The annuity in its simplest form is a contract between you and the issuing insurance company. Annuities in rare occasions can be a useful place to invest some money if you’ve exhausted all other tax-deferred retirement plan options, but you really need to do your homework. In many cases, it may be better to buy a mutual fund outright in a taxable account. There are numerous insurance companies out there feeding off of the uneducated investor by collecting surrender charges, loads, and other bogus charges. Don’t let yourself be one of those victims.
An annuity can have an impact that reaches far into your financial futureYou have to think ahead because, in most cases, you can’t reverse your decision.
Although the idea of income for life sounds great, there is one huge pitfall that most annuity salesmen forget to mention. Once you annuitize your contract, the contract is frozen - your decision is final.
Let’s look at an example:
You put $264,000 into an annuity at age 60 and accept the insurance company’s offer to pay you $1,000 per month for the rest of your life. You will have to live until age 82 to break even on the contract. If you live past age 82 the insurance company must continue to pay you the monthly check, but if you die before you reach age 82 the insurance company keeps the remaining funds. So even if you die as early as age 63, the insurance company keeps the remaining balance of your $264,000. Many investors find this hard to swallow. Nevertheless, prior to selecting payout, they have to decide whether annuitizing will be beneficial - and, ultimately, this depends on how long they think they will live.
Let’s look at the example from the article I read, this is what they are selling you, this is how they are stealing your hard earned and saved money: “For example, with interest rates recently at 4.56% on a 20-year Canada bonds, a 65-year-old who buys an annuity with a 15-year guarantee on $100,000 capital will receive ANNUAL (emphasis on me) income of $7,300 to the time of his or her death, which is the equivalent of a 7.3% annual return”
Thos sounds good?? If you do all above, investing your own money in the same bond you will have the same return AND you still have the capital!!!!!
“The example of a 75-year old who buys a 10-year guaranteed annuity on a $100,000 capital base with recent long-term interest rates. His or her ANNUAL (emphasis on me) income (and this example is not accurate as female annuitants receive higher incomes) would be 9,333
It you take $100,000 divided with 10 years gives you $10,000 per year. IF you invest that money in any kind of investment which gives you some return you are better of. It just doesn’t make sense to me why would anyone hand over their lives savings without some REAL benefit.
Take the $100,000 and invest it in a Segregated Found (if you’re uncomfortable with Mutual Founds) just because they have a guarantee so even in the down markets your money is guaranteed (and I will explain how Segregated Founds Work) at a rate of return of 6% (what is obtainable) you would have an annual income of 6,000 so you would have to use still 3,333 a year to make up the difference up to 9,333. In a 10 year period that’s about $34,000. If you deduct $34,000 from $100,000 you still have $66,000 after 10 years. If your investment has a better return you’ll have more of your capital.
This is what the bank does:
They take your $100,000 capital what you just invested in annuity, invest you money in credit cards with 18%-28% a year. Their return on one year is a min. of $18,000 and then they give you $9,333 and on top of that you loose your capital.
I really wonder who’s best is this? Yours? Or the Bank? Judge for yourself!
Although the idea of income for life sounds great, there is one huge pitfall that most annuity salesmen forget to mention. Once you annuitize your contract, the contract is frozen - your decision is final.
There are always dangers in putting all your savings into just one type of financial product. What happens if you need extra cash quickly for a medical emergency? If all your money is in an annuity, you won’t be able to get the extra money you need.
Create your own annuity from investing your savings: You could invest in very low-risk investments that will give you a guaranteed cash flow. It’s like having regular annuity income, but you don’t have to lock your money in at a lower interest rate. Just make sure you can get enough income from your investments. Even Guaranteed Investments Certificates (GICs) and government bonds are better then annuities. Take control of your capital. It’s your hard earned money. If you are not really into investing find someone you can trust to take care of your future, someone who really wants YOUR best. A financial expert can help you find the best strategy for your own situation.
April 21, 2009
Protect Your Capital with Annuity
December 10, 2006
6 funds to invest in with your kids
Are you looking to introduce your children to investing? Consider these tips and a half-dozen mutual funds with low initial outlays.
At Morningstar, we've often emphasized how important it is to start investing early in life. Not only does it give you a big head start in building a nest egg for a first home, a college education or retirement, but learning good investing habits early on can have a positive impact for years. That's why it's an excellent idea for parents to teach their kids about money and investing.
There are plenty of good ways to do this, some of which Morningstar's Sue Stevens recently described in her column (registration required).
Ultimately, there's no better way for kids to learn about investing than by doing it themselves, whether it's with money they've saved on their own or money given to them by a parent or other relative. Traditional tools such as summer jobs and savings accounts are still important, but mutual funds can also be an excellent way for older children to learn the value of a buck. Not all mutual funds are right for young investors, but with a little thoughtful research, it's possible to find some that kids can feel at home in.
What to look for
Broadly speaking, when helping kids invest in mutual funds, it's best to keep things simple. Focus on stock funds rather than bond funds because kids have very long time horizons and can take on plenty of risk. Large-cap stock funds are generally best; not only should they form the core of any long-term portfolio, but they're more likely to hold stocks of which the kids have heard. Kids will generally have no need for sector funds or other niche funds.
Young investors generally don't have a lot of money to throw around, so a fund that requires $5,000, $10,000 or more upfront is effectively closed to them. There are plenty of funds with minimum initial investments of $1,000, $500 or even $250, making them much more welcoming for beginners. You can read about some of these funds in this column by Christine Benz, and you can use Morningstar's Premium Fund Screener (membership required) to find funds with low minimums in addition to any other criteria you want. You might want to eliminate load funds; some of them have low minimums, but they're not appropriate if you're going to make lots of small purchases, as kids probably will.
Often it's possible to start with an even-lower initial investment -- sometimes zero -- if you set up an automatic investment plan, or AIP. Under that kind of plan, you arrange to automatically add a certain amount, such as $50, to the account each month. This can be a good option for kids with jobs that provide a regular income; not only does it allow them to start investing without a lot of money up front, but it will teach them how quickly that nest egg can grow when additions are made regularly. You can find out whether a fund has an AIP -- many do -- by looking on the Purchasing Information page of its Morningstar report, and you can use the Premium Fund Screener to screen for funds with AIPs.
Watch the expenses
Low expenses are a feature any fund investor should look for, and you'll do kids a favor if you instill in them early the importance of fund costs. This can be trickier than it seems at first because the cheapest funds can sometimes have high minimum purchases; still, kids can't go wrong if you steer them toward low-cost funds whenever it's feasible. Morningstar's free Mutual Fund Screener lets you screen for funds with expense ratios below their category average, and the Premium Fund Screener allows for expense screening that's more detailed.
Finally, it's often considered kid-friendly for funds to avoid alcohol, tobacco, gambling or pornography stocks because some parents or grandparents might not feel comfortable having kids investing in such businesses. Columbia Young Investor (LYIAX), a pioneer among kid-friendly funds that's soon being merged away, has always had such restrictions on its portfolio, as does its rival USAA First Start Growth (UFSGX).
This is a more personal standard than the other ones above, and it is one that parents might want to discuss between themselves and with their kids. If you do decide that you'd like a fund that screens out certain kinds of stocks, you can use Premium Fund Screener to find socially responsible funds, most of which at least shun alcohol and tobacco stocks. However, you'll also need to look at each fund individually to see whether its standards are ones with which you agree because funds can differ greatly in their definitions of "socially responsible" investing.
Six funds to consider
With all this in mind, here are some funds to consider if you have a child who's dipping his or her toe into the waters of investing. Of course, these aren't the only kid-friendly funds out there; judicious use of the screening tools mentioned above can help you find other candidates fitting the criteria that are most important to you. However, this list provides a good starting point for young investors:
USAA First Start Growth (UFSGX).
Now that Columbia Young Investor is on the verge of disappearing, this will soon be the only mutual fund explicitly geared toward young people. It's not without its drawbacks; its 1.45% expense ratio is high for a large-cap fund, and 25% of its assets are now in bonds, a higher percentage than most kids probably need. But manager Mark Baribeau avoids alcohol, tobacco and gambling stocks, and you can start an AIP for no money upfront and just $20 a month, one of the most kid-friendly plans out there.
TIAA-CREF Equity Index Investor (TCEIX).
Index funds have a place in any investor's portfolio, and kids are no exception. The big kahunas among index funds, Vanguard 500 Index (VFINX) and Fidelity Spartan 500 Index (FSMKX), are very cheap but have minimum initial investments of $3,000 and $10,000, respectively, putting them out of most kids' reach. This fund from TIAA-CREF has a minimum initial investment of $2,500, but that minimum is only $50 if you set up an AIP that invests $50 a month. Plus, this fund only costs 0.26% a year -- not as cheap as the Vanguard or Fidelity funds but still cheaper than most index funds and nearly all actively managed funds.
Vanguard STAR (VGSTX).
If you want to teach kids about the importance of low fund expenses, there's no better place to start than Vanguard. Some of Vanguard's most popular funds, such as 500 Index, are geared more toward older, more experienced investors, but Vanguard STAR is a good option for beginners. It provides exposure to 11 different Vanguard funds of various asset classes, including significant foreign exposure, and its track record is outstanding. A major factor in that good track record is the fund's rock-bottom 0.36% expense ratio. It does require a $1,000 initial investment, with or without an AIP, but nearly all other Vanguard funds require at least a $3,000 minimum, making this the best entree into this world-class family of funds.
Pax World Balanced (PAXWX).
This is one of the best socially responsible funds out there, with a strong long-term track record and reasonable expenses. It also has a low $250 minimum initial investment, whether or not you set up an AIP, making it an attractive starter fund. The fund keeps 25% to 45% of its assets in bonds, which makes it a bit conservative for most kids' needs, but it also provides significant mid-cap and overseas exposure, which can be hard to find in socially responsible funds.
T. Rowe Price Spectrum Growth (PRSGX).
This fund of funds is good way to obtain diversified, actively managed stock exposure. It invests in nine T. Rowe Price equity funds ranging from small to large cap, value to growth and domestic to international, and it has compiled one of the best long-term records in the large-blend category. Plus, like all T. Rowe Price funds, it's friendly to beginning investors; you can start an AIP with just $50 to start and $50 a month after that.
Ariel Appreciation (CAAPX).
This fund has struggled lately, but we have enough confidence in veteran manager John Rogers that it remains an Analyst Pick in the mid-cap-blend category. Rogers avoids tobacco, firearm and nuclear-energy stocks, and prefers firms that are environmentally friendly and cultivate diversity. It's also an easy fund for youngsters to get into; you can set up an AIP with no money upfront and $50 a month thereafter. On top of all this, Ariel maintains a number of educational initiatives to help disadvantaged young people.
Forex Money Management
Money management in the context of Forex trading refers to the process of analyzing trades for risk and potential profits, determining how much risk is acceptable and managing a trade position to control risk and maximize profitability.
Stop Losses.
There are no absolute rules to how to implement a money management strategy. However, some of the keys are to only risk a small percentage of your total equity capital on each trade. That way, you are able to recover from an unprofitable trade. Moreover, you may want to always have an actual stop set for each position. That way, you can assure that your losses from unprofitable trades are always limited in some predefined and controllable manner. Taking these steps and others can help limit the drawdown that you may suffer at any one time. One well known trader suggested a stop loss set 3% below your entry point; he then indicates that once your position has appreciated 3%, that you move your stop loss to your original entry point. For a full discussion of these rules and many useful other money management concept, see W.D. Gann’s famous book How to Make Profits In Commodities which was published many years ago.
Drawdown is simply the amount of money you lose trading, expressed as a percentage of your total trading equity. For example, if you funded your trading account with $20,000 and proceeded to lose $3,000, you would have suffered a drawdown of 15% ($3,000 divided by $20,000). To get back to breakeven, you would now have to obtain a positive return of 17.65% on your remaining equity capital ($3,000/$17,000). As you will see, as the size of the drawdown increases, the going forward positive return percentage increases exponentially:
5.00% - 5.26%
10.00% - 11.11%
15.00% - 17.65%
20.00% - 25.00%
Thus, the greater the drawdown, the more difficult it is to get back to a level of overall profitability.
Risk-Reward Ratios.
Other money management items include making sure any preplanned trades have an adequate risk-reward ratio such as 1:2. For example, if you sold the USD/CAD pair at 1.1723 and set a stop loss at 1.1823 risking a 100 PIP loss, you should not sell the position if it moves in your favor unless the price is 1.1523 or better (representing a 200 PIP profit).
Do Not Close Profitable Positions.
If you have the discipline, you should not sell your profitable positions even if they move past your risk-reward threshold level (1.1523 in the example above). Instead, you could hold onto the position and progressively move your stop to lock in your profits. For example, if the USD/CAD pair moved to 1.1475, you might place a stop loss at 1.1523 to lock in your 200 PIP profit. By doing that, if the market continued to move or trend in your favor, you could continue to profit from the trend. You could also continue to move your stop loss to lock in additional profit. The trailing stop feature can be useful to accomplish this and remove the need to continuously update your stops and instill a sense of discipline to your trading.
Forex Basics
The foreign exchange or Forex market is the largest and most liquid financial market in the world. As of April 2004, the Forex market experienced average daily turnover of approximately $1.88 trillion, which was a 57% increase (at current exchange rates) from 2001 daily averages. For more information regarding this surge in Forex trading activity, we refer you to the Bank of International Settlements, Triennial Central Bank Survey, Foreign Exchange and Derivative Market Activity in 2004 (March 2005).
The Forex market is predominantly an over-the-counter (”OTC”) market, with no fixed location and it operates 24 hours a day, starting each business day in Sydney, and moving around the globe as the business day begins in each financial center, first to Tokyo, London, and New York.
London, New York City and Tokyo are the principal geographic centers of the world-wide foreign exchange market, with approximately 58% of all foreign exchange business executed in the U.K., U.S. and Japan. Other, smaller markets include Singapore, Zurich and Frankfurt. Approximately 89% of foreign exchange transactions involve the U.S. dollar (”USD”), and approximately 37% involve the Euro (”EUR”).
An over-the-counter market is a market which lacks a centralized exchange. An example of a centralized exchange would be an exchange such as the New York Stock Exchange or the Chicago Mercantile Exchange. You will hear the phrase “inter-bank” from time to time. This refers to the foreign currency trading which occurs between banks. Historically, most of this trading had been conducted over the phone. However, the electronic brokering system was created in September of 1993 to permit electronic trading of foreign currencies between banks and other financial institutions. Now, much of the Forex trading that takes place occurs over various electronic systems.
The USD/EUR pair is by far the most-traded currency pair and in recent years has comprised approximately 28% of the global turnover in foreign exchange. There are three major kinds of transactions in the traditional foreign exchange markets: spot Forex transactions, outright Forex forwards and foreign exchange swaps. “Spot” Forex trades are foreign exchange transactions that settle typically within two business days with the counterparty to the trade. Spot transactions account for approximately 35% of reported daily volume in the traditional foreign exchange markets. “Forward” trades, which are transactions that settle on a date beyond spot, account for 12% of the reported daily volume, and “swap” transactions, in which two parties exchange two currencies on one or more specified dates over an agreed period and exchange them again when the period ends, account for the remaining 53% of volume. There also are transactions in currency options, which trade both over-the-counter and, in the U.S., on the Philadelphia Stock Exchange.
All of the transactions which are executed with Manchesterfx as a counterparty to a client are “spot” Forex trades which settle in two business days. In practice, however, these Forex trades never settle because they are rolled over on a daily basis.
Currency futures are transactions in which an institution buys or sells a standardized amount of foreign currency on an organized exchange for delivery on one of several specified dates. Currency futures are traded in a number of regulated markets, including the Chicago Mercantile Exchange, the New York Board of Trade, the Singapore Exchange Derivatives Trading Limited and the London International Financial Futures Exchange (LIFFE). Over 85% of currency derivative products (swaps, options and futures) are traded over the counter. Participants in the foreign exchange market have various reasons for participating. Multinational corporations and importers need foreign currency to acquire materials or goods from abroad. Banks and multinational corporations sometimes require specific wholesale funding for their commercial loan or other foreign investment portfolios. Some participants hedge open currency exposure through off-balance-sheet products. The primary market participants in foreign exchange are banks (including government-controlled central banks), investment banks, money managers, multinational corporations and institutional investors. The most significant participants are the major international commercial banks that act both as brokers and as dealers. In their dealer role, these banks maintain long or short positions in a currency and seek to profit from changes in exchange rates. In their broker role, the banks handle buy and sell orders from commercial customers, such as multinational corporations. The banks earn commissions when acting as broker. They profit from the spread between the rates at which they buy and sell currency for customers when they act as a dealer.
Typically, banks engage in transactions ranging from $5 million to $50 million in amount. Although banks will engage in smaller transactions, the fees that they charge have made the foreign currency markets relatively inaccessible to individual investors. Some banks allow individual investors to engage in spot trades without paying traditional commissions on the trades. Instead, the banks charge the investor the spread between the bid and the ask price maintained by the bank on all purchases and sales.
December 9, 2006
Types of investment
The major difference in the use of the term investment between the economics field and the finance field is that economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.
Business Management
The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: managers determine the assets that the business enterprise obtains; these assets may be physical (e.g. buildings or machinery), intangible (e.g. patents, software, goodwill), or financial (see below). Whatever the type of asset, the manager must assess whether the net present value of the investment to the enterprise is positive; the net present value is calculated using the enterprise's marginal cost of capital.
Economics
In Economics, investment means the purchase (and thus the production) and/or stock of capital goods and/or technology - goods which are not consumed but instead used in future production. Examples include building a railroad, or a factory, clearing land, or putting oneself through college. In measures of national income and output, investment is also a component of GDP given in the formula GDP = C + I + G + NX. The investment function in that aspect is divided into non-residential investment (such as factories, machinery etc) and residential investment (new houses).
Investment is often modeled as a function of income and interest rates, given by the relation I = (Y, i). An increase in income will encourage higher investment, whereas a higher interest rate may discourage investment as it becomes costlier to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than loaning them out for interest.
Finance
In finance, investment means buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold as an investment, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price.
Types of financial investments include shares or other equity investment, and bonds (including bonds denominated in foreign currencies). These investments assets are then expected to provide income or positive future cash flows, but may increase or decrease in value giving the investor capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows - so are not considered to be assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.
Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, or even investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.
Personal finance
Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important as investment risk can cause a capital loss when an investment is realised, unlike saving(s) where the more limited risk is cash devaluing due to inflation.
In many instances the term saving and investment are used interchangeably which confuses this distinction. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. To help establish whether an asset is saving(s) or an investment you should consider where your money is invested. If the answer is cash then it is savings, if it is a type of asset which can fluctuate in value then it is investment.
