Your Hill Of Beans

May 24th, 2009

What you know intellectually about stocks… bonds… mutual funds… commodities… real estate… or any other investment product isn’t worth a hill of beans when compared with your ability and willingness to respond rationally to the ever-changing perception of the market.

How you react (your personal behavior) to the behavior of the market as a whole will determine the degree of success you have with your investments.

More than likely, you know that you have to accept some risk when learning how to invest.  But, what may not be as evident is that even the riskiest investment can be controlled.

Let’s use the technology crash (2000-2002) as an example.  Investors were mesmerized by the extraordinary increase in stock prices from 1998 to early 2000.

Everything techie seemed to be making money.  It appeared to the casual and the experienced investor that there was no end in sight for profit.  But, without having a predetermined defensive plan that would automatically protect them in a down market… most of these investors suffered dearly.

Was this due to lack of awareness… hypnotic spell… greed… wishful thinking?  Or, maybe a little bit of each.

It doesn’t matter.  People who thought they knew how to invest just sat and stared as the value of their stocks soared skyward.

And, they kept sitting there even when the markets reversed course and plummeted into a dark hole.

Fortunes were made… and abruptly lost… because people who had yet to master the basics of how to invest believed foolishly that the downward spiral would stop.

But… it didn’t!

Although 2003 showed some improvement, it was too weak.  And, both 2004 qnd 2005 were uneventful.

So… was it wrong to invest in technology stocks?  Of course not.

But, it was wrong to commit money without first understanding how to invest using a predetermined course of action to protect your profits and limit your losses.

The Number One Rule… Don’t Lose Money Needlessly!

For instance, if a share price goes from $10 to $20, you should commit to sell if the price slides back to $15.

In other words, if the price gives back 25% of its gain… then, it’s time to sell.

No exceptions!

In this example, you would make 50 percent instead of 100 percent.  This assumes, of course, you would have sold when the price grew 100 percent.

The fact is most investors would not really do this… that is, sell at that time.

Instead, they would get a little greedy because most people want more rather than settle for a reasonable profit.

This may be considered human nature… but it usually leads to unnecessary losses.  The frightening downward trend of the stock market over the last 18 months simply proves that taking profits during times of decline can be the difference between preserving capital… of watching it go down a rat hole.

The point of all this is to remind us that our behavior is seldom… if ever…  rational when dealing with investments.

For those investors who had only experienced rising markets… corrections were disastrous.  Although market cycles can be somewhat predictable… the broad movements tend to be reactionary.

Having said this… even the current devastation was predictable… if only the average investor had followed the rule of stop-loss protection.

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Exercise Caution With Your Credit Cards

May 23rd, 2009

Most credit card offers have a minimum finance charge even if the actual amount of your finance charge is less.  For example, your computed charge may be 35 cents, but the issuer’s minimum charge might be $1.00.

A minimum charge typically applies when you must pay a finance charge when carrying over a balance from one billing cycle to another.

Other options to consider are things like… is the credit limit high enough… how well-accepted is the card… and the plan’s services and features.

For example, you may want an affinity card that is sponsored by a professional organization.  Or, maybe you want to select from among several small business credit cards… in order to better identify and organize your work expenses.

Federal law prohibits isuers from sending you credit cards you didn’t request, but they can send you a renewal or substitute card without your permission.  Issuers also may send you an application or a solicitation.

Prompt payment is critical if you want to avoid unnecessary charges and credit report problems.  To help avoid finance charges, follow the issuer’s mailing instructions.  Payments sent to the wrong address could delay crediting your account for up to five days.

If you can’t find the payment envelope, look for the address on your billing statement… call the company… or make a direct payment using their website.

When you pay more than the total current balance, you can keep the credit on your account or ask for a refund, if it’s more than one dollar.  This must be issued within severn business days of receiving your request.

If a credit stays on your account for more than six months, the issuer should make a good faith effort to send you a refund.

If you find a mistake on your bill, you can dispute the charge and withhold payment for that amount while the charge is being investigated.  Of course, you still have to pay any part of the bill that’s not in dispute, including finance and other charges.

If you do dispute a charge, make sure you follow the company instructions exactly.  Write to the creditor at the address indicated on your statement for “billing inquiries”.  If your dispute reaches the creditor within 60 days after the first bill containing the error was mailed to you… the creditor must acknowledge it in writing within 30 days of receipt.

When your credit cards are used without your permission you can be held responsible for up to $50 per card.  If you report the loss before the card is used, you should not be held responsible for any unauthorized charges.

Report the loss as soon as possible in order to minimize your liability.  Some issuers have 24-hour toll-free telephone numbers to accept emergency information.  Be sure to follow-up with a letter to include your account number, the date you noticed your card missing, and the date you reported the loss.  Get a delivery receipt.

You can dispute charges for unsatisfactory goods or services, if you made the purchase in your home state or within 100 miles of your current billing address.  The charge must be for more than $50.

These limitations don’t apply if the seller also issues the credit cards… or, if a special business relationship exists between the seller and the card issuer.

Of course, the courteous thing is to first make a good faith effort to resolve the dispute with the seller.  No special procedures are required to do so.  If all else fails… you may wish to consider filing an action in small claims court.

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What Is Asset Diversification?

April 23rd, 2009

Successful investing is premised on several ironclad principles.  One such principle is diversity.

But, diversity does not mean just owning several stocks.

Intelligent diversification means to allocate among asset classes in a balanced model that fits your behaviorial pattern.

There are numerous asset classes to include:

  • stocks
  • bonds
  • real estate
  • commodities
  • cash

But, it doesn’t stop here because there are sub-classes within these like:

  • domestic stocks
  • foreign stocks
  • government bonds
  • corporate bonds

Then, there are:

  • growth stocks
  • value stocks
  • emerging market stocks
  • investment grade corporate bonds
  • high yield corporate bonds

Your objective should dictate your allocation of assets.  Are you young and looking for maximum growth?  Or… are you older and more interested in income with preservation of capital?

Do you understand how to invest during market slumps?  Would you tolerate them… or would you toss and turn and lose sleep worrying about market volatility?

Are you willing to take an active role while learning how to invest?  Or, would you rather pay someone else to do this for you?

So, the question becomes how to invest using an asset allocation that is simple and effective.

Here is a time-proven strategy:

  • 30 percent U.S. stocks
  • 30 percent Foreign stocks
  • 10 percent High Yield bonds
  • 10 percent High Grade bonds
  • 10 percent Inflation Adjusted Treasuries
  • 5   percent Real Estate Investment Trusts
  • 5   percent Gold and Silver

Once you’re comfortable with the allocation within your account, you must pay attention… no less than annually… to make certain the model continues to be balanced.

It’s one thing to intentionally change the percentage of allocation.  But, it’s quite another if percentages become skewed due to market performance.

The primary purpose of the allocation is to protect you from the extreme movement of any one particular asset.

If extreme movements do disturb the percentage of your allocation, then it’s up to you to rearrange everything back into line.

For example… gold and silver are two metals that have recently made sharp moves in the commodity market resulting in extreme highs and violent corrections.

As this happens… your 5 percent allocation to these commodities will change dramatically.

The model integrity of how to invest demands that you sell some of the gold and silver positions and either pocket your profit or purchase more of another asset class already in your portfolio.

Today’s troubled financial environment doesn’t lend itself well to the rules of long-term investment strategy.  People are scared… and rightly so… due to the extraordinary violence connected to world financial markets.

Frankly, this validates the need to take greater personal responsibility for your own finances and make certain you have a solid plan that is designed to get you through tough times such as these today.

Everything indicates that things will get worse… before they get better.  One of the most troubling situations involves the dissipating value of the U.S. dollar.

All foreign exchange currencies appear to be in trouble… and it possible that gold and silver will become the predominant safe haven investments.

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Simple Debt Reduction Strategy

April 21st, 2009

What you own minus what you owe is referred to as your net worth.  It’s the total difference between your assets and your liabilities.

Here’s a simple illustration:

Home Value = $400,000           Mortgage balance = $200,000
Investments = 100,000             Credit cards = 20,000
Auto = 45,000                                Auto loans = 30,000
Savings = 15,000                           Bank loan = 5,000
You Own = $560,000                 You Owe = $255,000

Net worth = $305,000

You can increase your net worth one of two ways… own more things or have less debt.

In our example, you have $255,000 of debt.  Most people pay less attention to the mortgage and car loan balances because they consider them to be rather normal in maintaining a lifestyle.

Credit card companies charge between 12 to 29 percent (forget those slick, short-lived introductory teasers) and the bank loan is probably around 6 percent.

Now, ask yourself.  Which is faster?  Create $255,000 (in other words, own more) … or reduce $255,000 of debt?

In both instances, the result is the same because your net worth will have increased by the same amount.

To make $255,000 in 15 years, you’d have to invest over $7,000 every year for 15 years and make a minimum 8 percent rate of return.

Where can you find a guaranteed rate of return this high in today’s marketplace?

No where!

On the other hand, you can reduce $255,000 of debt in only 13 and 1/2 years by adding $100 extra each month to your minimum debt payment.

Think about that for a minute.

To increase your net worth by $255,000 you have to invest over $7,000 each year for 15 years. Then, you hope and pray you’ll get no less than an 8 percent average every year.

Or… you can come up with only $100 each month to reduce 100% of your debt (to include your mortgage) in only 13.5 years — guaranteed!

Check out this debt reduction chart.  You’ll need an Adobe Reader, which is probably already installed on your computer.  Or, go to adobe.com for a free download version.

In every instance, it is faster and more reliable to eliminate your liabilities than to increase your assets.  Why?

Because the interest you pay on your debt is excessively higher than the guaranteed interest you can earn.

By following the debt chart and adding an additional $100 each month to the minimum payment requirement, you can dramatically compound the effect of your payments and expedite the complete elimination of all your debt.

It’s a lot easier to come up with $100 extra each month than it is to find over $7,000 each and every year for the next 15 years.

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Small Business Wealth

April 17th, 2009

Most people who have made lots of money on their own understand the importance of small business ownership… even that first lemonade stand.

Not bound by traditional investing, they use personally controlled businesses to enhance their financial position.

Owning a successful small business greatly increases
your odds of becoming wealthy and staying wealthy.

More than ever, your long-term economic survival should include a source of income over which you maintain absolute control.

Developing a small business can help you retire more comfortably… send your kids to the best schools… and sleep peacefully every night without worrying about money problems.

Starting your small business - even at home - can be tricky, unless you take time to analyze and research exactly what you want to accomplish… in other words your written goals.

There are numerous niches from which to choose:

  • local business with local clients
  • webmaster or webmistress
  • eBay/Online auction seller
  • hard goods creator/artisan/crafts
  • information publisher
  • affiliate or network marketer
  • sales or referral agent
  • food preparation/recipes

Your greatest success will be based on the principle of doing something you really enjoy… but make sure there is demand for your product or service.

Some topics are always popular like losing weight… financial information… self-help… health and fitness.

Did you know people will actually pay for information that is readily available free of charge?

This is because gathering information takes a lot of time… and, most people don’t want to use their time this way.

Instead, it’s easier to pay someone else to do it for them… someone like you for instance.

So, if you’re willing to do enough research to become somewhat of an expert on a certain subject… there’s no reason to believe people wouldn’t buy from you to get the information they want.

You simply have to find out which subjects large numbers of people are querying the search engines for… and create a system to steer them your way.

We’ll post more about this topic shortly.  In the meantime, if you want to know how to make money in the largest financial market in the world… check out this site about forex trading opportunities.

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