Learn the stock market in 7 easy steps. Get spreadsheets & eBook with your free subscription!

IFB83: Listener Q&A: Short-Term Investing, Bond ETFs and Interest Rates

 

short-term investing

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern to decode industry jargon, silence, crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.

Dave:                                    00:36                     Welcome to Investing for Beginners podcast. This is episode eighty-three tonight. Andrew and I are going to take a few moments to answer some listener questions. We got some great questions recently and Andrew and I wanted to take a few moments to go over those with those with you guys. So without any further ado, I’m going to go ahead and read some questions in an Andrew’s gonna answer for us. So in Andrew’s going to be the area, answer man.

Dave:                                    01:00                     So first question. Hi Andrew. My name is Luke. I am 24-year-old college student and I’m a new subscriber and an ebook purchaser. First off, I would like to thank you for all that you’ve taken the time to put it out there. I’ve learned so much from your podcast alone that I’m feeling so much more confidently already about what am doing with my money. The first stock that I purchased was Comcast maybe a month and a half ago. I’ve been contemplating selling to buy into positions, still listed as buys and your ego letter that made the purchase of this month to Comcast has been pretty steady since that held it, but I figured I’d ask for input. I don’t want to miss out on any opportunities. Thanks in advance for any advice. Luke. Andrew, what are your thoughts?

Andrew:                              01:46                     So obviously like we like to say we can’t give personalized information or advice. I’m legally, but I can talk about kind of what I would do if I was in the shoes based on like the context a lot of investing in has to do with context. You have to understand that as you go along with your journey, the stock selections that you make, the investment decisions you make, the portfolio decisions that you make. Oftentimes those can be more important than actually the stocks you pick themselves up, but those are going to vary based on what your situation is, what your goals are, where your portfolio is. So some of the WHO’s just building a portfolio, you combine that with not combined, you can contrast that with somebody who already has a diversified portfolio and then you can contrast that with somebody who maybe is five years or less close to retirement.

Andrew:                              02:44                     And that would be those with all three be situations where they will all have a different portfolio, uh, decision making ideas and that reflects itself in the stocks that you buy or sell. So for me, when I first started out, when I was first building my portfolio, and Luke, you mentioned your an eletter subscribers. So you as a current subscriber, you can go back in the archives and you can look, because I have my eletter that followed the real money portfolio that I built from scratch. You can go back to the archives, you can read the first issue, the second issue, the third issue. And you can see how I built that portfolio in myself, so I knew that I wasn’t going to get diversification right away. I knew that I only. I was only investing a small amount and so it wouldn’t make sense to split that money and it wasn’t even possible anyway because a lot of a lot of stocks will trade at higher prices.

Andrew:                              03:41                     You factor in transaction fees wasn’t gonna hit diversification right away. I didn’t hit the diversification I wanted until about a year to year and a half to two years into building this portfolio. And if you now kinda look at the issues I’ve been writing and sending out lately, I have a fully diversified portfolio and so I am adding a lot of stocks in a consecutive months to keep that kind of diversification that I want that position sizing that I want. And so that looks very different from when I was first building the portfolio. I was picking the new stock every month. Now I have at the size amount, which is about $8,000. I’m still dollar cost averaging $150 a month. When you talk about diversification in 15 to 20 stocks is the ideal kind of diversification that’s about a five to seven and a half percent position size, so you want to have your stocks generally each stock maybe makes up like five percent of your portfolio.

Andrew:                              04:50                     That would be the most ideal kind of perfect 20 stock portfolio. So as I’m at now when I’m buying new stocks, I’m tending to group. Those were all take instead of one month buying one stock, I’ll take two or three months to add one position and that just gets me over that five percent position size. So again, the portfolio decisions look very different depending on what a part of your investing kind of situation you’re in. If I was building a portfolio and I had a stock. Let’s, let’s talk about Comcast because that was in the question. I look at Comcast and I, I do like a quick thing on Finviz, which you put the ticker and it shows you the general valuation metrics that some of the general financials that are in there. You have a stock, it’s very big. It’s $173 billion, so it’s definitely in that large cap space. It’s in the S&P 500, pays a nice two percent dividend and the valuation metrics are all like pretty low compared to kind of the overall market. You have a very low pe. The price to sales is pretty low. The price, the books kind of, right? Right. Where average average price to book is. It’s right around two, two point four, one right now. And you have debt to equity.

Andrew:                              06:14                     Which infant visits at St [inaudible] one point. Oh two. I bet if I were to look at the financials, the way I calculate that to equity, it might be a little higher, but it’s not something crazy. So what we have is sure, maybe it wasn’t a stock that with like the valuation metrics I use now, maybe I wouldn’t buy it today, but it also doesn’t have any super big red flags that I don’t see negative earnings.

Andrew:                              06:43                     I don’t see, concerning debt load based on, based on what this is telling me and evaluation still seemed pretty low. So you know, based on that or take any other stock, right, as long as long as you’re not talking about a stock where the valuations at a pe of 500 or it’s one of those bubble stocks that we talk about on the podcast all the time or it’s a stock that’s really struggling to create profit, has cashflow issues or stock with just a lot of leverage, you know, I think there’s value there and just keeping the stock in your portfolio and having it as you know, one five percent position. Sure. It’s maybe you wouldn’t have bought it today but it’s really in there. And if I’m, if I have like five positions in my portfolio, I’m trying to get to 15 to 20. So there’s a lot of value in just letting that be. And then just adding the new positions in this new way that I’m trying to buy stocks we talked about before with, with our first stocks we ever bought.

Andrew:                              07:39                     But I bought Microsoft and they still hold it and it’s, you know, it’s a sure I could sell it and reinvest it and maybe earn higher returns. But, you know, I, I think, uh, letting it run and compound even, even though I wouldn’t buy, like if I were to go back, basically what I’m saying is if I were to go back and uh, buy my first stock, it probably wouldn’t have been Microsoft knowing what I know today, but I don’t see any reason to sell it. And that can continue to just use, you know, as an investor you’re always going to get better and better and more skilled, more educated, so you can’t always assume that your past picks were maybe terrible. So why not let them run and you know, maybe if you get to a place where you’re at a full position size and you see like a really great opportunity and maybe you sell there and then buy a new one or if you see your stock just just becomes really, really reflective of a business that’s in trouble, then I think that’s a place to sell. But other than that, I don’t see any negative side effects of just kind of holding it and building the portfolio out and taking the time to do so. And being patient.

Dave:                                    08:49                     Question number two. Hi, Andrew. First Week. Thank you for creating this podcast. I started off with back to the basic series and has been immensely helpful. My only investment at the moment is a mutual funds, but after listening to your podcast, I’ve been thinking more seriously about investing in the stock market. My first course of action will be decreed a longterm 10 plus years investment portfolio. My question is this, is it at all possible to make money with short-term investing? After my long-term portfolio is in place, I was wondering if I could supplement my income was short-term investing. What are your thoughts on this? The reason why I ask is that while growing my money over 10 plus years is going to be great for me in the future. I could also use a little more money right now. Thank you. And keep up the great work Gopi.

Andrew:                              09:39                     Yeah, it’s a good question. And something that not only have I thought about in the past, I’ve thought about recently to, uh, as an example, I have a large cash balance that I am saving to give to the IRS. So if they are listening, your money is coming, taxes aren’t due yet, so I have time. But you know, I have this money. You think they’re listening, Dave, they might be okay, we’re straight, we’re all good, right? Good to know taxes, but you know, so I have this, this money, right? And it’d be nice to, to earn interest on it to maybe earn a dividend then come on it. But the thing you have to understand when it comes to the stock market is at any given year we can see it go up and down, up or down in value quite drastically. And so while we do all the things that we would like to do that are very prudent and that have been proven to work, right? Things like buying companies when they’re trading at a margin of safety, buying companies with low debt, buying companies that are growing their earnings and reinvesting those earnings and using those to really compound the growth and the size of that business. Those are all things that there’s no guarantees and while they tend to work over the long term, there’s no guarantee in the short term.

Andrew:                              11:03                     You really just can look at a chart of the s and p $500 to kind of see that play out for yourself. And so you can kind of stack the odds in your favor. You can do everything right, but if you run across a bear market or even a correction or for whatever reason, you know, um, tomorrow you could wake up in the sky, could be gray, and then your stock will be down 15 percent has nothing to do with what you did. It has nothing to do maybe even with what’s going on in the business. That’s just kinda the way Wall Street works sometimes. And the sky could be gray for that stock for many, many years. I remember when corning was basically flat for like two or three years and then it was just at such a low valuation for such a long time. I remember buying it and just being so frustrated because it wouldn’t go anywhere and I was like, I did it right.

Andrew:                              11:52                     I did it the way Graham with of it finally popped, but you know, by the time it popped up there were they given up on it in the sense that I just stopped thinking about it, but I still held the stock and then it popped after and that was obviously really nice. So those are the kinds of things that happen when you buy stocks and what we can really depend on when it comes to investing in the stock market. It’s obviously a place of a lot of uncertainty and we don’t know where prices are going to go, so maybe that can be discouraging, but we do know is that the business world tends to grow over time. Innovation tends to happen. The big companies, the good companies that provide good products tend to grow over time and we’ve observed over 90 plus years that the stock market has grown, you know, you can get annualized returns of over 10 percent a year by investing in the stock market and reinvesting your dividends.

Andrew:                              12:45                     So there’s a lot of power in that. And uh, the key to that is, is holding for a long period of time because there will be very many swings in the short term. So while yes, it would be nice, you know, to kind of have an extra stash of cash and put that into the market. So you create an income, I totally get it right. Create that income, get get some dividends in a, you could do that. And if you need the money soon, the market could really turn against you really, really quickly and that could just wipe out, not only wipe out all the progress you might’ve made from that, but really puts you in the other direction. Um, so, you know, maybe the recommendation instead is to look into like a high interest savings account. And now Ally, which is the brokerage, we recommend a, they offer like a, I think it’s like a two percent yield right now. So that could be a much better option in the short term rather than investing.

Dave:                                    13:45                     Question number three, Andrew, I would like to put some bonds in my portfolio and I have read in your book that you would recommend be in d, the vanguard total bond market ETF. My concerns with doing this at this time is that the interest rates are continuing to rise, which means that bond prices will drop. Do you have any other advice on purchasing bonds in your portfolio? I was contemplating utility stocks, but they sort of run the same way as bonds. I would just like to have part of my portfolio in fixed income, but I really do not like mutual funds, either suggestion.

Andrew:                              14:19                     So it is true, uh, bonds and interest rates tend to be inversely correlated. So the reason behind that, and I’ll get into that intro real quick bonds.

Andrew:                              14:32                     Obviously if interest rates are high bond coupons or high, if interest rates rise, then that means basically, you know, sam an investor like 100 bucks last year, if interest rates were at four percent, I could buy a bond, any old bond, and maybe it would give me a four percent coupon, a, if interest rates rise to five percent, well all of a sudden that 100 bucks I put in last year doesn’t look so great because it’s the only giving me four percent a year because today I can buy a bond at five percent a year. So the price of that bond actually is going down. So that’s why interest rates go, they tend, the prices of bonds tend to go the opposite way of interest rates. So the one way you can counter that is to buy a bond and hold it until maturity.

Andrew:                              15:26                     But the question is about ETFs. And so while yeah, you will see some price fluctuations with interest rates. If you look at a long term chart of a bond ETF like the BND, vanguard total bond, um, it’s much less volatile than a stock market ETF and why you might see the price drop in, in your etf portfolio. If interest rates really go really accelerate and they’re in a really quick time, it won’t be as drastic as the media makes it out to be. Or as you know, some people who are really smart about investing or stocks, it’s, there’s this huge disconnect between like for example, um, when I think of a investors saying, well, you know, the s and p could drop in two years because we’re in a bubble and things are overvalued. Like I get that right?

Andrew:                              16:28                     And we can kind of, you can expect like a 50 percent drop one b two too unrealistic because we’ve seen something like that before with bonds. People hear that, oh well if interest rates go up, bond prices will crash. And so they associate that with like a 50 percent drop. Like you had seen the stock market. But the reality of how interest rates will affect the prices of bonds is not as drastic. So I mean you look at a chart and the Beta on those are really, really low, which means volatility is really, really low and we’ve already seen rising interest rates and the prices haven’t been hit too bad. I’m certainly not a bond expert and sure they could crash, but I think there’s just a huge disconnect between, you know, maybe like a 10 percent drop in stocks and like a two percent drop in bonds because like the goals of these investors tend to be different and people in bonds, they talk about basis points which is like, like the point zero, one percent of returns and people in the stock market tends, tends to talk about five percent, seven percent, 10 percent.

Andrew:                              17:36                     It’s just like two different worlds. And yes, your prices could drop. I think over the long term you can get a relatively safe dividend from a bond ETF. You might have some volatility, but you know, if interest rates rise, it’s not going to be that way forever. And if you’re putting in fixed income into your portfolio, really what you’re trying to do there is to get a nice income stream and you know, unless you’re buying individual bonds, you really shouldn’t expect to be out of those positions in a short period of time. You know, unless you’re buying individual bonds with the short maturity, shouldn’t expect to be in those for a short period of time. So interest rates rise, they will eventually fall again. And so whatever you lose, you would hope to get back on the swing up. So a good valid concern, something that you definitely want to consider and maybe research when you’re looking at bond etfs, but also understand that a lot of the whole idea of bonds crashing or whatever, it’s, it’s, it’s, it’s a lot of hype and you should be looking at the long term and understand that interest rates just like everything else, the economy, just like the stock market, you have low periods, you have high periods, you have ups, we have downs.

Andrew:                              18:55                     It’s, it’s not going to be forever, forever. So what we’re talking about investing for the long term, you should have that mindset too.

Dave:                                    19:04                     Excellent. And one thing that I would like to throw out there as a possible suggestion would be to look at a US Treasuries, a, as the interest rates continue to rise, the yields on those are improving. So over the last eight to 10 years they’ve been pretty crappy because the interest rates were so low, but as the interest rates continue to rise, the yields on those become a lot more attractive and in some cases there’ll be more attractive than investing in a bond would. And the other advantage to those are they are obviously very secure because they’re backed by the full faith of the United States government, which, you know, depending on your political swings you could, you argue about, but the financial wherewithal of the country is strong enough that those are going to be as secure as we are going to be able to get.

Dave:                                    19:57                     The other aspect of that is, well, is that you can buy shorter-term securities so you can buy one year, three years, five years, 15 years, 50 years, however long you want to go. They have different short durations and I’ve been reading a lot about this recently about people that are a little bit nervous about the stock market and have been trying to go to cash or be as liquid as they can so that when things may be turn for the worse, they will have money available to buy things on sale. And one of the ways that they’ve been kind of, not necessarily hedging, but I guess putting their money where they can still earn something from it other than a savings account is they’ve been putting them in treasuries and had been doing short term treasuries like six months to a year because every six months they’ll the latter.

Dave:                                    20:50                     Um, so every six months a certain portion of the money will either come do and they can roll it over by additional or they can cash it out and do with it what they want. And so with the interest rates rising, they’ve been doing this a lot more recently because it allows them to make more money than they would if it was in a stock market and it’s very safe and secure and it’s easier, it’s easy, very easy to do. You can just walk into your bank and you can buy these things or you can go to  and you can buy Treasury.gov  them online and it’s super easy to use. And there are great fixed income that’s, I don’t think is talked a lot about. And frankly I think a lot of it is simply because for so long the interest rates were so low that they just were not really a viable option.

Dave:                                    21:35                     It was, they were kind of scorned and kind of looked down upon. But with the rising interest rates, you know, I think they’re anywhere from three to three and a half percent on the low side. So it’s not horrible. And it’s certainly something that you might want to consider if bonds or something that maybe is a little bit too mystical for you. Uh, Andrew did a great job of kind of explaining, you know, how they work, but some people can be a little bit scared off by him. So effect that’s maybe something that I would kind of give a thought to about using would be some treasuries.

Announcer:                        22:09                     What’s the best way to get started in the market? Download Andrew’s free Ebook at stockmarketpdf.com. You won’t regret it.

Andrew:                              22:19                     Yeah, that’s a great tip. T bills are a fantastic asset allocation for people who know if you’re, if you’re going to hold cash and as a whole t bills.

Dave:                                    22:28                     Good Morning Andrew. I hope this email finds you well as I’ve read through your ebook and a value trap indicator and now I’m looking to put what you have read into practice. I know from listening to the podcast you state that you use finviz.com To first screen the stocks. I was curious to see how many of the fundamental evaluations you discussing your books that you use in the screener, the screener criteria use. Thanks, Zach.

Andrew:                              22:54                     Yeah, another good question. Uh, we covered our screen stuff in advance and a lot of detail. Uh, I think it was the episode where the fine investment ideas, so that’s a good resource to really get in depth with all answer this kind of rapid fire if that’s even possible for me. So this is one of, this is an example of screen I ran recently. Um, so the market cap over 2 billion because I don’t want stocks that are too small where they could be, you know, very risky, a positive dividend yield, a country USA because today’s podcast episodes all about the US government and me, I guess sucking up to them. But now I’ve talked plenty of times about why I only buy US stocks pe under 30 and price to sales on to press the book under a higher price to sales price to book on her three and data equity on their one. So that’s a good kind of starting range. You can also add some of the other metrics that I talk about in the seven steps ebook, like price to cash. Uh, I like to keep that one.

Andrew:                              24:07                     I’m not plugged in and just kind of visually screen it out as I’m going through these companies. You can tweak these, this as much as you want and it gives you a good starting point for more in depth research. So for this screen for example, I got 92 stocks or what was it? I’m sorry, it was 172. So from here I would maybe pick a couple other things to, to screen out and then, and then go deeper from there. Uh, but those are some of the, like the major ones I almost always use like pe price to sales, price to book. Those are really, really good and obviously that’s an equity. Um, and then you can kind of fine tune from there, but you know, finviz is limited where they don’t have everything exactly like I teach, but you can get really, really close and then do your due diligence research from there.

Dave:                                    25:02                     Question number five, Andrew. I’ve been following your podcast for a few months now. Haven’t gone back into the archives to catch up on your journey and teachings. I just recently subscribed to your research letter and look forward to following your portfolio. I am starting out at age 44 with $20,000 using the 20,000 and then continuing with the 150 per month and your return projections, how can I calculate what I could potentially have in my portfolio in 10 years? Assuming I closely mirror your holdings. I am lucky to work for the state government and have a pension to fall back on, but I’d like to pay that as much as I can. Thanks.

Andrew:                              25:43                     Alright. So obviously nothing is guaranteed in the market. And we talked about how the reliability of returns, you really start to see that after about 20 year time period. So even like a 10 year time period, things could really go sideways in the market and you wouldn’t see the type of returns that we talk about like 10 percent a year, just like average type returns. But once you get around the 20 year time period, that’s when things really um, no matter like what 20 year time period. And I wish I remember which episode we discuss the end no matter what, 20 year time period you’re getting really, really close to that kind of average or above average return depending on, depending on the timing.

Andrew:                              26:23                     If you were to just for planning purposes, wanting to find out like how much with a 10 percent return Gimme after 10 years, the tool I love to use is from investor.gov one other US government resource. But you would just Google compound interest. It’s like the first or the second option. You’ve got the investor Dot Gov, you click on it and it gives you all those boxes right there. You simply fill up. Then how much do you have initially? How much are you going to contribute every month? How many years do you want to look at? And then your estimated annual interest rate can put 10 percent. If you want to see what a average market returns will be, 11 percent. If you’re, maybe you’re being a little more aggressive, a 17 percent if you think you’re the next Benjamin Graham, and then you just calculate it and they’ll tell you, and that’s really cool. I love using this tool.

Andrew:                              27:13                     I think it’s like a must use if you’re looking at your personal finances, if you’re trying to figure out how much should I dollar cost average, uh, what’s the tradeoffs between, do I want to cut this item from my budget and maybe put this much more into my investments? What would that realistically get me over this time period? That can be a great way to make those decisions and really visualize it.

Dave:                                    27:37                     All right folks, we’ll that’s going to wrap it up for tonight. I hope you enjoyed our little q and a session. Andrew did a great job of answering your questions and we really appreciate you guys taking the time to send those into us. So please keep sending us questions. We love talking about these things and seeing what we can do to help you guys learn as much as you can about investigating or as much as you can about trying to save money and invest for your future. So without any further ado, we’re going to go ahead and sign us off. You guys. Have a great week. Enjoy your time. Invest with a margin of safety, emphasis on the safety, and we’ll talk to you guys next week.

Announcer:                        28:11                     We hope you enjoyed this content. Seven steps to understanding the stock market shows you precisely how to break down the numbers in an engaging way with real life examples. Get access today at stockmarketpdf.com. Until next time, have a prosperous day.

Announcer:                        28:36                     The information contained just for general information and educational purposes only. It is not intended for a substitute for legal, commercial, and slash or financial advice from a licensed professional. Review. Our full disclaimer@einvestingforbeginners.com.