The Tale of Two Stock Trades

Sometimes you win, sometimes you lose. The most important part of stock trading is that you remember that your losers should be smaller than your winners. If you can learn to manage your trades like this, your win to loss ratio can be less than 1:1 (meaning you can have more losers than winners overall). Over the years I’ve learned a few different ways to manage trades in this manner.

Below you’ll find a breakdown of a pair of recent trades that illustrate my point. Within the past week or so, I opened two positions. Both Palo Alto Networks (PANW) and Starbucks (SBUX) had solid fundamentals and technicals at the time. Unless I am looking for an oversold contrarian trade (such as oil right now), I mainly have my eye on growth stocks. Both of the companies passed my fundamental tests, thus my next step is to look at the charts to determine a good entry point.

At the time PANW had pulled back roughly 15% from its all time high in July. I like stocks that are off their highs since this increases the probability of the price action going my way. Additionally the stock had formed a bullish pennant which gave me the “green light” to put some capital to work.

Over the next few days, PANW shot straight up (well, pretty much). So in order to ensure that this winning trade didn’t turn into a loser, I placed a stop order at the top of the gap to lock in my gains. At the time of this writing, the trade is up 18%. Keep in mind that most trades do not go in your favor this far and fast. An earnings release and reported projected growth rates had a lot to do with the price action shortly after I initiated the position. This one is still open.

The next trade didn’t go so well, it actually was a quick loser. I bought SBUX for most of the same reasons I bought PANW. The only difference being Starbucks growth potential isn’t as rapid as Palo Alto Networks. SBUX was off its highs and was consolidating in a ascending pennant. Additionally, SBUX had just bounced off the 50 day moving average twice before. Due to this price action and decent fundamentals, I expected price action similar to PANW.

Once the buy order was filled, I placed a stop order to sell the stock if the price sunk a dollar below the 50 day moving average. I figured that if price fell below that level, the chart and trade was broken and I didn't want to be in it. Well the very next day, SBUX sold off (with the rest of the market) and my stop order was triggered and filled. Over all I lost 2.3% on the trade; easily recoverable.

I hope this example illustrates the importance of trade and risk management. Before you get into a trade, know at what point the trade is broken and determine how much you are willing to lose if you’re wrong. Keeping your trade losses as small as possible will keep you in the market. If you spend more time trying not to lose money, the rest is will take care of itself.

Developing Your Life's Vision and Mission

Many of us seek knowledge and fulfilling experiences in the expectation that it will enable us live a great and meaningful life. However, for many this exercise usually occurs in the subconscious and it’s power is never fully leveraged. A popular way to take this effort to the next level is to develop a personal vision and mission statement. Your vision and mission statements will help you clearly articulate the things in life that are most important to you. These statements will also help you steer your life in the direction that you want it to go. In addition your life’s mission and vision will assist you develop your financial plan's goals and objectives, which are an important element in the financial planning process.

When all is said and done, your personal vision and mission statement should be the focus of your financial plan. This is due to the fact that your financial plan is a tool that will help you gather the financial resources needed to live your life the way you want to. Thus before you develop your financial plan, you need to have a good idea what you want to accomplish in life.

Determining Your Life's Vision

A vision statement is an inspirational description of your life's overarching purpose and values. When illustrating your vision you can choose to focus on describing the person you want to be. This includes areas in life such as family, leisure activities, education, community involvement and personal relationships. Here are a few examples of a vision statement for inclusion in your financial plan:

"I am a hardworking and dedicated small business owner who believes in spending quality time with my closest family and friends."

"I am a nurturing Mother of 3 who values education, loyalty and giving to those less fortunate."

"We are a strong, yet independent couple, who believes in building successful careers and enjoying travel to exotic locations."

When developing your vision statement remember it’s important to focus on the values that are most important to you. Our values influence our financial decision making process and help form our priorities. When using a list of your values to guide the development of your goals and objectives you will effectively steer your life in the right direction.

Determining Your Life's Mission

Your mission statement should be a declaration of what matters to you the most and what you are setting out to achieve. When writing your mission statement there are a few key factors to consider. First, what are a few of the most important things in your life? What do you value the most? Second, what does success look like? Describe what you are working towards. Below are a few examples of a mission statement for financial planning purposes:

"My mission is to increase the standard of living of my family through financial discipline and providing the best education available."

"My mission is to become a respected proponent and spokesperson for disabled Veterans and their families."

"My mission is to increase the adventure in my life through engaging in a variety of outdoor activities."

The critical element in your mission statement is a description of what you want to achieve, or in other words, what should be the results of your life’s work. Your mission should be a concise statement of your sole purpose.

Developing your personal vision and mission statement will help you live a fulfilled and enriched life. By understanding your values and purpose in life you can increase your chances of accomplishing your personal goals and objectives.

Passive or Active Portfolio Management

Investors have a decision to make when it comes to managing their portfolios. In the investment portion of your financial plan you can choose to actively or passively manage your portfolio. There are many compelling arguments for and against both approaches. However, before we dive into the details of which strategy is better, we must first discuss the theory of efficient markets.

The debate concerning the efficient market theory revolves around the concept that the price of a financial instrument (a stock, bond or other assets) already reflects all past information concerning its valuation. This means that the price of the financial instrument accurately reflects the true market value of the underlying asset.

On the other side of the debate there are investors that believe that the market is inefficient and that all information concerning the valuation of an asset is not known by everyone. These investors believe that financial instruments can be over or undervalued at any given time, thus they can take advantage of these price discrepancies to make a larger profit.

Active Portfolio Management

More often than not, active portfolio managers believe that markets are inefficient and that if they try hard enough they will be able to “beat the market” by identifying mispriced securities or by timing buy and sell transactions. These investors believe that they have an edge on other financial market participants.

An active portfolio manager spends a lot of their time researching publicly traded companies and staying up to date on global economics. Depending on their investing and trading style, they will read through company’s financial statements, create their own mathematical models and use technical analysis hoping to find an undervalued asset to buy or an overvalued asset to sell.

Active portfolio managers can beat the market, however consistently beating the market is rare. In addition, many active investors do not quantify their time spent researching different securities and therefore do not consider it an additional cost of their investment activity. If this cost was considered when determining portfolio performance, the statistics would show that the additional gains above the market as a whole would be insignificant.

Passive Portfolio Management

In contrast to active portfolio managers, investors that believe that markets are efficient, usually take a passive approach to portfolio management. These investors take the position that financial instruments are, for the most part, priced fairly at any given time. With this in mind, they refuse to spend their time looking to uncover the next high profit investment opportunity.

Passive investors will usually lean towards index funds that track specific segments of the market. In addition, these market participants will not attempt to time the market to squeeze a little more return out of their positions.

Despite their “hands off” methodology, passive investors will take the time to find the right balance of asset classes for their portfolio. They will conduct research in the attempt to create a portfolio that fits their risk tolerance, income and capital appreciation needs. In doing so they will create a portfolio with a variety of asset classes (stocks, bonds, commodities, futures, etc.) and market capitalization (i.e. small cap, mid cap, large cap stocks).

Combining Active and Passive Management

Similar too many other aspects of financial planning, when it comes to choosing an investing methodology there is no absolute right or wrong. The choice to actively manage your assets is completely up to you, neither solution is better or worse than the other. The only decision that really matters is determining which investing methodology fits your lifestyle and expectations.

With that said, you don’t have to choose one investment style over the other. If you participate in your employer's 401(k) you have the opportunity to take a passive approach in that investment account. This can be an easy decision due to the constraints that these accounts usually place on its participants.

If most of your invested assets are tied up in retirement accounts, you can choose to actively manage your personal investments. In doing so you can attempt to improve your overall returns. Unlike employer sponsored retirement accounts, investing in an individual account provides the flexibility to invest however you please. Having both accounts and using both methodologies can provide some great opportunities in your financial plan.

When it comes to seeking the best investment strategy, neither passively or actively managing your portfolio is more advantageous than the other. Choosing which method is right for you depends on your lifestyle and personal interests.

Retirement Planning in 2014

Planning for retirement is one of the most important aspects in the financial planning process. However, only 64% of us actually takes the time to plan and save for retirement. There’s no doubt that planning for retirement can be a daunting endeavor, however not having enough resources to live comfortably during retirement is a far worse alternative. Many of us postpone retirement planning due to the perception that we will have plenty of time in the future. This is not usually the case as many retirees wish they started to save for their retirement sooner. As we start or adjust our retirement plans in 2014, it’s important to remember that we control our ability to plan and save for retirement.

Despite the fact that we can control some aspects of our retirement, there are a few that we can’t. This includes elements such as economic growth, inflation and retirement plan contribution laws. These limits can change year to year as they are dictated by Congress. In 2014 ensure that you consider the following limits in your retirement plan and adjust if necessary.

Contribution Retirement Plans Limits in 2014

Contribution retirement plans are employer sponsored investment accounts. These accounts are funded through automatic paycheck deductions. In these plans a employer sets a matching contribution policy in which they will invest a percentage of an employee's income as a retirement plan investment.

If your employer offers a contribution retirement plan, it is in your best interest to participate. Not only do these plan offer you a quick and easy way to build your portfolio, it also provides great tax advantages. Your personal retirement account contribution is deducted from your paycheck before taxes are calculated. This helps you reduce your annual tax bill.

In order to limit the amount of tax that is deductible from these retirement plans, Congress caps the amount in which can be contributed to these accounts on an annual basis. In 2014 you will be able to contribute up to $17,500 in your 401(k), 403(b) and most 457 plans. In addition if you are 50 years or older you qualify for a retirement “catch up” contribution of $5,500. This will set your total contribution limit at $23,000 a year.

Individual Retirement Plans Limits in 2014

Individual Retirement Plans or IRAs, are tax advantaged investment accounts. These common retirement plans are usually managed by the individual and can be opened at most financial and brokerage firms. While IRAs have a few advantages over contributions plans, such as investment flexibility, they do not include an employer contribution.

Individuals can contribute up to $5,500 to their IRA in 2014 and if over the age of 50 they qualify for the additional $1,000 “catch up” contribution. While the contribution limits to IRAs are limited, maxing out your contribution to your IRA is better than not having any retirement savings at all.

In addition to the limits for IRA contributions, the tax advantages are also capped by your Adjusted Gross Income or AGI. In 2014 the traditional IRA tax deduction is phased out for single taxpayers with a retirement plan at work when their incomes are between $60,000 and $70,000. However this limit is raised for married couples when their combined incomes are between $96,000 and $116,000.

If you do not have a retirement plan for 2014, it’s never too late to start. Many put off saving for retirement for a variety of reasons. Retirement is enviable and postponing preparing for it makes it more difficult.

Financial Planning for Newlyweds

The joining of two people in marriage is quite a significant event, not only for the families of the newlyweds, but for their finances as well. While bringing together two incomes is a pretty straight forward endeavor, bringing together various expenses, assets, liabilities and the possible emotion connection to them can be tricky.

In my previous post “You’re Engage, Create a Financial Plan”, I discussed some of the advantages of having a financial plan before you’re actually married. In short, creating a financial plan can help you and your future spouse explore your life’s goals and objectives before tying the knot. This will help significantly reduce the possibility of disagreements when managing your finances in the future.

If you are a newlywed or recently became engaged, start the financial planning process by defining your combined goals and objectives. Once complete, the following steps will help you merge your finances and create a joint financial plan.

Data Collection and Analysis

During this memorable time in your lives, it’s important to locate all of the data that will impact your financial well being. This information will be used to construct your financial planning statements and determine the strengths and weaknesses that exist in your current financial situation.

The first step is to gather your qualitative financial planning data. This information will help you explore and document your risk tolerance, past experiences with money, feeling towards different investment products and your retirement expectations. This data is mostly used in the consideration of shared values and the emotional connection to various financial decisions.

In contrast, quantitative financial planning data is more numerical in nature. Gathering this data can be accomplished by listing the title and value of your cash accounts, insurance policies, estate planning documentation, and historical tax returns. This data will be used to develop forecasts and determine the affordability of your goals and objectives.

Once you have gathered and listed all of your financial planning data, it’s time to determine which accounts and policies should be merged, eliminated or simply left alone.

Merging Accounts and Financials

The decision to merge accounts and other financial planning tools, can be difficult. This is not only due to the volume of forms that will have to be filled out, but also the fear of losing control over a very important aspect of your personal life.

To begin merging accounts, it’s important to understand the advantages and disadvantages of each one. This will help determine if there could be any savings or added complexity from merging accounts (such as consolidating insurance policies or changing beneficiaries).

Once all of your options have been laid on the table, it’s time to merge the accounts that have the most advantages. When merging accounts, remember you don’t have to do it all at once. As long as there is open and honest communicate accompanied by a clear action plan, you can merge your financial accounts when it’s best for you and your schedule.

In today’s fast moving and advanced world, marriage is more than a romantic commitment to the person you love, it’s a business arrangement as well. Newlyweds should take the time to create a financial plan. This will ensure that the business side of you relationship is healthy and moving in the right direction.