This is where most financial advisors or investors go wrong, not properly accounting for risk tolerance. During the recent poor and volatile performance of stocks in 2008 and early 2009 there was not an investor whom did not have their risk tolerance tested. However, some investors were still happy and comfortable during those dismal times for the markets. Why? Because their risk tolerance was properly accounted for. Simple truth is, any individual whom was frustrated, angry, or complaining about the market conditions of 2008 and 2009 has improperly assessed, or was not properly advised on, their risk tolerance.
Assessing your risk tolerance will determine how comfortable you can be with your investments. If your risk tolerance is properly accounted for, no matter how much the markets fall you should still be comfortable and relatively happy with your investments.
Each individual has a risk tolerance that should not be ignored and rigorously understood before any of their capital is invested. Any good stock broker or financial planner knows this, and they should make the effort to help you determine what your risk tolerance is. Do not settle for any financial advisor to just give you a short survey or quiz of 10 questions and small talk for only 15 minutes to determine your risk tolerance. It goes deeper than this; after all, this is among the most important steps in your investing why should it not deserve as much time as anything else?
Determining one’s risk tolerance involves several different things. Mainly for your risk tolerance you need to be aware of your time frame, what you plan to achieve in that time-frame (goals), the amount of cash you have available to invest, and your age.
For instance, if you plan to retire in ten years, and you’ve not saved a single penny towards that end, you will be placed towards higher risk tolerance – because you will need to do some more aggressive – risky – investing in order to reach your financial goal.
On the other side of the coin, if you are in your early twenties and you want to start investing for your retirement at the age of 55, your risk tolerance will be low. You can afford to watch your money grow slowly over decades. In contrary, if you are in your early twenties you may be willing to take more risk because you have many years to recoup a loss or you may have the idea of retiring earlier at age 40 for example and live off of your investments
Realize of course, that your need for a high risk tolerance or your need for a low risk tolerance really has no bearing on how you feel about risk. Again, there are multiple factors in determining your tolerance.
For instance, if you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, how would you feel? How about asking the question, "If I buy $X worth of this stock what percentage would it have to drop in one month that would cause me to be uncomfortable?" If a drop of over 5% is the threshold that would cause you to be uncomfortable then you would be conservative to moderate on risk tolerance. If you would not be comfortable with anything more than a couple percent drop in one month then you would be highly conservative. In contrary, if it would take a drop of 20% or more within one in order for you to become uncomfortable then you would be aggressive.
Remember, risk and returns go hand in hand. In general, you can expect higher return investments to have higher risk. This is because risk is not only about losing money. Risk involves the amount of deviation or fluctuation from the mean both up and down. As an example if you have the goal of 100% returns in one year, you may place yourself as high risk tolerant, but at the same time if would only be comfortable with a 2% drop in one month then you would have to choose which is more important and meet in the middle, accept lower returns for more comfort. In this example, you would have to have moderate risk tolerance.
Would you sell out or would you let your money ride? If you have a low tolerance for risk, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are. This tolerance is based on how you feel about your money!
In the end it is goals, goals, goals and a complete understanding of what it takes to achieve those goals that will determine your risk tolerance.
Again, a good financial planner or stock broker should help you determine the level of risk that you are comfortable with, and help you choose your investments accordingly.
Wednesday, February 24, 2010
Monday, February 15, 2010
A Pharmaceutical Stock Poised to Rise
This is a stock that we had recommended in early September, actually it was mentioned as a superb buy on our investment DVD that was made in early September. We recommended this stock last September for a variety of reasons, both technical and fundamental.
Teva Pharmaceutical (TEVA) - This worldwide pharmaceutical company known for its bio-generics and active pharmaceutical ingredients, has been in an uptrend since the late '90's.
Since our September recommendation, TEVA is up close to 16% in only 4 months. However, TEVA is still showing some positive signs and potential for another burst higher.
What is the potential for TEVA?
Another 10-15% higher within several months. Why? Technically TEVA has recently been in a very bullish pattern on the daily chart, this pattern is called a bullish flag. Also, TEVA has just broke upwards out of the bullish flag pattern which is a confirmation. With the nature of bullish flag patterns, TEVA should head another 10% higher minimum within a relatively short period of time, 3-6 months.
(Click to Enlarge)
Recently, TEVA's strong upward trend has made it an institutional favorite. The 50-day moving average has been where buyers have been trampling this stock and supporting it on the way up, so you may want to consider buying at the 50-day simple moving-average. This moving average is a simple indicator available on many free chart packages including Yahoo Finance and MoneyCentral.
The recent pullback to the 50-day moving average resulted in the normal buying, but shoved it from a small flag that tells us that the advance will more than likely continue with a minimum short to medium term target in the high $60 area.
Recently, S&P just rated TEVA a "five-star strong buy" with a price objective of $70. Lastly, fundamentals are still very healthy for this "drug" stock as well. Therefore, TEVA is a great buy and would be a great addition to the large-cap portion of your portfolio. Also, one thing to remember is that historically the health care sector has been among the top performers when coming out of recession.
Thursday, February 4, 2010
Markets Still In Correction Mode, Stay On Defense
Major indices have been in a large correction this past week. This should not be new to our readers, because we have warned of this correction a few times in the past couple of months. As an update though, we are still moderately bearish on the markets and our analysis shows further fall can be expected from here in there short-medium term.
Due to the fact we are still bearish on the markets we still recommend that you remain overexposed to defensive investments, such as long-term government bonds, corporate bonds, TIPS, and others.
One common adage that you should be aware if and avoid is buying commodities when stocks drop. There is a lag between the two markets, and lately gold has been a leading indicator, advancing before the markets, and falling before the markets. We expect this trend to continue throughout the most part of this year. Therefore, you should not buy commodities as a safe haven investment for the short-medium term. If you want to take your cue from gold to get into stocks due to its leading nature, then a good move would be to wait for gold to confirm a new medium term uptrend. This new uptrend in gold would be confirmed if it broke above $1,135/ounce. Also, we recommend that you avoid short term t-bills, they are in a bubble and there are much safer, higher returning alternatives.
As a more moderate to agressive investment for you to make some descent returns during this correction you may want to consider buying the dollar. Sounds funny huh, buy a dollar? you already have dollars why buy some? Well, buying the dollar actually means going long on, or expecting it to appreciate in value. When the market corrects the dollar in general strengthens against the Euro, British Pound, and other major currencies. You can buy the dollar in a variety of ways.
Some conservative methods of buying the dollar are the PowerShares DB US Dollar Bullish Fund (Symbol:UUP), and the Morgan Stanley Double-Short Euro ETN (Symbol:DRR); just look at how well these two long dollar funds perform when the major indices drop. Both of these two funds are up today, while the DOW is down about 200 points.
More agressive ways to go long the dollar are to short other currencies through a forex otc broker. You must be very careful when doing this. Even though all you would essentialy be doing is one investment for the short-medium term, which would require only one click of the mouse, you still need to understand terms like leverage, margin, and how the trading platform works. If you want to buy the dollar against other currencies as we suggested above, which is the same as shorting other currencies against the dollar, then on your trading platform you will want to place a bid (means sell) position on the pair where the dollar is the quote/counter currency, and in contrast if the dollar is thebase currency you will then want to place an ask (means buy) position. Both of these mean you would be making an investment in future dollar strength.
All of the above investment recommendations are for the short-medium term only, except for the the long-term government bonds, which should outperform well in both the short and long term. With this post we just wanted to inform you of our current stance on the markets and some defensive investment opportunities that will do well if our view continues to unfold. That is why this blog is called "Seedlings To Your Healthiest Money Tree", take these seedlings above and use them wisely.
Due to the fact we are still bearish on the markets we still recommend that you remain overexposed to defensive investments, such as long-term government bonds, corporate bonds, TIPS, and others.
One common adage that you should be aware if and avoid is buying commodities when stocks drop. There is a lag between the two markets, and lately gold has been a leading indicator, advancing before the markets, and falling before the markets. We expect this trend to continue throughout the most part of this year. Therefore, you should not buy commodities as a safe haven investment for the short-medium term. If you want to take your cue from gold to get into stocks due to its leading nature, then a good move would be to wait for gold to confirm a new medium term uptrend. This new uptrend in gold would be confirmed if it broke above $1,135/ounce. Also, we recommend that you avoid short term t-bills, they are in a bubble and there are much safer, higher returning alternatives.
As a more moderate to agressive investment for you to make some descent returns during this correction you may want to consider buying the dollar. Sounds funny huh, buy a dollar? you already have dollars why buy some? Well, buying the dollar actually means going long on, or expecting it to appreciate in value. When the market corrects the dollar in general strengthens against the Euro, British Pound, and other major currencies. You can buy the dollar in a variety of ways.
Some conservative methods of buying the dollar are the PowerShares DB US Dollar Bullish Fund (Symbol:UUP), and the Morgan Stanley Double-Short Euro ETN (Symbol:DRR); just look at how well these two long dollar funds perform when the major indices drop. Both of these two funds are up today, while the DOW is down about 200 points.
More agressive ways to go long the dollar are to short other currencies through a forex otc broker. You must be very careful when doing this. Even though all you would essentialy be doing is one investment for the short-medium term, which would require only one click of the mouse, you still need to understand terms like leverage, margin, and how the trading platform works. If you want to buy the dollar against other currencies as we suggested above, which is the same as shorting other currencies against the dollar, then on your trading platform you will want to place a bid (means sell) position on the pair where the dollar is the quote/counter currency, and in contrast if the dollar is thebase currency you will then want to place an ask (means buy) position. Both of these mean you would be making an investment in future dollar strength.
All of the above investment recommendations are for the short-medium term only, except for the the long-term government bonds, which should outperform well in both the short and long term. With this post we just wanted to inform you of our current stance on the markets and some defensive investment opportunities that will do well if our view continues to unfold. That is why this blog is called "Seedlings To Your Healthiest Money Tree", take these seedlings above and use them wisely.
Tuesday, February 2, 2010
Lag Of the Curve, May Strike An Investment Nerve
Have a look at this chart:
What does this show? It shows something very interesting, and that you should be aware of as an investor. Above is a comparison of the 3-month, 5-year, 10-year, and 30-year treasury yields beginning in 1994.
What is its significance? The majority of the time short and long-term yield either rise or fall with high correlation, in tandem. However, there are rare periods when they do not, and currently we are experiencing one of those periods.
A good indicator of a recession, or large stock market correction has been when short-term yields rise above long-term rates. This is technically called an "inverted yield curve". Before every one of the last six recessions there has been an inverted yield curve, occuring on average about 3-6 months before the beginning of the recession.
What is shown in the charts above is that there has been strong flattening of short term yields, while the increase rate of longer term yields has slowed. Now have a look at the chart below:
If you look at at the end, where we currently are, it shows the difference of the 10 and 3-month at the top of the chart (between the 2 dashed horizontal lines).
Now look at what happened after the last time yield differences where at that point. There was a sharp drop down to the circle, the circle is the yield curve inversion.
From history, and the chart above, we can say that the next phase is dropping of long term yields and inversion of the yield curve. At the current rate, and historical trends, we can expect another yield curve inversion to occur within 1-3 years, and another recession in about 4-5 years based on current yield curve analysis.
Currently, this is what we believe will be a large catalyst to the short-term bond bubble (we are currently still in) burst we are expecting. Therefore, as short term yields rise and the yield curve begins to invert, inflation following or floating rate investments (floating bonds, floating bond funds, etc..), should do very well in the years to come. Also, other analysis of ours suggests long-term bond funds in general should do very well in the coming years.
What does this show? It shows something very interesting, and that you should be aware of as an investor. Above is a comparison of the 3-month, 5-year, 10-year, and 30-year treasury yields beginning in 1994.
What is its significance? The majority of the time short and long-term yield either rise or fall with high correlation, in tandem. However, there are rare periods when they do not, and currently we are experiencing one of those periods.
A good indicator of a recession, or large stock market correction has been when short-term yields rise above long-term rates. This is technically called an "inverted yield curve". Before every one of the last six recessions there has been an inverted yield curve, occuring on average about 3-6 months before the beginning of the recession.
What is shown in the charts above is that there has been strong flattening of short term yields, while the increase rate of longer term yields has slowed. Now have a look at the chart below:
If you look at at the end, where we currently are, it shows the difference of the 10 and 3-month at the top of the chart (between the 2 dashed horizontal lines).
Now look at what happened after the last time yield differences where at that point. There was a sharp drop down to the circle, the circle is the yield curve inversion.
From history, and the chart above, we can say that the next phase is dropping of long term yields and inversion of the yield curve. At the current rate, and historical trends, we can expect another yield curve inversion to occur within 1-3 years, and another recession in about 4-5 years based on current yield curve analysis.
Currently, this is what we believe will be a large catalyst to the short-term bond bubble (we are currently still in) burst we are expecting. Therefore, as short term yields rise and the yield curve begins to invert, inflation following or floating rate investments (floating bonds, floating bond funds, etc..), should do very well in the years to come. Also, other analysis of ours suggests long-term bond funds in general should do very well in the coming years.
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