Articles by "Basic Investment"
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REGIONAL BOND INSURANCE

Local bond owners can buy insurance for them. Despite the fact that municipal bonds are considered very safe, some investors are easier to sleep if they know that their investments are also protected against losses. A competent investor should understand the mechanisms of insuring municipal bonds, knowing their advantages and disadvantages, to get the right choice: to buy municipal bond insurance or not.

Why Do You Need Municipal Bond Insurance

Municipal bonds are debts incurred by states, municipalities or municipalities to provide financing for public projects and services, such as schools, hospitals and housing. Regional bond insurance is an insurance policy, the subject of insurance is a bond, and the insurance company (the person selling the policy) is a private insurance company.

Like other bonds, municipal bonds have certain risks. The main risk is the risk of default - the issuer's refusal to pay. The default means that municipal governments that issue bonds do not have enough funds to ensure timely payment of all bond payments.

When issuing regional bonds, future project revenue that finance the issuance of bonds can also be used as collateral. Thus, the added risk of such bonds is the possibility that this particular project will not work and can not provide sufficient revenue streams for timely payment of bonds. Insurance gives investors confidence that no matter what happens, interest and principal debt on the bonds will be paid in full and on time.

If a bond has a low risk of failure, then it is given a high credit rating, which positively affects its market price. In addition, a higher credit rating will receive bonds, where there is insurance. As a rule, the insured bonds get the highest possible credit rating: AAA. A higher credit rating allows the local government to issue lower interest on the bond when issuing it. 

There are four major institutions that assign credit ratings to bonds:
  • Moody's Investors Service
  • Standard & Poor's Corporation
  • Fitch IBCA, Inc.
  • Duff & Phelps Credit Rating Co.


Regional bond insurers also increase their market appeal. In addition, insurance helps investors to seriously look at small municipal issuers that are unknown to the market or do not issue bonds quite often.

What is Covered in Municipal Bond Insurance?

The guarantor company guarantees investors in local bonds that the interest and principal payments on the bonds will be paid in full and on time, if the issuer can not do so. In the event of a failure, the insurer makes all necessary payments to ensure that the investor receives all such amounts due to them. This warranty usually applies to all periods of the circulation of the bond and can not be canceled by the insurance company. Exceptions to this rule apply only to investment trust. In the case of investment trusts, bonds can be insured for the entire period of their circulation or for the life of the trust itself. Insurance companies usually insure local government bonds with only BBB or higher rating. Insurance policies can be written off to municipal bond funds.

On the initial placement of the local bonds, there may be a condition known as "demand for depreciation funds". To settle the bonds payable, the local government must make regular payments to the holders of special depreciation funds. Regional bond insurers also include these depreciation deductions, ensuring that the funds remain up to date and no payments are missed.

How are Municipal Bonds Insured?

Before issuing insurance to municipal bonds and offering them to investors, the bonds are bought by an underwriter, who in turn collects insurance and sells it to investors. Underwriting is the process of assessing the risks associated with bonds made by insurance companies. In the underwriting process, the insurance company decides whether to provide insurance for the issuance of these bonds and on what terms. Most of the companies that include local bonds are mono-food companies. This means that the company only issues insurance only on debt instruments, thus eliminating risks arising when insuring other products or services. This insurance company gets a careful analysis by the same rating agency that gives credit ratings on the bond itself.

Once the bonds are insured, their indicators are carefully monitored by the insurance company. This process is known as "observation". Under scrutiny, the insurance company carefully examines the bond issuer's financial statements and tries to ensure that the issuer's credit worthiness will be considered stable.

After underwriting, which takes about a month, the bonds are rated new. They are also given a special identification number, known as CUSIP. CUSIP is used to identify security when traded on the market or paid off.

Lack of Local Bond Insurance

Issuers of regional bonds must pay insurance premiums for insurance companies to issue insurance on their bonds. Despite the fact that investors do not pay these premiums directly, the fact that investment companies and issuers pay them, means these fees are transferred to investors. Transfer mechanisms usually lower the interest rate on bonds. Issuers are reducing interest rates, taking advantage of the fact that insured bonds now have AAA ratings. As you know, for the bond with the highest rating, the interest rate is slightly lower than the bond with the lower rank. The higher the risk of bonds, the lower the credit rating, the more investors who want to take this risk when buying this bond. In order for the insurance process to make sense for the issuer of this bond, the amount of savings from the interest rate reduction should be higher than the amount of insurance premium paid to the insurance company.

Insurance from municipal bonds does not in any way guarantee that bond market prices will reach current or future levels, because even insured bonds remain exposed to the effect of changes in interest rates on the market. Thus, the bonds sold before redemption may be worth less than the purchase price or the value.

Regional Bond Insurance Company

Most municipal bonds are insured by several large insurance companies. The largest insurer of government bonds in the world is the Association of Municipal Bond Insurance (MBIA). MBIA provides financial guarantees, provides investment management services and a host of other financial services to the population, private and nonprofit organizations.

The other major players in this market are the American Corporation for the Insurance of Municipal Bonds (AMBAC). AMBAC guarantees local government bonds and structured debt products. He is also the legal successor of the oldest government bond insurer, which first insured the first problem in 1971. AMBAC became a subsidiary of Citibank in 1985 and made an initial public offering in 1991. In 1995, AMBAC and MBIA established an international joint venture called MBIA-AMBAC International.

Since 1984, the Financial Guarantee Insurance Company (FGIC) has issued insurance for more than 13,500 local government bonds. The FGIC also provides the necessary public authorities of financial services, such as provision of credit resources and direct investment in projects. Municipalities can also ensure their bonds in a number of small insurance companies specializing in this market.

Should You Buy Insurance?

Insured country's bonds have a higher credit rating. They are one of the most reliable investments. If the issuer of the bonds defaults, the main debt under the payment of bonds and interest will be given by the insurer. However, this insurance has a price - lower interest payments. The decision to buy or not guarantee municipal bonds depends on your risk appetite - are you ready to forgo future profits in exchange for additional coverage? If so, then you should definitely consider buying exactly the insured municipal bonds.
December 05, 2017
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UNDERSTANDING THE PORTFOLIO OF THE BASIC INVESTMENT

Husband exchanged Saturday dinner with his wife's family to watch the quiet football on Sunday. Children exchange TV shows for throwing garbage and washing dishes, because they need pocket money. Parents allow you to go home on Friday nights, if their children behave well throughout the week.

Trade-off in investment is a choice between risk and income. Getting a profit for your investment means taking a risk. At least to some degree. But what is the risk? And how much risk can you pay?

In this section, we'll look at the different types of investment-related risks, and show how to develop your own approach to risk taking.

Two Types of Risks are Common

First, there is the risk of losing money in the short term. Over the past 85 years, the American stock market of investment has generated an average of 10% per year. However, if you look closely at certain years, you can see that every fourth year is not profitable.

If we consider a shorter period of time - weeks or months - the results of financial investments can be even more volatile.

Investors tend to focus exclusively on this type of risk. Because it's so easy. Every day you hear on the radio and television about the behavior of the stock market. If you do not have enough of this information - you can check your stock prices more often, even online.

But do not let market volatility take over. If you allow me, you will completely ignore the second and perhaps far more important risk associated with the investment process: the risk that you can not achieve your financial goals.

How does obsession with market volatility hinder our financial goals? Maybe you will invest too conservatively. Volatility can also force you to decide on the sale or purchase of shares based on their recent short-term price dynamics, rather than how these purchases or sales enable you to achieve your financial goals. In short, due to market volatility, you may not see the forest behind the trees.

Always link the importance of achieving your financial goals to the magnitude of the risk of market volatility you can receive.

What Contributes to Market Volatility

The primary way to reduce daily and weekly market volatility is to diversify your portfolio by combining different types of securities into it. By incorporating multiple investment instruments into a single portfolio, you can reduce the impact of individual risk factors and thereby reduce short-term market volatility.

Market risk. Market risk arises when you invest in asset classes or in the economic sector. For example, - in US stocks or bonds of developing countries. Market risk is the risk that the entire market segment will lose its value. For example, US stocks may come down on price if investors decide that US stock markets have gone up too high for the current rate of economic growth. Alternatively, emerging-market bond markets might collapse if investors decide that high inflation is on the way, which will require higher interest rates and, as a result, lower bond prices.

To minimize market risk, it is necessary to diversify its assets, by allocating investment among different market sectors behaving differently under different economic conditions. Thus, you reduce your portfolio dependence on a single market segment. For example, high-quality US bonds usually feel good when investors are worried about the outlook for the global economy. That is why, US bonds can act as a good counterweight to stocks. Similarly, high-yield securities, such as shares in utility companies or real estate trusts, usually feel bad in the face of an increase in interest rates. This investment class should be offset by securities with low coupon income or without it at all.

Specific risks for the company. Operational and price risks are two sets of factors that affect the volatility of individual stock markets in the short run.

Operational risk is the risk associated with the company as a business, and covers everything that can affect the profitability of the company. Price risk is a risk that is more related to the company's stock price than its business. How expensive are stocks in relation to corporate earnings? For the cash flow? For the sale?

To limit the risks directly related to the company, the portfolio must include stocks instead of one company, but immediately the entire series of shares. A good way to achieve this is to include mutual funds, or ETF funds, in mutual fund portfolios, which are inherently diverse stock packages established by predetermined rules.

Country risks Whether you invest only in the US or place your funds outside their borders, you expose your portfolio to insurance risk. There is a political risk, or the risk that the current regime will turn out to be bad, there are economic risks, or the risk that the country's economic development conditions will be replaced by the worst, which will negatively impact the prospects for enterprise development. In addition, if you invest in securities in currencies other than US dollars (and usually when investing outside the US), there is a risk that foreign currency will lose some of your currency, and your investment will depreciate accordingly.

To eliminate risk in the country, you can do several things. If you invest in US and overseas markets - invest in the whole market, not just one or two. If you invest only in US stocks, make sure that the company you invest is not totally dependent on the state of the American economy. For example, make sure you include a portfolio of shares of such companies that participate successfully in global markets, even if they retain their US headquarters. Most likely, such companies will be more stable if the US economy slows down.

How Much Risk Can You Pay?

The impact of market volatility in the short term can be reduced by including stock portfolios, bonds and fund units, each of which will behave differently at different times. It's also worth remembering that planning the distribution of funds in your portfolio will allow you to prevent the greatest possible risk - a lack of money in your portfolio when you have to start withdrawing funds from it. You should be aware that in the ideal world of the planning horizon and your financial goals determine the level of risk you can afford.

But you are not an emotionless robot that can not react to market volatility. You are human and as a person, try to assess how market variability can prevent you from achieving your financial goals. Then try doing everything to eliminate the factors that are causing the increased risk. In other words, reduce your risk by allocating funds between different sets of markets, economic sectors and companies.

Finally, answer yourself the questions that will help you develop your investment philosophy in relation to market volatility and risk, and also to understanding the portfolio of the basic investment :

  • What are the year-end losses on your financially and psychologically acceptable portfolio ?
  • What kind of loss do you want to receive as a result of a five-year period ?
  • How much risk do you want to take from your investment ?
  • How do you plan to diversify various investment risks (market risk, corporate risk, country risk, etc.) ?
  • Passing what tests of risk will enable the investment to get a place in your portfolio ?
December 05, 2017
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WHAT AND WHY IS INVESTMENT NEEDED ?

Larger organizations create it for the placement of their pension funds. Financial advisors create it for their clients. To create it, you need a bit of complicated philosophy and calculation. If they are wise and sophisticated, they can reach 15 sheets of size.

Who is this "them"? Declaration of investment They are needed not only for rich people, prone to writing. They are a must-have for all investors. Their strength lies in the fact that when writing an investment declaration, you are forced to declare your investment strategy in writing and make a mandatory investment plan. These are schemes and report forms.

We will not be able to cover one part of everything you need to include in your investment declaration. But as a seed, we can offer you to download, print and fill in blank investment declarations.

The Summary of Investment

The Summary of investment provides an overview of your current financial situation and what you expect from your investment portfolio. It's like an instant picture of the current situation. Update the investment summary every time you balance your portfolio.

Here is the question to be answered :
  • What is the asset value in my current portfolio?
  • How much money will I invest each month?
  • How many years I plan to invest?
  • What will my portfolio show after inflation reductions?
  • What is the maximum amount of loss I can transfer for a period of three months, one year and five years?
  • What is my target asset allocation?
  • What will be the reference for my portfolio?
  • To answer this question better, it's worth reading the "Portfolio Risk: how much risk can you take on yourself?" And "What is asset allocation"?

When it comes to the last question - select your reference carefully. Suppose you have a portfolio that invests 40% of a large company's shares, 10% of small companies, 30% of bonds, and 10% of shares of foreign companies. No need to use the S & P 500 index as a benchmark for such a portfolio. This is totally incompatible with her. This index is created to track the dynamics of stocks of American companies with large market capitalization. It would be suitable to track only 40% of your portfolio, which consists of relevant stocks, but not for the entire portfolio.

In most cases, you need a standard combination to correlate your overall portfolio success and the success of individual components.

You must also decide the period in which you will assess your portfolio and the investments that make up it. Will you compare with the annual portfolio return benchmark? Results of three or five years? The combination of this period? The best period for most portfolios will be one year, taking into account long-term profitability.

Investment Objectives

The "Investment target" section of your investment declaration is dedicated to detailing what you want to accomplish with your portfolio and for how long.

Answer the following questions:
  • What is my financial goal?
  • How long will it take me to reach this goal?
  • How much should I spend each year to achieve my goals?
  • To understand more specifically these issues in more detail, review the "Investment portfolio purpose portion of the cost of living in retirement."

Investment Philosophy

In the "Investment philosophy" section you define yourself everything that is important to you as an investor. This is the theory you believe in and which you will obey.

Here are some questions, answers to be formulated:
  • What is my vision of risk?
  • What is my vision of the role of basic investment and other investments?
  • What is my diversified vision?
  • What is my perception of trading?
  • What is my perception of cost?
  • What is my attitude towards taxes?
Before buying or selling securities, make sure the decisions you make are in line with your investment philosophy principles. If they do not match - ask yourself why. Maybe you should not buy or sell this security? Perhaps your decision is based on the short-term dynamics of this paper? Maybe you are influenced by someone's words or thoughts about the future of the market? Remember that all your decisions are based solely on your investment philosophy.

Criteria for Choosing an Investment

This section contains the rules you choose for your investment. This rule is very different from investors with investors, based on their personal investment philosophy. You can consider this criterion as a numerical expression of your investment philosophy.

Here are some criteria for choosing a shared investment fund:
  • Minimum rating for fund category
  • Minimum refund amount for fund category for certain period
  • The maximum rate of decline in the bear market
  • The maximum percentage of the 10 largest companies in the fund
  • The maximum percentage of each economic sector is included in the fund
  • The maximum factor is the overhead cost of funds
  • Minimum amount of fund assets
  • The current minimum management management period
  • The minimum coefficient of the tax efficiency of funds (the ratio of income of investment funds after paying taxes on income before tax)
  • Here are some criteria for selecting individual stocks:
  • Maximum price for each stock
  • Minimum return on equity
  • Minimum free cash flow
  • Estimated minimum five-year profit growth
  • Maximum rate of loan funds
  • Minimum dividend yield
  • Minimum market capitalization
  • Maximum value of P / E coefficient
  • Minimum income growth rate
Each newspaper you will include in your portfolio must match the criteria you have selected. If it does not match anything, ask yourself why. Do you need to change your criteria or is this investment not a place in your portfolio built on the principles of your investment philosophy?

Monitoring Procedures

The "Portfolio Monitoring" section describes the procedures that will be used to monitor the results of your portfolio. Here are your instructions to balance your portfolio and to sell investments that do not fit anymore.

Answer the following questions:
  • How often will you track your portfolio?
  • How will you determine the return on investment for each asset?
  • How will you determine the outcome of the investment in the portfolio as a whole?
  • How will you determine whether your portfolio achieves planned profitability?
  • How will you determine whether the loss is actually in the range you had planned before?
To determine how well your portfolio performs the task set, use a pre-selected benchmark to evaluate your portfolio. If you know that your portfolio did not achieve planned results on profitability, or that the actual loss is greater than what you set for your own acceptable, your portfolio may need to be adjusted.

However, do not focus only on profitability. First of all, make sure that the reason for choosing one other investment is still there. To do this, check each investment to meet the selection criteria you have set. If each stock or unit of mutual fund investment funds does not meet these criteria more than these criteria, you may have a candidate for sale in your hands. We will discuss portfolio monitoring procedures in more detail in the following sections.

Revised Investment Declaration

Once you've drafted your investment declaration, sign, place the date and return there within a year. Your investment statement is not just an instruction, but also a form of report that will evaluate the effectiveness of your portfolio.

So some basic things to understand about what and why is investment needed, such as :
  • You must to know about  The Summary of Investment itself
  • You must to know about what is your Investment Objectives
  • Investment Philosophy is no less important to learn
  • You must to know about Criteria for Choosing an Investment
  • If you want to run the investment then you must to know Monitoring Procedures
  • and the last is Revised Investment Declaration
December 05, 2017
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THE CONCEPT OF BASIC INVESTMENT 

FOR SMALL BUSINESS


Of course, there's a sarcasm. Usually the words "basic investment" and "fun" are not used together in one sentence. But what is lacking in basic aesthetic investments, they simply compensate for their meaning. The name "the concept of basic investment for small business" speaks for itself: this is the center (and possibly the only) part of your investment portfolio. The "basic" concept means investment requirements to maintain reliability over the years. This concept of basic investment for small business will be a solid foundation for the rest of your portfolio.

Once you have formed the basic parts of your portfolio, you can tackle other investments, building them on top of the core portfolio that has formed. Other investments may focus on specific economic sectors, such as health, for example, or in separate areas, such as Latin America. Because of their focus on one thing, other investments have greater growth potential, but for the same reason they can lead to increased volatility in the overall market value of the portfolio.

Mutual Fund Investment Funds as Basic Investments in Ordinary Portfolio

The stock investmenting market is dominated by large companies. They account for about three-quarters of the total US stock market capitalization. From the assumption that you want to take advantage of the growth of the stock market in general, and not only in part, you should consider the basic investment of a mutual fund stock, which is oriented towards a company with large capitalization.

Investment funds that own shares in large companies that are priced at a reasonable rate relative to their income are a reliable option for basic investment in any portfolio. Such funds usually do not lead the list of the most profitable investments, but they do not even spin on their tail. In short, they are "boring". This is what makes them the ideal choice as a basic investment.

An investor on an investor could be a little better with funds from a large capitalization company, whose market price allows them to be classified as "value-added investments." These funds are invested in large and long-term companies whose shares are priced less than their average share in the market. In addition, these funds invest in stocks of companies that have an excellent dividend payment track record. Focusing on investments in these slow-growing and sustainable companies brings this fund the lowest risk indicator in the historical period.

But wait a minute! In addition to "investment in value" there is also "investment in growth"! If the fund that follows the first strategy of investing is the right choice, why not choose the funds that match the second? These funds are usually invested in companies with large capitalization, whose growth potential is much higher than the market average.

With "investment in growth" funds it is not that simple. Although there are some exceptions, corporate growth funds do not fit basic investment requirements - their market price volatility is too strong to fit into the foundation of your portfolio with a clean conscience. In the period of market growth, the profitability of the funds will surprise you, but in times of recession, their losses are also unlikely to make you indifferent.

If you can not withstand high-yield prospects "growth funds" - try entering just one of them in the base portfolio. But do not forget to add a share of "value fund" with the same amount! From a technical standpoint, you create a kind of average fund, which is explained by us at the beginning of this section.

Maybe you want to enter the core of your portfolio and your foreign investment fund. Thus, you will not put all the eggs into the basket of the American stock market. Such funds should concentrate on the world's most advanced markets, investing in the most reputable companies, just as large corporate funds with capitalization in the United States.

In addition to stock funds, a good basic investment option is bond funds, if this does not conflict with your asset allocation concept. When selecting bond funds, stick to investments that only invest in high-quality securities. Try to select the funds whose securities have average maturity. Why? As the longer the securities circulate - the higher the market variability is its value. On the other hand, yields on short-term securities are usually very low. Choosing an average circulation period, you will get most of the long-term securities yields with only a portion of their market volatility.

Basic Shares

If funds are not suitable for you for several reasons and the stock is your choice, a stable and respectable company, called "blue chips", should be chosen as a base investment. As in the case of funds, the main concept will be "big" and "boring".

Preferred shares have a number of general qualities. For example, everything is profitable, meaning they are constantly generating a return on capital invested by shareholders very well. The indicator that characterizes return on capital is the ROE coefficient. However, each company can demonstrate the excellent value of this factor once in its life. Companies whose shares are appropriate as basic investments show excellent ROE values ​​over the years of their existence.

The stock of companies in accordance with basic investments continues to grow. Probably, their growth rates do not match the growth rate of a fashionable new company. But their earnings can be predicted from year to year, and they may pay part of this income to their shareholders in dividends.
Well and finally the company, whose shares are like a basic investment, is financially stable. In other words, they are not burdened with debt obligations. In addition, they generate a stable and significant positive net cash flow (net cash flow is money left after the company pays all costs). As a rule, such companies have a broad "gutter economy", which we discussed earlier. The business of such enterprises is mature, stable and profitable.

How Big Your Core Portfolio Should Be ?

Basic investment occupies up to 100% in individual portfolios. On the other - from 70 to 80 percent of assets. There are no clear rules that determine how large the portfolio should be associated with basic investments. We can only show that good practice is at least 2/3 of the total portfolio size. Ultimately, on this firm foundation you will build your financial welfare building.

Other investments are usually used for additional diversification or for additional growth opportunities. For example, if your basic investment is only for large company stocks, you might want to add some stocks of small companies or foreign stocks for additional diversification.

As long as you limit the portion of your most risky portfolio, your financial future is not threatened. Do not forget to first build a core core investment that is reliable and powerful - you do not need financial turmoil that can not survive in your portfolio.

I hope this article that discusses the concept of basic investment for small business can help the reader.
December 05, 2017

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