5 Popular Portfolio Types

Courtesy : Investopedia

Stock investors constantly hear the wisdom of diversification. The concept is to simply not put all of your eggs in one basket, which in turn helps mitigate risk, and generally leads to better performance or return on investment. Diversifying your hard-earned dollars does make sense, but there are different ways of diversifying, and there are different portfolio types. We look at the following portfolio types and suggest how to get started building them: aggressive, defensive, income, speculative and hybrid. It is important to understand that building a portfolio will require research and some effort. Having said that, let's have a peek across our five portfolios to gain a better understanding of each and get you started.

The Aggressive Portfolio
 
An aggressive portfolio or basket of stocks includes those stocks with high risk/high reward proposition. Stocks in the category typically have a high beta, or sensitivity to the overall market. Higher beta stocks experience larger fluctuations relative to the overall market on a consistent basis. If your individual stock has a beta of 2.0, it will typically move twice as much in either direction to the overall market - hence, the high-risk, high-reward description.
Most aggressive stocks (and therefore companies) are in the early stages of growth, and have a unique value proposition. Building an aggressive portfolio requires an investor who is willing to seek out such companies, because most of these names, with a few exceptions, are not going to be common household companies. Look online for companies with earnings growth that is rapidly accelerating, and have not been discovered by Wall Street. The most common sectors to scrutinize would be technology, but many other firms in various sectors that are pursuing an aggressive growth strategy can be considered. As you might have gathered, risk management becomes very important when building and maintaining an aggressive portfolio. Keeping losses to a minimum and taking profit are keys to success in this type of portfolio.

The Defensive Portfolio
 
Defensive stocks do not usually carry a high beta, and usually are fairly isolated from broad market movements. Cyclical stocks, on the other hand, are those that are most sensitive to the underlying economic "business cycle." For example, during recessionary times, companies that make the "basics" tend to do better than those that are focused on fads or luxuries. Despite how bad the economy is, companies that make products essential to everyday life will survive. Think of the essentials in your everyday life, and then find the companies that make these consumer staple products.
The opportunity of buying cyclical stocks is that they offer an extra level of protection against detrimental events. Just listen to the business stations and you will hear portfolios managers talking about "drugs," "defense" and "tobacco." These really are just baskets of stocks that these managers are recommending based upon where the business cycle is and where they think it is going. However, the products and services of these companies are in constant demand. A defensive portfolio is prudent for most investors. A lot of these companies offer a dividend as well which helps minimize downside capital losses.

The Income Portfolio
An income portfolio focuses on making money through dividends or other types of distributions to stakeholders. These companies are somewhat like the safe defensive stocks but should offer higher yields. An income portfolio should generate positive cash flow. Real estate investment trusts (REITs) and master limited partnerships (MLP) are excellent sources of income producing investments. These companies return a great majority of their profits back to shareholders in exchange for favorable tax status. REITs are an easy way to invest in real estate without the hassles of owning real property. Keep in mind, however, that these stocks are also subject to the economic climate. REITs are groups of stocks that take a beating during an economic downturn, as building and buying activity dries up.
An income portfolio is a nice complement to most people's paycheck or other retirement income. Investors should be on the lookout for stocks that have fallen out of favor and have still maintained a high dividend policy. These are the companies that can not only supplement income but also provide capital gains. Utilities and other slow growth industries are an ideal place to start your search.


The Speculative Portfolio
 
A speculative portfolio is the closest to a pure gamble. A speculative portfolio presents more risk than any others discussed here. Finance gurus suggest that a maximum of 10% of one's investable assets be used to fund a speculative portfolio. Speculative "plays" could be initial public offerings (IPOs) or stocks that are rumored to be takeover targets. Technology or health care firms that are in the process of researching a breakthrough product, or a junior oil company which is about to release its initial production results, would also fall into this category.
Another classic speculative play is to make an investment decision based upon a rumor that the company is subject to a takeover. One could argue that the widespread popularity of leveraged ETFs in today's markets represent speculation. Again, these types of investments are alluring: picking the right one could lead to huge profits in a short amount of time. Speculation may be the one portfolio that, if done correctly, requires the most homework. Speculative stocks are typically trades, and not your classic "buy and hold" investment.

The Hybrid Portfolio
 
Building a hybrid type of portfolio means venturing into other investments, such as bonds, commodities, real estate and even art. Basically, there is a lot of flexibility in the hybrid portfolio approach. Traditionally, this type of portfolio would contain blue chip stocks and some high grade government or corporate bonds. REITs and MLPs may also be an investable theme for the balanced portfolio. A common fixed income investment strategy approach advocates buying bonds with various maturity dates, and is essentially a diversification approach within the bond asset class itself. Basically, a hybrid portfolio would include a mix of stocks and bonds in a relatively fixed allocation proportions. This type of approach offers diversification benefits across multiple asset classes as equities and fixed income securities tend to have a negative correlation with one another.
The Bottom Line
At the end of the day, investors should consider all of these portfolios and decide on the right allocation across all five. Here, we have laid the foundation by defining five of the more common types of portfolios. Building an investment portfolio does require more effort than a passive, index investing approach. By going it alone, you will be required to monitor your portfolio(s) and re-balance more frequently, thus racking up commission fees. Too much or too little exposure to any portfolio type introduces additional risks. Despite the extra required effort, defining and building a portfolio will increase your investing confidence, and give you control over your finances.

Stashing Your Cash: Mattress Or Market ?

Courtesy : Investopedia

When stock markets become volatile, investors get nervous. In many cases, this prompts them to take money out of the market and keep it in cash. Cash can be seen, felt and spent at will, and having money on hand makes many people feel more secure. But how safe is it really? Read on to find out whether your money is safer in the market or under your mattress.

All Hail Cash?
 There are definitely some benefits to holding cash. When the stock market is in free fall, holding cash helps you avoid further losses. Even if the stock market doesn't fall on a particular day, there is always the potential that it could have fallen. This possibility is known as systematic risk, and it can be completely avoided by holding cash. Cash is also psychologically soothing. During troubled times, you can see and touch cash. Unlike the rapidly dwindling balance in your portfolio, cash will still be in your pocket or in your bank account in the morning.
However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term. 

A Loss Is Not a Loss

When your money is in the stock market and the market is down, you may feel like you've lost money, but you really haven't. At this point, it's a paper loss. A turnaround in the market can put you right back to break even and maybe even put a profit in your pocket. If you sell your holdings and move to cash, you lock in your losses. They go from being paper losses to being real losses with no hope of recovery. While paper losses don't feel good, long-term investors accept that the stock market rises and falls. Maintaining your positions when the market is down is the only way that your portfolio will have a chance to benefit when the market rebounds.

Inflation Is a Cash Killer
 While having cash in your hand seems like a great way to stem your losses, cash is no defense against inflation. You think your money is safe when it's in cash, but over time, its value erodes. Inflation is less dramatic than a crash, but in some cases it can be more devastating to your portfolio in the long term. 


Opportunity Costs Add Up.
 
Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, opportunity cost refers to the benefits you could have received by taking an alternative action. In the case of cash, taking your money out of the stock market requires that you compare the growth of your cash portfolio, which will be negative over the long term as inflation erodes your purchasing power, against the potential gains in the stock market. Historically, the stock market has been the better bet.

Time Is Money
 
When you sell your stocks and put your money in cash, odds are that you will eventually reinvest in the stock market. The question then becomes, "when should you make this move?" Trying to choose the right time to get in or out of the stock market is referred to as market timing. If you were unable to successfully predict the market's peak and sell, it is highly unlikely that you'll be any better at predicting its bottom and buying in just before it rises.


Common Sense Is King

Common sense may be the best argument against moving to cash, and selling your stocks after the market tanks means that you bought high and are selling low. That would be the exact opposite of a good investing strategy. While your instincts may be telling you to save what you have left, your instincts are in direct opposition with the most basic tenet of investing. The time to sell was back when your investments were in the black - not when you are deep in the red.

Buy and Hold on Tight.
 
You were happy to buy when the price was high because you expected it to go higher. Now that it is low, you expect it to fall forever. Look at the markets over time. They have historically gone up. Companies are in business to make money. They have a vested interest in profitability. Investing in equities should be a long-term endeavor, and the long term favors those who stay invested.Serious investors understand that the markets are no place for the faint of heart.

This is also the time to review the strength and weakness of our portfolio  and make necessary reshuffling to make it ready for next up move.Don't hesitate to sell the stock of a company in loss if we could find a better opportunity in another one considering the changing business environment.

The Ups And Downs Of Investing In Cyclical Stocks

Courtesy : Investopedia


Imagine being on a Ferris wheel: one minute you're on top of the world, the next you're at the bottom - and eager to head back up again. Investing in cyclical companies is much the same, except the the time it takes to go up and down, known as a business cycle, can last years.
What Are Cyclical Stocks?Identifying these companies is fairly straightforward. They often exist along industry lines. Automobile manufacturers, airlines, furniture, steel, paper, heavy machinery, hotels and expensive restaurants are the best examples. Profits and share prices of cyclical companies tend to follow the up and downs of the economy; that's why they are called cyclicals. When the economy booms, as it did in the go-go '90s, sales of things like cars, plane tickets and fine wines tend to thrive. On the other hand, cyclicals are prone to suffer in economic downturns. 

Given the up-and-down nature of the economy and, consequently, that of cyclical stocks, successful cyclical investing requires careful timing. It is possible to make a lot of money if you time your way into these stocks at the bottom of a down cycle just ahead of an upturn. But investors can also lose substantial amounts if they buy at the wrong point in the cycle. 

Comparing Cyclicals to Growth Stocks

All companies do better when the economy is growing, but good growth companies, even in the worst  conditions, still manage to turn in increased earnings per share year after year. In a downturn, growth for these companies may be slower than their long-term average, but it will still be an enduring feature.
Cyclicals, by contrast, respond more violently than growth stocks to economic changes. They can suffer mammoth losses during severe recessions and can have a hard time surviving until the next boom. But, when things do start to change for the better, dramatic swings from losses to profits can often far surpass expectations. Performance can even outpace growth stocks by a wide margin.

Investing in Cyclicals
 
So, when does it pay to buy them? Predicting an upswing can be awfully difficult, especially since many cyclical stocks start doing well many months before the economy comes out of a recession. Buying requires research and courage. On top of that, investors must get their timing perfect.
Investment guru Jim Slater offers investors some help. He studied how cyclical industries fared against key economic variables over a 15-year period. Data showed that falling interest rates are a key factor behind cyclicals' most successful years. Since falling rates normally stimulate the economy, cyclical stocks fare best when interest rates are falling. Conversely, in times of rising interest rates, cyclical stocks fare poorly. But Slater warns us to be careful: the first year of falling interest rates is also unlikely to be the right time to buy. He advises that it's best to buy in the last year of falling interest rates, just before they begin to rise again. This is when cyclicals tend to outperform growth stocks.

Before selecting a cyclical stock, it makes sense to pick an industry that is due for a bounce. In that industry, choose companies that look especially attractive. The biggest companies are often the safest. Smaller companies carry more risk, but they can also produce the most impressive returns.
Many investors look for companies with low P/E multiples, but for investing in cyclical stocks this strategy may not work well. Earnings of cyclical stocks fluctuate too much to make P/E a meaningful measure; moreover, cyclicals with low P/E multiples can frequently turn out to be a dangerous investment. A high P/E normally marks the bottom of the cycle, whereas a low multiple often signals the end of an upturn.

For investing in cyclicals, price-to-book multiples are better to use than the P/E. Prices at a discount to the book value offer an encouraging sign of future recovery. But when recovery is already well underway, these stocks typically fetch several times the book value. For instance, at the peak of a cycle, semiconductor manufacturers trade at three or four times book value.
Correct investment timing differs among cyclical sectors. Petrochemicals, cement, pulp and paper, and the like tend to move higher first. Once the recovery looks more certain, cyclical technology stocks, like semiconductors, normally follow. Tagging along near the end of the cycle are usually consumer companies, such as clothing stores, auto makers and airlines.

Insider buying, arguably, offers the strongest signal to buy. If a company is at the bottom of its cycle, directors and senior management will, by purchasing stock, demonstrate their confidence in the company fully recovering.

Finally, keep a close eye on the company's balance sheet. A strong cash position can be very important, especially for investors who buy recovery stocks at the very bottom, where economic conditions are still poor. The company having plenty of cash gives these investors more time to confirm whether their strategy wisdom was a wise one.

Conclusion
Don't rely on cyclicals for long-term gains. If the economic outlook seems bleak, investors should be ready to unload cyclicals before these stocks tumble and end up back where they started. Investors stuck with cyclicals during a recession might have to wait five, 10 or even 15 years before these stocks return to the value they once had. Cyclicals make lousy buy-and-hold investments.

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How To Retain Your Sanity In A Volatile Market

Courtesy : Investopedia

In the long term, stocks outperform bonds and bonds outperform cash. Can you name a 20-year period over the past 100 years when they didn't? Unfortunately this is something that many people forget as soon as the markets get ugly. People forgot in 1974, 1987, 2002 and 2008 as they panicked and sold, only to miss a recovery in prices. Why does this happen?

We often make our long-term investment decisions using historic market data to determine an asset allocation. Market return data are typically presented in literature and marketing material using annual, quarterly and monthly returns. These periods are fine for measurement, but they often miss what is really happening day to day, especially the terrifying moments that occur over a few days or even intraday. It is these anxious periods when sleepless nights occur and when investors make emotional decisions.

There are a few days during every bear market when we all wonder how low the market can go. Those are the days when you cannot flip on the television, the radio or even check your e-mail without in-your-face bad news about stock prices. Those are the days when you can be certain the headlines on the six o'clock news and in the newspapers will highlight the money you are losing, and they will feature countless gurus forecasting deeper losses.

The terrifying days are also the times when you should turn off the television, tune out the gurus and take the dog for a walk. If you can't get your mind off your money, you're not sleeping at night because you are worried about your portfolio, and you are teetering on the verge of making an emotional decision to "sell it all!" then action needs to be taken. Here is what you should do:

First, look at the amount of income you are getting from your current investments. The income coming from your investments generally does not go down even though prices do. Stocks and bonds continue to pay dividends and interest. When your annual expenses can be covered by the cash flows from dividends, interest and outside income, it makes it easier to ride out a bear market. This income reality check helped a lot of my clients get through the 2008 bear market.

Second, if the income reality check does not put you at ease and you are still sick to your stomach about the future of your portfolio, you have too much stock exposure and need to permanently reduce it. How do you do that? Lower your equity position by 10 percentage points. For example, if you are at 60%, go to 50%. If you are at 40% in stocks, reduce to 30%. A 10-point reduction in equity exposure usually reduces investor anxiety long enough for the stock market to recover.

Once the 10-point reduction in stocks is completed, keep the allocation as is through the bottom of the market and beyond. Don't go back to the risk level you once had in your portfolio, because you may be setting yourself up for another emotional sell during the next bear market. This small reduction will likely have only a small effect on the long-term return of your portfolio and a huge effect on your short-term psyche.

Third, if you are still having an emotional reaction after a 10-percentage-point stock reduction in your portfolio, you still have too much risk. Reduce the equity allocation by another 10 points. This should allow you to think clearly and get past the bear market. Once you get to this level of risk, stay there, even when the market recovers.

We have all made an asset allocation mistake during our lives. These mistakes tend to manifest themselves in bull or bear markets when we realize our portfolios are not in line with who we are emotionally.

I have no idea when the next bear market will occur, but it will occur--and when it does, some people will feel the need to panic. Don't do that. Any adjustment to portfolio allocation should be done in a logical and controlled way. These changes require deep thinking and even-handed judgment. A good investor checks and rechecks his or her feelings for symptoms of irrationality and then deals with the situation appropriately.

STOCK SELLING STRATEGIES ....

 Courtesy :oldschoolvalue.com


Buying stocks is easy, but do you have stock selling strategies? Do you consider your exit strategy prior to buying a company? The exit strategy is just as important as the entry strategy. The entry strategy is something everyone considers, but when do you sell? 

 Here are some  reasons for stock selling :

• You made a mistake in judging the company
• The company fundamentals have changed
• A better value or opportunity comes along
• The need for emergency cash
• Too far above intrinsic value

Acknowledging a Mistake

I believe this to be one of the key psychological barriers that an investor has to break in order to be successful. You have to be honest with yourself and remember your mistakes. Nobody wants to admit they are wrong, but as human beings, we are wrong quite often.Too often, investors know they’ve made a bad decision but choose to hang onto the losers until they can at least break even or come out with a tiny gain. This usually leads to a larger loss. If that stock is able to break even and we sell at that point, our mind does not recognize this as a shock. This bad decision eventually gets swept away only to be re-enacted at a later time.

If we know that a mistake has been made, sell.

Change in Business Fundamentals

This is pretty self explanatory. If a fashion company decides to start expanding or change its business to the agriculture industry, then we have a problem.Even if the prospects in the  same industry turn bleak and no chance for a revival on foreseeable future -Sell

Better Value Investment Ideas

An investment is defined as

The investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value. – dictionary

If the reason we are investing is to obtain profitable returns, doesn’t it make sense to sell a current investment in order to invest in a better, more profitable opportunity?. This is not just limited to stocks. You could find better value in real estate, bonds, coins, cars, antiques etc.

Better value knocking on your door? Sell.

Sell Stocks for Emergency Use

Life brings all sorts of situations. If you are in need of emergency cash, there is no real reason to visit a loan shark or bank to borrow money that you may already have.
This is a hard situation to call, but if this emergency is extremely urgent, sell.

Over priced and Valued

Intelligent investors monitor their companies, not the stock symbol. We understand that all companies have an intrinsic value. If you bought a great company at a discounted price and the price has now reached the intrinsic value, you could sell or hang onto it because you can fairly expect to receive a certain rate of return from your intrinsic value analysis and discount rate.But due to Mr Market’s craziness, say the price of the company shoots beyond the intrinsic value. Selling in this type of scenario is also psychological. Your greed is nudging you, grinning and nodding, telling you “you know it’s going up further”. If this ever comes around, halt, and reread or rethink your analysis and get back to basics. Price follows value, and if the price is pushed up due to speculation and hype, price will eventually meet value.

HAPPY NEW YEAR....

CHRISTMAS WISHES TO ALL .....

Retracement Or Reversal: Know The Difference

Courtesy : Investopedia

Most of us have wondered, at some point, whether a decline in the price of a stock we're holding is long term or a mere market hiccup. Some of us have sold our stock in such a situation, only to see it rise to new highs just days later. This is a frustrating and all too common scenario, but it can be avoided if you know how to identify and trade retracements properly.
What Are Retracements?Retracements are temporary price reversals that take place within a larger trend. The key here is that these price reversals are temporary, and do not indicate a change in the larger trend.

The Importance of Recognizing RetracementsIt is important to know how to distinguish a retracement from a reversal. There are several key differences between the two that you should take into account when classifying a price movement:

Factor Retracement Reversal Volume Profit taking by retail traders (small block trades) Institutional selling (large block trades) Money Flow Buying interest during decline Very little buying interest Chart Patterns Few, if any, reversal patterns - usually limited to candles Several reversal patterns - usually chart patterns (double top, etc.) Short Interest* No change in short interest Increasing short interest Time Frame Short-term reversal, lasting no longer than one to two weeks Long-term reversal, lasting longer than a couple of weeks Fundamentals No change in fundamentals Change or speculation of change in fundamentals Recent Activity Usually occurs right after large gains Can happen at any time, even during otherwise regular trading