Mallory Asks A Question: Do I need to be worried about China?

Howdy folks, I'm back again this week with another question for Eddie. It's impossible these days to listen to, read, or watch the news without hearing about China and it's always impending economic doom.

Listen, I'm not trying to say that I don't care about the economic well-being of the country with the largest population in the world. I, in no way, want the Chinese to suffer, and I'm sure you can't have a country of their size struggle financially and not have it felt the world-over. That said, this Chicken Little is tired of worrying about the sky is falling in regards to China and my stock portfolio, so I turned to Eddie.

I constantly hear on the news about China’s slowing economy and growing debt. That sounds terrible for China, but will that impact me as an American investor? Do I need to be paying attention to it? Is there anything that I can do (or should do) to prepare my portfolio in case China’s economy and stocks suddenly take a nose dive?

Eddie Goepp, COO of Wela

Great question Mallory. And you will probably hear a lot more about China too, well, as soon as the “Brexit” vote goes down and until Greece’s debt troubles bubble up again. By the way, those debt woes aren’t resolved, they’ve just been sufficiently kicked down the road for the time being.

China is the world’s second largest economy based on GDP, (gross domestic product) so it is important. But the slowdown is really more a result of the change in the type of economy China has. Historically, they’ve been largely industrial and manufacturing based and now are moving to a consumer based economy. Similar to the United States. But let’s look at their slowdown. Last year, in 2015, the U.S. economy grew by about 2.4%. China, on the other hand, grew at 6.9%...about 3X what the U.S. did. However, we’re used to seeing double digit growth numbers come out of China over the past 25-30 years. In 2010 for example, China grew at about 10.6%.

So what does this mean for you? Well, not a whole lot really. As long as you’ve got a diversified portfolio appropriate for your goals and time horizon. If you look at the S&P 500, the largest 500 domestic companies by market capitalization, only about 2% of revenues come from China. Not a huge number. So the only thing you can do is maintain a properly diversified portfolio and rebalance. Don’t over-expose yourself to China (or emerging markets for that matter) and rebalance once or twice each year.

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

And there we have it! It looks like China's economic temper tantrum is not something that's going to stop me from retiring someday. Whew! Now I'm off to plan my trip to Greece. It sounds like it's still pretty easy to find good deals over there...

Related: Will Greece's Vote Impact You?

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.

Treat Yo' Self With Appreciating Assets


I'm a HUGE Park's & Recreations fan, but when I saw the episode when Donna, Tom and Ben celebrate "Treat Yo Self Day" I both laughed and cringed. The reality is that many people treat themselves on items like mani-pedis, fancy lunches, expensive clothing, or a batman costume. While none of these items are inherently bad, they're typically the kind of items that almost immediately lose value.

Do you remember that fancy lunch you treated yourself to three years ago? Yeah, neither does anyone else.

Listen, I'm all about occasionally treating yo self, but what if rather than focusing on treating ourselves with these items that quickly lose value, we instead treated ourselves with appreciating assets? Appreciating assets are, simply put, assets that over time gain value. When you purchase these things, you're actually increasing your net worth over time.

Related: What's Your Net Worth Compared To The Average American?


What's that? Appreciating assets sound boring!? Au contraire, here are a couple of appreciating assets you could treat yo self with:

  • Fine jewelry

Generally speaking, if you purchase fine jewelry with precious metals and stones, it's much more likely to retain its value, unlike that costume jewelry you picked up at Target last week. It's not necessarily the most powerful of the appreciating assets, but it's definitely better those clothes you ordered online at 2 a.m. the other night.

  • Artwork

That's right, treat yo self with that painting you've been eyeing for a while now. Now, I'm not talking about that Jack Johnson poster you hung up in your dorm room freshman year. But if you can get your hands on some quality artwork to hang on your walls, that's much more likely to hold its value than say that bottomless mimosa brunch you treated yo self to last month.

  • Antiques

Let's be clear here again, the definition of an antique is any work of art, a piece of furniture, decorative object, etc. created or produced 100 years before the date of purchase. So no, that bed frame from your childhood probably doesn't count; however, if that bed frame was originally what your great-grandparents used growing up, then you're in luck.

  • Real Estate

I'm talking about your place of residence or investment real estate. I firmly believe Tom Haverford would describe owning rental properties as "dope." Besides, what could be more of a treat than walking into a house or condo that you own? So go on, treat yo self.

Related: When You Should Not Buy A House

  • A Stake In Your Buddy's Business

Let's say your friend has started a business that you think is better than waffles. If you're Leslie Knope (or, honestly, myself), then that's a really big deal. Why not see if your friend is interested in taking on investors? Then you could both treat yo selves.

Related: Why You Should Start An Opportunity Fund


Now listen, I understand that all of the above costs a good bit more than your typically mani-pedi and ladies' brunch or your boy's night out with beer and poker. That's the trade-off here. You can either save up and spend your money on something that will allow you to retain your money just in a different form and hopefully even increase in value, or you can just spend it and know that it's gone. That's a decision you have to make, and yet another reason it's called personalfinance. 

Something else to keep in mind with this blog, I'm focusing on assets that you could treat yo self with, so I pulled some of the more fun examples. In reality, the above examples would hopefully hold their value; however, if you want some more heavy hitting appreciating assets, you might want to check out a couple of these blogs.

Just The Basics: 9 Common Ways To Invest

5 Bad Habits To Avoid When Investing


Ultimately, life is all about balance, so yeah, sometimes you should treat yo self to a fancy lunch out. However, next time you're planning your big Treat Yo Self Day, determine if you'd rather splurge on something that'll also grow your net worth.


Ready to start investing? Check out our blog on 7 ways to Get Started Investing

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!

What is a REIT and how do they work?

what is a REIT Is it time to add real estate to your investment portfolio? Maybe.

Here’s the good news: You can reap the benefits of property ownership without getting late-night calls about clogged toilets, or scrambling to fill the space left vacant when that Indian-Canadian fusion restaurant goes under (which, let's be honest, it will).

Let’s talk about REITs.

Have you ever wondered who owns the building where you work? Or that new apartment complex they’re building down the street? (No? Huh. We thought everybody did that.) Well, anyways… your building might be owned by Dave, who works over in Receivables; that cute bartender you were chatting up last night; and a retired florist who lives in Fresno, California -- which is to say your office building may be owned by a REIT.

Real Estate Investment Trusts, or REITs, are similar to mutual funds or ETFs. But instead of owning a basket of stocks, the REIT owns a portfolio of commercial or residential properties or mortgages. Investors can buy shares of a REIT much as they would in a company or mutual fund. REITs, which were created by federal law in 1960, have become increasingly popular in recent years as people scramble for higher returns on their income-producing investments.

Related: Just The Basics: 9 Common Ways To Invest

REITs offer a great potential upside, including a steady income stream (they are required to distribute 90% of their income to shareholders), and the opportunity for solid long-term asset growth reflective of the real estate market. REIT’s have averaged an 11.8% annual return over the past 20 years, compared to 8.6% for the S&P 500 Index. But there are limitations and vulnerabilities, too. Those nice returns reflect the risk inherent in investing in a narrow category -- one that experiences ups, downs and outright collapses on a roughly 15-18 year cycle. So, it’s important to do a really deep info-dive before investing in a REIT.

Let’s jump right in…

There are two classes of REITs -- public and non-traded. Public REITs are traded on stock exchanges while non-traded REITs require shareholders to buy and sell their shares from the company that operates the trust. Public REITs are the best choice for most investors for several reasons, including liquidity. If things go sideways with a public REIT, investors can dump their shares quickly and easily. That’s not always the case with non-traded trusts. During the downturn of 2008, some real estate investment companies froze their REITs, leaving shareholders stuck with their investment as real estate values went into a death spiral.

Public REITs also offer greater transparency and, according to research firm Morningstar, better long-term results and faster recovery from downturns than private REITs. What’s more, non-traded trusts often demand upfront fees ranging up to 12%-15%. And you know how the Wela crew feels about excessive fees. (We’re against them.)

Related: The 7 Layer Dip Of Fees To Avoid When Investing

When shopping for a REIT it’s important to know the composition and quality of its holdings. Equity REITs acquire commercial property -- apartment buildings, shopping centers, warehouses, even timberland -- and generate their income from tenant rent. You’re looking for outfits that operate top-notch space with quality, long-term tenants. If the REIT owns a strip center with a vape shop, a place that will sell your stuff on eBay, and the Pretty Kitty Pet Emporium, skip it.

Mortgage REITs earn their living by trafficking in real estate mortgages and mortgage-backed securities. REITs typically focus on a specific category such as residential (apartment buildings, hotels, manufactured housing), retail (malls and shopping centers), or healthcare (hospitals, assisted living centers, medical offices). Investors need to consider the current state and future outlook for a REIT’s chosen sector when evaluating the trust. Many residential-focused REIT’s limit their investments to specific markets, usually large cities, thus the prospects for those local economies should be factored into an investment decision.

The caliber and experience of a REIT’s management team is also critical. Real estate is a savage business. Success requires careful selection of asset properties, effective tenant recruitment, and highly efficient execution of every management function from marketing to maintenance. It’s a jungle out there, so stick with established trusts that have a track record of maintaining a decent payout across multiple market gyrations.

Keep an eye on the REIT’s debt, too. Trusts that use a significant amount of borrowed capital will be more vulnerable when interest rates rise. Mortgage REITs tend to be more leveraged than Equity trusts.

While the return on REITs can be enticing, don’t go overboard. They should compose no more than 5%-10% of a portfolio. As with any investment vehicle, diversity is critical – the REIT allocation should be spread across several real estate categories. A great way to diversify – and avoid hours of research on individual REITs – is to invest in a REIT ETF. Yep – a basket of REITs that in turn hold baskets of properties and mortgages. Can’t get much more diverse than that! One ETF that Wela tends to hold is the Vanguard REIT Index ETF (VNQ).

Related: Go ETFs, It's Your Birthday: Celebrating 23 Years of ETFs

Real estate is a core element of the U.S. economy, and REIT’s make it possible for the average investor to participate in its historic growth. Choose wisely and REITs could be, to borrow from one veteran real estate investor, a “terrific” addition to the portfolio -- maybe even YUUUUGE.

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 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.

[INFOGRAPHIC] Indexing Your Indexes

We constantly hear about how market indexes like the S&P 500 or the Dow Jones have performed but have you ever wondered about how these indexes came to be or exactly how they work? This inforgraphic quickly breaks out their history and some general information about the biggest indexes in the game.

indexing-your-indexes (2)