Digging Deeper Into Index Funds

Posted by admin in Investment on Oct 17th, 2011 | 0 comments

There’s been a lot of bad press about mutual funds lately — especially as more and more people get fed up with the high fees that some mutual funds charge. So where do you go next? Well, you might be looking at the index fund side of things. Yet what if you don’t really know too much about Index funds? You might start feeling like there’s just no way that you could possibly handle everything, but that’s not true at all. In fact, index funds have been praised repeatedly for being much more passive of an investment than if you were to have an active portfolio of single stocks that you have to manage.

So, where do you go from here? Well you have to understand that index funds are still mutual funds, but they’re just not actively managed. That doesn’t mean that you’re going to be all alone in the wilderness — the Internet is a great source for information, which means that it’s not going to be the end of the world to actually focus on something other than your manager’s high fees. Of course, if you really do want to have someone with expertise managing your fund, then you’re going to have to be willing to pay the price. It’s completely up to you, so don’t think that we’re trying to pressure you.

The best thing that you can do for yourself is take some time and really do some research on the many different index funds out there. This is going to be about what you’re willing to risk, what areas that you want to explore, or even what areas that you don’t want to explore. If you’re not keen on biotech, you can avoid that sector completely without losing in the index funds game.  It’s always your show.

The index funds get their name from the fact that they represent a segment of the stock market — or even the bond market. There’s a lot of different ways that you can go with index funds, so it’s not like you have to be stuck with one option over another.

Make sure that you’re looking at the fees — some people are so ready to run from actively managed portfolios that they think that they’re going to automatically have some sort of paradise waiting for them in the world of index funds. This is just not the case at all. You’re a lot better off really thinking about the idea of going back to the research board and really making sure that you’re comparing apples to apples. As an investor, there’s no way that you’re ever going to find a zero-fee solution. Why should you be the only one making profits, after all?

It’s not always fair, but it is an opportunity to grow your portfolio that you should definitely consider.

What else do you need to know about index funds before you buy them? Well, understanding the fund structure is really important. An index fund can be anything from a closed-end fund to a unit investment trust all the way up to a mutual fund. You will need to understand fund structures before you can feel comfortable with any index fund.

From there, you will also want to track your performance for a while even after you close on the fund — just to make sure that things are solid before you let things just go on autopilot. Hands free money is often a pipe dream. If you really want the most control over your investments, you’re going to need to make sure that you think about the road that your investments are taking. Don’t get into the myth of passive investing to the point where you never check your portfolio. That could lead to some very costly mistakes!

Relative valuation

Posted by admin in Investment on Sep 28th, 2011 | 0 comments

Relative valuation involves using similar assets to value another asset.

One common example is in real estate, where prospective buyers will use the value of other properties of a similar size in the same area to determine the amount they are willing to offer for a particular property.

Relative valuation is proven for a range of assets every day – as fundamental issues are often relevant across sectors, or even markets, assets within those sectors or markets often move in tandem.

If we use share trading as an example, some of the common factors used to measure stock value include:

1.    Price to earnings ratio
2.    Return on equity
3.    Operating margin
4.    Enterprise value
5.    Price/cash flow per share

Example

Westpac and the Commonwealth Bank (CBA) are Australia’s two largest banks. On September 26, CBA shares were priced at AUD43.89, while Westpac shares were AUD19.11. CBA has a market capitalisation of AUD69 million and Westpac has a market capitalisation of AUD57 billion.

A share trader can use this information to determine whether investing in CBA or Westpac would be better value. Both companies’ market capitalisations are very similar, along with their enterprise values, so we’ll focus on the price to earnings ratio, return on equity and operating margin.

Although Westpac has a lower price to earnings ratio, the CBA has a higher return on equity despite having a lower operating margin. CBA also has a higher cash flow per share than Westpac and if it can continue churning higher cash flow, it’s a sign that it is creating more value from shareholders.

Limitations

Although relative valuations have their benefits, they also have their limitations. The greatest limitation is when the market has valued a business incorrectly – in the case of a bubble, it wouldn’t matter what either companies’ fundamentals were.

Also, company valuations are based on past performance, and future performance is what drives stock prices. Relative valuation accounts for the current and past value of a share, rather than future growth.

That being said, relative valuation is a simple tool that any trader can add to his arsenal, and the information required to perform your own evaluation is readily available.

What is the VIX, and How Can It Benefit You

Posted by admin in Investment on Sep 26th, 2011 | 0 comments

Have you heard about the Chicago Board Options Exchange Volatility Index? It’s affectionately nicknamed the VIX, and if you’re really trying to tighten your investing game it could even help you out. Some people are into it because the index measures how fearful investors might be at any time of the market. The true pros use the VIX to hedge against volatility because the entire index moves in the opposite direction of the S&P 500.

Complacency isn’t a good thing in the market. When you become a complacent investor, you’re on the verge of losing money — if you haven’t lost it already. This is because you will be ignoring market trends that signal that it’s time to move your money out. Now, we’re not talking about people that already have market orders put in. That’s not being complacent — that’s being a smart investor, but you can get a little lazy if you’re not at least tracking your performance. You don’t just want to set up your market orders and never get concerned about what the market is really doing.

Let’s go back into the topic of fear in the market in a different direction. The VIX is based on a calculation that estimates how volatile the S&P 500 is over 30 days. This is a “measured prediction” of what the market’s future will be like.

It ties into the marketplace place in the following ways. For starters, both readings are the inverse of each other. When the stock market is up, the VIX is down. The opposite is also true — when the stock market is down, the VIX goes up.

Now as a smart investor, it’s up to you to use the VIX to your advantage. The first thing you’re going to want to do is break out of that 30 day bubble. You don’t want to just settle for 30 days worth of data when historical patterns have long been the go-to staple. Most trading programs will let you pull up longer data than just 30 days, so you will want to take that option if you have it. Even free websites will have data on the VIX — it’s really that important.

Yet how do we specifically wield the VIX as a powerful tool, the way it deserves to be used? That’s the good part — it’s not as difficult as it sounds.

First we have to see the VIX as a hedging tool, foremost. If you really want a quick and dirty path to playing the VIX well, you will want to actually use the VIX exchange traded note (ETN). These are very similar to ETFs, and the symbol for the VIX-oriented version is VXX.

You might be a little confused at this point — we jumped from talking about using the VIX to your advantage and then hopped over to exchange traded notes. This is because the VIX is just an index — you can’t trade the whole thing, you will need to go through an ETF, futures contract, or an option contract. We recommend the ETN here because VXX tries to match the VIX movements as much as possible. Since it’s not perfect, we don’t want to use it for long-term investment plays — just short term hedging when you need it. If you are trying to make a quick profit, then playing a short term strategy with the VXX note is a good way to go.

When it comes to hedging, you will want to make sure that you really do stay short term and make your exit when your risk tolerance level starts getting started. It’s also essentially that you will be looking at the news while you’re working with the VIX. Since this is the “fear index”, paying attention to what’s happening in the financial media around you is definitely a smart idea.

Overall, it can take some time before you’re up to speed on the VIX and how it plays well with the S&P 500. However, as long as you take small steps there’s no reason why you can’t make a great profit and take advantage of any market!

Open a Brokerage Account Online, Save Money

Posted by admin in Investment on Sep 19th, 2011 | 0 comments

So, you’ve heard about opening a brokerage account online to save money. The truth is that it’s definitely possible, and many people are learning that going online is a great way to get deeper into the investing world. Your computer, combined with the Web, can create a powerful research tool that will let you measure performance with ease. If you were going to a traditional broker offline, you would have to rely on paper charts, which can be too much of a hassle to really embrace. It tends up becoming a question of convenience, and this is where the Web really wins.

So, is it just a matter of running out and picking any online brokerage? No. You will still need to take a few considerations into account if you’re really serious about making the online brokerage experience as strategic as possible for your agenda.

First and foremost, you should understand that there really two types of brokerage firms — the traditional (which some still call “full service”), and discount. As you can imagine from the name, full service brokerages are going to offer more features than their discount counterparts. It’s really all about what type of experience that you want to have. For example, if you really want to be guided by the hand, a full service firm is definitely for you. You’ll have the peace of mind knowing that you don’t have to be a Wall Street wizard yourself — you can have someone put their expertise to the text for you. Now, this also means that you will have to think even harder about the type of service that you want to get, because this “golden gloves’ treatment isn’t cheap. You’ll pay a lot more in commissions going with a full service firm.

Don’t forget that the higher price tag comes with being able to work one-on-one with someone. A good stockbroker will give you ideas on where to go next with respect to your financial goals, as well as send you detailed reports with how your investments are actually faring in the marketplace. You will be able to reach them by phone or email to buy a wide variety of securities, which can be very appealing. In theory, you wouldn’t even have to be at your desk to make market plays. When you’re someone that has a very packed schedule, this is an appealing feature to have on your side.

However, what if you’re looking for a less feature-filled service that still gives you the meat and potatoes — in this case, that means the ability to still buy and sell securities when you need to do so. You might not get the dedicated one-on-one service, but you would be able to still take charge of your financial life.

Discount brokerage services are all about doing things as a do-it-yourself investor, which can be appealing to people that already have a proper financial background. They don’t offer investment advice, but they do offer you the ability to get things done just the same. Most discount shops are online because the overhead is less, which means that your fees are less. However, you can find a discount side to even some full service houses too. If you go with an offline shop (why you would is beyond us — online is far superior), you would be calling in your order to any broker, not just one assigned to you.

So why would you even go in this direction? Well, it’s a good way to make sure that you keep your commission costs low. However, some of the discount shops offer another bonus: lower opening balance minimums.

Indeed, when you open up an online brokerage account, you’re going to be asked to deposit a certain amount of money into the account to start out with. You want to make sure that you maintain that starting balance, because there could be some fees if you let your account sink below this mark. Those fees can really add up — sometimes to the equivalent of 6-8% or better!

Don’t forget that there will always be some tools and research gear that will be offered to you as a customer. After all, they have to make sure that you actually have the tools you need to track how your investments are actually doing. There are some premium services that might be available to you, so you’ll need to make sure that you have money set aside to take advantage of them.

You shouldn’t forget about the tax implications — since this is a taxable account, you will be getting a statement at the end of the year — the same statement will be reported to the IRS. This means that if you have capital gains, you will have to declare them on your tax return and pay taxes on the amount. You can deduct capital losses against what you made on the account, and you can also place them against $3,000 in earned income. So that’s also a tax shelter in of itself, to a point.

Overall, getting your way into an online brokerage really isn’t difficult. We avoided naming names for a reason, of course — we’d rather you research the companies that interest you and then see if they’re going to be a good place to put your money. That’s all there is to it!

ETFs Give You Diversification Without Complications!

Posted by admin in Investment on Sep 19th, 2011 | 0 comments

Let’s get risky! One of the prevailing beliefs about the investing world is that it’s something where people cannot make money. And when we say people, we mean regular people. Warren Buffett can probably make money with his eyes closed, but they don’t call him the Oracle of Omaha for nothing. It’s all about being at the right place at the right time — or is it?

The truth is that if you really try hard to time the market, you’re going to end up unsatisfied. That’s because the market as a whole is volatile, and market timing just doesn’t work. You have to look at things from a more strategic standpoint.

The cornerstone of strategy in this case is definitely diversification. However, when you’re starting out it can take a while before you can sit back and really say that you’re truly diversified? What does it really take in order to get the experience that you’re looking for? Well, it involves picking the right investing tools from the beginning.

If you’re looking for diversification without complications, one of the first things that you need to look at are ETFs. Now, we did cover ETFs on the surface a little while back, but we wanted to cover ETFs again so that you really appreciate the value of these securities.

On the surface, ETFs (Exchange Traded Funds), are simply a group of stocks. They offer diversification in a big way, and they also offer convenience. Instead of trying to run around researching stocks all day, you can just tag along with an ETF that includes the category of stocks that you really want to pursue. If you’re an oil and energy fan, you can find EFTs for that. If you would prefer to dabble with commodities…there are ETFs that can satisfy your needs. OK, that sounds dirty — let’s move on.

Now, you might be wondering why ETFs sound so good and they aren’t expensive on their own. This is because they aren’t actively managed — investors don’t hold shares directly. What really happens is that when you own an ETF, you have ownership in the shares of the fund. In turn, that fund has a portfolio of common stocks in a certain part of the market. This can even be an international thing — there’s nothing that says that you have to only deal with domestic securities. When you turn to ETFs, the entire world becomes your investment playground, and many investors like that.

The trouble with ETFs — and why so many people don’t like them — is because you have to make sure that you still follow classic allocation strategy. You don’t just want to go with ETFs at random. You will still need to think about degrees of risk. You will still need to read the proper financial disclosures in order to decide whether the ETF is right for you. Don’t just let people push you into an ETF — you need to make the decision for yourself.

Keep in mind that you don’t want to trade too much within the ETF system — you have to go through a broker to make all of your trades, and that means that you’re going to have commissions. Since you can trade ETFs intraday (throughout the day), it means that you can make many trades during the day. You can even place stop or limit orders, which can help you make things more automated.

At the same time, you don’t want to go too automated. If you just think that you’re going to set and forget about your money, you’re in for a rude awakening. Fundamental and technical analysis is still the name of the game, which means that you need to watch performance and be ready to bail if things start making a trend south rather than north.

Does the rise of ETFs mean that you can forget all about mutual funds? Definitely not. You will still need to make sure that you look at your value goals and push forward carefully.

Overall, ETFs are still appealing enough in terms of diversification without complications. Start checking it out today!