Alibaba IPO: 3 risks investors should know

Alibaba Group Holding Ltd., the Chinese e-commerce giant, is set to price its shares after Thursday’s closing bell, and the highly-anticipated IPO could be the largest in U.S. history.

With so much fawning media coverage of the Alibaba IPO, investors could get sucked in by the fanfare. Therefore, it makes sense to step back and consider the risks of investing in Alibaba.


But first, some background on the IPO details, and what Alibaba actually does.

Alibaba is expected to sell an estimated $22 billion of shares before Friday’s IPO on the New York Stock Exchange. Demand for the shares is reportedly strong and the stock could see a pop during the first day of trading Friday.

The company was founded by Jack Ma and has a diverse array of businesses, including B2B web portals, online retail, shopping search engines, and cloud computing. (For more background, see Alibaba IPO: 6 things you need to know.)

“It’s easy to get caught up in the emotion and hype of an IPO of this magnitude, but, there are plenty of risks,” says Dennis Hobein, an equity analyst at

Let’s zero in on 3 of those risks:

1) Fuzzy corporate structure

Many investors are questioning the corporate governance and opaque ownership structure at Alibaba.

First off, due to Chinese restrictions on foreigners owning certain assets, Alibaba is structured as a “variable interest entity.”

“Basically, the Alibaba stock will buy you a stake in a Cayman Islands-registered entity which is under contract to receive the profit from Alibaba’s lucrative Chinese assets but will not actually own them,” MarketWatch reports.

The structure means that the assets and the company will be controlled by Ma and co-founder Simon Xie. Investors are expected to have little or no say on major decisions.

2) Revenue comparisons

If the Alibaba IPO prices at the high end of the expected range, the company would be valued at more than $160 billion. That means the company would be worth more than Amazon (AMZN) and eBay (EBAY).

However, in terms of revenue, Alibaba brings in less than Amazon and eBay, according to the chart below from Fortune:


Fortune does note that the revenue comparisons are not exactly apples-to-apples since Alibaba’s business model is similar to eBay’s in that it is a middleman coordinating sellers and buyers, and it takes a cut out of each sale.

Alibaba likes to tout a metric known as gross merchandise volume, which is the total value of items sold on Alibaba’s markets.


“Alibaba was able to generate a gross merchandise volume of $248 billion last year, which is more than double that for Amazon’s at $116.4 billion,” reports Aaron Mamiit for the Tech Times.

Still, the company’s uniqueness and complex business model show how complicated it is to value Alibaba,” reports Laura Lorenzetti at Fortune.

3) Insiders can sell earlier

The Wall Street Journal reports that a quirky arrangement will let some early Alibaba investors unload as much as $8 billion of shares the day it goes public.

Typically, large investors and company insiders are forbidden to sell shares until several months are after the IPO. These agreements are known as an IPO lockup.

“But with Alibaba, a number of shares equal to about a third of what could be sold in the deal aren’t covered by such restrictions, according to the company’s public filings,” the WSJ reports.

This is just another reminder that Alibaba is different than most other IPOs, so investors should be aware of the unique risks.

Despite the risks, some big investors plan on buying Alibaba because they still think the IPO is priced cheaply.

There’s not doubt that the Alibaba IPO will go down in history. It remains to be seen whether the IPO will be a good-long term investment, or if it could even signal the top of another tech bubble.

Continue learning: What you need to know about Alibaba

How to avoid 5 common investing mistakes

When it comes to successful investing, the field of behavioral finance has shown that sometimes the worst enemy dwells in each of us.

Human evolution has wired our brains with certain instincts that, if left unchecked, can lead to big investing mistakes, according to psychologists and behavioral finance specialists.


In other words, those flight-or-flight responses that served our ancestors so well on the savanna may actually sabotage our investing.

Here are 5 of the most common errors that investors make, and some tips on how to avoid them:

1) Spinning your wheels

Individual investors sometimes fall into the conceptual fallacy that winning in the stock market means out-hustling the next guy, acting on every scrap of new information and nailing new profit opportunities as they emerge.

Trouble is, unless you have the processing power of high-speed server networks used by high frequency trading shops, this strategy is likely to fail for most investors. Sometimes, the best investing is boring.

And timing the market is very tough, even for the pros. Only 22% of financial advisers tracked for a decade ending 2012 outperformed the Wilshire index, according to one study.

Better to dump the race metaphor and think of investing as a long-term endeavor. Buying a holding a diversified portfolio with a mix of passive and active strategies can be a better strategy for many. Dollar cost averaging is also a good idea to ride out the ebbs of flows of the market.

2) Being inflexible

Investors have an understandable tendency to stick with the same methodology and assumptions that worked in the past. This is called anchoring and can cause trouble when market or industry conditions change.


Economies and markets are fluid and not all investments and asset classes behave in the same way.

One way to counter anchoring is to continually retest assumptions and factor in new developments. Do the reasons you initially bought a particular company’s stock still hold up? Are they even relevant anymore if a new competitor or technology has disrupted the industry?

3) Reading too much into the past

Yes, the past can offer important clues about the future. And for better or worse, the past is the only thing we have to go on, unless you have a crystal ball. But hindsight is rarely foresight.

Our human brains evolved to look for patterns in our environment. However, this trait sometimes makes us too optimistic and overconfident in our certainty about what’s going to happen the future.

In practice, this can lead investors to make a common blunder and place too much faith that past returns will carry on into the feature. Believing too eagerly that a hot mutual fund manager or trading strategy will continue to deliver every year is usually a mistake.

That’s why just about every bit of financial marketing literature will have the following disclaimer: Past performance does not guarantee future results. It’s there for a reason, folks.

4) Being too afraid to lose

Behavior finance experts and psychologists have long noticed the human tendency to avoid losses in the most irrational ways. In fact, we feel the pain of loss more keenly that we enjoy winning. That’s the essence of loss aversion.


In the financial context, this can play out when an investor sticks with a losing stock, hoping on very thin evidence or none at all that the investment will eventually break even. Sticking with the status quo is less upsetting than actually taking action and realizing a loss.

Avoiding this trap takes the recognition (and a little humility) that losses are a natural part of the investing game. In fact, they are inevitable. The challenge is to limit losses and by taking cool and dispassionate approach to one’s portfolio.

5) Following the herd

Even the smartest investors can sometimes fall prey to human instinct to imitate group behavior. Herding has been behind every great speculative bubble from Dutch tulips to the U.S. housing boom and bust.

Following the crowd is a real problem in investing. It’s easy to assume the group knows something you don’t, and step in line.


If everyone is screaming buy social media stocks and they’re soaring, it’s tougher to resist the urge to join in the fun, especially when your neighbor is getting rich.

Assume the crowd may be wrong. Break down the assumptions behind the conventional wisdom and see if they stand scrutiny.

Being willing to sometimes zig when everyone else is zagging is the hallmark of the intelligent investor.

Of course, just like in life, mistakes will happen in investing. The perfect is the enemy of the good, as the saying goes.

Still, being aware of your predispositions as an investor might just help you sidestep a big pitfall that could postpone reaching your financial goals by years.

Continue learning: The top investing errors of millionaires

Opportune times: Take the European vacation of your dreams

A strengthening U.S. dollar means it might be an opportune time to book that European vacation you’ve long been fantasizing about.

You can thank Mario Draghi, the chief of the European Central Bank.


The euro/dollar exchange rate has weakened even further after Draghi recently announced a surprise interest-rate cut to help boost Europe’s soft economy.

Whether you’re envisioning yourself sipping barolo wine in Piemonte, enjoying gelato in Rome, or savoring brie in a Paris cafe, a rising greenback means American travelers can get even more of it in Europe.

Turning the tables

Currency exchange rates are heavily influenced by interest rates, as Jeremy Quittner at Inc. explains:

“What happens when your central bank cuts interest rates and the value of your currency declines? If you were America in 2009, following the financial crisis, you would have seen a flood of tourists breaking down your doors for cheap vacations and to go on shopping sprees for iPhones, designer jeans, and the like,” he writes.

Now, five years later, the tables have turned.

“In the wake of the European Central Bank’s decision to cut its main interest rate last week, which instantly caused the value of the euro to drop, Americans are expected to return the favor, pouring millions of dollars into the Old World as the value of goods and services decreases overseas,” Quittner added.

Tensions between Ukraine and Russia and expectations the Federal Reserve may finally begin raising interest rates in the U.S. have also played a likely role in driving the euro lower against the greenback.

euro-currency-etf-dollarThe price of an ETF that tracks the euro’s moves against the dollar

Euro trashed

The value of the euro currency versus the dollar is at the lowest level in a year.

That means U.S. travelers have more purchasing power in Europe. (The UK has its own currency, the British pound sterling, which has also weakened recently versus the dollar.)


Right now, a euro equals about $1.30, and some expect the euro to weaken even more.

Goldman Sachs analysts recently said they expect the U.S. dollar will achieve 1-to-1 “parity” with the euro by end end of 2017. They cited a struggling European economy, falling prices and a “dovish” ECB.

A stronger dollar versus the euro would only make that European vacation more attractive to American travelers. Of course, currency exchange rates are notably volatile and unpredictable.

The allure of the off-season

In terms of timing a potential tour of Europe, we are past the summer peak season.

Some travel experts call the September-October period the “shoulder season” that has many of the advantages of peak season but with thinner crowds and cooler temperatures.

“You’ll have good weather, daylight that lasts long enough, less people and a tourist industry that is ready and eager to please,” writes Veronica Davis.

And if you don’t mind the cold, the winter off-season months could be the best choice.

“Say goodbye to big crowds and say hello to lower prices. You will pay less, at least most of the time. From airfare to hotels to B&Bs, it is cheaper all around in the off-season,” Davis says.

Having Europe all to yourself is a dream come true for people who just want to take everything in without a lot of distraction. Shorter lines, less distractions, and cheaper prices mean you get to see more and do more,” she suggests. “If you don’t give a hoot about temperature, then just go there in the off-season. It’s the absolute best time of year to go – if your goal is to get the most out of the sights, architecture, and accommodations.”

Unless you’re lucky enough to win an all-expenses-paid European Vacation like the Griswolds, the trip is going to set you back.

However, the combination of a declining euro and off-season prices will make the trip a lot more affordable.

Continue learning: This top retirement destination offers an investing lesson

Fantasy football investing: Why Peyton Manning is Tesla

What does a 38-year-old NFL quarterback have in common with an electric car company?

Two words: high expectations. I believe Denver Broncos quarterback Peyton Manning is the fantasy football equivalent of Tesla (TSLA) in the stock market.

peyton-manning-fantasy-footballBroncos QB Peyton Manning

As a big enthusiast of fantasy football, I’ve noticed some interesting parallels with successful investing.

For example, fantasy football is not about finding the “best” player, just like investing is not about finding the “best” company.

Investing is about finding the best company relative to expectations. Great opportunity comes from the gap between future probabilities and expectations. I believe the same principle applies to fantasy football.

Why Peyton Manning looks “overvalued”

No doubt, Peyton Manning is one of the best quarterbacks in NFL history. The question is whether you should pay his expensive price tag to add him to your fantasy football roster.

According to ESPN’s auction values, fantasy football owners are paying an average of $55 for Manning. In investing parlance, that means the Denver QB has a relatively high valuation — he’s not cheap.

That $55 ties Manning for the highest value ever for a quarterback and is a full $12 more than the next quarterback this season. This may not come as a surprise since Manning passed for a record-setting 55 touchdowns and 5,477 yards last season. And he did have a very strong season opener against the Colts with 3 touchdown passes and nearly 270 passing yards.

However, I believe Manning’s numbers will cool this year, for three main reasons.

1. History

Below is chart of the nine times a quarterback has exceeded 40 touchdowns in a season.

fantasy-football-quarterback-touchdownsClick to enlarge image

Here you can see a very obvious regression after career seasons for these passers. Ignoring Tom Brady’s 2008 injury, a quarterback who throws for over 40 touchdowns throws 14 fewer touchdowns the following season. This includes a 21 touchdown drop for Manning himself from 2004 to 2005.

2. Age

The most impressive part about Manning’s record season was that he accomplished it at the ripe old age of 37. The average age of the 40+ TD quarterbacks is 28 years old.

History tells us that Manning should be about a decade past his prime. It’s only a matter of time before age catches up to Manning. We don’t know when it will be, but I believe it’s best to view Manning in terms of risks and rewards, rather than a certainty to continue his record-setting pace.

3. The Vegas ‘smart money’

Fantasy football auction values for individual players are an indication of public perception. When a player like Manning has a high auction value, it means fantasy football fans are “bullish” on him.

However, I also like to see what the “smart money” in Las Vegas is saying. I think of Vegas as the sophisticated investors of the fantasy football world. It can be a good idea to see what the smart money is up to.


Currently, Vegas has Manning’s 2014 passing touchdown line at 40.5. Coincidentally, this is right in line with the historical 14 touchdown drop-off I mentioned earlier.

Why Peyton Manning is like Tesla

So how does all this relate to Tesla?

In a business sense, Tesla is coming off a record-setting year of its own. Start-up car companies are rare, and an all-electric car company like Tesla is unprecedented.


Tesla has executed in every way you could ask, growing revenues by 90% over the last four quarters. With that being said, I believe expectations have gone too far. I see very little upside if any for Tesla’s stock from here.

Even Tesla’s high-profile CEO Elon Musk is warning about the stock.

elon-musk-teslaTesla CEO Elon Musk

“I think our stock price is kind of high right now,” Musk said recently. “If you care about the long term, Tesla, I think the stock is a good price. If you look at the short term, it is less clear.”

Why Tesla looks “overvalued”

If Vegas is the smart money in football, I believe option traders are the smart money for investing. (Options contracts give investors the right, but not the obligation, to buy or sell securities at a specified future date.)

Watching how options trade can provide additional information about investors’ market expectations over various lengths of time. In fact, this is a tool I use to evaluate regular buy and sell decisions for the Leveraged Value portfolio.

Without getting too bogged down in investment jargon, the trading in put options for Tesla suggests that investors see risk in the stock. Meanwhile, Tesla shares are at an all-time high after rallying nearly 90% so far this year and almost 40% the past three months alone.

This divergence in opinion between the investing public and sophisticated options traders on Tesla, mirrors that of fantasy football owners and the Vegas odds makers on Peyton Manning.

In the wake of record-setting paces, it can make sense to check the smart money. I try to avoid euphoria and examine probabilities. That’s why I expect slower growth from Tesla and fewer touchdowns from Peyton Manning in the coming months.

May you have a great season both in your investment portfolio and on the football field!

Learn more: Investing lessons from fantasy football

Alibaba IPO: 6 things you need to know

Alibaba Group Holding Ltd., a giant Chinese e-commerce player, has launched an investor road show ahead of a much-anticipated initial public offering (IPO).

It will value the company at about $155 billion and as high as $162.7 billion, according to a new filing with the Securities and Exchange Commission.


Alibaba is expected to list on the New York Stock Exchange in mid-September under the ticker BABA, in what will be one of the biggest stock debuts ever in the U.S.

Here’s what you need to know about the Alibaba IPO:

1) What Alibaba actually does

Alibaba was founded by Jack Ma, a former English teacher from the eastern Chinese city of Hangzhou. The company is kind of a Chinese mashup of eBay (EBAY) and Amazon (AMZN), offering everything from business-to-business web portals, online retail, shopping search engines, and cloud computing. Ma is worth $21.8 billion and is China’s richest person. Search giant Yahoo (YHOOowns a stake in Alibaba.

2) How much it aims to raise

If Alibaba ends up moving the maximum number of shares proposed at the highest price currently anticipated, this IPO could be one for the record books.

The company may end raising $24.3 billion, representing the biggest-ever IPO and eclipsing the $22 billion raised by Agricultural Bank of China (ACGBY) back in 2010.

3) How the valuation stacks up 

Believe it or not, Alibaba would be valued pretty close to Amazon and more than twice eBay (EBAY). The Chinese e-commerce company, though, would be well below its global rival Google (GOOG) and social network giant Facebook (FB).


4) An IPO valuation equal to Amazon’s

Don’t forget that Alibaba is the dominant player in the world’s biggest Internet market, home to 560 million internet users – twice as many as the U.S.

China’s equivalent of Black Friday in the U.S. is Single’s Day on Nov. 11, the biggest online shopping day of the year. Last November, Alibaba sites such as Toabao and Tmall raked in $5.75 billion in sales in that single 24 hour period.

5) Control of mobile payments

Alibaba’s mobile payments service Alipay controls about 70% of all of China’s mobile payments in 2013.

On top of that, the company dominates the business-to-business e-commerce business with a nearly 50% share as of early 2013.

6) The risks for investors

In its IPO prospectus, Alibaba has a 38-page section on potential risks. They include government interference, complex corporate structure and high debt levels. This biggest may be this: As a foreign company, Alibaba is exempt from certain corporate governance requirements and doesn’t need to file reports and disclosures to the SEC as promptly as American companies.

By the way, this is turning out to be a banner year for U.S.-based IPOs. Some $47 billion has been raised so far in 2014, according a Wall Street Journal article citing Dealogic data. That’s not including Alibaba. Throw that in and we could be looking at the biggest IPO year since the dot-com days of 2000, when companies debuting on American stock exchanges raised more than $100 billion.

Wait a second, should we be worried? It’s legitimate question because IPOs often tend to ramp up in the ending stages of the bull market.

And what about “super-sized” IPOs like Alibaba?

Looking at a history of the top 10 IPOs of all time in U.S. markets … mega-IPOs do tend to happen towards market tops,” said ConvergEX Group chief market strategist Nicholas Colas.

Learn more: The Alibaba IPO could be huge for Yahoo shareholders

Sep 8

Why the “active vs. passive” investing debate misses the point

In the world of investing, the active vs. passive debate has taken on almost religious overtones, and it’s impossible to get either side to agree on, well, anything.

We’re talking Coke vs. Pepsi here. Microsoft vs. Apple. What condiments are “correct" to put on one’s hot dog. Or, what happens when you put diehard Star Wars fans and “Trekkies” in the same room.


However, getting bogged down in the never-ending active vs. passive squabble is counterproductive and can cause investors to lose sight of the big picture. Like dealing with a passive-aggressive person, sometimes the best thing to do is ignore these ideological zealots.

Instead, active and passive strategies can be combined to tap the strengths of each approach. Our Chief Investment Officer, Sanjoy Ghosh, has written about how active and passive investing both hold a place in Covestor’s investing philosophy.

Let’s revisit some of the ways that active and passive strategies can actually work together, and why there really might be no such thing as truly “passive” investing.

A PR nightmare?

First, some basic definitions.

Passive investing involves following market benchmarks such as the S&P 500 and is usually associated with index funds and ETFs. The idea is to simply to track or mirror the market.

Active investing typically involves a human portfolio manager using market timing, stock picking or other techniques in an effort to beat or outperform the market.

Passive index investing has surged in popularity in recent years. There are several reasons for this. Investors have focused more on fees, and index investing is associated with very low costs. Also, academic research has documented how difficult it is to beat the market over the long haul.

Active mutual fund managers have been dealt “a public relations thrashing,” writes John Rekenthaler, vice president of research at Morningstar.

“Index-fund managers have convinced the marketplace that the critical investment issue is whether to be passive or active,” he said. “The triumph of indexing has become a familiar tale … Active management is regarded as a losers’ game. That belief, however, is incomplete.”

Rekenthaler, a long-time observer of the mutual-fund industry, notes that costs count more than active or passive. Low-cost investing is good investing, but not all low-cost investing is passive.

Heretics in the index temple

One interesting recent trend is that some asset managers known for their passive index portfolios are getting attention for their active strategies.

In fact, Rekenthaler finds that Vanguard’s low-cost actively managed funds have quietly outperformed their more-famous index siblings.


Also, the section of Vanguard’s website for financial advisors has a guest post on combining active and passive strategies in what are known as core-satellite models. The idea is to fuse the best parts of active and passive investing.

Building a better portfolio

BlackRock, which oversees a large family of index-tracking iShares ETFs, has also recently weighed in on how active and passive investing can be used together.

“While the debate between active and passive will never truly be settled, investors can sidestep the acrimony and embrace a simple approach that blends both to help build a better portfolio,” writes Russ Koesterich, global chief investment strategist for BlackRock, in the company’s blog.

“That of course leaves the question of how and when to combine active and passive.”


Koesterich says the right blend of index and active investments will depend on the investor’s specific risk tolerance and goals, but he offers five general factors to consider:

Active Funds

#1: Look for active funds with broad mandates.
#2: Consider active funds for asset classes that are difficult to represent with an index.
#3: Think of active funds as long-term, core holdings.

Passive Funds

#4: Consider passive funds when you’re trying to achieve precise exposure to certain asset classes in a cost effective and tax efficient manner.
#5: Think of passive funds for tactical exposure.

The bottom line is that active and passive investing shouldn’t be an “either-or” proposition. They can work together. 

In fact, “passive investing” is probably a misnomer.

"[T]here is no such thing as a truly passive portfolio," writes Cullen Roche at The Pragmatic Capitalism blog. “That is, the only ‘passive’ approach would be buying all of the world’s financial assets and simply taking the market return it generates every year. Of course, you can’t do this because no such product allows you to do this.”

Building a portfolio involves choosing which asset classes to invest in, such as stocks, bonds, real estate and cash. Investors also have to decide what percentage to devote to each asset class. Therefore, all investing involves a degree of “active” decisions, even if investors are using “passive” instruments such as index funds and ETFs to invest.

For some investors, the right mix of active and passive strategies could be the best solution.

Continue learning: Why active management is alive and kicking

Sep 3

Are cyborgs the future of investment advice?

Automated online portfolio management (often called “robo-advisers” in the press) build and manage investment portfolios at rock-bottom costs using technology and computer algorithms.

And they’re putting the pressure on traditional financial advisers to justify their assets under management fees with planning services and other human touches.

But what’s the golden ideal for the individual investor?


Technology, meet human

The pressure to streamline efficiency and fees is certainly a good thing for investors.

However, the future of investment advice might actually be services and platforms which combine the best features of man and machine, as some industry observers speculate.

Enter the cyborg money manager.

These man-meets-machine investing services are designed for tech-comfortable individuals who appreciate the convenience of online investing, but want an added human element available if they have questions.

Race to zero investing fees

The New York Times recently published an article on how online investment advisers are escalating the price war in the business of investment advice.

This is great news for investors because high fees can result in tens or hundreds of thousands of dollars lost over a lifetime.

These investing newcomers offer portfolios of index funds and ETFs that essentially run on autopilot. None of these companies charge more than about 0.5% of assets for these portfolios, according to this New York Times graphic.

There are several reasons why these upstarts charge less than established, big-name financial firms. They are typically backed by venture capital, and they use computer algorithms to build portfolios in place of humans, which is why they’re sometimes called robo-advisors.

The fact is that diversified, “plain-vanilla” portfolios based on academic research and back-testing have become a commodity in recent years. The cost of managing these portfolios keeps getting closer to zero, and the rise of low-cost, index-tracking ETFs as the building blocks has only accelerated this trend.

The question here is how passive and fully algorithmic, all-ETF portfolios will weather in a more volatile stock market than today’s — and how will those with all of their investable assets in such strategies fare long-term?

Cyborg advisers

So, the robo-advisers are chipping away at fees on the investment management side. But what happens when individuals need personal financial advice, active investing strategies, or planning services?

“Being able to talk to a human being face to face still matters to many people,” writes Rob Leiber in the NYT article. While some online investment start-ups did start with “a rather one-note proposition”— a portfolio of low-cost investments that runs itself — they have started to add more personalized features, he added.

Robo-advisers have had success with specific investor types, such as younger individuals who prefer using technology, and investors who want to “set it and forget it” with passively managed portfolios that track the market, rather than attempt to outperform it. And they don’t place a high priority on the human touch.

However, other online investment advisers are adding humans to the mix if clients have questions, and offering actively managed portfolios designed to beat the market.

The latter “tech-meets-human” services cater to individuals who want to be able to talk to a financial professional if they need help, and who also want a broad choice of investment options on the menu, including passive and active strategies — in one account.

Best of both worlds?

The bottom line is that better technology has allowed some online advisers to deliver basic investment portfolios at very low cost. However, investors suffer from common behavioral mistakes they tend to make over and over again, such as giving in to fear and selling at the worst possible time.

Therefore, many investors would benefit from talking to a live financial professional when they’re choosing investments that are suitable for their goals and risk tolerance, or when they’re tempted to abandon the long-term plan.

So, the next big trend in investment advice could likely be services which combine the strengths of automated technology with the wisdom and experience of human financial advisers. If the Terminator had a financial advisor cousin, he might be the next guy to watch on the personal finance scene.

"Cyborg" advisers enable both technology and humans to handle the tasks they do best.

Continue learning: Investing for less than the cost of a latte a month


Photo credit: JD Hancock via Flickr Creative Commons

Sep 2

This top retirement destination offers an investing lesson

When it comes to picking the perfect travel or retirement destination, it helps to think like a “value” investor: We all want the best location and amenities, but it’s also important to balance quality with cost.

In this way, we are reminded that balancing quality with value is as important in any investment model as it is when planning luxury travel or a post-retirement relocation.


This measured balance is a big reason why the region of Algarve in Portugal was recently named the #1 non-U.S. retirement haven by The Overseas Retirement Letter.

An unexpected winner

The “retirement haven” rankings are based on climate, cost of living, environmental conditions, how commonly English is spoken, real estate, taxes and other factors.

However, the Algarve took top honors this year due in large part to its low cost of living relative to the quality of life.

In other words, it’s a stunning destination that is also a great value — the best of both worlds.

Although other destinations in the global rankings offer lower costs of living, the Algarve is “the most affordable option in Europe,” said Kathleen Peddicord, publisher of The Overseas Retirement Letter. “For just $1,500 a month, you can live in the quintessential old world culture in the Algarve – the southernmost province of Portugal – where you will find medieval villages, some of the best beaches in Europe and amazing weather.”

The cost of living in Portugal is among the lowest in Western Europe, on average 30% lower than in any other country of the region, she added.

Other overseas retirement havens

Close behind the winner Algarve are six destinations in South America, Europe and Asia:

2) Cuenca, Ecuador – Beautiful climate, affordable and expat community
3) George Town, Malaysia – Budget living, low taxes, good weather, expats speak English
4) Chiang Mai, Thailand – Inexpensive, expats, weather and good health care
5) Dumaguete, Philippines - Affordable, great beaches, expats, balmy climate, good health care
6) Pau, France – Old World lifestyle, low crime and good health care
7) Medellin, Colombia - City living on a budget, health care


“There is no one best place to retire overseas; no one place is right for everyone. That’s why we rate the top destinations around the world, each special for its own reasons,” Peddicord said. “Not everyone wants to retire to the beach. Some want the amenities offered in a big city, while others want the tranquility of a mountain retreat.”

Many of these same principles of choosing a retirement destination are relevant to retirement investing.

Investing lessons

First off, one size does not fit all. When choosing a portfolio, investors need to consider their unique situation, including time until retirement, how much they’ve already saved, and their ability to absorb potential losses (known as risk tolerance).

In investing, fees can be equated to “cost of living.” As much as possible, you’ll want to limit the investing fees and costs you pay, so you can keep more of what you earn.

Meanwhile, the “quality of life” in investing can be thought of as the level of performance and services. You want to work with the best portfolio managers and financial advisers.

Similar to picking a top retirement destination, a successful investing approach balances the right strategy for you, with the lowest possible costs. And, in an ideal world, if you practice this balancing act while in your wealth accumulation phase, retiring or vacationing at luxury resorts in regions like Algarve will be an accessible financial possibility.

Continue learning: Stop paying management fees and keep more from your investments


Sep 2

3 things to know now that the stock market has tripled

The S&P 500 Index, which most financial professionals use to track the performance of the overall U.S. stock market, has now officially tripled in value — along with breaking through the 2,000 level for the first time, ever.

In a recent post, we looked at how often investors should expect 5% corrections, based on market history. This time, however, we’ll examine previous bull markets in which U.S. stocks have tripled, and see what lessons there are to be learned.


After all, when it comes to investing, you want to be looking ahead, not in the rear-view mirror. And remember, history never repeats exactly — it rhymes.

Here are 3 things investors should know now that the market has tripled from the 2009 financial-crisis low:

1. This has only happened four other times in recent history

The Armo Trader blog notes that that since 1962, the S&P 500 has tripled from a major low on four occasions.

stocks-triple-chartS&P 500 since 1963 (Click to enlarge)

So the S&P 500 is up 200%, but the interesting thing about the current bull market is that so many individual investors don’t trust it.

Who can blame them? Investors burned by the dot-com implosion and the financial crisis within a decade are afraid of another nasty drop, and many have missed the rally.

Now, it’s even harder for them to get off the sidelines because the market has already enjoyed a great five-year run. And some investors think stocks are too pricey.

“The United States stock market looks very expensive right now,” Yale economics professor and Nobel Prize winner Robert Shiller wrote in a recent New York Times column.

Finally, some investors find it psychologically difficult to buy stocks when they’re at all time highs, which takes us to our second point…

2. All-time highs don’t mean the market is automatically due for a pullback

It has been over two years since a 10% correction, and five years without a 20% decline.

Some bears point to all-time highs and the lack of a correction as proof that we’re overdue for a pullback.

However, independent trader and market technician Ryan Detrick warns not to be fooled into thinking new highs are bearish.

Making new highs in the S&P 500 “isn’t some bearish event like so many claim,” he says. New highs actually “tend to happen in clusters that can last years.”

In the chart below, Detrick shows that new highs have been a common feature of bull markets since 1950.

“Could we really have another 15 years of the this bull market? I have no idea to be honest. Still, my best advice is be open to it,” he writes. “It has happened before and very well could happen again.”

all-time-highs=sp-500-chartS&P 500 all time highs (Click to enlarge)

Notice how Detrick is using history as a guide to manage expectations, rather than as a crystal ball for precise forecasts.

Which takes us to point #3.

3. No one knows when the bull market will end

Investors have more information at their fingertips than ever before. Yet no one piece of data or research will tell investors when a bull market is over. They don’t ring a bell at the top of the market, as the old Wall Street adage goes.

That said, history shows that bull markets tend to end when investors are “euphoric,” which is a subjective term, writes Yahoo Finance contributor Ben Carlson.

“[M]arkets are emotionally-driven. There are so many moving parts involved that it’s impossible to simply use a single variable or even a handful of variables to tell you exactly when the good times will end,” he says.

Market historians often want to pinpoint what single factor tells investors to buy or sell. The reasons are often obscure and based on ‘animal spirits,’ or irrational, unpredictable, herd behavior,” adds Reuters columnist John Wasik.

To sum it all up, it seems that investors have yet to reach that euphoric level that have signaled previous major market tops. At the same time, the mood has improved significantly from the depths of the financial crisis.

So we’re probably somewhere in the middle, although exactly where is open to debate.

Continue learning: How often should investors expect 5% market corrections?


Photo credit: Ryan Johnson via Flickr Creative Commons

In the luxury property market, bidding wars are for suckers

In the U.S. housing market, real estate inventory of homes for sale remains fairly tight after the subprime bust, which is one reason why prices have continued to slowly recover in recent years.

However, in market for luxury homes, inventory is much higher.

In other words, there are more homes for sale for high-end buyers to choose from.


This is why in the luxury property market, getting involved in a bidding war doesn’t make a whole lot of sense right now.

The graphic below from Zillow shows the inventory of homes for sale in several U.S. cities, broken down by price point. The top-value tier (shown in orange) has the most inventory.

home-pricesCities’ real estate inventory by home price (Click to enlarge)


Supply and demand

Overall, home prices continue to rise in the U.S., although the pace of gains has slowed a bit recently.

The S&P/Case-Shiller National Home Price Index rose 6.2% in June from a year earlier, and increased about 1% from the previous month, according to data released Tuesday.

One reason home-price gains are cooling is that more sellers are placing their homes on the market, reports Ruth Mantell for MarketWatch.

“The evidence suggests that house prices are leveling off following the sharp increases of 2013, with the improved supply we have seen in recent existing home sale figures putting a cap on price pressures, and demand still below last year’s peaks,” said Andrew Grantham, an economist at CIBC World Markets, in the article.

The inventory of homes for sale looks tight by historical measures, but supply has been rising in recent months. More supply and easing price growth will give buyers more of an edge.

A tale of two housing markets

Yet it appears that recent inventory growth has been concentrated in the high-end or luxury home market.

There are several reasons why supply is constrained in the lower-end market, and looser at the higher end.

In the lower-end market, many investors have paid cash in recent years to “flip” houses at higher prices, or convert them into rental units.

Also, “underwater” mortgages tend to be bunched in the lower end of the market. When a mortgage is underwater, it means that the borrowers owe more on the loan that the house is worth, and they may not be able to sell the house. This can reduce the inventory of homes for sale.

Bidding wars ease

The dichotomy in the U.S. housing market is frustrating for first-time homebuyers, but encouraging for move-up buyers.

“There is inventory coming on line, albeit slowly,” said Nela Richardson, chief economist for Redfin, in a recent Bloomberg article. “The problem is it’s not equally distributed. There is more turnover at the higher end.”

housing-inventory-real-estate-home-price-comparison2014 vs 2013 inventory by home price (Click to enlarge)


“The rising inventory of more expensive properties is giving a boost to sales and easing the bidding wars of the past two years,” according to the report.

The bottom line is that high-end home buyers can probably afford to shop around and wait for a good deal.

It’s a buyer’s market in the luxury real estate sector, if your agent negotiates well. Maybe it really is time to purchase that vacation home in Malibu.

Continue learning: The 10 investing and personal finance books you should be reading this summer