A Retirement Planning Calculator / Spreadsheet

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Putting it All Together


Retirement planning can be thought of as consisting of two phases:
  1. The accumulation phase -- saving for retirement
  2. The distribution phase -- living in retirement
In the previous two posts in this series, we looked first at establishing a target for the savings needed to cover expenses during the retirement years, and then at creating a savings plan to reach that target. In this post, we'll add some enhancements to our retirement planning Excel spreadsheet in order to create a consolidated accumulation and distribution plan -- we'll put it all together. This, in turn, will give us a foundation to do some additional analysis in future posts. (See the end of this post for a link to the spreadsheet.)

A Consolidated Retirement Accumulation & Distribution Plan



Retirement Planning: Graph showing retirement plan from Excel spreadsheet/calculator
Consolidated Retirement Saviings Accumulation & Distribution Plan

  1. The graph above (click on it to expand it) shows a retirement plan for a 35 year old, Alex, who hopes to retire at age 65 and live to age 90. Alex has no savings yet, but is planning to save 13 percent of salary from now on. Alex plans to put 3% of pay into taxable accounts and split the remaining 10% equally between a tax-deferred employer-sponsored 401k and a tax-free Roth account. (For a full description of this scenario, see the appendix at the very end of this post.)
  2. The graph shows the accumulation of savings up until age 65, followed by withdrawals. Withdrawals are assumed to be made first from the taxable account (light blue), then the tax-deferred 401k account (medium blue), and finally from the tax-free Roth account (dark blue). Note that the balance in the Roth account goes to zero before Alex is 90 years old. The bright red slice is an estimate of the additional savings Alex would need in order for the savings to last until age 90.

Start Planning Retirement Early


This graph suggests that, under reasonably conservative assumptions, saving 13% of your income may not generate enough retirement savings if you wait until age 35 to start. Note, however, that if Alex were lucky enough to have an employer who provided a pension and matched 401k contributions up to 3% of employee salary, the situation would be remarkably better. Waiting until age 67 and receiving full social security benefits would also make a significant difference. (Note: for more on the importance of getting an early start, see Start Investing When You're Young).

How to Use Basic Retirement Planning Calculators More Effectively


Simple, so-called "linear," calculators/spreadsheets like this one help to identify the fundamental inputs to retirement planning, and the basic calculations and issues involved. In fact, this is a modified version of the spreadsheet I developed to do my own retirement planning early in my career. However, they must be used with care. In particular, I think it is important to be conservative in your assumptions regarding stock market returns -- especially if you are near, or in, retirement. To understand why, see Don't Plan Retirement Assuming Average Stock Market Returns.

Source from http://observationsandnotes.blogspot.com

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How Much Money Will You Need To Retire?

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How much in savings will you need to retire? A lot -- even many of you who are among the vanishing breed of employees who have traditional defined benefit pension plans. In this post I will introduce a spreadsheet to help you estimate the amount you need to save. I'll also provide a simple rule of thumb for those who prefer a shortcut.

Retirement planning: Savings needed vs life expectancy graph


Retirement Savings Needed vs Life Expectancy
 
This series of posts will not only help you estimate how much you will need to save, and help you develop a plan to save that much, it will also help you understand the whys. Understanding the issues, and the assumptions that retirement planning software packages typically make will, I hope, decrease the chances that you will misinterpret or misuse their results; this, in turn, will increase the chances of your living the retirement of your dreams.

How Much Will You Need in Retirement Savings?

For many people, the biggest savings challenge they will face is saving for retirement. The chart above (click to expand) shows the estimated savings needed for a hypothetical 25 year old, Pat, planning to retire at age 65 with living expenses of about $45,000/year in today's dollars. (Note: the $45,000 is after tax spending, not income.  If you plan to spend less than that in retirement, or have a traditional pension, or your employer matches some or all of your savings, or are more optimistic than Pat regarding the future of social security, or you're older than 25, or you expect less than 3% inflation, you may need to accumulate much less in savings.)  The solid red lines assume Pat's investments are in taxable accounts; the blue dashed lines assume the investments are in tax-deferred accounts such as IRA or 401k accounts.

As you can see, Pat will need about $2 million to fund retirement expenses to age 85 if the investments are in taxable accounts -- somewhat more if the investments are in tax-deferred accounts. The downward slope of the curves reflects the fact that, as a rule, the fewer years remaining to live, the less money needed. For example, not surprisingly, Pat will need less in savings at age 75 than at age 65. The curves that end at age 100 illustrate the fact that it will take significantly more money to fund 35 years of retirement expenses than to fund 20 years.

Retirement Planner Assumptions

Maybe a better answer to "How much money do I need to retire?" is "It depends." The amount you will need to save depends on a surprising number of factors -- most of which are difficult or impossible to predict. Below is a table of the input data used (click to expand) to produce the above graph.

Retirement planning: Savings needed assumptions
Retirement Savings Needed Assumptions
Note: Click on the above screenshot to expand it. The link to download the spreadsheet is at the end of the post.

Most people are relatively comfortable estimating their retirement age and their expenses in retirement. At the other extreme, however, are critical inputs that you may find very difficult to estimate, and over which you may feel you have little or no control -- your return on investment, inflation, and life expectancy (a euphemism for when you will die). In between are other important variables that you may or may not feel comfortable estimating, such as social security, pension income and tax rates (see link below for help on estimating social security). In fact, the only input that you can likely provide with certainty is your current age.

Introducing Al's Simple Retirement Planning Calculator/Spreadsheet

The retirement planning calculator/spreadsheet introduced in this post is similar to other basic planners that you will find. (See the end of this post for links to download the spreadsheet.) A key thing to remember is that the results can only be as accurate as your input. As a result, the reality is there is no way to know exactly how much you will need to save. For starters, you'd have to know how long you are going to live! Even so, I found a simple planner like this useful -- especially early in my career.

Another problem with models like this one is how they handle return on investment (ROI). Simple models assume your ROI will be the same year after year. Keeping up with recent stock market performance in the news -- it should be clear that the real world doesn't work that way. Unfortunately, the fact that it doesn't has huge implications on retirement planning. In a future post, we'll explore ways to deal with these issues more effectively.

A Conservative Rule of Thumb for How Much You'll Need to Save

In the meantime, here's a shortcut that many find useful. A common rule of thumb that some financial planners recommend is the 4% withdrawal rate. Withdrawing 4% of the portfolio in the first year of retirement is a plan that should work for a broad range of retirees. It follows that, using this plan, you would need savings equal to 25 times what you plan to withdraw from savings in your first year of retirement. This is a more conservative approach, and generally recommends savings larger than those recommended by the simple models. (In Pat's case the recommended amount is $3-3.5 million.) This approach to estimating required savings is most helpful if you're in or very near retirement; otherwise, you may find it difficult to estimate how much you will need to withdraw.

Note that the same factors still determine your needs; you just don't get a chance to specify them. For example, you'll notice that nowhere do you specify your expected return on investment or life expectancy. The method gives you a reasonable target under a broad range of circumstances, but it's not magic. If you're planning to invest all your savings in Treasury Bills, retire at age 50 and live to 120, this method won't give you a reliable savings target.

Conclusion

Most people will require substantial amounts in savings in order to retire comfortably -- especially if they do not have a traditional "defined-benefit" pension. Saving such large amounts will require a long-term saving and investment plan. The good news is that accumulating this much money is probably easier than you think.  The next post will help you develop a saving plan by addressing the question What Percent of Your Salary Should You Save?
Source from http://observationsandnotes.blogspot.com

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What Percent of Your Salary Should You Save For Retirement?

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"What percent of my salary should I save?" is a frequently asked question -- especially early in one's career. People often ask the question implicitly assuming there is a standard, magic percentage of your pay that works for everyone. I think the most honest answer is "it depends." In this post, we'll add some additional capabilities to my retirement calculator so that you can understand what the answer depends on and use the calculator to determine a percentage that works for you. (The download link is at the end of the post.)

Pat's Retirement Savings Plan


Graph. What % (percent) of salary plan to save

In How Much Money Will You Need To Retire?, we looked at a hypothetical 25 year old, Pat, who wants to retire at age 65 and have $45,000/year in today's dollars for after-tax living expenses (not income) during a 20 year retirement. The retirement calculator introduced in that post estimated that Pat would need more than $2 million in tax-deferred funds at age 65! (See that post for a discussion of the assumptions made; you may need to accumulate considerably less -- especially if you're older than 25, or you expect to spend less than Pat, or you expect to have a pension, or....) The graph above (click to expand) suggests that by saving and investing 10% each year, this 25 year old could accumulate the needed retirement funds -- and then some; the final total is over $2.3 million.

Keys to Successful Retirement Saving


Three of the most important factors in reaching your retirement savings goals are:
  • How much you contribute,
  • When you start, and
  • How much your investments earn

Clearly, the greater the percentage of your income you save and, the more you are likely to end up with. The general consensus is that 10% is usually the minimum starting point. Many people find that as they get older they are able to contribute significantly more. (See link at bottom of post for a fascinating discussion of how much other people are saving.)

The longer your money is working, the more it is likely to earn. By starting early, Pat is allowing 40 years for "the magic of compounding" to do its thing. Had Pat waited until age 35 it would have been considerably more difficult. (See Start Investing When You're Young)

The greater your return on investment (ROI), the more you will accumulate. Pat is assuming an ROI of 8%, the default assumption of many retirement planning calculators. Note, however, that it is your actual, not your planned, returns that ultimately matter. Be realistic; some of the links at the end of the post may be helpful in that regard.

From the above we can see that the percent of your pay you need to save clearly depends upon, at a minimum, when you start, and how much you earn on your investments. Start early and earn a substantial return, and you won't have to contribute as much. Even in the best of circumstances, however, you'll likely need to save at least 10%.

The Impact of Inflation


In Pat's case, there is another important factor that makes it much easier to accumulate $2 million than you would expect -- inflation. We've assumed that Pat is making about $65,000 a year. The savings needed are more than 33 times Pat's current salary; that sounds like a lot. However, in 2049, if Pat's salary keeps up with the assumed inflation of 3% per year, Pat's salary will be over $200,000! As a result, when Pat retires, $2 million dollars may "only" be a little more than 10 years salary.

Al's Retirement Savings Planner Assumptions


Note: Click on the screenshot below to expand it. The link to download the spreadsheet is at the end of the post.

Retirement planning savings assumptions

In the previous post, we saw that the amount needed for retirement depends on a surprising number of factors. When basic retirement planners calculate your planned savings, the results depend on a similar number of factors. Above are the inputs used by this model. It follows that the percent of your income you'll need to save also depends on factors such as how much money you start with (do you have a trust fund from a rich uncle?), and what percent of your savings are being matched by your employer.

Observations About Simple Retirement Savings Models


Simple savings models make the same simplifying assumption about return on investment (ROI) as we made when calculating needed savings. That is, they assume you will earn a constant return year after year. However, the fact that it's an unrealistic assumption is less of a problem here. That's because, assuming you update your plan every year or two, your estimate of how much you will have at retirement will become increasingly accurate. That doesn't mean you'll like the results, but at least you'll have the opportunity to do something about it if your plan is diverging too far from your target. For example, you could increase your annual savings during the remaining years; or, you could defer retirement until you've met your target.

A note of caution. So far we're only talking about saving for retirement. Many of you will also have to deal with saving for other important goals -- for example, buying a house, or sending kids to college.

How Much Should I Save For Retirement: Conclusion


In order to have a reasonable chance for a comfortable retirement, most people will need to plan to save a large sum of money. It's not as difficult as you think. However, there is no magic percent of your salary that works for everyone. Start early and you may be able to get by with 10%; wait 'till your mid-30s and you may well need to stash away 15% or more.

Note, however, that how much you'll want to save depends first upon what your situation will be after you retire.  For example, how much do you plan to spend?  Will you have a pension and social security? Those questions are addressed in the first post in this series. Retirement tools like this Excel spreadsheet can not only help you figure out how much you'll need to save to support your desired lifestyle, but also help you devise a plan to save it. The next post in this series will help you put together a consolidated savings and spending plan.  Remember, the earlier you start planning the easier it will be, and the better your chances for a comfortable retirement.

Source from http://observationsandnotes.blogspot.com

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Investing in FOREX or investing in Stocks?

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So, you have the money to invest, but you don't know whether to buy Stocks or try something new, like FOREX for example.

Stocks

Before we describe what are the benefits of FOREX, lets remember what are Stocks. Stocks have been a popular investment for hundreds of years. Companies issue stocks to raise capital for expansion and new projects, and each share of the stock represents a partial ownership in the company. Basically speaking, when you buy stocks you invest in the company and in the market it is working in.

Hence, when the company does well and makes a profit, the value of the stocks rise and you can sell your shares for a profit or hold on to the stock for even more gain in the future. Sometimes companies will issue dividends – part of the profits that are distributed to share holders, another way for you to make a profit.

Stocks are traded on Stock exchanges. Most stocks are bought and sold through brokers (agents) who charge a commission or fee for this service. American stock exchanges include the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ). Most stocks are only listed on one exchange, although large companies may have listings on several exchanges.

Stocks were traditionally seen as long-term investments. So-called 'blue chip' stocks - those having proven value over many years - may form the backbone of an investment portfolio. Short-term traders (Day traders) exist, but it is a relatively new phenomenon made possible with the advent of Internet trading. Day traders attempt to take advantage of large daily fluctuations in the market by buying and selling many times in one trading period. It is relatively risky and broker commissions charged on each transaction reduce any profits realized.

Stocks may sometimes be bought on Margin, meaning that the investor borrows money to buy the stocks. Margin rates are usually around 50% - the investor can borrow as much as half the value of the stock.

FOREX

The Foreign Exchange Market (FOREX) is quite different from the stock exchange. In contrast to the stock exchange, the FOREX is primarily a short-term market. Most traders enter and exit deals within a 24-hour period – sometimes within a few minutes. Many FOREX trades can be made in one day without building up a large brokerage fee because FOREX trades are commission free; hence, you keep all of your profit. Brokers earn money by setting a spread – the difference between asking and selling prices.

FOREX is the largest financial market in the world. It is handles transactions worth $1.5 trillion every day ($1,500,000,000,000). By comparison, all the American stock exchanges combined handle daily transactions worth about $100 billion ($100,000,000,000), 15 times smaller than FOREX. It is not located in any one location, but in the virtual space of the Internet. Trading markets are located world-wide and because of difference in time-zones trades can be made 24 hours a day, 5 days a week. Trading begins in Sydney, Australia on Monday morning (Sunday afternoon New York time) and continues non-stop until Friday afternoon New York time.

The huge volume of FOREX and its around the clock availability, means that it is one of the most liquid markets in the world. There is always a buyer and seller for any type of currency because the world economy relies on the movement of goods from country to country. Stock exchanges have more limited trading hours. While it is possible to trade on exchanges worldwide, each exchange is independent and operates for just 7 hours a day. There is no way to buy or sell a certain stock that is only traded on one stock exchange when that exchange is closed.

FOREX has even more advantages compares to Stocks: It is more predictable than stocks, it follows well established trends, it allows high leverage – typically 100:1 instead of 2:1 on the stock market; and it doesn't require a large investment – mini accounts as small as $250 can get you started in FOREX.

The big question is what is Best for you? Are you looking for a Day-Trading constant activity, with its advantages, or a long-term investment. Know the answer and you know the nature of your next investment.

 Source from http://www.howtoadvice.com

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Reasons to Invest Money

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For all those urgent reasons there are to invest maybe the most important be to broaden or increase our retirement fund for being our current life expectancy higher than before. Nowadays, investments are the foundation of our future financial level. Bad investments can bring us negative turnovers and therefore decrease our future possibilities. You are looking at two options for your money, the first you can spend it or save it and invest it. According to the Bureau of Economic Analysis,  personal savings of North Americans are very low comparing them to other developed countries. A low savings interest rate indicates that North American citizens are accumulating enough savings as to carry out successfully any emergency, and keep the life standard after retiring. Below you will find a list of why is it more important to save and invest than to spend.
  • People live longer than before and need more money to keep on living
  • Medical, educational, and insurance expenditures are still very high
  • The more one saves now the better his future in what having money to recycle refers to
  • By investing wisely you may better your life standards and increase your future wealth.
Without having to win the lottery you may accumulate an important retirement fund without having to dispose of great amounts of money. It is easier than what you can imagine. All that you need is time, money to deposit in regular periods of time and a return rate for your investments. The following arguments show how these three elements: time, money deposited and an investment rate interact in reaching your first million dollars.
For example:
  • An amount of US$231,377 invested during 30 years, at 5% annual interest rate, will have a future value of one million dollars.
  • If the return rate increases to 5 or 8%, the initial deposit will be reduced to US$99,377
  • A US$99,377 deposit invested over a thirty year period, at 8% annual interest, will have a future value of a million dollars
  • If you make regular deposits instead of investing a big amount , the sum of deposits will definitely decrease.
  • US$15,051 deposited each year during 30 years, at 5% per year, has a future value of US$1 million.
  • Earning a larger turnover reduces the annual deposit amounts.
  • US$8,827 deposited each year during 30 consecutive years, at 8% annual interest rate, also has a future value of US$1 million.
  • If you make monthly deposits instead of annual deposits the amount of each deposit will decrease more.
  • US$1,202 deposited each month during 30 consecutive years, at 5% annual interest rate, will result in US$1 million.
  • If you make weekly deposits instead of monthly ones the amounts will decrease even more
  • US$276 deposited weekly during 30 consecutive years, at  5% annual interest rate will also result in US$1 million in the future.
  • If the annual interest rate were increased from 5 to 8%, the weekly amount deposited would be the following:
  • US$154 invested each week at an annual interest rate during 30 consecutive years would render a future amount of US$1 million.
  • If we extend the investing period from 30 to 40 years and keep an annual interest rate of 8%, the weekly deposit would only be US$66.  
  • US$66 invested weekly, at 8% annual interest rate, during 40 consecutive years would be worth a million in the future.
From these varied options we arrive to the following conclusions:
  • When longer the period, bigger the effects of recycling, which reduces the single initial amount or the diversified deposit amounts.
  • While higher the turnover interest rate, higher will be the recycling effects, which reduces the initial amount or the diversified deposit amounts.
  • While longer the period and higher the interest rate lower will be the single initial amount or the diversified deposit amounts.
The key to a successful financial plan is to keep apart a larger amount of savings and invest it intelligently, by using a longer period of time. The turnover rate in investments should exceed the inflation rate and cover taxes as well as allow you to earn an amount that compensates the risks taken. Savings accounts, money at low interest rates and market accounts do not contribute significantly to future rate accumulation. While the highest rates come from stocks, bonds, and other types of investments in assets such as real estate. Nevertheless, these investments are not totally safe from risks, so one should try to understand what kind of risks are related to them before taking action. The lack of understanding as how stocks work makes the myopic point of view of investing in the stock market ( buying when the tendency to increase or selling when it tends to decrease) perpetuate. To understand the characteristics of each one of the different types of investment can or may help you determine which of them is the right one for your needs.

Source from http://www.beginnermoneyinvesting.com

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Stock Market Futures

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An operation with futures can be defined as a contract or agreement between two parts in which they commit to Exchange an asset, physical or financial, at an established price and at a future pre-established date at the signing of the resolution.
 
For the buyer, the contract of futures means the obligation of having to buy the underlying asset at a future price at the date of expire and for the salesman, it supposes the obligation to sell such underlying asset at the future price at the same date of expire.

In futures two positions distinguished themselves, in whose losses or profits will depend on the relation between the future price (agreed at the present) and the price of liquidation (price of the underlying asset at the market and on the date of expire):

Long position (buying):
  • If the future price is  < than the liquidation price, the buyer obtains a profit.
  • If the futures price is > than the liquidation price, the buyer has a loss.
Short position (selling):
  • If the futures price is > than the liquidation price, the salesman has a loss.
A key element on the contract of futures will be then the determination of the futures price. This will be calculated in base on the cash price of the underlying asset plus the net financial cost; financial cost that will mark the difference between today (day the contract is agreed) and the date of expire of the contract.

So then, it will depend on the underlying asset defined on the contract. As a way of example we present the case of the shares and the bonds.

Forward price of a share:
  • FW= PC (1 + ti)- d (1 + t’ I’)
  • Where  FW= forward price
  • PC= Cash quoting of the share
  • I  = Rate free of risk
  • D = Dividends paid before expiration
  • T= time until expiration
And it pays dividends during the contract period; the person who accorded on the futures contract will no perceive the dividends in question.

Before this situation, you will have to deduce its impact from the futures price. If this is not done, the cash operation would result more efficient than the future operation and everybody would buy in cash until this effect would dilute   (arbitrage operation).

Forward price of a bond without the intermediate coupon payment:
  • FW = (PC+ CC) (1 + it/360)- CCF)
  • Where  PC = Cash quoting of the bond
  • CC = Running coupon of the bond in t    (synonymous of the accumulated interests)
  • t = time till expiration
  • i = Free of risk type of interest corresponding to  t              
  • CCF = Running coupon the day of expiration of the forward
Forward price of a bond paid with an intermediate coupon:        

FW= (PC +CC) (1 + it/360)-CCF- CC’ (1 + I’ t’/360)
  • Where: CC’= Paid coupon in t’
  • T’   = time until the expiration since the payment of the coupon
  • I’   = Type of interest free of risk corresponding to t’   
In this case the intermediate coupon acts in the same way as with the payment of dividends of the shares. Those who have a future over a bond will not receive the coupon, so it must be discharged from the price.

Source from http://www.beginnermoneyinvesting.com

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Options, Call Options, Put Options and Writing Options

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This section focuses on options which are stocks derivative investments. A derivative security is a financial security that derives its value from another security. 

Stock derivatives as options and futures are securities that offer investors some of the benefits of stocks without having to own them. 

Future contracts will be discussed in the next section.

Options and how they work

An options contract gives the holder the right to buy or sell shares of a particular common stock at a predetermined price (strike price) at or before a specific date (expiration date). An option is a right not an obligation to buy or sell stocks at a specific price before or at expiration date.

The strike price is the price at which the option holder can buy or sell the stock. An option expires at its expiration date.
A stock option is a derivative security because its value depends on the underlying security which is the common stock of the company. For example, the value of an to buy or sell Intel stocks depends on the price of the stock in the market.

Another underlying securities, besides common stocks, for the options contract are stock indices, foreign currencies, US Government debt and commodities.

Options are negotiated in the Chicago Board Options Exchange (CBOE), the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), the Philadelphia Exchange (PHLX) and the Pacific Exchange (PSE). Options can also be negotiated in the over-the-counter (OTC) market.

Understanding how options contract work can provide you with additional tools that can be successfully used in volatile markets.

Options are used to speculate with the movement of future prices of stock, and to reduce the impact of volatility of the stock prices, in some aspects the options are similar to future contracts. One of these similarities is that option holders with small investments can control a great amount of money in stocks for a limited time. The risk of loss, however, is much less for option holders than for future holders.

An options contract gives the owner the right to buy or sell a specific number (generally 100) of common shares from a company within a period of time.

Source from http://www.beginnermoneyinvesting.com

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Stock Market and How Stocks Are Negotiated

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Stock markets are sensible to changes such as boosting and dwarfing of interest rates, political situations, events ahead of time, and those situations that one would never think could affect the economy or markets. In addition, the same stock markets have been constantly fluctuating due that they also have to adapt to any external situation.

To get to understand those changes, and how markets work may allow you to lower transaction costs when selling or buying stocks.

The stock markets: The stock markets are the foundation of any capitalist system where titles-valuables (stocks, bonds, options, future and services) are negotiated. The stock markets in the United States have two big interchanges and a parallel market (OTC.)

The New York Exchange (NYSE) and the American Stock Exchange (AMEX) are the largest in interchange and have negotiation environs in places in which there are stocks exchange.

The NASDAQ market is the same as that of the OTC, basically negotiates new stocks coming from low capitalization companies through phone and computer net chains. The stock markets and bonds have changed significantly due to technological advances. The wide and extent use of PCs and more specifically of the internet has given investors direct access to information that before would have been almost impossible to get.. Besides negotiation schedules for investors has been broaden. While before the markets gave access to negotiations during specific schedules, today negotiations are taking place out of schedule. Interchanges still close at the end of the negotiations official day (4:30 pm Eastern US time); after hours negotiations happen via the Electronic Computer Chain Network (ECN) which starts at 4:30 pm and ends at 9:30 am (Eastern US time), time in which the markets starts operating.

NYSE negotiations are taken place by floor specialists through sound voice auctions, but the NYSE is oriented towards the use automatic systems of wide use to accept sales and buy orders as done by its opponent, NASDAQ.

One of the many advantages that internet gives investors is that they can negotiate valuables through the line without the help of an stock market agent. Another advantage of the internet is the transparence in the market price. In other words, you can see the real price which buyers and sellers are willing to bargain over determined stocks. The bond markets still have a long way to go concerning transparence that their market prices should have for their potential buyers.

The transaction cost have dropped in the use of decimals. This change has had the effect of narrowing the lowest offer and ask for an extension of 1/16 points ($0.06) to a minimum of $0.01 per stock.

Coming of computers, on-line negotiations, ample negotiation schedules and the use of decimals have turned investing in different stocks something easier, but you also need to be better informed about the valuables you are going to buy or sell so easily. The stock market’s function is to provide continuous fair prices. Buying and selling financial valuables are auction procedures. A buyer offers a buying price (the amount he or she is willing to pay) and the sellers give their selling price (the price he or she is willing to sell at.) If these prices are similar the supply and demand coming from other buyers will be brought about until they complete the negotiation.

Source from http://www.beginnermoneyinvesting.com

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Investment companies have reached near in relation to providing the ideal type of investment for millions of investors that do not want to manage their own investments. Managers of these investment companies invest funds from investors in varied stock portfolios, bonds and instruments in the money market.

Investors participate of these investment companies depending on the amount of their investments. Which means that even with a modest investment the investor is the owner of a share in diverse stock and bond portfolios.

An advantage of this kind of investments is that investors that do not have time to manage their own financial investments or do not have the knowledge of individual financial values can invest their money in a diversity of stock and bonds portfolios, as well as in the money market instruments that offer mutual funds. Even so mutual funds are more often being monitored by regulators (Securities and Exchange Commission and the New York Attorney General for example) because of the excessive fees charged and for using the market timing shares in some mutual funds.

This shocking practice done by some mutual funds have put them on a dilemma on whether to invest or not in mutual funds. Many of them have turned to the exchange-traded funds as a more popular investing alternative.

Money growth that are managed by mutual funds companies have made them become important pieces of the stock market. According to the Investment Company Institute by the end of 2004 the mutual funds industry had moved around a $16.06 trillion of investors capital all over the world. With that many mutual funds from where to choose the investor should be very careful when selecting a mutual fund as well as to invest in individual stocks.

There are three steps that can make it easier to choose over what funds to invest in:
  • Understand how funds work
  • determine which are the objectives of the funds and what type of investments they make
  • Evaluate the performance of funds by reading the prospectus and other sources.

Source from http://www.beginnermoneyinvesting.com

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Investing with Options

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This site has been created in order to show people how they can increase their wealth like never before. We are going to take you into the strategies involved in options that common investors usually do not think about or have probably not even heard about. You will soon realize that option trading is a new opportunity to turn into some of the people in the world that know what it feels like to win. The first part of the site will be based on the options basics in order to fill people in on how it works. This will allow you to learn about how option trading is done and why. Then we are going to show some of the strategies that have been used in different occasions and which have proven to be successful. These are not only strategies that have been used before but they are also easy to adapt into the strategies of any investor or trader. There are currently a number of successful investors that currently utilize these strategies on a daily basis within their own business. We are also going to show people what needs to be done in order to set up their own business at home with the best options trading software that exists as well as provide information on the tools, brokers, web sites etc
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Grabbing at those opportunities 

The economical idea of price of opportunity is intimately related with the idea of restriction of time. You can only do one thing at a time, in other words, unfortunately, you have to sacrifice other things. The price of opportunity of any activity is the value of the best alternative that you could have done instead of another. Everyday we have to choose what sort of things we think are more beneficial to do. For example instead of staying home and watching television on the weekend, you might have chosen to take your kids out for ice cream, as this gave you more satisfaction and happiness. The price of opportunity only depends on the value of the best alternative. It does not matter if you have five alternatives or if you have thousands. The price of opportunity is simply the value of the best alternative because you can always reduce a complicated selection with many options, to a simple selection between two things: option X against the best of all the other alternatives. The price of opportunity can give you an indicator of when to do things and when not to do them. For example, maybe you are the type of person that really likes eating chocolate; however you have more of a knack for pretzels. If you were only offered chocolate, you would most likely take it; however if you were offered both chocolate and pretzels you would probably take the pretzels. The price of opportunity of eating your pretzels is not eating the chocolate. Since the price of not eating pretzels is greater than the benefits of eating chocolate, it would not make sense for you to choose the chocolate. Of course if you were to choose the pretzels you will still need to face the price of opportunity of sacrificing the chocolate; but you will be willing to do this because for you the price of opportunity of chocolate is less than the benefits of pretzels. The prices of opportunity impose inevitable restrictions in the behavior because you always need to choose what is best and are obligated to sacrifice the second best alternative. 

Source from http://www.beginnermoneyinvesting.com

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Investing in Silver

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Investing in Silver is one of the things that is taking off today in the investing world. Anyone that is thinking about making cash in the market should take some time to read about these kinds of things and comprehend that there are not always opportunities that come as far as making money is concerned. It takes people these days a lot of bravery to get in and start investing when they are not aware of exactly what is going to happen.

The idea of this site is something quite simple to understand if you have a basic knowledge and understanding about economics you will be able to see just how important this is for the market of silver. Understandably, it can seem a bit challenging for first time investors. Savings accounts and term deposits are easy to get to grips with-- but investment? Stock markets? There is a lot to learn when it is all new! Our focus is on investment and giving advice to help you make wise economic choices."

There are some myths that many people have heard about the price of silver and it seems that the most common one is that digital photography is going to destroy the silver market. This is actually something that is not completely understood by people and what has been researched about is something that is definitely going to be a shocker for a few.

No matter what the market, it is known that supply and demand is something that has to be well balanced. However, this is an aspect that would take us into a whole other aspect of the silver market. 

Silver as well as gold is measured to be a leading article of trade by the market. And even though these once used as money in the past it is interesting to find out how silver is traded now in our modern day and age. 

Silver was actually the first type of money that existed in history. The word silver and money are identical in places like South America and Mexico where it is called “plata” which means silver. 

Silver is one of the most important metals in this day and age. As a lot of people know, people are discovering more and more uses for silver every day and it is the metal that is used more than all the rest put together. New use has an effect on the demand, and demand will have an effect on the price, and we will look into some of the future and new uses for silver. 

There are different options of how investors can invest in the market, which include mining stocks, bullion, coins, and leveraged investments that are some options for the future.

Source from http://www.beginnermoneyinvesting.com

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Investing in Bonds

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Stock prices are guided by earnings. When a company’s gains increase through a period of time, the price of stocks of the company also are increased. 

Reaction of prices of bonds under certain economic events are mainly different to prices of stocks. Prices of bonds generally decrease when the news about the economy are good and increase when negative. An understanding about these characteristics of bonds could explain the phenomena.

Bonds features

 A bond is a negotiable debt security under which the issuer borrows money and in exchange agrees to pay fixed amounts of interests during a specific period of time, and besides gives back the total amount of the principal when the bond reaches maturity.

The principal is the net value (par value) of the bond that generally is $1000 per bond. 

A bond is similar to an IOU. Bonds also have certain similarity with the Certificates of Deposit (CDs) and savings accounts. Investors who deposit money in CDs (or savings accounts) are in effect a loan to banks.

Banks pay the investor interests over their deposits and later repay them the principal when CDs reach maturity. Equally, bond investors make loans to the issuer (corporation or government). This process turns them into creditors, not in owners, as in the case of investors in common stocks. In return, the issuer pays regularly a specific amount until maturity date of the bond.

Virtually, bonds have a maturity date, time in which the issuer gives the investors  back the face value of each bond. The main difference between the three, savings accounts, CDs and bonds is that investors can sell their bonds to others in the secondary market before the bonds reach maturity. Savings accounts and CDs cannot be sold to other investors.

Take into account that CDs in amounts larger than $100,000 can be sold before reaching maturity, make from it a very profitable investment.

Bonds are negotiable IOUs opposite to savings accounts and CDs in amounts smaller than $100,000, and issuers of these bonds pay regularly a fixed amount of interests y repay bondholders its principal on the fixed maturity date.

These regular payments of interests make bonds a good investment for investors that search fixed amounts of incomes and be given back its principal when at maturity date. Bonds in general have similar characteristics. A bond has a face value, also known as par value which is the bond amount that is repaid at maturity. The bonds par value is almost always $1,000 with very few exceptions. The par value is the amount under which interests to pay is determined.

For example, if a bond is bought when issued at a price of $1,000, the investor is buying such bond at its par value. At bonds maturity date the investor receives $1,000 per owned bond.

When bonds are issued a maturity date is fixed, and will be the date bondholders will receive the par value of their bonds. Maturity date is the date in which the issuer of the bonds takes away the bonds from the market and pays the bondholders its par value. Bonds’ maturity dates can be established from a day to 100 years.

Bonds with maturity of one year or less from the time of issuance are referred to as short-term bonds or debt. Bonds with maturity of one year to ten years are referred to as intermediate bonds or intermediate notes.

The long-term bonds are issued with a maturity of at least ten years and commonly up to 30 years. Disney Corporation and some other corporations have issued bonds with a maturity of 100 years, but this does not generally occur. Bonds have two types of maturity. The most common one is a term bond in which all bonds of a determined issue mature on the same date.
A serial bond has different dates of maturity within the same issue. The coupon rate of a bond determines the annual amounts of interests paid by a bond which generally is determined in a percentage over the face value.

If the coupon rate is of 5% the issuer of those bonds agrees to pay $50 (5% x $1,000, the face value) in annual interest per bond. Many bonds pay interests each semester, the bondholders will receive $25 per bond every six months. Some bonds have adjustable or floating interest rates.

Let’s suppose that last year you purchased a bond with a coupon rate of 5% when the market rates were also of 5%, and you paid $1000 per bond. This year the markets’ interest rate raised to 6%. What price would you receive if you sold such bond? Obviously, new investors wouldn’t pay $1,000 for a bond with a performance of 5% when they could buy new bonds with an updated coupon rate of 6% for each $1000. Due that new investors would expect to get at least a 6% from a bond that would be sold at a lower price than $1000 (a discount) in order to be more competitive against current bonds.

Equally, if the markets interest rates fall under the coupon the rate, the new investors will be willing to pay more than $1000 per such bond. That is how prices of bonds are vulnerable to the market interest rates, as to other factors that will be discussed later on.

Source from http://www.beginnermoneyinvesting.com

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How to Invest in Stock Market

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How to Invest: The Stock Market and Exchange is a great alternative for the savings of people and institutions. It permits them to obtain an important profitability against other types of official markets even if it means assuming, possibly, a greater risk.

An example of the growing importance of the stock exchange at a world wide level is the existence today of millions of small and big savers that are willing to put part of their excess funds in the stock exchange markets. The stock exchange, then, is each time more and essential element for the regular functioning of the financial system of a capitalist economy.

With this site we pretend to contribute with the essential knowledge, which includes the functioning of the stock exchange market, as also to present the main techniques to invest in it.

In the following Section a general description of the stock exchange is offered, its functioning, types of assets that are negotiated in it and the agents that intervene, also the main characteristics and functions that defines them are resume and a review of its history is done.

In Section 3 the securities object of dealings in the stock exchange are described in detail and in Section 4 the different types of more frequent operations are studied.

In Section 5 the required requisites for institutions that want to quote in the stock exchange markets are analyzed and the official procedure of quoting is described. Also, the official security and supervision of the market and the intermediaries in it are discussed.

Section 6 presents the different techniques for analyzing the shares of a Company. The pretension is to answer the question of; what to do to begin to operate in the stock exchange? For it, the main sources of information from the market and other tools used by the stock exchange annalists is gathered to comprehend the market and to try to foresee its future. The fundamental techniques of analysis and technical analysis are studied and a final comparison about its advantages and limitations is presented.

Section 7 is dedicated to the types of indicators that are used to follow the evolutions of the stock exchange markets: the stock exchange indexes.

In Section 8, the profile of the investor in the stock market is tried to achieve, having in account that there doesn’t exist any kind of universal description for them. Two types of investors are basically distinguished: according to its way of operating and according to its knowledge and financial capacity.

Source from http://www.beginnermoneyinvesting.com

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Futures, Future Contracts, Analysis and Speculating

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Futures contracts are complex investments that should not appear in investor’s  majority of portfolios because of the loss risks in relation to other securities such as stocks and bonds. The greatest risk is caused by the leverage obtained from futures contracts.

Futures contracts investors are required to pay only a small percentage (2 to 10%) of the total value of the contract. If the value of the contract declines significantly, investors are forced to pay additional amounts. Omitting to deliver such additional funds would result in a loss and liquidation of the investor’s position.

Source from http://www.beginnermoneyinvesting.com

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Beginner Money Investing | Learn Best Way How to Invest Money

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The Main Educational Ideas of my Beginner Money Investing site is to help you learn and train yourself to put money aside, commit money to earn a financial return as well as the Best Ways to Invest Money? how to invest moneyIs committing money to earn a financial return the same as playing for money? It must have crossed your mind if you had committed some money every month to acquire shares of any major company during four or five years previous to filing its bankruptcy. Having tried to take some business risks cost you an arm and a leg, but if you had given it a second thought you would have committed your money to a savings account earning a 1,3 or 2,3 annual percent during that time period. Still, during that lapse of time, the Dow Jones Industrial Average scale had raised 100% its price. Middle class property house prices had raised between 6% and 8% in that same time. Certificates gained around 6% per year. Could your possibilities to succeed be higher if you were playing at some casino or race? You may either come out naked or you may triple your pension money.

Committing money in certificates, shares and/or properties is not similar to playing for money, even when shares, certificates and property prices fluctuate suddenly. Keeping money aside at home is not the same either. Contrasting ideas come from the following: Putting money aside is to keep your money worth the same when not being used. On the other hand, committing money for profit has to do with risking. Depending on where you put your cash, that is to say what kind of business, you’ll get more or less turnovers. To invest is to put money in the financial market or in real estate to increase its future value. Committing your money includes shares, collecting coin, bonds, real estate, options, and future contracts; savings is usually done through a bank savings account.

Speculating is putting money in a place in which opportunities to get a financial return in blue through a determined period of time are just minimum. With this investment probabilities of getting back some money over a long period of time are really high. Therefore, we can assure that investing and speculating are not the same; moreover, speculating is more related to gambling in which odds are against the individual that decides to invest. The risk of loosing in future contract investments area extremely high. For each dollar earned from commercializing future contracts you loose another one. Then, why are there who invest en speculative values? The answer is very simple. If investments work as one hopes or expects, the investors will count with a substantial turnover.

Having success in investments requires knowledge about values and stocks in which one is investing as well as the risks that those values carry. Investment opportunities are very broad and the abundant information that exists in the internet may help you get more knowledge about those investment opportunities that you feel you can carry on. The negative part that comes along with the internet is that the use of such a simple and quick that you can make investing mistakes much more easily. Without having to talk about your investing ideas to your agent o financial broker, you could end investing in low return shares and bonds, but with a higher risk of loosing it all. Advice about investments are spread freely and easily through internet. But you should take into account that no advice is free. If you had followed the advice of a research analyst having to do with which shares to buy or sell for the 2000-2002 period you would have lost most of the capital you invested. Many analysts recommended the buying of shares and stocks with very little information about those values, and only because the prices had dropped to a very low level. For example, selling shares and stocks suggestions over: Enron, WorldCom, and Global Crossing came only when they were already near to file for bankruptcy.


By understanding how to build a investing portfolio you could keep safe against any potential loss such as those shares and stocks coming from the mentioned companies and corporations.
  • Put money aside, commit money to earn a financial return or take a business risk?
  • Motives for committing money to earn a financial return
  • Outlay of money process
  • Kinds of outlays of money for profit
Source from http://www.beginnermoneyinvesting.com/

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Retire young by investing in properties

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By: Milan Doshi

Retire early via property investments
How to retire in less than five years by accumulating good debts of more than RM3 million through property investments

I was having lunch a few weeks back with David (age 55), a past participant of my property investment program whom I had not met for many years. David works in the oil and gas industry and he was posted to the Middle East for the last five years. When he left Malaysia, he was a millionaire. When he came back for good, he was worth over RM5 million. Not a bad way to get rich quickly within such a short period of time. I am sure he would not have been able to make so much money so quickly had he remained in Malaysia. 

Hence the important lesson here for all employees is to be adventurous and grab any opportunity to earn a high income in a strong currency. The amount you earn working overseas in one year is equivalent to at least 3-5 years of working in Malaysia! The amount of money you are able to save while overseas will enable you to leapfrog your peers when it comes to investing. 

While away, David managed to accumulate over 10 residential properties and he paid cash for all the new purchases as he used to come home at least three times a year. David’s combined passive rental income today is over RM10,000 a month enabling him to retire very comfortably. He only took loans for the earlier three purchases he made before he went overseas. 

When I asked David, why he did not take any loans for all the recent purchases he made while working overseas with a high income, he replied that he did not like paying the bank interest. He was also afraid of interest rates going up like what happened during the Asian currency crisis of 1997/98. Another reason was that he preferred his surplus cash to be used up instead of leaving in fixed deposits where the temptation to spend or make ‘silly’ investments would be extremely hard to resist. David told me that his goal was to retire debt free and he was happy that he was finally able to do so at a fairly young age.   

While David did well for himself, I personally felt he could have done much better. Like David, many people’s goal is to retire debt-free early, preferably well before the age of 65. Did you know that it is possible to retire, if you so wish, within the next five years by accumulating good debts of RM3 million via property investments? Sounds too good to be true? Read on for the truth.

In my article in the June 2009 edition, I gave several reasons why you must aim to borrow intelligently as much as you can. They were:
Leverage

Transfer of Property Risks

Effects of Inflation on Bank Loans

How Your Net Worth Increases due to the Reduction in Liabilities 
Here are more reasons on why it makes sense to borrow money:

1. Time Factor: It may take you five to ten years to save RM100,000, but less than one month to borrow the same amount for property investments. Hence why wait to save when you can start investing now using borrowed money! You will be able to get rich quicker by starting your investment journey much earlier. 

2. Your ‘Hard Working’ tenants are paying your bank instalments, not you. Many people make the mistake of mixing up the bank instalments for their home and investment properties. For your own home, you are responsible to pay the bank instalments every month. Hence it is important to ensure that there is income or salary coming in every month. Alternatively, you must have a buffer to service three to six months bank instalments in case you temporarily lose your earning ability.

However, for investment properties that are being rented out, you are using the rentals collected from your tenants to pay the bank instalments. Even though you are technically responsible for the bank loans, as long as the properties are rented out and the rentals are sufficient to pay the bank instalments, there is really nothing to worry about as far as your own earning ability is concerned. 

You can go a step further and reduce risks by ensuring that 10 months rental is sufficient to service 12 months bank instalments in the event your property becomes vacant or unexpected property expenses crop up, etc. If you own several investment properties, another way of mitigating risks is to ensure that 80 percent of the combined rentals collected (in case of full occupancy) are sufficient to service 100 percent of the bank instalments every month. Your worry now shifts from servicing the various bank loans to ensuring the rental from all your properties comes in every month.

3. Spread between the ‘yields’ and ‘interest costs’. To illustrate this, let us assume that you are investing in medium priced condominiums in the Klang Valley in good locations where it is possible to get: 

Average Property Yields > 7.5% pa

Interest Costs on Bank Loans < 3.5% pa (Today, most banks are giving spreads of at least B.L.R. – 2.2% for residential housing loans)

Hence the Difference or Spread > 4% p.a. 

Currently in Malaysia, there is a huge spread between yields and interest costs. In other countries like Singapore or Hong Kong, the spread is less than 1.5 percent pa. Personally, I do not think the spread will remain this wide for long. Over time, yields will come down as residential rental rates remain the same (in areas where there is an over-supply, it may even come down!) and prices of property increases due to inflation. The BLR may also increase once the economy recovers. Even if the spread reduces from the current four percent to let’s say two percent over time, there still exists a comfortable cushion to invest in properties. In fact, now is a far more ‘comfortable’ time to purchase investment properties compared to the future based purely on the spreads.

Assume the current spread is four percent pa, let’s look at the gains for loans of various amounts. See the Table below:

Loan (RM)
Gains per Year (RM)
Gains per Month (RM)
1 million
40,000
3,333
3 million
120,000
10,000
5 million
200,000
16,666
10 million
400,000
33,333
If you have RM1 million in bank borrowings, you are getting rich passively by RM40,000 per year or RM3,333 every month. By the way, this happens to be the worst case scenario where property prices do not increase, which we all know happens to be highly unlikely! 

If your combined borrowings are RM3 million, your gains are RM120,000 every year akin to a passive income of RM10,000 every month. This is an amount that will enable you to retire comfortably if you so wish! Hence my contention that all it takes to retire is to accumulate at least RM3 million in bank borrowings and making sure your spread is 4 percent pa. If you are starting from zero borrowings, you can easily build up your borrowing quantum within the next five years no matter where you are financially today!

Once you have hit RM3 million in bank borrowings, are you going to stop there? I do not think so. In fact, I would recommend that you set a personal target of borrowing anywhere between RM5-10 million. The figures in the above table will give you sufficient reasons why you should set these achievable targets. In fact, the more you borrow intelligently for good property investments, the richer you become! 

Further, the figures in the table assume that property prices do not increase. If we were to factor in a modest five percent per annum increase in property prices every year, the gains shown in the table would easily be higher by another 30-50 percent! 

Coming back to David, what advice would you have given him? I frankly suggested that while he still had his last ‘high income’ pay-slip which was less a month old, he should quickly refinance all his properties and borrow to the maximum while he still could as the banks would not know that he is back for good. If David were to delay by a few months, he would find it more and more difficult to borrow money as he did not have any more fixed income and his age would not help either. And what to do with all the borrowed money? Go out and invest in more properties and pay cash for them!

Source from http://www.iproperty.com.my/

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