Reading WSJ is Great. This is Better.

If you’re like anyone that wants to learn more about the markets you probably have a Wall Street Journal subscription.  It is a great resource and something I used to read cover to cover almost every day.  I still read it often, but I tend to skip the bombardment of writers telling me stocks are going up/down on any given day, recently the narrative has been the trade war and tariffs.  Don’t get me wrong these things pose a big threat to the global markets, but in my personal opinion that has not even come close to materializing yet and as someone who looks at the big picture I don’t think one day of stock market noise can be explained by any one thing.

So if you are looking to further deepen your knowledge there are few things you can do, many of which are free or won’t break the bank.  Some of the things we like to do include:

Reading Actual Portfolio Management Research

Find a fund, asset manager, investor, professor, economist or anything of the sort that you like and resonate with.  Read what they have to say and ask yourself if it makes sense.  Then read something completely opposite and see what you think.  I used to think individual stock picking was the only way to invest.  My ideology was that bonds could never give me the returns I needed and other financial products involved heavy amounts of leverage.  Then I read Burton Malkiel’s, “A Random Walk Down Wall Street.”  Now, I like looking at data and Malkiel consistently provided concepts I found easy to understand followed by charts to drive his thoughts home.  I am now more open to a portfolio that is diversified across the world and across asset classes.

Some other ideas include reading AQR Capital’s website.  With $226 billion under management across all their offerings its quite amazing they have a research tab right on the homepage so you can read up on their thoughts and insights.  I am also a big fan of Meb Faber’s blog and weekly podcast.  Aside from running a $1b AUM investment manager he frequently puts out free research and inexpensive books.

Looking At Economic Indicators

The Federal Reserve, Bureau of Labor Statistics, Institute of Supply Management, etc. regularly put out economic indicators that gauge the health of the economy.  A lot of guesswork is taken out when you have data showing how many people are buying houses or how inflated the prices of goods are.

Getting even more creative, public companies are required to disclose their financials every quarter.  The largest companies choose to have earnings conference calls and field questions from some of Wall Street’s top analysts, but these are completely available to the public.  So for free you can hear the executives of top global business talk about what their views are on their businesses and the overall economy.

Some of our favorite indicators include:

  • Real GDP Growth – GDP Growth less inflation
  • Purchasing Managers Index(PMI) – gauges business health by means of a survey to purchasing executives at hundreds of companies which includes new orders, factory orders, employment level, supplier’s delivery times, and inventories
  • Housing Starts – how many people are buying new homes
  • Caterpillar/Boeing Earnings Calls – industrial giants who are sensitive to changes in the global economy

Tinkering With Data Series

There are a number of free or low cost data series out there on the internet.  One of the most popular is the Fama/French database which includes US equity data dating back to the 1920s.   AQR Capital, which I referenced before, has a similar dataset on their website as well.  These two are especially nice because they have different factors you can play around with and see how they have historically performed.

However, even yahoo finance has free data.  Most recently I was playing around with an S&P 500 strategy that tilts into lesser represented sectors of the market and found that yahoo price data was more than sufficient.

And you don’t have to be a programming genius either, you can do a lot with excel and you’d be surprised how one simple plot can lead to many ideas.  One of my favorite websites portfoliovisualizer.com actually allows you to create a portfolio and see how it historically performed.

But if you are a real nerd you can play around with quantopian.com, quandl.com, and quantiacs.com.  These websites have free financial data and essentially built a backtesting engine for you so you just have to code up a strategy and see how it performs.  (Not sure if quandl does the backtesting for you I just heard they have great data)

More than anything it is important to be creative.  The industry notoriously is pretty secretive about their research because an overused strategy is one that does not work.  However, more and more firms are starting to provide research and insights to the general public so make use of what you can.  We are working on starting two new sections of the website. One for money manager’s letters to investors and one with interesting papers, excel spreadsheets, and more. So hopefully we can provide value to you as well.

As always we welcome questions, comments, and thoughts via email at founders@themodernpiggybank.com.  Be sure to subscribe to this website and follow us on twitter @themodernpiggy2.

How To Use Your Cash Back Credit Card To Build A Rainy Day Fund

Cashback credit cards? Awesome. I’m personally so thankful that cash back cards are a thing because I utilize them to the full advantage. Or so I thought. Personally I have a Chase Freedom Unlimited card which gives me 1.5% back on everything I buy. Considering the fact that I graduated college recently and moved to a new city for my post grad life I got a lot of cash back during this move.

I try to use my credit card for every single purchase that I make because of the cash back feature. I know a lot of you will say this is irresponsible so let me quickly say I only expense things I can afford and will pay off every month. I don’t carry a balance and therefore I pay no interest on my card. So really, this cash back is just found money for me. When I was moving it was great because as I bought things that I would need in my new apartment my card gave me cash back to buy even more things I wanted but I didn’t consider essential to the apartment such as art or little knickknacks to make the apartment feel more like a home. Sadly, the plant I bought died but that’s neither here nor there. (I was devastated).

So getting back to cash back. If you are a responsible spender with your credit cards and not a frequent traveler I highly suggest going with the cashback option, but again you need to find a credit card that fits your lifestyle and personal spending habits. I know a lot of people around my age in cities like NYC or Boston that if they had excellent credit opted to go for the Uber credit card because of how it directly caters to those people who are very active in their social life. I also suggest checking out the Capital One Savor Card because of it’s great cash back on dining and entertainment.

I’ve talked to a lot of people about what credit card they use and why they chose that particular one. Most people take cash back and apply it to their statement balance so they owe less on their credit cards each month and I highly recommend doing this if you are carrying a balance from month to month. It will allow you to pay down your debt faster and get out of interest payments, if you have those.

Now that I carry a zero balance from month to month I don’t feel the need to apply my points right back into my credit card. Sure, I could go online and get some gift cards or apply them to travel but let’s be honest, I’m 22 and I don’t have time to go on crazy vacations and I try to curb my spending habits so that I can save more.

So I thought about this a lot. I wondered how I can best use my cashback. 1.5% sounds like nothing but it definitely adds up over the course of a year. As I was going through my options for my last point redemption it had an option if I would like to deposit the cash back into my checking account. Now I don’t keep my savings account with chase as you all know if you read my article on savings account, I use Marcus by Goldman. Some more digging allowed me to find that I can link any bank account up to my card and deposit the money there. Aha! A rainy day fund was created.

Sure I have my savings that I deposit a fixed amount in every month because I worked it into my budget, but I’ve never even thought about putting my cash back into a savings account. Even better, it’s an interest bearing savings account so basically I’m being handed money, putting it into an interest bearing account, and earning even more money on top of that. Think of it as a monthly allowance almost.

This is how I personally use my cash back but the more I thought about it the more I saw the wide range of possibilities this really has. Savings accounts offer low interest rates right now with the highest you’ll find hovering around 1.8% while the average market return year over year is 7%. So if you already have a rainy day fund and don’t feel the need to contribute more consider taking this cash back and putting it into an investment account, retirement or otherwise and letting it grow even more than a rainy day account ever would.

Make sure to subscribe to The Modern Piggy Bank using your email address and follow us on twitter @themodernpiggy2. As always you can email us directly at founders@themodernpiggybank.com with any comments or concerns you guys have. Have a topic you want to learn about? Shoot us an email and we’ll do the research.

Buy A House Not A Home

If you are like me, home ownership is probably a long ways away.  However, I recently read a white paper called “The Rate of Return on Everything, 1870-2015” published by the Federal Reserve Bank of San Francisco.  Theres a lot of good facts and data in there and I strongly encourage you to read it (or skim it like a certain Modern Piggy Bank Founder did… looking at you Will).  But if reading 123 pages of economic data and commentary isn’t your cup of tea I’ll spare you the burden and tell you what I found most interesting.

The paper looks at major asset classes over the time period 1870-2015 most notably bills, bonds, equities, and housing and analyzes their return statistics.  Believe it or not housing was on par with equities with average return of 7% a year.  In the post World War II era, equities have taken a marginal lead, but the investor has also needed to take on more volatility and is subject to the ups and downs of the business cycle.  Where as the housing market has been much steadier over time.  Additionally, housing does not correlate heavily to the global markets i.e. a bear market is less likely to have a significant adverse affect on housing prices.

Now home ownership has been seen as a rite of passage in America and a sign that someone is financially well off.  Unfortunately, situations like the 2008 financial crisis show how a house can sometimes not be a wise investment especially your primary residence.  I’m currently looking to apply for my first credit card which I will talk about in a later post, but I find it concerning how the Federal Government insured home loans leading up to 2008 and will loan teenagers with no grasp of the concept of credit hundreds of thousands of dollars to achieve higher education because it’s a “good investment” while private credit institutions want new credit card owners to have $200 spending limits.  Anyways, I digress.

Back on track.  You will always need a dwelling, it will always be an expense.  I will even go on to make a controversial claim that a mortgage on your primary residence is nothing more than an expense.  If you weren’t paying it down every month you would be living in an apartment paying rent.  When you go to upgrade homes you will now have a higher monthly expense with the total offset by the profits on your past home sale.  Furthermore, theres property taxes, utilities, home improvement/maintenance, etc.  Your primary residence will probably not produce a dollar of cash flow.

Enter the rental home market.  Instead of adding to your expense column you can invest your money into a home for tenants.  Sites like airbnb have made this incredibly easy for vacation spots.  Some people even rent guest rooms in their own homes to offset their housing costs.  For me, it makes sense to invest in an asset that tends to increase in value over time, although this is not always the case, while I can put it to work and pay off its expenses and maybe even a little extra.  To take it a step further the white paper previously mentioned suggests that the lower volatility will protect my downside in case things go wrong as opposed to the equity markets which are heavily correlated across the globe.

If you can fit it into your budget and are willing to do the due diligence consider investing in a rental property.  I mean not to discourage you from home ownership because it is something incredibly rewarding that I look forward to one day.  I mean to challenge your thinking so you can minimize your expenses and optimize your savings.

Whether you like what I said or hated it feel free to reach out at founders@themodernpiggybank.com and follow us on twitter @themodernpiggy2.

Trade Like A Quant

Sometimes dubbed the rocket scientists of Wall Street the meaning of quantitative analysts often takes on a broad meaning.  Quant is a fairly broad term honestly, but roughly means someone who takes an extremely mathematical approach to the markets.  While some quants use Einstein level math there are some practical lessons you can take away to use in your own portfolio.

More than anything quantitative analysts apply a rigid rules based approach to the markets.  They have specific buy and sell signals that they adhere to religiously and consistently.  This is where their great returns come from(if their algorithms are correct).  While some get blamed for things like the flash crash where the DOW dropped 9% in minutes it would be wrong to say that it was the strangest thing to ever happen in market history.  A signal for a quant could be something as simple as the 200 day moving average or as complex as analyzing S&P 500 futures contracts volume and expiration and placing an order nanoseconds before the futures expire and pocketing the spread, which is the high frequency trading world.

So how can you apply this? Well a buy and hold strategy sounds great in theory, but its harder to stick to in practice.  Sure its easy to say when the market has not had a down year since 2008, but it would have been really hard to hold onto your portfolio is 2008 when the US equity market shed about 40%.  If you haven’t experienced a massive drawdown like that imagine draining half of your savings.

So if you are someone who can’t weather massive drawdowns, and we don’t blame you if that is the case, consider taking a rules based approach.  It is great to have an investment plan that you can stick to and might even help you sleep better at night.  Here is a simple rule to get you to start thinking about what you might want to do:

Apply a short, medium, and long term moving average to your portfolio.  When conducting your rebalancing, best done once a year for tax benefits, tilt most towards the assets in upward trend above the moving averages, more towards the one that are not trending as strongly above one or two of the moving averages, and least towards those in a downtrend under the moving averages.

Note: This can be considered a trend following approach and is a popular investment style that may or may not suit you.  Over time strategies go in an out of favor so its often wise to pick a strategy that you understand and believe in and stick with it over the long term.

Building wealth takes strong discipline and taking your emotions out of investing by applying rules to a strategy that works can often help mitigate bad decisions.

Don’t Let Trading Fees Eat Your Profits Away

stacked round gold-colored coins on white surface

There’s no point to keeping extra expenses in your life, it just weighs you down in the end. Like we said before, a dollar saved is a dollar earned. Get rid of cable and pay for streaming services of what you watch, get a credit card tailored to your most popular purchase category, cook more, etc. There’s a lot that can be done. Your portfolio is a steak, do you want a fatty piece or a lean piece that will marble when its cooked and not char? In today’s day in age, when you’re managing your investments, the same thing can be done.

Traditionally, there were very high broker and platform fees. You’d even pay commissions if you were placing orders for stocks over the phone or online. Fees have gotten lower for discount online brokerages where now instead of commission, platform fees, or managing fees, you’re paying per trade. Sometimes as little as $5 per trade. And while this seems cheap, for most people starting out these trading fees can really add up and significantly decrease your invested capital.

Younger investors in their 20’s and 30’s have flocked to Robinhood which uses Apex Clearing Corp. as their clearing house because it charges $0 in fees overall. It doesn’t offer all the bells and whistles like other online brokerages such as extended trading hours or research but you can upgrade to premarket and after market hours for a minimal sum. You even have the ability to leverage your capital up to 3x which is a nice feature for more experienced investors and people looking to amplify their returns. Quick disclaimer: Leverage trading is highly risky and we do not recommend it.

So now you have an online brokerage that you hooked your bank account to for free. But businesses need to make money and now you’re probably wondering how they make theirs. To keep it simple, they invest your uninvested capital. Don’t worry, your capital is still yours to invest as you wish whenever you wish. It’s also been rumored that they also sell your order flow and trading information to High Frequency Trading firms (HFTs or firms that trade using algorithms). If these rumors are true, they sell this information for a higher premium than your traditional brokers. This shouldn’t change your investing habits unless you are trading large blocks of shares at once.

For us at The Modern Piggy Bank, we use Robinhood for our discretionary accounts and allocate only a fixed percentage towards it after allocating into our other investment accounts like a Roth IRA and 401k’s using more traditional platforms like Fidelity which recently just announced that that they were offering zero fee ETF’s from Ishares in what will be direct competition to Robinhood.

Just know your cost of investing is less than what your father paid, and less than his father. You don’t have the excuse of having hidden costs or that you’re paying fees for x,y, and z. So don’t make excuses when you can make money. We truly do trust Robinhood implicitly when it comes to our money and our accounts. While we would like to see more features added in the future if you see us on our phones, it will most likely be us with the Robinhood app open checking our portfolios.

Main Street’s Edge

One thing that new investors, myself including, usually grapple with is the belief that investing is a zero sum game.  There is a winner and loser on every end of a trade.  Furthermore, another hesitation plaguing retail investors is the belief that Wall Street has the edge with their superior research and execution ability.

The bad news is Main Street is completely right.  In the short term, trading is a zero sum game, there will be a winner and loser on either side of a trade.  This is especially true when we look at the options and futures markets.  If that’s not bad enough, fund managers have armies of PhDs at their disposal to conduct cutting edge research and legions of engineers designing computer systems to place trades in nano seconds essentially cutting the line in the execution queue.

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If you’re still reading good!  There may be hope for Main Street yet.  First, I would challenge you to think long term.  Investing education is fundamentally flawed in the sense that most people learn that the best way to invest is to pay close attention to a handful of hand selected stocks.  This causes us to over trade and exposes us to a lot of unnecessary risk.  If we look at the major indices we see a steady increase over time.  This makes sense because as the economy expands due to things like population growth which increases the labor force, technological advances which makes workers more productive, etc.  All of this steadily increases corporate earnings which is reflected in the steady increasing of major indices like the S&P 500.

In the past 90 years an investor could expect a 10% return annually on average from the S&P 500, though don’t take this at face value because annual returns fluctuate widely.  A modern investor could capture this utilizing the ETF SPY or the Vanguard 500 fund which have both minimal tracking error and costs.  You would continue to collect dividends, eliminate single company risk, and significantly outpace inflation in the long term all at a cost of less than 20 basis points per year.

So why doesn’t Wall Street just buy and hold if it’s that easy?  If you look at a hedge fund’s fee structure you may see that most charge 2 and 20.  2% on your total account value and 20% on returns.  The truth is Wall Street relies on investor money to pour in to make money.  To attract that money they have to outperform the benchmark S&P 500 and unfortunately few managers can consistently outperform ultimately resulting in being canned by their investors.  This is not to say that all money managers don’t deserve their paychecks.  In fact, there are countless managers who provide amazing strategies that outperform with low correlation to the equity markets you just have to do your due diligence to find them.

The edge that the small investor has is that they can buy and hold over long periods without having to answer to stakeholders.  While money managers were begging people to stay in 2008 the average investor could smile and pour more money into their IRAs buying US equities at huge discounts.

“Our favorite holding period is forever” -Warren Buffet

A prime example of this is Warren Buffet.  AQR published a paper on how he generates his alpha, a measure of market outperformance.  They concluded that Buffet’s philosophy of buying and holding great companies trading at fair prices outperforms because of two main factors. First, Buffet believes in his strategy as his market holding period is “forever.”  If you’re still not convinced, Buffet has seen his holdings decline by over 50% on two separate occasions in his career.  His sheer ability to sit through massive drawdowns is a big reason he is regarded as the greatest investor of all time.  Second, he is able to strategically apply leverage, a concept we’ll discuss in articles to come.

So there you have it.  As a retail investor you have the luxury of not answering to stakeholders who want consistent outperformance and are less tolerant of drawdowns which every portfolio is subject to.  Of course you have to have the discipline to sit through them, but being able to accept market returns over long periods of time is usually all the edge an investor needs to build wealth.