Posts Tagged ‘invest’

One of the starting points to investing comes with the savings of ten thousand dollars. This seems to be a magical number for some reason, at which point people look for the best and most effective ways to invest 10000. Contrary to what most people would like to hear, when you invest 10000 you are not able to live a decent lifestyle off of the returns. In fact, even with an index fund that saw the S&P 500 climb more than 40% in 2009, that phenomenal return translates to just $4,000 in returns, clearly less than $350 per month.

When people want to invest 10000, the best advice a professional planner can give them is to invest for the long-term and “forget about it.” This makes the most sense for most investors as it will allow them to focus on saving their next 10000. More importantly, if the investor trusts the advisor and the advisor is even half-ways competent, he or she will recommend better ways to save that next 10000. Ultimately, people who want to invest 10000 will not receive advice on how to invest the original 10000 but they will receive advice on how to create even greater wealth through an appropriate savings and investment program that looks at building a proper asset allocation model as well as a rudimentary financial plan that takes taxation and some estate planning issues into account as well.

A common question facing many advisors today is how to invest 10000 given the market conditions. Some people will ask this question and revel in the entertainment value of the advisor’s response because, unfortunately, there is no generic response to this question (there should not be anyway). The reason for the many different responses is that financial advice cannot be given on a generic level… ever.

Without fully understanding the investor’s goals and objectives, the advisor really should not be giving any advice at all. For instance, investors with low to medium risk tolerance but a small appetite for growth may be inclined to invest in high yield investments. An investor with greater risk tolerance and a better appetite for risk would probably be best served in an equity fund with great long-term performance, low expenses, and greater opportunity for sustained long-term growth.

As evidenced below, the question about how to invest 10000 cannot be generically answered, so the responses out of different advisors can certainly be comical as they seemingly skirt the question and provide something of a well-rehearsed, industry compliant regurgitation of questions to the person asking what is seemingly an easy, straight-forward question.

However, for those who are serious about where to invest this magic number, websites such as www.MutualFundSite.org is a great starting point because it will point you to the right spots. First is your financial advisor/planner, and if you do not have one then at least this site will provide you with the basics. Second is what mutual funds (and other investments) are all about, particularly as long-term investment (wealth building) vehicles. Third is that after you spend a bit of time on our site, you will understand the basics of investment management so that you can not only stay on top of your own financial advisor or planner, but on top of your own investment portfolio as well. (A well-respected financial planner in my area has a slogan: “Financial planning is not a spectator sport.” This catchy slogan has not only helped him attract a great deal of local business, but it is also so very true. His clients know, up-front, that they will need to invest some time and effort in understanding their investments, which allows him to sleep better at night because he knows that these folks are not investing in “him,” they are investing in the plan he helped them develop).

Smart investing is not nearly as complicated as many might lead you to believe. In fact, it really comes down to several scientific factors that just about anyone can implement in their own portfolio. And what makes smart investing even easier than a lot of people would like to believe is that, depending on the type of investment management program you choose, the investment can actually take care of itself.

Ultimately, the most basic premise behind smart investing is having a plan. We refer throughout this site to something called the asset allocation model that you will design before you invest a single cent. (You can learn more about the asset allocation model on the asset allocation section of the site). This is the most basic premise because, like the outline of a school paper, the game plan of a particular sports play, a business plan for a new start-up and these analogies can go on ad nauseum, the asset allocation model gets you thinking about the toughest questions up-front. Once you have the answers to these tough questions relating to risk, investment objective and time horizon, you can start picking the right investments to flesh out your investment plan.

This brings us to the second basic premise of smart investing: the investments themselves. While the asset allocation model will address tangible and measurable factors, it leaves out one important question: how involved do you want to be when it comes to investment management? Even if you hire a financial planner to look after all of your investment needs, you will still need to take some interest in your financial goals. However, whether you need to get involved once every quarter or once every year will depend greatly on the investments you choose. For the investor who wants greater control and flexibility in terms of cherry picking the right investments that will help achieve all of his investment goals, there will need to be greater involvement and more frequent reviews. However, this will allow the investor to pick only the most appropriate investments. The investor who wants to spend only the minimum required amount of time with his investments (and financial planner) may opt for a solution called a Fund of Funds or a pre-designed Portfolio of Funds that is very similar to a pre-determined “shopping basket” of mutual funds. This investment package will leave the investor will few (if any) options insofar as specific investments are concerned, but can be very hands-off in that the investment will rebalance itself once certain criteria are met (e.g. deviation from the asset allocation by a factor of 5% or more). Again, extremely hands-off. But the level of involvement that you choose can surely help you narrow your field of potential investments.

The key to this second basic premise is that smart investing involves sticking to the plan (normally devised in the first step – asset allocation). To be a smart investor, you will need to rebalance your portfolio and make necessary changes within the scope of your asset allocation model or within the guidelines set forth in terms of the investments you choose (e.g. if you need to deal with one bond fund, you should stay invested in that same asset class and not chase higher returns in another class). This is where the second premise comes into the picture because the type of investments you choose can mark the difference of a smart investor.

Through the course of your financial life, your investment management style will change. This does not negate the original asset allocation model that you designed when you began investing. Rather, as you age and evolve so does your investment plan. This means that retirement investing will also be an evolution of your original investment management style.

To explain this better, consider your goals at the start of your investment career. It is quite likely that the resources available to invest were less abundant, meaning you were more likely to invest $100 per month than have $1,000,000 to invest. As such, you would probably need to accept greater risks for your $100 per month than you would if you had $1 million straight away.

However, once you reach that retirement goal, you may opt to retire now that you have the financial resources to do so. And if that goal was, say, $1 million, it is extremely unlikely that you would draw the full $1 million to spend on that specific day. Instead, it is more likely that over the course of your retirement years, the $1 million would be drawn in incremental amounts so that most if not all of the resources are exhausted by the time you die.

Essentially, most of your savings will remain invested. Your goals will have changed from one of capital growth and accumulation to one of capital preservation. It is also quite likely that your objective would be to earn a decent income from your investments while preserving as much of the capital as possible so that you are drawing little from the capital and more from the generated income.

With the shift in post-retirement investing goals, objectives, risks and so on, so will there be a shift in your asset allocation model. Compared to earlier years where growth and accumulation were key, retirement investing will typically involve a greater fixed-income component to your portfolio. For most, there will still be a growth element, which can almost always be achieved with growth funds of some sort. Not only do growth funds allow proper risk spread and greater holdings given the costs, but it allows more time and attention to be focused on the portfolio’s core, which matters most – and that core is the now larger, greater income component.

This shift in retirement investing will turn the former “equity” investor into more of a “bond” or “income” investor, a change that is not always easily accomplished by many investors. The danger is that a lot of investors who do not understand how income investments work will end up in low-interest paying term deposits, meaning greater capital erosion and reduced lifestyle.

Knowing that there will be a fundamental shift in your retirement investing needs and being well aware of the dangers that such a shift will pose, it makes sense early on to establish and develop a relationship with an advisor you can trust and with whom you can work well. This does not necessarily mean that 100% of your assets should be invested with this advisor if you insist on managing your investment portfolio independently, but you could outsource the areas of your planning in which you have either little interest or little knowledge.

Ultimately, there is no question that there is a difference between pre- and post retirement investing. Not only will the asset allocation model evolve since its inception at your investment start-date, but the core investment goals will also evolve as will your lifestyle. This can present some dangers as the bulk of your portfolio in terms of percentage will shift from high equity holdings to lower equity holdings and from low income holdings to higher income holdings.

Once you have decided to invest money, whether you invest in individual securities or mutual funds, whether you invest $100 million or $100 per month, you will find yourself immersed in the domain of investment management.  For most, this idea is either a welcome change to their existing routine or it is a frightening thought (often exceedingly frightening).

However, investment management need not be such a daunting concept. In fact, it can rather simple if you have the right people working for you (and in the case of mutual fund investments, before you invest so much as a single cent with a fund manager, you are essentially “convinced” that you are working with the right people).

Of course, investing in a mutual fund makes the task of investment management quite a bit simpler. However, there are still some very basic tasks you should endeavor to complete every quarter at the very least to ensure that your original investment objectives are not only being met by your current investment portfolio but that those investments have not made fundamental changes to their individual approach, objectives, risks and strategy. In some cases, this can be as simple as going back to the Prospectus that is published annually by the fund company and exploring their Fund Objective.

Remember, when your investment advisor recommends a fund (or you find one yourself that meets your individual investment objectives and fits within your total asset allocation model) your decision will often be predicated by how well the fund’s objective can help you achieve yours. Therefore, if the fund’s objective changes then you could see a fundamental change to its performance and an obvious change to how that specific fund will contribute to your own investment objectives.

In addition to Fund Objective, some of the key areas of focus when it comes to your investment management tasks should be:

Management Profile – has it changed? If so, why? You can find this information primarily in the Prospectus or on popular analysis sites like Morningstar, but if there has been a change then you will want to investigate by digging deeper on the fund company’s website and searching its press releases. Understand the cause behind the change and determine as best as you can whether such a change can be tolerated by your portfolio.

Market Performance versus Index and Category.  If your fund has been able to exceed Index and Category returns consistently over the past 3 years but all of a sudden has fallen behind, understand why. If the fund in question has a high beta (meaning it is more sensitive than the market’s fluctuations) then that might be sufficient during times of poor market performance. However, if the markets are steady as a whole and your fund underperforms, what is the reason? What caused this instance of under-performance and are such changes acceptable to your portfolio? Again, Morningstar does a great job of analyzing fund performance against index and category.

How has the underlying Portfolio changed in the fund, if at all? This part is a little more involved and requires a bit of digging on the investor’s part, but is extremely vital. Remember that your investment decision was based on several factors, including asset allocation, management style and investment quality. You should understand if any of these factors have changed considerably since you made your purchase or last-reviewed the fund. If there have been changes to any of these three areas (asset allocation, investment style and investment quality) you will need to re-evaluate and/or re-balance the rest of your portfolio. Often, it is simply easier to replace the offending fund with another (there are plenty) that meets the original investment requirements. However, it is strongly advised that you understand the basis for the change before making hasty trades in and out of a fund and since most fund companies will provide management commentaries about such fundamental changes such information is often easily obtained.

Unfortunately, it may seem from the above that the task of investment management is still fairly complicated . This is actually quite far from the truth. With the resources available online, the “chore” can be rather illuminating and educational. Most importantly, it allows investors to get a deeper understanding of the funds and investments that are intended to help them achieve their financial goals. To recap, investment management when it comes to a mutual fund portfolio can be as simple as:

>> Reviewing the Fund’s Objective

>> Understanding changes in fund management, if any.

>> Comparing fund performance to index and category performance and investigating changes in trends.

>>  Reviewing changes and abnormalities in the fund’s underlying portfolio of securities.

It is not all that difficult to learn to invest. In fact, as technology has evolved, so have the resources that help people invest, many of which are free including this site. However, there are certain investment fundamentals that people should understand as they start to learn to invest and, more importantly, to invest well.

Smart Investing is the product of a lot of information and analysis.  When investing in mutual funds, the process of analysis is made much easier, again thanks to the free tools available online. In addition, a lot of mutual fund companies will publish information about their funds, commentaries from their fund managers and overviews of their product offerings that allow investors to obtain highly relevant, timely, and important information about the investment in question.

You can learn to invest well by learning to read financial statements. Although mutual fund investments take a lot of the analysis out of your hands and puts the workload on the fund manager, understanding financial statements can help in determining where to invest. For example, one particular mutual fund might have a heavy weight in a particular stock. Wise investors will examine this security’s financial statements in greater detail to determine whether the fund’s strategy aligns with the investors’.  Although some sort of financial statement knowledge is recommended, it is not necessarily required as much of information that can be useful for the investor can be found in the notes section.

Know where to go for information. Part of the financial planner’s job is to know where to find information they need. Not surprisingly, a lot of the key information that a financial planner needs can be found online at free sites, such as Morningstar. If you invest in mutual funds, then the fund companies often offer a lot of great information. If you invest in your own securities, then you should know what particular sites you can visit that discuss such specific investments .

In other words, you can learn to invest well by understanding the information that particular securities/companies publish or, at the very least, where to find that information. Again, mutual fund investments take a lot of this analysis off of your hands, but that does not negate your need to find information about that particular mutual fund or the investments within the mutual fund.