Rules of Prudent Investing

Constructing an Investment Plan

• Recognize that the ability, willingness and need to take risk is different for everyone. Plans fail because investors take excessive risks. The risks unexpectedly show up and the plan is abandoned. When developing a plan, investors should consider their investment horizon, stability of income, ability to tolerate losses and the required rate of return.
• Don’t invest in any security without fully understanding the nature of all of the risks. If investors cannot explain the risks to their friends, they should not invest. It’s critical to understand the nature of the risks being taken.
• A well-designed investment plan has many elements. It should integrate portfolio management with tax planning, estate planning and risk management.
• Don’t treat the highly improbable as impossible, nor the highly likely as certain. Investors assume that if their horizon is long enough, there is little or no risk. The result is they take too much risk. Stocks are risky no matter the horizon.
• Only work with advisors who will provide a fiduciary standard of care.That is the only way to ensure that the advice provided is in the investors’ best interest. There is no reason not to insist on a fiduciary standard.

Maintaining an Investment Plan

• The more complex the investment, the faster investors should run. Complex products are designed to be sold, not bought. Investors can be sure the complexity is designed to favor the issuer, not the investor. Investment firms do not simply give away higher returns.
• The only thing worse than having to pay taxes is not having to pay them. The “too-many-eggs-in-one-basket” problem often results from holding a large amount of stock with a low cost basis. Fortunes have been lost because of the refusal to pay taxes.
• The safest port in a sea of uncertainty is diversification. Portfolios should include allocations to the asset classes of large-cap and small-cap stocks, value and growth stocks, real estate, international developed markets, emerging markets, commodities and the appropriate amount of bonds.
• Owning individual stocks and sector funds is more like speculating than investing. The market compensates investors for risks that cannot be diversified away, such as the risk of investing in stocks versus bonds. Investors should not expect compensation for diversifiable risk­, such as the unique risk related to owning one stock or sector fund. Prudent investors only accept risk for which they are compensated with higher expected returns.
• Take risk with equities. The role of bonds is to provide the anchor to the portfolio, reducing overall portfolio risk to the appropriate level.

Staying in the Course

• The consequences of decisions should dominate the probability of outcomes. Investors should ask themselves if they can live with the outcome, regardless of how small of a chance there is of the outcome occurring.
• The strategy to get rich is entirely different than the strategy to stay rich. One gets rich through inheritance or by taking risk. One stays rich by minimizing risk, diversifying and not spending too much.
• The four most dangerous investment words are “This time, it’s different.” Getting caught up in the mania of the “new thing” is why the surest way to create a small fortune after starting out with a large one.
• If it sounds too good to be true, it probably is. Investment decisions should be based on the evidence from peer-reviewed academic journals.
• Keep a diary of market predictions. After a while, investors will likely conclude that they should not act on their “insights.”
• Good advice does not have to be expensive, but bad advice always costs dearly no matter how little is paid for it. Smart people do not simply choose services based on cost (the cheapest doctor or CPA). Costs matter; but it is the value added relative to the cost of the advice that ultimately matters.

            Please leave your comments in the box below...

How to Begin your Investment

FACTORS TO CONSIDER BEFORE INVESTING

Before you invest, you need to decide on the best investment option for you. To make this important decision, you should consider your goals for the investment, how long you can afford to tie down your money and how much risk you are willing to bear.

Investment goals

It is important to define your investment goals at the outset, as the choice will depend on the objective you are trying to achieve. Common investment goals are:

• Planning for your retirement
• Buying your house
• Providing for the education of your children or yourself
• Buying a new car
• Planning for a wedding or milestone birthday celebration
• Going on holiday

Investment horizon

It is essential that you have an idea of how long you can leave the money in an investment (or investment fund) account without the pressure to liquidate or cash out before realizing your objectives. Although mutual funds allow you to take money out at any time, funds that have a high degree of risk are meant for investors who have a long term horizon. This is because these funds typically invest in assets that can be volatile even though they tend to provide inflation adjusted returns over the long term. Therefore, if you invested in these assets for a short term, the risk of not getting your entire investment capital is higher compared to investing over the long-term.

Your investment horizon is fundamentally linked to your investment goals. For example if you are looking at buying a new house in a year, you may want to put your money in a investment fund that seeks to protect your capital invested and provide regular income. However, if you are a 28 year old man investing towards a higher education for your new born child, you are able to leave your money in a riskier, longer term fund in the expectation that the money will grow in line with inflation to cover the school fees when your child is ready to go for higher education.

Risk Appetite

Simply put, this means how much risk you are willing to take to get a higher level of return. The more risk you take, the higher the potential for real return, but also the higher the potential to make losses. If you are a risk taker, you may want to invest in a fund that has a higher proportion of investment in equities. However, for someone close to the age of retirement, you may want to stick to safer near cash investments.

Investment Expertise

If you are an experienced investor, you are able to invest directly in the different asset classes or pick an investment fund using your own knowledge, skill and experience. However, if you are just starting out, it may be advisable to ask professionals for advice. Funds are the easiest way for beginners, as you just need to have a basic idea of financial markets and the professionals will ensure your money is invested in the best possible way for you. Even if you have experience, sometimes it is good to talk to professionals who have first hand access to more market and information and instruments.

HOW TO INVEST   

After deciding to invest, you still have to choose how frequently you want to add to your investment and whether you want your interest paid out regularly.

Growth vs. Income

You have to decide whether you would prefer your savings to keep increasing or whether you want regular payments. If you would like to increase your savings, you are advised to reinvest your dividends into your fund. However, if you need to have a steady income for everyday spending or other purposes, you can choose to have your dividends paid out. You can also combine both options.

Lump Sum vs. Regular Savings

You have to decide on how frequently you want to invest, and the amount. If you have a lump sum to invest, you may want to make a one-off investment. However, you can also choose to invest a regular amount from your salary, or just make payments whenever you have excess cash. It is up to you to decide what you can afford and what is realistic for you, keeping in mind your financial situation and investment goals.

Hope this helps in enlightening about how to begin investment.

Like our Post, and feel free to share and comment. See you at the success end.

The 3 Types of Investments and Definitions

The word "investment" has become muddled with overuse. Referring to a stock or a bond as an investment is still in regular use, but now people make "investments" in their education, their cars and even their flat screen TVs.

In this article, we will look at the three basic types of investment as well as some of the things that are definitely not investments - no matter what the commercial says.

The Three Types of Investment

Investment, as the dictionary defines it, is something that is purchased with money that is expected to produce income or profit. Investments can be broken into three basic groups: ownership, lending and cash equivalents.

Ownership Investments

Ownership investments are what comes to mind for most people when the word "investment" is batted around. Ownership investments are the most volatile and profitable class of investment. The following are examples of ownership investments:

Stocks

Stocks are literally certificates that say you own a portion of a company. More broadly speaking, all traded securities, from futures to currency swaps, are ownership investments, even though all you may own is a contract. When you buy one of these investments, you have a right to a portion of a company's value or a right to carry out a certain action (as in a futures contract).

Your expectation of profit is realized (or not) by how the market values the asset you own the rights to. If you own shares in Sony and Sony posts a record profit, other investors are going to want Sony shares too. Their demand for shares drives up the price, increasing your profit if you choose to sell the shares.

Business

The money put into starting and running a business is an investment. Entrepreneurship is one of the hardest investments to make because it requires more than just money. Consequently, it is also an ownership investment with extremely large potential returns. By creating a product or service and selling it to people who want it, entrepreneurs can make huge personal fortunes. Bill Gates, founder of Microsoft and one of the world's richest men, is a prime example.

Real Estate

Houses, apartments or other dwellings that you buy to rent out or repair and resell are investments. The house you live in, however, is a different matter because it is filling a basic need. The house you live in fills your need for shelter and, although it may appreciate over time, it shouldn't be purchased with an expectation of profit. The mortgage meltdown of 2008 and the underwater mortgages it produced are a good illustration of the dangers in considering your primary residence an investment.

Precious Objects

Gold, Da Vinci paintings and a signed LeBron James jersey can all be considered an ownership investment - provided that these are objects that are bought with the intention of reselling them for a profit. Precious metals and collectibles are not necessarily a good investment for a number of reasons, but they can be classified as an investment nonetheless. Like a house, they have a risk of physical depreciation (damage) and require upkeep and storage costs that cut into eventual profits.

Lending Investments

Lending investments allow you to be the bank. They tend to be lower risk than ownership investments and return less as a result. A bond issued by a company will pay a set amount over a certain period, while during the same period the stock of a company can double or triple in value, paying far more than a bond - or it can lose heavily and go bankrupt, in which case bond holders usually still get their money and the stockholder often gets nothing.

Your Savings Account

Even if you have nothing but a regular savings account, you can call yourself an investor. You are essentially lending money to the bank, which it will dole out in the form of loans. The return is pitiful, but the risk is also next to nil because of the Federal Deposit Insurance Corporation (FDIC).

Bonds

Bond is a catchall category for a wide variety of investments from Treasuries and international debt issues to corporate junk bonds and credit default swaps (CDS). The risks and returns vary widely between the different types of bonds, but overall, lending investments pose a lower risk and provide a lower return than ownership investments.

Cash Equivalents

These are investments that are "as good as cash," which means they're easy to convert back into cash.

Money Market Funds

With money market funds, the return is very small, 1% to 2%, and the risks are also small. Although money market funds have "broken the buck" in recent memory, it is rare enough to be considered a black swan event. Money market funds are also more liquid than other investments, meaning you can write checks out of money market accounts just as you would with a checking account.

Close, but Not Quite

Your education is called an investment and many times, it does help you earn a higher income. A case could be made for you "selling" your education like a small business service in return for income like an ownership investment.

The reason it's not technically an investment is a practical one. For the sake of clarity, we need to avoid the ad absurdity of having everything be classified as an investment. We'd be "investing" every time we bought an item that could potentially make us more productive, such as investing in a stress ball to squeeze or a cup of coffee to wake you up. It is the attempt to stretch the meaning of investment to purchases, rather than education, which has obscured the meaning.

Not Investments

Consumer purchases - beds, cars, TVs and anything that naturally depreciates with use and time - are not investments. As an example, you don't invest in a good night's sleep by buying a foam pillow. Unless you're very famous, and even then, it's a stretch, since you can't reasonably expect someone to pay more for your pillow than the initial purchase cost. Don't take it personally, but there's very little demand in the second-hand pillow market.

The Bottom Line

There are three types of investments: ownership, lending and cash equivalents. There is no fourth category of consumer purchases.

Admittedly, it's a clever piece of advertising that removes some of the guilt from impulse purchasing; you're not spending money frivolously, you're investing! The decisive test is whether there is a potential to turn a profit. The important word is "potential" because not every legitimate investment makes money.

Making money through investing requires researching and evaluating different investments, not simply knowing what is and is not an investment. That said, being able to see the difference between an investment and a purchase is an essential first step.

Feel free to post your coments below...

What Is Investing?

Investing: The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.

Legendary investor Warren Buffett defines investing as “… the process of laying out money now to receive more money in the future.” The goal of investing is to put your money to work in one or more types of investment vehicles in the hopes of growing your money over time.

What is investing?

Investing is really about “working smarter and not harder.” Most of us work hard at our jobs, whether for a company or our own business. We often work long hours, which requires sacrifice and adds stress. Taking some of our hard-earned money and investing for our future needs is a way to make the most of what we earn.

Investing is also about making priorities for your money. Spending is easy and gives instant gratification—whether the splurge is on a new outfit, a vacation to some exotic spot or dinner in a fancy restaurant. All of these are wonderful and make life more enjoyable. But investing requires prioritizing our financial futures over our present desires.

Investing is a way to set aside money while you are busy with life and have that money work for you so that you can fully reap the rewards of your labor in the future. Investing is a means to a happier ending.

Investing Vehicles

There are many different ways you can go about investing, including putting money into stocks, bonds, mutual funds, ETFs, real estate (and other alternative investment vehicles), or even starting your own business.

Every investment vehicle has its positives and negatives, which we'll discuss in a later section of this tutorial. Understanding how different types of investment vehicles work is critical to your success. For example, what does a mutual fund invest in? Who is managing the fund? What are the fees and expenses? Are there any costs or penalties for accessing your money? These are all questions that should be answered before making an investment. While it is true there are no guarantees of making money, some work on your part can increase your odds of being a successful investor. Analysis, research and even just reading up on investing can all help.

Feel free to post your comment below