Equities - high risk

An investment in equities (shares or stocks) means that you have obtained part-ownership in the company whose shares you have bought.  Some companies are listed on a stock exchange, which means that your shares can be traded freely on that stock exchange.

Although equities are a high-risk asset class, they have the best chance of beating inflation over the longer term because of the inherent growth potential of the company in whch you have invested.

For that reason you should keep a SIGNIFICANT  portion of your portfolio in equities.  The basic rule is:  the longer the time until you retire, the more you should invest in equities.


How do I know how much of my portfolio should be in equities?

• Try this general rule of thumb:  multiply the number of years until you retire by two to get to the percentage of your assets that you should keep in equities. 
• For instance, you are 45 years old and have 20 years before retirement.  That means that you should invest 40% of your assets in equity.

Valuations are the core determinant of equity market returns.

Reason to hope for stock market investors
The "brutal" lesson will can learn from the past 10 years is that valuations are the core determinant of equity market returns.

By Paul Farrow
Last Updated: 12:14PM GMT 23 Feb 2009

John Maynard-Keynes: 'Success is always to the minority and never to the majority'
It is official. Equities were the worst performing asset class over the past decade, delivering negative real returns since 1998.

I don't suppose that those of you who have owned shares, unit trusts or Isas over the period will be too surprised at the revelation.

Unless you had been canny and bagged profits when they came and timed your run into commodities or emerging markets (and got out again) – or followed the gold bugs – you would have been a loser.

Fund statements that will have landed on doormats over the past year will have made for grim reading, while workers who are in defined contribution pension schemes have just learned that their pension fund has fallen in value by 25pc last year.

Consensus on where equities go from here is difficult to gauge, although the bears seem to outnumber the bulls. Investors seem to be shunning equities in favour if bonds.

Many advisers are once again advocating the merits of diversification – in other words, if you had invested in other assets such as cash and bonds, you would have fared better than someone who was overexposed to equities.

Yet not everyone believes diversification is the name of the game. Gary Potter, a multi-manager at Thames River, is one who argues that the crisis has narrowed the correlation between assets, making diversification less of a benefit.

He is happy to remain overweight in cash for the time being.

Some might be proclaiming the death of equities, although such thoughts could be premature.

It is easy to be sceptical about shares right now given their woeful performance, but the analysts who have just finished writing the 2009 Barclays Equity Gilt Study give reason for hope.

Firstly, the underperformance of shares has nothing to do with the asset class per se. Secondly, it says the macroeconomic environment has little influence on shares, which is a cheery thought given the deepening global recession.

Even corporate profitability, you might be surprised to learn, isn't the deciding factor on whether a share outperforms or not.

The study concludes that the "brutal" lesson will can learn from the past 10 years is that valuations are the core determinant of equity market returns.

Its research suggests that the reason shares have had such an abysmal ride over the past decade is that they were overvalued. Through the good times we were paying too much to get access to bumper profits.

"When the surge in growth ended abruptly in 2008, equity prices fell in line with the actual and expected decline in profits.

Expensive valuations therefore caused equity returns to underperform profits following the 2001 slowdown and then did the same during the ensuing boom, while finally failing to provide a cushion when the business cycle turned down," the study concludes.

You can probably guess where the Barclays mob are going with this, so if you are considering stuffing your spare cash under your mattress, keeping it in a savings account despite the dismal rates of interest, or even following the herd and piling into bonds, then bear this in mind.

The authors of the study believe that equity valuations will fall a little further and remain low for a while, before recovering late in the decade. Meanwhile, bonds' rising yields will "self-evidently" damage returns. The end result is that equities will outperform bonds over the next 10 years.

The contrarian argument put forward by Barclays might whet the appetite of those yearning for some optimism. Those optimists might also want to be reminded of this post-Depression scribbling from John Maynard Keynes, the most famous contrarian investor of them all.

In 1937 he wrote: "It is the one sphere of life and activity where victory, security and success is always to the minority and never to the majority. When you find anyone agreeing with you, change your mind."

http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/4786377/Reason-to-hope-for-stock-market-investors.html

Stashing Your Cash: Mattress Or Market?

Stashing Your Cash: Mattress Or Market?
by Lisa Smith (Contact Author Biography)


When stock markets become volatile, it makes investors nervous. In many cases, this prompts them to take money out of the market and keep it in cash. Cash can be seen, felt and spent at will and for most people, having money in hand feels safe. But how safe is it really? Read on to find out whether your money is safer in the market or under your mattress.


All Hail Cash?
There are definitely some benefits to holding cash. When the stock market is in free fall, holding cash helps you avoid further losses. Even if the stock market doesn't fall on a particular day, there is always the potential that it could have fallen. This possibility is known as systematic risk, and it can be completely avoided by holding cash.

Cash is also psychologically soothing. During troubled times, you can see and touch cash. Unlike the rapidly dwindling balance in your brokerage account, cash will still be in your pocket or in your bank account in the morning.

However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term.

A Loss In Not a Loss ...
When your money is in the stock market and the market is down, you may feel like you've lost money, but you really haven't. At this point, it's a paper loss. A turnaround in the market can put you right back to breakeven and maybe even put a profit in your pocket. If you sell your holdings and move to cash, you lock in your losses. They go from being paper losses to being real losses with no hope of recovery. While paper losses don't feel good, long-term investors accept that the stock market rises and falls. Maintaining your positions when the market is down is the only way that your portfolio will have a chance to benefit when the market rebounds. (For more insight, see How are realized profits different from unrealized, or so-called "paper", profits?)

Inflation: The Cash Killer
While having cash in your hand seems like a great way to stem your losses, cash is no defense against inflation. You think your money is safe when it's in cash, but over time, its value erodes. (Coping With Inflation Risk explains how inflation is less dramatic than a crash, but can be more devastating to your portfolio.)

Opportunity Costs Add Up
Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, opportunity cost refers to the benefits you could have received by taking an alternative action. In the case of cash, taking your money out of the stock market requires that you compare the growth of your cash portfolio, which will be negative over the long term as inflation erodes your purchasing power, against the potential gains in the stock market. Historically, the stock market has generally been the better bet.

Time Is Money
When you sell your stocks and put your money in cash, odds are that you will eventually reinvest in the stock market. The question then becomes, when you should make this move. Trying to choose the right times to get in and out of the stock market is referred to as market timing. If you were unable to successfully predict the market's peak and sell, it is highly unlikely that you'll be any better at predicting its bottom and buying in just before it rises. (This strategy is popular, but can few do it successfully, read Market Timing Fails As A Money Maker for tips.)

Common Sense Is King
Common sense may be the best argument against moving to cash, and selling your stocks after the market tanks means that you bought high and are selling low. That would be the exact opposite of a good investing strategy. While your instincts may be telling you to save what you have left, your instincts are in direct opposition with the most basic tenet of investing. The time to sell was back when your investments were in the black - not when you are deep in the red. (To learn more, read To Sell Or Not To Sell.)

Buy and Hold on Tight
You were happy to buy when the price was high because you expected it to go higher. Now that it is low, you expect it fall forever. Look at the markets over time. They have historically gone up. Companies are in business to make money. They have a vested interest in profitability. Investing in equities should be a long-term endeavor, and the long term favors those who stay invested. (My comment: Totally in agreement.) (For additional reading, check out Long-Term Investing: Hot Or Not?)

Nerve Wracking, but Necessary
Serious investors understand that the markets are no place for the faint of heart. Of course, with private pension plans disappearing and the future of Social Security in question, many of us have no other choice. (Be sure to read, The Demise Of The Defined-Benefit Plan, which provides a closer look at this situation.)

Once you've faced the facts, you need to have a plan.

1. Figure out how much money you need to amass to meet your future needs, and develop a plan to help your portfolio get there.
2. Find an asset allocation strategy that meets your needs.
3. Monitor your investments.
4. Rebalance your portfolio to correspond with market conditions, making sure to maintain your desired mix of investments.
5. When you reach your goal, move assets out of equities and into less volatile investments.

While the process can be nerve-wracking, approaching it strategically can help you keep your savings plan on track, despite market volatility.
by Lisa Smith, (Contact Author Biography)

Small-Business Financing: Debt vs. Equity

Summary

• Since debt and equity are accounted for differently, each has a different impact on earnings, cash flow and taxes, and each also has a different effect on leverage, dilution and a host of other metrics.
  
• Debt can be a loan, line of credit, bond or even an IOU -- any promise to repay borrowed amounts over a certain time with a specified interest rate and other terms.
  
• When you finance with equity, you are giving up a portion of your ownership interest in -- and control of -- the company in exchange for cash.
  
• While equity financing can be used for many different purposes, it is usually used for long-term general funding and not tied to specific projects or time frames.
  
• The mix of debt and equity that best suits your company will depend on the type of business, its age, and a number of other factors.

DEBT-TO-CAPITAL RATIOS FOR SELECTED INDUSTRIES
Publishing 34%
Homebuilding 37%
Advertising & Marketing 37%
Lodging & Gaming 56%
General Retailing 24%
Supermarkets & Drugstores 33%
Commercial Transportation 18%
Packaged Foods 27%
Restaurants 23%
Health Care: Managed Care 20%
Movies & Home Entertainment 17%
(Source: Standard & Poor's.)

Source:
http://finance.yahoo.com/how-to-guide/career-work/12825
Topics
Small-Business Financing: Debt vs. Equity
Debt
Equity
Striking a Balance

Additional comments:

Yahoo! Finance User - Wednesday, May 28, 2008, 11:37AM ET Report Abuse
Overall: 4/5
Nice overall article. Loan terms depend on what is being pruchased. Real estate (10 to 20 yrs), equipment (3 to 7 yrs), inventory (2 to 3 yrs), etc. An SBA backed loan can help lengthen these terms which will help decrease monthly payments.