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Non-Profit Organizations - What Are They?
Definition of Fund; Assets; and Fund Balance According to the “Financial and Accounting Guide for Not-For-Profit Organizations” written by CPAs Gross, Larkin, Bruttomesso, and McNalley, (fifth edition, pg 25) the definition of a these three terms...
ORGANIZING YOUR FINANCES - Thinking Outside The (Shoe) Box
If you’re like most people, your personal financial records are most probably kept in less than “Good Accounting Practices” standards.
For example, stashing old ATM receipts and hanging on to a stub showing what you paid for a pack of mints...
Taming the Paper Tiger at Work - A Book Summary
This article is based on the following book:
Taming the Paper Tiger at Work
By Barbara Hemphill
Kiplinger Books, 2003
ISBN 0938721984
182 pages
The Big Idea
Getting organized is not an easy task. Everyday,...
The Dismal Mind - Economics as a Pretension To Science
It is impossible to describe any human action if one does not refer to the meaning the actor sees in the stimulus as well as in the end his response is aiming at.
Ludwig von Mises
I. INTRODUCTION
Storytelling has been with us...
The Typology of Financial Scandals
Tulipmania - this is the name coined for the first pyramid investment scheme in history. In 1634, tulip bulbs were traded in a special exchange in Amsterdam. People used these bulbs as means of exchange and value store. They traded them and...
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Managing the Income Portfolio
The reason people assume the risks of investing in the first
place is the prospect of achieving a higher rate of return than
is attainable in a risk free environment...i.e., an FDIC insured
bank account. Risk comes in various forms, but the average
investor's primary concerns are "credit" and "market" risk...
particularly when it comes to investing for income. Credit risk
involves the ability of corporations, government entities, and
even individuals, to make good on their financial commitments;
market risk refers to the certainty that there will be changes
in the Market Value of the selected securities. We can minimize
the former by selecting only high quality (investment grade)
securities and the latter by diversifying properly,
understanding that Market Value changes are normal, and by
having a plan of action for dealing with such fluctuations.
(What does the bank do to get the amount of interest it
guarantees to depositors? What does it do in response to higher
or lower market interest rate expectations?)
You don't have to be a professional Investment Manager to
professionally manage your investment portfolio, but you do need
to have a long term plan and know something about Asset
Allocation... a portfolio organization tool that is often
misunderstood and almost always improperly used within the
financial community. It's important to recognize, as well, that
you do not need a fancy computer program or a glossy
presentation with economic scenarios, inflation estimators, and
stock market projections to get yourself lined up properly with
your target. You need common sense, reasonable expectations,
patience, discipline, soft hands, and an oversized driver. The
K. I. S. S. Principle needs to be at the foundation of your
Investment Plan; an emphasis on Working Capital will help you
Organize, and Control your investment portfolio.
Planning for Retirement should focus on the additional income
needed from the investment portfolio, and the Asset Allocation
formula [relax, 8th grade math is plenty] needed for goal
achievement will depend on just three variables: (1) the amount
of liquid investment assets you are starting with, (2) the
amount of time until retirement, and (3) the range of interest
rates currently available from Investment Grade Securities. If
you don't allow the "engineer" gene to take control, this can be
a fairly simple process. Even if you are young, you need to stop
smoking heavily and to develop a growing stream of income... if
you keep the income growing, the Market Value growth (that you
are expected to worship) will take care of itself. Remember,
higher Market Value may increase hat size, but it doesn't pay
the bills.
First deduct any guaranteed pension income from your retirement
income goal to estimate the amount needed just from the
investment portfolio. Don't worry about inflation at this stage.
Next, determine the total Market Value of your investment
portfolios, including company plans, IRAs, H-Bonds...
everything, except the house, boat, jewelry, etc. Liquid
personal and retirement plan assets only. This total is then
multiplied by a range of reasonable interest rates (6%, to 8%
right now) and, hopefully, one of the resulting numbers will be
close to the target amount you came up with a moment ago. If you
are within a few years of retirement age, they better be! For
certain, this process will give you a clear idea of where you
stand, and that, in and of itself, is worth the effort.
Organizing the Portfolio involves deciding upon an appropriate
Asset Allocation... and that requires some discussion. Asset
Allocation is the most important and most frequently
misunderstood concept in the investment lexicon. The most basic
of the confusions is the idea that diversification and Asset
Allocation are one and the same. Asset Allocation divides the
investment portfolio into the two basic classes of investment
securities: Stocks/Equities and Bonds/Income Securities. Most
Investment Grade securities fit comfortably into one of these
two classes. Diversification is a risk reduction technique that
strictly controls the size of individual holdings as a percent
of total assets. A second misconception describes Asset
Allocation as a sophisticated technique used to soften the
bottom line impact of movements in stock and bond prices, and/or
a process that automatically (and foolishly) moves investment
dollars from a weakening asset classification to a stronger
one... a subtle "market timing" device.
Finally, the Asset Allocation Formula is often misused in an
effort to superimpose a valid investment planning tool on
speculative strategies that have no real merits of their own,
for example: annual portfolio repositioning, market timing
adjustments, and Mutual Fund shifting. The Asset Allocation
formula itself is sacred, and if constructed properly, should
never be altered due to conditions in either Equity or Fixed
Income markets. Changes in the personal situation, goals, and
objectives of the investor are the only issues that can be
allowed into the Asset Allocation decision-making process.
Here are a few basic Asset Allocation Guidelines: (1) All Asset
Allocation decisions are based on the Cost Basis of the
securities involved. The current Market Value may be more or
less and it just doesn't matter. (2) Any investment portfolio
with a Cost Basis of $100,000 or more should have a minimum of
30% invested in Income Securities, either taxable or tax free,
depending on the nature of the portfolio. Tax deferred entities
(all varieties of retirement programs) should house the bulk of
the Equity Investments. This rule applies from age 0 to
Retirement Age - 5 years. Under age 30, it is a mistake to have
too much of your portfolio in Income Securities. (3) There are
only two Asset Allocation Categories, and neither is ever
described with a decimal point. All cash in the portfolio is
destined for one category or the other. (4) From Retirement Age
- 5 on, the Income Allocation needs to be adjusted upward until
the "reasonable interest rate test" says that you are on target
or at least in range. (5) At retirement, between 60% and 100% of
your portfolio may have to be in Income Generating Securities.
Controlling, or Implementing, the Investment Plan will be
accomplished best by those who are least emotional, most
decisive, naturally calm, patient, generally
conservative (not
politically), and self actualized. Investing is a long-term,
personal, goal orientated, non- competitive, hands on,
decision-making process that does not require advanced degrees
or a rocket scientist IQ. In fact, being too smart can be a
problem if you have a tendency to over analyze things. It is
helpful to establish guidelines for selecting securities, and
for disposing of them. For example, limit Equity involvement to
Investment Grade, NYSE, dividend paying, profitable, and widely
held companies. Don't buy any stock unless it is down at least
20% from its 52 week high, and limit individual equity holdings
to less than 5% of the total portfolio. Take a reasonable profit
(using 10% as a target) as frequently as possible. With a 40%
Income Allocation, 40% of profits and dividends would be
allocated to Income Securities.
For Fixed Income, focus on Investment Grade securities, with
above average but not "highest in class" yields. With Variable
Income securities, avoid purchase near 52-week highs, and keep
individual holdings well below 5%. Keep individual Preferred
Stocks and Bonds well below 5% as well. Closed End Fund
positions may be slightly higher than 5%, depending on type.
Take a reasonable profit (more than one years' income for
starters) as soon as possible. With a 60% Equity Allocation, 60%
of profits and interest would be allocated to stocks.
Monitoring Investment Performance the Wall Street way is
inappropriate and problematic for goal-orientated investors. It
purposely focuses on short-term dislocations and uncontrollable
cyclical changes, producing constant disappointment and
encouraging inappropriate transactional responses to natural and
harmless events. Coupled with a Media that thrives on
sensationalizing anything outrageously positive or negative
(Google and Enron, Peter Lynch and Martha Stewart, for example),
it becomes difficult to stay the course with any plan, as
environmental conditions change. First greed, then fear, new
products replacing old, and always the promise of something
better when, in fact, the boring and old fashioned basic
investment principles still get the job done. Remember, your
unhappiness is Wall Street's most coveted asset. Don't humor
them, and protect yourself. Base your performance evaluation
efforts on goal achievement... yours, not theirs. Here's how,
based on the three basic objectives we've been talking about:
Growth of Base Income, Profit Production from Trading, and
Overall Growth in Working Capital.
Base Income includes the dividends and interest produced by
your portfolio, without the realized capital gains that should
actually be the larger number much of the time. No matter how
you slice it, your long-range comfort demands regularly
increasing income, and by using your total portfolio cost basis
as the benchmark, it's easy to determine where to invest your
accumulating cash. Since a portion of every dollar added to the
portfolio is reallocated to income production, you are assured
of increasing the total annually. If Market Value is used for
this analysis, you could be pouring too much money into a
falling stock market to the detriment of your long-range income
objectives.
Profit Production is the happy face of the market value
volatility that is a natural attribute of all securities. To
realize a profit, you must be able to sell the securities that
most investment strategists (and accountants) want you to marry
up with! Successful investors learn to sell the ones they love,
and the more frequently (yes, short term), the better. This is
called trading, and it is not a four-letter word. When you can
get yourself to the point where you think of the securities you
own as high quality inventory on the shelves of your personal
portfolio boutique, you have arrived. You won't see WalMart
holding out for higher prices than their standard markup, and
neither should you. Reduce the markup on slower movers, and sell
damaged goods you've held too long at a loss if you have to,
and, in the thick of it all, try to anticipate what your
standard, Wall Street Account Statement is going to show you...
a portfolio of equity securities that have not yet achieved
their profit goals and are probably in negative Market Value
territory because you've sold the winners and replaced them with
new inventory... compounding the earning power! Similarly,
you'll see a diversified group of income earners, chastised for
following their natural tendencies (this year), at lower prices,
which will help you increase your portfolio yield and overall
cash flow. If you see big plus signs, you are not managing the
portfolio properly.
Working Capital Growth (total portfolio cost basis) just
happens, and at a rate that will be somewhere between the
average return on the Income Securities in the portfolio and the
total realized gain on the Equity portion of the portfolio. It
will actually be higher with larger Equity allocations because
frequent trading produces a higher rate of return than the more
secure positions in the Income allocation. But, and this is too
big a but to ignore as you approach retirement, trading profits
are not guaranteed and the risk of loss (although minimized with
a sensible selection process) is greater than it is with Income
Securities. This is why the Asset Allocation moves from a
greater to a lesser Equity percentage as you approach retirement.
So is there really such a thing as an Income Portfolio that
needs to be managed? Or are we really just dealing with an
investment portfolio that needs its Asset Allocation tweaked
occasionally as we approach the time in life when it has to
provide the yacht... and the gas money to run it? By using Cost
Basis (Working Capital) as the number that needs growing, by
accepting trading as an acceptable, even conservative, approach
to portfolio management, and by focusing on growing income
instead of ego, this whole retirement investing thing becomes
significantly less scary. So now you can focus on changing the
tax code, reducing health care costs, saving Social Security,
and spoiling the grandchildren.
About the author:
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", and "A Millionaire's Secret Investment Strategy"
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