Business Marketing & Finance Resources

In this quick little guide we’ll go over the basics of a sound, successful investment strategy. I’m going to describe to you the few key points that will help protect you from downturns, and keep your investments safely rising in almost any market.

The first thing we have to do is understand the difference between speculation and investment. They should never be mixed up, and they are very different from each other.

An investor is someone who entrusts some vehicle of the market, be it in the form of stocks, bonds, private investments, or something else to grow his or her money through genuine value growth, business planning, or sound financial management. When an investor hands their money over to a third party he´s doing so after having considered the risks and benefits, and after having taken a good look at the fundamentals and numbers behind a given company or other investment opportunity (e.g: Government Bonds). In essence an investor makes educated decisions and allocations that are based on tangible probabilities.

A speculator speculates: taking risks based on guesses, gut feelings, and trends in the general market that may not have any specific connection to a particular asset. Speculation is basically an attempt to outguess or even predict the timing of market movements. (more…)

First we must be clear that a bond is a debt, a company or country needs money and issues bonds, which hopes to raise funds by giving in exchange an interest rate which is the famous coupon. If the coupon is higher than what can be achieved market investors will look at who would be willing to pay more than the value in nominal bond mind is that if the bond is worth $ 1,000 investors willing to pay more than that which implies that the bond is sold at a premium. (Do not confuse this bonus with the bonds of the issues the Government has nothing to do).

Otherwise, if the coupon is lower than what you get in the market, then investors would not be so interested, so they need an incentive to buy in this case is a discount on the price. For example, if the bond is worth 1,000, then investors would be willing to buy it for 800, this is known as a discount bond.

Prices move inversely to interest rates, as expected if rates rise prices fall, which means may be able to buy bonds at a discount if there is an expectation that rise in the future or to sell premium if the bonds are not expected increases in interest rates.

The other important element here is another interest rate and is called the yield to maturity which is the annual fee is earned if the investor holds the bond for life. This rate is vital because it allows a bond compares with another, for example to compare Brazil’s bond due in 2027 with one of Venezuela with the same performance, coupon, see the yield to maturity or YTM, as known in the market.

2 bonds with the same maturity you will prefer the one whose YTM is greater, but remember that most YTM implies greater risk if the YTM is 6 Brazil 27% and Venezuela 27 is 12%, implies that Brazil risk is half that of Venezuela. However, the ability to take risk is everyone.

Ready, if we understand well these two concepts and we can enter the bond market, because as has been aware, the bonds are dependent on interest rates so I need to know in detail, are the policies of issuers and countries where bonds are traded in order to understand where they are going the bonds.

Following are some examples:

1. If the economy grows rapidly, it is expected to raise Central Bank interest rates to slow growth, and so the bond prices should fall.

2. If the economy slows, it is expected that the central banks lower interest rates to stimulate the economy, which implies that bond prices will rise.

3. If there is much inflation rates expected to rise.

4. If low inflation is expected that interest rates unchanged.

5. If the country has fiscal problems (case Greece), countries can issue new debt with higher coupons, but also expect higher interest rates, so prices can drop.

6. If the country is an exporter of raw materials (if Venezuela), bond prices may be more tied to their price expectations (oil, for example) that at the same rates of interest, which may explain movements that correspond with the rest of the market.

7. If the country or the issuer, have problems bonds fall in price regardless of charges (higher risk) and, if on the contrary hits a drive on the market, its bonds will rise. At this point it pays to know the views of rating agencies.

If you have a high interest in the economy, bonds can be his own because, as we rely primarily on the economy. Of course there are other issues of interest with respect to the bonds that we can go deeper later, but I have seen so far, is to avoid boredom for the next 15 years.

Many people in the world of finance are asking the question of whether mutual funds are the best stock investments that are available today. The truth is that this kind of investment option comes with many different advantages, however there are certainly some drawbacks as well. Therefore to really answer the question and determine if they are the best stock investments, you have to look and both their strengths and weaknesses and determine for yourself how they fit into your game plan.

Starting with one of the primary benefits, the whole concept is that you do not buy individual stocks or bonds, but instead pool your money and buy shares of a fund that buys up many different stocks, bonds and other investments. By doing so, you are diversifying what you hold and you are protecting yourself against risk because one or even several investments falling or failing won’t hurt the entire fund too much.

The general rule of thumb is that the entire stock market is eventually going to move up, even if it does suffer major downturns in the process. Individual stocks will fail and seriously fall, but if you aren’t investing in individual stocks, then you’ll ride the upward momentum of the entire market.

Another benefit is that you can find a fund that comes in all different shapes and sizes. In other words, you can still find some that offer high risk for high reward. You can also find an index fund, which isn’t managed but instead buys up all of the stocks in the entire market, or in one particular index or industry. The options are endless, and you’ll be able to pursue whatever you’d like.

Of course, one downside to this option is that you won’t be seeing any dividends. A dividend is a return you see on a stock investment without having to sell off your shares. Different stocks come with different levels of dividends, and some don’t come with any dividend at all.

However, many investors seek out the stocks with the best returns here, knowing they will hold onto their shares and they’ll be able to create an additional stream of income in the mean time. Some managed, pooled investments may offer a degree of dividends however you shouldn’t count on that option.

Another downside to this option is that because you are diversifying, you also limit the potential returns that you see from one or two really great stock investments. That’s the whole risk vs. reward trade that investors have to make. You are protecting yourself from one or two major losses, but then you also won’t be on the bandwagon for one or two major gains because your money is spread around.

So at the end of the day, are mutual funds the best stock investments? People will have different view points on this. Some people love the diversification and the hedging against risk, while others miss the dividends and the huge, one-shot returns. Of course, you can find varying degrees of risk and return with something managed like this, however it all comes down to personal preferences and what you’re expecting to receive in return for your investment.

Having a secure, fulfilling retirement is a primary goal for most of us. At some point in the future we will no longer receive a “paycheck” from an employer and will instead rely on the income from assets we have accumulated and saved, plus income benefits from defined benefit pensions, Social Security benefits, distributions from retirement savings plans such as 401(k)s, deferred compensation, sale of our business and other investments. For most people, the overriding and often primary directive of financial planning is simply “retirement planning.” However, planning for retirement is not a particularly easy process.

The retirement planning process involves using a retirement planning calculator and creating a road map toward your retirement goal and developing a plan to achieve that goal. The plan generally considers post-retirement budgeting, savings, tax management, debt management, pre-retirement budgeting and a host of other inputs all geared toward ensuring a quality retirement. However, planning for retirement takes time and judgment, because it involves many unknown variables. Among the top variables that may determine when retirement is feasible are lifestyle/family goals, longevity, future income tax rates, portfolio returns, the effect of inflation on expenses and future investment returns.

Let’s review the basics of these variables as they relate to your retirement plan.

Lifestyle Goals

Would you like to travel? Own one home or two? What is your retirement vision? These questions and others like them are necessary to help create a budget for your specific retirement needs.

Longevity

Attempting to gauge how long we’re going to live in retirement is a task that’s becoming more and more difficult. Medical advances have led to increased life spans and continue to increase the mortality age. This is best illustrated by the Social Security system. In its original design, participants in Social Security were expected to live only a few years after they have begun receiving benefits. People live longer now, and life spans are increasing each year. We believe it is wise to project a retirement plan that assumes you’ll live to age 100.

Future Tax Rates

Since we can only spend our “aftertax” income, it is imperative that we consider what tax rates our retirement income will be subject to. However, as government bodies at all levels change with each election, so do virtually all tax laws, including property tax, sales tax, state income tax and the granddaddy of them all, the federal income tax. Taxes such as property and sales taxes should be adjusted to account for cost of living increases. One thing is certain – taxes will exist in retirement.

Investment Returns

How much you can withdraw from your “nest egg” each year is perhaps the most critical variable to retirement projections. Like the other retirement variables, the annual return on your nest egg will not be linear. As we know, the investments most suited for providing long-term income security into retirement are going to fluctuate. Financial markets can have long periods of up and down investment return cycles. We need continual income and that is the key. That’s why we work toward constructing portfolios that can provide lifetime income security for our clients. Many retirees get caught up in “short-termism” and use CDs, shortterm bonds and fixed annuities as core holdings in their retirement portfolio. But this investment strategy is very risky. While inflation causes things to cost more, deflation can keep interest rates low for many years, requiring the need for retirees to invade their principal savings to meet their budget needs.

At FIM Group, we balance the long-term asset volatility with the more stable fixed investments to construct our clients’ portfolios. Our goal is to allow clients to live on the income generated from their diversified portfolio with a goal of providing income that can increase over time. That way clients won’t need to invade principal. Simply put, we call it living on the eggs (investment returns), not the chicken (principal).

Inflation

Loss of purchasing power caused by rising prices must be included in any retirement plan. It is safe to say that one dollar will buy less in the future. As you progress into retirement, you should factor in giving yourself a raise periodically to offset cost of living increases.

Family Constraints

Will you need to provide for or care for your parents and/or children in retirement? If so, how much will you help them? In summary, we are realistic about retirement planning and take retirement seriously. While the future is unknown, we do know that life will go on, some businesses will grow and pay great dividends, interest rates will fluctuate, politicians will fiddle with taxes, and inflation and deflation will fight it out. One thing, however, is certain: we will retire someday.