Fortune Watch

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

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

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

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

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

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

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

In simple economics, there is little distinction between savings and investments. One saves by reducing present consumption, while he invests in the hope of increasing future consumption.Therefore, a fisherman who spares a fish for the next catch reduces his present consumption in the hope of increasing it in the future.

Most of the people probably have savings accounts with ATMs to access their hard-earned cash and be able to store away any extra cash in a place a little safer than a mattress. A few of you may even have some stocks or bonds.

Let me explain why while a savings account in the bank may seem like a safer place than the mattress to store your money, in the long-term it is a losing proposition! If you open a savings account at the bank, they will pay you interest on your savings. So you think that your savings are guaranteed to grow and that makes you feel extremely good! But wait until you see what inflation will do to your investment in the long-term!

The bank may pay you 5 percent interest a year on your money, if inflation is at 4 percent though; your investment is only growing at a mere 1 percent annually.

Saving and investing are often used interchangeably, but they are quite different! Saving is storing money safely, such as in a bank or money market account, for short-term needs such as upcoming expenses or emergencies.

Typically, you earn a low, fixed rate of return and can withdraw your money easily.
Investing is taking a risk with a portion of your savings such as by buying stocks or bonds, in hopes of realizing higher long-term returns.

Unlike bank savings, stocks and bonds over the long term have returned enough to outpace inflation, but they also decline in value from time to time.The rate of returns and risk for savings are often lower than for other forms of investment.

Return is the income from an investment. Risk is the uncertainty that you will receive an expected return and preservation of capital. Savings are also usually more liquid. That is, you may quickly and easily convert your investment to cash.

The decision about which investment to choose is influenced by factors such as yield, risk, and liquidity. Investments may produce current income while you own the investment through the payment of interest, dividends or rent payments.

When you sell an investment for more than its purchase price, the profit is known as a capital gain, also called growth or capital appreciation.

Too much money in the Stock Market.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“Most people are to busy earning a living to make any money.” – Unknown

“A man who has a million dollars is as well off as if he were rich.” – Cleveland Amory

“Money is just the poor man’s credit card.” – Marshall McLuhan

“It is only by not paying ones bills that one can hope to live in the memory of the commercial classes.” – Oscar Wilde

“A bargain is something you can’t use at a price you can’t resist.” – Franklin Jones.

“Money can’t buy happiness; but POVERTY can’t buy ANYTHING.” – Anonymous

“I have enough money to last me the rest of my life, unless I buy something.” – Jackie Mason

“If it isn’t the sheriff, it’s the finance company: I’ve got more attachments on me than a vacuum cleaner.” – John Barrymoore

You Know You’re Rich When…
During a cold winter night you can’t find any more firewood so you hack the leg off your Steinway grand piano and use it to keep the fire going until your butler shows back up with something more flammable Your children play monopoly with real money.

God’s Time And Money
A preacher went into his church and he was praying to God. While he was praying, he asked God, “How long is 10 million years to you?” God replied, “1 second.” The next day the preacher asked God, “God, how much is 10 million dollars to you?” And God replied, “A penny.” Then finally the next day the preacher asked God, “God, can I have one of your pennies?” And God replied, “Just wait a sec.”

Broker
Why is the man who invests all your money called a broker?

Lending
If you lend somebody ten pounds and never see them again….. it was probably worth it.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Planning your financial future may not sound like the most glamorous of things, but it can make a huge difference. The key is to understanding the value of time.

They say death and taxes are the two things you can’t avoid. Well, they are wrong. There is a third thing – time. Time passes us by no matter how we try to fight it with exercise, diet and, in some cases, plastic surgery! From this description, it may sound as though time is a bad thing. It all depends on how you use it.

You can turn the passage of time to your financial benefit if you understand it. In truth, we live in a “now” world. Give me convenience or give me death! So many of us are used to getting things now, that the idea of doing something for a positive effect in ten or twenty years sounds ludicrous. Heck, most of us find it difficult to do such things even if we are talking about a benefit five years down the road. This is where you can make a major mistake in planning your financial future.

At its core, financial planning is really about time. The goal is to use dollars today in such a way as to maximize their future effect. Let’s look at a simple example.

The dream for many people is to own their own home. Millions of us clamor forth to find our first home and come up with the money for a down payment. We then apply for a loan, go through the application process and wait/pray for an answer. Most of us never even think about the term of the loan – the number of years it will be paid back over. We are just praying we get the financing and will worry about the detail later. This is a big mistake because it discounts time.

The traditional mortgage has a term of 30 years. This means you will be making that mortgage payment for 30 years or 360 months assuming you don’t sell it before then. Think about that for a minute. If you are 30 years old when you borrow the money, you will be making your final payment when you are 60! And they say people are unwilling to commit to things!

For a person that understands the importance of time in financial planning, a different approach is usually taken with a mortgage. Instead of a 30 year term, they go with a 15 year term. Since there is less time involved in the payback, each dollar of their monthly payment is converted into a greater percentage of principal, to wit, they pay much less interest over the length of the loan. Ah, but the monthly payment is more? Yes, but you can buy a lower price home, build up equity for five to seven years and then trade up for something nicer. You effectively have more money and a better home in five to seven years instead of the financial anchor of a 30 year mortgage. This is why understanding time is so important!

As hard as it may be, you should take into account time as a factor in your investing. If you can come to grips with the future benefits of action taken today, you will really be happy when those future benefits come around.