Investment Articles

As the UK heads into a period of extended inflation, low interest rates and volatile stock markets, investors are looking for safe investments to preserve and grow capital. Many investors are turning to gold as prices continue to rise due to an increasing demand from investors, but more savvy money men consider farmland to be the safest investment in 2010 as demand for food continues to rise and a severe shortage on the supply side continues to push up prices and create safer investment returns.

Farmland is considering a safe investment as it is a renewable resource, constantly reproducing the commodities that the population needs – food! Therefore consistently generating an income for landowners and retaining its value, especially in times of inflation.

The value of agricultural land in the UK has risen by 13% for the first six months of 2010, and by 19.7% for the twelve months to July according to the Knight Frank Farmland Index, the industry standard for measuring agricultural land values. In fact there has not been a single seven year period since records began, where farmland in the UK has not risen in value quicker than the rate of inflation, providing safe investment returns for landowners. The income generated from leasing good quality land to commercial farmers also goes some way to replacing the lost risk-free income on cash deposits due to such low interest rates.

There is always of course an element of risk, land values could fall for example, but as demand for food is rising at the fastest pace in history and the amount of land per person on the planet has halved from 0.42 hectares to 0.21 hectares, the next seven years is extremely unlikely to be the first time that agricultural land values will fall. There is also a risk that your farming tenant could default on his rent, but this risk is also minimal as agricultural occupancy rates in the UK are close to 100% year round.

So those investors looking for the safest investment possible should carefully consider whether a well-place agriculture investment in the form of good quality farmland will have a good fit for their portfolio, It would certainly provide growth and income and a very low risk profile.

To learn more about investing in agricultural land, or farmland as an inflation hedge, download the Agricultural Investment Guide at www.dgc-ai.com/btl-farmland

David Garner in Managing Partner at DGC Business Consulting – http://www.dgc-ai.com – a property investment boutique for high-net-worth investors. DGC specialise in sourcing off-market assets at deep discounts to valautions and design and deliver innovative low-risk pruchase and holding structures designed to minimise risk and maximise the potential for upside returns.

It was July of 2008 and oil prices soared to a $147 per barrel. At that time grain prices were going through the roof, the Chinese economy was overheating, the general population of the undeveloped emerging economies were on the verge of revolt, US consumers were angry about having to pay $4.50 per gallon of gasoline, stocks were heading lower every time oil prices were making new highs, and to top it off inflation was the main concern for just about every economic policy maker. My my my, how quickly things have changed. Who’d a thunk it? Oil would drop down to as low as $32 a barrel, the DOW down to the 6000’s, copper at less than $1.50 a pound; it appeared that the entire capital market structure was on the verge of collapsing. What a scary time it was not just for investors, but for anyone who had a bank account. I remember having conversations with my friends and family, wondering if their nest eggs would be safe in their 401 K’s, IRA’s, equity holdings and even in their savings accounts. Panic and fear ruled the world there for a few months.

Then with a few actions from the Federal Reserve, US treasury, revisions in the mark to market accounting rules, and a massive $850 Billion stimulus bill, VIOLA, Confidence was “restored”. Banks balance sheets improved, toxic assets held by the banks suddenly disappeared (through accounting magic of mark to market), and artificial stimulus was provided through the America Recovery and Investment Act. Unprecedented global government spending was running rampant, 0% interest rates were provided for the banks, and furthermore $1.4 Trillion worth of Quantitative Easing through the purchase of mortgage bonds and US treasuries from the Federal Reserve was enacted. The Dow climbed from the 6443 to as high as 11,205. The CNBC stock cheerleaders were proclaiming a firm “recovery” was in place and that we could expect a V shaped recovery.

It never made sense to me. I told my clients that there wouldn’t be a V shaped recovery and that I strongly advised them to not get fooled by the hype. Take everything that was said with a grain of salt and just remember who they are and what their functions are in their professional lives. I told my clients that the reason there wouldn’t be anything resembling a V shaped recovery in any shape or form was that we had way too many structural headwinds for this to occur.

1. In the housing market the amount of foreclosures are continuing to climb while the Federal foreclosure plan enacted by the president so far has been a huge failure, according to Special inspector general for the financial bailouts, Neil Barofsky, who said the program has not “put an appreciable dent in foreclosure filings”. Meanwhile Elizabeth Warren, who chairs a separate Congressional Oversight Panel on the bailouts, has said that Treasury’s failure to act more quickly could certainly be hurting the recovery. A problem that once was just for subprime mortgages has recently morphed into the ALT A and prime mortgages, causing an even deeper predicament. Now that the $8000. tax credit program has expired in April, we have had the worst home sales numbers in the last two back to back home reports. Without a recovery in the housing market, people don’t feel confident as they see in many cases the highest value asset they own deteriorating, therefore curtailing their normal spending habits. Former U.S. Federal Reserve chairman, Alan Greenspan, recently warned that a fall in house prices could derail the U.S. recovery and trigger a double-dip recession.

2. Credit, which is the life line for many businesses, is nowhere to be found. I’ve argued that it isn’t so much a problem of lack of liquidity as much as it is a problem of lack of credit worthy borrowers and aggregate demand for domestic goods and services, and if you couple that with all the toxic debt that banks are still holding on their balance sheets coming to a standstill, this is what you get; a severe lack of issuance of credit. Until the labor market markedly improves and commercial and residential properties are on safer ground, banks simply won’t lend, period.

3. A structurally damaged labor market. Many of the jobs that were lost during this downturn were in the construction and manufacturing base and many of those jobs won’t be coming back for a very long time. The overhang in residential and commercial properties is enormous; the demand for goods was crushed, which in turn devastated manufacturing jobs. Even now, with prospects of the manufacturers slightly improving (mainly due to growth from emerging economies), jobs still aren’t being offered, and a big reason for that has to do with technology and spending on equipment and software. As John Ryding, the chief economist at RDQ Economics stated, “You can understand that businesses don’t have to pay health care on equipment and software, and these get better tax treatment than you get for hiring people. If you can get away with upgrading capital spending and deferring hiring for a while, that makes economic sense, especially in this uncertain policy environment.” The growth from our economy simply isn’t growing fast enough to meaningfully improve the unemployment rate, as even the chairwoman of the president’s Council of Economic Advisers, Christina Romer said, “We need 2.5 percent growth just to keep the unemployment rate where it is. If you want to get it down quickly, you need substantially stronger growth than that. That’s what I’ve been saying for the last several quarters, and that’s why I’ve been hoping that we’ll please pass the jobs measures just sitting on the floor of Congress.”

4. State and local budgets are looking horrendous, without federal aid over 500,000 jobs are going to be eliminated through 2011. In this political climate, the will to continue to spend and bail out state and local governments, much less anyone else just isn’t there. It looks as if they will be going through their own very painful deleveraging process.

5. Uncertainty for corporations and small businesses due to tax hikes and burdensome regulations from the health care law and Wall Street Reform. There is a reason why corporations are sitting on $1.8 Trillion and why small businesses aren’t hiring and if it wasn’t already difficult enough for these entities to hire people as it is, government policies and their incessant need to demonize corporations and their profits are making it that much tougher for them to do so. The crew from PIMCO, who are the largest bonds dealers in the world, and home of the brightest economic minds, nailed it when they coined the term THE NEW NORMAL in 2009, which is defined as slower growth worldwide (more so in the G-3 than in emerging markets), higher unemployment, more de-leveraging, more regulation, and a weaker U.S. dollar over the next 3-5 years. I remember it was just last year when the president’s top economic advisor Larry Summers disagreed with PIMCO’s assessment of our economy entering into the “New Normal” period. It looks now as if Mr. Summers was dead wrong! El Erian, the man who coined the New Normal, compared Summers’ view of the U.S. economy to a three-stage rocket ship attempting to escape the pull of Earth’s gravity. The first stage is government spending, followed by inventory reductions and consumer demand.
Summers “has this concept of escape velocity,” El-Erian said Oct. 9 2009 at a meeting of financial-market professionals in Toronto. “We don’t have enough to achieve escape velocity.”

6. The 800 pound gorilla in the room is our National Debt risk. Look what happened when little old Greece had their problems; then it looked as if the entire European Union was going to come crashing down. People were talking about the Euro currency not surviving, and may I remind everyone that even though it appears that things are back in control again, that situation is far from over. It will re emerge again as all they did was buy some time and all these countries are now just beginning a very painful deleveraging process through austerity measures by cutting budgets, pensions, jobs and benefits that will certainly weigh on the entire Euro zone’s growth prospects which means their ability to pay back their own debt will diminish. Considering that 30% of all of our exports go to Europe, and their economies will undoubtedly slow down markedly, this will have a direct impact on our exports.

One day, just the same way the bond vigilantes (bond holders) held these southern European economies accountable for their reckless spending binges; they will undoubtedly turn their ire towards us if we don’t act in a timely manner. And who here has confidence that Congress or our president can do what it takes to get our fiscal house in order? Not me. I truly believe that many of our elected leaders, or for that matter many of the rest of us, know the consequences of this risk. Let’s put it this way; it basically would be like a run on a bank, except it is a run on the United States. Rates would soar, it would punish consumers, corporations, small businesses, the dollar would plummet, global confidence would fall apart, and there would be a whole new round of systemic risk that would shut the capital markets out which would affect every single securitized investment on the planet. One of the few investments that would gain value would be gold, and it would most likely soar 3, 4, and 5 times its value in a relatively short period of time.

The point of the preceding really hasn’t been to highlight the risks of sovereign default or the fear of one happening, but more so to give you an idea of where our economy stands and the challenges we face moving forward. The latest GDP growth figures for the second quarter shows that our economy has been slowing down for three consecutive quarters.

PIMCO’s chief, Bill Gross (another one of my favorite economists by the way) said deficit spending by governments that seek to maintain artificial levels of consumption “can be compared to flushing money down an economic toilet.” He went on to say, “Deficit spending will be unsuccessful because under the “new normal” scenario, deleveraging, re-regulation and de- globalization produces structural headwinds that lead to slower growth and lower-than-average investment returns.” As I’ve noted, our problems with the labor market are structural, and the idea of spending to fill the gap just isn’t working. I want you to think of the Stimulus Strategy as a bridge. On one side of the bridge is pre-recession on the other side is the recovery. The bridge is the stimulus and the idea was to build that bridge long enough to lead us to recovery. The problem is that the distance between the two is much further than most economists, and more importantly, the White house, had woefully anticipated, AND that we don’t have the resources ($$) to build a bridge long enough to get us from one side to the other. Now that stimulus funds are dissipating and wearing off, and state and local government jobs will be laying off thousands of workers, there is a very good chance that over the next 2 quarters our GDP growth will be around the 1% -1.5% area which most likely means the real unemployment rate will go higher. So what will this administration or the Federal Reserve do to try to get this economy going in the right direction in a meaningful manner?

Congress and the White House have virtually spent all of their political capital and don’t have the will to push through another stimulus bill, and if they do it will be very limited, and I am certain that it would be destined to fail simply because they just don’t understand that there is no quick fix solution and their attempts of staving off this downturn are ill-conceived. So that leaves the Federal Reserve. The Federal Reserve has already stepped up in an enormous way by lowering the Fed funds rate to 0%-.25%, with $1.4 Trillion of Quantitative easing through the purchase of Mortgage bonds and US treasuries; essentially printing money to buy our own debt with the purpose of providing more liquidity to the capital markets and lower mortgage rates. In regards to its effectiveness, that can be debated, for both sides. It has brought down rates and it has provided liquidity, but it hasn’t increased lending in an appreciable manner, and that folks, is what it’s all about.

Here’s what I believe what the Federal Reserve will do, and I believe it will happen sometime in the second half of the year. The options are:

1. Buy more assets. The Fed could buy more mortgage-backed securities, or since its holdings of MBS are so large, it could buy more long-term Treasury securities. Even James Bullard, a voting Federal Reserve board member and perennial inflation hawk, recently wrote a piece backing this idea if conditions continue to worsen.

2. Deepen its commitment to hold rates low for a long time. The Fed could rephrase that promise to provide additional guarantees or rock-bottom rates even when the recovery begins to take off.

3. Stop paying interest on excess reserves. The Fed could try to spark more lending by cutting the interest rate it pays banks on reserves they hold at the central bank from the current.25%.

4. Open a new lending facility. The Fed could open or keep open a lending facility to increase credit availability for any sector of the economy it wants to help out such things as commercial real estate.

5. Stop shrinking its huge balance sheet. It would be a more subtle approach as opposed to continuing more asset purchases.

6. The Fed could change its inflation target from 2% to 4%.

All these strategies carry heavy inflationary risks, but the fear of deflation is greater than that of inflation. When the Federal Reserve made their announcement of the $1.4 Trillion mortgage and Treasury purchases, the value of the dollar dropped 11% and the price of gold increased by 25% and silver 55% in a six month time period. Considering that we are now entering into the strongest time of the year for precious metals and we anticipate the dollar to get hammered because of these actions, we strongly advise our clients to increase their precious metal holdings.

I honestly don’t see how these actions will help spur bank lending; as noted earlier the problem isn’t liquidity or rates, it is confidence from the banking sector to lend. The risks of expanding the Fed’s balance sheet are tremendous. The size of the Fed’s balance sheet has exploded; it’s never ever been as close to as large as it is today. Every time there has been a large expansion of the money supply from central banks, inflation has always followed. Now the whisper on the street is that it Federal Reserve could expand its balance sheet by another trillion dollars.

The money supply that was created can sit there for quite some time, with latent price inflation. If banks don’t lend money, then it doesn’t matter how much money was created, there will be very little inflation. In order for inflation to come about, the money that was printed has to circulate into the real economy. However, the more money that is out there being held by the banks, the more POTENTIAL inflationary implications and risks exist. Psychology from consumers and banks can suddenly change, and the “velocity” of that money can release its way into the economy at an alarming rate, catching policy makers off guard, allowing inflation to take hold.

To make things worse, we see this scenario unfolding within the next few years, WITH a high unemployment rate, most likely around 7-8%, with GDP growth in the 1-2% area. This would be a very bad development for the economy known as stagflation, which can be defined as low growth with high inflation. There wouldn’t be too many investments that would thrive in this scenario other than precious metals. Investors should protect themselves by diversifying, and precious metals should be a part of your investment strategy. Once again, I thank you for the time you have taken to read this newsletter; I hope it helps.

For your financial future please see the opportunities provided in the following link:

Matthew Goldfuss is a gold, silver, and precious metals representative with eight (8) years experience. He has worked in one of the top companies in the field during that time and has achieved a high level of competance and expertise.

With literally thousands of managed funds available, selecting a good one can be a daunting task. Following a few simple guidelines will assist in picking a sound one.

Objectives and Timeframe
Part of the key to picking a good managed fund is first looking at your own personal situation. A retiree may look for a fund with solid income (i.e. regular dividends or distributions along with a high yield), whereas a young first time investor might be looking for long term capital growth. The former might be reliant on their managed fund for income, whereas the latter might prefer a fund that re-invests dividends, potentially leading to even greater returns at a later point in time. The proportion of one’s investments a proposed managed fund is likely to be (including other stock investments, property etc) also needs to be considered.

Risk Profile
Staying with the same example, a retiree who has accumulated substantial assets might elect to choose a managed fund with lower risk, to maintain those assets (for example, a diversified fund, or a fund that invests in only larger “blue chip” securities). Such a retiree’s assets, if diversified, might allow for investment in a higher risk, but potentially higher reward fund (such as a sector specific fund, or a fund that only invests in small start up companies) if this makes up only a small overall proportion of their net wealth. Conversely, if a first time investor’s proposed managed fund investment is likely to make up a high proportion of their savings, then investing in a lower risk fund may be more prudent. Risk may be able to be increased as savings are built up over time, and investments diversified.

Independent Research Houses
Every fund manager is always going to sing the praises of their own products. Highlighting attractive investment returns over one year as compared to similar funds might not tell the whole story – the comparative returns over three or five years might not be as attractive. An independent research house can assist in providing detailed analysis of a fund, and also the fund manager’s relative merits. Bear in mind that fund managers pay independent research houses to research their funds.

Consistent Track Record
Look for a fund manager and a fund that have provided reliable returns over a medium to longer term timeframe (more than 1-2 years). Short term performance can sometimes be anomalous. Performance also needs to be viewed with regard to overall market conditions. A rise of ten percent in a year is great compared to bank interest, but very poor if the overall market has risen thirty percent.

Past Performance Is Not Necessarily An Indicator Of Future Performance
This common disclaimer does highlight the inherent risks in investing. One take away from this is that it is important to look at past performance, but it is equally important to look at the reasons behind the figures. Are the results based on sound investment principles or good fortune? Does the fund manager’s outlook and strategy give you confidence in their ability to continue to provide you with good returns in the future?

Share Trading can contain many pitfalls. Heed each of the factors listed above, and you will give yourself the best chance of choosing a managed fund with positive performance.

William Shaw is a boutique investment manager which specializes in offering Managed Accounts to private individuals, Self Managed Super Funds and financial planners in Australia. Our Managed Accounts service has outperformed the ASX 200 by 23.32%. For more information about our managed share investment service and about our high conviction active investment methodology, visit Managed Funds

Knowing how to invest is more important today than ever before. With Social Security and company pensions questionable at best, Americans need to learn to invest for their own future financial security. Here are some pointers and major mistakes to avoid if you don’t feel real comfortable as an investor.

Learning how to invest is really not much different than learning how to play any other game. First, you need a general understanding of the objective and the rules. Second, focus on the basic aspects of the game. Then, concentrate on avoiding major mistakes while you hone your skills and develope a winning strategy.

Your objective as an investor should be to earn higher than average investment returns over the long term with only a moderate level of risk. To do this you will need to manage a diversified investment portfolio that includes safe investments, bonds, and equities (stocks). It’s a major mistake to keep all of your money in the bank at low interest rates because at that rate of return you won’t stay ahead of inflation after paying income taxes. Totally trusting a financial planner or going it alone without any investment help can also be expensive mistakes for the average investor.

So, the question is how to invest with a diversified portfolio and investment help you can afford and trust. The answer is to invest in mutual funds: money market funds for safety and interest, bond funds to earn higher interest income, and equity or stock funds for higher potential returns and long term growth. Mutual funds are designed for folks with little more than a grasp of investment basics. They select the individual investment securities for their investors as a group and professionally manage a portfolio based on the fund’s stated financial objectives.

By investing across the board in all three basic mutual fund types you can achieve balance while keeping risk at a moderate level. For example, losses in stock funds can be offset in part by the relative safety and interest income from money market and bond funds. As a general rule of thumb, all but the oldest of investors need some money in stocks to boost profits and stay ahead of inflation and taxes. How much of your total portfolio you allocate to stock funds vs. money market and bond funds will depend on your age and risk tolerance.

If you’re not real comfortable with how to invest but know that you need to anyway, start investing in mutual funds. If you invest equal amounts in all three of the basic fund types you can get started with only a moderate level of risk while avoiding major costly mistakes. Then take your game and investment strategy to a higher level by doing some homework with the assistance of a good investing guide.

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.

In Canada there are many people who go by the titles of Financial Advisor, or Financial Planner. What most people do not realize is that these titles are not regulated (with the exception of Financial Planner in Quebec). Anybody can use these titles without any educational or experience requirements.

What is regulated by the government is licensing to sell financial products, such as stocks, mutual funds and insurance.

For example, before you can sell mutual funds you must become licensed as a “Mutual Funds Salesperson” A registered mutual fund salesperson is legally obligated to ensure to products they sell you are suitable based on your investment objectives time frame and risk tolerance. They are not required to act as a fiduciary. A fiduciary has a duty to act primarily for the client’s benefit in matters connected with the undertaking and not for their own personal interest. In other words, there is no legal obligation to put your interests ahead of theirs. As long as the investment is suitable for you there is no need to inform you of lower fee alternatives, even if they know they are better for you.

Whether acting as a fiduciary is a legal requirement or not, I think we can all agree that we want to work with an advisor who put the interests of their clients ahead of there own. If this is not happening then you should be looking for a new advisor. Here are seven signs you financial advisor is putting there own interests ahead of yours.

1. You purchased a mutual fund from your advisor with a Deferred Sales Charge (DSC).
These funds can easily be spotted on your statements. Most will have DSC after the name. When an advisor sells you a fund with a DSC they get paid a healthy commission, usually 5% and in return you get locked into the fund for 7 years in most cases and are subject to a higher management expense ratio (MER) which will mean lower investment returns. Your advisor could sell you the same mutual fund with a low load, meaning lower commission for them and in return a lower MER and shorter locked in period for you. Another option is a front end load fund. The front end load fund will have no locked in period, the lowest MER of the three options and a negotiable commission paid up front. The fund companies do set a maximum amount the advisor can charge but there is no minimum so it can even be set to 0%. If you hold a DSC fund in your account ask your advisor why they choose that option over the others, and if he has a good answer please let me know, because I have not heard one yet.

2. The only time they call you is when they are trying to sell you something.
If the only time you hear from your advisor is in February when it is time to make your RRSP contribution, or they are trying to get you to buy a certain investment, then chances are that the advisor is more concerned with their income then your savings. This tells me that they are only interested in speaking with you if there is a chance that they will earn a commission and not really interested in your future.

3. They take days to return your calls.
Many people consider it a good sign if their advisor is too busy to answer the phone. This can be seen as a sign that they are a good advisor with many happy clients. To me it tells me one of two things. They have poor time management skills or they are a good salesperson and have taken on more clients then they can properly serve in an effort to make as much money as possible. An advisor who has the client’s best interests in mind will only take on as many clients as they can serve, even if it means turning away potential business.

4. They have changed companies more then once and got you to move your Investments when they changed.
It is possible that the advisor has good reasons for moving, but this is a common tactic used by many advisors in an effort to maximize their own income. When a new advisor moves funds over from the old company to the new one it usually generates a commission for them, and in most cases will create extra costs for you.

5. They have no financial education.
I am the first person to admit that having a bunch of letters after your name does not make you a good advisor, nor does it mean you are an ethical person. However, if an advisor has their client’s best interest in mind, I believe they should make some efforts to improve themselves though continuing education. If they are not willing to do this then I would look for someone who is. There are many financial designations out there. CFP, R.F.P., FCSI, CIM, FMA, Ch.F.C, R.F.P. This is by no means complete list but includes the most common designations.

6. They have not told you how they get paid.
Regardless of how your advisor gets compensated you as a client should be made aware of the compensation by your advisor. An honest advisor should be upfront about the fees you pay, the income they earn and should have nothing to hide. If they are making a recommendation they should let you know the different options which one they think is best, and if they get paid more for it then another option they should let you know why it is worth the extra cost. Your advisor should offer this information to you and not only mention it if asked.

7. You feel pressure to make decisions quickly.
If you are being told that you need to act right away or you are going to miss out on a great opportunity, chances are it is a line and nothing more. Purchasing investments can be a big decision and you should be encouraged to take some time to review your options before jumping into anything.

If any one of this situations applies to you, then you need to review the relationship you have with your advisor and consider looking for other options. If more then one applies I would start the search today.

Ryan Rohloff FMA, FCSI
http://www.atlasfinancialplanning.ca

When it comes to investing, most of the people may think of the size of the amount needed to kick off with an investment. The common perception of investment is “I need a lot of money before I can even think of investment”. This statement may not be true as there are always ways to invest if you do not have much money in hand.

Now, if you have $1,000 to start with, where should you put the money?

1. Pay Down and Pay Off Your Non-Mortgage Debts
The first and the wisest way is to pay down your debts, especially credit cards debts. It is unusual for investment returns to beat credit card interest. Therefore, if you have $1,000 in hand, you should think of paying down your debts first, until they are fully paid up.

2. Create Emergency Fund
After you have paid up the non-mortgage debts or you simply do not have debts, then the next step is to create your emergency fund. An emergency fund is served as a back up should something out of your expectation happens, namely lay-off. You need to save up to an optimum level of between 3 to 6 months of your monthly expenditures.

3. Identify Investment Tools
When you have another $1,000 again, start looking for mutual funds to invest. It is not a good idea to invest in individual company’s stocks. You need more than 10 stocks in your portfolio to reduce the risks of deficit returns.

4. Select the Funds
How do you select the funds? There are too many funds flooding the market and undeniably some of them are underperformed. So the best way is to follow the fund managers and not the funds. Get a fund manager with high reputation of beating the market consistently. However, also take note that with $1,000 to invest, you may be limited to certain funds with low minimum opening balances.

Ng Chung Mun is an expert in life planning, specifically in individual risks management. For more on life planning and mutual funds investment, visit http://www.101lifeplanning.com/investment/3-main-different-types-of-mutual-funds-to-choose-from.php

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

Asset Allocation Step 1: Evaluate Your Risk Profile

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

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

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

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

Asset Allocation Step 2: Break Down Equities and Bonds

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

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

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

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

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

Asset Allocation Step 3: Implement Your Plan

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

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

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

Conclusion

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

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

In Canada there are many people who go by the titles of Financial Advisor, or Financial Planner. What most people do not realize is that these titles are not regulated (with the exception of Financial Planner in Quebec). Anybody can use these titles without any educational or experience requirements.

What is regulated by the government is licensing to sell financial products, such as stocks, mutual funds and insurance.

For example, before you can sell mutual funds you must become licensed as a “Mutual Funds Salesperson” A registered mutual fund salesperson is legally obligated to ensure to products they sell you are suitable based on your investment objectives time frame and risk tolerance. They are not required to act as a fiduciary. A fiduciary has a duty to act primarily for the client’s benefit in matters connected with the undertaking and not for their own personal interest. In other words, there is no legal obligation to put your interests ahead of theirs. As long as the investment is suitable for you there is no need to inform you of lower fee alternatives, even if they know they are better for you.

Whether acting as a fiduciary is a legal requirement or not, I think we can all agree that we want to work with an advisor who put the interests of their clients ahead of there own. If this is not happening then you should be looking for a new advisor. Here are seven signs you financial advisor is putting there own interests ahead of yours.

1. You purchased a mutual fund from your advisor with a Deferred Sales Charge (DSC).
These funds can easily be spotted on your statements. Most will have DSC after the name. When an advisor sells you a fund with a DSC they get paid a healthy commission, usually 5% and in return you get locked into the fund for 7 years in most cases and are subject to a higher management expense ratio (MER) which will mean lower investment returns. Your advisor could sell you the same mutual fund with a low load, meaning lower commission for them and in return a lower MER and shorter locked in period for you. Another option is a front end load fund. The front end load fund will have no locked in period, the lowest MER of the three options and a negotiable commission paid up front. The fund companies do set a maximum amount the advisor can charge but there is no minimum so it can even be set to 0%. If you hold a DSC fund in your account ask your advisor why they choose that option over the others, and if he has a good answer please let me know, because I have not heard one yet.

2. The only time they call you is when they are trying to sell you something.
If the only time you hear from your advisor is in February when it is time to make your RRSP contribution, or they are trying to get you to buy a certain investment, then chances are that the advisor is more concerned with their income then your savings. This tells me that they are only interested in speaking with you if there is a chance that they will earn a commission and not really interested in your future.

3. They take days to return your calls.
Many people consider it a good sign if their advisor is too busy to answer the phone. This can be seen as a sign that they are a good advisor with many happy clients. To me it tells me one of two things. They have poor time management skills or they are a good salesperson and have taken on more clients then they can properly serve in an effort to make as much money as possible. An advisor who has the client’s best interests in mind will only take on as many clients as they can serve, even if it means turning away potential business.

4. They have changed companies more then once and got you to move your Investments when they changed.
It is possible that the advisor has good reasons for moving, but this is a common tactic used by many advisors in an effort to maximize their own income. When a new advisor moves funds over from the old company to the new one it usually generates a commission for them, and in most cases will create extra costs for you.

5. They have no financial education.
I am the first person to admit that having a bunch of letters after your name does not make you a good advisor, nor does it mean you are an ethical person. However, if an advisor has their client’s best interest in mind, I believe they should make some efforts to improve themselves though continuing education. If they are not willing to do this then I would look for someone who is. There are many financial designations out there. CFP, R.F.P., FCSI, CIM, FMA, Ch.F.C, R.F.P. This is by no means complete list but includes the most common designations.

6. They have not told you how they get paid.
Regardless of how your advisor gets compensated you as a client should be made aware of the compensation by your advisor. An honest advisor should be upfront about the fees you pay, the income they earn and should have nothing to hide. If they are making a recommendation they should let you know the different options which one they think is best, and if they get paid more for it then another option they should let you know why it is worth the extra cost. Your advisor should offer this information to you and not only mention it if asked.

7. You feel pressure to make decisions quickly.
If you are being told that you need to act right away or you are going to miss out on a great opportunity, chances are it is a line and nothing more. Purchasing investments can be a big decision and you should be encouraged to take some time to review your options before jumping into anything.

If any one of this situations applies to you, then you need to review the relationship you have with your advisor and consider looking for other options. If more then one applies I would start the search today.

Ryan Rohloff FMA, FCSI
http://www.atlasfinancialplanning.ca

When it comes to investing, most of the people may think of the size of the amount needed to kick off with an investment. The common perception of investment is “I need a lot of money before I can even think of investment”. This statement may not be true as there are always ways to invest if you do not have much money in hand.

Now, if you have $1,000 to start with, where should you put the money?

1. Pay Down and Pay Off Your Non-Mortgage Debts
The first and the wisest way is to pay down your debts, especially credit cards debts. It is unusual for investment returns to beat credit card interest. Therefore, if you have $1,000 in hand, you should think of paying down your debts first, until they are fully paid up.

2. Create Emergency Fund
After you have paid up the non-mortgage debts or you simply do not have debts, then the next step is to create your emergency fund. An emergency fund is served as a back up should something out of your expectation happens, namely lay-off. You need to save up to an optimum level of between 3 to 6 months of your monthly expenditures.

3. Identify Investment Tools
When you have another $1,000 again, start looking for mutual funds to invest. It is not a good idea to invest in individual company’s stocks. You need more than 10 stocks in your portfolio to reduce the risks of deficit returns.

4. Select the Funds
How do you select the funds? There are too many funds flooding the market and undeniably some of them are underperformed. So the best way is to follow the fund managers and not the funds. Get a fund manager with high reputation of beating the market consistently. However, also take note that with $1,000 to invest, you may be limited to certain funds with low minimum opening balances.

Ng Chung Mun is an expert in life planning, specifically in individual risks management. For more on life planning and mutual funds investment, visit http://www.101lifeplanning.com/investment/3-main-different-types-of-mutual-funds-to-choose-from.php

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

Asset Allocation Step 1: Evaluate Your Risk Profile

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

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

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

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

Asset Allocation Step 2: Break Down Equities and Bonds

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

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

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

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

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

Asset Allocation Step 3: Implement Your Plan

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

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

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

Conclusion

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

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