Step One- Asset Allocation

To begin you must take a close look at your own personal financial situation and determine what your investment goals are. You must take into consideration your age, how much money you have to invest, your future financial needs and how much time you have to build your investments. A 24 year old single individual fresh out of university will need to devise a very different investment strategy than will a 45 or 50 year old married individual trying to pay off a mortgage and getting ready to send a son or daughter off to college.

You also need to consider your risk tolerance as well as your personality. Are you a big risk taker or a little one? Are you willing to invest and take the risk knowing that you could lose but could also reap greater returns or does that make you shudder inwardly? Both of these items are connected and play a role in which type of investments you should select.

Once you are aware of your present situation as well as your future requirements for capital and your risk tolerance you will then be able to decide which asset classes you should allocate for your investments. Risk/return tradeoff is the name given to the principle of the possibility of greater returns at the expense that comes with the greater risk of losses. This is different for everyone.

Are You a Conservative or Aggressive Investor?

The more risk you are willing to bear in terms of your portfolio the more aggressive investor you are. If this describes you then you should concentrate more of your attention on equities and less on bonds and other types of fixed-income securities. On the other hand, the less risk you are willing to bear, the more conservative will your portfolio be. You must define yourself as an investor.

The primary goal of a portfolio that is conservative is to protect the value of it. An example of such a portfolio includes 70 to 75 percent fixed income securities, 15 to 20 percent equities and 5 to 15 percent cash and equivalents.

An aggressive or moderately aggressive portfolio is geared towards those who have an average risk tolerance. The goal of this type of portfolio is to strike a balance between income and capital growth. It might look something like this- 50 to 55 percent equities, 35 to 40 percent fixed income securities and 5 to 10 percent cash and equivalents.

Step Two- Achieving the Portfolio You Desire

After you do what is required in step one, which is to determine the proper asset allocation for your portfolio you then need to divide the capital you have amongst the asset classes you have chosen. On a very elementary level that means breaking down bonds into the bond class and equities into the equity class, etc.

You can also take it one step further and break down asset classes into subclasses that come with different types of risks and different potential returns. For instance you might take your equities and divide them between different sectors and market caps. You also might divide them between domestic stock and foreign stock.

There is more than one way to select the assets and securities that will satisfy the asset allocation strategy you have chosen. It is important that you analyze both the potential as well as the quality of every investment before you purchase it.

Stock picking is one option. You should select stocks that are in line with the amount of risk you are willing to take in the equity section of your investment portfolio. Consider such factors as stock type, market cap and sector. Make use of stock screeners to analyze companies and then create a shortlist of your top choices. If you go this route then you must regularly monitor the price changes that occur in your holdings as well as to keep up-to-date on the latest news in the industry.

Bond picking is another option. When selecting bonds consider such important things as the bond type, the bond rating, coupon, maturity and the general interest rate environment.

As far as mutual funds are concerned, be aware that they are available for a vast range of asset classes. Mutual funds make it possible for you as an investor to have both stocks as well as bonds that are well researched and chosen by professional fund managers.

If you do not wish to invest your money in mutual funds then exchange-traded funds (ETFs) are another alternative worth considering. ETFS are comparable to mutual funds that can be traded like stocks. They represent a large assortment of stocks that are generally grouped together by capitalizations, sector and country. However ETFs are not actively managed but what they do instead is they track a chosen index or other assortments of stocks. ETFs can cover a wide range of assortment classes and are an excellent means of rounding out a portfolio.

Step Three- Taking the Time to Reassess Portfolio Weightings

After your portfolio has been established it then becomes time to analyze and rebalance it on a periodic basis. You need to do this because movements in the market can sometimes cause the initial weightings you have to change. In order to assess the actual asset allocation of your portfolio you need to quantitively categorize all of your investments as well as to figure out the value proportions in relation to the whole.

Over time other things can change as well. Your financial situation can change as well as your future need for capital and your risk tolerance. These things can change at different times throughout an investor’s life. When any of these things become altered you need to adjust your portfolio to reflect these changes. For example, if your risk tolerance has gotten lower then you may have to reduce the number of equities you have.

To rebalance your portfolio you must figure out which of the positions you hold are overweighted and which are underweighted. To use an example, if 30 percent of your current assets are in small-cap equities and your asset allocation says that you should have approximately 15 percent of your assets in this class then you need to rebalance. When you rebalance you take a close look at your position and from there figure out what you need to reduce and what needs to be allocated to different classes.

Step Four- Doing a Strategic Rebalancing Act

By the time you reach this step you know which securities you require and which ones need to be reduced and by how much the reduction must be. You also know which securities are overweighted and underweighted.

When you decide to sell some of your assets in order to rebalance your portfolio consider the tax implications this brings with it. You also need to consider what the outlook of your investment securities are. If you have reason to believe that you have overweighted growth stocks that are about to drop then it might be in your best interests to sell some of them even if the tax implications say otherwise. To gauge the outlook it helps to look to research reports as well as listen to the opinions of financial analysts.

Investment Diversification Matters

Always bear in mind this rule of thumb for building a profitable portfolio- diversify as much as possible. If you don’t put all of your eggs in one basket then you are in a much stronger position investment wise. Always maintain diversification. Having securities from each asset class is important but it is not enough. Instead you must diversify within each asset class. Take the holdings you have in an asset class of your choice and spread them across a variety of subclasses as well as sectors of industries.

To achieve the diversification you need to be as profitable as possible and to see your money grow it is wise to use both mutual funds as well as exchange-traded fund (ETFs). These will make it possible for you as an individual and average investor to see the economies of scale that characterize large fund investors.

Depending on the performance of an individual stock your potential return could double or could quickly become worthless. Volatility then defines the degree to which a value of an investment tends to fluctuate over time.

One basic principle of investing for the beginner or the veteran stock picker, risk and volatility go hand in hand with investment returns, the higher the risk, the higher its volatility and potential returns. Investments with high risk and volatility have a greater chance of losing value is held over shorter periods of time, say less than five years. The effect or chance of a stock increasing in value over longer periods of time worked the same way.

Risk tolerance is defined by the amount of risk that you, the individual investor, are willing to withstand and be comfortable with in your investments. Not identifying what kind of risk tolerance you possess can surely lead to investing disaster.

Determining your risk tolerance is easy once you identify two very important factors. They are your time horizon for your investments, essentially how long you plan to hold your investments, and your personal response to risk. That means, what decision are you likely to make when you’re investment loses 15% in a day.

Obviously the longer you can hold your investment the more risk tolerance you are able to withstand. The longer period of time keep you from making hasty decisions over short-term ups and downs in the price of your stock. Longer-term can be defined as 10 years or more. Investors with moderate time horizons, say 5 to 10 years generally have moderate risk tolerance and should invest in growth and income by investing in stocks, bonds and cash equivalents.

Investors were shorter time horizons one to five years generally have low risk tolerance should invest almost entirely for income by buying bonds and cash equivalents. There is some correlation between risk tolerance and age however, that doesn’t apply across the board to everyone. Identifying your personal response to risk should include an examination about how you feel personally about taking risk in losing money. If you avoid risk in everyday life chances are you should avoid it in your investment strategy.

For example if you worry on a daily basis, that will easily trans-late into worrying about your stock investments. If you enjoy risk and don’t worry easily you should feel comfortable investing for growth or trading options online assuming you have a longer time horizon.

One of the best ways to identify how you will respond to market fluctuations and risk is to own a stock. Let’s say an issue at $20 per share. Over three months the stock appreciates and gains four dollars a share to $24. You begin by feeling pretty good about yourself having picked the winner and you are enjoying a nice gain. Now, through no fault of your own, earnings start to come out by companies related to the industry of your stock. Since they are not good your stock loses eight dollars per share over four days. Ask yourself this question, how would you react in that situation? If you can answer this question and answer this question truthfully you are on your way to identifying your investing risk and risk tolerance factors. Not everyone is comfortable trading in Forex Mini Accounts, and not everyone wants to trade in bonds. Everyone fits in somewhere, find your place and you will be a much happier investor

The markets just keep getting disappointing news.

This past week a bunch of banks reported worse than expected earnings and loan losses that are still growing. Bank of America saying they will possibly need billions more in aid from the Federal Government. Then besides all of Thain’s earlier missteps, came the revelation this past week that he spent 1.2 million redecorating his office!! All I could do was shake my head in utter disbelief. What’s 1.2 million when the company (Bank of America) that your are second in command of is getting Billions of dollars of taxpayer money from the Federal Government.

Microsoft released a disappointing earnings report and because of the market volatility they are unable to provide guidance for revenue or EPS (earnings per share) for the rest of the year.

Then there was a decline GDP(Gross Domestic Product) in Q4 for both China and the UK. This means that growth is slowing which is a bad thing.

To top it off housing starts fell to an annualized rate of 550 thousand units, the lowest on record going back to 1959. Initial jobless claims jumped back up to 589 thousand, which is a 26 year high.

Another ponzie scheme was discovered in California. Approximately 1000 people lost 52 million dollars.

Should I keep going on or just quit now? There is just no good news out there.

If the government announces plans to create a bad bank, that’s a bank that buys all the toxic loans from the troubled banks to get the loans off their books, that might put a floor in the financial markets and turn things around. It’s an idea that has been kicked around. We’ll have to wait and see.

Back on November 7th I wrote in my Stock Market Updates “Obama plans to raise the amount of federal money spent on science and technology research, to spur innovation and job creation. He will be seeking approval to spend 150 billion dollars over the next 10 years on clean energy technologies, and 10 billion a year over the next five years on healthcare information systems. He has pledged to double federal funding for basic research in science and technology, this includes embryonic stem cell research.”  As bad as the market has been the last few weeks, stem cell biotechs and healthcare stocks have been moving up. Geron’s announcement this past week about starting stem cell trials in humans for spinal cord injuries really caused a move. Keep in mind it is only a 10 person trial and it’s many years from being marketed. I am not recommending that you go and invest in these stocks, do you own research and investigation. These are sectors to keep your eyes on.

Some economic events this week are:
Existing home sales Jan 26th
Consumer confidence Jan. 27th
Durable goods orders Jan. 29th
Jobless claims Jan. 29th
None of which I expect to be good or surprise us with better than expected numbers.

As always whether you are long or short may all of your trades be profitable!!

Becky

First off beware of days where the market rallies. Changing the direction of this market will take more than a day or two of positive gains. A novice can look at a stock chart right now and spot a trend. Trust what your eyes see. In her Weekly Stock Market Updates Becky Smith accurately predicted lower lows recently, and we may be headed lower.

The Sidelines Is Not A Bad Place to Be

There are times when holding cash is a good thing. Consider at least for now paper trading stocks. This is a great opportunity for you to hone your trading skills. Stocks that reach new lows more often that not go lower and trying to find a bottom on individual stocks can prove costly.

Watch The News

This market is being driven by news. Look at what happened to the market late Friday when word leaked out of a new cabinet member for President Elect Obama. His likely choice for Treasury secretary, Timothy Geithner rallied the market on that news. Will that be a sustained rally?

Patience, Patience and More Patience

This market will call for investors to be patient beyond what has been normal. The markets will turn around. They always do. However, beware of misleading signals. In the end there will buying opportunities. Watch what the institutions do and follow their lead. It is a time for bears , but the bulls will reappear.

To all of you out there that would like to try your hand at day trading, you need to keep some things in mind. The market has been in a downtrend since December. We have been in a Bear market for the past couple of months. A bear market is when a market index (Dow, S&P 500, Nasdaq) is down over 20%.Right now the indexes are all down between 30% to 50%. In a down market, most stocks are going to go down. There will be individual stocks or sectors that pop on news, but then they will follow the market back down, for example GOOG, ISRG, POT (some of Wall Streets darlings) these companies beat their earnings expectations in the last couple of weeks, but are selling off because the market is trending down. Because of the reasons I stated above I have not been going long with my day trades, I look for stocks to short that have released bad news after the close.

Some things that I look at when I locate a possible short is the float. The float is the number of shares available for the retail investor to trade. The smaller the float the more unpredictable, and wild the swings. I usually do not short a stock that has less than a 15 million share float. I check the volume, I like 75,000 minimums, more is better. I look at the PE (price to earning ratio) the higher the pe the more expensive the stock the better chance it will come down a lot, on bad news. Also check how much of the float is shorted the higher the percentage there is a good chance that a big drop in price they will start covering and the price will start going back up.

If you do not have the time to sit at your computer and watch a stock that your thinking about day trading do not do it! For example last night XYZ reported earnings after market close. Their EPS was .25 vs .26 analyst estimate, their revenue was 130 million vs 142.8 analyst estimate they also issued a downside full year forecast, 562.1 million vs 582.1 analyst estimate.(This is the kind of news that I personally look for). Their float is 64.49 million, average daily volume is 1,059.310 shares traded, and the short ratio is 18.10%. This morning you could have shorted shares of XYZ at 4.90 at the open and within 15 minutes covered your short and made hundreds of dollars, depending on how many shares you shorted.. The share price fell to 3.70 a share within 15 minutes before recovering some. It is best to take your profits while you have them. When the price is falling fast or going up fast and you have a profit take it, don’t wait hoping for a little more. Over reaction is something that happens on good news and bad news, and the price usually adjusts.

It could be that the market has made a bottom and is going to start to rally again, we have had our best week in a very long time, but it was in the worst month that the markets have had in years. Next week will be interesting, with the election on Tuesday you might want to wait and see who gets elected and how the markets react. The job numbers are also being released on Friday, which could affect market direction.

To anyone that is just starting to day trade I would suggest that you paper trading stocks and see how you do before risking your money. This is not an easy thing to do consistently. There are also games that you can enter on the Internet and you can practice your strategy and possibly win prizes and money in the process. Wallstreetsurvivor.com has Online Paper Trading weekly and monthly games going and CNBC is starting a contest November 10.

However you trade short or long, may all of your trades be profitable!

Just like we have said, day trading takes lots of research and experience. We hope to have Becky Smith back as a guest columnist. If you would like to read more from her leave a comment and we will forward them to her. Becky is developing her own website, The Stock Trading Housewife, thanks Becky

Buying Stocks On Hot Tips

Begin buying stocks because someone, a friend, a relative, or a stockbroker gave you a hot tip. Buying stocks is not like buying a lottery ticket, although many people buy stocks the same way. This is gambling and investing should never be confused with gambling. Investing properly require research in the company and research in the market. Failure to do both will guarantee failure, and subsequently lost money.

Buy Stocks Because of Name Recognition

Many people think they are buying stock in huge corporations and that will minimize the risk of losing money. Nothing could be further from the truth. Filings for bankruptcy protection occur everyday and that includes large corporations. When you think to yourself, this company is too big to go out of business, remind yourself of Enron.

Trust your investing decisions with a stranger

As in any business there are unscrupulous individual who prey on unsuspecting victims. Before you hand your resources over to anyone, make sure you have researched their background and their historical performance. Do not rely on their word as the final say. It is likely that you have worked very hard for your money. Saving money is difficult and requires sacrifice in today’s economy. Investing money in the stock market requires that same kind of diligence.

Buying Stocks That Have Recently Fallen in Price

Many beginner investors choose stocks because they are perceived to be cheap. Financial markets often affect stock price. However more often stocks that have fallen out of favor have done so because of the company is not on firm financial ground. Bottom fishing often results is falling further to the bottom. Stocks that have reached new lows more often than not go lower.

Buying Penny Stocks

This is a favored place for beginning investors to begin with investing in stocks. The reasons are simple. Penny stocks are priced right for new investors. Beginner investors are told, 20,000 shares of XYZ can be purchased for pennies per share. The immediately think the stock needs only to appreciate in price a few cents to double their money. The lure of easy money draws then in and frequently the loss of their investments teaches them a lesson. Concentrate on stocks that are proven winners. Leave the speculative stocks to the speculators and train yourself to become an investor.

There are many online brokerages that have a system on place to paper trade stocks. You start with a hypothetical sum of “money” and place buy and sell orders according to your strategy for a given security or stock, You place your buy orders as you normally would except you are not risking real money, this the term paper trading. Sell orders work similarly.

Paper trading allows you time to research companies and essentially trains you to pick stocks according to your criteria.. For example, buying XYZ at $12.00 per share. Determine why that is a good entry level. Why is this stock poised for a move? Are good earnings due? One of the hardest things you will do as a stock trader or investor is planning an exit strategy. Why is that? In a word greed . There is nothing mire exhilarating than purchasing a stock and watching it make a run of 20% over the course of a day. Contrarily there is nothing more frustrating than watching a stock head south and you cannot figure out why. This is why before you buy a stock it is advisable to have an exit strategy. Paper trading can help you to prepare yourself to make these decisions.

Now for a word of caution. Paper trading does not expose a very important component of trading with real money. Were it not for emotional decisions, everyone might be able to make successful stock trades. However we are humans and we tend to make emotional decisions. The stress level is just not present when paper trading stocks. Beware of building a fable confident attitude when you transfer your money to a real trading account.

Still the positives far outweigh the negative as paper trading stocks allows you to get familiar with the processes to become a successful stock trader.

Day Traders

Traders that participate in day trading are called day traders. Day trading is a very risky trading style. Day Trading by definition is the buying and selling of a security within a single trading day. Stocks are never kept overnight because of extreme risk of prices changing to the detriment of the trader. The rewards of a day trading strategy can be substantial. The risk follows suit. Remember anytime the reward of trading any equity is great, conversely the risk carries the same weight or more if things go south. Ill give an example. I explored day trading a a strategy briefly in my investing career . A stock was purchased at 10 AM one Friday morning priced at $ 8.32 . 2000 Shares were purchased. The stock quickly rose to near $9.00 one hour later. The stock was held. Why? Pure and simple greed. If it went that high that quick perhaps it would go higher, right? That’s the problem with most beginning day traders. There are ways to make money with dat trading but it is not for the faint of heart. By the way the stock mentioned above was sold at the market close that day at under $7.50 a share, money lost and lesson learned

Long Term Investing

Long Term Investing on the other hand reduces your risk substantially and your stress level. Thinking of your investment on a long-term basis, takes away the day-to-day monitoring, even the minute-by-minute monitoring required in day trading. So what happens if your stock goes down on price? Market declines are a normal part of the equity investing cycle. So long as the story behind the stock is still good, market downturns can provide investors with buying opportunities that can add to their long-term growth potential. Stock experts say over the long term the stock market is still the place to put your money if you’re looking for the best returns. Here is another example , albeit one that has a measure regret. There was a day when IBM was the bell weather stock of the Stock Market. As IBM went so did the market. IBM simply controlled the comuter industry. I had read about a company named Dell Computers and did some research on the company. I decided no one could compete with IBM. I was wrong obviously , but the point is what if I had invested just $ 1000.00 dollars in Dell on that day and held the stock. I will figure out what it would be worth today and post in another article . Suffic to say it would be a significant amount.

So before you invest your hard earned money it is best to learn a few important principles to reduce your risk. By the way what is your risk tolerance? We will cover that in our pages. First and foremost it is important to establish your goal for investing and your expectations for your return on those investments.

Lets say you were living in Alaska, I was in Texas, and I invited you over for dinner. The first thing you would ask is for directions to my house. Imagine if I told you, oh no worries I live in Texas you’ll find me. Seems impossible doesn’t it? The same thing is true of investing. Without road maps your chances of arriving at your destination, in this case your investing goals, the chance of success are greatly diminished. You must have a plan, and then work your plan,