Design Your Portfolio to Fit You

Your investment portfolio must reflect what your money needs to do for you. If it doesn't, you may be taking too much risk with your investments or, on the other hand, you may be missing out on important growth. Either way, you and your family are the losers. Make sure your investment portfolio doesn't reflect a "one size fits all" mentality.

Asset allocation is the most important aspect of your investment strategy. It dictates the amount of dollars invested in cash, stock, bonds, real estate, or other types of investment vehicles. Your personal situation, and not that of your neighbor, determines your asset allocation. The way your money is invested should be customized for you and based on your needs.

Asset Allocation Rules

Rule #1:  Do not invest in the stock market unless you anticipate leaving the funds invested for at least five years, preferably longer.

The stock market will go up and down. This is a "fact," not a hypothesis. The history of the market shows us that money invested for a least a five-year period has a high probability of reflecting an increased value at the end of the period relative to the beginning. For a ten-year period, the probability of a gain is even greater. There are no guarantees, but investors who have the ability to stay invested over a long period of time have been rewarded for their patience.

Rule #2:  Funds that you need within a five-year period should be invested in the fixed income arena. 

With today’s low interest rates, it is difficult to think about investing in fixed income. However, that is exactly what you need to do if funds from your investment portfolio are needed to pay next year's college tuition or replace an auto in three years. Those dollars should be invested in vehicles that are expected to maintain a stable value even if the investment return is less than you would like.

Dollars needed in the next five years should not be subject to the risk of the stock market. Savings accounts, money market funds, and certificates of deposit are the most stable investments. Corporate bonds and government bonds such as Treasury bills will remain fairly constant, but can have some fluctuation in value when interest rates or economic conditions change. 

Determine the Appropriate Asset Allocation for You

The appropriate asset allocation will protect you in a down-market and assist you in an up-market. The asset allocation used in your portfolio must be based on your particular situation and not that of a co-worker or relative. The allocation must reflect your anticipated use of the funds. 

Situation: Married with two children

If you are age 35 and married with two children, ages 8 and 10, you need to save for college education, your retirement, and perhaps an addition to the house. Your 401(k) or IRA funds can be invested in the stock market since it is likely that you will not need these funds for at least twenty years or longer. The college funds can be invested in the stock market until the children reach high school, then you will want to consider a change in the allocation to invest those dollars needed in a fixed income vehicle. The money you are saving for the house addition next year must definitely be in fixed income assets only.  There is nothing more disappointing than to postpone a project because the stock market went down!

Situation: Retired married couple

If you and your spouse are age 65, your portfolio will likely be very different from the 35-year-old couple discussed above. If you plan to withdraw $30,000 per year from your investment portfolio to supplement your pension and social security, you should have at least $150,000 (five years of distribution needs) invested in fixed income. Depending on the size of your portfolio and your overall financial situation, you may want a greater amount in fixed income to provide more stability in your portfolio. 

Change your Asset Allocation with your Situation

As you move through stages of your life, your asset allocation needs to be revised to reflect your needs. Today's asset allocation should be based on your need for funds over the next five to ten years. As your future needs change, your asset allocation needs to be adjusted. "Single" with no family responsibilities to "married with children" requires a change in your asset allocation. Likewise, making a decision to retire in five years versus ten years requires a close review of your total investment portfolio.

Summary

Don't get caught thinking you should invest your funds in the same manner as your neighbor. To successfully meet your financial goals, your asset allocation must reflect your unique needs. Think it through yourself or work with your financial planner or investment advisor to assure the most important aspect of your investment portfolio is appropriate for you. - insideindianabusiness

10 Simplified Investment Management Principles

Keep these tips in mind for a greater chance of investment success.

Investors need to know the landscape so they can make good decisions with their money.

To help navigate the investment landscape and financial markets, we share 10 simple investment management principles with our clients. While past performance is, of course, no guarantee of future results, the following principles have historically correlated with a greater chance of investment success.

Diversify. Build a well balanced, low cost, globally diversified portfolio based on your risk tolerance, time horizon and investment objectives. Diversification means allocating capital in a manner that reduces exposure to any one asset class (stocks, bonds, cash, etc.) or particular risk. By investing across a variety of asset classes with, ideally, a low correlation of returns, you may have a portion of your portfolio that performs well in a good economy while another portion of your portfolio may perform well in a down economy. In doing so, you may offset the potential impact of a poor-performing asset class on your overall portfolio. Diversification will not ensure gains or guarantee against losses, but can better help to manage risk.

Stay the course. Maintain a written investment policy statement and consistent savings discipline to invest regularly during good markets and bad. Easy to say, more difficult to execute; investors love to chase returns of higher risk investments during good markets and scurry to conservative investments during down markets. Unfortunately, this often means buying high and selling low. Having a written investment discipline helps to stay the course and stick with your plan to better achieve your goals.

Invest for the long term. Time and compound returns are a powerful combination for potentially growing your wealth. Albert Einstein, who studied the mysteries of time and space, called compound interest the most powerful force in the universe. For example, a portfolio that earns a 6 percent annual rate of return will double in value roughly every 12 years and quadruple in value roughly every 24 years.

Focus on what is in your control. Amidst volatile markets, focus on what you can control by sticking to your investment plan created during calmer times. Run a Monte Carlo analysis, which simulates up and down markets of various lengths, intensities and combinations to create a realistic assessment and probability framework for achieving your goal(s).

Rebalance regularly. Regular rebalancing institutionalizes buying low and selling high by reallocating your portfolio to its original investment mix. Rebalancing may also serve as a risk management mechanism. Give your portfolio regular checkups to ensure that your target investment mix aligns with your risk profile.

Maintain liquidity. Maintaining sufficient liquid reserves may help you stay calm on the emotional roller coaster of financial markets. By setting aside emergency savings that will cover your short-term expenses, you can keep a cool head and better manage your stress during bouts of market volatility. Knowing that you have your short-term needs covered may help some investors sleep better at night.

Accept normal market volatility. Accept that market declines and fluctuations are a normal and expected part of investing and, historically, the trade off for potential long-term growth. Short-term market volatility is the friend of the long-term investor as it creates lower asset prices for purchase. To paraphrase Dean Witter, It takes courage to be optimistic about the future when pessimism abounds, but when the future is again clear, today's bargains will have vanished.

Invest incrementally. Often referred to as dollar cost averaging, invest incrementally over full market cycles rather than attempting to repeatedly time a market bottom. It is better to be generally right by investing consistently over time, rather than precisely wrong by investing all at once.

Noise is not a plan. It is imprudent to let the noise and hype of short-term events, covered aggressively in media headlines, influence long-term investment decisions. Plunge. Soar. Optimism. Panic. Greed. Trigger words and sensational headlines may cause investors to make irrational decisions, but market timing is folly.

Monitor your behavior. Investor behavior and corresponding adjustments to your asset allocation (strategy to balance risk versus reward) drive potential investment returns and impact your ability to achieve your goals. As Warren Buffett says, "The most important quality for an investor is temperament, not intellect." - money.usnews

3 Reasons to Start Investing Now

In order to secure your financial future you should start investing right now. It doesn’t really matter how much savings you have in the bank or if the economy’s doing well. Your age isn’t even of great consideration because you can never be too young or too old to invest. The most important thing is that you start investing today.

Delaying your investment plans until it’s convenient or when you feel it’s the right time may put your future at risk. You should commit to investing to achieve financial freedom. Here are three reasons why now is the best time to do it.

1. You want a comfortable retirement. One of the many reasons why people invest is that they want to live comfortably when they are no longer productive. Come to think of it, you can’t expect yourself to put your retirement on hold until you are in your 80s because you can’t afford to stop working. You owe it to yourself to prioritize and stick to your retirement plan. Invest early to ensure a comfortable and stress-free retirement.

2. You want to give your nest egg ample time to grow.  Having money in the bank is not enough to ensure financial security. You need to invest a huge chunk of your savings for it to yield significant returns. Start investing today rather than doing it later because you’re likely gain more if you start building your wealth earlier. Even if your investment grows at a slow yet steady rate, you’ll still accrue bigger, long-term investment returns.

3. You want to give yourself enough time to recover during financial setbacks. Keep in mind that investing is not without risks. When you invest, you acknowledge the possibility that things may go south and you may end up losing some of your money or all of it. When you have more time on your hands, however, you can still set things right and recoup your losses.

Time is of the essence when it comes to investing. Act on your investment plans right now so you may reap the benefits later. - streetwisejournal

Got Deep Pockets and Stout Heart? Try Alternatives

Novices, beware. Such investments help diversify risks but are highly speculative

Alternative investments, once the exclusive domain of institutional investors, are increasingly gaining traction among more sophisticated high-net-worth investors.

Eager to chase returns uncorrelated to the market, these investors are starting to turn to alternatives to diversify risks, to protect against inflation, generate income and cushion rising interest rates.

According to a 2014 McKinsey report, investors have been tilting money in recent years into alternatives with global assets hitting an all-time high of US$7.2 trillion (S$10 trillion) in 2013.

The report also said that global alternatives under management are growing at an annualised pace of 10.7 per cent, twice the growth rate of traditional investments.

But alternatives, which broadly comprise hedge funds, private equity and real estate-related investments, are not without risks.

They are highly speculative long-term investments that are less transparent, less liquid and less regulated, and with less frequent pricing and reporting.

They are, therefore, more suited for sophisticated and experienced investors willing to bear the risks, including the loss of the entire investment.





HEDGE FUND

S Hedge funds - unlike mutual funds which focus mostly on stocks and bonds - invest in a wider and more diversified pool of asset classes and financial instruments such as currencies, commodities and derivatives.

They also adopt less conventional strategies not normally available to mutual funds such as leveraging with borrowed money.


As their name implies, hedge funds are useful as a defensive investment because they aim to hedge against downside risks and generate consistent returns regardless of market conditions.

For example, as they are not constrained by an index, hedge funds are in a better position to take advantage of market dislocations such as uncertain interest rate environments in the markets that they trade.

This helps to shield investors from downside volatility, diversify risks, preserve capital and potentially increase upside returns.

From an investor's point of view, one of the most distinguishing features of hedge funds is being able to access strategies and markets that may be outside of the range that the investor may have access to. For example, they can "short sell" assets and mitigate losses when markets fall by borrowing and selling overvalued stocks, then buying them back later when prices drop.

Conversely, they can take a "long" position when the market rises by purchasing undervalued stocks which are likely to increase in value later.

They can apply unique techniques such as merger arbitrage by buying the securities of the company for sale and simultaneously selling those of the acquirer during mergers and acquisitions.

Hedge funds can also provide access to distressed securities, usually deeply discounted, during company bankruptcy.

As prospective returns from equities and bonds decline, and volatility remains elevated, we are overweight in hedge funds in portfolio allocation, in particular, multi-strategy hedge funds as they have the ability to switch between different investment strategies using the same pool of capital.

They respond to market movements by allowing portfolio managers to shift risk and allocate capital away from less attractive strategies to those that offer superior opportunities.

Investors should be aware that hedge funds do not have the liquidity of mutual funds as they typically allow redemptions only on a monthly or quarterly basis. They are also less transparent than traditional funds in the strategy and positions they take, and pose leverage risk which may result in loss of investment.


PRIVATE EQUITY

Private equity, regarded as a type of alternative asset class, is capital invested in companies that are, in most cases, not publicly listed on a stock exchange.

Typically, private equity firms will raise working capital for the company for various reasons such as restructuring, expansion or business re-engineering.

Wealthy and institutional investors will be invited to put their money into a fund set up and managed by the private equity firm.

Private equity investments are generally illiquid and require long holding periods of eight to 10 years or more.

This is because the private equity firm will invest in the company over the first half of the term and then aim to sell or exit for a profit over the second half.

This horizon enables the portfolio manager to time his entry and exit, and not be subject to the market gyrations faced by listed companies.

In return, investors can be rewarded by the illiquidity premium.

They will receive the return of capital plus a capital gain when the private equity firm exits the portfolio company. In some cases, a current yield may also be paid along the way.

We focus on private equity with exposure to emerging markets and energy sectors for reasons of falling entry prices and strong historical performance respectively.

REAL ESTATE-RELATED INVESTMENTS

Investors are most familiar with real estate, be it acquiring a piece of residential property or accessing it through listed products such as real estate investment trusts (Reits).

With soaring property values and huge demand, fund managers can provide investment access to real estate deals sourced from around the world that typically are the preserve of institutional investors.

For instance, there is rising interest from fund managers in commercial buildings with high-calibre tenants that offer the potential to deliver competitive returns from different geographies and markets. This can increase diversification and returns to the wider portfolio.

Also, since the 2008 financial crisis, as traditional bank lending has contracted, there has been a shift towards speciality financiers providing debt and loan facilities to industries such as real estate that are looking for fresh capital.

This may give investors a slightly diversified form of high-yield income - through funds participating in this restructured real estate debt - rather than simple capital gains from bricks and mortar.

Because of improving economic cycle and financing conditions in the euro zone, we are positive about the real estate-related investments in that market.

In conclusion, the alternatives market is beginning to compete with traditional asset classes for funds at a time when investors are growing in sophistication and seeking ways to increase the resilience of their portfolios and fortify against market swings.

With their growing popularity, it is not surprising that the McKinsey report projected that alternatives could comprise 15 per cent of global industry assets and produce up to 40 per cent of industry revenues by 2020.

That said, only experienced high-net-worth investors with the appropriate risk appetite and financial sophistication casting sights at the longer-term liquidity and investment horizon should consider alternatives, but not without first considering their personal circumstances, consulting their professional advisers and understanding the product features and risks. - straitstimes.com

Alternative ways to make your money work for you

Alternative investments are no longer just for the wealthy.

Savers who are tired of the paltry interest rates on offer from banks in the United Kingdom and elsewhere are pouring money into alternative investments.

Crowdfunding and peer-to-peer lending sites, which offer returns as high as 8 per cent, have been a big beneficiary of these funds, and regulations have been tightened up in recent months.

Mondo Bank, a digital “challenger" bank that attracted investment from the Tech City chairman and venture capital investor Eileen Burbidge, raised £1 million (Dh5.3m) through crowdfunding in just 96 seconds. Property Partner, another crowd funding website, offers returns of 13 per cent a year by allowing people to invest in residential buy-to-lets, without having to buy a whole house.

Stock market volatility, of which there has been plenty this year, is also another reason why investors like alternatives. Traditionally, many people look to alternative investments and the first port of call is often the safe haven of gold.

Other investments such as fine art and classic cars could increase in value but will also give pleasure.

If you are not sure that your parking is up to the responsibility of a classic car, you can also invest in a classic car fund. One of the most recent to be launched was the PHD Classic Car Fund in 2014, which gives investors the chance to drive one of its portfolio of cars for up to 50 days a year for a £200,000 investment. Each car in the portfolio is valued at more than £300,000.

Collectible items such as original film posters, first edition books, comics and magazines and many coins are likely to increase in value over a 10 to 30 year time frame.

Coins are one of the least widely collected investments, according to Knight Frank, yet have set record prices at auction recently. For example, an Edward VIII 1937 gold proof sovereign sold for £516,000 two years ago, a world record price for any Royal Mint coin produced in the UK. The had coin previously sold for £40,000 in 1984.

Jewellery is likely to at least hold its value but some pieces – particularly by classic designers such as Cartier and Tiffany – can become much more valuable than the precious metals and stones they are made off.

Wine is another investment that many people in the UK enter into, and there can be returns of 13 per cent on vintage wine. However, those who are serious about selling cases will want to get them cellared by a professional. Fine wine – like a classic car – is considered a “wasting asset" under UK tax rules, so any gains do not attract capital gains tax. 

Mini-bonds or loyalty bonds are another form of alternative investment that are popular with customers and savers.

Lancashire Country Cricket Club raised £3m to build a 150-bedroom hotel in 2014 by tapping its members and supporters for money, promising a 7 per cent equivalent return over five years.

The Jockey Club has also raised £25m from a mini-bond that tapped racing fans.

Adrian Bell at the stockbroker Canaccord Genuity attributes the rising popularity of company mini-bonds to the increasing regulation of other securities.

The incentives linked to many of the bonds – such as “cricket credits" to be spent on membership or match tickets in the case of Lancashire – are definitely part of the attraction.

But the fun of the incentive, should not cloud investors’ thinking on the risk inherent in the investment. - thenational.ae

Investment Tip: 5 Constraints to Know About Wealth Creation

An individual must look at various constraints involved before deciding on the asset class to park money.

Gone are the days when investors had only the broad categories of equities, bonds, cash and real estate for their asset allocation. Of late, a group of several investable asset classes, referred to collectively as alternative investments, has gained more prominence. Alternative investment asset classes include hedge funds of various types, private equity funds, managed or passively constructed commodity funds, artwork, and intellectual property rights.

One can further divide equities by whether the issuing companies are domestic or foreign, large or small, or whether they are traded in emerging or developed markets. However, one needs to consider the constraints on investments before deciding on which asset class he plans to park the money. Let us discuss some important investment constraints.

Liquidity constraints

Liquidity refers to the ability to turn investment assets into spendable cash in a short span of time without having to make significant price concessions to do so. The best way to find the liquidity of an asset class is to determine how long it would take to arrive into your pocket if you happened to need it today. One needs money to pay tuition, to pay for medical expenses or to fund other possible spending that requires holding of some liquid assets. Illiquid investments in hedge funds and private equity funds, which typically are not traded and have restrictions on redemptions, are not suitable for an investor who may unexpectedly need access to the funds.

Time constraints

In general, the longer an investor’s time horizon, the more risk and less liquidity the investor can accept in the portfolio. While the expected returns on a broad equities portfolio may not be too risky for an investor with a twenty year investment horizon, they likely are too risky for an investor who must fund a large purchase at the end of this year. For such an investor, government securities or a bank certificate of deposit may be the most appropriate investments because of their low risk and high liquidity at the time when the funds will be needed. While the investment in stock and bonds can be risky in the short run, time has a moderating effect on market risk.

Tax constraints

Besides an individual’s overall tax rate, the tax treatment of various types of asset classes is also a consideration in security selection and portfolio construction. For instance investors who are in the higher tax brackets may prefer tax-free bonds to taxable bonds or prefer equities that are expected to produce capital gains, which are often taxed at a lower rate than other types of income like dividends. A focus on expected after-tax returns over time in relation to risk should correctly account for differences in tax treatments as well as investors’ overall tax rates. Some types of investment such as provident fund or new pension schemes may be tax exempt or tax deferred. Similarly, investment in different types of mutual funds such as equity fund, debt fund, arbitrage funds, gold funds, etc.

Legal constraints

In addition to financial market regulations that apply to all investors, more specific legal and regulatory constraints may apply to particular type of investor. Trust, corporate, and qualified institutional investors are restricted by law from investing in particular types of securities and assets. There may also be restrictions on percentage allocations to specific types of investments in such investors.

Other constraints

Each investor, whether individual or institutional, may have specific preferences or restrictions on which securities and asset classes they can invest. Ethical preferences, such as prohibiting investment in securities issued by companies in the manufacturing or distribution of tobacco, alcohol, defence, firearm producers and environmental harmful products are not uncommon. Restrictions on investments in companies or countries where human rights abuses are suspected or documented would also fall into this category. Religious preferences may preclude investment in securities that make explicit interest payments. Unique investor preferences may also be based on diversification needs when the investor’s income depends heavily on the prospects for one company or industry. Sometimes, an investor who has founded or runs a company may not want any investment in securities issued by a competitor to that company.

One need to keep in mind the above investment constraints before actually embarking into asset allocation process.

Asset allocation

Alternative investment asset classes include hedge funds of various types, private equity funds, managed or passively constructed commodity funds, artwork, and IPRs.

One can further divide equities by whether the issuing companies are domestic or foreign, large or small, or whether they are traded in emerging or developed markets.

The best way to find the liquidity of an asset class is to determine how long it would take to arrive into your pocket if you happened to need it today.

Liquid investments in hedge funds and private equity funds are not suitable for an investor who may unexpectedly need access to the funds.

Each investor, whether individual or institutional, may have preferences or restrictions on which securities and asset classes they can invest. - financialexpress

Questions to Ask Yourself Before Investing

When it comes to investing, everyone has an opinion. People can take guesses as to what stock is going to take off, which company will outperform the others and where you should place your money to do well. It can be confusing.
While there is no surefire way to approach the stock market, there are a few questions you should be asking yourself before you invest money anywhere. What investments will be good for your personal goals? Which investments will show a nice return?

I found an interesting article on Mom and Dad Money about what you should be looking for when making investments. If you ask yourself the following questions before placing your money in the stock market, they may help you make better decisions when it comes to choosing what to invest in.

Do you understand?

A stock market decision could sound like the most attractive option, but if you don’t understand the decision you are making, it won’t make a difference. If the person explaining your stock options to you can’t explain it in a way that you can understand, don’t invest. Understanding what your investment is and what it may do is key to sticking it out through good and bad, which is the hardest part of investing. Without a good understanding of your investment, you may be more likely to bail at the first sign of trouble (and that could cost you a pretty penny).

Does it fit your plan?

Set a personal goal for your investments. Once you’ve put your personal investment plan into action, you will know what you should invest in. Bloggers at Mom and Dad Money, LLC compare this decision to food. “Imagine making a meal by throwing all your favorite foods into one big pot…. adding them together would probably be pretty gross.” The same goes for investing. You don’t throw together a bunch of great investments, you pick investments that will work well together. For instance, if you have some higher-returning investments in your account, they are more likely to have down moments. Your more conservative investments in your portfolio will even out the down time. This will provide a lower return in the long run, but it will provide balance (if that is what you are seeking). Just make sure your investments fit your overall plan.

Investing takes time, do you have it?

Warren Buffett once said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” With the mass amount of information about the stock market available, it is easy to want to make short-term investments. Investors who succeed in the stock market are investors that put their money into a company or stock that they want to hold forever.

Have you done your research?

Making an investment is a big decision. You will want to do plenty of research prior to making a decision. What is the company’s track record? What kind of data do they have to back up their findings? If you talk to someone and they simply talk about projections and back-tested returns, run! These are predictions and guesses as to how the company or stock will do in the future, they are not for-sure. Invest in something that has a good track record and not just predictions.

Do you understand the risk?

There is an inherent risk when investing. For instance, if you place your money with one company, the company could go bankrupt and you could lose every cent you invested. You can place your money in a diversified portfolio, but you will likely have a smaller return. However, when it comes to deciding which company or stock to place your money, always choose the option with the smaller downside. Again, this will all depend on your personal investment goals.

Are you planning ahead?

If you are looking at investing, you are likely planning ahead for something. However, you have to think ahead in terms of the stock market. Ask yourself if the investment will be easy to get out of if you need to pull your money out. The easier it is to get out of, the less overall risk there is. Also, question whether or not you need to open the new investment. Is your stock portfolio fine the way it is, considering your personal goals?

Bottom line when it comes to investing is to do your homework and make sure your personal needs are being met. Happy investing! - savingadvice