Tag Archives: NASDAQ:CSCO

Have New Money To Invest? Which Sectors To Buy? Which To Avoid?

Year-to-date, the Utilities ETF (NYSEARCA:XLU) has appreciated 21% and the big two telecoms, AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ), have also appreciated more than 20%. Those are amazing returns especially including the above-average dividend yields utilities and telecoms typically offer.

However, with the bid up prices, it has become riskier to invest new money in utilities and telecoms.

The top five utilities in the XLU are all overvalued, including NextEra Energy Inc (NYSE:NEE), Duke Energy Corp (NYSE:DUK), Southern Co (NYSE:SO), Dominion Resources, Inc. (NYSE:D), and American Electric Power Company Inc (NYSE:AEP).

Reversion to the mean can happen for any of these utilities that are overvalued, and it could mean negative returns in the short term.
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Handling the Risks of Investing in Stocks: Part 2

Summary

  • Buying stocks is a risk and reward game. We try to maximize the rewards and minimize the risks.
  • In the first part of the series, I discussed the risk of capital loss and volatility risk which come from investing in stocks, and ways to counter those risks.
  • In this part of the series, I’ll discuss valuation risk, the risk of market crashes, and individual risks.

Read part 1 of the article.

3. Valuation Risk

No matter investing for growth or income, overpaying for a company will not only reduce your returns but also increase your risk.

For example, during the internet bubble, Cisco Systems, Inc. (NASDAQ:CSCO) reached an all-time-high of $79. The price of buying at extreme overvaluation is an inevitable hard crash. To this day, it hasn’t come near that price.

graph showing Cisco's overvaluation in the internet bubble

Cisco was extremely overvalued in the internet bubble.

To counter valuation risk:

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