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Weekly Wisdom: Uncommon Wealth Sense

matt — Sun, 08 Nov 2009 10:09:03 +0000

Wisdom is often hidden from us.

It’s not a conspiracy. No government agency is charged with hiding this type of information or intelligence from us. Wisdom is usually hidden in obvious places. We’re just so wrapped up in what we think is true we never find out what we know is true.

I call this “uncommon sense.”

In financial matters, we find the same type of strangely-hidden wisdom. But, there are plenty of bloggers out there who have made it their mission to reveal Uncommon Wealth Sense. In this edition of Weekly Wisdom, we’ve found that subtle, sometimes counter intuitive wisdom about money matters, wealth building, and personal development.

Common wisdom states that you ratchet back your risk level the closer you get to retirement. Here’s the uncommon sense: Asset Allocation and Time from the Oblivious Investor.

Common Wisdom says that a little government nudging is a good thing. Bad Money Advice says, not so, The Nanny State is just a waste of money or time.

What’s the key to risk tolerance? Is it how much money you have in safe havens? How much time you have to recover? Nah. It’s composure, or how you react to unexpected events, according to Generation Y Investor.

Common wisdom says you don’t buy a car online.
Here’s tips on how to get a car or truck on eBay from Dough Roller.
A PhD is a ticket to wisdom, according to common wisdom. But that’s not what Michael Covel believes in this post about education and success.

Why do most budgets fail? They answer is not the one I thought it would be–and you might find it a surprise, too. According to Wisebread, it’s because people don’t keep track of their expenses initially.

To become intelligent you just need to read a lot of books and remember a lot of things. Nope. Dumb Little Man says here’s how to become intelligent.

Think that you can’t live a remarkable life? That luck rules your life? Not so. Thrilling Heroics tells you how to live a remarkable life.

All personal growth is good. Not always, according to Illuminated Mind. Be on the look out for fake growth.

Does money bring happiness? Most people say, no, but Financial Highway writes that money actually brings unhappiness.

Do you think you know what you’re paying for when you purchase a product or service? Eliminate The Muda is guessing that you don’t ALL of what you’re paying for.

The Financial Samurai is on record saying that the weak dollar is not a problem. That’s pretty counter-intuitive.

Are the Country’s Economic Problems too Big?

George — Sat, 07 Nov 2009 21:34:03 +0000

The current administration has made it very clear that it is committed to helping the economy as much as possible. The trillion dollar bailouts have had a measurable effect, and most people think that the recession is over. Although the short term effects of the stimulus have been realized, many people are wondering about what happens after the effects have worn off.

More Failed Banks

This article from Reuters describes nine bank failures that occurred in just one day. The government has successfully increased spending and prevented a depression in the short term, but what about the real health of the economy? As bank failures reach record highs, do we need to be concerned about whether the entire system will collapse?

Economists have been debating for nearly 100 years about how a government should manage its economy. Many economists even believe that the government cannot effectively manage an economy, and its meddling causes problems and side effects and offers few solutions. One thing is pretty clear: As the government prints more and more money to pay for unprecedented deficit levels, inflation is definitely something we need to be concerned about.

If the country’s economic problems are too big for the government to solve, then we are in for some tough times ahead. Besides that, if inflation takes off as a result of the spending, then we will have other massive changes in the economy. Who knows what will happen? Although nearly everyone seems perfectly happy to tell us what the future holds, I don’t think anyone can predict it with certainty.

Instead of trying to predict the future, I think it’s better to consider the possibilities. What if inflation takes off? What if government spending increases for the next few years? What if the dollar collapses? These are all viable possible futures that we can prepare for. In that way, whatever happens, we can be ready and make it work for us.

Although it is painfully obvious to many of us that the economy is undergoing massive changes, many people are totally unaware of the changes and never bother to think about it. Many people are taking the first time home buyer’s tax credit and thinking that it is free money. This seems a bit naive to me.

Whatever happens, it is pretty likely to have major effects on the economy and the financial lives of most people in this country. While we cannot predict the future with much accuracy, we can prepare for it. Many people are afraid of depressions and financial upheaval, but it is possible to turn these financial crisis into opportunities.

Start Your Personal Hedge Fund With Diversification

matt — Fri, 06 Nov 2009 10:05:06 +0000

As we’ve seen this week, technology and strategy have combined to give the power of hedge fund managers to self-directed investors. Automated Trading can give investors continual access to the market; trend following offers an easy-to-maintain strategy.

Hedge fund managers, though, have access to so many more markets, right? They can trade more than just stocks and bonds.

Now, thanks to aggressive online brokers who are eager to expand their offerings, individual investors now can trade all types of assets. It’s pretty safe to say that if a hedge fund can trade it, so can you.

This gives you another took of a hedge fund manager: diversification.

The original idea of a hedge fund was that the manager could “hedge.” He or she could use a variety of assets to ensure that the accounts went up, no matter what the current economic climate was, or how the market was reacting.

Hedge fund managers use a variety of tools to accomplish that. They can use non-correlated assets. For instance, 90 percent of the time, when the dollar moves down, gold moves up. The hedge fund manager, therefore, would employ shorting strategies on the dollar and long strategies on gold.

Another similar tool is diversification. As we discussed earlier in the week, position-sizing is necessary to manage risk. Sometimes, an investor will only have 1 or 2 percent in any one position. It’s necessary, then, to have several investments. Diversification helps spread the risk across a few trades.

Before the choices for diversification were stock and more stock. Now, because of the sweeping power of online trading, more assets than ever are available to the individual trader. Options, futures, currency futures, etc. can be traded.

One of the latest innovations for diversification is the ETF. The exchange traded fund mimics the movements of a variety of indices, markets, and commodity classes. They’re easy to trade. And best of all there are hundred and maybe thousands of these.

Seeking Alpha, one source for ETF insights, talks about just a few. The blog details the use of ETFs for hedging inflation. Another post reveals new commodity equity ETFs.

To learn more about ETFs and how they can be used in your plan to build your own personal hedge fund, keep an eye on Seeking Alpha and other financial sites, like the Street.com.

Start Your Own Hedge Fund With Automated Trading

matt — Thu, 05 Nov 2009 09:34:07 +0000

In yesterday’s post on utilizing Trend Following to start your own personal hedge fund, we discussed that one of the allies of the hedge fund manager and one of the enemies of the self-directed investor is time.

A hedge fund manager has all day to watch the markets and conduct research. Most self-directed traders don’t have that luxury. They have a job–or two–that keeps them from intensive trading activities. And, after staring at a computer screen all day, the last thing they want to do is to examine charts and graphs.

Recent technology is changing this. Independent investors and traders can use a complete menu of Automated Trading systems to augment, or completely take over, their trading activities.

Two places you can find Automated Trading systems are Collective 2 (an affiliate partner) and Strategy Exchange. Other providers and services for Automated Trading include Ninja Trader and Strategy Runner.

Automated Trading systems simply identify patterns and buy and sell stocks and other assets. These systems can run in real time and trade during the day, or they can run at night and enter their orders before the market opens.

The advantages of Automated Trading are many. They include:

They don’t make emotional or fear-greed based trades.
They can be refined and improved over time.
They can benefit from faster computers and accelerating technology.

Another advantage, and one that we’ll discuss in detail tomorrow in our final post on how to start a personal hedge fund, is that you can diversify your trading by using a range of Automated Trading systems with little extra time or effort.

If the hedge fund managers out there are hearing foot steps… it might be YOU… catching up on them.

Start Your Hedge Fund With Trend Following

matt — Wed, 04 Nov 2009 09:43:48 +0000

Hedge fund managers have one advantage over individual traders: they’re paid to trade. That’s not always the case for most traders, who have jobs (often full-time) to bring in money for their day-to-day living expenses, as well as save money for their trading activities.

With all that time, hedge fund managers can research and monitor the market. With all that money, they can hire people to research and monitor the market for them, while they play a few rounds of golf and shop for art.

For the individual trader, things are different. Many strategies that suit their lifestyle, won’t fit their dreams. Buy-and-hold is too slow and day-trading (without the ability to constantly manage the trades) can be too risky.

However, individual traders can use trend following strategies to compensate and compete with hedge fund managers.

Trend following techniques are considered high-probability strategies for successful trading. Basically, it means that what goes up has a tendency to go up. Until it goes down. And when it goes down it has a tendency to go down. The trend follower finds these moves and rides them until they die out.

Most hedge fund managers utilize some aspect of trend following. The Turtle Traders are some of the most famous examples of trend followers. That group spun off a whole trading floor full of fund managers.

But, you don’t need to be a hedge fund manager to use trend following. Trend following actually is common sense trading.

The steps include:

Select an entry point. You want to enter a position in an asset that has made consistent and strong moves. (The move can be in either direction because, as we’ll learn, hedge fund managers can make money in market neutral ways.)

Cut your losses, but let your profits ride. Traders hate to take a loss because it means (they think) that they failed. So, they hang on to assets they hope will miraculously move in their preferred direction. By taking small losses, trend followers can channel their money into winning trades.

Manage your money. High risk can lead to catastrophic losses. Trend followers learn to choose their battles, preserve their capital and learn to fight another day.

Use technology. Hedge funds bristle with new technology that they use to gain an edge in the market. They’re there for you, too. One example of this is trend following tools. INO, one of our partners, produces technology, like the Trend Analysis tool, and informational products like INO TV.

Tomorrow, we’ll discuss another tool for would-be personal hedge fund managers: Automated Trading. If you’re new to the series, you can read the introductory post, How To Start Your Own Hedge Fund.

How To Start Your Own Hedge Fund

matt — Tue, 03 Nov 2009 09:27:17 +0000

True story.

In the mid-2000’s a minor hedge fund manager named John Paulson noticed the housing price trends in the early 2000s had far out-paced historic trends.

He decided a new trend was coming–a massive drop in home prices. Paulson made an astute bet that the prices would decline. He was right.

Then, he and his wife went on vacation.

During the vacation, Paulson’s wife went to the ATM to check the balance. When she looked at the statement, she was more than a little surprised to see the figure: $45 million.

I don’t know how Paulson became a hedge fund manager and I’m not even sure you’d want to follow a similar path, but in this three-part series, you can learn that you have access to some of the tools and technology needed to create your own version of a hedge fund.

A hedge fund is a flexible investment company that takes money from large investors. Successful hedge fund managers use risk management to increase returns using a wide range of investment vehicles.

The hedge fund managers would like you to think that only they have the magic necessary to master these types of trades. But, more tools and technology are available to the individual investor. When used intelligently, the individual trader can have just as impressive returns. In the next three days, we’ll review some of these weapons.

We’ll discuss using trend following as a method to create your own personal hedge fund.

Part two will introduce you to hedge fund’s Automated Trading and advanced technology.

Finally, we”ll wrap it up with an overview of how some investors use ETFs to facilitate diversification in their own mini-hedge funds.

Working Whenever To Whenever: The New Office Hours

matt — Mon, 02 Nov 2009 09:40:52 +0000

Flickr

Society has decided–for whatever reason–to push papers five days a week, eight hours a day. Even those hours are mostly relegated to 9 a.m. to 5 p.m. Some folks cut out at 6 p.m. because lunch is not part of the eight-hour work day.

After all, food isn’t necessary for productivity.

It wouldn’t be correct to say that there are no advantages to the 9-5 slog. Just like dogs nipping at the ankles of the sheep, bosses and managers can herd their workers into the right direction, or at least in the same direction, if there’s a common time and place.

But, the strictly-regimented time and place of office work is starting to fracture under the strain. Commerce is becoming global and information is quickly becoming ubiquitous. You don’t need to access a drawer full of files to complete a task. That info is available whenever and wherever you want.

Not only is it no longer necessary, it may be actually holding us back.

The blog, Pick the Brain, dissects the eight-hour work day as a relic of the past and a tool that doesn’t work well for info workers.

A continuous 8 hour work day is a relic of the past. It makes sense for physical labor and manufacturing work, but with information workers it doesn’t account for the mental energy cycle. The ability of a factory worker to think analytically is irrelevant, he’s either cranking widgets or he isn’t.

Most people do have different times when they’re most productive; there are morning people and evening people. But, the post also brings up the twin peaks of information work. People are more productive in the morning and right after lunch. It’s a good bet that 90 percent of the work happens then.

The 9-t0-5 day will fracture further when small groups and even individuals are able to out-perform large companies that use the eight-hour standby as a way to control their staff. Individual workers, likewise, will break off and earn money in non-traditional ways.

Cloud Living, by Glen Allsopp, and the 4-Hour-Work-Week, by Tim Ferris, are the most recent exposes on the new approach to time and money. We’re also putting together a book called The Wealth Singularity that will explore this concept.

But there will be more.

Weekly Wisdom: Measuring Your Wealth Quotient

matt — Sun, 01 Nov 2009 10:17:02 +0000

Measuring your net worth is easy. You just add up all the money you have in your various accounts, throw in all your assets and subtract your debts.

But that doesn’t tell you how wealthy you are. Wealth is a condition. It does take into account the amount of money your have in stocks and bonds and so on. It considers the debts you have, too. Wealth, though, brings in your mental state, your money habits, and your potential.

We’ll call it the wealth quotient. Or, your WQ.

Just like your IQ and your EQ (emotional quotient) offer you a window into your intelligence and emotional potential, your WQ is a sign of your ability to find and build wealth.

In this edition of Weekly Wisdom, we’ll review some of the best posts and articles to help you measure–and improve–your wealth quotient.

Get Money Energy tells you the true meaning of wealth and how to tell how wealthy you are.

How to get wealthy, according to Wealth Pilgrim: Stop buying personal finance books. (Except the one we’re writing, of course.)

Save money good. Save money on investing double good. Here’s Healthy Living Gal with advice on how to slash your investment costs.

Remember when I said that your WQ had a mental element. A lot of that is based on your internal dialogue, according to Pick the Brain.

Are you ready to really rely on your Wealth Quotient? My Wife Quit Her Job has a guest post to tell you Step 0 To Quitting Your Job. So I Quit My Job gives you a new way to define your WQ reality.

Improving your WQ may require cost cutting. Here’s 3 Ways To Slash Investing Costs from Kiplingers.

Litemind, a cool blog I discovered through PlugIn ID, offers 6 Productivity Principles to Live By. We bet this will improve your WQ.

Don’t mistake Busy-ness for a healthy WQ. Alex Shulman says that Busyness is Laziness.

Finally… One guy who took his lumps and battled in and out of the wealth-building ring was Rocky Balboa. Here Man Vs Debt tells us Why Rocky Balboa Kicks Ass.

More Conflicting News about the Economy

George — Sat, 31 Oct 2009 19:34:35 +0000

As the effects of the government stimulus plan are seen, there are more and more signs that the recession is ending. The media is quick to pick up on any changes and report that the economy is recovering. This article at Yahoo Finances is all about the improving housing market. Yet I think that all the positive news is only one side of the story.

The other side is that the fundamentals have not really changed. Unemployment is high, and is rising. There is no evidence that it will improve. All of the improvements in the economy are from government spending: Cash for Clunkers, First Time Home Buyers Plan, etc. These measures are good at getting people who aren’t financially responsible to spend money. It is a short term improvement but will have a longer term negative effect.

How are the people who bought cars and houses going to make payments when they lose their job? How is a few dollars thrown at the American automotive industry going to help when it is fundamentally unable to compete in the global marketplace? Who is going to pay back the trillions of dollars spent in the stimulus?

These nagging and completely ignored questions will have to be answered, sooner or later. And I think it will be sooner, in the next few years. At that time the underlying financial situation of the country will be even worse, and more people will be aware of the deep rooted problems that the stimulus attempted to solve.

Although it is my belief that the stimulus spending did not really help the economy, only time will tell how things turn out. Maybe the fundamental advantages that America has will take hold and companies will begin increasing their profits.

No one can tell the future. The best thing that we can do is look at the different opinions around us and decide what is likely to happen. We get to plan for the best, and at the same time be prepared for the worst.

You And The Universe: A Tale Of Complex Simplicity

matt — Fri, 30 Oct 2009 09:12:40 +0000

Isn't the reality unreal? Isn't the unreal really real? Wrote@Flickr

New Scientist recently released a list of seven questions that keep physicists up at night.

I’m not a physicist, but one of these questions had me thinking late at night.

What is reality, really?

Pretty heavy, huh?

The magazine asked Anton Zeilinger, professor of physics at the University of Vienna, and it appears that they answer is that reality–all that you see around you (and a lot more)–is far more complex and far simpler than you can imagine.

We’re just scratching the surface.

Zeilinger, whose primary focus is quantum experiments that demonstrate the apparent influence of observers in the shaping of reality, said the key to understanding reality is comprehending that it’s not separate from us.

As he said:

“Maybe the real breakthrough will come when we start to realize the connections between reality, knowledge and our actions.”

Zeilinger’s own experiments prove that particles that are separated by (comparatively) vast distances are linked. And, remarkably, when you observe one, you instantly affect the other.

“No one has yet fathomed how the universe seems to know when it is being watched.”

The answer is simple when you think that maybe the watcher and the watched are actually one.