Showing posts with label ETF. Show all posts
Showing posts with label ETF. Show all posts

Saturday 12 May 2012

Interesting interview by John Bogle.





John Bogle the creator of Vanguard Index 500 is worth always listening too. Recently Mark Cuban the owner of the Dallas Mavericks disputed the merits of long term investing. Watch this video interview in link below. One interesting component in the interview was the fact that ETFs are causing lot of market volatility as they make up 40% of trades in the market everyday. Understanding their impact is very important.

Tuesday 13 December 2011

Five investment hazards

Five investment hazards
After HSBC is fined for mis-selling investment bonds, we look at the products that tempt buyers to take inappropriate risks.


Danger Toxic Hazard sign
Investment hazards to avoid Photo: Alamy
As we draw closer to the ban on commission payments on financial products, which will take effect in 2013, there is growing concern about a rise in the mis-selling of products and fears that some advisers and salesmen are grabbing what they can now.
"I've never seen so many cases of poor advice as I have in the last six months – from advisers 'churning' pension plans to selling unregulated products such as overseas property investments," said Philippa Gee of Philippa Gee Wealth Management. In some cases, she said, advisers were pocketing between 8pc and 10pc of the investment.
"We never see clients who have been mis-sold a National Savings product or a cheap tracker fund," said Ms Gee. "Inevitably, they've been sold a product they don't fully understand and are taking too much risk with their money. But the adviser has received a generous commission fee for it."
Alarm bells should ring if any adviser recommends a product where there is a toxic mix of high charges, commissions and complex terms. This doesn't mean that there aren't certain cases where such products may be appropriate. But evidence suggests that these are few and far between. Despite this, such products are sold to thousands of consumers each year.
With less scrupulous advisers making hay while they can, and the difficult investment environment perhaps tempting consumers to take risks, we look at five products where you should always think twice before signing on the dotted line.

Investment bonds

These made headlines this week when HSBC was fined £10.3m for selling bonds to elderly customers to pay nursing home fees. Regulators ruled that the bonds were mis-sold, given that the customers' average age was 83 and that there were penalties on withdrawals within five years, as well as a degree of investment risk.
These bonds aren't sold just to people needing long-term care. They are routinely offered to those with a sizeable cash sum to invest, whether they're saving for retirement or supplementing a pension. Ms Gee said: "Whenever I see a customer who's been ripped off, they've almost always been sold an investment bond."
These bonds are typically sold by insurers and allow customers to invest in a range of underlying funds. Their main advantage is that investors can withdraw 5pc of their capital each year without incurring a tax charge. But if the investment growth is less than this, capital can quickly deplete.
Most people are investing tens of thousands of pounds in these bonds (the average investment with HSBC was £115,000) and advisers earn commission of 6pc to 8pc. Investors should ask whether a diversified spread of low-cost equity or fixed-interest funds would be better. Ms Gee said: "Undoubtedly these bonds are oversold. I've advised hundreds of clients, but there's only one case I can think of where this was the most suitable product."

Structured products

These purport to offer a simple solution to nervous investors: get exposure to equity returns without putting your money at risk. Sadly, you will get far less than the market return (most investors don't get dividends, for example) and your capital could still be at risk.
Behind this persuasive "sell" are complex products that rely on derivatives and expose you to counterparty risk. Before signing up, make sure you are clear what the risks are and what return you will get. Santander recently sold "guaranteed" bonds which, it later admitted, weren't fully guaranteed, because of counterparty risk.
As with many types of investment, it's a mixed bag, with good, bad and downright ugly versions. Some structured deposits will be covered by the Financial Services Compensation Scheme (FSCS), so even if the bank selling it, or the counterparty underwriting the deal, went bust, up to £85,000 of your money would be protected. Others are "structured investments" where money can fall at twice the rate of the stock market in certain conditions. Always ask what the downside risk is, both in terms of market falls and the unlikely event of a bank backing it going bust.
"If you are not happy with stock market risk, I would not advise being in the stock market at all," said Ms Gee. "A well-diversified portfolio can often be a better way of managing such risks."

Multi-manager funds

Here, investors are paying a double layer of charges, often without any significant boost to performance. David Norman, the joint chief executive of TCF Investment, pointed out that the typical TER (total expense ratio) on unit trusts was 1.7pc, but on a multi-manager fund the average was 2.3pc, with many funds charging closer to 3pc.
These figures don't include dealing costs or any upfront fees. Some multi-managers don't include the charges on exchange-traded funds either, meaning the published TER may bear little resemblance to the charges deducted from your fund every year.
"Long-term investors are looking to beat inflation," said Mr Norman. "Historically, equities deliver 4.5pc more than gilts. But if you are paying more than 3pc to get a 4.5pc return, it's like trying to go up the down escalator."
These aren't just niche products, aimed solely at high-net-worth investors. Increasingly, these are the default options offered by a banks, including HSBC, Santander and RBS. Mr Norman added: "The principle of diversification is good, so these funds seem a simple, sensible option. But in a low-return environment it's important to keep an eye on costs. Most of these funds are charging too much."

Inflation-linked bonds

Popular at present are bonds where returns are linked to the retail prices index, rather than the stock market. With RPI now standing at 5.4pc and most banks paying less than 2pc, it's not hard to see why they are selling well. But investors should ensure they understand the more complex terms and conditions. If an account pays RPI plus 1pc, this does not mean you get 6.4pc today. Most are five-year accounts, and the return will be the difference in prices between now and the maturity date. Many people are expecting inflation to fall next year, once the rise in VAT drops out of the year-on-year calculation. As with structured products, there may be counterparty risks as well, although most are "structured deposits" that will be covered by the FSCS.

Exchange-traded funds (ETFs)

ETFs don't pay commission and have very low charges. So how can consumers go wrong? Sadly, they are far from simple products. There are physical ETFs, where the manager holds the shares or commodities of the index being tracked. But there are also synthetic versions, where there can be tracking errors and problems with liquidity if too many holders try to sell quickly. Many of these rely on complex derivatives. Worse, some offer "geared exposure", where the fund borrows to boost returns – but this can magnify losses if the market is against you.
Richard Saunders, the chief executive of the Investment Management Association, warned customers to make sure they knew what type of ETF they were buying. The term ETF is often used to describe their riskier cousins, known as exchange-traded products (ETPs), which don't offer the same level of investor protection. Investors should also ensure they look at all charges. The iShares FTSE 100 ETF has an expense ratio of only 0.4pc but annual platform charges make it more expensive than the Fidelity Moneybuilder UK Index fund or the Vanguard FTSE UK Equity Index fund.
Gary Shaughnessy of Fidelity said: "Fees reduce the value of your investments, so everyone should be clear about what they are paying. It's like deciding to fly with a flagship airline or its no-frills rival. There's more to the comparison than the eye-catching price in the advert. If you've been stung by extra charges for baggage, checking in and so on, you know that what matters is the total cost."


http://www.telegraph.co.uk/finance/personalfinance/investing/8946740/Five-investment-hazards.html

Saturday 4 July 2009

How Value Investors Use Investment Products

To be honest, if you are an experienced investor with time on your hands and all the right information and tools at your fingertips, you may not need investment products. But if you're starting out, don't have time, or need to build out a portfolio, they may make sense.

Investment products have investor benefits and investing benefits.

  • Selecting stocks can be a daunting chore for busy people.
  • Although you may be a skilled and knowledgeable investor, you may not have the time or inclination to be actively involved in tracking detailed financial information and selecting stocks.

One popular strategy for getting started in value investing is to use all the tools and skills, that you pick up on this, to start picking stocks on a small scale.

  • A few funds, like a core value-oriented fund or ETF, can put the remaining bulk of your investment dollars to work.
  • Practice makes perfect. As you gain confidence with your stock selection skills, you can move more dollars into individual equities and allocate fewer dollars to funds.

Funds and investment products can also be a great tool to round out a stock portfolio.

  • You may not feel comfortable choosing foreign stocks, small company stocks, or stocks in some other specialty area.
  • You can get exposure to these areas while getting the help of professional money mangers.

Funds, and their choices, can also light the way to individual stock selections.

  • Although some are reluctant to provide up-to-the-minute lists and selected stocks (they are required to twice a year), their investment lists, and top investments in particular, can initiate your own research into these companies.
  • Most interesting is to follow the funds of value "gurus" like Bill Nygren and Bill Miller, and of course, Warren Buffett. Imitation is not only flattering, but it can give you good ideas and save a lot of time.

Some investment products are:

  • open-ended and closed-ended mutual funds
  • REITS, and,
  • ETFs.

Whether or not you're a do-it-yourselfer, funds and other investment products have their place.

Tuesday 9 December 2008

Under 50? Do This, or You'll Regret It!

Under 50? Do This, or You'll Regret It!
By John Rosevear December 8, 2008 Comments (1)

I know, I know -- the stock market is crazy and unpredictable right now.

I know that sitting in cash or doing nothing until things settle down seems like a sensible course of action.

But I also know this: 10 or 15 years from now, the market will be up. Way up from here, in all likelihood.

If you're under 50, and you're trying to figure out what to do with the wreckage of your retirement portfolio, there's only one good answer: Buy great stocks.

Here's why.

When the game is rigged, bet with the house No, the stock market isn't "rigged" in the sense of being manipulated. It is, however, inherent in the market's nature to go up over the long term, scary bear markets notwithstanding.

Check out these 15-year returns, which assume purchase on Dec. 8, 1993 and include reinvested dividends for those stocks that have them:

Stock-----15-Year Gain

McDonald's (NYSE: MCD)
430%

Apple (Nasdaq: AAPL)
1,110%

Southern Company (NYSE: SO)
804%

Nokia (NYSE: NOK)
541%*

Qualcomm (Nasdaq: QCOM)
1,945%

Johnson & Johnson (NYSE: JNJ)
573%

Target (NYSE: TGT)
612%

Source: Yahoo! Finance.
Figures as of market close on Dec. 5, 2008. *Nokia return since Apr. 25, 1995.

Those returns are despite the dot-com bubble bursting and despite the recent market crisis. As Richard Ferri, an investment manager and author of several books on asset allocation and indexed investing, argues in this month's issue of Rule Your Retirement, there are strong reasons to believe that the market is naturally prone to going up over time -- and that average annual returns near 10% over the next 15 years are extremely likely.

His methodology and reasoning are a little too elaborate to lay out here -- check out the complete article for specifics -- but his recommendations for those under 50 are crystal-clear:

  • Your portfolio should be 100% in stocks.
  • Continue to add to your retirement accounts, and use that money to buy stocks.
  • Be aggressive -- as aggressive as you can stand.
  • Ignore performance. Don't look at your statements.
That last one might seem weird -- how will you know how you're doing if you don't look at your statements? -- but Ferri has a point. He argues that they're "completely irrelevant" -- following short-term price movements just doesn't give you any useful information. In fact, it's more likely to give you something to worry about, needlessly.

I'd add this caveat: This only works if you have very long-term investments! Not all portfolios are built to run 15 years or longer with no more maintenance than the occasional trade or rebalance -- in fact, most aren't.

How do you do that?

Construct a long-haul portfolio

Ferri is a proponent of indexing -- of using index funds and ETFs in your retirement portfolio. That’s one way to build a long-term investment strategy. Another way, one likely to yield far greater returns if done right, is to buy great stocks -- the blue-chip dividend monsters and future giants that will keep delivering rewards year after year. (Can you guess which method I favor?)

Of course, "buy stocks" isn't a complete to-do list. To maximize your gains over the long haul, you need a solid asset-allocation plan -- one that gives you exposure to all the key corners of the stock market. Your 401(k) provider can probably help you come up with a decent one -- though as a rule, those computer-generated templates tend to be more conservative than is appropriate for most young investors.

A far better set of asset allocation roadmaps for retirement investors -- one of the best I've seen, and one that works well whether you're using mutual funds in a 401(k) or stocks in an IRA, or a combination of the two -- are the ones maintained by the team at Rule Your Retirement. They're available to members by clicking on "Model Portfolios" under the Resources tab after you log in.

What do the unfolding financial crisis and ongoing market volatility mean for your money? The Fool's here with answers. Fool contributor John Rosevear owns share of Apple. Southern Company and Johnson & Johnson are Motley Fool Income Investor selections. Nokia is a Motley Fool Inside Value pick. Apple is a Motley Fool Stock Advisor recommendation.

http://www.fool.com/personal-finance/retirement/2008/12/08/under-50-do-this-or-youll-regret-it.aspx

Tuesday 2 December 2008

Avoid These Investment 'Bargains'

Avoid These Investment 'Bargains'
When is "such a deal" not such a great buy?

Christine Benz is Morningstar's director of personal finance, editor of Morningstar PracticalFinance, and author of the Morningstar Guide to Mutual Funds. Meet Morningstar's other investing specialists.

Like an extended warranty on a new appliance or the time-share pitch that's disguised as a "free" vacation, savvy consumers know that some deals that look good on the surface aren't all they're cracked up to be once you read the fine print. The same holds true in the investing marketplace.

A few months back, I shared some tips for unearthing a few true investment bargains. But what about those investments that seem like good deals but really aren't? I'll discuss some of them in this week's article.

Looking for Securities with a Cheap Share Price

Ford Motor and General Motors are currently trading at less than $2 and $3 per share, respectively. When storied companies like these two hit the skids, it may look tempting to gobble up their stocks in a bet that they won't go belly-up. After all, you can buy 100 shares of each for less than $500, and if they do manage to resuscitate themselves, you could stand to gain big. That's not the stupidest idea in the world--as long as you go in knowing that it's similar to a bet you might place in Vegas. If your bet works out, you're buying the drinks. If not, you could lose everything, as equity shareholders would likely lose almost everything if the two companies ended up in bankruptcy court. (For proof that gambling on near-busted companies is a risky proposition, just talk to shareholders of Fannie Mae, Freddie Mac , and American International Group

Hoarding Company Stock--Even When You've Bought It at a Discount

Many publicly traded companies give their employees the opportunity to purchase their stock at a discount to the current share price. That might seem like a good deal. But loading up on your company's stock can be dangerous, particularly if you're hoarding shares of your company at the expense of building a well-diversified portfolio. Remember: You already have a lot tied up in your company's financial health and your industry via your job, so it's a mistake to compound that effect by socking a disproportionate share of your portfolio into your employer's stock. To be on the safe side, limit employer stock to no more than 5% of your overall portfolio.

Buying a Cheap Fund, Then Paying Commissions on Small Purchases

Exchange-traded funds have recently taken off in the marketplace, in part because their expenses can be lower than mutual funds that invest in the same basket of securities. Before you venture whole-hog into ETFs, however, take a step back and think about your investment style. If you plan to make a lump-sum investment and let it ride, the ETF may well be the best bet for you. However, that's not so if you trade frequently or make small purchases at regular intervals (and dollar-cost-averaging is a great way to invest, by the way). That's because you'll pay a commission to buy and sell ETFs, and those charges could quickly erode any cost savings versus plain-vanilla mutual funds. Ditto for paying a transaction fee to buy a fund in a mutual fund supermarket or buying a front-load fund, even if its expenses are low.

http://news.morningstar.com/articlenet/article.aspx?id=265385