Archive for March, 2013

The Basics of Investing Your Money

While it is true that investing your money and taking advantage of compounding interest is one of the smartest moves that you can make financially, unfortunately the average person gets very little in the way of education when it comes to investing. This has led to countless financial mistakes that could easily have been avoided had the person who made them only known some basic information. With that in mind we put together a blog with all of the basics about investing your money. We hope you enjoy it and we believe that using this information will help you to build an excellent portfolio.

1)       Statistically and historically speaking, stocks have always outperformed any other type of investment. The simple fact is that stocks have provided close to a 10% return over the long run, which is the highest of any asset class. Bonds are next followed by long term US treasury bonds both of which have averaged a return of about 5%.

2)       Financially speaking, stocks can be hazardous especially in the short-term.

3)       The riskier and investment is the higher the rate of return that you will receive. Stocks, which are thought to be riskier than bonds, also tend to have a higher rate of return. This explains why long-term bonds also pay more than short-term bonds because the person who invests in long-term bonds will have to wait much longer for their final payoff and the chance that something will cause their value to fall is higher.

4)       If we are speaking short-term the price of stocks fluctuates due to many things, including interest rates, investor sentiment and even the weather. On the other hand however, in the long run the most important determiner of stock prices is earnings.

5)       It is very difficult to have a ‘bad year’ with bonds. For example, in 1994 the intermediate term treasury securities fell by 1.8% but the next year they rebounded to 14.4%. If you compare that to the 1973 – 74 crash when the Dow Jones industrial average fell 44% and didn’t make its way back to its old level for 10 years you can see that having a bad year for bonds is nothing like a bad year for stocks.

6)       When interest rates rise bond prices fall and vice versa. The reason is that bond buyers know that they won’t pay as much for an existing bond with a fixed interest rate than they would on a new bond because interest rates in general have gone up.

7)        One of the biggest threats to any long-term investment is inflation. Simply put, inflation has historically taken 3.2% a year away from the value of your money and historically that money has never been put back. Based on this alone you can see why it is important to invest your retirement money where it will earn the highest long-term returns.

8)       If there is one thing that is close to a sure bet in investing it is US Treasury Bonds.  The fact is that America’s economy has historically been quite strong and also the US has a habit of printing more money to pay off treasury bonds when needed. As a result they are .considered relatively risk free. Keep in mind however that just like with all other kinds of bonds, Treasury Bonds will suffer if interest rates rise.

9)       The more diversified your portfolio the safer it is. This may be the most vital bit of information that you can take away from this blog today. While a diversified portfolio may not outperform the market it is much less risky because even if some of your holdings take a dive it is highly unlikely that all of them will and it is also likely that some of them will go high enough to make up the difference.

There you have it; 9 of the best pieces of advice that you could ask for when it comes to investing. Just as with anything else that you do in life the more you use the tips in this advice the better you will become an investing. Good luck with all of them and we will see you back here soon with more financial advice and other tips for keeping your financial house in order.

Bonds – What They Are and How They Work

One of the most popular forms of investing is in Bonds but, for the uninitiated, bonds are somewhat of a mystery.  This Blog article aims to change that with some basic info about what Bonds are, how they work and what they can mean for the average person’s portfolio. Take a look and we’re sure that when you’re done you’ll not only know a lot more about Bonds but in fact be ready to go out and find some to invest in.  Enjoy.

The best way to explain what a Bond is and how it works is by example. When any business begins the founders usually have money that they will invest into it called capital.  They use this capital to open the business and begin taking care of customers.  If what they are producing or the services that they have are successfully marketed in time they will need to expand but, in many cases, the money needed for the expansion isn’t sufficient.  It is at this time that many companies will decide to issue bonds and this is when citizens like you and me can start purchasing them.

The reason to purchase is simple; the company promises to not only pay the money back that you paid for their Bonds but also, at certain agreed upon times and intervals, they will also pay extra payments in the form of interest. In this way Bonds are different from stocks because when you own stock you actually own part of the business.  When you buy bonds you are promised to be paid back what you paid in and also get interest but you will never actually own anything. The business has simply borrowed your money to expand, as if you were a bank.

The reason that anyone would want to purchase bonds over stocks is because, even though they may not make money as quickly or increase in value as much as stocks, they have some other traits that are very attractive.

Bonds offer capital preservation. What this means is that the money invested is very safe and, unless the company goes completely bankrupt, the investor will get back their original investment and much more.

Bond owners will get an interest payment regularly over the entire time that they hold the bond. This can be very helpful for retired persons as they get money at regular intervals and is also great for people who need regular cash flow.

Bonds can carry a big tax advantage, especially when they are issued from the federal or state governments or a municipality for the building of roads, bridges and other infrastructure. If you’re retired this can help minimize the total amount of taxes you owe every year.

As you can see Bonds are not only safe but very effective and offer benefits that are very advantageous, especially to retirees. It is for those reasons that any person looking to make some safe long-term investments should investigate Bonds as much as possible and include them into their well-rounded portfolio.

3 Tips for the Beginner Investor

When you’re considering starting investing there are so many bits of ‘advice’ that you’ll hear that you may quickly find yourself overwhelmed and confused.  The fact is however that there really are only 3 Rules that you need to follow, at least when you’re just starting out, and they will form a very good jump-off point for more learning while you earn.

Tip 1) Investing is NOT easy.  In fact, it’s extremely hard to do it ‘right’.  All the due diligence in the world, all the research, all the data that you can find is wonderful but, at the end of the day, a stock that looks like a winner on Monday may be a complete loser on Tuesday.  There will be reasons why it happened, of course.  Foreign sales have slumped, there was a glitch in the product pipeline, it snowed early in the West, etc., etc.  Some reason may actually make sense and appear to be ‘no-brainers’ and some fact pattern will say ‘I told you so’ while others will make no sense and leave you scratching your head trying to figure out what happened.  Point being, investing isn’t for sissies and it isn’t for quitters.  The faster you figure this out the better you’ll be and the less pain and stress the ups and downs of the market will cause you.

Tip 2) You need a plan and you need to stick to it. The simple, undeniable truth is that short-term traders absolutely love trends. They enjoy it immensely when the masses, like lemmings to a cliff, grab a hold of the latest ‘best thing’ that they’re told absolutely can’t fail.  Whether it’s a new ‘hot’ sector, a macro play that appears at 1st glance to make a lot of sense or the newest market flavor of the day these traders look forward to trends like a fat guy looks forward to a 7-course dinner.

The reason that they love trends so much is that beginner investors will jump on the bandwagon and push them higher and higher, even though they (the traders) don’t intend to hold on to them any longer than the trend lasts.  As soon as they see that a trend has burned itself out they bail and leave you (the investor) holding onto something that has little or no long-term value. If you have a plan however you won’t be vulnerable to these vultures, pure and simple.

Tip 3) Compounding is your best friend.  In fact, it’s the single greatest force for positive results in investing.  A carefully planned portfolio protects your downside and assures that your money will keep growing while also absorbing temporary declines in any one single asset (or even several) that you have.  The truth is that active traders need to be right almost all the time and, if they’re not, they’re done.  On the other hand, if you leave your money alone and let it grow your investments will continue to perform year after year.  Of the 2 options the latter is, in our opinion, much better.

10 Tips for First-Time investors Part 2

Welcome back for Part 2!  We hope that the 1st part of this 2 Parter was helpful and interesting.  These 2nd 5 Tips will help you just as much so have a look, take some notes and use them as you see fit.  Enjoy!

  1. No matter where you invest check out the fund manager before you make any decisions.  This means checking their credentials, their long term performance, their goals (and how they align with yours) and their reputation.  Keep in mind that even the best fund manager will sometimes have an off year and underperform occasionally and try to look at their long term results.  If they have been very successful but recently took a slight dip that shouldn’t spell major problems in your eyes.
  2. Remember that fads are for rock stars and children, not for smart long-term investors.  The dotcom crash in 2000 is an excellent example of people following a fad and then getting burned. Whenever you’re looking for an investment opportunity take your time, do your due diligence and do the research needed to make sure it’s a good opportunity. Technology is back in favor now, for example, but it’s still volatile and still not the best choice.
  3. When looking at past performance of any investment opp don’t focus completely on its past performance.  This is certainly an indicator of  how it might perform but is definitely no guarantee. Because of the simple fact that markets are cyclical it means that a great performer in the past may not be the best in the future. Again this goes to due diligence and research that you need to perform.
  4. Investing monthly to smooth out crests and lows is a better idea than investing once or twice a year.  It’s called ‘pound-cost averaging’ and will reduce the chance of any volatility in the market wiping out all of your gains in one fell swoop.  It’s a basic principle that many use.  Yes the amount of units you purchase 1 month may be less than another but, at the end of the year, they should even out.  In most cases you will end up paying less per share than the market average.
  5. We mentioned this before about putting all your investments only in the United States and that you should spread them out internationally.  Do the same with you investment overall and don’t, as they say, ‘put them all in 1 basket’.  Invest in a number of different companies or funds so that if one fails you still have the others to keep your portfolio afloat and healthy.

And that’s it.  10 excellent Tips that should help the new investor with their decision making process.  We wish you the best of luck with them and also suggest that, no matter what you do, use common sense, ask as many questions as you can, get advice from trusted sources and look at the whole picture long-term for the best results.  See you back here soon!

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