Grappling With Fund Risk

Posted on October 29, 2012 | Classroom

Risk tolerance refers to the level of volatility of an investment that an investor finds acceptable. The anticipated holding period of an investment is important because it should affect the investor’s risk tolerance. Time is a form of diversification; longer holding periods provide greater diversification across different market environments. Investors who anticipate longer holding periods can take on more risk.

The liquidity needs of an investor similarly help define the types of funds that the investor should consider. Liquidity implies preservation of capital, and if liquidity is important, then mutual funds with smaller variations in value should be considered. A liquid mutual fund is one in which withdrawals from the fund can be made at any time with a reasonable certainty that the per share value will not have dropped sharply. Highly volatile small-cap growth funds are the least liquid, and short-term bond funds are the most liquid. Table 1 lists the risk characteristics for different mutual fund categories.

Risk is the most difficult concept for many investors to grasp, and yet much of the mutual fund investment decision depends on an understanding of risk. There are many different ways to categorize investment risk and numerous approaches to the measurement of risk. If we can assume that the volatility of the return on your mutual fund investment is the concern you grapple with when you think of risk, the task of making decisions about risk becomes easier.

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Evaluating Dividend-Paying Stocks

Posted on September 7, 2012 | Classroom

The simplified approach can be applied to various investment strategies using the basic sources of information identified earlier. One popular strategy focuses on dividend yield. A dividend-yield strategy can help you find potentially undervalued stocks with low downside risk, provided the dividend is secure and expected to grow, and the firm is financially sound. This strategy will also tend to produce more income in the form of dividends, and less in the form of capital gains, than other strategies.

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Balancing Your Return Ideals With the Realities of Risk

Posted on September 5, 2012 | Classroom

Every builder starts with a foundation. If you are new to investing, you are building an investment portfolio, and you need to start with an investment foundation. That foundation consists of the basic investment principles.

Boiled down to its bare basics, investing concerns returns and risks.

An investor’s return consists of current income, plus capital gains due to growth, minus any losses from the investment.

Absent a crystal ball, investors can only make an educated guess as to what kind of return to expect. If an investor’s actual return turns out to be different than the return he expected, he could suffer an unexpected loss.

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Tips When Looking at Funds

Posted on August 20, 2012 | Classroom

In mutual fund investing there are no immutable laws to guide us, as we have in physics. But the collective experience of fund investors can be distilled into a few general rules. Some of it has empirical evidence pointing its way. Most is simply common sense that investors often set aside or forget in the heat of making an investment decision.

Top performance lists are dangerous. Probably the single most potentially dangerous action a mutual fund investor can take is to glance at these ubiquitous lists. Funds make the top of the lists not because they are like all the rest of the funds, but because they are decidedly different in some important way. Risk is usually the first important difference. For stock funds, holding stocks that are more volatile than the average stock, holding fewer stocks, or concentrating on only a few industries, raises risk and puts a fund in position to have a greater chance at making the top of the list.

As an example, take sector funds. You can’t beat the market by holding it, which is why you can always find a sector fund of one kind or another at the top of most performance lists. Call it stock picking, or industry weighting, or both, but the net effect is increased risk, and less diversification than the overall stock market.

Picking the funds at the top of the performance lists assumes that either these same stocks or sectors will continue to do well, or that the managers can continue to deftly take high risk and move money around better than all the rest.

For domestic bond funds, making the top of the list is a result of the maturity structure of the fund’s portfolio.

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Know Thyself: How Your Needs Will Steer Your Decisions

Posted on June 25, 2012 | Classroom

There are four basic aspects that compose your personal investment profile…

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Setting Up an Ongoing Investing Program

Posted on June 19, 2012 | Classroom

The first step is always the hardest. And individual investors taking their first steps in an investment program must also confront a sea of stock market uncertainty. Some plunge headlong into the market with all their savings. Others barely wet their feet before heading back to the safe shores of their money market funds. The problem, however, with these two all-or-nothing approaches is one of timing—the risk of entering the market at a high point in the market cycle.

Dollar cost averaging is simple in concept: Invest a fixed amount at equal intervals and continue to do so over a long period. The result is that more shares of a stock or mutual fund are purchased when prices are relatively low and less are purchased when prices are relatively high. This can result in lower average per share cost over time.

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Dividing Your Assets Between Stocks, Bonds and Cash

Posted on June 4, 2012 | Classroom

Step 1: Why Is the Allocation of My Assets Important?

At first glance, many investors assume that the basic asset allocation decision is easy. After all, at this level you are focusing on only three choices—stocks, bonds and cash (money market funds and short-term certificates of deposit).

While the choices are few, the way you allocate your portfolio among these three categories will have by far the greatest impact on your performance of any investment decision you make, assuming that you don’t violate the basic investment principles.

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Collecting Basic Data on a Stock

Posted on May 30, 2012 | Classroom

The Valuation Worksheet provides a systematic approach to gathering information needed for the valuations. Clearly, the information sources play a critical role in the analysis. Here, we take a closer look at sources of information and some of the problems and differences you may encounter when using them.

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FAQs about Financial Statements

Posted on April 19, 2012 | Classroom

Learn what intangibles are, how stock repurchase programs affect a company’s investment appeal and the difference between cash and pro forma earnings.

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Making Your First Investments

Posted on March 19, 2012 | Classroom

To begin a basic investment program, you need to go through the whole asset allocation process—first determining your allocation among the major asset categories and then further down among the major stock market segments. And you come up with this mix: cash, 10%; intermediate-term bonds, 10%; and stocks, 80%—with the latter split 80% in a “core” holding of large-capitalization stocks (which would be 64% of your total portfolio), 10% in the stocks of smaller firms, and 10% in international stocks (8% of your total portfolio in each).

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