Investment Articles

A key element of any investment philosophy is to invest in ‘quality’ companies. We believe quality companies deliver higher returns at a lower level of risk than low quality companies. The issue with the term ‘quality’ is defining what exactly is a quality company and what it not. Quality is a subjective measure and what may look like quality to one person is not to another. It is also difficult to measure and value. Unfortunately we cannot simply insert a line into a company’s balance sheet called ‘quality’ and attach an appropriate dollar figure.

Here are some key indicators of quality companies:

1. Track record of steady growth in earnings per share (EPS)
A quality company should be growing its earnings over time. It is important to look at EPS rather than just profits because profits can be inflated by issuance of additional equity and acquisitions. EPS is the best measure of real earnings growth.

2. Track record of steady growth in dividends per share
Nothing is more transparent than dividends. The payment of a dividend proves that a company has cash on hand and the financial muscle to produce a cash flow to shareholders. Dividend growth is the key to long-term share price performance

3. Strong balance sheet
It is a simple, but little considered, fact that companies with no debt do not go bankrupt. Some companies that have defensive businesses and high cash flows can tolerate higher levels of debt, but always look for rock solid finances, of which having a manageable level of debt is a key attribute.

4. Strong market position and pricing power
For share investors, competition is the enemy. Prefer companies that have the mettle on their competition either because they have an unrivalled brand, distribution network or product, or look for companies that face low levels of competition, like many utilities. Excessive competition puts pressure on margins and undermines profitability. Look for companies that have high levels of pricing power. Having the ability to increase prices is indicative of a company with a strong market position. Utilities sometimes have this pricing power controlled by regulation.

5. Inherently defensive business
Companies with businesses that are defensive are generally higher quality companies. Defensive businesses are those that provide goods and services for which there is a reliable and growing demand. Companies that provide these sort of ‘core’ services include, banks, utilities, oil companies, healthcare companies, and producers of food and personal hygiene products.

6. Strong management
The experience, vision, leadership skills and integrity of management can have a huge impact on the performance of a company.

Cam Watson is the Chief Investment Officer for ABN AMRO Craigs, which is one of New Zealand’s largest independent investment firms. He has over 18 years experience in the financial services industry. For eleven years Cam has been employed with ABN AMRO Craigs, becoming Chief Investment Officer in 2007.
Previously he has held Business Development, Investment Management, and Client Services roles at Tower, Southpac, Prudential and Tower Trust Services. This experience in a range of senior roles for major companies has given Cam a wealth of knowledge to draw upon and made him one of New Zealand’s trusted investment experts.
Cam holds a Bachelor of Arts Degree and a New Zealand Stock Exchange (NZX) Diploma. He has been a member of the NZX since 2001 and has a current Sharebroker Licence. As with all ABN Amro Craigs Investment Advisors, Cam is required to maintain continuous internal performance modules, covering topics such as industry and regulatory developments. He also has the support and resources of ABN AMRO Craigs global research network. http://www.abnamrocraigs.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

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

Asset Allocation Step 1: Evaluate Your Risk Profile

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

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

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

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

Asset Allocation Step 2: Break Down Equities and Bonds

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

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

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

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

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

Asset Allocation Step 3: Implement Your Plan

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

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

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

Conclusion

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

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

The longer one is involved in the investment sector the more you realise that being a successful investor is 20% market nous and 80% avoiding stupid mistakes. As legendary investor Warren Buffett put it; “investing is simple, not easy”.

With that in mind, Hhere are some of the more common potholes that continue to trip up investors.

Having unrealistic expectations
Shares have been the best performing investment over the past 60-70 years and have returned around 10% a year. During periods when inflation is low and rising returns tend to be more like 8% a year.

Investors gunning for returns of 15% plus will have to take huge risks to get there by putting all their money on a few shares or properties, or by using debt to gear their portfolio. The higher return you aim for, the higher the chances that you fail. As they say, aiming for the moon can mean you end up in a black hole.

Falling for con artists
There are many unsavoury characters out there that play on people’s gullibility and greed by offering unrealistic returns. Do not get sucked in. If it sounds to good to be true, it will be. I have seen return projections of 20%, 50% and even 150% a year offered to investors. Such returns are complete nonsense. They simply defy the laws of gravity. Consider $100,000 invested today and earning 50% a year. If you manage to earn this return every year you will be a billionaire in 23 years. You will then overtake Bill Gates as the world’s richest person after 35 years. Do you really think this is going to happen? High returns are simply unsustainable over long periods of time and the people offering them are guessing, at best.

Putting too much emphasis on market predictions
Within the investment industry there is an army of very smart investment analysts,economists, strategists and fund managers all getting paid to eyeball markets and come up with the next best investment idea.

Although this research is usually very interesting, and often backed up with very nice colour coded charts, much of the time it is wrong. What trips up all of these experts is not their analysis, but the fact that they are dealing with future events. The future is 100% unpredictable and even the most robust research can be proved worthless by a completely unforeseen event.

Smart investors recognise that nobody can predict the future direction of investment markets and that it is dangerous to put too much stock in such predictions.

Following the crowd
Investors have a fatal habit of chasing what’s hot. Unfortunately, past performance has no bearing on future performance and in fact, last year’s winners can often end up as next year’s wooden spooners.

Lack of balance
The biggest investment tragedies happen when people have their portfolio excessively concentrated on one investment, or one investment sector. The golden rule of investment is to have a good spread of investments across the main sectors; cash, bonds, shares, property and overseas investments.

Fees
This four-letter word has spelled disaster for generation after generation of investors who put their faith in such traditional savings products like whole of life policies and super schemes.

The costs involved with these funds have decimated returns leaving almost nothing for the investor.

Fees are arguably the biggest threat to an investor’s long-term returns. For instance, a super fund that earns 8.0% on its portfolio will have management fees of at least 1.5% then deducted then tax of 2.0%. Take off another 1.5% for advisory fees and 2.5% for inflation the investor at the end of the food chain is left with a return of just 0.5%. Reduce fees by investing directly into markets wherever possible.

Cam Watson is the Chief Investment Officer for ABN AMRO Craigs, which is one of New Zealand’s largest independent investment firms. He has over 18 years experience in the financial services industry. For eleven years Cam has been employed with ABN AMRO Craigs, becoming Chief Investment Officer in 2007.

Cam holds a Bachelor of Arts Degree and a New Zealand Stock Exchange (NZX) Diploma. He has been a member of the NZX since 2001 and has a current Sharebroker Licence. As with all ABN Amro Craigs Investment Advisors, Cam is required to maintain continuous internal performance modules, covering topics such as industry and regulatory developments. He also has the support and resources of ABN AMRO Craigs global research network. http://www.abnamrocraigs.com/

Not long ago investing was easy. There were few places you could invest and if you had money you wanted to invest, you left it to the professional stock brokers. However, deregulation of the financial markets has changed all this. In the past 20 years new investment products have been launched, changes have been made to the tax systems and retirement plans which have altered the attractiveness of many investment products.

Up to about 20 years ago, share investing was purely in the domain of the wealthy. For most people it was difficult to trade in overseas stock exchanges, there were no such thing as cash management trusts, installment warrants, exchange traded options, dividend imputation, reset preference shares and endowment warrants – to name a few. Now about 50% of investors are “mums and dads” investors who either own shares directly or in managed funds. Unfortunately, in recent years many investors have been “burnt” because they did not understand the risks of investing in financial markets.

Governments around the world have made it clear that it is important for people to take control of their own financial futures. The sustainability of government funded pensions is under pressure. If you do not save and invest, you will suffer a significant decline in your retirement living standard. The average life expectancy is about 80 years, so if you retire at 60 years of age, the savings you have accumulated in the 40 years of your working life will need to fund your retirement of 20 years or more.

Deregulation of financial markets, interest rates and currencies means that the market determines the value of investments and not government decree. This provides opportunities for educated investors to build wealth and for unwary investors to lose wealth. You must understand the opportunities and risks.

The ground rule is that if you want to be a successful investor in financial markets, you must educate yourself about investing. Even if you put your faith in a licensed investment advisor, not all are competent. It is essential that you understand how the financial markets work so that you do not put your hard earned money in the hands of an incompetent advisor who is only interested in the commissions available. How can you tell whether a particular investment is right for you? The only sure way is to become familiar with the language used in the financial industry and to have a sound investment strategy. Does this mean that you should keep you money safe by putting it under the bed or keeping it in the bank? No – but you do need to understand the risks involved and set ground rules for successful investing.

There are a number of ground rules in investing that haves stood the test of time. With time, patience and effort you can become a successful investor in all the areas that are open to you. This will not come overnight and you will have to be prepared for that fact there will be times you lose money. However,perseverance is a virtue above all others. The road is not always easy, but nothing worthwhile is.

Here are the ground rules for successful investing:

1. Be your own investment manager. No advisor or stockbroker should do it for you. Only you know what your real needs are, what your temperament is – and only you are motivated by your own best interests, not sales commissions. It is also more fun to do it yourself.

2. Confront risk and then reduce it through spreading your investments.

3. Take a contrarians view to investment markets. That is, look for opportunities and do the opposite of what everyone else is doing.

4. Do not be put off by investment jargon. Master it instead.

5. NOW is the best time to start investing. Do not wait for the markets to improve. If the share market is filled with gloom, that is the time to buy.

6. Make good quality shares the core of your investment strategy. Then you can rest easy when you invest in more speculative areas.

7. Always consider tax implications of making investments but never let tax minimization be the main objective. The fundamental rule is to think in terms of after-tax returns.

8. Keep up to date through reading the financial papers and searching independent investment research websites.

9. Discussing investments is stimulating. Condition your mind to talk to others about investing, especially people who are more experienced and knowledgeable than you are.

10. Do not be greedy. Discipline yourself to cut your losses with bad investments and cash in when you have made a reasonable profit.

11. Be patient. Rome was not built in a day. Similarly, you may not become wealthy overnight, but you will over time.

12. Never invest in anything you do not understand. If a particular investment sounds too good to be true, it usually is.

13. Pay yourself first. Most people invest money they have left over after paying the bills. Allocate yourself the first 10% of your monthly income to build up your investment capital. By doing this you will force yourself to become an investor and the long term benefits will be enormous.

If you master these 13 ground rules, you will be a successful investor. You will rival so-called professionals and will sleep easily at night knowing that money is the least of your worries.

In late 1981, the yield on 1-year treasury bills reached 17% and the yield on 10-year treasury bonds reached 15% – both yields proved to be the highest ever recorded in US history, and marked the beginning of a decline in market interest rates that lasted almost 3 decades. By 2009, 1-year and 10-year treasury yields bottomed at 0.3% and 2.5%, respectively. By any measure, the past 28 years represent the greatest bull market in history for fixed income securities. The magnitude of the decline in interest rates that commenced in 1982 and ended in 2009 may never be repeated in the lifetimes of anyone reading this article.

As we sit here, in early 2010, with bond yields near the lowest levels possible, it begs the question of whether or not the next 10-20 years could witness the worst bear market in bonds we’ve seen in decades…perhaps an environment reminiscent of the 1970’s. Everyone knows that rates are eventually heading higher, perhaps much higher, and interest rate risk for fixed income portfolios is equally high. Similar to an earthquake forecast in California – it’s not a question of if, it’s merely of a question of when? And much like a resident of California, any investor who owns fixed income securities needs to be aware of the attendant risk. Fixed income investors need to be mindful of the strategies that may be employed to protect a portfolio against the threat of rising interest rates.

The basic goal for most bond investors in any market environment is to construct a portfolio that satisfies certain characteristics of yield and liquidity, while having no more risk than is necessary. While there are many ways to evaluate the interest rate risk in any particular fixed income portfolio, the single most important metric that all investors must understand is duration. Although there are many different ways to measure duration, in its simplest form duration is a single number that measures time, in years, and represents the weighted-average time of receipt of all cash flows from a particular fixed income security. A long-term bond will have a higher duration than a short-term bond, and will therefore be more sensitive to changes in interest rates and have greater interest rate risk. The duration of a portfolio of bonds is simply the weighted-average duration of all its constituent holdings.

There are 4 general factors and related fixed income strategies that portfolio managers and individual investors can control to reduce the duration, and hence interest rate risk, of a bond portfolio:

1. Maturity: stated maturity of the bond

2. Coupon rate: premium or discount to market rates

3. Coupon type: fixed rate or floating rate

4. Embedded optionality

Maturity: Most investors control duration through a simple concept know as laddering. Laddering is nothing more than building a portfolio of fixed income securities with varying maturity out to some maximum point in the future, such as 10 years. For example, a $1 million laddered bond portfolio may have $100,000 worth of bonds maturing each year for the next 10 years. After one year has passed and the nearest bond has matured, the proceeds are used to repurchase a new 10-year bond, such that the overall portfolio always has 10 bonds with maturities spanning from 1 to 10 years. Assuming average credit quality and coupon rates, such a portfolio might likely have a mathematical duration of 4 years or so. Laddering isn’t a fixed income strategy, per se, but is actually a portfolio management technique: investors with laddered bond portfolios buy bonds of all maturities, from short-term to long-term, and simply accept market yields that are available at any given point in time. Nonetheless, the composite duration of the laddered portfolio may be adjusted to suit an investor’s beliefs about future bond market yields. For example, by constructing a bond ladder of shorter duration, such as from 1 to 7 years, instead of 1 to 10, investors can reduce the duration of their portfolios, and reduce their interest rate risk accordingly.

Coupon Rate: The second strategy for reducing interest rate risk in a bond portfolio focuses on bonds with high coupon rates. Bonds having coupon rates that are higher than prevailing market yields for the same credit quality are called premium coupon bonds – such coupons are at a premium to the otherwise available market yield. Premium coupon bonds have lower interest rate risk because the investor in the bond is receiving higher coupon cash flows, which reduces the duration of the bond. Said another way, if you have two otherwise identical bonds, but one pays a higher coupon rate than the other, this higher coupon bond will have a lower duration, and hence lower interest rate risk.

High yield bonds (which are higher coupon due to their lower credit quality) present an opportunity for investors to increase yield and reduce interest rate risk at the same time. Because high yield bonds have above-market coupon rates and yields to begin with, they are automatically lower in duration than otherwise equivalent-maturity investment grade bonds. Furthermore, owners of high yield bonds are likely to have an added benefit as credit spreads typically contract during an economic recovery, so owning such bonds offers the potential for both higher return and lower interest rate risk. A variation of this strategy might focus on bonds from issuers of economically-sensitive industries, such as financials, transports, natural resources, or other sector that is positioned to benefit from future economic growth.

Coupon Type: The third fixed income strategy for reducing interest rate risk in a bond portfolio focuses on the type of coupon: fixed rate versus floating rate. The entire reason why fixed income securities lose value in a rising interest rate environment is because their coupons are “fixed”. However, investors in bond markets can also invest in floating rate securities – securities that have their interest payments mathematically linked to a variable market reference rate, such as LIBOR. When short-term rates rise, the payments to investors in the floating rate securities will rise as well, providing levels of income that keep up with increases in market rates. As a result of this interest rate adjustment feature, floating rate securities have very low effective duration and consequently very little interest rate risk. Investors must be careful, however, because most floating rate debt securities are issued by non-investment grade entities, typically with significant total leverage, and thus most floating rate securities tend to have significant credit risk, similar to the high yield bond market.

Optionality: The fourth fixed income strategy for reducing the interest rate risk in a bond portfolio relies upon the existence of embedded options within a bond indenture, and specifically bonds having embedded call options (a structure that is especially common in the municipal bond market). The call option feature of a bond is the most significant characteristic that may reduce interest rate risk because it is the only feature that can actually accelerate the maturity date of a given bond. Callable bonds that have coupon rates that are higher than current market rates and trade at premiums to par value are known as “cushion bonds” – the name being derived from the fact that these bonds are not particularly sensitive to changes in interest rates; they do not appreciate very much when interest rates fall, nor do they depreciate very much when interest rates rise. Thus, these bonds can cushion, or buffer, a fixed income portfolio against the affects of changing interest rates.

In conclusion, for the investor or financial advisor concerned with the damaging consequences of rising interest rates, there are a variety of fixed income strategies that may be employed to construct defensively-positioned bond portfolios having reduced interest rate risk, while still maintaining adequate cash flow characteristics. A portfolio of relatively low maturity, premium coupon, callable bonds, along with floating-rate securities and having issuers of diverse credit quality would likely do well to provide meaningful levels of coupon payments while offering enhanced principle protection in an era of volatile and rising interest rates.

Ian McAbeer is the President of Blackhaw Wealth Management, an independent Financial Advisor providing portfolio management and investment advisory services to individuals and families, including the development and implementation of fixed income investment strategies. More information can be found at the firm’s website: http://www.blackhawwealth.com

In a Premier Consultant meeting on Tuesday, January 29, it was time to look at what happened, how we reacted to the Financial Melt Down and the results. A comment from John Payne, veteran Advisor at Houston Asset Management, says it all. He said what every man and one female were thinking; “Will we ever learn?”

On September 15, 2008, Americans started an emotional roller coaster ride, the likes of which we had never experienced in our lifetime. For me, Chief Investment Advisor and Premier Consultant to Mid Tier Millionaires, it appeared in the form of a zip line domino effect. As a 22 year Financial Veteran, it is the only way I can describe the emotion and my own personal experience. Visualize a calendar; it is Monday, September 15th and you hear the startling news ‘Lehman fell’. From then on it appeared in my mind as if dominoes were falling as fast as a zip line… it was zip, zip, zip, zip each week with seemingly no end in sight. It was pure panic. It was shocking, unbelievable and hard to grasp. The doom and gloom was everywhere. “Get out, get out, get out!” was SHOUTED by talk radio hosts.

Experts were being interviewed, saying go to cash, lectures were being held with 800 plus in attendance given by experts predicting the market would fall to 3500, 5500 – get out. Insurance agents were running ads of guarantee of principal that was assured to protect you – get out. Ads started popping up all over TV and radio that Gold would save you – get out. Were they right? Could they be? Then TARP would save the day. Even in this crisis the Government acted as usual; instead of tending to the crisis, they took full advantage and loaded up with Pork. At the time, I wrote to my clients, “this is important and must be done, but with the delay, what price with they make us pay?” I was referring to the pork. What did we get two weeks later; massive pork the likes we have never seen. So disappointing – but expected.

It is customary for me to provide a Quarterly Outlook for my clients. During this crisis, there was so much “noise”, it was mandatory to send out emails daily. Most of the time, misinformation, scare tactics and half truths were everywhere. It was not uncommon for me to send out emails first thing in the morning for what was being reported the previous night, then again around 1:00 for what was being reported that morning and then once again that evening for what was being reported between 1:00 p.m. and 7:00 p.m. These emails were bullet points, or short explanations, in plain English about what people were hearing on the news letting them know how it affected each of them. That was what made this “different”. My fear was this was MORE information overload. In my Client Advisory Board meeting, the first thing I asked was “is this too much information?” The answer I received reassured me; “No! The emails allow me to understand all that I hear and allows me to go take care of my business, my family, do my job, take care of my kids, my ailing parents, continue my charitable works, etc., knowing I will get clarification about the news I hear all day.”

For eighteen months, I felt like a dog digging furiously for a bone hidden in the back yard – anything I could find to give people reassurance. I was expecting to give people hope, but hope is neither a plan nor an investment strategy. You see, an Advisors main responsibility, after all the proper Financial Planning, is to ensure people understand the rebalancing and monitoring and stick to their plans, if the plan is solid. With this said, I could not find anything “to do”. It is human nature to want to “do something” and “take action”. All review processes include monitoring, rebalancing and firing those strategists that veer from the purpose as you initially hired them during a time of blue skies, sunshine and a strong breeze. But major shifts? During a Financial Melt Down? Going to cash, buying an Annuity after the fact, going to gold, selling out and buying Real Estate – nothing could justify any of these options.

What was confirmed – the contrarian theory; Whatever the Masses are Doing, Do the Exact Opposite.

Case in point; in 2008 when the S&P 500 dropped -37%, Preservation Strategy reported a drop of only -4.7% (net of management fees). When in 2009 new money invested into the Genworth Financial Wealth Management platform was reported to be $4,400,000,000 and 43% was allocated to Preservation Strategy. If you had started 2009 with 10-20% of your portfolio allocated to Preservation Strategy, that portion of your Portfolio would have had a return of +6.32% for the year (net of fees). If your portfolio was repositioned 100% to Preservation Strategy, your return was +0.82%. If you had diversified properly before the crisis depending on your Risk Tolerance, you would have had 23.99% return in a Moderate Growth Profile. If you added investable assets to what was at its lowest I have seen reported, 46.26% return.

And, as reminded by my friend and Premier Consultant John Payne, “in 2008, eleven of the twelve major investment categories had negative returns. Only one other time in the last 100 years has that happened. It was in 1932 at the bottom of the Depression. Articles came out in the first quarter of 2009 stating that, ‘Asset Allocation is dead’ and that ‘It is different this time’. No it is not. Asset Allocation was back with a vengeance in 2009 and it worked. I would rather put my faith in the 98 years out of the last 100 where asset allocation worked and not in the 2 where it did not.”

Dearest John, indeed will we ever learn?

Victoria Woods is Chief Investment Advisor at ChappelWood Financial Services to MidTier Millionaires, Author of “It’s All About the $Money, Honey!” TV Contributor for Fox News, Fox Business, NBC, CBS, ABC, and Founder of the Financial District located in Edmond, Oklahoma.

For more Financial tips visit http://www.TheFinancialDiva.com
http://www.ChappelWood.com

Yes, that is right your friends have been holding out on you. They have a dirty little secret that would surely make life easier for you if they would only have shared this simple fact. However, if they shared it with you, it would no longer be their little secret.

I know this secret and will gladly pass it along ready to you. If you do one simple thing for me, act on it. Don’t fritter it away. Do something today!

So if you are ready, here is their secret:

They aren’t very good at finding investment advisors either. Now don’t you feel better?

They hedge their bets by hiring more than one investment advisor. That’s right….they hire more than one advisor.

You are probably saying to yourself right now, why didn’t I think of that? The simple plain truth is it’s hard to find good help and hiring multiple advisors makes life simpler in so many ways. Think about it!

You get the chance to diversify not just your portfolio, but the risk your advisor’s strategy may underperform in the current market;
You get an opportunity to diversify by investment strategy. Please don’t make the mistake of hiring two advisors that invest the same way;
You get two times the market insight for the same money;
You get competition among your hired help and this is never a bad thing;
Finally, you get peace of mind over your investment advisor decision. Certainly you cannot go zero for two? What are the odds?

Of course, there are some simple rules to following this secret. First, you really need to have enough investment assets to make having an advisor worth doing in the first place. The bare minimum investment assets would probably be $200,000, so you end up with no less than $100,000 per advisor.

Second, make sure that the advisors do not manage money in the same manner. Otherwise you will just end up with two times the same results and none of the benefits outlined above.

Finally, some advisors have fee breakpoints. Make sure you are not hurting yourself when diversifying between two managers. In other words, if you cannot justify the added cost with a potential improvement in investment results, solutions or service, don’t follow your friend’s lead.

However for most of the affluent population, this little secret saves a whole lot of wear and tear on the old body and will help you sleep better at night too.

An author, registered investment advisor and Personal Financial Specialist, Jeff Diercks has helped investors grow and protect their portfolios in both up and down markets for over a decade. Mr. Diercks is regularly featured in the mainstream media as a specialist in ETF investing and trend following investment strategies. Check out his website at http://www.intrustadvisors.com for a number of free resources including a powerful guide to investing called “Make the Trend Your Friend.”

Over the course of the last two decades in the financial industry, I have had good fortune, and yes, bad fortune in learning about the realities of investments. When I speak with investors, it’s not uncommon for some people to insist on certain delusions they have accumulated regarding the subject. This article is an effort to give you some the characteristics of any investment proposal that deserves your careful scrutiny and distrust.

Most investment scams have certain characteristics in common:

1. Secrecy – Any investment program that is worth anything can stand up to the scrutiny of financial advisors, accountants, attorneys and anybody else with some investment acumen. Many scams create this confidentiality to give the investor the feeling that they are “on the inside,” privy to investments only available to wealthy families or a select group of fortunate people. The confidentiality requirement is designed to prevent you from communicating with others about your involvement so you will keep believing what the scammers are telling you.

2. High Returns – What rates of return should a person receive for investing money? Well, if it sounds too good to be true, it probably is. While 20% returns may be possible for very speculative investments under certain circumstances, anything beyond that is simply not real over time. If any return on investment is greater than what would normally be earned on that type of asset, it is a good indicator that something isn’t right. Consult a knowledgeable financial advisor of your investment plans if you have any doubt.

3. No Track Record – Any investment program should have returns that can be verified by a reputable third party, such as an accounting or law firm. Further, the principals of the program should have fully verified backgrounds with a proven record of successful past investment programs. Moreover, any start-up would have a logical product and a complete business plan replete with reasonable financials and marketing plan. If there is no track record, forget it.

4. Lack of Full Documentation – Any legitimate investment has full documentation, including a prospectus (a document that explains the details of an investment) or offering memorandum (which is for private placement programs, investment programs that are made available to qualified investors and not to the general investor public). Complete contracts would also be provided carefully covering all of the details of the proposed investment. Insist on full disclosure.

5. Guarantees – To my knowledge, the only investments that provide guarantees are insurance policies. If someone is offering you guaranteed returns or a personal guarantee, it’s not worth anything. If you lose your money in the investment, the personal guarantee is only as good as the assets of the person issuing the guarantee (if they had the money for the guarantee, why would they need yours?)

6. No Registration with Regulating Authorities – In order to offer an investment to the public, in most cases, the principal creating such an investment will have to register it with the State. Further, the person selling the investment will have to be registered with the State as a securities salesperson or investment advisor. Lack of such registration is a red flag.

7. Offshore Tax Benefits – For American citizens, there are no offshore tax havens. In other words, US citizens are taxed on worldwide income, regardless of the source. Anyone stating that you can save or avoid income taxes by moving offshore is just dead wrong. There is no surer way of creating a problem than attempting to evade taxes. While there are asset protection reasons to use offshore entities, there are no legitimate income tax saving strategies offered offshore that cannot be done domestically.

I know I said 7 tips, but I thought of one more…

8. International Lure – Investing internationally has a certain allure to it. It’s exotic and different. The only problem is that you transfer your assets overseas and the chance of getting them back may be zilch. The complexities of international financial regulations and laws make it a great justification for someone to not be able to deliver on intended investment results. Just keep your money closer to home.

Greed and Desperation

People invest in these programs due to desperation for money or the desire of getting something for nothing. The way to wealth is through investing wisely in your own ability and production and being intelligent enough to not spend everything you make. Falling victim to any investment scam can be a significant setback to your quality of life. Just don’t play that game. Learn the natural laws of money and apply them and you will be where you want to be in due course.

And if you feel that you are far too beholden to your creditors, maybe it’s time to do something about it. Christopher Music has helped many professionals gain control over their finances and achieve financial freedom — or at least move steadily in that direction. For more information on how you too can loosen your creditors’ grip on your pocketbook, visit Christopher’s website at http://www.wealthadvisoryassociates.com.

Wealth Advisory Associates, LLC is a Florida Registered Investment Advisory Firm and only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements.

A good investment advisor can make financial decision making a hassle-free experience-and help you develop the peace-of-mind to sleep well at night regardless of what happened in the stock market during the day. Since investment advice comes in many flavors, the challenge is to find the one that is right for you.

The Trouble With Titles

Do you need a broker, a financial planner, or an investment advisor? While these titles are often used interchangeably, the services provided by each of these professionals are often quite different. Brokers’ help investors buy and sell securities. Financial planners help investors prepare strategies for specific goals, such as retirement, and investment advisors provide advice for a fee. Of course, it is a bit more complicated than it first appears. Many of the investment professionals who you might think of as brokers are actually financial planners, just as some planners are actually brokers in disguise. To further complicate matters, most investment advisors are also financial planners, but only some financial planners are investment advisors. Investment advisors, of course, are available in numerous makes and models-some provide advice on just a single topic, such as tax-aware investing, while others offer complete financial planning services. Confused yet?

It’s a Lot Simpler Than it Seems

Forget the titles and their definitions for a minute and think about what it is that you want from a financial services professional. To find someone who can help guide your investment decisions, begin the search with a strict focus on your needs. Are you seeking advice about a single topic such as buying or selling a security? Are you planning your estate, planning for retirement or purchasing insurance? Are you in a high-tax bracket and looking to minimize the impact of taxes on your portfolio? Do you need guidance in creating a financial plan that encompasses all of these issues and more? Once you have a good idea of the types of services you need, you will be much better prepared to find an advisor who offers those services. If you are not exactly sure what you need, find an advisor who offers a full-range of services and let the advisor help you review your situation.

Ask the Right Questions

Once you have found an investment professional that can meet your needs, be sure to ask the following questions before you invest:

What are your qualifications? While there are no uniform credentials for financial services professionals, experience counts. In addition to experience, professional designations are often a good sign that the advisor takes his or her career seriously.

Have you ever been disciplined by any government regulator for unethical or improper conduct? Although disciplinary action does not necessarily mean that this advisor will steer you wrong, there are just too many honest advisors out there to risk your money by taking unnecessary chances. Ask to see a copy of the advisor’s “Form ADV” before you invest. The ADV will show you whether the advisor has been disciplined.

Whom do you work for? An increasing number of investors are making the decision to invest with independent advisors-that is, advisors who do not work for a big company, but instead founded their own small businesses. Independent professionals are not constrained by the need to support corporate business decisions, so they often have access to a much broader array of investment options than can be found at a big brokerage firm. Furthermore, because independent shops don’t have the name recognition and marketing muscle of a national brokerage, odds are that they have to provide good service if they want to develop a solid reputation in the community and stay in business for any length of time.

How are you paid? For investment professionals, compensation can come in many forms. Common compensation methods include: Fee: Fee-based advisors either charge a percentage based on the value of the assets they manage for you, an hourly consulting fee or a fixed fee. Commission: Commission-based advisors earn a commission on securities they sell. Fee and Commission: Fee and commission-based advisors receive a combination of fees and commission for their services. Before you sign any papers, ask your advisor how he or she is compensated and how that method of compensation benefits investors.

The Bottom Line

Selecting a good advisor is not difficult; it just requires a little thought and patience. The right financial advisor can help you make investment decisions that have a lasting and meaningful impact on your life. Therefore, before you rush out and make an investment, take the time to choose your advisor carefully-after all, it is your money and your future.

Financial Management Strategies (FMS) is a Registered Investment Advisory firm in the State of Maryland. We specialize in comprehensive wealth management and wealth preservation for individuals and small businesses, providing premium services in financial planning, business consulting, financial analysis and research, wealth management and real estate development.

Mr. Petiri is a Registered Investment Advisor. His nearly two decades of financial experience covers virtually all areas of finance from tax, insurance, stockbrokerage, personal financial planning and personal banking to corporate credit, business planning and consumer lending.