Every investment involves some amount of risk taking, and as a rational investor, your aim should be to maximise your returns as much as possible, to obtain the best compensation for whatever level of risk you decide to take. When it comes to earning interest, your savings can either go to the bank or building society or to bonds and gilts. Bonds and bank/building society deposits compete for the funds of individuals, and thus usually have the same trend (rise or fall) in interest rates and yield. Concerning yields, the longer the maturity, the higher the expected compensation or yield. In order to comprehend the need for both equities and bonds in your portfolio, you must first fathom the relationship between interest rates, inflation, strength of currency and the well-being of an economy.
When one invests in a share/equity, what has fundamentally happened is that an ownership has been purchased in the company that is being considered. This means that one can make decisions and also share in the profits of the firm. Profits are distributed in the form of dividends, and it is the directors of the firm that decide how much dividend they want to pay out of profits. In fact, where all profits are reserved for growth, no dividends at all are paid sometimes, a practice very typical of small and new companies. It must also be noted that the money that is invested, unlike an investment in bonds, cannot be redeemed. One good benefit of equities, though, is that it protects investors from the sting of inflation. This is because firms tend to make more profits and their shares tend to pick up value, as inflation rises. This shelter from inflation is nevertheless denied bond investors, whose real yields, will be very much impinged upon by a rise in inflation.
It is rewarding to be aware of the inverse relationship that exists between the price of bonds and interest rates. When interest rates rise, the price of bonds fall and vice versa. This is because as mentioned earlier, bank and building society deposits, vie for the funds of individuals. When interest rates rise, bank and building society deposits become more competitive, and it is necessary for the price of bonds to fall to compensate for the lower yields being paid. Conversely if interest rates fall, the price of bonds will rise, so that investors pay for the higher yields they can earn.
A booming economy normally has businesses as well as individuals chasing a lot of money to invest in production and to spend on day to day activities. The forces of demand and supply kick in, and hence increases the price of borrowing, which is interest rate. A boom also tends to trigger inflation, and a fall in currency, which benefits equity holders, but affects bond holders negatively as afore-said - a rise in interest rates leads to a fall in price of bond, and the increase in inflation devours the real value of the yield. The opposite of this combination of effects can be anticipated during a recession. Since the future is fairly uncertain, and one cannot accurately predict whether there will be a boom or recession, an investment that encompasses both equities and bonds stands to gain whether there is economic recession or boom.
The bottom line is that a mix of equities and bonds in a portfolio allows the investor to even the downs of one security with the ups of the other, whether there is a boom or recession. It is akin to the benefits enjoyed by a man I know who goes to Africa during the winter months, because the weather there at that time of the year, is really sunny and dry. When the rainy season starts in June/July, he will be nowhere to be found! Where do you think he will be? Back in England to have his share of the brightness of summer! In effect the access to England and Africa, like having a mix of bonds and equities, does not make him experience the torture of bad weather.
David Opoku BA Hons. in Accounting and Finance. ( Currently specialising in Financial Advising). E-mail: davido312@aol.com
I have a BA Hons. degree in Accounting and Finance. I am currently specialising in Financial planning.
Saturday, June 6, 2009
Are You Taking Too Much Risk With Your Investments? (by Ray Prince)
One of the most common situations we come across month in month out, is a new client in their 50's coming to us with a collection of policies, often worth considerable amounts of money.
In some cases, our office table groans under the weight of various policy documents (only kidding but I'm sure you get the point) amassed over many years. What is extremely worrying is that in virtually every case, here is a client approaching retirement who is taking far too much risk with their investments!
What is more, they have no idea that this is the case at all.
They may say something like "I was told by the adviser who sold it to me that it was safe because it is in a managed/diversified/with profits fund". Having then put the document in a drawer, it does not see the light of day again until the client feels that he/she should see "how it's doing".
Now, we are all human, and so we accept the fact that they don't know what they don't know, just as a dentist telling us about a problem with our teeth we did not know we had until our regular check up.
However, since this is a continuing huge issue that has the potential to ruin a dentist's/doctor's retirement plans, let's look at a recent case as an example.
Mrs Jones (name changed) has not seen her adviser for many years and decided to approach us having been to one of our talks and having received the newsletter for sometime.
She has various PEPs, ISAs and Pensions worth £200,000. Aged 54, she plans to semi retire at 55 and fully reire at 60. Working only 2 days a week from age 55 to 60, she has lots of places to visit in mind, and this pot of money will help her achieve this.
Readers of this newsletter will (hopefully) know about the term Asset Allocation. Basically, this is the percentage that you have in equities/property/bonds/cash, and is absolutely vital to get right.
Very simply this is because you need to be comfortable with the amount of volatility inherent in every portfolio. If markets dive, will you panic as you see your portfolio value plummet just when you need it?
Secondly, since we build cash flow forecasts for clients, which compare their goals to their assets, the idea is you can have a portfolio designed to achieve your goals with the MINIMUM amount of risk.
Mrs Jones duly filled in her risk questionnaire and expenditure template, and we built her cash flow forecast. It turns out that to achieve her goals the amount of exposure she requires to growth assets (more risky) is 40% of her portfolio. She is shocked to find that currently her exposure to growth assets is 98%!
So what would this mean in the real world for Mrs Jones?
One of the most volatile investment periods in modern history occurred in 1973/74. If this were to happen again, then her £200,000 on New Years Day in 1973 would be worth approximately £62,000 by New Years Eve 1974. Even after the market bounced back in 1975, showing huge gains, £200,000 would still have dropped to £155,000 by New Years Eve 1975.
However, if Mrs Jones were in a proper risk assessed portfolio with a disciplined approach to rebalancing (#) and a 40% exposure to growth assets, the drop over two years would be to around £163,000, and at the end of 1975 it would stand at £271,000.
That is a staggering £116,000 more. More importantly, it means peace of mind for Mrs Jones, who is secure in the knowledge that she has minimised her risk, and can simply get on with arranging her holiday of a lifetime to Australia.
The Financial Tips Bottom Line
If you are within 10 years of retirement, get a check up before it's too late! Even though you may have experienced good returns from the recent rise in world markets, don't make the mistake of thinking that shares may not fall in value as well.
# Please note the figures used presume Mrs Jones would rebalance her portfolio at reviews held on 31st December 1973 and 1974. Rebalacing is an extremely important investment discipline normally
done annually, whereby if Mrs Jones is happy to have an exposure to growth stocks of 40%, and these stocks fall heavily in value meaning they represent say 22% of her portfolio, she then sells other assets in her portfolio to take this back to 40%. In this case of course it meant buying equities at a low price, and seeing these stocks then rise in value in 1975.
ACTION POINT
Check exactly what investments you have. What percentage is in equities and property?
If (say) it is more than 80%, you could have too much exposure than either you need, or for your comfort levels.
Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives.
Just visit http://www.medicaldentalfs.com to get your free retirement planning guide.
Rutherford Wilkinson plc is authorised and regulated by the Financial Services Authority.
In some cases, our office table groans under the weight of various policy documents (only kidding but I'm sure you get the point) amassed over many years. What is extremely worrying is that in virtually every case, here is a client approaching retirement who is taking far too much risk with their investments!
What is more, they have no idea that this is the case at all.
They may say something like "I was told by the adviser who sold it to me that it was safe because it is in a managed/diversified/with profits fund". Having then put the document in a drawer, it does not see the light of day again until the client feels that he/she should see "how it's doing".
Now, we are all human, and so we accept the fact that they don't know what they don't know, just as a dentist telling us about a problem with our teeth we did not know we had until our regular check up.
However, since this is a continuing huge issue that has the potential to ruin a dentist's/doctor's retirement plans, let's look at a recent case as an example.
Mrs Jones (name changed) has not seen her adviser for many years and decided to approach us having been to one of our talks and having received the newsletter for sometime.
She has various PEPs, ISAs and Pensions worth £200,000. Aged 54, she plans to semi retire at 55 and fully reire at 60. Working only 2 days a week from age 55 to 60, she has lots of places to visit in mind, and this pot of money will help her achieve this.
Readers of this newsletter will (hopefully) know about the term Asset Allocation. Basically, this is the percentage that you have in equities/property/bonds/cash, and is absolutely vital to get right.
Very simply this is because you need to be comfortable with the amount of volatility inherent in every portfolio. If markets dive, will you panic as you see your portfolio value plummet just when you need it?
Secondly, since we build cash flow forecasts for clients, which compare their goals to their assets, the idea is you can have a portfolio designed to achieve your goals with the MINIMUM amount of risk.
Mrs Jones duly filled in her risk questionnaire and expenditure template, and we built her cash flow forecast. It turns out that to achieve her goals the amount of exposure she requires to growth assets (more risky) is 40% of her portfolio. She is shocked to find that currently her exposure to growth assets is 98%!
So what would this mean in the real world for Mrs Jones?
One of the most volatile investment periods in modern history occurred in 1973/74. If this were to happen again, then her £200,000 on New Years Day in 1973 would be worth approximately £62,000 by New Years Eve 1974. Even after the market bounced back in 1975, showing huge gains, £200,000 would still have dropped to £155,000 by New Years Eve 1975.
However, if Mrs Jones were in a proper risk assessed portfolio with a disciplined approach to rebalancing (#) and a 40% exposure to growth assets, the drop over two years would be to around £163,000, and at the end of 1975 it would stand at £271,000.
That is a staggering £116,000 more. More importantly, it means peace of mind for Mrs Jones, who is secure in the knowledge that she has minimised her risk, and can simply get on with arranging her holiday of a lifetime to Australia.
The Financial Tips Bottom Line
If you are within 10 years of retirement, get a check up before it's too late! Even though you may have experienced good returns from the recent rise in world markets, don't make the mistake of thinking that shares may not fall in value as well.
# Please note the figures used presume Mrs Jones would rebalance her portfolio at reviews held on 31st December 1973 and 1974. Rebalacing is an extremely important investment discipline normally
done annually, whereby if Mrs Jones is happy to have an exposure to growth stocks of 40%, and these stocks fall heavily in value meaning they represent say 22% of her portfolio, she then sells other assets in her portfolio to take this back to 40%. In this case of course it meant buying equities at a low price, and seeing these stocks then rise in value in 1975.
ACTION POINT
Check exactly what investments you have. What percentage is in equities and property?
If (say) it is more than 80%, you could have too much exposure than either you need, or for your comfort levels.
Ray Prince is an Independent Financial Planner with Rutherford Wilkinson plc, and helps UK Resident Doctors and Dentists get the best deals on mortgages, protection and investments, as well as helping them achieve their financial objectives.
Just visit http://www.medicaldentalfs.com to get your free retirement planning guide.
Rutherford Wilkinson plc is authorised and regulated by the Financial Services Authority.
Equities Stocks And Bonds Investing Business - Make A Fortune With These Simple Tips (by Josh Neumann)
What could be better than an equities stocks and bonds investing business when working for yourself and building a business? Prepare your own cash flow by making a note of investments you have made on different equities. If your investments bring in money, then that becomes a business for you, regardless of whether you engage in it full time or not.
People always put money in the market as investment, but do not initiate as business and it is left for the HNI (High net worth individual). The business shares that you own become equities stocks, and a bond is a debt security. A bond is a debt which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity.
Both bonds and stocks are securities, but in the case with equities, one holds a part of company. This isn’t the case with a bond, where you are simply loaning the firm money, to be paid back with interest at a certain time.
An equities stocks and bonds investing business pays you well in a couple of years. First, you do not use your own money to trade in the market and second, you make money as brokerage on every trade. It is always a win- win situation for both the investor and the business.
A business cannot be run alone, so it is imperative that you hire good relationship managers who know about the technicalities of the market and have the commerce background necessary to study different company’s quarterly results. You can also start selling mutual funds of different fund types so as to start with and later grow equities stocks and bonds investing business.
An equities stocks and bonds investing business is ideal for people who are retired and are left with a substantial amount of retirement money. This way, they have some time available to study up on their investments, without being tied down to a job or another business they may own.
However, no matter how young or old you are, you certainly can’t go wrong with an equities stocks and bonds investing business; just do your research, focus on one particular area, don’t try to invest in to diverse of fields, and you will make great money wit h the market.
For more info on how to buy stocks, and tips for investing in the stock market, visit http://www.stock-investing-tips.com, a popular site that teaches how to make a fortune from your investments.
People always put money in the market as investment, but do not initiate as business and it is left for the HNI (High net worth individual). The business shares that you own become equities stocks, and a bond is a debt security. A bond is a debt which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity.
Both bonds and stocks are securities, but in the case with equities, one holds a part of company. This isn’t the case with a bond, where you are simply loaning the firm money, to be paid back with interest at a certain time.
An equities stocks and bonds investing business pays you well in a couple of years. First, you do not use your own money to trade in the market and second, you make money as brokerage on every trade. It is always a win- win situation for both the investor and the business.
A business cannot be run alone, so it is imperative that you hire good relationship managers who know about the technicalities of the market and have the commerce background necessary to study different company’s quarterly results. You can also start selling mutual funds of different fund types so as to start with and later grow equities stocks and bonds investing business.
An equities stocks and bonds investing business is ideal for people who are retired and are left with a substantial amount of retirement money. This way, they have some time available to study up on their investments, without being tied down to a job or another business they may own.
However, no matter how young or old you are, you certainly can’t go wrong with an equities stocks and bonds investing business; just do your research, focus on one particular area, don’t try to invest in to diverse of fields, and you will make great money wit h the market.
For more info on how to buy stocks, and tips for investing in the stock market, visit http://www.stock-investing-tips.com, a popular site that teaches how to make a fortune from your investments.
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