Risk and Reward InvestingWritten by John McKeon
If you are doing your own investing in stock market, what would be first question you would ask yourself before you make any trade or investment? If your answer is how fundamentally sound stock is, or whether stock just broke out of a trading range on a chart, or fact that stock has gone down 50% in last 6 months, or whether volatility is low now so it is a good time to buy or sell, then you are probably on road to ruin. These strategies have nothing in common with each other and there are all kinds of different criteria that I did not mention that have nothing in common with each other. However no matter what type of strategy you use to make your investment decisions, there is only one crucial question that must be asked before you pull trigger and make trade. That is, what is my risk and what is my reward on this trade. Even if you are going to buy a stock and hold it for a long time, you still have to be aware of your risk and your reward. Why? Because entire stock market may be here for rest of your life, any one stock might not be. You think, that is okay I diversified a lot so I don’t need to know risk and reward. Wrong. Diversification is great, but you should still be aware of risk and reward because even indexes of entire market have a risk and a reward, depending on length of time invested. Point of entrance, exit, stops, and diversification, are all important things, but they by themselves are not risk and reward. You have to ask yourself how much am I risking, and what my potential reward is. "How much" are important words. Okay how do I do that? Well first you must define your investment strategy. If you want to buy and hold what exactly does that mean. Hold for 5 years, 10 years, or forever? What is forever? If you are 20 years old forever is different than if you are 55. Also if you are buy and holding, is forever when you stop investing or is it when you start withdrawing money? These are important questions that must be answered specifically. You might say it doesn’t matter because I will be diversified with index funds for next 15 years. Okay let me ask these questions. Are you 100% invested at all times? Do you know maximum drawdown (the largest loss from index high and low in any 15 year period) for index you invested in? Are you able to financially withstand that kind of drawdown? Alright, I know these are a lot of questions and all you want to do is invest in an index mutual fund for next 15 years and forget about it. Well I am going to say right now that if you think you are taking very little risk on 15 years you are wrong. If you bought S&P 500 in a 100% position in 1965 and needed money in 1980 you would have made no return on investment and had a 40% drawdown from 1969 to 1975. If you look at period of 1930 to 1955, a 25 year period it is even worse. I know it’s great depression and things are different today. Don’t assume anything. I am not saying that you should not invest. I am just saying that there is a risk and a reward. Every time you trade whether it is once a week or once every 15 years, that trade has a chance of winning and a chance of losing. Also, when you buy a managed mutual fund for 15 years you are not buying and holding. You are buying and selling but you are paying a professional to do it for you. He or she will have draw downs in fund and hopefully he or she will be looking at risk and reward for you. Even an index fund held for 15 years is not truly buy and hold because indexes change on a yearly basis. Some stocks come in index and some stocks go out of index. The longer time span, say 40-55 years, bigger risk but bigger reward. Also longer time span, longer you can withstand a large drawdown if it comes.
| | Worried About Debts? Written by John Mussi
Having trouble paying your bills? Getting dunning notices from creditors? Are your accounts being turned over to debt collectors? Are you worried about losing your home or your car?You're not alone. Many people face a financial crisis some time in their lives. Whether crisis is caused by personal or family illness, loss of a job, or overspending, it can seem overwhelming. But often, it can be overcome. Your financial situation doesn't have to go from bad to worse. If you or someone you know is in financial hot water consider options below. How do you know which will work best for you? It depends on your level of debt, your level of discipline, and your prospects for future. Developing a Budget: The first step toward taking control of your financial situation, is to do a realistic assessment of how much money you earn and how much money you spend. Start by listing your income from all sources. Then, list your "fixed" expenses — those that are same each month — like mortgage payments or rent, car payments, and insurance premiums. Next, list expenses that vary — like entertainment, recreation, and clothing. Writing down all your expenses, even those that seem insignificant, is a helpful way to track your spending patterns, identify necessary expenses, and prioritize rest. The goal is to make sure you can make ends meet on basics: housing, food, health care, insurance, and education. Your public library and bookstores have information about budgeting and money management techniques. In addition, computer software programs can be useful tools for developing and maintaining a budget, balancing your cheque book, and creating plans to save money and pay down your debt. Contacting Your Creditors: Contact your creditors immediately if you're having trouble making ends meet. Tell them why it's difficult for you, and try to work out a modified payment plan that reduces your payments to a more manageable level. Don't wait until your accounts have been turned over to a debt collector. At that point, your creditors have given up on you.
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