Author: Fin Kim

Trailing Stop Loss

Trailing stop loss can be useful if you have a stock that has run up and you want to make sure you keep some of the gains.  You can set a 10% trailing stop loss and then as the stock goes up, the sell order will adjust to 90% of the stock prices as it increases.  The sell price only moves in one direction, up.

Then, if it drops 10%, the sell executes.
Be warned if the stock opens below the sell price on a given day, you may sell for less than your limit order.
The avuncular folks over at Investopedia have some more details on trailing stops.
Every investor's situation is different but, what ball percentage of your stock holds would you have a Trailing Stop Loss on?  10%, 20%  more?

Mortgage advice from the Gurus

If you have money in the bank?  Is it better to have a mortgage or pay it off?

Rice Dellman
Rice Dellman has 11 reasons why you should have a mortgage.

Dave Ramsey
Dave Ramsey has an opposing view.  He says pay off your mortgage as soon as possible.

Dave Ramsey on should I pay off the mortgage.

More thoughts.
With the 2017 tax changes, deductible mortgage interest may not be as much as it used to be.

The direct math is pretty simple.  Let’s say you have a $200K mortgage at 3% mortgage and you have enough money in the bank to pay it off earning 1% interest.  Clearly, from the pure numbers, paying it off makes more sense.  You are paying out more than you take in, so why not get rid of that negative flow.

But, what if you could put some of the money in stocks and get an average return of 4% or more?  Then, it would be better to have the mortgage.  But, of course that investment would have some risk.

I think a big one is Rice’s #10, ‘Mortgages give you greater liquidity and flexibility.’
Consider the scenario where  you lose your job.  If you have no mortgage and limited savings because you put most of your money in the house.  You are not going to be able to get a new mortgage to access the value stored in your house.  Now you may not be able to pay your bills and need to sell the house.  If you went the other route and took out a mortgage and left a big chunk of money in the bank, you can ride out the hard times with your savings.

There is an old saying, ‘would you rather die with $1,000,000 or owing $1,000,000.  Maybe we need a third choice of dying with $0 cash and $0 debts.  Since you can’t take it with you, what good does a paid off house do for you when the end comes?  Wouldn’t you rather have used that money to live more comfortably.  Leaving an inheritance comes in to play here and that will depend on individual circumstances.  Leaving an investment account would be much easier for heirs than leaving a house.  If your house is paid off, then your heirs may end up selling it anyway.  If you have a mortgage, this would not be a burden on your heirs as they can sell the house to pay off the mortgage.  In our example, having the mortgage gave you the opportunity to have more money invested.  That money could go to your heirs.

Individual circumstances vary, we have opposing views from two experts.  The choice is yours.

Stock Market Strategies

Does ‘buy the whole market’ work during changing times?

A popular strategy is to use ETFs or Mutual Funds to buy the whole market. This works great in normal times where not a lot of change is happening. The strategy relies on the collective wisdom of all investors pricing the stocks correctly. When major changes are happening such as those caused by a pandemic or major shifts such as green energy, The winners and losers may really stand out from the broad market. In these times, The talented analyst may significantly outperform the broader market.

Are equal weight ETFs the way to go?

In typical ETFs, the stocks are market cap weighted. So the stocks with a high market cap will have a higher percentage in the fund. For S&P 500, the top 3 stocks will make up 16% of the fund. There are other funds that are equally weighted such as RTM. This is enticing because your fund is essentially auto re-balanced. As a given stock goes up relative to the other stocks in the fun the number of shares will be reduced. Similarly if a stock goes down, more shares will be added. This sounds like a win as you are taking profits from the winners and buying more shares when stocks are lower. On the flip side, what about a stock that is in decline, maybe on its way to bankruptcy. As the stock drops you keep buying more and more and more. In this situation, it might not be a happy ending.


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