Investment Articles

Treasury Inflation Protected Securities (known as TIPS), are inflation indexed bonds issued by the US Government. But what do they really offer you as an investor and how exactly do they work???

First of all, there’s a lot of investor angst regarding future inflationary expectations. After all – it’s a normal concern with the government deficit exploding to unfathomable proportions on a minute by minute basis (not to mention interest rates overall are at historically low levels, and when rates revert to the statistical mean inflation is a likely counterpart to that occurrence).

TIPS can be purchased direct from the US government through the treasury, a bank, broker or dealer – or most preferably through a low cost index fund such as DFA Inflation Protected Securities (DIPSX). Individual TIPS are purchased according to an auction process, where you can either accept whatever yield is determined at the auction or set a minimum yield you’re willing to accept. In the auction method, if your requested yield target isn’t met – your purchase request will not be executed.

TIPS come in 5, 10, and 30 year maturities and are bought in increments of $100. The return of principal AND ongoing interest payments depend on the TIPS principal value adjustment for the consumer price index (the CPI which is the most commonly used measure of inflation). The coupon payment however, is a constant and stays the same for the life of the security. This is where TIPS get a little tricky – while the coupon payment remains the same, the TIP itself fluctuates meaning the actual yield you receive will vary.

With the underlying TIPS unit value fluctuating based on the CPI, each coupon payment interest rate fluctuates (fixed dollar payment divided by a fluctuating par value equals a floating interest rate). So while the principal value fluctuates, the interest rate is fixed. This is how the holder is protected from inflationary pressures. If inflation increases, the underlying TIPS par value increases along with it.

As with the majority of US Government debt obligations, TIPS pay their coupon semi-annually. The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS).

In what situations would TIPS be a viable option for your investment portfolio? Take for example an expectation of inflationary pressures over the next five years. If you were to invest in a portfolio of TIPS, as inflation occurs the principal value of the TIPS rises to compensate you for the inflationary pressure. Your coupon payment remains the same, but your TIPS principal investment is worth more.

Now let’s look at the opposite of inflation – deflationary pressures. Should deflation occur, your principal value would drop. TIPS do have a backstop for deflation however. The TIPS maturity value payment is the greater of $100 per TIPS unit, or the adjusted current value at that time.

Treasury auctions vary by security type and date, and it’s challenging to find relevant samples for different types of issue. However here’s some real life examples of TIPS and regular 5 year treasury notes for comparison.

In a recent TIPS auction on April 26th, 2010, 5 year TIPS were priced at 99.767648 (or $99.77 per $100 par value TIPS security) with a rate of.50%. On the same day, the 5 year treasury note yield was sitting right at 2.6%. In this case, the regular 5 year treasury note is yielding roughly 5 times as much as the 5 year TIPS. Seems like a lot to give up for some inflation protection doesn’t it? The wide disparity in yield is primarily due to investor expectations of inflationary pressure (investors are willing to accept a lower interest rate for the inflation protection).

There is an upside however. Let’s look at a similar 5 year TIPS security issued last year on 4/15/2009. It was issued at $100.11 for each $100 TIPS and a rate of 1.25%. At the same time the normal 5 year treasury note yield was at 1.71% – not nearly the spread of the first noted TIPS example. That same treasury note issue today (June 5th, 2010) is indexed at 1.02858 or each TIPS is worth $102.86.

A 5 year treasury note issued on April 30, 2009 (as close as possible to the last TIPS example) priced at 99.691687 ($996.91 per $1,000 maturity par value) and yielded 1.875%. Today through TD Ameritrade where I custody client assets, that same 5 year note is priced at 101.188 ($1,011.88 per $1,000 maturity par value).

The roughly one year old 5 year treasury note has earned a return of the coupon payment (two payments at $9.375 each plus some accrued interest which we’re discounting for this example), plus an increase in principal of $14.97 which equates to a 3.37% return. For comparison, the closest issued TIPS issue from April 15, 2009 has garnered a return of two coupon payments (I’m using 10 TIPS to bring this example to parity with the $1,000 par value treasury note) of $6.25, and experienced an increase in value of $27.48 for a comparative return of 3.99%. In this example the TIPS outperforms the treasury note by a reasonable margin.

Granted, these examples aren’t perfect, but they’re close for illustrative purposes on TIPS calculations and values compared to treasury note calculations and values.

There are downsides to TIPS however – one being taxes. Should the principal value rise with inflation in a given year you’re taxed on the growth (which is NOT distributed, it’s only on paper) as if it were income. This creates somewhat of a phantom income tax – you don’t actually receive the money, but you’re taxed as if you did! The upside of this is you establish a new basis in the security and won’t be taxed on it again, and in fact if deflation occurs may have a loss to put on your tax return. Of course, don’t take my word for it – please consult your tax advisor.

In addition to the tax issue, there’s also political risk associated with the US Government (the rules can change – after all the rules change all the time!) in addition to the fact that the government calculates the CPI (who’s to say they’ve got their calculations right, and are they manipulated for other political or economic reasons?).

While TIPS are great for some investors, they’re not right for everyone, and certainly not right for an entire (or even a majority of) portfolio. However, should inflation pick up from these historically low levels over the next five years, the TIPS should comparatively do just fine compared to the regular 5 year treasury notes.

With all of the TIPS calculations noted above, still one of the best ways to hedge inflation is with a diversified portfolio of passive investment assets such as Dimensional Fund Advisors (DFA Funds), and other exchange traded funds (ETF’s). At Red Rock Wealth Management, our portfolios provide a substantial amount of NON-dollar denominated assets (a great way to hedge against a weak dollar). Client portfolios consist of over 13,000 equity (stock) securities across 41 countries. In addition, many US based companies hold non-dollar assets as well, and the Red Rock Wealth Management portfolio philosophy also holds other tangible assets the government can’t “print” – such as gold, oil, and timber.

The point is, through proper investment management your risk associated with inflation can be mitigated substantially through Treasury Inflation Protected Securities AND broad diversification.

Consider adding TIPS to your portfolio for a component of inflation protection, just make sure you fully understand all of the positive AND negative aspects of TIPS!

Greg Phelps is an Financial Advisor & Retirement Planner, and a Fee-Only CERTIFIED FINANCIAL PLANNER (TM) in Las Vegas and Henderson, Nevada. With over 15 years of financial industry experience, Greg is an accomplished financial advisor, author, and speaker. Through his financial consultant positions with two of the largest investment banking firms on Wall Street – Morgan Stanley and Goldman Sachs, as well as serving as the Regional Manager of Wealth Management and National Manager of Fiduciary Advisory Services at the 5th largest accounting firm in the country – RSM McGladrey, he’s consistently and ambitiously improved his skill and knowledge in the financial planning field. In addition to creating a Free Mortgage Rate Quotes utility for use by financial advisors with their clients, he strives to deliver exceptional financial planning advice and guidance in all areas relevant to his clients, with a specialty focus in retirement financial planning.

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”

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

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

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

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

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

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

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

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

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

Despite the fact that 59% of Americans oppose President Obama’s plan, according to CNN, and more than 48% oppose the plan, according to CBS News, the President and his minions have passed healthcare reform in the House. Reconciliation with the Senate is next and this process is likely to increase, not decrease, the tax burden on Americans for this new socialization of U.S. medicine.

So what is the bottom line for Americans, this bill will provide health care to those previously unable to receive healthcare, but someone will have to pay for this added cost to insurers. That someone is every American earning more than $200,000 and every household earning more than $250,000 per annum. Not only does this legislation add a new 3.8% tax on dividends, interest, capital gains and other investment income, but it also does so at a time where more active money management is essential to success in the stock markets. It also puts an undue burden on businesses as highlighted in the Heritage Foundation’s recent post “The House Health Fix: Even Higher Job Killing Employment Taxes.”

So what is a high income investor to do who worries about their financial security, questions their ability to outlive their retirement savings and now has their own government proposing additional taxation that discourages them from saving for these contingencies? The answer is we must rethink how we play the game and how we structure our portfolios.

Central to this rethink is to develop a core/satellite approach to the markets whereby you have tax efficient core holdings and you surround them with satellite investment strategies in tax free or deferred rappers that are not as tax efficient. What specifically do I mean by this?

1) Although dividend paying investments are the rage today in this low interest rate environment, you must now shift your focus to low tax, growth investments for your taxable accounts. Depending on your age, this could include an investments in small capitalization stocks that historically are high growth and rarely distribute dividends;

2) You should build a core/satellite investment approach and use low cost ETFs or mutual funds to make your core investments. Again this should be invested for growth, not dividends or income (unless its tax free);

3) Fund retirement savings accounts to the maximum allowable. Not only will this save you tax dollars, but it will allow you to move tax inefficient investment strategies to these accounts, thereby avoiding the 3.8% tax on investment income and gains;

4) If you have sufficient liquidity and a long time horizon, consider putting a portion of your taxable savings into an annuity or variable life insurance policy. Here again use these accounts to the extent possible to hold your tax inefficient investments.

5) Protect these long only, “buy and hold” strategies with non-correlated strategies in your tax deferred accounts. One of my favorite, and of course I am biased, is to use a trend following strategy as a return enhancer and as full or partial hedge for your core position in bear markets. Trend following strategies tend to do well in both markets that trend strongly up and down.

Let me just highlight how important number five is to the wealth equation because we are unfortunately in a secular bear market. If you look at a monthly chart of the S&P 500 index as an example, we are trading in a huge trading range that is likely to hold for the next 10-20 years.

So at some point we will again enter a bear phase of the market and head towards the bottom portion of this trading range. So saving taxes is great, but as we saw in 2000-2003 and again in 2007-2008, it’s also important to protect what you have. Don’t let the “tax dog wag your investment tail.” Pairing strategies, such as trend following strategies, that have the ability to follow both up and down markets with less sophisticated strategies, like “buy and hold,” can really smooth, diversify, and enhance your long-term returns.

An author, Certified Public Accountant and Personal Financial Specialist, Jeff Diercks has helped high net worth and institutional investors grow their investment assets in both up and down markets for over a decade. Mr. Diercks is regularly featured in the mainstream media as a specialist in trend following investment strategies. For a powerful guide to investing called “Make the Trend Your Friend”, visit http://www.intrustadvisors.com.

The best investments include stocks, bonds, real estate and gold. Few investors can pick the best investments from each category. The best investment strategy is to own all of the above. Few investors can afford to, or know how to do this on a budget. Here how you can do it.

The best investments are all available to every-day people. If you have a few thousand to invest and limited time or experience investing you can put together the best investment strategy for the average investor. All of this can be done in one package with a mutual fund account. There is no easier-to-apply or better investment strategy out there. When you are invested in stocks, bonds, real estate and gold… you’ve got a balanced portfolio. And a balanced portfolio is your best investment strategy, year in and year out.

Mutual funds are still the best investments for the vast majority of people because they manage investment assets for the investor in all of the above categories and more. When you invest in funds you are diversified within the fund. By investing money in each of the fund categories above you are diversified across the asset classes as well. The end result is a well balanced investment portfolio. The advantage: when one asset class goes out of favor, another can pick up the slack and work to offset losses with gains.

In the past, for example, rising inflation has worked to increase real estate values and the price of gold when stocks faired poorly. Inflation has been low for years, but will eventually rear its head again. Why not have an investment strategy that covers the bases and takes this into consideration? Rising interest rates can hurt bond investors and affect other asset classes as well. Why not spread your money around to avoid being in the wrong place at the wrong time?

Putting our investment strategy to work now comes down to opening a mutual fund account with a large reputable fund company; and picking funds to invest in. Your best investments take the form of stock, bond, real estate and gold funds. The largest fund companies offer all of the above. Some of them offer no-load funds with no sales charges and low yearly investor expenses. Search “no-load funds” on the internet to find them.

Your final consideration is asset allocation… how much or what percent of the money you invest should go to each fund or asset type. This will depend on your risk tolerance, whether you want to be conservative or more aggressive. The point of this article was to get you headed in the right direction toward the best investments and best investment strategy. To learn more before you take action please refer to articles on the subject of asset allocation and investment strategy. There are several available by this same author and others.

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

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

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.”

We have all been taught about the merits of diversification in investments. It is a variation of the old adage, “Don’t put all your eggs in one basket.”

Indeed, professional investment managers are trained to develop portfolios according to the tenets of Modern Portfolio Theory (MPT). MPT traces its roots to the work of Harry Markowitz and his seminal writings on “Portfolio Selection.” In his pioneering research, Markowitz was able to demonstrate the mathematical basis for diversification.

Essentially, Markowitz showed that selecting assets that have a positive expected return but exhibit low or (preferably) negative correlation to one another produces a combined portfolio that retains the positive expected return properties, but with lowered risk (as defined by variance).

Theoretically, this result arises due to the presence of at least two major sources of risk: nonsystematic (or unique) risk and systematic (or market) risk. While it is very difficult to eliminate market risk, it is possible to reduce the risks associated with unique investment assets. By combining investment assets that are subject to certain specific, unique risks with other investment assets that are subject to other unique risks, it may be possible to reduce the overall risk of the combined portfolio.

For the past several decades, this has been the mantra to which all investment managers adhered. Unfortunately, recent experiences in the capital markets have led both academics and professional investment practitioners to rethink portfolio construction. With the increasing interconnectedness of global markets and investment pools, we have seen that correlation structures among various investment assets are not always stable.

In fact, assets that typically exhibit low correlation with one another can dramatically change direction and begin exhibiting increased correlation during periods of market distress. The increased correlation leads to a reduction in the power of diversification and thus to increased risk in the overall portfolio. Unfortunately, this upward shift in correlation happens at exactly the time when an investor needs correlation the most: market distress.

As a result, investment managers need to be exceedingly careful in constructing portfolios that are able to withstand the dynamic nature of correlations, especially as the market experiences large disturbances. These “disturbances” are becoming much more commonplace: the Asian currency crisis of 1997, failure of the major hedge fund “Long Term Capital Management” in 1998, the burst of the “dot-com” bubble in 2000/2001, the terrorist attacks of 2001, the burst of the real estate bubble in 2007/2008, and the credit crisis of 2008/2009. In nearly every case, correlation structures among various assets increased at precisely the time when investors needed protection the most.

The best portfolio construction techniques have an appreciation for the fact that correlation structures may change during different “states of the world” or regimes. By incorporating these state-dependent correlation structures into portfolio design and optimization, investment managers can move to better protect portfolios during times of market distress.

Sharath M. Sury – Founder and Executive Director of the Sury Initiative for Financial Innovation & Risk Management (SIFIRM) at Santa Clara University, Sharath Sury devotes his time and energy to bringing together thought leaders who can address the development of real-world solutions to the current economic climate. Sharath Sury has worked with some of the brightest and most experienced experts in finance and risk management and aims to bring a greater sense of ethics and responsibility to his profession. Through his efforts, Professor Sury has established this invaluable forum for the research and discussion of new developments in the world of economics and finance and has attracted a renewed spirit of innovation to the industry. Sharath Sury also serves as an Adjunct Professor of Economics at the University of California and Adjunct Professor of Finance at DePaul University in Chicago. Sharath Sury’s interest and experience in wealth management began as an Associate and later Vice President at Goldman, Sachs & Co. He later founded and worked at S4 Capital, where he earned numerous accolades for his work.

http://blog.suryonline.net
http://everything-finance.net

The question is how to invest money to make money. The answer is to invest money only after asking a few questions about investment basics. Here are the questions to ask, and how to invest money to avoid scams and bad deals in general.

How to invest money, rule #1, is that there is no such thing as a perfect investment. A perfect investment would have the following features: guaranteed safe, guaranteed to make money and lots of it, high liquidity, zero costs and expenses, big tax breaks, and easy to monitor… so you always know where you stand financially. All investments can be compared based on investment basics, but no honest proposition contains all of the above features.

A scam will generally IMPLY that safety and high profits are guaranteed. Your first question before you invest money: what are the specific guarantees for safety and investment returns? If the answer you get sounds confusing or misleading, you have no need to ask any more questions. Something is rotten in Denmark, since no investment offers high safety and high profits… except scams. Now, let’s move on to some other investment basics and questions to ask. Remember, a large part of knowing how to invest money involves knowing how to avoid bad investments or those that don’t fit your needs.

Ask about LIQUIDITY. How quickly and easily can you get your money back if you want to cash in? What will it cost you? This is a very honest question, and the answer you get should be straightforward. You’re out to invest money to make money; not to get stuck with a loser that will cost an arm and a leg to liquidate.

The COST OF INVESTING is another investment basic you need to ask about. Most investments involve charges and fees to buy, hold, and/or sell. Many times the details are in the fine print, so make sure to ask upfront. High investment costs can turn a winner into a loser. For example, a good simple fixed annuity will pay a competitive interest rate and will have no charge to invest or hold; and no charges to cash in after just a few years. The wrong annuity contract can cost you 3% or more a year in charges and fees, plus heavy charges if you cash out in the first few years.

Be real careful when an investment promises tax breaks. Ask questions first and get it in writing before you invest money. Then, run it by your tax professional if you have one. If you don’t, take a pass. Your goal is to invest money and make money in the process. Not to take a chance and wind up in trouble at tax time.

Our last area of concern in regard to how to invest money and investment basics I refer to as VISIBILITY, or the ability to monitor your investment. After you invest money, then what? Can you track the value of your investment so you know where you stand financially at all times? Will you receive statements each quarter and at the end of each year showing the value of your investment assets?

As a financial planner, some of the worst horror stories of new clients I interviewed were brought to light when I asked to see their records for the investments they held. Sometimes their records or statements were incomplete or otherwise questionable. Sometimes, these investors could find no records at all and didn’t know who to contact to find out the status of their investment. That’s a perfect example of how to invest… NOT.

Before you invest money, sort out the investment basics covered in this article to avoid scams and other major investment mistakes. Don’t be afraid to ask the questions presented here. If you are dealing with honest people, they will be glad to answer your questions. If not, look someplace else.

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

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

If you are like most people on the planet, you covet your positive investment returns and are scared to death that you might give up those returns in this tough market climate. I believe this is why a majority of individual investors missed some or all of the recent stock market ascent off the March 2009 lows and 60%+ move higher.

I think this is why a November 2009 survey of high net worth investors by Investment News, showed that only a slim portion of the wealthy feel in control of their financial lives, an even smaller number (fewer than 9%) enjoy thinking about financial matters and only about a quarter feel successful in investing.

So what is the secret to feeling better about your investments and protecting your portfolio from Mr. Market’s bears? The answer is to have a plan to identify and hedge your portfolio when market conditions clearly show a change in market direction may be coming.

This is where trend following shines. Trend following strategies don’t try to predict market or stock movements, instead they capitalizes on the market’s movements wherever or whenever they occur. Trend followers respond to what is happening rather than anticipating what might happen.

The goal of the trend follower is to let a new trend develop and then invest with that trend. The trend follower then holds that position until there is a reversal. The smart trend follower does not invest at the exact bottom because he/she wants confirmation that a turn (reversal) has occurred. Likewise the trend follower will generally not sell at the exact top (which is more easily identified after the fact). They sell after a clearly identified change in trend (reversal). Therefore, the trend follower is able to capture the “meat” of the trend.

Another very important point is that the trend follower is indifferent as to whether the trend is going up or down to capture his/her return…as long as there is a trend they can make money.

So how can trend following be used to protect your portfolio from the bears? Simple, in your manager allocation include a trend following manager in your allocation. During times of sustained market distress, this manager’s positive returns in a bear environment will help to hedge or offset losses elsewhere in your investment portfolio.

The amount you allocate to the trend follower then becomes a question of how much of the remainder of your portfolio do you want to hedge or protect. Best of all this strategy is not insurance or options, which you may pay for and never use (sunk costs). These managers can make money, as long as there are trends to follow, in both up and down markets. They therefore are a perfect compliment to other managers and styles in a well diversified stable of managers.

An author, Certified Public Accountant and Personal Financial Specialist, Jeff Diercks has helped high net worth and institutional investors grow their investment assets in both up and down markets for over a decade. Mr. Diercks is regularly featured in the mainstream media as a specialist in trend following investment strategies. For a powerful guide to investing called “Make the Trend Your Friend”, visit http://www.intrustadvisors.com.

In our “can’t wait”, “get it now” society, wouldn’t it be nice to learn how to get more from your investment assets. Wouldn’t you like to secure a financial future for you and your family, while worrying less and prospering in both up and down markets? Obviously, this is the American dream! However, it is an achievable dream. Here are seven investing secrets to help you achieve these elusive goals. You won’t hear these from your broker!

1. Markets move in cycles. Learn to recognize these cycles and the investment strategies that prosper in that cycle. Right now we are in a secular bear market. Expect a lot of volatility and little long-term market movement within a large trading range.

2. Buy and hold won’t work right now. The reason, see secret #1. You need an actively managed investment strategy to win in this environment.

3. Trend following works in all cycles, especially secular bear markets. Find an advisor or manager who can spot up or down trends and ride them to profits within this longer term trading range.

4. Mutual funds are dead! Exchange Traded Funds (ETFs) are the way to go. They are low cost, marginable, can be traded intraday, give broad diversity of holdings, allow for stop loss orders, cover just about any stock, bond or commodity market and put and call options can be purchased or sold against the ETF position.

5. Risk management is the key to survival. Make sure you or your advisor have a written plan on how to manage your assets. This plan should also be specific as to when positions are entered and when (and how) they should be exited to protect your capital. This plan should be more than the standard investment policy statement.

6. Stay away from CNBC. This is the surest way to poor investment decisions is to get caught up in the 24 hype this channel must produce to keep an audience. If you must watch this channel, do so only during non-market hours.

7. Cut your losers short and let your winners ride. This is investing 101, but it is surprising how many people hold their losers and eagerly take profits on their winners. Let your winners ride as long as the trend is intact. Limit losses to no more than 6-8% of your position cost.

An author, registered investment advisor and Personal Financial Specialist, Jeff Diercks has helped high net worth and institutional investors grow their investment assets in both up and down markets for over a decade. Mr. Diercks is regularly featured in the mainstream media as a specialist in trend following investment strategies. Mr. Diercks’ firm, InTrust Advisors, has a multi-day mini-course that might help you achieve better investment results with your portfolio called “Seven Days to a Life Changing Investment Results.” This mini-course may be just what you need to get you motivated to secure your future today. You can sign up at http://www.intrustadvisors.com/investment-management-services/#sevendays.