Investing Tips For 2013

With all three major Indexes in the green Dow, Nasdaq, S&P 500 and unemployment dropping to 7.5% it appears the U.S. economy is finally showing signs of recovery.  The rally that began last November has not had a major pullback.  Commodities have been pulling back telling a different story possibly one of deflation.  Yes, falling commodity prices are good for stocks but is this a good enough reason to put a large percent of your money in stocks? With a 6 month rally with very little interruption and with summer just around the corner some strategic measures are necessary.

The U.S. inflation rate is at 1.5% the trend seems to signal low inflation and possibly deflation.  Europe also seems to be in a deflationary state.  The answer is simple when inflation is at 1.5% in the U.S. and 1.2% in the Euro Area, not much risk is needed to protect your money. An investor with $50,000 only needs $750 in profit to protect his money with our current inflation rate.  Only take on more risk if you believe it is necessary and possible to make large profits this year in securities.

The U.S. stock market is telling us that people are willing to take on more risk and tired of measly returns.  Investors are taking more risk simply because there aren't too many alternatives especially with interest rates at 0.25%.  The 10-year Treasury yield is currently at 1.75% at some point the Fed will start increasing interest rates making bonds undesirable.  As an investor you find yourself in a peculiar situation our inflation rates have remained pretty low possibly flirting with deflation if so  cash is your best bet then comes gold.  If inflation begins to rise be prepared to move into stocks or real estate.  Home prices have started to improve and in some states are making new peaks.  Low mortgage rates (30yr fixed at 3.48% and 15 yr fixed at 2.69%) make real estate as an investment or a hedge for inflation rather attractive.  In our present economic environment it is preferable to have some stock investments and a good amount of assets in liquid form to be able to move it once we begin to see signs of deflation or increased inflation. It is best to have a manageable amount of debt you don't want to be stuck with massive debt during deflation. 

The Ascent of The Bitcoin

When I last wrote about "Bitcoin a Digital Currency" it was trading at $5 for 1 Bitcoin.  Fast forward 1 year later and you will need $93 to buy 1 Bitcoin on MtGox it recently traded as high as $266.  Lack of trust in the European economy and the demand for privacy has made the digital currency rather expensive in the past few weeks. 

Want to jump in and make money? The crashes and wide spreads make this currency risky to speculate as tons of money can be made or lost in less than 24 hours. The recent popularity and glitches that need to be addressed suggest new comers will enter.  Online currency may be here to stay not hard to see in a paperless society full of online banking and credit cards.  When was the last time you handled a $1000 transaction in cash?  The Bitcoin is set to have a limited supply of coins minted making it a scarce commodity just like gold, corn or cigarettes in jail.

Although you can't buy a house or stock with the Bitcoin just yet the currency is making a few investors very wealthy.  Many websites are starting to accept them and the first Bitcoin ATM is being developed.  Even with the rise of the currency buy with caution there are several prices quoted on different exchanges at the same time and hack attacks have stolen Bitcoins.  Although many have complained about the lack of security and the use of the currency for illegal activities due to its anonymity the same can be said about all currencies and online transactions.  Whether the Bitcoin continues to rise or possibly disappear as fast as it appeared it is showing us the need for alternatives. 

With inflation still very low at 1.5% and the threat of deflation, cash is king no need to go running to another currency just yet.  Even gold had a historic slide now trading at $1,377.40 the troy ounce.  If you do buy a Bitcoin do it for fun I wouldn't suggest trading your life savings for a computer code. 

Investing Simplified

It is never too early or too late to start investing.  It is easy to start you do not need to be wealthy to open an online account.  Reputable online brokers require investors to start with a deposit ranging from $500-$2500 and they charge $7-$9.99 to buy or sell a stock.  If you do not have much money treat it as a 401k and only add $100 every 2 weeks.  For a beginner it is best to use dollar cost averaging especially with the market setting new highs.  Even if you have the cash do not invest all your money at once.

Make sure you understand the risks and costs of trading. Pick stocks you are familiar with and companies that interest you.  Understand that stocks are not all alike they do not move or feel the same.  A stock with high beta (above 1) like Facebook (FB) will be very volatile it will change in price more than the Dow (DJI) or S&P 500 (GSPC) the opposite is true for Pfizer (PFE).  Another way to tell how a stock will move in price is by the volume, a stock like (GE) with over 31 million shares will need a lot of buying from investors to make the price move in either direction.  General Electric is not a good stock for a day trader but it is a good stock for a long term trader or swing trader.  On the other hand a stock like Visa (V) with 3 million shares won't require much buying or selling for the stock's price to move making for some quick gains or losses.

When buying or selling stock a limit order  is one of the safest ways to get a stock at the price you want.  If you place a limit order to buy Merck (MRK) at $43.50 the order will not execute unless the stock reaches a price of $43.50 or less.  When purchasing a security I recommend buying 100 shares minimum if you do not have the means then buy what you can.  As a long term trader diversify and buy regularly only readjust occasionally to protect your portfolio.