As the description suggests, this article investigates how legitimate the charges and relative performance of mutual funds are considering the $10 trillion invested in them and the approximately 90 million individual investors that have put their faith in mutual funds for their retirement. To avoid excessive explanation, I'll outline why:
- Investment companies (typically) rely on assets under management, rather than performance to generate fees. The more assets, the greater the revenue. The problem is there is no benchmark to keep managers honest and competitive.
- Fund managers (typically) own very small portions of their own funds. Managers are not eating their own cooking. Just like with insiders of companies owning a large percentage of their stock, the same applies for fund managers to show a vote of confidence. More would be at stake for the manager and therefore he would have extra incentive to perform.
- Mutual funds under perform the S&P, which has averaged 12.3% annually since 1980, while the average equity mutual funds averaged around 10% annually over the same period.
- Fund manager profit margins come in at around 42%, not a bad take.
- Fees grow around 15% per year, and compared to the above cited performance of the S&P relative to mutual funds, is it warranted?
This is not to say that excellent mutual funds are not out there, but rare gems they are. Consider low cost alternatives like Vanguard, that charge ultra low fees, but mimic the indexes if you are conservative defensive investor. If you have the time, than a more enterprising approach can be taken to look for positives like fund managers that take a large stake in their own fund, low turnover to assure low fees and funds managers with long consistent performance records.
Saturday, May 3, 2008
How To Select A Mutual Fund
Investing in mutual funds is a way to make a surer investment than some other forms. It provides you with a more stable foundation for your investments and can act as a balance to other high-risk type of instruments. Here are some tips on how you can choose a good mutual fund that will bring you the safe returns you want.
Determine Your Investing Goals First
Your investing goals will help you determine just how you should invest. Mutual funds come in different forms, as well as risk levels, so you will need to make a decision about this from the start.
Decide How Much You Have for Fees
Some forms of mutual funds, such as no load funds, have no additional fees associated with them. This also means, though, that you do not get the same level of services with your mutual fund as you would with those that have fees. You have no professional assistance or oversight of your fund, which means that it will not be given the best attention or care. Of course, if you know what you are doing, then this would give you a low cost way to control your own funds.
Loaded funds mean that you will have to pay a sales fee for your purchase. Along with the fees, though, comes a lot better management of your investment. Your broker will pay closer attention to how your investments are doing which also means that you have a lower risk involved.
Choose How Much Involvement You Want
With no load funds, you need to pay attention to your own investments. This is because you are the only one making those choices, and any success you have is largely up to you. You also will not receive investment counsel from your choice of mutual fund company.
Loaded funds are the best way to go if you want professional care over your investment. This allows you to take a hands off approach and they do the investing for you. They know that poor management will mean loss of customers and money so they have a very good reason to want to do a good job.
Make Decisions over the Variables
Once you decide about the cost needed for the investment, there are some other factors you want to choose from. This would include things like:
• The time frame
• The taxes
• The fund's goals.
You will also need to consider how profit comes to you. If you are looking for dividends to be paid, then you need to look for funds that will do that.
Others may give capital appreciation or capital gains distribution. Just be sure that you know beforehand, so that you know how money is either to be paid to you or reinvested.
Determine Your Investing Goals First
Your investing goals will help you determine just how you should invest. Mutual funds come in different forms, as well as risk levels, so you will need to make a decision about this from the start.
Decide How Much You Have for Fees
Some forms of mutual funds, such as no load funds, have no additional fees associated with them. This also means, though, that you do not get the same level of services with your mutual fund as you would with those that have fees. You have no professional assistance or oversight of your fund, which means that it will not be given the best attention or care. Of course, if you know what you are doing, then this would give you a low cost way to control your own funds.
Loaded funds mean that you will have to pay a sales fee for your purchase. Along with the fees, though, comes a lot better management of your investment. Your broker will pay closer attention to how your investments are doing which also means that you have a lower risk involved.
Choose How Much Involvement You Want
With no load funds, you need to pay attention to your own investments. This is because you are the only one making those choices, and any success you have is largely up to you. You also will not receive investment counsel from your choice of mutual fund company.
Loaded funds are the best way to go if you want professional care over your investment. This allows you to take a hands off approach and they do the investing for you. They know that poor management will mean loss of customers and money so they have a very good reason to want to do a good job.
Make Decisions over the Variables
Once you decide about the cost needed for the investment, there are some other factors you want to choose from. This would include things like:
• The time frame
• The taxes
• The fund's goals.
You will also need to consider how profit comes to you. If you are looking for dividends to be paid, then you need to look for funds that will do that.
Others may give capital appreciation or capital gains distribution. Just be sure that you know beforehand, so that you know how money is either to be paid to you or reinvested.
Thursday, March 27, 2008
Guideline for Mutual Fund And ETFs
While we all wish we could be Warren Buffet, the truth is that most investors are best served just parking their money in a mutual fund or ETF. What is the difference between these two types of investment options and which one is for you?
Both mutual funds and ETFs allow the investor to achieve diversification. Each invests in a basket of stocks, so the investor generally does not have to worry that one individual stock will radically alter his or her returns. Both also give the investor the choice of investing in a certain sector, if he thinks a sector will perform well. For example, there are mutual funds and ETFs that focus just on technology, and there are also broader mutual funds and ETFs that focus on the market as a whole (if you want maximum diversification).
The key difference between mutual funds and ETFs are that mutual funds are actively managed, whereas ETFs are passively managed. What does this mean? Basically, mutual funds have a manager that chooses which individual stocks to buy and sell. He will actively choose generally 50-300 stocks in which to invest. In contrast, an ETF will just invest in the stocks that correspond to an index.
For example, the ETF Diamonds (DIA) seeks to track the Dow Jones index. The ETF's performance will almost exactly mirror how well the Dow Jones index does. So if the Dow Jones goes up 9% in a year, DIA will go up about 9% as well. In contrast, a blue chip mutual fund will also invest in blue chip stocks, like the ones that make up the Dow Jones index, though it may choose to invest in only some of the stocks in the Dow Jones as well as other blue chip stocks that are not in the Dow Jones. Thus, while the Dow Jones may go up 9% in a year, a blue chip mutual fund could have a vastly different return. It might lose 2% or it might gain 15%; it just depends on the luck and the skill of the mutual fund manager.
As you can see, the key difference is how they are managed. But which one is better? Well, it depends. Since there are more decisions and more effort involved in a mutual fund, these charge higher fees than ETFs. These fees may be worth it though if the mutual fund can outperform its index peers. If the mutual fund has returns similar to an index or worse, than the ETF will be better.
Investing in ETFs are a little easier than a mutual fund. As you can see, with an ETF, you are at least guaranteed to meet the index. With a mutual fund, you could do better or you could do much worse. One tip, more than any other, is to make sure you do not pay too high of expense fees with a mutual fund. If your mutual fund is ripping you off, you certainly will underperform the market!
Both mutual funds and ETFs allow the investor to achieve diversification. Each invests in a basket of stocks, so the investor generally does not have to worry that one individual stock will radically alter his or her returns. Both also give the investor the choice of investing in a certain sector, if he thinks a sector will perform well. For example, there are mutual funds and ETFs that focus just on technology, and there are also broader mutual funds and ETFs that focus on the market as a whole (if you want maximum diversification).
The key difference between mutual funds and ETFs are that mutual funds are actively managed, whereas ETFs are passively managed. What does this mean? Basically, mutual funds have a manager that chooses which individual stocks to buy and sell. He will actively choose generally 50-300 stocks in which to invest. In contrast, an ETF will just invest in the stocks that correspond to an index.
For example, the ETF Diamonds (DIA) seeks to track the Dow Jones index. The ETF's performance will almost exactly mirror how well the Dow Jones index does. So if the Dow Jones goes up 9% in a year, DIA will go up about 9% as well. In contrast, a blue chip mutual fund will also invest in blue chip stocks, like the ones that make up the Dow Jones index, though it may choose to invest in only some of the stocks in the Dow Jones as well as other blue chip stocks that are not in the Dow Jones. Thus, while the Dow Jones may go up 9% in a year, a blue chip mutual fund could have a vastly different return. It might lose 2% or it might gain 15%; it just depends on the luck and the skill of the mutual fund manager.
As you can see, the key difference is how they are managed. But which one is better? Well, it depends. Since there are more decisions and more effort involved in a mutual fund, these charge higher fees than ETFs. These fees may be worth it though if the mutual fund can outperform its index peers. If the mutual fund has returns similar to an index or worse, than the ETF will be better.
Investing in ETFs are a little easier than a mutual fund. As you can see, with an ETF, you are at least guaranteed to meet the index. With a mutual fund, you could do better or you could do much worse. One tip, more than any other, is to make sure you do not pay too high of expense fees with a mutual fund. If your mutual fund is ripping you off, you certainly will underperform the market!
ING Direct
ING Direct is an online banking web site that is very convenient for people. Since it is not the kind of bank with branches, but rather an online bank, ING Direct offers services without fees attached.
One kind of service that ING Direct provides is savings accounts. Savings accounts on ING Direct typically have higher interest rates than other banks, simply because they don't have the overhead fees of banks with local branches. There are no fees, no minimum deposits, no withdrawal charges, and you can have multiple accounts with different names for saving for different purposes. ING Direct savings accounts are linked to a checking account at your local bank for the purposes of making transfers back and forth. They do not use snail mail.
ING Direct does not offer checking accounts. They do, however, offer mortgages, home equity loans, mutual funds and also CDs of varying lengths. There are very low closing costs and no application fees for mortgages. Home equity loans have a large amount you can borrow, at a low rate, and have no application fees, no annual fees and no prepayment penalties. You can purchase a certificate of deposit (CD) from ING Direct for as short as a 6-month period and get a very good interest percentage on your money. CDs also have no minimums, so anyone can afford them. If you can keep money in for as short as 6 months, ING Direct offers one of the best interest rates around.
ING Direct allows you to schedule direct-deposit transfers to your savings accounts which will automatically be taken from your checking account. It is very easy to use, and easy for anyone to find a way to save money at a decent interest rate.
There are even rewards for referring friends to ING Direct. If you refer a friend and they sign up for a new account, ING will deposit $25 into your account. It's a good way to make extra money, and a legitimate way to save money.
ING Direct is FDIC insured, and has strong security measures in place to keep your information private and confidential. The web address is www.ingdirect.com .
One kind of service that ING Direct provides is savings accounts. Savings accounts on ING Direct typically have higher interest rates than other banks, simply because they don't have the overhead fees of banks with local branches. There are no fees, no minimum deposits, no withdrawal charges, and you can have multiple accounts with different names for saving for different purposes. ING Direct savings accounts are linked to a checking account at your local bank for the purposes of making transfers back and forth. They do not use snail mail.
ING Direct does not offer checking accounts. They do, however, offer mortgages, home equity loans, mutual funds and also CDs of varying lengths. There are very low closing costs and no application fees for mortgages. Home equity loans have a large amount you can borrow, at a low rate, and have no application fees, no annual fees and no prepayment penalties. You can purchase a certificate of deposit (CD) from ING Direct for as short as a 6-month period and get a very good interest percentage on your money. CDs also have no minimums, so anyone can afford them. If you can keep money in for as short as 6 months, ING Direct offers one of the best interest rates around.
ING Direct allows you to schedule direct-deposit transfers to your savings accounts which will automatically be taken from your checking account. It is very easy to use, and easy for anyone to find a way to save money at a decent interest rate.
There are even rewards for referring friends to ING Direct. If you refer a friend and they sign up for a new account, ING will deposit $25 into your account. It's a good way to make extra money, and a legitimate way to save money.
ING Direct is FDIC insured, and has strong security measures in place to keep your information private and confidential. The web address is www.ingdirect.com .
Thursday, March 13, 2008
Structured Settlement Mutual Funds Schemes
How often do you find yourself saying: "I wish I knew how to learn more about structured settlement mutual funds"
Well, this article about structured settlement mutual funds was written with you in mind. Enjoy.
Among the options open to you if you've received a structured settlement from a lawsuit or arbitration is what's known as structured settlement mutual funds. You should take some time before you choose an investment vehicle for your settlement money and learn the pros and cons of the mutual fund option.
Always keeping your long-term financial security in mind, structured settlement mutual funds offer advantages and disadvantages when compared to other investing options.
When you are awarded a structured settlement, an insurance company sets up an annuity in order to pay you small portions of the money at regular intervals. The safest option is to keep the money"in house" and get a guaranteed scheduled payment that will never change. The downside to going this super-safe route is that your money will not grow (much, if at all).
With structured settlement mutual funds, however, the money is invested in one or more mutual funds. Mutual funds are groups of individual equities (stocks), the make-up of which is closely managed in an effort to maximize returns. The individual stocks in any mutual fund can change regularly.
This introduces an element of risk - sometimes significant risk. So, if you have your structured settlement money in a structured settlement mutual funds set-up, you have the potential for higher rates of return, but you also incur more risk that you'll lose some of your money.
In most structured settlements, the annuity that is set up is guaranteed. You are assured of getting the same amount, month in and month out, until the settlement money runs out. It's a good option for those seeking to avoid any risk.
As you've read until now, structured settlement mutual funds is a subject that needs knowledge and effort to work around. And the information in this article was gathered from several resources.
There are some more gems of wisdom in what follows - keep reading.
Structured settlement mutual funds are not guaranteed. The upside is the potential for earning more if the mutual fund's value increases. It's like getting a raise, but it isn't a sure thing.
From a tax standpoint, income you receive from a fixed annuity is tax-free (in most cases). However, structured settlement mutual funds are subject to capital gains taxes and the possibility of some income taxation. Keep in mind that if your mutual fund loses money, the losses can be written off of your tax bill (under most circumstances), so it's not all bad if things don't go well.
Choosing a standard structured settlement fixed annuity means you are locked into a set payment amount and schedule. If your needs change down the road, this may cause you some financial hardships. With structured settlement mutual funds, you are allowed to move money around (within certain strict limits) from fund to fund. This will allow you to adapt to changes more readily.
As should be clear by now, this is not an easy decision. There are many pros and cons, whether you choose structured settlement mutual funds, the fixed annuity option, or any other alternative. This is one reason why it's a smart move to enlist the services of a competent lawyer who specializes in this area of the law. It's also wise to educate yourself as thoroughly as possible before making the final decision.
The day will come when you can use something you read here to have a beneficial impact. Then you'll be glad you took the time to learn more about structured settlement mutual funds.
Well, this article about structured settlement mutual funds was written with you in mind. Enjoy.
Among the options open to you if you've received a structured settlement from a lawsuit or arbitration is what's known as structured settlement mutual funds. You should take some time before you choose an investment vehicle for your settlement money and learn the pros and cons of the mutual fund option.
Always keeping your long-term financial security in mind, structured settlement mutual funds offer advantages and disadvantages when compared to other investing options.
When you are awarded a structured settlement, an insurance company sets up an annuity in order to pay you small portions of the money at regular intervals. The safest option is to keep the money"in house" and get a guaranteed scheduled payment that will never change. The downside to going this super-safe route is that your money will not grow (much, if at all).
With structured settlement mutual funds, however, the money is invested in one or more mutual funds. Mutual funds are groups of individual equities (stocks), the make-up of which is closely managed in an effort to maximize returns. The individual stocks in any mutual fund can change regularly.
This introduces an element of risk - sometimes significant risk. So, if you have your structured settlement money in a structured settlement mutual funds set-up, you have the potential for higher rates of return, but you also incur more risk that you'll lose some of your money.
In most structured settlements, the annuity that is set up is guaranteed. You are assured of getting the same amount, month in and month out, until the settlement money runs out. It's a good option for those seeking to avoid any risk.
As you've read until now, structured settlement mutual funds is a subject that needs knowledge and effort to work around. And the information in this article was gathered from several resources.
There are some more gems of wisdom in what follows - keep reading.
Structured settlement mutual funds are not guaranteed. The upside is the potential for earning more if the mutual fund's value increases. It's like getting a raise, but it isn't a sure thing.
From a tax standpoint, income you receive from a fixed annuity is tax-free (in most cases). However, structured settlement mutual funds are subject to capital gains taxes and the possibility of some income taxation. Keep in mind that if your mutual fund loses money, the losses can be written off of your tax bill (under most circumstances), so it's not all bad if things don't go well.
Choosing a standard structured settlement fixed annuity means you are locked into a set payment amount and schedule. If your needs change down the road, this may cause you some financial hardships. With structured settlement mutual funds, you are allowed to move money around (within certain strict limits) from fund to fund. This will allow you to adapt to changes more readily.
As should be clear by now, this is not an easy decision. There are many pros and cons, whether you choose structured settlement mutual funds, the fixed annuity option, or any other alternative. This is one reason why it's a smart move to enlist the services of a competent lawyer who specializes in this area of the law. It's also wise to educate yourself as thoroughly as possible before making the final decision.
The day will come when you can use something you read here to have a beneficial impact. Then you'll be glad you took the time to learn more about structured settlement mutual funds.
Equity Linked Mutual Funds Saving Schemes
Tax planning has changed radically over a period of time. Since its time for filling income tax returns for 2007-2008 as the end date (31st March '08) is approaching. As a tax payer you need to understand the best way through which you can make use of the exemptions provided by the government. Earlier people had limited choice of tax saving instruments to be used for the purpose of tax planning. But now with the ELSS (Equity Linked Saving Schemes) launched by most of the mutual fund companies, the whole approach towards tax saving has changed. With mutual funds tax planning had become more important part of over all investment planning. With equity linked saving schemes the tax exemptions can be used in a manner such that you not just disciple your investments but also create good corpus through equity investment.
Tax planning for resident Indians
We recommend tax saving funds, also referred to as Equity-Linked Saving Schemes (ELSS). One such reason is that their benefits are too much to ignore as they hold almost all the benefits of an equity mutual fund.
For one, they do not have any restrictions. If you choose to, you can invest the entire Rs 1 lakh available under Section 80C in these ELSS funds.
They give you the benefit of higher returns. You can get 8 per cent with your PPF and NSC. But if you can get a 40-50 per cent return, coupled with a tax benefit, what's wrong with it?
How do you invest in an ELSS scheme? It is as simple as investing in any other mutual fund schemes. You just need to fill the form of particular ELSS scheme in which you want to invest. Submit it through any transaction point with the required document i.e. usually PAN card and KYC form. That's it your work is done.
The benefit 3 Years lock in period for ELSS schemes.
Secondly, if you hate blocking your money for years on end, then this one surely made for you. The lock-in period for ELSS funds is just three years. When you sell after three years, you pay no capital gains tax. So, you get the tax benefit when investing and you pay no tax on your profits. The best way to invest in a mutual fund is investing systematically through out the year using SIP. So you commit to putting away a fixed amount every month in mutual funds. This is an automatic savings habit that will hold you in the long run and help you not only to save but also invest regularly and continuously in the capital market through equity linked saving schemes (ELSS). You need to be consistent in your investments to do well. The wonders which a disciplined investment can do cannot be replicated by even the best of investment strategies.
Want to know about the top mutual funds for Tax Saving?
Most of the Mutual fund companies have come out with tax saving funds. They are Equity Linked Saving Schemes (ELSS). The funds collected under this tax saving schemes are invested in equity instrument, thus providing better returns. Many of these ELSS funds generate as much returns as a diversified equity fund. With the awareness been increasing among the investor class, the equity linked saving schemes are gaining popularity among the investor class.
Take step towards informed mutual fund investment by investing with care and due diligence.
To know more you can visit Godmind and get the collection of recommended tax saving funds which is been provided by Godmind advisors. Also you can ask the Mutual fund Advisors on which ELSS (Equity linked saving scheme) fund to invest in.
You can know more through mutualfundadvisorindia.in website. In this you can get the understanding of selecting any scheme and filling the form.
Dipendra Nathawat - Godmind Mutual Fund Advisor.
Tax planning for resident Indians
We recommend tax saving funds, also referred to as Equity-Linked Saving Schemes (ELSS). One such reason is that their benefits are too much to ignore as they hold almost all the benefits of an equity mutual fund.
For one, they do not have any restrictions. If you choose to, you can invest the entire Rs 1 lakh available under Section 80C in these ELSS funds.
They give you the benefit of higher returns. You can get 8 per cent with your PPF and NSC. But if you can get a 40-50 per cent return, coupled with a tax benefit, what's wrong with it?
How do you invest in an ELSS scheme? It is as simple as investing in any other mutual fund schemes. You just need to fill the form of particular ELSS scheme in which you want to invest. Submit it through any transaction point with the required document i.e. usually PAN card and KYC form. That's it your work is done.
The benefit 3 Years lock in period for ELSS schemes.
Secondly, if you hate blocking your money for years on end, then this one surely made for you. The lock-in period for ELSS funds is just three years. When you sell after three years, you pay no capital gains tax. So, you get the tax benefit when investing and you pay no tax on your profits. The best way to invest in a mutual fund is investing systematically through out the year using SIP. So you commit to putting away a fixed amount every month in mutual funds. This is an automatic savings habit that will hold you in the long run and help you not only to save but also invest regularly and continuously in the capital market through equity linked saving schemes (ELSS). You need to be consistent in your investments to do well. The wonders which a disciplined investment can do cannot be replicated by even the best of investment strategies.
Want to know about the top mutual funds for Tax Saving?
Most of the Mutual fund companies have come out with tax saving funds. They are Equity Linked Saving Schemes (ELSS). The funds collected under this tax saving schemes are invested in equity instrument, thus providing better returns. Many of these ELSS funds generate as much returns as a diversified equity fund. With the awareness been increasing among the investor class, the equity linked saving schemes are gaining popularity among the investor class.
Take step towards informed mutual fund investment by investing with care and due diligence.
To know more you can visit Godmind and get the collection of recommended tax saving funds which is been provided by Godmind advisors. Also you can ask the Mutual fund Advisors on which ELSS (Equity linked saving scheme) fund to invest in.
You can know more through mutualfundadvisorindia.in website. In this you can get the understanding of selecting any scheme and filling the form.
Dipendra Nathawat - Godmind Mutual Fund Advisor.
Friday, February 22, 2008
Investor Valued In Mutual Funds
The long term value investor seems to get a bad name attached to it in a lot of investment books and web sites these days. There are plenty of ways to make money in the stock market and buying and selling stocks as short term investments works for some investors. I even do it some myself with a few stocks I own. I would venture to guess the average investor, who doesn't have time to research stocks every day, is better off in a long term strategy when it comes to buying stocks. This doesn't mean you are buying and holding until death do us part as some of these investment books and sites would have you believe. It simply means that nobody can pick tops and bottoms so you are better off staying in the game the whole time rather than jumping in and out every other week.
I know there are several factors to consider when deciding what kind of strategy you want to use when investing. For example, risk tolerance, years to retirement, quality of life after retirement and many others, but as a general rule long term value investing is the easiest way to a good return. It might be a little old school and not as sexy as trying to grab the next hot IPO, but you also won't be gambling on a long shot with your hard earned money.
Now I'm not saying you shouldn't buy some growth stocks, in fact, I think it serves you well to have value mixed in with growth. You have to be on top of those growth stocks though because the shelf life is shorter and more volatile than a value stock. Eventually the growth rate and PE have to come down so just be on your toes before the shoe drops.
A long term value investors still needs to watch his or her portfolio carefully and try and stay diversified. You want to make sure you lighten your load in sectors and industries that are not working and redistribute to areas that are performing better. You still will want to stay diversified, but there is no need to be overweight in underperforming industries. A lot of web sites and books seem to suggest that when a value stock is purchased it is held for life and this simply is not true. You can move in and out of value stocks when you think they have run their course. All I know is Warren Buffett has made boat loads of money while investing in value stocks.
A value stock might not get you one of those rare 900% or higher returns on your money in a couple years. It also might not be the hot topic at the next cocktail party, but it does give you a better chance of beating the indexes if you do your homework. It's much easier to pick a good quality stock based off steady increasing earnings than to guess what a new high flying company will do with no previous history to gauge off.
Sometimes it might not be the most glamorous route to the finish line, but the chances of you finishing the race the way you want too are pretty good with a long term value stock strategy.
I know there are several factors to consider when deciding what kind of strategy you want to use when investing. For example, risk tolerance, years to retirement, quality of life after retirement and many others, but as a general rule long term value investing is the easiest way to a good return. It might be a little old school and not as sexy as trying to grab the next hot IPO, but you also won't be gambling on a long shot with your hard earned money.
Now I'm not saying you shouldn't buy some growth stocks, in fact, I think it serves you well to have value mixed in with growth. You have to be on top of those growth stocks though because the shelf life is shorter and more volatile than a value stock. Eventually the growth rate and PE have to come down so just be on your toes before the shoe drops.
A long term value investors still needs to watch his or her portfolio carefully and try and stay diversified. You want to make sure you lighten your load in sectors and industries that are not working and redistribute to areas that are performing better. You still will want to stay diversified, but there is no need to be overweight in underperforming industries. A lot of web sites and books seem to suggest that when a value stock is purchased it is held for life and this simply is not true. You can move in and out of value stocks when you think they have run their course. All I know is Warren Buffett has made boat loads of money while investing in value stocks.
A value stock might not get you one of those rare 900% or higher returns on your money in a couple years. It also might not be the hot topic at the next cocktail party, but it does give you a better chance of beating the indexes if you do your homework. It's much easier to pick a good quality stock based off steady increasing earnings than to guess what a new high flying company will do with no previous history to gauge off.
Sometimes it might not be the most glamorous route to the finish line, but the chances of you finishing the race the way you want too are pretty good with a long term value stock strategy.
Links Between Mutual Funds And Stock Market
The Idea:
In my everyday perusal of the stock market I sometimes come across a stock whose current market value appears low and I of course wonder, "What is wrong with this stock?" A little research sometimes shows an obvious reason, but often it does not. A little more research and I can determine how secure this stock is as an investment, and if all looks good I make a purchase. Some of my best gains have come in this way.
The Problem:
The problem, if there is a problem, with investing in this manner is that it is often difficult to find these "bargains". With thousands of stock to choose from I don't have time to go through them all. So, question: How to make a quick determination on any given day as to what stocks may be undervalued? A method I have found to be quite useful is to compare the stock to the others in it's index.
A Solution:
The theory is that if ABC company makes widgets and the index comprised of all the widget making companies is doing well (i.e. people are buying widgets), then ABC should also be reaping the rewards. Low and behold after months of tracking this type of data it appears this theory is sound.
My best, unsubstantiated, guess for this behavior is due to what I would call "lag" time in the market. What appears to be happening is if ABCs clones or ABC itself hasn't yet noticed or reported the improvement, or, and this does happen, the market hasn't noticed that it has, you get lag.
The Result:
This lag period can last from days to a month, but when the market finally figures it out, and it almost always does (assuming I have done my research and can find no other factors keeping it down) my investment quickly pays off. My best analogy of this behavior is the old adage I learned in science class "Nature abhors a vacuum".
Uses:
# A very useful artifact of this calculation is that the short-term correction is often quite predictable. If an index is doing well but a given stock in the index is down say 5% for the past week, I can usually expect a 5 to 6% gain to be upcoming.
# It also is useful to determine a relative low in the price of a stock. Lets say I have been following ABC for some time and I believe it prudent to invest in some of its shares. I want to buy when the price is low, but when does this occur. No one can tell you exactly, but when it starts to appear as undervalued in it's own index you can be fairly certain it's not going to stay down much longer.
This strategy is of course highly speculative (notice the number of time I said 'often' or 'usually' in this article) and in no way replaces the necessary research (i.e. infrastructure, financial standing, industry, the market as a whole, various trends currently affecting the market, etc.). Performing this calculation does not render a "Pick". However, as a tool, to narrow down the universe that comprises the stock market into a short, manageable list, it is quite useful.
Conclusion:
Assuming this approach interests you then you may ask, how does an individual investor accomplish this task? Most investors already have a sector or index they follow closely and thus know how it has been performing. It is fairly simple to determine the overall trend of an index (try http://biz.yahoo.com/ic to follow indexes) and then see how each individual stock is performing. I have found it even more helpful, and much faster, to break down the individual indexes and stocks by different time ranges (ex. Index over the past 6 months and the stock over the past week) and then list these stocks on a day-by-day basis. With this daily list I can quickly pick out the potential "bargains" and get to work deciding which will be the most productive buy.
In my everyday perusal of the stock market I sometimes come across a stock whose current market value appears low and I of course wonder, "What is wrong with this stock?" A little research sometimes shows an obvious reason, but often it does not. A little more research and I can determine how secure this stock is as an investment, and if all looks good I make a purchase. Some of my best gains have come in this way.
The Problem:
The problem, if there is a problem, with investing in this manner is that it is often difficult to find these "bargains". With thousands of stock to choose from I don't have time to go through them all. So, question: How to make a quick determination on any given day as to what stocks may be undervalued? A method I have found to be quite useful is to compare the stock to the others in it's index.
A Solution:
The theory is that if ABC company makes widgets and the index comprised of all the widget making companies is doing well (i.e. people are buying widgets), then ABC should also be reaping the rewards. Low and behold after months of tracking this type of data it appears this theory is sound.
My best, unsubstantiated, guess for this behavior is due to what I would call "lag" time in the market. What appears to be happening is if ABCs clones or ABC itself hasn't yet noticed or reported the improvement, or, and this does happen, the market hasn't noticed that it has, you get lag.
The Result:
This lag period can last from days to a month, but when the market finally figures it out, and it almost always does (assuming I have done my research and can find no other factors keeping it down) my investment quickly pays off. My best analogy of this behavior is the old adage I learned in science class "Nature abhors a vacuum".
Uses:
# A very useful artifact of this calculation is that the short-term correction is often quite predictable. If an index is doing well but a given stock in the index is down say 5% for the past week, I can usually expect a 5 to 6% gain to be upcoming.
# It also is useful to determine a relative low in the price of a stock. Lets say I have been following ABC for some time and I believe it prudent to invest in some of its shares. I want to buy when the price is low, but when does this occur. No one can tell you exactly, but when it starts to appear as undervalued in it's own index you can be fairly certain it's not going to stay down much longer.
This strategy is of course highly speculative (notice the number of time I said 'often' or 'usually' in this article) and in no way replaces the necessary research (i.e. infrastructure, financial standing, industry, the market as a whole, various trends currently affecting the market, etc.). Performing this calculation does not render a "Pick". However, as a tool, to narrow down the universe that comprises the stock market into a short, manageable list, it is quite useful.
Conclusion:
Assuming this approach interests you then you may ask, how does an individual investor accomplish this task? Most investors already have a sector or index they follow closely and thus know how it has been performing. It is fairly simple to determine the overall trend of an index (try http://biz.yahoo.com/ic to follow indexes) and then see how each individual stock is performing. I have found it even more helpful, and much faster, to break down the individual indexes and stocks by different time ranges (ex. Index over the past 6 months and the stock over the past week) and then list these stocks on a day-by-day basis. With this daily list I can quickly pick out the potential "bargains" and get to work deciding which will be the most productive buy.
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