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We’ve all seen investment offers that promise to pay sky-high returns for what are at best extremely risky propositions — and at worst are pure frauds. Here’s a list of red flags that we often find in many of the frauds we see.
- If it sounds too good to be true, it is. Mom was right! Compare promised yields with current returns on well-known stock indexes. Any investment opportunity that claims you’ll get substantially more could be highly risky. And that means you might lose money.
- “Guaranteed returns” aren’t. Every investment carries some degree of risk, and the level of risk typically correlates with the return you can expect to receive. Low risk generally means low yields, and high yields typically involve high risk. If your money is perfectly safe, you’ll most likely get a low return. High returns represent potential rewards for folks who are willing to take big risks. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or “can’t miss.” Don’t believe it.
- Check out the company before you invest. If you’ve never heard of a company, broker, or adviser, spend some time checking them out before you invest. Most public companies make electronic filings with the SEC. There are computerized databases to check out brokers and advisers. Your state securities regulator may have additional information. And by the way — if a supposedly upright firm only lists a P.O. box, you’ll want to do a lot of work before sending your money!
- If it is that good, it will wait. Scam artists usually try to create a sense of urgency — implying that if you don’t act now, you’ll miss out on a fabulous opportunity. But savvy investors take time to do their homework before investing. If you’re being pressured to invest, especially if it is a once-in-a-lifetime, too-good-to-be-true opportunity that “just can’t miss,” just say “no.” Your wallet will thank you.
- Understand your investments. Fraudsters frequently use a lot of big words and technical-sounding phrases to impress you. But have faith in yourself! If you don’t understand an investment, don’t buy it. If a salesman isn’t able to explain a concept clearly enough for you to understand, it isn’t your fault. Don’t make it your problem by buying!
- Beauty isn’t everything. Don’t be fooled by a pretty website — they are remarkably easy to create.
Remember — an educated investor is our best defense against fraud! For more information on how to invest wisely and avoid fraud, please visit the Best Growth Stock Market Report .
Although you take risks when you invest in any domestic growth stock, international investing has some special risks:
Changes in currency exchange rates. When the exchange rate between the foreign currency of an international investment and the U.S. dollar changes, it can increase or reduce your investment return. How does this work? Foreign companies trade and pay dividends in the currency of their local market. When you receive dividends or sell your international investment, you will need to convert the cash you receive into U.S. dollars. During a period when the foreign currency is strong compared to the U.S. dollar, this strength increases your investment return because your foreign earnings translate into more dollars. If the foreign currency weakens compared to the U.S. dollar, this weakness reduces your investment return because your earnings translate into fewer dollars. In addition to exchange rates, you should be aware that some countries may impose foreign currency controls that restrict or delay you from moving currency out of a country.
Dramatic changes in market value. Foreign stock markets, like all stock markets, can experience dramatic changes in market value. One way to reduce the impact of these price changes is to invest for the long term and try to ride out sharp upswings and downturns in the market. Individual investors frequently lose money when they try to “time” the stock market in the United States and are even less likely to succeed in a foreign market. When you “time” the market you have to make two astute decisions — deciding when to get out before prices fall and when to get back in before prices rise again.
Political, and economic events. It is difficult for investors to understand all the political, economic, and social factors that influence foreign markets. These factors provide diversification, but they also contribute to the risk of international investing.
Lack of liquidity. Foreign stock markets may have lower trading volumes and fewer listed companies. They may only be open a few hours a day. Some countries restrict the amount or type of stocks that foreign investors may purchase. You may have to pay premium prices to buy a foreign security and have difficulty finding a buyer when you want to sell.
Less information. Many foreign companies do not provide investors with the same type of information as U.S. public companies. It may be difficult to locate up-to-date information, and the information the company publishes my not be in English.
Reliance on foreign legal remedies. If you have a problem with your investment, you may not be able to sue the company in the United States. Even if you sue successfully in a U.S. court, you may not be able to collect on a U.S. judgment against a foreign company. You may have to rely on whatever legal remedies are available in the company’s home country.
Different market operations. Foreign stock markets often operate differently from the major U.S. trading markets. For example, there may be different periods for clearance and settlement of securities transactions. Some foreign markets may not report stock trades as quickly as U.S. markets. Rules providing for the safekeeping of shares held by custodian banks or depositories may not be as well developed in some foreign markets, with the risk that your shares may not be protected if the custodian has credit problems or fails.
As investors have learned, the market value of investments can change suddenly. This is true in the U. S. securities markets, but the changes may be even more dramatic in markets outside the United States. The world’s economies are becoming more interrelated, and dramatic changes in stock value in one market can spread quickly to other stock markets.
Keep in mind that even if you only invest in stocks of U.S. companies you already may have some international exposure in your investment portfolio. Many of the factors that affect foreign companies also affect the foreign business operations of U.S. companies. The fear that economic problems around the globe will hurt the operations of U.S. companies can cause dramatic changes in U.S. stock prices.
Sudden changes in stock market value are only one important consideration in international investing. Changes in foreign currency exchange rates will affect all international investments, and there are other special risks you should consider before deciding whether to invest. The degree of risk may vary, depending on the type of investment and the market. For example, international mutual funds may be less risky than direct investments in foreign markets, and investing in developed economies may avoid some of the risks of investing in emerging markets. In conclusion, you should understand foreign markets even if you decide to stay domestic in your investments.
There are different ways you can invest internationally: through mutual funds, American Depositary Receipts, exchange-traded funds, U.S.-traded foreign stocks, or direct investments in foreign markets. This week we will go through the basic facts about international investing and how you can learn more about foreign companies and markets. Although this will cover foreign stocks, much of it also applies to foreign bonds. Take your passport and stay tune as this week we will go international!
Rebalancing is bringing your stock portfolio back to your original asset allocation mix. This is necessary because over time some of your investments may become out of alignment with your investment goals. You’ll find that some of your investments will grow faster than others. By rebalancing, you’ll ensure that your portfolio does not overemphasize one or more asset categories, and you’ll return your portfolio to a comfortable level of risk.
For example, let’s say you determined that growth stock investments should represent 60% of your portfolio. But after a recent stock market increase, growth stock investments represent 80% of your portfolio. You’ll need to either sell some of your stock investments or purchase investments from an under-weighted asset category in order to reestablish your original asset allocation mix.
When you rebalance, you’ll also need to review the investments within each asset allocation category. If any of these investments are out of alignment with your investment goals, you’ll need to make changes to bring them back to their original allocation within the asset category.
There are basically three different ways you can rebalance your portfolio:
- You can sell off investments from over-weighted asset categories and use the proceeds to purchase investments for under-weighted asset categories.
- You can purchase new investments for under-weighted asset categories.
- If you are making continuous contributions to the portfolio, you can alter your contributions so that more investments go to under-weighted asset categories until your portfolio is back into balance.
Before you rebalance your portfolio, you should consider whether the method of rebalancing you decide to use will trigger transaction fees or tax consequences. Your financial professional or tax adviser can help you identify ways that you can minimize these potential costs.
In this section you learn the procedures of setting an “action price” so that you can sell a stock or exchange traded fund.
To do this what you need is an online brokerage account.
Step 1:
In your first step, you need to decide between two alternatives. Either you need to stop loss order or you can stop limit order. You might be asked by your brokerage firm about how long the order is good for. It can be for one day or “good till cancelled” (GTC). But remember that, depending on the broker, GTC might continue for several months or even a year.
Step 2:
You set the “action price” when a stock or exchange traded fund (ETF) is sold with a Stop Loss order. Your order becomes a market order when the price is hit by the security which means that you may make the sale at a price that would differ from your “action price”. This happens during price swings after your “action price” is touched.
Step 3:
When you specify the price of the stock you want to sell at, it indicates a stop limit order. So, in general you can be rest assured that you will get the price you want because it never becomes a market order. But there is an exception. On account of a rapid movement of prices, your order might not get carried out at all. So, the prices are either up and down. This may result into the fact that the “action price” you’ve set is never touched.
Your tips…
When you notice a collapse in prices, don’t forget to use a stop loss. This would safeguard your capital. Remember, this happens mainly when you trade frequently.
You can use a buy stop order while purchasing a stock. Here, you enter the order at a price which is higher than the present stock market price. This is fact saves you for paying more than what you want for the growth stock.
A diversified portfolio should be diversified at two levels: between asset categories and within asset categories. So in addition to allocating your investments among growth stocks, bonds, cash equivalents, and possibly other asset categories, you’ll also need to spread out your investments within each asset category. The key is to identify investments in segments of each asset category that may perform differently under different stock market conditions.
One of way of diversifying your investments within an asset category is to identify and invest in a wide range of companies and industry sectors. But the stock portion of your investment portfolio won’t be diversified, for example, if you only invest in only one or two individual stocks. You’ll need at least six carefully selected individual growth stock picks to be truly diversified.
Because achieving diversification can be so challenging, some investors may find it easier to diversify within each asset category through the ownership of mutual funds rather than through individual investments from each asset category. A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, and other financial instruments. Mutual funds make it easy for investors to own a small portion of many investments. A total stock market index fund, for example, owns stock in thousands of companies.
Be aware, however, that a mutual fund investment doesn’t necessarily provide instant diversification, and returns especially if the fund focuses on only one particular industry sector. If you invest in narrowly focused mutual funds, you may need to invest in more than one mutual fund to get the diversification you seek. Within asset categories, that may mean considering, for instance, large company stock funds as well as international stock companies. Between asset categories, that may mean considering stock funds, bond funds, and money market funds. Of course, as you add more investments to your portfolio, you’ll likely pay additional fees and expenses, which will, in turn, lower your investment returns. So you’ll need to consider these costs when deciding the best way to diversify your portfolio.
Asset allocation involves dividing an investment portfolio among different asset categories, such as growth stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one and a very important one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.
Time Horizon - Your time horizon is the expected number of months, years, or decades you will be investing to achieve a particular financial goal. An investor with a longer time horizon may feel more comfortable taking on a riskier, or more volatile, investment because he or she can wait out slow economic cycles and the inevitable ups and downs of our stock market. By contrast, an investor saving up for a teenager’s college education would likely take on less risk because he or she has a shorter time horizon.
Risk Tolerance - Risk tolerance is your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. An aggressive investor, or one with a high-risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low-risk tolerance, tends to favor investments that will preserve his or her original investment. In the words of the famous saying, conservative investors keep a “bird in the hand,” while aggressive investors seek “two in the bush.”
When it comes to investing, risk and reward are inextricably entwined. You’ve probably heard the phrase “no pain, no gain” – those words come close to summing up the relationship between risk and reward. Don’t let anyone tell you otherwise: All investments involve some degree of risk. If you intend to purchases securities – such as stocks, bonds, or mutual funds – it’s important that you understand before you invest that you could lose some or all of your money.
The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time horizon, you are likely to make more money by carefully investing in asset categories with greater risk, like stocks or bonds, rather than restricting your investments to assets with less risk, like cash equivalents. On the other hand, investing solely in cash investments may be appropriate for short-term financial goals.
As previously discussed you can’t open a newspaper or read a magazine without seeing ads promoting the stellar performance of “hot” mutual funds in the stock market. So, look beyond the fund’s past performance when making your investment decisions and consider these tips:
Consider the age and size of the fund.
Before investing in a fund, read the prospectus to find out how long the fund has been operating and the asset size of the fund. Newly created or small funds sometimes have excellent short-term performance records. Because these funds may invest in only a small number of stock picks, a few successful stocks can have a large impact on their performance. But as these funds grow larger and increase the number of stocks they own, each stock has less impact on the fund’s performance. This may make it more difficult to sustain initial results. You can get a better picture of a fund’s performance by looking at how the fund has performed over longer periods and how it has weathered the ups and downs of the market.
Think about the volatility of the fund.
While past performance does not necessarily predict future returns, it can tell you how volatile a fund has been. Generally, the more volatile a fund, the higher the investment risk. If you’ll need your money to meet a financial goal in one year, you probably can’t afford the risk of investing in a fund with a volatile history because you will not have enough time to ride out any declines in the stock market.
Factor in the risks the fund takes to achieve its returns.
Read the fund’s prospectus and shareholder reports to learn about its investment strategy and associated risks. Funds with higher rates of return may take risks that are beyond your comfort level and are inconsistent with your financial goals. For example, a fund that invests primarily in stocks whose prices may change quickly – like initial public offerings or high-tech stocks – will usually be riskier than other types of funds. But remember that all funds carry some level of risk. Just because a fund invests in government or corporate bonds does not mean it does not have significant risk. For example, the fund’s investments could be very sensitive to interest rate changes. Thinking about your long-term investment strategies and tolerance for risk can help you decide what type of fund is best suited for you.
Ask about recent changes in the fund’s operations.
Has the fund’s investment adviser or investment strategy changed recently? Has the fund merged with another fund? Operational changes such as these can affect future fund performance. For instance, the investment adviser or portfolio manager who generated the fund’s successful performance may no longer be managing the fund.
Assess how the fund will impact the diversification of your portfolio.
Generally, the success of your investments over time will depend largely on how much money you have invested in each of the major asset classes – stocks, bonds, and cash – rather than on the particular securities you hold. When choosing a mutual fund, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is key to maintaining an acceptable level of risk.
