Anybody who has lost money this last year in the stock market may be unsettled. This has been a tough couple of years where almost everyone has come out a loser. The stock market is a place where anybody can look like a fool when it is going down and look like a hero when all stocks are going up.
Even though the market has made a small comeback, it does not guarantee that it will not start to head back down again. This is where you start to wonder whether you are missing out by not being in the market or whether this is just a false upward move before heading back down again. Professional investors have a slight advantage here because they are trained to understand market tendencies and to analyze the market.
Many people have thought about averaging down during this bear market, which just means they would buy more stock of what they already have but at lower prices. That would in effect lower the cost per share of the stocks they have but they would of course have more of them. This is a great thing to do if you can catch the market at the bottom but if the market has further to fall, then you just end up losing more money.
Any expert in the stock market will preach about the importance of stock diversification when you do get back in. What that entails is spreading your bets around on a variety of stocks rather than putting all your eggs in one basket. This is important because you want to protect yourself from picking one really bad stock and then losing most or even all of your money.
If this terrible market environment we have had now though, even those who were properly diversified have lost. Nothing can protect you from losing when the market goes down as much as it has and that is something you must be aware of and accept. Investing in stocks is risky and you should never invest money that you cannot afford to lose. Shortly though, it will be time to get back in the market and those that have strong stomachs will be the ones who stand to profit.
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Bill Gates probably doesn’t invest in mutual funds (funds), maybe because most of his money is tied up in Microsoft stock. Warren Buffet made his billions by managing investments, so he does not need their help, either. But, if you have money to invest and don’t really know how to invest and manage an investment portfolio, you should consider investing in mutual funds. Millions of average investors do.
Keep in mind that mutual funds are designed for folks who want professional investment management at a moderate cost. These are not short-term investments, but rather are for people with longer-term investment horizons. Once you have cash reserves in the bank for short term needs like emergencies, you are ready to invest.
Should you invest in mutual funds? If one or more of the following apply to you, you probably should.
If you want to accumulate a nest egg for retirement, give these investment packages consideration. For example, if you have a typical 401k plan at work, most of the investment options available to you are mutual funds.
If you decide to open a traditional IRA or Roth IRA, consider going with a major mutual fund family. This will give you a wide array of investment options, from safe and conservative to aggressive and growth oriented.
If you want to start slow and learn how to invest as you go, you should invest in mutual funds. For example, you can set things up so that $100 a month automatically flows from your checking account to a couple of mutual funds within a fund family.
If you want to invest in stocks and/or bonds, but don’t know how to invest in them, join the crowd and do it the sensible and easy way with funds.
If you have a lump sum of money to invest from a retirement plan, a CD that matured or from an inheritance, look no further. For example, if you leave your job where you had money in a 401k, you can move it and avoid taxes and penalties with a direct rollover to a mutual fund family.
If you are retired and want to earn a higher return with relative safety, try bond funds in addition to money market funds. When you want to receive a monthly income, they will send you the amount you specify.
If you want an investment in real estate, oil & gas, or gold the easy way, invest in mutual funds and let them deal with the details.
It doesn’t matter if you are young or old, rich or of modest means, conservative or aggressive as an investor. You need an investment portfolio that contains a variety of investment types. Unless you really know how to invest and can manage your own stocks, bonds, and money market securities…you should invest in mutual funds.
Finally, if you don’t know much about investing…you’re probably a red-blooded American. As a financial planner I worked with folks from all walks of life. Few knew how to invest on their own, so I often recommended mutual funds.
A retired financial planner, James Leitz has a 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.
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Retirement calculators are web tools that help people figure out how much they need to save for retirement. Do you need how much money you’ll need per month? Internet charts can help you a lot when it comes to picturing and understanding different scenarios. All the amounts you get as estimates usually depend on the daily dollar values. Moreover, retirement calculators also adjust the return on investment with a certain inflation rate, usually around 3%.
Some web retirement calculators help people determine the amount of money they will currently need when they retire. Starting from these premises, you can identify the best way to achieve your goals, particularly since improvements in the saving plans are possible. When using retirement calculators, you need to fill in sections or answer questions, but some of them will not apply to your situation, and can just be skipped.
Expenses, pension income and taxes are the basic factors that are used by retirement calculators, because these elements are the most likely to affect your retirement. You can get a very general idea about how much you can withdraw from your retirement plan, and how long the savings can last. There are different retirement calculators and they can be found on many financial web sites that aim at improving retirement saving goals. Even if tools differ according to the software on which they rely, the core methodology remains the same.
Thus, you will start by entering the current income, the anticipated retirement age and the expected annual savings. A maximum of 80% of your current salary is the estimate set by most financial planners. Besides individual factors, retirement scenarios can only be created if several market variables are taken into consideration. Most tools will display the results with the highest rate of success, because this is what people are interested in.
If you are also interested in the ratings given to the various online retirement calculators you can check reviews and detailed features for further information. Any user can in fact give a rating depending on the personal experience with a certain program. You’ll see that retirement calculators are often a topic of discussion on forums that discuss retirement in detail. The thing is that there is also advice available for maximizing the usage conditions of retirement calculators so that you can ensure a more comfortable retirement. Good luck!
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The options market has caught the fancy of many investors and this is not surprising. The beauty of options is embedded in its very name. You have the options but not the obligation to buy or sell stocks at a given price by a given time. Now for options buyers this option unlike futures limits their maximum liability to the option premium they had paid at the time of buying the options contract.
In’78, Chicago Board Options Exchange (CBOE) began options trading on popular stock indexes such as the S&P 500 Stock Index. The CBOE options trades in multiples of $100 per index point. This is much cheaper than the $250 multiple per index point for the S&P futures contract.
An index option allows the investor to buy the stock index at a set point within the given time period. Let’s take an example. Suppose the S&P 500 Index is at 1100 points. You have a bullish opinion of the market and are of the opinion that the S&P 500 Index will go further up.
There are options Greeks that you need to understand. Time and volatility are two very important factors for an options contract. In case of an index options, what this means is that if any time for the next three months you decide to exercise your call option, you will get $100 for each point the index is above 1150. So you decide to purchase a call option at 1150 for three months for 50 points. In other words you paid an option premium of $5000.
So when an options contract loses value, you only lose the premium that you had paid while buying that contract. In that case you will only lose the premium of $5000 that you had paid to buy the call index option. Now, 1150 is the strike price of the index option. In case the S&P 500 Index does not rise above 1150, you can simply decide to not exercise your call option.
So for you to make a profit with this call option, the S&P 500 Index will have to rise above 1200 point within the next three months otherwise you will lose your premium. Contrast this with S&P futures. Call options are considered to be bullish.
In case the S&P Index had fallen to 1100 point, you would have recouped your options premium. Put options are considered to be bearish. A Put Index Option works in exactly the same way as a Call Index Option except that you make profit when the stock index goes down. If you had bought the put index options instead of the call index option in our example above, every point below the strike price of 1150 would have given you a profit of $100.
Options are highly dependent on the volatility of the market as well as time to expiry. As the options contract nears expiry, its premium starts decreasing. The more the options contract is away from expiry, the higher the premium you will have to pay. But the most important factor is the expected volatility of the market. Now the option premium that you pay is determined by the market and it depends on many factors like interest rates and dividend yield.
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Different Types of Investments: As we said last time, owning a stock is like owning part of a company. As the company rises or falls in value, so does the price of it’s stock. A key distinction is that the value of the stock is not only driven by the fundamental value of the company, but by other factors as well. These factors may include overall stock market trends, domestic versus foreign trade issues, business sector climate, etc. Owning a bond, is like owning part of a loan to a company or institution, like the State of Texas. Bonds typically pay a fixed amount of dividend as the loan is repaid. The bond’s value is determined by the interest rate on the underlying loan, and the current interest rates and trends in the marketplace. For example, who would not want own a 10% bond right now, when the money markets or bank passbook savings accounts are paying 3%? Should the institution or company fail or default on the loan, you could lose all or most of your bond’s value. Large companies or institutions usually issue bonds; so the risk is greatly reduced over owning a company’s stock share. A stock mutual fund, is a group of stocks owned by a fund company to achieve certain investment objectives. Likewise a bond mutual fund is a group of bonds held to achieve a certain investment objective. Mutual funds, in both stock and bond types exist in many styles and forms. Fundamentally they are a savvy collection of stocks or bonds assembled and professionally managed for a specific or combination of investment aims. These typically diversify your investments so that no one particular company can sink your entire investment. The converse is that no one single stock can shoot your mutual fund up to a huge return. Typically each mutual fund focuses upon growth, income, value, large, small or mid-capitalization companies, or a combination of these objectives. There are thousands of different funds and dozens of fund families to choose from. There are also companies that rate mutual funds, like Morningstar (www.morningstar.com ). Some mutual funds use a management team to select and prune stocks in the portfolio, some use certain methods, and some follow the leadership of a single fund manager. You should check these out before investing in a particular fund. An oft-overlooked mutual fund consideration is the management fee or what are referred to as 12b-1 fees. Most fees are in the range of 1 to 2%. Be wary of any fund outside that range. The United States Securities and Exchange Commission can help unravel some of these issues for you. A good starting point is their investor section on mutual fund performance, specifically www.sec.gov/investor/pubs/mperform.htm . They also have a fund cost calculator to help take into account the fund management fees. Some funds are no-load mutual funds because they do not pay a sales person any commissions for selling fund shares. These are typically lower in cost, and if you own them for a long time, they can make a difference in the net return on your mutual fund investment. Conversely, there are loaded funds, which charge a commission when you invest in their fund. These vary widely in amounts, so ask for exact details before investing. Some require you to pay the sales commissions; others add that to the fund expenses. Either way it’s a cost to you. The Vanguard Funds (www.vanguard.com ) are often mentioned as a leader in creating no-load, low cost mutual funds. You will find compelling arguments at their website for owning no-load funds. You should check carefully on overall fund performance including fees when evaluating fund choices. Measuring Risk: Most mutual fund and stock tables and resources will list something called the beta or volatility of the items listed. Beta is a measure of the risk of the security listed associated with variation of the security when compared to the overall stock market. If beta is 1, then the stock or mutual fund varies about the same as the general market index. If less than 1, then the security is less volatile than the general index of comparison, with higher than 1 meaning more risk. Measuring Risk-adjusted Returns: There is also parameter called alpha, which is the market-adjusted return of the security. If alpha is positive, then the security earned a higher return than the relative market index of comparison. If alpha is negative, then the security earned less than the market did. Minimizing Overall Risk: Risks in the future may be reduced in the present only through preparation, planning and actions! We discussed preparation and planning for the future in the last Investment Corner, which is a key risk-reduction strategy. Risk reduction for investing is typically achieved through: • Diversification, • Portfolio Allocation, • Pre-determined buying and selling prices, and • Adherence to personal investing rules. Now let’s look at the first part of risk reduction strategy for investing. Diversification: Diversification is spreading out your investments across several areas to reduce risk and capture growth in multiple places. Diversification is typically done at several levels. At the uppermost level, we typically diversify investments across different investment vehicles, such as cash, stocks, bonds and real estate. By doing this, we reduce several important risks. Inflation can reduce the value of cash on hand over time, which is why smart folks do not keep their life savings in cash hidden in a mattress! On the other hand, inflation can drive down the value of fixed dividend investments like bonds as well. Real estate may rise or decline with inflation, depending upon the health of both the local and the greater economies. Fixed hard assets like precious metals funds (gold) will usually rise on inflation or fears of inflation. Other risks include stock market declines, individual company bankruptcies, and so on…. By not “placing all the eggs in one basket” we lower our exposure to risks through diversification. During broad stock market declines, many folks move assets from stocks to cash or bonds. And of course the opposite during bull market runs. Another diversification notion is that of slicing up your investment by specific growth sectors. Within a specific type of investment vehicle, say Mutual Funds, we diversify across the available growth and income sectors. Typically this is large, medium and small companies, as well as high dividend or high growth type stocks. You also could look into diversifying into domestic or international companies such as Asia-Pacific. At the lower levels of investment diversification are multiple choices within a specific growth target. Most advisors strongly recommend diversification within a stock or bond market holding. If you feel for example that the Internet’s growth will continue or expand soon, buying stock in several companies who offer Internet products would help lower risk of any one company not doing too well. Diversification across several stocks is usually done in simple form through equal partitioning. If for example you had $10,000 to invest, how would you do it? You could place 20% of your total investment amount in each of 5 different Internet stocks as in Table I: Table I –Stock Investment Diversification Stock Name Current Price 90 Day High 90 Day Low Amount Invested ~ Shares Company A $25 $28 $20 $2000 80 Company B $40 $40 $20 $2000 50 Company C $60 $60 $20 $2000 33 Company D $300 $300 $198 $2000 7 Company E $8 $9 $3 $2000 250 By looking at the trading ranges across the 90-day history, you can estimate the risks or volatility of each stock. Do the stocks have the same risks? Do they all have the same growth potential? One approach would be to allocate risks equally, as opposed to allocating investment equally. You would be to use the information in the range of stock trading prices to assess risk and re-allocate your investments as this diversification calculator shows below in table II: Table II – Risk Diversification Calculator Risk Diversification Calculator Investment Amount $10,000 Stocks 5 Stock_1 Stock_2 Stock_3 Stock_4 Stock_5 90-day Max $28 $40 $60 $300 $9 90-day Min $20 $20 $20 $198 $3 Cur. Price $25 $40 $60 $300 $8 Trade Rnge 32% 50% 67% 41% 100% Eq. Amt $2,000 $2,000 $2,000 $2,000 $2,000 $$ at Risk $640 $1,000 $1,333 $819 $2,000 Risk Ratio 1 1.5625 2.083 1.28 3.125 Risk-Red. $2,000 $1,280 $960 $1,562 $640 Adj. Inv.$3,104 $1,987 $1,490 $2,425 $993 If you do not want to do the research and monitoring required for several individual stocks or bonds, choosing a mutual fund may be the wisest choice, with a smaller but usually acceptable return on your investment. The key question you need to answer is not “Should I diversify?”, but rather “How will I diversify my investments?” About YOU The primary things you should know about yourself before selecting among the different types of investments are: I. How much of my time is available to monitor/manage my investments? II. How often do I want to change my investment choices? III. Do I want help and advice from investment professionals? These are important questions you need to answer for yourself. All investment requires some time commitments to monitor and manage. When stock markets or life situations begin to change, you may need to change your investment choices. If your experience level does not warrant it, getting professional help may increase both your results and comfort level. I. Time to manage your investments: Your time is worth money! At least if you can put it to good use in managing your investments… but do not become obsessive with it. Investments take time to grow. Every investment portfolio must be watched and pruned from time to time. You wouldn’t want to look back after 5 years and find that right after your investment choices were made, that the business climate changed and those choices had become poor performers. Two typical uses of your time applied to investment managing: • Weekly, monthly or quarterly checking for: o Stock movements o Business climate changes, o Company news • Annual or quarterly allocation changes o Re-planning or shifting your plans o Pruning and re-diversification o Reallocation of investment amounts Weekly or Monthly Check-ups If you buy individual stocks and bonds, these will need monitoring more often than if you had purchased mutual funds. However, stock and bond funds need attention too, just less often. Some questions you should answer for yourself are: • Can I afford time each week to check investments (Friday night or Saturday morning)? This is important for individual stocks and bonds. •Am I disciplined enough to check my investments periodically? This is critically important, as the business environments are constantly changing. • Can I put this on a monthly calendar and stick with it? Monthly checkups are important no matter what your investments may be… • If I get an automatic e-mail sent will I read it? Many investment houses will do this for all accounts above a certain size limit. You can pool your investments under one roof, usually with savings in cost plus perks for research, quotes, e-mails, etc. Both Fidelity and Schwab are good examples of these services once you reach certain size limits. Quarterly or Annual Check-ups If you are only into mutual funds as investment vehicles, then you need check them only quarterly or annually. After all you are giving up some small amount of income to pay for professionally managed investments, right? You may want to keep up with monthly or weekly news on the investment fund management team, however, as management team shakeups there could cost you. The key thing is disciplined reviews and setting a schedule that you can stick to. Ignorance in this case can be dangerous, so do it together with your spouse or a family member that you trust. As you get good at it, the time required to do these should drop from several hours to perhaps an hour to review all your investments. If you have been keeping tabs on things, it can be shorter still. “Even if you’re on the right track you will get run over if you just sit there!” – Will Rogers. II. Changing your investment choices: The challenge when deciding to change investments is often the emotional content. “We had a return of say 7%, when the broader markets got only 5%”. How did the overall group for your investment vehicle do? Morningstar provides good index comparisons, as do other groups. If your choices did not perform above the class average for 1 or 2 quarters in a row, it’s probably a good idea to consider other alternatives. That may require all the same diligence of researching an investment as you did originally. If you are seriously concerned and need to act quickly, you can always sell and put the proceeds into cash or a money market for a short time while you do the research. III. Getting help from professionals: I have often found the larger funds and investment houses to be a plethora of information via the Internet. They have how-to guides, acronym explanations, and in general some great advice. If however, these seem to complex for you, or you would prefer to seek out a single person with whom to deal, then find a Certified Financial Planner. The best ones should be able to provide references, a track record, and a good deal of services all at your doorstep. These services do not come free and can be in the thousands of dollars to set up your initial plans. Be certain to check 3 to 5 references and interview several planners before deciding. Determine what you pay exactly and what you get exactly after your selection is made. Be certain that they are certified, a place to begin is: http://www.cfp.net/ . Summary We’ve covered a lot of ground in this topic of stock and bonds versus mutual funds. Primarily remember that individual stocks require more monitoring, but can yield higher returns. The same applies somewhat to individual bonds. Newer investors to these may want to start with mutual funds, Money magazine has an annual issue every February that is very helpful and is usually available at public libraries. Finally remember to lower your risks by diversification, no matter what investments you make. Ask yourself the questions we reviewed about your time commitments and discipline for monitoring as part of the investing process. And of course, read-up on the Internet and some of the books listed below. Next time – Portfolio Allocation, Pre-determined trigger points, and Personal investing rules … Self-Study: Some great resources to continue your journey are located on the web. Try visiting these sites: •http://www.greatcompaniesgreatcharts.com/archives/001864.html •http://www.rightline.net/home/gate_rm.html •http://www.investorguide.com/stockfaq.html •http://www.pascoresearch.com/int_alpha.asp •http://www.stockbook.com/Evaluator/ Or read these well known authors and books: • William J. O’Neil: How to Make Money in Stocks • John Boik: Lessons from the Greatest Stock Traders of All Time • John C. Bogle: Common Sense on Mutual Funds : New Imperatives for the Intelligent Investor Additional info from this author may be found at http://www.sbtionline.com
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