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onomewrites

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  1. Asset Allocation

    What Is Asset Allocation? Asset allocation is one of the most important steps in your portfolio management process. The initial step for the financial planner is to determine your required rate of return based on your financial goals, risk tolerance and time horizon. The second step is to ascertain capital market expectations, as well as the expected return and expected volatility of each asset classes. There are two categories of asset classes: 1. Traditional asset classes include stocks, bonds, and cash 2. Alternative asset classes include mutual funds, commodities, real estate, private equity, hedge funds The third step is asset allocation, in which the financial planner develops a strategy of how much money to invest in each asset class for you to achieve your return objective at a risk level that you are able and willing to accept. The premise of asset allocation is that each asset class has a different risk and return characteristic, thus providing the investor with risk diversification benefits. For instance, a 20% stock / 80% bond portfolio will provide lower risk and return and a more regular cash flow than an 80% stock/20% bond portfolio. It is also important to note that the latter is a riskier portfolio and is more suitable for young individuals in their twenties who have a longer time horizon and can tolerate stock market volatility. On the other hand, the first portfolio is more suitable for individuals who are nearing retirement and cannot withstand a drastic decline in their portfolio. Why Is Asset Allocation Important? As explained above, the most significant benefit of asset allocation is that it provides diversification and helps the investor manage the risk of his/her portfolio. While most people do understand this concept, they would still focus on which investment would outperform or whether equity markets would trend up or down. Although these are important considerations, many professional money managers believe that asset allocation is the most important decision for the investors What Are Different Asset Allocation Strategies? As previously mentioned, the most important factors in determining the asset mix are risk tolerance and time horizon. An individual with a longer time horizon and higher risk tolerance should automatically tilt his or her portfolio toward stocks. According to a traditional rule of thumb, the percentage of stock allocation should be equal to 100 minus your age. So, if your age is 25, then 75% of the portfolio should be allocated toward stocks. Over the years, many experts have expressed concern over using this rule as they believe it results in extremely conservative portfolios for retirees. Also, following the aforementioned rule deprives an individual of venturing into other asset classes other than stocks and bonds. For instance, during high inflation, stocks, bonds, as well as cash and cash equivalents tend to underperform. To combat inflation (in financial terms we can say to hedge inflation risks), individuals can invest their money in real estate and commodities to achieve low variability in their portfolio returns.
  2. Types of investment risks -2

    TYPES OF INVESTMENT RISKS Liquidity Risk Liquidity risk refers to the possibility that an investor may not be able to buy or sell an investment as and when desired or in sufficient quantities because opportunities are limited. A good example of liquidity risk is selling real estate. In most cases, it will be difficult to sell a property at any given moment should the need arise, unlike government securities or blue-chip stocks. Market Risk Market risk, also called systematic risk, is a risk that will affect all securities in the same manner. In other words, it is caused by some factor that cannot be controlled by diversification. This is an important point to consider when you are recommending mutual funds, which are appealing to investors in large part because they are a quick way to diversify. You must always ask yourself what kind of diversification your client needs. Reinvestment Risk In a declining interest rate environment, bondholders who have bonds coming due or being called face the difficult task of investing the proceeds in bond issues with equal or greater interest rates than the redeemed bonds. As a result, they are often forced to purchase securities that do not provide the same level of income, unless they take on more credit or market risk and buy bonds with lower credit ratings. This situation is known as reinvestment risk: it is the risk that falling interest rates will lead to a decline in cash flow from an investment when its principal and interest payments are reinvested at lower rates. Social/Political / legislative Risk Risk associated with the possibility of nationalization, unfavorable government action or social changes resulting in a loss of value is called social or political risk. Because the Congress has the power to change laws affecting securities, any ruling that results in adverse consequences is also known as legislative risk. Currency/Exchange Rate Risk Currency or exchange rate risk is a form of risk that arises from the change in price of one currency against another. The constant fluctuations in the foreign currency in which an investment is denominated vis-à-vis one's home currency may add risk to the value of a security. Investors will need to convert any profits from foreign assets into Naira. If the dollar is strong, the value of a foreign stock or bond purchased on a foreign exchange will decline. This risk is particularly augmented if the currency of one particular country drops significantly and all of one's investments are in that country's foreign assets. If the dollar is weak, however, the value of investor’s foreign assets will rise. Understandably, currency risk is greater for shorter term investments, which do not have time to level off like longer term foreign investments.
  3. Type of investment risk -1

    TYPES OF INVESTMENT RISKS -1 1. Interest Risk Interest rate risk is the possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates. Whenever investors buy securities that offer a fixed rate of return, they are exposing themselves to interest rate risk. This is true for bonds and also for preferred stocks. 2. Business Risk Business risk is the measure of risk associated with a particular security. It is also known as unsystematic risk and refers to the risk associated with a specific issuer of a security. Generally speaking, all businesses in the same industry have similar types of business risk. But used more specifically, business risk refers to the possibility that the issuer of a stock or a bond may go bankrupt or be unable to pay the interest or principal in the case of bonds. A common way to avoid unsystematic risk is to diversify - that is, to buy mutual funds, which hold the securities of many different companies. 3. Credit Risk This refers to the possibility that a particular bond issuer will not be able to make expected interest rate payments and/or principal repayment. Typically, the higher the credit risk, the higher the interest rate on the bond. 4. Taxability Risk This applies to municipal bond offerings, and refers to the risk that a security that was issued with tax-exempt status could potentially lose that status prior to maturity. Since municipal bonds carry a lower interest rate than fully taxable bonds, the bond holders would end up with a lower after-tax yield than originally planned. 5. Call Risk Call risk is specific to bond issues and refers to the possibility that a debt security will be called prior to maturity. Call risk usually goes hand in hand with reinvestment risk, discussed below, because the bondholder must find an investment that provides the same level of income for equal risk. Call risk is most prevalent when interest rates are falling, as companies trying to save money will usually redeem bond issues with higher coupons and replace them on the bond market with issues with lower interest rates. In a declining interest rate environment, the investor is usually forced to take on more risk in order to replace the same income stream. 6. Inflationary Risk Also known as purchasing power risk, inflationary risk is the chance that the value of an asset or income will be eroded as inflation shrinks the value of a country's currency. Put another way, it is the risk that future inflation will cause the purchasing power of cash flow from an investment to decline. The best way to fight this type of risk is through appreciable investments, such as stocks or convertible bonds, which have a growth component that stays ahead of inflation over the long term.
  4. Financial Statements -3

    Additional Financial Information In addition to financial statements, prospective lenders or investors will also want to see a Sales Forecast and, if your business will have employees, a Personnel Plan. Sales Forecast The Sales Forecast is a chart that breaks down how much your business expects to sell in various categories by month (for the next year) and by year (for the following two to four years). For a cleaning service business, the sales forecast might list one-time cleanings, monthly cleaning contracts and annual cleaning contracts and further break those down by houses, condos, apartment units, entire apartment buildings and office buildings. For a grocery store, the sales forecast might list projected sales of fruits, vegetables, dairy, meat, seafood, packaged goods and hot prepared meals. If your business sells a product, your sales forecast should include the cost of goods sold. Personnel Plan If your business will have employees and not just managers, you will need a Personnel Plan showing what types of employees you will have (for example, cashiers, butchers, drivers, stockers and cooks), along with what they will cost in terms of salary and wages, health insurance, retirement plan contribution, workers compensation and insurance Use of Loan or Investment Capital You’ve made a strong case for your business idea, its viability and your ability to execute it. So how, exactly, do you plan to use any money that lenders or investors offer you? They’ll want to know. If you’re requesting a $100,000 loan, for example, you might break that down into the amount that will go toward equipment such as cash registers, shelving and refrigerated display cases; purchasing inventory; and carrying out your marketing campaign. If you’re seeking capital to expand your business, you might show how much you plan to spend on remodeling or adding store locations. If you're selling business units, state the individual price per unit. Proposed Repayment Schedule or Exit Strategy Potential lenders will want to know how and when you intend to repay the loan or line of credit, so you should put together a proposed repayment schedule and terms. They may not agree with your suggestion, but offering proposed terms shows that you are considering the loan from the lender's perspective. Also describe what collateral is available to secure the loan, such as inventory, accounts receivable, real estate, vehicles or equipment. Be aware that lenders do not count the full value of your collateral, and each lender may count a different percentage. Potential investors will want to know when their investment will pay off and how much of a return to expect. They will also want to see that you have an exit strategy to cash out on your investment – and theirs. Do you plan to sell the business outright to another individual or company? Hold an initial public offering and go public? What will your exit strategy be if the business is failing? At what point have you determined that you will cut your losses and sell or close down, and how will you repay investors if this happens? Remember, no one has to lend you any money or invest in your company. When they are considering doing so, they will be comparing the risk and return of working with you to the risk and return they could get from lending to or investing in other companies. You have to convince them that your business is the most promising option.
  5. Financial Statements -2

    Financial Statements-2 Whatever their form, financial statements must be complete, accurate and thorough. Each number on your spreadsheets must mean something. Don't estimate payroll, for instance; determine what it will actually be. Your income statement must reconcile to your cash flow statement, which reconciles to your balance sheet. Your balance sheet must balance at the end of every period. You must have supporting schedules (e.g., depreciation and amortization schedules) to back up your projections. Use realistic projections. In estimating the growth of your business, you will make certain assumptions, which should be based on thorough industry research combined with a strategy for how you'll compete. Also, analyze how quickly you'll achieve positive cash flow. Investors vary in their standards, but most like to see positive cash flow within the first year of operation, particularly if this if your first venture. In order for your projections to be accurate, you must know your business. If you've built an accurate and realistic model, but still project negative cash flow for more than 12 months, rethink your business model. When you put together your financial statements, make sure there are absolutely no typos or mistakes in your calculations. If you are inexperienced in preparing these statements, hire an accountant to help you. Even if you and all of your business partners know exactly what you are doing, you may still want to hire an unbiased, outside professional to check your work and give you a second opinion on whether your projections are realistic. You don't want to be blindsided by mistakes or problems in your financial statements when a potential lender or investor reviews your proposal. What You Can Learn from Your Financial Statements While the financial statements are helpful in and of themselves, the data they contain can also be used to calculate financial ratios such as gross profit margin, return on investment and return on owner’s equity. Ratios provide helpful information about a company's liquidity, profitability, debt, operating performance, cash flow and investment valuation.
  6. Financial Statements -1

    Three Key Financial Statements Your financial plan should include three key financial statements: the income statement, the balance sheet and the cash flow statement. Let's look at what each statement is and why you need it. 1. Income Statement/Profit and Loss Statement The Income Statement, also called the profit and loss statement or P&L, summarizes your company's revenue and expenses. Revenues are your company's sales and/or other sources of income (for example, a cleaning business earns revenues from the hourly or per-room or per-home fee that it charges its clients; a grocery store earns revenue from the foods and other products and services it sells. Expenses include items such as the cost of goods sold (the money you spend buying produce, meat and dairy from local farmers, for example) payroll for employees, payroll, sales and income taxes, business insurance and loan interest. The bottom line of the income statement shows the company’s net income, or its revenue minus expenses. Lenders and investors want to know what kind of numbers your company is working with and whether your company is profitable or expects to be soon. 2. Balance Sheet The Balance Sheet shows your company's assets and liabilities. It's called a balance sheet because the assets must perfectly balance the liabilities. Within each category are numerous subcategories. For example, your assets will include cash, accounts receivable, inventory and equipment. Your liabilities will include accounts payable, wages and salaries, taxes, rent and utilities, and loan balances. The Balance Sheetis important because it shows the company's financial position at a specific point in time, and it compares what you own to what you owe 3. Cash Flow Statement/Cash Budget The Cash Flow Statement shows the sums you expect to be coming into and going out of your business in a given time frame. Topics you'll need to examine to predict cash flow include sales forecasts, cash receipts vs. credit receipts and the time frame for collecting accounts receivable. How much will these expenses be, and how often will you need to pay them? Will you have trade credit, and how long will you have to pay your suppliers? Cash flow statements not only show potential investors that you know what you're doing, they also help you to make sure your business model is financially viable and to establish goals that you want to achieve. Your financial statements should show both a long- and short-term vision for your business. In business plans, three-year and five-year projections are considered long term, and your plan will be expected to cover at least three years. Your projections should be neither overly optimistic best-case scenarios, nor overly cautious worst-case scenarios, but realistic in-between projections that you can support. Don’t commit the common error of making hockey-stick projections that predict sudden, sharp growth – that’s a classic way to look like an amateur. Lenders may want your statements presented in a certain way, so ask before you draw them up. A bank, for example, may want to see monthly projections for the first year, quarterly projections for the second year and annual projections for the third year. In addition to financial statements for your company, if you are a new business, you may need to provide personal financial statements for each owner. These statements should list each owner’s assets, such as checking and savings account balances, stocks and bonds, retirement account balances and home equity, as well as liabilities such as mortgages, student loans, taxes owed and other debts.
  7. Financial Planning -2

    The confusion surrounding the term financial plans might stem from the fact that there are many types of financial statement reports. Individually, financial statements show either the past, present, or future financial results. More specifically, financial statements also only reflect the specific categories which are relevant. For instance, investing activities are not adequately displayed in a balance sheet. A financial plan is a combination of the individual financial statements and reflect all categories of transactions (operations & expenses & investing) over time. Some period-specific financial statement examples include pro forma statements (historical period) and prospective statements (current and future period). Compilations are a type of service which involves "presenting, in the form of financial statements, information that is the representation of management “There are two types of "prospective financial statements": financial forecasts & financial projections and both relate to the current/future time period. Prospective financial statements are a time period-type of financial statement which may reflect the current/future financial status of a company using three main reports/financial statements: cash flow statement, income statement, and balance sheet. "Prospective financial statements are of two types- forecasts and projections. Forecasts are based on management's expected financial position, results of operations, and cash flows." Pro Forma statements take previously recorded results, the historical financial data, and present a "what-if": "what-if" a transaction had happened sooner. While the common usage of the term "financial plan" often refers to a formal and defined series of steps or goals, there is some technical confusion about what the term "financial plan" actually means in the industry. For example, one of the industry's leading professional organizations, the Certified Financial Planner Board of Standards, lacks any definition for the term "financial plan" in its Standards of Professional Conduct publication. This publication outlines the professional financial planner's job, and explains the process of financial planning, but the term "financial plan" never appears in the publication's text. The accounting and finance industries have distinct responsibilities and roles. When the products of their work are combined, it produces a complete picture, a financial plan. A financial analyst studies the data and facts (regulations/standards), which are processed, recorded, and presented by accountants. Normally, finance personnel study the data results - meaning what has happened or what might happen - and propose a solution to an inefficiency. Investors and financial institutions must see both the issue and the solution to make an informed decision. Accountants and financial planners are both involved with presenting issues and resolving inefficiencies, so together, the results and explanation are provided in a financial plan.
  8. Financial Planning -1

    FINANCIAL PLANNING Financial planning is the task of determining how a business will afford to achieve its strategic goals and objectives. Usually, a company creates a Financial Plan immediately after the vision and objectives have been set. The financial plan describes each of the activities, resources, equipment and materials that are needed to achieve these objectives, as well as the timeframes involved. The Financial Planning activity involves the following tasks: · Assess the business environment · Confirm the business vision and objectives · Identify the types of resources needed to achieve these objectives · Quantify the amount of resource (labor, equipment, materials) · Calculate the total cost of each type of resource · Summarize the costs to create a budget · Identify any risks and issues with the budget set. Performing Financial Planning is critical to the success of any organization. It provides the Business Plan with rigor, by confirming that the objectives set are achievable from a financial point of view. It also helps the CEO to set financial targets for the organization, and reward staff for meeting objectives within the budget set. The role of financial planning includes three categories: 1. Strategic role of financial management 2. Objectives of financial management 3. The planning cycles When drafting a financial plan, the company should establish the planning horizon,which is the time period of the plan, whether it be on a short-term (usually 12 months) or long-term (2–5 years) basis. Also, the individual projects and investment proposals of each operational unit within the company should be totaled and treated as one large project. This process is called aggregation. A financial plan may contain prospective financial statements, which are similar, but different, than a budget. Financial plans are the ENTIRE financial accounting overview of a company. Complete financial plans contain all periods and transaction types. It's a combination of the financial statements which independently only reflect a past, present, or future state of the company. Financial plans are the collection of the historical, present, and future financial statements; for example, a (historical & present) costly expense from an operational issue is normally presented prior to the issuance of the prospective financial statements which propose a solution to said operational issue.
  9. WHY IS IT IMPORTANT TO HAVE AN INVESTMENT? Investing means to put forth an amount of something with the expectation that it will generate a return in the future. You will hear people talk about investing their time or effort, and of course, money. When you invest your money, it means that instead of spending it you are putting it in some sort of vehicle that will use it to make more money. And that’s why investing is important Developing an investment plan requires you to quantify your goals and could greatly improve your chances of achieving the retirement you have dreamed of. It could help maximize the chances of meeting the objectives in your financial plan that best aligns with your financial goals. Regardless of the state of your current financial picture, it’s always a good idea review your financial plan and understand how it relates to your financial goals and be aware of the options you can take that can help your financial well-being. Investing creates wealth. It’s easier to become financially independent when your money is working for you. The greater the return you earn from investments, the less you have to rely on your working salary to support yourself and achieve your financial goals. How do I start investing? Technically, anything that generates a return is an “investment”. This means even your piggy savings account at 1% interest is an “investment”. However, when most people, myself included, talk about investing, we’re referring to more profitable vehicles such a mutual funds, ETFs, and stocks. Personally, I think it’s best to start small and work your way up. Begin with a savings account so you can get used to putting away part of your income, and also accumulate some capital for investments that require a larger buy-in. Mutual funds will also let you start small, whereas opening on a brokerage account to begin trading stocks usually requires at least more. Where most twenty-something seem to be afraid to invest in the stock market, I can’t emphasize enough how much opportunity there is to really kick start lifetime wealth-building if you start now. It doesn’t even matter if you don’t have a lot to contribute, time is on your side. Why should I invest in stocks? Stocks can provide a better return than simply keeping your money in a savings account. I remember when I first learned about how stocks work, the things that shocked me most were: 1. you can receive money on a regular basis simply for holding a stock (this is called dividend) 2. This money will usually increase the longer you hold a stock (many regular dividend payers raise their dividend annually), which means you’re actually paid more every subsequent year you hold an investment). LIFE STAGES FINANCIAL PLANNING The investment strategies and tactics for achieving short-term goals are very different from those used to accomplish long-term ones. Managing for tax efficiency plays a key role every step of the way. ACCUMULATE In the accumulation phase you are working hard to build assets, support the household, save for college and, hopefully, set aside money for retirement. When it comes to investing in this phase, every dollar counts because dollars invested early will work hardest for you later. SPEND Phase two is retirement. During this phase, you’re likely living on a reduced income but now have the time to do things you enjoy. If you’ve planned adequately and factored in the potential for higher medical expenses along with your monthly bills, you should have enough extra money for a good quality of life. RELEASE The release phase begins upon your death when your heirs and charitable organizations can benefit from your generosity. Tax-efficient estate planning gives you the satisfaction of offering a leg-up to your children and grandchildren or a little bit of hope to the less fortunate.
  10. INVESTMENT TERMS DEALING WITH PORTFOLIO MANAGEMENT Asset Allocation Asset allocation is an approach to managing capital that involves setting parameters for different asset classes such as equities (ownership, or stocks), fixed-income (bonds), real estate, cash, or commodities (gold, silver, etc.). Asset classes generally have different characteristics and behavior patterns, getting the right mix for a specific investor's situation can increase the probability of a successful outcome in accordance with the investor's goals and risk tolerance. For example, stocks and bonds play a different role in an investment portfolio beyond the returns they may generate. Investment Mandate An investment mandate is a set of guidelines, rules, and objective used to manage a specific portfolio or pool of capital. For example, a capital preservation investment mandate is meant for a portfolio that cannot risk high volatility even if it means accepting lower returns. Asset Management Company An asset management company is a business that actually invests capital on behalf of clients, shareholders, or partners. The asset management business side of Vanguard is the one buying and selling the underlying holdings of its mutual funds and ETFs. Popular asset management companies in Nigeria are ARM, Stanbic Asset Management Company, Vetiva Capitals etc. Registered Investment Advisor An RIA is a firm that is engaged, for compensation, in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications. RIAs can include asset management companies, investment advisory companies, financial planning companies, and a host of other investment business models. The special thing about RIAs is that they are bound by a fiduciary duty to put the needs of the client above their own rather than the lower suitability standard that applies to taxable brokerage accounts. Stock Broker A stock broker is an institution or individual who or which executes buy or sell orders on behalf of a customer. Stock brokers settle trades -- making sure cash gets to the right party and the security gets to the right party by a certain deadline -- against their client's custody account. There are many different types of stock trades you can submit to your stock broker but be careful about becoming over-reliant upon them. A stop-loss trade, by way of illustration, won't always protect your portfolio. Additionally, it is sometimes possible to buy stock without a broker. Stock Trades There are at least twelve different types of stock trades you can place with a broker to buy or sell ownership in companies including market orders, limit orders, and stop loss orders. INVESTMENT TERMS RELATED TO A COMPANY Board of Directors - A company's board of directors is elected by the stockholders to watch out for their interests, hire and fire the CEO, set the official dividend payout policy, and consider recommending or voting against proposed mergers. Enterprise Value - Enterprise value refers to the total cost of acquiring all of a company's stock and debt. Market Capitalization - Market capitalization refers to the value of all outstanding shares of a company's stock if you could buy them at the current stock price. Income Statement - An income statement shows a company's revenues,expenses, taxes, and net income. Essentially, it shows the company's profit/loss standing. Balance Sheet - A balance sheet shows a company's assets, liabilities, and shareholders' equity. Annual & Financial Statements - An annual disclosure document certain firms are required to file with the SEC, it contains in-depth information about a business including its finances, business model, and much more. OTHER INVESTMENT TERMS TO BE KNOWN Stock Exchange - A stock exchange is an institution, organization, or association which hosts a market for buyers and sellers of equities to come together during certain business hours and trade with one another. Price-to-Earnings Ratio - Also known as the p/e ratio, it tells you how many years it would take for a company to pay back its purchase price per share from after-tax profits alone at current profits with no growth. Dividend Yield - The current yield of a common stock at its present dividend rate. If a stock is trading at N100 per share and pays out N5 in annual dividends, the dividend yield would be 5%. Volatility - Volatility refers to the degree to which a traded security fluctuates in price. Derivative - A derivative is an asset that derives its value from another source.
  11. DEFINITIONS OF SOME TERMS IN INVESTMENT Common stock: A share of common stock represents ownership in a legally formed corporation. For most companies, there is a single class of stock that represents the entire common equity ownership. However, some companies have multiple classes of stock, including dual classes of stocks. Often, one class of the stock will have more voting rights than another class of the stock. Owners of common stock are entitled to their proportionate share of a company's earnings, if any, some of which may be distributed as cash dividends. The best of the best stocks is usually referred to as blue chip. Preferred stock This is a sort of hybrid security that, while technically equity, behaves somewhat like common stock and somewhat like a bond. There are also different types of preferred stock such as Prior Preferred Stock, Preference Preferred Stock, Convertible Preferred Stock, Participating Preferred Stock and Cumulative Preferred Stock. Bond A bond represents money loaned to the bond issuer. Typically, the bond issuer promises to repay the entire principal loan amount on a future day, known as the maturity date, and pay interest income in the meantime based upon a coupon rate. There are many types of bonds including sovereign bonds issued by governments such as Treasury bonds, tax-free municipal bonds, corporate bonds, and savings bonds such as the Series EE savings bond and the Series I savings bond. There are investment grade bonds, the highest being AAA rated bonds, and, on the opposite end of the spectrum, junk bonds. If you don't want to buy bonds individually, you can invest in bond funds. Real estate Real estate is tangible property, such as land or buildings, that the owner can use or allow others to use in exchange for a payment known as rent. INVESTMENT TERMS DEALING WITH TYPES OF INVESTMENT STRUCTURES Mutual Fund A mutual fund is a pooled portfolio. Investors buy shares or units in a trust and the money is invested by a professional portfolio manager. The fund itself holds the individual stocks, in the case of equity funds, or bonds, in the case of bond funds, with the investors in the mutual fund receiving an annual report each year, detailing the investments owned, income generated, capital gains, both realized and unrealized, and more. Mutual funds do not trade throughout the day to avoid allowing people to take advantage of the underlying change in net asset value. Instead, buy and sell orders are collected throughout the day and once the markets have closed, executed based upon the final calculated value for that trading day. Exchange Traded Funds Also known as ETFs, exchange traded funds are mutual funds that trade throughout the day on stock exchanges as if they were stocks. This means you can actually pay more or less than the value of the underlying holdings in the fund. In some cases, ETFs might have certain tax advantages but most of their benefits compared to traditional mutual funds are largely a triumph of marketing over substance.If you want to use them in your portfolio, fine. If you prefer traditionally structured mutual funds in your portfolio, perhaps, better. Index Funds An index fund is not a distinct or special type of fund. Rather, it is an passively managed mutual fund, sometimes trading as an ETF, that allows the designer of an index to effectively manage the fund through controlling the methodology the fund's portfolio manager uses to buy or sell investments. The rules for which stocks get included in the portfolio are determined by a committees -- and that is what really matters as the investor in the index fund is still buying individual stocks only through a mechanism that hides them from plain sight unless you dig down into the holdings. Usually, index funds offer much lower expenses than non-index funds due to the fact it piggybacks on other investor's decisions, making it one of the best choices for smaller investors, particularly within tax shelters, as well as other investors in certain limited circumstances. Hedge Funds A hedge fund is a private entity, in olden days most often a limited partnership but more commonly a limited liability company as the latter has evolved to become the de facto standard due to its superior flexibility, that invests money from its limited partners or members in accordance with a particular style or strategy. Often, the hedge fund charges a flat 2% annual fee plus 20% of the profits over a hurdle rate with some other modifications to protect the investors. Due to government regulations meant to protect the inexperienced, investing in hedge funds can be difficult for most ordinary investors. Trust Funds Trust funds are a special type of entity in the legal system that offers tremendous asset protection benefits and, sometimes, tax benefits, if intelligently structured. Trust funds can hold almost any asset imaginable from stocks, bonds, and real estate to mutual funds, hedge funds, art, and productive farms. The downside is that the trust fund tax rates are compressed on income that isn't distributed to the beneficiary as a way to prevent huge accumulations of capital that lead to another aristocracy. That means much bigger bites from the Federal, state, and local governments without some sort of mitigation from prudent planning. Real Estate Investment Trusts (REITs) Some investors prefer to buy real estate through real estate investment trusts, or REITs, which trade as if they were stocks and have special tax treatment. There are all different types of REITs specializing in all different types of real estate. Master Limited Partnerships (MLPs) MLPs, as they are often known, are limited partnerships that trade similarly to stocks. Given the unique tax treatment and complex rules surrounding them, investors who don't know what they are doing should generally avoid investing in MLPs, particularly in retirement accounts where the tax consequences can be unpleasant if not masterfully managed.
  12. investment

    INVESTMENT Investing is actually pretty simple; you're basically putting your money to work for you so that you don't have to take a second job, or work overtime hours to increase your earning potential. There are many different ways to make an investment, such as stocks, bonds, mutual funds or real estate, and they don't always require a large sum of money to start. STEPS TO TAKE TO INVEST · Get your finances in order Jumping into investing without first examining your finances is like jumping into the deep end of the pool without knowing how to swim. On top of the cost of living, payments to outstanding credit card balances and loans can eat into the amount of money left to invest. Luckily, investing doesn't require a significant sum to start. · Learn the Basics You don't need to be a financial expert to invest, but you do need to learn some basic terminology so that you are better equipped to make informed decisions. Learn the differences between stocks, bonds, mutual funds and certificate of deposits. You should also learn financial theories such as portfolio optimization, diversification and marketing efficiency. Reading books written by popular investors is also a good thing. · Set Goals Once you have established your investing budget and have learned the basics, it's time to set your investing goal. Even though all investors are trying to make money, each one comes from a diverse background and has different needs. Safety of capital, income and capital appreciation are some factors to consider; what is best for you will depend on your age, position in life and personal circumstances. A 35-year-old business executive and a 75-year-old widow will have very different needs. · Determine Your Risk Tolerance Would a small drop in your overall investment value make you weak in the knees? Before deciding on which investments are right for you, you need to know how much risk you are willing to assume. Your risk tolerance will vary according to your age, income requirements and financial goals. · Find Your Investing Style Now that you know your risk tolerance and goals, what is your investing style? Many first-time investors will find that their goals and risk tolerance will often not match up. For example, if you love fast cars but are looking for safety of capital, you're better off taking a more conservative approach to investing. Conservative investors will generally invest 70-75% of their money in low-risk, fixed-income securities such as Treasury bills, with 15-20% dedicated to blue chip equities. On the other hand, very aggressive investors will generally invest 80-100% of their money in equities. · Learn the Cost It is equally important to learn the costs of investing, as certain costs can cut into your investment returns. As a whole, passive investing strategies tend to have lower fees than active investing strategies such as trading stocks. Stock brokers charge commissions. For investors starting out with a smaller investment, a discount broker is probably a better choice because they charge a reduced commission. On the other hand, if you are purchasing mutual funds, keep in mind that funds charge various management fees, which is the cost of operating the fund, and some funds charge load fees. · Find a broker or Advisor The type of advisor that is right for you depends on the amount of time you are willing to spend on your investments and your risk tolerance. Choosing a financial advisor is a big decision. Factors to consider include their reputation and performance, how much they charge, how much they plan on communicating with you and what additional services they can offer. · Choose Investment Now comes the fun part: choosing the investments that will become a part of your investment portfolio. If you have a conservative investment style, your portfolio should consist mainly of low-risk, income-producing securities such as federal bonds and money market funds. Key concepts here are asset allocation and diversification. In asset allocation, you are balancing risk and reward by dividing your money between the three asset classes: equities, fixed-income and cash. By diversifying among different asset classes, you avoid the issues associated with putting all of your eggs in one basket. · Keep Emotions at Bay Don't let fear or greed limit your returns or inflate your losses. Expect short-term fluctuations in your overall portfolio value. As a long-term investor, these short-term movements should not cause panic. Greed can lead an investor to hold on to a position too long in the hope of an even higher price – even if it falls. Fear can cause an investor to sell an investment too early, or prevent an investor from selling a loser. If your portfolio is keeping you awake at night, it might be best to reconsider your risk tolerance and adopt a more conservative approach. · Review and Adjust The final step in your investing journey is reviewing your portfolio. Once you've established an asset-allocation strategy, you may find that your asset weightings have changed over the course of the year. Why? The market value of the various securities within your portfolio has changed. This can be modified easily through rebalancing.
  13. STEPS ON HOW TO BECOME AN ENTREPRENEUR 1. Take a Stand for Yourself. If you are dissatisfied with your current circumstances, admit that no one can fix them except you. It doesn't do any good to blame the economy, your boss, your spouse or your family. Change can only occur when you make a conscious decision to make it happen. 2. Identify the Right Business for You. Give yourself permission to explore. Be willing to look at different facets of yourself (your personality, social styles, age) and listen to your intuition. We tend to ignore intuition even though deep down we often know the truth. Ask yourself "What gives me energy even when I'm tired?" How do you know what business is "right" for you? There are three common approaches to entrepreneurship: Do What You Know: Have you been laid off or want a change? Look at work you have done for others in the past and think about how you could package those skills and offer them as your own services or products. Do What Others Do: Learn about other businesses that interest you. Once you have identified a business you like, emulate it. Solve a Common Problem: Is there a gap in the market? Is there a service or product you would like to bring to market? (Note: This is the highest-risk of the three approaches.) If you choose to do this, make sure that you become a student and gain knowledge first before you spend any money. 3. Business Planning Improves Your Chances for Success. Most people don't plan, but it will help you get to market faster. A business plan will help you gain clarity, focus and confidence. A plan does not need to be more than one page. As you write down your goals, strategies and action steps, your business becomes real. Ask yourself the following questions: - What am I building? - Who will I serve? - What is the promise I am making to my customers/clients and to myself? - What are my objectives, strategies and action plans (steps) to achieve my goals? 4. Know Your Target Audience Before You Spend a Penny. Before you spend money, find out if people will actually buy your products or services. This may be the most important thing you do. You can do this by validating your market. In other words, who, exactly, will buy your products or services other than your family or friends? (And don't say. "Everyone will want my product." Trust me --they won't.) What is the size of your target market? Who are your customers? Is your product or service relevant to their everyday life? Why do they need it? 5. Understand Your Personal Finances and Choose the Right Kind of Money You Need for Your Business. As an entrepreneur, your personal life and business life are interconnected. You are likely to be your first -- and possibly only -- investor. Therefore, having a detailed understanding of your personal finances, and the ability to track them, is an essential first step before seeking outside funding for your business. As you are creating your business plan, you will need to consider what type of business you are building -- a lifestyle business (smaller amount of startup funds), a franchise (moderate investment depending on the franchise), or a high-tech business (will require significant capital investment). Depending on where you fall on the continuum, you will need a different amount of money to launch and grow your business, and it does matter what kind of money you accept. 6. Build a Support Network. You've made the internal commitment to your business. Now you need to cultivate a network of supporters, advisors, partners, allies and vendors. If you believe in your business, others will, too. 7. Get the Word Out. Be willing to say who you are and what you do with conviction and without apology. Embrace and use the most effective online tools (Twitter, Facebook, YouTube, LinkedIn) available to broadcast your news. Use social networks as "pointer" sites; i.e., to point to anything you think will be of interest to your fans and followers. Even though social networks are essential today (you must use them!), don't underestimate the power of other methods to get the word out: e.g., word-of-mouth marketing, website and internet marketing tools, public relations, blog posts, columns and articles, speeches, e-mail, newsletters, and the old-fashioned but still essential telephone. If you take these steps, you'll be well on your way to becoming your own boss. It's important to remember that you are not alone. If you want to "be your own boss" but you still feel stuck, reach out and connect with other entrepreneurs in a variety of ways. You may be surprised by the invaluable contacts that are right at your fingertips.
  14. FINANCIAL PLAN

    FINANCIAL PLAN A financial plan is a broad strategy for handling your finances, It should include both short and long-term goals. A financial plan helps you make the most of your money, regardless of your economic circumstances ESTABLISH YOUR FINANCIAL GOALS 1. Decide what you want your money to do for you 2. Determine what style of living you wish to achieve 3. List savings objectives ANALYSE YOUR CURRENT INCOME AND SPENDING · Carefully examine the amounts you estimated for both income and expenses · Overestimating income and understanding expenses is very easy to do and can cause big problems for your budget · Subtract your expenses from your income for each plan period. If you come out even or need extra money, consider ways to increase your income or cut your expenses · If you have extra money, decide how you want to apply it towards your saving goal PREPARE A TRIAL FINANCIAL PLAN A written plan listing your goals, your income, and your expenses reduces the temptation to overspend or spend carelessly Put your financial plan into writing Revise your plan and update it on regular basis Put your plan into action and keep organized records Keep track of your spending and savings Managing Personal Finance § Prevention § Preparation § Coping with challenges PREVENTION · Develop good saving habits · Practice sound money management · Use credit/loan wisely · Purchase enough insurance policy · Use reasonable caution in financial matters PREPARATION · Get a good education to better able find a job or get a business to start, sustain and make successful · Learn marketable job skills to advance on job or business · Stay current in your field or earn promotion or pay rise · Establish emergency fund equal to three or six months’ pay to give you time to assess the crisis and take action · Regulate your life style to live below your income level in case you need to meet unexpected expenses or must live on a lower income COPING WITH CHALLENGES · Accept that your financial crisis is real – it will not go away on its own · Avoid making any new credit purchases · Find free or inexpensive financial counselling · Adjust your spending habits and cut your expenses
  15. MUST HAVE FINANCIAL LITERACY SKILLS What is financial Literacy? Financial Literacy is the set of skills and knowledge that allow you to understand: · The financial principles you need to know to make informed financial decisions and · The financial products that impact on financial well-being. Things to focus on in building your financial literacy skill 1. Understanding the key financial product you may need throughout your life -- including bank accounts, savings plans, retirement savings plans, and basic investments like stocks, bonds and mutual funds 2. Understand basic financial concepts like interest rate, investment return, risk, diversification and so on 3. Understanding money and financial issues – even if you don’t really like to talk about them Sound Decisions -- You will have to make choices about saving, spending, budgeting, investing and managing debt throughout your life. Examples are getting education or another degree, starting a new job, buying a house, starting a family, getting ready to retire and living your senior years. Change Management -- You will have to proactively manage changes that affects your everyday financial well-being including events in general economy like recent collapse of financial markets, rising unemployment and the threat to high inflation. Some Basic Tips i. Identify ways to earn and save money. The rule of saving is “live below your means’’ in other words, do not spend every penny you make. ii. Create a realistic spending plan and stick to it. It may need occasional adjusting when a situation changes in your life, but practice discipline in sticking to your plan. Always have a budget iii. Reduce impulsive buying. Avoid buying anything until you’ve had time to determine how it will fit into your spending plan. If it doesn’t fit, don’t buy. iv. Don’t not make too many high risk investments -- when the promised reward is too good to be true, better to risk only money you can afford to lose. Also make your investments via a reputable investment firm/broker -- whether stocks, real estate or bonds. v. Let your savings work for you; leave savings in investment accounts that allow them to grow in a compounding way (the interest/gain earning extra interest/gain). vi. Shop for the best investments -- a proper mix of risk to reward. Don't put all your money in a savings account to earn a meager 3% annual interest rate when you can put in Treasury Bills that are just as safe (or even safer as it is backed by the Federal Government) and will earn you 16% annual return rate. vii. Diversify. Don't put all your eggs in one basket. Don't even listen to people who say you should put all your eggs in one basket and watch it. No successful investor puts all his investment in one asset class. A hallmark of proper financial literacy is a balanced and well-diversified investment portfolio.
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