Overpaid And Useless: A Profession That Needs To Go Away

Weather forecasters get a pretty bad rap for their accuracy.

However, this post isn’t about ripping on weather forecasters.  In fact, quite the opposite.  I bring them up so that I can compare them to another group of individuals whose profession  should really be brought into question.

You see, meteorologists often get blamed whenever a forecast is wrong.  If it rains on a day when sun was predicted, they get called out for a ruined picnic or day at the beach.  Clouds instead of the predicted sun can put a big damper on an outdoor activity.  The list goes on.

As I’ve gotten more interested in weather and looking at things, I’ve actually become a lot more tolerant of meteorologists.  If you look at what they do, it’s in fact pretty amazing that they get it right as often as they do.   They look at weather as it stands, then look at things that are happening hundreds, if not thousands, of miles away, and make predictions on what’s going to happen hours, and even days, down the road.  There are many things that can change, each with potential impact on what actually happens.  If you’re on the East coast and reading this, consider that your forecast for what’s supposed to happen is based on weather that hasn’t even hit land all the way across the continent.

What If There Were No More Forecasts?

So, what does this have to do with another profession that is pretty much useless?  I’m getting there.  Stick with me as I stay with the weather forecaster example for just a bit longer.

Imagine, for a second, that meteorologists stopped forecasting the weather.  What if all they did was talk about what already happened?  Think about tuning into the 5:00 news and having the four minutes dedicated to the meteorologist telling you what happened.  The Weather Channel would just talk about the last few days.  Online weather sites and apps would give up to the minute information about weather that already happened.

It sounds pretty useless, doesn’t it.

You’re right.

So, why do Wall Street analysts get to do exactly that?

Reporting News From Yesterday And Beyond

mb-201402wallstThere are a lot of Wall Street analysts out there, and from what I’ve been told, they get paid a lot of money to do what they do.  Which is to come up with snazzy reports with lots of important sounding language that rehashes information that, for the most part, has already been released and is well known.

Where do I sign up?

Upgrades and Downgrades On Yesterday’s News

I’ve noticed a troublesome pattern over the past several years as I track stocks I own or stocks that interest me.  The upgrade and downgrades that accompany reports seem to come out after big news has been announced, and therefore, after the stock market has already moved the stock in response to that news.

Citi, for example, released poor earnings.  The day of the earnings report, twelve analysts released reports that downgraded the stock, after it lost a few percent in early trading.  Wow, really big leap on that one.

In other words, they effectively said “And yesterday’s weather was..”

Do you know how many analysts downgraded Citi leading up to the reports?

Not a one.

Recently Ford has been under a lot of pressure.  A poor earnings reports, reduced guidance for 2014 sales, and a monthly sales report sent the stock on a slow slide.  After it slid for about six weeks, losing nearly 20% of its value, an analyst downgraded the stock, citing risk from the very items which had already been reported as threats to the stock price.

You don’t say.

Where do I sign up?

The Lost Value Of This Profession

Now, it seems to me, that these recommendations and analysis would have been more useful to investors before the report.

Some would argue that the data isn’t there.  Maybe that’s true, but I know that at many rating agencies, there are analysts dedicated exclusively to one company.  All day, every day, their job is to understand what’s going on.  At one company.  So while the company may not (and shouldn’t) release data to that analyst, if they’re not able to get some sense of what the company is doing and how they’re performing, and the challenges or opportunities that go into a report, what value is there in that job?

I’m thinking very little if any at all.

But, these analysts get paid a lot of money.  Probably a lot more than meteorologists. They get recruited from the best business schools.  They are held in high prestige.   Their information gets printed in glossy reports that get sent out all over the place.

But for what?

So they can release a report after the company in question releases theirs to say the same thing and guide investors to do what they’ve already done in the time between the actual drivers and the report being released.

Where do I sign up?

Once Upon A Time

I’m wondering if there was once value in this profession.  Before the internet when news releases were sparse and data wasn’t available and digested within moments of a company announcement, maybe these reports held value.  Back then, a report released hours or days after an earnings announcement may have held value if the market was slower to respond and there were days available to price in a driving factor.

But, that window doesn’t exist anymore.  Earnings, guidance, profits, sales, whatever the drivers are, those bits of data are processed and priced into stock prices in a matter of seconds.

Thanks But No Thanks

At this point, I take analyst recommendations at face value.  What that personally means is that for about every recommendation I see, it’s too little, too late, and it doesn’t tell me anything that has not already been reported.

If you ask me, I’d just as soon they disappear altogether.  And, if you’re used to reading them and wonder what else you could do, here’s a suggestion.

Go look up the weather forecast.  You might actually get some useful information.

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Taking the Risk Out of Trading

Many people believe that being financial independent and in control means that you have to play it safe and not take any risks. However, this can mean that your money will remain safe without ever accruing much wealth. With banks accounts offering little or no real interest nowadays, it is impossible to get rich putting your savings into a bank account. Investing might seem like the better option although it is fraught with risk and, as such, many people are put off. Here are our top tips to take the risk out of trading and investing:

Plan, Plan, Plan

You can never be too careful when you’re investing your own money. There are so many different guides available on investing and trading that you can take advantage of for free. The more you can plan and learn, the lower the level of risk that you are taking. Once you’ve learned the basics, you can begin to look at trading strategies and trading styles. There really is a wealth of material available and, the more you read, the more educated your decisions will become, eliminating much of the risk involved.

Scour the Market and Seek Expert Advice

Always remember that the trading market is vast and, as a result, it is always best to shop around for the best deal. Nowadays, there are so many brokers competing against each other that each one is looking to gain a competitive advantage by offering additional services. Features such as newsrooms, mobile trading and social trading are all optional extras that you should be aware of and should actively seek when you’re opening an account. Remember that any optional bonus can keep you ahead of the markets and enhance your knowledge, thus lowering risk further.

Try Before You Buy

If you’re unsure as to whether investing is right for you then you should seriously consider trying before you buy. Nowadays, many companies offer demo trading accounts and, as a result, you should always make sure that you utilise this feature before taking the plunge. This way, you can be absolutely certain that trading is right for you before you start investing your own money. If you just start trading without checking, you maximise the risk, exposing your savings in the process. Whereas, if you try on a free demo account, you can be certain that you know what you’re doing before you start. It is always better to make mistakes when it doesn’t cost you a single penny.

To conclude, although trading is inherently risky, there are ways that you can limit this in order to maximize any potential returns on your investment. By taking these very simple hints and tips on board, investing will become easier than ever and you should start maximizing your income in no time.

This was a guest post.

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

What’s New This Week? (Plus A Roundup)

A few updates and random thoughts, followed by some great posts I hope you check out:

  • A few weeks ago I wrote about how our IT department is being insourced.  We have received a few more details.  Our official offer letters should be arriving any day now.  They were promised by the 15th, so if that still holds, I’ll know what’s what in a week.  We did find out that our years of service will be credited from when we started, so I’ll come in with six years of service.  This means I’ll get roughly the same amount of time off as I do today, and has a few implications for benefits and such.  There is a lot of nervousness that they’ll be coming in offering less pay than we make today.  I think that’s just normal jitters, and I’m staying optimistic that it’ll be the same or better as what I am getting today.
  • Did you hear about the Walmart glitch on Wednesday where the website had prices mb-201311mistakeof various items at outrageously low prices?  I sure did.  I found a 55″ TV for $329, and while it was sold out online, it said that my local store had one.  Which, when I called, they confirmed that they did.  But, they were already aware by that point that the prices were a mistake (they had $800 treadmills ringing up for $33, computer monitors for $9, and new release video games for $17), and were not honoring those prices.  I read a few forums where people said they got in and picked up stuff right away, so it sounds like a lucky few were able to take advantage of the glitch, but sadly, we did not find an easy way to replace our damaged TV.
  • As a Ford stockholder, I’m a little annoyed at the activity on the stock.  Ford beat earnings a couple of weeks ago, and hit over $18 per share.  Since then it’s been on a somewhat steady decline, around the mid-$16 range, all on virtually no news.  I think institutional investors want a dividend increase, and are passively letting Ford know that they need to increase the payout.  Hopefully the stock reverses course soon!

Here are some great articles I thought you’d enjoy as well as listing a few carnivals I’ve been included in recently:

  • Money and Potatoes has been making some side money by selling plasma and blogs about all aspects involved, financial and otherwise.
  • Monica on Money lists eight warning signs that you might be living beyond your means.
  • Krantcents outlines a subtle difference between a wish and a dream, then goes on to illustrate how one can lead to big rewards if you take hold of it.
  • I’ve often thought that Baby Boomers, in addition to working hard, had a good set of circumstances in terms of some of the benefits associated with their careers.  Little House in the Valley expands on this and compares it to the Gen X and Gen Y groups.
  • Reach Financial Independence – Carnival of Personal Finance
  • According to Athena – Carnival of Personal Finance
  • Bite The Bullet Investing – Carnival of Retirement
  • Frugal Rules – Yakezie Carnival
  • Save Spend Splurge – Carnival of Personal Finance
  • Wealth Note – Yakezie Carnival
  • Figuring Money Out – Yakezie Carnival
  • Money Wise Pastor – Yakezie Carnival

Hope you have a great weekend!

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Two Seconds And Why High Frequency Trading Always Wins

Two seconds.  It probably took the average reader two seconds to read this.  Not much can happen in two seconds, right?

Wrong.

It turns out that two seconds can make all the difference in the world in the financial markets.  Enough to make (or lose) a fortune, as it turns out.

Economic Reports

OLYMPUS DIGITAL CAMERAOne of the big drivers of the stock market are economic reports that come out at various periodic times.  Weekly jobs reports, manufacturing data, consumer data, unemployment rates, and a whole host of other things are key drivers of the market.

Long story short, what will happen is that the market will guess at what the data will be.  Say they expect unemployment to go from 8.0% to 7.8%.  The actual number will often drive the market.  Though other factors are at play, if the number came in at 7.6%, it’s a good bet that the market will rally, whereas if it were to come in unchanged at 8.0%, the market would sell off.

Seems pretty straightforward, and at first glance it seems like you can trade with that data.  But, in many cases that assumption would be off.  It’d be off by two seconds, to be exact.

Early Access

See, some economic reports are now available for delivery in advance of the release to the general market.

Two seconds before the release, to be exact.

Yes, if the report is set to be released at 10:00 AM, you can pay to have it made available to you at 9:59 and 58 seconds.

Hardly seems like a big deal, does it?  But, as it turns out, two seconds can be a lifetime when it comes to computers and high frequency trading.

In two seconds, a computer can receive the report, open the report, scan the report, parse out any pre-determined words or phrases, determine if the report is favorable or unfavorable, put in orders, and have the orders executed.

This can and does take place all within the space of two seconds.

That means that anybody that doesn’t have that advantage (meaning every individual investor out there) is always going to be too late.  You can have an order at the go, hear ‘positive’ at 10:00 and 2 seconds, hit ‘Execute Trade’, and you’re still going to have missed out.  Not only will the computers have ‘heard’ the data already, they’ll already have acted on it.  You’ll be behind the eight ball.

Every single time.

I’ve long been critical of high frequency trading, and the impact that computers have had on the market.  Proponents of high frequency trading argue that the benefits are there for the market.  By making their trades quickly and trading even to make a penny per share, they are offering liquidity to the market, meaning that the exchanges can match up buyers and sellers very quickly.

That’s all fine, but when you consider that, on a basic level, every transaction has one winner and one loser, it becomes pretty apparent that the high frequency traders rarely lose.

Meaning someone else does.  And, guess who that someone often is?  You.  Me.  Whoever.

Expectations

I don’t think high frequency trading should drive individual investors away from the market.  There’s no reason for this practice to cause complete mistrust in the market, but it should set expectations.

Don’t expect to beat the market.  You can’t (at least not on a regular basis).  You can still grow your investments, just don’t think you can be the hotshot that beats the market.

Don’t expect to beat the computers.  Even without the two second head start, the computers can still generate trades based on real time data that will beat you.  They scan the newswires.  They process the data.  They make their trades, both buying and selling, all before you can finish reading the same headline that they’re using.  Meaning, if Ford announced that they doubled earning projections, go try to put in a trade, whether it be during market hours or during pre-market trading.  You’re going to find the price already reflects that.  The big money has already been made.

By the computers.

Readers, what are your thoughts on high frequency trading?  Is the two second advantage fair or should it be regulated away?  (Personally, I don’t think it would even make a difference)

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Is It Time To Switch To Roth IRA Contributions

Currently, I contribute all of my retirement contributions via my employer’s 401(k) plan.  I don’t quite max it out yet, though I’m working toward that goal.  However, I’m giving serious consideration to ceasing contributions, and instead contributing to my Roth IRA instead.  Here are a few considerations:

No Match

Right now, my employer doesn’t match anything, so there’s no discernable benefit to contributing even a penny to that plan as far as that goes.  They did a nice match for awhile, but cut it at the height of the recession, and all signs point to a continuation of the ‘no match’ policy.

Tax Considerations

One of the big reasons I’m thinking of switching is because of the eventual tax considerations involved between the two.  According to today’s rules, I’ll eventually have to pay income tax on my 401(k) withdrawls, but not so on the Roth IRA contributions.  Assuming that this policy holds true for the monies in the accounts, I think it would be good to have a balance between the two.

Contribution Amount

mb-money201308Because the 401(k) is pre-tax, whereas the Roth IRA would be post-tax, the up front effect would be that I’d be contributing less.  If I suspended contributions to the 401(k), I would take the resulting difference in my paycheck and contribute that toward the Roth IRA, so the net effect would be zero in terms of my ‘net pay’, though a $400 contribution today could be a $300 contribution tomorrow.

Market Effects

The market has performed so well that the difference has probably worked in my favor.  By contributing more, I’ve been able to take advantage of the gains with the extra money involved.  If I were to switch to a Roth IRA, I’d be betting that the massive gains would be tapering off, at least in the short term.  I’m starting to think that the market is ready for a breather, so this would be a good time in my mind.

Automatic Allocations

One thing that I like about the 401(k) is that my money is divided up between funds that I choose which give me a good allocation.  I’d have to discover how to make these allocations on a regular basis.

Transaction Fees

There are currently no up front transaction fees with the 401(k), but depending on what my investment preferences are, I could pay $10 per transaction, as my Roth is currently through Ameritrade.  They do have no-fee funds, but I’d have to do some research to see if they are comparable.  If I were to purchase anything with a transaction fee, I’d have to determine the threshold on when to make transactions.  I wouldn’t want to make a $300 investment every pay period, for example, and pay a $10 fee each time.  That would be a 3.3% investment fee right off the top.  Instead, I’d have to accumulate the cash to a point where it made sense.

Maintenance Fees

I do a regular check to make sure that I’m not involved with funds that charge over a 1% annual maintenance fee as I believe anything above that is too high. I’d have to carefully look at whether the fees and results are comparable with the options available.

More Options

Should I choose, I could invest in individual stocks with my IRA contributions.  Some argue that you should never do that with retirement investments.  I’d have to do research and give some serious weight of the pros and cons.  Right now, it’s an ‘out of sight, out of mind’ thought process.

Temptation

Right now, my retirement allocation never hits my paycheck.  With the option of having it deposited and more ‘available’, would the temptation exist to defer some of the retirement contributions?  Regularly or even occasionally would be detrimental to the long term goal of a fully funded retirement.  Knowing myself and my financial personality, I believe the risk to be extremely low, but it’s still a factor worth considering.

There It Is

So, there’s the long and short of what I’ve taken into consideration.  I’m curious what you think, readers, and if any of you are in this boat, what you’ve done and how you go there.  Are there any factors I haven’t thought of or mentioned?

Thanks!

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Why Higher Interest Rates Will Not Lead To Recession

It’s amazing all the panic I see when reading the news pertaining to higher interest rates.  Mortgage rates have gone up about 0.5% in the last few months, and stock markets have lately been hit by fears that the Fed will not only taper off Quantitative Easing, but will eventually raise the discount rate, which is pretty much the standard rate that many lending activities are based from.

The naysayers proclaim things like:

“Higher mortgage rates are going to kill the housing market recovery.”
“Higher interest rates will pop the housing bubble.”
“Higher lending costs will lead to recession.”

I’m sure you get the point.

Personally, I’m not buying it.

Demand fell.  Let’s look back to the reason that rates fell to the point where they did?  It was the economy.  Basically, companies and people stopped borrowing as the housing bubble popped, people were losing their jobs, and wealth was disappearing in the stock market crash.  All of that meant that credit was simply not in demand, which by the economic laws of supply and demand meant that rates had nowhere to go but down.

And they did.

But, now, they’re going back up, which is actually a good thing.  It means that there is more demand.  People want mortgages.  Companies want to borrow money.  These are not the signs of a fragile economy, but instead are indicators that the economy is indeed finding stable ground.

No permanent solution.  Low rates were never meant to be a permanent solution.  When the Fed stepped in and basically made the discount rate zero, meaning banks could borrow at no charge, this was meant to stop the free fall that the economy was in.

Now that we’re no longer in a free fall, the underlying reason for making the rates so low simply isn’t there.  Jobs may not be getting created as robustly as many would like, but we’re not shedding hundreds of thousands of them per month.  Housing prices are going up.  The actual number of homes being sold still has a ways to go in terms of recovery, but with the market showing such pent up demand, do people honestly believe that another bubble is right around the corner?

No more dirty work.  As the Fed tightens up their policies, it means that they are no longer responsible for shouldering the workload involved with our economic recovery.  Let’s think about that for a second.  With the Fed doing all the work, it’s been pretty easy for companies, including those in the financial industry, to sit back and let the Fed do all of the work.  The Fed has taken a lot of heat for getting so involved, but even if they become less involved, this shouldn’t mean that the economy will just collapse.  Instead, it means that the private sector now has to get back to hard work that they’ve been able to avoid for the last few years.

Since profits are at stake, you bet someone will do it.  Don’t believe for a single second that just because the Fed ‘backs off’ that nobody will pick up the slack.  Someone will see the opportunity to get back to business and will take charge.

This is a test.  This is only a test.  The stock market has been tested quite a bit since the Fed announced that they’ll taper things off (which leads to speculation that interest rate jumps aren’t far behind).  As I watched the stock market react day after day, I could sense that a lot of the ‘fears’ and ‘jitters’ and ‘uncertainties’ were merely posturing.

In fact, it felt to me like Wall Street was trying to needle the Fed into backing off from their plan to back off.  After all, if the stock market did a little mini-tank, wouldn’t that show that the market wasn’t ready for the Fed to back off of their control over the economy and maybe they should stick with it a while longer?

Am I saying that Wall Street was purposefully manipulating prices?  Well, it does seem to me that the activity for multiple days following the announcement should have already been priced in to a large degree.  So, if you follow the markets, draw your own speculation on that.  I’ll also say that I hope that the Fed doesn’t back down because of a few bad days.

In short, the Fed has made it clear that the days of free and easy money are coming to a close.  While this sends many people into a panic, I think it’s a great sign for our economy and indicates that even better days are ahead.

Readers, have interest rate changes spooked you or do you see it as a sign of opportunity ahead?

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.