Archive for

Who Wins The Investment Race, The Tortoise or The Hare?

There are basically two investment management styles: passive or active. I view these two styles as the passive tortoise and the active hare.

Why Chase the Active Management Hare?

The hare represents the active money managers who try to “beat the market” by using their crystal ball. They seek to generate impressive returns based on their in-depth (and highly paid) analyses and forecasts of when to buy or sell certain company’s stocks, or when to get in or out of the market and/or its various sectors.

Perhaps because the hare is fast and flashy, it also tends to generate the most media attention. If you pick up a financial journal or surf the web, it’s easy to find “news” based upon active management prognostications. The overwhelming quantity of it all appears substantive, worth heeding. If “everyone” is buying or selling something, it feels like they must know something you don’t, and that makes it tempting to follow the leader. However, in truth, this active style of investing has two serious drawbacks:

1. “Everyone’s” crystal balls are murky. Markets are generally efficient – too efficient to win the proverbial race by trying to outguess them. Whether it’s good news or bad, as soon as something is known by that aforementioned herd of “everybody,” guess what? The market knows it too. That’s because, the market pretty much is everybody. Thus, prices effectively adjust immediately in response to any new information, which means, by the time you (or your actively managed mutual funds) are trying to buy or sell to capitalize on the news, it’s too late. The race already has been run.

2. Crystal ball investing is expensive. Even if you or your actively managed fund could occasionally manage to be ahead of the game by placing some smart bets, it’s important to realize that every attempt costs you money. Every time you or your fund makes a trade, a broker charges a fee for the transaction; whether it’s a good move or a bad one. This means you have to make enough successfully timed trades to overcome the costs of your successful bets, as well as all the unprofitable ones.

Fix Your Future on the Slow and Steady Tortoise

The tortoise, on the other hand, represents the passive management style. The tortoise doesn’t own a crystal ball. He knows that, over time, the markets have generally headed upward rather than downward – at least for those who have stayed the course.

So, the tortoise avoids making investment decisions that are based on active attempts to forecast trends. Instead, he recognizes that the best way to invest in the market is to “be” the market. Whenever returns are earned by “everyone,” the tortoise already is there, slow and steady, patiently waiting his turn. By adopting this buy-and-hold strategy, he keeps costs low, using the science of how markets work to his best advantage.

The tortoise may not grab headline news the way the hare does, but if your true goal is to build long-term wealth, you might want to consider the tortoise-like approach of buying low-cost, passively managed mutual funds. The best passive funds seek to closely replicate the returns of a particular index or similar benchmark with as few costs as possible. A “benchmark” is a widely accepted standard against which performance of particular types of investments or particular investment managers can be measured to determine their success compared to others like themselves. Different types of investments or investment managers are compared against different benchmarks. For example, stocks from large, successful U.S. companies are inherently expected to deliver different levels of returns than stocks from small, stressed-out companies in tiny, emerging markets. So each is held to its own standard, or benchmark, to enable apples-to-apples comparisons for each across the various players in the market.

With passively managed funds, nobody’s getting paid triple-digit salaries to try (and likely fail) to be more clever than the market. Nor are huge costs being incurred to try to develop fancy and ineffective, forecasting techniques. Despite short-term fluctuations, the markets have by and large moved in an upward direction over time.

Passive investing puts you in the best position to capture and keep as many of those long-term returns as possible. Maybe it’s not as exciting to simply stay put during all the market changes, but it’s much more sensible.

Choosing the Business Loan That Best Suits Your Business

Most business owners know that running a business requires, planning, hard work, dedication and education. But even with all of those elements present, one of the main necessities for business success is money. Usually, for a business owner the question is not “Should I get a business loan?” but “What type of business loan should I get?” Finding a business loan that is suitable for a particular business is very important. The right business loan will allow the borrower to get the most he/she can possibly get out of the money that is lent. Listed below are a few types of businesses and the business loans that work best for them.

Business Type: Merchant
Best Business Loan Option: Merchant Cash Advance

A merchant business is a business that sells merchandise and/or services. Some examples of merchant businesses are retail stores, restaurants, and automobile repair shops. A merchant cash advance is a purchase of a business’ future credit card receivables, making it the best business loan option for merchant businesses.

Any business that regularly processes credit card transactions can use a merchant cash advance, although a business will usually be required to process a minimum of $2,500 a month in credit card sales in order to be considered for a merchant cash advance.

Merchant cash advances work well with merchant businesses because the repayment is taken as a small percentage of the business’ daily credit card sales, allowing merchants to continue business as usual as their merchant cash advance is repaid.

Merchant cash advances can be used for inventory, advertisement, working capital, or anything else that a merchant business may need, as there are usually no restrictions on how a merchant cash advance can be used.

Business Type: Startup
Best Business Loan Option: Startup Business Loan

The initial costs of starting a business are quite often more than accepted. For this reason, startup business loans can sometimes be a necessity.

When providing startup loans, most lenders will require an applicant to submit a business plan, present a proposal, and provide personal financial statements. Lenders want to know that a business has a good chance of surviving and producing funds in order to repay the loan. And in a worst case scenario, they want to know that they can count on the borrower to repay the loan if the business fails.

Startup business loans grant potential business owners access to a sum of money that will finance or assist in financing the building of a business from the ground up. Starting a business usually takes more than the money saved, raised and scrapped up from friends and families. The startup business loan can fund the initial expenses that businesses produce.

Type of Business: Manufacturing
Best Business Loan Option: Equipment Leasing

Some businesses do not make many credit card transactions, and may not need money for inventory and other costs that merchant or startup businesses may have. Instead, they use lots of equipment in their daily activities. A manufacturing business converts raw materials and component parts into consumer and industrial goods, and therefore requires the use of a variety of equipment.

For these types of businesses, equipment leasing may be a good option. Rather than lending money, equipment leasing companies lend equipment, providing most borrowers with the option of purchasing the equipment after a certain period of time.

Build Your Investment Strategy to Meet Your Goals

Establishing an investment strategy that meets your personality and your goals is relatively easy once you determine whether you want a conservative investment strategy or a moderate investment strategy. This requires two primary actions.

First, establish your personality and goals:

  • What kind of risk are you willing to accept? A few losses will always occur but are you willing to accept only minor losses or do you want to shoot for large gains that may results in more losses in the process?
  • How often do you want to trade? Are you willing to trade each week or would you prefer only once or twice a month or even less?
  • Are you willing to see your portfolio, your retirement account, or wealth account build very gradually over time or do you want to grow these fast?

Second, understand the strategy ingredients that make for conservative investments and moderate or aggressive investments:

  • Frequent trading, almost daily, is best suited for aggressive and in some cases moderate investments.
  • Setting sell stops that are low, like 1% to 3% will results in more frequent trading than sell stops that are a bit higher.
  • Trading a wide range of stocks versus ETFs or many mutual funds will generally produce more aggressive or moderate investment strategies.

Setting different rules or parameters in your retirement software or personal investments software can affect your results and define your investment strategy as either conservative, moderate or aggressive:

a) Ranking – setting sell rules based on the rank of a position (ticker symbol) in you group of potential positions. Ranking in the top 5% or 10% vs. the top 30% will produce more frequent trading and normally a more aggressive strategy.

b) Stops – setting the sell rules based on how much a position drops from its high point can also result in trading frequency, churning of your portfolio.

c) Hold rules – defining your strategy by saying you prefer to hold positions for no less than 10 days vs. 30 or 60 days sets up your strategy for aggressive vs. conservative.

d) Employing a Market Exit signal based on the equity curve of the performance of the stock markets can tell you when to pause or even cash out of the markets for a short or long time and by doing so preserve your money from losses. But setting this signal with a short evaluation period versus a long period can have a major effect: too long being bad because you won’t get a signal in time to avert major loss, but to short will have you again trading too frequently.

e) Period of Analysis – when you are analyzing your group of potential funds, ETFs or stocks the time period selected will also determine the type of investment strategy. Longer analysis periods will result in more conservative approaches while short periods, like 10 days, will be more aggressive and require more trading.

All these factors are not as intimidating as they may sound. The key to safe investing, to defining your investment strategy, is to understand that you are in control and that you can set these parameters to meet your personality and your objectives. Yes, you should back test to find the exact settings that meet your needs and reflect your desires in your investment software, but you can tailor the analysis testing to fall within your range of what is acceptable to you.