10
Apr/10

How the Obama Administration Affects Stock Investing

by Glenn under Misc Finance

When Barack Obama was elected US President in November of 2008, the US economy was going through rough times. The stock market had recently witnessed the most significant losses since Black Friday in 1929, jobs were being lost, and things were very unstable overall. Suffice it to say, Obama had is hands full when his administration took over. One of the biggest concerns on the minds of economic experts and financial analysts was how would his administration affect the economy, especially where investing in the stock market was concerned.

An economy in crisis

Strengthening the US economy became one of Obama’s priorities the moment he stepped into office in January, 2009. The state of the US economy combined with credit freezes were the biggest challenges that he faced where the overall economic picture was concerned. These issues had been festering for quite some time and it was obvious that they wouldn’t be fixed overnight.

Long considered to be the backbone of the US economy, the credit and lending industries witnessed some relief and realized some stabilization based on the economic bailout and the cash infusion that it provided. Regardless, the economy is slowly recovering, but is the recovery too slow to undo the damage that has already taken place? As a result, the economy is in a slow settling stage, which most likely will continue for quite a while.

The effect of the administration on the stock market

Many individuals lost their 401(k) plans as well as other retirement and non-retirement accounts as a result of the stock market crash that occurred prior to Obama’s election. Some brokerages and day traders have benefited from the current volatility of the stock market. If you have long term investment goals for retirement, this volatility may be providing individuals with an excellent buying opportunity based on the drops in values.

Market volatility is not going to decrease anytime soon and whether or not this can be attributed directly to the Obama administration remains to be seen. However, investing through what is called “dollar cost averaging” you might be able to take advantage of how this has affected the current markets. Additionally, you will have an opportunity to invest in stocks while their values stay lower. Eventually, the market will stabilize and things will hopefully return to normal soon.

How the above can affect a person’s finances

The quick and simple answer is that American’s won’t be affected much overall, at least for the short term anyway. Changes will most likely be slow to take effect which benefits the investor and their finances. In other words, it gives the investor time to adjust their portfolio and their personal money management. This enables you to take advantage of changes in policies that you could benefit from.

You will also be able to prepare for specific tax changes should those occur so that they do not work against you and your investments. Regardless of the presidential administration that is in power, you should always practice good money management methods and skills.

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8
Feb/10

How to Compare Annuities

by Glenn under Annuities

So you have decided to supplement your future pension and Social Security payments with an annuity, payable when you retire at a certain age. There’s only one problem: The market is flooded with different kinds of annuities, and you aren’t sure which annuity you should invest in!

Apples vs. Oranges

It’s important to remember that there are multiple financial products bearing the name “annuity,” but they can function very differently. The main annuities available include Fixed, Variable, and Guaranteed. When you compare annuities, it is best to do so by comparing annuities with others in their respective categories.

Fixed Annuities

As the name implies, fixed annuities give a fixed payment for the rest of the annuitant’s life after the annuitant reaches a certain age. The actual monetary amount may be changed to reflect the rise in inflation over time, so that even though the nominal amount paid out periodically to the annuitant looks like it’s increasing, it only really reflect the purchasing power of the contract they had in the beginning.

Variable Annuities

These annuities can be indexed to markets like stock markets, bond markets, mutual funds, etc, in order to increase them over time. However, there can be some risk involved since if the market drops so does the value of the annuity payment in the future. One of the advantages is that since it’s based in an equity which has yet to be cashed out, it is tax deferrable.

Guaranteed Annuities

Most annuities are only paid for the life of the annuitant. This means that the moment they die, their family no longer benefits from the income that the living annuitant might have provided them with from their annuity. A guaranteed annuity guarantees that even if the annuitant dies, their estate or designated beneficiary will continue to receive payments until a certain date.

The Best Decision

When comparing which form of annuity to purchase, it’s important to keep the above contractual conditions in mind. Which form of annuity is the insurer providing, and which one is best suited to you?

If you are single and have no dependents, a fixed annuity is the best bet if you make a normal income, whereas a variable annuity might be ideal if you understand and trust the investments the insurer is making, and you have a large income that might otherwise be taxed if put in a fixed annuity. Guaranteed annuities would be best if you have a dependant who is not covered by their own annuity.

Other Factors

Another major factor is the solvency of the insurer. Do you trust that they’ll be around in twenty years when you retire? If not, you might go for an insurer which offers less favorable terms but at least will be able to pay out.

Don’t just look in the U.S., either. Many European banks, like BCBE in Switzerland, offer foreigners tax deferment-eligible variable annuities which have superior track records of growth over time to many American insurers, and which have been around for years with no signs of financial instability.

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9
Dec/09

Are ETF’s a Good Way to Diversify?

by Glenn under ETFs

What are ETF’s?

ETF stands for Exchange-Traded Fund and is oftentimes called an Exchange-Traded Product or ETP for short. These are investments that are traded on the stock market in similar fashion to the way stocks are traded. The primary difference is that an ETF holds certain assets (i.e. bonds or stocks) and trades at roughly the same price as the net values of the underlying assets of the ETF. Typically, ETF’s will track an index like the MSCI EAFE or the S&P 500.

Because of their lower costs, stock market-like features, tax efficiencies, and decreased risk factors, ETF’s are very appealing to some investors. ETF’s are a combination of the best of both worlds where fund type investments are concerned. The valuation feature of mutual funds is combined with the tradability of a fund that is a closed-end type. Even though they are funds which are traded on stock exchanges, these closed-end funds are not classified as ETF’s and should not be confused with them.

Do ETF’s provide diversification opportunities?

For many individuals who are looking for a good investment which can enable them to purchase a basket of diversified shares, ETF’s are an excellent investment instrument. You can play a certain market sector without having to purchase individual shares of stocks but you can also trade them on the market just like stocks. Additionally, ETF’s are similar to closed-end mutual funds but they do have additional advantages to consider.

This is a definite advantage for the smaller investor who does not have a lot of money to risk. Now they have the ability to purchase stocks represented by a certain index (S&P 500 for example) on a smaller investment scale. A small investor with a few hundred dollars can do quite well when investing in an ETF. Naturally, there will be brokerage commissions to deal with. If you do your ETF investing online, you are most likely looking at a flat brokerage fee of around $7. However, you better educate yourself about the whole investing game before going it alone on the internet.

Today, there are many specialized ETF’s available to the small investor that enable them to play a market sector without investing huge amounts of money in the process. Just remember that sector type funds are not without an element of risk. Larger scale investors can also take advantage of investing in ETF’s as they can be re-priced several times during the trading day. Whenever the trading exchange is open for business, ETF’s can be bought and sold throughout the trading day.

Fortunately, ETF’s are considerably “transparent” as they are based on the indices of the stock market. Another key advantage to ETF’s is that their fees and the rate of turnover are much lower than more actively managed mutual funds. The distribution of capital gains is usually lower as well which helps to reduce tax liabilities on taxable accounts. So ETF’s offer an excellent way to diversify one’s portfolio and minimize the risk factors in the process.

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1
Sep/09

Advantages and Disadvantages of Investing in Bonds

by Glenn under Bonds

Whenever you are discussing the possibility of investing in any types of bonds, there are 2 key advantages and 2 key disadvantages that you need to take into consideration. If you are not completely savvy about bonds, you need to know that these can range from a moderately risky investment to one that is extremely risky. They are a debt security and that is what you need to realize right up front.

This is an investment wherein an authorized issuer of the security owes the holders of that a debt. Depending on the bond’s specific terms, the issuer may be required to pay interest and/or repay the entire principal at same later point in time. In essence, a bond is a formal financial contract where borrowed money is repaid with interest attached at fixed intervals. Additionally, there is a significant difference between bonds and stocks.

The key difference between is that the bond holders have a credit stake in the bond company. In other words, they are the lenders. Conversely, stockholders have what is referred to as an equity stake in the company and are the owners. The following is a breakdown of the 2 key advantages and the 2 primary disadvantages where investing in bonds is concerned.

The Advantages

Income advantage – one of the key reasons that bonds are a more secure investment than stocks is that they are debt securities. Whenever you are purchasing bonds, you are basically lending money that has to be repaid with interest over a specified period of time. Bonds can be issued by:

businesses
governments
private issuers

Since they can be traded just like other securities, the purchase price of bonds is subject to change. However, fluctuations in bond prices tend to be less volatile than that of stocks.

Rating Advantage – being subjected to certain rating systems provides the investor with another advantage when investing in bonds. These rating systems enable you to gauge how reliable a bond can be expected to be. Ratings typically range from AAA, the highest rating possible and a bond that you can expect to be repaid in full and on time, down to a C or D rating (C = unreliable / D = a bond in default).

The Disadvantages

Risk disadvantage – the primary disadvantage is the risk factor which stems from never knowing how reliable the ratings systems are (see above). The best example of this occurred in the 2008 home mortgage crisis where mortgage loan debt containing bonds and bond mutual funds were rated highly and considered to be very safe. Those high ratings meant nothing once there were wide-scale defaults in the industry.

Security disadvantage – remember right up front that bonds are only as good as the borrower’s ability to repay them. If they cannot repay the bond as stated initially, then it goes into default. Additionally, if repayment occurs earlier in a bond mutual fund, this is also a key disadvantage to the investors.

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17
Jul/09

Is Now a Good Time to Invest in Oil?

by Glenn under Investing

An overview of oil investing

For the investor who is skilled at timing the purchase and sale of stocks, investing in oil can provide huge monetary gains. However, with those monetary gains come huge risk and the possibility of huge losses as well. The oil investment market is not one that the faint of heart should dabble with since it is one of the most volatile market sectors out there. This has always been the case and it always will be. Changes are the norm and the risk element ranges from very low to extremely high.

Based on the following factors, investing in oil can potentially be a lucrative investment but you do not want to view oil investing as a hobby. Those factors which cause so much of the unpredictability in the oil market are:

absence of a growing supply
dwindling reserve volumes
scarcity factors of certain oil-producing regions
tightening supplies by oil-producing nations

When you consider the increasing global demands for oil today and the continual drive towards consumerism, the price of oil is not going to decrease any time soon – if it ever does at all.

5 steps to investing in the oil market

If your personal finances took a beating when gasoline prices recently soared to unprecedented levels (2006-07), then you should have given some thought to investing in oil (as well as natural gas). The benefit to you is that as gas prices rise again, your ROI will do the same thing. It’s a matter of knowing when to invest and when to sell. Here are some steps you can take to invest in the oil market.

Oil stocks – this is the easiest way to get involved as well as being one of the riskiest. You may also want to consider oil companies and refineries which are profiting from the rising price of gasoline.

Oil futures – there is room for speculation here if you have a sufficient sum of money that you are willing to lose. Oil futures are basically contracts which specify the price to purchase them at and the specific period of time to hold them. Basically, you are speculating that the prices of these futures are going to rise. If the price does not move the way you have speculated, you could lose a considerable amount of money, hence the extreme risk factor.

Consider investing in ETF’s – Exchange-Traded Funds or ETF’s enable you to invest in oil or energy stocks and are similar in nature to mutual funds. Additionally, the risk factor is considerably lower than futures and stocks.

Investigate limited partnerships – these partnerships invest directly in those companies that mine for gas and oil.

Diversify your gas and oil holdings – it may appear that gas and oil prices are increasing, but this is not always the rule of thumb. Your best bet is to invest in companies that are well-managed and have a proven track record of gains for their investors.

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12
Apr/09

Investing on a Budget

by Glenn under Investing

Budgeting for investments is a necessary evil because you should never invest more than what you can reasonably afford to lose, just like with gambling. And in a sense, gambling is very similar to investing. So how do you invest safely when there you have budgetary constraints to deal with? Here a few suggestions where that is concerned.

Understand that you do not need to pay anyone for investment advice if you know what you are doing – one of the first things you need to be aware of is that you do not need a financial planner or an investment broker to invest in anything. The internet has seen to that because people were getting sick and tired of broker fees and their commissions that oftentimes only paid for bad advice. Many people would swear to the contrary saying that they trust their broker and wouldn’t dream of trying to invest on their own. So you have a decision to make.

Do the necessary homework first – if you’re going to go it alone, you better educate yourself as much as you can about how the stock market operates and make sure that you investigate by the stock and the company offering it as thoroughly as possible before ever taking the plunge.

You can find the money if you are serious about investing – never say that you cannot afford to invest. There’s a good chance that if you sit down and do some budgeting that you will find a few dollars here and there to invest with.

Start small in the beginning and play it safe – let’s say you have $1,000 dollars to invest. Diversify your investment portfolio as follows:

65% in low to no-risk investments
20% in low to medium risk investments
10% in medium risk investments
5% in high risk investments

One of the best diversification tools is a 401(k) plan since you can control the percentages in the above investment categories.

Consider all the investment instruments available – in addition to the prior tip, your best bet for first time investing is to look at the safer investment instruments such as basic passbook savings accounts, CD’s, money market funds, and Treasury Inflation Protected Securities (or TIPS) as they are commonly referred to. Despite the fact that the interest yield is lower on these than other investment vehicles, they are far less risky and will afford you with more peace of mind in the long run.

Be creative when you are investing for the first time – remember first and foremost that investing does not always mean “playing the market” or investing in stocks. There are a number of investment options available besides the stock market, most of which are far safer and less risky than the stock market characteristically is.

Always work on balancing your portfolio and have an ongoing plan for success – one of the biggest mistakes first time investors make is that they do not manage their investment portfolios on a regular basis. If you do this, you will always have the peace of mind that your investments will most likely be growing.

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10
Feb/09

Mutual Funds: Load vs. No-Load

by Glenn under Mutual Fund

What is a mutual fund?

Mutual funds are defined as a collective investment scheme that is professionally managed and pools funds from a number of investors in order to invest in bonds, money market funds, stocks, and/or other investment securities.  Additionally, the mutual fund companies will assign a fund manager who is responsible for investing those funds on a regular basis.  Any net fund gains or losses are distributed to the fund investors on an annual basis.

There have been three basic types of mutual funds in existence in the US since 1940 which include:

Closed-end funds – a collective investment vehicle involving a limited number of available shares
Open-end funds – most commonly referred to as mutual funds and features the ability to issue and redeem fund shares at any time
Unit investment trusts (UIT’s) – these are investment companies in the US which offer a fixed or unmanaged security portfolio that has a definite life which are usually assembled by sponsors and sold to investors through a brokerage

The difference between Load and No-Load mutual funds

Mutual funds are normally classified into two categories – Load or No-Load.  The difference between the two is usually relegated to the fees that are charged when investing in either as follows:

Load Mutual Funds – you are charged for any shares (or units) which are initially purchased plus all applicable sales fees.  The fees usually range between 4% and 8% of the invested amount.  However, it may also be a flat fee depending on who the provider of the mutual fund is.  This amount is added as a “sales fee” to the purchase price of the fund.  As an example, if you were to invest in a 5% load fund in the amount of $1,000, you would only be investing $950 since $50 would be the broker’s commission.

There are 2 distinct types of Load Mutual Funds – Back-End (referred to as Class B funds) or Front-End (referred to as Class A funds).  With a Back-End load fund, you never pay any fees until you cash out or redeem the fund.  Conversely, a Front-End load fund is just the opposite meaning that you pay the fees up front.

No-Load Mutual Funds – these types of funds enable the investor to purchase shares/units whenever they wish without encountering any broker’s commissions or sales charges.  However, there are certain banks and/or brokers who may have a schedule of their own company fees for the redeeming or selling of 3rd party mutual funds.

Since one type of fund involves funds while the other does not, it is always wise to find out right up front what type of fund each one is.  If you are just starting out in the investment game, it’s a good idea to hire a financial planner or do your trading with a professional broker.  However, if you are already savvy about the different types of mutual funds, than the No-Load Mutual Fund might be a viable option as you will not have to incur any commissions or sales fees.

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