Investment Articles

The results are in! Roughly 260 people took the time to respond to the first income investing survey and I thank y’all very much for being so generous with your time. First, the generalizations:

As you will recall, the survey included eight “mostly true” or “mostly false” statements. Most people answered all of the questions without explanation or analysis (as requested), and most of the analysis explained exceptions to the “in general” nature of the questions being asked. All of your comments were well thought out, most were right on target and much appreciated.

Unanswered questions were judged half right and half wrong because there were too many of them to label totally wrong and wind up with meaningful statistics. Still, as a class, those who responded barely achieved a passing grade. A composite grade of just 72% correct is pretty scary.

Only 20 people assessed all eight statements correctly.

Here are the individual item results, based on my forty years of investment experience, including 35 managing OPM (other people’s money) professionally.

1. Tax deferred income is better than tax-free income. This turned out to be the easiest question of all, as 92.3% of you correctly labeled it “False”. One lesson to be learned early in your investment life is to grow a personal, tax-free, portfolio. “Uncle” has dibs on your retirement plans— all of them.

2. All individual investment portfolios eventually become retirement income portfolios. 38.5% of you failed to get the point— you can’t spend market value unless you sell the securities, and there is no guarantee that the market will cooperate with your retirement plans. Eventually, this one rings “True”, loud and clear.

3. An income investment portfolio should have a stable market value. In thirty-five years of investment management, I’ve determined that the single biggest error investors make is their focus on the market value of income securities. Stable income yes; stable market value – not! Roughly 25% of you incorrectly put this one in the “True” column.

4. Income investors should seek out mutual funds with the highest “total returns” to insure increasing levels of income. You did even worse on this one. 27% thought that higher total returns mean higher income— not at all. “Total Return” analysis is a mutual fund shell game. You can’t spend the growth— and you really should avoid open-end Mutual Funds as income providors.

5. Most often, market value changes will have no impact on the income generated from income-purpose securities. I was not surprised that so few respondents agreed with this mostly “True” observation. Clearly, too many investors (25%) are unclear on the nature of income securities.

6. 401(k) and IRA programs are excellent pension plans. Half of you, that’s 50% people, think of your defined contribution, self directed, savings plans as pensions. Shame on everyone: the government, financial advisors, tax and estate professionals, employee benefits professionals, RIAs— all of us.

7. Government bonds carry the lowest risk of loss, BUT they do fluctuate in market value. Nearly 25% of you missed the boat on this how-could-you-not-know-that “True” statement. My mouth stayed open for days.

8. Tax-exempt dividends in excess of 6% were paid without interruption throughout the financial crisis and remain available today. Also “True” at the time of the survey, and still true today— and only a handful of you emailed me for an explanation.

In summary, there were four generally “True” and four generally “False” statements, and I do appreciate that individual circumstances may make for some slight change in assessment. But if this were a “college entrance exam” for future retirees, retirement planners, or investment managers— well, barely passing just doesn’t cut it.

Many of you will disagree with my assessment. That’s fine, I expect to be beaten up a bit by people who are unfamiliar with my approach. But please be gentle, or at least civil.

Remember, your participation has earned you a free workshop, and thanks again for the input.

Steve Selengut
http://www.sancoservices.com
http://www.valuestockindex.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”

Our image of a canny investor might be clad in pinstripe, testosterone- fuelled and a ruthless risk-taker. Yet he is in serious danger of being outperformed by those of a more feminine persuasion.

One of the largest studies of investment activity, carried out at the University of California in 2001, showed that men traded 45% more often than women. Yet their average risk-adjusted returns were 1.4% less. Another large survey by DigitalLook found that women’s portfolios grew by 3% more than the FTSE in the year ended 31st July 2004, while men’s lagged 1% behind.

Since then the evidence for female supremacy in the investment markets has been steadily mounting. Now psychologists can identify the character traits that make up a winning investor. They’re also pinpointing those traits that explain why more men end up counting their losses in the markets.

What are those attributes that put one a cut-above the other? Women’s better investment performance may be down to the simple fact that they are:
More cautiousWomen’s portfolios are more balanced and diverse. They also choose more low risk, less faddy, options.
Less competitiveWomen invest less of their ego in a deal. They’re less motivated to prove their financial prowess to others or to be in it for the thrill.
More consistentWomen have been shown to back a less volatile portfolio than men. They’re also better at tuning out the ‘information’ that others may over-react to and riding out the ups and downs of the markets.
More patientThey engage in less fund hopping, trade less frequently and hold investments for longer. Those that trade most frequently earn the lowest returns, studies by Barber and Odean (2000) and Carhart (1997) have found. This is true of both individuals and mutual funds.
Better researchersAlthough women on the whole are less experienced investors than men, they will research more thoroughly and be less swayed by the herd.

Sure, these aspects of the female psyche also make women more conservative investors than men. And so they may not reap the stratospheric profits (or make the mega losses) that men do. But, by investing in funds that are consistently good over time women’s net returns are higher. And isn’t that what counts in the end?

Of course, many men have what it takes to make them top-notch investors. But their winning traits may not be the customarily masculine ones. The truly top male investors may be more in touch with their feminine side than we’d think.

Apart from a lack of estrogen and fewer handbags, what else accounts for the winner-loser divide? There are three key psychological traits that, when it comes to making the savviest investment decisions, can trip men up every time.

These are:
Attitude to riskMen are less risk averse than women and will back portfolios that are more uncertain. They’re more likely to put all their eggs in one basket instead of opting for a safer, more diverse portfolio. Men’s higher earnings and greater net worth also makes it easier for them to take greater risks than women. A US study by Wang in 1994 also showed that women are more likely to be offered safer options than men, by advisors who expect them to be risk-averse.
OverconfidenceOverconfidence is consistently found in more men than women, research shows. And this is especially true in male-dominated arenas such as finance. They overestimate the returns their investments will bring and the certainty of the return. They also have a misjudged overconfidence in the accuracy of their own knowledge and over-rate their own ability. In a Gallup study, both men and women expected their portfolios to outperform the market but men expected theirs to outperform it by a greater margin.
The herd instinctConstantly monitoring the market can fuel men’s over-activity and cause them to act irrationally. Men are more likely to get drawn into financial follow-my-leader games and information cascades. They also fall foul of being too well informed, instead of tuning out the endless stream of news and financial information and sticking to an annual portfolio review.

Despite women having more of the innate skills that could earn them the best returns, still lamentably few of them are in the game. Male investors outnumber females by eight to one, and a mere 3% of hedge funds are headed by a woman. Simonne Gnessen, who owns Wise Monkey Financial Coaching and has a predominantly female clientele, says women could do with borrowing some of that male over-confidence. “Many women have exactly what it takes to reach dizzy financial heights,” she commented, “the only thing holding them back is knowing that they have it and acting on it.”

Professor Karen Pine is a renowned researcher in Developmental Psychology as well as being a popular women’s writer. Currently she is Professor of Developmental Psychology at the University of Hertfordshire. Professor Pine’s research has been published extensively in international academic journals and presented at conferences worldwide. Women’s issues have always been at the heart of Karen’s interests and her wide-ranging research includes non-verbal communication, money management and body image. She has featured regularly in the media, on television programmes such as Channel 4 News and Richard and Judy and in news media from the Independent in the UK to the Sydney Morning Herald in Australia.

http://www.karenpine.com
http://sheconomics.com

Banks! No other industry is more hated and no other industry has faster profit growth after coming to the brink of collapse. The analyst community at large believes that financial companies earnings are likely to have risen 120% in the fourth quarter! Quite a number in our opinion. Although we always want to see strong earnings growth from any US company we believe this might be a bit excessive in its prediction.

Still, for many that’s not enough after feeling over a 50% drop in US indexes over the last two years along with 160 financial institution failures. Banks at this moment are the least favored at this moment for a variety of reasons but they may be the one’s offering the most opportunity and bang for the buck with those who have a good risk tolerance level. Mark Giambrone, a fund manager for USAA Investment Management Co., stated that the “The stocks are clearly too cheap,” and that “There may be some bumps in the road ahead, but for the most part those are reflected in the valuations.” It’s hard to fight with that logic at times when Citigroup still trades for less than $5 as an extraordinary example and the fact that the S&P Financials Index gained 15 percent in 2009.

Bank of America in particular is forecasted to illustrate among the U.S. banks according to data Bloomberg data. It is currently rated a “buy” by 25 of the 32 analysts who track the company Bloomberg data shows.

Analysts at this time believe profits could climb up to $.93/share in 2010 relative to a $.2/share loss in 2009.

At this time the analyst community is more bullish on bank stocks in the S&P 500 than anything else. They’re calling out a 14 percent rally among the group according to information from Bloomberg. That would pretty impressive rally since its 145 percent rally since March!

Financial companies continue to benefit from the Federal Reserve zero interest rate policy. Currently, the yield curve that measures the differential between the 2- and 10-year Treasury yields reached a record 2.88 percentage points in the prior month. This would easily allow banks to profit from this difference in yields.

Further, net interest margins could widen to 3.54% for 2010. The banks money make here through via the difference between what they pay to depositors and what they earn from loans.

Bob Doll, vice chairman and chief investment officer for global equities at BlackRock Inc., brought a strong point about banks. Stating that investors want to know that when “are all the assets that are classified as performing going to perform?” Doll himself doesn’t seem convinced yet as he stated on January 6th, 2010 that this “is the concern. We would wait for some price pullback and have patience before buying.”

What can be taken away from this news and information is that the banking industry as whole is healing and that matters whether you hate the industry or not. Money makes the world go round and they hold the key to capital thus it’s in everyone’s interest to see them do well. Though we see the banking industry mending still we would feel reluctant to deploy capital to the industry as a whole and would prefer to individually pick banks that we have confidence in and that have long term growth potential.

Ready to invest in banks and find out what opportunity is out there? CLICK HERE. Start building your personal empire today at http://www.claritiresearch.com.

From the end of 1999 through the end of 2009, all of the popular Wall Street market performance measurement tools were in the red. The average bloodletting level of the DJIA, the S & P 500, and the NASDAQ was a disturbing-to-some minus nineteen percent.

The Media has dubbed it “The Dismal Decade”.

Most of the investment community is either open-mouthed in shock or strident in blame about the somethings or someones who must be responsible for such horrific performance. Never again they swear to their clients— without ever a hint that they might themselves be the problem.

It won’t be long before the Wizards of Wall Street announce that they have studied the situation, and readied their sales minions to switch the shattered investment public into yet another fail proof (fool-magnet?) portfolio of hedges, gimmicks, signal responders, and panaceas for whatever the new decade brings.

Once again they will attempt to debug the market cycle and create an upward only future for the masses. Try not to be abused again— the markets aren’t broken, just the market shakers. Your portfolio should be up in market value— and not by just a little for the “dismal decade”.

These are the same geniuses that created the dotcom bubble by cramming valueless securities and speculative IPOs down your throats. They are the same charlatans who created the derivative markets and fraudulently hid their gaming devices in innocent looking rolls of tissue paper.

Wall Street thrives on the boom and bust scenario— because it doesn’t really matter to them how many of you win or lose. The evidence is clear; a boring-but-winning approach has been out there (and ignored) for three equally productive decades. The investment gods are outraged!

The past decade was a fabulous decade for old-fashioned value investors, particularly those with a reasonable selling discipline in their methodology!

It was a fabulous decade for those who understood that quality, diversification, and income generation are principles as opposed to media placating buzzwords.

It was a fabulous decade for those investors who were able to see over, beyond, and through artificial time constraints to find the long-term opportunities within every beautiful market cycle undulation. There were plenty of gyrations to gyrate to if you only knew how.

Investing is no longer a passive enterprise; and it never really was. If you can’t manage your portfolio throughout the market cycle, without succumbing either to greed, to panic, or to artificial and complicated hedging strategies, just stop. Right now. Listen and learn something old.

The only market cycle hedges needed are quality, diversification, and income— all classically defined. Throw in some disciplined selection and selling guidelines, a cost-based asset allocation formula, and a non-calendar year perspective and success will follow— cyclically.

You may miss a speculative spike or two (i.e., bubbles), but in the long run, Market Cycle Investment Management (MCIM) is a proven methodology for long run investment success.

You just can’t replace market cycle reality with calendar year gimmickry. Do better. Google investment grade value stock and request the ten-year MCIM numbers.

Change is good.

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”

As a man, I find myself asking myself often, “What is going on in this world?” Is it me or is there a concerted effort, or should I say a case of “trying too hard” to marginalize men in society. Now don’t get me wrong, I am all for “women rights,” only when women will decide to seek harmony with men. However, “gender equality” should not come at the expense of the rights of men.

That is why it humors me to no end at this current attempt by the feminist propaganda machine to not only blame men for the current economic landscape, but to proclaim, by way of a certain articles (see below), that women are better investors than men. Much of what is written suggests that men need to “step aside” and let women take over the reins of the decisions involving the investment portfolio. Without rehashing much of what was written in these articles, here is a summary of the main points:

• Men overall traded stocks 45% more frequently than women.
• Single men traded stocks 67% more frequently than single women.
• Women overall earned annual risk-adjusted returns that were 1.0% greater than men.
• Single women earned annual risk-adjusted returns that were 1.4% greater than single men.
• The major problem men have is ego.

While I don’t necessarily disagree with the stats, providing there was no number “massaging,” I do disagree with the conclusion that women are better investors and that men are somehow gender inferior to women in this area; This where I call it a case of “creating something that wasn’t there.” Now that we live in a society that fosters in women false empowerment and discourages constructive criticism, it is time to start exposing the truth. I don’t mind pimping out my investment portfolio to my women friends if I saw a clear advantage but I am going to share my 5 reasons why women are hardly any better investors despite the numbers that appear to the contrary.

Reason One: Women have a safety net

When have you ever seen the majority of the homeless in America made up of women? When have you ever heard of the majority of divorce settlements falling in favor of men? When have you ever seen a continuous stream of women losing custody over their children to their fathers? When have you ever seen domestic disputes where the majority of time women were arrested? I could go on and on, but this will suffice.

I went into left field to say that women, despite their “come up,” have a “safety net” provided for them by society. Forget the propaganda of women “struggling to make it to the top.” Women are achieving such because they are in a place where they can’t fail (which by the way was created for them by men). Men can complain or women may not want to acknowledge it, but that is reality.

So if you knew you couldn’t fail, then how do you think your investment performance would fare? If there is little to no risk to your world collapsing, then you can afford to sit back and hold your investments longer and trade them as little. While men are accused of being over confident in their trading, the numbers also imply that women generally do well because of conditions that they did not create.

As for men, there is no comparison. A man can spend his life toiling to create a respectable fortune and a suitable life, make one miscalculation, whether its marrying the wrong woman, gets fired, or the business goes defunct, and he is likely to do a free fall to the bottom. Because of this, it is the reason why men have the tendency to take more risk. We are not wired to take risk, but rather we must take chances in the real face of uncertainty to create a probable certainty.

Reason Two: Women posses no inherent added value

It is a disservice to both men and women to suggest that women possess some “super power” that men are lacking. This argument is based on the results that women out performed men by a measly 1 to 1.3%. I say measly because if it were the case that there was some inherent added value within the biological and gender make up of women, then why does this power eke out only less than 5%. That’s like calling the “man of steel” Superman but he can only lift 5 more pounds than the strongest body builder. The argument sounds a bit stretched.

When you look at the annual performance number combined with the 45 and 67% over trading statistics, it speaks volumes not to any power women may have, but rather to the mistakes that men make in the financial markets. The numbers really suggest men need a better framework for trading successfully. If you look at the numbers again, all men have to do is ever so slightly improve their trading by just a little, and men easily dwarf the trading performance of women. It is as simple as that.

On another note about the so called “gender superiority” women supposedly have when it comes to investing in the financial markets, my question is, if this is true, then why aren’t more women in droves coming in to take advantage of their “inborn super powers?” Women have for years taken on jobs and careers that were nontraditional and “worked hard to get to the top” of their professions, why wouldn’t they do something that supposedly comes “naturally” for them? As the rapper Jay-Z would say, “One of us ain’t playin’ right, but I’ll let you tell it.”

Furthermore, the collective of articles points out the reason why women make better investors is due to them having higher emotional intelligence than men. On the surface this is true because women are systemically tied to their emotions, so it obviously make sense. The more you use something the more intelligent you become in that area. This is so apparent but I have to ask, what does this have to do with the price of tea in China? If you look in the annals of giants in the investing or trading arena, how come you never hear any of these great men mentioning that they relied on their emotions to invest successfully? That is like me asking women, if they are so attuned to their emotions or their intuition, how come many of them fail to use their innate power to “feel” the difference between a good man and a loser. This brings me to the next reason.

Reason Three: Women have no long-term perspective

Last time I check, the divorce rate hovered around 50-70%. What is more interesting is that 60-70% of those divorces are initiated by women. Maybe I am missing something here but can anybody explain to me how I am supposed to believe they can pick and hold the right stocks for the long term, but lack discernment in their choice of men and lack the long-term perspective to stick with their relationships. I am just saying…

Reason Four: Women are masters of pride

Another argument for the idea that men need to “sit down” and let women take over is that men have too much ego. On this point, I definitely agree with this one. Men tend to put a little too much stock in what little they know, especially when it comes to investment selection. I know because I use to carry on with this tone managing my portfolio to my demise. But to suggest that men are “wired” this way or that women are not in possession of any flaw is ludicrous.

What women may lack in ego, they more than make up in pride. Here is a quick exercise. Count on your hands the number of times you ever heard a woman admit to a mistake or admitted that she was wrong? If you get the range of numbers I get then you clearly see that although a man will overcompensate on his expertise, women will avoid humiliation to the point of denial rather than admit that they made an error in their investment decisions. So it equals out. Are you finding it hard to believe that women are somehow “getting over” on men by using their “superior strength” in the financial markets?

Reason Five: Women don’t take rejection to well

You ever wonder why in spite of the changes in society with women moving up in the world, most women still hold (when it suits them) these beliefs that men are still supposed to pay for dinner, pursue them, and whatever else works for them in their favor. I quickly assess that the real reason is that women use this as a way of keeping power to overcompensate for their fear of rejection. After all, I just mentioned that women are the masters of pride. I will share an incident with you that will help bring home this point.

I remember years ago, I was at this bar with a couple of my partners. We were talking about whatever when we noticed that this particular woman sitting at the bar whispering amongst her girlfriends while looking in the direction of one of my friends. Eventually, she gets up and starts heading over in our direction and starts to have a conversation with him. Instead of us butting in, we proceeded to eat at our food while “ear hustling.”

Apparently, she was trying to engage him in a conversation about whether he had a girlfriend and what not. What made me start snickering was that his nonverbal language hinted to his disinterest. While she was making every attempt to close the deal, he finally told her that he was neither interested nor looking for a relationship at this time, since he just got out of relationship. Once she got the picture, she went back to the bar.

But then she started crying. I mean literally crying with her head down on the bar. It was so bad that her girls gathered around to console her. For obvious reasons, we and the few men who were privileged to see this were laughing hysterically. It was shocking enough that we witnessed the very few times a woman actually approaching a man, but to see a woman get rejected was kind of funny in a weird kind of way. Now she knows what men go through every day.

I bring up this story to make this point: Most women never put themselves in positions of great risk or danger. Consequently, when they encounter these situations, they are not trained to deal with them. So how all of sudden they are now better investors than men when the essence of the financial markets is risk, and I now need to turn over my investment decisions over to them. Miss me with this.

As I said earlier, most men under perform in the financial markets due to a lack of understanding or not having an optimal mindset for the markets. It really has nothing to do with gender as much as it has to do with social engineering. The secret to improving performance in the financial markets is to understand that what goes on in the markets is a microcosm of what goes on in society. Deflect the way society tries to influence you as a man, and you will begin to improve your performance in the markets.

Resources

http://www.women24.com/Content/Wellness/BodyAndSpirit/2502/c28a5f25e4eb47eebb6a376e49ad013d/24-03-2009-09-36/Why_women_are_better_investors

http://www.advancingwomen.com/more-money/why-women-make-better-investors-than-men.html

Henry “Solomon” Billingslea, Jr. is a financial trader, and the author of Pimping Wall Street, The Player’s Guide To Trading The Markets Vol. I. He offers a Free Trading Mentoring Program where he gives free coaching and free capital to get build a solid trading portfolio.

The new investor can start investing small with a large selection of investment options to choose from. If you want to go it alone and save money, your best investment path will depend on how much freedom you want. Here are two low-cost ways to start investing on your own.

If you want to start investing the easy way with professional money managers making the specific investment decisions for you I recommend no-load mutual funds. You save money by not paying a sales charge or commission when you invest, and yearly expenses can be quite low. With a major fund family you have a wide variety of investment options. This is your best investment path if you want help with investment management.

If you want the freedom to invest in anything from real estate to individual stocks and bonds… gold and silver or oil and gas… even in mutual funds: open an account with a major discount broker. It will cost about $10 to make an investment on your computer and the same to sell it. You can buy or sell in seconds on any business day. The investment management is all up to you.

With a discount brokerage account the new investor will save money and have more investment options than ever before in history. Trust me, compared to the old days the new investor has it made today. It’s even easier to start investing than you think, thanks in part to stocks that are actually exchange traded funds (ETFs). Let me give you an example.

Let’s say that gold prices have your attention and you would like a piece of the action. You only want to invest about $1000, and want to be able to get in and out quickly in case things get dicey in the gold market. You can pour over the stats for various gold mining stocks in search of the best investment. Or you can simply buy shares in an ETF that invests in gold bullion and tracks the price of it… stock symbol GLD.

A few years ago I would have advised every new investor to invest in mutual funds. But for you more adventuresome types who want to play a more active role in your own investment management… open an account with a discount broker. You don’t need to trade stocks or otherwise speculate just because you have an account. Look into ETFs on your broker’s web site. These investment funds can make your investing life easier.

If you want to start investing on your own I suggest you start small if you pick your own investments in a brokerage account. For larger amounts, like IRA rollovers, I suggest no-load funds for the new investor. Or, try it both ways. But if you really want to make your money grow, do your homework along the way.

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.

On the surface, index investing seems like a perfect fit for do-it-yourself investors. The simplistic buy-hold-rebalance mantra of index fund proponents combined with the abundance of help from investing authors and online forums leads scores of informed investors to take on the task of personal portfolio management each year. Many DIY investors never look back; they treasure their newfound fiscal autonomy and the challenge of overcoming future financial hurdles. Others, however, discover that they lack the time, interest, knowledge or discipline to successfully negotiate the dangerous DIY terrain, and they ultimately seek help from an investment advisor. The purpose of this article is to clearly present the rationale for each approach so that index investors can decide which tactic best suits their needs and abilities.

Why Investors Do it Themselves

According to a 2006 study by the Investment Company Institute, the primary reason that DIY investors manage their own portfolios is that they want to be in control. There is a sense of empowerment that comes with making your own investment decisions, and DIY investors, especially men, like holding the reigns. The study also found that the majority of DIY investors believe that they have the necessary information and intellectual ability to make well-informed, prudent financial decisions without the help of a professional. In the minds of these confident investors, advisory fees are an unnecessary expense. Finally, many individuals find personal finance to be a rewarding hobby. According to the study, the majority of DIY investors enjoy conducting their own financial research, crunching numbers and closely monitoring their investments.

Others choose the DIY path not because they love the idea of managing their own investments, but because they dislike the idea of hiring an advisor. You may fall into this category if you place a high value on your financial privacy, believe that most financial advisors are incompetent or untrustworthy, or simply want to save money by not paying advisory fees. The fact that all investment advisors aren’t created equal provides little solace to those whose opinions have been shaped by the numerous investor scandals of the past year or by a poor past experience with an advisor.

Finally, there is a group of investors who acknowledge that they would benefit from professional help but lack an investment account large enough to capture the attention of an advisor. First-time investors often fall into this category and tend to seek advice from public sources, relatives or friends.

Why Investors Hire Advisors

A good investment advisor can add value to your portfolio in a number of ways. First, he acts as a gatekeeper, preventing you from making common return-reducing mistakes. Numerous studies have shown that individual investors routinely give up as much as 7% in annual returns due to frequent trading, attempting to time the market and chasing past performance. Even the most seasoned index investor needs the occasional reminder to avoid distractions and stick with his investment plan.

A good advisor also provides access to research, techniques and investment choices that have the potential to boost returns. By understanding complex issues like tax management, estate planning and retirement forecasting, an advisor can help you better understand the likelihood of reaching your retirement goals and suggest steps that you can take to tilt the equation in your favor. Additionally, he may be able to expand your investment choices by providing access to exclusive fund families or share classes.

Finally, a good advisor performs laborious tasks like portfolio monitoring and rebalancing so that you can devote your time to other pursuits. An advisor who monitors your portfolio frequently can ensure consistency with your risk profile while potentially squeezing excess returns from rebalancing activity.

Conclusion

Many investors want a quantitative answer to the question of whether to hire an advisor; they want to know definitively whether an advisor would provide them with higher investment returns after fees. In order to answer this question, you must first ask yourself whether you have been able to develop and consistently implement a low-cost, disciplined investment plan on your own. Many investors don’t have enough interest, knowledge or ability to develop a sensible plan; even more lack the necessary discipline to follow one. If you find yourself veering off the path to chase a hot new sector or time the market, there’s a good chance that an advisor would bring some return-boosting discipline and objectivity to your investment decisions.

If you do possess the mental and physical fortitude to develop a sound plan and consistently stay the course, you should probably look to qualitative factors to make your decision. For instance, would you rather spend the time that you dedicate to investment management on other things, like visiting family or pursuing other interests? For many investors, the answer to this question changes later in life as financial situations become more complex, the consequences of poor decisions become more severe, and time with family becomes a bigger priority.

The bottom line is that managing your own index portfolio may be simple, but it’s not easy. If you decide to oversee your own investments, defend yourself against the tendency to stray from your investment plan by drafting an Investment Policy Statement. If you decide to hire a professional, choose a fee-only advisor who agrees with your passive investing philosophy, embraces his fiduciary responsibility to act in your best interests, and is willing and able to add value in the ways described above. Whichever path you choose, you can maximize your chances of investing success by accurately assessing your risk attitude and capacity, designing a diversified, low-cost portfolio, and sticking with your plan.

George Watkins is President of West Wind Wealth Management, an independent investment advisory firm that specializes in index portfolios. He has a BS in Economics from Duke University and an MBA from Harvard Business School. To download helpful tools and tips for DIY investors, purchase a personalized index portfolio recommendation, or inquire about full-service wealth management solutions, visit http://www.invest-it-yourself.com.

Are terms like ROI, diversification, cap rates, risk analysis, puts & call confusing you? If you are seeking to build your wealth for retirement or to achieve life goals, you need an investment plan. My guide to basic investment fundamentals is simple to understand. It is always best to start young saving and investing but it’s never, ever too late to start.

Investment Basics

Investments are both a hedge against insecurities of the future from inflation and for increased needs for money such as for retirement. Critical to investing is the power of compounding. This is what makes investing attractive. Your future wealth is decided largely by the prudent investment plans you undertake now. Investments always comes with an element of risk. It is for you to weigh the level of risk with possible rewards. Understanding risk is the cornerstone of investment fundamentals.

Diversification is the key to good investment management. Spreading your assets and investments across various types of investment spreads your risk. You never want to put too much money into one category – such as all your money in one stock. Spreading you investments across stocks, bonds, real estate and other categories better insures that if one stock or investment category goes south, it will be minimized by other categories that are doing better.

Risk is about your comfort level. If you are young, you may be willing to take much larger risks, and potentially larger rewards, than if you are nearing retirement when you don’t want to risk losing the value of your portfolio.

Investments such as treasury bills, CD’s and bank deposits earn a fixed interest; and they are low risk. Stocks and mutual funds promise more growth potential. When they do well, you stand to gain because you earn money on the money your investment makes. Investment in property can bring you handsome returns but over a period of time. Those willing to take greater risks use leverage. That is, they use the banks money to make money. Borrowing to buy stocks, or borrowing to buy an investment property is riskier but gives you the potential to earn much more. Diversifying investments ensures that you don’t lose everything if a particular investment doesn’t work out well.

Funds: Decide the amount that you can set aside for investment. With right planning, you should be able to set aside and build up an investment fund. Ensure that you have built sufficient cash reserve to meet short-term emergencies. Six months of salary put away in a low-risk savings account is a good place to start. Plan your expenditures so as to redirect funds for investment. Put away a percentage of your pay increase to long-term savings investment.

Plan: Take a broader perspective when planning your finances. Chalk out your financial goals such as a child’s education, retirement or buying a home. Analyze your current situation and determine your needs.

Knowledge: You should consider taking the guidance of an investment adviser. An adviser can help in tailoring your investment to suit your requirements. This would work well for those strapped for time and those who are not well-versed with financial planning.

Time: Investing in stocks and bonds is not everyone’s cup of tea – nor do you have the time to keep up on when to buy and sell. If you buy rental property, it takes time and effort to collect rents, handle complaints, fix problems, etc. Maybe REITs, which are like stocks in real estate, is a better alternative than owning property outright. Be realistic about the time you can put into managing your investments.

Expectations: Be realistic and reasonable about expectations on investments. While some may far surpass your expectations, sometimes investments may not pay off as well as they promised. Plan your tax liabilities too when overseeing your investment plans. Consider capital gains that may come into effect.

Preparation: Before placing your money towards an investment, weigh the cost of the investment. What are the broker and transaction fees if you are buying stocks or bonds. If buying investment property, carefully detail out all expenses and you will need to project them into the future.

The best advice is to start small and learn. As you gain confidence in yourself, it is easy to expand your portfolio.

As a serial entrepreneur and active financial investor, Howard Debs offers guidance on building your wealth. More resources and advice from Howard for both novices and experienced investors at Achieve Wealth 101

Any discussion on risk-adjusted performance measures must start with the grandfather of all risk measures the Sharpe Ratio or Reward to Variability which divides the excess return of a portfolio in excess of the risk free rate by its standard deviation or variability.

Most risk measures are best described graphically, a measure of return in the vertical axis and a measure of risk in the horizontal axis.

Ideally if investors are risk averse they should be looking for high return and low variability of return, in other words in the top left-hand quadrant of the graph. The Sharpe ratio simply measures the gradient of the line from the risk free rate (the natural starting point for any investor) to the combined return and risk of each portfolio, the steeper the gradient, the higher the Sharpe ratio the better the combined performance of risk and return.

Funds are ranked in order of preference with the Sharpe ratio but it is difficult to judge the extent of relative performance. M2; first proposed by Leah Modigliani and her grandfather Professor Franco Modigliani (1997) offers an alternative risk-adjusted return using the Sharpe ratio of the portfolio but calculated at the risk of the benchmark thus allowing direct comparison.

Investment statistics can either be grouped as Sharpe type combining risk and return in a ratio, risk adjusted returns such as M2 or descriptive statistics which are neither good nor bad but provide information about the pattern of returns of the portfolio manager. The first moment of a return series is the mean, the second moment is the variance, the third moment is skewness and the fourth moment kurtosis. Kurtosis measures the weight of returns in the tails or the peakedness of a return distribution. Investors should prefer high average returns, lower variance or standard deviation, positive skewness and lower kurtosis. The adjusted Sharpe ratio suggested by Pezier (2006) explicitly rewards positive skewness and low kurtosis (below 3, the kurtosis of a normal distribution) in its calculation and thus potentially removes one of the possible criticisms of the Sharpe ratio.

The regression statistics b (or systematic risk), r (correlation) and R2 are descriptive statistics. Jensen’s alpha is often misquoted as the portfolio manager’s excess return above the benchmark, more accurately it the excess return adjusted for systematic risk.

Treynor ratio or Reward to Volatility is similar to Sharpe ratio, the numerator (or vertical axis graphically speaking) is identical but in the denominator (horizontal axis) instead of total risk we have systematic risk or volatility as calculated by beta. Although well known the Treynor ratio is less useful precisely because it ignores specific risk.

The appraisal ratio first suggested by Treynor & Black (1973) is similar in concept to the Sharpe ratio but using Jensen’s alpha, excess return adjusted for systematic risk in the numerator, divided by specific risk not total risk in the denominator.This measures the systematic risk adjusted reward for each unit of specific risk taken.

In the same way that absolute return and absolute risk are combined in Sharpe ratio excess return and tracking error (the standard deviation of excess return) are combined in the information ratio, although given the need of an appropriate benchmark less useful for hedge funds.

The Sharpe, appraisal, Treynor and information ratios are familiar measures used by the industry for decades. More recently hedge funds have encouraged the use of further risk measures designed to accommodate the risk concerns of different types of investors. These measures can be categorised as based on normal measures of risk, regression, higher or lower partial moments, drawdown or value at risk (VaR).

Predominately hedge fund management styles are designed to be asymmetric in their return patterns. If successful this leads to variability of returns on the upside but not on the downside. Investors are less concerned with variability on the upside but of course are extremely concerned about variability on the downside. This leads to an extended family of risk-adjusted measures reflecting the downside risk tolerances of investors seeking absolute not relative returns.

Standard deviation and the symmetrical normal distribution are the foundations of Modern Portfolio Theory. Post-modern Portfolio Theory recognises that investors prefer upside risk rather than downside risk and utilises semi-standard deviation.

Downside risk measures the variability of underperformance below a minimum target rate. Theminimum target rate could be the risk free rate, the benchmark or any other fixed threshold required by the client. All positive returns are included as zero in the calculation of downside risk or semi-standard deviation.Downside potential is simply the average of returns below target, upside potential the average of returns above target.

In their article “A Universal Performance Measure” (2002) Shadwick & Keating suggest a gain-loss ratio, Omega (W) that captures the information in the higher moments of a return distribution implicitly adjusting for both skewness and kurtosis; dividing upside potential by downside potential.

A natural extension of the Sharpe and Omega is suggested by Sortino (1991) which uses downside risk in the denominator. Total risk has simply been replaced by downside risk, portfolio managers will not be penalised for upside variability but will be penalised for variability below the minimum target return.

The upside potential ratio suggested by Sortino, Van de Meer & Platinga (1999) can also be used to rank portfolio performance and combines upside potential with downside risk. Even “Prospect Theory” the fact that investors dislike losses far greater than they like gains can be built into a Sharpe like measure in the form of the Prospect ratio.

If value at risk is your preferred measure of risk then, of course, there is a Sharpe type measure that replaces standard deviation with VaR in the denominator; called reward to VaR. VaR does not provide any information about the shape of the tail or the expected size of loss beyond the confidence level. In this sense it is a very unsatisfactory risk measure; of more interest is conditional VaR otherwise know as expected shortfall, mean expected loss, tail VaR or tail loss which takes into account the shape of the tail. Historical simulation methods which make no assumptions of normality are particularly suitable for calculating conditional VaR. The conditional Sharpe ratio replaces VaR with conditional VaR.

Perhaps the simplest measure of risk in a return series from an absolute return investor’s perspective, wishing to avoid losses, is any continuous losing return period or drawdown. The average drawdown is the average continuous negative return over an investment period, three years being a typical period of measurement for comparison purposes.

The maximum draw down not to be confused with the largest individual draw down is the maximum potential loss over a specific time period, typically three years. Maximum draw down represents the maximum loss an investor can suffer in the fund buying at the highest point and selling at lowest.The Calmar ratio is a Sharpe type measure that uses maximum draw down rather than standard deviation to reflect the investor’s risk. In the context of hedge fund performance it is easy to understand why investor’s might prefer the maximum possible loss from peak to valley as an appropriate measure of risk.

The Sterling ratio replaces the maximum draw down in the Calmar ratio with the average largest draw downs.

Similar measures including the Pain ratio and the Ulcer Performance ratio incorporate the duration and depth of draw downs since the previous high water mark. The range of combined risk and return measures available for hedge fund investors is almost limitless.

With so many similar ratios the natural question to ask is “which is the best measure to use?” In fact Eling & Schuhmacher (2006) have published an article “Does the Choice of Performance Measure Influence the Evaluation of Hedge Funds” which concludes that most of these measures are all highly correlated and do not lead to significantly different rankings. Both the question and their article to some degree miss the point, risk like beauty is in the eye of the beholder, the investor most decide ex-ante which measures of return and risk best reflect their preferences and choose the combined ratio which reflects those preferences. One, and only one, of the above ratios are most likely to reflect the preferences of the investor. Care should also be taken to ensure hedge funds are not hiding volatility by using smoothed valuations. Consistent valuation criteria must by applied each month, although Global Investment Performance Standards (GIPS) do not require that specific risk measures are used they do require documented policies and procedures for valuations consistently applied and are therefore valuable and a source of comfort for any potential investors.

Read the full 13 pages article at:
http://www.statpro.com/resources/whitepapers/how_sharp_is_the_sharpe_ratio.aspx

Carl is also the author of “Practical Portfolio Performance Measurement & Attribution” part of the Wiley Finance Series, numerous articles and papers and editor of “Advanced Portfolio Attribution Analysis”

Most investors do not realize, but as a private investor managing his own money, he has got an immense advantage over a fund manager due to factors he may not even be aware of.

Sure it will take up some of your free time but it will probably be one of the most awarding activities you can invest your time in.

We have all worked hard for the money we have saved and it would only be prudent to invest in in the best way possible.

With public pension systems crumbling around the world because of aging populations, making the most of your savings had gotten much more important.

Below are the advantage I have come up with. If you come up with any others please send me a short note.

1. You can wait
As a private investor you can wait for attractive investment opportunities to present themselves. If you cannot find anything attractive you can stay in cash.

Fund managers do not have this luxury. They have to invest in whatever their investment area is irrespective of valuation.

Holding cash in the fund management world is known as career risk as the fund manager runs the risk of falling behind his peers or his benchmark. The larger the cash position the higher the career risk.

The best example of career risk I have read is value fund managers losing their jobs because they refused to buy internet shares during the internet bubble.

2. You can invest anywhere and everywhere
As a private investor you can invest in any type of asset in any country that offers an attractive risk return trade-off, be it corporate bonds, equities, options, real estate etc.

Fund managers have to stay within the fund’s investment area. Additionally complying with regulations, even further limits their investment choices.

You can argue that you can change to a fund in another investment area but that is also actively managing your money.

3. You can invest in any size
This is similar to the investing anywhere and everywhere as you have the freedom of investing in small or large companies whatever is most attractively priced.

I was recently astounded when I heard of a value fund manager that had to invest in companies that have a high weighting in a particular share index because he had institutional investors (read large investors) that would withdraw their funds should his performance deviate too much from the market.

This is ludicrous, why invest with a value manager if you really want market index performance? You want a value manager to do what he does best, search for undervalued companies.

4. You have no benchmark
As a private investor I only have one goal in mind, to grow my investment portfolio each year irrespective of what the market does.

I do not consider it a good year if I have lost 25% while the market has lost 40%.

I am sure your goal is the same.

Fund managers only have one goal, beating his benchmark irrespective of absolute return. I cannot remember how many times I have heard a fund manager say that he has to remain fully invested in his investment area as that is what his investors expect of him.

Just think of what happened to investors in technology funds as the internet bubble deflated.

5. You can focus and ignore
Studying, understanding and applying what has worked in investing is all you need to do to be wildly successful as a private investor.

You can only focus on a few things and ignore the market noise, you only have to spend relatively little time to be successful.

Fund managers have to have an opinion on a lot of different investment areas because they have to appear competent in company and client meetings. It is tough for them to have to say I do not know.

I do not watch financial television, its complete rubbish and a waste of time. Mainly yo-yo news i.e. what went up and down.

I have my investment criteria, I look for companies that falls within it and I study only that. The rest does not interest me and that saves a lot of time.

6. No conflict of interest
This is a big one. You only have your best interests at heart. In other words all your decisions are in your best interest.

Fund managers have to think of keeping their jobs, increasing their assets under management and keeping clients happy.

All this means is that their investment performance is not the most important thing on their minds.

Also fund managers in companies what also offer investment banking services may be pressurised to buy securities of investment banking clients irrespective of investment attractiveness.

7. You can have a long view
According to a study by the New York Stock Exchange the average holding period of shares held by investors have declined from five to six years in the 1950’s to 11 months.

It is unlikely that a company with problems, as undervalued investment inevitably have, can sort them out in such a short period of time.

As a private investor you can follow the company over many years and realize the gains when the company gets revalued by the market.

This may be the largest competitive advantage you have. The ability to look at a company solely on valuation and keep it as long as it is undervalued.

8. No peer pressure
Accept if you discuss your investment with friends or family you will have no peer pressure to buy or sell any investments.

I have gotten to the point that I am reluctant to discuss my investments because the response I get is either, “never heard of it” or “what, you must be mad, don’t you read the newspaper?”

Fund managers have a different problem. The funds they manage get compared to benchmark indices and other funds, including the individual fund holdings. Should you stand out in any way invites questions. Should the performance be worse than the peer group or benchmark career risk increases.

If you manage your own money you have none of these problems.

9. You decide
You make the final decision after you have done the analysis. You may be wrong but at least you make the calls either way.

A lot of funds are managed where committees decide what is bought and sold. Apart from the problems of group-think investment committees are staffed with people throughout the organization with different investment approaches, not all of which has shown good historical results.

Furthermore it may be difficult to tell your boss that his investment idea stinks if you have your bonus evaluation later that day.

This leads to suboptimal and sometimes completely dysfunctional decision making.

10. You can concentrate
If you find a really compelling idea you can choose to invest as large a part of your capital as you feel comfortable with.

With 80% of non-market risk diversified away with as few as 15 positions you can determine what your optimal number of investments are.

Mine is 30 as I feel comfortable with the weighting of each position in my portfolio and I can easily keep track of the investments.

When I see funds with 100 or more investments my first thoughts are that they must not have much conviction in any of their ideas.

Also with so many positions you may as well buy the market itself through an inexpensive exchange traded fund.

11. You control the costs
Controlling costs and fees, or the friction of investing, is a very important part of part of realizing superior long term results.

Using a discount broker I can buy and sell most shares for around 1% brokerage. If I hold a position for three years that equates to 0.33% per year plus a 0.25% custody fee.

That is a lot lower than funds that charge 1% to 1.5% per year on top of a 5% initial fee and other expenses.

Calculated over a period of 20 to 30 years keeping costs low makes a huge difference.

12. Down years are more bearable
This goes along with the point on making your own decisions.

Should you have a bad year at least you know you made the decisions, can learn from your mistakes and make adjustments to your investment strategy.

13. You can be fully invested
Should you find a large number of attractive investments you can be fully invested and remain so even if the markets declined and you are still convinced of the investment case of each investment.

With a fund manager this is unfortunately not the case. When markets fall they are bound to get redemptions. In order meet the redemptions they must either have cash available or sell investments.

But when markets are falling liquidity drops as well. That means that because investments have to be sold liquid investments are sold first. This selling pressure puts pressure on share prices leading the markets to fall further thus triggering more redemptions. You get the picture.

Some fund managers plan for such eventualities be keeping a certain amount of liquid investments or by keeping at least a small amount of cash on hand.

This as mentioned in one of the points above leads to suboptimal investments not necessarily the managers best ideas.

Luckily as a private investor you do not have this problem.

I always keep a cash reserve of one years living expenses aside to ensure that I do not have any pressure to sell investments should the market decline unexpectedly.

Also a large cash reserve gives me the peace of mind and opportunity to focus on investing for the long term.

There are of course a few funds where the drawbacks mentioned below do not apply but they are in the minority. The large bulk of fund management companies are focused on growing the amount of money they manage, where maximizing the returns to investors come a distant last.

Tim du Toit is the editor of EuroShareLab. The purpose EuroShareLab is to share knowledge and ideas gained in over 20 years of investing experience and continuous learning to help other independent investors on their investment journey.

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