Strategies for the successful investor part 7 : Performance obsession

Many investors are obsessed by performance in that they are always on the alerts for tips, hot stocks or emerging sectors of the economy. These investors always want to be on board of the latest bull market. They always want to buy at the lowest price and sell at the highest price.

However what investors need to know is that assets are mostly cyclical and that their ups and down do not takes place at the same time. Hence while one sector of the economy is down another sector will be down. Hence if you invest too heavily in one sector or in one asset then if their is a downturn or a bull market then you will be too exposed to that sector and as a result your portfolio will be adversely affected and you might lose heavily.

The way to go is to be exposed be a wide variety of assets such that when one asset lose value the decrease will be offset by an increase in the value of another asset. Hence if you are exposed to a wide variety of asset classes you will have your eggs in the same basket. In case their is a loss in one type of assets then it will only be a small part of your portfolio.

Hence the way to go is to through heavy indexing of the market. You will need to be exposed to a wide range of index fund and mutual fund. You will invest in bond fund, mutual fund in stocks, etc.

Hence when you will invest in index fund and mutual fund you will not have the need to chase performance. You will be exposed to every sectors of the economy and all this will be done passively. Hence  you will not need to chase performance. Your return will be close to that of the overall market.

Strategies of the successful investor part 4: Rebalancing

One of the most important aspect of your investing life is rebalancing. As you know a portfolio must be diversified in that the portfolio is composed of a wide variety of asset types such as bonds, stocks, etc. Depending on your investment plan and your risk tolerance the different asset classes will be a certain percentage of the portfolio. And in each asset class their would also be some diversification.

You would probably have stocks that are in different sectors of the economy or bonds that are from different types of issuers such as corporate bonds, municipal bonds or government bonds.

Hence it is important that your portfolio composition be as close as possible to that that your plan states. However the economy is not static. Depending on the state of the economy some stocks might increase in value while others decrease in value. This will cause your exposure to these sectors to change. The percentage of the stocks of some sectors of the economy will increase or decrease in your portfolio.

The change in price might also change your exposure to some asset classes. A bull market might increase the percentage of stocks in your portfolio while reducing the percentage of bonds in your portfolio. If left unchecked the asset allocation of your portfolio will change with time and also the riskiness of your portfolio will change. This might thus reduce your chance of reaching your goals.

Thus you need to rebalance regularly. At least once a year is sufficient. Your aim is to reduce your exposure to certain asset classes that have increased in value while increasing your exposure to those that has decreased in value. You will thus return your asset allocation to that that is stated in your investment plan.

You will thus have to sell securities and buy others. This is the most difficult part for some investors because of the cost involved in selling and buying securities. Also some investors may not like selling performing stocks and buying poor performing stocks. However history tells us that a portfolio left to fluctuate with the market always perform poorly.

So keep rebalancing and your portfolio and you will be on course to riches.  

What are treasury notes?

Treasury notes are securities that are issued by governments in order to raise funds to finance deficits. It has a maturity that ranges from 2 to 10 years. Hence it is a security that is traded in the capital market. the capital market is the market in which securities that has a maturity of more than 2 years are traded. treasury bonds is also a security that is traded in the capital market.

The treasury notes are issued at a discount and at maturity the face value is paid to the holder of the notes. The holder of the notes is also entitles to a coupon which is like an an interest paid on a certificate of deposit. This coupon is paid according to a coupon rate which  is merely the percentage of the face value of the note that would be paid as the coupon.

The 10 year note is often used to have an indication of future inflationary expectation. It is often used in the bond spread which is the difference in yield between the 10 year note and the three month treasury bill. The three month maturity date is considered to be so close in the future that the inflation in three month will be close to the actual inflation. The 10 year maturity date however is sufficiently far in the future that the inflation at that time cannot be known. However investors will want to ensure that the yield on the ten year note is adjusted for inflation. Hence the difference between two will be the expected inflation in ten years. The difference in the two yield cannot include a  risk premium like the corporate or municipal bond yield because government treasuries are considered to be the safest of securities.

What are treasury bonds ?

A treasury bond is a government security that has a maturity that ranges from 10 years to 30 years. It is thus a security that is traded in the capital market.

Like the treasury note it is issued at a discount. It also pays a coupon every six months according to a coupon rate. This security is mostly held by institutions that have long term liabilities like pension funds, long term insurers, etc. 

What is an interest-based security?

 

There are two ways in which securities are issued. They are either issued and interest is earned on the principal, hence the term interest-based securities, or they can be issued at a discount or at a premium, hence the term discount based securities.

In this post I am going to talk about those securities that are interest-based.

When you talk about such securities the investor, you, will invest a certain amount of money called the principal. This is the amount that you would invest at the beginning of the contract and at maturity you will receive this same amount. 

Then the return every year on this amount that is invested is called the interest. The interest earned will be calculated using the interest rate on the investment. The higher the interest rate the higher the interest earned.

Hence generally this principal is invested for a length of time ranging from 7 days to five years. The interest rate of the investment also depend on the length of time for which the principal is invested. Generally the longer the time the higher the interest rate. This is because your money is locked in the investment for a longer length of time. You will thus have to be compensated for the decrease liquidity and the greater risk taken.  

Now there are two ways in which interest will be accrued on the principal. It will be either a simple interest  whereby the interest will be calculated every year on the principal alone. Hence you will obtain the same interest every year.

You can read a post on simple interest here.

The other type of interest is the compound interest  whereby the interest earned every year is calculated on the principal and the interest earned in previous years. You can read a post on compound interest  here.

What is a Banker’s Acceptance?

As we have seen in an earlier post, the Banker’s Acceptance is one of the instruments traded in the money market.

It is simply an instruments that are used by companies to obtain funds. It is generally cheaper than loans or overdraft.

Let us take the examples below to understand how it works.

A company needs money to buy goods for the Christmas season and want to obtain funds from the bank and will pay back the money after Christmas. This company generally needs to pay cash especially if it is buying goods abroad where companies do not want to take the risk to give goods on credit.

The company will approach his bank and will enter into an agreement according to the sequence below.

1. The company approach the bank to enquire about the discount rate on BAs.

2. The BA will have a face value that the company will have to pay after a specific period of time. Likewise any investor that have bought the BA on the secondary market and who will present the BA to the bank at maturity will receive the face value as indicated on the BA.

The BA will also contain the commission that the bank will take from the company. Hence the bank will pay the company the face value minus the commission. If the face value is $ 1 million and the commission of the bank is $ 20000 then the company will receive only $ 980 000. 

3. If the bank accepts this agreement it will endorse it. Hence the name of Banker’s Acceptance. If the bank has accepted the agreement it would have to pay the face value of the BA to the holder of the BA at maturity.

4. The bank will then sell the BA on the secondary market where it will be traded until it reaches maturity.

5. At maturity the company will pay back the face value of the BA to the bank. However even if this does not happen, the bank will have to pay the holder the face value.

However I would still discourage small investors from investing directly in the money market. It is much better to invest in a  money market mutual fund.

What is a commercial paper?

The commercial paper is a form of debt securities that is issued by companies. As we have seen in this post on bonds government and corporations issue bonds that have maturities of greater than one year on the capital market. With regards to maturities shorter than one year the government will issue treasury bills whereas corporations will issue commercial papers. The commercial paper will thus be, like the treasury bill, a money market instrument.

Hence the commercial paper will be issued at a discount by companies and at maturity the holder of the commercial paper will be paid the face value of the commercial paper. The discount rate will depend on the credit rating of the company and present market conditions. Since it is only companies with good credit rating that can issue commercial papers, the discount rate will slightly higher than government for treasury bills.

Companies are constantly in need of funds to settle current liabilities and to buy inventories. This is because there is always a mismatch between income and spending, The companies will thus raise the short term fund needed in the money market because use of banks for such short-term financing is costlier and time consuming.

Just like the treasury bills, commercial papers are quite safe. This is because the short-term maturities at which they are issued means that investors can determine whether the firm has a risk of default on the commercial paper. This is because investors would have known from previous financial statements whether the companies is sound and what is the possibility of it going bankrupt. However as you may know banks with their exposure to risky derivatives or bank runs may go bankrupt even if they were sound a few months or weeks before.However given the slight possibility of going bankrupt the return will be slightly higher than on treasury bills.

You might thus think that commercial papers will be good to invest in. However these commercial papers are issued at high denominations. As a result the retail investors like you cannot invest directly in them. Thus the only way to get exposure to them is through money market mutual funds.But like I have said in a previous post it would be better if you invest in stocks, government and corporate bonds and other higher yielding instruments.

Happy investing.

What are treasury bills?

Treasury bills is one type of instruments that is traded in the money market. 

A treasury bill is typically a bond that is issued by a central bank or by a government that has a maturity of less that one year. The treasury bill is sold without coupon payment. A coupon is a payment that is made every six month. It is paid as a percentage of the nominal price of the bond.Hence the treasury bill is sold at a discount and then the government will pay the face value at maturity.

These treasury bills are issued by governments in order to raise funds from the market. Because these bonds are issued by the government of a country it is therefore considered to be the safest asset and as a result would have the lowest return of all. Because of its safety it is used very often to calculate the bond spread of other bonds. The bond spread is simply the difference in return between the other bond and the return on a three month treasury bill. The greater the bond spread the riskier the bonds.

Treasury bills are also the most liquid and the most traded of all instruments. This is mainly because banks and other non-bank financial companies are required by law to hold them. For banks they may be used as collaterals in repo transactions with the central banks or in the interbank market to obtain funds. Because they are highly liquid these institutions hold them so that they can be readily converted to cash to settle obligations. Otherwise if they have excess funds they invest them in treasury bill in order to get a decent return. Short term insurers also hold a significant amount of treasury bills because they also need to have access to their fund on short notice.

These treasury bills are issued in two ways. They are either issued through auctions or over the counter. Banks and other institutions participate in weekly auctions. They state the price, the discount rate and the maturity that they want and the central banks will allocate the bills starting from the one offering the highest offered price. After they are issued in the primary market they can then be sold in the secondary market where you can buy them. However you can still buy them directly from the central bank.

As an investor you might obtain treasury bills at any institutions that have them in their portfolio and are prepared to sell them or over the counter at the central bank. But I would strongly advise investing in a money market fund if you want to gain exposure to the money market.

However since treasury bills are the safest of all investment it makes no sense investing a lot of money in them. At best you can invest 5 to 10 % in them in case you want to diversify your portfolio and decrease the riskiness of your portfolio. I would myself advise about 10% in a money market mutual fund, 10% in a bond mutual fund and the rest in other instruments such as gold, stocks, and so on.    

Some Important Factors Related To Debt Consolidation

If you wish to lower your debt burden and enjoy a single monthly payment for all your debts at a reasonable interest rate, then debt consolidation might be a helpful choice for you. It is important for you to know how you can reduce your debt with debt consolidation. The steps given below would help you get a better idea about the procedure.

• Debt consolidation is the method of combining your various debts from your different creditors into one debt, usually to one lender. There are plenty of resources where you can search for a trustworthy debt consolidation company. Locating the right debt consolidation program and company is essential to becoming successful in debt consolidation.
• Prior to researching consolidation companies, you must have a clear idea of what you’re going to do. You must precisely figure out how much you’re obliged to pay your creditors. Establish a goal of becoming debt free. Don’t make decisions in a hurry. If you have fallen into debt and shift to another location, this does not signify you can make a new beginning and resume borrowing once more. You have to change your spending habits and stress on getting out of debt. Remember you can’t become debt free by acquiring further debt.
• Know that if you go for consolidation, it might ultimately cost you more. For reducing payments, if you go for a more extended repayment term, the outcome would be paying a higher amount of interest. Once more, having the reduced payment might encourage people to assume that they have more money and they again fall into the vicious debt cycle.
• Perform some cautious research and look for inspiring anecdotes. You would obviously search for a company that provides debt counseling and the most reasonable terms and rates for debt consolidation.

Debt is not a pleasant thing but sometimes, you cannot avoid debt. Debt consolidation can be the way out for your debt problems. However, choose a company carefully and check their background with the BBB (Better Business Bureau).

What is a penny stock?

As the name suggest a penny stock that is worth pennies or is quite cheap. The definition varies but any stocks that is very cheap compared to price of solid companies may be considered as a penny stock. That compared to stocks like Microsoft that may worth hundreds of dollars. Since a stock’s price is a reflection of the future earnings of the company then in theory a penny stock is the stock of a company whose earning’s prospect is quite tiny to be respectful.

So what is the fuss you may ask. The penny stocks is composed of two types:

1. The first group of stocks is made up of the stocks of companies that that are going out of business. Think of a company of  camera with reels, a magnetic tape company, or a company that makes floppy disks, etc. These companies may once have been mighty, but their products are now obsolete or their business model have failed and as a result they will certainly go out of business unless they reform or restructure. So any stocks of these companies is throwing money out of the window.

2. The second groups consist of tiny companies that have just started up but do not have the recognition of the bankers. So they are craving for you to give them the chance  that they need. Think of Microsoft or apple in the 70s.However you also know that 90% of small businesses will go out of business in the next 2 years. So it is still quite difficult to spot the company that will make it big.

Now that you have understood what penny stock is you can see that it is quite risky to invest in them but if you are able to spot the one then you can multiply you money by a lot.

 

Let us look at the factors that makes these stocks risky.

1. These stocks are generally not listed on an exchange. This may be because to list on an exchange a company have to abide to some strict conditions such as financial reporting guidelines, directors have to abide to some rules, etc. If these companies cannot abide to these rules that are there to protect shareholders or other stakeholders, then it is not a good idea to invest in them. Financial statements will enable you to analyse the company’s performance other several years and see if they are worthy of your money. The companies may be run by convicted directors. Companies run by convicted companies will not be allowed to list on exchanges and if they are not listed on exchanges they will not provide reports and as a result you will not know about the directors. As you can see there are a lot of risks.

2.If you have bought these stocks then someone out there may be thanking all the gods of the earth. You do not get an idiot everyday to buy a stocks that no one want. This is because penny stocks are illiquid that is they are difficult to sell. There are a lot of sellers but a few buyers. The only way people can sell their penny stocks is only if someone is foolish enough to buy it.

3. These stocks are easily manipulated by fraudsters. Since they are illiquid and hard to sell, some people buy them cheaply and then make a hype about the stock so that unsuspecting buyers will but them at a higher price.

As you can see it is quite risky to buy these types of stocks. Although you would make it big if you can buy in the next apple or the next Microsoft it is more likely that you will lose your money. So just like I advise investors to avoid derivatives, I would advise them to avoid penny stocks. Invest in healthy companies. Also if a listed companies is delisted or is about to delisted get out immediately.

Good luck to you all in your investing.

Strategies of the successful investor part 3:Do not follow the herd

If there is one thing that I have learned during this 2008-2009 recession is that following the herd is pointless and a waste of time. Hence while everyone was selling in the stock market and buying in the money market, I have been buying stocks on the cheap. the same thing goes for the bond market.

The reason for this is an old instinct from when humans were still like animals, the crowd effect or the herd effect. This instinct meant that when you see a whole bunch of people running in a certain direction, then it must mean that they are running away from a danger and as a result you must run with them.

So how does this translate in the investing world? If you see a lot of investors buying or selling a particular stocks then it must mean that they are right and as a result you must buy that stock too. The second reason is that as people buy that particular stock its value increases and the gain or return on investment increases. As the gain increases those that have not yet bought the stock would be pressured to buy the stock either by the investors that they work for or by their employers. This is a vicious cycle that few could resist.

Guest what I have done it and you can do it also.  How so you would ask.

First of all the only way you could make money on such bull market is to buy it first when it is cheap and then selling to the herd followers when has risen to a high enough value. I would say that this is difficult to do. If you have seen it the surely a lot of people would have seen it. However if you have been able to see it early and get on the bandwagon just wait until it is high enough and wait for some time and sell it so someone else. Do not wait for the top of the ride because when people realised it is all bullsh_t then they would be selling and you would not be able to get your money back.

Apart from such herd following tactics I have my own way of buying stocks. Research is important and as a result you must educate yourself in economics and some basic accounting. Certainly you can watch TV or read newspapers but only to get information on the economy and on spotting trends in the economy that you can exploit by investing in companies that are in that sector.

When you have learned some basic knowledge you can use that knowledge to research companies. You would analyse their financial statements, their future probability and the market they are in. For example you could see that KodaK and their future in the photo reel market is a dead end as they are entering the digital photography market fast enough.

If you want to go into mutual funds, index funds and Exchange traded fund then you could use your knowledge to research the different companies that are offering them. You would make research on historical return, management, commissions and fees and so on.

Very often you would come across the internet websites that promises to teach you how to invest and as a result you would obtain great return. Most of the time you would have to buy a report or a document that promises to give you tips on how to invest and as a result you will make great return. Most of these are false promises and a complete waste of money. Imagine if you have discovered a stocks that promises great return, would you make it public? Certainly not! you would secretly buy it little by little so as not to arouse suspicion. You would keep it a secret and earn the return alone. That is why you should keep to your plan and not buy all the crap documents that are being sold on the internet.

Sure I read on the internet but only information websites like the BBC, Yahoo money or famous economics like Paul Krugman. These website will give analysis on the economy as a whole and will give you indications on what the economy is going to do.

The last advise that i would give is to make your own research and follow your investment plan. Never never follow the crowd. Stick to your investment plan and to you asset allocation and you would stay on tract to meet your objectives.

strategies of the successful investor part 2 :Time is your best friend

As I have written in an earlier post, time is the best friend of the investor. As we have seen in the first post you will have to draw up a plan. this plan will contain information about for objectives, risk tolerance, risk tolerance and asset allocation.

However the time that you have will impact on these four aspects on you investment life.

I am going to take the examples of a person saving for sending his child to university and for retirement and talk about how the time aspect would affect the achievement of these objectives.  

Suppose that a person who is 20 years old want to retire at the age of 60 years old and also to save money for a child who has just been born. Such a person has 40 years to grow his portfolio for his retirement and 20 to send his child to university. Such a person has time on side.

This person can afford to be risk averse and conservative and invest in a greater amount of safe assets. This person can also invest a smaller amount  of money every month because he has the advantage of compounding. Compounding will ensure that his money will grow with time even with small monthly investment. Such a person would be able to achieve his objectives with no problems.

On the other hand if a person is 35 years old and want to retire at 60 years old and want to send his child to university in 10 years then this person will not have time on his side. This person will have to invest more aggressively and cannot afford to be risk averse and must choose assets with greater riskiness but with greater return. Such a person will not also have the advantage of compounding and as a result will have to invest more every month. This person may have no choice but to delay retirement or the time set to attain the objectives.

The lesson that we can learn today is that if you have time on your side then you are a lucky guy. But if you do not have time on your side then it would be harder.

Strategies of the successful investor Part 1: Set up a plan

This is the first part of a series of post which would be about the strategies of the successful investor. As we have previously discussed the only way to be secured financially is through investing. However there are some very important things the the beginner investor must keep in mind so that his portfolio will grow with time.

A plan is the cornerstone of your investing journey. The plan is simply a document that would guide you and make sure that you do not get off-track.

It contains firstly your objectives.Each person may have different objectives and to state them clearly and the time available is crucial to your plan. You may want to retire in 35 years or to send your child to college.

After having written your objectives you would thus try to determine the amount of money that would be required to achieve these objectives.

After having identified your objectives and the money that would be needed, you would then be able to identify the return that would be required to reach that amount of money. Your portfolio will thus have to have a certain annual return so that you will be able to reach that objectives. If you cannot reach that return then you would be unable to achieve your objectives.

However the return is also related to another term and that is your risk tolerance. This is related to the different component of your portfolio and the return of your portfolio. You have to understand that some investment instruments are risky in that you can lose your money especially if the company go bankrupt but if you can hold on to it and the company stays afloat you would have greater return. The higher the riskiness and the greater the return. Some people have a low tolerance and as a result would want safe assets. However safe assets would result in low return. Hence if you want higher return you would have to invest in riskier assets.

After having chosen the return that you want and the risk that you are prepared to tolerate you would thus be able to choose the investment instruments that you need to invest in to achieve the return that you want. 

What is a money market?

The money market is one of the markets that companies and government used to raise funds. What is special about the money market is that securities with a maturity of less that one year are traded in it.

In general all of the money market are debt instruments issued government, banks and companies. These instrument are very liquid and quite safe. As a result because of this safety they have a relatively low return. You would understand that generally instruments that are quite risky have higher yield and vice versa.

The following are the different money market instruments that you can invest in:

1. Treasury bills
2. Banker’s acceptance 
3. Negotiable certificate of deposits
4. repos and reverse repos
5. Commercial papers
6. Eurodollars

However compared to the stock market whereby individual investors can buy individual stocks, money market instruments are issued in high denominations and as a result it is quite difficult for individual investors to but them. The only way for investors to invest in them is through mutual funds and exchange traded funds. However if you have a lot of money you can buy treasury bills from the reserve bank offices.

These money market instruments are like instruments in the bond market in that they are not traded in a stock exchange like shares but are traded over the counter.

There are various reasons for an investor, a bank or an institution to buy securities in the money market and they are as follows:

1. The securities in the money market are very secure and as a result investors that have some money for a short period that they cannot lose prefer to invest in the money market and get a small return until they need the money. They can when needed sell the securities easily to get their money back since money market securities are highly liquid.
2. Some banks are obliged by law to hold a certain amount of money market securities to use as collateral in repo transaction with the central bank. These banks must also have assets that they can easily convert to cash in case money is needed to satisfy liabilities. Since these money market securities are highly liquid they are easily sold in the secondary market.
3. Some type of financial market institutions like short term insurer need by law to hold a certain amount of highly liquid money market instrument so that they can   meet their liabilities.
4. Some investors are risk averse and as a result they have a low risk tolerance. These investors prefer to forgo the high return associated with stocks and prefer to hold safe money market securities that however have low return.
5. Investors and financial institutions that have excess cash, for example after selling stocks and bonds that are falling in value or are about to default and are waiting to invest in other securities, can invest in money market securities and have a small return instead of holding cash with no return.

There are also many other reasons for investing in the money market and as time go by I would increase and refine the list above. So if any of the reasons is appropriate to you then go ahead.

However keep in mind that in the long run investing in the money market is not advised as the return is low. However there is a type of investing strategies called the permanent portfolio that relies on investing in the money market. I would write on it in another post.

How to borrow from prosper?

I must say that ever since Grameen started giving small loans to people, no other organisation has been able to replicate that except may be prosper.

What is prosper?

Proper is an organisation that link those that have money to those that needs money. In a way it is a financial intermediary but with one difference. It is not like one of those greedy banks that give loans at high interest rates and give small interest to savers. It gives the person with money control over who receives his money and at what interest rate. It also allows borrowers with good credit rating, but who have not been getting loans from banks recently, to get some decent loans at reasonable interest rate.

How to borrow from prosper?

In order to borrow from prosper i must be clear from the beginning that not everyone that are not receiving loans from the traditional banks will get it from prosper. If no body is giving you a loans it may be because you have not been paying your loans properly in the past and have a low credit rating. Prosper lends to people with credit rating 520 and above. If you have a lower credit rating you might want to improve it until you are above 520. I will write about credit rating and improving it in future post. If you qualify for prosper read on.Step 2. Complete a loan application.

You will start by filling out a form at prosper.com. You will give all your details and prosper will use these details to check your credit rating. Based on your credit rating prosper will classify you from AA - the best through E and HR (high risk). If you have a rating below 520 your application will be rejected.

Once you have been approved and registered you can now apply for loans. You will fill a form telling lenders how much you want, at what interest rate you are prepared to borrow and what you will do with the money. It is appropriate not to lie and to tell. Since many people lend after having read the application, the better your story the better your chance of getting the loan. Remember that depending on your credit rating, the interest rate at which people are prepared to lend to you will vary. So follow the table provided by prosper. If you deviate too far from the suggested rate, lenders will not lend to you.

Once you have filled your loan application, it will be listed. People will bid on portions of the loans. This is better because if you default then the loss will be shared by many lenders. This s called diversification. After 10 days if the loans have been fully funded then your loan will be approved. The interest rate will be the average of the interest rate that the lenders are offering.

After the loan has been approved the money will be credited to your account and prosper will charge a fee ranging from 1% to 2% of the loan.

After the loan has been granted you will have to pay every month the same amount for three years. If you default then it means that the last company that was prepared to lend to you is closed to you now. So be careful. Be on time.

If you have any experience to share with us or a question leave a comment below.

Stay away from credit card?
The snow ball. A better way of reducing your debt.
How to live within your means
Good debt or bad debt. Can you make the difference?
Invest or debt reduction
Credit card debt - The investors worst nightmare
What is debt consolidation?
How to consolidate a debt??

How to calculate compound interest on an investment

This calculator will enable you to calculate the compound interest on an investment. This is applicable if you invest a sum of money but do not remove the interest for use. As a result you will earn interest on the interest that was earned in previous years.


This is in contrast to simple interest that you earn when you remove the interest for spending and do not allow interest to accrue on it.

Please click on "click to edit" and then enter your information.

I hope that this calculator has helped you. If you have any question or idea about any calculator leave a comment.

What is compounding?
How to calculate the interest in your loan
Fixed and variable interest.
How to calculate simple interest on an investment
Simple and compound interest

How to calculate simple interest on an investment or a loan

This calculator will enable you to determine simple interest on a principal and the amount that will be left after a certain time. This is applicable in case you remove the interest for spending.

For example if you have a fixed deposit and every year you remove the interest and spend it.

Please click on "click to edit" and then enter your information.



How to calculate the interest in your loan
Fixed and variable interest.

The different types of mutual funds

This is the second part of a series on mutual funds . Like i said on the previous post, mutual funds are the investor's best friend. Especially if you want the easy approach to investing. However mutual funds come in a range of flavour ranging from the safe and conservative one to the risky and high yield ones. As a result in order to understand what type is better for you, you will need to understand the concept of risk and risk tolerance. That is how much risk can you accept in you investment.

The simple rule goes like this. The riskier the mutual fund the higher the risk and the more conservative and safe it is the lower the return.

What are the types of mutual funds?

1. Equity Funds

Equity funds invest only in equities. However you may have funds that invest across the board or you may have funds that are more specialised. Some funds invest in all different types of companies and of all sizes and as a result offer some diversification. However some mutual funds invest in special sector of the economy such as green, gold or technology. Others might invest only in large, medium or small caps companies. While these funds may offer some potential for growth it is unwise to invest all your money in a fund that invest in one sector or one type of company only. If you are really interested i would suggest investing only a small amount like 5 % of your money.

I would strongly suggest investing in a fund that offer some diversification in different sectors and in different company sizes. If you are really interested invest a small part of your money in a fund like gold, green , etc that has some growth potential.

2.Bond Funds

as I have mentionned in the post on deversification and in the post on bonds, bonds offer some advantage to the investor. Bonds can bring some stability to your portfolio and bring regular income in opposition to stocks which may not give regular payment as dividends payment depend on management. A bond fund would thus invest in bonds and since bonds pays biannual coupon payment the bond will give you regular payment.

A bond fund is thus the ideal investment for a retiree for example who would have had to invest in bonds so as to be able to generate regular income. Otherwise he would have had to design a bond ladder which may be beyond the normal investor's capacity.

Like equity some mutual funds invest accross the board in a wide range of bonds of various maturity, risk and issuers. This afford some diversification and risk reduction.

However there are also a lot of mutual funds that invest in a lot of different types of bonds. some would invest only in corporate bonds, muni bonds, government bonds, junk bonds, etc. These bonds may offer some great returns but because they are specialised there is greater risk. I would advise you to invest only in a general bond fund or to invest only a small amount of money in a special fund that you like. However remember that the most fund you invest in, you increase the fees and commissions that you have to pay annually.

3. Money Market Funds

The money market is the market that deals in the trading of short term securities. That is securitie that mature in one year or less such as treasury bills, cds, etc. As you might guess such securities would offer the lowest yield but are the most secure and safe. There is no chance that you can lose your money with a money-market mutual fund. If you have some money that you cannot afford to lose but you want to earn something with it until you need it then the money-market fund is ideal for you. It gives more earning than the CDs or savings accounts.

4. Balanced Funds

The balanced mutual fund can be said to be a mixture of the equity and bond mutual fund. It provide the advantage of long term growth and gain from stocks and the possibility of regular income with bonds. I would therefore strongly reccomend this type of fund for the average investor since it provide the advantages of both stocks and bonds.

Or you could buy in one general bond fund and one general equity fund.

5. Index Funds

The index is simply an index fund that is trying to emulate another index. For example an index fund can have the same shares of all the companies in the Dow Jones. The fund will thus rise and fall in value with the Dow Jones. You can read a post here on index fund.

This is also a good way to invest. Since stocks grow in the long term an index fund will grow in value with time.

6. Speciality funds

These mutual funds invest in stocks or investment instruments of a particular kind. You might have an african stock mutual fund, a chinese stock mutual fund, a gold stock mutual fund, a chinese companies corporate mutual fund, etc. The list is long. I would however strongly discourage investing in those funds as you lack diversity and they are generally riskier. If you really have to invest, invest only a small part of you money.


If you would like to share your experience with us or to ask a question, leave a comment below.

Introduction to diversification
What is an index fund?
What is a mutual fund?

What is a mutual fund?

I think that one of the average investors' best friend is the mutual fund. So What is it and why is it that good for you?

The mutual fund is a group of investors who pool together their money and with the help of a manager buy a collection of stocks, bonds and other investment instruments. Each investors will then own a share of the collection of investment instruments.

So how do you go about investing in mutual funds? You will how to find a company that manages a mutual fund. You will then buy invest your money in the company and you will be given share in the mutual funds.

For examples if you invest $ 100 dollars in a mutual funds that has a total of $ 1000 invested. It means that you own 10 % of the mutual fund and as a result you will have a right to 10 % of the profit after expenses has been paid.


So how does the mutual fund obtain its profit?

The mutual fund get its profit in three ways:

1. The dividend on stocks, coupon payment on bonds and profit on other investments.

2. The mutual fund can sell investment that has been bought at a cheaper rate and that would result in a capital gain.

This profit is then used to pay expenses and after that the remaining profit is distributed among the members.

Another way you can get money is to buy shares from the mutual fund and then when the mutual fund's value increases you can sell the shares for a profit.

Advantages of mutual funds

Investing in a mutual funds has a lot of advantages.

1. Experience manager

The fund will be managed by a seasoned investor with a lot of experience. Most likely if you are investing in a mutual fund it means that you are inexperienced or you do not have enough time to manage your portfolio. Hence the mutual fund is good for you, the manager will invest your money for you and you just have to sit back and watch you money grow.


2. Diversification

You would remember my post on diversification. It is important that you do not invest in stocks or bonds from one company only. Investing in mutual funds will ensure that you are sufficiently diversified because the mutual fund will buy all sorts of stocks, bonds, and other instruments. Hence by investing in a mutual funds it is as if you own shares, bonds and other instruments in those companies. Hence if one company go under it would have limited effect on the mutual fund.

3. Lower cost

Because mutual funds buy investment instruments for a lot of people the cost of buying these instruments decreases considerably. If for example one person was to buy some shares by himself he would pay lets say $ 4. However if the mutual fund was to buy the shares it would also pay the same fee. It would thus mean that the cost to buy these shares will be distributed among the members of the mutual fund. This cost advantages is a definite advantage if you want to invest small amount of money and you do not want to lose a lot of your money in fees and commissions. Read this article for more details.

3. Money back easily

You would remember from bonds or stocks that it is not easy to get your money back. In the case of bonds you will have to wait for the maturity, trade it in the secondary market at a loss or pay a premium up front that will allow you to redeem you bonds before maturity. For stocks on selling the stocks you will have to pay a fee and if you have a portfolio for each type of stocks sold you will pay a fee. However for the mutual fund you just have to contact the mutual fund and you get your money back. It is as easy to get in or get out.

Disadvantages of Mutual Funds:

1. "Experienced manager"

As you can see we have the same advantage and disadvantage. Why is that? That is because a professional investor is not necessarily a good mutual fund manager. On the one hand when he is an investor he is managing his own money on the other hand when he is a mutual fund manager he is managing your money and he is paid whether there is a profit or a loss as he is only an employee. In this case it is better to invest in a mutual fund where the manager has his own money invested in the fund. It could also happens that the manager may be running a scam as the Bernie Madoff scandal showed. So shop around. I would suggest that if you want to diversify have two three different mutual fund with different companies. You could have a stock fund, a bond fund and a money market fund with three different companies. If one goes under you will not lose everything.


2. Higher Cost

Again it might mean that i am contradicting an advantage but there some mutual funds that have a lot of cost so that it would have been better if you have managed you money yourself. First of all a mutual fund is a business who has to have a profit. The mutual fund need to pay fees and commissions when buying and selling securities, postage and other administrative fees, rent, wages of employees and manager, advertising fees , etc. In some mutual funds these fees may be considerable and as a result can really reduce your earnings. So be careful when choosing your mutual fund.

3. Overdiversification

Since the mutual fund will buy into a lot of companies and a lot of bonds it may happen that you are overdiversified. If you invest in a limited number of securities it is easy to spot one that is a drag on your profit and remove it. However in a large basket of securities it is more difficult to do so and you will have some good investment that will hide some bad investment. Furthermore you may invest in a lot of companies in the same category which is not a good strategy.


So as you can see the mutual fund can be a good investment but it may have some disadvantages if you are not careful.

Please read the next post on the different types of mutual funds.

If you have some questions or want to share your experience with us, please leave a comment.

Introduction to diversification
What is an index fund?

What are the different types of mutual funds?

What are the different type of bonds?

The last few days I have been writing on bonds. I wrote on what a bond is and what are the differences in yield and risk associated with bonds that are issued by various entities.

There are different types of bonds. You would remember from my first post that a bond

(i) is issued at a price that may or may not be different from the face or par value,
(ii) pays coupons or interests at different times of the year,
(iii) has a maturity date and
(iv) at maturity the issuers will pay you your principal back.

However not all bonds are the same. Some bonds would have one or more of the characteristics change to either the advantage of the issuer or the bond holder. If the advantage is to the issuer the bond will be cheaper,have a higher yield or heavily discounted. If the advantage is to the bond holder the bond will be more expensive to buy, have a lower yield or issued at a premium.

Here are the different types of bonds that i know.

1. Fixed rate bond also called straight bond or plain bond.
This would be the most common type of bonds. This bond will be issued and will mature after a period of time. It will pay coupon or interest twice a year at a given rate that would remain fixed until the bond matures. The principal or the face value will be paid upon maturity along with one last coupon.

2. Zero-coupon or Accrual bond

This type of bonds would pay no coupon or interest. It would be issued at a big discount and at maturity you would get back your principal. If the bond has a par or face value of $ 100 it might be issued at $ 60. And at maturity you would be paid the sum of $ 100.

This is not good for the investor since if the issuer default you would lose everything especially if the bond has a long maturity. So better avoid this one.

This is a type of bond that makes no coupon payments but instead is issued at a considerable discount to par value. For example, let's say a zero-coupon bond with a $1,000 par value and 10 years to maturity is trading at $600; you'd be paying $600 today for a bond that will be worth $1,000 in 10 years.

3. Perpetual bond

A perpetual bond is a bond that has no maturity date. It will continue to make coupon payments from the time it is issued for ever. However there is a trick in it. It is also a callable bond. See below for what a callable bond is. It means that after a period of 5 years or depending on the stipulations of the bond the issuer can recall it at any time and give you back your principal.

However if it is not callable, then it would be similar to stocks with the exception that you will not have voting rights. However you coupon rate will be fixed compared to shareholders who are not certain to receive dividends

This is a nice bond to invest into since you have the possibility to get coupon payments for a long time. However this type of bond is rarely issued and personally I would discourage this type of bonds since it give some uncertainty in your portfolio. It is better to just invest in a long term bond or medium term bond if that is your wish.

4. Inflation-indexed bond
This is a bond that is protected against inflation. It is going to have a coupon rate that is a few percentage point above the official interest rate. This will ensure that you do not lose money in high inflationary times when the rate of inflation will be higher that the coupon rate of normal bond.


5. Convertible bond

A convertible bond is one that will give you the right to convert it into a certain number of shares of the issuing company. You would however remember from above that stocks and bonds each has its own advantages so think well before converting your bonds.

6. Reverse convertible

This bond is the reverse of the convertible bond in that it gives the issuer the right to convert the bond to cash or stocks of a company. As you may have guess this is not good for you since it gives the company more rights than you.

7. Callable bond

A callable bond gives the issuer the right to call the bonds before maturity and pay the bond holder his principal. This is not advisable for a bond holder, because if you have locked in a high coupon rate, you would not want the company to call it back and then be forced to buy a bond with a lower coupon rate.

8. Puttable bond

A puttable bond gives the bondholder the right to sell the bond back to the issuer before the maturity date. This is advisable if you are buying bonds at a low coupon rate and you are anticipating a rise in bond coupon rate.



* Inverse floaters pay a variable coupon rate that changes in direction opposite to that of short-term interest rates. An inverse floater subtracts the benchmark from a set coupon rate. For example, an inverse floater that uses LIBOR as the underlying benchmark might pay a coupon rate of a certain percentage, say 6%, minus LIBOR.


9. Exchangeable bond

Such a bond is similar to the convertible bond except that it gives the bondholder the rights to convert the bond into stocks of a particular company at a particular time in the future and in certain condition.


10. Floating rate bond

A floating rate bond is one whose coupon rate will vary with a certain index such as the rate on the 6 month treasury bill. So if you think that the 6 month treasury bill rate is going to rise you can buy a floating rate bond and linked it to the index.

11. Inverse floating rate bond

This bond will have a coupon rate that will be as in the floating rate bond above except that the coupon rate will be a number minus the index. For example you might want the coupon rate to be (10 - yield on a treasury bill )%. Hence if you are anticipating the rate on the treasury bill to fall you can buy an inverse floating rate bond linked to it.


One last piece of information. These bond flavors are not without effort. For those that comes at an advantage to the bondholder a fee must be paid with the cost price. For those that come at an advantage to the issuer a discount or an increase yield is needed.

If you have any questions or you think that i have missed one please leave a comment below.


What is a bond?
Stocks have higher return than bonds
Introduction to diversification
What is a bond ladder?
The importance of the bond issuer?