Wednesday, October 30, 2013

Warren Buffett: Top 3 investing mistakes to avoid

Imagine having Warren Buffett as your personal financial adviser. USA TODAY asked the Oracle of Omaha to put on his personal finance hat and tick off the biggest mistakes investors make.

Warren Buffett, the billionaire investor with the Midas touch, has a message for Main Street stock investors: "Don't beat yourself."
"The nice thing about investing in stocks is that, over time, equities are going to do well," Buffett tells USA TODAY. "American business is going to do well. America is going to do well. So you have the tide with you."
Building wealth in stocks is still the way to go, even though the ride can get bumpy from time to time, Buffett, 83, says.
But to really profit from stocks and build wealth over time, says Buffett, individual investors must avoid making costly mistakes that shrink their portfolio balances, just as a football team that wants to boost their odds of winning must avoid fumbling the ball away, throwing an interception or taking a penalty at a bad time.
"Don't beat yourself," the Oracle of Omaha says. "Beating yourself is half the problem."
USA TODAY asked Buffett to put on his personal finance hat and to tick off the three biggest mistakes amateur investors make. Here's Buffett's "Top 3 Mistakes to Avoid":
1. Trying to time the market. "People that think they can predict the short-term movement of the stock market — or listen to other people who talk about (timing the market) — they are making a big mistake," says Buffett.
2. Trying to mimic high-frequency traders. Buying stock in a good business and hanging on for the long term, he says, is a better strategy than flipping stocks like a short-order cook flips pancakes.
"If they are trading actively, they are making a big mistake," Buffett says.
3. Paying too much in fees and expenses. There's no reason to pay an expensive management fee to invest in a mutual fund when super-low-cost index funds that mimic large indexes like the Standard & Poor's 500-stock index are available, he says.
"If they are incurring large expenses in connection with their investing," says Buffett, "they are making a big mistake."
Buffett, of course, is famous for buying stocks when they are cheap, buying solid businesses that make a lot of money today and will make a lot of money tomorrow, and hanging on to his investments for a long time to better maximize profit potential.
The strategy works. You don't become the richest person in America during your career with a lousy investment game plan. (Buffett, with a net worth of $58.5 billion, is currently ranked No. 2 behind Microsoft founder Bill Gates, who's worth $72 billion, according to Forbes magazine.)
"Doing reasonably well investing in stocks," Buffett says, "is very, very easy."
Here's how he says investors should play the investing game:
"Buy an index fund, preferably over time, so you end up owing good businesses at a reasonable average price," says Buffett. "And that is all you have to do."
That's it? It's that simple? Buffett says yes.

"You don't need to look at the prices of the stocks you own from week-to-week, or month-to-month, or even year-to-year," says Buffett. "If you own a cross-section of American businesses, and you don't get excited (and buy) just at the very top, and if you buy in over time, you are going to do well."
Author: Adam Shell, USAToday.
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Monday, October 28, 2013

Keep Your Clients Happy With A Cloud-based Solution.

In business, keeping your clients happy is everything. Whatever you can do to add value to your product or service is worth doing if it keeps you one step ahead of your competitors and keeps your most profitable clients on board.

Doing that means thinking creatively and having every available tool out there at your disposal when you need it. These days, more than ever, it’s about being flexible enough to meet your clients’ needs as and when their circumstances change.

Saying ‘I’ll get back to you’ just isn’t good enough anymore. If you want to stay on top of your game, you need the capability to respond with the information your client needs, right when it’s needed.

This is the reason why more and more investment managers are moving to Cloud-based portfolio and analysis platforms. These online risk and portfolio management tools give users all the services they need in one central location and can be customised to meet the needs of the user, as well as the client. But, most importantly, the information or service, you or your client needs can be accessed immediately, wherever you are in the world. And, as every good businessperson knows, providing your customer with a rapid solution to their need is a sure-fire way to win repeat business.

Join the Revolution

StatPro Revolution from the StatPro Group is an excellent example of the benefits that can be gained from taking your services (and your clients) to a Cloud-based platform. Covering over 3.2 million assets, the engine behind this incredibly versatile product allows users to create attractive, customisable and easily understandable risk and performance analytics. You can then choose to share this analysis with your clients directly over the Internet – a great way for you to demonstrate how you’ve added value to their portfolio. By being transparent with your work in this way, you can also build trust - meaning your clients are more likely to stay with you.

When business very often all boils down to keeping your clients happy, the Cloud-based platform also happens to be more cost-effective, as well as faster than traditional methods of client reporting. And it does of all of this in the Cloud without any hardware, software or maintenance costs.

The cloud is the future

Don’t make the mistake of thinking that the Cloud is just a fad that’s going to disappear when the next ‘big thing’ comes along. Cloud-based platforms are here to stay. Your clients are probably already using the Cloud in their own business or as part of their everyday digital life. And that’s understandable! The advantages are huge and we are only at the beginning of the Cloud revolution. The benefits are only starting to be realised.

It’s good to share - Because the information you’re looking for is in the Cloud, then it’s accessible by whoever needs it, wherever they are. All they need is an Internet connection and a PC, laptop or tablet. Collaborating with clients, partners and work colleagues has never been easier.

Access on a ‘need-to-know’ basis – When it comes to security and accessibility, with an online platform, you decide who has clearance to access your applications and data. Obviously, in this digital age of hackers, phishers and cyber-criminals, security is more important than ever before. Fortunately, by its very nature, the Cloud is one of the mostsecure places for your data, especially when you’re on the move, as your data isn’t stored on your device and, as we seen earlier, there are a host of ways to restrict access to data and services - not to mention third party security solutions that can be integrated into your platform.

Get it working for you – Some Cloud-based solutions, such as StatPro Revolution, offer a huge degree of flexibility when it comes to customising how you deploy and interface with your Cloud-based services. So, depending on your needs and what functionality you want to offer your clients, you can adapt your online platform to suit the way you do business.

Local knowledge and global expertise – Likewise, you can dictate how your service and data are delivered from a central location in the Cloud, tailoring each to make them ‘compatible’ with the region in which they are accessed or deployed. For example, you can choose to change the language format used, or customise the service to comply with regional variations in legislation and the local regulatory regime.

Everything in one place - Of course, there is a huge advantage to having everything in the one place. Projects and portfolios are easier to administer for everyone - you, your colleagues and your clients. With the right solution, you can rapidly deploy business information to any user with a full audit trail and without the hassle and expense of managing local applications. Result? You spend more time servicing your clients, instead of managing local IT applications and infrastructure.

The Cloud is becoming big business. Getting in at the outset means you’ll be better placed to benefit from new Cloud-based innovations and applications as they become available.

What’s good for your clients is good for your business

Statistics show that by improving customer service, businesses retain clients up to 18 months’ longer. Given the advantages, outlined here, offered by a Cloud-based risk and portfolio management platform, migrating to a solution such as StatPro Revolution is one guaranteed way you can do just that.

Whether you’re an asset manager, finance advisor or hedge fund manager, using a Cloud-based platform to share information with your clients in real time, will enable you to communicate more effectively with your clients and add value to the services you provide. Your clients will thank you for that - by staying longer and spending more. 
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Saturday, October 26, 2013

The Foreign Exchange Market

World currencies are traded on the foreign exchange markets. These foreign exchange markets are referred to as Forex. Forex is the largest financial market in the world. Although there is no physical structure such as the NY stock exchange on Wall Street, more than $3 trillion in trades are conducted daily on Forex markets, more than ten times the size of the combined daily turnover on all the world's equity markets. The biggest foreign exchange trading center is the UK where large banking institutions initiate buy and sell prices of the different currencies.

Forex markets are open 5 days a week 24/5 so trading can be done almost around the clock. Trading in Forex has more than doubled over the last 10 years due largely to the growing importance of foreign exchange as an asset.

Till recently, Forex was traded primarily by large banks, multinational corporations and wealthy persons. Today, individuals, placing their trades through forex brokers, make up a good portion of Forex traders. Investors, disillusioned by the performance of their stocks or bonds, are turning more and more to Forex to make some quick profits.

The truth is, however, that more people lose money in Forex than come out ahead. Trading Forex is not as simple as you think.  Understanding the price movements of the currency pairs takes a certain amount of understanding and experience which most beginner traders do not possess.  They jump into the market blindly and almost inevitably lose all their money.

In addition, with little knowledge and expertise to fall back on, novice traders fall prey to Forex scams. Although the majority of Forex brokers are honest and follow their country’s regulatory restrictions, there are some brokers that will open your account, take your money and then abscond without leaving a forwarding address.  Others resort to different fraudulent means to get your money.

Forex is unique in that the factors that affect the price movement differ from those that govern other markets. Political and social influences in a particular country can have a direct impact on the currency price and its ratio to the other currency in the currency pair. 

Foreign currencies are traded against one another; each pair of currencies thus constitutes an individual product.  Brokers often participate in the Forex markets by offering speculative trading; others provide the actual physical delivery of the purchased currency. Forex rate fluctuations are the result of real currency movements as well as expected currency changes. These changes can be caused by the country’s interest rates, inflation, GDP growth, surpluses or deficits as well as by other economic conditions. Most movements are the result of a combination of the above factors.

Banks may trade Forex on behalf of customers, but mostly trade for their own account. Individual Forex traders open accounts with online brokers who supply them with the information and services they would expect as an account holder.  Many brokers provide 24-hour chat or email assistance which is helpful for the beginner trader.
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Thursday, October 24, 2013

Increase Business Success with Affiliate Marketing

Marketing is an essential component to any eCommerce store. You need to make sure that you maximize on the results as much as you can. However, a number of eCommerce stores do not actually take advantage of all the methods available to them. Affiliate marketing, for instance, is not popular in most goods eCommerce stores, although it is more popular among virtual product eCommerce stores. But it could be a valuable tool for your business, regardless of what you sell.
Marketing Opportunity for the Affiliates
One of the missed marketing opportunities for eCommerce stores is the fact that you are marketing to the individuals who will end up marketing the brand themselves. In fact, according to Clickbank, most of the time affiliates wind up purchasing at least one product from the brand that they are promoting. Affiliate marketers are also more inclined to conduct more in-depth research on a product as they consider whether it is worth their time. Scam affiliate marketers won't take the time, but you don't want these individuals. So develop a strong marketing pitch directed at these affiliates to show them how they can make money by helping to market your products.
Better Knowledge of the Product
When you're trying to convince someone to market your product, you have to have a good knowledge of that product. If, for instance, you have developed a product that will compete with the iPad POS stand, then you need to make sure that you can distinguish it from its competition. You will also have to distinguish it from other affiliate products that are competing for your marketers' attention. Having hard numbers and statistics can help you to promote your product, but the research can then be incorporated into additional advertising campaigns to convince your customers that your product is an excellent one.
Free Advertising Options
The best part about affiliate marketing is the fact that you can get the advertising for free. Affiliates are generally only paid a percentage of the final sale. The sales that they make profit you as well. So, while the affiliate marketer gets paid, it does not come directly out of your pocket. Most of the time the affiliate marketing platform takes its cut out of the final price as well, meaning that you have nothing out of pocket initially.

Affiliate marketing is not the most popular advertising choice for businesses. However, it can be an excellent option. It gets your product out to additional individuals since you will be marketing it to the potential people who will help with the affiliate marketing. It also helps you get better knowledge of your own product. You can even reuse the data to improve your overall advertising. The best part about affiliate marketing though is the fact that the advertising itself costs nothing out of pocket. The affiliates, and even the affiliate platform, are paid out of the proceeds made from actual sales in most cases. You can adapt it to work for you and get greater exposure for your products. 
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Monday, October 21, 2013

The Need to Start Planning for the Future Now

This statement is one that you have probably heard hundreds of times; from the first time you encounter money you are told to ‘put some away for a rainy day’ and from then on you have most likely been told to put some money away for the future on countless occasions. However, have you ever actually sat down and weighed up how much you can benefit from offsetting some consumption today in return for a firmer financial footing later in life?

The main benefit of saving earlier rather than later is Compound Interest, dubbed the ‘8th Wonder of the World’ by the great Albert Einstein. This is where the interest you earn in the first period can earn interest in the second period as well as the initial deposit, and then all the interest earned in the first two periods can earn interest in the third period and so on and so forth. This can have a profound difference on the final value of savings down the line when compared with simple interest, as an example, savings of £10,000 over 20 years with a 5% interest rate would return £20,000 under simple interest, whereas the same sum would return over £26,000, no small difference when worked out as a percentage and the effects are amplified when you increase the rate offered or the time the savings are left for.

I think one of the best ways to show the benefits of saving earlier rather than later is to do a direct comparison of two people that save the same amount of money but over different time periods. I will take the case of two people that are saving for retirement, one saver starts at 20 years old and the other is a bit late to the party (but not later than a lot of people actually start saving for their retirement) and starts at 40 years old. They were both aiming to retire at age 60 and so the organised saver put £100 away per month for 40 years and the late saver put £200 away for the 20 years he had left before retirement, meaning they have both put away £48,000 apiece. If they both invest their money and get an average return of 7% per year (the amount Warren Buffett says the stock market should return), the person who invested for 40 years would end up with £265,000 compared with the second person who would end up with just £105,000! This is a staggering difference and again highlights the benefits of getting money invested early in your career rather than leaving it until later.

There are other benefits to saving early as well as financial, the additional peace of mind it gives you to have something tucked away for when life throws an unexpected incident your way is hard to put a price on. It doesn’t have to be difficult to save either, even a small amount per month adds up quickly over the course of a year or two, it’s a good idea to have a savings target that you can build up to, first putting away a small amount per month then building up until you reach the target.

Hopefully this article will encourage people to start early.            

Author: This article was written by Thomas Nash, a graduate in Economics from the University of Manchester, now working at raising awareness of the need for people to be adequately prepared for their retirement financially.
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Friday, October 18, 2013

How Patience Will Earn You Money In The Stock Market

The casino is open and we must go play now."

That seems to be the attitude that infects all too many investors. When the opening bells ring on the NYSE every morning at 9:30 am EST, traders seem to feel the need to do something.

The ticker tape is running, the talking heads on the media are cheerleading different stocks and sectors. The advertisements are almost constant, urging out to trade more efficiently and smartly, using the new super-duper platform that has all sorts of charts and the information you need to beat the market.

The sad truth all of this is done not to help you trade better, but to pay the bills needed to keep the studio open and keep commission dollars flowing into coffers of brokerage firms. It creates an atmosphere that encourages activity much like the casinos set the stage to keep you gambling.

Behavioral Analysis
Virtually every study ever done on the behavior and results of individual investors has shown us that retail investors badly underperform the stock market over time. The chief culprits for this lack of profits are trading too much and have a propensity to chase the hot stocks and stories of the day.

Year in and year out, roughly 90 percent of them are set to lose money. Only 10 percent turn a profit and far fewer beat the market returns, much less squeeze a living out of all the frenetic in-and-out trading in a short period of time. The brokers do pretty well off all the activity, but the traders themselves do not do nearly as well.

Investors and wannabe traders need to accept a simple fact. If you have a career, a profession, run a business or are otherwise occupied during the day, you are not going to win the trading game. Wannabe traders are trading against people with more information who spend eight to 12 hours a day doing nothing but studying the stock market.

Would you take on LeBron?
Serious traders have a flock of analysts and more than likely are getting technical advice from the people who invented the indicators and patterns novices are trying to master. When trying to beat the market by engaging in short-term trading or switching from hot stock to hot stock, traders are engaging in the financial equivalent of playing LeBron James in a game of one-on-one. You are not going to win, and the statistics and studies have proven that it is a losing game.

It is worse when individual investors decide to jump over and try to trade options. The depth and level of knowledge needed to successfully trade options requires full-time concentration on these markets and in-depth extensive knowledge of math and statistics. The guy on the other side of your trade is not making directional bets on markets and indexes and there is a good chance he is a literal rocket scientist.

The rocket scientist is armed with enough computing power to conquer the world and that option will be priced so as to take advantage of your desire to make a bet. The worst thing that can happen to a retail options trader is to make a few winning bets and start to think they understand how to trade options. That's when you run the biggest chance of losing an enormous amount of money. Most individual options traders are swimming with the sharks while wearing meat suits and just don't know it yet.

The amazing part of all this is that individual investors have a huge advantage and simply choose not to use it. They seem to prefer the excitement of the ringing bells and ticking tape to actually making money in the stock market. Individual investors have no mandate that dictates the type of stocks they must buy or which ones they must avoid.

They do not have to endure the quarterly performance pressure the larger investors face constantly. They can buy much smaller stocks than the institutions and hold them for as long as they like. They have a size and time advantage that is substantial and most choose not to use it.

It seems simplistic to say that buying cheap stocks in a bad market is the most profitable way to invest but it is exactly the truth for investors. If you look at the Forbes list of rich people the ones who made their money directly from investments and not just fees like Warren Buffett and Wilbur Ross made their money in exactly that fashion.

Be a boss like Schloss
Consider an investor like Walter Schloss who never aspired to be the biggest and kept his fund small but constantly just bought all the cheap stocks he could find and held them until they worked. Schloss earned about 20 percent gross for his investors for almost 50 years simply by buying cheap stocks in bad markets and holding them for long periods of time. He took advantage of the size and time advantage and made an enormous amount of money for himself and his investors.

There is a reason private equity is consistently one of the highest performing asset classes. Investors buy businesses when condition in the economy, or a specify sector, are not very good and they can buy a business at a bargain price. Investors hold them for a full business cycle or two and sell them in five years or so at a huge gain when conditions have improved substantially.

Investors could care less about the ticker tape or the candlestick pattern of a portfolio company and focus only on the business value. This is exactly the approach individual investors need to use to make money in the stock market.

Price and patience is the key to stock market profits. Buy businesses at a cheap stock price and hold them until they are no longer cheap. Ignore the bells, patterns and noise coming from Wall Street.

Your broker may not like it, but your accountant will.

Author: Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years as in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on, DailySpecualtion.Com as well as several print publication including Active Trader and the Wall Street Digest. You can learn how Tim invests in low risk, high yield stocks by clicking here andwatching his FREE webinar now.
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Thursday, October 17, 2013

Warren Buffett takes on the madness in Washington

Warren Buffett may be the most-popular man in Washington at the moment.

The Oracle of Omaha charmed the 400 attendees at Fortune's Most Powerful Women Summit by playing his ukulele Tuesday night, earning a standing ovation from the likes of Facebook's Sheryl Sandberg and IBM's Ginni Rometty. During his one-on-one interview Wednesday with Fortune's Carol Loomis, he continued to win over the audience with his refreshing and positive outlook about his life, the economy and women in business.

Still, he wasn't afraid to take on the dysfunction in Washington and said it was "so stupid" to even think that the U.S. could default on its debt. Highlights from Buffett's time on stage:

On the fight over the debt limit:

·         "We have spent 237 years since 1776 building a reputation as the most wonderful country on earth, and one that's entrusted with having the reserve currency of the world. ... That is being put in jeopardy now and it could be destroyed in a little while. A great reputation is like virginity. It can preserved, but it can't be restored."

·         "The whole idea of a debt limit is a terrible, terrible mistake. If you're going to spend more than you take in, what are you going to do except raise the debt limit? So it becomes this political weapon of mass destruction. It really is like a nuclear bomb. It's something that maybe you talk about but never dream of using."

On the economy:

·         "The country’s coming back. You can’t stop the United States. We get through everything."

·         "I’ve filed a tax return every year since I was 13. The last decade has been about the lowest tax rate. It was tougher when I was selling shirts at Penney’s."

On women:

·         "People in power don’t give it up easily. And to some extent, it just doesn’t surface much. Look at how far the country came using half of its talent. Think of what we can do using all of it."
·         "I went to public school and I had nothing but women teachers and they were terrific. But the idea of setting limits as to what talented people can do is crazy."

On Berkshire Hathaway:

·         "I started out feeling like I wanted to be private. I like looking in the mirror and making decisions and not getting any negative votes. Over time, I’ve found it more fun to run a public company. It’s a podium. I can play out ideas and explain why I do things. It’s a teaching mechanism, even."

·         "I’m running Berkshire for the people who want to stay in and not the ones who want to get out. I don't care what the company earns this quarter; I care about where we’ll be in five years."

On his outlook on life:

·         "I’m 83 and I’m having more fun in my life than ever before. The main thing is to be involved in something you love."
·         "The secret sauce in America is that you’re trying to make your lives better tomorrow."

This piece is a part of LinkedIn's live coverage around Fortune's Most Powerful Women Summit. For more, go here.

Author: Jacky Carter, Community Manager - Linkedin
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Wednesday, October 16, 2013

Investments For An Aging America

Back at the end of the Second World War, troops returned home in massive numbers and, as is always the case with young men and women, started to settle down to have families. The result was the baby boom, a period of time between 1946 and 1964 which saw the average marriage age drop nearly 2 years, and family sizes increase by approximately 25%. That population bulge is still working its way through the American economy, as the first wave of baby boomers start to retire.

So, what does this fundamental shift in American demographics mean for investors? What are some of the ways of taking advantage of an aging America?

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Probably at the top of the agenda lie investments in healthcare companies, which are set to see a rapid increase in demand for treatment as the boomer population develops diseases associated with age. While hospitals and other institutions will see benefits, one of the biggest winners is likely to be companies that provide home health care services for seniors. While these services may be susceptible to any significant changes in Medicare funding, the fact remains that caring for the elderly in a home environment is a much more cost-effective approach than tying up long-term beds. This may also translate into investment potential for retirement communities that provide ongoing care for aging residents, so a continuing care community in Terre Haute, IN, for example, may be a long-term investment that you should investigate.

Staying on the healthcare front, we know that an aging population creates increased demand for pharmaceuticals, so these may also represent a strong investment opportunity. However, while keeping an eye on the mainstream, investors would do well to look for disruptive research programs that have the potential to transform the lives of aging people. For instance, Alzheimer’s and other diseases such as Parkinson’s and Huntington’s place an enormous strain on the healthcare system. A recent study in the UK has now shown that it is possible to stop Alzheimer’s and potentially other neurodegenerative diseases in mice. While the therapeutic compound used to do this is nowhere near ready for human trials, this is exactly the sort of opportunity that investors should be looking for to take advantage of the aging trend.

On the other hand, a word of caution is needed around the domestic real estate market. Opinions are mixed on this, but one real possibility is that the housing market will decline significantly due to the 78 million Americans who make up the boomer generation downsizing as they retire over the next 20 years or so. This could lead to a significant oversupply, especially in the single-family dwelling market, with some pundits forecasting a crash of a similar magnitude to that which we experienced back in 2008 – and potentially with a longer time horizon.

However, the length of time over which this situation will unwind may actually act to mitigate its effects – and there are other countervailing forces. For instance, if there is a trend toward smaller households, this could drive a significant increase in demand for single-family dwellings. There is also an increasing trend for children to come back home to live with their parents, leading to multigenerational households that could delay or prevent single-family dwellings being released onto the real estate market. This may be accentuated by an increase of Hispanics and Asians who are of school-age and working-age, since some studies have shown that these minorities are more likely to have multiple generations within one house.

We are already starting to see a number of other sectors starting to target the boomer demographic. Television advertising is a bellwether of this. Insurance companies are increasingly advertising products such as life insurance that does not require a medical exam. Another example is the reverse mortgage – the US government offers a Home Equity Conversion Mortgage (HECM) program for seniors, but there are a number of other commercial providers. Whether or not we will see a further increase in the number and diversity of financial instruments designed for seniors is an open question, but again investors should be on the lookout for potential 

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Finally, the boomer generation represents a significant pool of pent-up cash, which investors can tap into with products and services specifically targeted at them. For instance, it may well be worth looking at companies that specialize in senior travel, as well as resorts that see high numbers of senior visitors. The medical device field may also be attractive – as a hypothetical example, companies that have innovative hearing aid designs could offer profit opportunities.
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Monday, October 14, 2013

Measuring Investment Performance

There are several ways to measure the return achieved on an investment and it is important to understand what each measure is telling you. Let’s use a basic example.  At the beginning of year 1 you deposit $100,000 with a portfolio manager.  At the end of year 1 you have a balance of $110,000 before withdrawals.  You decide to withdraw $20,000 at the end of year 1 leaving $90,000 invested.  At the end of year 2 you have a balance of $94,500.  How did you do?

Holding Period Return
One of the simplest measures of performance is a holding period return which compares your ending wealth to your beginning wealth adjusted for withdrawals.  In this case, your holding period return for the two years combined is 14.5% (($94,500+20,000-100,000)/$100,000).

You can compute the holding period return for each year individually as follows:

Year 1               10% (($90,000 +20,000-100,000)/100,000)
Year 2                 5% (($94,500-90,000)/90,000)

Note that the holding period return for the two years of 14.5% is different than if you summed the two years individual holding period returns.  This is because a different amount was invested in each of those years.

Arithmetic Average Return
The arithmetic average return is the simple average of the year’s returns (the sum of the holding period returns divided by the number of years). The arithmetic average for this example is 7.5%.

Geometric Average Returns
A geometric return is a better measure of the performance of a portfolio over time.  There are two types of geometric returns: an internal rate of return and a time-weighted return. 

The internal rate of return is calculated using a financial calculator of computer and considers the value in each period as well as deposits and withdrawals.  It measures the compound average return achieved by the investor.  For this example the internal rate of return is 7.72%.  Note that this exceeds the simple average in this case.  The reason is that you (the investor) withdrew part of you funds after the high return year and had fewer funds invested in the lower return year.  In hindsight this was a good decision.

That decision to withdraw should not be reflected in the portfolio managers return.  The time-weighted return computes a geometric average which removes the impact of deposits and withdrawals.  In this example the time-weighted return would be 7.2%.  So the portfolio manager is responsible for a compound average return of 7.2%.  The investor, however, earned 7.72% considering the timing of the withdrawal.

Risk Adjusted Returns
It is also useful to consider the return generated by a portfolio relative to its risk.  One measure could simply be the average return divided by the standard deviation of returns, or return relative to risk.  The higher this ratio the more return was generated per unit of risk.  A popular metric is the Sharpe ratio which subtracts the risk free rate from the portfolio average return before dividing by the standard deviation.  The Sharpe ratio measures the excess return per unit of risk.  A higher positive number is desirable (Sharpe ratios must be computed for a portfolio and benchmark for the same period to see which is higher).

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Friday, October 11, 2013

Investment Incentives For Historic Seattle Properties

If you invest in a historic property and renovate it, either with the intent of flipping it or keeping it for rental income, then there are often a number of government subsidies and tax breaks that are available to you. The reason for this is that cities and states want to preserve their historical areas, rather than see them decay. In fact, it is often these incentives that turn a borderline investment proposition into a relatively lucrative one. This is certainly the case in Seattle, so let’s look at exactly what incentives you can take advantage of there.

Investment Incentives
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First of all, there is the Federal Rehabilitation Tax Credit. This applies to qualified rehabilitation expenses for Seattle buildings that are listed in the National Register of Historic Places – for instance, if you are renovating a historic building in Seattle and need to hire a local plumber such as Jim Dandy Emergency Plumbers, this could very well qualify. The building has to have been producing an income for at least five years, but if it has, then you could receive a tax credit equal to 20% of the total renovation expenses. In some cases, buildings that are not on the register but were built before 1936 may also qualify – although the tax credit is reduced to 10%.

Next, if you are the owner of a historic property, you may also qualify for a special tax valuation of your property. This is designed to address a situation where investors would avoid carrying out needed renovations because the property value would go up along with the property taxes. Under this program, you are able to deduct the full cost of renovations from the assessed value of the property for a period of 10 years, provided that the property qualifies for the program. However, it is important to check the details of the program, since there are a number of conditions, such as restrictions on the relative size of renovation costs when compared to assessed value.

In addition to these tax breaks, there are also a number of grants that are available to offset renovation costs. For example, there is the Landmark Challenge Grant, which provides matching funding for renovations to deserving preservation projects. The Heritage Capital Projects Fund is also something that you should look into, although it will only provide one dollar of funding for every two dollars that you invest.
Investment Incentives tax breaks

Aside from these tax breaks and grants, there are also a number of other types of assistance that you can get in Seattle if you invest in a historic building. For example, you may be able to get zoning code relief, allowing you to do things such as convert the building to a use that is not normally allowed in the area. However, you are not entitled to zoning code relief – exceptions are evaluated on a case-by-case basis. Other things to look at include building code relief, preservation easements, and transfer of development rights – which allow you to transfer unused development rights from one building to other nearby properties.
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