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24 Feb

Growth vs. Value: What’s The Difference?

Posted by: Brad Neve /  Category: Investment Strategies

With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a daunting task.  Many investors feel it’s useful to have a system for finding stocks that are worth buying, deciding what price to pay, and realizing when a stock should be sold.  Bull markets–periods in which prices as a group tend to rise–and bear markets–periods of declining prices–can lead investors to make irrational choices.  Having objective criteria for buying and selling can help you avoid emotional decision-making.

Even if you don’t want to select stocks yourself–and many people would much prefer to have a professional do the work of researching specific investments–it can be helpful to understand the concepts that professionals use in evaluating and buying stocks.
There are generally two schools of thought about how to choose stocks that are worth investing in.  Value investors focus on buying stocks that appear to be bargains relative to the company’s intrinsic worth.  Growth investors prefer companies that are growing quickly, and are less concerned with undervalued companies than with finding companies and industries that have the greatest potential for appreciation in share price.  Either approach can help you better understand just what you’re buying–and why–when you choose a stock for your portfolio.

Value investing

Value investors look for stocks with share prices that don’t fully reflect the value of the companies, and that are effectively trading at a discount to their true worth.  A stock can have a low valuation for many reasons.  The company may be struggling with business challenges such as legal problems, management difficulties, or tough competition. It may be in an industry that is currently out of favor with investors.  It may be having difficulty expanding. It may have fallen on hard times.  Or it may simply have been overlooked by other investors.
A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock’s fair value.  Value investing takes into account a company’s prospects, but is equally focused on whether it’s a good buy.  A stock’s price-earnings (P/E) ratio–its share price divided by its earnings per share–is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth.
 
Value-oriented data
Here are some of the questions a value investor might ask about a company:
  • What would the company be worth if all its assets were sold?
  • Does the company have hidden assets the market is ignoring?
  • What would the business be worth if another company acquired it?
  • Does the company have intangible assets, such as a high level of brand-name recognition, strong new management, or dominance in its industry?
  • Is the company on the verge of a turnaround?
Contrarians: marching to a different drummer
A contrarian investor is perhaps the ultimate example of a value investor.  Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.
The challenge for any value investor, of course, is figuring out how to tell the difference between a company that is undervalued and one whose stock price is low for good reason.  Value investors who do their own stock research comb the company’s financial reports, looking for clues about the company’s management, operations, products, and services.
 
Growth investing
A growth-oriented investor looks for companies that are expanding rapidly.  Stocks of newer companies in emerging industries are often especially attractive to growth investors because of their greater potential for expansion and price appreciation despite the higher risks involved.  A growth investor would give more weight to increases in a stock’s sales per share or earnings per share (EPS) than to its P/E ratio, which may be irrelevant for a company that has yet to produce any meaningful profits.  However, some growth investors are more sensitive to a stock’s valuation and look for what’s called "Growth At a Reasonable Price" (GARP).  A growth investor’s challenge is to avoid overpaying for a stock in anticipation of earnings that eventually prove disappointing.
 
Growth-oriented data
A growth investor might ask some of these questions about a stock:
  • Has the stock’s price been rising recently?
  • Is the stock reaching new highs?
  • Are sales and earnings per share accelerating from quarter to quarter and year to year?
  • Is the volume of trading in the stock rising or falling?
  • Is there a recent or impending announcement from or about the company that might generate investor interest?
  • Is the industry going up as a whole?
Momentum investing: growth to the max
A momentum investor looks not just for growth but for accelerating growth that is attracting a lot of investors and causing the share price to rise.  Momentum investors believe you should buy a stock only when earnings growth is accelerating and the price is moving up.  They often buy even when a stock is richly valued, assuming that the stock’s price will go even higher.  If a stock falls, momentum theory suggests that you sell it quickly to prevent further losses, and then buy more of what’s working.
The most extreme momentum investors are day traders, who may hold a stock for only a few minutes or hours then sell before the market closes that day.  Momentum investing obviously requires frequent monitoring of the fluctuations in each of your stock holdings, however.  A momentum strategy is best suited to investors who are prepared to invest the time necessary to be aware of those price changes.
 
Why understand investing styles?
Growth stocks and value stocks often alternate in popularity. One style may be favored for a while but then give way to the other.  Also, a company can be a growth stock at one point and later become a value stock.  Some investors buy both types, so their portfolio has the potential to benefit regardless of which is doing better at any given time. Investing based on data rather than stock tips or guesswork can not only assist you as you evaluate a possible purchase; it also can help you know when to sell because your reasons for buying are no longer valid.
 
 
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16 Feb

Trust Basics

Posted by: Brad Neve /  Category: Estate Planning, Investment Strategies

 Whether you’re seeking to manage your own assets, control how your assets are distributed after your death, or plan for incapacity, trusts can help you accomplish your estate planning goals.  Their power is in their versatility–many types of trusts exist, each designed for a specific purpose.  Although trust law is complex and establishing a trust requires the services of an experienced attorney, mastering the basics isn’t hard.

 
What is a trust?
A trust is a legal entity that holds assets for the benefit of another.  Basically, it’s like a container that holds money or property for somebody else.  There are three parties in a trust arrangement:
  • The grantor (also called a settler or trustor): The person(s) who creates and funds the trust
  • The beneficiary: The person(s) who receives benefits from the trust, such as income or the right to use a home, and has what is called equitable title to trust property
  • The trustee: The person(s) who holds legal title to trust property, administers the trust, and has a duty to act in the best interest of the beneficiary
You create a trust by executing a legal document called a trust agreement.  The trust agreement names the beneficiary and trustee, and contains instructions about what benefits the beneficiary will receive, what the trustee’s duties are, and when the trust will end, among other things.
 
Funding a trust
You can put almost any kind of asset in a trust, including cash, stocks, bonds, insurance policies, real estate, and artwork.  The assets you choose to put in a trust will depend largely on your goals.  For example, if you want the trust to generate income, you should put income-producing assets, such as bonds, in your trust.  Or, if you want your trust to create a fund that can be used to pay estate taxes or provide for your family at your death, you might fund the trust with a life insurance policy.
 
Types of trusts
There are many types of trusts, the most basic being revocable and irrevocable.  The type of trust you should use will depend on what you’re trying to accomplish.
 
Living (revocable) trust
A living trust is a trust that you create while you’re alive.
A living trust:
  • Avoids probate: Unlike property that passes to heirs by your will, property that passes by a living trust is not subject to probate, avoiding the delay of property transfers to your heirs and keeping matters private
  • Maintains control: You can change the beneficiary, the trustee, any of the trust terms, move property in or out of the trust, or even end the trust and get your property back at any time
  • Protects against incapacity: If because of an illness or injury you can no longer handle your financial affairs, a successor trustee can step in and manage the trust property for you while you get better.  In the absence of a living trust or other arrangement, your family may have to ask the court to appoint a guardian to manage your property
 
A living trust can also continue after your death–you can direct the trustee to hold trust property until the beneficiary reaches a certain age or gets married, for instance.
Caution: Despite the benefits, living trusts have some drawbacks.  Property in a living trust is generally not protected from creditors, and you cannot avoid estate taxes using a living trust.
 
Irrevocable trusts
Unlike a living trust, you can’t change or end an irrevocable trust.  You can’t remove assets, change beneficiaries, or rewrite any of the terms of the trust. Irrevocable trusts are most often used to minimize estate tax.  The transfer may be subject to gift tax on the value of the property at the time of transfer, but the property, plus any future appreciation, is removed from your gross estate.  That means your ultimate estate tax liability may be less, resulting in more property that can pass to your heirs.
Tip: Each taxpayer has a $1 million lifetime exemption from the federal gift tax, so you may not actually have to pay the tax. You may owe state gift tax, though, if you live in one of the handful of states that impose gift tax. Additionally, property transferred through an irrevocable trust will avoid probate, and may be protected from future creditors.
 
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10 Feb

Balancing Your Investment Choices with Asset Allocation

Posted by: Brad Neve /  Category: Investment Strategies, Retirement Distribution Strategies

 A chocolate cake. Pasta. A pancake. They’re all very different, but they generally involve flour, eggs, and perhaps a liquid. Depending on how much of each ingredient you use, you can get very different outcomes. The same is true of your investments. Balancing a portfolio means combining various types of investments using a recipe that’s right for you.

Getting the right mix
 
The combination of investments you choose can be as important as your specific investments. The mix of various asset classes, such as stocks, bonds, and cash equivalents, accounts for most of the ups and downs of a portfolio’s returns.There’s another reason to think about the mix of investments in your portfolio. Each type of investment has specific strengths and weaknesses that enable it to play a specific role in your overall investing strategy. Some investments may be chosen for their growth potential. Others may provide regular income. Still others may offer safety or simply serve as a temporary place to park your money. And some investments even try to fill more than one role. Because you probably have multiple needs and desires, you need some combination of investment types. Balancing how much of each you should include is one of your most important tasks as an investor. That balance between growth, income, and safety is called your asset allocation. It doesn’t guarantee a profit or insure against a loss, but it does help you manage the level and type of risks you face.
 
Balancing risk and return
 
Ideally, you should strive for an overall combination of investments that minimizes the risk you take in trying to achieve a targeted rate of return. This often means balancing more conservative investments against others that are designed to provide a higher return but that also involve more risk. For example, let’s say you want to get a 7.5% return on your money. Your financial professional tells you that in the past, stock market returns have averaged about 10% annually, and bonds roughly 5%. One way to try to achieve your 7.5% return would be by choosing a 50-50 mix of stocks and bonds. It might not work out that way, of course. This is only a hypothetical illustration, not a real portfolio, and there’s no guarantee that either stocks or bonds will perform as they have in the past. But asset allocation gives you a place to start.
 
Someone living on a fixed income, whose priority is having a regular stream of money coming in, will probably need a very different asset allocation than a young, well-to-do working professional whose priority is saving for a retirement that’s 30 years away. Many publications feature model investment portfolios that recommend generic asset allocations based on an investor’s age. These can help jump-start your thinking about how to divide up your investments. However, because they’re based on averages and hypothetical situations, they shouldn’t be seen as definitive. Your asset allocation is–or should be–as unique as you are. Even if two people are the same age and have similar incomes, they may have very different needs and goals. You should make sure your asset allocation is tailored to your individual circumstances.
 
Many ways to diversify
 
When financial professionals refer to asset allocation, they’re usually talking about overall classes: stocks, bonds, and cash or cash equivalents. However, there are others that also can be used to complement the major asset classes once you’ve got those basics covered. They include real estate and alternative investments such as hedge funds, private equity, metals, or collectibles. Because their returns don’t necessarily correlate closely with returns from major asset classes, they can provide additional diversification and balance in a portfolio. Even within an asset class, consider how your assets are allocated. For example, if you’re investing in stocks, you could allocate a certain amount to large-cap stocks and a different percentage to stocks of smaller companies. Or you might allocate based on geography, putting some money in U.S. stocks and some in foreign companies. Bond investments might be allocated by various maturities, with some money in bonds that mature quickly and some in longer-term bonds. Or you might favor tax-free bonds over taxable ones, depending on your tax status and the type of account in which the bonds are held.
 
Asset allocation strategies
 
There are various approaches to calculating an asset allocation that makes the most sense for you. The most popular approach is to look at what you’re investing for and how long you have to reach each goal. Those goals get balanced against your need for money to live on. The more secure your immediate income and the longer you have to achieve your investing goals, the more aggressively you might be able to invest for them. Your asset allocation might have a greater percentage of stocks than either bonds or cash, for example.  Or you might be in the opposite situation. If you’re stretched financially and would have to tap your investments in an emergency, you’ll need to balance that fact against your longer-term goals. In addition to establishing an emergency fund, you may need to invest more conservatively than you might otherwise want to. Some investors believe in shifting their assets among asset classes based on which types of investments they expect will do well or poorly in the near term. However, this approach, called "market timing," is extremely difficult even for experienced investors. If you’re determined to try this, you should probably get some expert advice–and recognize that no one really knows where markets are headed. Some people try to match market returns with an overall "core" strategy for most of their portfolio.  They then put a smaller portion in very targeted investments that may behave very differently from those in the core and provide greater overall diversification.  These often are asset classes that an investor thinks could benefit from more active management.Just as you allocate your assets in an overall portfolio, you can also allocate assets for a specific goal.  For example, you might have one asset allocation for retirement savings and another for college tuition bills.  A retired professional with a conservative overall portfolio might still be comfortable investing more aggressively with money intended to be a grandchild’s inheritance.  Someone who has taken the risk of starting a business might decide to be more conservative with his or her personal portfolio.
 
Things to think about
  • Don’t forget about the impact of inflation on your savings.  As time goes by, your money will probably buy less and less unless your portfolio at least keeps pace with the inflation rate.  Even if you think of yourself as a conservative investor, your asset allocation should take long-term inflation into account.
  • Your asset allocation should balance your financial goals with your emotional needs.  If the way your money is invested keeps you awake worrying at night, you may need to rethink your investing goals and whether the strategy you’re pursuing is worth the lost sleep.
  • Your tax status might affect your asset allocation, though your decisions shouldn’t be based solely on tax concerns.
Even if your asset allocation was right for you when you chose it, it may not be right for you now.  It should change as your circumstances do and as new ways to invest are introduced.   A piece of clothing you wore 10 years ago may not fit now; you just might need to update your asset allocation, too.
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01 Feb

Is Nationwide on Your Side?

Posted by: Brad Neve /  Category: Article Only

The financial service giant Nationwide has a corporate slogan "Nationwide is on your side."  However  in a  class action suit originally filed in the United States District Court in Connecticut 2001, Nationwide is charged it with accepting "revenue sharing payments" from mutual funds as the cost of being included as investment options in its retirement plans.  The suit claims that  receipt of these payments violates the Columbus, Ohio-based company’s "fiduciary duty.,.

Nationwide denies any wrongdoing and denied that it was a fiduciary to the plan. In a preliminary ruling issued Nov. 6, 2009, the Court found Nationwide "may be a fiduciary", but this really begs the issue: Whose side is Nationwide on when it selects investment options for 401(k) plans?

Click this link to read the entire article.  http://www.dailyfinance.com/story/retirement/is-nationwide-on-your-side-not-everyone-thinks-so/19326327/

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