Investing requires continuous learning from the market.

Lessons to learn from markets

Ashish Pai / New Delhi January 31, 2010, 0:19 IST

There is money to be made. But remember the basics.

Also Read

- Simple strategies for small investors
- The top 10 business bestsellers
- Be curious about companies
- News you should not use
- Time your stock sale
- The momentum psychology


The best way to learn your investment lesson is by investing in equities. Each occasion in the market teaches new lessons, which will empower you to achieve your ultimate goal of building wealth.

Often, it happens that you start putting money in equities and the market moves to new highs. Then you are tempted to put in more money, since you are getting higher returns. Suddenly, the market starts to slide down. Forget returns on investment, you are not even able to recover your capital. This is a common grouse of most investors. They either lose in equity investment or end up in a no profit-no loss situation. Why? Is it because you make wrong decision or because the market is only meant for speculators and gamblers?

No, that’s not true. We go through this pain again and again because we do not learn from our previous experiences in the market. Only the ‘smart investors’ survive the ups and downs in the market and make pots of money. Here are some lessons required to be learnt from the market.

Evaluate when you lose money in the market. Do not just shrug and say, “I am not going to invest any more!”. Investing does not mean making no mistakes, it means learning from experience. All of us made mistakes, when we started - such as going by tips from broker or buying penny stocks. As time passed by, we learnt that by not following the herd, we may have limited gains but our capital will be protected.

Be patient when investing in the market. Investors who show the right kind of patience make the most from the stocks they invest in.

• You need to be patient by not booking losses at the slightest market provocation or
• by not selling stocks before they have reached an optimum price.
• Also, be patient by not panicking when in a market downslide or
• by not buying stocks which you know are good but currently priced higher.

Look for opportunities to invest. There will be many opportunities to grab in the market, such as

• FII selling,
• global downturn,
• credit crisis,
• currency crisis, etc.

Each such occasion is to be looked at as an opportunity. ‘Smart investors’ will fill their pockets with the crème de la crème stocks in the equity market on such occassions. For example, blue-chip stocks like BHEL, HDFC, NTPC and ITC were quoting low prices in the first quarter of last calendar year due to the global credit crisis. It was an opportunity to buy these stocks.

Look for quality advice before investing. Do not follow the herd mentality. Always remember, quality stock picking will help you generate substantial wealth over a period of time. The quality picks can be large-cap, such as SBI, HDFC Bank and Tata Power or mid-caps such as Petronet LNG, Power Grid and Marico.

Learn to invest systematically. Getting into a systematic investment plan (SIP) in mutual funds or directly in an equity portfolio is the preferred mode of investing. At the end of five to 10 years, this portfolio is likely to appreciate by leaps and bounds. If the market is in a bullish phase, the money may even double in less than three years.

Learn the importance of diversification. You can better your returns and reduce risks by diversifying your portfolio. You can diversify across asset classes like gold, commodity futures, property, etc, as well.

A profit booking policy is advisable. The profit booking policy can be based on expectations from equities. Suppose an investor has put money in a stock and it rises by 100 per cent in a year, he may book profits either partially or fully. One strategy could be to book profits in a way that the initial investment is recovered and the profit portion continues to be invested in the stock.

Assess risks before investing in the market. Many a time, we invest in a particular stock or fund without assessing the risks involved with the stock. For example, sectors such as real estate or metals are riskier as compared to FMCG or power. If you don’t have a high risk taking ability, do not go for risky stocks or sectors.

Do not borrow to invest. In a sliding market, such investors are most impacted, as they have to offload stocks due to margin calls or liquidity issues.

Do not chase momentum stocks. In most cases, investors enter such stocks at the peak and are stuck with these for a long period or have to sell at a loss. Some of the momentum stocks in the recent past were Unitech, DLF, Jet Airways, Reliance Industrial Infrastructure and Jai Corp. The prices of such stocks reach a peak on sustained buying and then slide, roller-coaster, in a few sessions.

Conclusion :
Investing requires continuous learning from the market. Like driving a car, investment is more of learning practically and hands on. It requires discipline. When you are driving a car, what speed to drive and which lane to drive in are decided by the driver. Similarly, in case of investment, you must know how much to invest, where to do so and when to sell.

The best is to have a disciplined approach, combined with an investment philosophy. Some of the great investors like Warren Buffet or George Soros have been successful as they have a disciplined way of investing. There is no easy way to make money. All of us have to learn lessons in investing in the same market and in the same way. Each time, investors are put to different tests. Only the learned investors will succeed. Be a ‘smart’ investor.

In brief :
* Learn from your past experience
* Have a strategy to invest
* Iinvest systematically
* Look at your liquidity requirements
* Diversification is advisable
* You will need discipline and patience

The writer is a freelancer


http://www.business-standard.com/india/news/lessons-to-learnmarkets/384131/

Congratulations, You're an Investor!

Congratulations, You're an Investor!
By Dayana Yochim
January 29, 2010 


During this monthlong Fiscal Fitness Boot Camp, we worked some money magic -- saving big bucks by scrutinizing our major (and even some minor) expenses.

What's the point? Sure, padding the bank account is good. Freeing up cash to more quickly pay down high-interest debt is even better.

But once the basics are taken care of -- once that debt is but a distant memory, and you've got a decent emergency cash cushion for life's just-in-case events -- the very best thing you can do with your money is to make it grow. In other words: You've mastered the art of saving. Now it's time to become a bona-fide investor.

Channel your inner Warren Buffett
The truth is that every one of us is already an investor. Every dollar decision we make is an investment, whether for long-term gain (retirement savings), short-term safety (emergency fund), or immediate pleasure (mocha latte -- hey, I'm not one to judge). (This mind-set -- "Treat Every Dollar as an Investment" -- is such an important part of successful money management that we've made it a key part of our Motley Fool Magna Carta.)

However, today we're going to venture into the world of traditional investing. If you complete today's homework, you'll snag the most handsome payoff of this entire series -- adding tens of thousands of dollars to your bottom line.

Don't start mentally spending that money just yet. Investing is a long-term exercise. The kind of savings we're talking about will accumulate over years -- decades, even. But it's not going to happen magically on its own. So let's get started.

Your first investment
As scary as the stock market has been as of late, it's still the best place for your long-term savings. (Note the emphasis on long-term. We're talking about money you do not need to touch for five to 10 years, depending on your tolerance for risk.) With that in mind, when it comes to traditional investing -- as in IRAs, 401(k)s, stocks, bonds, mutual funds, gold doubloons -- start with the basics and you're 90% of the way there.

Last year, we recommended three stocks -- Costco (Nasdaq: COST), Paychex (Nasdaq: PAYX), and National Oilwell Varco (NYSE: NOV) -- to our Fiscal Fitness graduates. But if you don't want to jump into individual stocks, that doesn't mean you shouldn't invest.

One of the easiest ways to get started investing is to sign up for a 401(k), 403(b), or 457 plan at work, if your employer offers one. The money is deducted from your paycheck and sent straight to your 401(k), 403(b), or 457, before income taxes are taken out.

Another reason to do so? Free money! Many employers add money to your account based on the amount that you sock away. Incredibly, however, many people don't take their employers up on the offer. That's essentially dissing an instant, guaranteed return on their money. For example, save $5,000 with a 25% employer match, and you suddenly have $6,250. (Whatever you do, don't make one of these six common 401(k) blunders!)

Once you've maxed out your 401(k) -- or if you don't have one at your place of employment -- it's time to move on to phase 2 of building a portfolio.

How to invest $50, $500, and $5,000-plus
First, determine how much you have to invest. Depending on how much money you've freed up to invest, some investment battle plans make more sense than others. Here's advice on how to proceed with $50, $500, and $5,000-plus.

How to invest $50:Thanks to the miracle of compound interest, even small sums can add up to big nest eggs over time. (Get a load of these charts to see what I mean.) If you're just starting out, the very best thing you can do is to commit to investing on a regular basis.

One of the best ways to invest small amounts of money regularly and cheaply is through a DRP -- dividend reinvestment plans. They and their cousins, direct stock purchase plans (DSPs), allow you to bypass brokers (and their commissions) by buying stock directly from the companies or their agents. They also allow you to reinvest dividends directly into more shares of stock. More than 1,000 major corporations offer these types of stock plans, many of them with fees low enough (or free) to make it worthwhile to invest as little as $50 at a time. Some plans even allow investments of as little as $20. Once you're in the plan, you can set up an automatic payment plan, and you don't even have to buy a full share each time you make a contribution.

What to do with $500: With this amount of money your investment options open up. You've got enough money to meet many companies' minimum initial investment requirement to open an IRA (or even a taxable brokerage account). (Here are 10 ways to size up a broker.)

Mutual funds are a popular investment option for many investors. You'll want to consider whether to go with an index fund, which simply tracks a particular benchmark, or an actively managed fund. You may want to start with a large-cap-oriented fund, which will give you exposure to well-known companies like ExxonMobil (NYSE: XOM), AT&T (NYSE: T), and Procter & Gamble (NYSE: PG). But you can also buy funds in just about any category, from bonds and small-cap stocks to shares of international companies like Vale (NYSE: VALE).

Some funds require as little as $250 for you to invest (typically restricted to IRAs). After your initial investment, you can add as much money as you like, as frequently as you like -- and if you choose a no-load fund and purchase directly from the fund company, there won't be any commissions. For beginners, a high-quality mutual fund is a great portfolio building block.

How to manage a $5,000-plus portfolio: As you establish a decent-sized retirement kitty (yay, you!), diversification should be your aim. You want to spread your money around -- allocate your assets -- owning both mutual funds and stocks to cushion yourself from stock market belly flops. (Here's the Fool's rules for asset allocation, including a handy chart that'll help you determine how much of your money should be invested in stocks.)

At this savings level, again, the power of making regular investments over time is very strong.

If you start with $1,000 at age 25 and invest an additional $1,000 each year, and your money earns 10% annually, then when you're ready to retire at age 65, you'll have more than $500,000 set aside. Yup. The key is to make sure that your costs of investing (including brokerage commissions, mutual fund management fees, etc.) add up to less than 2% of your account's overall worth. That's money that you've worked hard to save -- so make sure it's not slipping away in dribs and drabs!

Finally, let's end with the secret to investment success ...

Save more and invest more
End of story. Sounds dull, but if you get serious about those two things, you will turn your entire financial future around.

Let's say your Fiscal Fitness Boot Camp frees up 3% of your salary to invest this year. If you sock away $1,500 (3% of a $50,000 salary) and earn an 8% average annual return over five years (for a grand total of around $2,200), you'll bank $700 more than if you hadn't become an investor. Commit to the 3% savings goal for the next five years (for a total of $7,500 invested), and your portfolio will blossom to more than $11,000 -- that's an extra $3,500 in nest egg padding.

What's the point?
At the beginning of this article, I asked, "What's the point?" The example above just puts a dollar figure on the benefits of investing.

But the real point of this entire exercise is what that money represents.

• For some of you, the savings we've found during this month means freedom from the shackles of debt.
• For others, it means peace of mind, being financially prepared should you lose your job or if the water heater goes on the fritz.
• And for a few folks out there, this month of becoming fiscally aware will pave the way to an early retirement, the ability to put a down payment on a house in 10 years, or even just a sense of control and stability that you've never felt before.

So what's the point of saving and investing for you? Do share in the comments area below.

http://www.fool.com/investing/general/2010/01/29/congratulations-youre-an-investor.aspx

Reviewing the basics of interest-bearing investments

To have a good understanding of interest-bearing investments, learn and know the followings.

The risks of interest-bearing investments, for example:

• inflation,
• interest rate cycles and
• dubious borrowers with poor credit ratings.

The advantages of investing in this asset class, particularly

• the interest income on which you can rely.

Some of the main interest-bearing investments in the market.  These include: 

• cash,
• money market funds,
• bonds,
• participation mortgage bonds and
• voluntary purchased term annuities.

You have to know about two new market places other than the stock market: 

• the money market, where short-term interest-bearing secuities are traded, and
• the bond market, where longer-term interest-bearing securites such as bonds are traded.

Mistakes to avoid when investing in interest-bearing instruments

Interest-bearing investments may be relatively stress-free, but they too have their pitfalls.  Watch out for the following:

• Do not accept the first interest rate you are offered.  Compare interest rates, negotiate where possible and find out more about fixed versus fluctuating interest rates and the term of fixed-interest investments.
• Do not think interest-bearing investments are safe, risk-free havens.  Remember the impact of inflation.
• Do not forget about interest rate risk.  When interest rates increase, bond prices will decrease, resulting in a loss on your investment.  The longer the term of the bonds, the greater the drop in the market price.
• Do not invest in bonds without understanding the terms of the bonds and the interest rate environment.  Invest in well-known and reputable bonds rather than in unknown corporate bonds.

Other interesting interest-bearing investments: Mortgage Bonds and Term Annuities

Today a myriad of unit trusts invest in interest-bearing investments.  These include:

• money market funds,
• income funds, and,
• bond funds.

Mortgage Bonds

One of the most attractive interest-bearing investments with a fixed capital value is participation mortgage bonds. 

• Here you invest in units in large mortgage loans that are granted against the security of a first-class physical asset, for example, commercial, industrial or other property. 
• Your capital is guaranteed and you earn interest at a competitive rate that can be variable or fixed. 
• A great advantge is that a participation bond becomes quite liquid after the initial five-year period when you can still enjoy the interest income and withdraw on only three months' notice.
• (These mortgage bonds caused the subprime credit crisis in 2007-2008 in US).

Term Annuity

A voluntary purchased term annuity is another important investment product from which you can earn a regular income.  It is simply the exchange of a cash lump sum for income, which is paid annually, half-yearly, quarterly or in monthly instalments over a specified period (minimum five years). 

• This basically means that your original capital is refunded by way of regular instalments together with interest earned on the investment. 
• You will therefore not get back any capital at the end of the period as in the case of fixed deposit. 
• A voluntary term annuity can be purchased at any life office and is in essence an insurance contract. 
• The interest or annuity rate is fixed for the term of the contract, but varies from institution to institution. 
• This investment product also offers a tax benefit, as you pay tax only on the interest part of your annuity.

More about another interest bearing investments: bonds

Bonds are fixed-income securities that governments and companies issue in order to borrow money.  They pay interest to you for that privilege. 

The maturity date is the date on which the full amount that was borrowed is returned to you .

The investment term is normally a fairly long period, say ten years or longer.

The coupon is the interest rate you receive. 

Bonds are traded on the capital market in the same way that equities are traded on the stock market.

Bonds are medium-risk investments because the interest rate cycle has a definite impact on the value of bonds. 

If you want to understand bonds, this is the most important thing to remember:  when interest rates fall, bond prices rise; when interest rates rise, bond prices fall. 

This is simply because the coupon on the bond is fixed, and the market value of the bond is adjusted to bring the coupon in line with the external interest rate. 

Bonds are a very important part of a well-diversified portfolio.  In difficult stock markets, bonds can provide a cushion to soften the blow.

Money market funds have become very popular alternative to bank deposit

A money market fund is a type of unit trust that invests in interest-bearing instruments issued by banks, government and companies when they want to borrow money.

These short-term instruments are

• traded on the money market, and
• have a maturity of less than 12 months.

Money market funds have major advantages in comparison with other cash investments.  For example:

• You gain access to money market instruments even though you invest only a small amount.
• The interest rate is higher than for a bank deposit, as you are part of a group that can bargain for the best wholesale rates.
• You can withdraw your money at any time, like a call deposit at a bank.
• Interest rate risk is largely eliminated because money market funds are allowed to invest only in instruments with an average term of not more than 90 days.

Units in a money market fund have a fixed value of $1, and the only changing aspect is the interest income an investor earns on that unit.

This income is capitalised, or reinvested, which means the investor earns interest on interest.

Money market funds are ideal

• for pensioners who must live on their interest income or
• for the creation of an emergency fund from which you can withdraw money at any time. 

Money market funds also provide useful parking for investors

• to limit the risk of an investment portfolio in uncertain times or
• to phase in their funds.

When you invest in a money market acount, you should know the difference between the nominal and effective rate. 

• The effective rate is the interest rate you will earn if your money is deposited for the whole year and all the interest is reinvested. 
• The nominal rate is lower because this is the rate you earn every month before any reinvestment of interest is taken into account.

The 'safe' option of cash

Cash has always been seen as a fairly safe investment, and our forefathers were quite happy to put their money under the mattress and leave it there.

Today we realise that you cannot just put your money away and forget about it, because inflation will erode its value.

If you want a stable income, a bank deposit is still a valuable investment option.

However, money market funds have become a very popular alternative.

The calmer waters of interest-bearing investments: their risks and rewards

The interest-bearing investments include:

• cash
• bonds
• the money market securities.

Compared to the roller-coaster ride of equities, interest-bearing investments are like a sea of tranquillity.

The focus of interest-bearing investments is not on the appreciation (increase) of the capital you have invested, but rather on the provision of a steady interest income - often at a fixed rate.

While shares offer you higher returns at a higher risk, interest-bearing investments offer you lower returns at a lower risk, making them a safe haven for many investors.

But this safe asset class is not safe from inflation. 

Interest-bearing investments often do not generate the kind of return that beats inflation, and it is very important to remember that interest income is taxable.  After taking tax into account, the return on interest-bearing investments often struggles to beat the inflation rate.

The reason for this is simple.  Interest-bearing investments are normally money you lend to a bank, government, company or other institution with the undertaking that this exact amount will be paid back after a period of time. 

In return for this, you earn interest.

Since you only get the same amount back after a couple of months or years, that amount is usually worth less as a result of inflation. 

Your only real benefit is the income that you receive.

Interest-bearing investments also hold other risks. 

• This asset class is subject to the ups and downs of the interest rate cycle.  As interest rates increase or decrease, your cash flow can be affected - unless you have a fixed interest rate.
• Furthermore, you should beware of institutions with credit risk.  A high interest rate is not everything:  you must also be sure that your capital will be paid back. 

The so-called junk bond market in America is well known as a market where companies with poor credit ratings offer exceptionally high interest rates.  Sometimes it is better to earn less interest, but know that your money is safe.

Interest-bearing investments do, however, play an important part in an investment portfolio.  Although inflation will still erode the capital value of your investment, these investments do have advantages, including:

• offering you a relatively safe and predictable income.
• offering you less risk and volatility than an investment in equities
• offering diversification in your portfolio in case stock markets collapse
• giving you instant access to cash when you need it.

Investment in Property

Property is one of the main asset classes, the first investment most people make, and usually their biggest asset. 

Investment in property offers the promise of

• an appreciation (or increase) in capital and
• a regular income in the form of rental payments. 

That means that property, like equities, can beat inflation over time.

But you must also be aware that the capital value of your property can depreciate (or decrease) over time, therefore property is a medium- to high-risk investment.

One of the advantages of investment in property is gearing or leverage.  This is the use of debt in the form of mortgage bond finance to 'leverage' you or help you to acquire an asset you would not otherwise be able to afford.

With a little financial help from your banking friends, you will, it is hoped, make a good capital gain on your investment one day.

There are different ways of investing in property. 

• On the one hand, you can simply own your own home in which you live. 
• On the other hand, you can own an investment portfolio of different properites with a view to earning a rental income or capital profit from them. 
• A third way to invest in property is through the stock market.

Your own home

An own home is often the biggest asset in one's investment portfolio. 

For most people, paying off their house takes up most of their earnings.  They are using their mortgage bond to leverage them, possibly with the hope of making a capital gain one day.

Paying off a mortgage on your own home is one of the best investments you can make, and a golden rule to remember is that you should pay off your mortgage bond before you start thinking about investing in other asset classes.

As an own home can be a medium- to high-risk investment,  you should be aware of the following dangers:

• Property is highly illiquid.  This means you do not have immediate access to the value of your property should you need cash (although you could use your mortgage bond facility), and if you decide to sell your house, there is no guarantee that you will be able to do so quickly.
• The value of your house is influenced by many factors over which you have no control, such as political factors and economic and interest rate cycles.

An investment portfolio of properties

Buying a property with a view to letting it and using the rental income to cover your mortgage bond payments (with the mortgage interest often tax-deductibe) while you benefit from the capital appreciation of the property sounds like a great investment strategy.  So why do not more people do it?

The reason is perhaps because there are so many pitfalls in propety investment.  Some of these are:

• Large amounts are required to invest in property.
• Properties need to be managed.  Difficulties include problems with tenants, payments on time, maintenance, etc.  and these must all be factored into your calculations.
• There is a high risk of bad timing in property investment.  Certainly, you can make substantial capital gains, but only if you buy and sell the property at the right time.

Property investing on the stock market

Property investing on the stock market gives the small investor the chance to invest in property in a more liquid way.  You can sell your investment without having to sell a physical property, and you gain access to the propety expertise and scale benefits of large projects.  There are three sectors in the stock market property division in which you can invest, namely:

• property companies,
• property loan stocks, and
• property unit trusts or REITS

You can buy shares or units directly in these entities that own a diversified range of properties.  Each of these will have a different risk profile depending on factors such as

• the age,
• location and
• type of property in which it invests.

These entities normally perform well in a falling interest rate environment, but, as with all property investments, are vulnerable to

• interest rate cycles and
• economic and political change. 

These investments can therefore be fairly volatile and are recommended only for investors with specialised knowledge. 



Additional notes:

The concept of gearing:  This can be explained by the following example.  Say you have put down a deposit of $200,000 to buy a property of $1 million.  Within two years, the property's value increases by 10% to $1.1 million.  This means you have actually used $200,000 to earn $100,000 (i.e. 50% return) with the help of your bank manager!

Beware of property gains tax:  This can reduce the attractiveness of investment property.  Property gains tax can take a significant chunk of your capital gain when you sell property and will make it more difficult for this investment to beat inflation.

Remember Diversification

Most investment plans should include a combination of the 4 major asset classes because of the benefit of diversification.

Diversification in this context means spreading your investment risk between the various asset classes. In other words, not putting all your eggs in one basket.

Investors who are prepared to hold a combination of equities, bonds and money market instruments stand a greater chance of higher returns over the long term than those who invest only in conservative investments such as cash.

By combining

• the growth potential of equities with
• the higher income of bonds and
• the stability of money market funds,

you are employing a sound strategy to control the balance of risk and reward in your portfolio and to ensure that your investments fit in with your

• time horizon,
• risk tolerance profile and
• investment objectives.

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:

• 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.

http://myinvestingnotes.blogspot.com/2010/01/what-money-means-to-you-answer-10.html

Understand what money means to you: Answer 10 simple questions : Sheet1

http://spreadsheets.google.com/pub?key=tr9oMvjAsDJvkcPgXdd763A&output=html

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.

Property - moderate to high risk

Property is often the biggest asset in a person's investment portfolio.

Property can keep up with inflation and can be a very effective way of gearing your investment.

This means that by using external financing you can increase the return on your investment.  Debt in the form of a mortgage bond can help you to acquire an asset - and a return on this asset - you would not otherwise be able to afford.

The risk of property, however, is moderate to high. 

Much depends on

• the location of the property and
• the political and economic environment.

One big drawback of this asset class is illiquidity:  the fact that you cannot sell property as quickly as investments in other asset classes. 

For that reason the safest option is to own your own home, but to leave property speculation (a potentially risky business) to the experts.

Bonds - moderate risk

Bonds or gilts can be defined as interest-bearing securities issued by governments or companies in order to borrow money.

In essence, it is an IOU, in which they promise to pay you, the lender,

• interest and
• to pay back your capital sum on a specific date.

This asset class offers a moderate risk. 

• The capital sum that you invest can fluctuate, while
• the interest payments can be higher than on cash.

Cash - low risk

Cash is one investment from which you can never hope to make a fortune, althoug it can safeguard you against losing one.

Cash investments, including bank deposits and money market accounts,

• offer you the assurance of a regular interest income and
• knowing your capital will not be subjected to huge external fluctuations.

But cash also carries risk.  There is no guarantee that your capital sum will be protected against inflation, as this investment does not have any inherent growth potential.

The 4 major asset classes: the building blocks of any investment plan

Any serious investor should have a basic knowledge of the 4 major asset classes and the risk inherent in each:

• Cash - low risk  (For Savings and Protection)
• Bonds - moderate risk (For Income)
• Property - moderate to high risk (For Growth and Income)
• Equities - high risk (For Growth)

Remember this fundamental rule:

The bigger the risk you take, the greater the possible reward or return (growth on capital) you can expect.

The safer your investment and the smaller the risk you take, the smaller the possibility of a great return.

Why do so many people invest themselves into bankruptcy?

Investment is simply the saving of money with the aim of making it grow.

The amount you invest is called your capital.  Investing is therefore the creation of more money through the use of capital.

The trick, of course, is finding the right assets in which to invest.

Why do so many people invest themselves into bankruptcy?

The answer is that they

• invest in dubious or risky products, or
• know too little about themselves and the product or asset classes in which they invest.

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 know more about yourself and
• your relationship with money. 

Some "money psychology" should help you to deal with your financial affairs in a smart way.

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:

• 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.

Risk Tolerance

Time is not the only factor that affects the risk you take when you invest.

Your own tolerance of risk is an important factor.

Risk is the measurement of your willingness to see your investments shrink in the short-term, even though you know they will increase in the longer term. 

You need to have some idea of your level of risk tolerance.

Time Horizon

What are your major deadlines in life?

 How much time do you have to save and invest before you retire?

Your time horizon is very important when you invest, because compounding works best over a longer period. 

Time and risk are also related. 

If you are young and have many working years ahead of you, you can afford to take bigger risks with your investments than an older person close to retirement.

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. 

The Aim of Almost Every Investor

The aim of almost every investor is to obtain a combination of safety, income and capital growth. 

Sir John Templeton

The January Effect

Dow is down 3% in January 2010.

Do you believe in the January effect?  I don't.

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:

1. how long or short a time you have to invest
2. how much risk you can tolerate, and,
3. your investment objectives and whether they fit in with your time horizon and risk appetite.

Cash flow is another important factor to keep in mind when you assess your personal situation.  You need to have a good idea of your cash inflows and outflows and of how to do a balancing act between the two.  That is why a cash-flow needs analysis is such an important part of any financial advice programme.

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. 

In short, you have created an investment portfolio tailor-made, so that your money can work for you.


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

Reviewing the Financial Basics of Investment

• Long hours of back-breaking work do not guarantee financial independence.

• You need to work smarter with your money.  Let your money work for you.

• This can be achieved by clever investing and the magic of compounding.  This is the only way in which you can really beat your ultimate enemy, inflation, over the longer term.

A difficult environment - why invest? Take time out to try and understand the nuts and bolts of investment.

Compounding cannot take place without investment. 

It is through clever investment that compounding makes your money work for you.  The two are inextricably linked. 

Investment is closely associated with the ups and downs of financial markets. 

The last few years were particularly bad, as we saw the emerging markets crisis, the bursting of the internet bubble, then the terrorist attacks in the United States and the subsequent war taking their toll on investor sentiment, and the recent subprime credit crisis.  Many investors have seen their wealth being eroded and have become disillusioned with investment in general.

Do not neglect your first priority

One of the big problems is that people think they should invest in equities (also called shares or stocks) despite the fact that they answer 'NO' to all the following three questions:

1.  Can you comfortably cover your living expenses, including food and shelter?
2.  Do you have enough cash for emergencies?
3.  Do you have adequate insurance to protect your family?

The fact of the matter is that these items should be your first priority.  It is only SURPLUS FUNDS that you should invest in the stock market.

The fluctuations of financial markets have not proven that investment is inherently bad.  There is no other option if you want to combat inflation and increase the value of your savings over time.  But political and economic crises do emphasise that:

• You should be clever about investing.
• You should know the investment basics.
• You should get serious about your money and retirement.

Time passes all too quickly.  Take time out to try and understand the nuts and bolts of investment.  Do not allow yourself to run out of time.  Read widely and in doing so, you will arm yourself with the knowledge needed to make your money work for you.

Compounding: your ultimate friend

If inflation is your ultimate enemy, compounding is your ultimate friend.

Einstein even called it the eighth wonder of the world - and being the genius he was, he would have known!

Compounding is the best weapon in your arsenal, the one thing that can make your money grow, despite inflation.

Compounding simply means that the returns on the investment grow too, and not only the capital.  It is growth on growth, or interest on interest.

The longer you invest, the more your money will grow.  That is why time is important, and the earlier you start investing the more you will earn.

Delaying your investments is as bad as not investing at all.

Example of Ann and Peter, two young people.

Ann saves $500 a year.  She starts when she is 15 years old and invests in the stock market for 10 years at a return of 20% a year. After 10 years she stops adding money to her nest egg.

Her friend, Peter, only starts to save when he is 40 years old.  After initially squandering his income rashly, Peter starts saving $40,000 a year for 25 years, also at a return of 20%.

Who do you think has the most money at retirement?

• The total amount of $5000 that Ann had saved over 10 years, gave her a grand total of $22.9 million at the age of 65.
• Peter on the other hand, battled to save a total of $1 million and ended up with $22.7 million.

Neither of them will have any financial problems, but the point is that Ann's money grew for 50 years - twice as long as Peter's did, and with much less effort.

How did Ann achieve this?  Not because of:

• the rate of return:  both earned the same return on their investment, nor
• the capital she put in:  Peter put in far more.

But because of:

• the time factor.  Over time, Ann had growth on her money and on her returns.  Compounding is a winning recipe.

Inflation: your ultimate enemy

Inflation erodes your money systematically. 

Inflation simply means that prices of goods and services go up, so the purchasing power of your money decreases and you have to pay more to maintain the lifestyle to which you have become accustomed. 

For example, your pension may seem to be adequate now, while you are saving for it.  However, after a number of years' retirement, you may suddenly realise that the amount you had set aside is not enough and you cannot maintain your standard of living.  With life expectancy on the increase, people often outlive their money.

Even in the current relatively low-inflation environment, inflation can make a big difference in your retirement. 

For example:  if you hid $1,000 under your mattress today and left it there for 20 years, even at a fairly low inflation rate of 3%, it would have shrunk to the equivalent of $544 - almost half its original value.

So inflation eats away at your money.  It has no regard for how hard you have worked, how many hours you have put in or even how efficient you are.  Your money simply becomes worth less as time goes by.

Your money's job description and your principal financial goal: "Work to give a real rate of return."

Return is a very important concept in the investment world.  It is simply the difference between the money you start off with and the money you end up with.  In other words, how your money has grown. 

The rate of return is the pace at which you achieve that growth, and is normally expressed as a percentage per year. 

The nominal rate of return does not take inflation into account, while the real rate of return is the nominal rate of return less the inflation rate.

E.g.

Nominal rate of return for FD 4%
Inflation 3%
Real rate of return for FD 1% (4% - 3%)

You should learn how your money can work for you to increase over time and to beat inflation.

Your money should give you a real rate of return.  This should be your money's job description and your principal financial goal.

A few sobering statistics. Only 6 out of 100 people achieve financial independence

It is estimated that out of every 100 people aged 25 today, in 40 years' time:

• only 6 will be financially independent
• 34 people will have passed away
• 10 will be drawing a government pension,
• 20 will still be working, and,
• 30 will be dependent on relatives.

How many people of 60 and older do you know who are dependent on their family or still have to work?  Scary, isn't it?

Many people do not realise that, despite their strong work ethic, their hard work alone is not enough to help them on their way to accumulating wealth and becoming financially independent.

To gain financial independence, your money must work for you.  You need to be smart about money, and you need to know your money's enemies and friends.

The story of Rockefeller

As a teenager, John D. Rockefeller, one of the richest men in America in the 19th century, earned $1 hoeing potatoes for a neighbour for 30 hours.  A week later, he collected interest of $3.50 on a loan he had made to another farmer a year earlier.  Rockefeller learned early on that you do not necessarily need to work harder, but that you do need to work smart.

If you share Rockefeller's determination and want to end up being one of the 6 out of 100 people without financial worries when you retire, you should learn to invest early.

Everyone wants to be financially independent

Acquiring investing knowledge is important. The earlier you acquire this knowledge of how your money can work for you, the better for you.

In order to gain financial independence you need to understand first and foremost that hard work is important, but not enough. You should also be clever about making the money you earn work hard for you.

You also need to know yourself before you make any investment decisions. Your objectives and the time you have in which to achieve them are the 2 most important factors when deciding on an investment programme.

Unfortunately, very few investors realise this when they start. You will need to find out how much risk you can tolerate, as well as what your relationship with money is.

Investment options are increasing dramatically in number and sophistication. Many people stumble along, buying a share here and a unit trust there. Only when they start learning about investments do they realise that they have made a mess of things. You have to make the most of this sophistication by adhering to simple principles and basic truths when compiling your investment portfolio.

The road may sometimes be bumpy, and at times you may wonder whether it would not have been more prudent to keep your hard-earned money under your mattress. But you will see that patience will be rewarded, and the ability to achieve long-term objectives depends on a long-term plan.

Very good advice for the younger investors contemplating stock investing

When is a good time (age) to invest in the stock market?

3:02 am on January 28, 2010

Hi, I am 20 years old and am looking to start investing into the stock market. I have been told that I am too young to invest and that I will end up broke. I am going to be an accountant, so I know how to handle my money. Also, I was curious if there is a minimum to invest at a time or if I can invest a small amount now and invest more once I have established myself? And finally am I too young to invest?

Donald F 3:02 am on January 28, 2010 Permalink

I am glad that you are asking this question at your age. Like in everything else in life, there’s nothing like starting early. You are studying to be an accountant, so you already know the power of Compounding, and what it can do. Consider this excellent article about the benefits of starting early and what Compounding can do for you, when you start early.
Power of Compounding
http://www.valueresearchonline.com/story/h2_storyView.asp?str=4007

Next, I would recommend you to first get solid grounding in Investing. 3 must read books. If you haven’t heard of these, buy them NOW, today. They will be your invaluable guides to safe & prosperous investing and future wealth creation.
1. Intelligent Investor -Benjamin Graham
Considered the bible of all investors, this will foremost teach you the basics and most importantly, how not to lose money. Thats the first lesson you need, believe me
2. One up on Wall Street -Peter Lynch
This is another classic. Tells you how to spot winners from what you see around you. successful products, companies. Practically shows you how you do not need to be a hot shot financial analyst to be able to spot good moneymaking opportunities in stocks
3. Common stocks Uncommon Profits- Phil Fisher
As you dabble for 1 or 2 years, make some money and also make some small (hopefully) mistakes, you will start itching to catch the multi-baggers, the ones that go up 4x-10x in a couple of years! This book show you how to sift out probable winners
As you start reading the books, start an online trading account like someone mentioned e-Trade, use the principles in the first book to buy a few good stock at a reasonable price. Start listening in on the financial channels, start reading a business daily, daily. Check out great investing basics websites like
http://beginnersinvest.about.com/
http://www.investopedia.com/articles/basics/
http://www.kiplinger.com/moneybasics/
And ask questions to the more experienced investors at popular forums, hang in lurk at some of the great investing forums for pearls of wisdom and when you have a query that you have to have answered post a quick one. Consider Chucks Angels -a nice yahoogroup for wannabe investors too http://finance.groups.yahoo.com/group/chucks_angels/
Good Luck. You are not too early by any standards. I would say just about right time. Get cracking, boy!

Eka A 3:02 am on January 28, 2010 Permalink

When the stock market have got into bullish.But it up to the economics,although perhaps economics slow down but you can get profit in bearish.it up to your skill.I will show you and example that present you about the US recession can’t effect to everyone,thus you can make progit on this situation. here this link
http://finance-fantasy.blogspot.com/2008/05/us-financial-crisis-has-not-had-bad.html


cashing 3:02 am on January 28, 2010 Permalink

Try <— http://earn-cash-today.com/stock
Good luck!

jjunit 3:02 am on January 28, 2010 Permalink

"I have been told that I am too young to invest and that I will end up broke."
ha ha ha thats funny im 16 and i invest in stock options

Liz A 3:02 am on January 28, 2010 Permalink

You can invest at any point in your life and start with small amounts if you like. There are alot of different investment options out there so study up on it first and see what fits for you. If you go with stocks, remember the old saying "buy low – sell high"
To start, go to you local bank and talk to an advisor. They can give you some good option advise for free, that’s their job. Of course they would like you to invest through them, but you don’t have too.

andy 3:02 am on January 28, 2010 Permalink

When I was in the Navy, there were people your age investing in the stock market and making money. If you have spare money and can handle the risks go for it. I would start with an online stock trader such as e-trade to get your feet wet. It usually takes a few hundred dollars to get started. Good luck and happy investing.

Ray 3:02 am on January 28, 2010 Permalink

Anytime is good to invest. Your age is NOT a factor if you understand the marketplace and it’s ramifications.
There is no minimum – but you need to understand you pay commission per trade and buy the stock at it’s current market price.
And hope the price goes up. Then you sell it for profit.
However, there are also stock options you can trade as a tool to hedge your investments.
You should also look at futures trading as a tool for investment and hedging.
In the futures market (also called "commodities"), you can buy OR sell without ownership. You are "betting" or speculating the price of gold, or crude, or sugar, or wheat will go up OR go down. Much riskier than stocks, but you can make a lot of money in a short period. (you can also loose it just as fast!)
You can use a broker who will offer advise or trade yourself online- like schwab online.
However, it is the your responsibility to do the research.
What type of stock and the companies you invest in will determine your chances of success.
Dump it all on one stock or smaller amounts in a few different stocks? These are some things you will have to decide.
Also- DO NOT listen to people who give you TIPS. Chances are, by the time you hear the "hot tip", it’s too late. Someone else has already cashed in.
Watch the movie Boiler Room. IT will teach you a good lesson- how you can get scammed by what appear to be legitimate brokers.
DO YOUR HOMEWORK FIRST before you give anyone a cent.
Good Luck-

Sheri Dev 3:02 am on January 28, 2010 Permalink

Ziggy,
Investing in direct equity market without proper knowledge is risky. Till achieving the required knowledge, you can select mutual fund path by applying SIP (systematic Investment Plan) with best available funds today. that is recommended.
Still, you want to know about the time buy stocks, please read further.
There are two types of activities with share and stock. 1. Stock trading 2. Stock Investing.
Stock traders commonly buying stocks today and selling immediately the same day or next day to get small profits. This is dangerous for someone doesn’t have proper knowledge. The method most of the traders using to analyze a stock called Technical Analysis using trend and historical performance charts. It is a kind of speculation that can give you money or cost you money.
Stock Investing also same but, investors throughly analysis companies using various fundamental analysis tools and once they found a good one, the will invest on that. compare with the above, stock investing have long term investment perspective of 5 to 15 years. This will give them proper profits time to time from there in vestment.
Now about the time to invest:
There is a basic approach seeing that, buy stocks in low and sell at high. This is OK but you have to watch a lot and have skills to identify the stock moves.
The best time is to buy stocks is "Any Time" you want. But if you buy stocks at any time, you have to follow some criteria.

• First, you should have a long term investment perspective of 5 to 10 years.
• Second, you should study and analysis companies to know whether the stock of this company is suitable to invest or not. to analyze a company, great investors like Benajamin graham and warren buffett provided some valuation methods. read the same here: http://uliponline.blogspot.com/2008/05/ten-points-ben-grahams-last-will-and.html  if the company is suitable to this valuation methods and your investment horizon is long, buy the shares at any time not considering the market status and hold the shares. You will certainly get handsome profit.

Think and act intelligently. Nobody can make money from stock market within a day or two, a week, a month or an year. Money will always grow with time. Remember that.
Best wishes and go ahead.

gampublic 3:02 am on January 28, 2010 Permalink

Two things first: Generally, I’ve found accountants great with tax forms/laws, not so hot as investors, so beware of overconfidence. Second, you’re asking how to time the market, and history and study after study shows no one is worth a darn at it over time.

So the short answer is "A soon as possible *when* you know what you are doing".
Here’s my stock answer to investing rookies. Two suggestions:
1. Get professional advice from a fee only financial planner. Someone who sells advice – NOT products on commission like a stockbroker does. Fee Only Planners have no reason to give you anything but their best advice, since they want you to be happy and refer friends. And their compensation isn’t tied to what you invest in, eliminating conflicts of interest as much as possible. I think this makes sense in the same way it makes sense to hire a mechanic to fix your car – you just don’t want to spend the time and effort to figure it out for yourself. This is the most expedient method, but is more expensive out of pocket, than DIY, much like a mechanic. It still should be much cheaper than a stockbroker’s loads, fees and commissions however.
Full disclosure, I am such an advisor.

-or-

2. Do It Yourself – Read Books – for investing, my favorite authors are Larry Swedroe, Rick Ferri, William Bernstein, and John Bogle. Basically, they skip over the “pop finance” garbage (most media) that’s simply a distraction, and get down to real professional quality investing while still being accessible to most reasonably intelligent people. You will find this has nearly nothing to do with accounting as you study it. If you don’t mind spending the time to figure it out right, and are interested in the topic, this is a perfectly good choice, and less money out of pocket.

Your Call. Good Luck.

brckr1 3:02 am on January 28, 2010 Permalink
best time was about 2 months ago, or when the market was low. your not too young to invest, just talk with a brokerage firm or your bank…do alot of research first…..then wait….you may not make money fast but if you invest in good companies and look to the future………look at alternative energy stock, wind, solar, fuel cells, companies thet reclaim waste and those that turn waste emissions into energy…GRGR.PK on the NYSE….TMG.V,APV.TO and SBX.V all on the TSX………read what T. Boone Pickens has announced………



http://investing.hirby.com/when-is-a-good-time-to-invest-in-the-stock-market/

Investing In A Bear Market

Investing In A Bear Market

We are in the 6th inning of the residential RE crisis and the 1st inning of the commercial RE crisis. Most of you are trapped in normalized bull market valuation methods (Income Statements and Cash Flow statements) which states "earnings growth and cashflow" are what you should follow. In a bear market you should be focused on the (Balance Sheets and Cash Flow Statements). Notice the switch from income statement to balance sheet. Read some of my first few blogs and you will see before the residential RE crisis started in mass I was focused only on balance sheet items (cash and debt). I was right and the worst balance sheet stocks got killed not the ones with the biggest losses.

If you actually look at how I ranked builder stocks using cash and debt and applied it to other industries you would see the same result. Why? When a bear economy is upon us credit markets tighten, loans do not get renewed, cash flow turns negative, borrowing costs go up, interest burden becomes magnified, asset prices drop, etc.....

Wall Street can't value stocks as easily when the future is uncertain and earnings go negative or are falling. Bear markets are about surviving and the companies that thrive DURING AND AFTER a bear market are the ones with the best balance sheets buying assets on the cheap. They are also the companies that have the cash to continue to invest in future product while their competitors are trying to stay alive vs. thinking and investing in future operational profit.

Be like the best companies. Stop listening to doom and gloomers, raise cash, invest in yourself, work twice as hard, stay focused and push forward doing whatever you have to in order to make money. Invest it wisely. You may not make as much today, but deflation pushed all your consumer good prices down too. Everything is on sale even at the Chicken Ranch.

http://kolkalamar.blogspot.com/2010/01/investing-in-bear-market.html

Are You Paying Too Much For Stocks? Market Value is Not Equal to Actual Value

Are You Paying Too Much For Stocks?

Market Value Not Equal to Actual Value
A small loan can help you if you are short of cash until your next payday, but if you invest in the stock market and follow the crowd in their buying and selling habits, you may end up with many more liabilities than assets. Why? Have you noticed how much the stock market fluctuates in a day, and also the ups and downs of prices? Does that mean that the companies’ values goes up and down as much as the share price, or does that mean that there may be some other force at work here? As you can see, market value of a share doesn’t equal ACTUAL value of the same share, in terms of the value of a company.

Market Price Based on Emotions, Not Logic
One of the pioneers in value investing, Benjamin Graham, believed that many people rely too much on their emotions when investing rather than their logic. This explains the fluctuations of the market, and also why a lot of people think it’s risky to invest in it. What makes it risky is the constant buying and selling that goes on day after day, hour after hour. This constant buying and selling is what either drives the share price up or down, and it’s what creates the risk.

Ben Graham suggested in his book “The Intelligent Investor” that if you want to build your wealth from the stock market, you need to use a “dollar cost averaging” technique, meaning to consistently buy more shares at a lower price over time. As inflation and company values grow over time, your investments will be worth more in the long run. It’s also called “buy low and sell high” which you might have heard about. Unfortunately, most people tend to bring their emotions into their investing, and will panic and sell when the price is going down, because they are afraid to lose any more money on their investments, leaving them open to take out a small loan to survive.

Beyond the Smoke and Mirrors
The stock market is riddled with confusing terms, acronyms and policies, making it very difficult for the average investor to understand. All this is just smoke and mirrors designed to keep most people in the dark and dependent on high-priced brokers to navigate the investing maze for them. However, if you were to peek behind the curtain, you would see that all the confusion is just smoke and mirrors.

Inflated Price? Inflated Value!
In an effort to control the market prices, brokers and fund managers will either buy or sell enough shares to drive the price back up or down, depending on where the prices are going. Perhaps it’s due to a company that got good news or bad, and investors are trying to position themselves to not lose a lot of money, or make some. This tends to skew the value of a share price, and unbalances the market. Thus, a share price that has risen too quickly will have many shares sold off by fund managers or brokers to drive the price back down. Similarly, if a share price is dropping too fast, they’ll buy as many shares to even up. So if there are inflated prices, don’t go believing it’s actually worth that much. In fact, they may not be worth much at all!

P/E Ratio Tells it All
There is a very simple way to determine if a certain share price is on target or not—look at the Price per Earnings ratio. This is a valuation method that takes the company’s current share price on the market divided by the per-share earnings over a certain time frame, usually one year. If the price of shares in a company are $ 24 per share, and the earnings over the previous year were $ 2, the ratio of P/E is 12.

• Typically, the higher the P/E ratio is, the higher the expectations investors will have for company growth. This means that you will be able to see higher earnings within the next year with this company.
• However, the lower the ratio, the slower the growth regardless of what the market is doing.

Buy Low, Sell High
When you can learn how to find the correct value of a company or share, you will know when the share price is at its lowest, and when you can buy. After share prices crest, you can sell your shares and pocket the rest without needing a small loan. If you do this, you will be able to make money on the stock market when everyone else is losing money.

http://www.401kinformationblog.com/are-you-paying-too-much-for-stocks/

How to Value Stocks

The Stock Market

The stock market can be a great place to make money. However, the stock market can also be an incredibly frustrating place, where losing money becomes an everyday occurrence. Knowing what to buy and what to sell in the stock market can be very complicated. However, there is a method for estimating the true value of a stock that is both logical and often overlooked. Learning and implementing this method isn't easy, but once fully understood it is fairly easy to use and the results can be very rewarding

http://hubpages.com/hub/How-to-Value-Stocks

Active investing, look laterally in the same industry and trade up in quality

Value investing is never passive.  Like other strategies, it is also an active process employing knowledge, skills and using various tools.

One approach to finding a cheap (value) stock starts with a bottom up approach.

Having discover and own a stock in a particular sector, one can also look laterally to analyse other firms in the same industry.

Are these also cheap, and for the same reasons?  

You may decide that one of these other companies is a better investment than your initial purchase.

Perhaps, it is a higher quality company, with better profit margins or lower debt levels.

If so, you may trade up in quality, provided that you can still take advantage of the depressed status of the industry.

Judgement is required when selling a stock.

The decision to sell a stock requires judgement.

Judgement is required to sell a winner.

Judgement is required to sell a stock that has not recovered.

At some point, everyone throws in the towel. 

Even the most tolerant investor's patience can ultimately be exhausted.

There are always other places to invest the money.

A realised loss has at least some tax benefits for some investors.

A depressed stock in the portfolio is just a reminder of a mistake.

What are the triggers?

• A deterioration in the assets beyond what was initially anticipated.
• A deterioration in the earnings power beyond what was initially anticipated.
• The stock may still be cheap, but the prospects of recovery have now started to fade.

Just a wonderful feeling.

****Strategies for long term investment as markets correct

Strategies for long term investment as markets correct
By Manish Misra on January 29, 2010

The rally in the equity markets has finally taken a breather. A bout of profit-booking was seen last week and it may be early to predict whether this is the start of the much-anticipated downturn in the equity markets. So, what should be your long term strategy to invest in such a scenario?



Investors remain concerned over the pace of the global economic recovery and have turned cautious in their approach to the markets, leading to profit-booking at every rise.

Although the results season was largely positive with most companies reporting earnings in line with or exceeding market expectations, it was weak global sentiment and consistent sell-offs by foreign institutional investor (FII) in last few trading sessions acted as a catalyst for the market correction.

The current rally in the domestic markets was driven mainly by liquidity owing to heavy inflows from FIIs who found the Asian markets poised for a recovery much ahead of their Western peers. While the domestic economy did not disappoint in terms of earnings numbers in the last two quarters, the current prices had already factored in the growth, thereby not leaving much room for a further upside. The market will now look for global cues to decide on the future direction.

The Reserve Bank of India (RBI) in the monetory policy, scheduled to be announced today (29/01/2010) afternoon, is expected to hike the CRR and Reverse Repo rates.

Over the short term, the markets could display increased volatility and this in turn could throw up attractive opportunities for medium to long term investors. While the long term growth story of the domestic economy remains intact, the short term will always be marred with uncertainty. Long-term investors would do well to use this uncertainty to their advantage.

Here are some strategies investors can adopt to ensure their portfolios remain aligned towards growth:

1. Review asset allocation
Investors should stick to their asset allocation across equity, debt and money market instruments depending on their overall investment profile. Reviewing the asset allocation when the markets peak gives an indication of whether to book profits in equity. As the markets correct, an asset allocation review will help investors decide on the amount which should be shifted back to equity in order to balance the asset allocation.

2. Maintain liquidity
Falling markets often present attractive opportunities but it can be made use of only if investors have money to invest. Re-balancing asset allocation can provide some liquidity to the investor and this can be used effectively to pick up desired stocks when the markets correct.

3. Selection of stocks
Stocks, especially in the large-cap category, had a major run-up in the past few months. For investors, it was a risky proposition to enter these stocks at the levels at which they looked more than fairly-valued. A correction in the markets has brought these stocks back to prices which are attractive for medium to long term investors. Hence, investors can identify their target companies and slowly start accumulating these stocks as the markets offer opportunities.

4. Stagger purchases
While the markets have been in a correction mode for the past two weeks, it is difficult to predict whether this phase is temporary or will continue for a while. Hence, it is important to stagger the purchases over a period of time rather than buying in one go. The expected volatility in the markets may give investors many opportunities to pick stocks at desired prices.

Conclusion
Follow these time tested strategies to invest in stock market. Investors who did not get a chance to enter the markets in the last rally can now make use of the opportunity to invest in select stocks at attractive levels to build a robust long-term portfolio.

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