Investing: Personal Portfolio

Before one decides that they want to invest they need to make a few sub-decisions. Firstly one must know the purpose why they are investing, where they will invest, how they will invest and when they will invest. If these elements are not outlined clearly then there may be losses that occur because of this indecision.

THE WHY QUESTION

Dealing with the why question involves looking to the future. This is the intent and purpose why you are delaying consumption. Many people have different reasons why they go into different investment vehicles. As an investor you need to decide what tenure is best for you. I personally classify investment horizons into three; short, medium and long term. The short-term is for those investors who want a quick maturity of their investments that ranges from days to a year. Medium-term would be anything from 1 year to 5 years. Long-term would be anything above 5 years.

For example is someone is trading on news or merely speculating on price movements, they would go long or short for a limited time horizon. In this type of investment technical analysis is used to study the trends and candlesticks of an underlying investment such as currency pairs in foreign exchange arbitrage. Transactions of this kind can hardly be called investing. I would call them speculating since they do not take into account any meaningful fundamentals and hence the odds of making a profit become no different than tossing a coin. However if someone is saving for a wedding it would be critical to have an investment vehicle that is liquid and preserves the initial capital or principal such as fixed income securities or treasury bills (TBs). Such a person would be looking at a medium-term horizon depending on when he intends to liquidate and have the wedding. However if a 25 year old starts saving for retirement they have more time to hold investments until their prices align with their true values (in the case of value investors). Such a person could go long in stocks and hold them. In this instance, fluctuation of the stock is not as important since liquidation of the investment is deferred.

It is vital for anyone to decide why they are investing as this will give an acceptable time horizon bench-mark and more importantly determine the risk level acceptable to their portfolio.

THE WHERE QUESTION

Once one is clear why they are investing, it will not be hard to establish where they must invest. If you are simply speculating then there is need to take cover in the hedging system. This is because your positions are just guesses that may turn out wrong. This was coined in the saying “downside risk and upside potential”. So if you have bought long a mining stock that you anticipate going up, you may want to protect yourself by going to the derivatives market and buy a put on the same stock. A put is a right but not an obligation to sell an underlying security at a predetermined strike price in the future. So if the security price goes down the holder of the put may still sell at a higher price than the ruling market value of the underlying security (mining stock). These complex transactions are normally done by active traders in search of alpha. I would not recommend a novice trader to be dealing the derivatives market as even the most experienced fund managers and business remodeling gurus like Andrew Fastow shipwrecked because of them.

The novice investor can participate in two broad markets; the money and capital markets. The rule to success is keeping it simple. The money market serves those who are in the short-term investment horizon and the capital market serves those who are in the medium to long-term investment horizon. These two markets can be very crucial in making sure that your portfolio is well diversified and balanced. The money market gives a choice of investments such as TBs, negotiable certificates of deposit (NCDs), and other short-term debt instruments. Such instruments stabilize the value of a portfolio since they are not as volatile as stocks. The mix between stocks and debt instruments in a portfolio should be according to an investors risk profile. For the risk-averse investor, a portfolio could have 60%-80% debt instruments (with triple A ratings) and 20%-40% stocks (blue chips). For the more risk-loving investor a portfolio could have the above weighting but however inverted between stocks and debt instruments.

You can choose to divide the debt into time horizons as well but however remember that there is price volatility on long-term bonds caused by interest rate fluctuations. Stocks can be sub-divided into small, medium and large cap; value, growth, dividend and so on. If you are after higher return you could look at investing in emerging markets like India. The stock exchanges in India are among the top paying exchanges in the world in terms of yearly market return. It may be a mammoth task to invest in these exchanges on your own. You can easily do this through world funds like the Templeton India Growth Fund and many others. However to be able to harvest the maximum returns from these funds you need to hold your investment for more than five years. This is because you may end up being hurt by transaction costs and capital gains tax.

HOW AND WHEN QUESTION

Mutual funds are a good way to get started if you are a novice investor. It is not advisable to search for a fund using the highest returns from a single period. A fund has got to consistently return above market to qualify to be enlisted on your potentials. Also evaluate how they invest and their risk tolerance before you take the leap. Once you have invested do not jump from fund to fund as this will hurt your returns. Better still you may choose index funds that emulate a certain sector of the market or a whole market as John Bogle demonstrated with the Vanguard 500 Index Fund. The lack of active management generally gives the advantage of lower fees (which would otherwise reduce an investor’s return) and in taxable accounts, lower tax.

If an investor has the basics to begin investing on their own, I would suggest a concentrated portfolio. This portfolio is made up of a small number of stocks (advisably below ten) that you select and invest in. At best a concentrated portfolio must have stocks from sectors that can achieve negatively correlated returns. However if one carries out a thorough fundamental analysis and constantly reviews the portfolio to check for divergences there will be no need to structure a portfolio using the academic approach mentioned above.

Fundamental Analysis

When conducting fundamental analysis, an investor wants to be sure that they are buying a healthy business. Stock prices in the long run eventually align with the financial health of the underlying stock. The stock market punishes the weaklings and rewards the strong. Hence in doing your fundamental analysis you can look at the following aspects:

1. Market share trends – when the market share of a business is decreasing it is a clear sign that it is heading for the doldrums. Business can be operating in decreasing, static or growing markets. You will be better off if you buy a company that is increasing its market share in either a static or growing market. An investor can use the Porter’s Five Forces to analyze an industry and the market trends existing therein.

Management – the ultimate test of management is their frugality. In the words of Peter Lynch, if you invest in a company with gold plated toilet seats at its headquarters you have most likely contributed towards their purchase. Salaries paid to managers and the consistency of business strategy can also indicate the suitability of management. If you see management with such inconsistent strategies like raising equity financing and paying out dividends at the same time you should be suspicious. Managers must be open, have integrity and be honest. This is the criteria that the famous investor Warren Buffet uses.

2. Return on Equity (ROE) – this is by far the most important indicator of the financial health of a business. This indicator shows the return as a percentage of the equity or shareholders’ worth. It is specifically an investor ratio. Look at the ratio starting 10 year back to the present time. Look at how the trend is progressing. Make sure the accounting policies are consistent over the same period to avoid concealment of salient problems. You should invest in companies with a high and/or increasing ROE ratio. This also shows that the management is careful to incessantly increase shareholder value.

3. Price-Earnings Ratio (P/E) – this ratio equates the price of a share to the earnings it made over a period of 6 months or a year. It can also be a forward P/E when it measures using forecast earnings. This ratio is great if you are a value investor. You have heard the gurus say “always buy low and sell high to make the most returns”. But how do you determine whether a stock is cheap? You use the P/E ratio. However you must be careful to research why a stock has a low or high P/E ratio. According to the Efficient Markets Hypothesis all the information of a stock is reflected in its price. So if a stock has a low P/E ratio, it might be because it has very little prospects. On the other hand if a stock has a high P/E it may mean that the market has factored in its future growth. To measure this aspect analysts take to the PEG ratio that expresses the P/E over the future growth anticipated for that stock. However there are some stocks that tend to go under the market radar and it will take a lot of work to identify them.

4. Dividend paying stocks – these companies give back money to the shareholder in the form of dividends. Buy stocks in companies that pay dividends or buy back their own stock. Any company that does not have suitable merger or acquisition targets must give back money to the shareholders. A lot of companies lose money by trying to go into new industries in which they are ill experienced. This is why a company which buys back its own shares is a good company to invest in. By buying back shares, a company is actually reducing the supply of those shares on the market. From your Economics 101 course you probably know that when demand is more than supply the price goes up. So when the price of the shares goes up the investor has been rewarded by capital gains. On the other hand when dividends are paid the investor has been rewarded by income.

5. Debt – invest in companies that are debt-free or have low gearing. Gearing is the ratio of debt to equity. When a company is leveraged its returns will have more risk as measured by standard deviation. Also in bad times a leveraged company suffers more than a debt-free one. Debt covenants can be very stringent demanding a company to disclose whenever they enter into any riskier projects. Other lenders will recall the bonds placing the company at the risk of bankruptcy. Cash rich companies are better and less risky than debt-ridden ones. They can easily weather a financial storm than those companies in debt and cash-strapped.

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The Key to Personal Finance

Additional effort in managing one’s personal finances will result to a more positive usage of personal resources. With attainable, realistic goals, ones financial standing will progress in no time at all. However, for the part of the individual concerned, this calls for proper planning and monitoring. There is also a need to assess at some point to see if the goals set are being met or further intervention is needed to alleviate the financial condition.

Available Income:

Regular household cash flow
After Budget cash or net flow

Regular household cash flow is what remains after the expected yearly expenses are subtracted from the expected yearly regular income. After budget cash or net flow is simply what one ends up with after subtracting regular household liabilities from the known assets. The part of the regular income that does not go towards normal expenses is a very important resource that can be diverted towards other personal financial goals. A balance sheet should be able to determine the net worth before proceeding to plan further on how to save enough for bigger and more important purchases.

Factors to be considered if 50% net increase is desired:

Full liabilities
Outstanding debts
Investment Instruments
Savings yield- savings + interest gained
Outstanding student loans

It only goes to say that when liabilities decrease, a person’s net worth increases along with it. The number one advice for people with plans to progress financially is to avoid taking juicy bank loans on offer as they are ever-potent dangers to one’s credit score specially when the interest pile up. Recovery from debts will be a much needed boost to personal finance. The more payables are settled, the fewer the liabilities are and this carries a positive reflection on one’s balance sheet and also his credit standing.

Personal investments make up most of a person’s net worth and thus it is a perpetually good move to gain as much valuable assets as a person possibly can in the course of his lifetime. This is not to say that forethought should not be employed here but the contrary. Investing by buying up profitable assets should always be preceded by careful analysis, so that a purchase will actually add vigor to one’s portfolio. The general trend is that if you are the risk avoidant type of investor high risk investments are avoided. These are properties which have value that changes with the ebb and flow of time like real estate, precious metals like gold and other physical goods that are known to have volatile values.

The riskier among us, those whose mettle are undeniably more resistant to fear easily trade in stocks and other financial instruments of our time. In this type of assets, the rule goes that the higher the risk, the higher the possible gains. This kind of investments no doubt needs to be studied and studied again due to the very nature of it to avoid excessive losses and to catch gains when and where they are likely to fall.

As savings is an important and integral part of a person’s net worth, due research is called for to yield the names of institutions that offer better products or simply better rates for one’s hard earned dollars. For example, American soldiers have the option and the privilege to take advantage of the DOD Savings Deposit program that has very high interest rates at 10%.

Savings accounts and CDs serve you in two ways: firstly by increasing your total net worth and secondly by giving a much needed buffer zone to your personal finance portfolio, as seen by prevailing trends all over. The reason for this is because such instruments are federally insured and grows at a steady, favorable rate every year.

One thing that has perennially damaged net worth are student loans as they can persist a long time after a person has graduated and worked. To counter the negative impact of this, one effective practice is to take advantage of seasonal tax breaks. With American opportunity tax credit alone, an individual can save as much as $2,500 and those who are still studying should altogether shun away from private student loans in favor of federally funded loans as these carry a lower, or fixed rates in general.

Most effective ways to maximize cash flow:

Highly informed financial decisions
Making and adhering to a budget
Controlling impulsive buying
Putting Cost cutting measures in place

Smart financial choices can sometimes spell the difference between ruin and progress. For instance, there is a choice between buying a house which becomes unaffordable later on as opposed to renting a modest accommodation. If the sale price of the house is proven to be a figure greater than 20, when the actual sale price is divided by the yearly rental, then you would be wiser if you rent. Managing personal finance need not be a daunting task; it only requires patience and practice.

Where you can cut costs:

Cut back on unnecessary expenditure
Cooking instead of dining out
Look into car insurance cost cutters
Collecting and using coupons
Buying wholesale instead of retail wherever applicable

There is absolutely no shame in using coupons and the benefits are tremendous, it can even get to be a habit. Why pay the full price when a little vigilance in cutting and saving coupons goes a long way? If no printed material is available from where to glean coupons, the internet is always there, the perfect place to search for printable coupons.

Cook at home and cook in batches. Then freeze for later meals. Have the due diligence to look after leftovers and you will probably save a fortune in take-out budget. There is no shame in keeping eatable food and it does wonders to a family or individual’s food budget.

Cut down on company offers, like phone packages, cable or internet packages, whatever has hidden charges, zero in on them and ask to get only the basic service, pay only for what you actually need and use. The extra features cost and pile up in the long run.

Carpooling is also one way to save, and if you must absolutely drive, drive safely to avoid charges. These small things all contribute towards managing one’s finance in a sane and productive way. And the habits that are changed also stick, so it is best to make sure that you make changes for the better.

How to estimate: Tools in Determining Worth

Simple Net worth calculator
Retirement calculator- many are downloadable
Mortgage rate calculator, again downloadable
Spouse or partner income calculator for multiple income households
Loan calculator, for free from many sites
Currency converter- already in wide use everywhere
Home budget calculator- a standard for many housewives
FICO score range tool- again available for free online
Student loan calculator- for up to date interest rates

These personal finance calculators are absolutely necessary when strategizing and setting up your long and short term goals, tax payments and schedules, mortgage resolutions and other financial steps. The closer the estimates are to real figures, the closer you will be to realizing your plans and these depend heavily on calculators.

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Why You Need a Finance Calculator

For anyone who is involved the financial health of any organization, a finance calculator can be a great asset. Here are some examples of situations where this specialized calculator would make the task a much easier.

When a business needs to borrow a sum of money, one of the first things to that much be agreed upon is how must interest the organization can afford to pay over time, including the principle. Projecting the interest plus the principle lump sum and then breaking it down into payments can help the borrower have a better handle on what the business can afford in the way of payments on a monthly, quarterly, or annual basis. Having a calculator that has the proper features to run these projections makes the process much quicker, and allows the borrower to be better informed when approaching a financial institution about obtaining the loan.

Individuals who are engaged in the process of approving persons for loans will also find a finance calculator to be a great help. With the calculator at your elbow, you can run various repayment scenarios with ease, which will allow you to present the various repayment options that are available to a given client. Between the two of you, it is possible to arrive at terms that are acceptable to both the lender and the borrower in a very short period of time.

Having the right kind of calculator also makes the business of analyzing the current financial health of a business much easier as well. Utilizing a good quality finance calculator, persons who are involved with the Payables and Receivables can work hand in hand with finance directors. Together, they can get an accurate assessment of the company finances as they stand today, as well as where they should be in a week, a month, and a year. This sort of information can be especially helpful with a new business that is just beginning to find its legs or a company that has been through some rough times and is now showing signs of becoming profitable. With both of these situations, basing expenditures on accurate projections will help them both to continue on the road to success.

While a finance calculator may not offer much in the home setting, they can come in handy for some people who have a rather detailed budget and require additional tracking and projections compared to the rest of us. Helping to project expenditures when one has household staff, college tuition, and loans for home improvement to incorporate into the household budget may find that this more robust calculator would be a better choice than the standard calculator.

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How Significant is a Finance Calculator Tool?

Even a person with significant financial or business knowledge finds navigating the financial world difficult. The world of finance is a world full of legal riddles and unfamiliar speech. To help professionals and laypersons to maneuver in this complex world, a multitude of analysis tools, like a finance calculator, comes into play.

A finance calculator is an online tool which allows anyone to calculate the specific data for a financial plan that works with a client’s specific budget to meet their specific needs. There is a finance calculator for everyone.

The most popular financial calculator is used to calculate mortgages and their impact on one’s household budget. These mortgage calculators compute amounts of monthly payments as well as the impact of any prepayments. Using a mortgage calculator, a potential owner can determine how much he can afford in a mortgage as well as if he would like a 15-year or 30-year term mortgage and which is the best for his current and potential financial situations. Often mortgage calculators help consumers determine if refinancing their current mortgage is a worthwhile investment of time and their money.

Mortgage calculators help a consumer become financial-savvy and easily able to determine if a fixed or flexible interest rate is better for them or if allowing for adjustments would be a high risk or low risk course of action.

Other financial calculators cover a variety of financial areas including:

1. Retirement Savings and Planning

2. Social Security Payments

3. Roth IRA and Traditional IRA analysis

Additional business calculators provided necessary tools and information for sales volume analysis,
cash flow calculations, inventory assessments, working capital needs and financial profit to loss ratios.

Loan calculators are financial assessment tools that allow a consumer to break down and understand loan amortization, debt consolidation, the details of loan and credit payments and how to compare the specifics of certain loans such as car loans.

Credit cards and debt calculators offer items for determining the debt amount, accelerated debt payoff, and credit card payoff.

Savings calculators are helpful to determining all aspects of savings as related to short-term goals as well as long-term goals. There are even financial tools for calculating taxes as well as the impact inflation with have on our financial affairs.

No matter what the financial area, there is a financial calculator available to help each of us understand the numerical specifics that make up our financial well-being.

It’s best to understand financial courses as much as possible so you can make an informed decision and take the best steps possible to reach your objective. Our time is our so precious and despite cell phones and other conveniences we seem to never have enough of it. See below for more information on Finance Calculator

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