Investment Articles

Most people enter the investment arena thinking that “Risk” is a board game they played in college. Today, I would guess that the majority of investors have never owned an individual share of common stock or a Municipal Bond.

The popularity of investment products has heightened the risk for all investors and has indirectly led to many of the policy errors that threaten both capitalism and the economic fabric of America. Market prices are increasingly and inappropriately influenced by decision-making based only on the derivatives that contain them.

Few people consider the investment risk associated with public policy decisions. Product investors and derivative speculators participate in less personal markets, where it is more difficult to connect the dots between their personal financial interests and their political alignments.

So in a very real sense, investors have to deal with public policy risk every bit as much as they need to analyze the risks associated with the securities and other financial products they hold in their portfolios — complicated, but it is doable.

Apart from these important peripheral considerations, the risk of loss in any equity investment is generally greater than the risk of loss in any debt related instrument. The potential reward from each type is just the opposite, and that’s where all the excitement begins.

Do we risk more for the chance of a greater return, or do we risk less and try to preserve our investment capital? Keeping in mind that investment capital is a measure of cost, not of market value, and that the only real loss is a realized loss.

Typically, the older the investor, the more boring or income focused the portfolio should be — minimizing the overall level of risk. But it’s difficult to actively minimize or manage your risk in the “open end” mutual fund or passively managed ETF marketplaces.

Risk minimization requires the identification of what’s inside a portfolio. Risk control requires decision-making by the owner of the investment assets. Risk management requires a selection process from a universe of securities that meet a known set of qualitative standards.

Product owners assume the added “fear and greed” risk of the general population, while their fund mangers stand aside and mumble about the opportunities lost in either direction.

Without a risk sensitive menu to select from, 401(k) participants need to minimize risk by: (a) avoiding the poor diversification that may be a requirement of their plan, and (b) developing outside income portfolios with any investable income above the employer matching contribution.

The first and most important management action focused on risk minimization in any “program” is the development of an asset allocation plan. The plan separates “liquid” investment assets into two buckets (Equity and Income) based on cost, not market value. No portfolio should have less than 30% in the income bucket — no ifs, ands, or buts.

And no investment plan should be developed “tax” or “cost” first. Risk minimization comes first, and then tax minimization if possible. Finally, transaction cost minimization can be considered if you are qualified to run your program yourself.

A cost based asset allocation approach (Working Capital Model) assures growing levels of “base income” throughout the portfolio development process and, possibly, into retirement. Income growth, by the way, is the only real hedge against that other economic risk, inflation — a buying power problem that has nothing to do with the market value of the income producing assets.

Minimizing investment risk is done best through the use of disciplined sets of rules for the various operations involved in managing a portfolio. Strict rules need to be developed for security selection, three types of diversification, income production, and for profit taking.

Forget the Wall Street “I-can-fix-that” product menagerie. We’re not interested in massaging our market value to take the sting out of cyclical market value changes. Our plan is to take advantage of these changes as they unwind around us over time, and when they occur unexpectedly, causing short-term disruptions and dislocations.

In the securities markets (stocks and bonds), the real risk of loss can be minimized without products and futures speculations, without commodities and hedge funds, and without the ageda that most people experience throughout their investment lifetimes.

The old fashioned principles of investing: Quality, Diversification, and Income, plus disciplined, targeted, Profit Taking are the only hedges an investment portfolio needs to assure long-term success. Conveniently, the QDI+PT applies equally well to both classes of investment securities.

“Q” is for quality. If you study the long-term behavior of Investment Grade Value Stocks, and high quality income CEFs, you’ll discover that they hedge themselves quite effectively.

Risk is wrung out of portfolios by investing only in S & P, B+ or better rated, dividend paying, and historically profitable companies and then only when their equity prices are well below their 52-week highs.

“D” is for diversification. Absolutely never allow any position in your portfolio to exceed 5% of total portfolio working capital (i.e., the total cost basis) and never start a position anywhere near maximum exposure. You want to be able to buy more at lower prices.

Similar diversification rules apply to industry exposure and global diversification through the use of the mainly world class companies in the investment grade quality categories.

“I” is for income. Own no security that does not pay regular, dependable, dividends or interest. Regular and growing dividends are a quality indicator in equities. In the income “bucket”, seek out above average yields while avoiding those that seem either too high or two low.

Managed closed end funds do it best and provide easy “PT” and “buy more” opportunities. Buy established CEFs with long term “income” (not ROC) payment records.

“PT” is for profit taking. Absolutely always smile and take your profits willingly, net/net 7% to 10% (dependent upon available reinvestment possibilities and security class), and never, ever, look back.

Trading this same body of securities, again and again, has been shown to sustain growth of capital and income consistently in a relatively low risk environment.

Google Part III: Ten Time Tested Risk Minimization Strategies

Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”

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

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

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

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

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

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

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

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

Security in the language of business economics is the written (or electronic) evidence of ownership that provides the right to receive property or some other benefit that is currently not in direct possession of the holder. That is a pretty boring way of saying it is a piece of paper that says you own a chunk of a company or at least a chunk of its profits.

The most common forms of security are Stocks and Bonds, the buying and selling of these forms of security are the bread and butter of the stock market exchange. Both stocks and bonds are a type of corporate security. Bonds represent a debt of the corporation while stocks represent ownership or equity interest in the operations of a company.

Bonds Come In All Flavors and Sizes

A bond is a tool used by companies to raise money to invest in their business. The bond signifies the promise of the corporation to pay back the price of the bond with interest paid throughout the life of the bond at preset periods of time.

Bonds are good for investment because they tend to provide a safer return on the investment but still provide relatively high dividends.

Bonds are very flexible which is why they are such an attractive type of investment. They can be registered to a certain person, a group of people or, as it is more common, they are made payable to the bearer. The bondholder, whoever he may be, receives his interest payments by redeeming coupons attached to bond. These characteristics make bonds an excellent form of cash, which gives interest but is generally easily liquidated when needed.

However, companies would struggle if asked to pay all their bonds at once which is why it is common for them to pay them gradually through serial maturity dates or by using a sinking fund that saves a certain percentage of profit in order to pay outstanding bonds. It is smart therefore to make sure what type of policy the company you buy bonds from so there are no surprises when you need to cash in your bonds.

The main type of bond is the Mortgage Bond. This bond represents a claim on a real, specific property. These bonds are of the safer types and ordinarily results in bond owners receiving a priority treatment if financial difficulties occurred. However it seems like the irresponsible selling and dealing in mortgage based investment securities triggered or at least played an important role in the current housing, credit and mortgage crisis. It therefore pays to check what kind of mortgage bonds you buy into.

Another important bond type is the Collateral Trust Bond. The security for collateral trust bonds is an intangible property, often stocks and bonds that the company owns. This type of bond guarantees that if the company can’t pay your bond you get a piece of their company. This does not seem to be much help because by then the company is not likely to be worth much.

An interesting type of bond is the Convertible Bond. This hybrid bond adapts to varying circumstances. It can be exchanged for common shares at specified prices that can change over time. This bond is attractive because it can be very effective obtaining funds at a low interest at the beginning of a project when income is low but encourages conversion of bonds (debt) to ownership (stock). It is also a good option for clients that obtain a price protection on their investment without losing the possibility of profit provided by the stock feature. Obviously this is an attractive bond in periods of market uncertainty.

Another type of hybrid bond is the Income Bond. The Income Bond has a fixed maturity but you only get interest paid on it if the company also earns it. Historically these bonds appeared when railroads were “reorganized” which is fancy for gone bankrupt and bought by another corporation. The new owner offered this hybrid type of bond which was good for bond holders because it meant they didn’t lose everything and allowed the company to wait until they were making a profit to pay dividends on the bonds.

Linked Bonds are yet another hybrid type of bond where the interest returns are linked to some standard value, like the price of gas, a cost of living index, a foreign currency or a combination of all the above. These bonds were popular in the states during inflationary periods and are not as common today. They are still used in countries where the fear of inflation deters investors from buying fixed income bonds. The idea is that there is little benefit in getting a 10% interest on your investment if the price of bread or the overall cost of living has risen by 30%. Linked bonds are designed to guarantee the return on your investment is real and not just a numbers game.

As you can see there are all kinds of bond securities to invest in. Bonds may be one of the safest and smartest investments for people who don’t want the risk of buying and selling stocks but still want the potential for high returns on their investment. The hybrid bonds provide the best balance between security and profit potential. However no portfolio or circumstances are the same so contact a certified agent to find out what product is best for you.

Andrew Latham.

Read more articles on Language Learning at my Teach Yourself Blog.

As a new investor you probably wonder what a securities investment really is. There are basically three investment securities every investor absolutely needs to understand before deciding on a financial investment. Here’s your basic investment guide. Corporations issue equity securities to raise money in the form of common stock; and debt securities to borrow money in the form of bonds. The U.S. government issues debt securities to borrow money from investors in the form of Treasury bills, notes, and bonds. And then there are complicated and risky investment securities like derivatives, where the new investor does not belong.

As a basic investment guide I suggest that the new investor view the world of investments as three distinct and separate segments: savings alternatives, tangible assets, and investment securities. A bank savings account or CD is a savings alternative, not a security. Physical real estate property is a tangible investment or “hard” asset, not a securities investment. Stocks, bonds, and mutual funds are each a financial investment and they are the investment securities that all investors need to understand. Stocks and bonds are originally issued (sold) to the public. Then they trade in the secondary market on exchanges, as in the stock market. Since there is investment risk and the public is involved, these securities are regulated by the government.

Since they trade in organized markets or exchanges, investors have liquidity and can easily buy and sell stocks and bonds. A securities investment can offer higher returns and/or more interest income than money in the bank. Along with this comes higher risk. Common stocks are a financial investment that offers the potential for growth and higher returns. Bonds are investment securities that offer higher interest income. The average investor needs growth and/or higher income to get ahead financially. The question is: how should the new investor approach the subject of making a securities investment? Here’s a basic investment guide. First, learn the investment basics in regard to stocks and bonds. Then start investing in mutual funds.

When you invest in these funds professional money managers pick the stocks and bonds for you and a large pool of other investors. They manage the money. You just pick the fund(s) you want to invest in. The new investor belongs in stock funds, bond funds, money market funds, and/or balanced funds; and not in the likes of complicated and risky derivatives like stock options, swaps, and leveraged or inverse ETFs that invest in derivatives. The mutual fund industry is regulated to protect investors against fraud. Some of the more exotic securities are more difficult to regulate, as proven in the financial crisis of 2008.

A retired financial planner, James Leitz has an MBA (finance) and 35 years of investing experience. For 20 years he advised individual investors, working directly with them helping them to reach their financial goals. Jim is the author of a complete investor guide, Invest Informed, designed for average investors or would-be investors of all levels of financial background and experience. To learn more about investments and investing and his new financial guide go to http://www.investinformed.com.