Investment Articles

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.

For more great tips and expert advice on investing for a bright and secure future, please visit us at http://www.elementaryinvesting.com

Some ideas on Risk and investing

A friend of mine last week asked about buying some ETF’s. He knew I spent time buying stocks, but as he said, ” I don’t want anything exciting”. His view was buying ETF’s was less risky, and therefore better aligned with his investing goals and interests. I can’t argue with his thinking, but I am not sure it would suit my investing goals and interests. We are two different people.

Risk is often the specific factor that people will cite as to why they will not buy individual stocks but instead look for other avenues for saving and investing. The attraction of vehicles like ETF’s and mutual funds fulfill their need to be invested, but avoids them having to spend the time and worry of picking stocks. The diversification achieved through these vehicles creates the illusion of less risk, and in a steady market that is generally true.

I checked out iGoogle for a definition and it talks about risk as either a source of danger as well as the probability of a negative outcome. It also has two interesting examples that identify a risky investment or losing money. For the purposes specific to investing I would like to call it a measure that specifies the chance of an outcome not matching your expectations. If there is an 80% risk of rain bring an umbrella! If it is just 10% then you might be fine. The difference between investing and rain forecasts is you can have 0% chance of rain, but never 0% investment risk.

An investor gets paid for taking a risk with the general rule being, the more risk you take, the more money you make. The economy is based on this simple concept. If someone else uses your money they pay rent, or interest. The likelihood of you getting your money back determines how much interest you charge. This exact same concept applies to buying stock. If the risk is higher you expect, and demand a higher return for taking that risk.

Let’s start by examining a government Savings Bond. I did some poking around and found one that is paying a huge %0.65. That means a $100 bond held for 1 year pays you 65 cents. With government bonds there is almost no risk. You will absolutely get paid. This particular bond is also flexible. Part way through the year you can get your cash back. No interest, but, no problem either since you are not locked in. For a government bond you have not accepted much risk, so the money you are paid is tiny.

The better question to ask is “did you make money?” With an inflation rate at about 2% you need to make $2 on your hundred-dollar investment, just to stay even. In this case with only 65 cents you actually lost wealth since you can buy less with the money you took out after a year. You actually traded financial risk for inflation risk and lost.

Currency risk is an added factor to consider. Let’s consider an American that buys a Canadian Bond in February 2009 and now it is February 2011. You may be surprised to find you have a bonus gain on the exchange rate. In 2009 the Canadian dollar was trading at $0.80 cents against the American dollar. As of February 2011 they are close to parity. In 24 months you are up 20% due to the exchange rate. However, guess what happens to the Canadian buying an American bond. That is a 20% loss.

As a Canadian investor I was enjoying a subscription to an American investment newsletter a few years back and the authors were great. Every stock they highlighted went up at least 10%. Unfortunately because the Canadian dollar had gone up the value of my account had actually gone down. That was learning currently risk the hard-way.

Taking a look at the stock market, I started by using the stock filter at theglobeandmail.com and on the New York stock market I found 40 companies with a yield of 0.60%. Very close to the savings bond rate. I looked at Eldorado Gold with shares closing at $16.81 and an annual dividend of 10 cents per share. Over the last week this stock has been had a low of about $15.90 and a high of $17.00. If you bought it at the market low you would still be getting the 10 Cent dividends but you have only paid $15.90 per share. That is a slightly better yield of 0.629% so a few days can make a difference. For this stock the 52 Week high was $20.23. If you bought it then the yield was only 0.49%.

As I mentioned with the Savings Bond I used as an example you can get your cash out at any time. This is also true of a stock like Eldorado Gold, but, you may be at the market high of $20.23, or the 52-week market low of 11.39. As an example if you could buy partial shares, let’s say you bought $100 dollars of Eldorado at $16.81 for a holding of 5.949 shares of Eldorado and you sold them at the high of $20.23. That is a sell price of $120.34 or a 20% gain in addition to the 10-cent dividend per share. Clearly you are a genius in the markets. The bad news is you may have needed the money quickly and sold for the market low of $11.29. Now your $100 is only $67.16. Not good.

So the decision to make is, if you can see into the future, are you satisfied with the potential to make a 20% gain with the risk of a 35% loss. You need to follow some rules to limit your losses. Here are some of my best ideas.

1) Be faster to sell than to buy. Back to risk. If the outcome is not matching your expectation don’t be the last guy holding the bag.

2) Diversification. Do not to put all you eggs in one basket. Understand how to invest in different sectors, different types of investments, and for different time frames. But rule #1 still applies. Being diversified does not mean holding a lot of different losers.

3) Diversify your strategies. This includes how to pick stocks, working with options in a variety of ways and also learning about fundamental and technical analysis. You can also do a lot of reading on the difference between growth and income strategies.

4) Get advice. Along with get advice, also be aware of the source. Advice can come from a financial advisor a subscription newsletter or that well dressed guy on the elevator. Do you know their history of success? Are they getting paid for the advice they give you and does that payment affect the advice they give?

5) Have a Plan – Trade the plan. I prefer the notion that you buy a company to go on a journey of discovery. The discovery may be good news, or bad news, but if you know why you started, you will know when the trip is over. A trading plan mitigates risk because if the reason for the journey changes or the navigator gets lost, you can get out of the car.

Try this for yourself. Use the above rules and apply them to each position you currently hold. Why did you buy it and on who’s advice? How long has it been since you checked to see if the advice still applies? What was the purpose of the journey and has the company arrived there yet? For both the market sectors, and strategies you have used are you diversified? You now have a choice. If you don’t have the answers to these questions, then perhaps you should consider some savings bonds. Your portfolio is suffering the one other risk not discussed here – unknown risk. That type of risk is very hard to manage.

Greg is a retail investor with over 25 years of sketchy success in the markets. As penance for not following any rules for most of his investing life he now looks for and writes about simple ways the self directed investor could have more success that he did at Stock Trading Options

Websites that features free fortunes online hold great appeal to certain types of consumers. These readers enjoy learning more about astrology, holistic remedies, relationship issues, and personal growth. For people who appreciate New Age techniques, finding free fortunes online can result in great loyalty to the website and its writers. When a reader bookmarks a website and returns frequently for more updates, they become an integral part of a website’s success. Loyalty to the website helps the site grow and thrive – word-of-mouth advertising is also another benefit of providing a worthwhile service by posting free fortunes online.

If you’re looking for ways to invest in a niche industry on the World Wide Web, you may find that astrology websites are viable business opportunities. While these sites don’t profit from giving away fortunes, they often make money through advertising, the sale of in-depth reports, etc. Clever Internet entrepreneurs give away a little information to entice the reader, and then charge for similar information that provides even more exciting details about the future. Often, people who run websites will seek out partnerships – this lowers their own investment risk, and also spreads the workload between two or more people.

To see if a partnership will really work out, learn more about investing and finance. You’ll need to acquire some knowledge of search engine optimization, web marketing, and social media promotion. Great content is really the most important component of a thriving fortune website – since you don’t sell a physical product, the words you post to your site will make or break the business venture. Finding great content and growing the website can be as easy as finding the perfect freelance writer or astrologer.

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If you have been looking for a safe way to invest, then you are going to want to think about what makes an investment risky. For the most part, a risky investment takes place when an investor puts money into a company, business venture, or debt that may not pay off. This often times happens when the investor has either not done the research or has been tricked into believing that an investment is safer than it actually is. If you are just getting started as an investor, it’s going to be up to you to make sure that you know where you are putting your money and how much you will be getting back. A good way to invest in these instances is with a stand by letter of credit.

For those who are just learning about investments, the stand by letter of credit may be a new concept. These letters are issued when a buyer makes a purchase but is unable to pay up front. Instead, the bank will issue a letter that says that the sum must be paid by a certain date. There is always an interest on the payment that can be anywhere from one to eight percent. If the buyer does not pay by the date on the letter, then the provider of the goods or services may cash the letter. Most letters are good for about one year.

If you are thinking now about investing in standby letters of credit, you will appreciate the relative safety of the investment. These letters are always backed by the bank, meaning that you can be sure that you will not lose your money. At the very worst, you may end up getting the same amount of money that you invested. In other words, you would break even. In most cases, however, the investor can accrue a substantial amount by investing in these letters. They are popular investments because of the safety of the investment, though many investors who prefer larger risks for high rewards will stay away from letters.

If you are looking for a safe way to begin investing, you may want to give standby letters of credit a chance. You will feel secure knowing that your money is backed up by a bank. You will also feel good knowing that chances are that you will accrue some value from the investment. You will able to get a good start investing your money without risking too much.

For more information on investing in investment opportunities usually or normally not found in the marketplace, click here!

Sean Johnson is an Investment Advisor for http://www.inquest.biz an Investment Referral Service for investors requesting information on specific investments.

It is commonly said and believed that there are countries in which investors can invest and those in which they must not. In fact, many investors today are paranoid about investing in some countries. And, nothing in this whole wide world will make them invest in some countries outside their own. Unfortunately, the investment environments are getting more tricky, dangerous and competitive that investors must cast their investment nets wider ashore if they are to remain liquid and not go hungry ultimately. This is more so against the background of the global financial crisis that has proved that no country is immune to financial and investment collapse irrespective of level of development.

The opinion in conservative investment environments before is that some nations are nearly immune to crash due to their matured investment culture, transparency, honesty of stakeholders and strict regulatory regimes that guarantee returns on investment. Against these backdrops, investing in Africa, Asia and Latin America for instance will not be readily embraced given the general investment climates and level of policy frameworks in those environments. Unfortunately, data and experiences now suggest that these are emerging markets and they hold huge prospects for future of investments and this is regardless of which investments are in question. Cases of Brazil, India and China have somewhat proved this point.

The issue to be concerned with now is that; if these so called ‘investment risky’ business jurisdictions hold huge prospects for daring and real investors, how are they to invest profitably in these investments? Below are some things investors must ensure when investing in any country/environment regardless of the levels of development of those country/state/city and even village.

1. The investor must study the place of investment critically. The study is not just about professional feasibility studies that will be full of jargon that are too familiar to failure. The study should be both professional and rudimentary and investors and/or their representatives must go to the streets to ask/study ordinary people about dynamics of investing in their countries. Critical stakeholders in government, industry and politics must be engaged even informally to get their views and opinions candidly on the investment climate predominant in such domains.

2. Investors must free themselves of stereotypes and biases about the place of investment. A lot of prejudices and stereotypes have been spread in the investment sectors about some places and these will not make some investors invest in such places. The good news however is that most of these prejudices and stereotypes are not true in most instances.

3. Investors must be patient and calculative when they are about to invest in new places. Many rush into investing in new places due to bandwagon effects. Many rush into new investment jurisdictions and portfolios because that is the ‘in thing’ and ‘new deal in town’. Not because they have weighed the trajectories which include professional details and even socio-cultural factors and other informal forces.

4. After investing, investors must also be patient to watch their investment perform before they pull out and label the investment as bad one. Not that they will be so much in a hurry to sell off the investment after a little shock or failure.

With the above issues, profitable investment is most likely in any environment. This include both old and new as well as developed and undeveloped terrains.

Olayinka Akanle is a Researcher, Lecturer and development expert. Available at yakanle@yahoo.com

The Trustee Act 2000 makes it clear that trustees are required to obtain and consider investment advice from a person they consider qualified to give it. This makes a great deal of sense but how does it work in practice?

The first job of the Investment Adviser is to help the trustees to prepare an Investment Policy Statement. This statement is intended to clearly identify what the proposed investment is required to achieve, over what time period, and how performance will be assessed in the future. A typical Investment Policy Statement will include the following:-

The overall level of return expected and minimum yield required
The income or capital requirements
The nature of timing of any liabilities
The liquidity requirement, including dates of planned expenditure
The marketability of the investments – important if income needs to be raised quickly
The time horizon of the trust – less than five years or long term
The time horizon over which performance will be assessed
The residence and tax status of the trust and the beneficiaries
Any socially responsible investment constraints
Other tax and legal constraints

Once agreed with the trustees, the statement will help the adviser in devising a strategy to generate a sufficient return to fulfill these objectives over the short, medium and long term.

Investment Risk

In an ideal world, trustees would expect a competitive and rising income with no risk to capital. In the real world however, interest from deposit accounts will not even match inflation. This means that the assets of very many trusts are guaranteed to go down in real terms. To protect trust assets against inflation and/or to generate a reasonable income in the current climate, some investment risk has to be accepted. Whilst cash that will be needed in the next year or two will have to be kept on deposit, money not earmarked for short term expenditure should be invested in a professionally designed portfolio of assets such as equities, gilts, corporate bonds and commercial property. The investment adviser will be able to suggest a portfolio to fulfill the objectives within the Investment Policy Statement and to explain the risks involved. It is for the trustees to decide if that level of risk is acceptable or whether the stated growth or income requirements were over optimistic. A degree of compromise is often required before an investment portfolio is finally agreed upon.

Investment Management

The size of the required investment largely dictates how the portfolio will be managed. This is because a major factor in reducing investment risk is diversification. As an example, investing in a portfolio of 40 or 50 shares carries much less risk than investing in just one or two. This means that smaller amounts might be directed towards collective investment such as unit trusts or investment trusts which can provide the required spread. There is often a combination of the two approaches with UK investments being directly held and foreign investments being in collectives. This is because the UK portion of a portfolio is invariable larger than the amount invested in (say) the USA or Europe.

Designing a suitable portfolio is only the start of the process. As different assets grow at different rates, the risk profile will move away from where it was originally set. For example, a typical portfolio might be invested 40% in equities with the balance in cash and fixed interest securities. If stock markets have a good year, the equity content might grow to 50% or more and the risk profile will have increased. A process needs to be established to regularly monitor and adjust the risk profile of the portfolio. The day to day management of larger portfolios, including rebalancing to maintain the original risk profile, is often passed to a discretionary fund management company. The role of the nominated Investment Adviser then becomes one of helping the trustees to evaluate the performance of the Investment Manager against the benchmarks agreed in the Investment Policy Statement as required by the Trustee Act 2000.

Independent Advice

To obtain impartial advice on the entire investment market, trustees should deal with an Independent Financial Adviser. There will than be no concerns about their recommendations being tainted because of access to a limited range of products or funds. Similarly, an Independent Financial Adviser will have no compunction about replacing an under-performing fund manager in the future – whereas an adviser working for the same company might not be in a position to do so.

Mike Wilson is a director of Scottsdale Consulting Ltd, having entered Financial Services in 1985 he specialises in pensions and investments, as well as expat services. He has a wealth of experience advising clients and in training other financial advisers.

Here is a list of the main types of investment risk, along with a description of the risk. By using this information you can be better informed about some of the risks involved when you invest your hard earned money. Some of them may surprise you and you may never even have considered them a risk.

The types of investment risks are:

Inflation Risk

• This would expose you to the risk that the spending power of an asset will be eroded by inflation over time, with inflation being on everybody’s mind at the minute its a very important factor not to omit from your planning.

Interest Rate Risk

• The risk that interest rates will fluctuate, its important to think beyond the current rates on offer and get a feel for how you expect rates to change over the period of your investment.

Shortfall Risk

• The risk that investments may not achieve their anticipated returns, remembering that investments can fall in value too. You could think about how you would manage if there was a shortfall.

Market/Systematic Risk

• The risk that the value of the stock market may fall, as mentioned above but here you might like to think of leaving the investment to overcome the shortfall and this can work well if you have time on your side.

Provider Risk

• The risk that the provider may not be able to pay back the money invested, something that was not really considered in too much detail a few years ago. But, with recent events this is very much on people’s minds, so have a look out for financial strength and feel comfortable about the provider.

Taxation Risk

• The risk that the Government may alter taxation legislation thereby having a detrimental effect on your assets. Increased taxation or the loss of tax breaks could adversely affect your returns, most are out of your control but make the most of any tax breaks while you can to take advantage and improve your returns.

Diversification Risk

• The risk that too much is held in one asset or asset class. A very important part of investment planning, don’t have all your eggs in the one basket, spread your risk.

Of course discussing these with a qualified adviser can help you understand them further, and then you can be in an informed position before you go ahead and consider taking risk.

http://impartialmoney.blogspot.com/

As part of my litigation practice, I represent investors harmed by the misconduct of their stockbroker, investment advisor, or financial planner. Some of these cases can be brought in court; most are required to be arbitrated before the Financial Industry Regulatory Authority (FINRA). In either venue, however, many of these cases have common themes, which teach important lessons about investing.

Wall Street Doesn’t Have a Crystal Ball

The financial industry spends millions of dollars convincing the investing public that it can predict with some accuracy the future price movements stocks. We all know that predicting the future is impossible, but when Wall Street breaks out its technical charts, graphs, and its highly paid analysts discussing “P/E ratios,” “EBIDTA,” “relative strength,” “quantitative analysis,” “momentum plays,” “valuation,” “trading strategies,” “market timing” and the like, it sounds as if they have discovered a window on the future. But the reality is that price movements of stocks are unpredictable and random because stock prices react to news, which by definition is unpredictable and random. The resignation or indictment of a CEO, a product recall, an “earnings disappointment,” the failure of a new product to generate significant sales, or an international crisis all will affect stock prices. These types of events are rarely anticipated and occur randomly. Therefore, contrary to what Wall Street’s very effective marketing would have you believe, those who “beat the market” in the short term do so because of luck, not skill. Academic Research has shown that there is a very low probability — less than 3% — that any one broker, money manager, or investment newsletter can pick investments that consistently outperform benchmark market averages (such as the S&P 500) over long periods of time (10 years or more). Those odds are about the same as the odds of throwing “snake eyes” at a craps table in Vegas. What is the probability that with the money you have to invest today, you can identify the lucky broker, financial advisor, or mutual fund who will consistently roll snake eyes and beat the market for the next 10 or 20 years? Very slight.

Lesson learned: Avoid actively managed investments; stock picking and market timing are losers games.

One Size Doesn’t Fit All.

When you shop for clothes or shoes, there are a variety of sizes and styles because each of us is physically different, and each of us has our own fashion style (or lack of style). Investing choices should also be “tailored” to fit you as an individual. Just as a tailor or shoe salesman measures you before determining what clothes or shoes will fit, a conscientious advisor will similarly “measure” you to determine what types of investments are suitable for you, and how those investments should be allocated in your portfolio to meet your needs, goals and risk tolerance. The advisor should make inquiries to determine your investing time horizon, short and long term liquidity needs, income and savings rate, net worth, tax bracket, and investment experience and knowledge.

Most importantly, the advisor needs to understand what level of risk gives you discomfort. Can you tolerate a decline of 20% in your portfolio without panicking, or do you need to construct a portfolio which, based on historical data, is likely to fluctuate up or down only 5% per year? As a general rule of thumb, more aggressive, risk tolerant investors should be more heavily weighted in small capitalization “value” equities, while conservative, risk adverse investors should be more concentrated in bonds and large capitalization “Blue Chip” securities.

An advisor who takes the time to understand your needs and risk tolerance will recommend diversifying and allocating assets amongst various types of investments consistent with your goals and risk profile. Studies show that over 90% of your investment returns depend on how your assets are allocated among different investment classes, while only about 2% is due to the specific stocks, bonds and other investments you choose to buy.

Lesson learned: An advisor should spend the time to learn your particular circumstances, and tailor investments to fit your own risk tolerance profile. Run, don’t walk, from any advisor who tries to sell you something without first learning about you and your risk tolerance, who has the same solution for everyone, or who recommends putting all your assets into a single type of investment.

Wage War on Fees, Expenses and Commissions.

Over long periods of time (10-20 years), well diversified portfolios have returned approximately 9% per year. Fees, expenses and commissions, imposed year after year, substantially reduce the long-term net investment return. The average expense ratio for actively managed mutual funds is approximately 1.5%. Similar or higher charges are assessed in “managed accounts” or “wrap accounts” where the investor is charged a fixed percentage of the portfolio rather than commissions on each trade. Because of the miracle of compounding, even a small difference in expenses charged against your investments can make a significant difference in the final long term investment results. For example, the final value of an initial $100,000 equity portfolio earning on average 9% a year for 10 years with 1.25% in annual fees and expenses will be $208,754.58. That same portfolio, with identical returns, but with 2% in annual expenses, will be worth $193,439.835, or $15,323.73 less. Additional fees, commissions, and expenses, by themselves, can make it difficult to “beat the market.” As we have seen, there is a high probability that an advisor cannot select investments that beat the market, and the probability of market underperformance is necessarily increased when the account is subject to excessive fees, commissions, and expenses.

Lesson learned: Keep the fees and expenses charged to your portfolio as low as possible. Avoid advisors who are paid on commission.

Don’t Chase Last Year’s or Last Month’s Winners

Mutual funds, Wall Street firms, and financial newsletters love to tout their recent successes. Investors flock to the fund, firm, newsletter, or investment category with the highest recent returns. But what happened in the past is a poor predictor of what will occur in the future. One study suggests that only 14% of the top performing investment managers for a particular year will be among the top performing managers the following year. The same historical reality that applies to stock picking applies to recent “market beating” firms and mutual funds — the fund or firm that did well last year is not likely to repeat that success the next year, and highly unlikely to consistently outpace its peers for long periods.

Lesson learned: Don’t chase recent winners.

Be Leery of Investment “Products” Wall Street loves to sell “investment products.” These come in a variety of forms, including limited partnerships, investment trusts, variable annuities, variable life insurance, mortgage backed securities, and others. Some of these products cobble together investment and insurance concepts in a single package, to be sold as something that will supposedly cure one or another investment risk, or provide a benefit, such as life insurance or a guaranteed return. Often, these products pay the highest commissions to brokers and insurance agents. When I see the phrase “investment product,” my expectation is that I will see an investment loaded with fees and expenses, and which is often too complicated for the average investor to understand. These products are suitable for some people, but are often too costly or complicated to be appropriate for most investors.

Lesson learned: Be leery of “investment products.” Look carefully at the fees and expenses for such products, and if the investment is very complicated, ask yourself whether you should risk your hard-earned money in something you don’t understand.

Make Sure Your Money Lasts as Long as You Do.

In retirement, many baby boomers suddenly will have access to significant lump sums of money, accumulated through savings, pensions, IRA’s, and 401k’s. There is a temptation to spend those assets freely, without considering that those funds may have to last 20, 30 years or more. It is critical for the investor to structure their retirement investments, and any withdrawals from retirement funds, so as not to outlive their money. As a rule of thumb, a withdrawal rate of 4% or less, adjusted for inflation, will increase the chance that there will not be a shortfall. Of course, each investor must consider their life expectancy, the composition of their portfolio, any other sources of funds (such as Social Security or company pensions), and their spending habits.

Lesson learned: The higher the withdrawal rate from your retirement assets, the greater the risk you will outlive your money.

Avoid All the Noise and Invest in Index Funds.

An index fund seeks to match the returns of a specified benchmark by buying representative amounts of each stock in the index, such as the S&P 500 or the Wilshire 5000. Other index funds focus a particular industry, or a particular geographic area, such as the telecommunications or health care sectors, or the leading publicly traded companies of South America or Japan. There are also index funds that track corporate government bond indexes. These funds don’t try to “beat the market,” they “meet the market,” by investing in the securities comprising the benchmark index. As seen, only a small percentage of active money managers beat the market over the long term. That being so, having an investment that “meets the market” year after year is, based on historical data, statistically more likely to provide superior long term returns than active money management trying to “beat the market.” Much of the superior performance of index funds is due to their low expenses, which average.25%, or about 1/5 of the expenses charged by actively managed mutual funds. Additionally, most index funds necessarily provide diversification (e.g., owning the 500 companies in the S&P 500, or the 5000 companies in the Wilshire 5000), and are tax efficient, since there is no active manager trading for short capital gains.

Lesson Learned: Allocate your investments among a variety of national and international equity and bond index funds. A 60/40 portfolio (60% diversified equities, 40% diversified bonds and cash) is generally considered to be a well diversified balanced portfolio of moderate risk. Those seeking more risk should consider increasing their exposure to equities, while those desiring less risk should increase their bond and cash balances. The particular percentages suitable for you must be based on upon your particular risk tolerance, goals, and financial needs.

Robert C. Port is a partner with the Atlanta law firm of Cohen, Goldstein, Port & Gottlieb, LLP, where he practices business and securities litigation. He has a particular emphasis on representing investors harmed by the misconduct of their stockbroker, investment advisor, or insurance agent. Mr. Port has an AV Rating by Martindale Hubbell Law Directory, and has been selected as a “Georgia Super Lawyer” in the practice areas of Business Litigation and Securities Litigation by Atlanta Magazine.

Risk is something you encounter everyday not just when investing. When most people think of investment risk they tend to think of the loss of their principal sum. But the question is: are there any no-risk investments?

While there are some investments that have less risk than others but there is no investment which is truly risk free. You cannot eliminate risk but you can manage it.

Perhaps if we take a look at the different types of risk it will make it easier to understand.

• Capital Risk is the type of risk that many of us think of and it is the risk of losing your invested money. This can relate to any type of investment from bonds to shares.

• Inflation Risk is the where an investor’s rate of return on investment doesn’t keep pace with the inflation rate. This risk particularly relates to term deposit funds which are normally considered low risk. If the inflation rate were to increase to a percentage higher than your return the real return would be negative.

• Interest Rate Risk is the drop in an investment’s interest rate and once again relates to the more conservative type of investment of term deposits at the bank. Bonds (referred to as fixed interest) also suffer interest rate risk. The prices of bonds move up and down, but not usually as much as shares (also known as stock). While bonds tend to be thought of as a conservative investment their returns can be volatile. If the interest rates go up the bond looses value and a decline in rates means the value goes up. There could be a significant decrease in the overall return of any particular bond because of interest rates. Bonds are a loan to a Corporate, Municipality or Government.

• Market Risk is where an investor sells their investment at a less than desired price and makes a loss such as when the price of shares drops. Shares are owned by you as investor and tend to be volatile.

• Liquidity Risk is the limitation on the availability of funds for a specific period of time. Some investments have penalties for early withdrawal whereas others do not allow withdrawal until a set time. If money is required in a hurry this will affect the investor.

• Default Risk is the failure of the organization where your investment is made. Even capital guaranteed investments are subject to this if the guarantor fails. At one time Sovereign Debt was thought of a ‘risk free’ however there have been defaults in history. And in recent times you only need to look at Iceland, Portugal, Ireland, Greece, and Spain. These countries have given us the acronym PIGS when international bond analysts are referring to faltering or indebted economies.

• Legislative Risk can affect any investment as it is the changes in tax laws and other regulation that may make certain investments less advantageous.

If you are looking for higher returns, you have to be willing to live with higher degree of risk. But as you can see it’s impossible to avoid risk totally. We all know that you can potentially achieve higher returns through shares than with bonds and that bonds achieve higher potential returns rather than cash, but to get higher returns you need to take on some degree of volatility. At the end of the day there are no investments that have no-risk at all.

Lyn Bell has been in the finance industry for more than 30 years and is a Certified Financial Planner. She has helped many clients achieve their financial goals. Sign up to get Lyn’s free newsletter SoundFinance News and receive a free gift.

A disclosure statement is available free on request.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Google Part III: Ten Time Tested Risk Minimization Strategies

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