Hot Stock Tip: Don't Take Tips

Well meaning friends and advisories often send out specific picks as to what to trade and when.

Unfortunately, there are inherent dangers in such programs, despite everyone's best efforts. First, even with Twitter, your mentor makes the trade, sends you the details and you must receive it. Then you act on it. Most often, you miss the move simply because of the time delay in this process. Imagine getting the message to buy long. By the time you get it, the trend reverses. In good faith, you buy long and quickly realize you're now in a 'hope and hold' situation. The move is over.

Frankly, as a trader, the last thing I'm thinking about when I'm looking to enter a position, is to send out a message. My focus is where it should be: on the trade itself. Be wary of traders who are not focusing on the trade at hand. Their concentration should not be on advising folks on trades in the moment; it needs to be on the trade at hand.

Secondly, and I stress this endlessly, you yourself should become the expert. It is you, who should learn how to read the technical indicators, make the assessments and determine the entry and exit points. As traders, you are not merely mechanics clicking the keys on others' whims. Be able to read the raw data and form your own determinations. It is actually not that difficult once you learn how. Imagine knowing this information and acting on it at will. Your money tree will always be in bloom.

Candlesticks are raw data. So are moving averages, stochastics and all the other input items that entail a trade. By relying on others - regardless of who they are - you are putting your faith and confidence in someone else's interpretation of what the markets are doing. Is this not the very reason you got into trading your own accounts? Did your financial guru not squander away your money already?

Recognize that traders who act on tips are likely an insecure breed with too much money, destined to lose it. Even if the tipster is correct, by the time you get the tip, it's history. In this day of the internet, everyone has essentially the same knowledge available. Learn to use it effectively and place the odds in your favor.

Tips are for waiters and cabbies, not to be played in the stock market.

A note about Hugh:

Trader Hugh is a successful, full time options trader and trainer on the NYSE. Learn but one strategy well and you could make an excellent living. As part of the training, Hugh provides 'one on one' sessions and Live Trading, where you watch and learn everything Hugh and his cohorts trade, every Tuesday and Thursday morning.

Enjoy a free trial with Hugh, just for the asking. Just reach out to me at http://www.estockoptiontrading.com/

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Performance and Behavior - Part 2

Last month we considered the idea that investor behavior accounts for far more of the real-life returns in an investment portfolio than investment performance. In fact, we showed how the Dalbar Corporation in their annual Quantitative Analysis of Investor Behavior, indicates that the average stock fund over the past 20 years had an average return of over 4 percent more - per year - than the average stock fund investor.

If this premise of "behavior trumps performance" is really true, then how can we explain the investing world as it has existed for decades? There are billions of dollars spent on advertising, analysts and infrastructure in this behemoth system of financial services that communicates and supports this message: "We can help you time the market just right. We can help you choose the best stocks to beat the market. Your investing troubles are over. We can be your guru." How do they make investors believe this? Basically, they baffle them, charm them and appeal to their emotions. They use every psychological fallacy, influence technique and emotional entreaty "in the book" to enact their plan of compliance. And it undoubtedly works with great efficiency and effectiveness.

I wish we could take the time and space here to talk about all of the techniques they use. JWA University has featured several books over the years that would explain many of them (such as Paradox of Choice, Economic Facts and Fallacies and Why Smart People Make Big Money Mistakes). But let's focus on just three emotional compliance techniques to make the point.

1. Appeal to Bias (or the Confirmation Bias)

X is true because I desperately want to find any possible evidence to confirm my bias and will selectively ignore anything that does not.

OR, for example:

The financial advisory system is structured so that "experts" can advise which stocks, bonds and other financial instruments can be selected and timed to provide superior returns on a consistent basis.

This line of reasoning is fallacious because it has no bearing on whether the belief is true or false. Just because the financial industry has successfully conveyed that this is a true statement does not support that the statement is true. But what a powerful impact this assumptive attitude has had. Ask any man or woman on the street what an investment advisor does and you will get an answer that contains similar components to "they help you pick winning stocks and advise you on when is the right time to invest." Both are exercises in futility.

2. Appeal to Authority (or the Expert Fallacy)

Person A is (claims to be) an authority on subject S.

Person A makes claim C about subject S.

Therefore, claim C is true.

This is a sister fallacy that often times simultaneously appeals to the Confirmation Bias and exponentially increases the behavioral influence over its victims. The Financial Industrial Complex will often parade what they claim to be "brilliant economists" who are adept at making the most accurate macroeconomic forecasts. Then they march their Chief Investment Strategist out to all the business talking head shows to convey the market metrics that coincidentally just happen to simultaneously promote his/her fund or fund family. The truth is that no matter what the market or economic topic might be, there will consistently be a healthy balance of "experts" taking either side of the claim made to the investing public. This gives investors ample opportunity to selectively cherry pick the experts willing to defend and deliver a "solution" that caters to his/her biases. These highly educated, highly paid, highly positioned executives make the case compelling. You can begin to easily see the pattern that is emerging with the coercing techniques. You are also catching on quickly I'm sure, that these are transferable to any walk of life in which one might want to make a point. Politics comes to mind...

3. Appeal to Emotion

Favorable emotions are associated with X.

Therefore, X is true.

This one may be the most effective and insidious of the three we have chosen to discuss. It is so simple and immutable. It works in almost any situation concerning any topic. But let me challenge you to do something that you will find intriguing. One evening while watching TV, just do an unscientific survey of the appeals to emotion in the commercials you see. Yes, this means you will actually have to watch them instead of fast forward through them. But within two to three hours, you will be fascinated with what you see. Note the recurring grandparent themes, or "saying goodbye", and the number of ads featuring dogs! (To make it even more fun, make a note concerning financial advertisements only.)

I think you would agree that believing something simply because A) you are looking to confirm your biases, B) an "expert" said so, or C) "it makes me feel good"; is NOT how a wise and prudent person makes good decisions. These items speak to the very essence of behavior - which is what we already emphatically stated - is the key to success.

So how do you feel when you consider how these and many other compliance techniques are employed on you constantly? Hopefully, by simply being reminded that techniques such as these exist, you may be able to inoculate yourself when they are used against your best interests.

Next time we will delve into some more practical applications of proper behavior as we consider the virtues of patience and discipline when it comes to investing. You may be surprised when you learn what these terms really mean to the wisdom based investor.

Until then, be on the lookout for compliance techniques in your life - and try to be on your best behavior!

Come visit our website at: http://jwafinancial.com/ and sign up for a free consultation today!

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Investment Basics 101

In order to invest you must first decide upon a particular type of investing. Once you do this, you can start teaching yourself more about your style.

Although each style incorporates different tactics and therefore requires a unique approach, most investment styles overlap when it comes to the basic elements.

To build a foundation, you will need to know the types of orders available.

Before we move on, you ought to know that stocks are the main instrument for investments. Each stock has a "ticker" symbol. For example, Apple's stock ticker is "AAPL". More importantly, stocks have a certain number of shares, and those shares are what you buy. Imagine you're buying a tiny piece of the company. The typical amount used when buying shares is 100, and it's called one "lot". Of course, you don't have to buy 100 shares, you can buy odd numbers of shares. Any number not rounded to 100 is considered an "odd lot". This means that if I buy 16 shares, it's an odd "lot" of shares.

Types of Orders:

There are two basic orders you can place: Buy and Sell. Each have variations however, which can make buying or selling a stock seem complicated if you don't know what you're getting into.

To start, the simplest order is a Market Order. This means when you place the order, you will get filled at the most immediately available price. If you buy at the market, you're purchasing a specific amount of shares immediately at the current price.

The other common order type is called a Limit Order. This is when you set a specific price to buy or sell at. To illustrate, if you want to buy a stock at $20, placing a buy limit order would allow you to buy the stock only until the price hits $20.01. Once the stock price buys/sells at $20.01 or higher, your order would not get filled. If you want to sell a stock at $20 using a sell limit order, the order would get filled all the way up until the price hits $19.99. At $19.99 or lower, your order would not get filled and the transaction would not take place. Basically, a limit order gives you some degree of control over the price you buy or sell a security at.

There are other types of buy and sell orders, but they are more complicated and will be explained at a later point in time.

Armed with the information from this article, you've almost learned all the basics. Visit How To Become An Investor to learn the rest, including an introduction to financial statements and what trading hours are!

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2013 And 2014 Bond Bubble - Best Investment Funds If Bubble Bursts

If the bond bubble bursts in 2013 or 2014 it will be headline news and it's best to know where your best investment funds - the best mutual funds to invest money in - are now. The best mutual funds to invest money in will invest your money in what are called "alternative investments". If you are not familiar with these specialty funds, it's time to pay attention.

There IS a bond bubble because bond prices are absurdly high, which has resulted in record low interest rates. If you are an average investor your best investment vehicle takes the form of mutual funds; but it's your job (or your financial planner's job) to find the best mutual funds to invest money in. Most investors (and financial planners) see only 3 basic choices to invest money in: safe investments, bonds, and stocks. Alternative investments like gold, silver, basic metals, real estate, natural resources, and other commodities and TANGIBLES are too often ignored.

I suggest that alternative investments are your best investment if the bond bubble bursts in 2013 or 2014 because tangibles like basic materials (like copper and aluminum), oil, and real estate have an INTRINSIC VALUE. They are not just financial assets like stocks and bonds. The best mutual funds will be those that invest money in these areas (for you). Here's the logic.

The bond bubble bursts - which means that BIG investors sell bonds and send bond prices into a tailspin. The really big investors (like insurance companies, pension funds, and mutual fund companies) SELL as much and as fast as they can. FEAR strikes the stock market and heavy selling sends prices (in general) down. Bond funds are pummeled and DIVERSIFIED equity (stock) funds are severely bruised. Where will the big investors invest money now? Since they've just cashed in billions and billions in the markets, the money they've taken in has to go someplace. And what about average investors who thought they owned the best mutual funds, bond funds?

Big money will flow to the money market (the safe haven). It will also search for the best alternative investment. For most people the simplest way to invest money in this alternative arena will be through specialty equity (stock) funds that invest money in stocks of companies involved in specialty areas like precious metals, energy, basic materials, and real estate. These should be the best mutual funds and your best investment to earn higher returns if the bond bubble bursts and the stock market in general tumbles.

The best investment strategy for 2013 and 2014 will be to cut your exposure to bond funds and general diversified stock funds. The best mutual funds to invest more money in: money market funds for safety, and specialty funds that invest in the "alternative investment" arena for growth and higher returns. The best investment portfolio should include all 4 asset classes: cash (safe investments), bonds, stocks, and alternative investments.

Should the bond bubble burst in 2013 or 2014 high uncertainty and risk will make it difficult to invest money and find the single best investment or best mutual fund. Spread your money around and diversify across the 4 asset classes to achieve true balance. That's the best investment advice I can think of.

Author James Leitz teaches investment basics, stocks, bonds, mutual funds and how to invest in his investing guide for beginners called INVEST INFORMED. Put Jim's 40 years of investing experience to work for you and get up to speed at http://www.investinformed.com/. Learn how to invest.

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Performance and Behavior - Part 1

Harry Truman once said, "The only thing new in the world is the history you don't know." This Yogi Berra-esque quote by the former president simply states the obvious. So how does this apply to the investing world?

For all the machinations that individual investors - and their investment "gurus" - go through trying to successfully time the market ups and downs or pick the hot stocks or mutual funds, there is one investing maxim that has stood the test of time: Investment performance means almost nothing in the long-term, investor behavior means almost everything.

To make this point, I would like to take you back in history some four decades, to a Friday the 13th in April of 1970. Does that date sound familiar? Apollo 13 is one of my favorite all-time movies. Perhaps you remember where you were when you heard about the difficulty our astronauts had encountered so many thousands of miles away that day. The fact that they returned home safely was at least providential - if not miraculous.

If you have an iPhone in your pocket, pull it out for a minute. It is estimated that this machine contains more computing power than existed on earth in 1950. When Apollo 13 blew up it destroyed the mainframe computer. The device you are holding in your hand is a million times smaller, a million times cheaper and a thousand times more powerful than all the computer power that was available to NASA on that fateful night. So what does this have to do with investing? More on that in a moment...

Let's go back to my statement concerning performance versus behavior. Each year, Dalbar, Inc., a securities market research firm, publishes a Quantitative Analysis of Investor Behavior. Since 1994, Dalbar has been measuring the effects of investor decisions to buy, sell and switch into and out of mutual funds. Once the investor data is compiled, the return is compared to the S&P 500 Index, which of course is a proxy for the U.S. stock market. The difference in the returns of actual investors against the S&P 500 provides a good way to measure the effects of A) seeking superior investment performance through active means (ie, picking and timing), as compared to B) regulating for proper investor behavior by holding a super-diversified passive portfolio for the long term and letting the invisible hand of the free market do all the work. Over the years, these reports have shown again and again that the average investor earns less than mutual fund performance reports would suggest. Why is that? Simply put, humans are emotional beings that make emotional, sometimes rash decisions about their money.

Here is more history to make the point: Dalbar reported the average stock fund investor had an average annual return of 3.49% for the period beginning January 1, 1992 through December 31, 2011 versus the S&P 500 return of 7.81% per year. The average equity investor underperformed the S&P 500 by 4.32% for the past 20 years on an annualized basis. And here is a calculation you won't be able to do in your head: If you had invested $100,000 in an S&P 500 Index fund on January 1, 1992, your account would have grown to just under $450,000 by the end of 2011 (This assumes tax-free growth in a retirement account). However, the average stock fund for actual investors' $100,000 would have only grown to a little over $230,000 based on Dalbar's behavioral research. How important is investor behavior? Shall we say doubly important.

Now, back to Apollo 13. What does it have to do with our conversation here? Optimism. No matter how optimistic we are about the future, we cannot be optimistic enough when it comes to the entrepreneurial commitment to excellence and the innovation that free markets spawn. In 42 years, we have gone from a rickety old space capsule (by comparison) to a small gadget that gives us the world at our fingertips. And by the way, the S&P 500 Index was at 87 on the day Apollo 13 exploded. I will say again - it was at 87. That is not a misprint. The day I wrote this article in early August, it stood at around 1400 - and that does not include the dividends paid over this four decade stretch. So we have experienced tremendous growth in the great companies in the supreme free market system of all of history. But this did not occur without setbacks. Since 1970, we've seen three years where markets dropped by more than 20% and 5 years where it dropped more than 10%. These down markets represent ample opportunities for investors to have behaved badly (i.e. panic and sell out at the bottom). But overall, the S&P is up about 1,440% since the day Americans held their collective breath for the safe return of our brave men.

As you can see from learning this new insight, the issue is not the market. Most everyone can make a financial plan work well with a market return on equities in their portfolio. The issue is behavior. How can investors behave in the right manner to assure financial success? This is where a real understanding of history comes in.

We have named our current monthly newsletter series "Wealth with Wisdom." I prefer the following definition of wisdom: rational action under uncertainty. 1 There is perhaps no better metaphor in modern day life for uncertainly than the stock market. Over the next several months we will try and provide an installment of wisdom that will benefit you and those you care about as you seek the best ways to behave when it comes to your money.

"A wise man will hear and will increase learning;
and a man of understanding shall attain unto wise counsel."
-King Solomon, Prov. 1:5

Come visit our website at: http://jwafinancial.com/ and sign up for a free consultation today!

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Business Opportunities For NRIs In The Indian Market

India is the largest democracy in the world. The country ranks second in the world in terms of total population. The liberalisation and globalisation of the Indian economy has led to more foreign direct investment (FDI) inflows in Indian markets. As a result, the scope for business in India has increased.

There are plenty of business opportunities in India for Foreign Investors, Non-Resident Indians (NRIs), Persons of Indian Origin (PIO) and Overseas Corporate Bodies (OCBs). The country offers liberal policy regime, along with easy availability of loans, funds and various other initiatives, which makes India a lucrative investment destination for NRIs and PIOs.

Some of the promising sectors where NRIs may invest include power, pharmaceuticals, mining, hotel & tourism, coal & ignites and other infrastructural projects. NRIs can also invest directly in Indian real estate except buying agricultural lands or plantations. They can look at huge number of central and state sponsored projects in key infrastructural sectors like education, healthcare and construction for higher returns.

Business Opportunities in India

Some of the major factors that help businesses in India to flourish include:

* High number of people with disposable income, emerging middle class, low cost competitive workforce, and investment friendly policies

* Availability of rich natural resources

* Availability of a considerable section of population proficient in English

* A well-established banking system consisting of public and private banks and other financial institutions

* Competitive advantage in Information Technology, which can be used to enhance productivity in Industries

* Improved infrastructure for business ventures

Steps for NRIs /PIOs to start business in India

* Applying and getting PIO card (Person of Indian origin) - to make investments in properties, etc

* Getting permanent account number (PAN card) from the Indian tax department, making it smoother to undertake all business and investment transactions above Rs. 50,000

* Selecting a right and highly profitable business in India among various available options

* Selecting an experienced person/ business professional to plan business and investments

* Selecting a business partner in India and start a business

Investors can also take the help of business incubators and facilitators to become established and sustainable during their start-up phase. Business incubators are programs designed to nurture the development of entrepreneurial companies. They provide the companies with business support services, business advice, assistance with business planning, market and international networks, and also help in obtaining finance. Incubators usually offer companies rental space with flexible leases, basic office services and access to equipments all under one-roof. Successful completion of a business incubation program increases the chances of a start-up company to stay in business in India for long term.

Government Initiatives

To attract foreign investment into India, the Government is offering several facilities to NRIs, PIOs and OCBs. The economic reforms have brought policy changes in terms of ease of entry, investment, location, usage of technology, import and export. These changes have created an investment-friendly environment, which results in more business opportunities in India.

NRIs are permitted to open bank accounts in India with funds remitted from abroad, foreign exchange brought in from abroad or with funds legitimately due to them in India, with authorized dealer.

Further, the Reserve Bank of India (RBI) has granted general permission to NRIs/PIOs, for undertaking direct investments in Indian companies under the automatic route.

Harjeet is an Indian - born mass-market novelist, who covers the world internet related topics. He writes columns and articles for various websites and internet journals in the domain of Business Opportunities in India and Business in India.

OIFC

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How to Invest For Profit

People are often looking for new ways to create additional money to help them pay their bills and general expenses which are seemingly going up at a faster rate than wages, or to get rid of or at least reduce the day-to-day stress involved with the traditional work place.

Perhaps you are looking to make life a bit easier for you and your family by earning extra money each month. Or perhaps it is your intention to possibly replace your job income to enable you to become time free. Whatever your incentive is you have to establish what you expect to gain from your endeavour.

This would be the starting point in formulating a detailed plan which will allow you to achieve the level of income that you need. For example if your goal is to earn $3,000 a month then your plan for achieving this would have to be significantly different if your goal was to earn a few hundred dollars a month.

There are many ways to achieve your goals. One possible way is to develop your very own investment portfolio. It is possible that in a relatively short period of time (it will not come overnight however) you could you reach your goals whatever they are, without necessarily having to spend thousands in the process.

Leave nothing to chance and with some helpful information you can succeed. However a cautionary note like everything else in life there can be no guarantees that you will be successful.

Making investments can be very daunting if you are new to the game and have limited or no experience. Initially it can seem that your investments are increasing nicely and then the opposite happens, with you facing a potential loss.

No one wants to see their investments heading the wrong way but there are things that you can do to minimise this risk. Whatever the market there are ways to boost profits and limit losses and there is help available for you to help you achieve success.

It does not matter where your interest lies it could be in stocks, commodities, FOREX, options, or even real estate there is further information available to help you whatever market type you are interested in.

Having the most suitable knowledge available can be the difference between success and failure, knowledge which is appropriate and applicable to each the type of market featured.

Different market types and trading styles can be more profitable at different times, and consequently the knowledge is available which will help and educate you in this respect.

The right knowledge can mean the difference between success and failure. The Investing for Profit Mall site is there to provide you with the knowledge suitable and applicable to each type of market featured.

So go ahead, look around and find the investing strategies that are right for you by visiting the links page at:

http://www.howtomakemoneyonline.uk.com/

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More Faith In The Future

"Every decision is risky; it is a commitment of present resources to an uncertain and unknown future." - Peter Drucker

This quotation reminds me of three things about life:

Number 1: Risk is a way of life. There is simply no avoiding it in any realm. Our job is to assess and choose the risks that we believe will pay off the most (or cost us the least).

Number 2: We must decide to do something. To do nothing is really a decision to do something - nothing. Furthermore, when we decide we must be committed to it.

Number 3: The future is uncertain and unknown. But would we have it any other way? That is exactly what brings the adventure to life, isn't it? The upside resides only in the unknown.

It is always amazing to see studies like the one Franklin Templeton did over the last three years in which they surveyed 1000 people to see how they thought the stock market had performed. In all three years (2009, 2010, 2011) half or more of the respondents said the S&P 500 had ended "down or flat" for each of those three years. The reality? 2009 +26.5%, 2010 +15.1% and 2011 +2.1%. So maybe they did not miss it by much last year, but the point is there is a negative bias among most Americans when it comes to the economy. This is because bad news sells advertising. Therefore Americans are inundated with bad news which shapes our view of history AND the future.

But news outlets who are trying to sell ads are not the only culprits. I believe there is a prevailing sentiment in our nation in which certain political persuasions want to set a negative tone about the future in order to gain more dependency on government and this affects investor behavior very negatively. Think about this. How often do you hear the word "sustainable?" Sustainable energy, sustainable food, sustainable communities. We have centuries worth of oil and natural gas within our borders alone - and that does not count that which we have not yet discovered or accessed. Farmers in America are paid NOT to grow more food. We have natural resources that have not been touched and open land as far as the eye can see that can support communities far and wide. Is it possible that government would rather us not be so optimistic so that they may enact more control? "Sustainability" maintains that aura of "Uh oh, we are running out of something - or everything. Better just hope we can sustain it." How about we just open up markets and reduce taxes and regulations so we can thrive? To me, sustainability is code word for "we give up." Forget that.

Additionally, as we see much of American history erased from the texts books in our schools, I believe it has a measurable effect on our view of the future. You have heard all the lines... "Those who refuse to learn from the past are doomed to repeat it."... "The more we know about the past, the more we can predict the future." Well if the past is portrayed only in incomplete terms, where does that leave us? Many are asking us to eschew capitalism in favor of more "certainty" in our future; via greater government programs. One tactic to win minds to this way of thinking is by revising our history to write out American Exceptionalism and write in America's shortcomings and mistakes. I say tell it all.

But don't leave out the greatness of our story - how we came together to form a new nation of historic and even EPIC dimensions. It had never been done! America truly is a miracle. We must tell our children that great men and women of optimism have always come together in difficult times to find solutions. We must show how the free market gives us the capacity and opportunity to do anything we set our heart and mind to do in this country. Because we are free. This grand bargain of security for less freedom - they can keep. The supposed future of "certainty" which limits risk, also limits opportunity. The notion of making everyone equal in the economic outcomes of their lives is a recipe for failure.

It has been tried and has never worked. In fact it cost not just billions of dollars, but over 100,000,000 lives in the 20th century. We must maintain our faith in the future. The facts of the market tell us this over and over again. See the evidence. An old joke in the USSR said, "In Russia, the future is predictable. It's the past that keeps changing." Let that sad joke of the Soviet Union never be said of America. Because if we choose to sit down and not correct those who rewrite or omit history, then they - not we - will write the future. Optimism must always be the only reality. Spread the word.

Come see check out our website at: http://jwafinancial.com/ and request a free consultation today

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Tactical Asset Allocation Can Be Successful - With the Right Model

Portfolio returns in excess of an index can be achieved through active investment management in two ways: security selection, and active (or tactical) asset allocation. Research shows that about 90% of a typical balanced stock-bond portfolio risk and return comes from Policy asset allocation - see Brinson et.al. (1986, 1991), Ibbotson & Kaplan (2000). Clearly, potential for adding value through actively managing asset allocation is at least as large as from active security selection. However, while active security selection is widely practiced, tactical asset allocation (TAA) has been largely overlooked or out of favor. Here, we discuss some of the reasons for this, and describe the process that should be followed in order to successfully perform TAA.

TAA is an investment strategy that centers on altering investment proportions to take advantage of differences in expected performance and risks of broad asset classes (such as stocks and bonds) or sub-classes (such as U.S. and global equities). Several requirements to the investment process stem from this definition. First, the responsibility for TAA must be placed with the group within the investment organization that spans across asset classes - typically the office of the Chief Investment Officer. Second, it has to be based on accurate, timely asset mix information (actual and benchmark). Thirdly, the effect of these investment decisions has to be measured as part of performance evaluation. Lastly, TAA decisions have to be largely based on systematic quantitative results rather than on judgment.

Because the implications to performance are so large, many investment managers already attempt actively managing their asset allocation, even if implicitly. You may hear this in your investment strategy meeting: "We want to be positioned defensively due to anemic economic recovery in the U.S." (or due to "debt crisis in Europe" or whatever the current concern may be), or "We would like to take advantage of the rally in equities." However, doing this implicitly, without the proper process and structure, is dangerously likely to result in underperformance.

Clearly, successful TAA requires timely, accurate calls on expected asset class performance. "Active management is forecasting", say Richard Grinold and Ronald Kahn in their well-known book Active Portfolio Management (1999). The authors establish the following relationship between active return (alpha) and forecasting skill, or information coefficient (IC):

a = s * IC * Score

The key to achieving good performance from TAA, therefore, is the skill (IC) of forecasting asset class returns.

This, of course, is not easy. Qualitative judgment is likely to be affected by the prevailing sentiment in the market which will be exactly wrong at market turning points. Many managers use a set of indicators to help determine future market direction. This is a step in the right direction, but at any point in time, there usually is about the same number of indicators that give a positive signal as negative. How do we know which indicators are currently relevant, and what the proper weights are to each? In addition, a set of disjointed indicators cannot produce a history of return forecasts, which is required in order to determine if the method has any skill. One needs to combine predictor factors into a consistent statistical model that produces return forecast series, correlating which to actual returns gives IC.

Numerous published studies have tested predictability of the stock market via factor models. Generally, they find little evidence of out-of-sample forecasting ability; small excess returns that are achieved by some models often don't justify the costs. It is common to interpret these results as not supporting the idea of actively managing asset allocation at all. But there is light at the end of the tunnel!

We attribute the lack of success of the forecasting models commonly described in academic literature to two reasons. First, while some of them are quite sophisticated from the statistical standpoint, they tend to miss important aspects of what works in investment practice. Second, researchers often limit the set of factors to only a few variables that are commonly described in macro-economic literature as drivers of business cycles. We found that using much broader set of variables selected empirically rather than fitting a pre-defined economic theory, is necessary to build a model with good forecasting ability. These variables should include economic, valuation and market factors employed by investment managers as predictive indicators. An example of a factor that is not common is the CBOE implied volatility index ("VIX"), which is known by practitioners to be inversely related to market returns.

Thus, we recommend that investment organizations develop return forecasting models that address these shortfalls, provided that the organization can devote proper resources to it. The focus should be on equities as the main source of return variability in a balanced portfolio.

Alternatively, an investment manager may wish to partner with a research firm that provides return forecasting. This solution has clear advantages for many managers. First, it is cost-effective - creating an internal research team to spend considerable time (likely years) developing models would be expensive, and success would not be guaranteed. So, outsourcing this from a vendor of return forecasts may be the only viable solution for sophisticated smaller managers. Secondly, immediate access to vendor return forecasts can potentially help improve client portfolio performance much sooner than an internal solution.

Books:
Richard Grinold, Ronald Kahn
"Active Portfolio Management: A Quantitative Approach for Producing Superior Returns and Controlling Risk" (1999)

Links:
Performance Analytics Inc.
Equity index return forecasting
contact@parmodel.com
http://www.parmodel.com/

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Commercial Property VS Residential Property

Cost

Commercial property purchases tend to be larger projects, requiring greater outlay than residential property investing. Deposits also usually need to be larger - for commercial properties the purchaser usually needs to put up at least 30 per cent of the purchase price. Interest rates on commercial loans also tend to be higher.

Compared:

Commercial: larger properties and usually a larger minimum deposit required, at at least 30 per cent of total purchase price.Residential: - smaller deposit required, usually at least 80 per cent of total purchase price but in some cases purchasers can borrow up to 100 per cent.

Returns

Net income for landlords tend to be higher for commercial investment, ranging around 7 - 10 per cent after costs. In part this is due to the fact that tenants pay for insurance, ongoing maintenance and other outgoings.

Compared:

Commercial - tends to attract higher net income. Tax deductions can be more substantial as depreciation tends to be higherResidential - investors usually need to pay all maintenance and associated costs.

Length of Leases

Commercial contracts attract longer lease periods. Most commercial leases are signed for three years or more.

Compared:

Commercial - leases are longer, being usually three years or more, and even up to 20 yearsResidential - shorter leases of around six - 12 months in length

Risk and Property Values

While historically, the majority of residential property has tended to double every decade or so, demand in commercial property can fluctuate with the business cycle. However, both types offer good capital growth opportunities for keen investors.

Compared:

Commercial property - property value growth is harder to predict, but risk can be minimised by choosing to invest in a popular and in-demand commercial areaResidential property - property value growth tends to be more predictable, with steady growth in demand pushing up prices over the longer term

Maintenance Costs

Most residential property maintenance is the responsibility of the landlord, while the leasor or the owner of the commercial property usually passes on responsibility for maintenance to the commercial tenant.

Compared:

Commercial property - the tenant has responsibility for ongoing maintenanceResidential property - the landlord covers maintenance costs for the property, though this can be negatively geared

Tenants

Residential properties are generally easier to let as it takes longer to find commercial tenants. However, commercial tenants tend to pay more attention to maintaining the property as part of their business, and this may even be a condition in commercial leases.

Compared:

Commercial property - commercial tenants tend to keep properties in their original condition or even improve themResidential property - residential tenants tend to be easier to find than commercial tenants

Both types of properties have their pros and cons and it's advisable to research the types properties well before you make an investment decision and start thinking about issues associated with purchasing such as stamp duty, home loan fees, property law fees, tax, and other issues.

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