Investment Articles

Since most people are lacking in investment experience, the best investment guide for most folks keeps things simple and starts with the basics. The ideal guide to get you off and running should cover virtually every investment option of interest to the general investing public. Buckle up and read on as I lay before you the universe of investments in plain simple English.

Not only will this basic investment guide for the inexperienced investor list all of the popular investment choices out there, it puts them into perspective. For example, some investments are safe and can quickly and easily be bought or sold because they have high liquidity; while others offer high profit potential with significant risk and low liquidity. This investment guide divides the investment universe into just two general categories: FIXED and VARIABLE investments. Each of these can be further separated into two parts, for a total of just four basic investment options, which are often referred to as asset classes.

Fixed investments pay interest and are safer than their variable counterparts. They get their name from the fact that either the investor’s principal (amount invested) or the interest rate paid is fixed and does not change for the life of the investment. Cash equivalents like money market funds or savings accounts is the first subcategory here, where the principal is fixed and does not fluctuate in value, while the interest rate can vary over time. The other subcategory is bonds, where the interest rate is fixed but the principal is not, as bonds fluctuate in value.

Variable investments are growth oriented and their price or value fluctuates, or is variable. Both profit potential and risk are greater here as the primary objective is to profit from an increase in the price or value of the investment. Stocks are the first subcategory and they offer good growth potential with some dividend income, and can easily be bought or sold on any business day at market price. Alternative investments include real estate, oil, gold, other commodities, and all other investments not mentioned above as the fourth category; and they can offer investors growth opportunities and perhaps income with varying degrees of liquidity.

In a fixed investment the investor is simply lending money to an entity like a bank, corporation or the government to earn interest. With a variable investment you take on the risks associated with ownership in order to make a higher rate of return. In putting together and managing your personal investment portfolio include all four of the asset

classes to achieve balance. In this way you should be able to get long term growth plus income with only a moderate level of risk.

In any endeavor the devil can be in the details, and investing is no different. Even a complete investment guide can’t walk you through the details of every specific investment option available today. But now you should have the big picture in your mind and a foundation to build upon.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.

The traditional guide to investing or investing guide tends to focus on stocks and bonds and the benefits of the balance achieved by owning both. In past years this basic investment strategy has worked for the most part. Investing in 2010 and beyond might be a different story.

Any guide to investing or investment strategy for 2010 and beyond will need to make adjustments in focus. For many years the major investment houses have recommended a balanced portfolio consisting of stocks and bonds. Conventional wisdom assumes that investing 60% in stocks and 40% in bonds should produce good long term returns at only a moderate level of investor risk. Little attention has been given to the other asset classes or other major investment options.

Over the years investors and money managers tended to act and react to the economic environment in a somewhat predictable fashion. In bad economic times they sold stocks and bought bonds, which sent stock prices down and bond prices up. As the economic picture brightened they moved money from bonds to stocks sending stock prices higher. Both investments did well in the 1980s and 1990s as the economy generally grew and interest rates generally fell over that time period.

Even in more recent times a portfolio of stocks and bonds worked, as losses in one asset class were at least somewhat offset by gains in the other. Together they offered the investor both the higher income from bonds and the higher growth and profit potential of stocks. Plus, this basic traditional investment strategy produced a balanced portfolio with only a moderate level of risk. Investing in 2010 and beyond won’t be that simple.

The real problem with the guidance provided in a traditional guide to investing or with the conventional investment strategy discussed above is the level of today’s interest rates. In 2010 interest rates hit record lows, approaching zero in the money markets. When rates reverse direction and head upward in the future bonds will fall in value, period. Stock prices will fight an uphill battle as consumers cut spending, causing corporate sales and profits to fall.

Think “diversification” as your guide to investing in 2010 and beyond, and move some of your investment dollars outside of the traditional box of stocks and bonds. Include the other two asset classes in your investment portfolio: safe cash equivalents like money market funds, and alternative investments like real estate, gold, and natural resources mutual funds. The first will pay interest that increases as interest rates go up; and well selected alternative investments can produce profits to offset losses in a falling stock market.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.

Introduction
The bottom line of every business is controlled by finance. The strength of finance includes control of the future of all the employees of a certain company. There are diverse aspects of investment controlled by finance. A company’s cash flow management is based on its investment policies. A proper financial investment helps a company in maintaining a perfect balance in the cash flow such that there is no sudden deficit that could lead to hazardous results. Financial investment in a planed manner has a role to control the investment, insurance and risk management issues of a company. These together contribute towards economic success.

Risk, Rate and Diversification
Before one goes through the deep features that are included in financial investment, it is required to understand the concept of risk. There are basically two different meanings that are given to risk. It could either be considered as loss of a certain portion of the capital investment or not enough profit as compared to the assets at stake. It is impossible to eliminate risk entirely. It can be reduced by diversifying the business. The intelligence lies in managing the risks such that if taken in the short term, it produces a long-run benefit. One should manage risks such that it lies well-within the context of the aimed goals. (The Daily Angle, 2009)

The next important part of investment is the rate of return. It is often believed that the more a person takes risks; the higher would be the rate of return. Whenever there is greater amount of security that comes from lower amount of risks, it becomes more suitable for the risk avert investors. This is termed as risk/rate trade off.

The third most important part of investment in finance is in terms of diversification. It is a reality that if a company deals in just one sort of business, there is a higher probability of failure. If the same company has many forms of business, then one form can certainly counteract the other. This is the benefit of diversity. Diversification in business can be adopted in the following ways:

• Across asset classes
• Across markets and regions
• Across investment management styles

Factors of Successful Investment

• One would have to decide the appropriate time as to when to sell a fixed-interest investment. If a person sells the same before the time of maturity, there are chances for the rate of interest to fall within the period of holding the investment. If this happens, the seller could enjoy a profit on the original investment.
• At the same times, if the interest rate rises during the time of investment, then there are chances that the seller would receive a lower amount as compared to the amount he could have received at maturity. This would therefore result into a loss.
• Another important factor that the investor must keep in mind is that the way a form of maturity or bond performs in the market would be different for different bond or maturity based on the economic conditions of the market. There could be arise but at the same time a fall too. (Vong, 2006)

Sources of Finance

Internal Sources

Personal Savings: In this form of financial sourcing, a businessman invests money in his own business. A substantial amount is used for running one’s own business.

Retained profits: In this form of sourcing, a businessman doesn’t use his money but saves it. These profits are termed as kept by the accountants and not spent.

Working Capital: The daily expenses that are accounted in the firm are termed as the working capital. This includes stationery, rent, wages etc. The working capital can also be defined as the difference between the assets and the current liabilities of a company.

Sale of Assets: This form of financial sourcing is required when the business is in desperate need of cash. At this point of time, the only alternative left for the company is to sale some of its fixed assets as they do not provide any revenue and use it in the development of the business. (Radcliffe, 2005)

External Sources

Ownership Capital:

Ownership refers to those businessmen who are shareholders. This occurs in a limited liability company as the partners and the owners of businesses are not holders of shares. There are two types of shares:

Ordinary Shares: These are those shares that are issued to the owners of a company. These shares can be entitled to dividends once a fixed amount of profit has been made or after a certain date. The ordinary shareholders can put funds into the companies through their respective retained profits. This might not bring in large amount of funds but it is preferable as a low-cost source of finance. The ordinary shareholders can also put their funds by paying for a new issue of shares. This is efficient when a company is in the growing stage.

Preference Shares: These are those shares which have a fixed percentage of dividends even before the ordinary shareholders receive any amount of dividends. It can be advantageous as these dividends are not required to be paid in those years when the profit has decreased substantially. There are no voting rights associated with these shares so there is total control of the shareholders. It does not put any restriction in the borrowing power of the company. (Brigham, 2004)

Non-Ownership Capital:

Debentures: These are the raised capital of a company in the long-term for which interest is paid under a written acknowledgement. They can be advantageous when the interest rates are volatile in nature. The coupon rate of debentures can be changed according to the fluctuation in the market rates.

Bank-Lending: These are the most important forms of financial sourcing. These are generally for a shorter period of time but at times they can also be taken on a medium-term basis. In case of short-term lending, the companies are required to keep an overdraft which is given by the bank and the interest is charged accordingly on the given amount. This is generally done for a period of three years or less. The medium-term lending is done on a three to ten year basis. This sort of lending is done for the larger companies according to a set margin depending on the riskiness and credit-standing of the borrower.

Leasing: In this form of financial sourcing, there is an owner of an asset who allows another person to use it. Here, the user is responsible for the equipments granted. (Metrick, 2006)

Terms of Investment in Finance

Opportunity Cost

Opportunity cost gives the best possible alternative that could be considered in making the investment decisions of a company. The basic principle of economics is to consider the resources as scarce. Under the situation, opportunity costs refer to that cost which makes sure that there is optimum utilization of the resources. Let’s say a company invests a sum of 5,000,000 ADE in the training and research programs, then its effectiveness can be measured when the company analyses the consequences of spending the same amount in some other operational cost. So, before accessing the rue cost of any financial decision, calculation of opportunity cost is a fundamental.

Net Present Value (NPV)

The value of inventory changes for a company gradually over a certain period of time. The net present value is the actual present value derived from the cash flows over that period of time. It includes a specific discounted rate which is according to the rate at which the capital needed for a certain project could be returned. So, NPV is the total value that a particular investment in the firm adds value to that firm. If it is greater than zero, it is accepted or else rejected.
Internal Rate of Return (IRR)

IRR gives an indication of the quality of the investment. It tells the company whether they should make the investments or not. So, a good IRR indicates that a particular project gives a better yield as compared to the alternative investments. In general, IRR should be larger than the cost of the capital for adding value to a company. (Wilmerding, 2006)

Discounted Rate of Return

The discounted rate of return gives the expected rate of return of an investor from an investment.

Roles of Investment in Finance

Strategic Role: The strategies with respect to the investment in finance are based on its objectives. The strategic role of financial investment is to ensure that the policies implemented by the company eliminate all those elements that have no contribution to the financial success of the company. A company should plan its financial strategies in such a way that they are not only opportunistic in nature but also practically feasible. They are bound to avert risks to the maximum. A proper dissemination of the policies of a company is also a part of the strategic role of the financial investment. This keeps the employees on track of the financial restrictions of the company.

Operational Role: The operational role of the financial investment process is to restrict the company members from crossing the boundaries of financial distress. The operations should provide a platform for the future planning of the company. This is more prominent with maximum involvement of the manager. Another important role of the financial investment is the training of the members of a company to live up to the financial requirements of the company. This includes the budgeting process and the methodologies involved in maintaining the cash flow. All the assets and the debts should be managed as a part of the operational role of the financial investment. So, much of the balance sheet of a company owes its being to the operational role of financial investment.

Responsibilities of Investment in Finance

The financial investment of a company is bound to affect the stakeholders. A company lives on the expectations of many of its stakeholders. Even during tough financial times, the company should make sure that it is able to meet the stakeholders’ expectations. This has an adverse affect when the prices of the shares of an organization suddenly lower. A stakeholder would invest in a company when he is confident of the fact that the investment in the company would not let the prices go down. A company should therefore have a risk calculated amount that helps it in these periods. (Lerner, 2008)

I am a pre final year student at the Indian Institute of Information Technology and Management, Gwalior, India pursuing a five year integrated course (dual degree) leading to the award of B.Tech (Information Technology) and MBA. I am currently in the 9th Semester. ABV-IIITM Gwalior, a Deemed University, is an apex Institute, established by the ministry of HRD (Human Resource Development), Government of India.
The competitive environment at my Institute coupled with my inherent trait of trying to learn something new from each experience has made me come a long way in these four years. I have not only learnt to work under pressure and intense competition with some of the brightest students in the country but have also worked with an esteemed KPO called CBI Solutions in the meanwhile. This has given me the experience to get exposed to some of the most challenging marketing traits in the business. Moreover, I have been awarded first rank for IT and Entrepreneurship at the end of my 7th Semester.
I have been privileged to work at Polaris Retail Infotech Limited, Gurgaon from May to July’08. This taught me the practical application of relationship marketing as I saw the preparation of customer interfaces through their software Smart Store. This is visible at billing counters at retail stores of the fame of Shopper’s Stop. Also, I’ve been in the editorial board of my college magazine, La Vista for the past 3 years and eventually I hold the responsibility of the Chief Editor.

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

Investment strategy is a little like religion in the financial advisor community. There are few situations that would get emotions boiling, fists flying, and require police action faster than putting a buy-and-hold advocate and a market timing zealot in a room and asking them to resolve their differences. The truth is that most strategies work some of the time, a few work most of the time, and only Bernie Madoff figured out how to make one work all the time, right up until he got caught. Investment strategies have two major parts: 1) what investments to buy, and 2) when to buy and sell. Because I’m an investment advisor and human, I have some built-in biases, but following is an attempt to objectively look at several common strategies with a minimum of sarcasm.

Allocation Strategies (what to buy)

Strategic Asset Class Allocation

Traditional asset classes include stocks, bonds and cash. These classes are then divided into subcategories based on geographic location (U.S., developed foreign countries, emerging markets), company size (small-cap, mid-cap, large-cap), and bond style (treasuries, mortgage-backed, high-yield, etc). Real estate, commodities, and hedge funds are sometimes added as additional asset classes. The idea behind Strategic Asset Class Allocation is to come up with a portfolio of non-correlated assets that meets an acceptable risk profile, and then stick with that allocation as the market goes up and down. The portfolio is typically rebalanced periodically to maintain the percentages of each asset class, but mostly the portfolio is left alone.

Most Common Supporting Arguments:

Easy to set up with mutual funds, which are typically aligned with asset classes.
Mutual funds provide diversification by owning many stocks with professional management.

My Rebuttal:

Many mutual fund managers tend to favor certain stock sectors at the same time, making the portfolio less diversified than it appears (e.g. overweighted in Energy or Financials).
Most stock asset classes are highly correlated when looked at over the last decade.

Semi-Objective Opinion:

Dividing the stock world by geographic location (U.S. & foreign) or by company size no longer results in a diversified portfolio. This has been a long-term trend developing and getting worse over the last 20 or so years. As an intuitive example, when oil drops from $150/barrel to $35/barrel, all energy companies get hurt, whether they are large or small, based in the U.S. or based in Brazil. However, it is true that an asset class allocation model is easy to implement with mutual funds, and the addition of non-correlated alternative investments can improve overall diversification.

Balanced Sector Allocation

As stated above, a major problem with Asset Class Allocation is that the major equity classes do not behave differently enough to do an effective job of diversification. Balanced Sector Allocation gets around this by diversifying across low-correlated sectors (Technology, Energy, Financials, Healthcare, etc). This is not a new concept. Just about any portfolio that uses individual stocks diversifies this way, and the strategy can be implemented using either individual stocks or sector-based Exchange Traded Funds (ETFs).

Most Common Supporting Arguments:

Spreading investments across non-correlated sectors does a much better job of diversification than dividing investments by company size or where their headquarters happens to be located.
Individual stocks and ETFs typically have significantly lower expenses than mutual funds.
Sector allocation can be precisely controlled.

My Rebuttal:

If Sector Allocation is implemented with a few individual stocks for each sector, there is a significant amount of company-specific risk added to the portfolio.

Semi-Objective Opinion:

In addition to showing a significant performance improvement over the last 10-20 years, Sector Allocation passes the “this just makes sense” test. Intuitively, a Healthcare stock and an Energy stock will do a better job at diversification than a large-cap Energy stock and small-cap Energy stock. The manager of an actively-managed mutual fund is typically doing sector allocation within a particular Asset Class (e.g. Large Cap Value), but if you own several mutual funds, there is obviously no coordination between the managers.

Tactical Asset Allocation/Tactical Sector Allocation

These strategies are similar, with the difference being that one uses traditional asset classes and the other uses stock sectors. In both cases, the objective is to predict which stock class or area of the market will perform better in the near future, and overweight the portfolio to take advantage of that market segment or segments. The basis for determining which asset class or sector to invest in or stay out of can be based on a computer model, economic indicators, or (more commonly) an advisor’s opinion or gut feel.

Most Common Supporting Arguments (some with questionable accuracy):

The advisor has a track record of picking the winning sectors.
When in a bear market, it’s better to be in bonds, cash, or defensive sectors (e.g. healthcare).
It is possible to time the market, it’s just that most people do it wrong.

My Rebuttal:

There are enough advisors trying new things that, statistically, some will be right on their predictions. When this happens, they get their own radio show. When they’re wrong, you never hear about them.
Unpredictable events or government intervention can make any prediction completely worthless.
Overweighting some sectors and ignoring others adds risk.

Semi-Objective Opinion:

In order to significantly beat the market, you have to take some additional risk, and this strategy does that. When called correctly, this strategy can make huge gains. It can also lose a significant amount of money while everyone else is making money. By picking the right sectors or asset classes at the right time, it is possible to make money in practically any environment. However, similar to flipping a coin and trying to get “heads”, I’m not sure past success is a great predictor of future success.

Buy and Sell Strategies

Buy-and-Hold

A pure buy-and-hold strategy involves buying a high-quality investment such as stocks or a mutual fund, and then holding the investment through highs and lows until either your investment objectives change or you find out the investment is not as high-quality as you thought it was. The rationale is that the overall market goes up over time, and you don’t want to miss a big up day in the market by holding cash.

Most Common Supporting Arguments (some with questionable accuracy):

The majority of market gains occur on a relatively few number of days, so if you miss one of these days, your returns will be significantly less.
“Time in the market” is more important than “timing the market”.
Warren Buffet is a buy-and-hold advocate.

My Rebuttal:

Missing the worst days of the market is far better than catching all of the best days. However, since no timing system exists that misses only the best days or misses only the worst days, both situations are ridiculous and using them as arguments stretches the definition of integrity.
Warren Buffet does not “buy-and-hold” like you and I would, unless you have the resources to buy a company, install the management, hold the management accountable for performance, etc.

When It Works/When It Doesn’t Work:

Buy-and-hold makes money when investments go up, and loses money when they go down. Therefore, it works well during bull markets and works poorly during bear markets. For this strategy to continue to work for the next 30 years like it did the last 30 years, you have to assume that investments will continue to go up like they have during a period of economic growth that was fueled by the Baby Boom generation, an Energy bubble, a Technology bubble, and a Real Estate bubble.

Market Timing (prediction-based)

Market Timing is one of the most loosely-defined terms in the financial industry. There are many advisors who deride market timing, and yet routinely practice market timing themselves. Broadly-defined, market timing is a strategy that makes changes to a portfolio based on predicted market performance. These changes may involve selling all investments and moving to cash, or simply adjusting the percentage of stocks and bonds because of economic conditions or anticipated market behavior. Prediction-based market timing bases decisions on an advisor’s assessment of future conditions. If high-inflation is anticipated, investments that hedge against inflation would be added. If economic contraction is anticipated, an advisor might move to a heavier cash position.

Most Common Supporting Arguments:

By using indicators such as inflation, unemployment, factory usage, etc, it is possible to anticipate which sectors have a higher chance of outperforming in the future.

My Rebuttal:

Economic indicators work when nothing interferes with them, but unexpected events such as government action or national conflict override any statistical probability used for predictions.
Overweighting some sectors and ignoring others adds significant risk to a portfolio.

When It Works/When It Doesn’t Work:

This method is highly dependent on the person or statistical model making the prediction. If the predictions are accurate, this strategy has a good chance of significantly outperforming other methods. If the predictions are wrong, the opposite is true. Because of the large number of advisors who make predictions, a certain number will get it right several times in a row, but statistically this will not indicate any greater likelihood that they will continue to be right in the future. As mentioned above, unanticipated news events or government action will instantly derail most statistical models.

Market Timing (momentum-based)

Momentum-based market timing uses technical indicators (stock charts and current market behavior) to determine whether the market is in a downtrend or an uptrend. Downtrends occur when more people want to sell than want to buy, and uptrends occur when more people want to buy than want to sell. Price movement and trading volume can determine whether there is more buying pressure or more selling pressure at any given time, and the theory behind momentum is that once a trend is in place, it tends to stay in place. For how long? Until it stops.

Most Common Supporting Arguments:

Price movement and trading volume offer strong clues about buying pressure and selling pressure, and whether large institutional traders are buying or selling.
Institutional traders do not establish or eliminate entire positions in a single trade, and typically spread trading over several days or weeks. Therefore, trends tend to stay in place for some period of time once they are established.

My Rebuttal:

This makes a lot of sense to me, so I don’t typically argue against it. However, it has some weak points (see below).
Some advisors can go over-board on technical patterns (head and shoulders, cup and handle, shallow birdbath with a floating stick…I made that one up). These advisors are traders looking for short-term movements. Trends, on the other hand, are determined more by a pattern of higher-highs or lower-lows, and it doesn’t need to be very complicated.

When It Works/When It Doesn’t Work:

There are some key components required for this system to work.

1) The method for determining trends must not be too early or too late. Stocks seldom move in a straight line. They typically make a strong move, and then rest or pullback. Assuming too early that a trend is being established or ending will result in jumping in or out during pullbacks or corrections. Waiting too long or for too many confirmation signals will result in missing a good portion of the trend.

2) Investments must be liquid. You must be able to act when your system tells you to buy or sell.

3) Whether you use Moving Averages, charting, or any other system to determine a trend, the trend will not always hold. Each system will break down under certain conditions, so the objective is to use a system that works under the widest set of conditions and/or breaks down under the narrowest set.

Market Timing (emotion-based)

This is not a strategy that is typically planned for or entered into intentionally, and is the form of market timing most often practiced by those who swear they hate market timing. Many practitioners of this strategy consider themselves to be buy-and-hold investors, but they end up moving to cash when the pain gets too great or the market is too scary. Typically, this happens after a significant loss is already on the books, which actually makes this a form of momentum. The rationale is that if my investments have already lost money, they may continue to lose money. The problem is that if emotion or fear drives the sell decision, then the decision to get back in is typically based on “feeling better”, which almost always happens at a higher price than the sell price.

Most Common Supporting Arguments:

Not too many people are active proponents of this strategy, but a lot of people practice it.

My Rebuttal:

Not much to rebut, other than pointing out that you can’t call yourself a buy-and-hold investor if you move to cash or change your stock allocation when the market gets scary, and no one should use this method as an example to “prove” that all market timing systems are doomed to failure.

When It Works/When It Doesn’t Work:

This strategy seldom works, and is the reason that the vast majority of investors buy when the market is high and sell when the market is low. It doesn’t matter which strategy you use; just about anything is better than basing investment decisions on emotion.

Disclosure (my bias)

I use a Balanced Sector Allocation strategy using low-correlated ETFs, and momentum-based market timing. The objective is to participate as much as possible in uptrends, and avoid as much of the downtrends as possible. This requires a set of rules that makes the decision points unemotional. A Balanced Sector Allocation guarantees participation in the hottest trending sector at any given time, but with a mechanism to get out of a sector when it starts heading back down.

Weak Points:

Because it takes a little while for a downtrend to show itself, sell decisions will never happen right at the top of a trend. The same holds true for uptrends and buy decisions. If the market gets indecisive and swings far enough that it keeps looking like uptrends and downtrends are forming but no follow-through happens, a condition could occur where losses are exaggerated. This would be a very specific and narrow set of conditions, and I have other checks that attempt to minimize this condition, but it still exists.

Jerry Verseput is a Certified Financial Planner and President of Veripax Financial Management, LLC in El Dorado Hills, CA. For more information about Veripax Financial Management’s services and Mr. Verseput’s portfolio management philosophy and techniques, visit http://www.veripax.net

Never has a financial education in investment basics been more important. Since the financial crisis of 2008 it has been difficult to find attractive investment options. The question is: where to invest in 2010 and beyond. In answering that question, this article will start you on your road to a financial education by focusing on the investment basics that few average investors understand.

You have the same basic investment options that a big money manager with a financial education from one of the best universities in the country has. The difference is that he or she has to decide where to invest billions of dollars. The good news is that there are only four basic investment options out there. The bad news is that deciding where to invest in 2010 and beyond is not an easy task. Let’s look at the four options, often referred to as asset classes: safe investments, bonds, stocks, and alternative investments.

SAFE INVESTMENTS are savings products and cash equivalents like: bank CDs, savings accounts, money market securities like U.S. T-bills, and money market mutual funds. These safe investments pay interest, but with interest rates near all-time lows, they don’t pay much. Most safe investments are paying less than 1% a year in interest.

BONDS are long-term interest-paying investments. Today you can make over 5% in interest income a year in bonds and bond funds. This might make them sound attractive, but there’s a catch here: interest rates are presently very low and are likely to go up in the future. When interest rates go up the price or value of bonds will fall. That’s the investment basics of bond investing. It’s called interest rate risk, and it is real.

STOCKS were the investment option of choice for the big money managers in 2009 and early 2010. Looking at the two above investment options you can see why. The big money went into stocks and this sent prices higher. Then, uncertainty returned to the international financial scene, and stock markets fell as a debt crisis in Europe took center stage. If stocks continue to fall, deciding where to invest in 2010 and beyond will get even tougher, with only one basic investment option left to consider.

ALTERNATIVE INVESTMENTS are the final frontier, and they are increasing getting attention from big money managers who manage pension funds and other large pools of money. Included in this asset class: gold, silver, other commodities, real estate, and natural resources like oil and natural gas. Virtually any other investment, or security that is traded on an organized exchange (other than the first three basic investment options discussed) could be classified as an alternative investment.

Given the state of today’s financial markets, you can see why deciding where to invest in 2010 and beyond is a challenge. One more thing should be crystal clear. Without a financial education the cards are stacked against you. The best way for most people to invest in all of the above asset classes is through mutual funds. Invest in all four of the basic investment options with funds; and in times of high uncertainty like today… diversify, diversify, diversify.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.

Investment strategy is a little like religion in the financial advisor community. There are few situations that would get emotions boiling, fists flying, and require police action faster than putting a buy-and-hold advocate and a market timing zealot in a room and asking them to resolve their differences. The truth is that most strategies work some of the time, a few work most of the time, and only Bernie Madoff figured out how to make one work all the time, right up until he got caught. Investment strategies have two major parts: 1) what investments to buy, and 2) when to buy and sell. Because I’m an investment advisor and human, I have some built-in biases, but following is an attempt to objectively look at several common strategies with a minimum of sarcasm.

Allocation Strategies (what to buy)

Strategic Asset Class Allocation

Traditional asset classes include stocks, bonds and cash. These classes are then divided into subcategories based on geographic location (U.S., developed foreign countries, emerging markets), company size (small-cap, mid-cap, large-cap), and bond style (treasuries, mortgage-backed, high-yield, etc). Real estate, commodities, and hedge funds are sometimes added as additional asset classes. The idea behind Strategic Asset Class Allocation is to come up with a portfolio of non-correlated assets that meets an acceptable risk profile, and then stick with that allocation as the market goes up and down. The portfolio is typically rebalanced periodically to maintain the percentages of each asset class, but mostly the portfolio is left alone.

Most Common Supporting Arguments:

Easy to set up with mutual funds, which are typically aligned with asset classes.
Mutual funds provide diversification by owning many stocks with professional management.

My Rebuttal:

Many mutual fund managers tend to favor certain stock sectors at the same time, making the portfolio less diversified than it appears (e.g. overweighted in Energy or Financials).
Most stock asset classes are highly correlated when looked at over the last decade.

Semi-Objective Opinion:

Dividing the stock world by geographic location (U.S. & foreign) or by company size no longer results in a diversified portfolio. This has been a long-term trend developing and getting worse over the last 20 or so years. As an intuitive example, when oil drops from $150/barrel to $35/barrel, all energy companies get hurt, whether they are large or small, based in the U.S. or based in Brazil. However, it is true that an asset class allocation model is easy to implement with mutual funds, and the addition of non-correlated alternative investments can improve overall diversification.

Balanced Sector Allocation

As stated above, a major problem with Asset Class Allocation is that the major equity classes do not behave differently enough to do an effective job of diversification. Balanced Sector Allocation gets around this by diversifying across low-correlated sectors (Technology, Energy, Financials, Healthcare, etc). This is not a new concept. Just about any portfolio that uses individual stocks diversifies this way, and the strategy can be implemented using either individual stocks or sector-based Exchange Traded Funds (ETFs).

Most Common Supporting Arguments:

Spreading investments across non-correlated sectors does a much better job of diversification than dividing investments by company size or where their headquarters happens to be located.
Individual stocks and ETFs typically have significantly lower expenses than mutual funds.
Sector allocation can be precisely controlled.

My Rebuttal:

If Sector Allocation is implemented with a few individual stocks for each sector, there is a significant amount of company-specific risk added to the portfolio.

Semi-Objective Opinion:

In addition to showing a significant performance improvement over the last 10-20 years, Sector Allocation passes the “this just makes sense” test. Intuitively, a Healthcare stock and an Energy stock will do a better job at diversification than a large-cap Energy stock and small-cap Energy stock. The manager of an actively-managed mutual fund is typically doing sector allocation within a particular Asset Class (e.g. Large Cap Value), but if you own several mutual funds, there is obviously no coordination between the managers.

Tactical Asset Allocation/Tactical Sector Allocation

These strategies are similar, with the difference being that one uses traditional asset classes and the other uses stock sectors. In both cases, the objective is to predict which stock class or area of the market will perform better in the near future, and overweight the portfolio to take advantage of that market segment or segments. The basis for determining which asset class or sector to invest in or stay out of can be based on a computer model, economic indicators, or (more commonly) an advisor’s opinion or gut feel.

Most Common Supporting Arguments (some with questionable accuracy):

The advisor has a track record of picking the winning sectors.
When in a bear market, it’s better to be in bonds, cash, or defensive sectors (e.g. healthcare).
It is possible to time the market, it’s just that most people do it wrong.

My Rebuttal:

There are enough advisors trying new things that, statistically, some will be right on their predictions. When this happens, they get their own radio show. When they’re wrong, you never hear about them.
Unpredictable events or government intervention can make any prediction completely worthless.
Overweighting some sectors and ignoring others adds risk.

Semi-Objective Opinion:

In order to significantly beat the market, you have to take some additional risk, and this strategy does that. When called correctly, this strategy can make huge gains. It can also lose a significant amount of money while everyone else is making money. By picking the right sectors or asset classes at the right time, it is possible to make money in practically any environment. However, similar to flipping a coin and trying to get “heads”, I’m not sure past success is a great predictor of future success.

Buy and Sell Strategies

Buy-and-Hold

A pure buy-and-hold strategy involves buying a high-quality investment such as stocks or a mutual fund, and then holding the investment through highs and lows until either your investment objectives change or you find out the investment is not as high-quality as you thought it was. The rationale is that the overall market goes up over time, and you don’t want to miss a big up day in the market by holding cash.

Most Common Supporting Arguments (some with questionable accuracy):

The majority of market gains occur on a relatively few number of days, so if you miss one of these days, your returns will be significantly less.
“Time in the market” is more important than “timing the market”.
Warren Buffet is a buy-and-hold advocate.

My Rebuttal:

Missing the worst days of the market is far better than catching all of the best days. However, since no timing system exists that misses only the best days or misses only the worst days, both situations are ridiculous and using them as arguments stretches the definition of integrity.
Warren Buffet does not “buy-and-hold” like you and I would, unless you have the resources to buy a company, install the management, hold the management accountable for performance, etc.

When It Works/When It Doesn’t Work:

Buy-and-hold makes money when investments go up, and loses money when they go down. Therefore, it works well during bull markets and works poorly during bear markets. For this strategy to continue to work for the next 30 years like it did the last 30 years, you have to assume that investments will continue to go up like they have during a period of economic growth that was fueled by the Baby Boom generation, an Energy bubble, a Technology bubble, and a Real Estate bubble.

Market Timing (prediction-based)

Market Timing is one of the most loosely-defined terms in the financial industry. There are many advisors who deride market timing, and yet routinely practice market timing themselves. Broadly-defined, market timing is a strategy that makes changes to a portfolio based on predicted market performance. These changes may involve selling all investments and moving to cash, or simply adjusting the percentage of stocks and bonds because of economic conditions or anticipated market behavior. Prediction-based market timing bases decisions on an advisor’s assessment of future conditions. If high-inflation is anticipated, investments that hedge against inflation would be added. If economic contraction is anticipated, an advisor might move to a heavier cash position.

Most Common Supporting Arguments:

By using indicators such as inflation, unemployment, factory usage, etc, it is possible to anticipate which sectors have a higher chance of outperforming in the future.

My Rebuttal:

Economic indicators work when nothing interferes with them, but unexpected events such as government action or national conflict override any statistical probability used for predictions.
Overweighting some sectors and ignoring others adds significant risk to a portfolio.

When It Works/When It Doesn’t Work:

This method is highly dependent on the person or statistical model making the prediction. If the predictions are accurate, this strategy has a good chance of significantly outperforming other methods. If the predictions are wrong, the opposite is true. Because of the large number of advisors who make predictions, a certain number will get it right several times in a row, but statistically this will not indicate any greater likelihood that they will continue to be right in the future. As mentioned above, unanticipated news events or government action will instantly derail most statistical models.

Market Timing (momentum-based)

Momentum-based market timing uses technical indicators (stock charts and current market behavior) to determine whether the market is in a downtrend or an uptrend. Downtrends occur when more people want to sell than want to buy, and uptrends occur when more people want to buy than want to sell. Price movement and trading volume can determine whether there is more buying pressure or more selling pressure at any given time, and the theory behind momentum is that once a trend is in place, it tends to stay in place. For how long? Until it stops.

Most Common Supporting Arguments:

Price movement and trading volume offer strong clues about buying pressure and selling pressure, and whether large institutional traders are buying or selling.
Institutional traders do not establish or eliminate entire positions in a single trade, and typically spread trading over several days or weeks. Therefore, trends tend to stay in place for some period of time once they are established.

My Rebuttal:

This makes a lot of sense to me, so I don’t typically argue against it. However, it has some weak points (see below).
Some advisors can go over-board on technical patterns (head and shoulders, cup and handle, shallow birdbath with a floating stick…I made that one up). These advisors are traders looking for short-term movements. Trends, on the other hand, are determined more by a pattern of higher-highs or lower-lows, and it doesn’t need to be very complicated.

When It Works/When It Doesn’t Work:

There are some key components required for this system to work.

1) The method for determining trends must not be too early or too late. Stocks seldom move in a straight line. They typically make a strong move, and then rest or pullback. Assuming too early that a trend is being established or ending will result in jumping in or out during pullbacks or corrections. Waiting too long or for too many confirmation signals will result in missing a good portion of the trend.

2) Investments must be liquid. You must be able to act when your system tells you to buy or sell.

3) Whether you use Moving Averages, charting, or any other system to determine a trend, the trend will not always hold. Each system will break down under certain conditions, so the objective is to use a system that works under the widest set of conditions and/or breaks down under the narrowest set.

Market Timing (emotion-based)

This is not a strategy that is typically planned for or entered into intentionally, and is the form of market timing most often practiced by those who swear they hate market timing. Many practitioners of this strategy consider themselves to be buy-and-hold investors, but they end up moving to cash when the pain gets too great or the market is too scary. Typically, this happens after a significant loss is already on the books, which actually makes this a form of momentum. The rationale is that if my investments have already lost money, they may continue to lose money. The problem is that if emotion or fear drives the sell decision, then the decision to get back in is typically based on “feeling better”, which almost always happens at a higher price than the sell price.

Most Common Supporting Arguments:

Not too many people are active proponents of this strategy, but a lot of people practice it.

My Rebuttal:

Not much to rebut, other than pointing out that you can’t call yourself a buy-and-hold investor if you move to cash or change your stock allocation when the market gets scary, and no one should use this method as an example to “prove” that all market timing systems are doomed to failure.

When It Works/When It Doesn’t Work:

This strategy seldom works, and is the reason that the vast majority of investors buy when the market is high and sell when the market is low. It doesn’t matter which strategy you use; just about anything is better than basing investment decisions on emotion.

Disclosure (my bias)

I use a Balanced Sector Allocation strategy using low-correlated ETFs, and momentum-based market timing. The objective is to participate as much as possible in uptrends, and avoid as much of the downtrends as possible. This requires a set of rules that makes the decision points unemotional. A Balanced Sector Allocation guarantees participation in the hottest trending sector at any given time, but with a mechanism to get out of a sector when it starts heading back down.

Weak Points:

Because it takes a little while for a downtrend to show itself, sell decisions will never happen right at the top of a trend. The same holds true for uptrends and buy decisions. If the market gets indecisive and swings far enough that it keeps looking like uptrends and downtrends are forming but no follow-through happens, a condition could occur where losses are exaggerated. This would be a very specific and narrow set of conditions, and I have other checks that attempt to minimize this condition, but it still exists.

Jerry Verseput is a Certified Financial Planner and President of Veripax Financial Management, LLC in El Dorado Hills, CA. For more information about Veripax Financial Management’s services and Mr. Verseput’s portfolio management philosophy and techniques, visit http://www.veripax.net

Never has a financial education in investment basics been more important. Since the financial crisis of 2008 it has been difficult to find attractive investment options. The question is: where to invest in 2010 and beyond. In answering that question, this article will start you on your road to a financial education by focusing on the investment basics that few average investors understand.

You have the same basic investment options that a big money manager with a financial education from one of the best universities in the country has. The difference is that he or she has to decide where to invest billions of dollars. The good news is that there are only four basic investment options out there. The bad news is that deciding where to invest in 2010 and beyond is not an easy task. Let’s look at the four options, often referred to as asset classes: safe investments, bonds, stocks, and alternative investments.

SAFE INVESTMENTS are savings products and cash equivalents like: bank CDs, savings accounts, money market securities like U.S. T-bills, and money market mutual funds. These safe investments pay interest, but with interest rates near all-time lows, they don’t pay much. Most safe investments are paying less than 1% a year in interest.

BONDS are long-term interest-paying investments. Today you can make over 5% in interest income a year in bonds and bond funds. This might make them sound attractive, but there’s a catch here: interest rates are presently very low and are likely to go up in the future. When interest rates go up the price or value of bonds will fall. That’s the investment basics of bond investing. It’s called interest rate risk, and it is real.

STOCKS were the investment option of choice for the big money managers in 2009 and early 2010. Looking at the two above investment options you can see why. The big money went into stocks and this sent prices higher. Then, uncertainty returned to the international financial scene, and stock markets fell as a debt crisis in Europe took center stage. If stocks continue to fall, deciding where to invest in 2010 and beyond will get even tougher, with only one basic investment option left to consider.

ALTERNATIVE INVESTMENTS are the final frontier, and they are increasing getting attention from big money managers who manage pension funds and other large pools of money. Included in this asset class: gold, silver, other commodities, real estate, and natural resources like oil and natural gas. Virtually any other investment, or security that is traded on an organized exchange (other than the first three basic investment options discussed) could be classified as an alternative investment.

Given the state of today’s financial markets, you can see why deciding where to invest in 2010 and beyond is a challenge. One more thing should be crystal clear. Without a financial education the cards are stacked against you. The best way for most people to invest in all of the above asset classes is through mutual funds. Invest in all four of the basic investment options with funds; and in times of high uncertainty like today… diversify, diversify, diversify.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.

At first glance the best investment strategy in late 2007 was to sell every stock investment you held; and the best strategy in early 2009 was to put 100% of your investment portfolio into stocks. The result would have been no investment losses in 2008 and big profits in 2009 and early 2010. Your odds of doing this without a crystal ball were about zero. But with a simple and sound investment strategy you can make the best of any market situation.

The best investment strategy is not a formula that tells you when to dump one investment asset and when to buy and hold another on a short term basis. Trying to time the markets is speculation and beyond the scope of sensible investing for the average investor. What you need is a longer-term sound plan that only requires minor adjustments over time. Let’s look at the key elements to putting together your best investment strategy for long term profits with less risk.

You must take risk into consideration when judging the results of, or putting together any investment strategy. Our crystal ball scenario went from an asset allocation of zero for stock investment to 100%. Not only is this strategy very risky, it is also short-sighted. It begs the question: what do you do in 2010 and beyond? When do you cut your stock investment and run, and where do you go next? Overstay your welcome and your stock investment profits could evaporate in a few months, because the truth of the matter is that you have no long term investment strategy at all.

As an average investor, taking risk without a plan is not the way to play the investment game. It’s your money and it’s important to you. View putting together your best investment strategy like this: you want to earn in the neighborhood of 10% a year over the long term taking only a moderate amount of risk. This means that you will likely never make 50% or more in a year because you have no crystal ball. It also means that you have a real good chance of avoiding big losses that can upset your future financial plans (like a secure retirement) as well.

Every good investment strategy focuses on asset allocation. This means that you allocate your money by diversifying and spreading it across all four, or at least three of the asset classes. Starting with the safest these are: cash equivalents, bonds, stocks, and perhaps other investments called alternative investments (like real estate, foreign or international securities, and gold). The simplest and best way for you to do this is through mutual funds that invest in each of these areas: money market, bond, stock, and specialty funds, respectively.

For example, if you want relatively low risk and simplicity you might allocate 1/3 each to a money market fund, a bond fund, and a stock fund. At the beginning of each year you review your investment portfolio to make sure your asset allocation is on track. If, for example, your stock investment has grown from 33% to 40% of your to total investment value, move money from your stock fund to the other two to make them all equal again. By doing this you are taking money off the table from your riskier stock investment when the market gets pricey, and adding money to stocks when prices are lower. In this way you have lower risk, no need for a crystal ball, and you know exactly what you are going to do each and every new year.

If you feel the need to keep it simple, do so as in our example above. If you want to take the best investment strategy to the next level include international stock funds and specialty equity funds like real estate and gold funds. The added advantage here is that in the past these alternative investments have proven to have the potential to offset losses when stock prices in general are falling. In short, they offer even more diversification to your asset allocation.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.

You can learn to invest in 2010 or you can invest with the crowd. Invest like most folks and you might not be a happy camper. Here’s why now is the time to learn to invest. Consider what follows to be your personal financial stimulus package for getting up to speed and on your way to financial success… with a financial education.

There are two basic reasons you need to learn to invest in 2010. First, the gravy train is over. Your employer and your government have their own problems and can not afford to guarantee your financial future. Second, it will not be easy to make money investing in the future. Uncle Sam is up to his eyeballs in debt and major corporations are fighting to grow sales and profits in a new competitive world economy. The future of Social Security is suspect, and traditional pension plans are going by the wayside.

Today it’s a matter of: learn to invest your own money in a contributory retirement plan or an IRA if you work for a living. If you’re older, it’s learn to invest what money you have stashed away or suffer the consequences. In the world of investing money today there is no longer a good safe place to hide and ignore the economy and the markets, because interest rates are near all-time lows. That’s a sword that swings both ways. If you seek the safety of fixed investments like CDs you earn little interest. Try to make money investing in riskier investments like stocks, bonds and real estate and you’re asking for trouble without a financial education.

Our government has been holding interest rates down to stimulate a lackluster economy. Sooner or later rates will rise and inflation will likely follow. Will future higher interest rates give the safety-minded a good safe place to park money? Not if inflation rises to offset the gain in interest rates. Will stocks and real estate be good investments? Only if the economy improves and people can find jobs and pay their bills. And what about bonds?

Bonds will be a guaranteed loser when interest rates and inflation take off. And that’s a problem for the millions of investors who hold bond funds, including those who fled other investments in search of the relative safety and higher interest income offered (under normal circumstances) by bond investments. The problem with the higher interest income from bonds is that it is FIXED for the life of the bond. As the interest rate goes up for new bond issues, the value of existing bond investments will fall as they become less attractive.

Now, do you really want to face the above scenario without a financial education? Even if you have a financial planner? If you plan to invest in 2010 and beyond do yourself a favor and learn to invest, starting with investment basics. Once you understand the investment basics of stocks, bonds, mutual funds, real estate and other alternative investments you’re ready to tackle the investing aspect. Your ultimate goal: putting together a sound investment strategy, with asset allocation and proven investing tools like balance & rebalance and dollar cost averaging working for you.

Without a sound investment strategy you are investing with the crowd, uninformed. The crowd did not make money investing last decade. They lost money and are likely in for more of the same in the future with the threats of higher interest rates and inflation lurking in the shadows. Be different, and get yourself and your level of financial education up to speed!

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals.

Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.