Business Finance Profile

Archive for May, 2011

The idea behind insurance is to make sure that you are prepared for the direct and indirect expenses that an accident can cause you to incur. There are several types of insurance, and these days, it is possible to insure just about anything and buffer yourself from costs, income loss and even liability. However, one area that many people don’t take into consideration is properly insuring their children.
Many people with children just cannot entertain the thought that their child might some day be taken from them. However, this is a tragic part of life for some people, and it can be a devastating setback from more than an emotional standpoint.
It should not be thought morbid or tempting fate to take out a life insurance policy on your child. There are some schools of thought that tend to consider this sinister. As with any insurance policy, taking out an insurance policy on your child is simply preparing for a worst-case scenario. Losing a child can be crippling to parents and siblings, and can have a subsequent financial impact. Beyond covering any burial costs, it takes no imagination whatsoever to see that the loss of a child could be emotionally debilitating to the entire family. 
Divorce and family dysfunction are alarmingly common after the loss of a child. A parent will want to give themselves the time needed to grieve. Insuring your child will help ensure that you will be able to afford the time off that you will need. In addition, such a loss may have an emotional impact felt deeply by a family and family dynamics often go into a spin. Parents may need grief counseling as well as professional help to deal with siblings or other family members impacted by the loss. Family counseling is often recommended by clergy and clinical professionals.
This is the thought process behind a life insurance policy that is taken out on a child. You can ensure that in the aftermath of an unthinkable loss, the financial impacts, temporary earnings loss and professional counseling needed are not additional stresses that prevent you and your family from healing, and even worse can tear it apart. If you have children, this is something that you will want to take into account.

Accept it many of you are now spending on bills to pay for what you have wanted for years and now you can finally afford it. The last thing you will thing about is an investment for your retirement. It is your choice whether to have fun with spending money now but suffer when you get older or inverse! Take some advice from those with a little more experience: Start investing early in your career. Start from day one and you will never miss that money you’re setting aside. If your company has available a 401-K or a TSP program, jump on the band wagon immediately. If you don’t have these programs at your disposal, you can still start an IRA and the concepts stated here are applicable as well. 
I can guarantee that it really does it make a difference when you start contributing. It is important to invest in your retirement account early in your career for two reasons. First, if you’re fortunate to receive matching contributions, you don’t want to miss out on those added contributions that are a significant part of your retirement benefit. Second, the longer contributions stay in your account, the more you stand to gain. Your money makes money in the form of earnings, and those earnings in turn make money, and so on. This is what is known as the “miracle of compounding.” As money grows in your account over time, the proportion resulting from earnings will become larger compared to the proportion resulting from contributions. 
The size of your account balance is going to depend on how much you (and your company if they match funds up to a certain percentage) contribute to your account and how your account grows as a result of earnings on your investments. To get an idea of what your retirement account could be in the future, look at the following projections. 
Think this way. Assume that you are an employee eligible for organizational contributions, that you are earning $28,000 each year, and that you receive no future salary increases. You choose to save 5 percent of basic pay each pay period; therefore you receive total organizational contributions of 5 percent. The growth projections below are for an assumed annual rate of return of 7 percent on your investments. 
After five years your account balance would be almost $17,000; after ten years your balance would increase to $40,000; and after contributing for twenty years, your account would have a balance of $122,000. Clearly your balance would continue to increase each year. If you contributed for forty years, which is fathomable if you start a job at 23 and want to retire at age 63, your account balance would be $615,000. That’s over half a million dollars folks! Just from contributing 5% of your income from the day you start work! 
Can this number convince you to start saving money now?

Two popular terms which often confuse investors are “trend following” and “momentum investing.”  Perhaps the most glaring commonality between these two is their blatant defiance of “buy and hold,” the practice of selecting an investment and holding it indefinitely, believing that over time the market goes up, and therefore any investment will appreciate.  Although the buy and hold approach has been touted for years by academics as the best method of investing, in reality it has its shortcomings, which are apparent in every Bear market.  
Despite being the antithesis of buy and hold, both momentum investing and trend following strategies are predicated upon a disciplined investment approach that’s designed to buy when the price of an issue is increasing and sell when the price is declining.  Additionally, an exit strategy is normally incorporated to override the human tendency to hold losing positions much too long.  Yet despite the distinct characteristics that these two terms share, in reality they are quite different.
What is Trend Following?
Trend following, in its most basic definition, is a systematic investment approach predicated upon buying and selling securities based on the sustained price movement of the issue.  It’s important to point out that trend followers don’t predict the future price movement of a stock; rather they examine the issue using technical analysis to determine which direction, if any, the equity is currently moving.  If a bullish trend is emerging, the trend follower will likely buy a position in the stock and hold it until the trend begins to weaken or change direction.  If the equity exhibits a bearish trend, the trend follower can short the position, wait until the trend reverses, or merely find another issue.    But there’s much more to being a successful trend follower than just selecting and buying securities.  In fact, it can be argued that the most important aspect of trend following isn’t when and what to buy, but rather when and what to sell! Often times, successful trend followers establish a “sell rule” that must be violated prior to selling the issue.  These sell rules vary depending on the risk tolerance of each investor, but they typically consist of a trailing stop loss coupled with a confirming indicator.  The overarching benefit of sell rules is that they provide a disciplined, mechanical methodology which the average investor should seriously consider implementing into his investment philosophy.  
What is Momentum Investing?
Momentum investors are constantly searching for companies that are moving faster than the market.  They believe substantial returns can be realized if they find, buy and hold onto those issues for as long as the price continues to go up.  The old axiom, “if it isn’t broken, don’t fix it” illustrates the shared philosophy of momentum investors; those companies with the biggest price changes over the last few months are more likely to continue making substantial gains.  Fundamental analysis plays a much bigger role in momentum investing than it does in trend following.  Momentum investors believe that buried within a company’s earnings statement is the reason why the price has been increasing so dramatically.  And if that underlying reason is uncovered, the opportunity presents itself to capitalize on that knowledge in the future.  
In the case of trend following, investors want to identify where a security may be within the performance cycle.  For example, how close to the 52-week high or low is the current market price and what is the short-term direction of the issue?  For the momentum investor, the key criteria may be the relative strength of the security versus the market or more importantly the peer group of the particular security in question.
How to Develop a Successful Investment Strategy
Investors often ask why go through all the effort of actively managing a portfolio.  The simple answer lies in the proven behaviors of economic cycles and sector rotation.  Independent studies have proven that over time the largest percentage of a securities’ price appreciation is driven by the industrial group within which the company is classified and not the performance of the individual company itself.
However, the real reason why investors should actively manage their portfolios is a concept called the “Time Value of Money,” also known as “Compounding Rate of Growth.”  Many financial professionals will use the example of how a penny, if doubled every day, is worth over $10 million after only 30 days.  A very impressive and eye opening number given the small amount of initial capital outlay.  What would happen if instead of doubling the penny every day, it were to grow by only 75%?  The investment would be worth slightly over $195,000 rather than $10.7 million.  Reducing the growth rate further to 50% and the end value is now $1,917.51.  A 25% growth rate for 30 days produces a value of only $8.08.
How does the concept of compounding growth translate into the selection of an investment strategy?  Investors who actively manage their portfolios, either through trend following or momentum investing, have the ability to take modest gains and re-invest the profit in other trending securities over and over again.  Buy and hold investors are not awarded this luxury since they rarely sell when the price is at the top.  Rather, they buy a position when the price is low, ride the position all the way up in a bull market, and then watch as is loses value in a bear market.  It’s a very frustrating strategy, equally hard on the stomach as it is on the wallet.  
Both strategies, trend following and momentum investing, demand a certain level of self-discipline in order to be successful.  A portfolio risk-management system that uses the current market price and equity level of a position and some form of market volatility measurement is recommended. An example of such a system could be a proprietary market model focused on technical indicators, back tested over time, coupled with a volatility indicator.  The system might employ either the Average Directional Movement Index (ADX/R), the CBOE Volatility Index (VIX) or the more traditional Advance Decline Line, Breadth or Volume indicators.
Taking Portfolio Risk Management Systems One Step Further
One noted management system authored by William O’Neil is CANSLIM.  The CANSLIM approach combines both fundamental and technical analysis much like the Core Equity Portfolio available at QMA Investment Management, LLC.  The weakness in the CANSLIM approach, along with many other similar systems, is that they stop short of providing a truly utilitarian system for the investor.  The user ends up with a list of stocks, all of whom have meet the systems criteria, but no method for distinguishing between the good, the better and the best.  To address this problem, Alpha Advisor Service, LLC created the AAS Rating Score.  This number is a time-weighted risk-adjusted alpha value used to rank each of the 1700 investments analyzed daily by AAS.  The purpose of the AAS Rating Score is to create a level field to measure all investment alternatives.  The highest AAS rated securities provide the greatest risk-adjusted return compared to the lowest rated securities.  This approach is superior to other forms of alpha analysis since it is time-weighted, thereby identifying those stocks or funds that are providing greater returns for the risk taken.  A tool of this caliber, which is available for any investor via the Alpha Advisor Service Newsletter, provides the means of not only developing a customized portfolio risk-management system, but also a disciplined method of buying and selling the securities within the portfolio.