Risk and Reward Investing

If you are doing your own investing in the stock market, what would be the first question you would ask yourself before you make any trade or investment? If your answer is how fundamentally sound the stock is, or whether the stock just broke out of a trading range on a chart, or the fact that the stock has gone down 50% in the last 6 months, or whether the volatility is low now so it is a good time to buy or sell, then you are probably on the 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 the trigger and make the 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 the entire stock market may be here for the 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 the risk and reward because even indexes of the entire market have a risk and a reward, depending on the 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 the 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 the next 15 years. Okay let me ask these questions. Are you 100% invested at all times? Do you know the maximum drawdown (the largest loss from the index high and low in any 15 year period) for the 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 the 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 the S&P 500 in a 100% position in 1965 and needed the money in 1980 you would have made no return on investment and had a 40% drawdown from 1969 to 1975. If you look at the period of 1930 to 1955, a 25 year period it is even worse. I know it's the 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 the 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 the indexes change on a yearly basis. Some stocks come in the index and some stocks go out of the index. The longer the time span, say 40-55 years, the bigger the risk but the bigger the reward. Also the longer the time span, the longer you can withstand a large drawdown if it comes.

Now what if you are trading stocks with an entry and an exit point already predefined; that is where do I get in and where do I get out. That strategy might be good but that is not risk and reward.

The most important question is how much am I invested and how much do I get out. What is the % of risk on each stock position in the portfolio and what is the risk to the total portfolio. Let's take an example. You bought 100 shares IBM @50 for $5000 in a total portfolio of $200.000.

You put a sell stop loss to sell all 100 shares if IBM goes to $40 / share. That means your risk on IBM is $10 / share or $1000. But your real risk to your portfolio is .5% or $1000 divided by $200,000. If you have a sell exit point of $100 then your reward on the stock would be 100% and the reward to your total portfolio was 2.5%. So your total risk to reward was 5 to 1. You could crunch numbers all day to make up formulas to fit your strategy, but the most important part is how much are you risking. Here are some general rules when it comes to risk: Don't risk more than 2% on any given trade or idea. That doesn't matter if your strategy is technical or fundamental or discretionary. Risking 1% would be safer. Most large fund managers risk much less.

Diversify. Buying 1% risk on IBM and 1% on Dell and 1% on Hewlard Packard is a 3% risk because they all sell the same products Don't risk more than 20% of your portfolio at any one time, 10% would be better. You have to have a way to quantify the greed factor or it might consume you and all your money at the same time.

In my own portfolios I try not to risk more than 7% on an initial portfolio position.

Initial risk and on going risk can be two different risks. As a trade becomes profitable the amount of at risk at any moment in time can be a variable not a constant. That would allow for letting profits run while cutting losses short. However, making your initial risk a variable in most cases would be a disaster. Once initial risk is conceived it should never be increased. Greed may become the primary factor in increasing initial risk and that is always a fast track to increasing losses.

I hope that risk and reward become the primary strategy concern in your future investing and trading

private placement fund manager, and owner of http://ww.buypanic.com, an investment newsletter. I ahve over 24 years trading experience, specializing in stock index trend following. I alos have experience in volatility based money management principles. Buypanic.com offers valuable insight on both stock strategies and money management

An Introduction to Real Estate Investing

There are a great many books and web sites devoted to real estate investing out there, but most of them concentrate on one specific area of investing. It's often hard to find a general description of real estate investing, one that lists the various real estate investing strategies and how to get started. That's what this article will set out to do.

Before beginning, you must understand that real estate investing is not a get rich quick scheme. Real estate investing can, and will, make you wealthy, but it certainly won't happen overnight and it will require work. As you perfect your technique and gain experience, the amount of work needed to gain a lot of money will reduce, but it will take effort and persistance to make it there.

If you're completely new to real estate investing then the only sort of investing strategy you're likely aware of is rental properties. Landlording has been around since there have been houses and people to rent them to, and it will continue to be a wealth builder. In fact, most of the 'no money down' real estate strategies you hear about still include rentals as part of their plan. Still, there are other ways to make money from real estate investing out there.

The next most 'traditional' method is to buy a fixer-upper, fix it up, and then sell it for a profit. This is commonly referred to as 'rehabbing' and is a very good way to make a lot of money in a relatively short period of time. Most rehabbers won't even look at a property unless they can make at least $20,000 of profit, and this is usually within 3-4 months time. Rehabbers tend to be experienced investors with available money, or have partners who help provide any extra cash required.

But if you're just starting out you likely won't have access to large amounts of money. One way to get involved in this area of real estate investing without needing any money at all is to 'flip' houses to these rehabbers. What this entails is you going out and finding these fixer-uppers, noting all the work required to fix the place up. You then place a low offer in to the owner, taking into account the fix up price and some built in profit. Once you have the house under contract you then flip it to a rehabber for a small fee. This can result in several thousand dollars for you, without you having to spend a dime. 'Flipping' properties can be a great way to start your real estate investing career.

Another 'no money down' technique that's popular on the late night infomercials is called 'lease optioning'. This is basically a rent to own strategy that allows you to control a property without ever taking ownership of it. It's a slightly more complicated strategy that warrents its own article, but it does allow you to make money in several different ways, each without ever having to spend any of your own money. If you're not put off by longer term investments then lease options are definately worth more research.

There are other strategies that involve foreclosures and getting the home owner to sign the deed over to you, but for now I'd suggest learning more about flipping and lease options as entry-level real estate investing strategies.

How do you find properties that would make good real estate investments? Again, an entire article can be devoted to that, but there are basically two ways: you go looking for them, or you get them to come to you. The first way involves reading the newspaper classifieds and scanning the Multiple Listing Service (MLS). This is where having a great real estate agent is a must - they can get you more details on homes than you can view on the mls website, and can often let you know of great deals before they even become available to the general public.

Having home owners contact you means setting up an advertising campaign. This can involve placing ads in the newspaper, placing bandit signs at strategic locations around town, starting a direct mail campaign, etc. There are many ways to let people know that there's a new real estate investor in town, and it would be in your best interest to try each of them to see which ones work best for you.

Whether you decide to go looking for deals, have them come to you, or both, they key is to be persistant. Real estate investing is a numbers game - most of the time you won't be able to make the deal work, but every time you do it translates into thousands of dollars for you. The more owners you talk to, the more deals you'll be able to do, the more money you'll make.

I hope this article gives you a bit of an idea of what the world of real estate investing is like. There's a lot to learn out there, and all of it is very interesting. Find the area that interests you the most, then get out there and start talking to home owners. Don't be discouraged if you're getting turned down a lot - just remember that when it does pay off, it will pay off big!

Adem Hamidovic is a part time real estate investor and operator of http://www.ProfitPiggy.com, a website devoted to new and experienced real estate investors alike

Are You Worth Investing In?

Do you realise that if you're green you're growing and if you're ripe you're rotten? So says Winston Marsh, Business Marketing Guru in his recent newsletter.

Here's and excerpt from it ...

"Over the last week or so I have been presenting a series of seminars for MYOB throughout New Zealand and I have made an amazing discovery.

Most people would rather service their car than service their brain!

Now what do I mean by this? Well, quite simply, nobody gives a second thought to putting their car in for service or to get it fixed. They might moan and groan about the cost but they'll still do it.

Why?

Because they need their car to get around! They rely on it and have become dependent on it. So, no matter what the cost, they get the car serviced or fixed or whatever. They might have to beg, borrow or steal to pay for it but they front up with the money and get it done.

But, it's a whole different scene and set of feelings when it comes to an investment in the most important piece of machinery--- that money making, good time creating piece of machinery called themselves.

So many people have truckloads of reasons and excuses as to why they can't spend some time or money to get better at what they do... and some of the reasons are pathetic."That's the night that Who Wants To Be A Millionaire is on" or "I'm too tired after work" or "I went to something like that once and I didn't like it" or "I can't afford it" or whatever are the reasons that they don't invest in their brain.

Yet there's only thing that will determine your income and level of success and that's your brain ... what you feed it on and how you use it determines your results. Look after it and fill it with new ideas and information and it will richly reward you. Neglect it and it will fade and fail."

www.bgrowth.com.au

The Final Word I've found that those people who do not invest time and money in themselves and rely on their employer to pay for their development, dance to someone else's tune. They leave their future in someone else's hands.

In fact most people drift along in life taking whatever is dished out to them.

They cannot 'be bothered' investing any extra time, money or energy in themselves. It's much easier to float with the crowd.

I also notice that many of the clients I have who invest their own money into their coaching program are extremely committed to making changes into their lives. They move ahead in leaps and bounds compared to clients who have had their program funded by their company.

When you pay for something yourself, you are more likely to value it.

If you really want to move ahead in your life, isn't it time that you started to invest in yourself?

Lorraine Pirihi, principal of The Office Organiser is Australia's Personal Productivity Coach. She specialises in working with businesspeople showing them how to dramatically boost their productivity, reduce the stress and the mess in their lives and have more time for enjoying their life

IF- The Wonders of Investing

If it seems as if all investors are selling, who is buying?

If trading has become entertainment for you, it may be time to refocus on profits.

If your stock has reached an annual low, can it go any lower?

If your stock has reached an annual high, can it go any higher?

If all the television analysts jumped off a bridge, would anyone care?

If your portfolio is based solely on fundamental analysis, perhaps it is time to learn technical analysis.

If I said you had a beautiful portfolio, would you hold it against an index?

If you are tired of losing value on the long side, perhaps its time to learn both sides of the market.

If you do not have a written financial plan, you should.

If you could put aside $205 at the beginning of each month for thirty- five years, with an 11% annualized return you may save over $1 million.

If you have stopped looking at your portfolio statements, does that mean your game plan is off?

If a fool and his money are easily separated, who introduced the two?

If buy and hold is your philosophy, why do you need a broker?

If a tree falls in the forest, does it ruin the stock market for the day?

If someone invented a computer program for investments that proved 100% correct all the time, we would never know about it.

If you think the market capitulated, you are not in a state of selling hysteria.

If 1,000,000 lemmings jump, can they all be wrong?

If you want to know what Greenspan thinks about economics, count the times he smiles.

If you expect nothing of your portfolio, you will not be disappointed.

If you are a rational investor, can you benefit from an irrational market?

If you managed your money like the government, you would take money from your neighbor and spend it on stock options that expire this week.

If you are confused with the opinions of the media, create your own

Wardlaw's belief is that familiar life elements best illustrate practical investment strategies; not typical investment jargon. With that philosophy, the author assists financial planners/advisors, brokerage firms, periodicals, and other investment information syndicates create informative and entertaining articles. For comments and questions, please contact the author at tools2invest@yahoo.com

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