Posts Tagged ‘Investments’

Looking After Your Money

July 29th, 2010

How to preserve your capital

As global financial markets continue to yo-yo in brutal swings, and with deposit and bond yields returning next to nothing, many investors are searching for ways to still have market exposure but without the risk.

Risk vs reward

Most investors are familiar with the principal: The higher the risk, the greater the potential reward. Conversely, minimum risk usually implies limited or low returns. How do you know if “risk” is for you? It helps to know what kind of an investor you are, or what type of personality you have. Are you the type of person who enjoys the ups and downs, twists and turns of a roller coaster? Or do you take one look at that roller coaster and head straight for the merry-go-round instead?

The reward

The reward for holding on to your investments until the end of the rollercoaster ride is that they may grow in value. You have to be willing to hold on through the long term in hopes of reaching your goals. If you go the slower route on the merry-go-round, your investments will probably fluctuate less but may not reward you as much in the long run.

Structured products

Over the past 15 years, investment companies have created products that combine exposure to growth with the safety of a deposit or a bond. They succeeded in creating what are termed capital- or principal-protected structured notes. These products allow investors to share in the upside of some predetermined stock index or other asset class while guaranteeing the initial principal invested.

Too good to be true?

If something sounds too good to be true, it probably is. So the question is: “Where’s the catch?” It’s very important to read the small print and understand the structure of each individual product.

The small print

When reading the fine print you may also find the following terms:

• Capped upside:

To make sure your principal is secured, you must sometimes sacrifice the maximum amount you can make. For example, the deal might limit your positive return to 8% in any one year. While that might sound fine, keep in mind that that is not much participation in the index.

• Liquidity:

Structured products are meant for people who intend on holding their investment until maturity. The principal protection guarantee doesn’t apply to people who liquidate early. It’s quite common that if you want to sell before the program is over, even if the underlying investment has gone up, you’ll end up getting back less than you paid. Why? Because there’s not much of a secondary market for these investments, and the redemption fees take their toll.

Speak with your adviser

While structured products may seem ideal because of the growth potential and the principal protection, keep in mind that you need to understand what the terms of each product are prior to investing. Before you consider purchasing them for your portfolio, it’s a good idea to speak with your financial adviser to determine how, and if, they fit into your financial plan.

Tags: financial adviser, Investments, Risk vs reward, The stock market
Posted in Finance | No Comments »

Smart Investors Lick Their Chops When Disasters Strike.

July 1st, 2010

Think like a contrarian when it comes to your Investments

Turn on the TV or radio and you are immediately transported to the oil spill in the Gulf of Mexico. For savvy investors, this type of a disaster and others like it may be an opportunity to profit. While it may seem a bit crass to try and profit when the birds and fish are dying – and previously pristine, white beaches are now covered in oil – smart investors lick their chops when such disasters strike.

Why they are pleased

Why? Because in the case of BP, they focus not solely on the damage caused by BP, but rather on the damage caused to BP’s stock and bond price. This is not a suggestion that you buy BP shares, but it’s a great example of what is termed “contrarian” investing. Investors who go against the general market trend are called “contrarians”.

Contrarian

A contrarian is defined as an individual who believes that certain crowd behavior among investors can lead to exploitable mispricings in the securities markets. For example, widespread pessimism about a stock can drive its price so low that it overstates the company’s risks and understates its prospects for returning to profitability.

BP

A contrarian investor would make the case that BP is the fourth most profitable company in the world, and it has already lost more than half of its value. In addition, a contrarian would assess that even the worst-case scenario would mean that the company’s litigation exposure and clean-up costs would come to maybe two or three years of its operating income. And no one expects the company to pay up immediately; much of the litigation exposure will be tied up in the courts for years. It was 19 years after the Exxon Valdez oil spill until the Supreme Court made a final ruling regarding Exxon’s legal liabilities. This is not a recommendation to buy the stock – it’s just a good example to explain the concept.

Distressed stocks

Identifying and purchasing distressed stocks and selling them after the company recovers can lead to above-average gains. Conversely, widespread optimism can result in unjustifiably high valuations that will eventually lead to drops, when those high expectations don’t pan out.

Backward thinking?

What about the risk?

Some investors do have an inverted perception of risk. They tend to buy stocks when they have already appreciated significantly and sell them after they have already gotten crushed. However, this is the opposite of the golden rule of investing: Buy low and sell high.

Baron Rothschild

Baron Rothschild, a member of the Rothschild banking family, is credited with saying: “The time to buy is when there’s blood in the streets, even if the blood is your own.” This motto has served shrewd investors for decades. The most famous of all investors, Warren Buffet said: “You pay a very high price in the stock market for a cheery consensus.” In other words, if everyone is in agreement about a particular investment, it may not be a good one.

Tags: Baron Rothschild, Investments, Investors, Smart Investors
Posted in Economy, Finance | No Comments »

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