Strategies and Concepts of Basic Investing : The Portfolio Theory of Investment

The Portfolio Theory of Investment :

Contemporary Portfolio Theory

The history of investing in the United States is divided into two periods: before and after 1952.

Why?

Well, it was the year that an economics student at the University of Chicago named Harry Markowitz published his doctoral thesis which is now known as Modern Portfolio Theory.

How important was Markowitz's paper that he received a Nobel Prize in economics in 1990 because of his research and its continuing effect on how investors line of attack in investing today.

It starts out with the assumption that all investors would like to elude risk on every occasion possible and defines risk as a standard deviation of expected returns.

Rather than look at risk on an individual security level, Markowitz proposes that you measure the risk of an entire portfolio.

When considering a security for your portfolio, don't base your decision on the amount of risk that carries with it.

As an alternative, consider how that security backs to the overall risk of your portfolio.

Markowitz then considers how all the investments in a portfolio can be anticipated to move together in price under similar conditions called "correlation," and it measures how much you can expect variation of different securities or asset classes in price relative to each other.

For example, high fuel prices might be good for oil companies, but bad for those who need to buy the fuel.

As a consequence, you might expect that the stocks of companies in these two industries would often move in conflicting directions.

These two industries have a negative (or low) correlation. You'll become better in the diversification of your portfolio if you own one airline and one oil company, rather than two oil companies.

When you put all this together, it's completely possible to form a portfolio that has much higher average return compare to the level of risk it contains.

So when you build a diversified portfolio and spread out your investments by asset class, you're really just managing risk and return brought by the asset rather than the asset itself.

Strategies and Concepts of Basic Investing : Asset Allocation

Asset Allocation:

Asset allocation is the main instrument in the conflict to build a diversified portfolio.

This is where the task of presuming how much of your portfolio will be invested in different asset classes, such as stocks, bonds, or cash.

Asset allocation or apportionment has been acknowledged as a very significant part of the development of a portfolio.

Actually, a study has found that your choice as to the way you divide up your portfolio into numerous classes is more vital than the process of selecting the actual assets and funds that you will own.

Thus, in developing your asset division strategy, remember that,

Usually, the younger you are, the more risk you can afford to take. (Aggressive risk taker)

As you get older and nearer to retirement, you will more likely is less captivated in the growth of your portfolio and more engrossed in capital preservation –

This means to protect the value of your portfolio from any declines.

While preserving your portfolio as you reach your preferred retirement age becomes more essential because a large deterioration in the value of your assets can upset your retirement regime and making it impossible to retire according to your plans.

Most brokerage firms preserve a recommended asset allocation for their customers.

The firm’s investment strategist determines the optimal percentage of a distinctive portfolio that should be invested in specific asset classes at any time, and bring up-to-date the asset allocation strategy on an unvarying basis.

There are also consultants who recommend a portfolio that's always invested fully (100%) in stocks, this is because that this asset class distributes the best return.

Strategies and Concepts of Basic Investing : Investment Diversification

Investment Diversification :


The significance of Diversification means structuring a portfolio that comprises securities from different asset classes.


Since bonds incline to do well when stocks don't, you could create a portfolio that includes a certain ratio of stocks and bonds.


This helps warrant that at slightest a portion of your holdings is always doing well.


Another way to diversify is to purchase securities in the same asset class that are not affected by the identical variables. For example, entertainment companies, industrial factories, and airline carriers are completely not the same businesses.


Conditional on the country's economy, one or more of these industries might tend to perform better than the others.


If you build a portfolio that consist of securities from a number of sectors, odds are that one or more would always be doing better than the industry’s average.


When you diversify/differentiate, you try to certify that at any particular time, the value of some of your holdings might go up and down, but generally you're doing fine.


The trick is to find securities that don't have affinities to increase or decrease in price at the same time.


In exchange for the balancing of risk and return in a diversified portfolio is that your overall return might be rather lower than you could get in an undiversified portfolio.


Still, along the way, a diversified portfolio will have less unpredictability, and securer returns.


Diversification does not eradicate risk, however. It is merely a tool that can moderate the risk you face with your investments.

This Week, The World : GDP Forecast by IMF

This Week, The World :

This week the IMF released a demoralized update on the world economy as they anticipates global gross domestic product, GDP to increase by 3.5% this year (the slowest pace since 2009).

The approximation for growth in Britain was cut to just 0.2% (behind France on 0.3%) and growth rates were trimmed for some big emerging markets, so far seen as a barrier against a global slowdown.

The IMF warned that things could get worse if America did not deviate their course from the looming “fiscal cliff” of tax rises and spending cuts designed to boot in at the end of 2012.

It also called for a “robust and complete monetary union” in the euro zone according to The Economist

New Segment : This Week, The World

Today I would like to introduce you to a new segment of the blog this week entitling

“This Week, The World”

In this new section, I will be sharing/highlighting the latest and current issues that is happening/on-going in both the economy and financial world on a weekly basis that I felt that it will directly and indirectly affect matters pertaining to our personal finance--

in terms of financial knowledge and experience.

It won't be too lengthy and time consuming as it will be presented in a brief and yet informative manner.

Equipping ourselves with these knowledge will render us an extra edge in the competitive market of the financial environment.

Thus, It is important to keep up with the present-day contents of the financial world to enable us to refine our financial choices as some sort of personal financial indicator (varied from different individuals) is needed and supported by the knowledge form this segment.

So?

Stay Tune to “This Week, The World” segment this week! >.O!

Strategies and Concepts of Basic Investing : The R&R of Investments (Risk and Return)

The R&R of Investments (Risk and Return):

I am pretty sure that you'd like to make a fortune in the markets.

I mean, who wouldn't want to?

Then the first thing you need to understand, before you pledge your capitals even to a portfolio; that it is important to comprehend a return on any investment comes with a certain degree of risk.

In investing, risk is the chance you take that the returns on a particular investment may vary. 

That's another way of saying that there are uncertainties when you're investing; and the higher the uncertainty, the higher the risk is.

Whatever that you decide to do with your savings and investments; you will always face some risk.

Investing in stocks, bonds, or mutual funds carries risks of varying degrees.

While risk in your portfolio may be inevitable, however it is controllable.

The puzzle of controlling risk and return is that you need to capitalize on the returns and curtail the risk. When you do this, you guarantee that you'll make enough on your investments, with an acceptable amount of risk.

So, what institutes tolerable risk?

While it is different for everyone, a good rule of thumb followed by many investors is that you shouldn't wake up in the middle of the night worrying about your portfolio. 

If your investments are causing you too much concern, it's time to reassess how you're investing, and bail out of those insecurities that are giving you insomnia in favor of investments that are a little less painful.

When you find your own comfort zone, you'll know the amount of risk you are willing to tolerate in order to achieve your financial goals. (Personal risk tolerance/degree of risk that you’re able to accept in terms of losses)

When it comes to your long-standing financial future though, the major risk of all may simply be to do nothing.

If you don't invest for retirement, or for the college education of your children, or to help meet your personal financial goals, then you're most likely guaranteed a future of just scraping by.

Strategies and Concepts of Basic Investing : Basic Investing Strategies Part- 3

- Continue from Part- 2 -

Strategy No.3

Currency-Cost Averaging: (Money Currency; Dollar, Ringgit etc.)

Currency-cost averaging is another practice of diversification –

The notion here is that your money buys more shares when the price is inexpensive and less when the price is high. This will lowers your overall cost and, assuming the fund's general trend line is mounting, you seize more of the benefit.

Instead of spreading your money over a group of different stocks or bonds, it diversifies your investments over time. It is natural to us to buy lots of stock when prices are rising and to stop buying them altogether when prices are on the slump.

Currency-cost averaging forces you to do the opposite

What??

 

It means you end up buying the most stock when prices are low.

?? <You>

But. How does it work?

Suppose you decide to put RM400 a month into a mutual fund that invests in the stocks of large companies. Your broker or fund company can set up an account for you and the money is drawn directly from your remuneration on the same day each month.

If a share of the fund costs RM50 in June, your RM400 will buy eight shares. If the price rises to RM80 in July, you buy five shares. If the price drops to RM20 in August you buy 20 shares.

This method is not to say currency-cost averaging shields you from a falling market.

If the fund's value thumps, so will your whole investment. So, the strategy does warrant that you invest new money when prices are low so that you can enjoy the build-up when the market recovers as always does with time.

Note that the idea here is to protect yourself from putting all your money in at once and having it (the market) crash days or weeks later.

Then again, it's also true that if the market moves abruptly higher, you would have missed an opportunity but then again; due to the volatility of the market in times, the risk is worth it.

Strategies and Concepts of Basic Investing : Basic Investing Strategies Part- 2

- Continue from Part- 1 -

Strategy No.2

Asset Allocation:

Asset allocation is yet another way to differentiate your investments. It takes lead of the fact that when it comes to risk and reward, financial categories like stocks, bonds and money-market accounts all behave quite differently. 

Let us look at the three asset classes that are available in the market before we can apportion them.

Stocks, for example, offer the highest returns among those three asset but they also carry the highest risk of losses. (High Risk, High Returns)

Bonds aren't so rewarding, but they offer a lot more stability than stocks. (Average Risk, Average Returns)

Money-market returns are small, but you'll never lose your initial investment. (Low Risk, Low Returns)

An asset-allocation strategy lets you looks at your specific goals and positions (financially) and determines the best asset mix that gives you the optimal blend of risk and reward.

Here's an instance. Say your goal is retirement.

When you're in your 20s or 30s and have time to make up for short-term market losses, an asset-allocation outline would put you deeply into stocks, maybe 100% of your savings and you might even flavour it up with a mix of large-company stocks, small-company stocks and international stocks to spread your exposure within the category.

As you moved into your late 30s and early 40s, You'd probably want to add some bonds to give your portfolio some stability and income. Maybe you'd shift to a 70/30 blend -- still favouring growth, but not exaggerate it because the closer you are to your retirement age, the more you would surge up the bonds and leak off the stocks.

And in your last few years, when you just could not afford big market fatalities, your portfolio would be weighty on short-term bonds or money-market funds -- the least risky of all investments.

If you're serious about it, this model also helps you buy low and sell high.And If you "rebalanced" this way each year, you'd always be trading expensive assets for those with more growth potential.

Strategies and Concepts of Basic Investing : Basic Investing Strategies Part- 1

Basic Investing Strategies :

Let’s see...strategies...strategies and...

What?

Yup!Investing strategies...here we go!

Strategy No.1

Diversification:

The single best way to protect yourself from a let-down in one stock or industry is to spread your risk through several different investments. (Bear in mind that the more diversified your portfolio is, the less any one stock can hurt you by a blast.)

If you've got the time and energy, you can construct your own diversified portfolio which also means keeping track of at least 15-20 different stocks or bonds at most at once—it is disheartening I would say.

However, there is a much stress-free resolution to this which is to buy a variety of mutual funds and leave the variation of uncertainties up to professional.

As we discuss in depth in our Mutual Fund section, by purchasing a fund that invests in large, blue-chip/top-class corporations, another that looks for lesser growth firms and yet another that invests abroad, you can easily spread your money across hundreds of separate stocks; for a small fee, but the savings in time and exertion are most likely worth it.

Strategies and Concepts of Basic Investing

Hi!

Hoped you had a great weekend last week..This blog had been receiving a lot of views in regards to my last week's postings..

Thank you all so much!!

It really encourages me to do more posting (feeling that I am on the right track) and felt that many people are curious and would like to know about financing their future (me as well).

I hoped that providing these tips and exposure to the financial world will help you and me in the preparation of our future financing needs.. PLEASE feel free to follow this site and recommend this site to your friends if you feel that it is helpful.

Last week is all about the introduction to the types of investments that is available in the financial arena; For this week we are going to look at the strategies and concepts of basic investing..

Huh??concepts?strategies?

Yes..before we go into a war, strategies and the concepts is important factor that usually determines the outcome of  a war..so as financial investing.

Here is some of the concepts and strategies that I will be discussing for this week :


- Basic Investing Strategies
- The R&R of Investments (Risk and Return)
- Diversification of Investment
- Asset Allocation
- The Portfolio Theory of Investment
- Investment Auto-Pilot

as well as

- Random Walks of Financial Market

Types of Investments : Saving Bonds

Saving Bonds Basics :


For those who are knowledgeable in the financial domain, Savings Bonds have been the medium of choice to reach their savings ends.

Why?

It's because they have lots of advantages that have assisted to make them so popular.

Savings bonds are debt securities issued by the government’s Treasury department to assist in paying for government’s borrowing needs. Savings bonds are considered one of the safest investments because they are backed by the government.
These are liquid investments, which means it's easy to cash in your savings bonds anytime whenever you need the money. There's no penalty if you cash in your savings bonds anytime after the first six months that you've owned them, and you can cash them out at any bank.

The principal and interest of savings bonds are guaranteed by the credibility of the government. If you ever lose a savings bond, it can be replaced.

Interest on savings bonds is tax-exempted from state and local income taxes. Federal income taxes are postponed until you cash your bond, or until it stops earning interest (+ - 30 years down the road).

Another benefit of Savings Bonds is that the interest can be excused from taxes if the bonds are used for college expenses for the bond owner, the owner's spouse, or a dependent.

When a savings bond reaches maturity, it doesn't stop accumulating interest. It is automatically extended, and can be extended for additional periods following that. Interest continues to increase on the bonds during these extensions.

Types of Investments : Bonds

Bonds Basics :

Bond...James Bond...

Hahaha...Surprised? nope...I am not doing a movie or character review...it is still financial matter. ;)!

Today we are going to look at bonds..lets skip the what question and go straight to point, a bond is a loan and you are the lender.

Well, who's the borrower?

Usually, it's either the local government, a state, a local administrative district or a big company. As we know, all of these entities need money to operate; to fund the federal deficit, for instance, or to build roads and finance factories.

But then where do they get it from? they acquire capital from the public by issuing bonds.

Usually when a bond is issued, the price you pay is known as its "face value." Once you buy it (whatever the price is), the issuer is expected to pay you back on a particular day (the "maturity date") -- at a predetermined rate of interest . 

The "coupon." Say, for instance, you buy a bond with a $10,000 face value, a 7% coupon and a 5-year maturity. You would collect interest payments totaling in each of those 5 years. When the 5 years was up, you'd get back your $10,000 and leave.

The primal difference between stocks and bonds is that stocks does not guarantee anything about dividends or returns. Although dividend may be as regular as a heartbeat, but the company is under no obligation to pay it (but as they see fit). And while stock spends most of its time moving upward, it has been known to spend months sometimes even years --going the other way.

When companies or entities issues a bond, however, the company/entity warrants to pay back your principal (the face value) plus interest.

If you buy the bond and hold it to maturity, you know exactly how much you're going to get back (in most cases, anyway).

This is why bonds are also known as "fixed-income" investments as they assure you a steady payout or yearly income. And although they can carry plenty of risk , this regular income is what makes them inherently less volatile than stocks.

Types of Investments : Stocks

Stocks Basics :

Well, what is it about?

OWNERSHIP!

as blunt as that. Stocks is (a piece of ownership of the company usually)

This is ownership in the most literal sense: You get a piece of every desk, written agreement and trademark in the place. Better yet, you own a slice of every dollar of profit that comes through the door. The more shares you buy, the bigger your stake becomes.

OK, Then how exactly do you value a Stock?

The stock market itself is basically a daily vote on the worth or the value of the companies that trade there. All those guys screaming at each other? Their job is to take in the day's news and purify it down to a single question:

Will it help the companies I own make earnings in the future, or will it deter them from doing so? If the stocks you bought involves in a scandal or deteriorating public image, most likely to look for its shares to fall.

However,if strong economic power produces a more promising prospect better than PC sales, traders will buy with a vengeance.

Earnings are the maximum measure of value as far as the market is concerned. Companies report their profits four times a year and investors pours over these numbers --

How do I know whether I gain from the stocks or not?

It is expressed as earnings per share ,EPS (is the value of the share higher or lower than the price/value you initially bought?) higher=gain; lower=loss

Hence, before purchasing the stock, try to gauge a company's present health and future potential before purchasing it.

It is said that the market rewards both fast earnings growth and stable earnings growth.

Stock traders will even pay up for a money-losing company that promises to earn a lot in the future (e.g. 1998's explosion in Internet stocks);

and the things the market will not tolerate are declining earnings or unexplained losses.

Companies that surprise the stock market with bad quarterly reports will almost always get penalized.

Then, what about the Risk?

While history shows that stocks will rise given the fullness of time, however; there are no assurance --

particularly when it comes to individual stocks. Unlike a bond, which promises a payout at the end of a specified period plus interest along the way, the only assured return from a stock is if it appreciates on the open market. (While many companies pay shareholders dividends out of their earnings, they are under no obligation to do so.)

The worst-case scenario is that a company goes bankrupt and the value of your investment evaporates altogether. 

Good news is, that's unlikely and rare to happen as more often, a company will run into short-term problems that depress the price of its stock for what seems an excruciatingly long period of time.

For all the risk, however, there are ways to manage your risk exposure. The best is to diversify (owning a variety of stocks). It's also important to remember that investors are well compensated for rolling the dice with equities.

One final note: Along with ownership, a share of stock gives you the right to vote on management issues. Company executives work at the bidding of shareholders, who are represented by an elected board of directors.

By law, the goal of management is to increase the value of the corporation's equity. If this extent doesn't happen, shareholders can vote/have a say to have management removed.

That's the way it is supposed to work, ideally. As noted above, one of the grim realities of the stock market is that individual investors rarely amass enough stock to be able to exert any tangible influence/authority over a company -- and it is left to big institutional shareholders or groups of company insiders. 

Consequently, it behooves you to carefully research management's competency before you buy a stock. And the best measure of that is reflected on the company's ability to consistently deliver earnings over time.

Types of Investments : Certificate of Deposit

Certificate of Deposit Basics :


The basic principle behind a certificate of deposit is very simple enough:


You lend a bank your money (minimum RM1, 000) for a specific amount of time (up to five years). In return, you receive a set amount of annual interest on the loan and when the Certificate of Deposit, CD contract reaches maturity (when it ends), you get your money back. 
In Malaysia, this is also known as the term fixed deposit.


Depending on several factors, the key importance is the interest rate that is offered by the bank you use, the predominant interest rate environment, how much money you invest and how long you lock it up for. (Usually the term for Fixed Deposit in Malaysia is monthly, three month, half a year as well as yearly)


Your local bank most certainly sells CDs, but sorry to disappoint as its rates may or may not be competitive.


*Note that the interest rate differs from country to country


Therefore, when buying a CD, there are two terms you need to keep straight: 


Annual percentage yield (APY):


The yield is the total amount of interest you will earn in one year. It's conveyed as a percentage of what you invest and takes into account the way the bank compounds interest.
Annual percentage rate (APR):
The rate is simply the interest rate you will earn for that year.


Confused?


An example should help. If, say, you earned 1% per month, the APR would simply be 12% (12 months=12%). 


But the APY would be 12.68%.


Why?


That's because the APY takes into account the compounding effect on the interest you earned earlier in the year.


Pros


For conservative investors, the best thing about CDs is that your money is safe. When you purchase one through a bank, your total assets there are FDIC insured for up to RM100, 000 and if you're going to invest more than that, you should purchase at least two CDs. 


However, at a brokerage house, a single CD may be insured for up to RM500, 000 through the Securities Investor Protection Corporation (SIPC), or even more through the broker's private insurance.


*Note that the sum insured for both FDIC and SPIC varies from country to country hence it is better to check with your local banks or brokerage house if not then the FDIC and SPIC of your country


The other advantage is that you know what's coming to you. Although fixed (rates does not drop nor increase) you aren't at the mercy of the market, so you can plan ahead and accordingly. Bright side is you're still earning a whole lot more than if you let that money rot away in a savings account earning a trifling 2% or less.


Cons


There are two big problems with CDs: They have miniature returns and they can lock up your money for the long haul. If you buy a five-year CD in 2001, for example, you can't get the money out any earlier than 2006 without paying a steep penalty. Even on a one-year CD, you might be penalized three months’ worth of interest (withdrawing before maturity date). That's why a money-market fund is usually a better alternative. The rate may be slightly lower, but you can withdraw your money whenever you see fit.


Granted, a money market fund is not considered as secure as a CD, but the difference is minimal. 


But even money funds don't get around the insignificant returns issue. While you can sensibly expect a 10% annual return from a stock mutual fund, you're going to earn about half that from a typical CD or money-market fund.


Consequently, neither investment should be used for anything other than to park money for a short period of time. 


If, say, your children is heading off to college within a year and you want a risk-free way to keep earning interest on the money you've saved, a CD makes sense.


But if they are just three years old and you're just starting their college fund, then you need to be much more aggressive.

Types of Investments : Saving Accounts

Saving Accounts Basics :


Saving account?an investment? (O.O)?


Yes, saving account is also consider a type of investment.


Many institutions (banks especially) offer more than one type of savings account (for example, passbook savings, gold investment savings, statement savings and etc..). 


Upon opening a passbook savings account, you will receive a record book in which your deposits and withdrawals are entered to keep track of transactions on your account; 


*This record book must be presented when you make deposits and withdrawals. (except for passbook-less saving accounts which is popular these days--to reduce paper usage for environmental protection)


Savings accounts at federally insured depository institutions are protected by federal deposit insurance, FDIC. 


Generally, the government protects the money you have on deposit to a limit of RM100,000.


Account features and fees vary from one institution to the next thus, it's important to look closely and compare features. Here are some of the most common features to consider for comparison:


Fees :


Will you have to pay a flat monthly fee?
for current account for example, some bank charge a certain fees for the account itself; usually twice every year (six month-six month).


Secondly,will you pay a fee if the balance in your account drops below a specified amount? Is there a charge for each deposit and withdrawal you make? If you can use ATMs with your account, is there a charge for this service? Are fees reduced if you have other accounts at the institution? 


Interest Rate :


What is the interest rate? Can the institution change the rate after you open the account? Does the institution pay different levels of interest depending on the amount of your account balance, and, if so, in what way is interest calculated?


Interest Compounding :


This is the most crucial feature that needs to be accounted for in selecting saving account that suits you. 


How often is interest compounded? Daily? Monthly?


As well as how often they pay interest?monthly?twice a year?yearly?


*Note that the duration of the calculation of compounded interest is not the same as the interest pay out time.

Types of Investment : Money Market Funds

Money Market Funds Basics:

Money market funds are mutual funds. 

Hmm?

Difference is,

They don't invest in stocks but treasury bills (e.g. notes and bonds with less than 13 months until maturity), popular profitable paper, bank notes, and other high-quality, short-term debt instruments which  shouldn't be confused with money market accounts, or money market deposit accounts, which are FDIC-insured but pay much lesser rates on average).

*Federal Deposit Insurance Corporation, FDIC

Money market capitals attempt to maintain a constant $1.00 per share NAV, so their risk contact is non-existent when compared with stock and bond funds.

Money market funds are not assured or guaranteed by the government (or anyone else), but the Securities and Exchange Commission heavily regulates them; they have a number of restraints on the quality, maturity and diversity of the securities they may invest in.

Though it certainly is a prospect, no retail investor has ever lost money in a money market fund.

While nothing is risk-free, money market funds have had a far better track record than banks in their 25 year history. 


Remember, even with money market funds, return equals risk (a repercussion of "there's no free lunch").

Types of Investments : Mutual Funds Part-2

- Continue from Part-1 -


But...

How does a mutual fund's NAV increase? 

Well, there are a couple of ways that a mutual fund can make money in its portfolio. (They're actually the same ways that your own portfolio of stocks, bonds, and cash can make money).

Dividends :

A mutual fund can receive dividends from the stocks that it owns. Dividends are shares of corporate profits paid to the stockholders of public companies. Although, the fund might have money in the bank that earns interest, or it might receive interest payments from bonds that it owns. These are all sources of income for the fund. Mutual funds are required to hand out (or "distribute") this income to shareholders. Usually they do this twice a year, in a move that's called an income distribution.

Capital gains :

At the end of the year, a fund makes another kind of distribution, this time from the profits they might make by selling stocks or bonds that have gone up in price. 

These profits are known as capital gains (capital appreciation), and the act of passing them out is called a capital gains distribution.

However, unfortunately; funds don't always make money. 


If the fund managers made some investments and it didn't work out, selling some investments for less than the original purchase price, the fund manager may have some capital losses.


Everyone hates to have losses, and funds are no different. The good news is that these losses are subtracted from the fund's capital gains before the money is distributed to shareholders. 


If losses exceed gains, a fund manager can even pile up these losses and use them to offset future gains in the portfolio. That means that the fund won't pass out capital gains to shareholders until the fund had at least earned more in profits than it had lost. (Although you might want to reconsider your decision to remain invested in a fund that's losing money if the rest of the market is growing).

Types of Investments : Mutual Funds Part-1

Mutual Funds Basics :


Once you've decided to invest in the stock market, mutual funds are actually an easy way to own stocks without worrying about choosing individual stocks (if you are not confident in your investing skills) . 

As an added bonus, you can find plenty of information on the Internet to help you learn about, study, select, and purchase them.

But what is a mutual fund? 

Well, It's not complicated. 

A general description of a mutual fund might be something like this: 

a single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors.

In other words, The management of the fund is the responsibility of the investment company, by selling shares in the fund to individual investors. When you invest in a mutual fund, you become a part owner of a large investment portfolio, along with all the other shareholders of the fund. 

When you purchase shares, the fund you invested to purchase the share is channeled by the fund manager along with the money contributed by the other shareholders to invest in the portfolio put together by the fund manager himself/themselves.

Every day, the fund manager counts up the value of all the fund's holdings, figures out how many shares have been purchased by shareholders, and then calculates the Net Asset Value (NAV) of the mutual fund, the price of a single share of the fund on that day. 

If you want to buy shares, you just send the manager your money, and they will issue new shares for you at the most recent price. This routine is repeated every day on a never-ending basis, which is why mutual funds are sometimes known as "open-end funds."

If the fund manager is doing a good job, the NAV of the fund will usually get bigger (Value appreciate) 

Then your shares will be worth more.

Types of Investments

Before we can formally 'go into' all the actions of investment, must know the 'player' (types of investments in this case) before we can play the game. I will be updating/posting all the types of investment individually (under a different post for each type). 


For now; let me list down all different types of investment for this post : 


- Mutual Funds 
- Money Market Funds 
- Saving with Saving Accounts 
- Certificate of Deposit, CD 
- Stock


and


- Bonds 
- Saving Bonds

Finance - Basics/Know-How [Overview] Part-2

- Continue from Part-1 -


After you have decided, give your investment some time. Don't invest in equities with the intention to pull the money in weeks, months or even less than five years minimum. When you're more comfortable with the ups and downs of the market, then you can consider increasing your investments and broadening their diversification, again consistent and in line with your risk tolerance.


The worse lesson a beginner can have is making a lot of money right away.


After that happens, many decide that investments are guarantees, and they invest all they have.


So my advice is to invest a little that you can afford to lose.


Watch the ups and downs of the market and become comfortable with the volatility while at the same time increase your knowledge in available investment choices and risks.


Getting familiar with the market before blindly investing will be an added advantage and over time, you should have a diverse portfolio of mutual funds consistent with your objectives, risk tolerance and tax situation.

Finance - Basics/Know-How [Overview] Part-1

The Big Picture :



Honestly, I don't know if I can deal with all the issues that just might ruin your life because this blog is based solely on my personal experience and view. Anyway; 


Let's get started!


Question - "How much can you afford to lose?" try asking  yourself this..


Hmm?<your response> didn't expect this question do you? Yes, I DID say lose.


The brokerage community usually asks, "How much do you want to make?" , abit understated don't you think?


Well, after you have decided that you are willing to accept the risk of loss, and how much you are willing to risk (because even prudent investment has risk), I would advise starting slowly.


You can consider starting with a diversified mutual fund. There are dozens of high quality, no-load funds that invest in larger company stocks available to you and might as well want to avoid individual stocks as they increase both your risk and not to mention the probability of reward


However, not a prescription for a beginner.