Evaluating Your Investment Returns

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According to David Fabian, “A vital part of Investment success depends upon one’s ability to compare historical returns with an index or benchmark.

Doing so will let you measure if your approach meets the performance expectations or evaluate the efficiency of somebody else’s recommendation prior to hiring them. Although is may be very common in the entire industry, many investors still make knee-jerk conclusions based on unreliable or biased information.

Two primary conditions that must be satisfied when determining the viability of any investment approach are discussed below:

A proper standard of evaluation

We now lay down the reasons why these concepts are essential to your decision process.

Let us talk about time.

In reality, time is a commodity that has lost its overarching value in the fast-evolving dynamics of our daily existence. People so often fall prey to the temptation of immediate gratification provided by modern technology that they totally overlook how much time is required to accumulate wealth through the process of compounding.

For instance, if you start saving and investing starting at your mid-20’s and then you retire in your mid-60’s; it would have taken you 40 years to accumulate your wealth. But it does not end there. You need to sustain your wealth’s security for another 20 years through managing and conserving your investable assets. The growth period alone will take 480 months or 40 years, while the distribution or income period could last for 240 months or 20 years more. You need enough patience to see it through.

You cannot simply compare returns over very short time-durations. That is why you can hear people cry: My portfolio has been stagnant in four months! I’m below the benchmark on a 6-month rack record! Alas, my portfolio is 250 basis points lagging from the S&P 500 this year – I am done for!

The truth is that even the most efficient investment method will suffer some setbacks through underperformance. It may take some months or even last for a couple of years or more at a time. The best step to take during such doubt-filled or self-pitying moments is to recall why you chose this strategy in the first place.

Is your investment strategy still consistent with your risk tolerance level?

Could there be an intervening and temporary factor that is causing the adverse conditions?

Can you do something to manage this factor in order to enhance your long-term returns?

Have you really considered the risks of shifting to another approach in mid-stream?

Experts would advise that you analyze the performance of any investment method over a period of 3 to 5 years, enough time to determine the strengths and weaknesses over several conditions of the markets (bear, bull, transitional, and others).

The bond or stock markets can proceed for a few years along a particular direction. While that may favor some investors, it can also hurt others. Not that either side is bad investing; it all has to do with each group being exposed to different risks.

Creating and protecting your wealth is not a 100-meter dash — a short-distance race, so to speak. Rather, it is a marathon — a sustained race where risk conditions must be considered at close-range and behavioral principles applied with accuracy. Great patience is, therefore, of utmost importance in order to succeed as an investor. There are no short-cuts in this industry.

A Suitable Benchmark

A common pitfall among investors is the tendency to compare apples and oranges.

A prime example is that of a company whose primary approach is to have a mix of bonds and stocks allocated through ETFs that are adjusted according to meticulously-developed strategies. As such, it has a total of 20 to 40% stocks and 50 to 70% bonds in the Strategic Income Portfolio at any particular period.

However, the most common feedback the company derives when evaluating performance is how its portfolio stacks up against the S&P 500 Index. It seems that people are programmed to think that the S&P is the singular reliable benchmark available, such that it has become the darling standard of many index lovers throughout the world.

Obviously, there is no basic logic to comparing the returns of a 100% stock portfolio (the S&P 500) versus a multi-asset portfolio that contains less than 50% exposure in stocks. A better and more suitable benchmark for such a type of investing method would be the 40/60 allocation in the iShares Core Moderate Allocation ETF (AOM). That is where the data will exhibit a clearer picture of actual performance.

In a similar manner, comparing the 0 to 60 mph rate of starting acceleration of a Porsche in a few seconds to that of a Suburban would not make sense either, would it? Although that is an accepted truth, in general, only a few investors consistently apply that universal principle in their investment practices.

It is vital to appreciate that fundamental concept in the process of accurately measuring risks or comparing similar approaches.

Never compare investing in bonds and stocks to the revenues of a CD or a money market account.

Never relate a portfolio of technology stocks to closed-end funds.

And never compare hedge-fund revenues to that of a bunch of ETFs.

We can continue down the line. . . .

Perhaps, the most difficult hurdle to making this logical conclusion is the fact that most investors do not know the suitable benchmark for comparison objectives or where to locate them. They merely gravitate to the S&P 500, the NASDAQ Composite or the Dow Jones Industrial Average because they see them flashed on the news or on the web daily.

In the end, every particular asset type or investment instrument should be weighed or evaluated by a similar group of equals. ETFs have made that process less difficult for many years now; however, you must always undertake the task of finding an appropriate index to serve as a benchmark. Ask a professional analyst how and where to find a good benchmark as a reliable yardstick.

The Ultimate Goal

Investing involves a lot of psychology and comprehension of the relationship of certain facts and information. This article hopes to develop a new perspective not considered previously or to strengthen an existing point-of-view. It is hoped that either way, the reader will attain a more reliable and more solid frame of reference for evaluating a portfolio’s performance in the future.

Why value investing could be the riskiest investment strategy

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Why value investing could be the riskiest investment strategy

For many years, value investing has grown to become a very popular and profitable investment strategy. Among those who consider value investing as a viable choice are Benjamin Graham and Warren Buffett – two of the most successful value investors with spectacular gains over a long period of time.

The expected returns from value investing are comparatively high, although the risks are oftentimes much higher than most investors can handle. This is because value investing can result in an investor being subject to value traps, which occurs when a stock’s price is low for a very valid reason. What are value traps?

Value traps

Surprisingly, value traps are more common than most investors realize. In spite of global share prices having increased from the beginning of the year, many other shares will still actively trade at significantly low prices in comparison to the broader index.

Although some might catch up and recover, others will not. Nevertheless, low-priced shares commonly appeal to value investors since the capital gain potentials are attractive. In short, for a good number of conservative investors, value investing may provide a high-risk option which could bring a substantial loss.

Beyond prices

Value traps may indeed provide a trading risk for value investors who do not realize that “value” goes beyond merely having a low share price. According to Warren Buffett, “It is better to buy a great company at a fair price than to buy a fair company at a great price.” Ultimately, the viability of a company must be measured along with its share value.

Hence, if a firm’s shares are selling at a lower price than their net asset value, a potential risk in the future might keep them from recovering the valuation deficit. Likewise, a stock which is valued according to the wider index may in reality provide significant value for money if there is a positive expectation of a rapid increase in returns over a medium-range period. In short, value investing can be a great strategy when you consider certain essential factors, such as price, prior to acquiring the shares of a company.

Periodic changes

Obviously, with rising stock prices, value investing loses its appeal. As investors all over are buying, value investors are selling and choosing to invest in other assets, such as cash. Conversely, when market prices are down, value investors will be buying stocks instead of selling them, contrary to the overall market consensus.

Being a value investor then can be a challenging occupation; and, on the short-term basis, it is quite easy to suffer paper losses as past trends continue to prevail. However, on the long-term basis, it has proven to be a viable strategy for investors of a certain level of experience and capability. It is not totally risk-free. So, by not merely focusing on price, this approach can serve as a highly-dependable road to financial success in the long run.

Tips for Avoiding Financial Mistakes for Millennials

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Tips for Avoiding Financial Mistakes for Millennials

If you are in your early and feel you should prepare yourself for financial success while avoiding serious mistakes, what do you need to do?Here are some valuable tips.

Firstly, relax! You are in the best time to be enjoying life; and getting started on the road to a secure financial future is one of the wisest moves you can do. Go ahead and have some fun, discover exciting avenues and be open to potential ventures and adventures you can pursue for a lifetime. Do not become paralyzed with the fear of making mistakes or you will miss out on fruitful and gratifying opportunities. That would be counterproductive – learn to embrace mistakes as they can be stepping stones to learning and growing.

Nevertheless, some mistakes can cause disastrous and long-term financial effects compared to others, although they may seem harmless on the surface.

Go over these five financial missteps that can adversely undermine your financial life. Knowing how not to commit the same mistakes will greatly enhance your potential for building your personal wealth.

Mistake #1: Delaying on Your Savings Plan

This mistake tops all other mistakes in terms of keeping people from achieving a certain degree of financial stability. According to a survey, 39% of all respondents admitted regretting not having saved much earlier on while 63% claimed that saving early is the best advice they could offer to people.

Old people should know better than the young ones on this matter. Consider this: At 25, a millennial who tucks away 10% of her $30,000 income yearly will accumulate more than $620,000 at 65, based on a 2% annual raises and a 6% yearly rate of return on investments. If she postpones it for only five years, the nest egg goes down by about $140,000 and waiting 10 years reduces it by over $250,000.

You see how delaying on your plan to save can reduce your potential earnings in the future? Check out online apps that help you calculate how much you will accumulate if you start now.

However, there is a way to avoid this error. If your employer offers a 401(k) plan, contribute the minimum allowed amount to avail of full benefits of your employer matching funds.

Open a Roth IRA or Traditional IRA account at a mutual fund firm if your employer does not offer 401(k). Contribute to your fund using automatic transfers from your checking account every month.

While doing that, set up an emergency fund amounting to a minimum of 3 months’ worth of living costs in a savings account, as a buffer in case you lose your job or for other emergency needs.

Remember, the important thing is to develop the habit of saving weekly or monthly and to continue doing it in your entire working life.

Mistake #2: Borrowing money you do not need

There are times when borrowing is essential, such as for a house, a car or for a college education to enhance your earning capacity. However, taking out a loan to sustain a kind of lifestyle above your pay level will cause big problems.

You have to realize that paying off a loan can greatly affect your budget. NerdWallet’s latest yearly survey on consumer debt revealed that the regular household spends over $6,650 just for interest payments yearly.

Before you do take out a loan, answer these questions: Do you really need it? If so, can you live with a cheaper alternative? Finally, calculate if the monthly principal and interest you pay for so many years will yield for you a more beneficial alternative in terms of savings and investment accounts that can accumulate and serve to protect you from financial straits.

Mistake #3: Believing the Wall Street’s byline “investing is complicated”

Investors often understand Wall Street companies to be saying that one needs to monitor the financial markets at all times, distribute your money over all kinds of complicated and cryptic assets and always be on your toes at any time in order to invest in new promising stocks. And the catch is that to make any substantial return, you must seek their help – obviously for a high price worth their “expert” advice.

Don’t you believe it! Even veterans in the market cannot accurately predict what the financial markets will end up doing. Terrance Odean, professor at the University of California Berkeley, conducted research which showed that outguessing the market by constant trading tends to reduce an investor’s chances to gain good returns.

The better alternative is by doing less: Create a basic portfolio of widely assorted stock and bond funds that suits your risk tolerance level and leave it as it is through market highs and lows, except for a rebalancing adjustment once in a while. Check out online tools which will help you do proper asset allocation consistent with your risk capacity in order to find a balanced mix of bonds and stocks that works for you.

Mistake #4: Paying too much for financial counsel

The annual fees you pay for a mutual fund manager or the occasional fees in exchange for advice in choosing potential funds and other financial counsel will affect whatever returns you expect from your investments by reducing your savings. Minimize such costs as much as possible.

In terms of investments, you can gain greatly reduced costs by sticking to low-cost ETFs and index funds. You can readily gain savings of at least 1% annually in relation to the regular stock mutual fund.

Go ahead and consult a financial adviser, if you feel you need to; however, be sure you get the precise amount you have to pay and the specific benefits you will receive, before giving out any money. Likewise, make sure the price is reasonable and comparable to fees charged by other advisers.

You may also hire an adviser on an hourly scheme rather than shelling out a specific percentage of your assets or using an online-adviser app or service utilizing algorithms that recommend affordable investing tips.

Mistake #5: Not monitoring your progress

One thing you should not do is to become money-obsessive. Neither should you be a Pollyanna and let things take their course, hoping everything will come up roses. Take time to regularly assess your financial status at least once-a-year to determine if you are on the right path.

The best overall measure of your financial health is through knowing your net worth, which is the value difference between your assets and liabilities, that is, how much you have and how much you owe.

For those who regularly save and invest wisely, their net worth should gradually increase. Once your net worth is static, you must increase your savings, invest more sensibly or reduce your indebtedness.

Calculate your net worth using simple online tools. A yearly estimate and comparison with the results of past years will easily show whether your net worth is increasing or not.

Likewise, make use of other free online tools which will help you evaluate your other financial aspects, including a check on how your present saving habit and investing pattern will create a stable retirement future for you.

It goes without saying that in order to increase your wealth-building potential, you need to cultivate your talents and abilities to a point where you can earn and save more during your professional life. And remember the value of having a solid defense against the five mistakes mentioned here. Doing so will significantly enhance your chances of reaching your financial goals and spending a secure future.

How and When to be Average Joe or Average Jane

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Most people fall in the so-called “average” or “median” range. After all things are counted and considered, the statistical middle-ground is where all things tend to gravitate – the world of the, sorry for the term: mediocre.

To be honest, no one wants to be mediocre, run-of-the-mill or commonplace. People in the city park may take selfies that are quite ordinary compared to people who challenge the heights of the Nepalese mountains or the Alaskan wilderness. People do not just want a few likes but viral likes, so it seems. We want to be among those who make an impression for being extraordinary. And that takes a lot of effort to achieve and sustain.

But as investors, the average can provide a lot of benefits.

The idea of being average is the very foundation of the biggest changes to investing in recent years – the surge of the passive index fund.

In the past, you (or a broker) selected a portfolio of stocks that has the potential to bring you wealth. The more adventurous investors opted for a chance to benchmark themselves (while the newspapers aimed for a chance to „score” the stock market). That gave birth to the index.

One possible choice is the ASX 200, which tracks the overall market performance, giving investors a view on how the total market value shifts in a day, a week, a month or a year. It is expected to rise by about 10% yearly, within a long-term period.

And, obviously, we are talking of averages — the average firm and the average year. Choosing to buy an index-tracking fund, as investors usually do as a rule, is quite alright. You can expect to gain average return (minus some fees) over a long duration, enough to produce a sizeable profit in the end.

However, do not expect to get 10% yearly. Moreover, not all firms will gain a value growth by such an amount. Some can go broke. Others come up with the latest “hot product”. Some may exploit the advantages of their product and market, to offer years of market-crunching returns (for instance, Domino’s share price). And there are also those that remain stagnant for ten years (check out Westfield).

The market can spiral downward sometimes. We all know how the last global financial meltdown brought the market down by over half its value from late 2007 to early 2009. That occurred after it had doubled in value from 2003 to 2007.

The idea of „average” provides a restful, promising relief for investors, which may not be absolutely true. Nevertheless, that is no reason to avoid it; for a 10% annual return across 30 years will convert an investment of $100,000 into $1.74 million.

So it is with real estate properties — the quoted prices are national averages, which include stellar Sydney and lagging Perth and Darwin. At the very least, they are city-level average prices, such as those of inner- city apartments, harbourside mansions and suburban residential projects, everything that is traded in the market in a year.

Furthermore, for both assets and real property, the quoted prices reflect only those that actually moved from one hand to another and not the bulk of assets that were kept in a private safe or properties still in use by their happy owners.

Although it is not wise to be foolhardy, the average point (where half of the data is either above or below) presents a totally different picture. You need more than luck to get over the average-trap. Hence, if you can succeed in „buying” the average – that is, by using an index fund – you made the right initial step. Just remember that it will require big challenges along the way, whether you do buy or not.

Effective growth investing lessons from master investors

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How do you achieve sustainable growth in investing? One needs to choose those leading companies that are prepared to provide strong, consistent and long-term increases in profits and revenue. These are the firms that reward their shareholders with above-average market returns.

Apply these tips coming from some of the most experienced investing leaders. See how you, too, can discover the latest winning growth stocks and, thereby, make a fortune for yourself.

1. Go for Quality

The best investment choices are often the best businesses you can find. David Gardner, popular investor and co-founder of Motley Fool says, „I look for the excellent, buy the excellent and add to the excellent in time. However, what I sell is the mediocre. That is my investment style.”

Quality companies possess the most powerful competitive edge, the widest market potentials and a top-of-the-line management. They know how to be creative, trend-setting and pioneering. Most of all, they can build wealth for their shareholders and lead others to achieve their dreams.

2 & 3. Jump in as early as you can; and grab that basement-price offer

You can maximize your profit by investing early in a great business as more investors join in the harvest. Wealth abounds for those who practice this principle – especially for the 10- and also the 100-baggers – bringing on life-changing gains.

Nevertheless, many investors frequently hesitate to enter into the early-stage surge of best growth company stocks because they appear pricey, only to regret having missed the opportunity to gain in the end. While buying stocks in these quality businesses at high prices is an option, we can decide to go ahead and pay the premium for a quality acquisition. Setting your targets too low or just a notch or two below the optimum level might cause you to lose the opportunity to hit a multi-bagger.

4. Invest on a long-term duration

Warren Buffett puts it this way: „My favorite holding period is forever.” CEO and master investor, Tom Gardner, in fact, has established at Motley Fool at least a five-year holding time rule in an Everlasting Portfolio since he adheres to the effectiveness of holding stock on a long-term basis. In David Gardner’s words, as a prime mover of one of the most efficient high-growth investment-consultancy services in the world, the heart of this investment approach consists of “two keys. . ., stock by stock: In before the big majority of people, and out after the big majority of people”.

Aiming to buy stocks in businesses and holding on to them for years or even decades allows the power of tax-deferred compounded returns to our advantage.

5. Those who win keep on winning

Tom and David Gardner reveal another winning advice: Invest in businesses and management groups with unequalled track record of success. In their tweeted message, they say:

“Our take on that famous disclaimer: ‘Past performance’ may turn out to be the single *best* determinant of future results we have can.”

Although it is not guaranteed, winning can be made into a habit. The force of momentum and the trusted experience developed in past successes tend to favor those who continue to face investment risks. And we do not refer to foolhardy risk-taking based on pride, but well-informed, facts-based choices born out of positive and strategic projections of a fruitful future.

6. Let your portfolio speak your best to the world

David Gardner once gave this valuable advice: „Determine where the world is headed; and as soon as you can, get there.” Your portfolio speaks of your aspirations, interests, specialization and profession – that is where your advantage lies. Above all, your portfolio runs parallel to the trajectory of your vision of the future—and with a more positive view, the clearer the vision is.

7. Do not give up the fight

Growth investing can be frustrating at times; there will be moments when you harbor doubts and want to give up. Certain inexplicable short-term fluctuations and extreme bear market dips may wreak havoc on top-quality yet usually high-priced growth stocks, taking a toll on your emotions. Ultimately, the only path to success is to remain steadfast throughout any undesirable turn of event.

“The short-term will not teach an investor to learn enough – usually in a significant way — to be so successful in the long-term,” according to Tom Gardner.

Be assured with the knowledge that everything will pass and, thus, you must expect the big-league companies to come out victorious after the dust clears up, remaining stable while the rest of the bunch lose their market share. With that in mind, consider such sell-offs as potential moments for strengthening your positions at even higher prices and enhancing your long-term returns.

Making Thousands through IRA Investing Tips

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For beginners as well as veterans in IRA investing, here are a few important things to consider. Newbie investors obviously need education in fundamental matters while long-time investors can always benefit from new ways to enhance their investment strategy.

So, how do you maximize returns from your IRA?

Choose what fits your goals: Traditional or. Roth

Should you go for traditional or for Roth IRA? While your traditional IRA contributions can be classified as tax-deductible, Roths use after-tax money; however, they provide tax-free withdrawals when you reach retirement age. To know more about either type of IRA, visit informative investment websites. Here are a few valuable tips on which to choose:

When you should choose a traditional IRA:

  • If you are within a higher tax bracket now, in contrast to your expected level when you reach retirement
  • If a tax break now is more preferable to you than tax savings when you retire
  • If you have no retirement plan sponsored by your employer because your income is too large to qualify you to directly contribute to a Roth IRA

When you should choose a Roth IRA:

  • If you want to stay in your present tax rate
  • If you want to diversify your retirement assets, aside from your pre-tax account such as a 401(k)
  • If you expect to use the money when you retire and would choose rather to keep it in that account to allow it to grow as long as you want (A Roth IRA will not demand a minimum distribution from a specific age.)
  • If you want all your money safely parked somewhere (You can withdraw your original contribution amounts in a Roth IRA at any time.)

Take full advantage of the tax benefits

To maximize returns from your IRA, choose the most appropriate types of stocks. Whatever stock whose value grows in time will provide higher gains for you in an IRA compared to a taxable brokerage account. Nevertheless, dividend-growth stocks will optimize the entire compounding capacity of investing in IRA; hence, you must utilize your IRA through buying individual stocks.

As an example, with two stocks often favored in many portfolios, such as Berkshire Hathaway and Apple, one can assign one in a traditional IRA and hold the other in a taxable brokerage account. Invest $5,000 in each one of these two accounts.

As of today, Apple pays a 1.9% yield in dividends, generating $95 from your $5,000 investment for a year. You will be charged a 15% tax in a taxable brokerage account, effectively giving you about $81 return. However, in a traditional IRA, you get a tax-free deal. Remember: You can now reinvest the entire $95 in more shares, whereas you have less to put back in a taxable account to work with. Although $14 is not that much, the compounding power of money works more in the former than in the latter, especially in the long-term.

To illustrate more clearly, under a 1.9% dividend yield for Apple and a stock gain of 8% annually, you will observe the difference in the gains of an initial investment of $5,000 over time:

Time Period Taxable Account Traditional IRA
1 Year $5,481 $5,495
5 Years $8,673 $8,810
10 Years $13,726 $14,124
20 Years $34,348 $36,301
30 Years $78,536 $84,899

Your returns are more obviously higher over a longer period of time than otherwise, as seen in the difference above after 30 years. A $6,400 advantage, more or less, in a traditional IRA is definitely more preferable.

A $5,000 investment in Berkshire Hathaway, in comparison, would only take advantage from an initial tax deduction on your IRA contribution. As Berkshire has no dividend-yield payments, your investment in both kinds of accounts will grow by a fixed amount over time.

The young should invest aggressively now

Allocating too little money or not investing at all could be the worst mistake anyone can make in IRA investing, especially among young investors.

It is natural for millennials to be wary of investing in stocks, considering the early-2000s’ tech crash and the more recent Great Recession, and since many of these millennial investors had parents who lost their investments in the market.

You can use an accepted rule of thumb to determine the percentage of stocks to be included in your portfolio by deducting your age from 110. For instance, if you are 40, around 70% of your money invested must be in stocks. Using this principle will allow your portfolio to become more conservative as you near the retirement age. It is likewise worthwhile to note that ETFs and stock-based mutual funds can serve as good alternative investments if individual stocks do not appeal that much to you.

Just remember that stock investments will always involve volatility. Hence, in any particular year, a 10% drop in the stock market should be expected. Nevertheless, on the long-term, stocks will provide better gains compared to any other types of assets.

Lastly, most of all your investment money will never acquire greater growth opportunity in the long-term than they do in the present, no matter what happens to the market this week or this year. At 25, according to a conservative average of 7% annual growth rate over many years, one only has to invest $5,000 each year ($417 every month) to become a millionaire-retiree at 65. However, at 35, you need to set aside $15,800 each year, or $1,318 monthly, to reach the same level of wealth at 65.

In short, invest as much as you can and as early as you can since time is your most valuable asset, aside from your dollars.

Investment TIPS to Care About

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Back in 1997, the U.S. government issued Treasury Inflation-Protected Securities (TIPS), which are backed by the credit and full faith of the government and guarantees that their value will not be eroded by inflation; thus, providing risk-free asset for investors in the U.S.

Both TIPS face value and coupon payments are indexed to keep up with inflation and to protect buying power, while their returns are set in real inflation-adjusted terms.

Under positive inflation (versus deflation) conditions, actual returns are below the nominal gains quoted on traditional (without inflation adjustment) bonds. Estimating for the real interest rate, we get:

real interest rate = nominal interest rate – expected inflation rate

Or, to be more exact, the actual formula using these variables will be:

(1 + nominal interest rate) = (1+ real interest rate) * (1 + expected inflation rate)

We determine nominal interest rates by adding the compensation expected to keep up with inflation and a real interest rate of return for the investment. Surely, bond prices and interest rates can be impacted by supply and demand. And real interest rates may take a negative value, as mentioned above.

Of course, investors hope for a positive nominal return on investment (the very reason for investing, obviously); however, the gain might not catch up with the inflation rate. TIPS, compared to conventional bonds, provide returns which are quoted as real interest rates.

TIPS nominal returns cannot be predicted in advance since they are determined by the actual inflation experienced. It also follows that nominal returns can be determined for conventional bonds; however, their real returns can only be determined after monitoring the realized inflation track until the maturity date.

Adjustments of inflation for TIPS are set to the Consumer Price Index for All Urban Consumers (CPI-U). Such adjustments are observed according to the “accrued principal,” a dedicated term used for TIPS.

Accrued principal is the value after due adjustment for inflation of the original face value at the time the TIPS was issued. Inflation adjustments for TIPS are achieved through the coupon rate being paid on the accrued principal value, not on the value of the nominal initial face.

Likewise, during maturity, the investor gets back the accrued principal, not the nominal face amount.  An inflation-adjusted value is paid at a real coupon rate and an inflation-adjusted value is paid at maturity.

During deflation, the accrued principal can go down; however, it is protected against dipping below its original par value. What this signifies is that TIPS on the secondary markets having lower accumulated principal can provide higher protection during deflation, considering all other factors unchanged.

On the other hand, deflation that is not substantial enough to make the accrued principal to drop below its original par value will adversely affect TIPS in relation to conventional bonds. As a general rule, the goal of TIPS is to protect investments from unpredictably high inflation; thus, acquiring TIPS with a lower relative accrued principal is a supplementary factor in selecting certain TIPS to buy.

TIPS are available in nominal dollars. The ask price for TIPS on the secondary market is set in real terms, quoted as a percentage value of the accrued principal after adjustment for inflation. The actual price paid is computed as the ask price multiplied by the accrued principal, then divided by 100.

Since 1997, TIPS bonds and notes have been issued. From that time until the middle of 2002, every TIPS auction covering different maturities yielded an initial real return over 3%.

Fortunate investors in 1998 and 1999 could have acquired 30-year TIPS giving almost 4%, while 10- and 20-year TIPS gains were more than 4% in 1999 and 2000. TIPS yields have dropped since then.

A TIPS auction for a five–year note conducted in October 2010 made news as the real yield dropped below zero (at negative 0.55%) only for the first time. Buyers of such issues have resigned themselves to returns not protected from inflation.

Although unusual then, negative returns for TIPS have recently become a more common occurrence nowadays.

Financial Planning for Novices: How to Begin

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Financial Planning for Novices: How to Begin

Inclement weather has the surprising advantage of giving us time to spend quality time indoors and deal with our finances. Even the most innocent questions from a nervous friend, if she is doing the right thing or not or where to check her credit score eventually, turned into the issue of what to do next.

Everyone going through the “growing-up blues” needs the assurance that the things she was doing and bringing her anxiety made her a better person every step of the way.

The key is finding out how to begin effective financial planning. Here are some helpful steps to follow:

Do not be anxious

Although you might not end up choosing the most beneficial funds for your retirement plan or you end up paying for a credit score instead of getting it for free or you paid a slightly higher interest rate on your loan than you wanted, you will still be way ahead by a long stretch compared to having done no planning at all.

Granted, everyone wants to have the best choices for optimizing benefits and savings; however, fretting over how to chase the “highest and best” and ending up being paralyzed is counterproductive. The better goal to aim for is TIME. It is a commodity you cannot renegotiate or purchase back.

Do with what you already have

Determine where you are exactly before making a plan for your future by calculating the figures that that tell you what you have and what you need to have.

Do a financial inventory first – net worth, account balances, credit score, liabilities and assets. Consolidate all your finances using Personal Capital’s free tracking application in order to obtain a complete perspective of your financial status at any time.

Direct your course

Look at your finances as a road map, telling you where to put location markers along the way as you travel and to direct your destination. Only by marking your origin and staking out your destination will you be able to determine the most efficient route from one point to the other – and that is how finances work as well. Set your goals, your time frame and the cost for every step of the journey and order them according to their urgency.

Get educated on how you can effectively set and achieve goals through online aids that help you how to remain organized and to monitor your progress.

Marking your direction

Your present financial assessment marks your starting point and your goals as your destination, while your budget is your direction on the map. And before you can even begin to take the trip on that map, you must draw your direction – that is, make a budget.

Create a budget that best suits your situation — a percentage budget, a zero sum budget or a cash- only budget – making sure that you stay above your make-or-break level, meaning your minimum cost of living, including savings.

By diligently minimizing your spending to essential expenses and/or maximizing your income in order to reach and go above the essential level, you will begin making headway. Read on the article “How to make a budget without a budget”.

What now?

Having done your inventory and determined your minimum financial level, you can have a better idea of your leftover money in order list your prioritized objectives. Where do you start? Should you pay off your loan? Or save into a retirement account? Open a savings account for a down payment for a home? Increase your emergency fund? With so many needs and not enough money, what is one to do?

At this point, the “growing-up blues” set in. Relax and be not anxious – no matter what happens, as long as you make reasonable choices, the road will lead you home.

Categorizing Financial Goals

There are four major categories of financial goals:
• Emergency savings
• Loan payment
• Short/Medium-term savings
• Long-term/Retirement savings

Most experts recommend funding all of these goal categories, aside from covering your monthly costs, and assigning bigger income portions to your highly-favored goals. However, rarely do things work your way and your limited income may require you to choose one or two financial goal categories above the rest.

Oftentimes, the two most crucial are emergency savings and loan payment. Providing yourself a safety net at a minimum of $1,000 is the first on your list (although the target amount should be enough to cover your living expenses for about 6 months). With your 1k emergency fund, proceed by distributing your money accordingly for emergency savings contributions and loan payment. You may also want to insert a tiny amount for your retirement savings into the picture — this could be as small as $50 monthly – which is good enough for a low-interest debt.

Also, remember to contribute to short and medium-term fund savings. For young professionals, you have enough time before you reach 59½ to set aside some money for your lifelong dreams, whether a dream house, raising a family, travel, etc. That refers to money apart from your retirement nest egg or emergencies funds.

However, if your budget will not allow you to contribute to all savings categories, your best solution is to seek ways to increase your income. Saving money and reducing your daily expenses can only do so much. Your ability to earn more has practically no limit whatsoever; and having the flexibility and freedom that greater earnings provide will further enhance your financial and life aspirations. Financial experts will attest to this fact.

Financial Planning for Novices Review
• Assess your financial situation
• Set your goals
• Make a budget and surpass your minimum cost of living
• Prioritize your objectives and set aside surplus money from your living cost
• Enhance your income generation for funding higher targets
• Relax and enjoy your accomplishments

Breaking it down to the barest components, novices can do effective financial planning using a few essential, practical steps, namely: earn more money, reduce expenses and set aside extra money consistent with your highest goals.

Following these vital tips is your best weapon against the onset of “growing-up blues”.

Saving and Spending Hacks

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Were you a victim of the holiday spending spree this past season or a winner? Many of us lost; and the New Year gives us pause to evaluate our personal financial habits once more and, hopefully, initiate some positive and lasting changes for the future.

Consider these valuable saving and spending hacks you can implement.

Go long-term

Think ahead into the future. Whatever your age is, save now for your retirement. The earlier you do, the better. Apply for an employer-sponsored plan, if possible. Or if you can, opt for IRAs which help you build wealth in bounds.

Build categorized funds

Think of this as a challenge: Do the 52-week savings procedure. Set aside $1 on the first week, then $2 the second week, until you finish the 52nd week, when you are supposed to add $52 to your pot. Hacking this process gives you $1,378 in savings in the next year, plus interests earned.

As long as you set for yourself a specific goal, starting a savings account can bring great benefits. Go for banks that offer fee-friendly services, such as Ally Bank Member FDIC, ally.com, which enables you to open an Online Savings or Money Market account without minimum savings requirement or monthly service charges. It is quite convenient to deposit money through an e-check deposit, direct deposit and you gain compounded-daily interests on your savings. Moreover, keeping this money in a separate account lets you monitor your spending habit versus the remaining balance.

Utilize shopping apps

It has become quite easy to save money using online apps. Do some research and find discount codes, loyalty plans or cash-back providers that allow you to monitor your expenses and reward you for the use of their shopping portal instead of going directly to the big name retailers’ homepage.

Gain rewards

Although it is downright risky and even foolhardy to run up credit-card bills one cannot pay back, many expert consumers have the ability to exploit credit card reward plans for airline mileage, hotel points or hard cash on-hand.

“Utilize credit cards that offer reward for things you often purchase,” says Diane Morais, chief executive officer and president of Ally Bank, subsidiary of Ally Financial Inc.

Open a new credit card which provides a minimum buying limit, such as the Ally CashBack Credit Card, which offers a $100 bonus when you spend $500 in eligible purchases within the first three billing cycles, and gives 2% cash-back at gas stations and grocery stores, as well as a 1% cash-back on all other purchases – including 10% bonus on rewards which you deposit into a qualified Ally Bank account.

It is not necessary to open a new account if your present credit cards to avoid fraud and also offer promos or cash-back schemes, allowing you to earn substantially on daily purchases.

Consider the above tips and aim to become a strategic consumer  – one who spends wisely and saves productively.

Become a Better Investor In 2017

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Become a Better Investor In 2017

If you are like me, you probably worry a lot about being caught in an investing trap. I am a recent player in the investment industry, with my only accomplishment being able to max out my IRA each year. I do not have a Plan B for my investing strategy; so I have tried to educate myself about other ways of investing in order to invest more actively or, at least, fortify my ongoing investments this year.

Many young professionals do not know for sure how to invest their money, except for their 401(k). If you are one of those clueless individuals, check out these novice tips to help you achieve your resolution to become a better investor this year. Investment expert Hans Scheil, the president of North Carolina-based Cardinal Retirement Planning, Inc. and author of The Complete Cardinal Guide to Planning for and Living in Retirement will help us understand these principles. By the way, he is a 40-year veteran in the financial services area, helping investors build a diversified and sound investment portfolio.

1. Invest only beyond your 401(k) and IRA if you have reached your limit in your contributions.

Scheil emphasizes that deciding to invest beyond a 401(k) or IRA should only be considered when you have reasonably maxed out your retirement accounts. He says, „This is because of income taxes. You cannot pass up deferred tax or even free tax benefits. Firstly, plan and decide how much you need to invest, where the [extra money] is coming from (a bonus, regular income, asset sale, inheritance, gift, savings account money, etc.), when you may have to use it or when you want the money, and how much risk you can withstand.”

2. Avoid focusing on daily market fluctuations.

“New investors often focus on daily market cycles and timing the investing process. You will never enter at exactly the right time or exit at exactly the right time. Averaging dollar cost or investing at regular periods will tend to balance out the highs and lows,” says Scheil. The guiding principle is that if you are between 25 and 35, the market movements on any particular day will not overly affect the retirement money you expect to get 30 years after.

3. Before considering other investments, first understand completely your present portfolio.

Scheil offers a diagnostic list of questions to assess your situation: “When you have extra money to invest, I recommend a quick evaluation of your current portfolio. Do you have a balanced diversification? Does your investment standing address your set goals? Do your investments perform reasonably against actual risks and the market conditions? Knowing the exact answers to these questions will help you decide if you should use your extra money into your existing investments.”

4. What you might actually need is not opening another account. 

Regarding three various kinds of investments, Scheil gave these comments (These are his personal views; other experts may have other opinions, obviously.):

To open or not to open another account - “You need a new investment account only if it is has a different name on the account or has a different tax status.”

To invest or not to invest in a particular business - “I recommend diversification only if you personally own and manage the specific business you invest in.”

To invest in real estate or not - “Investing in real estate is advantageous in a portfolio to serve as an optional investment with a stocks portfolio, up to a certain proper amount. Owning real estate yourself is great as well; however, it might end up difficult to sell and burdensome to handle.”

5. If you are considering new investments, determine what will succeed in 2040-2050.

According to Scheil, the most appropriate choice for millennials wanting to improve their investing potential is to “remain in the stock market for the long-term and consider buying during market dips”. Likewise, he strongly suggests that we think hard about what will gain long-term value when dealing with stocks.

“Be guided by this simple test: What will be very valuable in the year 2050? What will earn a lot from now up to 2050? Renewable energy, bio-technology, goods and services for the elderly, products in demand in growing economies and other potential goods are viable choices,” says Scheil. „Moreover, companies, such as Apple, Google, Tesla, CISCO, Amgen and CVS, present golden opportunities.”