Money & Investing - Banks.com

Over the past couple of weeks, we’ve been looking at the principles in The Four Pillars of Investing by William Bernstein, using a post from Get Rich Slowly as a guide. So far, we’ve looked at the theory of investing, history of investing and the psychology of investing. Today’s topic is understanding the business of investing.

Pillar Four: Business of Investing

One of the things that many investors do not pay much attention to is the way investing — as business — works.  I like that Bernstein gives readers a course in how investing works in business terms. And, of course, the point of a business is to get your money. The investing industry is no different in that regard. Fees and commissions are designed to earn money for brokerages, mutual fund administrators and other money managers.

Another interesting point that Bernstein makes is that there are other forces at work that can deplete your earnings: inflation and paying attention to sensationalist stories in financial media.

Inflation is the obvious culprit. It erodes your earning power and reduces your returns.  Media sensationalism is a little less obvious. Get Rich Slowly describes it thus:

Meanwhile, traditional financial journalism tends to hype hot mutual funds and brokerage houses — spreading what some people call “financial pornography” — in order to boost sales.

This is an interesting point. After all, the herd mentality often leads one wrong. It is often best to consider market performance and fundamentals, rather than rely on talking heads and “experts” whose main purpose is to garner ratings.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.

One of the fears I hear regularly is that with stock market volatility — and other upheavals in the investing world — that investing is “too risky” or “not smart” right now.

It is true that some types of investing may not be the best idea right now, especially for beginners. But investing is still a smart choice. It is important to use investments to allow the law of compounding interest to work in your favor. You just have to be careful about what you invest in.

Stocks

If you choose carefully, picking fundamentally sound value stocks, you can actually find some great bargains right now. Buying more while the market is mostly down on most days can mean great gains down the road. Index funds are another way to get into stock investing without exposing yourself to excessive risk (although that risk will always be there). Mutual funds can also offer stock investing diversity with lower risk than individual equities (but watch out for the associated fees).

Bonds

These are considered “safe” investments — when they are government bonds. Federal bonds regularly grow, albeit at a rather stodgy rate. However, they can make good investments in terms of safety, and they generally do better as the economy falters. For better returns (but greater risk) corporate bonds and municipal bonds can be invested in.

Currencies, Commodities and Futures

Currencies are rather risky. When you get involved with FX trading, you should have a high risk tolerance. It is possible to make quite a lot of money on the currency market, but it requires some practice and the ability to take chances with your cash.

Commodities and futures are also quite risky. These require knowledge of markets and savvy decision making. Any number of factors can affect how commodities and futures move, and it is important to know what you are doing and to have a high risk tolerance when you engage in commodities and futures trading.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.

Tags: stock market, currency market, investing blog, index funds,
futures trading, investments, FX trading

This morning’s stock market news is focused on the issues surrounding investment banks. Morgan Stanley is reporting that its quarterly profit is of 60 percent, and this is having an effect. Even though this is in line with “expectations” in the current environment, the dramatic difference in profitability is taking its toll on Morgan Stanley shares on the stock market.

And that is as it should be.

Too often in the past few weeks, we have seen similar stock market news treated as something promising because it is in line with “expectations.” By that reasoning, you could simply always under-promise, and then when you perform abysmally, you could point to your “expectations” and receive a stock market boost. The fact that the same hype isn’t being parroted in the Morgan Stanley case is one of the more encouraging things about this story.

Other investment banks are seeing trouble

Lehman Brothers continues to struggle after its earlier warnings, but it is managing to stave off a collapse reminiscent of Bear Stearns. Indeed, the hope is that Lehman Brothers will ultimately recover.

Fifth Third is also seeing some problems. It is going to sell $1 billion in stock in order to raise capital, and it will slash its dividend. The idea is to try and build up a reserve so that when the third quarter earnings time comes around, there is something there to absorb all of the losses.

Indeed, investment banks are rushing to raise funds in order to absorb the predicted losses that are expected as a result of the ongoing fallout from the credit market crash.

Goldman Sachs remains practically the only one of the major investment banks not to be totally burned by the events of the credit market crash. Even though earnings are off 10 percent, that’s a darn sight better than anyone else. Why is Goldman Sachs doing so well? Mainly because the company had the foresight not to get neck deep in risky mortgage backed securities. Yes, the company had losses. But they weren’t as large as everyone else’s in the investment bank club.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.

Tags: stock market, stock market news, investing blog, Goldman Sachs,
investment banks, investments, credit market crash