Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Showing posts with label investment objectives. Show all posts
Showing posts with label investment objectives. Show all posts
Wednesday 7 September 2011
Basic Investment Objectives
The options for investing our savings are continually increasing, yet every single investment vehicle can be easily categorized according to three fundamental characteristics - safety, income and growth - which also correspond to types of investor objectives. While it is possible for an investor to have more than one of these objectives, the success of one must come at the expense of others. Let's examine these three types of objectives, the investments that are used to achieve them and the ways in which investors can incorporate them in devising a strategy.
Safety
Perhaps there is truth to the axiom that there is no such thing as a completely safe and secure investment. Yet we can get close to ultimate safety for our investment funds through the purchase of government-issued securities in stable economic systems, or through the purchase of the highest quality corporate bonds issued by the economy's top companies. Such securities are arguably the best means of preserving principal while receiving a specified rate of return.
The safest investments are usually found in the money market and include such securities as Treasury bills (T-bills), certificates of deposit (CD), commercial paper or bankers' acceptance slips; or in the fixed income (bond) market in the form of municipal and other government bonds, and in corporate bonds. The securities listed above are ordered according to the typical spectrum of increasing risk and, in turn, increasing potential yield. To compensate for their higher risk, corporate bonds return a greater yield than T-bills. (For more insight on treasuries, read Buy Treasuries Directly From The Fed.)
It is important to realize that there's an enormous range of relative risk within the bond market. At one end are government and high-grade corporate bonds, which are considered some of the safest investments around; at the other end are junk bonds, which have a lowerinvestment grade and may have more risk than some of the more speculative stocks. In other words, it's incorrect to think that corporate bonds are always safe, but most instruments from the money market can be considered very safe.
IncomeThe safest investments are also the ones that are likely to have the lowest rate of income return, or yield. Investors must inevitably sacrifice a degree of safety if they want to increase their yields. This is the inverse relationship between safety and yield: as yield increases, safety generally goes down, and vice versa.
In order to increase their rate of investment return and take on risk above that of money market instruments or government bonds, investors may choose to purchase corporate bonds or preferred shares with lower investment ratings. Investment grade bonds rated at A or AA are slightly riskier than AAA bonds, but presumably also offer a higher income return than AAA bonds. Similarly, BBB rated bonds can be thought to carry medium risk but offer less potential income than junk bonds, which offer the highest potential bond yields available, but at the highest possible risk. Junk bonds are the most likely to default.
Most investors, even the most conservative-minded ones, want some level of income generation in their portfolios, even if it's just to keep up with the economy's rate of inflation. But maximizing income return can be an overarching principle for a portfolio, especially for individuals who require a fixed sum from their portfolio every month. A retired person who requires a certain amount of money every month is well served by holding reasonably safe assets that provide funds over and above other income-generating assets, such as pension plans, for example.
Growth of Capital
This discussion has thus far been concerned only with safety and yield as investing objectives, and has not considered the potential of other assets to provide a rate of return from an increase in value, often referred to as a capital gain. Capital gains are entirely different from yield in that they are only realized when the security is sold for a price that is higher than the price at which it was originally purchased. Selling at a lower price is referred to as a capital loss. Therefore, investors seeking capital gains are likely not those who need a fixed, ongoing source of investment returns from their portfolio, but rather those who seek the possibility of longer-term growth.
Growth of capital is most closely associated with the purchase of common stock, particularly growth securities, which offer low yields but considerable opportunity for increase in value. For this reason, common stock generally ranks among the most speculative of investments as their return depends on what will happen in an unpredictable future. Blue-chip stocks, by contrast, can potentially offer the best of all worlds by possessing reasonable safety, modest income and potential for growth in capital generated by long-term increases in corporate revenues and earnings as the company matures. Yet rarely is any common stock able to provide the near-absolute safety and income-generation of government bonds.
It is also important to note that capital gains offer potential tax advantages by virtue of their lower tax rate in most jurisdictions. Funds that are garnered through common stock offerings, for example, are often geared toward the growth plans of small companies, a process that is extremely important for the growth of the overall economy. In order to encourage investments in these areas, governments choose to tax capital gains at a lower rate than income. Such systems serve to encourage entrepreneurship and the founding of new businesses that help the economy grow.
Secondary Objectives
Tax Minimization
An investor may pursue certain investments in order to adopt tax minimization as part of his or her investment strategy. A highly-paid executive, for example, may want to seek investments with favorable tax treatment in order to lessen his or her overall income tax burden. Making contributions to an IRA or other tax-sheltered retirement plan, such as a 401(k), can be an effective tax minimization strategy. (For related reading, see Which Retirement Plan Is Best?)
Marketability / Liquidity
Many of the investments we have discussed are reasonably illiquid, which means they cannot be immediately sold and easily converted into cash. Achieving a degree of liquidity, however, requires the sacrifice of a certain level of income or potential for capital gains.
Common stock is often considered the most liquid of investments, since it can usually be sold within a day or two of the decision to sell. Bonds can also be fairly marketable, but some bonds are highly illiquid, or non-tradable, possessing a fixed term. Similarly, money market instruments may only be redeemable at the precise date at which the fixed term ends. If an investor seeks liquidity, money market assets and non-tradable bonds aren't likely to be held in his or her portfolio.
Conclusion
As we have seen from each of the five objectives discussed above, the advantages of one often comes at the expense of the benefits of another. If an investor desires growth, for instance, he or she must often sacrifice some income and safety. Therefore, most portfolios will be guided by one pre-eminent objective, with all other potential objectives occupying less significant weight in the overall scheme.
Choosing a single strategic objective and assigning weightings to all other possible objectives is a process that depends on such factors as the investor's temperament, his or her stage of life, marital status, family situation, and so forth. Out of the multitude of possibilities out there, each investor is sure to find an appropriate mix of investment opportunities. You need only be concerned with spending the appropriate amount of time and effort in finding, studying and deciding on the opportunities that match your objectives.
Posted: Sep 1, 2008 Safety
Perhaps there is truth to the axiom that there is no such thing as a completely safe and secure investment. Yet we can get close to ultimate safety for our investment funds through the purchase of government-issued securities in stable economic systems, or through the purchase of the highest quality corporate bonds issued by the economy's top companies. Such securities are arguably the best means of preserving principal while receiving a specified rate of return.
The safest investments are usually found in the money market and include such securities as Treasury bills (T-bills), certificates of deposit (CD), commercial paper or bankers' acceptance slips; or in the fixed income (bond) market in the form of municipal and other government bonds, and in corporate bonds. The securities listed above are ordered according to the typical spectrum of increasing risk and, in turn, increasing potential yield. To compensate for their higher risk, corporate bonds return a greater yield than T-bills. (For more insight on treasuries, read Buy Treasuries Directly From The Fed.)
It is important to realize that there's an enormous range of relative risk within the bond market. At one end are government and high-grade corporate bonds, which are considered some of the safest investments around; at the other end are junk bonds, which have a lowerinvestment grade and may have more risk than some of the more speculative stocks. In other words, it's incorrect to think that corporate bonds are always safe, but most instruments from the money market can be considered very safe.
IncomeThe safest investments are also the ones that are likely to have the lowest rate of income return, or yield. Investors must inevitably sacrifice a degree of safety if they want to increase their yields. This is the inverse relationship between safety and yield: as yield increases, safety generally goes down, and vice versa.
In order to increase their rate of investment return and take on risk above that of money market instruments or government bonds, investors may choose to purchase corporate bonds or preferred shares with lower investment ratings. Investment grade bonds rated at A or AA are slightly riskier than AAA bonds, but presumably also offer a higher income return than AAA bonds. Similarly, BBB rated bonds can be thought to carry medium risk but offer less potential income than junk bonds, which offer the highest potential bond yields available, but at the highest possible risk. Junk bonds are the most likely to default.
Most investors, even the most conservative-minded ones, want some level of income generation in their portfolios, even if it's just to keep up with the economy's rate of inflation. But maximizing income return can be an overarching principle for a portfolio, especially for individuals who require a fixed sum from their portfolio every month. A retired person who requires a certain amount of money every month is well served by holding reasonably safe assets that provide funds over and above other income-generating assets, such as pension plans, for example.
Growth of Capital
This discussion has thus far been concerned only with safety and yield as investing objectives, and has not considered the potential of other assets to provide a rate of return from an increase in value, often referred to as a capital gain. Capital gains are entirely different from yield in that they are only realized when the security is sold for a price that is higher than the price at which it was originally purchased. Selling at a lower price is referred to as a capital loss. Therefore, investors seeking capital gains are likely not those who need a fixed, ongoing source of investment returns from their portfolio, but rather those who seek the possibility of longer-term growth.
Growth of capital is most closely associated with the purchase of common stock, particularly growth securities, which offer low yields but considerable opportunity for increase in value. For this reason, common stock generally ranks among the most speculative of investments as their return depends on what will happen in an unpredictable future. Blue-chip stocks, by contrast, can potentially offer the best of all worlds by possessing reasonable safety, modest income and potential for growth in capital generated by long-term increases in corporate revenues and earnings as the company matures. Yet rarely is any common stock able to provide the near-absolute safety and income-generation of government bonds.
It is also important to note that capital gains offer potential tax advantages by virtue of their lower tax rate in most jurisdictions. Funds that are garnered through common stock offerings, for example, are often geared toward the growth plans of small companies, a process that is extremely important for the growth of the overall economy. In order to encourage investments in these areas, governments choose to tax capital gains at a lower rate than income. Such systems serve to encourage entrepreneurship and the founding of new businesses that help the economy grow.
Secondary Objectives
Tax Minimization
An investor may pursue certain investments in order to adopt tax minimization as part of his or her investment strategy. A highly-paid executive, for example, may want to seek investments with favorable tax treatment in order to lessen his or her overall income tax burden. Making contributions to an IRA or other tax-sheltered retirement plan, such as a 401(k), can be an effective tax minimization strategy. (For related reading, see Which Retirement Plan Is Best?)
Marketability / Liquidity
Many of the investments we have discussed are reasonably illiquid, which means they cannot be immediately sold and easily converted into cash. Achieving a degree of liquidity, however, requires the sacrifice of a certain level of income or potential for capital gains.
Common stock is often considered the most liquid of investments, since it can usually be sold within a day or two of the decision to sell. Bonds can also be fairly marketable, but some bonds are highly illiquid, or non-tradable, possessing a fixed term. Similarly, money market instruments may only be redeemable at the precise date at which the fixed term ends. If an investor seeks liquidity, money market assets and non-tradable bonds aren't likely to be held in his or her portfolio.
Conclusion
As we have seen from each of the five objectives discussed above, the advantages of one often comes at the expense of the benefits of another. If an investor desires growth, for instance, he or she must often sacrifice some income and safety. Therefore, most portfolios will be guided by one pre-eminent objective, with all other potential objectives occupying less significant weight in the overall scheme.
Choosing a single strategic objective and assigning weightings to all other possible objectives is a process that depends on such factors as the investor's temperament, his or her stage of life, marital status, family situation, and so forth. Out of the multitude of possibilities out there, each investor is sure to find an appropriate mix of investment opportunities. You need only be concerned with spending the appropriate amount of time and effort in finding, studying and deciding on the opportunities that match your objectives.
Read more: http://www.investopedia.com/articles/basics/04/032604.asp#ixzz1XDtcyAaU
Friday 31 December 2010
What Is Your Risk Tolerance?
It is conventional wisdom that a younger investor can take more risk than an older investor thanks to a longer time horizon. While this may be true in general, there are many other considerations that come into play. Just because you are 65 doesn't mean you should shift your investment portfolio to conservative investments. Growing life expectancies and advancing medical science mean that today's 65-year-old investor may still have a time horizon of more than 20 years.
So, how does an individual investor determine his or her risk tolerance? Let's take a look.
Read on here.
So, how does an individual investor determine his or her risk tolerance? Let's take a look.
Read on here.
Tuesday 21 December 2010
New year financial resolutions
New year financial resolutions
John Wasiliev
December 21, 2010 - 11:22AM
While the coming fortnight usually sees most people relax and enjoy the festive season, anyone who is taking a longer break could do worse that put some of this time towards a review of their investment strategy.
One reason why such reviews can be useful at this time of the year is because you can do something about a strategy that may not be going that well while there is still plenty of the financial year remaining.
The end of the calendar year is half way through a financial year so there is still six months of the 2010-11 financial year remaining. You can also come up with financial new year’s resolutions with the goal of implementing at least one that should improve your financial position.
For example you could make it a resolution that if you invest in shorter period term deposits that offer attractive returns that you still getting a good rate when the investment is rolled over. Banks have been known to invite investors to roll a deposit over for a 'similar term' without pointing out that same term does not necessarily mean the same higher interest rate.
Another thing you can do, suggests Elizabeth Moran, an analyst with fixed interest broker FIIG Securities, is reassess your appetite for taking risks with your money. Is it still the same as it was a year ago or have you become more pessimistic or optimistic?
Being more gloomy about the year ahead could suggest your tolerance for risk has lowered. Remaining optimistic on the other hand suggests you are happy with the present state of affairs. A question to ask is whether your state of mind is related to the state of your portfolio.
A useful strategy when conducting a review is to check your exposure to different types of investments – shares, property and income investments – and decide whether they are likely to satisfy your goals for the rest of the year.
Another consideration is to put any goals you have into perspective and maybe do things a bit differently.
A commentary in the current edition of the National Australia Bank's private wealth division’s newsletter highlights the importance of having goals. It also makes a very interesting observation about goals and investing.
It notes goals are often expressed with a single purpose in mind such as meeting certain future liabilities or expenses like paying for children’s education in 12 years’ time or retiring with a certain level of income at age But the reality is that people often have multiple goals with different time horizons as well as different priorities.
An alternative investment strategy is one that that recognises multiple goals, priorities and time horizons. It can involve having distinct investment portfolios for each goal with each portfolio evaluated on its ability to meet its objective.
Reflecting on the connection between an investment strategy and goals can be worthwhile at strategic times, such as the end of the calendar year, because it can be a period when people have the commodity many complain they are short of, namely the time to think about things. January is generally the quietest month of the year in financial markets, making it the most suitable time to spend considering your financial affairs.
By contrast, the end of the financial year around 30 June is often a rushed period. There is never a real break and most people are as busy in July and August as they are in May and June. At least over the Christmas-New Year summer holiday period, things do slow down to give you space to consider your financial future.
http://www.brisbanetimes.com.au/money/on-the-money/new-year-financial-resolutions-20101218-19172.html
John Wasiliev
December 21, 2010 - 11:22AM
While the coming fortnight usually sees most people relax and enjoy the festive season, anyone who is taking a longer break could do worse that put some of this time towards a review of their investment strategy.
One reason why such reviews can be useful at this time of the year is because you can do something about a strategy that may not be going that well while there is still plenty of the financial year remaining.
The end of the calendar year is half way through a financial year so there is still six months of the 2010-11 financial year remaining. You can also come up with financial new year’s resolutions with the goal of implementing at least one that should improve your financial position.
For example you could make it a resolution that if you invest in shorter period term deposits that offer attractive returns that you still getting a good rate when the investment is rolled over. Banks have been known to invite investors to roll a deposit over for a 'similar term' without pointing out that same term does not necessarily mean the same higher interest rate.
Another thing you can do, suggests Elizabeth Moran, an analyst with fixed interest broker FIIG Securities, is reassess your appetite for taking risks with your money. Is it still the same as it was a year ago or have you become more pessimistic or optimistic?
Being more gloomy about the year ahead could suggest your tolerance for risk has lowered. Remaining optimistic on the other hand suggests you are happy with the present state of affairs. A question to ask is whether your state of mind is related to the state of your portfolio.
A useful strategy when conducting a review is to check your exposure to different types of investments – shares, property and income investments – and decide whether they are likely to satisfy your goals for the rest of the year.
Another consideration is to put any goals you have into perspective and maybe do things a bit differently.
A commentary in the current edition of the National Australia Bank's private wealth division’s newsletter highlights the importance of having goals. It also makes a very interesting observation about goals and investing.
It notes goals are often expressed with a single purpose in mind such as meeting certain future liabilities or expenses like paying for children’s education in 12 years’ time or retiring with a certain level of income at age But the reality is that people often have multiple goals with different time horizons as well as different priorities.
An alternative investment strategy is one that that recognises multiple goals, priorities and time horizons. It can involve having distinct investment portfolios for each goal with each portfolio evaluated on its ability to meet its objective.
Reflecting on the connection between an investment strategy and goals can be worthwhile at strategic times, such as the end of the calendar year, because it can be a period when people have the commodity many complain they are short of, namely the time to think about things. January is generally the quietest month of the year in financial markets, making it the most suitable time to spend considering your financial affairs.
By contrast, the end of the financial year around 30 June is often a rushed period. There is never a real break and most people are as busy in July and August as they are in May and June. At least over the Christmas-New Year summer holiday period, things do slow down to give you space to consider your financial future.
http://www.brisbanetimes.com.au/money/on-the-money/new-year-financial-resolutions-20101218-19172.html
Tuesday 7 December 2010
Investing with the big picture in mind
Investing with the big picture in mind
Posted on November 6, 2010, Saturday
YOU don’t have to be an expert to get started, but it helps to know the basics before you set a plan for investing. Since the whole idea of investing can be overwhelming and intimidating for anyone who has never done it, try taking small steps.
Here are some basic Do’s
•Do:
•Get some financial education.
•Invest some time, then money.
•Read books and newspapers.
Attend seminars.
Get together with other like-minded people to learn about investment choices including the stock market, property or even a business.
You might also consider hiring a professional, like a financial planner to go through your current financial situation and goals, and work out a detailed financial plan for you. Besides giving you a professional perspective of your financial health, a good financial planner will know the kind of products in the market that will suit you.
But professional help doesn’t come cheap. So the best option would be to get a recommendation from neutral or independent sources such as the Financial Planning Association of Malaysia (FPAM) or the Securities Commission Malaysia before settling on a planner.
Always remember the three important principles of investing:
1. Investment Goals
What is the purpose of your investment? Is it to achieve high dividend yields or a consistent income yield? Once you’ve determined your short-term and long-term objectives, you can identify suitable investments, the level of risk you can tolerate, and what your expectations are.
2. Know your risk tolerance
High returns come with equally high risk. Realise your ability and willingness to lose some or all of your original investment in exchange for greater potential returns.
If you’re an aggressive investor, or one with a high-risk tolerance, a well-diversified equity fund should take up the majority of your portfolio. If you can take on only a moderate degree of risk, then perhaps a hybrid investment plan such as a 50:50 investment portfolio in a moderate risk fund with significant cash savings in a bank account is your calling.
3. Time horizon
Decide on how long you intend to invest and what stage of your life you’re at. If you are saving up for your daughter’s education in which you will need it in the near future such as within five years, then, you would likely to take on less risk because of a shorter time horizon. Also, maintain at least six month’s income in an easily accessible deposit account or put your money in liquid investments such as unit trust funds. This will allow you to have access to your money in the event of emergencies.
Here are two examples* to give you a general idea:
Scenario 1:
Sharon decides to start investing a sum of RM500 monthly, in an investment vehicle that will yield her an average of eight per cent per annum over the next 30 years till retirement. At the end of 30 years, the total sum of her investment would have amounted to RM750,000.
Scenario 2:
If Sharon decides to start investing five years later, a sum of RM500 monthly, in a similar investment vehicle that will yield her an average of eight per cent per annum over a period of 25 years till retirement, her total nest egg would have only amounted to RM478,000 due to the loss of an additional five years in compounded growth.
* Source: Investment Calculator from HwangDBS Investment Management corporate website www.hdbsim.com.my/tools/general-investment
This article is brought to you by HwangDBS Investment Management, your Asian Financial Specialists; we believe you deserve to live the life you want.
http://www.theborneopost.com/?p=73323
Posted on November 6, 2010, Saturday
YOU don’t have to be an expert to get started, but it helps to know the basics before you set a plan for investing. Since the whole idea of investing can be overwhelming and intimidating for anyone who has never done it, try taking small steps.
Here are some basic Do’s
•Do:
•Get some financial education.
•Invest some time, then money.
•Read books and newspapers.
Attend seminars.
Get together with other like-minded people to learn about investment choices including the stock market, property or even a business.
You might also consider hiring a professional, like a financial planner to go through your current financial situation and goals, and work out a detailed financial plan for you. Besides giving you a professional perspective of your financial health, a good financial planner will know the kind of products in the market that will suit you.
But professional help doesn’t come cheap. So the best option would be to get a recommendation from neutral or independent sources such as the Financial Planning Association of Malaysia (FPAM) or the Securities Commission Malaysia before settling on a planner.
Always remember the three important principles of investing:
1. Investment Goals
What is the purpose of your investment? Is it to achieve high dividend yields or a consistent income yield? Once you’ve determined your short-term and long-term objectives, you can identify suitable investments, the level of risk you can tolerate, and what your expectations are.
2. Know your risk tolerance
High returns come with equally high risk. Realise your ability and willingness to lose some or all of your original investment in exchange for greater potential returns.
If you’re an aggressive investor, or one with a high-risk tolerance, a well-diversified equity fund should take up the majority of your portfolio. If you can take on only a moderate degree of risk, then perhaps a hybrid investment plan such as a 50:50 investment portfolio in a moderate risk fund with significant cash savings in a bank account is your calling.
3. Time horizon
Decide on how long you intend to invest and what stage of your life you’re at. If you are saving up for your daughter’s education in which you will need it in the near future such as within five years, then, you would likely to take on less risk because of a shorter time horizon. Also, maintain at least six month’s income in an easily accessible deposit account or put your money in liquid investments such as unit trust funds. This will allow you to have access to your money in the event of emergencies.
Here are two examples* to give you a general idea:
Scenario 1:
Sharon decides to start investing a sum of RM500 monthly, in an investment vehicle that will yield her an average of eight per cent per annum over the next 30 years till retirement. At the end of 30 years, the total sum of her investment would have amounted to RM750,000.
Scenario 2:
If Sharon decides to start investing five years later, a sum of RM500 monthly, in a similar investment vehicle that will yield her an average of eight per cent per annum over a period of 25 years till retirement, her total nest egg would have only amounted to RM478,000 due to the loss of an additional five years in compounded growth.
* Source: Investment Calculator from HwangDBS Investment Management corporate website www.hdbsim.com.my/tools/general-investment
This article is brought to you by HwangDBS Investment Management, your Asian Financial Specialists; we believe you deserve to live the life you want.
http://www.theborneopost.com/?p=73323
Wednesday 28 July 2010
Friday 26 March 2010
Allocate funds wisely, enjoy your golden years
26 Mar 2010, 0427 hrs IST, Lovaii Navlakhi,
Let us take the case study of a 65-year old and analyse the same. Mrs X has Rs 50 lakh and has invested the same in different products. Each of these has different time horizons and varying rates of return; some are taxable and some are tax-free. Mrs X requires Rs 25,000 pm to manage her lifestyle.
Regular Cash Flow
At this moment, she may be quite relaxed as her investments are earning more than her required earnings of Rs 25,000 per month. There could be some issues in terms of regularity of the income, as some of the interest payouts are not monthly. Returns from mutual funds may not be regular too, but in this case is a buffer.
Asset Allocation
The portfolio of Rs 50 lakh has just 12% of the assets in equity, and hence, is a conservative portfolio considering Mrs X’s age. Since this seems sufficient to meet her goals, we are fine with her investment in fixed income instruments to the extent of 88%. There is, of course, a possibility that Mrs X has a running PPF account in which she can deposit the returns from her equity MFs and continue to earn 8% tax-free returns. As one is aware, the maximum that one can add in a PPF account in a financial year is Rs 70,000.
Taxable Income
The returns from equity MFs by way of dividends are tax free. The income subject to tax amounts to Rs 3,42,500 for the year. However, Mrs X can take benefit of the Rs 1 lakh invested in ELSS under Section 80C (even investment in PPF can get the same benefit, subject to a maximum of Rs 1 lakh at present), and thus have a taxable income of Rs 2,42,500. Since Rs 2,40,000 of income is exempt for senior citizens, Mrs X will pay a tax on only Rs 2,500 @ 10%. Thus, her returns of 8.3% on her portfolio are virtually tax-free.
Liquidity Analysis
We assume that Mrs X will live to the age of 90 years, and hence she needs this money to last her for the next 25 years. Prima facie, earning a return of Rs 3 lakh per annum does not seem difficult. However, we have not considered the rate of inflation — if it is 6.5% p.a, the funds will last her 20 years. Further, in case she needs Rs 5 lakh as medical emergency, the money will run out in 18 years. An alternative suggestion to Mrs X will be to increase her equity allocation to 25%, and push her portfolio returns to 9% p.a. That way, her funds last her for 25 years, if inflation remains at 5% p.a.
A financial planner will evaluate the portfolio from multiple perspectives such as returns, risks, liquidity, taxability and even longevity; and approaching one could give you peace of mind, and a greater piece of the action on earth. Get one today!
The author is the MD & Chief Financial Planner of International Money Matters Pvt Ltd.
http://economictimes.indiatimes.com/articleshow/5725337.cms
Let us take the case study of a 65-year old and analyse the same. Mrs X has Rs 50 lakh and has invested the same in different products. Each of these has different time horizons and varying rates of return; some are taxable and some are tax-free. Mrs X requires Rs 25,000 pm to manage her lifestyle.
Regular Cash Flow
At this moment, she may be quite relaxed as her investments are earning more than her required earnings of Rs 25,000 per month. There could be some issues in terms of regularity of the income, as some of the interest payouts are not monthly. Returns from mutual funds may not be regular too, but in this case is a buffer.
Asset Allocation
The portfolio of Rs 50 lakh has just 12% of the assets in equity, and hence, is a conservative portfolio considering Mrs X’s age. Since this seems sufficient to meet her goals, we are fine with her investment in fixed income instruments to the extent of 88%. There is, of course, a possibility that Mrs X has a running PPF account in which she can deposit the returns from her equity MFs and continue to earn 8% tax-free returns. As one is aware, the maximum that one can add in a PPF account in a financial year is Rs 70,000.
Taxable Income
The returns from equity MFs by way of dividends are tax free. The income subject to tax amounts to Rs 3,42,500 for the year. However, Mrs X can take benefit of the Rs 1 lakh invested in ELSS under Section 80C (even investment in PPF can get the same benefit, subject to a maximum of Rs 1 lakh at present), and thus have a taxable income of Rs 2,42,500. Since Rs 2,40,000 of income is exempt for senior citizens, Mrs X will pay a tax on only Rs 2,500 @ 10%. Thus, her returns of 8.3% on her portfolio are virtually tax-free.
Liquidity Analysis
We assume that Mrs X will live to the age of 90 years, and hence she needs this money to last her for the next 25 years. Prima facie, earning a return of Rs 3 lakh per annum does not seem difficult. However, we have not considered the rate of inflation — if it is 6.5% p.a, the funds will last her 20 years. Further, in case she needs Rs 5 lakh as medical emergency, the money will run out in 18 years. An alternative suggestion to Mrs X will be to increase her equity allocation to 25%, and push her portfolio returns to 9% p.a. That way, her funds last her for 25 years, if inflation remains at 5% p.a.
A financial planner will evaluate the portfolio from multiple perspectives such as returns, risks, liquidity, taxability and even longevity; and approaching one could give you peace of mind, and a greater piece of the action on earth. Get one today!
The author is the MD & Chief Financial Planner of International Money Matters Pvt Ltd.
http://economictimes.indiatimes.com/articleshow/5725337.cms
Saturday 30 January 2010
How do asset classes fit in with your profile?
From answering the 10 simple questions (reference below), your total score tells you more about yourself. Three basic profiles emerged and helped set the necessary guidelines for your investment portfolio.
The three basic profiles and their respective investment objectives are:
Click here to find out what asset classes these respective investors should include in their portfolios.
http://spreadsheets.google.com/pub?key=t5u-KMcEYg81UlomoCgxU9A&output=html
The three basic profiles and their respective investment objectives are:
- You cannot afford to make mistakes: Conservative investment objectives
- You are carefully weighing up your options: Prudent investment objectives
- You want to grow bigger and better: Aggressive investment objectives
Click here to find out what asset classes these respective investors should include in their portfolios.
http://spreadsheets.google.com/pub?key=t5u-KMcEYg81UlomoCgxU9A&output=html
Read also:
What money means to you? Answer 10 simple questions.
Understand what money means to you: Answer 10 simple questions : Sheet1
What money means to you? Answer 10 simple questions.
In order to really make your money work for you, it is important to try and get
To find out more about your investment orientation and your relationship with money, answer the 10 simple questions below as honestly as possible. This will also help set the necessary guidelines for your investment portfolio.
Time horizon
Questions 1 - 5
Risk tolerance
Questions 6 - 8
Investment Objectives
Questions 9 - 10
http://spreadsheets.google.com/pub?key=tr9oMvjAsDJvkcPgXdd763A&output=html
Your total score tells you more about yourself.
Less than 10: You cannot afford to make mistakes
Between 10 and 20: You are carefully weighing up your options.
More than 20: You want to grow bigger and better.
- to know more about yourself and
- your relationship with money.
To find out more about your investment orientation and your relationship with money, answer the 10 simple questions below as honestly as possible. This will also help set the necessary guidelines for your investment portfolio.
Time horizon
Questions 1 - 5
Risk tolerance
Questions 6 - 8
Investment Objectives
Questions 9 - 10
http://spreadsheets.google.com/pub?key=tr9oMvjAsDJvkcPgXdd763A&output=html
Your total score tells you more about yourself.
Less than 10: You cannot afford to make mistakes
Between 10 and 20: You are carefully weighing up your options.
More than 20: You want to grow bigger and better.
Investment Objectives
There are four major financial phases in life:
Each depends on how you view
Identify where you are in the cycle and how it affects your financial goals.
- a no-strings-attached youth,
- building a family,
- working towards retirement, and,
- retirement itself.
Each depends on how you view
- your lifestyle,
- your financial situation and
- your investment objectives.
Identify where you are in the cycle and how it affects your financial goals.
Be realistic: adjust your investment objectives to fit in with your time horizon and risk tolerance level.
You also have to realise that you need to align your time horizon, risk tolerance and investment objectives.
You might have a very short time horizon before retirement and a low risk tolerance, you might want to see significant capital growth.
It is important to be realistic: you have to adjust your investment objectives to fit in with your time horizon and risk tolerance level.
This also means you will have to find a balance between the risk you are prepared to take and your preferred returns. Risk and reward are always at opposite end of the scale - the higher the risk, the higher the potential return, and the lower the risk, the lower the expected return.
Therefore, the importance of you knowing more about who you are and how you want your money to work for you at this stage in your life.
You might have a very short time horizon before retirement and a low risk tolerance, you might want to see significant capital growth.
It is important to be realistic: you have to adjust your investment objectives to fit in with your time horizon and risk tolerance level.
This also means you will have to find a balance between the risk you are prepared to take and your preferred returns. Risk and reward are always at opposite end of the scale - the higher the risk, the higher the potential return, and the lower the risk, the lower the expected return.
Therefore, the importance of you knowing more about who you are and how you want your money to work for you at this stage in your life.
Three most important personal factors to consider: Your Time Horizon, Risk Tolerance and Investment Objectives
How well do you know yourself
In understanding your relationship with money, what are the 3 most important personal factors to consider?
These are:
By knowing more about yourself and where you want to be, you can now use this knowledge to construct an investment portfolio that fits your unique needs:
Related:
Understand what money means to you: Answer 10 simple questions
http://spreadsheets.google.com/pub?key=tr9oMvjAsDJvkcPgXdd763A&output=html
Asset Allocation: The Best Way to Minimize Risk of Your Portfolio
http://myinvestingnotes.blogspot.com/2011/01/asset-allocation-best-way-to-minimize.html
In understanding your relationship with money, what are the 3 most important personal factors to consider?
These are:
- how long or short a time you have to invest
- how much risk you can tolerate, and,
- your investment objectives and whether they fit in with your time horizon and risk appetite.
By knowing more about yourself and where you want to be, you can now use this knowledge to construct an investment portfolio that fits your unique needs:
- your time horizon,
- your risk tolerance and
- investment objectives.
Related:
Understand what money means to you: Answer 10 simple questions
http://spreadsheets.google.com/pub?key=tr9oMvjAsDJvkcPgXdd763A&output=html
Asset Allocation: The Best Way to Minimize Risk of Your Portfolio
http://myinvestingnotes.blogspot.com/2011/01/asset-allocation-best-way-to-minimize.html
Saturday 24 January 2009
Having A Plan: The Basis Of Success
Having A Plan: The Basis Of Success
by Chad Langager (Contact Author Biography)
"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework." Warren E. Buffett (Preface to "The Intelligent Investor" by Benjamin Graham)
Any veteran market player will tell you, it's vital to have a plan of attack. Formulating the plan is not particularly difficult, but sticking to it, especially when all other indicators seem to be against you, can be. This article will show why a plan is crucial, including what can happen without one, what to consider when formulating one as well as the investment vehicle options that best suit you and your needs.
The Benefits
As the "Sage of Omaha" says, if you can grit your teeth and stay the course regardless of popular opinion, prevailing trends or analysts' forecasts, and focus on the long-term goals and objectives of your investment plan, you will create the best circumstances for realizing solid growth for your investments.
Maintain Focus
By their very nature, financial markets are volatile. Throughout the last century, they have seen many ups and downs, caused by inflation, interest rates, new technologies, recessions and business cycles. In the late 1990s, a great bull market pushed the Dow Jones Industrial Average (DJIA) up 300% from the start of the decade. This was a period of low interest rates and inflation and increased usage of computers - all of these fueled economic growth. The period between 2000 and 2002, on the other hand, saw the DJIA drop 38%. It began with the bursting of the internet bubble, which saw a massive sell-off in tech stocks and kept indexes depressed until mid-2001, during which there was a flurry of corporate accounting scandals as well as the September 11th attacks, all contributing to weak market sentiment.
Amid such a fragile and shaky environment, it's crucial for you to keep your emotions in check and stick to your investment plan. By doing so, you maintain a long-term focus and thus assume a more objective view of current price fluctuations. If an investor had let their emotions be their guide near the end of 2002 and sold off all their positions, they'd have missed a 44% rise in the Dow from late-2002 to mid-2005.
Sidestepping the Three Deadly Sins
The three deadly sins in investing play off three major emotions: fear, hope and greed.
Fear has to do with selling too low - when prices plunge, you get alarmed and sell without re-evaluating your position. In such times, it is better to review whether your original reasons (i.e. sound company fundamentals) for investing in the security have changed. The market is fickle and, based on a piece of news or a short-term focus, it can irrationally oversell a stock so its price falls well below its intrinsic value. Selling when the price is low, which causes it to be undervalued, is a bad choice in the long run because the price may recover.
The second emotion is hope, which, if it is your only motivator, can spur you to buy stock based on its price appreciation in the past. Buying on the hope that what has happened in the past will happen in the future is precisely what occurred with internet plays in the late '90s - people bought nearly any tech stock, regardless of its fundamentals. It is important that you look less at the past return and more into the company's fundamentals to evaluate the investment's worth. Basing your investment decisions purely on hope may leave you with an overvalued stock, with which there is a higher chance of loss than gain.
The third emotion is greed. If you are under its influence, you may hold onto a position for too long, hoping for a few extra points. By holding out for that extra point or two, you could end up turning a large gain into a loss. During the internet boom investors who were already achieving double-digit gains held on to their positions hoping the price would inch up a few more points instead of scaling back the investment. Then when prices began to tank, many investors didn't budge and held out in the hopes that their stock would rally. Instead, their once large gains turned into significant losses.
An investment plan that includes both buying and selling criteria helps to manage these three deadly sins of investing. (For further reading, see When Fear And Greed Take Over, The Madness of Crowds and How Investors Often Cause The Market's Problems.)
The Key Components
Determine Your Objectives
The first step in formulating a plan is to figure out what your investment objective is.
Without a goal in mind, it is hard to create an investment strategy that will get you somewhere. Investment objectives often fall into three main categories: safety, income and growth. Safety objectives focus on maintaining the current value of a portfolio. This type of strategy would best fit an investor who cannot tolerate any loss of principal and should avoid the risks inherent in stocks and some of the less secure fixed-income investments.
If the goal is to provide a steady income stream, then your objective would fall into the income category. This is often for investors who are living in retirement and relying on a stream of income. These investors have less need for capital appreciation and tend to be adverse to stock market risks.
Growth objectives focus on increasing the portfolio's value over a long-term time horizon. This type of investment strategy is for relatively younger investors who are focused on capital appreciation. It's important to take into account your age, your investment time frame and how far you are from your investment goal. Objectives should be realistic, taking into account your tolerance for risk.
Risk Tolerance
Most people want to grow their portfolio to increase wealth. But there remains one major consideration - risk. How much, or how little, of it can you take? If you are unable to stomach the constant volatility of the market, your objective is likely to be safety or income focused. However, if you are willing to take on volatile stocks then a growth objective may suit you. Taking on more risk means you are increasing your chances of realizing a loss on investments, as well as creating the opportunity of greater profits. However, it is important to remember that volatile investments don't always make investors money. The risk component of a plan is very important and requires you to be completely honest with yourself about how much potential loss you are willing to take. (For further reading, see Determining Risk And The Risk Pyramid and our tutorial on Risk and Diversification.)
Asset Allocation
Once you know your objectives and risk tolerance, you can start to determine the allocation of the assets in your portfolio. Asset allocation is the dividing up of different types of assets in a portfolio to match the investor's goals and risk tolerance. An example of an asset allocation for a growth-oriented investor could be 20% in bonds 70% in stocks and 10% in cash equivalents.
It is important that your asset allocation is an extension of your objectives and risk tolerance. Safety objectives should comprise the safest fixed-income assets available like money market securities, government bonds and high-quality corporate securities with the highest debt ratings. Income portfolios should focus on safe fixed-income securities, including bonds with lower ratings, which provide higher yields, preferred shares and high-quality dividend-paying stocks. Growth portfolios should have a large focus on common stock, mutual funds or exchange-traded funds (ETFs). It is important to continually review your objectives and risk tolerance and to adjust your portfolio accordingly.
The importance of asset allocation in formulating a plan is that it provides you with guidelines for diversifying your portfolio, allowing you to work towards your objectives with a level of risk that is comfortable for you. (For further reading, see The Importance of Diversification and The Dangers of Over-Diversification, as well as Five Things To Know About Asset Allocation and Asset Allocation Strategies.)
The Choices
Once you formulate a strategy, you need to decide on what types of investments to buy as well as what proportion of each to include in your portfolio. For example if you are growth oriented, you might pick stocks, mutual funds or ETFs that have the potential to outperform the market. If your goal is wealth protection or income generation, you might buy government bonds or invest in bond funds that are professionally managed.
If you want to choose your own stocks it is vital to institute trading rules for both entering and exiting positions. These rules will depend on your plan objectives and investment strategy. One stock trading rule - regardless of your approach - is to use stop-loss orders as protection from downward price movements. While the exact price at which you set your order is your own choice, the general rule of thumb is 10% below the purchase price for long-term investments and 3-5% for shorter-term plays. Here's a reason to use stops to cut your losses: if your investment plummets 50%, it needs to increase 100% to break even again. (For further reading, see Ten Steps To A Winning Trading Plan.)
You may also consider professionally managed products like mutual funds, which give you access to the expertise of professional money managers. If your aim is to increase the value of a portfolio through mutual funds, look for growth funds that focus on capital appreciation. If you're income-orientated, you'll want to choose funds with dividend-paying stocks or bond funds that provide regular income. Again, it is important to ensure that the allocation and risk structure of the fund is aligned with your desired asset mix and risk tolerance.
Other investment choices are index funds and ETFs. The growing popularity of these two passively managed products is largely due to their low fees and tax efficiencies; both have significantly lower management expenses than actively managed funds. These low-cost, well-diversified investments are baskets of stocks that represent an index, a sector or country, and are an excellent way to implement your asset allocation plan.
Summary
An investment plan is one of the most vital parts for reaching your goals - it acts as a guide and offers a degree of protection. Whether you want to be a player in the market or build a nest egg, it's crucial to build a plan and adhere to it. By sticking to those defined rules, you'll be more likely to avoid emotional decisions that can derail your portfolio, and keep a calm, cool and objective view even in the most trying of times.
However, if all of the above seems like too tall an order, you might want to engage the services of an investment advisor, who will help you create and stick to a plan that will meet your investment objectives and risk tolerance.
by Chad Langager, (Contact Author Biography)
Chad Langager is the Senior Financial Editor for Investopedia.com. Chad graduated from the University of Alberta Business School with a degree in finance.
http://www.investopedia.com/articles/pf/05/061005.asp?partner=WBW
by Chad Langager (Contact Author Biography)
"To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework." Warren E. Buffett (Preface to "The Intelligent Investor" by Benjamin Graham)
Any veteran market player will tell you, it's vital to have a plan of attack. Formulating the plan is not particularly difficult, but sticking to it, especially when all other indicators seem to be against you, can be. This article will show why a plan is crucial, including what can happen without one, what to consider when formulating one as well as the investment vehicle options that best suit you and your needs.
The Benefits
As the "Sage of Omaha" says, if you can grit your teeth and stay the course regardless of popular opinion, prevailing trends or analysts' forecasts, and focus on the long-term goals and objectives of your investment plan, you will create the best circumstances for realizing solid growth for your investments.
Maintain Focus
By their very nature, financial markets are volatile. Throughout the last century, they have seen many ups and downs, caused by inflation, interest rates, new technologies, recessions and business cycles. In the late 1990s, a great bull market pushed the Dow Jones Industrial Average (DJIA) up 300% from the start of the decade. This was a period of low interest rates and inflation and increased usage of computers - all of these fueled economic growth. The period between 2000 and 2002, on the other hand, saw the DJIA drop 38%. It began with the bursting of the internet bubble, which saw a massive sell-off in tech stocks and kept indexes depressed until mid-2001, during which there was a flurry of corporate accounting scandals as well as the September 11th attacks, all contributing to weak market sentiment.
Amid such a fragile and shaky environment, it's crucial for you to keep your emotions in check and stick to your investment plan. By doing so, you maintain a long-term focus and thus assume a more objective view of current price fluctuations. If an investor had let their emotions be their guide near the end of 2002 and sold off all their positions, they'd have missed a 44% rise in the Dow from late-2002 to mid-2005.
Sidestepping the Three Deadly Sins
The three deadly sins in investing play off three major emotions: fear, hope and greed.
Fear has to do with selling too low - when prices plunge, you get alarmed and sell without re-evaluating your position. In such times, it is better to review whether your original reasons (i.e. sound company fundamentals) for investing in the security have changed. The market is fickle and, based on a piece of news or a short-term focus, it can irrationally oversell a stock so its price falls well below its intrinsic value. Selling when the price is low, which causes it to be undervalued, is a bad choice in the long run because the price may recover.
The second emotion is hope, which, if it is your only motivator, can spur you to buy stock based on its price appreciation in the past. Buying on the hope that what has happened in the past will happen in the future is precisely what occurred with internet plays in the late '90s - people bought nearly any tech stock, regardless of its fundamentals. It is important that you look less at the past return and more into the company's fundamentals to evaluate the investment's worth. Basing your investment decisions purely on hope may leave you with an overvalued stock, with which there is a higher chance of loss than gain.
The third emotion is greed. If you are under its influence, you may hold onto a position for too long, hoping for a few extra points. By holding out for that extra point or two, you could end up turning a large gain into a loss. During the internet boom investors who were already achieving double-digit gains held on to their positions hoping the price would inch up a few more points instead of scaling back the investment. Then when prices began to tank, many investors didn't budge and held out in the hopes that their stock would rally. Instead, their once large gains turned into significant losses.
An investment plan that includes both buying and selling criteria helps to manage these three deadly sins of investing. (For further reading, see When Fear And Greed Take Over, The Madness of Crowds and How Investors Often Cause The Market's Problems.)
The Key Components
Determine Your Objectives
The first step in formulating a plan is to figure out what your investment objective is.
Without a goal in mind, it is hard to create an investment strategy that will get you somewhere. Investment objectives often fall into three main categories: safety, income and growth. Safety objectives focus on maintaining the current value of a portfolio. This type of strategy would best fit an investor who cannot tolerate any loss of principal and should avoid the risks inherent in stocks and some of the less secure fixed-income investments.
If the goal is to provide a steady income stream, then your objective would fall into the income category. This is often for investors who are living in retirement and relying on a stream of income. These investors have less need for capital appreciation and tend to be adverse to stock market risks.
Growth objectives focus on increasing the portfolio's value over a long-term time horizon. This type of investment strategy is for relatively younger investors who are focused on capital appreciation. It's important to take into account your age, your investment time frame and how far you are from your investment goal. Objectives should be realistic, taking into account your tolerance for risk.
Risk Tolerance
Most people want to grow their portfolio to increase wealth. But there remains one major consideration - risk. How much, or how little, of it can you take? If you are unable to stomach the constant volatility of the market, your objective is likely to be safety or income focused. However, if you are willing to take on volatile stocks then a growth objective may suit you. Taking on more risk means you are increasing your chances of realizing a loss on investments, as well as creating the opportunity of greater profits. However, it is important to remember that volatile investments don't always make investors money. The risk component of a plan is very important and requires you to be completely honest with yourself about how much potential loss you are willing to take. (For further reading, see Determining Risk And The Risk Pyramid and our tutorial on Risk and Diversification.)
Asset Allocation
Once you know your objectives and risk tolerance, you can start to determine the allocation of the assets in your portfolio. Asset allocation is the dividing up of different types of assets in a portfolio to match the investor's goals and risk tolerance. An example of an asset allocation for a growth-oriented investor could be 20% in bonds 70% in stocks and 10% in cash equivalents.
It is important that your asset allocation is an extension of your objectives and risk tolerance. Safety objectives should comprise the safest fixed-income assets available like money market securities, government bonds and high-quality corporate securities with the highest debt ratings. Income portfolios should focus on safe fixed-income securities, including bonds with lower ratings, which provide higher yields, preferred shares and high-quality dividend-paying stocks. Growth portfolios should have a large focus on common stock, mutual funds or exchange-traded funds (ETFs). It is important to continually review your objectives and risk tolerance and to adjust your portfolio accordingly.
The importance of asset allocation in formulating a plan is that it provides you with guidelines for diversifying your portfolio, allowing you to work towards your objectives with a level of risk that is comfortable for you. (For further reading, see The Importance of Diversification and The Dangers of Over-Diversification, as well as Five Things To Know About Asset Allocation and Asset Allocation Strategies.)
The Choices
Once you formulate a strategy, you need to decide on what types of investments to buy as well as what proportion of each to include in your portfolio. For example if you are growth oriented, you might pick stocks, mutual funds or ETFs that have the potential to outperform the market. If your goal is wealth protection or income generation, you might buy government bonds or invest in bond funds that are professionally managed.
If you want to choose your own stocks it is vital to institute trading rules for both entering and exiting positions. These rules will depend on your plan objectives and investment strategy. One stock trading rule - regardless of your approach - is to use stop-loss orders as protection from downward price movements. While the exact price at which you set your order is your own choice, the general rule of thumb is 10% below the purchase price for long-term investments and 3-5% for shorter-term plays. Here's a reason to use stops to cut your losses: if your investment plummets 50%, it needs to increase 100% to break even again. (For further reading, see Ten Steps To A Winning Trading Plan.)
You may also consider professionally managed products like mutual funds, which give you access to the expertise of professional money managers. If your aim is to increase the value of a portfolio through mutual funds, look for growth funds that focus on capital appreciation. If you're income-orientated, you'll want to choose funds with dividend-paying stocks or bond funds that provide regular income. Again, it is important to ensure that the allocation and risk structure of the fund is aligned with your desired asset mix and risk tolerance.
Other investment choices are index funds and ETFs. The growing popularity of these two passively managed products is largely due to their low fees and tax efficiencies; both have significantly lower management expenses than actively managed funds. These low-cost, well-diversified investments are baskets of stocks that represent an index, a sector or country, and are an excellent way to implement your asset allocation plan.
Summary
An investment plan is one of the most vital parts for reaching your goals - it acts as a guide and offers a degree of protection. Whether you want to be a player in the market or build a nest egg, it's crucial to build a plan and adhere to it. By sticking to those defined rules, you'll be more likely to avoid emotional decisions that can derail your portfolio, and keep a calm, cool and objective view even in the most trying of times.
However, if all of the above seems like too tall an order, you might want to engage the services of an investment advisor, who will help you create and stick to a plan that will meet your investment objectives and risk tolerance.
by Chad Langager, (Contact Author Biography)
Chad Langager is the Senior Financial Editor for Investopedia.com. Chad graduated from the University of Alberta Business School with a degree in finance.
http://www.investopedia.com/articles/pf/05/061005.asp?partner=WBW
Wednesday 24 December 2008
Secrets of 6 top financial advisers
Secrets of 6 top financial advisers
Some of the financial planning profession's most respected veterans reveal their favorite strategies for tough times.
Strategies from those who know
• Send feedback to Money MagazineWhen you're paddling in rough financial waters, it helps to have an experienced guide. That's why we've taken some of the most pressing money questions you have and posed them to people who tackle these problems every day.
These half-dozen pros are among the most esteemed advisers in the field. Some serve only wealthy clients, some the merely affluent.
But whatever their outlook, they share wisdom based on years of experience - a grand total of 158 years - and thousands of hours working with people who, like you, want the best possible future for their families.
Let the learning begin.
By George Mannes, Money Magazine senior writer
The secret to staying cool in this market
Years in business: 23Client assets: $50 millionKnown for: Leading planner voice in the Latino community
• Send feedback to Money Magazine
Know what you can control
Louis Barajas - The coachLouis Barajas, Wealth Planning Santa Fe Springs, Calif.
Obviously, it's okay to feel upset. If you're really interested in helping yourself, think about what is within your control - and what isn't.
You can control how much money you're spending. You can control whether you're becoming more valuable at work. You can't control your office being shut down. You can control whether you put a résumé together and start looking for a job.
You're saying, "I've lost $50,000. I've lost $100,000." You can't change the event. What you need to focus on is the outcome you want. I've gone through this with a lot of clients: "What was the money for?" I ask. "For my retirement," they say. "I just wanted to play golf a couple of times a week and travel once in a while."
And we've sat down and looked at their portfolios. A lot of times they're still on target for that retirement. Or maybe instead of playing golf three times a week, they're going to be able to play twice a week. The feeling of having lost control of outcomes is what creates panic and fear. Don't forget that you do have options.
The secret to creating the right mix
Years in business: 39Client assets: $500 millionKnown for: Wrote the textbook "Personal Financial Planning;" teaches at Pace University
• Send feedback to Money Magazine
Tailor the averages to who you are
Lew Altfest - The teacherL.J. Altfest & Co., New York City
Start out with a portfolio that's 65% stocks and 35% bonds and cash. That's my clients' average asset allocation. That's moderate: It gives you the upside of stock with significant protection for times such as now.
Then you have to take into account your personality and your circumstances. How safe is your job, how much money have you accumulated, can you afford to take risks?
If you're young and have decent risk tolerance, you could go to 80% stocks. If a lot of your money goes toward debt repayment, shift more toward bonds. But if your portfolio is less than 50% stocks, be prepared to accept a lower standard of living in retirement.
You can make tactical moves too. I think you should be overweighted in stocks now because you have the potential for above-average returns. Pull back when everybody says, "Why did we ever doubt the market?"
People want to tilt a portfolio toward that which has performed well and away from the areas that have not performed well. You should be doing the opposite. The thing that you should do robotically is rebalance and get back to your original allocation every quarter or once a year.
The secret to saving more money
Years in business: 29Client assets: $120 millionKnown for: Former chairwoman, National Association of Personal Financial Advisors
• Send feedback to Money Magazine
Fund your goals before you spend
Peggy Cabaniss - The calm voiceHC Financial Advisors, Lafayette, Calif.
It's easy to fritter money away. What you need is a plan.
Let's say you make $10,000 a month gross. Write that down. Take out what your income tax is and what you pay for Social Security. Take out whatever is deducted from your paycheck for your health plan and your 401(k).Notice that I set out goals first. What 95% of people do is, money comes into their checking account, they spend it, and at the end of the month there's nothing left. Of course they don't accomplish their goals.
On the day that money hits your checking account, have a certain amount automatically transferred to a savings or brokerage account. The main thing is that it doesn't sit around tempting you to spend.
The secret making your money last
Years in business: 27Client assets: $650 millionKnown for: Former chairman, Certified Financial Planner Board of Standards
• Send feedback to Money Magazine
Keep two years in cash
Harold Evensky - The deanEvensky & Katz, Coral Gables, Fla.
In retirement, if you start taking money out of stocks at the wrong time, you're in trouble: "Gosh, the market's down, but I've got to sell because I need groceries." So I developed the cash-flow-reserve strategy.
We don't believe in investing in stocks or bonds unless we expect to hold on for at least five years. Problem is, carving five years' worth of cash out of a portfolio puts too big a chunk in money markets. There's an opportunity cost to not being in the market. Two years of cash provides a significant cushion.
So if someone has a million dollars and needs 5% a year - $50,000 - we have two portfolios: a $900,000 stock and bond portfolio, and a $100,000 cash reserve. Maybe put the first year in a money-market account and the second in a short-term bond fund.
We've never run out of cash, but if we did, we would simply sell short-term bonds in the investment portfolio. We wouldn't have to sell stocks or long-term bonds when they're in the tank. The system worked well in the crash of '87 and the tech crash, and it's working very well now.
The secret to avoiding a high tax bill
Years in business: 26Client assets: $150 millionKnown for: Helped establish the personal financial specialist designation for C.P.A.s.
• Send feedback to Money Magazine
Shelter your best investments
Jim Shambo - The tax cutterLifetime Planning Concepts, Colorado Springs, Colo.
You should always maximize tax-deferred 401(k)s and IRAs, but what assets do you hold in them? The usual argument is to keep stocks outside your 401(k) so that when you sell you're taxed on the capital gain, not ordinary income.
But most people ignore a fund's portfolio turnover to their detriment. Even if you don't sell a single share of your actively managed stock fund, you're going to have gains because the whole portfolio turns over every five years, maybe less. The longer you hold the fund, the better off you are having it in a tax-deferred account. If you're under 40, you've got maybe 40 years of tax deferral.
Outside an IRA you're paying capital-gains taxes every year. Turnover is why I like index funds. Their portfolios turn over maybe once every 20 years. If you invest only in index funds, keeping stocks on the outside of an IRA and a 401(k) and bonds inside makes sense.
Actually, it's important to have a blend of stocks and bonds inside and out of your retirement accounts so you have the flexibility to rebalance in the IRAs. You don't want to sell stocks in a taxable account and generate gains.
The secret to balancing goals
Years in business: 14Client assets: $40 millionKnown for: Wrote "The Young Couple's Guide to Growing Rich Together"
• Send feedback to Money Magazine
Make long-term targets No.1
Jill Gianola - The family's helperGianola Financial Planning, Columbus, Ohio
I start with clients' longest-term goals first - usually retirement - and see what it would take to fund those. Then I work backward. Their second-longest- term goal is often their children's college. The furthest goals are usually the big ones; if you don't start working on them now, you're not going to make it.
People are willing to rearrange their short-term goals - "Okay, we can't buy the house for another couple of years" - but they don't necessarily want to postpone retirement. You have to make progress on several fronts to make sure you get to the finish line.Start with the minimum. With a 401(k), the minimum is to get the match. For me the minimum on a credit card is what it takes to pay it off in three years. If you have enough to meet both goals, you're good to go.
More galleries
Some of the financial planning profession's most respected veterans reveal their favorite strategies for tough times.
Strategies from those who know
• Send feedback to Money MagazineWhen you're paddling in rough financial waters, it helps to have an experienced guide. That's why we've taken some of the most pressing money questions you have and posed them to people who tackle these problems every day.
These half-dozen pros are among the most esteemed advisers in the field. Some serve only wealthy clients, some the merely affluent.
But whatever their outlook, they share wisdom based on years of experience - a grand total of 158 years - and thousands of hours working with people who, like you, want the best possible future for their families.
Let the learning begin.
By George Mannes, Money Magazine senior writer
The secret to staying cool in this market
Years in business: 23Client assets: $50 millionKnown for: Leading planner voice in the Latino community
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Know what you can control
Louis Barajas - The coachLouis Barajas, Wealth Planning Santa Fe Springs, Calif.
Obviously, it's okay to feel upset. If you're really interested in helping yourself, think about what is within your control - and what isn't.
You can control how much money you're spending. You can control whether you're becoming more valuable at work. You can't control your office being shut down. You can control whether you put a résumé together and start looking for a job.
You're saying, "I've lost $50,000. I've lost $100,000." You can't change the event. What you need to focus on is the outcome you want. I've gone through this with a lot of clients: "What was the money for?" I ask. "For my retirement," they say. "I just wanted to play golf a couple of times a week and travel once in a while."
And we've sat down and looked at their portfolios. A lot of times they're still on target for that retirement. Or maybe instead of playing golf three times a week, they're going to be able to play twice a week. The feeling of having lost control of outcomes is what creates panic and fear. Don't forget that you do have options.
The secret to creating the right mix
Years in business: 39Client assets: $500 millionKnown for: Wrote the textbook "Personal Financial Planning;" teaches at Pace University
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Tailor the averages to who you are
Lew Altfest - The teacherL.J. Altfest & Co., New York City
Start out with a portfolio that's 65% stocks and 35% bonds and cash. That's my clients' average asset allocation. That's moderate: It gives you the upside of stock with significant protection for times such as now.
Then you have to take into account your personality and your circumstances. How safe is your job, how much money have you accumulated, can you afford to take risks?
If you're young and have decent risk tolerance, you could go to 80% stocks. If a lot of your money goes toward debt repayment, shift more toward bonds. But if your portfolio is less than 50% stocks, be prepared to accept a lower standard of living in retirement.
You can make tactical moves too. I think you should be overweighted in stocks now because you have the potential for above-average returns. Pull back when everybody says, "Why did we ever doubt the market?"
People want to tilt a portfolio toward that which has performed well and away from the areas that have not performed well. You should be doing the opposite. The thing that you should do robotically is rebalance and get back to your original allocation every quarter or once a year.
The secret to saving more money
Years in business: 29Client assets: $120 millionKnown for: Former chairwoman, National Association of Personal Financial Advisors
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Fund your goals before you spend
Peggy Cabaniss - The calm voiceHC Financial Advisors, Lafayette, Calif.
It's easy to fritter money away. What you need is a plan.
Let's say you make $10,000 a month gross. Write that down. Take out what your income tax is and what you pay for Social Security. Take out whatever is deducted from your paycheck for your health plan and your 401(k).Notice that I set out goals first. What 95% of people do is, money comes into their checking account, they spend it, and at the end of the month there's nothing left. Of course they don't accomplish their goals.
On the day that money hits your checking account, have a certain amount automatically transferred to a savings or brokerage account. The main thing is that it doesn't sit around tempting you to spend.
The secret making your money last
Years in business: 27Client assets: $650 millionKnown for: Former chairman, Certified Financial Planner Board of Standards
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Keep two years in cash
Harold Evensky - The deanEvensky & Katz, Coral Gables, Fla.
In retirement, if you start taking money out of stocks at the wrong time, you're in trouble: "Gosh, the market's down, but I've got to sell because I need groceries." So I developed the cash-flow-reserve strategy.
We don't believe in investing in stocks or bonds unless we expect to hold on for at least five years. Problem is, carving five years' worth of cash out of a portfolio puts too big a chunk in money markets. There's an opportunity cost to not being in the market. Two years of cash provides a significant cushion.
So if someone has a million dollars and needs 5% a year - $50,000 - we have two portfolios: a $900,000 stock and bond portfolio, and a $100,000 cash reserve. Maybe put the first year in a money-market account and the second in a short-term bond fund.
We've never run out of cash, but if we did, we would simply sell short-term bonds in the investment portfolio. We wouldn't have to sell stocks or long-term bonds when they're in the tank. The system worked well in the crash of '87 and the tech crash, and it's working very well now.
The secret to avoiding a high tax bill
Years in business: 26Client assets: $150 millionKnown for: Helped establish the personal financial specialist designation for C.P.A.s.
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Shelter your best investments
Jim Shambo - The tax cutterLifetime Planning Concepts, Colorado Springs, Colo.
You should always maximize tax-deferred 401(k)s and IRAs, but what assets do you hold in them? The usual argument is to keep stocks outside your 401(k) so that when you sell you're taxed on the capital gain, not ordinary income.
But most people ignore a fund's portfolio turnover to their detriment. Even if you don't sell a single share of your actively managed stock fund, you're going to have gains because the whole portfolio turns over every five years, maybe less. The longer you hold the fund, the better off you are having it in a tax-deferred account. If you're under 40, you've got maybe 40 years of tax deferral.
Outside an IRA you're paying capital-gains taxes every year. Turnover is why I like index funds. Their portfolios turn over maybe once every 20 years. If you invest only in index funds, keeping stocks on the outside of an IRA and a 401(k) and bonds inside makes sense.
Actually, it's important to have a blend of stocks and bonds inside and out of your retirement accounts so you have the flexibility to rebalance in the IRAs. You don't want to sell stocks in a taxable account and generate gains.
The secret to balancing goals
Years in business: 14Client assets: $40 millionKnown for: Wrote "The Young Couple's Guide to Growing Rich Together"
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Make long-term targets No.1
Jill Gianola - The family's helperGianola Financial Planning, Columbus, Ohio
I start with clients' longest-term goals first - usually retirement - and see what it would take to fund those. Then I work backward. Their second-longest- term goal is often their children's college. The furthest goals are usually the big ones; if you don't start working on them now, you're not going to make it.
People are willing to rearrange their short-term goals - "Okay, we can't buy the house for another couple of years" - but they don't necessarily want to postpone retirement. You have to make progress on several fronts to make sure you get to the finish line.Start with the minimum. With a 401(k), the minimum is to get the match. For me the minimum on a credit card is what it takes to pay it off in three years. If you have enough to meet both goals, you're good to go.
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Monday 1 December 2008
Investment : Types & Overview
Investment : Types & Overview
Though the term investment simply means using the present income for generating wealth in the future or net addition to the stock of capital, still it has its infinite meanings through its versatile application in the real practices.
The term investment has gained its strength in the recent years through changing economic climate over the world. The world business climate is changing very fast and it is the term investment, which is in the perfect direction to provide smell to more than 6 billions over the world.
From the latest United Nations Conference on Trade and Development( UNCTAD report, it is found that the developing nations over the world have actively participated in the field of investment. As to UNCTAD statistics, investment to the developing countries over the world has nearly doubled in two years.
Increasing liberalization among the countries over the world can justify the best result from investment. Present economic success brought by the countries such as India and China have gained a lot from the investment boom.
Present economic growth is largely dependent upon investment factor. This section covers meaning of investment, trend in investment and investment companies over the world.
Investment refers to an asset which is purchased with the expectation that it will generate income in the future or its’ value will appreciate in future so that it will be sold at a higher price. In other sense, we can say that Investment is the purchase of the goods which are not consumed at the present but is used to create wealth in the future. Investment cannot be done without Savings. Savings provides the funds necessary for investment. Investment is influenced by Rate of Interest. Falling interest rates result in increasing rate of Investment. Investment plays a vital role in economic growth of the country as Investment increases the production capacity of the economy.
The meaning of the term Investment is different in different genres. In Economics, Investment is the production per unit time of goods which are not consumed at present and are used for future production. According to economic theory Investment depends on income and rate of interest. An increase in income positively affects the Investment but an increasing rate of interest has a negative effect on it. The interest rate in this case is nothing but the opportunity cost of investing the funds rather than using them at the present. In Finance, Investment means purchasing of securities or any other assets in money market or capital market or purchase of any liquid assets like gold or residential real estate property or commercial real estate property.
Find below various Investment types , investment companies, and real estate investment:
Investment Companies & Types
Edward Jones Investment
Fidelity Investment
Franklin Templeton Investments
Vanguard Investment
Fremont Investment
Land Investment
Property Investment
Bank of America Investment
Financial Advisors
Financial Planning
Private Equity
Retirement Planning
Investment Overview
Finance Investment
Investment Brokerage
Investment Guide
Online Investment
Investment Securities
Return on Investment
Business Investment Opportunity
Investment Strategy
Types of Financial Advisors
Unit Trust
Venture Capital
Wealth Management
Real Estate Investment
Real Estate Investment
Real Estate Investment Property
Real Estate Investment Trust
Investment Firm
Fremont Investment and Loan
Investment Property Loan
Investment Banks
http://www.economywatch.com/investment/
Though the term investment simply means using the present income for generating wealth in the future or net addition to the stock of capital, still it has its infinite meanings through its versatile application in the real practices.
The term investment has gained its strength in the recent years through changing economic climate over the world. The world business climate is changing very fast and it is the term investment, which is in the perfect direction to provide smell to more than 6 billions over the world.
From the latest United Nations Conference on Trade and Development( UNCTAD report, it is found that the developing nations over the world have actively participated in the field of investment. As to UNCTAD statistics, investment to the developing countries over the world has nearly doubled in two years.
Increasing liberalization among the countries over the world can justify the best result from investment. Present economic success brought by the countries such as India and China have gained a lot from the investment boom.
Present economic growth is largely dependent upon investment factor. This section covers meaning of investment, trend in investment and investment companies over the world.
Investment refers to an asset which is purchased with the expectation that it will generate income in the future or its’ value will appreciate in future so that it will be sold at a higher price. In other sense, we can say that Investment is the purchase of the goods which are not consumed at the present but is used to create wealth in the future. Investment cannot be done without Savings. Savings provides the funds necessary for investment. Investment is influenced by Rate of Interest. Falling interest rates result in increasing rate of Investment. Investment plays a vital role in economic growth of the country as Investment increases the production capacity of the economy.
The meaning of the term Investment is different in different genres. In Economics, Investment is the production per unit time of goods which are not consumed at present and are used for future production. According to economic theory Investment depends on income and rate of interest. An increase in income positively affects the Investment but an increasing rate of interest has a negative effect on it. The interest rate in this case is nothing but the opportunity cost of investing the funds rather than using them at the present. In Finance, Investment means purchasing of securities or any other assets in money market or capital market or purchase of any liquid assets like gold or residential real estate property or commercial real estate property.
Find below various Investment types , investment companies, and real estate investment:
Investment Companies & Types
Edward Jones Investment
Fidelity Investment
Franklin Templeton Investments
Vanguard Investment
Fremont Investment
Land Investment
Property Investment
Bank of America Investment
Financial Advisors
Financial Planning
Private Equity
Retirement Planning
Investment Overview
Finance Investment
Investment Brokerage
Investment Guide
Online Investment
Investment Securities
Return on Investment
Business Investment Opportunity
Investment Strategy
Types of Financial Advisors
Unit Trust
Venture Capital
Wealth Management
Real Estate Investment
Real Estate Investment
Real Estate Investment Property
Real Estate Investment Trust
Investment Firm
Fremont Investment and Loan
Investment Property Loan
Investment Banks
http://www.economywatch.com/investment/
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