Here’s what every stock market expert will tell you – slow and steady wins the race. Keep your regular contributions going, lean on the benefits of time and compounding, and you will be financially set when you retire. Ignore the daily swings of the stock market, those are based on the whims of traders and market makers, just keep at it and you will be just fine. Statistics will be quoted, including the infamous “the stock market has returned XYZ since 19-whenever,” and those are supposed to buttress the argument that the stock market is just fine… as long as you ignore the daily gyrations.

Here’s the problem I have with that line of thinking – the market may have offered a reasonable rate of return since the Great Depression but a lot has changed since then. With the sheer number of electronic trading, including emotionless computer algorithms that follow their independently programmed instructions, and events such as the flash crash, it’s obvious we aren’t in the same era as before. High frequency trading accounts for almost 75% of all buying and selling of equities, according to Bloomberg.

The first arrow that pierced the sanctity of the stock market was when I read Trading with the Enemy by Nicholas Maier, which chronicled Maier working at Cramer’s hedge fund. In that book, Cramer finds out about a newspaper article before it gets published and trades based on that information. Is it insider information? Perhaps. Does this happen all the time? Very likely. Does this make you believe that us buy and holder suckers are really just buying into a Ponzi scheme?

Do I believe the stock market is the easiest way for you to save for retirement? Yes. You really can’t beat getting into and out of a fairly liquid position for only a few dollars. When I buy shares of Apple, and I have, I’m not worried I can’t find a buyer in the next ten seconds. I might have to adjust my expectations, which should be in line with demand at the moment based on Bid/Asks, but I can find someone fairly quickly… much quicker than any other asset.

Is my faith somewhat affected by the hundred+ point swings in the market that seem to happen on a daily basis these days? Also yes.

How about you?

(Photo: psycho-pics)

I’ve been a fan of dividend stocks for a few years now, ever since the Great Stock Market Sale of 2008 (I picked up a few more in the Less Volatile Sale of Mid-2011). With my longer time horizons and my hardy stomach for volatile stock prices, I found it easy to be patient and purchase shares in solid companies with good earnings and a dividend policy that was consistent and not overreaching. With a basket full of dividend stocks paying out once every quarter (or twice a year), one of the bigger questions on my mind was whether I wanted to reinvest my dividends.

Many brokerages now let you reinvest your dividends without charge. It’s a nice feature that was, many many years ago, only available through company-specific DRIPs. The question is whether automatic reinvestment makes sense?

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You’ve probably heard of the 120 minus your age diversification rule: subtract your age from 120 and that’s how, as a percentage of your investments, much you should have invested in stocks. The rest should be in bonds. The idea behind that rule is that stocks are “risky” and bonds are “safe.” Are bonds really any safer than stocks?

At it’s core, a bond is a simple instrument. You are basically buying a debt instrument and loaning a company or municipal government or some other entity some money. The bond has terms like a regular interest payout (coupon rate), a life span, and a par (face) value. The bonds are themselves guaranteed by the entity that issued them and riskier entities typically offer higher interest rates to offset the risk that the entity defaults.

As you’d expect with any financial instrument, there are all sorts of variations on this general theme. For example, there are bonds that let the issuer “call” them, or pay them off, early. There are zero coupon bonds sold at a discount to face value (so you pay $80 for a $100 bond, get no interest, but you get $100 when it matures).

So does that make them riskier or safer than stocks?

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The tech boom of the late 1990s and very early 2000s made day trading a household term. Before the days of cheap stock trades and even cheaper real-time information, buy and hold was the norm. For regular folks, buying and selling stocks during the day was both expensive and fruitless because you didn’t know the exact price (you just called your broker to fill an order) and you wouldn’t until the next day, when it was printed in the newspaper. The internet changed all that.

However, buying and holding is still the smartest strategy, despite lower transaction costs, because the vast majority of people are terrible at picking stocks. We don’t do enough research, we aren’t as knowledgeable about a company as we should (it takes more than reading their income statement and balance sheet – a lot more), and we aren’t able to research as much companies as we should (we should know the company, it’s competitors, it’s suppliers, it’s distributors, it’s regulatory environment, etc.). We have day jobs!

I came to this realization because I’ve been reading Crossing Wall Street for at least a year. It’s written by Eddy Elfenbein, a self-proclaimed stock market addict and named by CNN/Money as the best buy and hold blogger. His “thing” is his annual Buy List of stocks that he changes once a year and frequently puts up against the S&P500. He’s beaten the S&P500 each of the last four years and his site, and his list, is completely free (so no “fee” so to speak).

All that is well and good but when you read his posts, and his email newsletter, you’ll probably realize how little you know about the companies you own. He has an uncanny way of predicting a company’s earning’s results and is rarely surprised (if there is every a surprise, it’s usually with annual projections or some other surprise), which is a sign that I don’t know enough!

One example, his buy list, doesn’t necessarily “prove” that Buy and Hold investing works but it certainly doesn’t hurt when you have a well informed person making up that list. (I don’t have anything patterned about the Buy List, I do own a few companies on it, but I do like reading his posts – and he responds to email)

When it comes to investing, there are two things you can control – how much you pay in fees and how much you pay in taxes. With fees, it’s pretty straightforward because fees are disclosed up front. A brokerage charges you $x per trade, a mutual fund company pulls x% in expenses, and both are required by law to make those very clear.

Taxes are slightly different. The tax code can be complicated and it doesn’t help that there are so many different “types” of investment accounts from 401(k)s to Roth IRAs to your plain vanilla brokerage account. When it comes to investing, what you buy and where can be just as important as what you buy.

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One of the ways that you can diversify your portfolio, while at the same time limiting some of your risks, is to invest in index funds. An index fund is a group of investments that follows a specific index. If you invest in an all market index fund, then you get a little share of everything on the stock market. There are funds that follow the S&P 500. You can find index funds that follow specialty indexes, such as those for alternative energy, or small business. You can even find index funds for bonds and other investments.

While investing in index funds isn’t everything, this strategy can provide you with a way to earn market returns, pay low fees (index funds cost much less than actively managed mutual funds), and build up your nest egg. Choosing index funds, though, can be somewhat daunting. If you have a little less than a minute, though, you can get a head start on the process:

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I don’t normally review too many investment related books, unless I have a personal interest or I feel they have value to everyone, but I couldn’t pass up a book called “Super Boom: Why the Dow Jones Will Hit 38,820 and How You Can Profit From It.“

Last October, Jeffrey Hirsch predicted, in the Stock Trader’s Almanac, that the Dow would increase to 38,820 by the year 2025. The 38,820 number sounds absurd, doesn’t it? Based on the 2010 close of 11,577.51, reaching 38,820 is “only” an 8.4% annual growth rate over 15 years. Most would call it a rosy prediction… so it’s not nearly as outlandish as it probably first appeared.

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The Robin Hood Tax is a collection of financial transaction taxes similar to the Tobin tax, proposed in the United States. The Tobin tax, suggested by Nobel economist James Tobin, was a tax on all spot currency conversions and designed to penalize short term forex trades. The Robin Hood Tax is broader and would add a tax to a variety of financial transactions from currency exchange to stock trades to bond sales. It would also include a levy on banks and other financial activities (called a FAT tax).

Why Robin Hood? He stole from the rich and gave to the poor. This tax would steal from the rich (bankers) and give to the poor (social programs) too and the idea has the support of over a thousand economists.

How much would the tax be? On transactions like stock trades and the like, it’d be 0.05%. On a purchase of $1,000 in stock, you’d expect to pay 50 cents. If you’re a savvy buy and hold type, you won’t even notice it. The real money makers are those mega-traders who use arrays of computers and transact in the tens and hundreds of millions of dollars each day.

What do you think of this idea? I love it.

(Photo: Oxfam)

The S&P Dividend Aristocrats is a list of companies in the S&P500 that have increased their dividends each year for at least 25 consecutive years. It’s a starting point for a lot of dividend investors because 25 years is a long time and seen as a sign of reliability. Any one on the list has weathered not only the most recent recession but also the one in the late 1980′s as well as the dot com bust. It’s been a turbulent time but one thing must be clear – past performance is not indicative of future results. The list is a start but should not be the end of your research.

The list is updated annually to add and remove companies. There were several additions and several removals this year.

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When I was in elementary school, we played a stock market game in which each team was given $10,000 to invest over the course of a month. It was about the time of the first Gulf War, when Iraq invaded Kuwait, and someone on our team suggested we purchase shares of Caterpillar. Then, as the days would pass, we’d review our copies of the New York Times business pages for the closing price of the stock the previous day.

That’s right… we checked the newspaper and saw only the closing price from the night before. No after market trading, no level 2 market data – none of that stuff. We were only eleven and it would be many years before you could even get real time data (everything was 20 minutes delayed, unless you paid).

The deluge of stock information only serves one purpose – increased activity. That’s why I thought it was funny that this story about a Google glitch on Apple’s ticker was even a story. The sad part is that as you watch it tick down, you don’t know if it’s a glitch or a flash crash.

If it’s a glitch, you won’t freak out when you see it. If it’s a flash crash, you won’t freak out when you see it. If it’s a real crash, chances are you wouldn’t have beaten the computer traders, institutional experts, and all the other folks who are in line ahead of you… and you won’t freak out about it either.

The lesson? Don’t check stock prices every minute.

(Photo: bransorem)