Investment Articles

It is essential to find a lucrative investment strategy if you are ever going to make a decent return. So many people make the mistake of going into investments blindly, and then pay the price. First decide what kind of a return you want to make, what constitutes a lucrative strategy to one person, may be a low turnover to someone else. The appropriate strategy will be one that you are comfortable with.

Choosing how you will invest your money is very much down to how much risk you want to take. If the risk is too low, then you won’t make a high yield on your investment, if it is too high then you have crossed the line from taking a calculated risk, into gambling. You should have researched your strategies and have a good understanding of the market. Being prepared when going into a lucrative investment strategy may mean the difference between making a fortune and losing it all.

Is Buying Long a Lucrative Strategy?

By buying stock long you are essentially choosing an option that offers minimal risk. Unfortunately you are not going to make a huge amount of money using this strategy. However a passive technique called the “buy and hold” is a lucrative investment strategy in some respects. This means buying stock and holding onto it, even if the market takes a dive. Long-term investments, such as these, are taxed lower than short-term investments. This type of investment is only suitable for those who are prepared for the long haul.

Buying short is the way to make fast investment returns. They carry bigger risks, but also massive rewards! It is essential in this game that you invest the money yourself, and don’t pass it on to some fund manager. This way you will learn about stocks fast. One of the main pitfalls is by getting over excited and trying to make too much money in a short space of time. If you have initial success, do not run away with yourself by increasing your risk threshold. You should stick to the same strategy, especially if it works.

Setting Triggers Is The Key To Success

This is an excellent investment technique and lucrative investment strategy. Set triggers for yourself. An example of a trigger is a fall in stock prices. This is a strategy that can pay dividends if you set yourself strict rules and guidelines to stick to.

Understanding lucrative investment strategies can be a complicated business, and it is paramount that you understand them fully before making an investment. Only professionals really understand the process, and it is definitely a good idea to take advice off somebody who knows what they are talking about. Guidance doesn’t mean they should be making the decisions; so always speak your mind about what it is you want. In time you will be the one dishing out the advice!

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If you are like most people, your initial reaction to the question posed by the title to this white paper is “no.” However, for many investors, the answer is “yes.” With all of the investment options available today, many investors are intimidated, confused and frustrated by the investment process. Recent studies also support the suggestion that many investors are perfect targets for investment fraud or already are victims of investment fraud. For instance,

A recent study by Schwab Institutional found that 75% of investor portfolios were unsuitable for investors given their financial situation and goals;

A recent study by CEG Worldwide concluded that over 94% of those holding themselves out as wealth managers were more product salesman than wealth manager;

The 2010 IPT Elder Investor Fraud Survey reported that investment fraud is the number crime against the elderly, affecting an estimated 7.3 million older Americans, or one out of every five senior citizens. Since that number only counts the instances of fraud actually reported, the number of victims is undoubtedly higher.

One of the problems with avoiding investment fraud is the difficulty in detecting some types of fraud due to the subtleness or complexity of the fraud itself. Another problem with detecting fraud is the personal biases and beliefs that each investor has regarding investing. The purpose of this article is to alert investors to some of the more common elements of investment fraud so that investors can prevent unnecessary investment risk and financial loss due to investment fraud.

Fraud and Cognitive Biases

The common response to investment fraud is to call for greater investor education programs. However, a recent law review article in The Elder Law Journal suggests that investor education programs may be largely ineffective due to cognitive issues such as cognitive biases and/or cognitive deficits of investors. Cognitive biases are personal beliefs that impact our decisions. Cognitive deficits are impairments in mental ability, including impairments due to aging.

In the article, “Deception, Decisions and Investor Education,” the author, suggests a model of fraud victimization, which she refers to as the “deception/decision cycle.”1 As investors are provided with investment information, they filter the information through their personal beliefs, beliefs based upon a combination of actual experience, education and first impressions. An Investor’s beliefs, or biases, may or may not be accurate, but they can become so ingrained, or “anchored,” within a person that the person resists any conflicting information.

These biases may be strengthened even further by what are known as “truth” and “authority” biases, a person’s tendency to accept a statement as true, especially when the statement comes from someone with actual or perceived authority or expertise. The individual investor, whether because of issues such as cognitive biases/deficits, the complexity of the investment information of the sheer volume of such information, may fail to recognize the deception involved in the fraud.

Asset Allocation and Cognitive Biases

A perfect example of how cognitive biases can negatively impact investment decisions is a common misperception involving asset allocation. When you mention asset allocation or diversification to most investors, they think in terms of quantity rather than quality. Consequently, a large percentage of investors have portfolios that are diversified in terms of types and numbers of holdings within the portfolio, but the portfolios are not “effectively” diversified due to the high correlation of returns, or overlap, between the investments.

Portfolios that are not “effectively” diversified are sometimes referred to as being “pseudo” diversified since they appear to be diversified, but they do not actually provide an investor with the benefits of a truly diversified portfolio. The high correlation between the investments results in an investor having less downside protection than they would have with a truly diversified portfolio.

As an example, most people would consider a portfolio consisting of a large cap fund (IWB – iShares Russell 100 Index), a small cap fund (IWM – i Shares Russell 2000 Index), an international equity fund (EFA – iShares MSCI EAFE Index) and a bond fund (AGG – iShares Barclay Aggregate Bond Index), to be diversified since it consists of four different types of funds. A review of a correlation of returns matrix for a portfolio of the four exchange traded funds (ETFs) representing the four categories over the time period 8/31/2003 to 8/31/2011 tells a different story.

IWB/IWM – 0.93 IWB/EFA – 0.91 IWB/AGG – 0.05

IWM/EFA – 0.81 IWM/EFA – (0.03) EFA/AGG – 0.11

Analyzing rolling periods of returns often provides a better picture of trends and the persistence of trends. An analysis of rolling five year periods of returns for the referenced ETFs provides the following information:

2010-06

IWB/IWM – 0.966 IWB/EFA – 0.970 IWB/AGG – (0.308)

IWM/EFA – 0.896 IWM/AGG – (0.325) EFA/AGG – (0.432)

2009-05

IWB/IWM – 0.985 IWB/EFA – 0.991 IWB/AGG – (0.282)

IWM/EFA – 0.977 IWM/AGG – (0.338) EFA/AGG – (0.340)

2008-04

IWB/IWM – 0.967 IWB/EFA – 0.999 IWB/AGG – (0.445)

IWM/EFA – 0.973 IWM/AGG – (0.518) EFA/AGG – (0.4650

The higher the matrix number, the higher the correlation of returns and performance. A negative matrix number indicates a negative correlation of returns, which means that the two investments behave differently during various market conditions.

The matrix clearly shows a high correlation of returns between the large cap and the small cap ETF, and a high, albeit varying, correlation of returns between the international ETF and the large and small cap ETFs. The matrix clearly shows a low correlation of returns between the bond ETF and the other three ETFs. An argument can be made that a portfolio consisting only of the large cap ETF (IWB) and the bond ETF (AGG) would produce similar results.

Since fees and expenses are relatively low for most ETFs, cost is not that much an issue with a portfolio of ETFs. Since many financial advisers do not use index funds or ETFs in making recommendations, the negative impact of “pseudo” diversification can be seen in a portfolio of load-based mutual funds, again representing the four asset categories used in the ETF portfolio. The mutual funds represented are American Funds Growth Fund of America (large cap equity), Oppenheimer Discovery (small cap equity), Fidelity Worldwide (international) and PIMCO Total Return (bond).

2010-06

Am/Opp – 0.922 Am/Fid – 0.981 Am/PIMCO – 0.705

Opp/Fid – 0.948 Opp/PIMCO – 0.688 Fid/PIMCO – 0.597

2009-05

Am/Opp – 0.922 Am/Fid – 0.981 Am/PIMCO – 0.519

Opp/Fid – 0.948 Opp/PIMCO – 0.636 Fid/PIMCO – 0.451

2008-04

Am/Opp – 0.893 Am/Fid – 0.989 Am/PIMCO – 0.052

Opp/Fid – 0.935 Opp/PIMCO – 0.482 Fid/PIMCO – 0.148

The data shows the correlation of returns over rolling five-year periods in order to show not only the correlation of returns, but also the trend in correlation of returns. Once again, we see the same high correlation of returns between the equity-based mutual funds, with a lower correlation of returns between the bond fund and the equity-based funds that we saw with the ETF portfolio. The results are consistent with studies that have shown an increase in correlation of returns between equity-based investments over the past decade, especially during periods of increased volatility in the markets.

The correlation of returns matrix exposes the false illusion of diversification created by the bias of assessing diversification on the quantity of funds or types of funds alone. This bias is sometimes difficult to remove, as diversification based on quantity and type seems to make sense. Unfortunately, that is exactly what unscrupulous financial advisers are relying on, as they try to exploit the “truth” and “authority ” biases.

Portfolio Optimization and Cognitive Biases

If you have had an asset allocation plan or portfolio optimization plan prepared by your financial adviser, look at the plan and see if there is anything in the plan that gives you the projected risk, return or correlation of return data on the actual investment portfolio the financial adviser recommended to you. Investors rarely see such an analysis using the investor’s actual investments, primarily because the commercial asset allocation/ portfolio optimization programs used by most financial advisers are not designed to produce such a “real world” analysis. And yet, the calculations can be done using Microsoft Excel.

In many cases this failure to provide a “real world” portfolio analysis results in recommendation-implementation gaps, often leaving investors with portfolios significantly different from the asset allocation/portfolio optimization plan provided to them by their financial adviser, especially with regard to exposure to unnecessary investment risk.

The calculations required to calculate the projected risk, return and correlation of returns statistics for an investor’s actual investment portfolio are complex. Consequently, most investors are unable to calculate the actual portfolio’s statistics themselves or to otherwise detect an investment adviser’s fraudulent behavior.

Too often an investor falls prey to the “trust” bias or the “authority” bias and just accepts the plan given to them without questioning the accuracy of the plan or the failure to provide a “real world” analysis of the actual investment portfolio that their financial adviser recommended. But you should question your financial adviser and ignore any “trust” or “authority” biases, especially since the portfolio optimizers often produce recommendations that are counterintuitive and/or contrary to existing legal standards.

Some examples may help to prove my point. Two of the most important factors in constructing a suitable investment portfolio are the investor’s risk tolerance level and the investor’s investment time horizon. With that in mind, an experiment with two popular online asset allocation calculators provides some interesting results.

The first asset allocation calculator asked about risk tolerance, but did not even ask about investment time horizon. The regulators take the basic position that anyone with an investment time horizon less than five years should generally avoid equity-based investments since they might not have enough time to recover any losses suffered in the market. With the first calculator, we ran the same set of personal investment parameters, with the only exception being that we varied the risk tolerance level in each scenario. The results are shown in Appendix A.

Two clear issues emerge regarding investor protection. First, regardless of the investor’s risk tolerance level, the calculator recommends a portfolio consisting of approximately 60% equities and 40% bonds/cash. Second, the calculator completely ignores the “low” risk tolerance entry, exposing the risk averse investor to an undesired level of investment risk due to recommended equity allocations.

With the second asset allocation calculator, information was requested on both the investor’s risk tolerance level and the investor’s investment time horizon. Once again, the same set of personal investment parameters are used in each analysis, changing only the risk tolerance level and/or the investment time horizon. The results are shown in Appendix B.

If you accept the regulators’ position regarding a minimum five-year investment time horizon for equity investments, then the second calculator’s equity allocation for the 3-5 year time horizon is questionable, as it recommends a 30% allocation to equities for the low risk investor and a 45% allocation to equities for a moderate risk investor.

Expanding the time horizon out to 5-10 years, the low risk investor get the same portfolio recommendations that the 3-5 year time horizon/moderate risk investor got, which obviously raises questions. Strangely, the moderate risk investor with the 5-10 year time horizon receives a recommendation that increases the bond allocation to 65% and lowers the equity allocation to only 45%.

Increasing the investment time horizon to 10-20 years produces basically the same recommendation for both the low risk and moderate risk investor, with the recommended equity allocation only varying by 5 percentage points. The calculator appears to overweight the investment time horizon and basically ignore the low risk investor’s preference to avoid investment risk.

The last example is just further evidence that most asset allocation/portfolio optimization software programs are highly unstable and susceptible to mistakes, so much so that they have been criticized as “estimation-error maximizers” by industry expert Richard Michaud. Investors who wish to protect their financial security would do well to replace any “truth” and/or “authority” biases with a healthy dose of skepticism and a willingness to question their financial advisers.

Investment Fees and Expenses and Cognitive Biases

Investors look to their financial advisers for advice and generally defer to any recommendations provided by their adviser. Again, this is often the results of both the “truth” and the “authority” biases. Many financial advisers limit their investment recommendations to actively managed, commission-based products, which may not be in an investor’s best interests.

The negative impact of biases grows even deeper once the impact of fees and expenses is considered. Fees and expenses on index funds and ETFs are usually low since there is little or no active management of such investments. Fees and expenses on actively managed mutual funds can vary, with some even assessing annual fees and expenses in excess of 1.0% per year. Fees and expenses are important to investors since they reduce an investor’s return.

Assume that we have two funds, Fund A and Fund B, both with relatively similar performance returns. Fund A is an index fund/ETF. Fund B is an actively managed fund that has an R-squared rating of 93, which means that approximately 93% of Fund B’s return can be attributed to the performance of a benchmark index, in this case the index represented by Fund A. However, Fund B’s annual fees and expenses are 1.0% per year, while those of Fund A are 0.25% per year.

Since most of the return of Fund B can be attributed to an index rather than the contributions of active management, why would an investor pay three times more in annual fees and expenses for Fund B? Before investing in Fund B, it is useful to see just how beneficial the active management has been and exactly what the active management is effectively costing the investor.

One commonly used method for making such assessments is known as the active expense ratio. The active expense ratio was introduced by Professor Ross Miller, a finance professor at the State University of New York at Albany. Professor Miller basically compares a fund’s R-squared rating with the excess annual fees charged by the fund to determine a fund’s “effective” annual fees and expenses.

In our example, the active expense ratio calculates to an effective annual active expense ratio fee of 3.02% for the active management of the fund, a little over 200% higher than the stated fees and expenses. For the four mutual funds in our sample portfolio, the active expense ratios were as follows.

American Funds Growth

R-Squared – 98.34

Stated Expense Ratio – 0.69%

Active Expense Ratio – 4.44%

Oppenheimer Discovery

R-Squared – 93.43

Stated Expense Ratio – 1.34%

Active Expense Ratio – 4.63%

Fidelity Worldwide

R-Squared – 97.58

Stated Expense Ratio – 0.71%

Active Expense Ratio – 3.06%

PIMCO Total Return

R-Squared – 68.43

Stated Expense Ratio – 0.56%

Active Expense Ratio – 0.53%

There are those who may argue that the active expense ratio is misleading. However, when an actively managed fund derives most of its performance from an index and an investor can obtain that same index’s performance at a much lower cost, one has to question the wisdom of reducing one’s investment returns by paying “money for nothing” and reducing one’s investment returns. Why pay three times more for essentially the same results?

And yet investors do it every day, impacted by “truth” and “authority” biases they may not even be aware of. Some investors have no choice, as their company’s retirement plan may only offer actively managed, commissioned-based investment options as a result of their plan’s fiduciary being influenced by their own “truth” and “authority” biases. Armed with the knowledge of both these biases and active expense ratios, it would not be surprising to see both plan participants and plan fiduciaries act to provide more meaningful investment options within retirement plans.

Wealth Management and Cognitive Biases

“Anchoring” is one of the strongest cognitive biases and, with regard to investing and wealth management, one of the most potentially destructive influences on wealth preservation. Anchoring can be defined as a reluctance to retreat from existing beliefs and decisions and a resistance to even consider new or opposing information.

The difficulty with addressing anchoring bias can summed up with the observation from noted economist John Maynard Keynes that “the difficulty lies not so much in developing new ideas as in escaping from the old ones” and that “worldly wisdom teaches us that it is better for reputation to fail conventionally than to succeed unconventionally.” Beliefs often become truths, regardless of whether such beliefs are valid, often resulting in unnecessary risk and financial loss.

A perfect example of the potential negative impact of anchoring can be seen in investors that adopt a buy-and-hold approach to wealth management, or, as buy-and-hold critics often refer to the strategy, the “buy, forget and regret” approach. It is interesting to note that the buy-and hold approach to wealth management is apparently derived from an ongoing misinterpretation of a famous financial study.

A 1986 study, commonly known as the Brinson-Hood-Beebower (BHB) study, concluded that approximately 94% of the variability of a portfolio’s returns was attributable to the portfolio’s asset allocation mix. The study made no representations whatsoever regarding the impact of asset allocation on a portfolio’s actual returns, only on the variability of a portfolio’s returns.

Nevertheless, financial advisers and investment companies misrepresent the study’s findings to support their buy-and-hold argument, claiming that all an investor has to do for investment success is to set up an appropriate initial asset allocation and maintain that allocation since the BHB study proved that asset allocation determines 94% of an investor’s returns. The problem is that many investors have read or heard this mantra so often that they have fallen prey to the “truth” and “authority” biases and the misrepresentations are now firmly anchored into their personal beliefs.

It is interesting to note that the buy-and-hold approach is not derived from the works of the early pioneers of wealth management, Nobel laureates Dr. Harry Markowitz, the father of Modern Portfolio Theory, and Dr. William Sharpe. In fact, Dr, Sharpe has recently stated that investors should change their asset allocation in response to changes in market values. A recent study by asset allocation expert Roger Ibbotson has rebuffed the buy-and-hold strategy, stating that active management and asset allocation have about the same impact on a portfolio’s performance.

There are many investment professionals who would argue that the buy-and-hold approach is fundamentally sound and does not constitute investment fraud. These professionals usually claim that anything other than a buy-and-hold approach, with an occasional rebalancing to restore the original asset allocation parameters, constitutes market timing, which is both costly and ineffective.

From a legal perspective, what buy-and-hold advocates fail to realize is that the buy-and-hold approach completely ignores the proven cyclical nature of the market and t the Prudent Investor Act, whose guidelines which are often used by regulatory bodies and the courts in determining questions of fraud and prudent fiduciary conduct. The Prudent Investor Act clearly states that a fiduciary should make changes in an investment portfolio when changes in the market or economy dictate such changes are necessary in order to protect the portfolio against unnecessary risk and losses.

The classic definition of market timing involves having all of one’s assets either in the market or out of the market. The potential tax implications and the difficulty in perfectly timing the stock make such a strategy practically impossible. Reallocating some of one’s resources to reduce risk exposure is not market timing, but smart, defensive investing.

Smart investors would do well to heed the advice of noted investor Ben Graham, who warned that “the essence of investment management is the management of risks, not the management of returns. Well managed portfolios start with this precept.” Various studies support Graham’s postion, with such studies documenting the fact that avoiding losses has a much greater impact than missing potential returns.

Many investors suffered unnecessary investment losses during the recent 2000-2002 and 2008 bear markets due to their cognitive biases regarding the buy-and-hold approach to investing and their refusal to objectively consider other investment approaches. Unfortunately, these same investors will likely continue to suffer unnecessary investment losses unless and until they recognize their cognitive biases and objectively examine their investment strategy. As George Santayana pointed out, those who cannot remember the past are condemned to repeat it.”

Conclusion

Investment fraud is a pervasive problem. While various statistics are often cited as evidence of the problem, the truth is that such numbers are only a small percentage of the actual cases of investment fraud, as many cases go unreported and many victims of investment fraud are unaware that they are victims due to the subtlety or complexity of the fraud itself.

An emerging theory of investment fraud is that investors are susceptible to investment fraud due to cognitive biases and/or cognitive deficits that impair their ability to properly analyze investment situations and the recommendations of their financial advisers. It is imperative that investors become aware of and overcome potentially harmful personal biases, such as “truth” bias, “authority” bias and anchoring, in order to properly analyze investment options and better protect their financial security.

© Copyright 2011, InvestSense, LLC. All rights reserved.

This article is for informational purposes only, and is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional adviser should be sought.

Notes

1. Jayne W. Barnard, “Deceptions, Decisions and Investor Education,” Elder Law Journal, Vol. 17, No. 2 (2010), 201.

APPENDIX A

Low Risk Portfolio

Investment Parameters > Age: 50 > Assets: $250,000 > Risk Tolerance: Low > Tax Bracket: 25% > Economic Outlook: Moderate > Income Needs: 4%

Recommended Allocation > Large Cap Equity – 23%, Midcap Equity – 13%, Small Cap Equity – 9%, Foreign Equity – 14%, Bonds – 23%, Municipal Bonds – 18%, Cash – 13%

Moderate Risk Portfolio

Investment Parameters > Age: 50 > Assets: $250,000 > Risk Tolerance: Moderate > Tax Bracket: 25% > Economic Outlook: Moderate > Income Needs: 4%

Recommended Allocation > Large Cap Equity – 21%, Midcap Equity – 14%, Small Cap Equity – 10%, Foreign Equity – 16%, Bonds – 26%, Municipal Bonds – 18%, Cash – 0%

High Risk Portfolio

Investment Parameters > Age: 50 > Assets: $250,000 > Risk Tolerance: High > Tax Bracket: 25% > Economic Outlook: Moderate > Income Needs: 4%

Recommended Allocation>Large Cap Equity – 20%, Midcap Equity – 16%, Small Cap Equity – 13%, Foreign Equity – 17%, Bonds – 24%, Municipal Bonds – 0%, Cash – 10%

APPENDIX B

3-5 Year Investment Time Horizon

Low Risk Tolerance: Bonds – 70%, Large Cap Equity – 15%, Small Cap Equity – 5%, Foreign Equity – 10%

Moderate Risk Tolerance: Bonds – 50%, Large Cap Equity – 25%, Small Cap Equity – 10%, Foreign Equity – 15%

High Risk Tolerance: Bonds – 60%, Large Cap Equity – 20%, Small Cap Equity – 10%, Foreign Equity – 10%

5-10 Year Investment Time Horizon

Low Risk Tolerance: Bonds – 50%, Large Cap Equity – 25%, Small Cap Equity – 10%, Foreign Equity – 15%

Moderate Risk Tolerance: Bonds – 65%, Large Cap Equity – 20%, Small Cap Equity – 5%, Foreign Equity – 10%

High Risk Tolerance: Bonds – 40%, Large Cap Equity – 30%, Small Cap Equity – ]15%, Foreign Equity – 15%

10-20 Year Investment Time Horizon

Low Risk Tolerance: Bonds – 30%, Large Cap Equity – 30%, Small Cap Equity – 20%, Foreign Equity – 20%

Moderate Risk Tolerance:Bonds – 25%, Large Cap Equity – 35%, Small Cap Equity – 20%, Foreign Equity – 20%

High Risk Tolerance: Bonds – 20%, Large Cap Equity – 40%, Small Cap Equity -20%, Foreign Equity – 20%

James W, Watkins, III is an attorney, a CFP® professional and an Accredited Wealth Management Adviser®. His areas of expertise include wealth preservation, asset protection, investment fraud and fiduciary law. He is CEO of InvestSense, LLC, a registered investment adviser firm located in Atlanta, Georgia. For additional articles and information, visit the company’s website, http://www.investsense.com. Mr. Watkins can be contacted at tawj3@yahoo.com, and followed on LinkedIn and on Twitter @InvestSense.

Alternative Investment Lessons – Buy Physical Assets

In the current climate, investors are seeking alternatives to traditional investment assets, hoping to preserve capital, avoid the ravages of volatile equity markets, and generate investment returns that are not wholly dependent on the performance of the wider financial markets.

Physical assets are proving most popular with investors, items that retain a tangible value, rather than paper-based investments that can ultimately reduce in value to zero, despite the value of any underlying assets. Gold is the prime example. Whenever the stock market fall substantially, investors sell shares and buy gold. The resulting spike in demand for what is a finite asset drives up the price, creating returns for investors.

Other alternative investment assets that are becoming increasingly popular also rely on supply and demand for their capital value, but where demand is guaranteed. Farmland is a good example; there is a finite stock of suitable arable land, most of which is already being used, yet the population is not only growing in size, but also in consumption per capita of food and energy. This means that the product of farmland -crops – will continue to rise in price as demand outweighs supply. This creates an income stream with a positive correlation to population growth. Also, as the land earns more money it too becomes a more valuable assets, so farmland rises in value faster than the rate of inflation providing a good capital preserve as well as income.

Farmland as an alternative investment now forms part of the investment portfolios of a number of major pension funds, hedge funds, sovereign wealth funds and university endowments. Long-term investors that can afford to hold the asset for some time are well positioned to preserve and grow capital whilst also generating income.

Investing in real assets like farmland protects the investor from short term market volatility, as these kind of alternative investment assets have a real use, they hold real value. Some investor attempt to harness this growth in global consumption by investing in agribusinesses through the equity markets, but whilst this method of investment will capture broad sector-wide growth, the value of even great companies falls when the market dips or crashes.

Another alternative investment asset that relies on demand for essential commodities is timber. Investors that purchase commercial woodland, earn revenue from timber sales at harvest, so returns are dependent on the growth of trees, rather than financial markets. Also, trees retain their value, and grow into bigger, more valuable trees every year.

Forestry investments are similar to farmland investments in a number of respects; in the first instance, they benefit from increasing demand and limited supply, they retain value when the markets crash, and investing in timber companies does not provide the same shelter as investing in the physical asset.

But timber is unique in one respect, and that is that not only do the trees grow bigger giving more timber to sell, they also grow in value as timber prices increase in line with, or faster than the rate of inflation.

There are all kinds of alternative investments, but many share very similar characteristics as laid out in this article. They rely on supply and demand, rarer items command higher prices, and their performance has a low or negative correlation to traditional assets like stock and shares. The same can be said for investing in fine wine, art or collectibles, all of which are also becoming more and more popular as alternative investments.

Download the Alternative Investment Report at the DGC Asset Management website.

David Garner is Partner at boutique alternative investment boutique DGC Asset Management Limited.

Investors looking to diversify their portfolios and insure their wealth against the ravages of volatility in traditional markets, will most likely have come across a range forestry investments, promising to generate superior inflation-adjusted and risk-adjusted returns for the long-term investor.

But how have timber investments performed? And how does the smaller investor participate in this interesting alternative investment asset class?

Firstly let’s look at the past performance of forestry investments, as measured by one of the main timber investment indices, the NCREIF Timberland Index; according to this basic measure of investment returns in the sector, this asset class outperformed the S&P500 by some 37 per cent in the 20 years between 1987 and 2007. When stocks delivered average annual returns of 11.5 per cent, forestry investments returned 15.8 per cent.

At the same time, returns from investing in timberland and woodlands have been proven to display a much lower volatility, an attractive characteristic for today’s investor.

Previously, the majority of investment returns from forestry investments have been mopped up by larger, institutional investors such as pension funds, insurance companies and university endowments, who have collectively placed over $40 billion into timber investments in the past decade.

So on to the second question; how do smaller investors participate in this kind of alternative investment?

According to a study by Professor John Caulfield of the University of Georgia, returns from forestry investments are three-fold;

An increase in timber volume (biological growth of trees), which accounts for some 61 per cent of return on investment.
Land price appreciation, accounting for only 6 per cent of future returns.
Increase in timber prices per unit, delivering the final 33 per cent of investment returns for timber land owners.

So the best way to harness the performance of timber investments is to take ownership of trees, either directly, or through one of the array of forestry investment funds or other structures.

Timber REITs

One way for smaller investor to participate in timber investments is through a Real Estate Investment Trust (REIT). These investment structures are like funds, in that investors can buy and sell shares in the trust on an exchange, the REIT acquires and manages timber investment properties, but unlike normal companies must pay out 90 per cent of their earnings to investors through dividends.

Some examples of Timber REITs are:

Plum Creek Timber is the largest private owner of timberland in the U.S. and the largest timber REIT with a market cap of about $5.6 billion, many investors have chosen this as their route into forestry investments.

Potlatch is also a timber investment REIT while

Rayonier generates about a 30 per cent of its REIT earnings from timber.

Weyerhaeuser has disposed of its paper and packaging businesses and will convert to a REIT by year end.

The Wells Timberland REIT is not publicly listed but may be available for purchase through Wells Real Estate Funds.

Another way for smaller investors to add forestry investments to their portfolios is to buy Exchange Traded Funds that attempt to track the performance of timber returns. This is less direct than owing timberland, or investing in a timber REIT, as the ETF may also invest in shares in companies involved in the timber supply chain including processors and distributors. This means that investing in forestry through ETFs exposes the investor to some of the volatility of equity markets.

The Guggenheim Timber ETF owns about 25 stocks and REITs involved in the global timber and paper products industry with a 30% weighting to U.S. companies.

The S&P Global Timber & Forestry Index Fund holds 23 securities and is 47 per cent invested in the U.S.

Timber Investment Management Organisations (TIMO)

Those with more capital to spare can participate in forestry investments through TIMOs, although the majority of these investment specialists require a minimum investment of $1 million to $5 million and a commitment to tie up funds for up to 15 years. TIMOs essentially trade timber land assets, acquiring suitable properties, managing them to maximise returns for investors, the disposing of them and distributing profits to shareholders.

Many experts believe that the active management style of TIMOs ensures that they can be more reactive to market conditions than REITs, and therefore don’t tend to fall and rise in line with the market quite as much.

Direct Forestry Investments

Those with access to sufficient capital and the appropriate expert advice can invest in physical properties. Commercial timber plantations are complex operations that require skill, knowledge and expertise to manage effectively and maximise returns whilst lowering risk.

For armchair investors, or those with less capital to spare, many companies offer investors the opportunity to purchase or lease a small portion or plot within a larger, professionally managed timber plantation. Investors normally take ownership of their plot and trees via leasehold, whilst the timber investment company plants, manages and often harvest the trees on behalf of the investor.

Options for investors range from species to species and region to region, with current opportunities in Brazil, Panama, Costa Rica, Germany, Nicaragua and other, more exotic locations like Fiji.

Investors should be wary as many of these direct forestry investments are frontloaded with enormous commissions for salesmen and promoters, with many offering ‘agents’ up to 30 per cent commission for the sale of plots to investors, and in many cases, no due diligence even exits.

In some cases, the Author has seen forestry investment plots in Brazil packaged and sold to investors for over £100,000 per hectare. Investor should seek advice from an independent consultant with experience of this alternative investment asset class, and who is able to present a complete suite of due diligence material, including an independent valuation of the forestry investment property on offer.

Summary

Investors choose forestry investments due to their effect as an inflation hedge, and their ability to generate non-correlated return on investment in the long-term.

Performance of the asset class is driven by demand for timber, weighed against global supplies, and in the long-term we are using timber at a faster pace than we can grow it, making timber investments an attractive asset class for the investor seeking stable, long-term capital appreciation within their investment portfolio.

Investors looking into which type of forestry investment is right for them should consult an adviser that can demonstrate experience and expertise within the sector.

DGC Asset Management Limited is an alternative investments business, identifying opportunities to invest in non-correlated assets.

David Garner is Partner DGC Asset Management Limited.

The abundance of investment products and investment information available today can be intimidating and confusing to many investors, both novice and professional. Over my twenty-plus years as an attorney and investment adviser, I have tried to help others focus on some of the critical information in order to avoid unnecessary investment losses, to help level the playing field against some of the ne’er-do-well that continue to defraud the public and plague the financial services industry.

Speaking with a colleague the other day, he commented on the fact that a lot of the important information we get through trade publications such as InvestmentNews rarely seem to get mentioned in the mainstream media and press. And when we mention such information to clients, they often comment on how useful such information would have been.

After my conversation with my colleague, I started thinking about some of the “inside” information I have shared with my clients that produced the most reaction and appreciation. In hindsight, I think three numbers have stood out the most to me and my clients. The three numbers every investor should know are as follows:

1. “75″ – The number “75″ is actually important for two reasons. First, a study by Schwab Institutional found that approximately 75% of investor portfolios were poorly structured and unsuitable for their investors given the investors’ financial needs and goals. I believe that this is primarily a result of the fact that (1) stockbrokers are not required to act in a client’s best interests, and (2) investors are often mislead by portfolios that appear to be diversified because they hold a number of different types of investments, but such portfolios are often not truly, effectively diversified.

The second reason that the number “75″ is important is because research and history have shown that approximately two-third, or 75%, of stocks follow the general trend of the market. This simply supports the popular Wall Street adage, “don’t confuse brains with a bull market.”

2. “94″ – While there are many firms and individuals in the financial services industry calling themselves wealth managers, a study by CEG Worldwide, a well-respected financial services consulting firm, concluded that only 94% of those calling themselves wealth managers or claiming to provide wealth management services failed to meet the criteria used to qualify as wealth managers. The criteria that CEG used in their study to determine true wealth management was based primarily on advisers who practiced wealth management as a process as compared to those who simply used “wealth management” as a marketing ploy to push product. This is the same criteria that investors and fiduciaries should use in choosing a financial advisor to work with.

Secondly, one expert has suggested that this number (OK, actually 93.6, which rounded off is 94), and the study that produced it may have caused more damage to investors than any other number/study. The number comes from the famous 1986 Brinson, Hood and Beebower (BHB) study that stated that 93.6% of the variation of a portfolio’s returns could be explained by the portfolio’s asset allocation.

The study did not say that asset allocation explained 93.6% of the portfolio’s actual returns, but rather the variation of the portfolio’s returns. Nevertheless, dishonest brokers and advisers misrepresented, and still do misrepresent, the BHB study’s findings to convince investors to choose an asset allocation and rigidly adhere to it, despite the proven cyclical nature of the markets. This is the mantra of the” buy and hold” approach to investing, an approach that some have suggested is better described as the “buy, hold and regret” approach to investing. Just ask investors how well that worked during the 2000-2002 and 2008 bear markets.

Unfortunately, given the current budget issues that exist at the time I write this post, static asset allocators may soon get yet another costly education. Dr. William Sharpe, a Nobel laureate for his work in the area of investment management, now stresses the need to be proactive and adjust portfolio allocations when changes in the economy and/or the market dictate such moves.

3. Zero – This number represents the number of variable annuities (VA) and equity indexed annuities (EIA) an investor should own. As a former compliance officer and a current securities attorney I have heard all the convoluted and conniving justifications for these atrocities. I have written posts and articles warning investors about these products. While there may be a few limited instances where they may make sense, such as wealth preservation for high net worth investors, the way they are marketed to the masses is extremely questionable.

One Wall Street Journal article reported that variable annuity salesmen were told to treat potential annuity clients as “blind twelve-year-old,” and to “put a pitchfork in their chests,” and provide questionable responses to potential client’s questions. VA salesmen and VA advertisements often tout that by purchasing a VA the investor will never run out of money.

What is often not made clear that in order to guarantee that lifetime stream of money, you give up all rights to the money invested in the VA. Once you annuitize your VA, the balance goes to the insurance company once you die, not to your heirs. In most cases the insurance company offers various choices for payout, such as joint survivor and a guaranteed period, but these options generally result in lower periodic payouts and, in some cases, additional fees.

One of the most onerous aspects of VAs is the excessive fees that most VAs charge, especially with regard to the so-called death benefit. VAs typically guarantee that in the event the VA owner dies with out having annuitized the VA, the owner’s heirs will receive either the accumulated value of the VA at the time of the owner’s death or the amount of the owner’s actual investment in the VA, whichever is greater. So the VA issuer is only insuring the amount that the VA owner actually puts in the VA.

Meanwhile, the insurance company assesses the VA’s annual death benefit fee not on the basis of their actual legal obligation, which is the amount of the VA owner’s actual investment, but rather on the accumulated value of the VA. One study estimated that the actual expense of the annual was approximately 0.10-0.12, but that the insurance companies often charged approximately 1.50%, or approximately fifteen times the estimated value, resulting in a nice windfall for the insurance company. The additional fee also cost a VA investor by reducing this investment return.

EIAs are also problematic. EIAs are generally sold with the pitch that investors can earn the same return that the stock market does, with the guarantee that even if the market is down, the EIA investor is guaranteed a minimum return. What many investors are told is that the potential return is usually capped at a relatively low number, say 10%, and then is reduced even more by a “participation rate,” usually an additional 2-3% reduction. In short, the EIA investor is looking at annual rate of between 2-7%. If the market is up 20% or more for the year, just who is getting the benefit of the excess over the investor’s return?

There may be other significant numbers that I have omitted. However, investors and fiduciaries that remember these numbers and the reasons for their significance will be in a better position to protect both their financial security and/or their clients’ financial security.

James W. Watkins, III is an attorney, a CFP professional and an Accredited Wealth Management Adviser. His areas of expertise include wealth management, wealth preservation, wealth protection and fiduciary law. He is CEO of InvestSense, LLC, a registered investment adviser firm located in Atlanta, Georgia. For additional articles and information, visit http://www.investsense.com. Mr. Watkins can be contacted at tawj3@yahoo.com, and followed on Twitter @InvestSense.

Our time in history continues to be defined by sustained economic problems in developed nations, including sovereign debt defaults, national bail-outs, failing financial institutions, rising inflation, low interest rates and volatile financial markets. It is this set of circumstances that have led investors of all shapes and sizes to seek out and acquire assets that display a low to zero correlation with the wider economy, and financial markets in particular.

One of these assets is timber, as institutional investors including pension funds, hedge funds and family offices pile billions of investment dollars into the sector with the aim of generating long-term returns that are not dependent on the wider economy.

Five Reasons Investors Choose Forestry

1. Forestry Investment Profits Are Not market Dependent

The majority of returns achieved from forestry investments are widely attributed to the biological growth of the tree into valuable timber assets at harvest. Capital growth therefore, is not dependent upon traditional market forces as trees continue to grow regardless of the economic climate.

2. The Market for Timber is Expanding and Supply is Limited

Timber is a tangible asset in high demand and limited supply. As the global population continues to expand, the appetite for construction timber in developing nations such as China and India is expected to double. This, combined with the fact the 20% the Earth’s natural forests have been destroyed, make for a compelling case, ensuring that timber investors enjoy a growing market for their end product.

3. Forestry Investment Returns are Stable and Consistent

Whilst long-term by definition – trees take years to grow into harvestable timber – at the same time, biological growth of well-managed trees is consistent and stable, thus forestry investments avoid the volatility now associated as standard with traditional equity based investments.

4. Forestry Investments Carry Tax Advantages

In many economies, profits from the sale of timber are exempt from many taxes including capital gains tax, inheritance tax and income tax. This makes timber a particularly attractive assets class for investors concerned about tax liabilities or succession planning.

5. Forestry Investments Have Consistently Outperformed Traditional Assets

Whilst past performance may not be the most accurate indicator of future performance, it is of course all we have to go on other than our projections and assumptions. The major indices that measure the performance of the Forestry sector; the NCREIF Timberland Returns Index in the US and the IPD Forestry Index in the UK, both show that forestry has outperformed the majority of other asset classes for decades.

So in summary, forestry investments are supported by solid, long-term fundamentals of increasing demand for the commodity and a diminishing ability to supply it. It is likely then that owning timber provides the investor with access to a highly valued commodity that, when given enough time and having been well-managed, grows in size not just value, providing double bottom line returns that are not co-dependent upon financial markets.

At the same time, the many tax advantages continue to make this asset class appealing to both institutional and private investors alike.

Download the DGC Asset Management Forestry Investment Report at: http://www.dgcassetmanagement.com

David Garner is Partner at boutique alternative investment boutique DGC Asset Management Limited.

If recent stock market activity does nothing more, it shows us that volatility continues to be the name of the game when it comes to investing, as £120 billion is wiped off the value of UK shares alone in the course of four days.

Investors have traditionally employed a number of strategies such as asset allocation and diversification in an effort to reduce risk. But more recently than ever before, the big investment players such as Pension Funds, Hedge Funds and Sovereign Wealth Funds are turning to alternative investments to generate returns that are not dependent on the performance of traditional assets such as equities and bonds.

A recent report by Morningstar and Barron’s; the 2010 Alternative Investment Survey of U.S. Institutions and Financial Advisers, has revealed that institutional investors have allocated more than 25% of their assets under management to alternative investments.

Barclay Capital also recently stated that pension funds have added substantially to their farmland and commodity holdings, with institutional investors expected to hold up to $1 trillion in agricultural assets by 2015, way up from a mere $6 billion held in this asset class ten years ago.

Both institutional and private investors are hoping to generate superior returns in order to boost the performance of their portfolios without dramatically altering the over risk profile, and many see farmland and timber as ideal assets in the current economic climate.

Forestry investments generate profits from the production and sale of timber, so investment returns rely on the biological growth of trees, rather than the performance of financial assets. And with farmland, growth in demand for food, feed and fuel is pushing up the price of food, which bolsters farmland incomes and in turn makes productive land a more valuable asset, capturing capital growth.

There is most certainly an appetite for simple, transparent and tangible assets that are unlikely to depreciate as they are supported by solid long term fundamentals nod remain in high demand, and where investment performance is not dependent upon the decisions and choices of Fund Managers or economic or political news. Many investors consider that owning assets within the food, energy, water and commodity markets are likely to prove more profitable than investing in companies as demand for these essential commodities will continue to grow as the population expands at the fastest pace in history.

China recently invested $1.5 billion dollars into a farmland development project in Argentina, bringing investment capital for infrastructure, and technical expertise in large-scale irrigation, in exchange for long-term leases of farmland from the Argentine Government virtually rent free.

Swedish and American Pension Funds have recently committed hundreds of millions of dollar in investment capital to farmland purchases in order to capture inflation in the capital value of the asset, whilst also generating income streams, useful for meeting commitments in the short term to member of their schemes.

So alternative investments may be the order of the day, but barriers to entry do exist for smaller investors, and those considering such investments should seek advice form experienced Consultants.

David Garner is Partner at boutique alternative investment boutique DGC Asset Management Limited.

Download the agriculture investment and forestry investment reports at: http://www.dgcassetmanagement.com

High CD rates alone are not enough, as venturing in CD requires more strategy and preparation than you think. It is true that having good CD rates definitely make the most of your returns. However, having several CD investment strategies is still highly recommended. Such a strategy, like CD laddering, provides great benefits for optimizing your investment returns.

Fundamentals of CD Laddering

In CD laddering, investors basically deposit their investments in a distributed fashion among CDs that have distinct gains and term durations. Laddering is a mitigation strategy that enhances liquidity and instigates a periodic rate of return. Consequently, it can also restrain the risks of having to isolate your savings in long terms by taking advantage of the varying interest rates.

A carefully planned CD ladder will certainly pay off at different intervals. This only implies that the investor can have greater control over his multiple investments. He can actually anticipate when his return will arrive and make use of that as an advantage. Fluctuating interest rates are unavoidable during this era. If an investor applies laddering, he may take advantage of these fluctuations. For instance, if interest rates are escalating during one of the investor’s pay off time, then the investor may choose to reinvest into a CD with a much higher interest. Or, he may just want to let the savings rollover which in turn, creates a new and much better CD. If the investor wants to liquidate the CD, he may do so.

Investment Earnings on an Interval Basis

One of the great features of CD laddering is the periodic term durations. Instead of having the usual one-time deposit for a very long duration, let us say 5 years, an investor has the option to distribute the total investment into 5 CDs with different maturities. For instance, a $ 100,000 deposit may be divided into five $ 20,000 deposits, each with different maturity dates starting from 1 year, up to 5 years. Every year, there will be a return and the investor will have a great flexibility on how he will reinvest the capital depending on the interest rate fluctuations.

Various kinds of CDs ranging from standard to variable rate CDs can also be incorporated into the ladder strategy. In this case, the investor will accept additional risk while introducing a higher reward. Provisional CDs like market-index CDs can also be included in the laddering plan.

One thing to note is that, reinvesting your principal from one CD into a fresh CD that has equal maturity date to your current longest duration CD will allow you to benefit on high investment rates while consistently receiving great returns. Another great thing with CD laddering is that investors have the liberty to customize their CD term durations; may it be annually, semiannually, monthly or quarterly, whichever he prefers.

More Benefits from CD Laddering

For safekeeping purposes, Federal Deposit Insurance Corporation (FDIC) covers all CD investments, so guaranteed, your money is safe. Moreover, laddering provides higher CD rates compared to standard individual CD rates. With this strategy, investors will be able to get into several interest rates and cost average the finances. CD laddering is perfect for investors who are less aggressive when it comes to investing. Investors who engage in CD laddering experience optimum liquidity and return of investment.

For more information, visit our website http://www.cdrates.org.

Not to sound like this is a covert operation that only a select few at the highest levels know about but there are some binary options secrets. Another term could be FAQ’s which will be more important to know.

Listed below are some you can use as you go through your trading career.

1. Colors For The Levels On The Trading Floor
These show what the direction of the trading is relative to the previous closing day. If it’s red the direction is lower. If it’s green the direction is higher.

2. Expiry level is the same as when the trade was opened
When that happens the trader gets the full investment returned.

3. Expiry Level
The level that Reuters determines the asset expires at.

4. Time zone and trading hours
Your broker’s site should reflect the expiry time and trading hours according to your own computer’s time zone. A particularly good advantage so you don’t make a mistake on time zones and try to enter a trade when the markets are closed.

5. Web Based Platform
No software to download to your computer. Saves you room on your hard drive so you don’t have to continually update your software.

6. No minimum withdrawal amount.
A good broker will also have the option to have one withdrawal per month that is exempt from commission fees. So the best way to avoid paying commission fees is to withdraw your funds only once per month.

7. The ability to see past expires
This will give you some indication of what the risk will be in opening a particular trade on a stock. Just remember as with mutual funds, past performance is no guarantee of future performance.

8. Start With A Plan
A plan to your manage your money is always wise. While it might be an oxymoron the successful traders in speculative investing all have a plan.

9. Choose The Right Broker
This is a broker who runs a transparent business plan. Not one that fills you up with false promises that sound too good to be true.

10. Learn from the mistakes you make.
Even with a sound strategy you’ve honed through paper trading there will be trades that you thought would turn to gold but instead became lead. Make sure to learn what you did wrong and apply the lesson to the next trade.

All of the binary options secrets listed above should help you have a long and profitable trading career. So go out and make it a great day.

For more information on binary options Click Here

With high inflation, we need to take control of our finance and plan for our futures nowadays. Living within one means reduce the risk of debt but is it sufficient to secure your future? Why do we need to be financially free and have financial control?

We need to invest to build up a source of income, which will continue to grow and be able to provide a secure future for ourselves and possibly our next generation.

The reasons to invest include:

1. Let your money work for you: Learn to save money and invest the rest so that it grows even when you are sleeping.
2. Cope with inflation: If you have wise investment that surpasses the inflation rate, you have a sound future finances. You have no worries of the prices of dairy expenses.
3. Business owner: Business needs to invest, whether small or big small sized business. Investing not only grow the capital and expand the business but also teaches one to become a successful businessman.
4. Dependents: Money generated from investment can help to pay bills, buy accessories and pay expenses for holidays.
5. Education: Education fee is increasing with inflation. Investing in an education plan helps to support someone’s studies.
6. Assurance: By making long term investment, you can be assured of sufficient money if you plan to retire. Start investing young and you can have a higher return before you retire.
7. Attaining things you want: The returns from investment can be used to get those things that you dream off, such as cars, houses, etc.

Investment return has to be a source of money unrelated to our regular wages, but money from income producing assets. We have to invest in income producing assets so that they will grow and we can be financially independent.

The investment risk level that you take depends on your needs. If you are interested to make fast money, you would be interested in investment which involves high risk. If your plan is for retirement, you would prefer something that is safer and can grow over time.

The main objective in investing is to create wealth and security with time. It is always impossible to earn an income as one will want to retire. Hence, smart investment helps to insure your financial future. The earlier you gain the investment knowledge, the more successful you will be. Longer time in investment means higher return and you can retire earlier.

To get more free tips and advice on making money and business opportunities Click here to download my free ebook Or visit my website @ www.savemoneyoffer.com