Investing: Taking a look at metrics: Beta

I haven’t done a financial post in a while due to the depressing view of how Covid has changed the market landscape. I am back on the horse and thought I would examine how some of the metrics work that you may see in your stock analysis profiles in your investment and retirement accounts.

The Covid effect on your retirement portfolio was an alarm bell for me regarding risk. Most advisors qualify stocks and people into 3 risk groups: Sometimes, you see some designations in between these 3.

High Risk
Moderate Risk
Low Risk

These risk profiles help an advisor define the portfolio that you should adhere to for your financial goals. I fall in between the High and Moderate profile since I have a good recovery time. If you’re in the same boat, don’t fret over the Covid dip. I believe this represents a buying opportunity for long term investors. Since I don’t have a fiduciary to assist with our goals, I wanted to examine how some of the metrics like Beta might be an indicator of risk. For reference, Beta is a measure of how much your stock choice varies against the stock market as a whole. So, if the idea is true, then those low risk stocks will have a low beta, but also return a lower percentage of gain over time. Conversely, when the market is in a big dip, it is also likely that they will swing further that the market as a whole.

I took data from my IRA provider and graphed return vs beta for large and mid caps with a beta between -1 and 2. 574 stocks were returned in the filter. It looks like there is a pretty decent correlation between the total return (5 years) and the beta value as stated above. Of course, we should consider that we have been in a Bull market for quite a bit of time and this data also represents the current drop due to Covid 19.

With concern to risk, those who move less in the market also tend to have less total return (under 300%). Those stocks who have a beta above 1 largely represented the largest gains in the last 5 years.

There is some caution though as you examine beta vs risk. There are multiple factors that should go into making decisions about how you invest. I was surprised at a few really strong performers on the list like Microsoft who had a Beta rating of .95 and Ascendis Pharma (.94), but had one of the best returns of all the companies. This tells me that Microsoft and Ascendis are still a great play for both those with lower risk and maybe* those who want to see the potential for a very high return. On the flip side, some like Darden Restaurants have only returned 28% over the last 5 years and maintain a higher Beta at 1.2, but would not likely be considered an investment in my book due to the low return in what was a strong bull market.

The conclusion here is that Beta is a good metric to judge how your stocks might perform relative to the market as intended, but it doesn’t dictate what the returns will be. It also warrants further investigation since there are clearly outliers that might indicate very weak companies with low returns in largely positive markets such as Darden. I think that Beta will be a go-to indicator for stock selection, but needs to be combined with many others to form a personal score factor.

–Notice–

I am not a professional investment advisor and use this blog to examine ideas on my own accord. Do not use these writings as professional investment advice. I do not currently hold a position in MSFT, DRI or ASND.

College Savings

Good Evening SNH’ers,

This is more of a user feedback post. I am debating about the best strategy to help my kids with funding for college. I know that I cannot fully fund their college activities, but I do want to have some money reserved to give their first year a start. I have seen several strategies available each with their pluses and minuses.

Method #1 – 529 Plan

Pros
- Can generally put in as much or as little as you want.
- It is shielded from the fafsa form as counting against your child’s available funding.
- It is valid in any state.
- If funded in your local state, may have tax exemptions or deductions.
Cons
- Funds must be used for education or a penalty is assessed.
- Usually pretty low growth fund opportunities (sub 6%).

Method #2 – Prepaid Plan

Pros
- Generally gets a better forward interest rate by committing funds at current rates.
- Generally exempt from federal taxes
- You will have a predefined amount of tuition you have paid for in advance.
Cons
- Can typically only be used in the state at public universities.
- Usually structured payment plans that may or may not fit well with your current financial plan.
- Not all states offer these plans.
- Not transferable outside of the state, though some states have made allowances for “equivalent in state value.”

Method #3 – Parent funded investment account

Pros
- Unlimited fund options with a private broker
- Larger growth opportunity
- No restrictions on how the money is used
- If no college is planned, money can be reserved for other uses
Cons
- There is no guarantee that the market was favorable to your investments
- There may be capital gains taxes you may have to pay

Within this list, I don’t currently favor the prepaid option. While the savings are great, I am not in position to commit any of my kids to an in-state public school. I like the 529 plans because you can transfer them to another child and you have a low risk investment that generally stays above inflation from the data that I have seen. Method 3 looks great on paper, but you really have to watch the market carefully, and I am not too good at picking funds that are so stable that I could count on an ROI each year.

There may even be a 4^th strategy to combine a 529 plan with an investment account funneling off dividends to the 529 plan and committing to regular contributions to both the 529 and the investment account.

Let me know what your thoughts are, I would love to see what you think is the smarter way to save for college expenses.

Invest Early, Invest Smart

If you’re like me and started late into the game, go start investing right away!

Good Evening SNH’ers,

I have decided this post to be all about saving for the future. I hope this article encourages those of you without retirement accounts to start one tomorrow, or even tonight. When I was younger, saving was encouraged but never made a priority in my life. I always understood the benefits of compounding and how the longer that I kept money invested, the greater the outcome I would have. I think the investment path is one of the tools we need to approach life just a bit smarter.

Background

I had some revelation about a year and a half ago that no matter what, I needed to get a retirement account started because Mrs. SNH and I did not have any plans whatsoever for how we would end up in retirement. It was bleak and the math on the lottery tickets didn’t prove favorable. I also looked at our current finances and forced it to be a priority to get something started. It meant really ratcheting our food costs and even controlling how we chose to drive making each trip more purposeful with the miles spent in our car. I also used a work at home program doing small click-work for Amazon’s mechanical turk program that helped kick start the process. It is really a great program to get a few dollars moving in the right direction, but you really have to stick with it to get more that 100 “hits” done before you start to achieve anything appreciable. At the same time, I also set about putting away 1% of my income into my 401k. As I saw more money go into the 401k, I also opened a private Roth IRA for some strategic reasons that I will post down the road. I look forward to meeting a modest retirement goal at this point.

Onward to compounding

One of my favorite tools is to estimate what happens to money as it compounds at the following site: https://www.dividend.com/tools/compounding-returns-calculator.php. This calculator allows you to play the “what if” scenario. Let’s say that you estimated a 7% growth on your investment every year and put in a total $1000 at the ripe old age of 17. At the age of 67 which is now the social security definition for retirement (here) if you were born after 1960, that would net you about $29,457.03. Parents, here is where it really gets crazy, what if we did that same investment when your child was born and had a full 67 years to mature in an investment account. It soars to just over $93,000. That is the power of compounding. The lesson learned is that the earlier you invest, the less you will need to put in down the road to have a secure future at retirement age. If you started investing at age 40, to get to the same 30k at age 67, you would have to put in about $4600 to reach that 29k mark. To reach the 93k mark, you would need to put in roughly $15,000!

Another great tool I have found to play the game is here: https://www.hughcalc.org/drip.php . This one allows you to look at reinvesting dividends and making monthly contributions to an account which is much more realistic for investors where they can sock a little away each month and account for dividends and stock appreciation.

The take away

If you’re like me and started late into the game, go start investing right away! There are many great ways to get started with next to nothing. After all, the sooner we start, the more we will see when we get to retirement!

Here are some of the places you might start investing:

Schwab (http://www.schwab.com)

Fidelity (http://www.fidelity.com)

Betterment (http://www.betterment.com)

Ally Invest (https://www.ally.com/invest/?PRtarget=am )

TD Ameritrade (https://www.tdameritrade.com/home.page )

Ellevest (http://www.ellevest.com)

Full disclosure: I am not a financial planner or fiduciary and write from personal experience. I advise that you discuss your financial future with a professional to evaluate decisions that can affect your investment paths as they are far more suited to assisting you and your personalized needs.