Saturday, February 20, 2016

How automated trading affect future of trading and investing

According to recently released article from Bloomberg: ,,The Rich Are Already Using Robo-Advisers, and That Scares Banks", assets under management in automated programs gradually grow. They should also small investors seek automated solutions for their investments?

Mainstream idea of investing is in passive approach. On the stock markets you are usually trading or better investing in the long-term. It means that you buy shares of a particular company or a whole sector, and hold them. It often indicates the average return of 10% per annum. However, detailed examination shows the fact that achieved return at the investment on the local or regional level, doesn't have to reach positive numbers even in a matter of years. A typical example is Japan where stock market is experiencing bad times for 20 years. This can be good reason to leave old portfolio theory. Investors should in terms of uncorrelated returns and strong balanced portfolio think about adding active trading part. This part can use automated trading which protect investors against psychological aspects of active trading and also optimizes time dedicated to active trading.

Today's technology offers much better conditions to develop and trade automated trading strategies than a few years ago. Computational power together with the involvement of artificial intelligence, machine learning methods and data mining, allow develop and test individual trading logics in fraction of time. Thanks to this can developers of these automated trading strategies discover effective trading logics with predictive capabilities.
Still prevailing opinion that robots cannot replace human. This is the reason of skepticism about automated trading. Investors should realize that automated trading itself is only the end of the whole process. On the beginning is human who define the basics and control the whole process of developing and testing despite the fact that the process is automated. It is much more about looking for objective advantage in the market that can be traded by automated solution. From investor perspective is much easier evaluate results from automated trading than when active trading will make himself.

Automated trading gradually grows and solutions as well. Because the development of automated trading is both financially and knowledge consuming, investors should look for automated solutions, already created by developers for trading. In this point it is more about communication with developer about understanding principles of automated trading solution which he offers. Investors will know, how evaluate results from automated trading, what technological aspects does it contain and what support they receive if anything goes wrong.

Author: Daniel Stepnicka,
Director, Co-Founder of
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Thursday, February 18, 2016

How to Hold Real Estate in your Roth IRA

Real estate as an investment option
After the 2008 global financial crisis, investors are increasingly looking for assets, away from stocks and bonds, that can help diversify their portfolios, act as an inflation hedge, and provide a long-term return for retirement. One such asset is real estate, and it may be best to hold it in a self-directed IRA account, which is run by a third-party administrator and allows the investor to choose what types of investments and asset classes to put in the account. A self-directed Roth IRA offers you the added advantage of compounding your income, gains, or savings tax-free and enables you to invest in real estate such as residential homes, condominiums, commercial properties, co-ops, or even land, all within your Roth IRA.

Things to consider and prepare
Investing in the real estate in a self-directed IRA does require a different mindset because there are a number of rules you must follow, or the tax benefits can be voided. First, you need to find a bank or brokerage that has a qualified trustee or custodian for self-directed IRA and knows how to handle your real estate purchases, administers the account, and files the relevant documents with the IRS. You must also have enough money in your IRA account to buy the real estate investment from your IRA account. Some custodians may allow you to borrow to purchase the property as long as the loan is non-recourse, i.e. the house alone is used as the collateral. You cannot buy a property which you reside in or is a part of your business or buy a property you or your family members own a specified percentage – the IRS bans self-dealing. With a self-directed IRA, you also are the only one responsible for your investment decision and complying with all the regulations and rules for your investments.

Operational procedures
After your IRA custodian has purchased the property for you, the title will be in the name of your IRA custodian. The IRA account pays all the management fees, taxes, insurances, and property-related expenses and so the account needs to have sufficient cash. You could lose the tax benefits or incur penalties if you fund these expenses from your own account.

To have more control over your investments, you can create an LLC that is owned by the IRA to invest for your IRA. With this checkbook control, the IRA owner can write cheques to make purchases, pay property bills and marketing expenses, and have greater control over the assets.

Some advantages and disadvantages
Real estate can provide the owner with long-term investment value with the potential for appreciation. If the property is rented, it can provide the owner with rental income. Not only is real estate a hard asset compared to stocks and bonds but also an investment the investor understands well. The other big advantage is that if you purchase the property from your self-directed Roth IRA without a mortgage, all the rental income will be compounded tax-free. However, if you finance the property purchase with a mortgage, then the rental income becomes unrelated business taxable income, which will be taxed when earned. Another disadvantage is that you cannot claim depreciation when holding the property in the IRA. You will not be able to enjoy any advantage from your property investments until you retire.

REIT can be an easier option
If holding a physical property in your IRA is too much work for you, you can also consider investing in a Real Estate Investment Trust (REIT), which is similar to a mutual fund but invests in the real estate market. REITs are required to pay out 90% of their profits through dividends. However, investors also need to understand any tax implications when holding REITS in the Roth IRA.

Real estate investment is a good investment diversifier and provides long-term value especially when held in a tax-free Roth IRA. As to which type of the IRA accounts or real estate investments suit the investors’ goals the best, the investors will be wise to consult their financial advisers, accountants, and tax professionals first.

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Thursday, February 4, 2016

3 Things You are Not Doing Today that can impact your finances tomorrow

Murali, a 32 year old HR consultant, is worried about how his finances will shape up. His mind is often plagued with questions such as “will I have enough money to live my retirement years peacefully? how would I pay the fee for my child’s engineering degree? What would happen to my family if I am not there? Will they be able to sustain their living expenses in my absence?” Murli is not sure if his finances are on the right track and whether he is control of his future.

Murli’s questions can arise on anyone’s mind. While these concerns are very reasonable, what really matters is that how you address these concerns. You are already doing ‘X’ number of things to manage your finances, but perhaps you may not be doing some things (which you should do!) that can impact your finances tomorrow. Let’s take a look at these things.

1.   Not investing with a goal in mind
When you talk about the future, it usually referred in two timelines: immediate and distant. In the financial language, you can call these timelines as short - term (such as buying a car or renovating your home) and long – term (such as child’s marriage or your retirement). If you don’t classify your investment goals, according to the time horizon, you wouldn’t know how, where and how much to invest.

When you want to accumulate wealth (financial freedom) for the future, you need to start investing early and keep a long term perspective. More the number of years to invest, higher the corpus you would have.

2.   Not Diversifying the Investment Portfolio
In an online survey conducted by ET Wealth recently, 53% respondents admitted that have neither fixed their asset allocation nor follow it. Also, 15.7% respondents said that portfolio doesn’t need rebalancing. Now, if you are not doing asset allocation or rebalancing your portfolio every year, it's a financial slip up at your end. It could affect your financial security in the future.

Let’s say, you are a regular investor. You invest a substantial part of your savings at fixed intervals. But, if you don’t diversify your portfolio, then the chances are you are not going to benefit from the risk-return trade-off in the long run. Have you heard of the saying, “Don’t put all eggs in one basket?” The same logic applies to your investment too.  At the same time, you should also monitor your investments closely and make changes in the allocation as and when you deem necessary.

An investment instrument such as wealth plans from ICICI Prudential are a fine example of sensible asset allocation. These plans give you an opportunity to choose your own percentage of equity and debt funds to earn healthy market-lined returns. You also get the flexibility to switch from one fund to another based on your financial goals and market fluctuations. Additionally, you also get a life cover, which will take care of your insurance needs. Hence, it is advisable to have at least one wealth plan in your portfolio.

3.   Not Automating Your Investments

Surprised? Well, not setting up monthly standing instructions towards your investment could be a serious financial mistake on your part! Let’s take an example here. If you have taken a life insurance policy and decide to pay through a non – ECS mode of payment, you have to depend on manual or automated reminders to pay the premium. If you forget or delay the payment, not only your policy will lapse, but you will also have to pay a late or penalty fee. This may put a brake on your investment till the time you renew the policy again.

To avoid such a situation, it is advisable to go for automated standing instructions. This way, your investments will work like SIPs with multiple benefits. You start it and forget it, without worrying about payment reminders, policy lapse or non – payment charges. The deductions will happen automatically, thereby instilling financial discipline in you.

Your today is like a financial opportunity that you can encash tomorrow. Take advantage of these opportunities as much as you can in your present!
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