Investment Articles

When we invest in anything, we are attempting to maximize our return on that investment, given some level of acceptable risk. All financial investments involve a balance between return and risk. Investing in art is no different. We have to ask: “What is the expected rate of return, and what are the risks?” Besides these criteria, art investment offers other investment advantages. So let’s take a look at these issues in art investment.

When we invest in anything, we are attempting to maximize our return on that investment, given some level of acceptable risk. All financial investments involve a balance between return and risk. Investing in art is no different. We have to ask: “What is the expected rate of return, and what are the risks?” Besides these criteria, art investment offers other investment advantages. So let’s take a look at these issues in art investment.

Rate of Return

Calculating a rate of return on art investment is difficult. The difficulty lies in devising a performance index that accurately reflects the movement in the prices of art. Since we are concerned with investment, I am considering only what I call investment grade art. This is the art that is offered by the major auction houses such as Christie’s and Sotheby’s — not the art you might find in a downtown gallery. Admittedly, this criterion is not precise. There have been several indexes created to measure the changes in art prices. One of the most respected indexes of investment grade art is the Mei Moses All-Art Index. The index was developed by two New York University professors, and is often quoted as the most reliable in describing art price fluctuations. This index indicates that art prices have almost matched the performance of stocks, and that over some periods, the rate of return on art has beaten the stock market. This would put the annualized rate of return somewhere close to 6%.

Other estimates for price growth in art have not been so optimistic. In fact, some estimates place the rate of return near zero. A study directed by Luc Renneboog at Netherlands, Tilburg University estimates that the rate of growth from 1970 to 1997 to be around 4%. We can speculate that the long-term rate of return for investment grade art is somewhere between 2% and 6% with 4% probably a fairly decent estimate depending on the art bundle.In today’s economy where certificates of deposit are yielding close to 0%, a 4% yield on fine art would appear attractive.

Asset Diversification

It is a fundamental premise of financial management that asset diversification can reduce overall risk of a portfolio of assets. Adding new financial assets to any portfolio should serve to reduce risks, especially if the performance of the new asset does not correlate directly with other assets in the portfolio. Although price swings of stocks and fine art are often paralleled, they are not always perfectly in sync. Stock prices usually reflect economic activity whereas fine art is not as directly impacted.

Inflation Hedge

Real property can provide a hedge against inflation. Whereas inflation can eat into the value of monetary based assets such as bonds and certificates of deposits. Like real estate, coins, and gold, art is real property. Although the supply of art continues to grow, the demand for investment grade art is growing even faster. Renoir and Picasso have long stopped painting. Periods of hyperinflation, have always seen huge increases in the prices of investment grade fine art.

Tax Advantages

As it has been noted earlier long-term profits are taxed at lower rates than ordinary income. Plus, a portfolio in art offers the possibility of other tax advantages if the owner donates the art to qualifying charities, especially museums. In the same vein, fine art assets can play a significant role in an individual’s estate planning.

Although current reduced tax rates for long-term gains and estate taxes have worked to reduce many of these tax advantages, these tax cuts are scheduled to expire in the next few years. New tax schedules could emerge again favoring the tax advantages of art assets.

The Joy of Collecting

There are other gains that can be derived from art investment — the joys of collecting and displaying an art collection. One might argue if you are going to collect art anyway, you might as well pursue the collecting seriously with an aim of ultimately making a profit from the process. There is a danger of developing the mindset of a collector if you are seeking financial gain.

Investors make money in art when they sell to collectors — not the reverse.

Summary

So why invest in art? Probably the most compelling reason is the reduction of portfolio risk by diversification and as an inflation hedge. Although a 4-6% return on investment surpasses money-based assets, it falls behind stocks and precious metals. However, price reflects supply and demand. The supply of investment grade art is diminishing as contemporary artists gravitate to electronic art mediums. Paint on canvas for the current generation of artists is passé, and new electronic forms of art-making add nothing to inventory of marketable art. This trend may not be immediately felt on the art market, but could have a tremendous effect in twenty or thirty years. And art investment is always a long-term proposition.

By combining the possible financial gains from investing in art with the emotional pleasure of owning and displaying the art, then art investment can become “profitable.”

RL Foster has had extensive experience in the art business. He has worked almost twenty years in the gallery business — first as the marketing director of one Denver’s most successful galleries and later with his own gallery. For much of that time, he has also worked as a professional art appraiser and is the director of the website: InvestingInArt.net. He also advises artists and conducts several workshops a year on the business of art. He has written many articles on art and artists for national publications.

http://www.investinginart.net

The whole idea behind making financial investments is to get a good return on your investment. Making smart investments should be your goal. Not researching your options can possibly be the biggest mistake you can make. You want to learn as much as you can understand. Taking the time to find the most lucrative investment strategy can make the difference between you losing or winning.

How you choose to invest your money will most likely be based on how much risk you’re willing to take. As with all investment endeavors, there is a loss risk. Having a good financial plan from the start is essential. Researching the various investment strategies can help you figure out what you feel safest with.

Buy Long

Buying stock long is not a lucrative investment strategy. With this particular strategy, you can only lose what you have put into it. It may sound good to know that it offers minimal risk; it also offers the least return.

Buy short, sell long

This strategy has a little bit of risk attached to it but can be lucrative if it’s used properly. With this particular type of investment, the assets or securities that are being sold have been borrowed from a third party; intending on buying the same assets later on. The seller unloads the assets at a higher price. When the price of the assets drops, is when they pay the original owner. The seller is simply profiting from the drop in price. This strategy is profitable as long as the drop in price is substantial enough.
Buy and Hold

A passive technique, the “buy and hold” can be considered a lucrative investment strategy. The investor buys the stock and holds onto it, no matter what happens with the market. Equities to yield a higher return than assets do. This strategy is also beneficial tax wise because long term investments are taxed at a lower rate than short term investments.

Set triggers

This is not an investment technique but can also be considered a lucrative investment strategy. Set triggers for yourself. For example, a downturn in the market can be used as a trigger to buy stock that may have been too rich for your blood before. This strategy can aid in you acquiring very lucrative assets. However, you should set guidelines and limits and be sure to stick to them.

These are only four investment strategies among many. Only a professional truly understands how any of them work. Before you make any investment decisions, it would be wise to seek counsel. Let them guide you on how to make your money grow. Keep in mind however, that it is your money being invested. Just because they recommend it, doesn’t mean you have to do it if you’re uncomfortable with their suggestions.

Finding a lucrative investment strategy is a key factor in making your investments worth anything. The idea is to yield a return that is noticeable. As was stated before, with any investment there is risk. The right strategy should decrease the risk factor for you.

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Making financial investments is one of the many things that you can do to take steps in ensuring a solid financial future. By creating a diverse portfolio, you can stand to reap the rewards of money well spent. The return on your investments can possibly change your financial situations. Yet, investments for beginners can be a little scary.

When you are just getting into the game of investing, there are a lot of things that you need to know. Most people do consult professionals but there are things you should research on your own. Investing money is not something that should be entered into wearing a blindfold. The more knowledge you are armed with, the better.

Investments for beginners can be tricky. You may be weary of the risks involved yet you must be comfortable with the fact that with some investments, loss is a risk. There are some low risk and risk free investments that can be made. You should learn in the beginning what your options are.

Stock and Bonds

Two of the most common investments for beginners are stocks and bonds. Stocks are equity investments and are relatively riskier than bonds. Bonds are debt investments. They are less risky but also yield a lower return. This rule isn’t always applicable since there are some bonds that are high risk and yield a large return.

Mutual Funds

When it comes to investments for beginners, one of the best ideas may be to create an investment portfolio. If you can’t afford to create your own, you can buy into an already existing one buy investing in mutual funds. There are many advantages to mutual funds. They offer diversification, they are extremely flexible and funds are managed by a professional. By purchasing small parts of stocks, bonds and various securities; you can work your way up to building your own portfolio.

CD’s

Certificates of Deposit, commonly known as “Cd’s” are also a top choice for beginners. With these, you invest a certain amount of money and you are guaranteed a return in a specific amount of time. The interest rates for Cd’s are higher because you cannot access the money until the CD has full matured. The maturity time can be anywhere from a few months to a few years. There is a high minimum investment required to purchase.

Stocks and bonds, mutual funds and Cd’s are not the only investment options for beginners. There are other securities that may interest you depending on how much money you can put into your initial investment. You should research all of your options and seek counsel before you make any choices. The final decision is yours and should be made wisely.

Think about if you are looking to see a return in the near future or if you are willing to wait some time to reap larger rewards. Investments for beginners are relatively the same as investments for everyone else. There is money that has to be spent and risk that will most definitely be taken.

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During the economic crisis of the past decade, markets and industries crashed and hundreds of companies and millions of people were caught with their pants down. This ordeal has taught everyone the value of security during uncertain times. One of the surest ways to buffer yourself from economic crunches is by making sound investments. While there are traditional investment strategies available to first-time investors, alternative investments are rapidly gaining momentum, and for good reason.

Alternative Investments: The Basics

Alternative investments refer to investment strategies that go beyond traditional investments like stocks, bonds, cash, or property. Popular financial assets in the alternative investment category are:

1. Hedge Funds

2. Private Equities

3. Financial Derivatives

4. Venture Capital

5.Commodities

They also include several tangible assets including, but not limited to, the following:

1. Wine

2.Antiques

3. Stamps

4. Art

5. Coins

Characteristics of Alternative Investments

Unlike traditional investment strategies, alternative investments are not direct fixed-income or equity claim on the assets of an issuing body. They are complex in nature, so most of these assets are held by accredited, high net-worth individuals. They also tend to lack liquidity and have a low correlation to traditional financial investments such as shares of stock in a company. This low correlation adds to its appeal, especially with investors who are looking to diversify their investment portfolio (the low correlation coefficient will be discussed in depth in a later section).

Also, compared with more common investments like mutual funds, alternative investments have higher minimum investment requirements and fee structures. The cost of purchase and sale is relatively high. In addition, they are subject to less regulation. While this may be good on one hand, it also has the effect of limiting opportunities to publish verifiable performance data. Hence, historical data on risk and returns may be limited. This data could be useful in promoting an alternative investment to potential investors.

Because current market values of some forms of assets are difficult to determine at the least, it is imperative for investors looking to invest in alternative investments to conduct proper due diligence. This especially applies to tangible assets like artworks and wine.

Some investors consider alternative investments as a good means to diversify their portfolio, thereby reducing overall investment risk. However, this is not the only reason why more and more investors are now looking into expanding their financial prospects via alternative channels.

The Appeal of Alternative Investments: Low Correlation, Absolute Return

Although there are a number of alternative assets presently being offered in the marketplace, a common characteristic among these numerous options is their low correlation coefficients with both fixed income and equities. Low correlation is considered important when choosing assets for inclusion in a portfolio, primarily because assets that are relatively uncorrelated with both bonds and stocks tend to have minimal exposure to systematic market risk factors. Absolute Return Strategies – strategies that seek a low correlation to systematic risks in the market, make it their objective to attain relative independence from the underlying equity or fixed-income market benchmarks’ overall performance.

Absolute return does not come without its challenges, however. There are potential constraints on the upside. To illustrate, when broader stock markets are picking up, investors with low-correlation alternatives may see their portfolios performing weaker in relation to those with traditional assets. This somehow implies that absolute returns can be maximized in negative market climates and tend to underperform during positive economic climates.

The Economic Atmosphere for Alternative Investments

It would not be an understatement to say that alternative investments were, for the longest time, reserved mostly to high net-worth investors. The broader retail market finds the field of alternative investments difficult to penetrate because of reasons mentioned earlier in this article:

- High minimum investment sizes;

- High minimum fee structures; and

- Assets with no liquidity.

Recent years show a change – an evolution – in the economic atmosphere, where alternative investments are concerned. Progress in global financial markets has developed and provided greater opportunities and a wider range of products through which more investors can enrich their portfolios with alternative assets. Directional alternative assets like commodities, real estate and foreign currencies, as well as hedge strategies like buy-write become accessible to more investors through exchange-traded funds (ETFs), exchange-traded notes (ETNs), and mutual funds.

These options were not available until recently. With increasing entry points into alternative investments, investors now find themselves able to participate in innovative investment approaches that promise increased profits. If alternative investments appeal to you, now would be the best time to start investing in alternative assets.

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A business plan should have seven clear sections. These are: summary, concept section, market conditions, promotion costs, marketing strategy, manpower plans and exit strategy. The summary should be short, and no more than a page. It should give a brief overview of your business strategy and the logic on which your business plan is based. It can mention the business development plan, the key people, the form of business organization and the financial objectives. The summary must be simple and easy to understand. It should focus on the main elements of your plan and avoid generalizations.

The concept section should explain your business strategy, and provide a clear description of your main product, or service and how it will beat the competition. It can also include any other information that can have a major impact on your business. For example; if you are planning to use a new type of distribution channel, you should explain this in the concept section. The development process must be described if you are seeking financing for starting a new business or expanding an existing business.

You also need a market section that describes the market potential, competition, target segment, trends, etc. It should also describe your strategy for getting a competitive advantage, identify consumers for your products, and the ways you intend to target them.

You also need to identify the competing products or services, the reasons for their success and how they compare with your products or services. This is even more important for a start-up business, which has to compete with established businesses.

You also need to decide as to how you want to position your product. Do you want your customers to see your product as a low-cost substitute, or as a high quality premium product?

Another section that you need is on advertising and promotion plans and how they will help you communicate your product or service benefits to your target market. This should be in tune with your marketing strategy and your business strategy.

All businesses cannot engage in research and development, because it is a long-term investment. Lenders and investors tend to have a short-term perspective and may not want to commit money for this purpose.

A section about the operations can describe how the major functions of the business will be conducted, more effectively than the competition.

The requirement of people can be described in another section. This section should state the skill levels of those who have already been recruited and give a timeline when the rest will be hired. Also include the resumes of key people, with their responsibilities.

Lenders and investors will want to know about the payback and exit period. Most of them may want your business to become profitable and to go public in 5 years, so that their investments will appreciate and become liquid. They usually want to have a cash-out option in 5 years.

A section about the financials will be needed to show the historical financial statements as well as the projections for 3 to 5 years. You may need to project different scenarios, depending on the complexity of the business, for the benefit of your lenders.

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Investigating and searching for strategies and investments that fit your goals is essential to successful investing. Whether you are looking for details on a stock you own or if you just want a closer look at a potential investment, you will need to conduct a thorough search of available resources that can help you become a better trader and a better investor, managing your finances in the most responsible way possible.

Conducting these types of searches will help you to generate ideas about individual stocks, market sectors, and industries that you may be interested in. They can help you formulate an investment strategy for your financial account or portfolio. If you have a 401K plan or other retirement plan, you can use their online options to read more about the stocks you are interested in to see if they may be right for you. If you do not have your own individual plan, or if the information provided on these websites is not specific enough or as understandable as you need it to be, you can also conduct this search elsewhere-by using one of the larger search engines, browsing to find out what others have to say from their experiences, or by joining discussion boards or forums.

Using these methods, you will be provided with information on stocks that fit your choice of predefined value, their growth over time, the way they blend, and other various sector strategies. This could be just what you need to start on a path to a successful financial strategy. If you have not settled on an exact strategy before hand, you will still have time because after you sort through all of this information there will be no need to worry. Keep in mind that while you may have a large amount of knowledge in the beginning, you can easily lose sight or lose interest in your investments, which ultimately results in you losing interest in your finances all together due to the way the market can change. This is because if something were to happen to your investments since you did not put in enough effort and time into understanding how they are operating, you will be losing your own money in the long run. When you want to find or check up on a stock that fits into a certain investment style, sector or market cap, you will need to conduct an efficient search, which may be done quickly and easily provided you know what you are looking for.

Some websites even include technical data that can even show you chart patterns, or annual results from other investors. You may even find reviews or historical information that may sway your decisions. This will give you more power and control over finding the right kind of investments for you. It is important to view the most important information if you do not have time to review an entire strategy. The fundamental, or most important, information is going to include the earnings of an investment, the revenue growth, and what the profit margins are. This will either be nicely mapped out for you, highlighted, or otherwise marked; else it will be a needle in a haystack of other information; another reason why you should always know what you are looking for!

Whether you are just searching for a simple investment strategy to fit your goals, or if you are searching for individual securities that will complement a strategy you already have selected, reviewing and analyzing the appropriate information is a crucial point in letting your finances work for you and grow to their fullest potential. The best stock investing advice that can be given for financial investment situation is the advice of information.

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St. Kitts and Nevis is one of the few places in the world to offer a government run Citizenship by Investment Program. This program ultimately grants citizenship to those who have made a significant investment in the country, namely in real estate. The Citizenship and Passport Program in St. Kitts and Nevis was established in 1984.

How does Citizenship by Investment Work?

In St. Kitts and Nevis, a significant financial investment must be made in real estate. Once this and other requirements are met, the government will grant the investor a Government Certificate of Registration as a Citizen as well as a passport. Once this process is completed, all paperwork is exactly as that of all other citizens. Investors can then choose to acquire a driver’s license if they would like to drive.

The Requirements

There is first a registration fee of $35,000 for the applicant. Additional family (dependants) must be registered as well for an additional fee of $15,000 per person. A minimal real estate investment of $250,000 is required in order to gain the status of citizen. You are not required to pay the fees until your application for citizenship has been approved by the government. The real estate purchase is required to be completed once you have obtained the appropriate documents.

During the application process, you will be asked for identification. This will include a birth certificate for the applicant, and birth certificates and/or marriage certificates for the spouse and children (or in some cases grandchildren). Applicants over the age of 12 must complete an HIV exam and everyone should submit 2 passport sized photos of themselves.

Why Invest in St. Kitts and Nevis?

The landscape alone is gorgeous enough to make anyone want to stay there for as long as possible. Aside from that, the relaxing atmosphere, rich culture, and friendly natives only make it more tempting. Economically, if you wanted to live there only part time, it is a great investment.

There are real estate management companies ready and able to maintain your property in addition to leasing or renting your space when you are not using it. You can enjoy the property for yourself at your own leisure, and earn a return on your investment while you live elsewhere. There aren’t any restrictions if you decide to eventually sell your property, and chances are that you will find an eager buyer quickly, just because of the neighborhood and the eye-catching views.

With the Citizenship by Investment program, you will also be able to enjoy Visa free international access to the United States, the United Kingdom, Hong Kong, and more than 65 other countries around the world. There is also no personal income tax, so that is a freedom in and of it.

Nevis Real Estate is certainly a worthy investment that has many benefits. Citizenship is a great option, and you do not have to denounce your existing citizenship in order to obtain it there. It is a beautiful island and a good opportunity.

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A majority of individuals have made the decision to increase their opportunities to discovering financial stability by taking advantage of investment possibilities. The idea that you can generate a strong financial future without having to toil in a daily job is highly appealing to many. Whether you are looking to capitalize in real estate investment, the stock markets, or another financial industry, there are a wide number of possibilities that a person can pursue in order to achieve their financial goals. When looking to take advantage of the opportunities that are available with your portfolio management, there are often three methods individuals choose to pursue in order to maximize the opportunities that are available to them.

Method One: Individual Pursuit

The first method that is often pursued by the new financial investor is found with the attempt to do it themselves. These individuals recognize the potential that is associated with the investing environment and believe that accomplishing portfolio management alone will not only offer the promise of achieving financial success, but will also save them money by avoiding the aid of any professional resource. A very limited number of individuals have found success pursuing this opportunity and it often represents a significant financial loss that serves more as a life lesson than an investment opportunity.

Method Two: Programmed Assistance

The second method that individuals often pursue when they either have very limited knowledge about investments or had poor success with the individual pursuit, is found with programmed assistance. In the online environment there are a wide number of programs that promise individuals the next great opportunity of success with their portfolio management. Discovering the best program that fits your specific financial situation is important in order to avoid attempting an investment strategy that you do not have the resources to support. This allows individuals to take advantage of the limited knowledge of professionals through the utilization of software they may have participated in creating.

Method Three: Portfolio Management Services

The third method available to an individual looking to take advantage of all the opportunities that exist with financial investment is found with the utilization of a portfolio management service. This type of service represents a team of investment professionals who you can utilize to aid in seeking advice, as well as pursuing financial investment opportunities that best represent the ideal options for your financial situation. The utilization of a portfolio management service will often provide the inexperienced investor with the greatest number of opportunities to find quick success with their investment pursuit and avoid many of the complications associated with an experienced investor.

These three methods represent the most common opportunities individuals pursue when trying to maximize the potential associated with developing a financial investment strategy.

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Investing is such a complicated field that there are literally tens of thousands of books written on the subject. Investing can be quite difficult, depending on the strategy, though it and can also be simple and straightforward if done properly. One of the best pieces of investment advice ever given is to diversify your portfolio into several different investment vehicles. This can help you spread out the risk and achieve a steady return on your investment capital. This is the goal of most investors. This type of investing can be categorized broadly as value investing and with a diversified investment strategy that holds a goal of long term positive returns.

Value Investing
On the whole, value investing is generally defined as investing that focuses on buying investments that have good value. This is a fundamentally safe and secure type of investment strategy. The goal is for steady appreciation and consistent yields on capital invested. Value investing is a fundamental and lies at the base of a solid financial investment plan. Buying investments because they are a good value is a mark of a solid investment plan. If you buy companies because they are good value, then chances are you will be in a position to enjoy capital appreciation in the years to come.

Stock Market Investing
Stock market investing is one of the fundamentals of value investing. By diversifying investments into the stock market it is possible to spread out investment funds into a wide variety of different companies and their stocks. It is certainly very difficult to choose specific stocks that are going to go up in value immensely in the years to come. The Walmart-like stocks are few and far between and taking them at their outset is almost impossible. This certainly does not mean that you should not try. Buying fundamentally sound stock market investments can be a goal and ticket to a fruitful financial future ahead.

Penny Stock Investments
Penny stocks are those that bear their own name. These stocks are often valued very lowly and the costs are often quite low-often times ranging from a few pennies per share up to a couple dollars per share at the most. Some investors believe that there is great potential return in penny stock investments because you can buy for such a low cost a large amount of shares and if there is any appreciation in value this year value will likewise increase. An increase in the share value will yield an increase in the investment return as well.

Bonds Investing
Bonds are another core element of a diversified investment strategy. Bonds typically have slow and steady growth patterns and consistent yields year after year. This makes them the ideal investment for slow and steady capital appreciation. There are several different types of bonds available ranging from government-backed bonds to higher risk corporate bonds. Bonds remain one of the best ways of diversifying a portfolio with safe and secure investment returns. Talk with an investment adviser about the different kinds of bond ratings and how the different types of bonds will play an important part in your overall investment portfolio.

Mutual Funds Investing
Mutual funds are yet another way of diversifying investment risk and return. Some mutual funds specialize in high risk/high yield type investments, while others mirror segments of the stock market (as in Spider Funds, which buy the exact companies that appear on certain stock indices). Mutual funds are run by a board of directors and a management team in most cases. These individuals have the responsibility of making the investment choices for the entire fund.

Mutual funds are traditionally one of the most popular investments options and routes to take. Mutual funds are easier to become involved with than almost any other investment. They are often times the starting place for investors who are looking to have the potential for return while also curving the risks in spreading out the potential downside. One of the challenges with mutual funds, however, is the fact that there are so many and they can be difficult to choose between them. Out of thousands of different mutual funds, finding one that meets your investment requirements can be tricky. It also should be noted that just because a mutual fund has done well in the past that does not mean that it will continue to do well in the future. Very few mutual funds maintain a steady track record over time.

Commodities Investing
Commodities are another option for a diversified investment portfolio. Commodities represent certain items like corn, oil, gold, silver, and other such natural items classified as commodities. Commodities can often be used as a ‘hedge’ investment and have a safe and secure track record. Investing in commodities should be done with the help of an experienced investment adviser only or with much experience under your belt. They are not typical investments and should not be viewed as ones that are as easy to invest in as bonds or mutual funds. Typically, commodities investments can be used as a counter-trend type of investment, or in other words, as a protection against loss when other types of investments seem to be falling. Commodities will typically hold their value contrary to the stock market as a whole.

All of these different types of investment options should be discussed with a qualified investment adviser or broker. To venture into these investments on your own can be dangerous. It should be mentioned that with any investment there is the potential for loss. Anytime you have the potential for substantial gain, likewise you have the potential for substantial loss. Some of these investments are more secure than others. You should discuss your options and your long-term strategy with your investment adviser to determine the best plan moving forward. You’ll want to create a diversified plan that creates a steady return while minimizing risks.

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Some investors believed that from the period of 1982-2000 it was their “right” to earn 10% every single year in their investment portfolios without any identifiable risk. After the 2001-2003 bear market that mentality returned. People have short memories and suffered again in the period of October 2007-March 2009. Risk showed up at our doorstep and caught everyone by surprise. Warren Buffett, George Bush and many others were on that list. Everyone is concerned about risk now. The question in the era of “the new normal” is to how to invest wisely taking risk into regard.

Asset Allocation: Everyone has heard about it but who practices it? A strict model forces one to by when everyone is selling and sell when everyone is buying. Once or twice a year at the most is the time frame to review a portfolio. A change in one’s life, be it personal, emotional, or financial are valid reasons to adjust the portfolio. But it is not enough to blindly follow a rigid formula. We incorporate our macro views to identify the markets that call for the highest concentration (and likewise the lowest). The same can be said for the fixed income world, which comes in many different flavors.

An Investment Policy Statement is essential in addressing an Asset Allocation Program. That is because we will have the information to help clients allocate to strategies that address our three legged stool of successful investing, need for capital appreciation, risk tolerance level, and liquidity issues. A lack of such a policy can take a client in a direction that he/she may dispute in the future. Whether he/she should have a conservative, moderate, or aggressive portfolio, all parties concerned should be in agreement at the beginning and throughout the relationship.

Listed Options: Options can be used to increase income with a number of strategies. One such strategy is the “collar”. The motivation behind this strategy can be for one of two reasons. The first is to take a limited risk with limited upside potential on a stock that you wish to buy. The second reason is to manage a position that may be very large for your portfolio or one that carries a very low cost basis that hopefully can avoid being sold.

Let’s take a look at a sample trade. IBM currently is trading at $155.00. One can sell a February 155 call that will expire in 30 days for a price of $2.50. The downside protection is to purchase a February 150 put for $1.25. At expiration if the stock closes at 155 or above the investor will be “exercised” and out of the position at $156.25. I took the $1.25 credit that came from the two option transactions and added that number to $155. This equates to a 10% annualized return. On the downside the the “break even” point is $153.75. The risk is limited to $150.00. Ideally the risk should equal reward, but this example is just for illustrative purposes.

Due to the current bear market many investors are underfunded. Institutional and individual investors need to squeeze everything they can out of their portfolios to make up for poor performance, but must be vigilant about not taking on to much risk. Asset Allocation, an Investment Policy Statement and suitable options strategies are the cornerstone for providing the potential for a positive investment and risk management future.

Daniel B. Stern has been an active member of the Chicago Board of Trade since 1975 along with being a ’seat holder’ at the Chicago Board Options Exchange from 1988-2009. He is founder and head of Stern Investment Advisors, LLC, a financial investment firm company based in Chicago. His experience as a futures trader and options trader, (along with investing his own funds and managing money for his clients) has given him the necessary background to provide clients with the tools to succeed with their financial goals.