“Investing for Dummies” During Difficult Markets

Everyone’s financial situation is different. What may be good advice for a 21-year-old likely is not be the best advice for a 65-year-old. Some investors may be willing to accept portfolio risk while others look for safety. While some may be able to muddle through, others may need a professional financial advisor to be their guide.

But there are some basic things every investor should keep in mind:

Diversification – You’ve heard the expression “Don’t put all your eggs in one basket.” The same holds true for investment portfolios. If all your investments are in the same area or category, and that category takes a hit, you’ll likely absorb all of the damage. On the other hand, if your investments are spread out over different categories, then a big hit in one category could have a very little effect on you. For that reason, it makes sense to divide holdings among stocks, bonds, real estate and cash.

Asset allocation – Simply put, this is the strategic approach to diversifying.  Generally, the older you are, the less risk you want to have in your portfolio, since a loss will be harder to make up over time. So those that are older may want more bond holdings in their portfolio, because bonds are considered less risky than stocks, in most markets. On the other hand, younger investors may be willing to assume more risk and allocate a greater percentage to stocks in the holdings in hopes of greater gains over time.

The slightly more savvy go even further, dividing stock holdings between large, mid or small-sized companies or  spreading the risk out to less correlated sectors like healthcare, transportation, technology and energy.

Dollar Cost Averaging – Purchasing investments at regular intervals with a fixed dollar amounts has advantages. This tends to reduce the impact of market volatility in their portfolios.

Let’s assume you have $150/mo to invest.

Month 1 – You buy 6 shares of the stock at $25/share.

Month 2 – You buy 10 shares of the stock at $15/share.

Month 3 – You buy 5 shares of the stock at $30/share.

Over three months, you have 21 shares with a total cost of $450, averaging just over $21/share.

More shares are purchased when the price is low, and fewer are bought when it is high, so the average price per share goes down over time. Although risk does not completely disappear, this strategy reduces volatility risk.

Kicking it Up a Notch – Now for savvy investors, market downturns mean opportunity, a chance to buy stocks with good potential for growth at bargain prices. This is where research and strategy come into play. It also requires learning about more strategies like:

• Understanding the difference between a market order and a stop order.
• Knowing the difference between growth stocks and value.
• Learning what option contracts are – The right to buy or sell a stock at a predetermined price.
• Understanding market metrics like Price to Earnings ration (P/E).

There are many more strategies and theories, from technical chart patterns to option straddles.

If becoming a full time student of the market is not something you can afford the time to do, consider hiring a Registered Investment Advisor (RIA). That is, a professional that manages your investment portfolio for a fee as opposed to a commission. This way there is no underlying agenda to “sell” you something that may not fit your needs. In the end, engaging a professional to handle the investment management of your portfolio can help your assets to grow and give you the piece of mind to sleep soundly at night.

The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a financial professional, CPA or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.  

The views and opinions expressed herein are those of the author and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

 

Basic Understandings of Executive Compensation

In the recent light of corporate governance, board involvement and financial/economic crisises, it is not a wonder why Executive Compensation has become such an area of intense focus.  

Essentially, every company employs key executives who are critical to the success of the business.  Retaining these skilled, well-trained professionals can be extremely challenging in today’s competitive environment.  A well thought out and fair executive compensation plan can help to motivate, incentivize and retain those creative professionals that drive the success of the business.

Weighing Talent

Who Gets Executive Pay?

Usually only those members of your most senior management team qualify for executive pay. It is usual the members of the “C-Suite.” By title they typically are:

• Chief Executive Officer
• President
• Chief Operating Officer
• Chief Financial Officer
• And other Chief Officers; i.e. Chief Information Officer & Chief Marketing

What Are the Components of Executive Compensation?

While a non-exempt employee earns simply an hourly rate and, hopefully, a benefits package that includes basics such as medical, paid time off, and a 401(k) option, the components of executive pay are more numerous and more complex. They include, but are not limited to:

• Base salary
• Incentive pay, with a short-term focus, usually in the form of a bonus
• Incentive pay, with a long-term focus, usually in some combination of stock awards, option awards, non-equity incentive plan compensation
• Enhanced benefits package that usually includes a Supplemental Executive Retirement Plan (SERP)
• Extra benefits and perquisites, such as cars and club memberships
• Deferred compensation earnings

What Is Executive Compensation Based Upon?

Most organizations have separate executive pay plans and these plans focus much more on the individual, where it is the person for whom the compensation package is tailored. The executive pay packages must still be consistent with the compensation philosophy of the organization. They must be competitive in terms of what is being offered to similar officers within the same industry and in comparably sized organizations. Whereas geography is a huge factor in terms of prevailing wages for non-exempt employees, at this end of the pay spectrum geography is not as an important factor. Recruitment at this level is usually at the national or even international.

Why Is Executive Pay Complicated?

Executive pay is complex for a number of reasons, which include tax minimization, financial reporting, and government regulations. While most of us are left on our own to deal with Uncle Sam and the taxes we owe every April; effective executive compensation plan designs look at the current tax laws and take those laws into consideration. Plan updates are made when favorable tax benefits are found.

The Sarbanes-Oxley Act (SOX) that passed in 2002 enhanced financial disclosure and put limits on what can be offered to executives of public companies. SOX stopped loans to executives, for example. The Financial Accounting Standards Board (FASB) has determined that stock options must be reported on financial statements as an expense. The combination of SOX and FASB regulations has made stock options granted a less popular element of the total reward mix.

How Can I Design an Executive Compensation Plan for My Organization?

This is not an undertaking for the inexperienced to take on by themselves. This is the time to call in an expert and partner with your finance department. The total rewards package for your executives needs to be reviewed by your legal counsel and satisfy your executive pay committee of your board of directors. You must assure that sufficient employment, severance, and change of control agreements are in place to meet the needs and goals of the organization. Concurrently, your executive pay plan needs to have clearly understood corporate-wide measurements to maximize the compensation investment being made. It is critical to get this pay right for the good of your executives, as well as the health and leadership of organization.

The information herein contained does not constitute tax or legal advice. Any decisions or actions based on information contained herein should not be made without first consulting a CPA or attorney.

For more information contact Compass Asset Management Group, LLC at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Protect Your Portfolio Using Options Strategies

Four ways to protect your stock portfolio using options.  Use these strategies to handle the market’s surprises.

Many investors have heard horror stories about options. “They’re too risky, too complicated, and too speculative,” some have warned. Contrary to that belief, options are not always risky or complicated. In fact, as you understand the advantages and disadvantages of options, you’ll appreciate how you can use options in conjunction with stocks. Although most investors’ primary goal is to earn profits, one constructive way of using options is to protect your stock portfolio from disasters. Here are four strategies to consider:

1. Sell a covered call This popular options strategy is primarily used to enhance earnings, and yet it offers some protection against loss. Here’s how it works: The owner of 100 (or more) shares of stock sells (writes) a call option. The option buyer pays a premium, and in return gains the right to buy those 100 shares at an agreed upon price (strike price) for a limited time (until the options expire). If the stock undergoes a significant price increase, that option owner reaps the profits that otherwise would have gone to the stockholder. Thus, the covered call writer sacrifices the possibility of earning profits over and above that previously agreed upon price — in exchange for that real cash payment. Additional details are required to gain a complete understanding of this idea, but the basic premise is this: cash now in exchange for profits that may never materialize.

2. Buy puts When you buy puts, you will profit when a stock drops in value. For example, before the 2008 crash, your puts would have gone up in value as your stocks went down. Put options grant their owners the right to sell 100 shares of stock at the strike price. Although puts don’t necessarily provide 100 percent protection, they can reduce loss. It’s similar to buying an insurance policy with a deductible. Unlike shorting stocks, where losses can be unlimited, with puts the most you can lose is what you paid for the put.   By picking a strike price that matches your risk tolerance, you guarantee a minimum selling price — and thus the value of your portfolio cannot fall below a known level. This is the ultimate in portfolio protection. The reason the vast majority of conservative investors don’t adopt this strategy is that puts are not cheap, and this insurance often costs more than investors are willing to pay. Yet the protection a put provides just may be priceless.

3. Initiate collars – Collars represent the most popular method for protecting portfolio value against a market decline. The collar is a combination of the two methods noted above. To build a collar, the owner of 100 shares buys one put option, granting the right to sell those shares, and sells a call option, granting someone else the right to buy the same shares. Cash is paid for the put at the same time cash is collected when selling the call. Depending on the strike prices chosen, the collar can often be established for zero out-of-pocket cash. That means the investor is accepting a limit on potential profits in exchange for a floor on the value of his or her holdings. This is an ideal tradeoff for a truly conservative investor.

4. Replace stocks with options The three previous strategies are relatively easy to use and involve little risk. The stock replacement strategy, on the other hand, can be tricky. If not done properly, the investor’s portfolio can vanish. The idea is to eliminate stocks and replace them with call options. The point of this strategy is to sell stock, taking cash off the table. The stocks are then replaced by a specific type of call option — one that will participate in a rally by almost the same amount of stock. Ideally, the chosen stocks can incur only limited losses when the market declines. This strategy is similar to buying puts: limited losses, profit on rallies, and costly to initiate. For example, let’s say you own 300 shares of XYZ Corp. You have a nice profit that you want to protect. The stock is currently at $54 per share. You sell the shares and buy three call options with a 50 strike price (giving you the right to buy shares at $50). You choose a fairly long time period — perhaps one year (minimizing commissions to replace options as they expire). It’s crucial to replace stock with options whose strike price is lower than the current stock price. The risk for inexperienced investors is that they may choose less expensive call options (out of the money). That is far too risky because there’s no guarantee those options will increase in value.

These four strategies are designed to protect a portfolio against varying amounts of loss. Don’t assume that they also guarantee profits.  In fact, before using any option strategy, the best advice is to consult with a professional to both gain a more thorough understanding of what it is you are attempting to do and the best advice in how to do it.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.