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OTC derivatives are significant part of the world of global finance. The OTC derivatives markets are large and have grown exponentially over the last two decades. The expansion has been driven by interest rate products, foreign exchange instruments and credit default swaps. The notional outstanding of OTC derivatives markets rose throughout the period and totaled approximately US$601 trillion at December 31, 2010.[5] In the past two decades, the major internationally active financial institutions have significantly increased the share of their earnings from derivatives activities.
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The Key To High Returns Is A Disciplined Strategy
Having a disciplined investment strategy differentiates the professional from the do-it-yourself investor. An investment strategy does not have to be complicated. If you were to sum up Warren Buffetts investing strategy it might be to buy good businesses at a fair price with the intention of holding them forever. An investment strategy helps provide focus and ensures emotions are held in check when making decisions. Having an investment strategy for both asset mix and security will provide discipline to be a successful investor over the long term. In this article, we will look at different investment strategies and how you can pick the right one for you.
See also: 4 Steps To Creating A Better Investment Strategy
Strategic Asset Mix
Central to any investment plan is the strategic or long-term asset mix. In general, its purpose is to capture the benefits of diversification and the advantages of investing in assets that have a low correlation to each other. The strategic asset mix is essentially the link between your long-term investment goals and the capital markets.
Many investors want to keep the current asset mix of their portfolios close to their strategic asset mix. A simple rebalancing strategy is all that is required. Typically, as each asset class will perform differently over time, the asset mix will deviate from the strategic asset mix. (For related reading, see Diversification: Its All About (Asset) Class.)
For example, a balanced portfolio of 60% equity and 40% fixed income could become 70% equity and 30% fixed income after a strong stock market. Rebalancing would require selling equities and using the proceeds to buy fixed-income assets, so the asset mix then will get back to the long-term asset mix. The rebalancing could be done on a regular basis, semiannually, annually or when an asset class deviates by a set percentage.
A rebalancing strategy is effectively a sell high, buy low strategy, because it will always sell the assets that have been the best relative performers and buy the assets with relatively weak performance. (For more insight, read 6 Asset Allocation Strategies That Work .)
Tactical Asset Allocation
A tactical asset mix strategy attempts to add value by overweighting the asset classes that are expected to outperform, and underweighting those asset classes that are expected to underperform.
As an example, if an investor believes that over the next year the U.S. equities market will be weak, the investor might decide to underweight his exposure to equities and overweight cash or bonds. Unlike a rebalancing strategy, which is mechanical, tactical asset allocation requires some forecasting ability to make the correct decisions. (To learn more about asset allocation, read Achieving Optimal Asset Allocation.)
Security Selection Strategies
There is no shortage of strategies to choose from when buying and selling stocks. Countless books have been written describing many strategies in detail. Strategies range from growth, to value and momentum. There are fundamentally based strategies, as well as technical or quantitative strategies. There are also top-down and bottom-up strategies. (For related reading, see A Top-Down Approach To Investing.)
Each type of strategy will have its proponents, but any logical, rational strategy that is followed consistently is always better than no strategy at all. The value is in the disciplined approach a strategy provides.
Developing Your Strategy
The value of an investing strategy is not in the strategy itself, but in how it is followed and implemented.
In investing, there are two different approaches: a top-down or a bottom-up approach. In a top-down approach, the investor analyzes the major factors that will influence the capital market and the companies in it. The main factors will be the overall economy, monetary and fiscal policy, demographic changes, inflation, industrial sector trends and interest rates. Other investors will take a bottom-up approach, analyzing individual companies, their financial statements, growth prospects and industry trends.
One approach is not necessarily better than the other. However, depending on your own interests, knowledge and experience, one approach might be more appropriate for you. As an example, an economist will likely take a top-down approach to investing and an accountant might feel more comfortable with a bottom-up approach. Your orientation to analyzing investments will determine the types of investment strategies to follow.(For more insight, see Where Top Down Meets Bottoms Up.)
In addition, the amount of time you are able to commit to your investment program determines the type of strategies to use and how much of the investment decision-making you will delegate. For example, with limited time, an investor might build a portfolio using a few exchanged-traded funds (ETFs) and then rebalance once a year. Similarly, the investor might have all of their investments in a couple of balanced funds or have their funds managed by a discretionary money manager.
Information and knowledge are important to the success of any investment strategy. One should identify the sources of data, investment commentary or investment research. The biggest challenge as an investor is to be able to filter out truly useful information from the needless noise. A disciplined investment strategy forces you to focus on the information that is important for your decision-making process.
Delegating Decision Making
Recognize the fact that it is difficult to do it all when it comes to investing. If you have a well-diversified portfolio and you invest in the major assets classes - and maybe some of the sub-asset classes as well - you are not likely to be able to actively manage all your investments effectively, unless you have a lot of time to allocate. The question then becomes, what to do yourself and what to delegate to others. It is important to stick to your strengths and interests and delegate out the asset classes in which you have a limited expertise.
As an example, an investor might feel confident trading large cap value stocks. As such, this person should concentrate their efforts on that asset class and delegate the investment management of other asset classes to someone else. Investors have several choices here, including active or passive management of the funds or assets they are looking to delegate. From the passive management side, you can find an advisor to handle the areas that you have little time to manage or research; you could also purchase a mutual fund or an ETF that provides exposure to these areas.
The Bottom Line
Having an investment strategy for both asset mix and security selection is important to ensure consistent success as an investor. Having the discipline to follow an investment strategy is more important than the actual strategy chosen. Equally important to any strategy, is determining what to manage yourself and what to delegate to others.
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How To Become A Self-Taught Finance Expert
So you want to become a financial expert, but dont know where to start? Have no fear, a wealth of information is at your fingertips, and getting started is easy. From a basic introduction to personal finances to advanced security analysis, anyone interested in learning can get access to the necessary resources. (For more on a career in finance, check out Is A Career In Financial Planning In Your Future?)
For a basic introduction to sound financial concepts, you cant do much better than The Richest Man in Babylon. Its a tiny little book, written in an uncomplicated style. It also captures the wisdom of the ages in an easy to follow manner.
Once youve covered that, the famous For Dummies series provides insight into everything from budgeting to mutual funds. Managing Your Money for Dummies, Budgeting for Dummies and Mutual Funds for Dummies are three titles that will help you expand your knowledge of basic concepts.
By the time you finish those four books, you are likely to have identified specific items that you would like to learn more about. For these inquiries, theres no better place to go for fast, easy access to information that online. Investopedia and similar sites provide access to a wealth of information that will keep you busy for weeks if not months. Investopedias tutorials are particularly notable, as they provide an in-depth look at a wide variety of topics.
Google and other search engines let you hone in on specific topics, and many mutual fund companies and financial services firms offer a wealth of free information. A visit to their websites can reveal everything from general education on a wide array of products to economic forecasts and economic insights from professional market watchers. With a just a little effort, you can even identify and follow comments from your favorite economist, investment strategists, portfolio manager, or other expert.
The library, you local bookstore and multiple online retailers also offer literally thousands of books on every conceivable topic. From financial history and Wall Street villains to hedge fund analysis and day-trading strategies, theres a book (or ten) for every topic of interest. (For more read, Can You Learn The Stock Market?)
Television, Radio and Podcasts Can Help Too
Television broadcasts and/or podcasts are from a variety of experts. At the national level, Suze Orman and other gurus cover the common topics. Kramer and his peers talk stocks. At the local level, your hometown is likely to have an expert or two that you can tune into at no cost. (To read more on gurus, see Investing Quotes You Can Bank On.)
Ready to Step Up Your Game? Hit the Books Again
After you have covered the basics and want a solid overview at a more detailed level, The Wall Street Journal Guide to Investing is a great place to start. When you are done with that, your local library or bookstore will contain a variety of magazines covering both timely and general financial services topics. When you are ready to learn about stock research, Value Line is a great publication that provides an introduction into how you can begin to research and analyze stocks. Some libraries provide access to Value Line for free. If your local library does not, the service is available by subscription. Even if you choose not to conduct your own stock analysis, the Value Line website is worth a visit.
If you make it this far, you are clearly serious about your endeavor. Now its time to make your quest a daily habit. Subscribing to the The Wall Street Journal will give you a daily overview of the issues impacting global business operations. The Journal also has a great Money and Investing section. Barrons is another fine publication read by many professionals in the financial services industry. There are many other top-quality publications dedicated to various aspects of the financial services world. Find one that matches your interests and read it. (Check out, 5 Must-Read Finance Books.)
Talk to the Experts
Once you have solid understanding of the various aspects of the financial services world, it is time to spend some time talking to the experts. Financial services professionals make a living with their expertise and can help you learn about everything from mortgages and debt management to retirement savings and estate planning. Some of these topics are covered in seminars, others in one-on-one consultations. You can even pick up a thing or two just by having an informal conversation. Talk to a professional financial advisor, talk to your banker, talk to your accountant and your attorney. Then listen and learn as they share their knowledge. (For help on locating an advisor, read Advice For Finding The Best Advisor.)
Ready for More?
If you like what you have seen and heard and are ready for more, the CFA Institute (a non-profit organization that offers a range of educational and career resources, including the Chartered Financial Analyst (CFA) and the Certificate in Investment Performance Measurement (CIPM) designations) provides access to the curriculum for several of their well-regarded programs for free:
• http://www.cfainstitute.org/cfaprogram/courseofstudy/Pages/study_sessions.aspx
• http://www.cfainstitute.org/cipm/courseofstudy/curriculum/Pages/index.aspx
The Certified Financial Analyst program is an extremely well regarded curriculum, and the Certificate in Investment Performance Measurement (CIPM) Program is the investment industrys only designation dedicated to investment performance analysis and presentation. If articles with titles like Evaluating Portfolio Performance by V. Bailey, Thomas M. Richards and David E. Tierney, and Investment Performance Measurement: Evaluating and Presenting Results, Philip Lawton and Todd Jankowski, eds. (Wiley 2009) capture your interest, the CFA institute has a reading list that you are sure to like. (For help choosing a designation, check out CPA, CFA Or CFP - Pick Your Abbreviation Carefully.)
A Life-Long Pursuit
The financial services field is constantly evolving and changing. Recent decades have seen the rise of unified managed accounts, the development of exchange traded funds, the evolution of annuities and insured investment products and a host of other developments. Change is par for the course as the industry adapts to dynamic economic conditions and changes in what investors want and how they wish to deploy their assets. In this environment, there is always something new to consider, something old to revisit and something interesting just beyond the horizon. Keeping up with the industry is an important part of a financial service professionals life, and continuing education requirements are required for many of these experts to maintain their credentials. What this means for the-self taught expert is that you will always have an opportunity to add to your body of knowledge.
Short Position Disclosure (Rule FINRA 4560) – FINRA members must report their short interest positions in OTC equity securities at mid-month and end of the month.
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Does It Still Pay To Invest In Gold?
From gold exchange-traded funds (ETFs ) to gold stocks to buying physical gold, investors now have several different options when it comes to investing in the royal metal. But what exactly is the purpose of gold? And why should investors even bother investing in the gold market? Indeed, these two questions have divided gold investors for the last several decades. One school of thought argues that gold is simply a barbaric relic that no longer holds the monitory qualities of the past. In a modern economic environment, where paper currency is the money of choice, golds only benefit is the fact that it is a material that is used in jewelry.
On the other end of the spectrum is a school of thought that asserts gold is an asset with various intrinsic qualities that make it unique and necessary for investors to hold in their portfolios . In this article, we will focus on the purpose of gold in the modern era, why it still belongs in investors portfolios and the different ways that a person can invest in the gold market.
A Brief History on Gold
In order to fully understand the purpose of gold, one must look back at the start of the gold market. While golds history began in 3000 B.C, when the ancient Egyptians started forming jewelry, it wasnt until 560 B.C. that gold started to act as a currency. At that time, merchants wanted to create a standardized and easily transferable form of money that would simplify trade. Because gold jewelry was already widely accepted and recognized throughout various corners of the earth, the creation of a gold coin stamped with a seal seemed to be the answer.
Following the advent of gold as money, golds importance continued to grow. History has examples of golds influence in various empires, like the Greek and Roman empires. Great Britain developed its own metals based currency in 1066. The British pound (symbolizing a pound of sterling silver), shillings and pence were all based on the amount of gold (or silver) that it represented. Eventually, gold symbolized wealth throughout Europe, Asia, Africa and the Americas.
The United States government continued on with this gold tradition by establishing a bimetallic standard in 1792. The bimetallic standard simply stated that every monetary unit in the United States had to be backed by either gold or silver. For example, one U.S. dollar was the equivalent of 24.75 grains of gold. In other words, the coins that were used as money simply represented the gold (or silver) that was presently deposited at the bank.
But this gold standard did not last forever. During the 1900s, there were several key events that eventually led to the transition of gold out of the monetary system. In 1913, the Federal Reserve was created and started issuing promissory notes (the present day version of our paper money) that guaranteed the notes could be redeemed in gold on demand. The Gold Reserve Act of 1934 gave the U.S. government title to all the gold coins in circulation and put an end to the minting of any new gold coins. In short, this act began establishing the idea that gold or gold coins were no longer necessary in serving as money. The United States abandoned the gold standard in 1971 when the U.S. currency ceased to be backed by gold.
The Importance of Gold In the Modern Economy
Given the fact that gold no longer backs the U.S. dollar (or other worldwide currencies for that matter) why is it still important today? The simple answer is that while gold is no longer in the forefront of everyday transactions, it is still important in the global economy. To validate this point, one need only to look as far as the reserve balance sheets of central banks and other financial organizations, such as the International Monetary Fund. Presently, these organizations are responsible for holding approximately one-fifth of the worlds supply of above-ground gold. In addition, several central banks have focused their efforts on adding to their present gold reserves.
Gold Preserves Wealth
The reasons for golds importance in the modern economy centers on the fact that it has successfully preserved wealth throughout thousands of generations. The same, however, cannot be said about paper-denominated currencies. To put things into perspective, consider the following example.
Example - Gold, Cash and Inflation
In the early 1970s, one ounce of gold equaled $35. Lets say that at that time, you had a choice of either holding an ounce of gold or simply keeping the $35. Both would buy you the same things at that, like a brand new business suit, for example. If you had an ounce of gold today and converted it for todays prices, it would still be enough to buy a brand new suit. The same, however, could not be said for the $35. In short, you would have lost a substantial amount of your wealth if you decided to hold the $35 and you would have preserved it if you decided to hold on to the one ounce of gold because the value of gold has increased, while the value of a dollar has been eroded by inflation. (For more insight, read All About Inflation.)
Gold as a Hedge Against a Declining U.S. Dollar and Rising Inflation
The idea that gold preserves wealth is even more important in an economic environment where investors are faced with a declining U.S. dollar and rising inflation (due to rising commodity prices). Historically, gold has served as a hedge against both of these scenarios. With rising inflation, gold typically appreciates. When investors realize that their money is losing value, they will start positioning their investments in a hard asset that has traditionally maintained its value. The 1970s present a prime example of rising gold prices in the midst of rising inflation. (For related reading, see What Is Wrong With Gold?)
The reason gold benefits from a declining U.S. dollar is because gold is priced in U.S. dollars globally. There are two reasons for this relationship. First, investors who are looking at buying gold (like central banks) must sell their U.S. dollars to make this transaction. This ultimately drives the U.S. dollar lower as global investors seek to diversify out of the dollar. The second reason has to do with the fact that a weakening dollar makes gold cheaper for investors who hold other currencies. This results in greater demand from investors who hold currencies that have appreciated relative to the U.S. dollar.
Gold as a Safe Haven
Whether it is the tensions in the Middle East, Africa or elsewhere, it is becoming increasingly obvious that political and economic uncertainty is another reality of our modern economic environment. For this reason, investors typically look at gold as a safe haven during times of political and economic uncertainty. Why is this? Well, history is full of collapsing empires, political coups, and the collapse of currencies. During such times, investors who held onto gold were able to successfully protect their wealth and, in some cases, even use gold to escape from all of the turmoil. Consequently, whenever there are news events that hint at some type of uncertainty, investors will often buy gold as a safe haven.
Gold as a Diversifying Investment
The sum of all the above reasons to own gold is that gold is a diversifying investment. Regardless of whether you are worried about inflation, a declining U.S. dollar, or even protecting your wealth, it is clear that gold has historically served as an investment that can add a diversifying component to your portfolio. At the end of the day, if your focus is simply diversification, gold is not correlated to stocks, bonds and real estate. (For more insight, read The Importance Of Diversification.)
Different Ways of Owning Gold
One of the main differences between investing in gold several hundred years ago and investing in gold today is that there are many more options to participating in the intrinsic qualities that gold offers. Today, investors can invest in gold by buying:
• Gold Futures (For more on this investment type, see Trading Gold And Silver Futures Contracts.)
• Gold Coins
• Gold Companies
• Gold ETFs
• Gold Mutual Funds
• Gold Bullion
• Gold jewelry
Conclusion
There are advantages to every investment. If you are more concerned with holding the physical gold, buying shares in a gold mining company might not be the answer. Instead, you might want to consider investing in gold coins, gold bullion, or jewelry. If your primary interest is in using leverage to profit from rising gold prices, the futures market might be your answer.
Many economists link economic expansion and contraction to the level of interest rates. Interest rates are seen as a leading indicator for the stock market as well.
Broker-dealers often receive buy and sell orders that ‘match’ – meaning, someone is willing to sell a security for the same price someone else is willing to buy the same security. In this situation, broker-dealers will execute the trade “internally”.
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The 6 Most Common Portfolio Protection Strategies
The key to successful long-term investing is the preservation of capital. Warren Buffett, arguably the worlds greatest investor, has one rule when investing - never lose money. This doesnt mean you should sell your investment holdings the moment they enter losing territory, but you should remain keenly aware of your portfolio and the losses youre willing to endure in an effort to increase your wealth. While its impossible to avoid risk entirely when investing in the markets, these five strategies can help protect your portfolio.
Diversification
One of the cornerstones of Modern Portfolio Theory (MPT) is diversification. In a market downturn, MPT disciples believe a well-diversified portfolio will outperform a concentrated one. Investors create deeper and more broadly diversified portfolios by owning a large number of investments in more than one asset class, thus reducing unsystematic risk. This is the risk that comes with investing in a particular company as opposed to systematic risk, which is the risk associated with investing in the markets generally.
Non-Correlating Assets
According to some financial experts, stock portfolios that include 12, 18 or even 30 stocks can eliminate most, if not all, unsystematic risk. Unfortunately, systematic risk is always present and cant be diversified away. However, by adding non-correlating asset classes such as bonds, commodities, currencies and real estate to a group of stocks, the end-result is often lower volatility and reduced systematic risk due to the fact that non-correlating assets react differently to changes in the markets compared to stocks; when one asset is down, another is up.
Ultimately, the use of non-correlating assets eliminates the highs and lows in performance, providing more balanced returns. At least thats the theory. In recent years, however, evidence suggests that assets that were once non-correlating now mimic each other, thereby reducing the strategys effectiveness. (See why investors today still follow this old set of principles that reduce risk and increase returns through diversification. Check out Modern Portfolio Theory: Why Its Still Hip.)
Leap Puts and Other Option Strategies
Between 1926 and 2009, the S
OTC derivatives can lead to significant risks. Especially counterparty risk has gained particular emphasis due to the credit crisis in 2007. Counterparty risk is the risk that a counterparty in a derivatives transaction will default prior to expiration of the trade and will not make the current and future payments required by the contract.[2] There are many ways to limit counterparty risk. One of them focuses on controlling credit exposure with diversification, netting, collateralisation and hedging.
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Profiting In A Post-Recession Economy
People will always question what the future economy will look like after it suffers a recession. Though there are different implications with each recession - owing to its causes and the governmental and financial changes that are brought about - the economy will definitely shift and there will emerge new economic practices and trends for industries, consumers and investors.
Following the depths of the 2007-2009 recession theres a new world characterized by:
• Non-existent consumer discretionary spending
• Tighter credit and borrowing standards
• Reduced home ownership
• Increased consumer savings
The above effects will serve to:
• Hold down corporate profit growth
• Restrict employment growth
• Likely reduce future expected market returns
Despite the above, investors have options and opportunities as long as they keep their expectations in line with the expected future outcome. Some wonderful investment opportunities exist for investors in all stages of life.
Industries to Look For
When it comes to investing in the economy defined by the characteristics above, one question should dominate your investment consideration: Does this company make an essential or non-essential product?
When times are tough, people respond with their wallets. Unless folks are given great incentives, they wont buy unless they have to. In that kind of environment, I would favor food companies to retailers, healthcare providers to homebuilders, and defense contractors to automakers. Things like food, medicine and national security are musts in this world. An extra purse or a new car or bigger homes are not. And heres the best part: most of the companies that provide these necessary goods will continue to be around for a long time. (These type of companies are normally grouped in a sector called consumer staples – to learn more see A Guide To Consumer Staples.)
When economies are sour, the stock market tends to punish all companies regardless of what line of business they are in. In other words, a business like a Kraft or Johnson and Johnson that sell essential food and health products all over the world may likely see its shares suffer along with other discretionary businesses like retailers. And you can be comforted by the fact that even in tough times, people still need to buy food and Tylenol. Looking for these types of companies will likely earn you market-beating returns during the several years following a recession, despite an overall sluggish economy.
Despite the temptation, avoid retailers and other companies that make non-discretionary consumer goods. Such companies will likely experience reduced profit margins as they are forced to mark down their products to entice consumers.
Importance of Commodities
Commodities are the most fundamental of human essentials. Things like wheat, corn, oil, zinc, copper and coal. While you might not physically buy some of these commodities, you cant go through a normal day without them. Every time you turn on a light switch or power up your stove, the electricity used is provided by coal or natural gas. Grains are the basic building blocks for all the foods we eat. Oil, besides being refined into gasoline, goes in things like plastic, carpets, soaps and detergents.
Besides being essentials, commodities also have inflationary pricing power. If the government prints massive amounts of money to combat the recession, inflation will likely happen. It might not happen immediately afterwards, but it will rear its ugly head. Commodities, for those reasons are a good place to be.
Fertilizer companies are also great considerations. Fertilizer is the necessary ingredient to boost crop yield - that is, producing more food from the same amount of land. As the global population grows, so will the need to maximize food production. When looking at commodity plays, focus on the larger businesses with the quality assets such as the large integrated oil companies. We will always need oil and the biggest companies have the deepest pocket book to continue providing us with the black gold during various pricing environments. Otherwise look for those companies that are the low cost producers.
International Investment Exposure
To illustrate why investors should also consider diversifying internationally we can take a look at the 2007-2009 recession. Although this was a global economic recession, it didnt affect every country equally. According to J.D. Power Asia-Pacific, as of 2009, it was estimated that there were 820 cars for every 1,000 people in the US. In China, the figure was 34 cars per 1,000. Numbers like this illustrate the potential in countries like China, Brazil and India.
Major international commodity companies are now almost certain to have exposure to the growth in China. Such businesses enable investors to get the exposure without having to invest directly in China. The growth engines for companies like Johnson and Johnson is the fact that billions of people outside the U.S. will need its products.
Conclusion
As long as investors are aware of the likely economic shifts that lie before them in a post-recession environment, the opportunity to make excellent investments is there.
There is no central ‘exchange’ in the OTC market; therefore, broker-dealers must communicate and trade directly with other broker-dealers. In order to notify other broker-dealers that they are willing to trade a security at a particular price, broker-dealers post their ‘quotes’ on an Inter-dealer Quotation system such as OTC Link. The aggregation and ranking of these quotes defines the ‘market’ for a security. The highest ‘bid’ (purchase price) and lowest ‘ask or offer’ (sale price) becomes the ‘inside market’ or NBBO – the National Best Bid and Offer.
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Sometimes it does not seem logical to consider a resistance level broken if the price closes 1/8 above the established resistance level. For this reason, some traders and investors establish resistance zones.
7 Common Investor Mistakes
Of the mistakes made by investors, seven of them are repeat offenses. In fact, investors have been making these same mistakes since the dawn of modern markets, and will likely be repeating them for years to come. You can significantly boost your chances of investment success by becoming aware of these typical errors and taking steps to avoid them. (To read about market histories, see The Stock Market: A Look Back, The Bond Market: A Look Back and The Money Market: A Look Back.)
TUTORIAL: Investing 101 For Beginner Investors
1. No Plan
As the old saying goes, if you dont know where youre going, any road will take you there. Solution?
Have a personal investment plan or policy that addresses the following:
• Goals and objectives - Find out what youre trying to accomplish. Accumulating $100,000 for a childs college education or $2 million for retirement at age 60 are appropriate goals. Beating the market is not a goal.
• Risks - What risks are relevant to you or your portfolio? If you are a 30-year-old saving for retirement, volatility isnt (or shouldnt be) a meaningful risk. On the other hand, inflation - which erodes any long-term portfolio - is a significant risk. (To see more on risk, read Determining Risk And The Risk Pyramid and Personalizing Risk Tolerance.)
• Appropriate benchmarks - How will you measure the success of your portfolio, its asset classes and individual funds or managers? (Keep reading about benchmarks in Benchmark Your Returns With Indexes.)
• Asset allocation - What percentage of your total portfolio will you allocate to U.S. equities, international stocks, U.S. bonds, high-yield bonds, etc. Your asset allocation should accomplish your goals while addressing relevant risks.
• Diversification - Allocating to different asset classes is the initial layer of diversification. You then need to diversify within each asset class. In U.S. stocks, for example, this means exposure to large-, mid- and small-cap stocks. (Find out more about allocation and diversification in Five Things To Know About Asset Allocation, Choose Your Own Asset Allocation Adventure and A Guide To Portfolio Construction.)
Your written plans guidelines will help you adhere to a sound long-term policy, even when current market conditions are unsettling. Having a good plan and sticking to it is not nearly as exciting or as much fun as trying to time the markets, but it will likely be more profitable in the long term. (To find out how to make your investment plan, see Having A Plan: The Basis Of Success, Ten Steps to Building A Winning Trading Plan and Tailoring Your Investment Plan.)
2. Too Short of a Time Horizon
If you are saving for retirement 30 years hence, what the stock market does this year or next shouldnt be the biggest concern. Even if you are just entering retirement at age 70, your life expectancy is likely 15 to 20 years. If you expect to leave some assets to your heirs, then your time horizon is even longer. Of course, if you are saving for your daughters college education and shes a junior in high school, then your time horizon is appropriately short and your asset allocation should reflect that fact. Most investors are too focused on the short term.
3. Too Much Attention Given to Financial Media
There is almost nothing on financial news shows that can help you achieve your goals. Turn them off. There are few newsletters that can provide you with anything of value. Even if there were, how do you identify them in advance?
Think about it - if anyone really had profitable stock tips, trading advice or a secret formula to make big bucks, would they blab it on TV or sell it to you for $49 per month? No - theyd keep their mouth shut, make their millions and not have to sell a newsletter to make a living. (To learn more, see Mad Money ... Mad Market? and The Madness Of Crowds.)
Solution? Spend less time watching financial shows on TV and reading newsletters. Spend more time creating - and sticking to - your investment plan.
4. Not Rebalancing
Rebalancing is the process of returning your portfolio to its target asset allocation as outlined in your investment plan. Rebalancing is difficult because it forces you to sell the asset class that is performing well and buy more of your worst performing asset classes. This contrarian action is very difficult for many investors.
In addition, rebalancing is unprofitable right up to that point where it pays off spectacularly (think U.S. equities in the late 1990s), and the underperforming assets start to take off. (Keep reading about this subject in Equity Premiums: Looking Back And Looking Ahead.)
However, a portfolio allowed to drift with market returns guarantees that asset classes will be overweighted at market peaks and underweighted at market lows - a formula for poor performance. The solution? Rebalance religiously and reap the long-term rewards. (Find out how to put this tip to use in Rebalance Your Portfolio To Stay On Track, When Fear And Greed Take Over and Master Your Trading Mindtraps.)
5. Overconfidence in the Ability of Managers
From numerous studies, including Burton Malkiels 1995 study entitled, Returns From Investing In Equity Mutual Funds, we know that most managers will underperform their benchmarks. We also know that theres no consistent way to select - in advance - those managers that willoutperform. We also know that very, very few individuals can profitably time the market over the long term. So why are so many investors confident of their abilities to time the market and select outperforming managers?
Fidelity guru Peter Lynch once observed, There are no market timers in the Forbes 400. Investors misplaced overconfidence in their ability to market-time and select outperforming managers leads directly to our next common investment mistake. (For more insight, see Pick Stocks Like Peter Lynch.)
6. Not Enough Indexing
There is not enough time to recite many of the studies that prove that most managers and mutual funds underperform their benchmarks. Over the long-term, low-cost index funds are typically upper second-quartile performers, or better than 65-75% of actively managed funds.
Despite all the evidence in favor of indexing, the desire to invest with active managers remains strong. John Bogle, the founder of Vanguard, says its because, Hope springs eternal. Indexing is sort of dull. It flies in the face of the American way [that] I can do better.
Index all or a large portion (70-80%) of all your traditional asset classes. If you cant resist the excitement of pursuing the next great performer, set aside a portion (20-30%) of each asset class to allocate to active managers. This may satisfy your desire to pursue outperformance without devastating your portfolio.
7. Chasing Performance
Many investors select asset classes, strategies, managers and funds based on recent strong performance. The feeling that Im missing out on great returns has probably led to more bad investment decisions than any other single factor. If a particular asset class, strategy or fund has done extremely well for three or four years, we know one thing with certainty: We should have invested three or four years ago. Now, however, the particular cycle that led to this great performance may be nearing its end. The smart money is moving out, and the dumb money is pouring in. Stick with your investment plan and rebalance, which is the polar opposite of chasing performance.
Conclusion
Investors who recognize and avoid these seven common mistakes give themselves a great advantage in meeting their investment goals. Most of the solutions above are not exciting, and they dont make great cocktail party conversation. However, they are likely to be profitable. And isnt that why we really invest?
A decentralized market of securities not listed on an exchange where market participants trade over the telephone, facsimile or electronic network instead of a physical trading floor. There is no central exchange or meeting place for this market.
Portfolio Mismanagement: 7 Common Stock Errors
Ignorance may be bliss, but not knowing why your stocks are failing and money is disappearing from your pockets is a long way from paradise. In this article, well uncover some of the more common investing faux pas, as well as provide you with suggestions on how to avoid them.
1. Ignoring Catalysts
The financial pundits, trade journals and business schools teach that proper valuation is the key to stock selection. This is only half of the picture because calculating P/E ratios and running cash flow spreadsheets can only show where a company is at a given point in time - it cannot tell us where it is heading.
Therefore, in addition to a quantitative evaluation of a company, you must also do a qualitative study so that you can determine which catalysts will drive earnings going forward.
Some good questions to ask yourself include:
• Is the company about to acquire a very profitable enterprise?
• Is a potential blockbuster product about to be launched?
• Are economies of scale being realized at the companys new plant and are margins about to rise dramatically?
• What will drive earnings and the stock price going forward?
2. Catching the Falling Knife
Investors love to buy companies on the cheap, but far too often, investors buy in before all of the bad news is out in the public domain, and/or before the stock stops its free fall. Remember, new lows in a companys share price often beget further new lows as investors see the shares dropping, become disheartened and then sell their shares. Waiting until the selling pressure has subsided is almost always your best bet to avoid getting cut on a falling knife stock. (To learn more, read How Investors Often Cause The Markets Problems.)
3. Failing to Consider Macroeconomic Variables
You have found a company you want to invest in. Its valuation is superior to that of its peers. It has several new products that are about to be launched, and sales could skyrocket. Even the insiders are buying the stock, which bolsters your confidence all the more.
But if you havent considered the current macroeconomic conditions, such as unemployment and inflation, and how they might impact the sector you are invested in, youve made a fatal mistake!
Keep in mind that a retailer or electronics manufacturer is subject to a number of factors beyond its control that could adversely impact the share price. Things to consider are oil prices, labor costs, scarcity of raw materials, strikes, interest rate fluctuations and consumer spending. (For more on these factors, see Macroeconomic Analysis and Where Top Down Meets Bottom Up.)
4. Forgetting About Dilution
Be on the lookout for companies that are continuously issuing millions of shares and causing dilution, or those that have issued convertible debt. Convertible debt may be converted by the holder into common shares at a set price. Conversion will result in a lower value of holdings for existing shareholders.
A better idea is to seek companies that are repurchasing stock and therefore reducing the number of shares outstanding. This process increases earnings per share (EPS) and it tells investors that the company feels that there is no better investment than their own company at the moment. (You can read more about buybacks in A Breakdown Of Stock Buybacks.)
5. Not Recognizing Seasonal Fluctuations
You cant fight the Fed. By that same token, you cant expect that your shares will appreciate even if the companys shares are widely traded in high volumes. The fact is that many companies (such as retailers) go through boom and bust cycles year in and year out. Luckily, these cycles are fairly predictable, so do yourself a favor and look at a five-year chart before buying shares in a company. Does the stock typically wane during a particular part of the year and then pick up during others? If so, consider timing your purchase or sale accordingly. (To learn more, see Capitalizing On Seasonal Effects.)
6. Missing Sector Trends
Some stocks do buck the larger trend; however, this behavior usually occurs because there is some huge catalyst that propels the stock either higher or lower. For the most part, companies trade in relative parity to their peers. This keeps their stock price movements within a trading band or range. Keep this in mind as you consider your entry/exit points in a stock.
Also, if you own stock in a semiconductor company (for example), understand that if other semiconductor companies are experiencing certain problems, your company will too. The same is true if the situation was reversed, and positive news hit the industry.
7. Avoiding Technical Trends
Many people shy away from technical analysis, but you dont have to be a chartist to be able to identify certain technical trends. A simple graph depicting 50-day and 200-day moving averages as well as daily closing prices can give investors a good picture of where a stock is headed. (To learn about this method, read the Basics Of Technical Analysis.)
Be wary of companies that trade and/or close below those averages. It usually means the shares will go lower. The same can be said to the upside. Also remember that as volume trails off, the stock price typically follows suit.
Lastly, look for general trends. Has the stock been under accumulation or distribution over the past year? In other words, is the price gradually moving up, or down? This is simple information that can be gleaned from a chart. It is truly surprising that most investors dont take advantage of these simple and accessible tools.
The Bottom line
There are a myriad of mistakes that investors can and do make. These are simply some of the more common ones. In any case, it pays to think about factors beyond what will propel the stock you own higher. A stocks past and expected performance in comparison to its peers, as well as its performance when subjected to economic conditions that may impact the company, are some other factors to consider.
Narrow Within the Group
Once the industry group is chosen, an investor would need to narrow the list of companies before proceeding to a more detailed analysis. Investors are usually interested in finding the leaders and the innovators within a group.
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Biggest Industry Ups And Downs Of 2011
February 06, 2012 | Filed Under » Bear Market, Bull Market, Economy, Investing Basics
2011 was an eventful year for the American economy, and it seems to be slowly getting back on track. The last few weeks of 2011 started seeing some positive activity in consumer spending. Banking is slowly recovering, as is the demand for cars. Employment opportunities have improved with unemployment down to 8.5%. However, it was a recession-hit year for the economy, with greater focus on creating higher consumption through greater government spending.
SEE: Consumer Spending As A Market Indicator
According to the Chief Financial Officer of Washington DC, Natwar Gandhi, There is no consumer demand as we speak. The businesses are not investing, as they do not see any demand out there. So the only player who can really generate demand is government. The government needs to spend money. There is a need to spend money on our infrastructure, which is abysmal. Unless government spends money to generate demand, I see very likely a lost decade, the kind that the Japanese have experienced over the last 10 years.
Lets take a look at the industries that performed the best and the worst in the year 2011. We will keep the Standard and Poors (S
For thou convenience $GAEC BarChart Technical Analysis NITE-LYNX
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Traders usually concentrate on charts made up of daily and intraday data to forecast short-term price movements.
In the U.S., over-the-counter trading in stock is carried out by market makers using inter-dealer quotation services such as OTC Link (a service offered by OTC Markets Group) and the OTC Bulletin Board (OTCBB, operated by FINRA). The OTCBB licenses the services of OTC Link for their OTCBB securities.
Variety A Bitter Spice For Investors
Customer confusion is a phenomenon that has emerged relatively recently and is normally considered in terms of conventional marketing. For instance, if you go into a big box store, you will be confronted with dozens of models of various products, which, to the average person, may look pretty much the same. This can be confusing and problematic for both customers and firms.
The same thing often occurs in the investment market, but the effects are even more substantial and the consequences for consumers may be far more serious than for other goods and services. If youve ever felt overwhelmed by the array of financial products in the market, read on for some tips on how to simplify your portfolio.
Customer Confusion
A number of studies reveal that while customers may initially be attracted to a wide choice of products, many eventually give up in despair or make the wrong decisions. For instance, Frank Pillar and his colleagues investigated the consequences of mass confusion and the burden of choice in the online world (Journal of Computer-Mediated Communication, 2005). I also looked at the confusion phenomenon from a broader marketing perspective in Choice That Sends Out Wrong Buying Signals (Daily Telegraph, 2005).
What these studies suggest is that being spoiled for choice has serious implications, not just for the successful marketing of investment products , but on the gains or losses for investors. In the investment sector, the main victims are those that are financially inexperienced and rely on brokers and advisors to recommend products.
Too Many Choices
For instance, investment magazines and the financial sections of many newspapers display a remarkable array of products, categories, sub-categories and statistics. This often confuses consumers.
Take theThe Wall Street Journal Europe, which has a section on international investment funds. In August 2007, the total fund listing for Alliance Bernstein, which is just one organization, contained more than 60 funds: five conservative funds, seven balanced and various permutations of growth funds, value funds and so on. For less experienced investors in particular, choosing which fund or combination of funds will work best for them can be very difficult.
Too Much Complexity
Some products such as (certain types of) certificates, options and derivatives are notoriously complex and each constitutes its own esoteric world. An article from the highly-regarded Swiss Neue Zuercher Zeitung entitled Confusion Over Complex Financial Products (July 2007), makes this exact point. Referring to the collateralized debt obligation (CDO) market, the article points out that because of the high level of complexity, these products are difficult to evaluate and rate.
Furthermore, the markets for all investments are in constant flux. This means that even if you have clarity at one point in time, confusion can arise later as a result of ongoing developments relating to interest rates, market sentiment, economic data and many other factors.
The Dangers of Confusion
With the truly overwhelming selection of assets in the financial markets, many investors find it nearly impossible to make efficient and effective purchasing decisions based on the right criteria. In fact, they are often totally unable to figure out what they really need or even understand what they are being offered. When investing becomes a stressful ordeal, customers minds tend to shut down in protest. Their wallets either go back into their pockets or their money ends up in the wrong place.
In addition, inexperienced investors are particularly vulnerable to misselling. As a result, cases abound in which people put large sums of money into the hands of a broker, having no idea how their money will be handled. In a worst-case scenario, the money is plugged into products that are totally unsuited to the unwitting investor.
The growing number of choices in the market can mean that even experienced brokers may not be able to cope with the changing array of funds in the market and, as a result, may limit themselves to a very narrow range. In other words, brokers may sell specific products either because they are genuinely good, or simply because they are familiar. The latter reduces confusion - even for brokers - but can be financially dangerous for their clients. Unscrupulous brokers may also stick to the products that bring in the highest commission. This truly unethical behavior is also facilitated by consumer confusion.
Coping with Confusion
There is a right and a wrong way to cope with confusion about which products belong in your portfolio. The wrong way is to cop out and put everything in cash or in one product or asset class. This leads to a poorly constructed and inadequately diversified portfolio. Conversely, some investors have a hodgepodge of all kinds of assets that do not fit together at all. This is also poor asset allocation and it too can prevent an investor from realizing appropriate returns.
Find A Trustworthy Advisor
Learning enough to make good investments or finding people you can rely on and trust are good ways of working through the customer confusion problem. Some effort is essential in order to avoid falling into the classic investment traps. That is, you need to make sure you either knowhow to invest well, or you need to know that you are relying on people who merit your trust.
However, given the extraordinary complexity of the investment world, it is necessary to accept some limitations to the above. In this business, even an expert does not know everything. For example, a bond specialist may not be the best person to turn to for guidance on equity investments or foreign products. In order to get the best financial advice , you need to consider where peoples expertise lies and where it ends.
Keep It Simple
Even if you have good advisors, dont let your portfolio get too busy. Limit your portfolio to a variety of asset classes and items that both you and your broker understand. For example, the conventional wisdom is that if you have a portfolio of individual stocks, 10-15 stocks is about all that you can cope with without becoming overwhelmed. It simply is not possible to keep tabs too many bits and pieces in a portfolio.
For this reason, despite what they often promise, funds with 40 or more holdings tend to track the market as a whole. That is, individuals or fund managers with overloaded and excessively complex portfolios tend not to manage them actively and effectively. As a result, a market indexfund that is designed to move with the market may be more effective - not to mention much less confusing.
In the same vein, if you have 30 different funds, it is likely to be very difficult to manage, monitor and control them all effectively. For some investors, a mixed fund that does all this for you might be the best way to avoid confusion. Such funds contain a combination of asset classes such as stocks, bonds and alternative assets and they do all the monitoring and rebalancing. If they do it well, it is probably the simplest and least confusing way to invest for those with limited time or little inclination to manage their own money.
The Bottom Line
If confusion is to be avoided, you need to keep your portfolio simple and sensible, but at the same time, sufficiently diversified. Take the time to find this balance, and avoid becoming overwhelmed by new products. Investing neednt be complicated, and if you avoid confusion, your portfolio will reward you for it.
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Company Analysis
With a shortlist of companies, an investor might analyze the resources and capabilities within each company to identify those companies that are capable of creating and maintaining a competitive advantage. The analysis could focus on selecting companies with a sensible business plan, solid management and sound financials.
Arbitrage is the trading strategy that takes advantage of the price differential between two or more markets for the same underlying asset. Investors and traders profit from the price differential by buying at the cheaper price and selling at the higher price or vice versa. In liquid markets, arbitrage is a short-term strategy because traders quickly recognize the imbalance and correct their prices.
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As part of the analysis process, it is important to remember that all information is relative. Industry groups are compared against other industry groups and companies against other companies.
The margin account agreement generally provides that the securities in your margin account may be lent out by the brokerage firm at any time without notice or compensation to you. The firm's lending of securities does not affect the value of your account.
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A fundamental analyst believes that analyzing strategy, management, product, financial statistics and many other readily and not-so-readily quantifiable numbers will help choose stocks that will outperform the market.
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Is a security's current price an accurate reflection of its fair value?
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