Fortune Watch

In years of answering people’s questions about investing, I’ve come to classify two major sources of problems: One, investing without thinking enough, and two, thinking too much about investments. We all know at least a few hypochondriacs who continuously suspect themselves to be suffering from dangerous illnesses and require frequent visits to specialists and get exotic medical tests done to allay their fears.

Similarly, there are a vast number of investment hypochondriacs who suspect their asset portfolios to be suffering from some dangerous disease. Generally, they believe that this disease can only be diagnosed by having a specialist examine the portfolio and test it by applying exotic formulae that will perform some magical analysis. Somewhat like its medical version, investment hypochondria, too, is encouraged by these specialists who claim to detect and cure exotic diseases suffered by investment portfolios.

One of the most popular type of diseases in this field is a faulty asset allocation. Many people are worried sick about whether their investment portfolios have the correct amount of money allocated to debt and equity. Periodically, I get asked about what the formula for calculating asset allocation is and sometimes I’m actually asked this not by a patient but by a budding specialist.

The problem, of course, is that there is no formula, nor can there ever be. Asset allocation is just a fancy term for investing according to your needs. Try to get anyone like this to plan your investments and they’ll start by putting up a charade whose purpose is to convince you that finding out correct asset allocation is a complex process that requires proprietary formulae being churned up in complex looking spreadsheets invented by teams of MBAs.

By this process, deciding on an asset allocation starts by figuring out how risk-averse you are and how much risk you are willing to take to get the returns you want. This sounds so logical and systematic but is actually completely useless. Professional investors who are investing other people’s money may be able to find out their location on a risk-vs-return continuum, but at the back of their mind, everyone else wants zero risk. And guess what, zero risk is effectively possible if you do asset allocation the right way.

The key to really figuring out asset allocation is simply to make a rough time table of the future, one where you try and lay down when you will need how much money. Now, what you need to understand is that over some time horizon, most asset types turn zero risk, or as least as close to it as humanly possible. What you need to do is to match your investment time horizon (and not some theoretical risk level) to the asset type. Assets like bank Fixed Deposits and cash mutual funds are always zero risk, short-term income funds are zero risk after six months, and a good stock portfolio like a well-chosen set of diversified equity funds are close to zero risk after maybe seven years.

I‘ll admit this is a slightly simplified view but what I’m trying to do here is to demonstrate the principal on which individuals should base their asset allocation. There is no formula for asset allocation. The right way to do this is to figure out what you plan to do with your money in the future.

Too much money in the Stock Market.

When there is too much money in the stock market, it can be a warning sign that things are about to change.

New money coming into the market could means investors who have been holding cash investments (CDs, bonds, and so on) are jumping into equities.

Individually, this may be a good decision, depending on where investors place their money.
Better Stock Return Unfortunately, what often happens is inexperienced investors watch a bull market run and want to get in on the better returns the stock market offers.

They may not choose their investments wisely and push the prices of hot stocks even higher. Because they are inexperienced, they buy stocks they hear about on television or from friends.

Rather than do their own research, money pours into the market and pushes up certain stocks beyond reasonable expectations.

If you have been a stock investor for at least 10 years, this scenario may sound like the tech bubble of the late 1990s.Stock Market Bubble. Huge amounts of cash poured into the market creating a demand for something to buy. During that period, it was any stock that had to do with the Internet.

Like any market where there are more buyers than sellers, prices shot up until professional investors began pulling their money out of the market and values crashed.

This doesn’t mean you should stay out of a market where there is lots of enthusiasm. However, be careful about what stocks you buy and even more careful about what you pay for them.

Don’t rely on the market to keep its enthusiasm forever.

On Tuesday, February 27 this year, the Dow Jones Industrial Average dropped 416 points—the markets sharpest drop in three years. Two emotions—fear and greed—can lead to bad investment decisions.

Investing can be dangerous yet profitable endeavor. Many people have been burnt and decide not to ever invest again. This is the primary fear for investing in anything. They may give you excuse such as ‘I don’t have enough money’ or ‘I don’t know where to invest’. But the number one fear is always the fear of losing money. If a novice investor knows that he won’t lose money, he must have used all means necessary (such as loan) to buy as much investment opportunity possible.

Investing here can mean a lot of things from buying gold coin to real estate. There are several ways of how to reduce your fear of investing in common stock.

Get Educated. When you know more about something, you are more certain of your outcome. When you know how to calculate the fair value of a common stock, you will know your expected return of investment. Remember that the less uncertainty you have, the less risk you undertake. You will also know more about the downside risk of your investment. If a common stock has $ 3 per share of positive net cash, is profitable and is currently trading at $ 5 per share, then you know that it won’t trade at below $ 3 per share for a long period of time. Your maximum possible risk here is 40% of your original investment.

Start Small. When you begin your investing journey, you have a lot of unknowns. Less education means more unknown which means greater risk. How small should you start? As much money that you can afford to lose. If you still have no idea, then how about $ 1 a day? One dollar a day will give you $ 500,000 after fifty years of investing with 10.5 % return. Even if you have $ 500,000 right now, it is better for you to start small if you are a novice investor.

Pay Yourself First: means that you find investment that can pay you first as investors. What investment can pay you first? One thing that comes to mind is buying a common stock that historically has steady or increasing dividends. There is one more way to pay yourself first by selling covered call options. For novice investors, however, I suggest we put this subject of selling covered call options off until you get really really comfortable with investing in common stock.

Learn From Your Mistake. Once you begin investing, the fear of losing money is always there. The best ways to learn is from your own mistake, but do not to hasten your learning curve.

Will you be fear-free after reading this column? The answer is no. Fear is always there because of uncertainty. Successful investing is about predicting the future which is uncertain. Even investing in your money-market account is uncertain. It involves some small risk. The risk might be inflation being higher than the interest rate offered. There is also uncertainty regarding the direction of interest rate. Interest rate used to be in the high single digits during the 1980s. Look where it is now.

We live in uncertain world. Instead of hiding behind the wall, we need to embrace it and educate ourselves to reduce the uncertainty. Doing this will in effect increase our investment return beyond the rate of inflation.

Investing in the stock market sometimes boils down to one essential element, namely good choices.

No matter how well we do our research, how often we buy and sell, or how much we pay experts for their tips and advice, without choosing stocks that represent value, we won’t succeed.

Although some are good at predicting the direction of the market and timing the ups and downs, if they don’t purchase the right stocks, they will still meet with difficulties when trying to reap profits.

For that reason, some of the best paid people on Wall Street are known primarily for their talent at picking stocks. Financial advisors give talks and write books and newsletters about how to choose stocks that will outperform the market, and most experts echo the same sentiment and agree that one of the best ways to judge a stock is from the point of view of a consumer. By using instincts we have already honed as ordinary shoppers, we can often ferret out information that even the most skilled and software-savvy market watchers miss. While they study analytical charts, earnings reports, and the stock exchange ticker tape, folks just like you actually do business with the companies they invest in, because their experience as a customer speaks volumes about the value of the company and its products and services.

Here are the kinds of things to look for as indicators of a company’s worth.

How popular is their product or service? If everyone you know uses it, and is satisfied with such things as price, customer service, and reliability, the company is probably well situated among the competition. Are the employees satisfied? One of the best ways to judge a company is by talking to employees. Many companies put on a good façade, but underneath the fancy marketing is plenty of discontent. But if employees like a company – especially if they like it enough to buy stock in it – that’s a very good sign.

How well known are they? You may find a great startup company with all the trappings of success, but discover that it is lesser known. Many small or regional companies are popular in their own back yards, but the rest of the world may not yet know about them. Buying such unknowns can be a great way to invest in the next hot stock. If the fundamentals look good, sometimes being lesser known is a good thing for investors getting in on the ground floor.

If they went out of business, where would you go for similar products and services? If you can’t think of a convenient alternative, the company is probably in a niche market that enjoys customer loyalty and repeat business.

Shop around, and notice what you see and how each business makes you feel. Then trust your intuition. Make a list of companies that get your attention, and then call their shareholder relations department and ask for more details. By starting your list with companies you already have a first hand experience of, you raise the chances considerably that you will make smart choices.

Most, but not all, stocks move with the overall trend of the market. I’m not talking necessarily about one-day bumps, but general upward and downward trends – bull markets and bear markets. For this reason, it’s important to have an idea what the general trend of the market seems to be and what the market is telling us about future trends.

For this reason, it’s important to have an idea what the general trend of the market seems to be and what the market is telling us about future trends.

You can get a good idea of where the market is headed with just two pieces of information: Price and volume. When you put these two together, you get a picture that tells whether there are more sellers in the market or buyers. Volume tells you whether there is movement in the market and price tells you which direction.

The volume indicator comes from the daily sales volume. Both of these indicators are available online from many different sites. If the market has a high-volume day and prices (of the indexes) are up, you are probably looking at mutual funds and institutional investors buying, which is a sign of an up market trend.

On the other hand, a high-volume day with lower prices could mean a downward trend with the big players backing out of the market. You need to use some common sense when watching these indicators. For example, if you have three or four days of high volume and rising prices, it is not unusual to hit a high-volume day where the prices fall off.

You’ll usually hear the talking heads on television refer to this as “profit taking.” If you begin to see the down days too frequently in a market that has been moving up, it may be a sign that it is about to reverse course or stall.

Mutual funds and institutional investors are the volume buyers and sellers that move the market. When they began moving in a direction, that’s where the market goes and you can see it in the price and volume numbers. A market that shows sharp price movements in either direction without corresponding volume increases is sending false messages that should be watched carefully.

What does this mean to you? Don’t swim upstream. The obvious forces of supply and demand (except when something extraordinary occurs) drive the market. When there are more buyers (higher prices on higher volume) than sellers, the market is trending up.

When there are more sellers (lower prices on higher volume) than buyers, the market is trending down.

Watch for signs that the market is changing course (different price and volume than the prevailing trend), if you see more than a few of these, prepare for a change.

We have all heard the old saying ‘health is wealth’ this I think is perhaps only about half right. If we think wealth is the key to health, then you know you’ve found good wealth to afford the comforts of life, and your worries would take a backseat. Much the opposite would happen if your finances are out of control.

I believe that the ultimate success is defined as staying alive. And the more I think about this, the more I believe it. After all, what do money, power, and good looks matter if you’re dead? For starters, smarter people are likely to have more money.

The first step towards a secure financial position starts with budgeting. You must have a budget to gauge your future positioning. A budget is nothing but an overview on how much you earn, spend, and save. This can be short-term as in case of daily or weekly budgets. It helps you to have an idea about where your money is or will be. Budgeting also helps in achieving long-term goals. For instance, if you fancy owning a Lexus after five years, you should plan to save some bucks from your pay every month and budget accordingly. If you stick to this practice, your desires won’t fail you.

Another must-do en route to financial health is to save. They say if you look after your pennies, the pounds will follow soon. So be penny-wise and start saving early in your career, but save to save future troubles/emergencies. However, this is not to say that you say good bye to fun-factors in life. Indulge in luxuries or occasional extravagances, but save consciously.Don’t remain tied in debt. The sooner you become debt-free, the healthier it is for you. And remember to start paying off the highest-interest loans first. Loan interests are known to break lives, so be aware of the dangers.

Yet another obstacle to a financially healthy future is your credit card. These are such items in your wallet that can drive you to bite off more than you can chew. If you cannot pay your card bills in full, say ‘no’ to credit cards and save yourself a perennial debt-trap.

Of course, we all like to pamper ourselves with a new dress, an expensive watch or a handsome car; but be sure to think before you spend. Do you really need it? If the answer is ‘no’, forget it.

Having said all that, it’s true at the same time, that no matter how much you organize or plan your finances, life throws up unexpected surprises and you’re caught unaware. Maybe you’ve forgotten to consider your emergency house paint or missed an important bill. It’s then that you’d need payday loan online to get the clog out of the wheel.

Wise men would say: keep this as your last option. To sustain your financial health, choose not to go for these high-interest loans.

Work as a team in managing your finances and maintain equal voices in your partnership no matter how much money either of you earns.

It is critical for married partners to work together in maintaining the different financial dimensions of their household. This includes both partners being involved in everyday financial decisions and transactions, as well as working toward your financial future together.

One of the more interesting topics is when a couple is struggling to handle their finances like a married couple. What I usually hear is one of the spouses handles all of the finances and the other just takes orders from the one who handles the money.

What I have found in my limited experience with marriage is that a budget does not work unless both spouses are working together to plan a budget and stick to it. My suggestion is to dedicate an hour every two weeks to sitting down with your spouse to discuss the budget and go over any changes or concerns about the budget and the general household finances.

When it comes to the subject of marriage and money, it always comes down to communication. I remember hearing a wife talk about how she handles all of the finances, but her husband gets angry with her when she spends money one something he doesn’t agree with. Well, get off your lazy butt and get involved in the finances, buddy! You can’t rant and rave to your spouse about where the money is going if you won’t take the time to help plan where it should go.

Another thing to consider is putting your defensive personality in check before starting to talk about the finances and the budget. It’s so easy to get in fights when talking about your opinions about the money. I may want $50 to go towards household stuff, but she may want $100. You can’t let this kind of discrepancies turn into world war 3 or else it will put a huge strain on other areas of your life.

It’s okay to compromise on issues with the budget, because when you put your spouse’s interests above your own, then you are making healthy compromises. Remember, studies have shown that issues with money is one of the leading causes of divorces. It can make or break your marriage, so take it seriously when you two talk about what to do with your dough.

Investing in conservative blue chip stocks may not have the allure of a hot high-tech investment, but it can be highly rewarding nonetheless, as good quality stocks have outperformed other investment classes over the long term.

Historically, investing in stocks has generated a return, over time, of between 11 and 15 percent annually depending how aggressive you are. Stocks outperform other investments since they incur more risk. Stock investors are at the bottom of the corporate “food chain.” First, companies have to pay their employees and suppliers. Then they pay their bondholders. After this come the preferred shareholders. Companies have an obligation to pay all these stakeholders first, and if there is money leftover it is paid to the stockholders through dividends or retained earnings. Sometimes there is a lot of money left over for stockholders, and in other cases there isn’t. Thus, investing in stocks is risky because investors never know exactly what they are going to receive for their investment.

What are the attractions of blue chip stocks? Great long-term rates of return. Unlike mutual funds, another relatively safe, long term investment category, there are no ongoing fees.You become a part owner of a company.

So much for the benefits – what about the risks? Some investors can’t tolerate both the risk associated with investing in the stock market and the risk associated with investing in one company. Not all blue chips are created equal.

If you don’t have the time and skill to identify a good quality company at a fair price don’t invest directly. Rather, you should consider a good mutual fund.

Selecting a blue chip company is only part of the battle – determining the appropriate price is the other. In reality supply and demand for a stock sets the stock’s daily price, and demand for a stock will increase or decrease depending of the outlook for a company. Thus, stock prices are driven by investor expectations for a company, the more favorable the expectations the better the stock price. In short, the stock market is a voting machine and much of the time it is voting based on investors’ fear or greed, not on their rational assessments of value. Stock prices can swing widely in the short-term but they eventually converge to their intrinsic value over the long-term.

Investors should look at good companies with great expectations that are not yet embedded in the price of a stock.

Creating an investment plan can be a tricky but rewarding experience. The key to having a solid and fully customized plan is to know what your financial goals are and make sure your plan fit your needs. Investment plans are extremely popular because many people, due to the unstable job market and insufficient social security, are trying to save for their retirement.

Investment plans help investors buy a set number of stocks, bonds, and funds at regular intervals. This occurs automatically and does not require the investor’s constant attention. If you are interested in an investment plan below are some basic information and helpful tips about investment plans and how to choose the one that best fits your needs.

How does it work? Investment plans automate the investment process. Initially the investor picks out stocks which they want to regularly invest in. Then money is automatically removed from one of your financial accounts (checking, savings, or money market) and stocks are purchase for you by the investment plan coordinator.

As the investor you can make adjustments to how much money, how often, and what type of stocks will be purchased. Most brokerages, which offer investment plans, allow you to make changes at a small fee. However, one of the benefits of online investment firms is that many of the traditional fee based options, like adjusting your financial plan, are free of charge.

How much? Deciding how much you should invest is never an easy question. Only you know your financial situation and how much you can afford to put toward an investment plan. It is important to not over invest only to leave yourself short in paying your monthly obligations. You need to make sure the money you choose to invest will be available at the same time each month in the same amount. Think about the future. Perhaps this month you have more disposable income available however, most months you do not. It is better to invest less and not run short at the end of the month.

Becoming wealthy is not a matter of how much you earn, who your parents are, or what you do, it is a matter of managing your money properly.

Money earned can either be consumed or saved. When money is saved it can either be hoarded or be invested to enhance its value. An investment project requires information about the various avenues available.

Money is often a scary thing to deal with, especially those who have never worked with it in detail before. Investing for the future can be even scarier. Still, even young men and women as well as those preparing to retire need to know the basics of investing to prepare for the future and insure their financial freedom. An understanding of what assets are, what kinds of assets are out there, and specific tricks of the trade will help beginning investors start on their journey to economic security.

The general term used to refer to the investments made is ‘assets’. Assets reflect one’s investment in cash, bonds, stocks or other sources that generate income. Out of the various assets available for investment, the most common one is Stock. Stock refers to the shares of the companies.

Assets are investments in cash, bonds, stocks and much more. They are basically a combination and melding of everything someone owns or is owed. An asset class is basically a general term referring to the wide variety of investments that can be made by today’s investors. Asset classes include things such as stocks, bonds, and cash equities. Before investing, an understanding of assets classes and the pros and cons of each is a definite must.

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