Debt Views

When compounding money, your personal rate of return can be a highly subjective thing. Spreading financial risk over many different investment vehicles is generally the key. There is a place for even high risk, high return investments.

Your personal rate of return refers to an investors ability to maximize the annual compounding rate of their portfolio. The way this is done by spreading risk and assessing opportunities based on that risk. Typically, high risk propositions are risky, but the way to play these propositions is to play off the odds.

The bulk of the portfolio, in any prudent investors estimation, should be made up primarily of illiquid quality real estate. The most basic example of an investment is the humble bank deposit, usually a fixed term deposit because the interest is slightly higher. This is also the safest investment of all because banks are guaranteed by the government. This humble investment model is used as a bench mark for many investors.

By looking at the level of risk a bank offers and the resulting return, you can get a clear perspective and vision, when comparing other investments. When you compare real estate to a bank deposit, real estate shines favorably. First it’s a tangible asset. Bricks and mortar can be insured. Second, providing you do not over capitalize, your return is made up of two segments. The rental and the capital gains. Historical rental returns on a mean average comparison is roughly 7% of the purchase value. The capital gains are also 7% This totals 14% Almost 300% more than the banks 5% Quite an increase. The risk rising slightly but really not disproportionately to the returns. The main thing is not to buy over priced real estate.

Maybe 10 percent of the portfolio can be used to buy shares or other exotic investment vehicles like options. Finally, 5% of the value of the portfolio can be used as “mad money” This is quite fun and you play this money aggressively. For example, you may have 5% of $300,000 to play with so you have $15000

This can be split into 7 different investments. Anything from Emu farming, to Alpacas, to Oil drilling start ups. The returns on these high risk ventures is expectedly high. If they pay off, they pay double or triple your investment. I have seen prospectus with promise of 10 times return on capital. Of course, you don’t expect to get your money back on all investments. But some can and do deliver. Some get through. Out of the 7 you may have broken even on 3, taken a 50% loss on 1 lost one completely but made a 1000% return on three. By the end of the year, you have added 25% equity on your entire portfolio, by dabbling in these high risk start ups. In the end, your personal rate of return is reflected by how prudently but aggressively you have compounded your folio.

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As you already know, there are so many investing options online. The following are some of the most common investments. Many have become successful traders in these fields.

1. Currency trading
2. Stock trading
3. Forex trading

All of these involve high risks of losses and once again do not attempt any of these if you can not afford to lose the money you invested.

In trading, the psychology of the mind relates to the thinking and emotional actions and responses to a situation such as fear, greed, pride, hope and jealousy. These can be factors that affect investment decisions. On the trade market, your aim is to maximize your profit and minimize your risk.

Looking at all the traders who are involved in a market, there is that one group that fails to plan properly and which in other terms simply means they plan to fail. You sure don’t want to be in that group.

Here is why those plans are to fail:

1. Traders become attached emotionally to what they do about on the market with very little or inadequate testing.

New traders, when they obtain a trading plan, they stick to that plan immediately and start to use the knowledge they have been taught and randomly throw it all together into whatever they think is their trading plan.

These traders (at least most of them) are destined to fail because their strategy is not tested thoroughly enough. They blindly guide themselves through the trading market. You have to watch out for all factors and test your trade plans constantly, don’t you think approaching trading in this better for future success?

2. They fall in love with the system and their net profit results without much understanding of other key statistical data.

There are thousands of data other than net profits that you could be taking into consideration. However, to keep your hair on your head safe you can not always look at all of them although ideally it should be done.

One other statistics that is important is the recovery factor. It can be used to determine whether the system is going to be profitable or not.

New traders face many problems that come up with time, and then they lose money very quickly in the markets. Some people can completely wipe out their finances in their first year. So, once again, thinking and emotions play a big role in determining whether you fail or succeed.

Everybody hates to lose but unfortunately losses are unavoidable in investments trading. All I can say is all the best and be careful.

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The effect interest rates have on the performance of our economy cannot be overstated. Understanding how interest rates affect the business cycle will help you know how to structure your portfolio to achieve growth while minimizing risk. Read on to learn more.

Would you wear a winter parka on a Florida beach in the middle of summer? Of course not. I doubt any of us would wear a bikini to go ice fishing in the middle of a Minnesota winter. I know I wouldn’t!

Clothes are a tool that is used to help regulate our body temperature. They protect us from the cold or keep us from over-heating. Their proper use determines our comfort from one season to the next. We don’t want our body temperature to wildly fluctuate up and down.

It’s the same when it comes to investing. Unfortunately, many don’t understand the changing of economic seasons and therefore fail to adjust the clothing used in their portfolio. As many saw in 1997-2000 and 2000-2002, the investment clothes that work in one season are close to useless in another.

There are economic business cycles. There are seasons when the economy is expanding, other’s when it is contracting. There are also times (called peaks and troughs) that are like spring and fall, times of transition from one major cycle to the other.

Interest rates are one key in determining where we are in that cycle. The Federal Reserve uses the rate it charges on over night loans to banks (the Fed Funds rate) as an accelerator or brake on the economy.

It may seem strange that small changes in the over night rate banks pay could have an impact on the overall economy. Banks lend more money then they receive in deposits. That ‘extra’ money comes from inter-bank loans and is referred to as the Fed Funds Market. It stands to reason that if a bank pays more on what it borrows, it will have to earn more on what it lends.

The Federal Reserve controls the Fed Funds rate by putting money into the inter-bank loan market or by taking it out. Just as supply and demand causes the price of a stock to go up or down, so is with the interest rate charged in the Fed Funds market. By putting money in or taking money out the Federal Reserve is able to artificially control the supply demand balance.

Interest rates affect every area of our economy. If you have to pay a higher interest rate on a mortgage your monthly payment is going to be higher. Since you can only afford to spend so much a month on that payment, the interest rate affects the how much home you can afford.

Likewise, most businesses borrow money to fund expansion, cover inventory and to smooth out cash-flow. Just like the homeowner, they have a limited amount they can afford in payments each month. The amount they borrow affects whether they can build bigger plants, buy more computers or hire additional employees.

Different industries do well in different parts of the economic cycle. The construction industry will perform best during periods of low interest rates because low interest rates are designed to spur growth. When people and businesses can borrow at low rates they will build new homes, skyscrapers and factories.

Similarly, we each tend to buy the same amount of toothpaste and toilet paper regardless of where interest rates are. The companies that make those essentials aren’t going to see the big change in demand for their product that a construction company might.

Equity investments can be categorized as cyclical or non-cyclical based on how they are affected by changes in the economic cycle. The proportion of each in a portfolio will greatly affect the overall volatility. I recommend having a portfolio of high-quality non-cyclical companies. You can then introduce cyclical companies as the seasons change to add additional growth. Make sure you adjust the cyclicals as the seasons change.

Economic cycles don’t just affect stocks. They determine whether it is a good time to own bonds, and what type of bonds to own, as well. The last several years, interest rates have been at historic lows. You don’t want to lock in low rates for 30 years. When interest rates are above the historic norms, that’s when you want to stretch out your maturities.

Think of your investment portfolio as a living, breathing entity. Recognize that the investments used in it will determine your comfort level as the economic seasons change. Doing so properly will allow you to increase your return while reducing your risk. Take advantage of economic cycles. Don’t let them take advantage of you.

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