Unless you have the time to do the proper research, one of the best and safest ways to invest in commodities is through a commodity mutual fund.
Commodity mutual funds are a great way to diversify your investment portfolio, in a way that complements stocks and bonds.
You can not only make a significant amount of money by doing this, but you can also hedge against losses because commodities tend to move in the opposite direction of stocks. Not always, but it is a general rule you can count on most of the time.
There are a variety of commodity mutual funds to invest in, and here are a few to understand and consider.
First of all there is the fund that holds the actual physical commodity it has invested in.
These types of funds will take ownership of things like gold and silver, and then issue units against them.
Another type of commodity mutual fund is one that buys futures contracts, where owning the specific commodity isn't a part of the picture.
These funds are operationally tracking funds, which track an underlying index, which of course is tracking the actual price movement of the commodities themselves.
Another thing to understand with these types of funds are they hold debt like US Treasury bonds, with which they can use to pay expenses if they choose to.
Another way of investing in a commodity mutual fund is through a fund set up specifically to invest in the stock of a company producing a commodity. They could be mining or agricultural companies, etc. Most investors understand this, but it is still a very good way of partaking in the commodity market.
So it's really not that difficult to understand, and if you follow the markets or choose a fund with a quality fund manager to manage the fund, you have really good chances at beating the stock market.
One must be able to live with the wide swings at times though, which is why I talked earlier about it not being for the weak at heart.
Even commodity mutual funds can move in large swings, and that should be understood so we don't just move in and out of commodities at a whim, and lose the value of sticking with it.
We always must remember to include a stop when we're investing in commodities, and need to put a stop loss in place to manage the risk we're taking on.
It's important to understand the basic way investing in commodities is done, as it helps us to ask the right questions of fund managers, which can put a healthy check and balance in place, so they don't think they can do anything they want without you checking up on them.
People across all professions admit that those taking the most interest in what they're involved in get the most attention, and it does counter the idea of just doing whatever they want. That's a good thing when its your money and future at stake
courtesy of http://EzineArticles.com/?expert=Taylor_Raimee
Tuesday, September 15, 2009
Wednesday, September 2, 2009
The Truth About Mutual Fund Fees
Have you ever been "fee'd" to death? It's probably happening to you right now by the mutual fund industry, and you don't even know it. The worst part: the fees are deceptive, and you probably wouldn't pay them if you knew the truth.
The fee game involves getting "fee'd" to death by the mutual fund industry, what I like to call the "industrial-investment complex."
Here's some background: The fee that is charged is always presented as a percentage of assets under management. It's really smart for the mutual fund industry to do this. If they're managing a thousand dollars and their fee is 1 %, they're going to get $10. But if they're managing a billion dollars, the fee for assets under management is still the same percentage. It's still that small 1%. So the investor is thinking "Oh, wow, that's only 1%, that's small for all that service."
As the mutual fund industry has grown over the past 20 years, they manage more and more money; $10 trillion today, which comes to $500 billion in potential fees each year. That small fee that's shown as a percent of assets under management never looks that large. That's a main reason why investors think, "Oh wow, this is cheap and not that much" when, in fact, it's very expensive. Seemingly small percentages, added up and compounded over time, make a huge difference for your investments. Every unnecessary investment expense that recurs time and time again cuts deeply into your returns.
A much more equitable fee would be a percentage of income, or a percentage of performance. So if the fund grows its client's money 10%, it would charge the fee to performance and not the fee for assets under management. If it loses 40%, there would be a negative fee to performance. This would give a very accurate, absolute fee structure; however, the mutual fund industry would never do this because it would cut into their profits and show clients the truth, which is that fees are very, very expensive, and they are not good at growing your money.
There are also fees that you probably don't even see or know about. One of these is called the direct brokerage fee. This is how mutual fund companies pay inflated trading costs to their "preferred brokers." These preferred brokers are organizations that help the mutual fund industry sell and market their funds. So the mutual funds turn around and do business with them at an inflated rate. Basically, they're paying a higher rate than they have to.
Then there's what's called the principal-agent problem. This means the agent's attention is not on what is best for their client, but on what is best for the agent. What applies here is that they're not getting the best price for you. Instead of getting the best trading price that the public could get, they're giving business to a company based on how well they succeed at marketing to you, the investor.
Here's an example: In 2001, when the mutual fund industry was a lot smaller than it is today, America Funds, one of the largest fund companies in the world, paid out $34 dollars in direct brokerage fees. The brokers receiving these fees were selected purely because of "excellence" at marketing their funds to investors. That's an extra $34 million they paid out to organizations that helped sell their funds. That's a hidden fee that the mutual fund companies absolutely do not have to disclose for what it truly is: a sales commission.
It's completely bogus to pay these sums as brokerage commissions, but they do because it puts their funds at the top of a list, a list that your 'financial advisor' will promote to you. While this shows up on the books in such a way that it looks like the cost of conducting stock transactions, it's really a form of sales incentive that the clients end up paying for so that the mutual funds get sold to them. The brokers who sell the most mutual funds get a disproportionately large percentage.
The mutual fund industry calls this a brokerage commission, but it's really a sales commission. These are not investment companies; these are sales organizations masquerading as investment companies. What they are selling and trading is your future. You have to do something about it so your future isn't another pawn on a chess table. The first step in taking control of your financial future is to begin to understand the myths that are holding you back.
courtesy of http://EzineArticles.com/?expert=Ronald_Peck
The fee game involves getting "fee'd" to death by the mutual fund industry, what I like to call the "industrial-investment complex."
Here's some background: The fee that is charged is always presented as a percentage of assets under management. It's really smart for the mutual fund industry to do this. If they're managing a thousand dollars and their fee is 1 %, they're going to get $10. But if they're managing a billion dollars, the fee for assets under management is still the same percentage. It's still that small 1%. So the investor is thinking "Oh, wow, that's only 1%, that's small for all that service."
As the mutual fund industry has grown over the past 20 years, they manage more and more money; $10 trillion today, which comes to $500 billion in potential fees each year. That small fee that's shown as a percent of assets under management never looks that large. That's a main reason why investors think, "Oh wow, this is cheap and not that much" when, in fact, it's very expensive. Seemingly small percentages, added up and compounded over time, make a huge difference for your investments. Every unnecessary investment expense that recurs time and time again cuts deeply into your returns.
A much more equitable fee would be a percentage of income, or a percentage of performance. So if the fund grows its client's money 10%, it would charge the fee to performance and not the fee for assets under management. If it loses 40%, there would be a negative fee to performance. This would give a very accurate, absolute fee structure; however, the mutual fund industry would never do this because it would cut into their profits and show clients the truth, which is that fees are very, very expensive, and they are not good at growing your money.
There are also fees that you probably don't even see or know about. One of these is called the direct brokerage fee. This is how mutual fund companies pay inflated trading costs to their "preferred brokers." These preferred brokers are organizations that help the mutual fund industry sell and market their funds. So the mutual funds turn around and do business with them at an inflated rate. Basically, they're paying a higher rate than they have to.
Then there's what's called the principal-agent problem. This means the agent's attention is not on what is best for their client, but on what is best for the agent. What applies here is that they're not getting the best price for you. Instead of getting the best trading price that the public could get, they're giving business to a company based on how well they succeed at marketing to you, the investor.
Here's an example: In 2001, when the mutual fund industry was a lot smaller than it is today, America Funds, one of the largest fund companies in the world, paid out $34 dollars in direct brokerage fees. The brokers receiving these fees were selected purely because of "excellence" at marketing their funds to investors. That's an extra $34 million they paid out to organizations that helped sell their funds. That's a hidden fee that the mutual fund companies absolutely do not have to disclose for what it truly is: a sales commission.
It's completely bogus to pay these sums as brokerage commissions, but they do because it puts their funds at the top of a list, a list that your 'financial advisor' will promote to you. While this shows up on the books in such a way that it looks like the cost of conducting stock transactions, it's really a form of sales incentive that the clients end up paying for so that the mutual funds get sold to them. The brokers who sell the most mutual funds get a disproportionately large percentage.
The mutual fund industry calls this a brokerage commission, but it's really a sales commission. These are not investment companies; these are sales organizations masquerading as investment companies. What they are selling and trading is your future. You have to do something about it so your future isn't another pawn on a chess table. The first step in taking control of your financial future is to begin to understand the myths that are holding you back.
courtesy of http://EzineArticles.com/?expert=Ronald_Peck
Saturday, August 22, 2009
My Secret Mutual Fund Investing Strategy Revealed
As a financial planner I was probably a little over-cautious about making sure that my clients did not lose money. But then, rule number one was that clients don't like to lose money. So, I developed a mutual fund investing strategy that I never shared with anyone ... until now. I'll tell you how it works by way of a true story.
In 1987 I sat down with a new client who had about $100,000 in an IRA, 100% of which was invested in stock funds. Jeff was a dentist, and being self-employed wanted help because he really didn't know how to invest, and his IRA was going to be a significant part of his future retirement security.
At that point in time I was very uncomfortable with the stock market. Jeff was very uncomfortable with his present adviser because he was losing money with him.
He wanted me as his adviser, and wanted to rollover his IRA as a first step in our new relationship. I told him that I was with him all the way, but first there was one thing I wanted him to do as I handed him the telephone. I had his current mutual fund statement in front of me, and had him dial the toll-free service number.
"Tell them to transfer all of your money to their safe money market fund," I suggested, and he did. I wanted him to do this because, like I said, I was not comfortable with market conditions and a rollover can take weeks before the paperwork goes through and the transfer of money actually takes place. I did not want him to lose his shirt in the interim.
I set the paperwork up so that all of the money that went into his new IRA with me went into OUR money market fund. This transaction would pay me exactly zero in commissions, because money market funds are very safe and very liquid and flexible. However, they pay the representative (me) zero.
Five weeks later the transfer of money took place, and it occurred at the end of the worst trading day in the history of the U.S. stock market. Stocks lost about 23% that day. Jeff saved well over $20,000, because he had been sitting safe in a money market fund when it happened.
Now, here's the investing strategy we then pursued; and how I subsequently made some commission for my efforts.
Jeff had $100,000 safely tucked away in our money market fund, and this money could be moved around at will into any other fund in the fund family. When it moved into stock or bond funds, I made a commission. Plus, we set things up so that he had money flowing into his IRA automatically each month from his checking account as new IRA contributions.
All money flowing into his mutual fund IRA went into his money market fund.
We then transferred half of his $100,000 from the money market fund equally into four different stock funds, so that he was 50% invested in stock funds. Our goal was to get him up to 75% in stock funds, keeping all four stock funds about equal, over the next couple of years. To accomplish this I set things up so that money flowed from the money market fund into each of the stock funds each month. In this way he was easing into the market over time. This is called DOLLAR COST AVERAGING.
When we reached our goal of 75% stock and 25% money market, I turned off the spigot.
Our long-term investing strategy was to maintain the 75-25 ratio, and to keep the value of the four stock funds about equal. Whenever the numbers got out of line by a few percentage points, we simply moved money around to bring them back in line. In other words, we REBALANCED his portfolio periodically.
Two powerful investing tools were employed in our investing strategy: dollar cost averaging and rebalance. Plus, Jeff had maximum flexibility in managing his total portfolio.
courtesy of http://EzineArticles.com/?expert=James_Leitz
In 1987 I sat down with a new client who had about $100,000 in an IRA, 100% of which was invested in stock funds. Jeff was a dentist, and being self-employed wanted help because he really didn't know how to invest, and his IRA was going to be a significant part of his future retirement security.
At that point in time I was very uncomfortable with the stock market. Jeff was very uncomfortable with his present adviser because he was losing money with him.
He wanted me as his adviser, and wanted to rollover his IRA as a first step in our new relationship. I told him that I was with him all the way, but first there was one thing I wanted him to do as I handed him the telephone. I had his current mutual fund statement in front of me, and had him dial the toll-free service number.
"Tell them to transfer all of your money to their safe money market fund," I suggested, and he did. I wanted him to do this because, like I said, I was not comfortable with market conditions and a rollover can take weeks before the paperwork goes through and the transfer of money actually takes place. I did not want him to lose his shirt in the interim.
I set the paperwork up so that all of the money that went into his new IRA with me went into OUR money market fund. This transaction would pay me exactly zero in commissions, because money market funds are very safe and very liquid and flexible. However, they pay the representative (me) zero.
Five weeks later the transfer of money took place, and it occurred at the end of the worst trading day in the history of the U.S. stock market. Stocks lost about 23% that day. Jeff saved well over $20,000, because he had been sitting safe in a money market fund when it happened.
Now, here's the investing strategy we then pursued; and how I subsequently made some commission for my efforts.
Jeff had $100,000 safely tucked away in our money market fund, and this money could be moved around at will into any other fund in the fund family. When it moved into stock or bond funds, I made a commission. Plus, we set things up so that he had money flowing into his IRA automatically each month from his checking account as new IRA contributions.
All money flowing into his mutual fund IRA went into his money market fund.
We then transferred half of his $100,000 from the money market fund equally into four different stock funds, so that he was 50% invested in stock funds. Our goal was to get him up to 75% in stock funds, keeping all four stock funds about equal, over the next couple of years. To accomplish this I set things up so that money flowed from the money market fund into each of the stock funds each month. In this way he was easing into the market over time. This is called DOLLAR COST AVERAGING.
When we reached our goal of 75% stock and 25% money market, I turned off the spigot.
Our long-term investing strategy was to maintain the 75-25 ratio, and to keep the value of the four stock funds about equal. Whenever the numbers got out of line by a few percentage points, we simply moved money around to bring them back in line. In other words, we REBALANCED his portfolio periodically.
Two powerful investing tools were employed in our investing strategy: dollar cost averaging and rebalance. Plus, Jeff had maximum flexibility in managing his total portfolio.
courtesy of http://EzineArticles.com/?expert=James_Leitz
Wednesday, August 12, 2009
Make Money by Watching the Best Mutual Fund Managers
There are a whole lot of mutual funds out there, and there are quite a few that aren't that impressive, but there are certainly a select few with amazing managers that seem to stand out year after year. Mutual funds are closely regulated and continually update shareholders on what stocks they have been purchasing and which they are selling, so it seems to me like more investors should be taking advantage of a nice free resource. By watching the portfolio of the best mutual fund managers you are able to get some great ideas for your own portfolio, and you can do it all for free.
Just about every major financial website give you a list of the top 10 or top 25 holdings of just about every mutual fund out there. Keep in mind that this information can be a few months old, so the manager may have been making quite a few moves since this list has taken place. Some critics use this argument as a reason for why you shouldn't pay attention to mutual fund holdings.
I understand the point, but if you are investing for any kind of long-term returns knowing what stocks are consistently in a mutual fund's top 10 can be a great tool to use. Many of the mutual fund related websites, such as Morningstar, will show you which stocks the managers have purchased more into since their last filing and which stock they have begun to trim their positions in. This information is useful because most mutual fund managers accumulate a stock over time, so it is often possible to pick up the stock as the manager is still in the accumulation phase.
What exactly makes a mutual fund manager the best? Consistent outperformance is absolutely the biggest key to being one of the best. Everyone can have a great year or two, but those who consistently are able to beat the market and their peers are the ones that you will want to follow closely. The best mutual fund managers also have a consistent strategy or theme that they use when investing, which should be apparent by looking at the moves they make in their portfolio. For example, some fund managers tend to look for companies that have fallen off the radar of most Wall Street traders, and other managers like to look for stocks that yield a high dividend.
The basis of this theory is that there so many different places that investors look for stock picks. There are stock pick message boards all over the Internet, and stock pick newsletters that charge huge amounts of money. Some of these sources may be useful, but many of them tend to fall victim to the pump and dump schemes that are so common now. On the other hand, if you are looking for information from the top mutual fund managers, why would there be any reason to doubt their motive? The mutual fund manager is trying to do his/her best to make money for investors and keep their job. A wise investor will use mutual fund portfolio holding information to help in the process of finding stocks worthy of an investment.
courtesy of http://EzineArticles.com/?expert=Jacob_Lindahl
Just about every major financial website give you a list of the top 10 or top 25 holdings of just about every mutual fund out there. Keep in mind that this information can be a few months old, so the manager may have been making quite a few moves since this list has taken place. Some critics use this argument as a reason for why you shouldn't pay attention to mutual fund holdings.
I understand the point, but if you are investing for any kind of long-term returns knowing what stocks are consistently in a mutual fund's top 10 can be a great tool to use. Many of the mutual fund related websites, such as Morningstar, will show you which stocks the managers have purchased more into since their last filing and which stock they have begun to trim their positions in. This information is useful because most mutual fund managers accumulate a stock over time, so it is often possible to pick up the stock as the manager is still in the accumulation phase.
What exactly makes a mutual fund manager the best? Consistent outperformance is absolutely the biggest key to being one of the best. Everyone can have a great year or two, but those who consistently are able to beat the market and their peers are the ones that you will want to follow closely. The best mutual fund managers also have a consistent strategy or theme that they use when investing, which should be apparent by looking at the moves they make in their portfolio. For example, some fund managers tend to look for companies that have fallen off the radar of most Wall Street traders, and other managers like to look for stocks that yield a high dividend.
The basis of this theory is that there so many different places that investors look for stock picks. There are stock pick message boards all over the Internet, and stock pick newsletters that charge huge amounts of money. Some of these sources may be useful, but many of them tend to fall victim to the pump and dump schemes that are so common now. On the other hand, if you are looking for information from the top mutual fund managers, why would there be any reason to doubt their motive? The mutual fund manager is trying to do his/her best to make money for investors and keep their job. A wise investor will use mutual fund portfolio holding information to help in the process of finding stocks worthy of an investment.
courtesy of http://EzineArticles.com/?expert=Jacob_Lindahl
Friday, August 7, 2009
What Are Exchange Traded Funds
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.
By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you'd pay on any regular order.
One of the most widely known ETFs is called the Spider (SPDR), which tracks the S&P 500
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Exchange-traded funds (ETFs) can be a valuable component for any investor's portfolio, from the most sophisticated institutional money managers to a novice investor who is just getting started. Some investors use ETFs as the sole focus of their portfolios, and are able to build a well-diversified portfolio with just a few ETFs. Others use ETFs to complement their existing portfolios, and rely on ETFs to implement sophisticated investment strategies. But, as with any other investment vehicle, in order to truly benefit from ETFs, investors have to understand and use them appropriately.
Understanding most ETFs is very straightforward. An ETF trades like a stock on a stock exchange and looks like a mutual fund. Its performance tracks an underlying index, which the ETF is designed to replicate. The difference in structure between ETFs and mutual funds explains part of different investing characteristics. The other differences are explained by the type of management style. Because ETFs are designed to track an index, they are considered passively managed; most mutual funds are considered actively managed. (For more insight, read Mutual Fund Or ETF: Which Is Right For You? and Active Vs. Passive Investing In ETFs.)
From an investor's perspective, an investment in an index mutual fund and an ETF that tracks the same index would be equivalent investments. For example, the performance of the SPDR S&P 500 ETF and a low-cost index fund based on the S&P 500 would both be very close to the to the S&P 500 index in terms of performance.
Although index mutual funds are available to cover most of the major indexes, ETFs cover a broader range of indexes, providing more investing options to the ETF investor than the index mutual fund investor.
Low Risk Investing Strategies
In the past couple years, many of us have taken some pretty big hits in our investment portfolios even in markets that we were told were "safe" or "recession proof."
I don't know about you, but I would like to get nice returns even if the market goes down. Heck, I'd settle for my portfolio staying not losing value and just staying the same during an economic downturn.
And that's what I'm going to talk about today. Some low risk investing strategies to do just that.
Understanding Risk
First, let's start off with an example of risk and why it isn't wise to risk a large percentage of your portfolio on a single trade.
There are some systems out there that have you risking 5% or even 10% of your money on a single trade. And while that's not too hard to make back, the problem occurs when you have a few bad trades in a row.
And if somebody tells you their system never has a losing trade, they're lying. Even the best will have a few losers in a row from time to time.
So let's say you have a few bad trades and your $50,000 account goes to $30,000. That's a 40% loss. Ouch.
So what return do you need to get to make back that 40% loss? Hint: It isn't 40%. It's actually 66.6% that you need to get now. I'll spare you the math, but you're welcome to do it. The reason that it's so much higher is that when you lose money you have a smaller base to work with than before.
Can you see why nearly all professional money managers are only willing to risk at most 2% on a single trade and frequently it's more like .5% or 1%.
That means even if the trader has 10 consecutive bad trades (it will happen at some point to everyone), you'll still only have lost about 20% of the account which can be made up with a few good trades. However, much beyond that 20%, and you're on dangerously thin ice.
Most people think mutual funds and bonds when they want low risk investing, however, exchange fund trading offers a lot of the same benefits that mutual funds do, but with better liquidity, lower fees, and intraday trading ability.
Thanks to Gary_Ruplinger for the article
I don't know about you, but I would like to get nice returns even if the market goes down. Heck, I'd settle for my portfolio staying not losing value and just staying the same during an economic downturn.
And that's what I'm going to talk about today. Some low risk investing strategies to do just that.
Understanding Risk
First, let's start off with an example of risk and why it isn't wise to risk a large percentage of your portfolio on a single trade.
There are some systems out there that have you risking 5% or even 10% of your money on a single trade. And while that's not too hard to make back, the problem occurs when you have a few bad trades in a row.
And if somebody tells you their system never has a losing trade, they're lying. Even the best will have a few losers in a row from time to time.
So let's say you have a few bad trades and your $50,000 account goes to $30,000. That's a 40% loss. Ouch.
So what return do you need to get to make back that 40% loss? Hint: It isn't 40%. It's actually 66.6% that you need to get now. I'll spare you the math, but you're welcome to do it. The reason that it's so much higher is that when you lose money you have a smaller base to work with than before.
Can you see why nearly all professional money managers are only willing to risk at most 2% on a single trade and frequently it's more like .5% or 1%.
That means even if the trader has 10 consecutive bad trades (it will happen at some point to everyone), you'll still only have lost about 20% of the account which can be made up with a few good trades. However, much beyond that 20%, and you're on dangerously thin ice.
Most people think mutual funds and bonds when they want low risk investing, however, exchange fund trading offers a lot of the same benefits that mutual funds do, but with better liquidity, lower fees, and intraday trading ability.
Thanks to Gary_Ruplinger for the article
Sunday, August 2, 2009
Choosing Between Dollar Cost And Dollar Value Averaging Investing
Choosing Between Dollar Cost And Dollar Value Averaging
As investors, we face a bit of a dilemma: we want high stock prices when we sell a stock, but not when we buy. There are times when this dilemma causes investors to wait for a dip in prices, thereby potentially missing out on a continual rise. This is how investors get lured away from investing and become tangled in the slippery science of market timing - a science that few people can hope to master.
In this article, we will look at two investing practices that seek to counter our natural inclination toward market timing by canceling out some of the risk involved: dollar cost averaging (DCA) and value averaging (VA).
Dollar Cost Averaging
DCA is a practice where an investor puts a set amount of money into investments at regular intervals, usually shorter than a year (monthly or quarterly). DCA is generally used for more volatile investments like stocks or mutual funds, rather than for bonds, CDs, etc. In a broader sense, DCA can include automatic deductions from your paycheck that go into a retirement plan. For our purposes, however, we will focus on the first type of DCA.
DCA is a good strategy for investors with a lower risk tolerance. If you have a lump sum of money to invest and you put it into the market all at once, you run the risk of buying at a peak, which can be unsettling if the prices fall after the investment, which is known as timing risk. With DCA, that lump sum can be tossed into the market in a smaller amount, lowering the risk and effects of any single market move by spreading the investment out over time.
For example, suppose that as part of a DCA plan you invest $1,000 each month for four months. If the prices at each month's end were $45, $35, $35, $40, your average cost would be $38.75. If you had invested the whole amount at the start of the investment, your cost would have been $45 per share. By using a DCA plan, you can avoid timing risk and enjoy the low-cost benefits of this strategy by spreading out your investment cost.
DCA Pitfalls
All risk-reduction strategies have their tradeoffs, and DCA is no exception. First of all, you run the chance of missing out on higher returns if the investment continues to rise after the first investment period. Also, if you are spreading a lump sum, the money waiting to be invested doesn't garner much of a return just sitting there. Still, a sudden drop in prices won't damage you as much as if you had put it all in at once.
Some investors who engage in DCA will stop after a sharp drop, cutting their losses; however, these investors are actually missing out on the main benefit of DCA: the purchase of larger portions of stock (more shares) in a declining market, thereby increasing their gains when the market rises again. When using a DCA strategy, therefore, it is important to determine whether the reason behind the drop has materially impacted the reason for the investment. If not, you should stick to your guns and pick up the shares at an even better valuation than before.
Another issue with DCA is determining the period over which this strategy should be used. If you are dispersing a large lump sum, you may want to spread it over one or two years, but any longer than that may mean missing the general upswing in the markets as inflation chips away at the real value of the cash. (For more insight, see All About Inflation.)
DCA may not, however, be the best choice for a long-term investment strategy. It may not even be the best choice for dispersing a lump sum.
Enter Value Averaging
One strategy that has started to gain favor is the value averaging technique, which aims to invest more when the share price falls and less when the share price rises. It is done by calculating predetermined amounts for the total value of the investment in future periods and then making an investment to match these amounts at each future period.
For example, suppose you determine that the value of your investment will rise by $500 each quarter as you make additional investments. In the first investment period, you would invest $500, say at $10 per share. In the next period, you determine that the value of your investment will rise to $1,000. If the current price is $12.50 per share, your original position comes to be worth $625 (50 shares x $15), which only requires you to invest $375 to put the value of your investment at $1,000. This is done until the end value of the portfolio is reached. As you can see in this example, you have invested less as the price has risen and the opposite would be true if the price had fallen.
Therefore, instead of investing a set amount each period, a VA strategy makes investments based on the total size of the portfolio at each point. Below is an expanded example comparing the two strategies:
As you can see, the majority of shares are purchased at low prices. When prices drop and you put more money in, you end up with more shares (this happens with DCA as well, but to a lesser extent). Most of the shares have been bought at very low prices, thus maximizing your returns when it comes time to sell. If the investment is sound, VA will increase your returns beyond simply dollar cost averaging for the same time period. And it does so at a lower level of risk. Additionally, in certain circumstances, such as a sudden gain in the market value of your stock or fund, value averaging could even require you to sell some shares without buying any (sell high, buy low). Value averaging is a simple, mechanical type of market timing that helps to minimize timing risk.
DCA vs. VA
Choosing between the two depends on your reasons. If it is the passive investing aspect of DCA that attracts you, then stick to it. Find a portfolio you feel comfortable with and put the same amount of money into it on a monthly or quarterly basis. If you are dispersing a lump sum, you may want to put your inactive cash into a money market account or some other interest-bearing investment. If you are feeling ambitious enough to engage in a little active investing every quarter or so, then value averaging may be a much better choice.
In both these cases, we are assuming a buy-and-hold strategy - you find a stock or fund that you feel comfortable with and purchase as much of it as you can over the years, selling it only if it becomes overpriced. Legendary value investor, Warren Buffet, has suggested that the best holding period is forever. If you are looking to buy low and sell high in the short term, by day trading and the like, then DCA and value averaging are of little use. If you invest conservatively, however, it may be just provide the edge you need to meet your goals.
courtesy of Investopedia
Best Books For Dollar Value Averaging
Best Dollar Cost Averaging Books
As investors, we face a bit of a dilemma: we want high stock prices when we sell a stock, but not when we buy. There are times when this dilemma causes investors to wait for a dip in prices, thereby potentially missing out on a continual rise. This is how investors get lured away from investing and become tangled in the slippery science of market timing - a science that few people can hope to master.
In this article, we will look at two investing practices that seek to counter our natural inclination toward market timing by canceling out some of the risk involved: dollar cost averaging (DCA) and value averaging (VA).
Dollar Cost Averaging
DCA is a practice where an investor puts a set amount of money into investments at regular intervals, usually shorter than a year (monthly or quarterly). DCA is generally used for more volatile investments like stocks or mutual funds, rather than for bonds, CDs, etc. In a broader sense, DCA can include automatic deductions from your paycheck that go into a retirement plan. For our purposes, however, we will focus on the first type of DCA.
DCA is a good strategy for investors with a lower risk tolerance. If you have a lump sum of money to invest and you put it into the market all at once, you run the risk of buying at a peak, which can be unsettling if the prices fall after the investment, which is known as timing risk. With DCA, that lump sum can be tossed into the market in a smaller amount, lowering the risk and effects of any single market move by spreading the investment out over time.
For example, suppose that as part of a DCA plan you invest $1,000 each month for four months. If the prices at each month's end were $45, $35, $35, $40, your average cost would be $38.75. If you had invested the whole amount at the start of the investment, your cost would have been $45 per share. By using a DCA plan, you can avoid timing risk and enjoy the low-cost benefits of this strategy by spreading out your investment cost.
DCA Pitfalls
All risk-reduction strategies have their tradeoffs, and DCA is no exception. First of all, you run the chance of missing out on higher returns if the investment continues to rise after the first investment period. Also, if you are spreading a lump sum, the money waiting to be invested doesn't garner much of a return just sitting there. Still, a sudden drop in prices won't damage you as much as if you had put it all in at once.
Some investors who engage in DCA will stop after a sharp drop, cutting their losses; however, these investors are actually missing out on the main benefit of DCA: the purchase of larger portions of stock (more shares) in a declining market, thereby increasing their gains when the market rises again. When using a DCA strategy, therefore, it is important to determine whether the reason behind the drop has materially impacted the reason for the investment. If not, you should stick to your guns and pick up the shares at an even better valuation than before.
Another issue with DCA is determining the period over which this strategy should be used. If you are dispersing a large lump sum, you may want to spread it over one or two years, but any longer than that may mean missing the general upswing in the markets as inflation chips away at the real value of the cash. (For more insight, see All About Inflation.)
DCA may not, however, be the best choice for a long-term investment strategy. It may not even be the best choice for dispersing a lump sum.
Enter Value Averaging
One strategy that has started to gain favor is the value averaging technique, which aims to invest more when the share price falls and less when the share price rises. It is done by calculating predetermined amounts for the total value of the investment in future periods and then making an investment to match these amounts at each future period.
For example, suppose you determine that the value of your investment will rise by $500 each quarter as you make additional investments. In the first investment period, you would invest $500, say at $10 per share. In the next period, you determine that the value of your investment will rise to $1,000. If the current price is $12.50 per share, your original position comes to be worth $625 (50 shares x $15), which only requires you to invest $375 to put the value of your investment at $1,000. This is done until the end value of the portfolio is reached. As you can see in this example, you have invested less as the price has risen and the opposite would be true if the price had fallen.
Therefore, instead of investing a set amount each period, a VA strategy makes investments based on the total size of the portfolio at each point. Below is an expanded example comparing the two strategies:
As you can see, the majority of shares are purchased at low prices. When prices drop and you put more money in, you end up with more shares (this happens with DCA as well, but to a lesser extent). Most of the shares have been bought at very low prices, thus maximizing your returns when it comes time to sell. If the investment is sound, VA will increase your returns beyond simply dollar cost averaging for the same time period. And it does so at a lower level of risk. Additionally, in certain circumstances, such as a sudden gain in the market value of your stock or fund, value averaging could even require you to sell some shares without buying any (sell high, buy low). Value averaging is a simple, mechanical type of market timing that helps to minimize timing risk.
DCA vs. VA
Choosing between the two depends on your reasons. If it is the passive investing aspect of DCA that attracts you, then stick to it. Find a portfolio you feel comfortable with and put the same amount of money into it on a monthly or quarterly basis. If you are dispersing a lump sum, you may want to put your inactive cash into a money market account or some other interest-bearing investment. If you are feeling ambitious enough to engage in a little active investing every quarter or so, then value averaging may be a much better choice.
In both these cases, we are assuming a buy-and-hold strategy - you find a stock or fund that you feel comfortable with and purchase as much of it as you can over the years, selling it only if it becomes overpriced. Legendary value investor, Warren Buffet, has suggested that the best holding period is forever. If you are looking to buy low and sell high in the short term, by day trading and the like, then DCA and value averaging are of little use. If you invest conservatively, however, it may be just provide the edge you need to meet your goals.
courtesy of Investopedia
Best Books For Dollar Value Averaging
Best Dollar Cost Averaging Books
Saturday, August 1, 2009
Who Should Invest in Mutual Funds?
It's a shame that most Americans have heard about mutual funds, but few really understand them. Tens of millions of investors have money in these managed pools of investors' money, yet few of them really understand the investment options inside their fund family or 401k plan.
At the same time, some people are invested in mutual funds in their 401k, and don't even know it! Unfortunately, many folks are confused about mutual funds and investing in general. Most want to do what is best for them financially, as long as they can make more money than they can at the bank without taking much risk.
Who should invest in mutual funds? Anyone who can relate to what they just read should!
What's the difference between speculative stocks, junk bonds, stock options, commodities futures contracts vs. mutual funds? The answer is that only investors with considerable investment knowledge and investing experience should play with the likes of speculative stocks and the rest of the lot.
The rest should invest in mutual funds. This includes about 98% of the investing public. Let me get a little more specific.
If you want a safe place to invest and earn competitive interest rates, invest in money market mutual funds. You can get your money back quickly and easily with no sales charges or fees for early withdrawal.
People who want to earn higher interest with moderate risk should invest in bond funds.
Anyone who wants to participate in the stock market without picking his or her own individual stocks to invest in should invest in stock mutual funds.
All those who want a balanced portfolio of stocks and bonds should consider traditional balanced funds.
Folks who would like to be invested in gold, oil, other natural resources, or real estate should consider specialty mutual funds.
If you want to keep your decision making to the absolute minimum, you should invest in LIFECYCLE or TARGET RETIREMENT mutual funds. Here you simply tell the fund company if you want to be conservative, moderate, or aggressive in your investing. Or, tell them when you plan to retire, or if you are already retired. They manage your money accordingly, usually at a moderate cost to you.
The odds are that you should invest in mutual funds. My job is to inform people. Yours is to do some learning, and then to invest in mutual funds.
courtesy of http://EzineArticles.com/?expert=James_Leitz
At the same time, some people are invested in mutual funds in their 401k, and don't even know it! Unfortunately, many folks are confused about mutual funds and investing in general. Most want to do what is best for them financially, as long as they can make more money than they can at the bank without taking much risk.
Who should invest in mutual funds? Anyone who can relate to what they just read should!
What's the difference between speculative stocks, junk bonds, stock options, commodities futures contracts vs. mutual funds? The answer is that only investors with considerable investment knowledge and investing experience should play with the likes of speculative stocks and the rest of the lot.
The rest should invest in mutual funds. This includes about 98% of the investing public. Let me get a little more specific.
If you want a safe place to invest and earn competitive interest rates, invest in money market mutual funds. You can get your money back quickly and easily with no sales charges or fees for early withdrawal.
People who want to earn higher interest with moderate risk should invest in bond funds.
Anyone who wants to participate in the stock market without picking his or her own individual stocks to invest in should invest in stock mutual funds.
All those who want a balanced portfolio of stocks and bonds should consider traditional balanced funds.
Folks who would like to be invested in gold, oil, other natural resources, or real estate should consider specialty mutual funds.
If you want to keep your decision making to the absolute minimum, you should invest in LIFECYCLE or TARGET RETIREMENT mutual funds. Here you simply tell the fund company if you want to be conservative, moderate, or aggressive in your investing. Or, tell them when you plan to retire, or if you are already retired. They manage your money accordingly, usually at a moderate cost to you.
The odds are that you should invest in mutual funds. My job is to inform people. Yours is to do some learning, and then to invest in mutual funds.
courtesy of http://EzineArticles.com/?expert=James_Leitz
Thursday, July 30, 2009
7 Keys To Mutual Fund Investing
There are 7 basic things you should keep in mind when putting together a portfolio of mutual funds. Pay attention to these 7 key items, and you're on your way to successful investing.
1. Decide upfront whether you want to be conservative, moderate or aggressive. Don't stray far from moderate unless you are retired and adverse to risk, or young and willing to accept considerable risk for the potential of high returns.
2. Mix it up by owning stock, bond and money market funds. A moderate portfolio should be about 60% invested in stock funds, with the rest split between bond and money market funds.
3. About 60% of your stock dollars should go to diversified U.S. (domestic) stock funds, with 25% to 30% going to international funds. For the remainder consider a mix of real estate, gold, and natural resources specialty funds to add balance to your portfolio.
4. When selecting bond funds avoid long-term funds and low quality (junk) funds. These pay higher dividend yields, but carry more risk. Concentrate on intermediate-term high quality funds. Don't invest in tax-exempt funds unless you are in a higher tax bracket.
5. For the sake of safety, flexibility and liquidity, always keep some money in money market mutual funds. To be cautious in a low-interest- rate environment, make your allocation to money market funds about equal to your allocation to bond funds. Invest in tax-exempt money market funds only if you are in a high tax bracket.
6. Now, review your overall mutual fund portfolio. You should be about 60% in stock funds, 20% in bond funds, and 20% in money market funds. This will put you in a moderate position, leaning somewhat to the conservative side.
7. Keep your investing costs low. Avoid sales charges whenever possible. Look for funds with low expense ratios. No-load funds and index funds are the key to saving thousands on sales charges, fees, and expenses.
That's it, plain and simple. When your percentages get out of line as time goes on, rebalance back to 60% stock funds ... 20% bond funds ... 20% money market funds. Within the stock category, keep about 60% in U.S. funds ... 25% in international stock funds ... 15% in specialty funds.
This should keep you in the middle of the road, and on course for long-term growth with only a moderate level of risk.
courtesy of http://EzineArticles.com/?expert=James_Leitz
1. Decide upfront whether you want to be conservative, moderate or aggressive. Don't stray far from moderate unless you are retired and adverse to risk, or young and willing to accept considerable risk for the potential of high returns.
2. Mix it up by owning stock, bond and money market funds. A moderate portfolio should be about 60% invested in stock funds, with the rest split between bond and money market funds.
3. About 60% of your stock dollars should go to diversified U.S. (domestic) stock funds, with 25% to 30% going to international funds. For the remainder consider a mix of real estate, gold, and natural resources specialty funds to add balance to your portfolio.
4. When selecting bond funds avoid long-term funds and low quality (junk) funds. These pay higher dividend yields, but carry more risk. Concentrate on intermediate-term high quality funds. Don't invest in tax-exempt funds unless you are in a higher tax bracket.
5. For the sake of safety, flexibility and liquidity, always keep some money in money market mutual funds. To be cautious in a low-interest- rate environment, make your allocation to money market funds about equal to your allocation to bond funds. Invest in tax-exempt money market funds only if you are in a high tax bracket.
6. Now, review your overall mutual fund portfolio. You should be about 60% in stock funds, 20% in bond funds, and 20% in money market funds. This will put you in a moderate position, leaning somewhat to the conservative side.
7. Keep your investing costs low. Avoid sales charges whenever possible. Look for funds with low expense ratios. No-load funds and index funds are the key to saving thousands on sales charges, fees, and expenses.
That's it, plain and simple. When your percentages get out of line as time goes on, rebalance back to 60% stock funds ... 20% bond funds ... 20% money market funds. Within the stock category, keep about 60% in U.S. funds ... 25% in international stock funds ... 15% in specialty funds.
This should keep you in the middle of the road, and on course for long-term growth with only a moderate level of risk.
courtesy of http://EzineArticles.com/?expert=James_Leitz
Tuesday, July 28, 2009
Why Mutual Funds Are the Best Option For Wealth Building
Mutual funds are making a strong penetration among common people. The reason is very clear. Every individual keeps interest to make money. But, due to lack of proper knowledge they hesitate to enter into the stock markets. So, mutual funds give a good platform for common investors.
Investments in any financial instrument requires some expertise. But, if we will talk about stocks, bonds and some special financial instruments then it requires more expertise and constant supervision to enable an investor to take informed decisions.
In general, Small investors usually do not have the necessary expertise and the time to undertake any study that can facilitate informed decisions while investments. This is the predominant reason for the popularity of mutual funds. Apart from it, there are many other benefits that can be taken by investing in mutual funds.
Investors can diversify their investments by investing in mutual funds. Small investors may not have the amount of capital that would allow optimal diversification. Since the corpus of a mutual fund is substantially big as compared to individual investments, optimal diversification becomes possible. As the individual investors' capital gets pooled into a mutual fund, all of them are able to derive the benefits of diversification.
Apart from it, investors can save transaction cost by investing in mutual funds. Transactions of a mutual fund are generally very large. These large volumes attract lower brokerage commissions and other costs, as compared to the smaller volumes of the transactions entered into by individual investors. The brokers quote a lower rate of commission to fund houses. So, investors can get benefit.
Other benefits are also with mutual-funds. Mutual funds generally offer a number of schemes to suit the requirements of the investors. Thus the investors can choose between regular income schemes and growth schemes, between schemes that invest in the money market and those that invest in the stock market, etc. Some schemes provide some added advantages also.
The most important thing is mutual-funds are managed by professionals. Mutual funds are generally managed by knowledgeable, experienced professionals whose time is solely devoted to tracking and updating the portfolio. Thus, investment in a mutual fund not only saves time and efforts for the investor, it is also likely to produce better results.
Liquidating a portfolio is not always easy. There may not be a liquid market for all the securities held. In case only a part of the portfolio is required to be liquidated, it may not be possible to sell all the securities forming part of the portfolio in the same proportion as they are represented in the portfolio. These problems can be solved by investing in a mutual fund. A mutual fund generally stands ready to buy and sell its units on a regular basis. Thus, it is easier to liquidate holdings in a mutual fund as compared to direct investment in securities.
Now days, fund houses are providing many option for investors. According to requirements, investors can choose the best option.
courtesy of http://EzineArticles.com/?expert=Swati_A
Investments in any financial instrument requires some expertise. But, if we will talk about stocks, bonds and some special financial instruments then it requires more expertise and constant supervision to enable an investor to take informed decisions.
In general, Small investors usually do not have the necessary expertise and the time to undertake any study that can facilitate informed decisions while investments. This is the predominant reason for the popularity of mutual funds. Apart from it, there are many other benefits that can be taken by investing in mutual funds.
Investors can diversify their investments by investing in mutual funds. Small investors may not have the amount of capital that would allow optimal diversification. Since the corpus of a mutual fund is substantially big as compared to individual investments, optimal diversification becomes possible. As the individual investors' capital gets pooled into a mutual fund, all of them are able to derive the benefits of diversification.
Apart from it, investors can save transaction cost by investing in mutual funds. Transactions of a mutual fund are generally very large. These large volumes attract lower brokerage commissions and other costs, as compared to the smaller volumes of the transactions entered into by individual investors. The brokers quote a lower rate of commission to fund houses. So, investors can get benefit.
Other benefits are also with mutual-funds. Mutual funds generally offer a number of schemes to suit the requirements of the investors. Thus the investors can choose between regular income schemes and growth schemes, between schemes that invest in the money market and those that invest in the stock market, etc. Some schemes provide some added advantages also.
The most important thing is mutual-funds are managed by professionals. Mutual funds are generally managed by knowledgeable, experienced professionals whose time is solely devoted to tracking and updating the portfolio. Thus, investment in a mutual fund not only saves time and efforts for the investor, it is also likely to produce better results.
Liquidating a portfolio is not always easy. There may not be a liquid market for all the securities held. In case only a part of the portfolio is required to be liquidated, it may not be possible to sell all the securities forming part of the portfolio in the same proportion as they are represented in the portfolio. These problems can be solved by investing in a mutual fund. A mutual fund generally stands ready to buy and sell its units on a regular basis. Thus, it is easier to liquidate holdings in a mutual fund as compared to direct investment in securities.
Now days, fund houses are providing many option for investors. According to requirements, investors can choose the best option.
courtesy of http://EzineArticles.com/?expert=Swati_A
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