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  1. THINGS TO KNOW ABOUT ASSET ALLOCATION 3. Determine Your Long- and Short-Term Goals We all have our goals. Whether you aspire to build a fat retirement fund, own a yacht or vacation home, pay for your child's education or simply save for a new car, you should consider it in your asset-allocation plan. All these goals need to be considered when determining the right mix. For example, if you're planning to own a retirement condo on the beach in 20 years, you don't have to worry about short-term fluctuations in the stock market. But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments. And as you approach retirement, you may want to shift to a higher proportion of fixed income investments to equity holdings. 4. Time Is Your Best Friend The Department of Labor has said that for every ten years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. Having time not only allows you to take advantage of compounding and the time value for money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks. A couple of bad years in the stock market will likely show up as nothing more than some insignificant blip 30 years from now. 5. Just Do It! Once you've determined the right mix of stocks, bonds and other investments, it's time to implement it. The first step is to find out how your current portfolio breaks down. It's fairly straightforward to see the percentage of assets in stocks versus bonds, but don't forget to categorize what type of stocks you own (small, mid or large cap). You should also categorize your bonds according to their maturity (short, mid or long term). Mutual funds can be more problematic. Fund names don't always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested. The Bottom Line There is no single solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you don't have, don't worry. It's never too late to get started. It's also never too late to give your existing portfolio a face-lift. Asset allocation is not a one-time event, it's a life-long process of progression and fine-tuning.
  2. THINGS TO KNOW ABOUT ASSET ALLOCATION 3. Determine Your Long- and Short-Term Goals We all have our goals. Whether you aspire to build a fat retirement fund, own a yacht or vacation home, pay for your child's education or simply save for a new car, you should consider it in your asset-allocation plan. All these goals need to be considered when determining the right mix. For example, if you're planning to own a retirement condo on the beach in 20 years, you don't have to worry about short-term fluctuations in the stock market. But if you have a child who will be entering college in five to six years, you may need to tilt your asset allocation to safer fixed-income investments. And as you approach retirement, you may want to shift to a higher proportion of fixed income investments to equity holdings. 4. Time Is Your Best Friend The Department of Labor has said that for every ten years you delay saving for retirement (or some other long-term goal), you will have to save three times as much each month to catch up. Having time not only allows you to take advantage of compounding and the time value for money, it also means you can put more of your portfolio into higher risk/return investments, namely stocks. A couple of bad years in the stock market will likely show up as nothing more than some insignificant blip 30 years from now. 5. Just Do It! Once you've determined the right mix of stocks, bonds and other investments, it's time to implement it. The first step is to find out how your current portfolio breaks down. It's fairly straightforward to see the percentage of assets in stocks versus bonds, but don't forget to categorize what type of stocks you own (small, mid or large cap). You should also categorize your bonds according to their maturity (short, mid or long term). Mutual funds can be more problematic. Fund names don't always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested. The Bottom Line There is no single solution for allocating your assets. Individual investors require individual solutions. Furthermore, if a long-term horizon is something you don't have, don't worry. It's never too late to get started. It's also never too late to give your existing portfolio a face-lift. Asset allocation is not a one-time event, it's a life-long process of progression and fine-tuning.
  3. onomewrites

    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.
  4. 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.
  5. 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.
  6. 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.
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