Recent years, Climate change has become a popular investment theme, giving rise to green stocks and mutual funds that focus on issues such as global warming and alternative energy. According to a survey conducted by Allianz Global Investors earlier this year, Americans believe that changing government policies and other factors will welcome a "golden age" for environmentally friendly investing. Additionally, 78% of investors surveyed think that green technologies have the potential to be the "next great American industry."
Among the larger mutual funds out there are the Winslow Green Growth(WGGFX Quote), Guinness Atkinson Alternative Energy (GAAEX Quote) and the DWS Climate Change(WRMSX Quote) portfolios.
As the chart shows, these funds have lost about half of their value in the past year, more than doubling the 22% decline of the S&P 500 index. These funds serve as proxies for alternative energy and are prone to wide swings. They've gained at least 26% since March 9, keeping pace with the broader market's rally. The Winslow Green fund led the pack, rising 34%.
The poor relative performance of the past year is no reason to give up on the strategy. Most of the stocks in the green space are those of industrial or technology companies. While those sectors lose more value than most industries during slowdowns, they can lead economic expansions. In some ways, it's reassuring that the shares have acted predictably in the past year.
Winslow Green has the most interesting portfolio. It covers the bases of solar and green technology, but its largest holding is WaterFurnace Renewable Energy(WFFIF Quote), a geothermal stock. WaterFurnace shares have lost 5.6% in the past year, outperforming the S&P 500.
DWS Climate Change's portfolio is a bit of a disappointment. At year-end, its top holdings included General Electric(GE Quote), United Technologies(UTX Quote) and Siemens(SI Quote). All three are active in the space, but their alternative energy divisions are too small to move the needle for any of them.
Showing posts with label mutual funds. Show all posts
Showing posts with label mutual funds. Show all posts
2009-04-25
2009-04-08
Mutual Funds Strategy in a Recession
While in a recession, stock prices are dropping. Fears of further declines and mounting losses chase investors out of stock funds and push them toward bond funds in a flight to safety. It's an effective tactic for investors who are seeking to avoid risk and are smart or lucky enough to sell while their portfolios are still on the positive side - but it's not the only strategy available to combat tough times. Here we list what you can do with mutual funds in the face of a recession.
What Bond Funds Have to Offer
There are several types of bond funds that are particularly popular with risk-averse investors. Funds made up of U.S. Treasury bonds lead the pack, as they are considered to be one of the safest. Investors face no credit risk, as the government's ability to levy taxes and print money eliminates the risk of default and provides principal protection.
Bond funds that invest in mortgages securitized by the Government National Mortgage Association (Ginnie Mae) are also backed by the full faith and credit of the U.S. government. Most of the mortgages (typically mortgages for first-time home buyers and low-income borrowers) securitized as Ginnie Mae mortgage-backed securities (MBS) are those guaranteed by the Federal Housing Administration (FHA), Veterans Affairs, or other federal housing agencies.
Next on the list are municipal bond funds. Issued by state and local governments, these investments leverage local taxing authority to provide a high degree of safety and security to investors. They carry a greater risk than funds that invest in securities backed by the federal government, but are still considered to be relatively safe.
Taxable bond funds issued by corporations are also a consideration. They offer higher yields than government-backed issues, but carry significantly more risk. Choosing a fund that invests in high-quality bond issues will help lower your risk.
While corporate bond funds are riskier than funds that only hold government issued bonds, they are still less risky than stock funds.
Beyond Bonds
When it comes to avoiding recessions, bonds are certainly popular, but they aren't the only game in town. Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds do provide a high degree of safety, they should only be used only for short-term investments.
Contrary to popular belief, seeking shelter during tough times doesn't necessarily mean abandoning the stock market altogether. While investors stereotypically think of the stock market as a vehicle for growth, share price appreciation isn't the only game in town when it comes to making money in the stock market. For example, mutual funds that focus on dividends can provide strong returns with less volatility than funds that focus strictly on growth.
Utilities-based mutual funds and funds that invest in consumer staples are less aggressive stock fund strategies that tend to focus on investing in companies that pay predictable dividends.
Traditionally, funds that invest in large-cap stocks tend to be less vulnerable than those that invest in small-cap stocks, as larger companies are generally better positioned to endure tough times. Shifting assets from funds that invest in smaller, more aggressive companies to those that bet on blue chips provides a way to cushion your portfolio against market declines without fleeing the stock market altogether.
More Aggressive Strategies
For wealthier individuals, investing a portion of your portfolio in hedge funds is one idea. Hedge funds are designed to make money regardless of market conditions. Investing in a foul weather fund is another idea, as these funds are specifically designed to make money when the markets are in decline.
In both cases, these funds should only represent a small percentage of your total holdings. In the case of hedge funds, "hedging" is actually the practice of attempting to reduce risk, but the actual goal of most hedge funds today is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Hedge funds typically use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk." In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market. In the case of foul weather funds, your portfolio may not fare well when times are good.
Diversification: A Strategy for Any Market
While bond funds and similarly conservative investments have shown their value as safe havens during tough times, investing like a lemming isn't the right strategy for investors seeking long-term growth. Trying to time the market by selling your stock funds before they lose money and using the proceeds to buy bonds funds or other conservative investments and then doing the reverse just in time to capture the profits when the stock market rises is a risky game to play. The odds of making the right move are stacked against you. Even if you achieve success once, the odds of repeating that win over and over again throughout a lifetime of investing simply aren't in your favor.
A far better strategy is to build a diversified mutual fund portfolio. A properly constructed portfolio, including a mix of both stock and bonds funds, provides an opportunity to participate in stock market growth and cushions your portfolio when the stock market is in decline. Such a portfolio can be constructed by purchasing individual funds in proportions that match your desired asset allocation or you can do the entire job with a single fund by purchasing a mutual fund that has "growth and income" or "balanced" in its name.
Conclusion
Regardless of where you put your money, if you have a long-term time frame, look at a down market as an opportunity to buy. Instead of selling when the price is low, look at is an opportunity to build your portfolio at a discount. When retirement becomes a near-term possibility, make a permanent move in a conservative direction. Do it because you have enough money to meet your needs and want to remove some of the risk from your portfolio for good, not because you plan to jump back in when you think the markets will rise again.
What Bond Funds Have to Offer
There are several types of bond funds that are particularly popular with risk-averse investors. Funds made up of U.S. Treasury bonds lead the pack, as they are considered to be one of the safest. Investors face no credit risk, as the government's ability to levy taxes and print money eliminates the risk of default and provides principal protection.
Bond funds that invest in mortgages securitized by the Government National Mortgage Association (Ginnie Mae) are also backed by the full faith and credit of the U.S. government. Most of the mortgages (typically mortgages for first-time home buyers and low-income borrowers) securitized as Ginnie Mae mortgage-backed securities (MBS) are those guaranteed by the Federal Housing Administration (FHA), Veterans Affairs, or other federal housing agencies.
Next on the list are municipal bond funds. Issued by state and local governments, these investments leverage local taxing authority to provide a high degree of safety and security to investors. They carry a greater risk than funds that invest in securities backed by the federal government, but are still considered to be relatively safe.
Taxable bond funds issued by corporations are also a consideration. They offer higher yields than government-backed issues, but carry significantly more risk. Choosing a fund that invests in high-quality bond issues will help lower your risk.
While corporate bond funds are riskier than funds that only hold government issued bonds, they are still less risky than stock funds.
Beyond Bonds
When it comes to avoiding recessions, bonds are certainly popular, but they aren't the only game in town. Ultra-conservative investors and unsophisticated investors often stash their cash in money market funds. While these funds do provide a high degree of safety, they should only be used only for short-term investments.
Contrary to popular belief, seeking shelter during tough times doesn't necessarily mean abandoning the stock market altogether. While investors stereotypically think of the stock market as a vehicle for growth, share price appreciation isn't the only game in town when it comes to making money in the stock market. For example, mutual funds that focus on dividends can provide strong returns with less volatility than funds that focus strictly on growth.
Utilities-based mutual funds and funds that invest in consumer staples are less aggressive stock fund strategies that tend to focus on investing in companies that pay predictable dividends.
Traditionally, funds that invest in large-cap stocks tend to be less vulnerable than those that invest in small-cap stocks, as larger companies are generally better positioned to endure tough times. Shifting assets from funds that invest in smaller, more aggressive companies to those that bet on blue chips provides a way to cushion your portfolio against market declines without fleeing the stock market altogether.
More Aggressive Strategies
For wealthier individuals, investing a portion of your portfolio in hedge funds is one idea. Hedge funds are designed to make money regardless of market conditions. Investing in a foul weather fund is another idea, as these funds are specifically designed to make money when the markets are in decline.
In both cases, these funds should only represent a small percentage of your total holdings. In the case of hedge funds, "hedging" is actually the practice of attempting to reduce risk, but the actual goal of most hedge funds today is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Hedge funds typically use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk." In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market. In the case of foul weather funds, your portfolio may not fare well when times are good.
Diversification: A Strategy for Any Market
While bond funds and similarly conservative investments have shown their value as safe havens during tough times, investing like a lemming isn't the right strategy for investors seeking long-term growth. Trying to time the market by selling your stock funds before they lose money and using the proceeds to buy bonds funds or other conservative investments and then doing the reverse just in time to capture the profits when the stock market rises is a risky game to play. The odds of making the right move are stacked against you. Even if you achieve success once, the odds of repeating that win over and over again throughout a lifetime of investing simply aren't in your favor.
A far better strategy is to build a diversified mutual fund portfolio. A properly constructed portfolio, including a mix of both stock and bonds funds, provides an opportunity to participate in stock market growth and cushions your portfolio when the stock market is in decline. Such a portfolio can be constructed by purchasing individual funds in proportions that match your desired asset allocation or you can do the entire job with a single fund by purchasing a mutual fund that has "growth and income" or "balanced" in its name.
Conclusion
Regardless of where you put your money, if you have a long-term time frame, look at a down market as an opportunity to buy. Instead of selling when the price is low, look at is an opportunity to build your portfolio at a discount. When retirement becomes a near-term possibility, make a permanent move in a conservative direction. Do it because you have enough money to meet your needs and want to remove some of the risk from your portfolio for good, not because you plan to jump back in when you think the markets will rise again.
2009-03-29
Technology and Emerging markets: The biggest losers would be the best buys
Wall Street is not in the spiritual realm, but it does cherish at least one verse from the book of Matthew: "So the last shall be first, and the first last."
The market's biggest losers habitually return in the role of top dog. That's happening right now to two of last year's most beaten-down groups, technology and emerging markets. And both seem likely to continue to outpace other stocks, both because they have good prospects and because they're still relatively cheap.
"You always look at two sides -- not only the (investment) concept but the price of buying that concept reasonably," says Lew Alfest, president and chief investment officer of LJ Altfest & Co. in Manhattan.
The technology sector and developing nations have little in common except that they both are unusually risky. Last year, when risk was punished without mercy, both groups declined much more than broader markets. The average tech-sector fund lost 43.5% of its value, according to Morningstar, while the S&P 500 Index ($INX) declined 37%. Emerging markets funds tumbled 54.4%, while developed foreign markets sank 43.1%.
This year those relationships have been reversed. Tech funds are actually up 2%, as of March 19, while domestic large-cap funds are down 11.5%. Emerging markets funds are down 3.7%, compared with the 13.7% decline of foreign large-cap funds.
Technology: Flush with cash
Technology companies are benefiting currently because they are displaying relatively high resistance to the troubled financial sector.
"Balance sheets for large-capitalization technology companies are phenomenal," says Robert Stimpson, manager of Black Oak Emerging Technology Fund (BOGSX). "They don't have a lot of debt, and they don't have big working-capital needs."
Rather, technology firms have held on to relatively high cash flows, which furnishes their working capital. Last week, IBM (IBM, news, msgs) showed its financial strength by bidding to acquire Sun Microsystems (JAVA, news, msgs), the developer of high-end computer servers.
"Within large-cap technology, there is a persistent characteristic that during times of economic distress, the strong get stronger," Stimpson says. Technology also continues to provide productivity improvements to its customers, enabling them to do more with less. And it continues to innovate, enabling successive waves of new business creation.
Technology was one of the first sectors for which mutual funds were designed, and there are hundreds of them. Among the best are Ivy Science & Technology (WSTAX), Seligman Communications & Information (SLMCX) and T. Rowe Price Global Technology (PRGTX).
Emerging markets: Growing, while the developed world shrinks
Emerging markets, too, are benefiting from partial immunity to the financial crisis.
"Emerging market financial companies have generally not had the exposure to toxic assets like they have in developed markets," notes Craig Shaw, manager of Harding Loevner Emerging Markets Fund (HLEMX).
And while growth has turned negative in developed economies, many developing nations continue to enjoy growth, albeit at a slower rate than last year. Gross domestic product is expected to fall 2.2% this year in the United States, 2.4% in the euro zone and 5.3% in Japan. In China, however, it is forecast to grow 6%, and in India 5%. In Russia it is expected to ebb only 2%, and in Brazil a slender 0.4%.
But after last year's huge losses, stock prices in emerging markets are lower than in developed-nation stock markets. "They're trading at a price-earnings multiple of roughly 10," Shaw says. The comparable numbers in developing nations are 12 to 14. "So you're getting a big discount on a number of really good companies out there with good long-term growth prospects and strong financials."
In addition to the Loevner portfolio, outstanding emerging-markets mutual funds include Acadian Emerging Markets (AEMGX) and Oppenheimer Developing Markets (ODMAX).
Calling a bottom
The recovery in these two groups could presage a stronger market overall, says Jeff Mortimer, chief investment officer of Charles Schwab Investment Management.
"During bear markets, the baby does get thrown out with the bath water, especially toward the end," he says. "And as things start to turn green, what typically happens is the risky stuff will do relatively better. The junk runs first."
Mortimer believes things started to turn green on March 9, when the S&P 500 ($INX) plunged to 656.73, its lowest level in more than 12 years. It immediately rallied sharply, and closed at 823 on Monday.
"It seems to me (March 9) was very significant," he says. "There was incredible pessimism, a sell-at-any-price mentality. Markets make emotional lows, and that to me was a severely emotional day."
Mortimer expects stocks to "meander down here for awhile" rather than continue to rally hugely. But he also expects the March 9 low to hold, meaning the bear is out of ammunition and it's safe to venture back into equities.
Of course, if the last truly shall be first, that means the financial sector should shoot up like a beach ball held underwater. And indeed financial sector funds were the No. 1 performer during the month ended March 19, sprinting ahead 8.8%, compared with the 6.7% gain of technology and the 6.5% advance of emerging markets. So do you feel lucky? After all, the book of Matthew is gospel.
Source from:By Tim Middleton MSN Money
The market's biggest losers habitually return in the role of top dog. That's happening right now to two of last year's most beaten-down groups, technology and emerging markets. And both seem likely to continue to outpace other stocks, both because they have good prospects and because they're still relatively cheap.
"You always look at two sides -- not only the (investment) concept but the price of buying that concept reasonably," says Lew Alfest, president and chief investment officer of LJ Altfest & Co. in Manhattan.
The technology sector and developing nations have little in common except that they both are unusually risky. Last year, when risk was punished without mercy, both groups declined much more than broader markets. The average tech-sector fund lost 43.5% of its value, according to Morningstar, while the S&P 500 Index ($INX) declined 37%. Emerging markets funds tumbled 54.4%, while developed foreign markets sank 43.1%.
This year those relationships have been reversed. Tech funds are actually up 2%, as of March 19, while domestic large-cap funds are down 11.5%. Emerging markets funds are down 3.7%, compared with the 13.7% decline of foreign large-cap funds.
Technology: Flush with cash
Technology companies are benefiting currently because they are displaying relatively high resistance to the troubled financial sector.
"Balance sheets for large-capitalization technology companies are phenomenal," says Robert Stimpson, manager of Black Oak Emerging Technology Fund (BOGSX). "They don't have a lot of debt, and they don't have big working-capital needs."
Rather, technology firms have held on to relatively high cash flows, which furnishes their working capital. Last week, IBM (IBM, news, msgs) showed its financial strength by bidding to acquire Sun Microsystems (JAVA, news, msgs), the developer of high-end computer servers.
"Within large-cap technology, there is a persistent characteristic that during times of economic distress, the strong get stronger," Stimpson says. Technology also continues to provide productivity improvements to its customers, enabling them to do more with less. And it continues to innovate, enabling successive waves of new business creation.
Technology was one of the first sectors for which mutual funds were designed, and there are hundreds of them. Among the best are Ivy Science & Technology (WSTAX), Seligman Communications & Information (SLMCX) and T. Rowe Price Global Technology (PRGTX).
Emerging markets: Growing, while the developed world shrinks
Emerging markets, too, are benefiting from partial immunity to the financial crisis.
"Emerging market financial companies have generally not had the exposure to toxic assets like they have in developed markets," notes Craig Shaw, manager of Harding Loevner Emerging Markets Fund (HLEMX).
And while growth has turned negative in developed economies, many developing nations continue to enjoy growth, albeit at a slower rate than last year. Gross domestic product is expected to fall 2.2% this year in the United States, 2.4% in the euro zone and 5.3% in Japan. In China, however, it is forecast to grow 6%, and in India 5%. In Russia it is expected to ebb only 2%, and in Brazil a slender 0.4%.
But after last year's huge losses, stock prices in emerging markets are lower than in developed-nation stock markets. "They're trading at a price-earnings multiple of roughly 10," Shaw says. The comparable numbers in developing nations are 12 to 14. "So you're getting a big discount on a number of really good companies out there with good long-term growth prospects and strong financials."
In addition to the Loevner portfolio, outstanding emerging-markets mutual funds include Acadian Emerging Markets (AEMGX) and Oppenheimer Developing Markets (ODMAX).
Calling a bottom
The recovery in these two groups could presage a stronger market overall, says Jeff Mortimer, chief investment officer of Charles Schwab Investment Management.
"During bear markets, the baby does get thrown out with the bath water, especially toward the end," he says. "And as things start to turn green, what typically happens is the risky stuff will do relatively better. The junk runs first."
Mortimer believes things started to turn green on March 9, when the S&P 500 ($INX) plunged to 656.73, its lowest level in more than 12 years. It immediately rallied sharply, and closed at 823 on Monday.
"It seems to me (March 9) was very significant," he says. "There was incredible pessimism, a sell-at-any-price mentality. Markets make emotional lows, and that to me was a severely emotional day."
Mortimer expects stocks to "meander down here for awhile" rather than continue to rally hugely. But he also expects the March 9 low to hold, meaning the bear is out of ammunition and it's safe to venture back into equities.
Of course, if the last truly shall be first, that means the financial sector should shoot up like a beach ball held underwater. And indeed financial sector funds were the No. 1 performer during the month ended March 19, sprinting ahead 8.8%, compared with the 6.7% gain of technology and the 6.5% advance of emerging markets. So do you feel lucky? After all, the book of Matthew is gospel.
Source from:By Tim Middleton MSN Money
2009-03-06
Using the investment pyramid to build portfolio
A portfolio that's right for someone else may not be best for you. The factors that make a difference are:
· Your age
· Your goals, or what you want to accomplish by investing
· The time frames for your various goals
· Your attitude toward risk—or what's called your risk tolerance.
One should also understand the ideas of asset allocation and diversification. Only then should you consider what your investment choices are and how different types of investments put your money to work.
Once you choose your asset mix, you’re ready to pick specific investments. The investment pyramid shows you have many choices within each asset class.
Using the investment pyramid
· The chart arranges various investment choices according to the risk-reward relationship.
· The higher the investment is located in the pyramid, the higher the potential return, and the higher the risk.
· Since cash and cash equivalents offer the lowest risk and return, you will find them at the bottom of the pyramid.
· Mutual funds are included in all categories because there are many different kinds of mutual funds. Each fund has its own level of return and risk.
· The classification of a stock as low, moderate or high risk depends on your point of view. What seems risky to you may not seem risky to the next person.
Note: The types of investments listed under each section of the pyramid are only a framework. The risk of each investment varies with economic conditions.
What should I ask before I buy any investment?
· Do I understand how this investment works?
· Do I have good information about how this investment has done in the past?
· Do I understand the costs of this investment and the risks?
· Am I looking for safety, income, or growth from this investment?
· Do I have good information about how this investment is likely to do in the future?
· How much can I hope or expect to make?
· What other investments do I have already? Do I want to invest in more of the same or do something new?
· How long do I plan to invest (my time horizon)?
· Your age
· Your goals, or what you want to accomplish by investing
· The time frames for your various goals
· Your attitude toward risk—or what's called your risk tolerance.
One should also understand the ideas of asset allocation and diversification. Only then should you consider what your investment choices are and how different types of investments put your money to work.
Once you choose your asset mix, you’re ready to pick specific investments. The investment pyramid shows you have many choices within each asset class.
Using the investment pyramid
· The chart arranges various investment choices according to the risk-reward relationship.· The higher the investment is located in the pyramid, the higher the potential return, and the higher the risk.
· Since cash and cash equivalents offer the lowest risk and return, you will find them at the bottom of the pyramid.
· Mutual funds are included in all categories because there are many different kinds of mutual funds. Each fund has its own level of return and risk.
· The classification of a stock as low, moderate or high risk depends on your point of view. What seems risky to you may not seem risky to the next person.
Note: The types of investments listed under each section of the pyramid are only a framework. The risk of each investment varies with economic conditions.
What should I ask before I buy any investment?
· Do I understand how this investment works?
· Do I have good information about how this investment has done in the past?
· Do I understand the costs of this investment and the risks?
· Am I looking for safety, income, or growth from this investment?
· Do I have good information about how this investment is likely to do in the future?
· How much can I hope or expect to make?
· What other investments do I have already? Do I want to invest in more of the same or do something new?
· How long do I plan to invest (my time horizon)?
2009-03-03
To understand basic investment characteristics
To be successful in investing, we should understand the essence of investment well. It will help us to make decisions. Though there are many investment options, every investment has three key common characteristics:.
Expected return
Refers to the amount of interest, dividends or capital gains that you expect to receive from your investment. (Actual returns may, of course, be quite different.)
As noted before, there is a direct correlation between expected return and risk. The higher the expected return, the greater the risk.
Risk
Is the possibility that you could lose some of, all of, or more than your principal investment, or that you could earn less return from the investment than you expected.
Lower risk investments include government treasury bills and Canada Savings Bonds. At the higher end are investments like futures and shares of junior venture companies. Mutual funds have a wide range of risk profiles.
Marketability (or 'liquidity')
Refers to whether you can sell or redeem your investment quickly at or near the current market price.
Term deposits are an example of an illiquid investment, since you generally can't withdraw your money before the end of the term without paying a significant penalty.
Many other investments, such as mutual funds or listed securities, are very marketable because they can be quickly sold or redeemed on short notice and at low cost.
Marketability is an important factor to be considered when selecting your investments
Expected return
Refers to the amount of interest, dividends or capital gains that you expect to receive from your investment. (Actual returns may, of course, be quite different.)
As noted before, there is a direct correlation between expected return and risk. The higher the expected return, the greater the risk.
Risk
Is the possibility that you could lose some of, all of, or more than your principal investment, or that you could earn less return from the investment than you expected.
Lower risk investments include government treasury bills and Canada Savings Bonds. At the higher end are investments like futures and shares of junior venture companies. Mutual funds have a wide range of risk profiles.
Marketability (or 'liquidity')
Refers to whether you can sell or redeem your investment quickly at or near the current market price.
Term deposits are an example of an illiquid investment, since you generally can't withdraw your money before the end of the term without paying a significant penalty.
Many other investments, such as mutual funds or listed securities, are very marketable because they can be quickly sold or redeemed on short notice and at low cost.
Marketability is an important factor to be considered when selecting your investments
2009-03-02
Basic investment options
There are many ways to invest your money, and people have many investment options. Of course, to decide which investment vehicles are suitable for you, you need to know their characteristics and why they may be suitable for a particular investing objective. Here we introduce the basic ones.
Bonds
Grouped under the general category called fixed-income securities, the term bond is commonly used to refer to any securities that are founded on debt. When you purchase a bond, you are lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out.
The main attraction of bonds is their relative safety. If you are buying bonds from a stable government, your investment is virtually guaranteed, or risk-free. The safety and stability, however, come at a cost. Because there is little risk, there is little potential return. As a result, the rate of return on bonds is generally lower than other securities.
Stocks
When you purchase stocks, or equities, as your advisor might put it, you become a part owner of the business. This entitles you to vote at the shareholders' meeting and allows you to receive any profits that the company allocates to its owners. These profits are referred to as dividends.
While bonds provide a steady stream of income, stocks are volatile. That is, they fluctuate in value on a daily basis. When you buy a stock, you aren't guaranteed anything. Many stocks don't even pay dividends, in which case, the only way that you can make money is if the stock increases in value - which might not happen.
Compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential: you must assume the risk of losing some or all of your investment.
Mutual Funds
A mutual fund is a collection of stocks and bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, which enables you (as part of a group) to pay a professional manager to select specific securities for you. Mutual funds are all set up with a specific strategy in mind, and their distinct focus can be nearly anything: large stocks, small stocks, bonds from governments, bonds from companies, stocks and bonds, stocks in certain industries, stocks in certain countries, etc.
The primary advantage of a mutual fund is that you can invest your money without the time or the experience that are often needed to choose a sound investment. Theoretically, you should get a better return by giving your money to a professional than you would if you were to choose investments yourself. In reality, there are some aspects about mutual funds that you should be aware of before choosing them, but we won't discuss them here.
Alternative Investments: Options, Futures, FOREX, Gold, Real Estate, Etc.
So, you now know about the two basic securities: equity and debt, better known as stocks and bonds. While many (if not most) investments fall into one of these two categories, there are numerous alternative vehicles, which represent the most complicated types of securities and investing strategies.
The good news is that you probably don't need to worry about alternative investments at the start of your investing career. They are generally high-risk/high-reward securities that are much more speculative than plain old stocks and bonds. Yes, there is the opportunity for big profits, but they require some specialized knowledge. So if you don't know what you are doing, you could get yourself into a lot of trouble. Experts and professionals generally agree that new investors should focus on building a financial foundation before speculating.
Bonds
Grouped under the general category called fixed-income securities, the term bond is commonly used to refer to any securities that are founded on debt. When you purchase a bond, you are lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out.
The main attraction of bonds is their relative safety. If you are buying bonds from a stable government, your investment is virtually guaranteed, or risk-free. The safety and stability, however, come at a cost. Because there is little risk, there is little potential return. As a result, the rate of return on bonds is generally lower than other securities.
Stocks
When you purchase stocks, or equities, as your advisor might put it, you become a part owner of the business. This entitles you to vote at the shareholders' meeting and allows you to receive any profits that the company allocates to its owners. These profits are referred to as dividends.
While bonds provide a steady stream of income, stocks are volatile. That is, they fluctuate in value on a daily basis. When you buy a stock, you aren't guaranteed anything. Many stocks don't even pay dividends, in which case, the only way that you can make money is if the stock increases in value - which might not happen.
Compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential: you must assume the risk of losing some or all of your investment.
Mutual Funds
A mutual fund is a collection of stocks and bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, which enables you (as part of a group) to pay a professional manager to select specific securities for you. Mutual funds are all set up with a specific strategy in mind, and their distinct focus can be nearly anything: large stocks, small stocks, bonds from governments, bonds from companies, stocks and bonds, stocks in certain industries, stocks in certain countries, etc.
The primary advantage of a mutual fund is that you can invest your money without the time or the experience that are often needed to choose a sound investment. Theoretically, you should get a better return by giving your money to a professional than you would if you were to choose investments yourself. In reality, there are some aspects about mutual funds that you should be aware of before choosing them, but we won't discuss them here.
Alternative Investments: Options, Futures, FOREX, Gold, Real Estate, Etc.
So, you now know about the two basic securities: equity and debt, better known as stocks and bonds. While many (if not most) investments fall into one of these two categories, there are numerous alternative vehicles, which represent the most complicated types of securities and investing strategies.
The good news is that you probably don't need to worry about alternative investments at the start of your investing career. They are generally high-risk/high-reward securities that are much more speculative than plain old stocks and bonds. Yes, there is the opportunity for big profits, but they require some specialized knowledge. So if you don't know what you are doing, you could get yourself into a lot of trouble. Experts and professionals generally agree that new investors should focus on building a financial foundation before speculating.
2009-03-01
What are the top investing mistakes to avoid?
Investing is not an easy job. Even advanced investors sometimes make mistakes. But if we set clear goals and do enough homework carefully, we'll avoid the common mistakes and have a better chance of success.
The following is the top investing mistakes:
1. Not setting clear goals.
What are you saving for and how much do you need? Are you saving for retirement? A house? A car? Will you need to use your money in five, ten or 25 years? You need to know these things before you invest. Then you can choose investments that best fit your situation. For instance, if you will need your money soon, you may want to choose safer investments. Why? You won’t have time to make up any losses.
2. Putting all your money in one type of investment.
A mix of investments often works better. If one loses, another may gain. Remember, some businesses have cycles. Some may do well in the summer, some in winter. Some will react to world events, some may not. If you put all your money in a single investment (no matter how good it seems) and something goes wrong, you could lose all your money.
Some people avoid this mistake by investing in mutual funds or exchange-traded funds (ETFs). With these products, your money goes into a mix of investments. And over time, it’s your investment mix that most affects your results. That’s why many advisers tell investors to avoid putting more than 5-10% of their money in any one investment.
3. Investing in things you don't understand.
If you don't understand how an investment provides a return to you, or how a business is organized, or how it makes money, you need to either learn more about it or consider avoiding it. Also make sure you understand what can make the price of an investment rise and fall. This will help you decide whether an investment is a good choice for you.
4. Taking chances you can't live with.
Don't invest in something that makes you lose sleep at night from worry. Most people are better with investments that they don't need to watch every day. If you're going to take chances, make sure you only invest money you can afford to lose.
5. Forgetting about your investing costs.
There are always costs when you invest. In some cases, you pay fees. For instance, you pay sales fees when you buy and sell stocks. Mutual funds charge yearly fees to cover the cost of managing your money. These fees can vary from fund to fund. So before you buy, make sure you understand and compare those costs. It will help you make better investment choices.
Also, don't forget there can be a cost to playing it too safe when you invest. If you keep all your savings in a bank account, for instance, you won't lose money. But you also give up the chance to grow your money faster. That can cost you money in a different way.
6. Following hot tips or rumours.
What looks like great information may just be noise. Make sure you know and trust the source. If you're looking for advice, get it from an expert. That's doing your homework.
7. Other common investing mistakes include
· getting too comfortable with a good investment
· hanging on too long to a bad investment
· trying to rush results
· trying to time the market
· chasing success.
The following is the top investing mistakes:
1. Not setting clear goals.
What are you saving for and how much do you need? Are you saving for retirement? A house? A car? Will you need to use your money in five, ten or 25 years? You need to know these things before you invest. Then you can choose investments that best fit your situation. For instance, if you will need your money soon, you may want to choose safer investments. Why? You won’t have time to make up any losses.
2. Putting all your money in one type of investment.
A mix of investments often works better. If one loses, another may gain. Remember, some businesses have cycles. Some may do well in the summer, some in winter. Some will react to world events, some may not. If you put all your money in a single investment (no matter how good it seems) and something goes wrong, you could lose all your money.
Some people avoid this mistake by investing in mutual funds or exchange-traded funds (ETFs). With these products, your money goes into a mix of investments. And over time, it’s your investment mix that most affects your results. That’s why many advisers tell investors to avoid putting more than 5-10% of their money in any one investment.
3. Investing in things you don't understand.
If you don't understand how an investment provides a return to you, or how a business is organized, or how it makes money, you need to either learn more about it or consider avoiding it. Also make sure you understand what can make the price of an investment rise and fall. This will help you decide whether an investment is a good choice for you.
4. Taking chances you can't live with.
Don't invest in something that makes you lose sleep at night from worry. Most people are better with investments that they don't need to watch every day. If you're going to take chances, make sure you only invest money you can afford to lose.
5. Forgetting about your investing costs.
There are always costs when you invest. In some cases, you pay fees. For instance, you pay sales fees when you buy and sell stocks. Mutual funds charge yearly fees to cover the cost of managing your money. These fees can vary from fund to fund. So before you buy, make sure you understand and compare those costs. It will help you make better investment choices.
Also, don't forget there can be a cost to playing it too safe when you invest. If you keep all your savings in a bank account, for instance, you won't lose money. But you also give up the chance to grow your money faster. That can cost you money in a different way.
6. Following hot tips or rumours.
What looks like great information may just be noise. Make sure you know and trust the source. If you're looking for advice, get it from an expert. That's doing your homework.
7. Other common investing mistakes include
· getting too comfortable with a good investment
· hanging on too long to a bad investment
· trying to rush results
· trying to time the market
· chasing success.
2009-02-18
How to invest in a down market
These days business newspapers filled with market crash news in a daily basis. But the business world is full with tips even in a down market. Can you invest at this time? The ultimate answer is “Yes”. Read below to get an exact idea to the right place to park your money.
Have you known what happened to Mr. Warren Buffett, the greatest investor, at this time? Yes, everybody losing in the market but he added another $500 Cr’s to his wealth. How?
Any one of us can do the same. This is NOT the time to invest in stock market but in the same time, this is the correct time to invest in stock market. These all depends on how your mind works and how much you are tied with your money. If you are dealing with money like a hen which is sitting on the eggs, you are not the right person to read this. Everyone has fear about money lose. But the truth is, intelligent action through well study and long term focus, stock market will never give you loses.
Remember, stock markets are at the bottom line and valuations are very attractive with all the companies. There are 2 major options in front of you to invest your money at this time of down market.
1. First option is very simple and it is secure. Park your money to bank FD’s for desired time and sits freely. Enjoy the interest what you are getting. Your money is safe. But what will do if the bank crash? That is your question to answer yourself.
2. Second available option is, you still have options to invest in stock market. It is not a joke. You can still invest in stock market if you think like Warren Buffett. You are well aware that stock prices touched the bottom line and valuations are very attractive. Yes it is. Financial turmoil or the stock market crash doesn’t mean that all companies are in lose. Why don’t you select large cap companies that have well established business as well as increasing earnings at these times too?
Yes. Invest at this time on the blue chip stocks of carefully selected companies. Don’t go behind any mid or small cap companies at least at this time. Blue chips are your best friends at this time. They have well establish business and it is impossible to close down such business to give you lose. So select such companies and invest on that. This was the method what Buffet was practically doing.
Valuations are very attractive and price of the blue chip stocks are in bottom line because of the financial turmoil. You can see there will not be any affect to there business and that is the best point you have to keep in mind to invest on that stocks.
Don’t panic after investing to well established companies or blue chip companies. Let it be there. Every down has an up. It will take time but, certainly the market it will go up. The only point to remember is, this is not the time to trade or invest your money for short time. If you decided to invest in stock at this time, invest with blue chip stocks and for long term.
Besides, there are some tips on investing in a down stock market. When things look their worst, and you really want to sell and get out, that is probably the time to buy! But always keep in mind that know your limitations.
It is a bad idea at this time, if you planning to invest bulk amount to mutual funds. Better, wait and see for some time before mutual fund investing. You can select good mutual funds to invest money in a SIP basis. If economic growth is intact, then there is nothing to bother.
Be a prudent investor. Keep your new investments only to the stocks of blue chip companies. Invest in good mutual funds ONLY in sip basis or park your money to the bank Fixed deposits. Never panic, be patient, the market will most likely come back over the long run.
Have you known what happened to Mr. Warren Buffett, the greatest investor, at this time? Yes, everybody losing in the market but he added another $500 Cr’s to his wealth. How?
Any one of us can do the same. This is NOT the time to invest in stock market but in the same time, this is the correct time to invest in stock market. These all depends on how your mind works and how much you are tied with your money. If you are dealing with money like a hen which is sitting on the eggs, you are not the right person to read this. Everyone has fear about money lose. But the truth is, intelligent action through well study and long term focus, stock market will never give you loses.
Remember, stock markets are at the bottom line and valuations are very attractive with all the companies. There are 2 major options in front of you to invest your money at this time of down market.
1. First option is very simple and it is secure. Park your money to bank FD’s for desired time and sits freely. Enjoy the interest what you are getting. Your money is safe. But what will do if the bank crash? That is your question to answer yourself.
2. Second available option is, you still have options to invest in stock market. It is not a joke. You can still invest in stock market if you think like Warren Buffett. You are well aware that stock prices touched the bottom line and valuations are very attractive. Yes it is. Financial turmoil or the stock market crash doesn’t mean that all companies are in lose. Why don’t you select large cap companies that have well established business as well as increasing earnings at these times too?
Yes. Invest at this time on the blue chip stocks of carefully selected companies. Don’t go behind any mid or small cap companies at least at this time. Blue chips are your best friends at this time. They have well establish business and it is impossible to close down such business to give you lose. So select such companies and invest on that. This was the method what Buffet was practically doing.
Valuations are very attractive and price of the blue chip stocks are in bottom line because of the financial turmoil. You can see there will not be any affect to there business and that is the best point you have to keep in mind to invest on that stocks.
Don’t panic after investing to well established companies or blue chip companies. Let it be there. Every down has an up. It will take time but, certainly the market it will go up. The only point to remember is, this is not the time to trade or invest your money for short time. If you decided to invest in stock at this time, invest with blue chip stocks and for long term.
Besides, there are some tips on investing in a down stock market. When things look their worst, and you really want to sell and get out, that is probably the time to buy! But always keep in mind that know your limitations.
It is a bad idea at this time, if you planning to invest bulk amount to mutual funds. Better, wait and see for some time before mutual fund investing. You can select good mutual funds to invest money in a SIP basis. If economic growth is intact, then there is nothing to bother.
Be a prudent investor. Keep your new investments only to the stocks of blue chip companies. Invest in good mutual funds ONLY in sip basis or park your money to the bank Fixed deposits. Never panic, be patient, the market will most likely come back over the long run.
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