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| Q and A with Denisa - Investing |
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- Debt Management and Bankruptcy
- Life Cycle Planning
- Investing
- Home Financing
- Retirement
- Children and College
- Life Insurance
- Marriage and Divorce
- Budgeting and Taxes
- Business Planning and Opportunities
- Estate Planning
- Financial Identity
- Tips and Miscellaneous
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3. Investing
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To protect your investments against Ponzi Schemes:
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Look at your account statements for clues
a. First, that statement should come from a fairly reliable third party, a custodian bank or brokerage, rather than the manager himself.
b. Second, you should compare the values of your individual holdings in your account statements with the values posted by Yahoo or MSN.
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Most importantly, ask yourself a couple of questions:
a. Does it just make sense? Does the rate of return that you are being promised relative to what the market is actually doing make sense?
b. Ask How. If your advisor claims to deliver much higher rate or return, it is not that it can't be done; you just need to ask "How". Does it mean that you will have to take much higher risk to get that rate of return?
- Lastly, don't put too many dollars into any one thing. Diversification is a key to stopping this. It doesn't pay for the schemer to have too many accounts for small amounts of money.
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How would a person take charge of their investment portfolio?
The best way to take charge is to do it yourself but conducting a detailed financial analysis takes a long time that most of us don't have. The easiest way to do this is to buy actively managed mutual funds. If you have conviction that some sector of the market is going to do well, then find a fund that invests in that sector and let that fund manager make the little decisions about which specific stocks to buy and sell. You've made the big decision.
Based on your age (e.g. 35) how do you determine aggressiveness recommended for investment?
The risk tolerance of your portfolio is heavily dependent on two factors, your goal and the time you have to reach that goal. So, age is a big part of that. What really matters is how long before your goal becomes your reality. If you want to retire at 55 and you're 35 today, your goal is twenty years away.
How do we prepare for another down market?
Investing is as much a state of mind as it is an activity. The right perspective is crucial. Don't worry about the day-to-day fluctuations, focus on the long-term.
Live within your means so there is a constant stream of new investment that can take advantage of changing circumstances. Don't become a speculator, but don't give in to being a saver.
If my managed IRA is increasing in value again, should I leave it in place?
Why wouldn't you leave it alone all the time? If the strategy is appropriate for you, if the process in place to execute that strategy is sound, if the people are competent, then leave it alone.
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"I would like to invest in emerging markets. What countries should I look at and how is this segment doing compared to the US stocks?" Keith
ANSWER:
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Should you invest in emerging markets? Yes. Should you put everything in emerging markets? No. You should invest in lots of countries.
In a volatile asset class like emerging market equity, diversification is critical.
One beauty of the emerging markets is that there is something there for everyone:
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- If you like technology, look at India, Singapore, and Taiwan.
- For healthcare, look in Israel, Eastern Europe, Singapore and Korea.
- Manufacturing? China.
- Natural resources? Brazil, Indonesia, Russia.
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Over the last couple of years, emerging markets have fallen rather dramatically, far more than the US. However, over the past decade, emerging markets have risen while the US market has fallen.
There are risks in emerging markets that most investors are not used to. Currency devaluations of 50% or more can make investing in some emerging markets more like riding a roller-coaster.
Pick an established fund with a long track record and experienced investment team. Don't make this too big of an allocation in your portfolio. Yes, it might be beneficial at times, but it is also very volatile, so keep the exposure modest.
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"Is gold a good investment now? How does it compare to other investments today and historically." Sincerely, Dennis
ANSWER:
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Gold operates differently than most other commodities in terms of what drives supply/demand. It's similar to bonds as being one of those assets that fearful investors run to in uncertain times but it's also very different:
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- With bonds you get paid interest
- Stocks have dividends
- With real estate you can get rents
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With gold, you get none of these benefits.
Gold may do well in an inflation environment but over time, it does not have a great track record. From 1960 large cap stocks returned on average 9% per year, bonds a little over 7.0%and gold earned just under 7%, but with more volatility. If someone started investing in 1980, they would've earned twice as much per year in a Treasury Bill.
The bottom line is that gold is not a place to stash a lot of one's wealth and historically, the best investments have been stocks and real estate. However, if a person is insistent on getting gold exposure, the purest form is investing through Exchange Traded Funds, such "SPDR Gold" that actually consists of shares of interest in gold bars stored in a secured vault.
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"We hear about the Bernard Madoffs, the Marcus Schrenkers, and other crooks who profess to be star wealth managers. How is the average investor supposed to know who is qualified to offer sound and unbiased financial advice? What should we look for and how do we pick the right financial advisor? Denisa, help!" Don
ANSWER:
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Don, despite some of the bad apples in the financial industry, there are many honest and well credentialed professionals, but it will take some effort on your part to find the right one.
The backgrounds of financial advisors can vary as much as the services offered. Their education and experience should demonstrate a solid foundation and a commitment to keeping current.
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- Educational background AND professional credentials
- Years of experience
- Affiliation with any broker-dealer or insurance company
- Form of compensation
- Client references
- Citations for disciplinary reasons
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Federal and state laws require that individuals holding themselves out as providing investment advisory services are required to be registered with either the U. S. Securities & Exchange Commission (SEC) or the regulatory agency of the state in which they conduct business.
Therefore, find out if the advisor has such registration and ask for a copy of that registration called Form ADV Part II.
Most importantly, interview more than one.
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"Now that I have lost big chunk out of my investments, should I cash out of the stock market and put money in the savings account?"
ANSWER:
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It would seem like a reasonable thing to do given the circumstances. However...it is important to understand that cash will never make back what you have lost to date. The only way you are ever going to meet your goals is to stay in the right asset allocation. The 3% that your bank may offer sounds like a great deal now but at 3%, you will have to wait over twenty years to get back to where you were. At least you have a fighting chance to regain your starting position by owning stock over entire market cycles. You will eventually regain part of your losses.
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"Are we repeating the Great Depression?"
ANSWER:
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Rather than the next great depression, it is a virulent recession, which we haven't really seen since the early 1980s. Much of the decline is already behind us but the path ahead is difficult to see. It will ultimately return us to growth as it happened about 80% of the time over recent decades. It may take longer than we'd like to see, but it will happen.
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"Exchange Traded Funds seem to be hot investments these days but I am reading that this is one of the underlying problems of the market today. Why? How do they really work?"
ANSWER:
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Exchange Traded Funds (ETFs) are actually open-end funds that trade daily like stocks on the stock exchange. They go by strange names like the QQQ, the SPY, or the DIA. They typically replicate the performance of some index, like the Dow Jones or the S&P500, or some industry sector.
The problem is that many investors don't do fundamental research on the individual companies that make up the ETF, and they just trade in and out of ETFs all day long.
So, from the bigger perspective, let's take the SPY ETF for example, that mirrors the performance of the S&P 500 index on daily basis. Every time someone buys shares in the SPY, they are buying shares of all the stocks that make up the S&P 500. There is no conscious decision being made to just buy the individual companies. Yet when enough investors trade in and out of the ETF, they can drive up and down the price of the individual stock.
Also, EFTs are really designed for rapid traders as opposed to long term investors. If you are a long investor, mutual funds or just plain stocks may be more appropriate because they offer many active strategies.
For more info on particular ETF, you can go to http://www.etfconnect.com.
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From: Tony
"I read a lot about hedge funds. Is this a good time to be investing in these funds? If so, which ones?"
ANSWER:
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The short answer to your question is yes, this is the time to buy hedge funds, if you can choose the right one.
The better question is, ‘which is the right one?'
There are a few basic styles of hedge funds: global macro, long-short, merger arbitrage (which is just a specific variation of long-short), etc.
The trouble we've had recently in the hedge fund space is that they have become so common and so many people have entered the field. Unfortunately, a lot of new investors were not up to the task, however; now that a lot of the investors have exited from this category, the odds of getting a good hedge fund manager are better.
The other consideration is that hedge funds have not proven to be that much better than the typical "buy-and-hold" approach. A straightforward buy on the S&P 500 Index, left to ride over the last twenty years, would have yielded about the same result. So, no more return for what is probably a lot more risk hasn't proven to be a better mousetrap. Fees that are often 2% - plus 20% of any gains - mean that hedge funds are far more attractive for the sponsors and managers than for the participants.
In a nutshell, hedge funds have their place in portfolios, but the question is what kind of return do you need? Can a hedge fund meet that need, and are you willing to pay for that return stream?
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From: Vincent K.
"I know this is a good time to buy more investments. What criteria do I look at to decide if a stock or mutual fund is a good one to add to my portfolio?"
ANSWER:
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The two basic variables of investing are expected return, and risk/volatility, and correlation.
Adding non-correlated assets to a portfolio, or assets that have different 'cycles' of returns such as stocks and bonds (the best example) or U.S. stocks and international stocks, helps lower the chances of everything in your portfolio losing money at the same time. Something is working all the time.
The more variety you get, such as adding real estate, commodities, international bonds, etc. the better, since each cycle is slightly different than the others and tends to smooth the long-term returns of a portfolio. Last year, of course, everything correlated downward (not common), but over time the correlations tend to work.
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From: Kimberly
Age: 35 - 39
"Denisa, I am so excited about the financial education series on Tuesdays! Do you plan on covering basics about investing? For example, I do not know if I should invest into a mutual fund, or an IRA, Roth IRA or my 401K? This is all very confusing to me. Thank you for your advice."
ANSWER:
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It is about balancing a risk and return. Think of it as having three buckets to put your money into:
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- for short-term goals(1-5 years; i.e. )
- for mid-term goals (6-9 years; i.e. college education)
- for long-term goals (10 years +, i.e. retirement)
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*Short-term money - invest in safe instruments such as, Money Market Accounts, CDs, etc (with financially sound, FDIC-insured institutions)
*Mid-term money - invest for growth, in a well-diversified mutual fund portfolio
*Long-term money - invest for growth, in a Roth IRA, Traditional IRA and a 401(K) or 403(b) (if you work for a public sector employer)
Each bucket of money funds a different goal, balancing risk and return. Money growth in each bucket differs, which means a different tax treatment, a potentially higher income tax and a lower capital gains tax. That is why you want to take advantage of all the 'buckets'.
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From: Kara G.
Age: 45 - 49
"I have a 401K through my work. Because of everything happening with the economy during this time, should I be moving around and changing what funds I'm investing in?"
ANSWER:
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The question you should be asking is not whether you should change funds inside of your 401K as a result of the economy, but rather whether you should change your allocation to make sure that you are well diversified across all the different asset categories (US stocks, International equity, US Bonds, Foreign Bonds, Real Estate Funds, and Commodity Funds).
Call your 401K investment advisor and discuss whether your current allocation matches your time horizon and your risk tolerance.
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From: John
Age: 45 - 49
"I've seen headlines about socially responsible investing. How does it work and does it make sense to have socially responsible funds in my investment portfolio? Thanks. "
ANSWER:
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Socially responsible investing (SRI) means integrating personal values and social and environmental concerns with investment decisions.
The Social Investment Forum reports that in 2007 the SRI market was $2.71 trillion out of $25.1 trillion of the total U.S. investment marketplace, and growing 18% from 2005 to 2007.
SRI investors encourage corporations to improve their practices on environmental and social issues, and seek to build wealth in underserved communities, by employing these approaches:
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- Screening for both negative and positive causes, such as tobacco, alcohol, gambling, weapons, animal testing, environment, human rights, employment equality, community investment, etc.
- Shareholder advocacy involves socially responsible investors taking an active role, such as talking with companies on social and environmental issues.
- Community investing by directing capital from investors and lenders to underserved communities, providing access to credit, equity, capital, and basic banking products.
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(source: The Social Investment Forum)
John, your decision to add SRI funds should be based on the same fundamental approach as with any other fund. The key is always to be diversified and once your core asset allocation is in place, then you can screen funds according to your personal values and ideology.
Although many SRI funds have also been impacted by the market declines, I think that the market volatility will draw more investors to SRI investing. The emphasis will be on responsible investing and investors will pay more attention how their dollars are being invested.
Here are some other SRI related resources for consumers:
Indexes tracking SRI funds
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- Domini 400 Social Index (DS 400 Index)
- Calvert Social Index
- Citizens Index
- Dow Jones Sustainability Index
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They differ in the emphasis they place on social characteristics.
The Social Investment Forum (SIF) (www.socialinvest.org) is a national membership association that promotes the concept of socially responsible investing. SIF's website offers useful tools for investors including extensive database of SRI funds with screen profiles and performance data.
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The benefits of investing can be significant, it is the only way to attain long-term financial goals and beat inflation over time. So let’s talk about a three key principles of successful investing.
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- Compounding of interest is a simple yet very powerful concept of growing interest on top of interest. It can be best illustrated with a Rule 72. (Here is how it works).Take an interest rate and divide it by the number 72, and it will show how fast your investment doubles. For example at 8%, you money doubles every 9 years! ( 72:8 = 9 yrs)
- Diversification means that you spread out your investment between different categories like US stocks, foreign stocks, bonds, and real estate. By doing that you are actually reducing the risk over time and boosting your return.
- Lastly. Dollar-Cost Averaging - is when you systematically invest a set amount of money. For example, each month you automatically invest $50 into an XYZ mutual fund. By investing this way, you get a bigger bank for your buck.
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So by putting money each month into a well diversified investment account (your 401K or an IRA) you should be well positioned to hit your long-term financial goal.
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Tonight I have more tips for you on Smart Investing:
Have a Global Focus:
Put a portion of your investments in international funds. It can protect your money against the fluctuating dollar and give your portfolio a boost from the growth in the emerging markets like China, Brazil or India.
Maintain the Right Balance:
Over time the fluctuating stock market shifts your balance between stocks and bonds. For example, let’s say you divided your investment account last year to be 60% in stocks and 40% in bonds, and now the stock portion of your account may be more like 70%. So once a year you should rebalance your account to its original allocation. Many 401K plans offer an automatic option to do the rebalancing for you.
Look at the Big Picture:
Focus more than just on fees and taxes when you are selecting funds for your investment account. Fees are certainly important but low cost funds alone do not guarantee the best performance. A better approach is to first make sure you are well diversified and then to focus on the actual fees.
These are just a few more ideas to help you stay on the right track with investing.
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Tonight, I will answer a question from a viewer: Maggie wants to know how to select a reputable financial planner and check them out for any disciplinary actions.
Maggie, your friends and co-workers should be your first stop to ask for referrals. Also, check out the database of the Financial Planning Association for a few extra contacts in your area. Then you will want to interview several of them and ask about their:
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- Education, professional credentials and experience
- Their specialty; like investment planning, retirement or divorce planning
- Compensation. Financial professionals get paid in a number of ways and you need to figure out what best fits your needs
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Finally, here is how you check them out for any disciplinary action. Individuals holding themselves out as investment advisors are required to be registered with either the SEC or the state’s department of securities. To find out if the advisor has such registration, ask him for a document called Form ADV. This form will provide information about the advisor’s services, fees, any disciplinary actions, as well as any conflict of interest.
The bottom line is that before you hire someone, look beyond their credentials. Remember, that this is a long-term relationship.
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