💸 What To Do With Your Next Dollar

What’s on the Menu 🍴

Since stocks are at new all-time highs, everyone’s wondering…

“What should we do with our next dollar?”

There’s a lot that goes into making a wise decision…

But today we’ve got a mental model to help start to think through that decision.

Let’s go!

• Stocks Are On A Tear: S&P 500 Chart Update 🚀

• Hot Chart of the Week 🔥

• What To Do With Your Next Dollar 💸

• Chart of the Day: Robinhood Soars 🤑

Today’s newsletter is a 5 minute read.

Stocks Are On A Tear: S&P 500 Chart Update 🚀

2023 is ending like no one could have predicted, with stocks pushing ALL-TIME-HIGHS.

The euphoria is building and it begs the question “now what?”

Looking at technical analysis of the S&P 500, we’ve been saying that this is a new bull market, and NOT a bear market rally.

The technical structure of price action made it clear that it was acting exactly like the end of a bear market.

Well now we have some interesting forces at play to make the case for more bullishness ahead.

Let’s break down price action and the possibilities & probabilities:

1. FOMO Buying Through All-Time-Highs: This market is catching investors and money managers off guard. There’s so much money in money market mutual funds and treasuries because everyone was so worried about the risks of recession all year.

The opportunity cost of NOT investing in stocks is clear with the returns we’ve seen year-to-date in the S&P 500 and the Nasdaq. Many people missed the boat at this point, but it may lead to FOMO buying of stocks (FOMO = Fear Of Missing Out). People may pile money in at the highs which could drive prices even higher before we see any kind of correction in price.

1. All-Time-Highs Act As Resistance: It’s also very possible that we see price get to all-time-highs, but then sellers come in to take profits and we don’t see a break higher. This is where a much needed correction could happen.

2. Dip Buyers Take The Opportunity On A Pullback: Sentiment has officially shifted in stocks, so it’s absolutely possible investors see the worst behind us as the Federal Reserve is expected to lower interest rates. This could mean any pullback that DOES come, gets bought up quickly (dip buying). We see this as a strong possibility if a pullback in price occurs. It’s likely to come from the $4,600 level, which is prior resistance now turned support.

As difficult as the market is to predict, we at least can use some parameters that price gives us as a guide on how to approach allocating capital going forward.

Pullbacks in price from here could end up bringing solid dip buying opportunities as things finally start to look more positive in the economy, but we’re not 100% out of the woods yet.

Keep in mind that when the Federal Reserve lowers rates, it typically coincides with a slowing economy.

But, naturally, there are possible stimulative benefits of lower rates that can help keep stocks elevated from here.

Hot Chart of the Week 🔥

There are a lot of stocks with great gains this year, but there’s one chart that REALLY surprises us right now: Costco (ticker: COST)

The stock has soared 50% this year, and in the past five years is up over 250%!

It’s been an amazing run for the membership-only warehouse retailer.

But do the fundamentals justify the move?

That’s the question investors should be asking themselves when ANY stock goes into a parabolic upside trajectory.

Costco’s revenue growth clocked in at about 6% in the past quarter, while earnings per share grew about 11% versus the prior year.

That’s not too shabby, but those levels of growth aren’t typically associated with a 50% share price move in under a year.

Costco has grown revenues & earnings every year since 2009 however, so the stability is something investors REALLY love.

In a world of uncertainty it seems investors are increasingly paying up for consistent growth.

Here’s a chart of the forward P/E ratio for Costco over the last decade:

As you can see, Costco stock is nearing its highest valuation ever, a level that is more than DOUBLE the median stock in the S&P 500 index.

Interestingly, analyst earnings estimates on Costco have not gone up this year.

While analysts do forecast COST growing earnings by about 10% again next year, that expectation hasn’t budged in 2023.

So this 50% move has been mostly due to valuation expansion and a lot less to do with the underlying business growth.

We’re not necessarily calling for an end to Costco’s growth in revenues, earnings, or share price.

But we do think it would be crazy for COST investors to expect a similar 50%+ share price performance again in 2024.

In general, as risk-to-reward shifts to being less favorable on any stock, taking some profits off the table is worth considering.

At a minimum we should adjust our future return expectations!

What To Do With Your Next Dollar 💸

“Money management is a skill.”

It’s so important to not just learn how to make money, but MANAGE money.

Your dollars don’t have a brain, so you have to tell them what to do. This often leaves people wondering what truly is the “next best move” for their money.

Here’s a simple approach to putting your next dollar to work:

1. Complete Your Emergency Fund: You may already have your emergency fund fully funded. If so, you can move on to the next step. However, a lot of people end up realizing that their emergency fund isn’t enough.

How many months of living expenses you should have saved depends on your personal situation and comfort level. I am a business owner, so, I like having 12 months of living expenses in my fund. However, you may be in a situation where you know you can go live with parents or a friend and not have to worry about having a roof over your head. That thought alone may have you more comfortable with just a couple of months of expenses. The general rule of thumb is 3-6 months of expenses in a high-yield savings account (for maximum interest).

2. Add To Retirement Plans For Multiple Benefits: In the U.S. qualified plans like 401(k)’s are not only a way to save on taxes and invest for retirement, but they’re also a form of asset protection. IRA’s are also protected up to certain amounts depending on your state.

Be sure you’re contributing enough to get a match from your employer if it’s offered. If you’re self employed, you have even more reason to consider liability protection. Look at opening a Solo-401(k) or SEP-IRA. If your business makes a lot of income, you can consider your own pension plan!

3. Prioritize goals to know your next steps: There are 3 main types of goals to prioritize from here:

• Having enough funds to live in retirement (including early retirement planning)

• Saving for a specific goal like buying a home, paying for a wedding or buying a car, etc.

• A broader financial planning goal like tax or estate planning, risk management (insurance), or paying off debt

For example, if your goal is early retirement, you’ll want to focus next on investing in a TAXABLE brokerage account next.

If you’re looking to save for a down-payment on a home, you want to move towards saving conservatively in the right type of account.

You may even have to start branching your money out to multiple different types of accounts from here to achieve multiple types of goals.

You may notice that goals are truly the core of solid and efficient financial planning! You never want to be using the wrong account for the wrong type of goal.

An example of the account and goal not aligning, would be investing your down payment for a house into the stock market. This would be quite risky, especially if you need the money in the next year or two!

So, I encourage everyone to sit down before the end of the year and look at the goals you set in the beginning of 2023, how far you’ve come, and if you can make changes to be more efficient in 2024.

Chart of the Day: Robinhood Soars 🤑

On December 6th we wrote in the Daily Dough about how Robinhood (HOOD) was lagging behind other crypto names like Coinbase (COIN), and the Bitcoin miners (MARA, RIOT).

HOOD is officially following through and trying to catch up to its peers.

It’s been a great trade that many members in our Wealth Building Community have been able to trade.

Food For Thought 🧠

“Investing should be more like watching paint dry or watching grass grow.
If you want excitement, take $800 and go to Las Vegas.”
- Paul Samuelson

DISCLAIMER: We are not investment advisors, and this content is for educational purposes only. We don’t offer financial, legal, or tax advice. Nothing we say is a recommendation to buy or sell any assets. Trading and investing are extremely risky, so please be careful and do your own research.