Investment Articles

So you took advice off the nice friendly Financial Adviser, and three years on you now have less money than you started with. Where did it go wrong? To be truthful it all went wrong about 2001. I had been a financial adviser for about ten years. Up until 2001 you could invest in just about any equity base investment and turn a sizable profit within five years. Since 2010 that has not been the case. In the long term equity investment will still knock the socks off deposit, and is far less fraught than property investment, however to get the best from your investment it needs to be managed.

Maybe you thought it was. I do not mean a managed fund, as this is just normally management within a sector or group. And I do not mean by a Bank. I wish I could comment on this one further but legal action prevents me from doing so. And I do not mean managed by your friendly adviser, as he will only look at your investments now and again. And I do not mean the company your investment vehicle is with. I know that it says that they manage your Investment Bond, yes they do. But not the choice of the individual investments within it. So it is actually up to you to manage the individual investments. So now you have your answer to the question. Your investments are performing poorly because you are managing them, or not as the case turns out.

Most investment vehicles allow for changes of funds free of charge. Some vehicles are open to any investment choice, so a great deal can be done to ensure that your investments perform well. However in reality once a fund choice has been made that is the way it will stay for many years. Quite often right up to encashment, then returning a very poor rate.

However there is a solution. Most Investors do not realise that their investments can be managed on a daily basis. A very select few Financial Brokers are able to offer In House Portfolio Management. This ensures that your individual investments are being monitored. And if need be, changes can be made. The volatility that we have seen over the last few years can then be used to your advantage, rather than your loss. Portfolio Management costs, but it is an added value service so it pays for itself, normally many times over.

If you have an offshore investment that lacks performance. Inquire about Personal Portfolio Management. It may be the difference between a comfortable retirement or having less money than you started with. Which would you rather?

http://www.pension-transfers-qrops.com
http://www.pension-transfers-qrops.com/services.html

As a Socially Responsible Investment manager the most common question we hear from potential clients is “and adviser told me that socially responsible investing isn’t profitable” versus non-screened portfolio management. In general the adviser providing the dogmatic opinion does not offer any foundation for their opinion but this is their chance to influence the potential client especially if they cannot offer an Socially Responsible Investing (SRI) option for the investor. Unless you have a few arrows of your own in your quiver you may be quite likely shrug your shoulders and resign yourself to an non-screened portfolio versus a clean portfolio.

Probably due to the fact that I’m over 50 now with a repellent view of hyperbole and unsubstantiated opinions I have been uncomfortable with opposite view as well: socially responsible investing improves rate of return. It has been my view based upon empirical experience of managing Socially Responsible portfolios for 20 years that social responsibility is not a significant determinant of investment performance. Socially Responsible Investing is a highly subjective practice where investors can have divergent opinions on industries and companies. There is not unified screening standard amongst the ethical investing industry, each firm or fund makes their own decisions on screening criteria. While some funds screen for only 3 or 4 issues there are other funds that screen over a dozen.

Practitioners of ethical investing may draw attention that investors always assume a given level of risk with any equity investment but that the risk premium associated with SRI is less. Case in point the risks associated with Tobacco, Asbestos or BP and the Gulf oil disaster. However in my 20 years involved with socially responsible investing, screening stringency is often a matter of interpretation as BP was considered Best of the Lot for many years for funds that desired petrochemical exposure.

Let’s take a look at some of the academic studies that have touched upon the issue of the factors of Socially Responsible Investment performance:

* Moskowitz Award winner, John Guerard, Jr., director of quantitative research at Vantage Global Advisers, examined the returns of Vantage’s 1,300 stock non-screened stock universe and a 950 screened universe (The screens eliminated companies that failed to pass alcohol, gambling, tobacco, environmental, military, and nuclear power). He found “that there is no significant difference between the average monthly returns of the screened and non-screened universes during the 1987-1994 period. The “un-screened 1,300 stock universe produced a 1.068 percent average monthly return during the January 1987-December 1994 period, such that a $1.00 investment grew to $2.77. A corresponding investment in the socially-screened universe would have grown to $2.74, representing a 1.057 percent average monthly return. There is no statistically significant difference in the respective returns series, and more important, there is no economically meaningful difference in the return differential.”

Guerard’s conclusions are reinforced by other works:

* “Socially Responsible Investment: Is it profitable” Dhrymes, Columbia University July 1997 June 1998.Dyrymes concluded that: “that by and large the Concerns and Strengths of the KLD index of social responsibility are not consistently significant in determining annual rates of return.”

* Socially Responsible Investment Screening Strong Empirical Evidence For Actively Managed Value Portfolios. June 2001, revised December 2001 Stone, Guerard, Gultekin, Adams.”No Significant Cost” means no statistically significant difference in risk adjusted return”. In addition, they surmise that “the conclusion of no significant cost/benefit is not just a long term average. It has remarkable short term consistency!”

In my opinion this report presents a balanced view in that they concluded that the during the time of the study 1984-1997 the stock market rewarded the growth oriented style and that the performance of SRI investments could become “brittle” if markets were to become risk averse and adopt a more Value oriented style……….a remarkably accurate presumption!

Could the performance of SRI funds which have exceeded or lagged their respective benchmarks be in part due to size (average capitalization from micro cap to large cap) and style (Value or Growth)?

Fama and French of Dartmouth University examined the annual rate of return and beta (volatility) of an non-screened universe of Growth vs. Value from 1928 to 2009 by dividing stocks into ten deciles (groups) based on book-to-market value, rebalanced annually and found that Value had the lower risk while Growth had the higher risk. In addition, they found that the highest book -to-market stocks exceeded the return of the lowest book-to-market by 21% to 8% on average. Stock valuation was as significant factor in the Fama and French study where the cheaper the equity valuation the better the return.

Market Cap size was important in the Fama and French study as well (1992). Market cap size showed a significant edge to small and micro cap equities on a monthly basis. *Monthly returns for the smallest 10% of equities were 1.47% versus 0.89% for the largest decile.

It is our contention that there are attributes that could account for performance to equities other than social profiles and that concurrently a portfolio of socially screened equities with the highest book-to-value ratios could exceed comparative benchmarks largely due to valuation metrics and capitalization size. In a case of pure cherry picking the monthly rate of return smallest market cap and lowest book value to market price was 1.63% versus.93% monthly for largest market cap and highest book value to market price.

I tested this theory using data supplied by the Social Investment Forum and Russell Index regarding the 10 year average rate of return for socially responsible mutual funds versus their respective benchmarks trends do emerge.

Data as of June 30, 2010

Benchmarks

* Russell Mid Cap Value Index was the top 10 year performer +7.55%.
* Russell Mid Cap Growth Index returned -1.99%.
* Russell 2000 Value returned +7.48%
* Russell 2000 Growth Index returned -.92%

Equity Large Cap performance (information provided by SIF)

* 4 mutual funds show positive 10-year average annual rates of return:
Calvert Social Investment Equity +0.14% (Growth)
Neuberger Berman Socially Responsive +3.18% (Value)
Walden Social Equity +1.46% (Value)

Parnassus Equity Income +4.65% (Value)

Equity Small Cap performance

* 2 mutual funds from one mutual fund company showed a positive 10-year rate of return.
Ariel Appreciation +6.16% (Value)

Ariel Fund +5.62% (Value)

Disclaimer: While the sample size of SRI fund performance is very small. I gleaned data from only the profitable SRI funds for the last 10 years. The SIF forum does not show fund performance information for funds that have closed, merged or liquidated. It would be a safe presumption IMO that funds that no longer exist were weak performers since money will flock to where it’s treated best. Plus, hedge fund performance data was not available on the SIF site.

The results do fall in line with substantial academic works (Fama and French, Lakonishok) and it is possible that SRI performance should be viewed thru the lens of Value/Growth and Market Cap size.

A logical question that must be asked upon reading this might be: “If small market cap and low valuations are the sweet spot for investing, then why are there so few funds or managers focusing on this strategy?” Not to be obvious… ok, well lets be obvious: The small cap / low price to BV tends to be the focus of many private portfolio managers since our small size allows us the dexterity to invest in companies that are simply too small for billion dollar mutual funds. Successful funds tend to outgrow the size/valuation strategy espoused by Graham as assets become larger and the investment selection becomes narrower. But this topic should best be explored at a later date.

No holdings mentioned.

Brad Pappas
President of Rocky Mountain Humane Investing
Allenspark, Colorado
303-747-0500
http://www.greeninvestment.com
copyright Rocky Mountain Humane Investing, Corp 2010

Most people enter the investment arena thinking that “Risk” is a board game they played in college. Today, I would guess that the majority of investors have never owned an individual share of common stock or a Municipal Bond.

The popularity of investment products has heightened the risk for all investors and has indirectly led to many of the policy errors that threaten both capitalism and the economic fabric of America. Market prices are increasingly and inappropriately influenced by decision-making based only on the derivatives that contain them.

Few people consider the investment risk associated with public policy decisions. Product investors and derivative speculators participate in less personal markets, where it is more difficult to connect the dots between their personal financial interests and their political alignments.

So in a very real sense, investors have to deal with public policy risk every bit as much as they need to analyze the risks associated with the securities and other financial products they hold in their portfolios — complicated, but it is doable.

Apart from these important peripheral considerations, the risk of loss in any equity investment is generally greater than the risk of loss in any debt related instrument. The potential reward from each type is just the opposite, and that’s where all the excitement begins.

Do we risk more for the chance of a greater return, or do we risk less and try to preserve our investment capital? Keeping in mind that investment capital is a measure of cost, not of market value, and that the only real loss is a realized loss.

Typically, the older the investor, the more boring or income focused the portfolio should be — minimizing the overall level of risk. But it’s difficult to actively minimize or manage your risk in the “open end” mutual fund or passively managed ETF marketplaces.

Risk minimization requires the identification of what’s inside a portfolio. Risk control requires decision-making by the owner of the investment assets. Risk management requires a selection process from a universe of securities that meet a known set of qualitative standards.

Product owners assume the added “fear and greed” risk of the general population, while their fund mangers stand aside and mumble about the opportunities lost in either direction.

Without a risk sensitive menu to select from, 401(k) participants need to minimize risk by: (a) avoiding the poor diversification that may be a requirement of their plan, and (b) developing outside income portfolios with any investable income above the employer matching contribution.

The first and most important management action focused on risk minimization in any “program” is the development of an asset allocation plan. The plan separates “liquid” investment assets into two buckets (Equity and Income) based on cost, not market value. No portfolio should have less than 30% in the income bucket — no ifs, ands, or buts.

And no investment plan should be developed “tax” or “cost” first. Risk minimization comes first, and then tax minimization if possible. Finally, transaction cost minimization can be considered if you are qualified to run your program yourself.

A cost based asset allocation approach (Working Capital Model) assures growing levels of “base income” throughout the portfolio development process and, possibly, into retirement. Income growth, by the way, is the only real hedge against that other economic risk, inflation — a buying power problem that has nothing to do with the market value of the income producing assets.

Minimizing investment risk is done best through the use of disciplined sets of rules for the various operations involved in managing a portfolio. Strict rules need to be developed for security selection, three types of diversification, income production, and for profit taking.

Forget the Wall Street “I-can-fix-that” product menagerie. We’re not interested in massaging our market value to take the sting out of cyclical market value changes. Our plan is to take advantage of these changes as they unwind around us over time, and when they occur unexpectedly, causing short-term disruptions and dislocations.

In the securities markets (stocks and bonds), the real risk of loss can be minimized without products and futures speculations, without commodities and hedge funds, and without the ageda that most people experience throughout their investment lifetimes.

The old fashioned principles of investing: Quality, Diversification, and Income, plus disciplined, targeted, Profit Taking are the only hedges an investment portfolio needs to assure long-term success. Conveniently, the QDI+PT applies equally well to both classes of investment securities.

“Q” is for quality. If you study the long-term behavior of Investment Grade Value Stocks, and high quality income CEFs, you’ll discover that they hedge themselves quite effectively.

Risk is wrung out of portfolios by investing only in S & P, B+ or better rated, dividend paying, and historically profitable companies and then only when their equity prices are well below their 52-week highs.

“D” is for diversification. Absolutely never allow any position in your portfolio to exceed 5% of total portfolio working capital (i.e., the total cost basis) and never start a position anywhere near maximum exposure. You want to be able to buy more at lower prices.

Similar diversification rules apply to industry exposure and global diversification through the use of the mainly world class companies in the investment grade quality categories.

“I” is for income. Own no security that does not pay regular, dependable, dividends or interest. Regular and growing dividends are a quality indicator in equities. In the income “bucket”, seek out above average yields while avoiding those that seem either too high or two low.

Managed closed end funds do it best and provide easy “PT” and “buy more” opportunities. Buy established CEFs with long term “income” (not ROC) payment records.

“PT” is for profit taking. Absolutely always smile and take your profits willingly, net/net 7% to 10% (dependent upon available reinvestment possibilities and security class), and never, ever, look back.

Trading this same body of securities, again and again, has been shown to sustain growth of capital and income consistently in a relatively low risk environment.

Google Part III: Ten Time Tested Risk Minimization Strategies

Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”

The source of funding of any project has great importance. This is so as no business deal or venture is possible without finance. Private equity investments are one such source of finance. These funds have assumed great importance and statistics prove that private sources finance new ventures at a gigantic rate, that is almost 25 times more than finances from other sources. Thus private finance givers have turned into excellent investors for new projects.

Private equity investors are investors who have a high net worth and asset value and have liquid cash available. These investors are the back bone of private equity investments. Last year 300,000 firms and enterprises were launched in the USA and nearly one seventh of this lot was financed by these equity investments.

Private equity investors have made a mark in the financial field and they have had a tremendous impact in the entrepreneurial market. It is estimated that that these investors fund anything in a range from $20 – $60 billion annually.

Private investors with money to spare generally keep their money and investments in non-public companies. Thus a equity investor will most likely make an investment for 3 to 7 years, in contrast to venture capitalists who invest in companies at the inception stage or launch and also for much shorter periods

Private equity firms will follow some parameters while making an investment,that will include a strong management team and the company’s ability to bring in profit. They will also look at the growth potential of the company and whether an investor’s capital is safe as well as good return on his capital.He will also look at the exit clauses in case the equity investor wants to get his investment out.

Thus Private equity is never in loss making companies. Private investors are there to get a good return on the money they have invested and as such they will track the profit graph of any company they invest in. The private equity investor will look for agreements that give him a share of the profit generated at the time of exit. This will be an important clause for him as he can use the profit to invest in some other company.

From 2007 onwards the private equity financiers did take a nose dive as the economic scenario had become bleak,but at the turn of the present year the investors are back and have funds to spare as recession is on the way out.

For a startup company, Angel Investors can be considered the entrepreneur’s best friend, their saving grace, their answer to a prayer. Some say they are called “angels” because they are an answer to the entrepreneur’s prayer for money to get their business launched, or to respond to accelerated growth, or to bridge the capital divide and reach profitability.

Angels are the financial fuel of the economy. Before Venture Capitalists get involved, before banks will loan a company an unsecured note; Angel Investors provide the capital that fuels the entrepreneurial spirit and helps inventions become products and ideas become reality. I like to refer to them as Compassionate Capitalists. “Compassionate” because they have figured out that even though they can lose all their money, by providing investment capital to an entrepreneur with passion and purpose to see his or her company succeed, they are providing a hand up, not a hand out, that will fuel the economy by creating jobs and potentially whole markets by bringing innovation to the market. “Capitalists” because they aren’t donating to a charity, they are investing in a risky venture that banks won’t loan to and venture capitalist won’t even look at, with the intent of creating a big return on their investment. High net worth men and women become angel investors to create great wealth, never with the intent to lose money.

Angels are wealthy individuals who provide seed capital and growth capital to companies in the startup and early stage of their company’s life cycle. Their capital can be offered in exchange for equity in the company or as some specialized form of debt facility. Investing in this stage of company is the most risky, but it can also be the most rewarding. Rewards come not just from the financial returns, but also from experiencing the purest form of capitalism…bringing value to the market by supplying a product or service to satisfy a market demand. There is a definite sense of pride and accomplishment from being able to say you were an early investor in a block buster like MicroSoft or Starbucks, and surprisingly, there is little regret from the early stage investors in the near misses like WebVAN and PETS.com because they got their sizeable returns when those companies went public. It was the investors that followed the advice of their stock broker or financial planner to invest when those companies when public that saw a decline in the value of their investment because they bought at “retail” hoping that the value would increase over time. Angel investors buy stock when the company is still private, and reap their rewards with the company then sells that stock to another buyer or to the public stock market. They learned early in life that profit is made when buying at wholesale and selling at retail. That is how it works for the wise angel investor.

Investing or buying Private Equity of early stage companies is one of the secrets the wealthy use to create more wealth. As Robert Kiyosaki wrote in his best seller book, Rich Dad’s Retire Young, Retire Rich on page 127:

“the rich invest in shares of a company when the company is still a private company”.

To become a successful angel investor, it is important that individuals learn how to identify and screen opportunities for early stage private equity investing. In the eBook Series “How to Be an Angel Investor”, investors are taught how to take what they know from investing in public stocks and real estate and apply to making investment decisions about private equity investments. There are a couple of key points from the 5 volume eBook “How to Be an Angel Investor” that beginning angel investors should keep in mind:

1. Make sure you have a variety of investments to choose from. If you only have deals coming from your accountant or the guy you met at a cocktail party, you need to expand your horizons to get better quality deal flow and not be afraid to invest outside of your geography. Join an angel investor group or plan to attend events where multiple pre-screened companies will be presenting for at least 9 minutes. An investor cannot be expected to determine the validity of a business from a 90 second spiel as promoted in the fast pitch events that have become so trendy of late. The situation to avoid is having a desire to be an angel investor or “silent partner” in a deal, so you put money in to a deal that seems OK but in reality it isn’t a good deal. The investor doesn’t know this because he or she hasn’t been exposed to anything better. You buy the bruised apple because it is the only one on the shelf.

2. Make sure there are other investors participating. It’s OK to be the first investor in a deal if you know they have other investors pending, on the fence ready to join in along with you, or you have a group of investors that co-invest together. If you are the first investor in a deal, and you are investing an amount significantly greater than the minimum investment or the full amount to get them to their next milestone that will increase their value, you can sometimes negotiate more favorable terms for yourself. The situation you want to avoid is loving a deal or the entrepreneurs behind it so you throw your money away because no one else invests and it was an insufficient amount of money to get the company to the next level when they would attract other investors or begin to generate revenue.

3. Don’t get hung up on percentages of ownership. The price paid for the stock and the number of shares held is more important than the % of ownership you have because the % will change over time through multiple rounds of financing. Owning 100,000 shares at 50 cents a piece won’t matter if it is 1% or 30% of the company if the company has a reasonable plan to grow their value of the company so that it can be sold for $5 a share, as an example. A $50,000 investment will return to you $450,000. Often a company’s amount of issued and authorized stock will change over time as the company raises capital and the % will go down, but the amount of shares will remain the same and the focus should be on the strike price of the stock at the next interval of financing.

4. Ensure there is a solid barrier to entry from the competition. The barrier to entry comes in many different flavors. Most often it is in the form of a patent and most novice angel investors focus on having a patent. Patents are good but they aren’t the Holy Grail. If a big company, or a foreign company, chooses to violate the patent instead of buying the company, you can hang it up because the court costs alone will put the early stage company out of business. Patents do not prevent clever inventors of figuring out a better way to do the same thing or even just a different way to do the same thing. The filed patent gave them the idea, yet doesn’t keep them from bringing a similar product to market. Trade Secrets can be a great way to go for many products: software, food formulas, processes and so on. If that is the way the company is going, then you must ensure they have done the necessary steps to actually establish it as a trade secret…aka the formula for Coke. Other barriers to entry can be the management team, strategic partnerships, time lag on being first to market, and product pipeline.

5. Be clear on how the ROI will be achieved. When you look at your asset portfolio to see how alternative investments like private equity investment fits in, you can seek ways to “flip your money”, get a steady income, or hold for a big return years down the road. Your investment decision may vary over time depending on the rest of your portfolio and the situation with the company. A “flip” would be a short term note secured with a contract or order, a convertible debenture that gives you the option to collect the $$ or convert to stock, or bridge financing to a larger investment. Steady income may come if you provide royalty financing, investing to receive a % of the revenues until a fixed amount is paid back or investing in an LLC that pays you cash as the company becomes profitable. The big ROI comes when it is straight equity investment with plans for the company to be bought or to go public 4-8 years or more in the future.

Early stage equity acquisition can be great investment opportunities! These investments have the potential to reap big rewards for early investors who have an appetite for the risk and have the liquidity to make the investment. Just ask anybody who invested in Google, Amazon or Home Depot! The bigger the risk, the greater the reward! Success builds confidence! Put your money to work by helping a young company grow. Create wealth for yourself, other investors, and those founders and employees of the early stage company that can then be re-invested again and again.

Author Info: Karen Y. Rands

© Kugarand Holdings 2010

Choosing an asset allocation, or the mix of stocks, bonds and cash in a portfolio, is the most important decision that you’ll face as an investor. A study by Ibbotson Associates concluded that asset allocation decisions determine about 100 percent of investment performance for those who follow a low-cost, long-term investing strategy. Similarly, according to a Dalbar and Associates study, many investors underperform the market because they deviate from their asset allocation plan during market downturns. Investors who want to maximize their long-term investment returns must develop a risk-appropriate asset allocation plan that they can stick with in good times and bad.

Asset Allocation Step 1: Evaluate Your Risk Profile

A reliable, long-term asset allocation plan starts with a thorough understanding of your risk profile. It’s helpful to think of your risk profile in two parts: your risk capacity, or the degree of portfolio volatility that you can absorb financially, and your risk attitude, or your emotional tolerance for risk.

Risk capacity is influenced by factors like income and net worth, but its largest determinant is time horizon. Early in life, when retirement is far off, your future earning potential can be thought of as a sizable bond, allowing you to allocate the majority of your retirement portfolio to more volatile equity investments. As you grow older and your future earning potential decreases, it’s important to replace those bond-like expected earnings with a higher percentage of bonds in your portfolio. By the time you retire, most of your investments should be in bonds in order to provide a reliable, low-volatility source of income.

Risk attitude is more difficult to quantify than risk capacity, especially for first-time investors who haven’t experienced difficult market conditions. Many investors make the mistake of failing to understand their risk attitude until a market downturn occurs. This usually leads to selling equity investments at the worst time (the bottom of the market), only to miss out on a subsequent market rebound. To help avoid this phenomenon, investors can use resources like risk questionnaires and historical performance charts to help find a stock/bond mix with an emotionally acceptable level of volatility. These tools are far from perfect, however, so when in doubt, it’s best to err on the side of conservatism.

Generally speaking, your most conservative risk dimension (capacity or attitude) should determine your portfolio’s equity/bond split. For example, if you have the risk capacity to handle a portfolio of 80% equities, but can only stomach the volatility of a 70% equity portfolio, you should choose the more conservative allocation. Developing a plan that you can stick with in good times and bad is much more important than maximizing your expected return.

Asset Allocation Step 2: Break Down Equities and Bonds

Once you’ve settled on a risk-appropriate stock/bond mix, you can think about subdividing the equity and fixed income portions of your portfolio. The key to this part of the asset allocation process is finding a suitable tradeoff between simplicity and maximum expected return.

Modern Portfolio Theory tells us that by adding volatile asset classes that don’t move in lockstep with the rest of our investments, we can increase our portfolio’s risk-adjusted return. Based on that principle, consider adding international stocks and Real Estate Investment Trusts (REITs) to your equity portfolio. Companies outside of the US represent more than half of the value of global equity markets, and investors have historically been compensated for the risks that accompany international investing. Likewise, REITs offer a great diversification benefit and give investors unique exposure to the commercial real estate market.

Within your US and international stock allocation, you may also want to boost your exposure to small company and value investments, as investors have historically been compensated for the risks inherent in these investing styles. If you’re not familiar with the arguments for overweighting these equity segments, however, you should probably steer clear of them in favor of simplicity.

To expand your fixed income allocation beyond a broad sampling of the US Bond Market, consider adding Treasury Inflation-Protected Securities (TIPS) and municipal bonds. TIPS are unique because, unlike traditional bonds, their principal and interest payments adjust with inflation, so they offer a government-guaranteed rate of return above inflation when held to maturity. Municipal bonds are appropriate for investors in high tax brackets with taxable investment accounts, as the interest from these bonds is generally tax-exempt in the issuing state and at the federal level.

Portfolios can be sliced and diced in any number of ways, but a more complex portfolio is not necessarily a better one. Wise investors understand that their investing success will largely be determined by their ability to stick with their asset allocation plan, and for that reason, they err on the side of simplicity.

Asset Allocation Step 3: Implement Your Plan

Once you’ve broken down your portfolio into target percentages, all that remains is to implement your asset allocation plan. With literally thousands of funds to choose from, it’s best to narrow down the field by focusing on one factor that you can control: investing costs.

First, you can minimize the impact of many fees, expenses and taxes by investing in low-cost index funds and ETFs. If your workplace retirement account has limited choices, simply pick the lowest cost funds that fill a position in your asset allocation plan. Secondly, pay close attention to all applicable fees and commissions prior to doing business with a brokerage firm or mutual fund company. IRAs and other investment accounts are extremely portable, so there’s no good reason to stick with a high-commission broker. Finally, maximize your portfolio’s after-tax returns by placing tax-inefficient asset classes (e.g., REITs, Bonds) in tax-sheltered accounts.

Once you’ve settled on specific investment choices, help yourself stay on track by formally documenting your asset allocation plan in an Investment Policy Statement (IPS). This document provides an organized framework for recording your investing goals, philosophy and target allocation so that you can help yourself resist the temptation to stray from your long-term strategy. The ideal time to draft an IPS is while the rationale for your asset allocation decision is fresh in your mind.

Conclusion

More than any other factor, your ability to develop and implement a risk-appropriate asset allocation plan will determine your investing success. By thoroughly evaluating your investing risk profile, choosing an appropriate level of portfolio complexity, and picking low-cost investments, you’ve taken a giant step toward your long-term investment goals.

George Watkins is President of West Wind Wealth Management, an independent, SEC-registered investment advisory firm that specializes in index fund and ETF portfolios. A former nuclear-trained Naval Officer, George has a BS in Economics from Duke University and an MBA from Harvard Business School. To receive a free asset allocation recommendation or a personalized portfolio recommendation for as little as $19, visit http://www.invest-it-yourself.com.

Choosing an asset allocation, or the mix of stocks, bonds and cash in a portfolio, is the most important decision that you’ll face as an investor. A study by Ibbotson Associates concluded that asset allocation decisions determine about 100 percent of investment performance for those who follow a low-cost, long-term investing strategy. Similarly, according to a Dalbar and Associates study, many investors underperform the market because they deviate from their asset allocation plan during market downturns. Investors who want to maximize their long-term investment returns must develop a risk-appropriate asset allocation plan that they can stick with in good times and bad.

Asset Allocation Step 1: Evaluate Your Risk Profile

A reliable, long-term asset allocation plan starts with a thorough understanding of your risk profile. It’s helpful to think of your risk profile in two parts: your risk capacity, or the degree of portfolio volatility that you can absorb financially, and your risk attitude, or your emotional tolerance for risk.

Risk capacity is influenced by factors like income and net worth, but its largest determinant is time horizon. Early in life, when retirement is far off, your future earning potential can be thought of as a sizable bond, allowing you to allocate the majority of your retirement portfolio to more volatile equity investments. As you grow older and your future earning potential decreases, it’s important to replace those bond-like expected earnings with a higher percentage of bonds in your portfolio. By the time you retire, most of your investments should be in bonds in order to provide a reliable, low-volatility source of income.

Risk attitude is more difficult to quantify than risk capacity, especially for first-time investors who haven’t experienced difficult market conditions. Many investors make the mistake of failing to understand their risk attitude until a market downturn occurs. This usually leads to selling equity investments at the worst time (the bottom of the market), only to miss out on a subsequent market rebound. To help avoid this phenomenon, investors can use resources like risk questionnaires and historical performance charts to help find a stock/bond mix with an emotionally acceptable level of volatility. These tools are far from perfect, however, so when in doubt, it’s best to err on the side of conservatism.

Generally speaking, your most conservative risk dimension (capacity or attitude) should determine your portfolio’s equity/bond split. For example, if you have the risk capacity to handle a portfolio of 80% equities, but can only stomach the volatility of a 70% equity portfolio, you should choose the more conservative allocation. Developing a plan that you can stick with in good times and bad is much more important than maximizing your expected return.

Asset Allocation Step 2: Break Down Equities and Bonds

Once you’ve settled on a risk-appropriate stock/bond mix, you can think about subdividing the equity and fixed income portions of your portfolio. The key to this part of the asset allocation process is finding a suitable tradeoff between simplicity and maximum expected return.

Modern Portfolio Theory tells us that by adding volatile asset classes that don’t move in lockstep with the rest of our investments, we can increase our portfolio’s risk-adjusted return. Based on that principle, consider adding international stocks and Real Estate Investment Trusts (REITs) to your equity portfolio. Companies outside of the US represent more than half of the value of global equity markets, and investors have historically been compensated for the risks that accompany international investing. Likewise, REITs offer a great diversification benefit and give investors unique exposure to the commercial real estate market.

Within your US and international stock allocation, you may also want to boost your exposure to small company and value investments, as investors have historically been compensated for the risks inherent in these investing styles. If you’re not familiar with the arguments for overweighting these equity segments, however, you should probably steer clear of them in favor of simplicity.

To expand your fixed income allocation beyond a broad sampling of the US Bond Market, consider adding Treasury Inflation-Protected Securities (TIPS) and municipal bonds. TIPS are unique because, unlike traditional bonds, their principal and interest payments adjust with inflation, so they offer a government-guaranteed rate of return above inflation when held to maturity. Municipal bonds are appropriate for investors in high tax brackets with taxable investment accounts, as the interest from these bonds is generally tax-exempt in the issuing state and at the federal level.

Portfolios can be sliced and diced in any number of ways, but a more complex portfolio is not necessarily a better one. Wise investors understand that their investing success will largely be determined by their ability to stick with their asset allocation plan, and for that reason, they err on the side of simplicity.

Asset Allocation Step 3: Implement Your Plan

Once you’ve broken down your portfolio into target percentages, all that remains is to implement your asset allocation plan. With literally thousands of funds to choose from, it’s best to narrow down the field by focusing on one factor that you can control: investing costs.

First, you can minimize the impact of many fees, expenses and taxes by investing in low-cost index funds and ETFs. If your workplace retirement account has limited choices, simply pick the lowest cost funds that fill a position in your asset allocation plan. Secondly, pay close attention to all applicable fees and commissions prior to doing business with a brokerage firm or mutual fund company. IRAs and other investment accounts are extremely portable, so there’s no good reason to stick with a high-commission broker. Finally, maximize your portfolio’s after-tax returns by placing tax-inefficient asset classes (e.g., REITs, Bonds) in tax-sheltered accounts.

Once you’ve settled on specific investment choices, help yourself stay on track by formally documenting your asset allocation plan in an Investment Policy Statement (IPS). This document provides an organized framework for recording your investing goals, philosophy and target allocation so that you can help yourself resist the temptation to stray from your long-term strategy. The ideal time to draft an IPS is while the rationale for your asset allocation decision is fresh in your mind.

Conclusion

More than any other factor, your ability to develop and implement a risk-appropriate asset allocation plan will determine your investing success. By thoroughly evaluating your investing risk profile, choosing an appropriate level of portfolio complexity, and picking low-cost investments, you’ve taken a giant step toward your long-term investment goals.

George Watkins is President of West Wind Wealth Management, an independent, SEC-registered investment advisory firm that specializes in index fund and ETF portfolios. A former nuclear-trained Naval Officer, George has a BS in Economics from Duke University and an MBA from Harvard Business School. To receive a free asset allocation recommendation or a personalized portfolio recommendation for as little as $19, visit http://www.invest-it-yourself.com.

If you have money that you want to optimize your rate of return or have the most gain while maintaining some diversification, where should you invest it? These are funds that you do NOT anticipate needing in the next five years or more. They may be in your IRA, your retirement account, brokerage, or other type of savings account.

In general you might invest in commodities, real estate, fixed income, or stocks.

Stocks or equities still offer tremendous upside and will probably provide higher returns than commodities, real estate, or fixed income over the next 5 years.

Fixed income is any investment where the terms of what an investor receives is fixed by a legal contract. Examples of fixed income include government bonds, bank certificates of deposit, corporate bonds, annuities, and guaranteed insurance contracts. Mutual funds that invest in fixed income instruments are NOT fixed income. They are equity shares in a managed pool of fixed income investments. There are NO guarantees of return of principal or interest payments in a bond fund. A bond fund is NOT a fixed income investment.

Does anyone think interest rates will go lower? Can the Federal Reserve set a rate lower than zero? Do you want to invest in a bull market that has been going on since 1982 which is 28 years old?

If interest rates go up, the market value of bonds will go down. If you answered no to the previous 3 questions then you probably believe at best interest rates will stay at current levels. Actually in the last year the rates on the 30, 20, 10, and 5 year bonds have all increased. It’s more likely that interest will continue to rise. The questions are for how long and how high they will go up.

As interest rates rise the market value of fixed income investments will drop. While an investor who holds their fixed income investment until maturity will receive their principal and interest under the terms of their purchase, they will suffer opportunity costs. Do you want to own a 3 year Certificate of Deposit yielding 3% when you could earn 4% on a two year Certificate of Deposit?

Fixed income is not the place to make money over the next few years. It is a great place to keep your funds for a short time because you are going to spend the money within the next 5 years or less.

Buy guarantees from qualified guarantors. I like the U.S. Government. Do not place money you expected returned to you in a specific time in a bond fund. Bond funds should be used only in rare special circumstances.

Real estate has improved in some markets. Real estate is less liquid. It is difficult to liquidate only 4% of a real estate investment. Currently there is an abundance of housing, commercial space, and raw land. Until these conditions change in the specific geographic area you are investing in real estate appreciation will be capped around the rate of inflation. I am referring to investing in real estate which is different than deciding whether to buy a home or rent a home. Buying or renting is different than investing in real estate.0

The International Monetary Fund (IMF) forecasts commodity prices to rise at 5.8% this year and 1.6% next year. While some traders will make good returns, they could probably do better trading futures on the equity markets.

The IMF projects World Output to grow by 3.9% in 2010 and 4.3% in 2011. The growth in World Output should drive an increase in earnings of the S&P Global 1200. The increase in earnings should drive price appreciation of at least 10% per year for the next two years. Price appreciation may be greater than 10% because the current price of the S&P Global 1200 is undervalued relative to the future net profits of its constituents.

Therefore a rational probability of attaining better than 10% per year gain in the market value of the S&P Global 1200 without any leverage exists. A greater than 10% return in equities is a better return than 2 year treasuries offered at.99% per year, commodity prices rising at 5.8% this year and 1.6% next year, or the real estate market in the United States. The real estate market is still confronted with too much supply and is likely to appreciate at less than 3% per year.

There is still a large amount of cash on the sidelines waiting for a retreat in stock prices.

In 2009 bond funds were positive on cash flows into them. In stock funds, more money was withdrawn than contributed. Money markets are paying.81% per year. These are NOT the conditions for an equity market top. These are the conditions of a bond market top!!

As the lagging mob reacts to the declining returns in their bond funds and the pain of missing the rise in equity prices, funds will move from bonds to equities. This will fuel a further rise in equity prices.

While the global stock market has made significant strides in the last 12 months up over 50% in the last 12 months, it needs to go up another 40% just to approach it’s fair value.

For investors with funds they do NOT plan on consuming over the next 5 years, I’m recommending an allocation of 98% equity and 2% cash.

For which equity investments, feel free to contact me.
Have a wonderful Day!
Dave

http://davesfavs.com/aboutus.html

Investments

Let us learn a few basic types of investments. Most available investments like bonds, stocks, and mutual funds fluctuate in value. Investors must be willing and able to tolerate the ups and downs of the market as well as fully understand that there is the possibility that they may lose the principal if their investments decline in value. Returns on investments will follow the risk-return spectrum. Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies).

Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments. Get free investments advice from authorized investments experts.

Portfolio

Stay on top of your portfolio and learn strategies that can help make your money last. Get expertise and exclusive services tailored to your more complex portfolio goals. A diversified portfolio not only reduces unwanted risk, but also contributes to a winning portfolio. And having a well-diversified portfolio doesn’t necessarily mean just buying more than one stock; branching out into other areas of investment could be a viable alternative. Stocks and Bonds Asset Allocation Brokerage and Bank Accounts Multimedia Interactive Graphic calculate your financial comeback see how long it could take for your portfolio to return to its peak value.

Investors are holding off from buying or selling European properties and hedging their portfolios against currency risk, amid ongoing uncertainty over the value of the euro. These are all the basic tools that are used in portfolio construction and management. futures, options, swaps) which can alter the characteristics of portfolios. Overall, this is a must read (at least as a starting point) for anyone interested in developing knowledge about portfolio theory. For example, this article would be very helpful for anyone who would like to understand with a more critical eye on the importance of investment portfolios an its management.

Retirement

Confusion widespread are increasingly forced to save for their own retirement, half of current investors admit that investing is confusing. It’s true that women in general are more risk averse than men. When the investment community was debating whether or not retirement funds should be divested from companies operating within South Africa’s hated system of apartheid, some pension administrations accused the divestment advocates of acting as social engineers. Long-term care insurance may have a role in your retirement plan. Retire on your own terms – get guidance to help you create a better retirement strategy. Any earnings on investments can fund the insurance premiums and also supplement your retirement.

The key to investing is to minimize the risk and to maximize the financial reward. Getting a hold of the difference between saving and investing is the key to managing your money. Investing is the key to meeting your long-term financial goals. Because of this, a key for common sense investing is to not be swayed by group-thinking.

My name is Delano Dorasamy. I’m am a South African National with a improving chemical business. CEO of Masspack Marketers.Our company does a range of cleaning material consumables,and have just released our brand new washing powder SKY WASHING POWDER.

Please visit our website at http://www.skychem.co.za

Out of the blue, Indian Insurance Industry has become the talk of Dalal Street as it has become a major contributor in terms of investments in equity market. Though the premium collection has slowed down in early 2009 to some extent but it has been gaining pace with overall healthy market sentiments. The premiums collected under ULIPs are the major driver in boosting the equity investments. The renewal premium of the industry in ULIP category increased from Rs. 26,638 crore to Rs. 37,543 crore, an increase of 41 per cent on year on year basis. In addition, insurance companies have increased their exposure in equities – they have invested Rs. 44,358 crore in equity in the April-December period of current fiscal year.

The mis-selling practice in ULIPs are curbed to a major extent after the insurance watchdog, Insurance Regulatory and Development Authority (IRDA) introduced some ‘ investors’ friendly ruling, putting the cap on charges up to 3 per cent and 2.25 per cent for ULIPs having maturities up to 10 years and beyond 10 years respectively. Moreover, the IRDA ruling on solvency ratio, corporate governance, public disclosures, payment made to intermediaries and allowing unit linked health insurance plans, have benefitted greatly to Insurance industry.

How do ULIPs perform well in long-term?

The major objective of ULIPs is to build wealth, steadily in long-term along with an additional insurance cover. Investors should have a clear view that, investing in ULIPs is not to get a high insurance cover out of it.

The Fund Manager in Insurance firms has an edge over other market related products, in terms of holding stocks for an extended period. Hence, the churning in portfolio stocks, measured by Portfolio Turnover Ratio (PTR) is relatively less or negligible. Since the churning involves costs, it has a major impact on fund’s performance. Higher the Portfolio Turnover Ratio, higher is the cost involved.

Moreover, IRDA’s cap on total charges including cap on Fund Management Charges (FMC) in case of ULIPs have brought another transparency benefiting policyholders in terms of increased returns at their ends.

A close look on the performance of other market related products vis-à-vis ULIPs gives a startling fact; other market related products lags behind ULIPs return by a larger margin in the long run which confirms that investments in ULIPs are ideal investment vehicle for wealth creation in long term. On an average, the historical fund management charges (FMC) in other market related products (Mutual Funds come to be around 2.1 per cent) while in ULIPs, the maximum FMC is capped at 1.35 per cent.

For example, a periodic investment of Rs. 1 lakh in a diversified equity linked fund (ELSS) for a period of 15 years grows to Rs. 28.54 lakh at an assumed growth rate of 10 per cent giving an net yield of 7.69 per cent (considering an average FMC of 2.1 per cent) while the same amount invested in ULIP for the same period may range from Rs.28.63 lakhs to Rs. 31.59 lakh at an assumed growth rate of 10 per cent giving a net yield ranging from 7.97 per cent to 9.03 per cent. The final value goes down further if we consider other tax-saving instruments such as PPF giving a return of 8 per cent annum. An investment of Rs.1 lakh per annum in PPF for a period of 15 years grows to Rs.27.15 lakh.

So, clearly, ULIPs score over other products in terms of returns and additional benefit such as insurance cover; however, it scores below PPF as investment in ULIPs involves high risks. The return in ULIPs goes up further due to less FMC if the investment choice is debt fund and assumed rate of return is 10 per cent (in debt funds, the FMC is generally around 0.75-1 per cent). The table shows the different returns as given above. However, the high entry costs along with operational costs mar performance of ULIPs having or when opted for shorter maturity period.

Amar Ranu
India
“If fate means you to lose, give it a good fight anyhow..”