Savings Accounts - Choosing A "Rainy Day"
By Tim Bennett
First the bad news – none of us are saving enough money. In the US last year the proportion of household income stashed away, known as the “savings ratio” plummeted to a level last seen during the Great Depression. In a recent survey, Sainsbury’s revealed that in the UK, one in five people claim not to have enough saved to last even a month if they lost their jobs and 12% of us have no cash savings at all. In fairness some would argue that with interest rates hitting rock bottom over the last five years no one, on either side of the Atlantic, has had much of an incentive to squirrel money away. However times are now changing - the UK base rate has risen sharply in the last 12 months and banks and building societies have, in most cases, responded by offering some pretty juicy savings rates. In any event it makes sense to have the equivalent of at least three months gross salary tucked away just in case. After all no one knows what lies around the corner – redundancy, marriage, an accident or just some time off. All a lot easier to deal with if you have a savings buffer. Given the vast number of savings accounts around, what features should you look for?
A decent interest rate
As a rule of thumb, if a bank’s savings account isn’t paying at least the Bank of England base rate then sign up with someone else because there is plenty of choice. The best rates tend to be for accounts operated either over the internet or by post as this saves the provider administration costs. Also, if you are aged 50 or above make sure you are getting the slightly enhanced rates often available for “silver savers”. At moneysupermarket.com you can compare rates at a glance. Having opened an account, it pays to monitor the interest rate periodically as some banks offer a great introductory deal but don’t then keep up with competitors as the base rate rises. Also watch out for hidden interest penalties for making multiple withdrawals - even on an instant access account, some providers will dock that month’s interest for example.
Flexibility
The point about saving is easy access – why set up an emergency fund that you can’t access for say three months? Although you may (though this is by no means guaranteed) get a little more interest on a notice account or a fixed term deposit there are often penalties for making withdrawals and we think the extra flexibility of being able to get to your money immediately, with a “no notice” account, more than compensates. The other problem with fixed rate accounts is that if interest rates rise while your money is locked away you won’t be able to take advantage.
Tax efficiency
Make sure that you use your individual savings account allowance, as the money earned is tax free up to the government’s limit – currently £3,000 per year - whereas interest in a normal account is taxed. Again, shop around as there are many Isa providers and interest rates and charges on these accounts can vary.
Offsetting – do your homework
Given that many budding savers also have mortgages, an account that lets you offset any balance in your savings account against your mortgage can look tempting and save some tax. The idea is that say you had £10 of savings and a £100 mortgage, with this type of account you would only get charged mortgage interest on the net balance of £90. Whether this is a good idea depends on several things – the offset mortgage rate you pay may be higher than for a standard mortgage for example, and the savings rate you could achieve somewhere else might be better too. Nonetheless worth investigating.
Tim Bennett, Chartered Accountant (in-house) writes about financial news and investing strategy for MoneyWeek.com
Article Source: http://EzineArticles.com/?expert=Tim_Bennett
Intermarket Analysis - Do Intermarket Relationships Help Make Trading Decisions?
By Doug Tucker
It is generally accepted that there is a relationship, or a measurable correlation between certain markets. There have been many articles, books, trading systems, and approaches based on intermarket relationships. If you turn on the financial news you will usually hear an explanation such as: the stock market was down today because crude oil was up, or maybe the stock market was up today because crude oil was up. It can even get more complex. You might hear something such as the stock market was down today because crude oil, being up sharply today, caused the bond market to be down. With the bond market down and interest rates up, the stock market was under pressure and down it went. Etc. Etc.
I find it a good idea to question everything, especially commonly held beliefs that might not hold up under close inspection.
One can very quickly and easily test these tried and true intermarket relationships with easily available free data and a simple spreadsheet or charting program. The quickest function to use is the simple correlation study, where you plug in one variable, and then compare it to a second variable. The study tries to find a correlation between two data series. If it finds a positive correlation the value will go as high as + 1.0. That would be a perfect and positive correlation between the two series of prices. If it finds a perfect correlation, but inverse, or negative then it will have a value as low as - 1.0. Readings near the zero line would show no discernible correlation between the two samples.
It is rare to have a perfect correlation between any two market for a very long period of time, but most analysts would probably agree that any reading sustained over the +0.7 or under the –0.7 level (which would equate to approximately a 70% correlation) would be statistically significant. Also, if the correlation value went from a positive to a negative correlation frequently, the relationship would most likely be unstable, and probably useless for trading.
If a picture is worth a thousand words, I'll save some of mine by directing you to my blog where I have many examples. I've included a couple of similar markets that did show a high level of correlation just to show what a good, stable correlation would look like. The rest of the markets shown are of relationships that most people believe to have stood the test of time, but the charts show otherwise. The address is below:
http://tuckerreport.com/articles/intermarket-analysis/
The most widely accepted correlation for as long as I can remember is the inverse correlation between stock prices and interest rates. It is assumed and generally accepted that as interest rate go higher, that stock prices go lower, and conversely, as interest rates go down, then stock should go up. On the second point, the Japanese market was in a huge downtrend for a time, and lowering interest rates to near zero did little to help. Back to the first point, the interest rates recently have been increasing steadily and many stock markets around the world, including the Dow Jones Industrials, have recently made all time highs.
In addition, crude oil is supposed to be bearish for bonds and stocks, yet crude is near an all time high along with stocks. Gold is supposed to be inverse to the stock market. It has been briefly a few times in the last couple of decades. Over the last few years it has been in an even steeper uptrend than stocks. As this is being written, the stock market has had a huge sell off, and gold came right down with it. Looks like the inverse correlation has been divorced, or at least separated.
What does any of this tell us? Is the much-touted intermarket analysis a waste of time? In a word: yes.
Many trading systems were bought and sold based on inter-market relationships. Every one of them now is most likely worthless. The problem with those systems, and intermarket approaches in general, is they were designed on relatively small samples of data. If they used much larger samples of data, they most likely would not find the intermarket relationships, they thought existed, to be stable and robust. When an intermarket relationship becomes obvious to everyone, it’s on its way to becoming useless. What everyone knows isn't information that helps make successful trading decisions.
Even if you could find a long lasting, intermarket relationship, how would you use it? I assume the purpose of that analysis would be to find an edge by figuring out which market was leading the other. How can you tell which is leading, if indeed one does lead. You can try to guess at the fundamentals, but that would be a guess about the future. Why not just trade the market you are guessing about and not compound the situation by assuming the guess, if correct, will affect the other market in the way desired. You might be right in your guess, but wrong by assuming the relationship between markets will play out the way you anticipated.
There is even a long held belief that stock market averages influence most of the direction of individual stocks, some say by 70%. But obviously, there are many instances of stocks going down in up markets, and stocks going up in down markets.
My conclusion is that each market should be charted and analyzed individually. Intermarket relationships are fun for discussion, and for financial journalist, but I don't believe they can help in making trading decisions.
Doug Tucker has a blog with daily commentary on stock indexes, precious metals, and other markets. There are many articles on technical analysis and indicator design and interpretation. To visit go to: http://tuckerreport.com/
Article Source: http://EzineArticles.com/?expert=Doug_Tucker
Understanding Fixed Income Securities: Expectations
By Steve Selengut
I've come to the conclusion that the Stock Market is an easier medium for investors to understand (i.e., to form behavioral expectations about) than the Fixed Income Market. As unlikely as this sounds, experience proves it, irrefutably. Few investors grow to love volatility as I do, but most expect it in the Market Value of their equity positions. When dealing with Fixed Income Securities however, neither they nor their advisors are comfortable with any downward movement at all. Most won't consider taking profits when prices increase, but will rush in to accept losses when prices fall.
Theoretically, Fixed Income Securities should be the ultimate Buy and Hold; their primary purpose is income generation, and return of principal is typically a contractual obligation. I like to add some seasoning to this bland diet, through profit taking whenever possible, but losses are almost never an acceptable, or necessary, menu item. Still, Wall Street pumps out products and Investment Experts rationalize strategies that cloud the simple rules governing the behavior of what should be an investor's retirement blankie. I shake my head in disbelief, constantly. The investment gods have spoken: 'The market price of Fixed Income Securities shall vary inversely with Interest Rates, both actual and anticipated' and it is good.'
It's OK, it's natural, it just doesn't matter, I say to disbelieving audiences everywhere. You have to understand how these securities react to interest rate expectations and take advantage of it. There's no need to hedge against it, or to cry about it. It's simply the nature of things. This is the first of three successive articles I'll be writing about Fixed Income Investing. If I don't improve your comfort level with this effort, perhaps the next one will strike the proper chord.
There are several reasons why investors have invalid expectations about their Fixed Income investments:
(1) They don't experience this type of investing until retirement planning time and they view all securities with an eye on Market Value, as they have been programmed to do by Wall Street.
(2) The combination of increasing age and inexperience creates an inordinate fear of loss that is prayed upon by commissioned sales persons of all shapes and sizes.
(3) They have trouble distinguishing between the income generating purpose of Fixed Income Securities and the fact that they are negotiable instruments with a Market Value that is a function of current, as opposed to contractual, interest rates.
(4) They have been brainwashed into believing that the Market Value of their portfolio, and not the income that it generates, is their primary weapon against inflation. [Really, Alice, if you held these securities in a safe deposit box instead of a brokerage account, and just received the income, the perception of loss, the fear, and the rush to make a change would simply disappear. Think about it.]
Every properly constructed portfolio will contain securities whose primary purpose is to generate income (fixed and/or variable), and every investor must understand some basic and 'absolute' characteristics of Interest Rate Sensitive Securities. These securities include Corporate, Government, and Municipal Bonds, Preferred Stocks, many Closed End Funds, Unit Trusts, REITs, Royalty Trusts, Treasury Securities, etc. Most are legally binding contracts between the owner of the securities (you, or an Investment Company that you own a piece of) and an entity that promises to pay a Fixed Rate of Interest for the use of the money. They are primary debts of the issuer, and must be paid before all other obligations. They are negotiable, meaning that they can be bought and sold, at a price that varies with current interest rates. The longer the duration of the obligation, the more price fluctuation cycles will occur during the holding period. Typically, longer obligations also have higher interest rates. Two things are accomplished by buying shorter duration securities: you earn less interest and you pay your broker a commission more frequently.
Defaults in interest payments are extremely rare, particularly in Investment Grade Securities, and it is very likely that you will receive a predictable, constant, and gradually increasing flow of Income. (The income will increase gradually only if you manage your asset allocation properly by adding proportionately to your Fixed Income holdings.) So, if everything is going according to plan, all that you ever need to look at is the amount of income that your Fixed Income portfolio is generating' period. Dealing with variable income securities is slightly different, as Market Value will also vary with the nature of the income, and the economics of a particular industry. REITs, Royalty Trusts, Unit Trusts, and even CEFs (Closed End Funds) may have variable income levels and portfolio management requires an understanding of the risks involved. A Municipal Bond CEF, for example will have a much more dependable cash flow and considerably more price stability than an oil and gas Royalty Trust. Thus, diversification in the income-generating portion of the portfolio is even more important than in the growth portion' income pays the bills. Never lose sight of that fact and you will be able to go fishing more frequently in retirement.
The critical relationship between the two classes of securities in your portfolio, is this: The Market Value of your Equity Investments and that of your Fixed Income investments are totally, and completely unrelated. Each Market dances to it's own beat. Stocks are like heavy metal or Rap'impossible to predict. Bonds are more like the classics and old time rock-and-roll'much more predictable. Thus, for the sake of portfolio smile maintenance, you must develop the ability to separate the two classes of securities, mentally, if not physically. For example, if your July 2005 Market Value fell, it was because of higher interest rates not lower stock prices. More recently, the combination of higher rates and a weaker Stock Market has been a Double Whammy for portfolio Market Values, and a double bonanza for investment opportunities. Just like at the Mall, lower securities prices are a good thing for buyers' and higher prices are a good thing for sellers. You need to act on these things with each cyclical change.
Here's a simple way to deal with Fixed Income Market Values to avoid shocks and surprises. Just visualize the Scales of Justice, with or without the blindfold. On one side we have a number that represents the Current Market Value of your Fixed Income portfolio. On the other side, we have a small 'i' for interest rates, and 'up' or 'down' arrows that represent interest rate directional expectations. If the world expects interest rates to rise, or even to stop going down, 'up' arrows are added to 'i' and the Market Value side moves lower' the current scenario. Absolutely nothing can (or should) be done about it. It has no impact at all on the contracts you hold or the interest that you will receive; neither the maturity value nor the cash flow is affected' but your broker just called with an idea.
The mechanics are also simple. These are negotiable securities that carry a fixed interest rate. Buyers are entitled to current rates, and the only way to provide them on an existing security is to sell it at a discount. Fortunately, one rarely has to sell. Over the past few years of falling interest rates, Fixed Income securities have risen in price and investors (should) have realized capital gains as a result'adding to portfolio income and Working Capital. Now, that trend has reversed itself and you have the opportunity to add to existing holdings, or to buy new securities, at lower prices and higher interest rates. This cycle will be repeated forever.
So, from a 'let's try to be happy with our investment portfolio because it's financially healthier' standpoint, it is critical that you understand changes in Market Value, anticipate them, and appreciate the opportunities that they provide. Comparing your portfolio Market Value with some external and unrelated number accomplishes nothing. Actually, owning your fixed income securities in the most freely negotiable manner possible can put you in a unique position. You have no increased risk from a reduction in security prices, while you gain the ability to add to holdings at higher yields. It's like magic, or is it justice. Both sides of the scales contain good news for the investor' as the investment gods intended.
About the author:
Steve Selengut
sanserve@aol.com
800-245-0494
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"
source:www.ezinefinder.com
Successful Stock Market Investing
By Oliver Gillies
Before entering into the markets at any level it is crucial to have a working knowledge of the dynamics of the stock markets and the main influencing factors.
These will be briefly touched upon. The main influencing factors are likely to be economic, such as inflation, interest rates and GDP. A variety of other factors are likely to have an effect, relating to possible geo-political factors (i.e., wars, civil unrest), also political uncertainty generally has a profound effect on the markets.
From this we can see that there are a wide variety of variables that are going to affect the markets as a whole which will ultimately determine the supply and demand of direct equities.
There are a general set of principles that you should adhere too constantly in order to reap the rewards that the stock markets have to offer, below I will outline some of these universally accepted principles for experienced private as well as institutional investors.
•Set a concrete nominal value you can realistically afford to invest. For example if you go out to the bookies to bet on the horses you would generally have a set amount to spend and once you reach that level cut your losses or cash in. What I am trying to convey is discipline and routine which is essential for consistent returns.
•Do not treat the stock market like the lottery. It is a skill that needs to be mastered and perfected to “trade effectively”. Be in it for the long term and like anything in life essentially the more skills you build the more effective you will be.
•Eliminate as much risk as possible by doing your homework on a stock you are going to invest in. Information is freely available more so than ever especially on the internet. You will be able to locate company accounts and assess the general health of a company through a variety of sources.
•Diversity is truly the key in the markets. All the big guys know this in the markets usually “hedging” their large position’s with an inverse position or more stable position. Do not put all of your egg’s in one basket as they say equally spread capital over a number of positions.
•If you loose money on one position it’s not the end of the world all of the massive guy’s the Karl Icon’s and Warren Buffet’s would have if not still loose money in the markets. Try and look at every event as a learning experience on which to add to your arsenal of skills.
Oliver Guillies is a Graduate working with a firm of Stockbroker's in the City of London. He has a passion for travel amongst other thing's. If you want to read more up to date articles and opinion's on Oliver Guillies blog Click Here
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