The first page of search engine research tells you that: “Investors use hedging strategies when they are unsure of what the market will do”— isn’t that always the case? Further along you learn that there are many different kinds of strategies, nearly all of which rely upon some sort of derivative betting mechanism.

But what is hedging all about in the first place?

Conspiracy theorists have their hands in the air. What’s that? Portfolio hedging strategies were created to expand the market for the first generation of derivative products— options and futures contracts. Hmmm, not so far fetched an idea, really. Just back up a bit and think about what they are trying to accomplish.

Hedges are designed to massage your market value numbers, a kind of security blanket that softens the highs and lows of the market cycle. But why focus on the fluff of transient market values in the first place? Cycles eventually correct themselves without the unnecessary drama, guesswork, risk, and trading fees.

It’s not the market value of the portfolio that is of primary importance. It’s the actual content of the portfolio and how you deal with the natural dynamics of the securities you own. Why can’t the media reinforce that kind of stuff instead of the emotion of the month?

If a portfolio has a semi-guaranteed “base income” of 4%, a 4% cushion (or hedge) is always in place, one that grows annually with proper asset allocation management, and adds to the market value in upward cycles— nah, too simple.

Once upon a time (long before Quants, Swaps, and million dollar bonuses) investors knew that they could not know “what the market will do”— in direction, duration, range, or vacillation. They recognized that neither humans nor human created machines could predict the future with any degree of accuracy. So they learned how to deal with uncertainty.

They recognized the cyclical nature of the major variables that moved the market cycle, and they developed a strategy that actually worked for decades. Long-term investors navigated the peaks and troughs of the market cycle with the now obsolete, eyes wide shut, buy-and-hold approach.

This dinosaur lost its potency as soon as the markets became accessible to virtually everyone— professional investors, custodians, and trustees (in the old days) understood investing, risk vs. reward thinking, diversification, fundamental analysis, and income generation.

Those safer “good old days” are gone.

Cultural changes, the need for instant gratification, the paramutual, product mentality of the modern investment arena, and the growth of the financial services industry brought fast and furious directional change that undermined the safety of the playing field.

Today’s unprepared (but well-heeled masses) are quick to accept the candy-coated, easy to own and abuse, gambling chips distributed by the Wall Street gaming institutions and blessed by their over-lobbied senatorial henchmen.

Unfortunately, trustees, custodians, and sales professionals’ job preservation instincts led them to the dark side as well.

Most people paint themselves into a market-value-only-assessment corner by investing in multi-security products and by ignoring the all-important income bucket of their portfolios. Wall Street propaganda doesn’t allow investors to focus on anything but market value, creating the need for “protective” hedging techniques.

But what do these phony insurance policies promise, and what do they actually protect?

The lack of education and general unpreparedness of newly enabled investors opens the doors for all forms of schemes, scams, techniques and hedges — all designed to limit the bottom line impact of perfectly natural market forces.

Why do we jump through all of these “prevent-defense” hoops? Because we just don’t know how or have the patience to design and manage a classic, safer, plain vanilla, stocks and bonds portfolio. The market cycle is the favorite son of the investment gods. You either make it your friend or fail as an investor!

The ultimate investment portfolio hedging strategy is one that only requires simple to understand investment techniques like the portfolio income “hedge” described above— part of the Working Capital Model’s QDI, and the centerpiece of the Market Cycle Investment Management methodology.

The other two features of this approach (one that has guided its users through, around, and over the three financial meltdowns of the past 40 years) are explained briefly below. The “I” in QDI is for income.

“Q” is for quality. If you study the long-term behavior of Investment Grade Value Stocks, and high quality income CEFs, you’ll discover that they hedge themselves more effectively than any artificial mechanism ever could.

Take a look at their histories, put a hypothetical $100 in each whenever they fall 20% from their 52-week high, and sell them when they produce a 10% profit. How many millions would you be worth today?

“D” is for diversification. Absolutely never allow any position in your portfolio to exceed 5% of total portfolio working capital (i.e., the total cost basis) and never start a position anywhere near maximum exposure.

Be honest now, how many losses would you have reduced, and how many profits would you have pocketed had you respected the QDI?

Put your investment portfolios on cruise control, with a hedging strategy approved by the investment gods— really.

Steve Selengut
http://www.sancoservices.com
Professional Portfolio Management since 1979
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”

How Much Do I Invest?

If you are just starting out investing, you may be thinking that you should invest every last cent you have. Unless you can see into the future and pick a share that will double overnight, investing everything is foolish and an almost sure way to lose it through poor decisions. To determine how much money you should invest, you need to figure out how much you can actually afford to invest and what are your financial goals, both the short-term and long-term.

The first thing you need to do is to look at how much money you currently can afford to invest. Do you have any savings in a bank account somewhere? If so, this is the first step! However, you don’t want to cut yourself short in terms of money if you devote all the money and tie it up in some investment. You have to ask yourself what the money was being saved for. If you were saving up for a new car, it may be unwise to invest all of it at once, because you will need to money to buy a car that you will need!

For living expenses, it is always a wise move to keep at least three (preferably six) months of living expenses in the a bank account you can access readily. This money is your safety net, so NEVER invest this money, no matter how good the opportunity is. Keep it safe by keeping it in the bank.

If you have money left over from the above paragraph, this is where you can start thinking about investing. Unless you have an inheritance waiting for you, this will be all the money you have to invest. It doesn’t matter how much it is; it only matters that you invest it wisely over time.

So now that you have your starting money, what is next? The next step is to determine how money you can afford to add to your investment portfolio over time. If you are currently employed, you can devote a certain percentage of your weekly pay cheque and have it invested. You may even be able to talk with the payroll department of your company and have it automatically deducted from your pay and invested for you. That way, you won’t be able to spend it. How convenient is that! At this stage, it is best to talk to a qualified financial planner to set up a household budget and see how much of your regular income you can afford to invest. You’d be surprised that smaller, regular amounts invested at regular intervals can add up over the years, especially if your investment choices are sound! The amount you invest shouldn’t leave you out of pocket or affect your lifestyle, but you want to invest enough so that you reach your financial goals as safely and as soon as possible.

For certain investments, there will be an initial amount required. Generally, the better the invest, the more will be required, though this is not always the case. If you have done your research, you will know all the initial costs. If you don’t have the money for the initial investment, you should look elsewhere. There are many opportunities available for those who look hard enough for them. Some people make the mistake of borrowing on their credit card. This will lead to disaster, as the interest rate on the card will usually be much higher than the return of the investment.

When deciding how much to invest, the final decision should always come down to you. If you have done all the research and had some good professional advice, you should only invest money that will not affect your current lifestyle. Remember, putting food on the table and paying the rent will always be more important that a risky investment opportunity. Only use money you are prepared to lose. That way, you can always “live to fight (or invest) another day”.

About The Author:

Doug has been writing articles online for nearly 3 years now. Although he specializes in topics such as investing and trading commodities, you can check out his latest website, USBWirelessDongle.com, which discusses the various types of USB wireless dongles, such as Bluetooth dongles and other types of dongles for all your wireless computing needs!

Article Source: http://EzineArticles.com/?expert=Doug_Arnold

I just spit out my coffee all over my desk. Not because it tasted bad or because it was too hot. I was on the phone with one of my old friends when it happened. You see, he was telling me that he was unloading some property in the US and that he was considering exchanging his money immediately out of the US dollar once he gets it. Ok fine, that wasn’t my choking moment. It was when he said, “I’m thinking of exchanging everything to the Euro because it’s better than the US dollar, and I think the Euro will one day be the reserve currency”. Spit.

Part of any investment strategy is to at least try and get the “big picture” right. Perhaps the Euro which is experiencing a very overcrowded short position will have a nice pop in the short term. However, in a big picture way, and longer term, to become the reserve currency is a long shot and I would not place my money on. Currency can play a big role in the outcome of investment returns and when taken in the context of an investment portfolio, it should be analyzed as a risk to either mitigate or not. First, here is a refresher on the basics of the currency markets:

Here in Canada, the majority of investors use Canadian money to invest abroad. When doing so, our loonie will get converted to the appropriate currency of the country being invested in. But it is always traded with the US dollar before it moves to another currency. This is called the cross trade.

Basically there are three major currencies that trade on the market; the US dollar, the Japanese Yen, and the Euro. Everything else is cross traded against one or two those three. For instance, if a Canadian investor wants to buy the Bolivian Boliviano known as the BOB, their Canadian dollars are first exchanged to US dollars; the cross trade. Though they don’t disclose all of the “crosses” used to eventually get to the BOB, typically, a quote is given and the investor chooses to take it or not. How a regular investor eventually goes from a Loonie to a BOB is all done behind the scenes with the currency traders.

The point is, when an investor converts to another currency, the US dollar always plays a role in the trade. Traditional investors have to determine their outlook for the US dollar as well as other currencies to determine whether it warrants hedging out the risk or not.

As an example of how currency can affect the returns on an investment portfolio I have included this chart which shows various index percentage returns year to date (May 31st 2010) based in the local currency of the respective country, and then, the same index converted to Canadian currency.

Dow Jones Industrial Avg. -2.79% and in Canadian Currency -3.05%
S&P 500 2.30% and in Canadian Currency -2.56%
NASDAQ Composite -.53% and in Canadian Currency -.80%
S&P/TSX Composite -.15% (Canadian currency)
German DAX Index +.43% and in Canadian Currency -13.91%
FTSE MIB Index -15.87% and in Canadian Currency -27.88%
Swiss Market -3.2% and in Canadian Currency -13.49
Hang Seng Index -9.63% and in Canadian Currency -10.32

(source Bloomberg World Equity Indexes Year to Date May 31st 2010 9:33 AM EST)

Based on this data, it would have been wise to use a currency hedge in an investment portfolio. Had an investor used Canadian currency and converted to the Euro in order to invest in the German DAX index and then cashed out and converted back to Canadian dollars, they would have lost money instead of made money (based on the above time frame). Going forward, to hedge or not is based on what one thinks of the global macro picture.

My Big Picture:

Personally, I think the macro picture when it comes to currency is very uncertain and will most likely be very volatile. With sovereign debt in abundance, risk of deflation, risk of another recession, all within the scope of already low interest rates, just makes me think the only tool in the tool box to be used is a global race to currency devaluation. Since I’m not a currency speculator, I prefer to mitigate currency risk in investment portfolios for the time being.

Now, I need another cup of coffee.

Susan Mallin works with MGI Securities as a Toronto-based investment advisor. As an investment advisor at MGI Securities, Susan is able to offer clients a full suite of investment services and investment products. Her process was designed to guide clients through a sea of choices in order to help them make decisions, in a manner that is simple yet effective, throughout the journey of reaching their financial goals. Susan’s investment practice isn’t focused on account size or age. It’s about desire, attitude and willingness to succeed.

Visit my blog, for relevant, understandable investment resources.

Copyright Susan Mallin. All rights reserved. You may reprint this article as long as you leave all of the links active, do not edit the article and give the author credit.

Article Source: http://EzineArticles.com/?expert=Susan_Mallin

Managing an investment portfolio is in many ways no different than managing a business. If you want to get the optimum return on your investment, you need to measure how well you are doing. If you run a business without measuring the growth in profits and assets and what has contributed to or detracted from that growth, then you won’t have sufficient information to know when or how things need to be changed in order to improve the return. Exactly the same principle applies to managing your investment portfolio.

If you are an investor rather than a speculator, your aim will be to optimise your return over a long time frame, say 5-10 years. Your investment time frame ends when you spend your capital, not at the point when you need income from your portfolio, so even if you are retired you will still be a long term investor for at least part of your portfolio. The total return on your portfolio is sum of the income received from the portfolio by way of interest, dividends or distributions, and the change in value of the portfolio which comes about from a change in the price of the investments you hold. This return should be measured on a quarterly basis. If your portfolio is partly invested in growth assets such as shares, then its value will move up and down over time – some years it will perform well and some years it will produce a negative return. A portfolio made up entirely of fixed interest investments should have a consistently positive return. However, risk and return go together and as an investor, your choice is between a stable portfolio producing a consistent but low return and a more volatile portfolio producing a variable return in the short term but a high return over the long term.

If your portfolio contains growth assets, don’t make the mistake of comparing the performance year by year with a fixed interest portfolio because to do so is to compare apples and oranges. There is one thing certain about a volatile portfolio – there will always be some years when a fixed interest portfolio would have done better. The problem is, we only know with the benefit of hindsight which years that is true for. For a growth portfolio, it is the average return over the period of investment that you should focus on, not the year-on-year return.

In the short term, the performance of each asset class in your portfolio should be compared against the market index relevant to that asset class. Your aim is to do better than the market. If your share portfolio dropped in value by 5% but the share market index went down by 15%, you did well with your shares. In the long term, your overall aim should be to produce a better average return after tax and fees than you would have achieved by leaving your money in the bank for the same period. With a well diversified portfolio, the more you have invested in growth assets and the longer your investment time frame, the higher your return is likely to be.

Liz Koh is a financial planner and the author of the best selling book – Your Money Personality: Unlock the Secret to a Rich and Happy Life, Awa Press, 2008, available from http://www.awapress.com.

For Liz’s best tips for financial security, visit her website http://www.moneymaxcoach.com to receive your free e-book “8 Steps to Financial Freedom”.

Article Source: http://EzineArticles.com/?expert=Liz_Koh

I have little doubt that the contents of this article will agitate a few people, and infuriate even more. But I have sound reasons for writing on this topic and will try to make a case for the various choices I expound upon. Hopefully, my reasoning will resonate with a few people and perhaps turn a few heads. Needless to say, there are a wide range of investments being aggressively marketed to potential traders in the current economic environment. The average trader needs to be well-informed as to the potential risks, and potential rewards associated with the investment opportunities being offered.

I think one of the most important issues, especially of late, is the issue of transparency in financial reporting. Both the stock market and futures markets are highly transparent exchanges with well-documented recordkeeping and long-standing procedures in trading. There are well-established trading and clearing procedures in these two types of exchanges that have evolved over decades of trading and now function in nearly seamless fashion, despite the number of fiduciaries involved with each individual transaction. To be sure, the procedural methodology in stock trading and futures trading are well-established and well documented through legal precedent and published in a manner that each investor should have a firm understanding of the risks and procedures involved in these two investment classes.

But the question is a bit more complicated than simple standardized procedures, as some investments lend themselves to specific types of trading while other classes of investments are better suited for different types of investing. For example, the pure speculator will probably lean towards futures contracts in his investment portfolio because of the high level of leverage and volatility futures contracts inherently possess. On the other hand, a conservative investor with a longer-term investment horizon might favor a blue-chip stocks as his favorite investment class. While there are instances where stock investing can be quite volatile, by and large stock investing is a more stable investment than their volatile cousin, the futures contract. The important point here is for the average investor to match his investment goals with a class of investments that will meet his needs and expectations.

For example, an investor who prefers very volatile investments in hopes of making a tidy profit in a relatively short period of time probably shouldn’t invest in blue chip stocks. While some erratic movement in blue-chip stocks is possible, they are generally fairly stodgy and methodical in price movement. On the other hand, another investor may truly enjoy the volatile price movement involved in trading oil futures, for example. Oil futures are often very volatile and it takes a steady and skilled hand to manage these investments profitably. Just the same, the potential for extraordinary profits over a short period of time is far more likely in oil futures than blue-chip stocks. I must add one caveat, though: the fact that volatility exists in a given investment class does not assure profit, it only assures movement and it is up to the individual investor to translate that movement into profit, as opposed to loss.

In recent years another investment class has appeared and it is called Forex. Opinions on the Forex market range from a wholehearted acceptance of the investment to some investors who are, to say the least, very wary of the Forex market. I trade the Forex market from time to time and have not encountered any of the alleged horror stories some investors claim occur. But I think it is important to note that the Forex market, as opposed to the stock and futures markets, has very little transparency. There is no exchange on which Forex pairs are essentially traded. The Forex market is a loose conglomeration of participating banks that clear Forex trades more or less independently. To date, the system has worked reasonably well and been free from any widespread accusations of fraud or wrongdoing. To my way of thinking though, the lack of transparency in the Forex market is something that needs to be rectified before I can wholeheartedly embrace the Forex trading system.

Without standardized contracts, exchange oversight, and a centralized location the possibility for widespread problems simply outweighs the possible benefits the Forex system offers. I think at some point this need will be realized and the Forex system will develop a centralized exchange with standardized contracts as the public clamors for the uniformity common to all investment classes. But to date, the system is still a loose association of banks and financial institutions clearing the Forex trades. To my way of thinking, I will stick with stocks and futures contracts and my trading until the Forex system advances to the point of uniformity. Of course, there are uniform currency futures available on the Chicago Mercantile exchange for those who are interested in trading currencies. On positive note, I have no doubt that the Forex markets will evolve into a more structured trading format in the near future.

I am a long time retail and institutional trader who now only trades part time, usually in the morning. I enjoy writing informational articles about my style of trading so others may benefit. Learn to trade the E mini Contracts from a real trader, not a salesman. Learn everything you need to know to trade the e-mini contracts with confidence. I invite you to receive our free, no obligation video series every night, delivered directly to your e-mail box. These videos contain valuable tips on the trading the e-mini and advanced techniques for profiting in your trading effort. All at no cost. Receive you valuable videos series by clicking here.

Article Source: http://EzineArticles.com/?expert=David_S._Adams