Читать книгу The Handy Investing Answer Book - Paul A Tucci - Страница 12
ОглавлениеHow long have people been investing?
In approximately 1700 B.C.E., the Code of Hammurabi, discovered in 1902, laid out a set of rules for investing. Babylon, an ancient city in what is now Iraq, was ruled by various kings; the sixth king, Hammurabi, ruled for nearly 43 years. Under Hammurabi, a set of codes were enacted that helped the king rule his people. Although many of the codes described basic laws and governance, some codes described rules involving investing, loans, and financial transactions. Some copies of the original codes predate the main codes, which were etched upon a large stone, by several decades.
What do the Hammurabi Codes describe?
Some of the codes or laws describe what happens if commercial deals are not paid, the transfer of property, loan repayment, rent/lease arrangements, interest on property, and contract laws, among many other subjects.
What other city-states helped contribute to modern-day investing?
There are many other places around the world and in different periods of time that shaped and formed modern-day investing. In the 1300s, the city-state of Venice was a major center for the clearing or exchanging of obligations held by one owner, and exchanging them with another owner. Venetians began to do what today’s modern brokers do: bringing buyers and sellers together in order to transact a financial obligation. These same Venetian traders even engaged in international finance by buying and selling obligations owned by various European governments.
Stock tickers like this one, invented by Edward Calahan in 1863, reported changes in stock prices by printing out long strips of paper. They were not replaced until computers came into more common use in the 1970s.
When was the stock ticker invented?
Although it was invented by Edward Calahan in 1863, it was unveiled in New York City in 1867. The stock ticker machine was later improved by Thomas Edison in 1869 and was widely used until the 1970s, when it was gradually replaced by computer terminals. The machines were able to communicate current prices of stocks, which previously had been handwritten, or expressed verbally, and could transmit and ultimately print the quotes at one character per second. The great significance of the invention of the ticker machine is that it enabled the dissemination of prices across a large audience. Stock prices could be known by buyers near real time, allowing the markets to become more efficient and competitive.
What is a “ticker symbol”?
A ticker symbol is a unique series of characters, as many as five characters long, that identifies the name of the investment actively traded on an exchange. For example, Google is known as GOOG on the National Association of Securities Dealers Automated Quotations (NASDAQ) exchange, and Ford is known as F on the New York Stock Exchange (NYSE).
Why were these machines called Stock Ticker Machines?
The machines were called ticker machines because of the distinctive ticking noise the machines made while printing the ticker symbol and brief information about the stock price, on thin paper called ticker tape.
Specifically, what do ticker symbols indicate?
When you see ticker symbols moving across a screen, they usually tell us several things. The abbreviated letters, of one to five characters in length, indicate on what exchange the stock is listed. Symbols that are from one to three characters represent companies listed on the New York Stock Exchange, while symbols that are four or five characters represent companies listed on the NASDAQ Exchange. What you often see after the stock symbol is a recent price, change in price, and, in some instances, the volume of shares traded. You still see ticker symbols today, and the above information floating across a television screen or monitor as you watch financial programming or peruse financial websites.
What are “dividends”?
Dividends are the distributions of profits or earnings of a company to shareholders of record. It is generally defined as a distribution of some of the company’s profit to a specific class of shareholders as determined by that company’s board of directors, and is usually issued on a per share basis. If you have more shares, you are paid more of the company’s earnings during the period set forth by the board of directors.
What is a “blue chip stock”?
A blue chip stock is a publicly traded company that is usually very large, may be distributing profits in the form of dividends for many years, is a leader in the sector in which it competes, has notable stability and growth, and has the ability to adapt to changing market conditions successfully.
Where did the term “blue chip stock” originate?
It is thought by many to be derived from gambling, specifically the card game “poker,” where in betting, the use of the blue-colored chips represents the most expensive chip at the table.
When did The Wall Street Journal begin to publish a Dow Jones Industrial Average?
The Wall Street Journal began publishing an average of the prices of stocks listed on the New York Stock Exchange in 1896.
What is the Dow Jones Industrial Average (the “Dow” or “DJIA”)?
The DJIA is a price-weighted average of thirty blue chip stocks traded on the New York Stock Exchange. It is often seen as a barometer of the health of the stock markets.
How important is the DJIA to the investment community?
The DJIA is widely regarded as the most important index to follow in the world. It broadly indicates stock prices and investor confidence.
Who picks which stocks are components of the Dow?
The editors of The Wall Street Journal decide which companies should be included in the Dow. They search for a balance of companies reflective of the U.S. economy as a whole.
Who created the DJIA?
Charles Dow created the Dow, picking 11 stocks, then increasing this number to 12 stocks before publishing the average in 1896 that made up the Dow.
How else do I use the Dow in order to analyze my portfolio?
You may use the Dow in order to compare the performance of your stocks, bonds, and mutual funds, and ask yourself whether you are outperforming or underperforming the Dow. It helps to see this comparison over different periods of time in order to assess the success of your investment choices.
What is the oldest company in the Dow?
Of all the companies that composed the original Dow, only one—General Electric—remains today. General Electric has been a component of the Dow since 1907.
What are some of the newest entries in the Dow?
Cisco Systems and Travelers were added to the Dow in 2009. Nike, Visa, and Goldman Sachs were added to the Dow in 2013.
How many times has the list of Dow companies changed since its inception?
The Dow components have changed 99 times, including increasing the number of components from 12 to 20 in 1916 and increasing them again from 20 to 30 in 1928.
Why are companies removed from the list of companies on the Dow?
Individual companies that compose the DJIA are removed because of economic and managerial trouble. Others no longer offer a good representation of index components reflective of the American economy at large, and must be replaced by healthier, more representative companies. Still other companies tracked by the Dow are removed because their stock price is very low, and not as relevant as other firms in the average.
This is the General Electric Building in Rockefeller Center in New York City. GE is the only original DOW company, first listed in 1907, still in existence.
What are some of the largest percentage moves of the Dow?
On March 15, 1933, the DJIA gained 15.34%. On October 19, 1987, the DJIA declined by 22.61%.
Why are some stocks with low prices specifically removed from the Dow?
Since the companies tracked by the Dow represent an average of the prices of shares in the securities that compose the index, stocks with lower prices tend to pull the average down, making the index less effective as a barometer of the market at large.
Which companies have been recently removed from the Index?
General Motors, Citigroup, AIG, Altria Group, Honeywell, Hewlett-Packard, Kraft Foods, Bank of America, and Alcoa.
How much did the Dow fall at the onset of the Great Depression?
On October 29, 1929, at the onset of the Great Depression, the Dow Jones Industrial Average plunged more than 11%, to 230.07 points. The average had hit a peak of 381.17 the month before, but would not reach this number again until 1954.
What are some other notable dates in NYSE history?
In 1987, the DJIA plummeted more than 22% in one day, yet the next day, the volume of shares traded (600 million) created a new volume high record. By 1997, daily trading volume of shares exchanging hands reached one billion. In 2001, in the wake of the World Trade Center attack, the NYSE was closed for four sessions, the longest period of time the exchange was closed since 1933. Yet when the exchange reopened on September 17, 2001, the NYSE hit another record, with over 2.37 billion shares traded. In November 2013, the Intercontinental Exchange Group (ICE) acquired NYSE Euronext, creating the leading global network of regulated exchanges and clearing houses for financial and commodity markets.
How is the Dow important to our understanding of the activity and performance of blue chip stocks?
The Dow has been tracking the performance of a price-weighted basket of 30 blue chip stocks since late 1928, and is seen by many as a barometer of the overall health of the economy and markets.
How well has the Dow performed since it began?
Through 2009, the Dow has risen in 64% of years, and declined in 36% of years.
Why is ICE so important to the investing community around the world?
ICE is so important to the investing community around the world because now, one-third of the world’s global cash trading flows through its systems; it trades more than 50% of the world’s crude and refined oil futures contracts; it lists 90% of the Dow Jones Industrial 1000 and 78% of S&P 500 listed companies; it introduced 120 Initial Public Offering (IPO) transactions, raising $36.9 billion in 2012; and it currently captures 53% market share of all technology IPOs through the third quarter of 2013.
How important is the NYSE to global equities trading?
The NYSE is very important. With its membership greater than 8,000 listed companies, approximately 40% of all global equities are traded on the NYSE.
How do I begin investing?
Investing begins with an understanding of asset allocations, or how you divide your investment capital into different categories or classes, such as stocks (and mutual funds, foreign stocks, or global stocks), fixed income securities, real estate, commodities (including gold, silver, petroleum, etc.), and cash. It may also include private equity investments in small companies or businesses and foreign currencies, among many other types of investments.
What is a very important consideration when thinking about investing?
One of the most important concepts in investing is to limit your risk through diversification of your investments. The thinking is, if your portfolio is sufficiently diverse, your exposure to the declines in any class of investments is mitigated, as other classes of investments may increase in value, thus protecting your total portfolio.
Why is diversification necessary?
When you invest, it is generally thought that if you spread your investments in a variety of classes, and their values do not move up or down in the same way, this diverse portfolio will have less risk than if you invest all of your money in just one class or type of investment. A diversified portfolio may also have a weighted average risk less than the average risk of each of the investments in the portfolio. It is also accepted that, over time, a diverse portfolio will yield higher returns than one that is relatively less diverse and more concentrated, and will yield a higher overall return than any one individual investment in the portfolio. The main thinking is that positive results of these diverse investments should help reduce the effects of other investments that may decline, as long as your investment choices are not correlated or synchronous. If you have investments in U.S. stocks and Brazilian stocks, and a problem arises in the U.S. economy that may not affect the Brazilian markets, perhaps the investments that are exposed to the U.S. economy may decline, while the Brazilian stocks may not decline, or may even increase.
You should never put all your eggs in one basket, so to speak. Instead, diversify your portfolio with a mix of low- and higher-risk investments to get the best return over time.
What are some other reasons why I should diversify my investment portfolio?
Diversification will not guarantee that you won’t lose money or make big gains with your investments. But it will help you to have a portfolio that matches your appetite for risk, especially if your investment choices are less relatively tied or correlated. The most important point about investment portfolio diversity is that in a perfect world, while the value of your total portfolio will increase less than your best-performing investment, it will never do worse than your worst-performing investment.
What are some important questions to ask myself when managing the diversity of my portfolio?
Some of the more important questions to ask yourself include:
• What capital have I committed to investing in various investments? Am I reinvesting the proceeds? If so, into what investments?
• Is my portfolio out of balance because of this, and into what areas of concentration?
• What is the value of each category of investments in my portfolio, and what would I like it to be today, and in the near- and long-term future?
• What investments have I made lately, and in what categories?
• How have my investment choices and the values created today changed over the past one, five, and ten years?
• Have I kept the losers?
• Have I created more winning investments?
• What investments am I thinking of acquiring next, when, how much, and why?
• Will I sell something to do this, or will I invest new capital into this idea?
What is “correlation”?
Using historical returns on individual investment choices, you can see if two investments move in the same way, using various statistical analysis methods. If two stocks are 100% correlated over some time period, this means they move exactly the same way, given some event or market condition. If they are 50% correlated, then approximately half the time, over some period of time that is analyzed, the two stocks move in the same way, either up or down or even flat, with no change. If the correlation is –50% between the pair of investments, it means that they are moving in opposite directions, so as one goes up, the other goes down. As you build a diverse portfolio of investments, it is generally accepted that good investors, over time, find and invest in different classes whose returns do not move in the same or similar fashion.
What is “concentration”?
Concentration occurs when you invest your capital in a few investment classes or one class. The thinking behind this approach for certain investors is if one investment or investing idea is outperforming other investments, perhaps it is a good idea to focus or concentrate your investment in this idea, in hopes of making relatively higher returns. Of course, your acceptance of this concept certainly depends on how much risk to your portfolio you are willing to accept, as a more concentrated investment choice may carry more risk than one that is relatively more diverse. Some investors even believe it is better to decide to invest their money based upon fewer choices or less diversity, as the returns are thought to be higher.
How often should I check or analyze my portfolio to make sure it is properly allocated?
You should check your investment portfolio to make certain it is properly balanced at least quarterly—if not monthly—in order to ensure that your investments are not too synchronous or correlated. Of course, this allocation depends on such factors as how much you have to invest, what your financial goals are, how much time you have before you need access to the capital (your time horizon), your tolerance to risk, and whether you are undertaking some sort of big financial challenge (losing a job, changing a job, health issues, etc.).
What is a “cyclical investment”?
A cyclical investment could be any investment that is highly correlated to some chronic economic event, condition, or pattern. People buy fewer cars and travel less if they are not employed. So investments dependent upon demand created by the level of employment of these cohorts may perform less than desirably, as the unemployment rate increases.
Financial challenges, such as whether you are looking for work, are something you should consider when evaluating your stock portfolio for risky versus safer investments.
What are the two major stock exchanges?
Although there are many different stock exchanges in the United States, the two most important ones are the NYSE and the NASDAQ. The NASDAQ is the second largest stock market in the world, behind only the NYSE in terms of market capitalizations.
How old is the New York Stock Exchange?
The New York Stock Exchange is the oldest stock market in the United States. It was founded in 1792 by 24 stockbrokers who met at 68 Wall Street, but it was not officially founded until a constitution was signed in 1817.
What is the first step to accumulate wealth and savings?
Most experts agree that you must first understand your financial picture, to see what areas need to be altered or changed, by identifying your net worth. Others believe you must first change your basic attitudes and beliefs about money and wealth in order to reach your financial goals. And still other experts believe you must first establish financial goals—without them, you have no way to attain success. Perhaps combining the above ideas is a prudent course of action.
What is my “net worth”?
Your net worth is one of the most important measurements of how much you are “worth” financially. Your net worth is the value of all your assets, including cash, stocks and bonds, mutual funds, retirement accounts, including your IRAs and 401(k)s, and equity in your homes, any metals (such as gold or silver), minus all of your liabilities, that may include car loans, mortgages, credit card debts, student loans, significant health-related expenses, and any other obligations you may incur.
What is a “high net worth individual”?
A high net worth individual is someone who has a net worth, excluding the value of his principal residence, in excess of $1 million.
Why is knowing my net worth important to attain my financial goals?
Understanding and computing your net worth provides instant feedback as to your ability to save money, shows you how indebtedness may drain your savings, and fund the costs of your borrowing to cover expenses. Knowing your net worth also provides you with a way to visualize how you, in certain conditions, create wealth through borrowing, especially if you borrow money at interest rates that are low enough, and invest this cash in, for example, a real estate market that has increasing values over time.
What is the midpoint, or median net worth, of families in America?
According to a 2007 report by the U.S. Census Bureau, the median or midpoint of all families reporting shows that their net worth is $221,500, of which nearly 90.3% is in the form of equity in their houses. Of course, since the crash of the real estate markets in the United States in 2008, this number has decreased in some markets rather significantly. But it does demonstrate that many families derive a great percentage of their net worth from home ownership.
What are some of the most interesting books on investing?
Some of the top investing books include: Edwin Lefèvre’s Reminiscences of a Stock Operator (1923), Jack Schwager’s Market Wizards (1988), William Falloon’s Charlie D. (1997), Benjamin Graham’s The Intelligent Investor (1949), Peter Lynch’s One Up on Wall Street (2012) and Beating the Street (1994), Philip Fisher’s Common Stocks and Uncommon Profits (2003), Michael Porter’s Competitive Strategy (1998), Adam Smith’s The Money Game (1976), John Train’s Money Masters of Our Time (2003), Anthony Crescenzi’s The Strategic Bond Investor (2010), Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds (1841), Gerald Loeb’s The Battle for Investment Survival (2007), Benjamin Graham and David Dodd’s Security Analysis (1934), Philip Lord Carret’s The Art of Speculation (1927), Burton Malkiel’s A Random Walk Down Wall Street (1973), and John Rothchild’s A Fool and His Money (1998).
What kinds of information can help me understand and learn more about investing?
There are many sources of information available to help you understand the financial world and the world of personal investing, including online blogs, newsletter feeds, thousands of websites, government websites, non-profit websites, weekly magazines, newspapers, books, and TV and radio programming.
Isn’t it easier for me to just have a financial adviser, so that I don’t have to spend time learning about personal finance?
No. In order to make the best use of anyone’s advice, you must take the time to be well informed so you can understand different options or strategies. Millions of people feel a financial adviser can make decisions for them, or that they can pay someone to “manage” their finances, so they need not learn about it. People often fail to learn enough about personal finance, and cannot tell the difference between bad advice and good advice. If you are not well informed about the myriad choices available to you and your advisers, it is very difficult to know what option is best for you.
What are some good personal finance blogs?
According to experts at the website www.technorati.com, some of the top personal finance blogs include: Free from Broke (http://freefrombroke.com/), Digerati Life (http://www.thedigeratilife.com/blog/), Oblivious Investor (http://www.obliviousinvestor.com/), Cash Money Life (http://cashmoneylife.com/), and Get Rich Slowly (http://www.getrichslowly.org/blog/).
There is so much information online. How do I choose what to read?
It is important to use the Internet to search for broad topics, beginning first with various financial sites, and then digging deeper into the subject before moving on to the next subject. If you study this information in small increments, over time you will learn a considerable amount about each of the areas of personal finance of interest to you. When you feel the subject matter is getting too technical for you, stop and move on until you are ready for more details. Websites are developed and produced in the same manner as newspapers and magazines. Editors and writers cover many topics, from basics on personal finance to very advanced technical analysis of individual stocks and trading strategies. Find websites that are at your level, and just dive in. If the story or topic is too deep, try Googling that word or phrase, and read a definition of it before continuing. After you do this daily or weekly, you begin to see similar stories covered many times, and you will be able to develop an opinion on that idea after reading so many different perspectives. This is how you begin to build your knowledge on personal finance and keep current about what is happening with your money.
How many people use the Internet to find economic or financial information?
Of the approximately 220 million online users in the United States, according to the Pew Research Center, nearly 70%—or 154 million people—seek some form of economic information while surfing the Internet.
Where Americans get their financial and economic news.
What are the most popular sources of financial information?
Among Americans who use broadband to connect to the Internet, 52% get their financial and economic information from the Web, compared with 43% for TV/cable, and 46% for newspapers.
How do Americans find economic information?
Americans use a variety of sources: talking to people; using the Internet; hearing about some financial information while watching TV; listening to financial programming on the radio; and reading a newspaper.
How active are Americans in using the Web to find financial and economic information?
Only 18% of Americans actively use the Internet every day to find financial and economic information. About half of all Internet users get this information every few days.
What percentage of online economic users receive alerts or feeds about news and information pertaining to their investments?
About 13% of these users utilize Really Simple Syndication feeds (“RSS feeds”) and other alerting tools that allow them automatically to receive information from a website, blog, financial company, or news source that is relevant to their investments or investing ideas.
What percentage of economic users online use the Internet to find information to protect their personal finances?
Twenty-seven percent of all users use the Internet in some form to seek information to protect and grow their investments. Seventeen percent use the Web to compare financial companies and professionals who work in financial services.
Does access to so much information come at another hidden price?
According to the Pew Research Center, 37% of all economic Internet users feel more worried about our nation’s economic future, compared with 10% who feel more confident about it. The access to so much information, both good and bad, shapes how we feel about our investments and future financial picture.
What percentage of all online economic users feel they have learned something about our financial crisis?
Thirty-nine percent of these users feel they have increased their own understanding of the situation by using the Web.
What percentage of all Americans have contributed to content about the recession online?
About 23% of all adult Americans have contributed something online about the recession, through blogs, social media sites, comments on news sites, and discussion boards.
Who are the financial information seekers online?
The majority of Internet users seeking financial information are older than 30. In fact, 14% are age 30–49, 13% are 50–64, and 15% are 65 and older. Only 6% of these users are age 18–29.
What is “investing”?
Investing is the act of using money to buy a financial product with the expectation of making more money over a period of time than what you used to buy the financial product.
How long should I hold an investment?
Some people who trade stocks can make a return on their investment in a few seconds, while others take a few months or even years. If you keep your money invested in cash in a bank, you might make anywhere from 0% interest to a few percent return on the investment over a few years.
What must I consider before investing?
You must decide what type of investment to buy, how much money to put into the investment, how long you will hold it, how much of a return you wish to make, how much risk there is of losing money on the investment over time, how much could you potentially make, and how much you can afford to lose.
What is “total return”?
Total return means how much your investment grew over a period of time, including all interest, dividends, and capital appreciation, less fees and/or commissions.
How do I compute the total return?
Your total return is computed by taking the amount your initial investment increased (your gain) plus all dividends or interest you received while you owned it. To calculate your percentage of total return, take the number you calculated above and divide by the amount of your initial investment. In order to compute your total return on an annual basis, take your percentage of total return and divide by the number of years you held the investment. Of course, these calculations are not adjusted for any taxes due on the investment gains. Please consult your tax adviser for further information.
What is a simple example of return on investment?
If you bought a stock for $5,000 on January 1, and sold it one year later for $5,500, your return would be 10%. You can compute this by subtracting $5,000 from $5,500, dividing this number ($500) by $5,000, and multiply by 100. This means your investment earned a one-year return of 10%.
What is “return on investment”?
Return on investment, expressed as a percentage, means how much more money you will make or earn over a period of time as a result of buying the investment.
How do I compute my return on investment?
You can figure your return on investment by taking how much money you originally put in when you purchased it, and subtracting it from the value of your investment when you sell it, less any fees/commissions or taxes, and then dividing this number by the amount you originally invested. Multiply this number by 100 to reveal your return on the investment, expressed as a percentage.
Why is patience important to successful investing?
Patience is important to successful investing because you may have to ride out what may be temporary short-term storms or declines in the market and keep a long-term view.
Why are people afraid to invest?
Most people fear investing because they lack knowledge about investing, don’t know how to manage the risks, and hear and read about various crashes in the markets that happen periodically, which can cause people to lose a lot of money.
What are some of the biggest mistakes individual investors make?
People investing in the markets typically sell when the price is low, during or at the end of a notable decline, out of panic. And they may buy at the highest price, once they discover a new investment they hear of from their friends, who heard it from their friends, and so on. Or they buy when the markets are reported by various media outlets to be at their all-time high. By the time the news reaches you, it is probably long past the time to have invested.
What are some other mistakes that investors make?
Investors often make emotional decisions about owning investments, perhaps by refusing to sell the stock of a company because a relative worked there, or being afraid to sell a stock because of losing a certain amount. If the investor had sold it, he may lose less than if he had kept it, but because of emotions, the investor holds on to it, hoping the price will go back up.
What types of investment or financial products exist?
There are many different financial products, mostly divided into one of these broad categories: stocks, bonds, and cash. In addition, there may also be real estate, insurance policies, private equity ownership, currency trading, and hybrid investment products that combine the benefits of a mixture of these and other investments.
What are some of the most important investment types?
Some of the most important investment types include: emerging market stocks; foreign stocks; U.S. stocks; precious metals; commodities; high yield corporate bonds; municipal bonds; cash; treasury bills; money market funds; U.S. high quality bonds; European bonds; global bonds; and long-term U.S. government bonds.
What is a “portfolio”?
A portfolio is a mixture of investments of different types and risks that an individual or institution may own in hopes of making more money over time. It is generally defined as the collection of investments held by an individual, investment company, or mutual fund.
What is “diversification”?
Diversification is the act of making investments in different categories with the hope and expectation that the risk of losing money is spread out or diversified within the portfolio, thus reducing the overall risk of losing money on the whole portfolio.
How does diversification reduce my risk?
Diversification reduces your risk because when you have a variety of investments in a portfolio, the fluctuations in the value of any one investment have less of an effect. If you have several uncorrelated investments, you may minimize the risk of losing money.
What does the saying “Don’t put all your eggs in one basket” mean?
It demonstrates the need for diversification. If you put all your investments in one stock, and the stock price falls, you lose a major amount of money. If you had put your money in three different stocks, and two of the three go up, and only one goes down, you could still have made money, or perhaps lose less money than if your investment was concentrated in one stock.
What is an “individual investor”?
An individual investor is a person who directly or indirectly purchases stocks or bonds, and invests in the market on his own account.
How many individual investors exist in the United States?
It is very difficult to estimate the precise number of individual investors in the United States because so many people invest in the markets in some way: by having retirement funds; buying individual shares of stock in a company; keeping money in a money market fund, which, in turn, invests the money; owning mutual funds; and payment of insurance premiums. All told, there are most likely more than 200 million Americans with some exposure to the financial markets.
What is an “institutional investor”?
An institutional investor is a large organization that pools money together with other large organizations, as well as individuals, and invests this money in private and public companies.
Who are these institutional investors?
Institutional investors can be commercial banks, investment banks, mutual funds, pension companies, retirement fund companies, and hedge fund companies.
Why is it good to be an institutional investor?
Because of their size, institutional investors can obtain a better price for the shares they buy. They trade in huge volumes of stock, both buying and selling, and their effect can swing stock prices at any moment during the day. Institutional investors also can command the best price when they are interested in selling their positions because they hold so much of a particular stock.
What other benefits do institutional investors have?
Because of the magnitude of the number of shares they own, institutional investors’ positions can allow them to have management say in the direction of a company, and they are occasionally given a seat on the boards of both private and public companies they may own.
Bear markets are protracted periods of time in which stock prices go down.
What is a “bear market”?
A bear market occurs when there has been a decline in a stock market average of 20% from a high, and is often characterized as a period of time when stock prices are in a state of decline, reported profits of listed companies are less than expected, inflation is increasing, interest rates are relatively high and increasing, and money is flowing out of the stock markets.
Why do bear markets happen?
Bear markets happen for many reasons. According to many experts, bear markets occur because investors are pessimistic about where the economy is headed, causing the declines to sustain themselves over a long period of time. Investors sell their shares, anticipating losses, and other investors see more losses in their portfolios, so they sell also. During bear markets, capital may be sidelined, or may be directed toward other investments such as bonds or cash in expectation of a signal to return to the equity markets.
What duration of time defines a bear market?
A bear market is a period of time in which the prevailing stock prices trend downward by more than 20% for at least two months.
What is a “correction”?
A correction occurs in the stock market when the trends of indexes show a decline in prices of 10–20% over a short period of time, from one day to less than two months.
Are corrections good for some investors?
Some investors look at corrections as buying opportunities, as often overvalued stock prices are reset to a lower level, representing their true value, and giving investors an opportunity to buy at a lower price. These same investors will typically have ready access to liquid assets, such as cash, in order to take advantage of the perceived bargain during a correction.
What are some of the greatest declines of the Dow during a bear market?
In October 2007, the Dow entered a bear market that lasted 517 days, and saw the DJIA decline by 53.9%. By contrast, the initial 1929 Dow crash, that heralded the Great Depression, saw a decline of “only” 47.9%, and lasted 71 days.
Periods of stock market prosperity are called bull markets.
What is a “bull market”?
A bull market is a period of time during which there are more buyers than sellers of stocks, causing overall stock prices to rise, and when investor confidence trends higher in anticipation of rising prices, increasing their investments over time.
How long does a bull market last?
Through the year 2009, and for the 113 years since the inception of the Dow, the average length of a bull market has been 2.7 years.
How much personal wealth was lost during the Crash of 2008?
Eleven trillion dollars of Americans’ personal wealth, whether in the form of stocks, bonds, cash, or real estate, was wiped out in a very short period of time.
What percentage of Americans saw their portfolios decline during the period of economic decline 2008–2010?
Thirty-five percent of all Americans saw a decline in their personal investments.
What are seven factors to consider before investing?
According to the U.S. Securities and Exchange Commission (SEC), investors should evaluate their current financial plans; evaluate how much risk they are comfortable taking; diversify their investments; create and maintain an emergency fund; consider using dollar cost averaging when making an investment; rebalance their portfolios when necessary; and avoid circumstances that may lead to fraudulent investments.
What is “timing the market”?
Timing the market is the act of using economic, fundamental, and technical indicators to predict future performance and time one’s decisions to enter or exit a stock position based upon this information.
Why is timing the market controversial?
Timing the market is controversial because some experts believe the markets are random yet efficient; there are exactly the right number of buyers and sellers at any given point during the day, so the most efficient price is always realized. Because of the randomness of market movements, it cannot be accurately timed. Other experts who trade every day rely on technical and fundamental analysis to determine their trading positions, and believe that—given certain clues—the markets can be timed, allowing an investor to make profit as a result.
When should I rebalance my portfolio?
When you rebalance your portfolio, you make a personal decision based upon many factors, including your aversion to risk, your return goal, what period of time you are willing to wait for the return you expect, what industries or sectors make up the portfolio, and how they are weighted. A professional portfolio manager may choose to rebalance a portfolio when a single holding reaches a higher percentage than a certain percentage of the total portfolio, determined well in advance.
Why should I invest my money?
People invest their money for a number of important reasons. They wish to have some level of financial security now and in the future. They understand the concept of saving compared with spending, and wish to earn some return on their money over a period of time. They also wish to have someone pay them either interest or a share of the profits of a company, or to realize gains in the share prices or value of their investment choices. If you were to invest your money in a bank savings account, the money earns interest in exchange for the bank’s use of the money. If you buy shares in a company, you have the potential to earn income through distributions of profits of the company, and if you sell the shares, you have the potential to sell the shares at a higher price than what you paid for them initially when you invested. If you buy anything of value, and hold it until it increases in value relative to what you paid for it, you are investing.
What is the most important consideration before deciding to invest?
One of the most important considerations before deciding to invest is knowing that you can lose some or all of your money when you invest, and that you must know beforehand how much risk you are willing to tolerate. On the other hand, you are also aware that you can make a great return on your investments, and that the benefits of investing may outweigh the risks you perceive with the investment you undertake.
Depending on your age and how long you have until retirement, you will want to invest in either safer, income-generating investments or, if you are young, gamble on more high-risk, high-interest stocks. The later you start investing, the more you’ll have to save per month to retire comfortably.
Why is time so important in investing?
Because of the compounding of our returns, your money can potentially be more valuable over a long period of time. A simple example might be a person who starts to invest at age 18 at five dollars per week. If his overall investments earn 8% per year, he might have $134,000 in his portfolio by the time he reaches the age of 65. If he were to delay for just one year, and begin at age 19, the portfolio will be valued at $10,000 less than if he started at age 18. And if he waits until he is 40 years old to start investing, he would have to put away approximately $32 per week just to have the same amount by the time he reaches age 65. So time does matter when it comes to investing.
How can I protect my investments before I begin to invest?
The SEC believes you should ask certain basic questions, whether you are a beginning investor or have invested for many years. Consider if the seller of the investment is licensed to sell the investment, as most financial fraud is perpetrated by unlicensed dealers who are trying to separate you from your money. You should also look into the accreditations of your adviser. Thousands of people have been given poor advice from unlicensed financial advisers, who may try to steer their clients into the wrong investment choice in order to make a bonus or commission on the sale of that investment choice. The SEC also recommends that you check if it has registered and approved the investment sale.
How do I know if a potential investment is fraudulent?
If the marketed investment shows that it is too good to be true, it may be fraudulent. Generally, you should compare various attributes of the investment to some benchmark, such as the annual returns, expenses, earnings, or debt. If these comparisons are not in line with the normal returns for this type of investment, you should probably avoid it.
Do higher rates of returns generally mean that my money may be more at risk?
Certain more exotic investment vehicles, such as collateralized mortgage obligations, promise higher rates, but are quite risky, as they may be derived from more at-risk loans and mortgage products in order to attract investors. So it is very important to know fully what investments you are making and their inherent risks before you commit.
What is “dollar cost averaging”?
Dollar cost averaging is a simple timing strategy of investing, whereby an investor buys the same dollar amount of a stock at regular intervals (say $100 per month of a certain stock). If the price of an investment increases over time, we acquire fewer of these shares. Conversely, if the price of the investment drops, we acquire more of these shares. This lowers the total average price per share of an investment, meaning the investor is able to invest more profitably than if he were to “time the market.” Dollar cost averaging is a worthwhile investment strategy employed by many investors in order to fix the amount invested each period for the purchase of shares, or for the purchase of an investment.
Why is dollar cost averaging a beneficial strategy for investing?
When it comes to investing in such investments as mutual funds, the prices may fluctuate as the value of the underlying portfolio may increase or decrease. This fact, coupled with dividends from shares held within the portfolio as well as changes to fees that are charged to account holders, may change the price you pay to acquire shares. Through dollar cost averaging, you are able to acquire more shares if the price drops and fewer shares if the price increases. This means you reduce the risk of acquiring many shares just before a major decrease in the price of the shares, which helps mitigate your overall risk in these investments. Although it is relatively easy to employ dollar cost averaging when it comes to investing in mutual funds, some individual stocks also allow for the regular acquisition of shares. You should consult your investment adviser for specific information on using dollar cost averaging to acquire individual shares.
What is another popular approach to investing?
Another popular investment strategy for long-term investors is an approach called buy and hold in which the investor selects an investment, buys it, and holds it for a defined period of time, or until the return goal is met.
What is an “asset allocation strategy”?
Many investors adopt an asset allocation strategy in which you buy and invest in a mix of investments believed to achieve the highest return for whatever level of risk with which you are most comfortable. The main logic behind asset allocation strategy is that each category of investment, if properly selected, may perform differently than the others, given different economic conditions. Typically, as stocks or equity investments rise, bond investments may not perform as well. When institutional investors begin to load up on bonds, equity markets may not do as well. With asset allocation, you try to balance your portfolio in an attempt to take advantage of the ebb and flow of various economic and market conditions.
Why does investing require a specific mindset, so that I may be prepared for the long road ahead of me?
According to experts at Morningstar, the mutual fund analytical research company, investing requires a certain mindset in order for you to reach your long-term goals. It suggests that you try not to overreact to the various ups and downs of market cycles. According to Morningstar, when the news is spreading about a possible increase or decline in various markets with which our investments may be correlated, when the talk on the street is all about the financial markets, this is precisely the wrong time to sell or buy equity investments. Morningstar further suggests that you stay on track to hit your long-term goals, and try to develop the discipline to keep to your long-term financial investing performance goals.
Why am I so important when it comes to investing success?
Morningstar further reports that we tend to give an inordinate amount of attention to our investments themselves: what they are, what their returns have been, how well the company is doing. We seem to forget that the buying and selling of these investments depends strictly on our own behavior and emotional state at the time we buy and sell. If you extrapolate this sentiment to millions of investors, you can begin to see how each investor’s individual attitudes and behaviors may shape and form the markets in which you invest, as well as your own performance within these markets.
What did experts at BlackRock—the world’s largest global asset management company, serving both large institutional investors and individual investors—find in their landmark 2013 study of investor attitudes?
BlackRock, along with the private research firm Cicero, surveyed approximately 17,600 investors from 12 countries to try to gauge the pulse of the investment community. From this initial survey, BlackRock polled 4,000 investors and 500 financial professionals to analyze the U.S. investment community. Their survey concluded several themes, including: investors’ concern about their financial futures; more reluctance to invest and wish to preserve cash; a knowledge gap when it comes to evaluating opportunities to generate income; tightness on household income; and widespread fears about meeting retirement goals.
After the stock market turmoil of 2008 to 2009, what did one of the largest mutual fund companies in the world, Vanguard, find in its survey of over 3,000 U.S investors, age 21 to 79?
In a short period of time, from May-June 2009, experts at Vanguard surveyed U.S. investors, finding that three-quarters of all American households with $5,000 or more to invest, invest a portion in equities. Overall wealth and educational level attainment are related to a household’s participation in investing, as is the age of the investor. Investors who are at or near retirement age have less exposure and are therefore less likely to hold equities than are younger investors. The survey also found that even during the correction in 2008 to 2009, 60% of investors stayed the course without making major changes to their investments; 21% of investors reduced their exposure to equities; 5% sold all their equity holdings; and 17% saw the correction as an opportunity to increase their investments in equities. Some reasons for this dynamic may include how near investors were to reaching retirement age during this period of turmoil, their individual mortgage financial position at the time, and whether their jobs were secure.
Of Americans who had money in equities during the stock market correction of 2008–09, 60% kept their money where it was, 21% reduced their exposure to equities, 17% increased their investment, and 5% 22 sold all their equities.
What other insights does the Vanguard study show about investor attitudes?
The Vanguard study makes some interesting conclusions from the results of its survey, including that investors who are more dependent on the work of financial advisers and those who invest only in tax-deferred retirement plans are less likely to panic. Fully three-quarters of survey respondents were strongly or somewhat aware that large market declines are possible. Half of all respondents felt the risks inherent to investing were worth taking in order to realize long-term gains. Another 50% of respondents felt that during this period of time the stock markets were riskier than in past years. Many respondents also felt their retirement was somewhat impaired by the “crash”, and their responses were tied to similar factors, including how near they were to retirement, how secure they felt in their current job or career path, and their housing/mortgage situation.
After a market correction, what attitudes of individual investors seem to be apparent?
The Vanguard survey found that individual investors, when faced with a notable market correction, seem to be confused about what to do next. If your savings decline, your logical and natural impulse is to reduce your spending so that you can build up your savings. At the same time, you may also see the correction as an opportunity to buy by adding money to your long-term investing accounts. But experts at Vanguard saw that, psychologically, many individual investors have a difficult time doing this, since the emotions and sentiment associated with a significant decline may cause many investors to leave the market. Many respondents felt they would merely work more or delay retirement, if they were several years from actually retiring.
What mindset helps me become financially successful?
You should begin to think that you live in an abundant world, a place where earning money is unlimited, smart work is rewarded, and financial goals are always attained. Think of how you feel, for example, when you do not have to worry about making a mortgage or rent payment, or what it feels like to create a budget and stick to it each month. It is very important to believe that you can control your finances and create wealth. No matter your background, whether you have struggled to make ends meet or came from a relatively more affluent family, or somewhere in between, you should have a clear picture in your mind of where you want to be in terms of your personal finances.
How do I know if I am not in control of my finances?
Everyone is in control of his finances, to a certain degree. We all choose every day whether or not to purchase something. If you were to rent an apartment, or buy a car, you decide based upon how much income you have, and whether it is affordable or not. A person who cannot tell the difference between an apartment that is too expensive, compared with one that is within his budget, would be more out of control with regard to spending. Someone who spends more of his income than he makes would be less in control. A person who has learned to consistently make the right spending decisions over time—someone who manages to have a large net worth on a relatively meager income, but understands and practices personal finance each day—is very much in control of his finances.
If I just make more money, would I still have to worry about my personal finances?
Yes. Just having a high income does not ensure your financial security. Millions of Americans make much more than average, and yet are still one paycheck away from disaster, because they spend nearly all they make, and have no short-term or long-term financial plan. Many experts suggest evidence of this phenomenon by looking at the number of foreclosures of very expensive houses, condominiums, and vacation properties that came on the market after 2008. Many of these people made well over $100,000 per year, yet did not have emergency funds available to ride through a job change or other life change because they spent everything they made and more.
How much does my ability to delay present gratification in favor of future gratification play in personal financial success?
The belief that it is acceptable to do without something now, and save for something in the future, is the core to your financial success. You have to make the decision every day—that it is acceptable to delay your rewards today, in favor of future rewards. This is something you can learn to do each day, so that you may become comfortable getting rewarded for your work many years later.
Too many investors panic when the market takes a downturn, forgetting the wisdom of always buying low and selling high because they fear losing money in the short term.
What do average investors do that decreases their returns?
Many investors buy investments when markets are at their highs, and panic and sell their investments when prices are at their lows. This happens because these investors do not understand that they “are” the markets, or at least participants in a rather large way in the markets. As more stories fill the airwaves and Internet saying the market is at an all-time high (meaning prices of investments and demands are high), these investors buy stocks, mutual funds, and other investments. And when the opposite happens—when prices fall, demand decreases, and stories fill the airwaves and Internet saying a crash is happening—these same investors sell at precisely the wrong time. The markets may be depressed compared with an over-inflated price before. So some investors see crashes as great opportunities during which to invest. These same investors see market highs as when prices are peaking, and sell when everyone else is buying.
What is “risk”?
In investing, risk is a quantifiable number that compares an investment’s actual return against what was expected. This number is probabilistic, and gives an investor an indication as to how the investment might perform against some benchmark.
What are some examples of risks?
Some examples of risks that may affect the prices of investments include: a natural disaster that causes Wall Street to shut down; a disruption in the pumping and transportation of oil; an abrupt change in the exchange rate between two currencies; an abrupt change in interest rates; corporate expenses that never made the expected return for the company; and use or misuse of technology in a company. All may have an adverse effect on an investment’s price at that moment in time. Some of these events may have extremely short-term effects on the prices of target investments, while others may affect the long-term prices of potential investments. Short-term and long-term risks need to be considered when making investing decisions.
How can potential investors evaluate risks?
It is important for you to understand the concept that you must balance risk with reward, and evaluate investments that reward more highly than riskier investments. At the same time, you must be quite clear in evaluating your own personal tolerance for risk.
How do I determine my tolerance to risk?
To determine your tolerance to risk, you can simply ask: If I were to lose a sum of money that I am thinking of investing, how much of this portfolio am I willing to lose? According to CNN/Money, investors tend to underestimate risk when financial markets are doing well, and overestimate risk when markets are in a tailspin.
What tools may investors use to evaluate risks of default?
If a company is having serious financial difficulties, this usually is reported to a third-party company, that in turn measures the health of many companies, especially their ability to repay obligations. Many companies, such as Standard & Poor’s, Moody’s, Dun & Bradstreet, and Fitch Ratings track how well companies are meeting their obligations. Companies with little debt and lots of cash, and that always pay off debts and obligations, are relatively safer investments than those that cannot.
Are questionnaires available that may help people evaluate their tolerance for risk?
There are hundreds, perhaps thousands, of online tools—many for free—that allow users to evaluate their own personal feelings toward risk.
