In addition to limiting non- systematic risk, one of the goals of creating a diversified portfolio is to provide a more consistent return year in and year out. In the long run, consistency provides a greater profit than you’d achieve fluctuating between some stellar years and some black holes. Diversifying means buying a number of investments within an asset class. No matter how good a blueprint is, it doesn’t guarantee high-quality results. You also need superior construction. In investment terms, this means building your portfolio by selecting a diversified group of securities for each asset class you invest in and ensuring that each security meets your criteria for investing. For example, if US equities are one of your asset classes, you might choose
a number of individual stocks. Or you might diversify by choosing a variety of mutual funds or exchange-traded funds (ETFs) investing in US equities. Diversification within each asset class is essential because it allows you to offset, or dilute, security-specific risks. You can expect securities that share similar characteristics to react in much the same way to specific factors or situations. For example, one of the major determinants of the value of any long- term corporate bond is   Read more…

Variation is a fact of investment life. The asset class that provides the strongest return in one year is likely to be overshadowed the following year—or the year after that. The same is true of asset subclasses. In some years small caps outshine large caps. Other years the opposite is true. By owning both, you boost the potential for greater overall gain. Most securities have two types of risk: systematic and nonsystematic. Systematic risks affect an entire market or asset class. An example of interest rate risk is that almost all recently issued bonds lose market value when interest rates rise. Likewise, currency risk affects all non-US investments, whose return is vulnerable to the changing
value of the dollar against the currency in which the investment is denominated, or sold. And inflation risk reduces buying power when your return on investment is less than the rate of inflation. You can counter systematic risk with asset allocation, creating a portfolio of asset classes that are vulnerable to different risks, not all of which are likely to occur at the same moment. Bonds may suffer as interest rates fall, but stocks often excel. So does real estate. And that low correlation is exactly   Read more…

The term instrument might suggest a trumpet or a scalpel rather than a stock or a bond. Similarly product is more likely to make you think of vegetables or running shoes than of currency. But the terms are used frequently and often interchangeably to refer to both specific investments and to investment vehicles, or mediums for investing, such as unit trusts and mutual funds. Asset class is a category or type of investment, such as stocks or bonds. All investments in the same class share characteristics that differentiate them from another asset class. Each class typically has a number of subclasses of investments whose similarities are even more narrowly defined. For example, small-company stocks are a subclass of stocks. There are nine traditional asset classes, each of which behaves differently enough from the others to merit its own category, and a number of nontraditional classes. Cash Equivalents US Equities Non- Dollar Equities Mortgage Backed Securities Short Term Debt Long Term Debt Non- Dollar Debt Real Estate Precious Metals Other assets are harder to assign to conventional asset classes, often because they behave differently than their names would suggest. That’s the result, in many cases, of actually straddling two classes. Contributions   Read more…

Like most people, you’re probably investing to achieve some specific financial goals. Your list may include some, though probably not all, of the common objectives that many people share: Enjoying a comfortable retirement requires a vision of your golden years and the lifestyle you’ll lead, as you grow older. Paying for your children’s college education is expensive but can provide a career advantage for your progeny, perhaps for generations to come. Buying a home (or a vacation home) is a primary goal with a down payment and good credit. Building a business cost money. Financing your entrepreneurial spirit may require your own money in the game. Traveling around the world is an exciting prospect for entertainment and self-education. It can be a meaningful opportunity for your family as well. Endowing a chair at your alma mater or donating to your favorite charity Providing financial security for your parents with long term care assistance and eldercare oversight. Enriching your heirs is at the heart of leaving a legacy. Often the impact can be felt for generations. The bottom line is that most people can’t afford to pay for everything they want to accomplish with the income they earn. That’s why investment   Read more…

Stochastic modeling, sometimes known as Monte Carlo simulation, is a statistical process that uses probability and random variables to predict a range of probable performances, such as traffic flows or investment portfolio returns. The term stochastic comes from the Greek word meaning skillful in aiming. An investment asset is something of value that you can use to help meet your financial goals. For example, if you buy stock in a corporation, your stock is an asset. If the stock increases in value over time, you can either sell it for more than you paid for it, or you can hold it in your portfolio to increase your net worth. If the stock pays dividends, you can either spend the money or use it to make more investments, whether in the same stock or in something else. Of course, assets don’t always behave the way you expect. Stocks may cut their dividends rather than raise them, especially in tough economic times. And some stocks lose rather than gain value, either in the short term or over the long haul. Besides stocks, there are many asset categories, called asset classes, which produce gains and losses in different ways and react differently to   Read more…

When compounding is involved, time is money. The more years that you add contributions to your plan, and the more years that any earnings increase your principal, the larger your account balance has the potential to grow. Of course, there are no guarantees about either the rate or the regularity of the earnings. They may be outstanding one year and dismal the next, or they may go through longer, but still alternating, periods of growth and decline. That’s the reality of investing. Having time on your side means that bumps in the road, like a period when investment prices go down and your account value shrinks, may be setbacks. But they don’t have to be fatal. 401(k) plans are the most common, and best known, employer sponsored salary reduction plans. But they’re not the only ones. If you work for a not-for-profit organization such as a school
or college, a hospital, a cultural institution, or a charitable organization, your employer may offer a 403(b) plan, sometimes known as a tax-deferred annuity (TDA). Similarly, the plan a state or municipal government offers may be a 457 plan, while federal government departments and agencies provide a thrift savings plan. And if you work   Read more…

Building a good credit history means developing good credit habits:
 Get a credit card and use it responsibly
 Make purchases every billing period, and pay them off in full and on time
 Apply gradually for additional credit You can keep up to date
on what the credit reporting agencies know about you by checking your credit report three times a year—once at each of the three major bureaus. It’s free. All you have to do is log on to www.annualcreditreport.com and follow the instructions. You’ll also find out how to correct errors or add explanations.  The three major national credit bureaus—Equifax, Experian, and Trans Union—collect two types of information about you. The first is how you use credit, from how much you owe on car loans, mortgages, and credit cards to the timeliness of your monthly payments. There’s an incredible amount of data that falls into this category— about two billion items a month, which breaks down to an average of 11 items per credit user. Did you ever wonder why it takes a retail store or an online credit card company just a minute or two to approve your application for credit? Did you know that you may be quoted   Read more…

When you talk about Visa or MasterCard, you’re probably referring to your credit card. But Visa and MasterCard are actually payment networks or financial processing systems. These competing organizations handle trillions of dollars of credit and debit card transactions around the world, serving as the intermediary between you, the merchant who accepts your card, the merchant’s bank, and the bank that issued your card. Most merchants that accept one of these cards generally accepts the other, so from a pur- chasing perspective there’s little difference between them. Most banks also offer both cards. But some banks have stronger relationships with one or the other, and tend to offer more perks if you sign up for the one they favor. Most banks also offer debit cards with a Visa or MasterCard logo. You can use these cards at point-of-sale locations and also in place of credit cards in restaurants and retail stores. That differentiates them from bank ATM cards. If your credit card bill
 invites you to skip a
month’s payment
without penalty, the
lender isn’t doing you
a favor. If you take the 
offer, you probably won’t
owe a late fee, but you will owe finance charges on your unpaid balance. And any purchases you   Read more…

Finding a bank that will best meet your needs depends, in large part, on your spending and saving habits—or the ones you’re trying to cultivate. The more you know about how you’re likely to use your accounts, the more effective your search can be. To get started, ask yourself these questions: How many bills do you typically pay each month, and how often do you with- draw cash at the ATM? Do you have enough cash available to meet a minimum balance requirement for a no-cost or interest-bearing checking account, and will you be able to keep that amount in your account? Do you need a bank that’s open nights and weekends? It’s no secret that banks make
a lot of money from fees they charge retail clients. You may 
not mind paying the cost of optional services, like bank checks or wire transfers, if you need to use them. But there are fees you can—and should—avoid, either by choosing a bank that doesn’t charge them or doing your best not to incur them, since they can set you back $35 or more each time. They include overdraft fees, balance inquiry fees, low balance fees, extra check fees, and replacement statement   Read more…

A financial adviser or insurance professional whose core competency is college planning can help you design a timeline that incorporates a saving schedule, maintaining good grades, preparation of standardized entrance exams and procurement of financial aid. It’s like a roadmap that has milestones along the way to keep you on plan so you can hit your academic and financial goals. Parents should continue to contribute to their retirement. Simultaneous savings plans are not in conflict once you establish your budget and summon the discipline within yourselves to accomplish it. One discipline to incorporate immediately is debt reduction, especially credit card debt. Start paying down your credit card debt and stop spending. This includes spending on your debit card. While spending only available cash, it’s still spending, and much of that spending is discretionary. One last thought in this area: have a garage sale. It will not only generate some cash, but it may be a reminder of unwise spending that can be your motivation to save more money in the future. Once your plan is set up and operational, you need to look at reducing taxes to create more cash flow. In fact, many parents redirect their tax returns to   Read more…