The Drawbacks in Avoiding Giant Stock Losses

It is possible to avoid Giant Stock losses but as with everything, there are pros and cons.
Examining “what if” scenarios in retrospect can only serve to prevent you falling in the same mistake in the future. Most stock market investors will be asking themselves if there is a way to avoid being crushed in the future by a situation similar to Thursday’s one thousand point flash crash.

The answer is yes, it is possible but each scenario has its drawbacks.
Setting an asset allocation which is reasonable protects you from potential market meltdowns. Your exposure to stocks is the best way to defend yourself from becoming a casualty in a giant stock loss situation.

If, for example you had invested $100,000 in a large core fund company at the end of April, you’d have experienced a 6.6% loss by the end of Thursday, or in other words you would have suffered a loss of $6580. Large company core funds are stocks in companies who have market values in excess of $10 billion. Companies that are growing yet selling at reasonable prices in relation to earnings are coveted by managers.

Investing in money market funds or bonds can also help protect your losses drastically. Diversifying your investments goes a long way in ultimately protecting you. In the previous example, if you had invested 60% into a large company core fund and 40% into government bond fund, your losses would have been reduced to less than half or in other words only 3.2%.

A proven way of determining how much of your portfolio should be invested in stocks is to deduct your age from 100 to get a percentage. This percentage is indicative of how much your retirement portfolio should be invested in stocks. For example a 40 year old person should have 40% of their portfolio in bonds with the remaining 60% invested in stocks.

This does have its drawbacks though and just as a 30 year old person may not need 20% of their assets in bonds, a 70 year old individual may not need 20% of their portfolio in stocks. Nonetheless this process is a good way to start.

The next factor in avoiding giant stock losses is your level of tolerance to sustain short term losses. If you were financially ruined on Thursday this could be an indication that you overinvested in stocks. If you were in the process of buying stocks when the market plunged this would indicate you didn’t invest enough.

Another thing you should consider if you want to avoid giant losses is a stop loss order. Stop loss orders are basically instructs your broker to sell when your stock reaches a certain percentage in loss, for example if you’re training a stock at $100 and you don’t want to lose more than 10%, your stop loss order would instruct your broker to sell if the stock reached $90.

Stop loss orders have a big drawback: As soon as a stop loss order becomes a market order when it reaches its trigger point. It will be sold for whatever it can get on the open market. What this means to you as an investor is that in a chaotic market environment your stock may sell for far less that your stop loss price, e.g. if your stop loss price was $90 your stock may sell at $85 depending on the market.

As stock increases in value, you should set your stop loss order accordingly. ExitPoint.com and SmartStops.net are two online sites that offer valuable resources and advice on how to set your stop loss orders.

Last but not least, a good way to defend yourself from giant stock losses is to avoid investing in inverse ETFs, or stocks that rise when there’s a fall in the market and vice versa.

It is wise to avoid these stocks because not many investors are adept enough to trade in these funds quickly enough in a chaotic market. As long term investments they do very poorly, especially the ones that claim you will get double and triple inverse returns on them. A good example of this would be the Direxion Large Cap Bear which rose to 9.7% on Thursday but was down 59.9% for the past year.

Highest 5 – year CD rate, slides to 3.30% from 3.44%

The best CD rates on the market just became a little less attractive as EverBank cut the interest on its highest yielding 5-year CD to 3.30% annual percentage yield, from 3.44% recently.  Still, the online bank based in Florida remains the place to go for the best available 5-year CD rates in the country.  This has been the case since March 16 on this year.

From March 16 to April 2, the rate actually increased gradually form 3.30% to 3.44%, but eventually came back down to 3.30%.  Nationally, the average for 5-year CD APYs has risen to 2.14% from a record low of 2.06% in late January of this year.

EverBank only asks for a minimum deposit of $1,500; however, they do slap higher penalties than most banks for pre-terminations; 25% of the interest you would have earned if you’d kept the account for the length of the term.

Apart from EverBank, the best rate is 3.25% APY, you can get this rate from:

An online division of Flushing Savings, igobanking.com requires only a $1,000 minimum deposit.

Miami Lakes base BankUnited asks for a $5,000 deposit, they have 75 branches in FL.

Have a look at our database where you can find CD rates listings for many other banks, and find yourself a great deal.

Invest in Foreign Markets without Relying On Standard Money Market Rates

As money market rates continue to plummet, many investors are looking at unconventional investment methods. One way of circumventing bad money market rates is by investing in foreign markets. There are specific brokerage firms that specialize in these types of investments.

A Good Foreign Investment Firm: Euro Pacific Capital
Peter Schiff is famous for predicting the subprime mortgage crisis of the 2000s, among other things. He is an Austrian School adherent of economic theory, and he’s also a massively successful brokerage owner. His firm, Euro Pacific Capital, focuses on finding strong markets throughout the world. In other words, Euro Pacific Capital is not limited to one continent; rather, it specializes in offering foreign stocks and bonds in addition to U.S. stocks.

Think and Invest Globally
The philosophy behind Euro Pacific Capital is simple. They believe in finding the best investment opportunities available around the globe. Many foreign stocks are out of reach to domestic investors, but with Euro Pacific Capital, investors have access to a far greater array of investment options.

Access to Markets All Over the World
You can also find investment advice and easy online access to foreign stocks. Euro Pacific Capital offers many resources for investors who want to purchase interest in precious metals such as gold. This is as alternative as you can get, but Euro Pacific Capital is bringing great returns to investors.

If you’re looking to branch out and invest in foreign stocks, look at Euro Pacific Capital. It is a great idea to look at global markets for investments.

Stay Ahead of Inflation with Series I Savings Bonds and Savings Rates

The majority of savings rates are not adjusted for inflation. This means that when inflation rates rise, your interest basically gets eaten by the market. One exception to this rule is Series I Bonds, a government bond that is actually indexed by inflation. Here’s an overview of these bonds.

The Basics of Series I Bonds
Series I bonds were created in the late 90s with the express purpose of protecting the owner from inflation. You can purchase a variety of denominations of Series I bonds, notably: $50, $75, $100, $200, $500, $1,000, and $5,000. Investors can purchase Series I bonds at face value.

There are minimums and maximums, however. Investors can purchase a minimum of $50 Series I bonds, and a maximum of $5,000 in Series I bonds annually.  However, you can purchase $5,000 in paper bonds and $5,000 in electronic bonds in one calendar year.

Restrictions and Limitations
You must wait at least one year before you cash in Series I bonds. It’s best to wait at least five years before cashing in your bond, because if you cash in a bond before five years, you have to pay a three month penalty.

You must purchase electronic Series I bonds through TreasuryDirect.  I Bonds offer great interest rates that steadily stay above the inflation rate. This means you are guaranteed to make a good return on your Series I bonds.

Series I Bonds: Slow and Steady Returns
Series I bonds will have fixed rates set by the Fed. Individuals and corporations can purchase Series I bonds, as long as the purchaser is a U.S. resident with a Social Security number.

Series I bonds make a great conservative investment for people who want to ensure that they gain steady returns on their money.

Find High CD Rates with Credit Unions

Sometimes, credit unions can offer the strongest CD rates on the market. Many investors have noticed that the CD rates offered by credit unions often exceed those given by banks. Here, we’ll discuss some of the pros and cons of purchasing CDs with credit unions.

Credit Unions Offer Plenty to Investors
First of all, many credit unions consistently deliver very high interest rates on CDs. This makes them especially attractive to investors. In many cases, credit unions will offer an interest rate that is roughly half a percent higher than the interest rates offered by nearby banks.

Credit unions can afford to provide such high interest rates because they engage in cooperative savings. The earnings of the credit union are returned to members as high rates on savings. Most credit unions are also nonprofit organizations. This means they are not beholden to a group of shareholders. So, credit unions have the capability to offer high interest rates on CDs.

Options for Different Types of Investors
Also, credit unions also sometimes present CDs that have a lower minimum principal deposit than banks. This appeals to investors of lower income brackets, or simply to investors who wish to invest a small amount of money in a CD. Credit unions also offer CDs with short maturity rates, giving investors the chance to receive payments sooner than with traditional bank CDs.

Many people have a knee-jerk reaction to CDs in that they always go to banks. Banks are viewed as more stable institutions than credit unions. But, properly accredited credit unions can offer some of the best CD rates available on the market. It’s a good idea to investigate these institutions before you make your investment in either a bank or credit union.

Stock Market Options and Effects

The price of a stock in the stock market changes based on supply and demand. If more people wish to sell it than buy, then there is greater supply than demand, resulting in the price falling. A potential shareholder, if not relying on a broker to handle the accounts, should research the positive and negative news of a company. The investor should not equate the value of the company with its stock price. A company’s value is its market capitalization, which is defined as the sum of the total amount of various stocks issued by a corporation multiplied by the stocks’ price. The investor should always be aware that the price of stock reflects the anticipated growth of the company, not its current value.

Earnings reports are perhaps the most important factor that affects a company’s value. Every company must have positive earnings, or profit, reports to survive. During earning sessions, investors look at quarterly earnings reports to see if the results are better or worse than expected. If the company’s results are good, then the price jumps, and vice versa.

Market capitalization is not the only indication of a company’s success. During the late 1990s, many internet companies had market capitalizations in the billions of dollars, yet many of them made very little profit. The valuations were unstable and most saw their earnings dwindle during the dotcom bust. This proves that there are other variables i.e. price/earnings ratio, indicators, and moving average convergence divergences, that influence the price of stocks. In fact, no one truly can predict when and why stock prices change. Everyone agrees they are volatile and price is inconsistent and that perhaps looking at past price movements can best indicate when to sell; however, there is no one theory that can explain everything. While investors’ attitudes and expectations ultimately affect stock prices to some degree, it is still extremely difficult to come to a unified theory.

Stocks- Brokerage Firms
Most investors purchase stocks using a brokerage firm. While discount brokerages are inexpensive, full service brokerages offer advice, manage the investors’ accounts, send in statements, research various companies, and usually charge more. Since the buyer and seller are employing the brokerage to complete a deal, the brokerage may collect a percentage of the transaction, money from both parties, or only a commission from the seller. Some brokerage firms have recently begun trading stock in the Internet, which allows their clients more access to research information. Here, the shareholder is extensively involved with the brokerage and research in order to make the best deals. The benefit of brokerage firms is that they save their clients considerable time by facilitating the transactions, which some people are not comfortable doing on their own.

DRIPs & DIPs
Dividend reinvestment plans and direct investment plans allow shareholders to directly purchase stocks directly from the company. These plans are an efficient means of investing small amounts of money at regular intervals, as anyone can construct a portfolio of common stocks with few fees, and they are a popular alternative to using brokers.

Mutual Funds: Hedge and Exchanged-Traded Funds

There are numerous kinds of mutual funds that allow investors to receive a secure rate of return with minimal risk.  While the funds have various amounts of risk, it still behooves investors to research each kind of fund and be fully cognizant of the investment they are making.

Open-End Mutual Fund
An open-ended mutual fund issues new shares to investors and buy back shares when investors wish to sell.  These funds do not have restrictions on the amount of shares the fund will issue.  If demand is high enough, the fund will continue to issue shares no matter how many investors there are.  In such funds, when the investment manager determines the total assets are too large to execute its stated objective, the fund will be closed to new investors.  In some extreme cases, it may be closed to new investment by existing fund investors.

Closed Mutual Fund
As referred to above, closed funds are closed either temporarily or permanently to new investors after an investment manager is concerned the asset base is too large to execute his investing style.  Shareholders in a closed mutual fund are allowed to continue investing in that fund, yet they are often precluding from other investments.

These funds differ from closed-end funds.  Despite the similar name, the latter is structured and listed as a stock on a stock exchange.  Closed-end funds have a fixed number of shares and generally invest in technical or other specialized sectors.

Equity Funds
Equity funds are the most common kind of mutual fund; in fact, they hold 50% of all mutual fund investments in the United States.  Equity funds tend to invest in equity as opposed to investments in stock and bond funds.

Bond Funds
Accounting for 18% of mutual fund assets, bond funds presently include term funds, municipal bonds, and high -yield bonds.  Term bond funds have a fixed set of time prior to maturity.  Municipal bond funds have numerous tax advantages and lower risk but at the expense of having lower rates.  High-yield bonds tend to invest in corporate bonds and while there is much potential for a large return, there is also significant risk.

There is presently a misconception that bond funds have little to no risk.  However, this is a falsehood as bond funds are subject to numerous risks i.e. prepayment risks, interest risks, and credit risks.  An investor is responsible for reading all of the fund’s information, and the information can be retrieved from the prospectus, which discloses most risks.

Money Market Funds
Holding 26% mutual fund assets in the United States, Money market funds are a conservative approach to investing with mutual funds.  They receive some of the lower rates of return, though entail the least amount of risk as well.  These funds pay dividends that generally reflect short-term interest rates.  Such typically invest in certificates of deposit, commercial paper of companies, government securities, or other highly liquid securities.  Despite the low amount of risk, it is still important that an investor reads all of the fund’s available information, including its prospectus and most recent shareholder report.

Types of Stock Markets

Stocks are traded on exchanges, places where sellers and buyers negotiate a price. Exchanges can be physical locations where transactions occur on the famous trading floors. Exchanges can also be located virtually and conducted electronically with computers. These exchanges are the lifeblood of the stock market, which is where securities are bought and sold. Stock markets facilitate this transaction in order to reduce the risk of investing.

Securities are created on the primary market. Here, public sector institutions, companies, and governments obtain funding after selling a stock or bond through a syndicate of securities dealers. The sale is called an initial public offering and the process is called underwriting.

The secondary market is where investors trade securities without the involvement of the issuing companies. When people refer to the stock market, they are in fact referring to the secondary market where these previously issued securities are sold and transferred from one investor to another. The secondary market is far more liquid than the primary one, as well.

New York Stock Exchange
Founded in 1792, the New York Stock Exchange is the market of choice for most of America’s largest corporations including Wal-mart, McDonald’s and General Electric. Most of the trading occurs in person on the trading floor. Prices are determined with an auction method – the highest amount a purchaser will spend and the lowest amount a party will sell – and once the trade is made, the details are sent to the brokerage firm who contacts the investor about the order. An individual known as the specialist is responsible for matching the buyers and sellers. Presently, virtually all but the highest priced stocks can be traded electronically. Customers can send route orders to the floor for trade or directly send in orders for immediate execution.

Nasdaq
Nasdaq is a mostly virtual market that has no central location or floor brokers. Instead, trading is conducted electronically. 5,000 of the more actively traded over-the-counter stocks are traded on Nasdaq. After the tech boom of the 1990s, Nasdaq became home to numerous large technology firms i.e. Oracle, Dell, and Microsoft. Market makers act as specialists, as they match up buyers and sellers directly; in addition, market makers preserve an inventory of snares to meet investor demands.

Firms that wish to qualify for listing on the exchange must be registered with the SEC, have at least three financial firms to act as brokers for special securities, and meet minimum requirements for public shares, capital, and shareholders.

Other Exchanges
Other exchanges include the American Stock Exchange, which generally deals with derivatives, where the price depends upon one or more underlying assets, and small cap stocks, which includes stocks with a relatively small market capitalization.

There are other global stock exchanges that represent much of the total global investment. The London Stock Exchange, Frankfurt Stock Exchange, and Hong Kong Stock Exchange are, in particular, powerful exchanges where billions in stocks are transacted every day.

How Mutual Funds Work

Over 80 million people in America alone have investments in mutual funds. While stock markets generally yield a better return than mutual funds, the mutual fund managers have a certain experience and knowledge that laymen may not be able to muster. Investors can often rely on their managers’ understanding the market. It is optimal for mutual funds to be invested within domestic and foreign stock mutual funds, fixed-income mutual funds, or income fund equivalents.

History of Mutual Funds
Mutual funds grew popular in the mid 1980s when investors realized that pooling assets together could result in overall lower risks with moderate returns. In fact, such investments have been around for several hundred years. Mutual funds originated in 1774, when Adriaan van Ketwich convinced investors to pool their investments together and minimize risk so that the poor and middle class could contribute. While there were varying kinds of mutual and investment funds in the 19th century Holland, Scotland, and United States, the first modern mutual fund was created in 1924 and went public in 1928. The stock market crash of 1929 resulted in many of the then 700 closed-end funds losing their popularity while the small open-end funds grew in popularity. The Securities and Exchange Commission was created in 1933 in part to protect consumers’ investments in mutual funds.

Mutual funds grew more popular in the 1950s with an escalating interest in the 1960s, where there was an aggressive growth of mutual funds. In the 1970’s, a ‘no load’ fund, which had no sales commission and where the money went straight to the investors, not their managers, grew in popularity as well. The 1980s and 1990s brought with them a bull market mania, as the stock market grew at an even greater pace. Despite the burst of technology bubble and various scandals, mutual funds are still a growing market with more and more nations opening their markets to the world (i.e. China, Vietnam, etc).

Today – What To Look For
While it is important to look at the past performances and histories of mutual funds, this is no guarantee of any future success. An investor must be cognizant of (1) the fund’s sales fees, and expenses, (2) the taxes required when receiving a distribution, (3) the size of the fund, (4) the fund’s volatility, and (5) changes in the fund’s operations.

When investing in a mutual fund, the consumer must also carefully review the fund’s prospectus and shareholder reports. The investor is responsible for (1) scrutinizing the fund’s expenses and fees, knowing how the fund affects one’s tax bill, (3) considering the age and size of fund, (4) considering the turnover rate, (5) understanding appreciating the volatility of the fund, (6) understanding all the risks the fund requires to achieve returns, (7) learning about any changes in the mutual fund’s operations, (8) investigating the kinds of fees charges and services offered, (9) and assessing how the fund will impact the investor’s portfolio’s diversification.

What are Commodity Exchanges

Various commodities and derivatives products are traded within a commodities exchange.  These market investments trade in raw materials such as cotton, coffee, oil metals, and agricultural products and contracts.  The contracts include futures, futures on options, forwards, and spot prices.  Commodities exchanges tend to be incorporated non-profit associations, and they determine and enforce rules and procedures for the trading of commodities and related investments, which also includes commodity futures.  Commodities exchanges generally trade future contacts on commodities.

For example, a farmer raising wheat will sell a future contract on the wheat that has yet to be harvested.  The farmer will guarantee that the wheat will be sold for a fixed price so that a bread company can buy the contract even before the harvest, thus protecting the farmer and buyer should the market value of the wheat change.

Commodities Market Explosion
Commodity markets are where raw or primary products are exchanged. These commodities are traded on the aforementioned commodity exchanges, where they are bought and sold in standardized contracts. The commodities markets have had an upturn in trading investments in the 2000s.  From 2002-2007, the value of global physical exports of commodities rose 17%; during that same time, the value of commodity derivate trading on exchanges rose 200%.  Over-the-counter trading, which is where two parties directly trade stocks, bonds, derivatives, or commodities, derivatives has increased more than 500% in that time period as well.  The over-the-counter commodities’ derivatives markets, trading mostly in gold and silver, increased 27% during the 2002-2007 period, as precious metals fell to only 8% of such commodities derivatives trading.

Commodity markets are clearly being explored presently as they give the investors a potential large payout despite the risk.  In 2007, global derivative and physical trading of commodities on exchanges shot up to 1,684 million contracts, an increase of over 33% from 2002.  Industrial metals increased 30%, energy at 29%, and agricultural at 30% during the period, while precious metals only grew 3%.

To some degree, this explosion in commodities trading correlates with the economies and open markets of China and India.  As these countries have become significant consumers and producers, the commodities market has seen a major increase.  Other countries such as Vietnam and Israel are growing into economic successes, which in turn have led to this explosion in agricultural commodities due to large exports from those nations.  Many argue that the 2008 global boom in commodity prices – for everything from coal to corn – came from a combination of demand by China and India and unrestrained speculation in forward markets.

Because this commodities bubble popped in the latter months of 2008, many anticipate that farmers will face large drops in crop prices; steel commodities have also tumbled due to the lower demand.  This reversal in commodities’ fortunes accelerated in 2009 as oil prices and soybeans, once safe investment for commodities traded, have experienced erratic performance.  Sugar, however, has been a strong gainer, in part due to a somewhat more limited supply than other commodities.

Next Page »