Financial and Investment Resources

Archive for October, 2009

Find Tips About Financial Education Program

Financial well being is no different to playing golf. You need to learn the basics through a comprehensive financial education program. The program also needs to teach you the right mindset for achieving prosperity. Financial freedom or success can have different definitions to many people but any financial education program needs to also teach you beyond the basics and principles of how to swing a golf club.
What about when your ball goes into a bunker? Did your golf pro teach you how to get out of trouble? We all know the world of finance and investment does not run smoothly all the time. For the untrained, making financial decisions can be like not knowing what club to use on the tee or any other part of the course – because they do not know what the outcome may be. To the trained golfer you know what club to use and will be successful more often than not when you play a shot from any position.
To find the best financial education program you need it to cover the fundamental basics like budgeting, cash flows, understanding all types of investments, investment structures and understanding company reports and research papers. It also needs to teach all the advanced strategies like minimising your taxes, estate planning issues, retirement planning strategies and protecting your assets. It also needs to teach you about prosperity, financial well being and the importance of a healthy lifestyle. Probably the most important aspect, just as the golfer needs constant revision and practice to keep a low handicap, you will need constant reviews and ongoing access to professionals and mentors.

Therefore it shouldn’t surprise us that during recent months more and more people have fallen victim to the ill effects of money-related anxieties. The current economic crises in many countries have resulted in the loss of jobs, homes, personal savings and pensions on a global scale. Large financial institutions have collapsed and even the wealthiest nations have resorted to emergency measures to prevent total financial collapse. In the developing world, the rising cost of food and other basic commodities has also caused much concern and anxiety.

And while the prepaid debit card companies are trying to expand their offerings so they can attract more of the traditional “banked” customers, the banks are looking closely at trying to expand their own line of products into the underbanked.

Buying financial advice is a different experience than buying a new washing machine. Mind you, many investors would argue that they have been through the wringer over the last two years! The trouble is, it is very hard to assess the quality of the advice you are buying in advance, and it may not be until some time after receiving and acting on the advice that you realise it was good, bad or indifferent. There are many people who need good financial advice who don’t know where to turn and who feel ill-equipped to distinguish between good advice and bad.
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When making decisions, investments, we know better to manage our emotions, investing and the use of logical based investment process. And when times get tough, we strive to give our emotions get in the way. When emotionally based investment behavior drives our investment decisions, consider that lose money. Recognizing the investment behavior, which allows you to invest your emotions get in our way, is an important step to keep them at a distance.

Richard Thaler and Cass Sunstein in his book entitled “Nudge: Improving decisions about health, wealth and happiness, we describe some of the emotions that investments tend to get in our way and how we can deal with them. When the market trend from lower left to upper right, you can easily get lost in some of this emotional investment.

Following the herd. It’s easy to go along with the crowd. If it is safe for them, it must be safe for me. Nevertheless, we must pay attention to those signals, which we have little to get something can not be right. This is especially true if our investment process tells us to take precautions. If our analysis tells us to be cautious, despite the fact that the crowd says, to take steps to protect your profits.

If your stocks are those that are discussed at all cocktails, you know, you become part of the herd. This does not mean that you should close these positions; it means you should rethink why you own them, should you keep them, and what is your exit strategy.

False sense of security. When things go well, investors might be lulled into a false sense of security. Markets will continue to grow our portfolios grow with him. We could even take on more risky investments, buying a hot stock market in an attempt to increase our revenues. When profits come Easy, investors tend to think that they know everything, and lose their sense of anxiety. When this happens, it indicates that you are vulnerable to large losses on the market should turn against us.

Whenever you feel this investment behavior, to reconsider their positions on the basis of what you are looking at what is going right and what can go wrong. Be prepared to take action if the positive trends turn against you. Always think that could change the current sound momentum. Few opposite perspective do not hurt.

Reduce risk. The best professional investors are always to focus first on the risk that they acquire. Furthermore, they articulate what they will do to manage this risk. Then they examine the potential return. When things go well, there is a tendency to ignore the risk you incur. After a good long-term action, the risk of reversal increases. If you are unable to formulate an increased risk you assume, it is a sign that you can avoid the growing dangers of your position.

To manage this investment behavior does not cease to do homework. Especially continue to assess the risks of their positions as they grow in value. Always use a strategy to reduce risks, which include selling part of your position after Nice ran. Be assured, your trailing stop where it should be. Consider using covered calls and protective puts when the parameters of risk may be higher. No one went broke selling positions that were profitable.

Forgetting to diversify properly. When we make money on the market and our portfolio grows in value, we strive to congratulate ourselves on the fact that we have a large investor. During our portfolio can become too concentrated in one asset without us even realizing it. This might work, if this asset class is one of the leaders in the market. In the end, the time will come when money will be transferred to other assets, leaving behind you. Worse yet, your portfolio may decline in a hurry.

To manage the investment of emotion, at least quarterly, preferably monthly, to assess how you have become too concentrated in one asset. If it looks like some shares increased significantly, it might be time to take a little bit on the table. Consider the sale of half of each winning position and put money to work in another and the surrounding areas. The other half of your best stock can save Running with Trailing Stop to protect your growing profits. Only now, you’re playing for money at home.

Investing emotion is one of behavior we can control, adhering to its rules. When our emotions get in the way of investment, we tend to make mistakes that will cost us. When things go well, is easy to forget to follow appropriate rules of investing. Take steps to recognize the symptoms, and then return to a proven investment process. Your portfolio will thank you.
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Conventional wisdom tells us to place our money on an investment vehicle we are most familiar with and on investment vehicle we can benefit most. Since understanding the rise and fall of stocks is much easier than knowing the basics of options trading, it is a more popular choice for the many. But the fact is options trading provide several advantages than any other investment vehicles, including the stock market or even the Forex. Let us look at some:

Leverage

Buying a call option gives the investor a good option position that is similar to stock position. For example, if an investor would by 300 stocks selling at $50 per share, he would have to pay $15,000. But if he would choose to purchase three $20 calls (each contract representing 100 lots or shares), he will only have to pay $6,000 (3 contracts X 100 shares/contract X $20 market price). The investor would then have an extra $9,000 to spend or invest on his or her discretion. The process is obviously not as simple as that. The investor would have to know which call to buy to have a good option position, similar to stock position. However, if you are looking for a good investment without risking large sum of money at once, option trading is the better choice.

Limited Risk

Investment is said to be for the risk takers. This is good if your risk automatically yields to profit. But that is not always the case. In options trading, however, you can have unlimited profit potential and at the same time have limited risk. This is because options trading only give you the right to buy or sell underlying asset, and not the obligation. Meaning, if the price is not right at the end of the contract, you can just ignore and let the contract expire. If, however, you can profit for the change in shares prices, you can assert your right and pursue the contract.

For example, you buy a certain call option for $20 (strike price) that will end on the third Friday of March. On the expiry date, shares you bought are trading at $25. Definitely, you can instantly earn $5 per share and would have to pursue with the contract.

What if the at the expiry date is lower than the strike price?

Let us imagine that the shares you have bought went down to $15 or even $5 at the end of the contract, do you have to pursue the contract? No!

You just have to let the contract expire.

What have you lost then?

The option premium you paid the seller. Nothing more.

Unlimited Profit Potential

Say a certain call option you have bought is now trading at $38 per share. You can exercise your right to buy it for the strike price of $20 and earn $18 minus the Option Premium you have paid. This is just an example. The price of shares can go higher than that. And if you have carefully chosen your call, you can get the best profit without breaking your bank. Note: if you are planning to pursue the contract and buy the shares, remember that you have to pay the full amount. So at the expiry date, make sure that you have you the cash.

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Find Out Important Info About Financial Modeling For Individuals. However, most people stop short of modeling their financial future. This articles touches on the meaning of financial modeling, its merits, ways to implement it and things to watch out for.

The most valuable part of a financial model is its application to analyzing risk. Have you ever asked yourself what would happen if you retired early? Would your savings carry you? What if you lost your job? How long could you survive without your main source of income and what expenses would you need to eliminate or reduce? How would a major purchase such as a vacation home or a recreational vehicle affect your financial position? You may know that your current budget has room for the loan payments, but may the purchase derail your retirement plans? Financial modeling helps you answer the question, “What if?” By adjusting your assumptions to reflect different possibilities such as the ones I have mentioned here, you can identify and understand the risks to your financial future and even test how effective plans to mitigate those risks are.
There are several ways to build a financial model. If you have the skills to do so, you can build one yourself with a spreadsheet application such as Microsoft Excel.

Many people are not that comfortable with financial mathematics. For those of you that fall in the latter category, there are still several options available. There is software available on the market at varied costs and levels of sophistication. Financial planners often offer this service for free in order to up-sell their other services. There are also consultants that will build a financial model for you. There are, of course, plusses and minuses with each of these methods.
If you chose to build your own, you will need to verify the output. Good techniques include entering only portions of your finances with known outcomes to test the results, testing extreme assumptions to make sure the output makes sense under those conditions and having someone with the appropriate background peer review your work.

If you chose to use a financial planner, you should be aware that his or her analysis may be geared more to up-selling their products than to giving you a detailed financial analysis. Also, beware of the software they use. It is unlikely the person putting your analysis together is the one who created the software. Therefore, the program might be a black box to the financial planner. This is often the cause for errors due to not understanding the computations that the program uses to perform the analysis.

The software option also presents this black box issue. If you choose to use software, you should make sure you have a good understanding of how the software works and what each input you enter means. Buying a software package that is user friendly, but still sophisticated in the calculations behind the seen is the best way to go.

The consultant can explain what assumptions were made and any simplifications that were made in building the model. The consultant is also not going to try to up-sell you on other products. The main draw back to using a consultant is cost. Specialized attention to you as a customer is often on the expensive side.

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If you are fifty years old or older, you may remember the slide rule and pencil in math class; if you are younger than that, you probably had the advantage of being able to use a calculator in your high school courses. Either way, the results are what mattered, and when you use investment growth calculators, the results matter even more than they did in Algebra.

That is because investment growth calculators are tools that do better than tell you the value of some arbitrary X. Investment growth calculators show you, in very real terms, and usually with pretty graphs, charts, or tables, how your investment dollars will multiply under certain conditions.

Basically, although they cannot determine the actual performance of, say, stocks, for example (now that would really be an amazing tool!), they can provide you valuable information about how your finances may grow with certain assumptions.

Letís say, for example, that you are now thirty-five years old. You think the government is crazy when it says that seventy is considered retirement age, and you want to be able to grab the golf clubs and the suitcase while you are still young enough to enjoy the greens and leisurely travel to foreign lands. You want to kiss your career goodbye the minute you hit the big 6-0, but you have no idea if that is really possible or not. Well, you can play around with the various fields of investment growth calculators to discover how much you need to invest, what return you need to get, and how many years you need to invest to reach that retirement goal.

If your kids are now toddlers and your goal is to put them through college in fifteen years, do you know what you have to do to be able to get them that coveted degree without flipping burgers while they study? Advisors can show you some guidelines using investment growth calculators.

One thing you must remember is that the answers you get from this tool are only as good as the information you program into them. If you are your advisor put in incorrect information or exaggerated figures youíre asking for major problems with your investments. Therefore always double check the information to ensure its accuracy.

With investment growth calculators, you can change various fields and see how those changes would affect your investment income. You can change the number of years you would like to (or are able to) invest, the rate of return (expected, of course, not guaranteed!), your initial balance, and even your tax rate. Although hypothetical in nature, investment growth calculators are a valuable tool when deciding your investment plan.

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