your age” in bonds. When you are in your 40’s, bonds should make up 40% of your portfolio. When you are 50, that percentage should be 50%.

Related: Why You Should "Own Your Age" In Your Investment Portfolio

Alternative investments – This smallest bucket of non-stock or bond assets provides more income and some insulation from the gyrations of the stock market.

So, why should you hold income investment when you’re seeking growth? Because income investments – stocks, bonds and alternative investments – can both enhance and protect that growth. The dividends, interest and other payments generated by income assets can be reinvested, even as those assets themselves insulate you from volatility by providing diversity and stability.

Your investment machine isn’t hitting on all cylinders unless you have income assets in the fuel mix.

Disclosure: The information is provided to you as a resource for educational purposes only. Nothing herein should be considered investment, legal, or tax advice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. It is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

I Liked PE In School, But Don't Understand It Now That I'm Investing. What Is The Price To Earnings Ratio?

Let’s talk for a minute about a key measure of stock value, the Price to Earnings Ratio or P/E.

Yes, yes – you were told there would be no complicated formulae, rituals or incantations involved in growing your nest egg. But the P/E isn’t all that complicated and it’s a pretty handy tool for assessing possible investments, and for impressing people at the bar when the conversation turns from sports to the hot stock du jour.

The P/E is simply the ratio of a stock’s current selling price to the company’s recent earnings per share (EPS), typically over the past four quarters. If Acme Industries shares are currently trading at $30 and its EPS is $2, the P/E would be how much? Come on, you know this. Right. 15.

The P/E can help determine whether a stock you are considering is “expensive” or “cheap.” When you invest, you want to buy into companies that have strong earnings, or the near-term prospect of strong earnings. And, ideally, you want to pay as little as possible for those earnings. In the Acme example above, you are paying $15 for every dollar of earnings that you buy.

Related: 7 Ways To Get Started Investing

Whether a P/E is “good” or “bad” depends on several factors, including the company’s growth rates – past, present and expected. A stock’s P/E reflects the market’s level of confidence in the company. A P/E above the market or industry average is a sign that the market is expecting significant success and earnings growth from the company in the near term.

But the P/E isn’t perfect and should not be the sole measure of a possible investment. For example, beware of a stock with a high P/E despite low recent growth. Something isn’t right in that situation. The stock may, for example, be benefitting from unjustified media hype or Wall Street buzz. Similarly, a stock might be considered over-priced if its current P/E isn’t supported by analysts’ projections for the company’s future growth.

Related: Just The Basics: 9 Common Ways To Invest

Industry norms must also be weighed when assessing a P/E. You can’t really compare the P/E of two companies in different categories; such as a utility and a start-up tech firm. The P/E ranges for those industries are wildly different. Utilities are stable, low-growth operations and tech firms experience wild growth and constant upheaval.

There, that wasn’t too painful, was it? And now you’ve got another tool to help make smart investment decision – or to at least better understand the decisions you’ve entrusted to your financial advisor.

What The Finance Is Going On With The Apple App Store!?

what the finance logo 2016421 Matt and Eddie are digging into one of the biggest businesses in the world, Apple. More specifically, the Apple App Store. It's been around for less than 10 years, but the App Store revolutionized mobile devices.

The guys dig into how the world adjusted to the App Store. It's fun to think back on life before iPhones. They also demonstrate the similarities between the App Store and a financial product you might be using today...

Matt and Eddie then look into the business behind the App Store. Who is making money through the App Store? It's not just the developers.

All this and more in this week's podcast!

Does Day Trading Add Up?

Let’s face it, Americans are about as patient as a four-year-old on a sugar high.  We want what we want, and we want it now – RIGHT NOW!  While this trait serves us well in some ways – fueling competition and innovation – it’s a bad, bad thing when it comes to managing our personal finances.

Unless we’ve done a truly terrible job with this blog, it should be clear that we believe thoughtful, committed, long-term investing is the best way to achieve one’s financial goals, including a secure and rewarding retirement.

Shockingly, not everyone agrees.  Millions of Americans continue to play the short game.  They jump in and out of various investments hoping to buy low, sell high and score big.  The most extreme practitioners of this “market timing” philosophy are the day traders.  They habitually buy and resell a stock in the same trading day (often within minutes) in an effort to profit off the price differential as the stock moves up or down in value.  Some day traders do this for a living; others dabble to supplement their income.

Day trading is one the Internet’s many problem children.  While people have always speculated on stocks, the web gave everyone access to the tools and information necessary to make rapid trades.  Day trading emerged during the dot.com bubble of the 1990’s when it seemed everybody had a friend who knew a dude who was supposedly riding the market wave to financial independence by flipping stocks on his home computer.

After falling off the radar for a decade or so, day trading has reemerged in recent years, perhaps as a result of the market turmoil of 2008-2009, which left some people thinking they could do at least as well as the pros.  That mentality is fed by the relentless marketing of training programs that suggest it’s possible to secure a financial future by flipping stocks. (Like this)

Day trading

Yeah… not really.  The overwhelming majority of day traders are unsuccessful.  A 2004 academic study based on data from the Taiwan stock exchange revealed that 80% of day traders lost money and only 1% were “predictably profitable.”  That figure is probably low in the opinion of some experts, who think it may be as high as 90%.

“[D]ay trading is one of the dumbest jobs there is,” wrote former Wall Street analyst Henry Blodgett. “[M]ost of the people who do it… would be far better off working at Burger King.”

So why is day trading still a thing?  Because it lights up the same pleasure centers in the brain that make gambling so addictive. Day trading offers constant stimulation and occasional rewards to thrill-seekers who have a sense of invulnerability. In other words, young men.  Seventy-five percent (75%) of day traders are men aged 25-45, according to Hersh Shefrin, a professor at the University of California, Davis, who studies financial behavior.

“Over-confidence and over-optimism appear to be severe among day traders,” Hersh noted in his book, Beyond Greed and Fear.

It’s no mystery why these cocksure guys usually end up struggling to pay the rent.  The reasons are obvious and offer lessons for all investors.

The first deadly pitfall is under-capitalization.  Day traders need a big stack of cash to cover their inevitable losses and an even bigger pile if they hope to generate decent profits.  SEC regulations require day traders to keep a minimum $25,000 in their brokerage accounts at all times.  But industry experts set the bar much higher, suggesting a minimum ante of 50-times monthly living expenses to insulate the baby trader from the inevitable mistakes and losses.  Ideally, this should be “risk capital,” money that can be lost without leaving the trader homeless.  Anyone even hoping to make a decent full-time living from trading -- a return of $50,000 to $125,000 per year – needs a minimum $250,000 in capital, says veteran trader Alton Hill.

Too many traders lack the self-discipline necessary to make decisions based on analysis rather than emotion, according to industry observers.  This can lead to deviation from a carefully crafted trading strategy or excessive trading, which is costly and unproductive.  It can also result in bad reactions to failed trades.  In a desperate bid to recoup the loss a frenzied trader may repeat the same mistake or make new ones.  You know, like that college buddy you took to Vegas?  The one who was sure the next hand or roll of the dice was gonna turn it all around?

Traders who do manage a modest profit on their trading often see those gains offset by the significant cost of doing business, including brokerage commissions, sophisticated trading and analysis software, and access to real-time market news and in-depth research.

That expensive research is useless if the trader doesn’t know how to leverage it. Successful day trading requires wide and deep knowledge of market dynamics – not just the fundamentals, but near-Jedi level understanding of its complex structure, rhythms and craziness.  Such mastery comes only with time and practice during which the trader is often hemorrhaging cash.

And here’s the topper: Whatever profit a day trader does scratch from his countless hours of eye-straining, headache-causing, stomach-churning work is taxed as ordinary income at rates ranging up to 39.6%.  When a long-term investor finally cashes out he will pay a maximum 20% on his capital gains.

Bottom line, day trading is a sucker’s bet. It entices with an intoxicating brew of visceral thrills and possible wealth.  It delivers on the thrills, for sure, but seldom on the wealth.

For serious wealth building, long-term investing is unquestionably the way to go.  Setting financial goals, creating a budget, establishing an investment plan and sticking to it – these are not sexy things.   But they are proven, time-tested tools for securing a financial future -- elements of a strategy employed by the world’s most successful investors, including a guy named Warren Buffett.

As for the money-related thrills?  Budget another weekend trip to Las Vegas with your college pal.  It will be just like day trading – except with an awesome (and cheap) buffet.

What In The Financial World Are FANG Stocks?

WARM WISHES FOR THE HOLIDAY SEASON You might have heard a co-worker casually mention investing in FANG stocks, or perhaps your favorite nightly news anchor threw out the term while giving a recap on the stock market's performance for the day.

If you have FOMO because you don't understand this acronym, fear not! The team at Wela is here to help. We've asked our advisors to help clarify what FANG stocks are and why people keep talking about them.

What are FANG stocks?

FANG stands for Facebook, Amazon, Netflix, and Google.

(*Note: Google has changed its business structure and is now going by Alphabet; however, their ticker still starts with a G, so we're sticking with FANG. Plus it sounds much better than FANA.)


Why do they have their own acronym?

The acronym was created by the host of CNBC’s Mad Money, Jim Cramer, a few years ago due to their high growth potential.

Related: 8 Books You Should Read To Be A Better Investor


Who talks about them?

All investment professionals and individuals that take an active interest in market activity. More specificially, people who watch CNBC.


Should the average investor know what FANG stocks are?

The average investor should be familiar with the acronym FANG because the average person uses a service by one or all of these companies on a daily basis. However, the relevance of the acronym will fade if the collection of stocks does not continue to outperform the market.

 Related: Just The Basics: 9 Common Ways To Invest


When did people start talking about FANG stocks?

Talk of FANG really picked up mid to late 2015 after posting a historic run throughout the year. Collectively, FANG stocks were up 60.69% in 2015 while the S&P 500 was down .73%. In fact, the S&P 500 excluding FANG was down 4.8% in 2015.

Typically it is a bad sign for the overall market when FANG is outperforming it. Investors are essentially saying that they can’t find growth elsewhere in the market, so they are forced to concentrate on those four stocks.


Do people still care about FANG stocks in 2016 since the market has been so volatile?

Fang stocks are still watched closely, however, they have underperformed the market so far in 2016. FANG stocks are down 14.4% YTD, while the S&P 500 is only down 7%.



Ashley Asks A Question: Why do companies decide to go public?

I hear a lot of acronyms around the office. Most sound like teenage texting shorthand. AUM, REIT, CFA, CFP, and IPO. It's that one, IPO, that I've been curious about. Initial Public Offering. I get that and I assume you do too.

But I was always asking myself, "Self, why do companies even go public?" Seems like kind of a pain to go from total control to being run by a board and letting randos vote on the direction of your business. Or the pressure of being responsible to produce results for a gaggle of people relying on you to make them stacks (that's millennial for thousands of dollars).

So, as always in this series, I bring to you a burning question of mine that I'm too lazy to google. Let's get to it.

Do companies go public when they need money or when they have money?

Eddie Goepp, COO of Wela

Typically, a private company goes public when they’re looking to raise money in order to grow their business. Sometimes, however, large established companies that are privately owned will go public in order to provide liquidity for their shareholders. More on this in a second…

When a company “goes public” that means that they sell shares of their corporation to investors. These investors could be large institutions like state pension funds or individuals like you and me. When these investors buy shares, they are exchanging their money for ownership within the corporation that is now being publicly traded. At the initial public offering, also known as “IPO”, the company offers shares for purchase and in exchange, receives the cash that is raised.

In the case of a private company looking to grow, this cash will likely be used to expand distribution of their product or grow the product line itself. In the case of a large established company looking for liquidity, this offering of shares in their company provides a market for the original shareholders to sell all, or a portion of, their interest for cash.

Let’s say you own 10% of the shares in a private company that is worth $10 million dollars. That means your ownership value is $1 million. However, you can’t pay your mortgage or buy groceries with that ownership. You need a liquid market in which you can sell a portion of your shares in order to generate cash. This is an example of a company going public in order to provide liquidity.

Bottom line: Mostly because they're looking to raise money but could be larger companies looking for liquidity.

Bottom bottom line: I wish millennials would stop using made up acronyms. Don't be lazy kids.