Investment Articles

American investors lost trillions of dollars as a result of the bear markets of 2000-2002 and 2008. As a result of such losses, mutual funds companies are beginning to offer so-called absolute return mutual funds. The goal of an absolute returns strategy is to achieve, positive, more consistent returns under all market conditions. While the power of consistent returns has long been recognized, investors should be aware that the new absolute return funds often use different approaches in trying to achieve such results, some more questionable than others.

The focus on absolute returns has been long overdue. While many investors and investment advisers focus primarily on returns, smart investors realize that the true secret to successful investing is managing investment risk. Legendary investor Benjamin Graham first advanced this concept decades ago. Investors would be well advised to read Charles Ellis’ classic, “Investment Policy-Winning the Loser’s Game” (the more recent edition simply goes under the title of “Winning the Loser’s Game”) for a simple explanation of the concept. Simply put, the concept of absolute returns simply follows the Wall Street axiom of “don’t tell how much you made, tell how much you were able to keep.”

Many investors lost money in the recent bear markets because they adopted the popular static buy-and-hold approach to investing. But the recent bear markets offered further proof that the buy-and-hold approach is fatally flawed in that it fails to recognize the cyclical nature of the stock market. What most investors do not realize is that the buy-and-hold approach is based largely on a famous study known as the BHB report and a misrepresentation of the study’s findings.

Some financial advisors will mislead investors and tell them that there is no reason to make adjustments in one’s portfolio since the BHB study found that asset allocation, not individual investments, accounted for 93.6% of investment returns. What the BHB study actually found was that asset allocation accounted for 93.6% of the variability of investment returns, not the returns themselves,

Looking at only three types of investments, stocks, bonds and cash, the BHB study concluded that the variability of a portfolio’s investment returns increased as more money was allocated to the more volatile investments. In retrospect, this seems to simply be common sense. The key takeaway for investors is that the BHB study, however, did not study the determinants of actual investment returns, did not claim to do so, and made no representations regarding same.

Advocates of the buy-and-hold approach to investing often offer numbers regarding the cost of missing the “best” days of the stock market. As a trial attorney, I am always interested in the other side of the story, what is not being said. In this case, what is not being said is that recent research indicates that the benefits of avoiding the “worst” days of the market far outweigh the cost of missing the “best” days of the market.

A recent study by Javier Estrada of the IESE Business School found that missing the “best” 10, 20 and 100 days of the stock market (defined as the Dow Jones Industrial Average) during the period 1990-2006 reduced an investor’s returns by 38%, 56.8%% and 93.8%, respectively. On the other hand, Estrada found that avoiding the “worst” 10, 20 and 100 days of the stock market improved an investor’s returns by 70.1%, 140.6% and 1,691%, respectively. The study found similar results for the period 1900-2006. The difference in the numbers is due in large part to the fact that investors have to earn more, sometimes significantly more, than they lost just to break even and the time spent in making up for such losses constitutes an opportunity cost for an investor.

So what does this mean for investors? Does this mean that investors should engage in short-term market timing to avoid market corrections? Not at all, as trying to time the short-term swings in the stock market would be both costly and virtually impossible.

Absolute return investing simply acknowledges the cyclical nature of the market and then takes advantage of such nature to maximize potential performance. Those familiar with the classic book,”The Art of War,” will recognize this strategy of using the nature of things to one’s advantage as a cornerstone of General SunTzu’s strategies, but it is equally applicable to investing.

The truth is that most investment portfolios fail to take advantage of the nature of the market, as they contain too many investments with a high correlation of returns, meaning that the investments react in like manner to market conditions and therefore fail to provide an investor with adequate protection against downside risk. A 2007 study by Schwab Institutional reported that 75% of investor portfolios studied were inappropriate for the investor in light of the investor’s goals and/or financial situation. This unfortunate situation is often due to the shortcomings of the commercial asset allocation/portfolio optimization software often used by financial planners and investment advisers.

Fortunately, investors wishing to implement an absolute returns strategy can do so on their own and save the costs and expenses involved with mutual funds. There are a number of investment products currently on the market that can greatly simplify the process of constructing an absolute returns portfolio. By heeding the advice of General Tzu and focusing on investment alternatives that have varying levels of correlation of returns and monitoring the stock market to decide when portfolio reallocation or substitutions may be appropriate, an investor can effectively manage investment risk and improve their potential for investment success.

James W, Watkins, III is an attorney, a CFP professional and an Accredited Wealth Management Adviser. His areas of expertise include 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.

In the current financial marketplace, with low interest rates and market volatility, getting a really good return on your investments is difficult to achieve. Most investors are always looking for that special product or stock that offers extra special returns. However, to get the sort of returns that are significantly above average requires not just excellent research, analysis, financial advice – and luck; it also requires courage, as you are entering into the realms of risk-taking.

It is a truism that risk and reward go hand in hand – the bigger the potential investment return, the greater the potential risk of loss. So the question is, when it comes to investing your hard earned savings, have you got the stomach for what could be a roller coaster ride, in order to ensure you get the best possible investment returns?

As an investor, your attitude to risk is crucial and should be one of the first things that you discuss with your financial adviser. But discussing it is perhaps not enough, as it allows subjectivity to creep in, both on the side of the investor and adviser.

This is why several financial adviser firms now use risk-profiling tools to provide objectivity to the whole investment planning process. These tools are not just gimmicks but provide the basis for a meaningful discussion that is not “led” by the adviser.

The results can be surprising and can highlight gaps between an investors’ actual and perceived risk tolerance. They can also show disparities between the investors’ risk tolerance and current asset allocation. Also, if you are investing as a couple, both of you should take the test separately because it can highlight differences in attitudes that need consideration.

There are various tests out there, including some sophisticated online options. Several providers of investment products also offer risk and asset allocation tests but these should be treated with caution as they veer towards recommending their own products. Personally, I quite like the simplicity of questionnaires provided free by some financial advisers as they are quick and easy to complete, make you think and can lead to a productive dialogue with the adviser.

Most tests measure an investor’s risk tolerance and create a risk profile for that investor, along with a recommended asset allocation strategy.

Obviously other factors also come into play, such as an investor’s risk capacity. In other words, the investor may be willing to take risks but may not be financially well placed to do so. So the ability to absorb losses should also be taken into account.

Similarly, age and timescales have an impact. For example, whilst the attitude to risk of investors approaching retirement may still be gung-ho, they should perhaps consider safer investment options. On the other hand, even cautious younger investors looking at an investment window of 10 to 20 years will actually find that the likelihood of losses in equities is small and the returns greater. For them, equities carry far less risk than someone on a short timescale.

A final thought. Taking the test alone can help you, as an investor, understand your attitude to risk and whether your existing portfolio is right for you but it cannot help you pick products or investments. This is where you still need to talk to a quality financial adviser.

Chris Flood, MA (Oxon), MBA, is a marketing and management consultant based in Bristol UK. He writes articles on investments and financial planning as well as other subjects. To discover your attitude to risk, please go to http://www.kelland-gloucester.com/attitude-to-risk.asp.

Further information about Kellands Gloucester and its investment services can be found at http://www.kelland-gloucester.com

Banks offer a variety of products that involve different amounts of risk tolerance and reward. Many people are turning to CDs (Certificates of Deposit) as a safe way to invest their money while getting a good rate of return. But just how do CDs work and how secure are they?

How CDs Earn You Money for Both Short and Long Term Savings Goals

A Certificate of Deposit can be bought at any time and does not constitute opening an account, the way you would with a checking or savings account. Like a savings account, a CD earns interest, however it can earn substantially more because of the way it is built. With a CD, you agree not to withdraw your money during a certain period of time. As a result, the bank, such as Aurora Bank, rewards you by paying you compound interest on your deposit every day, and putting that interest toward your balance at the end of each month.

Getting Started with a CD

Banks want your business, which is why many of them are offering great CD rates that consistently beat the national average. Terms lengths can be as short as six months, to as long as five years with many different levels in between depending on the bank of choice. You can also buy multiple CDs with different deposit amounts and maturity rates to ensure that you have access to cash when you need it, while still getting the historically higher rates that CDs offer over traditional savings accounts.

Secured by the Federal Government

Unlike some investment products, CDs are backed by the solidity of the federal government. For member Banks, the FDIC insures bank deposits for up to the maximum amount allowable per person, per bank – including CDs. Not all bank products are FDIC insured, making CDs a safe way to store your money while making it earn extra income for you. Whether your savings goals are short term, long term or both, a Certificate of Deposit is a great way to earn a nice return just by saving your money.

That’s because CDs work on the principle of compound interest. Interest is compounded daily and paid back to you every month. You can even choose to have your CD automatically rollover into a new set term at its maturity date. However, if you know what to look for, a CD can offer several advantages over a traditional savings account.

Jess Hall writes out of Jersey City about different investment opportunities, including what to look for to find the best CD bank. Always looking for a trusted financial institution for advice and tips she tends to look to Aurora Bank FSB more often than not.

How to become better at managing money? The best way to start is to avoid making costly mistakes that will be pulling you down and taking months or even years to recover. Many financial blunders are easy enough to avoid once you know what to watch out for.

1. Decision Paralysis

Today there are so many choices, so many financial products and so many offers. It all bundled with financial jargons. It becomes really difficult for one to understand. Also there is plenty of information available on the web, on the media and on the neighbourhood. This makes decision making much more complex. All these things coupled with the fear of making a wrong financial decision lead us to the DECISION PARALYSIS. We don’t take any decision and start postponing it.

2. Ignoring Personal Finance

Most of us think that we need to work hard to make money and build wealth. I agree that you need to work hard but that is not enough. You work hard for money. How the hard earned money can be left idle? If you could focus on your personal finance, your money will start generating passive income with which you can achieve your financial goals with comparatively less effort.

3. Peer Pressure

Peer pressure plays a notorious role in taking wrong investment decision. One feels very safe when he takes the decision, which everyone around him/her has taken. But a product suitable for your colleague or your cousin need not be suitable for you.

4. Too early to plan retirement

You may be saying ‘who me? I am too young to be thinking about retirement”. It is not so! Rethink. You should have started thinking about it yesterday. Because time flies quickly. If you were smart, and planned for retirement when you are young, your retirement years will be really those “Golden years”. If not you need to compromise and you need to work longer and retire later than others.

5. Trying to make quick buck

Risk-Return Tradeoff Principle is a very basic and profound investment principle. Low level of risk is associated with low potential returns, whereas high level of risk is associated with high potential returns. So as to generate high returns one need to tolerate high risks. If you are comfortable only with low risks, you can expect only low returns. No one can defy this basic principle. A scheme cannot deliver high returns with low risk. There were no such schemes in the past. There are no such schemes in the present. There will not be such schemes in the future too. Finance company deposits which assured high interest rates have defaulted. One of the latest examples would be the ponzi scheme by Madoff. Whenever you hear about such schemes with low risks and high returns, you understand it is an illusion. It is better to ask more questions and get it clarified, instead of making assumptions.

6. Investing in things you don’t understand

If you are choosing to invest in a scheme which you don’t understand then you will also not understand what type of returns to expect. Do you understand the Highest NAV Guaranteed Schemes? Who gives the guarantee and what is guaranteed? Do you understand Futures and options completely? Ultimately from where does money come if you are profiting and where does the money go if you lose?

7. Investing in what is hot

If you are investing in what is hot, then you are following the crowd. If you follow the crowd, you will get what others are getting. You will not get anything more. You need to be fearful when others are greedy and you need to be greedy when others are fearful. So don’t go by the market trend or the hot pick of the month. Think like a contrarian and follow value investing.

8. Too many cooks

If you have different agents or advisors for different investment products (insurance, mutual funds, stocks…….), then none of them will know your complete picture. Their advice will be very limited and biased towards their products only. Too many cooks spoil the soup.
How to fix these financial blunders?

Give priority to your personal finance and spend some quality time on that. We all work for money. So we need to efficiently manage our money to secure our future.
Set your financial goals like kid’s higher education, buying a home or retirement with more details. Work out a personalised comprehensive financial plan to achieve the goals. Then create an action plan for the year in sync with the comprehensive financial plan. Be committed to your financial plan.
Obtain assistance from a professional financial planner who has knowledge and access to all financial products in the market. Ask the right questions and understand the plan and products before proceeding on the same.

These tips will refrain yourself from making those financial blunders and managing your money better. To know more about it you can download FREE SEPCIAL REPORT by clicking the link http://www.holisticinvestment.in

In the past, traditional energy companies represented excellent investment opportunities for savvy individuals. With more importance being placed on green sources of energy, an individual may be considering investing in alternative energy. When considering an alternative energy investment, most individuals are faced with three investment products to choose from including mutual funds, ETF’s, and stocks. Each of these options represents certain advantages and disadvantages over the next and it is up to the individual investor to determine which best fits his or her needs. Climate change, political pressure, and the demand for new sources of energy all represent compelling reasons to consider alternative energy investments.

Mutual funds may be the best way to invest in alternative energy for individuals that have time for their investment to grow incrementally. Individuals that are interested in investing a lump sum or who want absolute transparency in their investments should consider ETF’s, or exchange traded funds. ETF’s make it possible for an investor to know exactly which companies their money is going to. Purchasing individual stocks is a good way for an individual to make a concentrated investment, but they are much more volatile and place the individual at a greater risk of losing their money.

There are also specific industries that fall under the umbrella of alternative energy which may represent unique investment opportunities. For instance, an investor may have a personal interest in such alternative energies as geothermal energy, wind, or solar energy. By purchasing ETF’s, an investor can determine exactly which corporations his or her money goes to. An investor that has a preference for solar energy, for example, but who does not have a favorable opinion of ethanol will have the opportunity to focus his or her investments on that particular energy while avoiding the other.

When it comes to investing in any type of energy, whether it is alternative energy or more traditional types, an investor should carefully and thoughtfully consider every purchase. As with any other type of investment, there are risks associated with placing money in alternative energy investments. An individual should never invest more money than they can comfortably afford to lose. By carefully researching each company and gaining a better understanding of the way that stock is traded, a person can make a better decision regarding when and how much of their money they are going to invest. Savvy investors understand that when it is done correctly, it is possible for the benefits to outweigh the risks of investing.

For more information on investing in investment opportunities usually or normally not found in the marketplace, click here!

Sean Johnson is an Investment Advisor for http://www.inquest.biz an Investment Referral Service for investors requesting information on specific investments.

Wealthy clients who require advanced investment planning and wealth management services should be concerned the next time they talk to the financial advisor at their bank, or the broker at the big Wall Street firm. Concerned that is, if they value independent and transparent advice on their accounts and wealth management plan. When it comes to providing affluent clients the types of services they need most: investment transparency, elimination of conflicts of interests, fiduciary responsibility, independent financial information, accountable compensation structures, these companies fall short on all of the above. Hidden fee share arrangements, high commissions, pay to play investment products, no fiduciary responsibility to the client and firm reviewed policies on what employees can discuss all play a very critical role in diminishing the affluent client’s ability to get transparent and accountable advice.

Many large private clients have much too much wealth to be advised by a bank, where the average account size is rarely above a few million dollars. Besides the obvious conflicts of interest that banks have, another concern for affluent investors is the inability of these companies to build sustainable advisory teams. Big banks and Wall Street firms do not want to build dedicated teams of highly qualified advisers. It is expensive and an administrative headache. Plus, the top financial talent usually does not want to work in a captive-firm environment, where profit margins are cut and turnover is high.

Another big concern with banks and big Wall Street firms is of course, conflicts of interest. How can a company provide independent advice when they have their own products to sell? How can an adviser provide independent advice when they are paid a commission by a third party to place its products, or are paid more when they trade more? What affluent clients really need a bank or big Wall Street firm for is asset custody and borrowing money. Investment advisory is a very tricky business for them, because they are not held to a fiduciary standard for their clients, they are not required by law to place the client’s interests above their own.

That is where a true investment fiduciary can help. A fee only Registered Investment Advisory (RIA) firm functions much differently than a traditional Wall Street firm or bank. A fee only Registered Investment Advisor does not manufacture any products in house and has no ties to any institution or investment products: Not a single investor should be a shareholder in the business and the firm should not be affiliated with any asset managers. This guarantees total independence in the choice of investments and fairness in the allocation of opportunities. Fee only advisors are only paid by their clients and pass savings onto them. A quality fee only RIA firm should provide affluent clients with a step by step and very thorough process that systematically explores their complete financial picture and outlines a true wealth management plan that best suits their needs.

Tony DePasquale is the President of Elysien Private Wealth & Real Property. An independent forensic investment auditing & advisory firm headquartered in Henderson, Nevada. Tony can be reached by email at tony@elysien.com or through the company web at http://www.elysien.com

What do we mean by ROI?

Essentially, it is what you get back in return for making an investment in a product, project or business.

Here are two simple examples:

1. Suzie sells name badges for a living. She makes $1 profit per tag. Each tag costs her $2 to make. By expressing Suzie’s profit as a percentage of the unit cost, her ROI is 50%.

2. Mr Greedy has $1000 to invest in a fixed deposit. A sales representative at his local bank informs him that he will earn $100 in interest after one year. Mr Greedy’s ROI is 10%. Note that banks will usually quote you an interest rate of 10% when promoting their savings or investment products.

The higher your ROI the harder your money is working for you and the more profit you will make.

The problem

Investment return calculations are highly flexible and can be easily manipulated to suit the user’s needs. When financial institutions advertise their products, they are going to tell you about great interest rates. It is only natural for these firms to sugar coat their investment returns to drive sales, which is why you need to ask one important question.

What is your net return?

Experts will quote you what is known as a nominal ROI on their products. This is the investment return before costs. That is all good, but you should be more concerned about the net ROI or return after costs.

Have a look at the following example:

Mr Return’s financial planner informs him that he can expect a nominal return of 10% on his investment portfolio. Inflation is 4%.

Firstly, this does not mean that Mr Return’s wealth will grow at 10% per annum. Secondly, it also does not mean that he will beat inflation by 6% (10% less 4%). If we look at his net return, it paints a completely different picture.

Nominal return: 10%

Less inflation: 4%

Less tax: 3.8%

Less annual management fees: 1.5%

Net return: 0.7%

What does a net ROI of 0.7% mean?

If you invest $10000 at 0.7% fixed investment return for 20 years, your real wealth will only grow by about $1500. And that is after 20 years!

Key lessons

1. Make sure you look at all the costs when assessing an investment product, project or business.

2. Determine your net ROI. Will your return enable you to achieve your financial goals at the given level of risk?

3. If your net return is not good enough, move on. Do not buy into a deal on the basis of nominal return.

4. Your goal as a wealth creator is to MAXIMIZE ROI at the LOWEST possible risk.

About The Author:

(C) Copyright – Roberto Lanzillotti. All Rights Reserved.

Having given due consideration to the strategies in Part 1, let’s now consider other tax effective investments to help children with the costs of higher education.

Trust Arrangements

In cases where the donor is confident that the child will have a mature disposition at age 18, a bare trust based investment will offer maximum tax efficiency.

Where more control is required over the investment so that there is, in effect, a “wait and see” approach before the child benefits at age 18, a discretionary trust may be more appropriate.

We will now look at these in more detail. Clearly, in either case, the underlying investment should be made to achieve maximum tax efficiency within the constraints of the required investment parameters.

It is not generally legally possible (although certain life policy exceptions do exist) to make outright gifts of assets to minor children and obtain a valid legal discharge. Indeed, it is not often advisable from a practical standpoint. For this reason trusts can be used effectively.

Two options exist:

Bare Trust

Here the donor could consider an investment into a collective investment (unit trust or OEIC) held subject to a bare trust for the absolute benefit of the child.

The advantages of this structure would be:

Income

Where the grandparent is the donor, income will be taxed as the grandchild’s. It is likely that the grandchild will be a non-taxpayer. This means that where dividend income arises, recovery of the tax credit on those dividends will not be possible and so, if this is of importance, an investment in corporate bond funds could be considered.

These generate interest distributions which are paid under deduction of income tax at 20% and this can be recovered by or on behalf of a non-taxpayer.

Alternatively, an investment in an offshore corporate bond fund could be considered. Here interest is paid
gross and so this will avoid the need for a reclaim of tax.

In cases where the parent is the donor of a bare trust for the benefit of his/her minor child who is unmarried and not in a civil partnership, then if the gross income on investments within the trust exceeds 100 gross in a tax year, it would be taxed on the parent. Therefore, if the parent is a higher rate taxpayer, it may be appropriate to invest in low yielding investments and concentrate an achieving capital growth.

Capital growth

Capital gains will be taxed on the child so this could be a useful way, through careful investment management, of using the child’s annual CGT exemption of 10,100 (tax year 2010/11).

Moreover, the annual exemption is not restricted according to the number of trusts created by the same settlor. Any gains that exceed the annual exemption in a tax year will probably only be taxed at 18%.

Where investment funds are held in a bare trust and being invested to assist with the future payment of university costs, the collective investment could be gradually encashed over three or four years. The child could draw down on the investment from age 18 and, provided capital gains fall within the annual CGT exemption, in effect enjoy a tax-free stream of capital payments.

Another investment that could be held in a bare trust is a single premium bond. H M Revenue and Customs now takes the view that where chargeable event gains arise on single premium bonds heldsubject to a bare trust, they should be taxed on the beneficiary.

The exception to that is in cases where the beneficiary is the settlor’s minor unmarried child not in a civil partnership where the “100 rule” applies (ie. if gross income exceeds 100 in a tax year, it is taxed in full on the parental settlor). However, this rule doesn’t apply with a grandparent settlor or a parental settlor once the child attains age 18.

Therefore, if full policy/segment encashments are made from a bond, chargeable event gains may well count as the child’s income and so, provided the child is not a higher rate taxpayer, in effect provide a series of tax-free payments.

To facilitate some tax-free encashments to fund the costs of pre- university education the 5% (tax-deferred) annual allowances could be used in the knowledge that on eventual encashment after the child had attained age 18, a tax charge is unlikely to arise. Of course, tax (while important) should not be the only determinant of underlying investment strategy.

Investors should always aim to strike an appropriate balance between investment suitability and tax efficiency – ideally achieving both.

Gifts to bare trusts are PETs and so no immediate IHT would arise. Indeed, they will be totally free of IHT if the donor survives for 7 years.

Discretionary / Flexible Trust

A discretionary trust would give control to the trustees to determine who should benefit from the gift and when. This means that if the child does not have a financial need at age 18 or is not responsible enough to receive cash at that time, the release of benefits could be held back until a later date.

Aside from the 1,000 standard rate band, trustees of discretionary trusts are charged to income tax as if they are additional rate taxpayers. Since 6 April 2010, the tax rates on income above this band arising to discretionary trustees are 50% (42.5% on dividends) regardless of the trust’s level of income.

This means that in cases where a grandparent is the settlor, it may be appropriate for the trustees to distribute income to a grandchild beneficiary who is a lower or non-taxpayer in order to recover the additional rate tax paid by the trustees.

Indeed, in these circumstances an interest in possession trust that gives the grandchild a vested right to income but with the trustees having the power to appoint capital may be attractive as this will avoid the beneficiaries having to recover income tax that the trustees have already paid.

In cases where the settlor is the parent of a minor unmarried child beneficiary, it should be noted that
the “100 rule” can apply. This means that if more than 100 of gross income in a tax year is paid out of the trust to the minor child beneficiary of the settlor, it will be taxed on that parental settlor.

Another planning point to consider, where appropriate, might be to trigger the “settlor-interested trust
rules” by including the settlor’s spouse in the class of beneficiaries. This would result in the income being assessed on the settlor which would lower the tax rate provided the settlor is not an “additional rate” taxpayer.

Two types of investment may be appropriate for the trust.

Collectives

If income was not to be distributed it would generally, from a tax standpoint at least, be best for the trustees to invest for capital growth, for example in collectives. This will enable them to use their annual Capital Gains Tax exemption, which is normally 5,050, with excess gains only taxed at 28%. However this investment strategy may introduce an increased level of risk into the portfolio.

Should an adult grandchild have a need for cash at or after age 18 in circumstances which would mean the trustees would have a likely CGT liability, the trustees could make an absolute appointment of benefits to the grandchild and claim CGT hold- over relief. This would mean that the gain would effectively be transferred to the beneficiary, who would have his full annual CGT exemption (10,100) to offset against
any capital gains that arise on subsequent encashment.

Investment Bonds

Alternatively, (and especially if the settlor-interested trust or gains oriented collective strategies were not possible or appropriate) in order to avoid the high rate of tax that trustees pay on trust income, the trustees could invest in single premium bonds.

In such circumstances, any chargeable event gains (which will include reinvested income within the bond) will automatically be taxed on the settlor if he/she is alive and UK resident in the tax year in question.

Their top rate of tax may well be lower than that of the trustees. Otherwise, chargeable event gains will be taxed on UK resident trustees at 50%, with a 20% tax credit available in respect of chargeable event gains arising under a UK bond.

A UK single premium bond could thus be a particularly tax attractive investment where there is a desire to invest for growth from reinvested income rather than capital gain.

In cases where the trustees wish to encash the bond to realise cash to make a payment to an adult beneficiary to fund university costs or assist with a mortgage or wedding costs, thought could be given to making an appropriate appointment of capital, and then the trustees assigning the bond to that adult beneficiary.

That would not in itself trigger a chargeable event but future chargeable event gains on encashment of the bond will be taxed on the beneficiary at his/her tax rate which will hopefully be lower than the rate paid by the settlor/ trustees.

Gifts to discretionary trusts are chargeable lifetime transfers but an immediate IHT charge would only arise if the settlor exceeded his nil rate band (on a seven year cumulative basis).

Whilst ten-year periodic charges can arise, these are only likely to be an issue if a substantial amount was being placed in trust which is fairly unlikely in these cases.

The Financial Tips Bottom Line

Children will need help in later life to meet a number of financial commitments – be it university costs, assistance in buying a house or funding the costs of a wedding. All of these costs can be expected to increase in the future.

Unless large sums of capital are available, the only realistic way of financing these costs is for a parent or grandparent to set up an advance programme of saving.

The demise of the Child Trust Fund means that Government help will not be available in the future.

All parents and grandparents / guardians need to be aware of tax-efficient investment products and, where appropriate, trusts to maximise the returns available for the child. Where trusts are used, these can enhance tax efficiency and the trust selected can be tailored to meet the parent / grandparent’s and child’s circumstances.

Ray Prince is a fee based Certified Financial Planner with Rutherford Wilkinson ltd, and helps UK Resident Doctors and Dentists plan to achieve their financial objectives. Just visit http://www.medicaldentalfs.com where you can request your free retirement planning guide.

Rutherford Wilkinson ltd is authorised and regulated by the Financial Services Authority.

As part of my litigation practice, I represent investors harmed by the misconduct of their stockbroker, investment advisor, or financial planner. Some of these cases can be brought in court; most are required to be arbitrated before the Financial Industry Regulatory Authority (FINRA). In either venue, however, many of these cases have common themes, which teach important lessons about investing.

Wall Street Doesn’t Have a Crystal Ball

The financial industry spends millions of dollars convincing the investing public that it can predict with some accuracy the future price movements stocks. We all know that predicting the future is impossible, but when Wall Street breaks out its technical charts, graphs, and its highly paid analysts discussing “P/E ratios,” “EBIDTA,” “relative strength,” “quantitative analysis,” “momentum plays,” “valuation,” “trading strategies,” “market timing” and the like, it sounds as if they have discovered a window on the future. But the reality is that price movements of stocks are unpredictable and random because stock prices react to news, which by definition is unpredictable and random. The resignation or indictment of a CEO, a product recall, an “earnings disappointment,” the failure of a new product to generate significant sales, or an international crisis all will affect stock prices. These types of events are rarely anticipated and occur randomly. Therefore, contrary to what Wall Street’s very effective marketing would have you believe, those who “beat the market” in the short term do so because of luck, not skill. Academic Research has shown that there is a very low probability — less than 3% — that any one broker, money manager, or investment newsletter can pick investments that consistently outperform benchmark market averages (such as the S&P 500) over long periods of time (10 years or more). Those odds are about the same as the odds of throwing “snake eyes” at a craps table in Vegas. What is the probability that with the money you have to invest today, you can identify the lucky broker, financial advisor, or mutual fund who will consistently roll snake eyes and beat the market for the next 10 or 20 years? Very slight.

Lesson learned: Avoid actively managed investments; stock picking and market timing are losers games.

One Size Doesn’t Fit All.

When you shop for clothes or shoes, there are a variety of sizes and styles because each of us is physically different, and each of us has our own fashion style (or lack of style). Investing choices should also be “tailored” to fit you as an individual. Just as a tailor or shoe salesman measures you before determining what clothes or shoes will fit, a conscientious advisor will similarly “measure” you to determine what types of investments are suitable for you, and how those investments should be allocated in your portfolio to meet your needs, goals and risk tolerance. The advisor should make inquiries to determine your investing time horizon, short and long term liquidity needs, income and savings rate, net worth, tax bracket, and investment experience and knowledge.

Most importantly, the advisor needs to understand what level of risk gives you discomfort. Can you tolerate a decline of 20% in your portfolio without panicking, or do you need to construct a portfolio which, based on historical data, is likely to fluctuate up or down only 5% per year? As a general rule of thumb, more aggressive, risk tolerant investors should be more heavily weighted in small capitalization “value” equities, while conservative, risk adverse investors should be more concentrated in bonds and large capitalization “Blue Chip” securities.

An advisor who takes the time to understand your needs and risk tolerance will recommend diversifying and allocating assets amongst various types of investments consistent with your goals and risk profile. Studies show that over 90% of your investment returns depend on how your assets are allocated among different investment classes, while only about 2% is due to the specific stocks, bonds and other investments you choose to buy.

Lesson learned: An advisor should spend the time to learn your particular circumstances, and tailor investments to fit your own risk tolerance profile. Run, don’t walk, from any advisor who tries to sell you something without first learning about you and your risk tolerance, who has the same solution for everyone, or who recommends putting all your assets into a single type of investment.

Wage War on Fees, Expenses and Commissions.

Over long periods of time (10-20 years), well diversified portfolios have returned approximately 9% per year. Fees, expenses and commissions, imposed year after year, substantially reduce the long-term net investment return. The average expense ratio for actively managed mutual funds is approximately 1.5%. Similar or higher charges are assessed in “managed accounts” or “wrap accounts” where the investor is charged a fixed percentage of the portfolio rather than commissions on each trade. Because of the miracle of compounding, even a small difference in expenses charged against your investments can make a significant difference in the final long term investment results. For example, the final value of an initial $100,000 equity portfolio earning on average 9% a year for 10 years with 1.25% in annual fees and expenses will be $208,754.58. That same portfolio, with identical returns, but with 2% in annual expenses, will be worth $193,439.835, or $15,323.73 less. Additional fees, commissions, and expenses, by themselves, can make it difficult to “beat the market.” As we have seen, there is a high probability that an advisor cannot select investments that beat the market, and the probability of market underperformance is necessarily increased when the account is subject to excessive fees, commissions, and expenses.

Lesson learned: Keep the fees and expenses charged to your portfolio as low as possible. Avoid advisors who are paid on commission.

Don’t Chase Last Year’s or Last Month’s Winners

Mutual funds, Wall Street firms, and financial newsletters love to tout their recent successes. Investors flock to the fund, firm, newsletter, or investment category with the highest recent returns. But what happened in the past is a poor predictor of what will occur in the future. One study suggests that only 14% of the top performing investment managers for a particular year will be among the top performing managers the following year. The same historical reality that applies to stock picking applies to recent “market beating” firms and mutual funds — the fund or firm that did well last year is not likely to repeat that success the next year, and highly unlikely to consistently outpace its peers for long periods.

Lesson learned: Don’t chase recent winners.

Be Leery of Investment “Products” Wall Street loves to sell “investment products.” These come in a variety of forms, including limited partnerships, investment trusts, variable annuities, variable life insurance, mortgage backed securities, and others. Some of these products cobble together investment and insurance concepts in a single package, to be sold as something that will supposedly cure one or another investment risk, or provide a benefit, such as life insurance or a guaranteed return. Often, these products pay the highest commissions to brokers and insurance agents. When I see the phrase “investment product,” my expectation is that I will see an investment loaded with fees and expenses, and which is often too complicated for the average investor to understand. These products are suitable for some people, but are often too costly or complicated to be appropriate for most investors.

Lesson learned: Be leery of “investment products.” Look carefully at the fees and expenses for such products, and if the investment is very complicated, ask yourself whether you should risk your hard-earned money in something you don’t understand.

Make Sure Your Money Lasts as Long as You Do.

In retirement, many baby boomers suddenly will have access to significant lump sums of money, accumulated through savings, pensions, IRA’s, and 401k’s. There is a temptation to spend those assets freely, without considering that those funds may have to last 20, 30 years or more. It is critical for the investor to structure their retirement investments, and any withdrawals from retirement funds, so as not to outlive their money. As a rule of thumb, a withdrawal rate of 4% or less, adjusted for inflation, will increase the chance that there will not be a shortfall. Of course, each investor must consider their life expectancy, the composition of their portfolio, any other sources of funds (such as Social Security or company pensions), and their spending habits.

Lesson learned: The higher the withdrawal rate from your retirement assets, the greater the risk you will outlive your money.

Avoid All the Noise and Invest in Index Funds.

An index fund seeks to match the returns of a specified benchmark by buying representative amounts of each stock in the index, such as the S&P 500 or the Wilshire 5000. Other index funds focus a particular industry, or a particular geographic area, such as the telecommunications or health care sectors, or the leading publicly traded companies of South America or Japan. There are also index funds that track corporate government bond indexes. These funds don’t try to “beat the market,” they “meet the market,” by investing in the securities comprising the benchmark index. As seen, only a small percentage of active money managers beat the market over the long term. That being so, having an investment that “meets the market” year after year is, based on historical data, statistically more likely to provide superior long term returns than active money management trying to “beat the market.” Much of the superior performance of index funds is due to their low expenses, which average.25%, or about 1/5 of the expenses charged by actively managed mutual funds. Additionally, most index funds necessarily provide diversification (e.g., owning the 500 companies in the S&P 500, or the 5000 companies in the Wilshire 5000), and are tax efficient, since there is no active manager trading for short capital gains.

Lesson Learned: Allocate your investments among a variety of national and international equity and bond index funds. A 60/40 portfolio (60% diversified equities, 40% diversified bonds and cash) is generally considered to be a well diversified balanced portfolio of moderate risk. Those seeking more risk should consider increasing their exposure to equities, while those desiring less risk should increase their bond and cash balances. The particular percentages suitable for you must be based on upon your particular risk tolerance, goals, and financial needs.

Robert C. Port is a partner with the Atlanta law firm of Cohen, Goldstein, Port & Gottlieb, LLP, where he practices business and securities litigation. He has a particular emphasis on representing investors harmed by the misconduct of their stockbroker, investment advisor, or insurance agent. Mr. Port has an AV Rating by Martindale Hubbell Law Directory, and has been selected as a “Georgia Super Lawyer” in the practice areas of Business Litigation and Securities Litigation by Atlanta Magazine.

As we’ve seen during the past two years, investors can turn their backs on sluggish asset classes such as equities or real estate. While traditional investment strategies have produced lackluster returns recently, there has been a growing interest in alternative asset classes. Investors have placed renewed focus on portfolio diversification and are enticed by the more predictable returns offered through life settlement investments. However, this new found attention raises other questions about the suitability of life settlement investments for various investors. In an industry dominated by institutional investors, are these investments appropriate for retail investors?

More than ever before life settlements are accessible to all types of investors. With online services like the new Life Settlement Investments Finder, it is now easier than ever for retail investors, family offices and institutional investors alike to make investments in the asset class. Online services such as these, match investors’ profiles against a query of known viatical investment choices. By default these services make life settlement investments available for everyone from the institutional investor and to the mass affluent.

Although there are now a number of ways to participate as a retail investor, most high net worth individuals are not offered alternative investments by their advisers. In fact, many broker dealers prohibit their representatives from even selling or discussing life settlement investments. For those that do decide to pursue the opportunity, a myriad of choices abound. One could invest in this asset class by buying; individual policies, fractionalized shares of policies, positions in dedicated life settlement investment funds or even shares of hedge funds with activity in the space. Each strategy has its own level of risk & reward and necessitates a different degree of sophistication as an investor.

Most investors are accustomed to the high level of disclosure provided by investment products such as mutual funds. Retail investors must understand, and be comfortable knowing, that the same level of transparency is not available with all types of life settlement investments. They must accept that, even in this age of 24 hour a day information saturation, there is a certain level of insulation between a retail investor of an investment fund and an insured.

In addition, retail investors must understand that direct or fractionalized ownership of policies are an illiquid position. A policy can’t be bought or sold instantaneously like a stock. That means investors exiting an investment prior to maturity will incur high transactional costs and cycle times. Life settlements should be approached with a buy and hold strategy requiring a timeline measured in years, not weeks or months.

With more prominence as an investment strategy, life settlement investments are also getting more scrutiny. Critics argue their complexity, risk and opaque nature should be avoided by all but the most capable institutional investors. Well capitalized investors have the benefit of being able to build homogenous portfolios that are statistically predictable and reduce the overall extension risk of individual insureds. Building and maintaining a portfolio of insurance policies is an involved process and takes a serious commitment. The capital required to execute the compliance, due diligence and acquisitions is usually only available to institutions. However, just because smaller investors can’t undertake the same initiatives doesn’t mean they are precluded from the asset class altogether.

As long as retail investors are aware of the risks and unique nature of the space, there is no reason that they shouldn’t enjoy the benefits of life settlement investments. When done correctly, the investment strategy offers an uncorrelated asset class that generates predictable long term returns. The key as with any investment, is to ensure the proper product is chosen and strategy employed.

Please visit Christian Evulich’s technorati column for more information about life settlement investments.