Managing your Financial » limit

Managing your Own Money

Mon, 21 Jun 2010 03:45:49 +0000

Many investors who manage their own money and their own investments have several tremendous advantages over fund managers. Investors who have bypassed the allure of the fund management industry often come to realize that through diligent research and logic, they can keep up with the returns of the big boys.
My investment business, albeit in the fund management profession, is run along the private investor’s lines. All of the advantages below are practiced by my fund.
While this may appear to be caused by superior market knowledge and over-confidence, there are in fact a number of advantages the small guy has. I advise all amateur and part-time investors to read over these structural advantages and use them to your benefit.
1. You can wait.
Private investors have the luxury of time on their side. If you cannot find anything attractive you can stay in cash. Fund managers do not have this luxury for two reasons. Firstly, they have to invest to their mandate irrespective of current market valuations (for example equity funds must have a certain percentage of their money in equities at all times). Holding cash in the fund is also a risky strategy for fund managers as they run the risk of being left behind by their peers, whom they are compared to on a quarterly, monthly and sometimes even daily basis.
2. You can invest anywhere and everywhere.
Without an investment mandate, you can invest in any type of asset in any country that offers an attractive risk return trade-off, be it corporate bonds, equities, options, real estate etc. As mentioned above, fund managers have to stay within the fund’s investment area. In the case of pension funds, there are even more severe limits that, in my opinion, limit the returns the fund can provide.
3. You can invest in any size
Similarly to investing anywhere, there are no size constraints on your investment. Fund managers are faced with ridiculous restrictions as to how much to “weight” to certain indexes in order to match their performance as closely as possible.
4. You have no benchmark
You only have one goal in mind, and that is to grow your investment portfolio each year irrespective of what the market does. I do not consider it a good year if I have lost 25% while the market has lost 40%. Fund managers are groomed to beat their benchmark and this performance is always viewed in context, irrespective of absolute return.
5. You can focus and ignore
Studying, understanding and applying what has worked in investing is all you need to do to be successful as a private investor. I advocate reading Benjamin Graham classic, The Intelligent Investor. The rest should follow. Pay no attention to market noise, alternate opinions or what the television “talking heads” say. Do your own research and arrive at your own conclusions.
6. No conflict of interest
The individual investor has only their interest to look out for. This is a big advantage when it comes to large fund managers catering to larger institutions. Fund managers have to think of keeping their jobs, increasing their assets under management and keeping clients happy, suggesting that performance is not the most important thing on their minds. Also, clashes between investment banks and fund managers are regular occurrences and sometimes result in inopportune purchases by fund managers.
7. You can have a long view.
According to a study by the New York Stock Exchange the average holding period of shares held has declined from five to six years in the 1950s to 11 months, meaning the average holding period is less than one financial year. It is extremely unlikely and almost impossible that an undervalued company can right itself in such a short period of time. This may be the largest competitive advantage you have: The ability to look at a company solely on valuation and keep it as long as it is undervalued, irrespective of what the competition is doing or market price.
8. No peer pressure.
There is no pressure to buy or sell any investments. Fund managers get compared to benchmark indices and other funds, including the individual fund holdings. If you manage your own money you have none of these problems.
9. You decide.
The private investor is in control of all their decisions. You make the final decision after you have done the analysis. You may be wrong but at least you make the calls either way. Many fund managers are run by committee which leads to inherent clashes. Try telling your boss that his investment ideas are wrong!
10. You don’t have to di-worse-ify!
Every individual should hold only as many stocks as they feel comfortable with. There is no set limit either on the low or high end. However, most mutual funds hold positions in excess of 100 stocks. My business has only 7 positions. While I advise 10 as the optimal, we won’t buy stocks just because we hold seven and need ten!
11. You control the costs
Controlling costs and fees (the friction of investing), is a very important part of realizing superior long-term results. Discount brokers provide ideal services for the private investor, so long as you are not a day trader! Calculated over a period of 20 to 30 years keeping costs low makes a huge difference.
12. You can be fully invested
This is a huge structural advantage you have and is the bane of the fund management business. Fund managers are bound to get redemption requests when markets fall, and to meet such requests either need to be in cash or sell shares. However, as we have seen in 2008 in particular, when markets are falling liquidity drops, sometimes to the point where a fund manager is unable to sell his position. This results in selling pressure on stock prices leading to further market falls, thus triggering more redemptions, and so on.
There are of course a few funds where the drawbacks mentioned below do not apply but they are in the minority, my fund being one of those. The large bulk of fund management companies are focused on growing the amount of money they manage, while the performance of your portfolio is not the utmost concern.
If you do not want to manage your own investments then find a fund manager who is not bound by parameters and can show clearly that the performance of your investment is there foremost concern.

Manage Your Debt and Credit

Mon, 21 Jun 2010 03:35:18 +0000

Credit was once defined as “Man’s Confidence in Man.” But in fact, the definition of credit today is more like “Man’s Confidence in Himself.” Using credit today means you have confidence in your future ability to pay that debt. Forty years ago, your parents may have paid cash for their homes and their cars, a largely unheard-of event today. If they borrowed money at all, chances are it was from a relative or friend, and not a financial institution.
Today debt and instant credit are part of our everyday lives. The convenience of instant credit, however, has taken its toll. Many individuals use credit cards to spend more than they earn, and a few of these people actually build themselves a debt prison from which some never emerge. On the other hand, those who never use credit can be denied a loan or credit when they have a justifiable need or use for it. Using credit establishes a history of financial responsibility: Until you establish a credit history, your chances of qualifying for an important loan, such as a mortgage, are greatly reduced.
What is the balance between using credit wisely and staying out of overwhelming debt? Let’s look at the facts and some pros and cons.
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Installment Debt
Debt comes in many forms, and most types help us in our daily lives — when used responsibly. Most people cannot buy a home without some financial help, and many cannot buy a car (especially a new one) without some sort of financing. The money borrowed to purchase large-ticket items is called installment debt: The debtor pays a portion of the total at regular intervals over a specified period of time. At the end of that time period, the loan with interest is paid off.
Installment debt allows you to purchase items at a competitive interest rate: for example, 5% to 7% for a 30-year home mortgage and 8% or 9% for a car loan. The loan is paid back on an amortizing schedule, monthly payments of a fixed amount that remain constant over the life of the loan. At first, most of the monthly payment consists of interest. In later years, principal begins to be paid down.
Installment debt is easily budgeted and the debt is eliminated on a predetermined date. Even for those who may actually have the cash to purchase the desired item, installment debt can make financial sense if you can earn a higher return (after taxes) on your investment of cash than you must pay on your installment debt.
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Revolving Credit
A revolving line of credit, also called “open-ended credit,” is made available to you for use at any time. Examples of revolving credit are credit cards such as Visa, Mastercard, and department store cards. When you apply for one of these cards, you receive a credit limit based on your credit payment history and income. When you use the credit line, you must make monthly minimum payments based on the total balance outstanding that month. Some lines of credit will also have an annual account fee.
While revolving credit is a convenient way to borrow, it can also become an endless pit of minimum payments that barely cover the interest due. Many cards charge annual rates of interest of 18% or higher. As you pay off your debt, the minimum payment is also reduced, thus extending your payoff period and, consequently, the interest you pay. Paying just the minimum due on a $2,000 credit card loan could mean making monthly interest payments for 10 or more years!
Revolving credit, in addition to being convenient, eliminates the need to carry a lot of cash and can help establish you as a creditworthy risk for future loans. The itemized monthly statements also can help you track your expenses. But some people can easily yield to the temptation that the convenience of credit cards offers. Impulse buying, failing to compare costs, and purchasing large items you can’t afford are all downfalls brought on by always available purchasing power. Spending more than you earn in any given period is a dangerous practice at best, but doing it over an extended period of time can be financial suicide.
Installment Debt vs. Revolving Debt
Lower interest rates and an amortizing repayment schedule can make installment debt a much cheaper alternative to revolving credit.
Installment Revolving
Beginning Balance $2,500 $2,500
Interest Rate 10% 18.5%
Years to Repay 4 30*
Interest Cost $544 $6,500
*Paying 2% minimum monthly payment.
Sources and Costs of Debt
Source Type of Debt Cost
Banks and Credit Unions Personal, secured Low
Personal, unsecured Moderate
Mortgage Low
Credit Card Low to High
Mortgage Companies Mortgage Low
Department Stores Revolving High
Insurance Companies Personal, unsecured High

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Using Credit Wisely
To use credit intelligently, start by examining the terms of the card(s) you are currently using. Keeping track of your cards, their rates, and your current balances will help you to be aware of how you use credit cards. Increased competition in recent years has led some credit card companies to offer enticing features to attract new cardholders, including no annual fees and low interest rates for an introductory period. (And credit card companies sometimes will give their introductory rates to existing cardholders so that they won’t transfer their balances to another credit card company.)
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Eliminating Credit Card Debt
If you think you may have too much credit card debt, begin to address it by honestly evaluating your spending habits. Examine your existing expenses to analyze how your money is spent. You will most likely be able to identify the problem areas where you are more likely to spend too much or too readily with credit cards. Then, based on your current spending practices, create a realistic budget to pay off your credit card debt in the shortest time possible while not adding any more debt to it. For assistance, you may want to turn to your financial advisor, who can help you to allocate your resources wisely to address your credit card debt.
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The Role of Debt
Today, carrying installment debt is almost a fact of life. Mortgages, car loans, or small-business loans (to name a few) are part of almost everyone’s life. On the other hand, carrying credit card debt is usually not a good idea. At interest rates of 16% and up, it’s hard to justify keeping savings that could pay off that 18% department-store credit card in the bank at 2%.
Debt and credit play increasingly important roles in our lives. As the aging Baby Boomers get closer to their peak earning years, many are realizing the need to reduce debt and increase savings. Even though analyzing your spending habits and creating a budget to address your debt may seem a little overwhelming, the simplicity of the philosophy of the Depression era still stands: Never spend more than you earn. Once you have come to grips with this basic fact, managing your debt will become far easier and more rewarding.
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Summary
• Installment debt means the loan is paid off in a specified period of time by making predetermined payments periodically.
• Revolving credit is a line of credit that is instantly available through use of a credit card (and sometimes a check).
• As you pay down your debt in a revolving line of credit, the minimum payment is also reduced, thus extending your payoff period and, consequently, the interest you pay.
• Spending more than you earn in any given period is a dangerous practice at best, but doing it over an extended period of time can be financial suicide.

Steps to Financial independence

Mon, 21 Jun 2010 03:31:23 +0000

Financial independence is just as important as physical independence. While you need to take steps to ensure that you are able to take care of your physical needs, the same goes for your money. Here are some tips to staying financially independent.

There are many things that can happen in life that can rock our financial world. Even if you have a cushion built up, nothing is for certain. Just ask those who invested with the stock market or other investors before the financial crisis erupted. What you can protect is your good name and financial standing.
This means your credit standing. Even when money is low, a good credit score and history can buoy you up in the interim. It is a perk that we can all have if we take a few notes.

The first tip is to have a budget in place. For moms or dads that leave the workforce to stay home and care for the children or pursue an independent business, finances can be crucial. You are losing one income where once there were two.

Before the time comes, live according to your newly amended budget. Cut entertaining to a minimum, limit eating out, lower utility bills and find other ways to save money. These are all examples of ways you can test your budget to see how well you can manage on less.

Before the final decision is made, carve out the basic structure of a budget. You will learn what bills occur on a monthly basis: car payment, insurances, mortgage, grocery bill and utilities. Tally up how much money you will need to have on hand for the essentials.

It has long been recommended that the average family create an emergency fund. This fund can then be used for car repairs, unexpected expenses and to stay afloat between jobs. Three to six months’ salary for you and your spouse is the usual recommendation.

Next, curb credit card spending. When you are short of money is not exactly the best time to run up the credit cards. It can add another financial burden to an already stressed budget looking for money.

Being proactive will help you to protect your credit to weather the changes in your lifestyle. After all, good credit will benefit you in the long run and open doors that would otherwise be closed if you were to suddenly fall on hard times and have trouble making ends meet.

Most people worry about their credit history. Like we said before, a good credit rating can make all the difference in many situations. If you know that money will be tight in the near future, do all you can to lower high interest rate bills, specifically credit cards. Placing emphasis on them can help you lower the bill or pay them off altogether before one spouse leaves the workforce.