Web Strait’s Finance

I had recently read a very interesting article from Yahoo! Finance. It lists out 6 deadly investing mistakes in which commonly made by the investors. From my point of view, it had somehow shown us those bad habits in which should be abandoned by the investors if they intended to make money from their investments. Hence, I  decided to post it here in order to share with the other readers. Finally, I would like to deliver my appreciation to the writer, William Lynott in writing such a good article.

Original Source:

Bankrate.com
6 deadly investing mistakes
Friday September 5, 6:00 am ET
William Lynott

These are scary times for anyone trying to build or preserve their retirement accounts. Today’s roller coaster ride of economic ups and downs — with swings in the Dow Jones average of 500 points or more in just a few days — is enough to churn stomachs in all but the most steely nerved passengers.

Is this simply another predictable, even healthy, correction in a long-term bull market? Or are we poised for an investor meltdown?

No one knows for sure, of course. Even a modern-day Nostradamus couldn’t tell us what’s going to happen tomorrow. But no matter what, avoiding these six costly investment mistakes will help you to keep your head above today’s troubled waters.

Stick with fundamentals.

Most financial professionals believe the current slump is a predictable — and even healthy — correction in the long-term bull market. Other forecasters are far more gloomy. Either way, it’s critical to avoid these potentially deadly mistakes.

6 deadly investing mistakes:

• Panicking over market fluctuations
• Reacting to daily economic reports
• Turning off your buying during a downturn
• Trying to time the market
• Not maintaining appropriate asset allocation
• Abandoning your investment strategy

Mistake No. 1: Panicking over market fluctuations
“Fluctuations in the market are a natural part of our economic cycle,” says Stacy Francis, Certified Financial Planner and founder of Francis Financial in New York. “When the market is in a downturn, it may seem logical to cash out and go home, but before you do that you may want to think about your long-term goals for that money.”

Market downturns, even recessions, are relatively common occurrences in a free economy. A recession is defined as a decline in Gross Domestic Product, or GDP, for at least two consecutive quarters, making it rather easy for us to slip into one. But they have become shorter duration and less severe than they were in the past.

According to studies by Ned Davis Research, since World War II, the average expansion in our economy has lasted 57 months, while the average recession has lasted 10 months. In the past 20 years, according to the study, we haven’t had a recession last longer than eight months.

All of this suggests the rules of the game of profitable investing remain pretty much the same. During the current bumpy ride, investor concerns are focused on such things as the effects of the subprime mortgage crisis, the price of oil and the threat of a recession. While any of these may seem of formidable proportion, they are probably no worse than the concerns that bothered investors in the 1960s or the 1980s, or any other period.

“Many people sell low and buy high because emotion drives their investment decisions,” says Lisa Featherngill, CPA/PFS, member American Institute of Certified Public Accountants. “Remember, you haven’t lost money until you actually sell the security.

“If you decide to sell, buy something else right away. Studies have shown that your investment returns will suffer dramatically if you miss the best days of the market. Nobody knows when the best days will occur, so stay invested.”

In short, investing for a financially healthy retirement still calls for the same kind of common-sense approach that has worked so well in the past. Most experts predict that the long-term future will most likely mirror the long-term past. That is, a steady pattern of economic growth with periods of expansions, recessions and downturns in the market.

Mistake No. 2: Reacting to daily economic reports
“In an effort to sell newspapers and air time, the media trains investors to look out for the next economic number of the day,” says Jordan Kimmel, managing director at Magnet Investment Group in Randolph, N.J. “Whether it’s employment numbers, capacity utilization or inflation statistics, there is always a number of the day to tempt investors into overreacting. In reality it is nonsensical to react to daily economic reports. No investment strategy is better than identifying superior companies and holding them while letting your money compound over time.”

Mistake No. 3: Turning off your buying during a downturn
Some of the world’s most successful investors made their fortunes by buying when everyone else was selling. But that’s not easy to do. Investing steadily during market downturns may be too much of a psychological adventure for most of us, but there is a system that enables almost anyone to take advantage of those tempting buying opportunities. It’s called dollar-cost averaging.

“Dollar-cost averaging calls for spending a fixed dollar amount each month or quarter on a specific investment or part of a portfolio, regardless of the ups and downs of the share prices,” says Francis. “By following this pattern consistently, you will purchase more shares when prices are low and fewer shares when prices are high.”
For example, if you decide to spend $500 each month on purchasing shares, you will be able to buy only a few shares if the price is $100 per share. However, if the price goes down to $50 the next month, the same dollar investment will buy twice as many shares.

“By making regular and consistent purchases over a longer period of time, your cost basis — the total amount you pay for a security — is spread out. That provides a cushion against normal market price fluctuations,” says Francis.

“Dollar-cost averaging is a time-proven and effective way to minimize the effects of emotion in financial management,” says Kimmel.

Mistake No. 4: Trying to time the market
“It’s better to invest regularly, without regard for the general condition of the economy or the direction of the stock market,” says Darrell J. Canby, CPA/CFP and president of Canby Financial Advisors, in Natick, Mass.

“Timing the market, trying to determine the best time to buy specific stocks, rarely works,” he says. “You might get lucky once in a while, but your luck isn’t likely to last.”

Rick Willeford, M.B.A. and CPA/CFP, in Atlanta, says simply, “Market timing and day trading are for suckers. The financial press makes money from advertising, and they do that by keeping you breathlessly chasing the latest tip or fad. They make money whether you win or lose.”

Waiting for stocks to hit the “bottom” before you buy or hit the “top” before you sell has long since proven to be a loser’s game for investors. Select the stocks or mutual funds that you buy only on the basis of sound fundamentals.

Mistake No. 5: Not maintaining an appropriate asset allocation
If there is one point that virtually all financial advisers agree on, it’s the critical need for you to maintain an asset allocation suitable to your personal circumstances. Asset allocation refers to the process of dividing your investable assets among stocks, bonds and cash.

The diversification mix that is right for you at a given point in your life will depend on such things as your age and your tolerance for risk.

If your retirement is years away, most experts recommend relatively heavy investments in equities, 60 percent or more of your total portfolio. “However, if your time horizon is less than three years,” says Certified Financial Planner Greg Womack from Edmond, Okla., “stay in fixed investments like CDs, short-term bonds and money markets.”

Once you allocate your assets in the manner right for your circumstances, it’s important to rebalance at least once a year. As the price of equities goes up or down, the ratio you have established will change. If the value of your equities has risen, you may want to sell off some of them to restore your original ratios. If their value has dropped, moving more cash into equities may be appropriate.

“If your portfolio is largely within an IRA or other retirement plan, consider rebalancing every quarter,” says Womack. “If it is regular, taxable money, consider at least annually, perhaps more during extremely volatile periods. For a rebalancing strategy to work, you must own assets that don’t react the same way over differing market conditions.”

Mistake No. 6: Abandoning your investment strategy
“Creating a plan such as dollar-cost averaging and sticking with it under all market conditions is the way to maximize your returns,” says Kimmel. “Human nature makes it difficult for the average investor to stick to an investment strategy unaffected by emotion. Sometimes it’s fear; sometimes it’s pure greed. Either way, allowing emotions to affect your investing decisions is certain to damage your financial future.”

Womack agrees:
“It’s human nature to chase hot sectors that have already made a significant move,” he says. “It’s also natural to panic and sell-out when everyone else is doing the same.”

While it may be the natural thing to do, it’s not the smart thing, according to Womack. “It’s important to have an investment strategy and stick to it. Remember: If the headlines are full of it and everyone else is doing it, you’re probably too late.”

There is, of course, much more to the maintenance of an investment portfolio that may well help you sleep during these scary investment times. However, sticking with these common-sense fundamentals will go a long way toward achieving that end.

Do you still remember that most of the market analysts(including our government) in Malaysia claimed that “Malaysia is a safe haven” when credit crunch crisis started deteriorating in U.S.? Yea, they may be right, this is simply because none of our banks or financial institutions involved directly in U.S. Supreme loan Crisis.

In fact, U.S. is now being threatened by economy recession as well as high inflation(Note: U.S. might already in a recession). As a result, their demands for goods & services will definitely decline. In such situation, Malaysia can never escape from it’s impact. Because this will somehow affects the export of Malaysia(Note: US is one of the largest export markets for Malaysia) and hence impacts our economy in general.

However, some of those economic and political “experts” in Malaysia always clung to the notion that “Our local and regional demands is still strong enough to neutralize the impact of recession in U.S.”. Anyway, such “fairy tale” seems had already come to an end. This is simply because the whole world including Malaysia are now facing food crisis and fuel price hikes. As a consequence, the people including Malaysian had no choice but to face the high inflation in their daily life.

Apart from rising in prices of the imported rice(i.e. the main food for Asian) by around 100%, the latest news was the Government of Malaysia had announced an increase in petrol price by 41% and diesel price by 63% in which had started immediately on 5th June 2008. This is the largest increment in fuel prices in the history of Malaysia. The effects had already started to kick in. E.g. rising in the transportation fees, foods prices & etc. As a result, the cost of living must go up and the purchasing power of consumers must go down.

Once the purchasing power of consumers had declined, how far the statement sounds “Our local and regional demands is still strong enough to neutralize the impact of recession in U.S.” will still be true? Obviously, such statement is really ridiculous in the current context. With shrinking wallet, most of the people will more likely to keep just those necessities and sacrifice those unnecessary expenses(E.g. entertainments, trips, investments, shoppings & etc).

As a consequence, the sales made by the businessmen who owned factories, shops and etc will also decreased at the end. While the operational costs are rising but the sales and profits are dropping, the businessmen may start thinking of cutting costs by reducing the labours and so on. Some might even face bankruptcy. E.g. the airline companies. If such situation happened, the soaring unemployment will further deteriorates the economy. Therefore, if we don’t handle such situation carefully, then a disastrous recession will be awaiting us.

Next, what would be the decision of the central bank in the monetary policy that applied to overcome the current crisis? While the operating costs & the inflation rate keeps climbing; But the GDP expected to be slowed down. It’s really a tough decision for the Bank Negara(i.e. the Central Bank of Malaysia) to decide whether to increase the interest rate or keep it unchanged. By increasing the interest rate, the costs in doing any business will definitely increase. Furthermore, this would also cause the people to be more likely to just put their money into the fixed deposit account. I’m sure that such situation will not be favored by most of the businessmen.

So, should the central bank just keep the interest rate unchanged? Okay, let’s say the central bank decided to keep the interest rate unchanged; In your mind, what’s the situation that might happen instead? I think most of the banks and financial institutions will started to tighten their lending procedures. Because they are facing the risk in which the interests earned from the lending process is unable to cover the increasing inflation. As a result, the companies can’t borrow money as easily and hence slow down the activities of economy. Anyway, from my point of view, a moderate increase(i.e. around 0.25%) in the interest rate would be a better choice for the current context.

In fact, such type of inflation isn’t mainly caused by the consumers in the markets. But it had been caused by the speculators(i.e. those with plenty of fund) who trying to make profits from their speculations in the crude oil and other commodities like gold & etc. As a result, such speculators making huge money from it but billions of others suffering from the fuel and food price hikes. Of course, those have been exploiting the resources by simply declaring wars on others should be blamed too.

First of all, how do you describe the unit price or NAV(Net Asset Value) of mutual funds? Investopedia says “In the context of mutual funds, Net Asset Value per share is computed once a day based on the closing market prices of the securities in the fund’s portfolio.”. Indeed, the unit price or NAV will reflect the real or intrinsic values of each fund’s portfolio. In other words, we can say that unit price of funds will reflect how much each fund worths.

Sometime, the investors might think that a mutual fund with higher unit price is too expensive and may be “overvalued”. Therefore, they tend to look for or buy those funds with lower unit price and hope that such fund’s unit price can later rise up to a level that had been achieved right now by those funds with higher unit prices. However, if you’ve already get the meaning delivered from the 1st paragraph, then you must know that the concepts of “undervalued” and “overvalued” used for a particular share in stocks market should never be applied in unit trusts or mutual funds. Again, while an individual share can be undervalued or overvalued; such situation is quite impossible to happen in unit trusts. This is simply because a fund with a higher unit price could also holding a basket of undervalued stocks in it’s portfolio while the fund with lower NAV could be invested in a basket of fully or even over valued shares.

During the bull market period, assume that an equity fund with NAV = $1.00 before had raised up to $1.50. Mean while, another fund with initially lower unit price, says NAV = $0.50 might now reached $0.75. Finally, both funds will bring investors the same return rates i.e. 50%. Hence, the unit price shouldn’t be a main concern that determines which funds to be picked.

In fact, during a bull market period, there will be many existing funds performs well and generate an attractive returns and hence their NAVs will go high and even higher. At the same time, there must be a lot of new equity funds being launched during this period to attract the investors. One of the main reason that made the fund institutions to launch a series of new funds during such period is simply because that is a golden period for them to make their businesses.At this period, everyone is “feeling good” and optimistic over their future. Therefore, the businesses are much easier to be dealed during this period.

Apart from this, the unit price of these newly launched funds must be relatively much lower than the existing funds those had been rallying during the bull period. Moreover, the fund institutions would also offer free units or discount in the selling price to those who invested in these new funds. This might bring an illusion to the people that now is a “golden chance” for them to invest in these new funds with such lower unit price.

Anyway, there must always be a bear awaiting for us after the bull rallies too high and long. Therefore, most of the equity funds will now start to move towards lower unit prices in a downtrend market. To make matter worse, a series of redemptions(especially those with huge amounts) that would occur during such period will cause the unit prices of funds to go even lower. As a result, those equity funds in which have just been launched during last bull period will now suffer the most and their unit price will move from the lower to even lower. All in all, when you start looking for any fund to be invested in your future, unit price doesn’t matter.

NEW YORK (AP) — Citigroup Inc. shareholders may have finally gotten what they wanted — the resignation of Chairman and Chief Executive Charles Prince — but Wall Street’s worries are far from over.

At an emergency meeting of the Citi board Sunday, the nation’s largest bank announced Prince’s widely expected departure, but also estimated it would take additional losses of $8 billion to $11 billion. In the third quarter, it already took a hit of $6.5 billion in asset mark-downs and other credit-related losses.

Meanwhile, the company remains entrenched in a mire of off-the-books investment vehicles funded by risky debt. Citigroup may need to take the fall for them if they fail.

And Citigroup’s not alone in its debt problems. When borrowers with poor credit stopped paying their mortgages, many banks not only had to take losses on those subprime mortgages, they also saw instruments in their portfolios backed by mortgages plummet in value. No one knows how much longer home prices will keep slumping, and whether problems related to the housing market will start affecting other types of consumer debt.

Also to be seen is how much longer the credit markets will stay tight, and if the currently strong portions of the economy will be hampered by banks’ inability to make loans.

By Madlen Read, AP Business Writer
Source: Yahoo! Finance