Taking Aim at Your Retirement: A Look at Target Date Mutual Funds

Posted on June 5, 2013 | Investing

There is an appealing simplicity in the concept of target date funds that has a strong attraction for investors: Just pick a year, and lean back—your portfolio management is now on autopilot, with coordinated diversification among the major asset classes that is rebalanced periodically toward your estimated time of arrival, your target date.

But while the concept of the target date fund has a justified appeal to a broad range of investors, making the right choice among the many target date fund offerings and understanding how the funds work is not quite as simple as it appears at first glance.

The Risk/Growth Dilemma

Target date funds are built on the assumption that investors who are farther from their target retirement date should have higher allocations to stocks, and that the stock commitment should decrease as the target date approaches. Thus, funds with an earlier target date will start out with a lower stock allocation than funds with a later target date, but all of the target funds within a family will decrease their commitment to stocks as the target date approaches.

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Market Barometers: A Look at Stock Indexes and How They Work

Posted on May 8, 2013 | Investing

You may not need a weather man to know which way the wind blows.

But in the financial world, you do need a stock market index to know which way the stock winds are currently blowing. That’s why the broad market indexes are quoted daily by virtually every media source as a barometer of the state of the overall market.

How do these market indexes work and what are they telling you?

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State-Based Exchange-Traded Funds

Posted on April 9, 2013 | Investing

Exchange-traded funds (ETFs) are continuing to prove themselves as ever-present and almost chameleon-like in their ability to take on many new forms as a perceived need arises. The latest additions to the ETF world are state-based ETFs.

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Life Cycle Funds

Posted on April 5, 2013 | Investing

Life cycle funds are marketed as a maintenance-free way for individuals to invest for retirement. They were created under the assumption that many individuals needed a one-stop investment vehicle that properly rebalances their portfolios over their investment lives, as their investment needs change. Typically, in an individual’s younger years, riskier but higher-return potential assets should be emphasized, but as the individual approaches retirement, the percentage commitment to these types of investments should be gradually reduced. Life cycle funds are designed to follow this investment pattern.

At first, life cycle funds were limited to mutual funds, but over the years, life cycle exchange-traded funds ETFs have been created.

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14 Personal Finance Questions

Posted on January 28, 2013 | Investing

A list of practical answers to frequently asked investing and personal finance questions.

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Rolling the Currency Dice: Investing in International Bond Funds

Posted on December 4, 2012 | Investing

The search for yield and the weak U.S. dollar have prompted individual investors to set their sights abroad, and to consider investing in foreign bond mutual funds. International bond mutual funds, however, have their own unique set of risks. And these risks are magnified by the often rapid ebb and flow of international currency markets.

Yields may be higher in other countries and the dollar may be swooning, but a careful look at international bond mutual funds is in order before you let your money travel overseas.

The two primary risks of investing in foreign fixed-income securities are:

Credit Risk: The riskiness of the issuers of the individual securities in the portfolio, and
Currency Risk: The risk that the currency in which the securities are denominated will change in value relative to the U.S. dollar.

There is also a more subtle risk for individual investors: understanding the sometimes arcane portfolio holdings of these funds, which may include futures, options, repurchase agreements, loan participations and asset-backed debt such as collateralized mortgage obligations.

And in terms of holdings, it can be surprising to what degree some of these international bond funds are actually invested in U.S. securities—contrary to the purpose driving most individual investors to international bond mutual funds in the first place.

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The Top 10 Economic Indicators: What to Watch and Why

Posted on October 2, 2012 | Investing

Economic reports and indicators are those often-voluminous statistics put out by government agencies, non-profit organizations and even private companies. They provide measurements for evaluating the health of our economy, the latest business cycles and how consumers are spending and generally faring. Various economic indicators are released daily, weekly, monthly and/or quarterly.

While it is important to keep a pulse on the economy, few analysts or economists wade through all of these massive volumes of data.

Which reports are worth it—and why?

Here’s a primer on 10 of the most common and vital economic indicators. Even if you don’t follow these reports yourself, it is helpful to know where the “experts” are drawing their opinions from. If you do peruse these reports, remember that data can change rapidly, and that broad trends are not judged by one isolated economic data point.

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The Psychology Behind Common Investor Mistakes

Posted on September 27, 2012 | Investing

Behavioral finance, a relatively new area of financial research, has been receiving more and more attention from both individual and institutional investors. Behavioral finance combines results from psychological studies of decision-making with the more conventional decision-making models of standard finance theory.

By combining psychology and finance, researchers hope to better explain certain features of securities markets and investor behavior that appear irrational. Standard finance models assume that investors are unbiased and quite well informed. Investors are assumed to behave like Mr. Spock from Star Trek, taking in information, calculating probabilities and making the logically “correct” decision, given their preferences for risk and return. Behavioral finance introduces the possibility of less-than-perfectly-rational behavior caused by common psychological traits and mental mistakes.

Six common errors of perception and judgment, as identified by psychologists, are examined in this article. Each has implications for investment decision-making and investor behavior. An understanding of the psychological basis for these errors may help you avoid them and improve investment results. And in some cases, market-wide errors in perception or judgment can lead to pricing errors that individuals can exploit. Understanding the psychological basis for the success of momentum and contrarian strategies can help investors fine-tune these strategies to better exploit the opportunities that collective mental mistakes create.

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The First Step

Posted on September 26, 2012 | Investing

Let’s suppose you are relatively new to your 401(k) plan. And like many new investors, you’ve started to read through investing guides that stress the importance of asset allocation—not only among the major categories of stocks and fixed-income investments, but also within categories such as large stocks, small stocks and international.

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How to Set and Revise Realistic Price Targets for Your Stocks

Posted on September 25, 2012 | Investing

An investor over time attaches some validity to his or her initial price objective, meaning that modifying that expectation becomes difficult for reasons totally contained only between one’s ears.

But stocks go where they want to, despite what any participants think is justified and despite what investors might wish would happen. Investors unable or unwilling to let go of original price opinions are doomed to lose, either through losses in positions that never come back, and/or from better opportunities elsewhere that have been lost.

There are two primary ways that investors get into trouble when setting price objectives:

The initial idea, including the selling-price objective, may have been wrong from the start.
If correct at first, the original idea can become outdated and, therefore, inaccurate as subsequent events transpire.
How, then, does one develop a realistic price target?

As we shall see in this article, selling-price targets should be based on logical analysis, which includes several dimensions and several elements. Hope, an emotion, is absolutely not a valid part of investment decisions (to buy, sell, or hold), and should never play any part in setting a realistic exit target. Price goals based even in part on a position’s original cost basis should be avoided, since they are based on the hopes of not losing money and of being able to feel happy or smart. That being said, however, investing is an art rather than a science, so investors should work diligently to do well, but not agonize over the impossibility of achieving perfect results.

Three Key Elements
Price objectives, both when set initially and when reconsidered later, should have three elements:

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