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States have their own requirements for finding and claiming unclaimed property. If you believe you have unclaimed property, the state will require you to send them information about yourself to verify your ownership of the unclaimed property. After verifying your ownership, the state will either mail you a claim form or permit you to fill out the form online and print it for submission to the state.
Financial Advice With Zero Return
Many people rely on financial advisors, either independent ones or those employed at banks. The good ones will at least ensure that you have a sensibly diversified portfolio and that it stays that way. However, a recent study indicates that many advisors do not increase the actual investment returns on an ongoing basis.
What Advisors Do and Dont
An investigation conducted at the University of Frankfurt in Germany reveals that neither portfolios advised by banks nor independent advisors, do any better than those for which no advice was given. Finance professor Andreas Hackethal explains that the main problem is the failure of advisors to correct systematic investment errors sufficiently, while at the same time, they generate additional costs. (For related reading, see Diversifying Your Portfolio.)
Furthermore, this work almost certainly applies to the United States. According to Hackethal, an investigation by Bergstresser et. al in the U.S., demonstrated that mutual funds sold through U.S. broker channels underperform other mutual funds. They take this as indirect evidence that brokers or advisors do not add value for clients.
The Frankfurt-based study used client data from a large German bank and from an online broker that specializes in providing independent advice. The survey sample that was given advice, performed no better than the execution-only group.
The researchers also confirm that banks (and certain other advisors) have the wrong incentive structures, so that the advisory process all too often helps only the seller and not the investor. (To learn more, read Paying Your Investment Advisor - Fees Or Commissions?)
Investor Reluctance to Obtain and Follow Good Advice
Good advisors are clearly hard to find, but they are indeed out there. However, Hackethal found a widespread client reluctance to use good, skilled advice, preferring to rely on their own generally mediocre investment skills. A staggering 95% of those questioned were not even interested in free independent advice from an advisor with no incentive, at all, to recommend specific products.
Equally amazing is the fact that of the remaining 5%, only half actually followed the advice that they were given. Of this tiny group, half again followed the advice only half-heartedly, even though the recommendations would have led to substantially better returns.
It seems to be mainly wealthy, experienced investors who really appreciate the value of good advice from the right people. Yet, almost anyone would benefit from a second, objective opinion on what to do with their hard-earned savings.
The Solutions
The Frankfurt researchers do not believe that more governmental regulation is the answer either. In particular, given the above consumer attitudes to advice, purely seller-side regulation seems doomed to fail. For instance, Hackethal doubts that simply providing more information in the form of brochures, for example, will help much. It will take a lot more to achieve the necessary transparency and learning effects … with respect to investment risks and opportunities.
Clearly, somehow, investor attitudes towards advice need to change and the incentive structures in the industry as well. In addition, investment selling processes at banks may need to be overhauled in a more general sense. There is a compelling need to establish just why, in so many instances, the advisory process fails to work for the investor.
There are undoubtedly independent and bank advisors who can and will help people get more bang (and bank) for their buck. What is lacking is an understanding of the difference between good, mediocre and really bad advice. Above all, far greater market transparency is essential, so that people are able to draw the appropriate distinctions between a fine investment, a rip-off and the various shades of gray between the two extremes. At present, too many investors just do not know who they are dealing with. As Hackethal puts it the person sitting opposite them could be excellent or an outright crook. The clients just dont know. (Learn more on how to Find The Right Financial Advisor.)
An Important Benefit Remains - with Genuinely Independent Advisors
Independent financial advice can, however, at least prevent excessively risky, undiversified portfolios. That is, even if an advisor does not lead to better returns, if they can prevent you from having a high risk portfolio that rockets in a boom and plummets in a bear market, that can be worth a lot. This is a separate issue and needs to be kept in mind. The above research dealt with better investment performance, not with avoiding disastrous losses in a crash.
The Bottom Line
Financial advice can be pretty ineffectual for two main reasons. Firstly, when the incentive structures are wrong, the advice benefits mainly or only the bank or broker. Secondly, investors are remarkably reluctant either to seek out or follow objective advice from a third party. Overcoming this highly unsatisfactory situation entails a combination of changed structures and attitudes on both the buyer and seller sides of the market. This is not easy to achieve, and regulation alone will certainly not do it. The industry needs to take a long, hard look at what it is doing, both wrong and right.
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The OTC market is made up of many different types of companies, ranging from OTCQX companies worthy of investor consideration to economically distressed companies to speculative shell companies.
The Knowledge-Experience Continuum: Where Do You Fall?
It is only through studying the practicalities of investments that people learn and understand how it really works. Even so, their knowledge and understanding always has its limits, and learning and doing are two very different things.
These issues apply to a greater or lesser extent to almost everyone in the industry - theory and practice are often worlds apart, but many people dangerously treat them as one and the same.
In this article, we will look at what constitutes learning, understanding, experience and real expertise, as well as what sets the limits. The basic issue is that when it comes to investing, there is a huge gap between theory and practice. For this reason, it is important to take a look at the different levels of knowledge and how we achieve them.
The Dangers of Theoretical Knowledge
People who study business or economics in college generally learn passively just to pass exams. Many do not really understand the material until they start teaching the same theories. And even then, this is still just theory. Practice happens when students apply this theory in their personal investing.
Even business professors who write articles in related areas, such as economics, tend to do so theoretically and do not necessarily know much about the real world of investment. In fact, their own investments may be run by other people.
Unfortunately, some types of theory just arent helpful in practice. For example, although a good theoretical knowledge of economics, should help you learn quickly about real-world investments; unfortunately, the theory alone is of little practical use. Knowing about supply and demand, neoclassical interest rate theory and Keynesian cross diagrams is light years away from the real world of conflicts of interest, commission-hungry brokers and failed attempts at market timing. In other words, these theoretical models often assume the world has very specific and predictable conditions; does this sound like the world you live (and invest) in? (For related reading, see Economics Basics.)
In the world of investment, theory alone can even be dangerous, and this applies particularly to a limited degree of practical knowledge. The old saying that a little knowledge is a dangerous thing applies in this context, because it can inspire confidence in the investor, even when he or she has little experience and should be cautious.
The main problem is that the investment industry does not work the way an inexperienced person is likely to think. For example, who would ever dream that many fund managers try to beat an index and fail? How could the man in the street know that brokers may sell risky investments because these bring in the most money? Similarly, naive investors might put too much confidence in their brokers abilities and assume that they know what theyre doing without further investigation. Unfortunately, mismanagement is not uncommon, but for an investor with limited experience, this may not be apparent.
Experience Versus Real Expertise
As you now know, passive knowledge alone does not count for much; you need to actually do things to develop real expertise and skills. Nonetheless, it is also possible to have a lot of experience with something, without having a profound understanding of how it works. (To learn from experienced money managers, read Words From The Wise On Active Management.)
For example, someone who simply works in a bank may administer funds and other assets for years and or decades and not really know much about them. This is particularly the case with routine activities at lower levels. Another danger is that someone who worked with pensions for 20 years may get transferred to hedge funds two weeks before you turn up with your money. This person is then very experienced, but perhaps not in the right area.
The combination of directly relevant experience and various aspects of sophistication is really essential to good money management, both on the part of the investor and his or her broker /advisor. Motivation is also vital. This means being genuinely interested in and caring about your portfolio. If you do your own investing, this may not be a problem, but if you hire a broker, you will need to find one who is motivated to help you. No amount of education and experience counts if it is not applied appropriately. These are complex issues, but they are of fundamental importance.
Knowledge in One Area Is Still Ignorance in Another
Given the extraordinarily wide range of investments, someone who knows a lot about stocks may know (almost) nothing about bonds. And even a government bond expert could be relatively ignorant about the ins and outs of corporate bonds. The term experienced investor can therefore be extremely misleading.
Only experience in a specific sector is really likely to help. The extent to which knowledge with one asset class applies to another, for example, is extremely variable and cannot be taken for granted. Therefore, never assume that someone has the right package of skills, experience and expertise to advise or work in a particular field - do your research and determine exactly what experience a professional has and how directly it applies to his or her current line of work.
The Knowledge-Experience Continuum
Given the above, we can divide up private investors into three main knowledge-experience categories:
1. The Know Nothings. The first category would be those who, for all intents and purposes, know nothing. Almost everyone earns some money and perhaps even invests part of it, but if this is purely passive, uninterested and unmotivated, people can go through their entire adult lives without gaining any real knowledge or understanding of the investment process and what it entails.
2. The Know A Littles. The next group would be those with a limited degree of knowledge and experience. This knowledge could be very theoretical, such as from university economics or even some college finance courses, or it could be more practical, from reading newspapers, magazines and books.
Many people fall into this category. They know a bit or even a fair amount about stocks, bonds and real estate, but this knowledge may remain superficial and narrow. They would not necessarily know what constitutes a high versus low-risk portfolio or the difference between amutual fund and a hedge fund . They still have to rely heavily on the experts.
3. The Know A Lots. Moving on from the above level, there are obviously those with above-average or advanced levels of knowledge and experience. These people have been reading extensively for years, maybe even teaching or writing on investments or have been managing their own money or that of others quite actively. Despite this, they too will inevitably have gaps in their knowledge and experience.
Applying the Continuum to People in the Industry
When it comes to investment professionals , the three groups above still apply, but with some important differences. Professionals are extremely varied in terms of their area(s) of expertise and commitment to customers, so it is important to find out not only how experienced a professional is, but also in what areas.
Conclusions
What people really know, understand and can do in the investment industry is absolutely fundamental to managing your money or hiring someone else to manage your money properly. A complex interplay of education, motivation, relevance and sophistication all determine whether an investor or a professional can successfully manage a portfolio. It is therefore extremely important to know who you are really dealing with. This in itself constitutes one of the great challenges of the investment scene.
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FINRA requires member firms to find the market with the best price to execute their customer order. OTC Link and the FINRA's OTC Bulletin Board TM Quotation System are the two recognized inter-dealer quotation systems for facilitating electronic best execution by broker-dealers. The two quotation systems may only be used to satisfy best execution if there are two or more priced quotes in a security. If less than two priced quotes exist for a security, broker-dealers must contact three other dealers for priced quotations.
Dollar-Cost Averaging Pays
Dollar-cost averaging (DCA) is a wealth-building strategy that involves investing a fixed amount of money at regular intervals over a long period. This type of systematic investment program is familiar to many investors, as they practice it with their 401(k) and 403(b) retirement plans. When it comes to implementing investment strategies based on dollar-cost averaging, there may be no better investment vehicle than the no-load mutual fund - the structure of these mutual funds almost seems to have been designed with dollar-cost averaging in mind. Here we look at why, helping you use dollar-cost averaging when investing in mutual funds .
Review of Dollar-Cost Averaging
Dollar-cost averaging is carried out simply by investing a fixed dollar amount into your mutual fund (or other investment instrument) at pre-determined intervals. The amount of money invested at each interval remains the same over time, but the number of shares purchased varies based on the market value of the shares at the time of a purchase. When the markets are up, you buy fewer shares per dollar invested due to the higher cost per share. When the markets are down, the situation is reversed and you purchase a greater of number of shares per dollar invested. Its a strategic way to invest because you buy more shares when the cost is low, so you get an average cost per share over time, meaning you dont have to invest the time and effort to monitor market movements and strategically time your investments.
Why Dollar-Cost Averaging Works Well With Mutual Funds
The expense ratio that mutual fund investors pay to invest in a fund is a fixed percentage of your contribution. That percentage takes the same relative bite out of a $25 investment or regular installment amount as it would out of a $250 or $2,500 lump-sum investment. Compared tostock trades , for example, where a flat commission is charged on each transaction, the value of the fixed-percentage expense ratio is startlingly clear. Consider the following:
Example A
• By making a $25 installment in a mutual fund that charges a 20 basis-point expense ratio, you pay $0.05, which amounts to a 0.2% fee.
• By making a $250 lump-sum investment in the same fund, you pay $0.50, or a 0.2% fee.
Example B
• By making a $25 investment in a typical stock through a broker who charges $10 commission per trade, you pay $10, which amounts to a 40% fee.
• By making a $250 investment in a typical stock through a broker who charges $10 commission per trade, you pay $10.00, which amounts to a 4% fee.
The examples above show that you have to buy more stock in order for the percentage of the commissions to go down. In comparison, the structure of the mutual fund expense ratio makes the investment more accessible: the no-commission trading of the mutual fund coupled with low minimum investment requirements allows almost everyone to afford mutual funds.
Furthermore, many mutual funds waive their required minimums for investors who set up automatic contribution plans (plans that put dollar-cost averaging into action). All this enables low-wage earners and folks with tight budgets to invest $10 or $25 or another nominal amount on a regular basis without worrying about the impact of trading costs. While small contributions may not seem impressive at first glance, they enable investors to get into the habit of saving, and can really add up over the course of a lifetime thanks to the power of compounding.
Of course, dollar-cost averaging with mutual funds isnt a strategy that is limited to use by the less than affluent. If you have a large sum of money and invest it all at once, you face the risk that declining financial markets will take a huge chunk out of your portfolio. Dollar-cost averaging offers the perfect solution to your dilemma. To facilitate a long-term strategy for investing large sums of money, many mutual funds offer investors the ability to make a lump-sum investment in a money market fund, from which predetermined amounts are automatically invested into a designated higher-risk mutual fund at pre-arranged intervals. Its a convenient, cost-efficient solution that mitigates concerns about investing a large sum of money at the wrong time.
A Long-Term Strategy
Regardless of the amount of money that you have to invest, dollar-cost averaging is a long-term strategy. While the financial markets are in a constant state of flux, they tend to move in the same general direction over fairly long periods of time. Bear markets and bull markets can last for months, if not years. Because of these trends, dollar-cost averaging is generally not a particularly valuable short-term strategy.
Consider, for example, an investor making 10 purchases of a mutual funds shares over the course of a month. While it is unlikely that the purchase price of the shares will be identical for each transaction, it is also unlikely that they will differ significantly over such a short time frame.
On the other hand, over the course of a market cycle lasting five or 10 years and including a bull market and a bear market, the price of a given security is likely to change significantly. Dollar-cost averaging will help to ensure that your average cost per share represents both the premiumsof a bull market and the discounts of a bear market, as opposed to just the premiums usually paid by investors in a bull market.
Conclusion: Keep Costs in Mind
While low, percentage-based expense ratios make mutual funds the perfect vehicle for dollar-cost averaging, it pays to exercise caution when it comes to your investments . Some mutual funds charge low-balance fees, sales loads, purchase fees and/or exchanges fees. Be sure to read the disclosure materials prior to investing and make sure you are aware of all expenses associated with your investments.
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The opposite is true for illiquid securities. Liquidity depends on a number of forces including supply and demand, price transparency, trading history, market venue, market participants and freely tradable shares (public float).
The broker should ask you about your investment goals and personal financial situation, including your income, net worth, and investment experience, and how much risk you are willing to take on. Be honest.
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Getting Started In Stocks
So youve decided to invest in the stock market. Congratulations! In his 2005 book The Future for Investors, Jeremy Siegel showed that, in the long run, investing in stocks has handily outperformed investing in bonds, Treasury bills, gold or cash. In the short term, one or another asset may outperform stocks, but overall stocks have historically been the winning path.
Tutorial: Stock Basics
But there are so many ways to invest in stocks. Individual stocks, mutual funds, index funds, ETFs, domestic, foreign - how can you decide what is right for you? This article will address several issues that you, as a new (or not-so-new) investor, might want to consider so that you can rest more easily while letting your money grow.
Risk Taker, Risk Averse or in the Middle?
You may be eager to get started so that you, too, can make those fabulous returns you hear so much about, but slow down and take a moment to contemplate some simple questions. The time spent now to consider the following will save you money down the road.
What kind of person are you? Are you a risk taker, willing to throw money at a chance to make a lot of money, or would you prefer a more sure thing? What would be your likely response to a 10% drop in a single stock in one day or a 35% drop over the course of a few weeks? Would you sell it all in a panic?
The answers to these and similar questions will lead you to consider different types of equity investments, such as mutual or index funds versus individual stocks. If you are naturally not someone who takes risks, and feel uncomfortable doing so but still want to invest in stocks, the best bet for you might be mutual funds or index funds. This is because they are well diversified and contain many different stocks. This reduces risk - and doesnt require individual stock research. (For more insight, read Personalizing Risk Tolerance, Mutual Fund Basics and The Lowdown On Index Funds.)
Have much time and interest do you have for investing?
Should you invest in funds, stocks or both? The answer depends on how much time you wish to devote to this endeavor. Careful selection of mutual or index funds would let you invest your money, leaving the hard work of picking stocks to the fund manager. Index funds are even simpler in that they move up or down according to the type of company, industry or market they are designed to track.
Individual stock investing is the most time consuming as it requires you to make judgments about management, earnings and future prospects. As an investor, you are attempting to distinguish between a money-making stock and financial disaster. You need to know what they do, how they make their money, the risks, the future prospects and much more.
Therefore, ask yourself how much time you have to devote to this enterprise. Are you willing to spend a couple of hours a week, or more, reading about different companies, or is your life just too busy to carve out that time? Investing in individual stocks is a skill, which, like any other, takes time to develop. (For more on this research, read Introduction To Fundamental Analysis.)
Eggs in One Basket
It is best that you not be exposed to only one type of asset. For instance, dont put all of your money in small biotech companies. Yes, the potential gain can be quite high, but what will happen to your investment if the Food and Drug Administration starts rejecting a higher percentage of new drugs? Your entire portfolio would be negatively impacted. (For related reading, see The Ups And Downs Of Biotechnology.)
It is better to be diversified across several different sectors such as real estate (a real estate investment trust is one possibility), consumer goods, commodities, insurance, etc., rather than focusing on one or two or three, as above. Consider diversifying across asset classes, as well, by keeping some money in bonds and cash, rather than being 100% invested in stocks. How much to have in these different sectors and classes is up to you, but being invested more broadly lessens the risk of losing it all at any one time. (For more insight, check out Introduction To Diversification.)
A Portfolio for Beginners
If you are just starting out, think seriously about investing most of your money in a couple of index funds, such as one tracking the broad market (e.g. the S
Equity Securities, including OTCQX, OTCQB and Pink Sheets securities, which improves pricing for investors and results in greater volumes and better overall liquidity. In 2008 FINRA expanded the rule to cover real-time trade reporting and dissemination of trade reports to include OTC ADRs and Foreign Ordinary shares.
The Alphabet Soup Of Stocks
If youve ever watched financial TV or read financial papers, you may have heard of classifications like cyclical, growth and income stocks . As if the difference between preferred and common stocks wasnt enough, there are now more categories to add to the confusion! In this article, well try to replace the confusion with some clarity and logic.
Stocks and the Business Cycle
Many stocks can be broken into categories that denote the way in which different stocks perform during various times of the year or periods of the business cycle:
• Seasonal - These companies are characterized by the different levels of demand they face throughout the year. A snow shovel manufacturer, for example, is probably not very busy in the summer. Another seasonal effect is the increase in retail sales during the holidays. Butinvesting in seasonal stocks doesnt mean that you can automatically gain a healthy profit simply by purchasing a retail stock in the fall and selling it just after Christmas - not all seasonal stocks are guaranteed to do well, even during their peak seasons. When you analyzefinancial statements for a seasonal stock , you need to compare results to the same season of the previous year. (For related reading, see Analyzing Retail Stocks.)
• Non-Seasonal - These stocks are not affected by the change of seasons. Certain companies produce or sell goods that have what we call an inelastic demand curve. A good example is a peanut butter manufacturer - the demand for peanut butter is generally not affected by the weather or holidays.
• Cyclical - These companies, whose business activities intensely follow the business cycles of the economy, are always the first stocks to reflect a recession or an expansion. These companies dont necessarily intend to follow the business cycle, it just so happens that their products share this relationship with the economy. A good example of a company with cyclical stock would be a car manufacturer or an airline company. Luxury is one of the factors in the relationship between these stocks and the business cycle. Take Porsche, for example: when the economy is doing well, the sales of these fine automobiles rise. Conversely, when the economy goes into a slump, sales slow down.
• Non-Cyclical - This is the opposite of a cyclical stock. Profits of a non-cyclical stock do not change readily with the business cycle. These are companies that provide us with essentials, such as healthcare and food. Also referred to as defensive stocks, these stocks dont rely on the economic environment for increased sales. A perfect example is the diaper industry: regardless of whether the economy is busting or booming, parents have to buy diapers for their babies.
• Stocks and Dividends
Adding to the confusion, stocks are also classified according to their type of dividend payout schemes. Now remember, this is separate from what we have already discussed. Dividend payouts have little to do with the seasonal demands a company faces; instead, they are determined by each companys individual policies and objectives.
• Growth
- Growth stocks are known for their lack of dividends and rapidly increasing market prices. Defined by their tendency to grow faster than the market, these companies generally reinvest all earnings into infrastructure in order to maintain rapid growth, rather than directly paying out their earnings to investors. Young technology companies are often considered to be high growth, but the main characteristic of growth companies is that they believe that plowing earnings back into the research and development of new products benefits shareholders more than a dividend check every three months.
• Income - These stocks arent (usually) growth hungry, or theyve already reached their maximum growth potential. Income stocks prices do not tend to fluctuate a great deal. However, they do pay dividends that are higher than average. The value of an income stock depends on its reliability and track record in paying dividends. Generally, the longer a company has maintained dividend payments, the greater its value to investors. Historical examples of income stocks are real estate investment trusts (REITS) and utility stocks, many of which pay out annual dividends of 5% or more. (Learn how dividends benefit investors in The Power Of Dividend Growth.)Stock Slang Terms
Finally, the financial industry uses many slang terms to describe and categorize stocks. These terms arent always intuitive, but they do have their place in the financial world. Here are some of the many terms used to characterize stocks:
• Blue Chip – These are companies that are cream-of-the-crop, old-school and everlasting. Blue chips tend to be market mammoths, and have proven their ability to survive through both good times and bad. The term comes from poker, where blue chips are the ones with the highest value. These companies are generally expensive to purchase but can be safe bets. General Electric (NYSE:GE), Wal-Mart (NYSE:WMT) and IBM (NYSE:IBM) have all established themselves as blue chips.
• Penny Stock - The term penny stock is used to denote stocks that trade for less than a dollar, but can also refer to stocks that are considered very speculative. These stocks are generally new to the market, with no reputation or history to fall back on. Penny stocks present the possibility of large gains or losses. (For related reading, check out Spot Hotshot Penny Stocks.)
• Bo Derek – This is a term created by traders in the late 70s to describe the perfect stock. Back then, actress Bo Derek was considered the perfect 10. This slang term might be a little dated for a new generation of investors, as Bo Derek was famous in another era.
Conclusion
Now, how do these terms fit with one another you might ask? Well, next time you hear a cyclical income stock referred to as a real Bo Derek, youll know what it means. A stocks categorization can be varied and prone to change in different situations. Stocks that were once speculative may become blue chip, cyclical stocks can become non-cyclical due to some widespread economic changes and seasonal stocks may reduce their exposure to seasonal pressures by exporting goods. Changing times mean that dynamic companies will change their visions and goals. The important thing is to not only remember what category a stock falls under, but also how it compares to other stocks of the same group.
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Designed for companies with financial reporting problems, economic distress, or in bankruptcy to make the limited information they have publicly available. The Limited Information category also includes companies that may not be troubled, but are unwilling to provide disclosure pursuant to to OTC Pink Basic Disclosure Guidelines. Companies in this category have limited financial information not older than six months available on the OTC Disclosure
The Wall Street Animal Farm: Getting To Know The Lingo
Many people are intimidated by the business news because they dont understand the vernacular. Bull? Bear? Ostrich?!! What does this have to do with money? But theres good news: Wall Street language isnt only for business elites with advanced degrees from Ivy League schools. In fact, you may be surprised to find out that most Wall Street lingo is neither sophisticated nor esoteric. Yes, the truth is that investment bankers and brokers typically use words you probably mastered in kindergarten. Lets take a look at these barnyard words from a financiers perspective - youll be fluent in no time.
A Dog With Fleas
Depending on your movie knowledge, you may remember this classic line in the 1987 movie Wall Street : Its a dog with fleas, kid. That was how Gordon Gekko described a stock tip from a young, ambitious stockbroker named Bud Foxx. A dog is an underperforming stock or asset. Most Wall Street investors think of dog as a four-letter word, but a few are attracted to the dogs of the market. An investment philosophy called the dogs of the Dow theory advocates purchasing the most beaten-down stocks in the Dow Jones Industrial Average (DJIA) each year. According to this theory, by purchasing the stocks with the highest dividend yields in the Dow 30, investors can expect returns in the 13% range over a 15-year period.
Bear
The term bear refers to the given market conditions. Bull and bear are probably the most familiar terms on Main Street. Bear markets are rife with pessimism and negative sentiment. Typically, a bear market is one that has experienced declines of at least 15-20% and lasts more than two months. Probably the most famous bear markets occurred in 1929, which some believe caused the Great Depression. Unfortunately, economic indicators in 2008 have drawn comparisons to the Great Depression of 1929. The severe housing and credit bubbles originating in the first decade of the new millennium in the United States burst abruptly in 2007, and this credit unwinding, or deleveraging had a negative ripple effect on economies and markets worldwide. Venerable institutions, such as Bear Sterns and Lehman Brothers were wiped out by this bear market . Stock markets across the globe also experienced severe downturns. Governments engineered financial rescue packages for many large banks and insurance giants to avoid global financial markets meltdowns.
While there is no clear-cut strategy for investors in terms of surviving a bear market, many financial advisors suggest that bear markets occur as part of the normal economic and business cycle. For longer-term investors, these bear markets could be viewed as buying opportunities. Other advisors may recommend selling stocks and raising cash until a clear direction or bottom of the market begins to appear. (To learn more, read Adapt To A Bear Market.)
Bull
The term bull refers to a very positive stock market environment in which stock prices are increasing and money is flowing into stocks. Investor confidence is high in bull markets. During the 1990s and through early 2000, the U.S. stock market experienced a sustained bull market in stocks. Perhaps the poster child for the technology bull market of the 1990s was Cisco Systems (Nasdaq:CSCO). Cisco was experiencing tremendous growth due to the internet boom, and the stock returned nearly 75,000% from 1990 to 2000. Similarly, America Online (AOL) returned 480% in just six months. Bull markets can be very powerful creators of wealth for the average investor as well as Wall Street gurus. (For related reading about stock returns during bull markets, see The All Equities Portfolio Fallacy.)
Ostrich
An ostrich is an investor who fails to react to critical situations or events that are likely to impact his or her investment. For example, if the Securities and Exchange Commission (SEC) is launching an investigation into a company, an action that could be detrimental to the companys stock price, the ostrich will simply ignore this news. The ostrich effect is one in which investors bury their heads in the sand, hoping for better days ahead. Ostriches appear (or disappear) most frequently during bear markets, when people tend to experience the most financial stress.
Pig
A pig is any investor who puts greed ahead of his or her investment principles or sound strategies. Anyone who watches investment guru Jim Cramer knows one of his most famous expressions: Bulls make money, bears make money and pigs get slaughtered. A pig tends to think that a 100% return over a 12-month period is not good enough. As a result, the pig may then go and borrow money on margin or mortgage his or her home to buy more of a stock at a higher price with the hope of making more money on the investment. The pig can get slaughtered if the stock drops and all the original gains are lost.
Smart investors are disciplined investors. Professional investors know when to take profits as well as when to cut their losses. Their primary concern is the preservation of capital and not necessarily hitting a home run every time they step up to the plate.
Sheep
A sheep is an investor who has no strategy or focus in mind. This type of person simply listens to others for financial advice, and often misses out on the most meaningful moves in the market as a result. For example, sheep investors who had a philosophy of only buying value stocks in the 1990s missed one of the greatest bull markets of our time. In other words, a sheep can be eaten by a bull or bear if he or she isnt in the right place in the market.
Conclusion
Dont assume that you cant learn trader-talk or Wall-Street-speak just because you dont work there. In fact, picking up the lingo may be more of an exercise of your animal knowledge instead of your investment savvy. Learning these terms can help you gain some insight into the world of words on Wall Street. Surprisingly, youll find that they arent different much from the words heard on Main Street - or in kindergarten classrooms across America.
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The most difficult decision is the investment decision which should be based on thorough research on the company and security. OTCMarkets.com provides investors with comprehensive, in-depth data, including trade data, company news, and company financials to help facilitate an investor’s investment decisions.
6 Proven Methods For Selling Stocks
Choosing a time to sell a stock can be a very difficult task. It is especially difficult because, for most traders, it is hard to separate their emotions from their trades. The two human emotions that generally affect most traders with regards to selling a stock are greed and fear of regret. The ability to manage these emotions is key to becoming a successful trader.
Rising Profits
For example, many investors dont sell when a stock has risen 10 to 20% because they dont want to miss out on more returns if the stock shoots to the moon. This is due to their greed and the hope that the stock they picked will be a big winner. On the flip side, if the stock fell by 10 to 20%, a good majority of investors still wont sell because of their fear of regret. If they sell and the stock proceeds to rebound significantly, theyll be kicking themselves and regretting their actions.
So when should you sell your stock? This is a fundamental question that investors constantly struggle with. You need to separate out the emotion from your trading decisions. Fortunately, there are some commonly used methods that can help an investor make the process as mechanical as possible. In this article, I will look at six general strategies to help decide when to sell your stock.
Valuation-Level Sell
The first selling category well look at is called the valuation-level sell. In the valuation level sell strategy, the investor will sell a stock once it hits a certain valuation target or range. Numerous valuation metrics can be used as the basis, but some common ones that are used are the price-to-earnings (P/E) ratio, price-to-book (P/B), and price-to-sales (P/S). This approach is popular among value investors who buy stocks that are undervalued. It can be a good signal to sell when a stock becomes overvalued based on certain valuation metrics.
As an illustration of this method, suppose an investor holds stock in Wal-Mart that they bought when the P/E ratio was around 13 times earnings. The trader looks at the historical valuation of Wal-Mart stock and sees that the five-year average P/E is 15.5. From this, the trader could decide upon a valuation sell target of 15.5 time earnings as a fixed sell signal. So the trader has used a reasonable hypothesis to take the emotion out of his decision making. (For more on the P/E, see Profit With The Power Of Price-To-Earnings.)
Opportunity Cost Sell
The next one well look at is called the opportunity cost sell. In this method, the investor owns a portfolio of stocks and would sell a stock when a better opportunity presents itself. This requires a constant monitoring, research and analysis on both your own portfolio and potential new stock additions. Once a better potential investment has been identified, the investor would reduce or eliminate a position in a current holding that isnt expected to do as well as the new stock on a risk-adjusted return basis.
Deteriorating Fundamentals Sell
The deteriorating fundamental sell rule will trigger a stock sale if certain fundamentals in the companys financial statements fall below a certain level. This sell strategy is slightly similar to the opportunity cost in the sense that a stock sold using the previous strategy has likely deteriorated in some way. When basing a sell decision on deteriorating fundamentals, many traders will focus mainly on the balance sheet statement with emphasis on liquidity and coverage ratios. (Learn more about the balance sheet in Breaking Down The Balance Sheet.)
For example, suppose an investor owns the stock of a utilities company that pays a relatively high and consistent dividend. The investor is holding the stock mainly because of its relative safety and dividend yield. Furthermore, when the investor bought the stock, its debt-to-equity ratio was around 1.0 and its current ratio was around 1.4.
In this situation, a trading rule could be established so that the investor would sell the stock if the debt/equity ratio rose over 1.50, or if the current ratio ever fell below 1.0. If the companys fundamentals deteriorated to those levels – thus threatening the dividend and the safety - this strategy would signal the investor to sell the stock.
Down-from-Cost and Up-from-Cost Sell
The down-from cost sell strategy is another rule-based method that triggers a sell based on the amount, in percent, that youre willing to lose. For example, when an investor purchases a stock he may decide that if the stock falls 10% from where he bought it at, he would sell the stock.
Similar to the down-from cost strategy, the up-from cost strategy will trigger a stock sale if the stock rises a certain percentage. Both the down-from-cost and up-from-cost methods are essentially a stop-loss measure that will either protect the investors principal or lock in a specific amount of profit. The key to this approach is selecting an appropriate percentage that triggers the sell by taking into account the stocks historical volatility and the amount you would be willing to lose.
Target Price Sell
If you dont like using percentages, the target price sell method uses a specific stock value to trigger a sell. This is one of the most widely used ways by which investors sell a stock, as seen by the popularity of the stop-loss orders with traders and investors. Common target prices used by investors are typically ones based on valuation model outputs such as the discounted cash flow model. Many traders will base target price sells on arbitrary round numbers or support and resistance levels, but these are less sound than other fundamental based methods.
Bottom Line
Learning to accept a loss on your investment is one of the hardest things to do in investing. Oftentimes, what makes investors successful is not just their ability to choose winning stocks, but also their ability to sell stocks at the right time.
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Investing In Oil And Gas UITs
The substantial rise in energy prices in the mid-2000s attracted many investors seeking aggressive growth and profits in the oil and gas industry. Although many of these investors cashed in on the gains posted by various energy and natural resources equities, exchange-traded funds (ETFs) and mutual funds , there are other alternatives available that provide more direct exposure to the energy markets.
Limited partnerships, working interests and unit investment trusts (UITs) all provide pass-through treatment of both income and deductions derived from oil and gas investments at the wellhead. This article will examine the nature and purpose of oil and gas UITs, their advantages and disadvantages, and help you decide if they should be fueling your portfolio.
Nature and Composition
By definition, oil and gas UITs are very similar to other UITs that invest in stocks or real estate. Each trust is broken down into individual units that are priced and sold to investors. Each unit represents an undivided proportional interest in all of the oil and gas properties held by the trust, and each trust has a set maturity date upon which all gains and losses from the sale of the assets are dispersed to the unit-holders.
Unlike stock unit trusts or real estate investment trusts (REITs), oil and gas UITs invest directly in either production or exploratory drilling oil and gas assets, then pass through the income and expenses realized from the actual production of oil and natural gas.
Who Should Invest in Oil and Gas UITs?
Investors who are seeking more direct, tax-advantaged exposure to oil and gas investments should consider oil and gas UITs, as the UITs can pass through deductible operational expenses and investment income that is eligible for the depletion allowance.
Energy-focused mutual funds may only buy equity interests in various oil, gas and other energy companies, but seldom offer direct participation of any kind. Energy mutual funds cannot offer pass-through treatment, and usually can only post fully taxable dividends and capital gains.
Furthermore, oil and gas UITs will not post taxable capital gains of any kind until the trust matures, unlike mutual funds that pass through capital gains annually. Aggressive investors seeking larger profits in the energy sector may also benefit from the more direct arrangement of oil and gas UITs as opposed to energy mutual funds.
Pros and Cons
One of the main advantages that holders of energy trusts enjoy is the pass-through tax status, similar to that of limited partnerships or direct working interests. As stated previously, income derived from oil and gas UITs can be eligible for the depletion deduction, and a proportional share of deductible operational expenses is passed through as well.
It should be noted that oil and gas UITs are usually riskier by nature than energy mutual funds, as any properties that cease to produce, for whatever reason, during the tenure of the trust cannot be replaced until maturity. Another factor to consider is that oil and gas units are wasting assets, as their value will automatically decline as producing properties within the trust become depleted over time. Furthermore, investor income is reduced by maintenance and operating costs associated with oil and gas production at the wellhead, such as electric fees, pumping fees and parts replacement.
Income realized from oil and gas UITs is also subject to fluctuation with the rise and fall of energy prices. This risk can be at least partially offset with an investment in both oil and gas properties within the same trust, as the prices of oil and gas do not necessarily move in lock-step.
Finally, oil and gas UITs that participate in drilling of any kind include the risk of unsuccessful development, where one or more wells that are drilled produce little or no oil or gas. This occurrence can obviously lower the value of the trust, as well as deprive the investor of income from the anticipated current production that is never realized.
How Do I Pick the Right Oil and Gas UIT?
When choosing a UIT that invests in oil and gas properties, the most important criteria for investors generally will be the level of risk inherent in the trust. Aggressive trusts that focus on exploratory drilling projects are much more speculative in nature than UITs that invest solely in producing properties. However, successful exploratory drilling also offers greater tax deductions and the potential for higher income. Moderate or conservative investors seeking a regular stream of income should probably restrict their investing to UITs that contain mature producing oil and gas fields.
The Bottom Line
Although oil and gas UITs are similar securities to REITs or trusts that invest in stocks or bonds in many respects, they offer a relatively unique set of advantages and risks to investors. Those seeking more direct exposure to the energy sector (as well as those needing tax-advantaged income) can benefit from investing in these trusts. Investors considering UITs should consult with a tax advisor to determine the efficacy of UITs given their individual tax situations.
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How To Invest When Youre Deep In Debt
Its natural that if you have some money saved or invested, you want to see it grow. There are many factors that can prevent this from happening, but for many people, one of the biggest obstacles is debt. If you have debt to deal with - be it a mortgage, line of credit, student loan orcredit card - fear not, you can still learn how to balance your debt with saving and investing .
Types of Debt
Generally speaking, having debt can make it very difficult for investors to make money. In some cases, investing while in debt is like trying to bail out a sinking ship with a coffee cup. In other words, if you have a debt on your line of credit at 7% interest, the money you are investing will have to make more than 7% to make it more profitable than simply paying down the debt. There are investments that deliver such high returns, but you have to be able to find them knowing you are under the burden of debt.
It is important to briefly distinguish the different kinds of debt here:
1. High-Interest Debt - This is your credit card. High interest is relative, but anything above 10% is a good candidate for this category. Carrying any kind of balance on your credit card or similar high-interest vehicle makes paying it down a priority before starting to invest .
2. Low-Interest Debt - This can be a car loan, a line of credit, or a personal loan from a bank. The interest rates are usually described as prime plus or minus a certain percentage, so there is still some performance pressure from investing with this type of debt. It is, however, much less daunting to make a portfolio that returns 12% than one that has to return 25%.
3. Tax-Deductible Debt - If there is such a thing as good debt, this is it. Tax-deductible debts include mortgages, student loans, business loans, investing loans and all the other loans in which interest paid is returned to you in the form of tax deductions. Because this debt is generally low interest as well, you can easily build a portfolio while paying it down.
The types of debt we will cover in this article are long-term low-interest and tax-decductible debt (like personal loans or mortgage payments). If you dont have high-interest debt or, better yet, all your debts are tax deductible, then read on. If you do have high-interest debt, youll need to pay it off before you begin your investing adventure.
Why Invest?
Debt elimination, particularly of something like a loan that will take long-term capital, robs you of time and money. In the long term, the time (in terms of compounding time of your investment) you lose is worth more to you than the money you actually pay (in terms of the money and interest that you are paying to your lender). You want to give your money as much time as possible to compound. This is one of the reasons to start a portfolio in spite of debt (but not the only one). Your investments may be small, but they will pay off more than investments you would make later in life because these small investments will have more time to mature.
The Plan
Instead of making a traditional portfolio with high and low-risk investments that are adjusted according to your tolerance and age, the idea is to make your loan payments in the place of low-risk and/or fixed-income investments. This means that you will be seeing returns from the lessening of your debt load and interest payments rather than the 4-8% return on a bond or similar investment. The rest of your portfolio should focus on the higher-risk, high-return investments like stocks. If your risk tolerance is very low, the bulk of your investing money will still be going toward loan payments, but there will be a percentage that does make it into the market to produce returns for you. (To learn how to design your portfolio, read A Guide To Portfolio Construction.)
Even if you have a high risk tolerance, you may not be able to put as much as youd like into your investment portfolio because, unlike bonds, loans require a certain amount in monthly payments. Your debt load may force you to create a conservative portfolio in that most of your money is being invested in your loans with only a little going into your high-risk and return investments. As the debt gets smaller, you can adjust your distributions accordingly. (To learn more, check out Rebalance Your Portfolio To Stay On Track.)
Conclusion
You can invest in spite of debt. The important question is whether or not you should. The answer is very personal. There is no denying that there can be benefits from getting your money into the market as soon as possible, but there is no guarantee that your portfolio will perform like it needs to. Such things depend on how adept you become at investing.
The biggest benefit of investing while in debt is psychological (as much of finance is). Paying down long-term debts can be tedious and disheartening if you are not the type of person who puts your shoulder into a task and keeps pushing until it is done. For many people who are servicing debt, it seems like they are struggling to get to the point where their normal financial life - that of saving, investing, etc. - can begin. Debt becomes like a limbo state where things seem to be happening in slow motion. By having even a modest portfolio to distract you from the tedium, you can keep your enthusiasm about your finances from ebbing. Knowing that the sun will come up and being able to see the dawn are very different experiences. For some people, building a portfolio while in debt provides a much needed ray of light.
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Should You Buy Stock Or An ETF?
After completing a thorough research of an attractive sector, you may like a couple of stocks and an exchange-traded fund (ETF) that fit your criteria. Now you need to decide, do I buy the stocks or the ETF? Investors encounter this question every day. Many are under the impression that if you buy an ETF, you are stuck with receiving the average return in the sector. This is not necessarily true, depending on the characteristics of the sector.
SEE: Building An All-ETF Portfolio
Making this choice is no different from any other investment decision. As always, you want to look for ways to reduce your risk. Of course, you want to generate a return that beats the market (create alpha.) Reducing the volatility of an investment is the general method of mitigating risk. Most rational investors give up some upside potential to prevent a potentially catastrophic loss. An investment that offers diversification across an industry group should reduce the portfolio volatility an investor is exposed to. This is one way that diversification through ETFs works in your favor.
Alpha is the ability of an investment to outperform its benchmark. Any time you can fashion a more stable alpha, you will be able to experience a higher return on your investment. There is a general belief that you must own stocks, rather than an ETF, to beat the market. This notion is not always correct. Being in the right sector can lead to achieving alpha, as well.
When Stock Picking Might Work
Industries or situations where there is a wide dispersion of returns, or instances in which ratios and other forms of fundamental analysis could be used to spot mispricing, offer stock-pickers an opportunity to exceed.
Maybe you have a good legal insight on how well a company is performing, based on your research and experience. This insight gives you an advantage that you can use to lower your risk and achieve a better return. Good research can create value added investment opportunities, rewarding the stock investor .
The retail industry is one group in which stock picking might offer better opportunities than buying an ETF that covers the sector. Companies in the sector tend to have a wide dispersion of returns based on the particular products that they carry, creating an opportunity for the astute stock picker to do well.
SEE: Analyzing Retail Stocks
For example, recently you have noticed that your daughter and her friends prefer a particular retailer. Upon further investigation, you find that the company has upgraded its stores and hired new product management people. This led to the very recent roll out of new products that have caught the eye of your daughters age group. So far, the market has not noticed. This type of perspective (and your research) might give you an edge in picking the stock over buying a retail ETF.
Company insight through a legal or sociological perspective may provide investment opportunities that are not immediately captured in market prices. When such an environment is determined for a particular sector, where there is much return dispersion, single stock investments can provide a higher return than a diversified approach.
When an ETF Might Be the Best Choice
Sectors that do have a narrow dispersion of returns from the mean do not offer stock pickers an advantage when trying to generate market-beating returns. The performance of all companies in these sectors tends to be similar. For these sectors, the overall performance is fairly similar to the performance of any one stock. The utilities and consumer staples industries fall into this category. In this case, investors need to decide how much of their portfolio to allocate to the sector overall, rather than pick specific stocks. Since the dispersion of returns from utilities and consumer staples tends to be narrow; picking a stock does not offer sufficiently higher return for the risk that is inherent in owning individual securities. Since ETFs pass through the dividends that are paid by the stocks in the sector, investors receive that benefit as well.
Often, the stocks in a particular sector are subject to disperse returns, yet investors are unable to select those securities which are likely to continue over-performing. Therefore, they cannot find a way to lower risk and enhance their potential returns by picking one or more stocks in the sector.
SEE: How To Pick The Best ETF
If the drivers of the performance of the company are more difficult to understand, you might consider the ETF. These companies may possess more difficult to evaluate technology or processes that cause them to underperform or do well. Perhaps their performance depends on the successful development and sale of a new unproven technology. The dispersion of returns is wide, and the odds of finding a winner can be quite low. The biotechnology industry is a good example, as many of these companies depend on the successful development and sale of a new drug. If the development of the new drug does not meet expectations in the series of trials, or the FDA does not approve the drug application, the company faces a bleak future. On the other hand, if the FDA approves the drug, investors in the company can be highly rewarded.
The semiconductors, certain commodities and specialty technology groups fit the category where ETFs may be the preferred alternative. For example, if you believe that now is a good time to invest in the mining sector, you may want to gain specific industry exposure. However, you are concerned that some stocks might encounter political problems harming their production. In this case, it is prudent to buy into the sector rather than a specific stock, since it reduces your risk. You can still benefit from growth in the overall sector, especially if it outperforms the overall market.
When deciding whether to pick stocks or select an ETF, look at the risk and the potential return that can be achieved. Stock-picking offers an advantage over ETFs, when there is a wide dispersion of returns from the mean. And you can gain an advantage using your knowledge of the industry or the stock.
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, and regardless of return dispersions, an ETF is your best choice
SEE: 5 ETFs Flaws You Shouldnt Overlook
The Bottom Line
Whether picking stocks or an ETF, you need to stay up to date on the sector or the stock in order to understand the underlying investment fundamentals. You do not want to see all of your good work go down the drain as time passes.
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5 Ways To Invest In Travel And Tourism
Most consumers are familiar with the travel and tourism industry from using its services for some needed rest and relaxation during family and related vacations. However, these same activities can be invested in, with many publicly-traded firms offering travel activities for the end benefit of growing the capital of their underlyingshareholders. Listed below are five areas of the travel and tourism market that could prove lucrative from an investing standpoint. It could also help committed travelers better understand the landscape and hunt down some travel deals.
Online Travel Providers
As with many industries, revenue continues to shift to the internet when it comes to providing travel and tourism services. Stock brokers have been replaced in large part with online trading platforms, while traditional travel agents have had to compete with online websites that allow consumers to shop for low prices and convenient schedules.
Leading online travel providers include publicly-traded players such as Orbitz, Priceline and Expedia. In particular, Priceline has been highly successful in driving traffic to its website to book flights and bid for cheap, last minute travel deals. Over the past five years, it has seen sales and profits grow around 20% annually. This growth has fully shown through in its stock price, which is up around 1,000% in the past five years.
Cruising
The cruise line industry has been in existence for more than a century, but still is not that widespread as a travel choice for many consumers. Carnival, the largest cruise line operator in the world, has estimated that only 3.4% of the population in North America has ever been on a cruise. The percentages are even lower in the rest of the world.
Capacity is also growing nicely; Carnival estimates the entire industry has seen average annual capacity growth of roughly 5.6 to 6.9% over the past five years.
Hotels
The hotel industry is dominated by a couple of leading international players. This includes publicly-traded firms Marriott and Starwood Hotels, as well as privately owned Hilton. These companies have largely blanketed their home United States market and are now growing internationally. In Starwoods case, 84% of its new hotel pipeline was international. These chains have also pursued the managing of properties for hotel owners, as well as timeshares where they sell the rights for consumers to use their properties for a week, or more, during each calendar year. (For additional reading, see Timeshares: Dream Vacation Or Money Pit?)
Maga-resorts
Large resort operators combine the development of hotels with other entertainment and related amenities. Publicly-traded operators in this space include Gaylord Entertainment, which owns the Opryland resort in Nashville and other properties in Texas, Florida and Maryland. It specializes in massive resorts that allow big travel groups to host conventions and other giant gatherings.
Vail Resorts owns some of the best-known ski resorts in Colorado and surrounding areas. This includes Vail Mountain, Breckenridge and Beaver Creek Resort. Of course, Walt Disney specializes in kid-friendly theme parks, hotels and entertainment complexes, such as Disney World in Florida and Disneyland in California.
Casinos
Las Vegas-style gambling is growing rapidly across Asia. Macao has grown into the largest gambling market in the world and has seen the building of massive casino resorts from Las Vegas-based firms such as Wynn Resorts and Las Vegas Sands. Both are publicly traded companies. This growth is expanding to other parts of Asia, including Singapore, and potentially Vietnam and Japan.
The Bottom Line
These are just some of the many opportunities to invest in the travel and tourism industries across the world. Overseas growth, especially in emerging market economies, should continue to outpace that in more developed markets in North America and Europe. However, as with the online travel space, there will always be pockets that are picking up market share in every part of the world. (To learn more, read An Evaluation Of Emerging Markets.)
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4 Traits Of A Great Index Fund
The average consumer has likely never heard the name, John Bogle. Bogle, founder of the Vanguard Group and creator of the first index fund, doesnt get as much love as he deserves from the investing world. The company he founded now has $1.7 trillion under management, but he was forced to retire at the mandatory age of 70 and for many industry professionals, the hope was that his retirement would silence a man who was fiercely critical of the world of mutual funds. That didnt happen.
Bogle has long said that the mutual fund world suffers from high fees and lack of accountability to shareholders, as well as too much turnover within the fund, producing extra taxes and commissions.
However, Bogle isnt just hard on the professionals. He and many others believe that trying to be a better stock picker by selecting individual stocks and trying to buy them at just the right time, is a mathematical impossibility. If everybody is trying to beat the market but everybody is the market, theyre almost trying to outsmart themselves.
SEE: Stop Paying High Mutual Fund Fees
Bogle created the index fund as a means of removing the many variables that are nearly impossible to overcome. He said of the index fund, index funds eliminate the risks of individual stocks, market sectors and manager selection. Only stock market risk remains.
However, even index funds have variables and picking the wrong funds can have the same negative effect on your portfolio as other funds. If youre planning to fill your portfolio with index funds, heres what you should look for in a high-quality fund.
1. Low Expenses
Index funds, by their nature, are low-fee instruments, but even Vanguard has funds like the 500 Index Admiral Shares, with an expense ratio of .05%, and the Global ex-U.S. Real Estate Index, which has a 0.50% ratio. Other companies have funds that are even higher.
Picking funds solely based on fees isnt an advisable strategy, but minimizing expenses as much as possible always translates to a higher portfolio balance .
2. Correlation to the Underlying Index
What good is an index fund if it isnt correlated to the market? If the S
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Get Organized With An Investment Analysis Form
When youre thumbing through annual reports, proxy statements and analyst ratings of multiple companies, the numbers can start to blur together. On top of that, once youve taken a look at all the financials a company has to offer, you can find yourself wondering what the significance is of the figures youve been looking at. Its information overload and its to be expected in any situation where fairly abstract ideas, like solvency ratios and assets per share, are thrown about in large quantities. In this article, well show you how to organize all the company information youve gathered into a readable and useful format.
Just sitting down with a bunch of financial statements isnt a very efficient or effective way of determining whether or not a company is a good investment decision. Youve got to organize your thoughts - otherwise youre just going to be spinning your wheels. Thats why creating your own investment analysis form can be one of the most valuable investment tools in your arsenal. An investment analysis form is a tool that you can use to help gather numbers and essential information needed to make an investment decision in one easy-to-use format.
Simplify Your Research
An investment analysis form is the perfect place to record key figures and pieces of information about your company as you find them in your research. This can be done on a customized form on a sheet of paper or on the computer through a spreadsheet program.
An investment analysis form allows you to better interpret your data systematically, as all of the information is collected into a standardized format. Because information is plugged in uniformly, youre guaranteed not to miss anything that you have deemed important.
An investment analysis form also allows an investor to simplify his or her research by only looking at information that is relevant to the investment decision , while throwing out any superfluous data. There are a lot of reasons why you might run into extraneous information in your research, but unless you make sure that its kept out of your investment criteria, its difficult to say whether or not unimportant information is influencing an important decision.
You can bet that investment professionals dont just go at a 10-K without a plan, and neither should you.
Collect Key Figures
Information Within the Form
The first step in developing your own investment analysis form is determining what you want to include in it. There are some figures that are essential and some that will be specific to your individual investing style.
Things like recent stock price, earnings per share (EPS), price/earnings ratio and total debt are pretty universal. Dont have an investment form that is missing an essential piece of financial information - anything that you would expect to see on the stock quote page of your favorite financial website should probably be included.
Numbers arent the only thing that belongs on the form. Youll definitely want places to write in things like products, addressed and unaddressed risk, legal troubles and the like. Your personal instincts and impressions after doing your research will be invaluable when you go back to looking at the stock a day or a year down the road, so make sure that you have a place to write them down. If you do a lot of investment research , its even easier to forget your impressions about a certain stock. Thats when having all those comments right at your fingertips is such a benefit. (Learn why it is helpful to keep a log of your instincts and actions, read Lessons From A Traders Diary.)
Now that youve got the essentials and the write-ins taken care of, dont forget the simple stuff. Have a place for the company name, the symbol and the date you did your research. Include things like state of incorporation, investor relations contact and a phone number for the main circuit board. While it may seem like a lot, it sure comes in handy when you need to reach someone to voice your concerns or just to get the latest financials from the company.
The process of creating an investment form is not a one-time deal, as you will likely make many changes over time as you hone your analysis skills.
Creating the Form
There are a couple of ways to set up your form. You can take a pen and paper and set up your spaces to write in information or, for the technically inclined, you can put it together on your computer using anything as simple as a word processor or as complex as professional page layout software.
If youd prefer to go paperless, using a spreadsheet program like Microsoft Excel can offer you quite a bit of flexibility. If you prefer to use the old-school paper method, take your form template to your closest copy center and go copy crazy. Make enough copies so that you wont have to worry about running out in the near future. That way, when they are finally ready for some analyzing, youll have all the blank copy forms youll need.
Analyze Your Investments
Once youre all set up with a form of your own, youll probably find that collecting your thoughts is a lot easier than it used to be. If you can interpret a stock quote online, you should have no problem interpreting the data youd want to include on your form. It just simplifies the process of investment analysis.
Where the idea of an investment analysis form really shines is when youre trying to scale across investments . Having information available to you in an organized way for multiple companies makes a comparison of two companies a much less impractical task and can help cement your understanding of what attributes make for an attractive investment. Just dont forget that an investment analysis form is just an aide. It wont tell you whether a particular stock is a smart investment, but it can help you organize your thoughts and data so that you can make that determination for yourself.
Conclusion
Scouring through piles of 10-Ks can be an unpleasant and confusing task, especially for a less experienced investor, but with the right tools for the job, making use of the information you collect can be all the easier. Creating your own investment analysis form can enable you to interpret the information you deem important in selecting an investment without losing your head in a sea of numbers.
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Introduction To International REITs
Investing in real estate investment trusts (REITS) has long been an excellent way for investors to diversify stock portfolios. In 2007, the global real estate market represented more than $900 billion of equity capitalization and was growing, according to the National Association of Real Estate Investment Trusts (NAREIT). For the longest time, publicly-traded real estate investment trusts were only available in the areas like the U.S. or Australia; now, more foreign countries are adopting similar structures.
Tutorial: Exploring Real Estate Investments
If youre an investor who owns U.S. REITs, you are only seeing part of the total picture. In fact, a shift toward an international REIT portfolio may be more suitable. Expanding an investment portfolio to include international real estate could open the door to potential return opportunities while further dampening portfolio risk. As is said in real estate, its all about location, location, location.
Breakdown of Global REIT Market
Before we begin to dissect the characteristics and benefits of investing in foreign REITs, let us first recap the REIT universe as a whole. A REIT is a corporation that purchases, owns and manages real estate properties and/or mortgage loans. The REIT structure is unique in that REITs are given special tax status that allows them to avoid corporate tax, as long as 90% of the income is distributed to investors. Although the REIT structure avoids double taxation to shareholders, tax losses cannot be passed through. (To read more REIT basics, see What Are REITs? and ourExploring Real Estate Investments tutorial.)
The global real estate securities market has grown significantly as both developed and developing countries move to create REIT or REIT-like corporate structures. Prior to 1990, however, only the U.S., the Netherlands, Australia and Luxembourg had adopted REIT-like structures. In 2007, according to Dimensional Fund Advisors, the global REIT market was dominated by the U.S. (55%), Australia, Great Britain and Japan. Therefore, non-U.S. REITS make up almost half of the global REIT market. The global REIT universe continues to expand; therefore, investors who limit their REIT positions to U.S.-only funds will also likely limit their opportunities. (Keep reading on this subject in The Emergence Of Global Real Estate.)
Benefits of REITs
One of the benefits of REITs when compared to direct equity real estate investments is that investors have the ability to more effectively and efficiently diversify their real estate portfolios because REITs tend to be more liquid. Of course, the biggest advantage offered by REITs is the diversification benefit. Investors strive to locate asset classes that offer low correlations to other positions in their portfolios. The lower the correlation, the lower the idiosyncratic risk. (To learn more about the benefits of diversification, see Introduction To Diversification and Risk And Diversification.)
The chart below illustrates the low correlation that REITs have to other U.S. core indexes over an extended period of time.
Monthly Return Correlation Coefficient: January 1979 to December 2006
-- Equity REIT Index S
When opening a new account, the brokerage firm may ask you to sign a legally binding contract to arbitrate any future dispute between you and the firm or your sales representative. Signing this agreement means that you give up the right to sue the firm or your sales representative in court.
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Trust In Utilities
Utilities become desirable, to both novice and seasoned investors, whenever the market or the economy is going through a downturn. Picking individual utility companies to invest in can be time consuming, and if you choose poorly, you will not take part in the benefits that investing in public utilities can provide.
Mutual funds that specialize in utility companies are most often where investors place their money. They offer instant diversification, but that comes at a price – in the form of management fees, which are normally passed along to investors. Utility trusts that operate or invest in public utilities can be a good alternative for many investors. (For more on mutual fund fees, take a look at Stop Paying High Mutual Fund Fees.)
What Are Utility Trusts?
Utility trusts are a type of income trust that are less growth focused than traditional income trusts. An income trust is simply an investment trust that holds income-generating assets; in this case, it would be utilities. The income produced is passed on to the investors (usually called unitholders). These payments are generally higher than a typical stock dividend because, relative to income trusts, non-income trusts use more of their income to fuel more growth instead of paying it out to shareholders.
Income trusts typically aim to pay out a consistent cash flow to their unitholders. It is important to remember that, like dividend-paying stocks, income trusts do not guarantee a dividend, though they strive to pay one. If the underlying business loses money, the trust can reduce or eliminate payouts altogether.
Understanding Utilities
A public utility is a company or organization that operates and maintains the infrastructure for a public service. Public utility companies are subject to state and government regulation, and can either be privately or publicly owned. The biggest difference between the two is that a privately-owned utility may be listed on a stock exchange. Prices charged by public utility companies are regulated by the state or local government. In order for a public utility to charge higher prices, it needs to get approval from a committee. However, these can often take time and have little to no guarantee that the rate increases will be approved. (To learn more about these companies, be sure to check out the Utilities Industry Handbook.)
Advantages of Utility Trusts
Public utility companies are relatively safe and constant when it comes to dividend return. This predictable dividend makes cash flows similar to a bonds cash flow, and therefore they react similarly to changes in interest rates - but not always. Also, like a bond, a higher yield generally means taking on higher risk. The income produced by the underlying utility companies held in a utility trust is easily passed along to the unit holders. The portfolio for a utility trust usually does not change often, which ensures a steady dividend stream if the underlying companies are stable.
The Government Cloud
When it comes to public utility companies, one cannot escape the role the government plays. Each utility company - whether private or public - has to deal with government regulations and red tape. The biggest trend among government in regards to public utilities is deregulation. As of September 2010, 27 states have either passed legislation or are in the process of restructuring the electric power industry (8 of those have suspended their restructuring for now).
Electric utilities have gone through the most dramatic change due to deregulation. Most public utility companies that deal with electricity no longer generate the power. Instead, they service and maintain the grid the power is delivered on. Private companies are now generating the power and selling it to the public utility companies. Investors thinking about public utilities need to be watchful of government regulations and climate when they choose this field. (To learn more about deregulation, read Free Markets: Whats The Cost?)
One concern when it comes to this sector is that, thus far, governments have been hesitant to allow public utilities to raise rates, which makes it challenging to recoup their investment in capital spending and construction of new plants. Government regulations and the restriction on rate increases is what sent the public service of New Hampshire into Chapter 11 for the construction of the Seabrook Nuclear Power Plant. Keeping an eye on the climate in Washington can help an investor looking to put their money into this sector.
When to Invest
When it comes to utilities, there are better times to buy than others, and its important to remember that public utility companies are considered a defensive play. Tough economic times usually benefit utilities, as people still need water, electricity and natural gas to flow uninterrupted, regardless of the economy.
Also, lower interest rates make the steady and high dividend yields offered by utility companies an attractive place to invest. Those interested in capturing income from their investments look to utility companies as a good place to put their money. Keep an eye on a turning market and rising rates, which typically have an inverse effect on the public utilities stock price. (For more defensive investing, read Guard Your Portfolio With Defensive Stocks.)
Green Movement
One of the biggest risks facing public utility companies is the green energy movement, and electric utility companies are feeling the pressure. Whether they create or buy the electricity, governments want the power to be created from renewable sources. This can be costly to upgrade and, with the existing government reluctance to allow public utility companies to recoup their capital expenditure through raising rates, it can hurt the dividend. Any time funds that could otherwise be paid out to shareholders in the form of dividends are instead used for improvement, lower cash flow to the investor in the short term is inevitable. So be careful if your primary interest is on a steady dividend cash flow from utilities, and the utilities are making a lot of capital expenditures instead of paying it out as dividends.
When it comes to investing in utility trusts, one must look at the portfolio and the underlying companies carefully. The risks common to public utility companies should be screened by investors looking to invest their money with a utility trust. So, if there are risks that can affect the future dividend payout of one of these utilities, steer clear of that utility trust.
Summing It All Up
Utility trusts are a great way to invest in the public utility sector. Public utilities are a great place to invest in during tough economic times and tough market conditions. Their inverse relationship with interest rates means you can still make money when the economy is not doing as well. Trusts offer an investor an easy way to quickly diversify within the public utilities sector without having the costs that are associated with mutual funds. Dividends are paid out quickly to trustees, so earning a steady income is possible.
OTC Markets cooperates fully with securities regulators and those regulators are continually working to combat fraud; however, it is not possible to eradicate fraud from the markets. Accordingly, you must be very cautious when making a decision to invest in an OTC security.
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Buy-And-Hold Investing Vs. Market Timing
If you were to ask 10 people what long-term investing meant to them, you might get 10 different answers. Some may say 10 to 20 years, while others may consider five years to be a long-term investment . Individuals might have a shorter concept of long term, while institutions may perceive long term to mean a time far out in the future. This variation in interpretations can lead to variable investment styles.
For investors in the stock market , it is a general rule to assume that long-term assets should not be needed in the three- to five-year range. This provides a cushion of time to allow for markets to carry through their normal cycles.
However, whats even more important than how you define long term is how you design the strategy you use to make long-term investments . This means deciding between passive and active management. Read on to learn more.
Long-Term Strategies
Investors have different styles of investing, but they can basically be divided into two camps: active management and passive management. Buy-and-hold strategies - in which the investor may use an active strategy to select securities or funds but then lock them in to hold them long term - are generally considered to be passive in nature. Figure 1 shows the potential benefits of holding positions for longer periods of time. According to research conducted by Charles Schwab Company in 2012, between 1926 and 2011, a 20-year holding period never produced a negative result.
Source: Schwab Center for Financial Research
Figure 1: Range of S
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