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How To Build Wealth During Turbulent Stock Markets, Part I

There is Much Greater Geo-Political Instability Today than 20 Years Ago

In mid-2006, the global markets corrected a great deal. In the U.S., the Dow plummeted 4%, the Nasdaq about 6%, and the S&P 500 about 5% in a single week. European stocks posted their biggest drop since May 2003, and the FTSE 100 in the UK had its biggest two-day loss in 3 years. And that was just the beginning of very turbulent times in the global stock market that destroyed billions of dollars of cap...

safest places to invest money, achieve financial freedom, advanced wealth planning techniques

There is Much Greater Geo-Political Instability Today than 20 Years Ago

In mid-2006, the global markets corrected a great deal. In the U.S., the Dow plummeted 4%, the Nasdaq about 6%, and the S&P 500 about 5% in a single week. European stocks posted their biggest drop since May 2003, and the FTSE 100 in the UK had its biggest two-day loss in 3 years. And that was just the beginning of very turbulent times in the global stock market that destroyed billions of dollars of capital. On the other hand, during this time, in Asia, the HK Hang Seng index was up 22% for the year, the South Korean index was up 55%, the Australian markets were up 31%, and China was up 50% over their 12-month lows.

Then for the rest of the year, the U.S. and global markets grew even further and almost every investor had long forgotten about these drops until a historic 9% single day drop in the Shanghai markets triggered a global market decline in the 1st Quarter, 2007 (though the explanation truly is not this simple).

When we experienced the first drop in 2006, the U.S. was allocating $2 billion to shore up its borders, major conflict still was raging in Iraq and Afghanistan, and Venezuela had increased the top royalty rates on oil to 33% from 16.67% after raising this rate from just 1% in October, 2004. In Bolivia, Evo Morales had followed his friend Chavez’s lead in protecting national assets, and nationalized his country’s oil and natural gas resources. And in Mexico, political unrest, according to Subcomandante Marcos, was the worst since 1994 as Mexico neared its next Presidential election. Still that wasn’t even the worst of it.

In Iran, the threat of nuclear confrontation with Israel and the United States loomed, and in the U.S., record trade deficits, and a falling dollar waited ahead.

Well despite the recent bouyancy in the global markets, I still believe that we may see the worst to come. Why? Just read the paragraph above. Nothing much has changed in 2007 from back then regarding the above. So in response, I have been shifting significant portions of my clients’ assets into several areas for protection. But not just for protection but to profit greatly when more turbulence hits.

When severe market corrections occur, the biggest mistake individual investors make is to panic sell during these market corrections and then buy back in after the market bounces back significantly. That’s the worst thing you could do - Sell low and buy high -yet millions of investors responded exactly in this manner. But yet if you are mainly invested in Europe and the U.S., you need to rebalance your portfolio now because you will be punished for such short sightedness when other major corrections occur in the future or if this current one continues after a slight bounce higher this past week.

So What is an Investor to Do?

The first thing one needs to do is to stop listening to the advice of large investment firms. Investment firms will tell you that it’s impossible to time the market and that to remain fully invested at all times is a much better strategy. First of all, if you go back and read my blogs for the past couple months where I repeatedly warned people to prepare for a market correction, and specifically told people to start buying inverse funds on the U.S. index you’ll know that it is possible to predict market corrections. After all, I wasn’t the only person saying this.

The reason most investment firms tell you that it’s impossible to market time is that often they don’t get paid on non-invested assets, and even when they do, who would ever want to pay management fees on cash? Recently, friends asked me to take a look at their portfolios and to provide them with advice. What I saw was predominantly domestic portfolios (i.e. if the investor lives in the U.S. almost all the stocks our American stocks, if the investor lives in Singapore, almost all the stocks are Singaporean stocks, if the investor lives in London, almost all the stocks are U.K stocks, etc.). These are the types of portfolios that will get punished again in the future.

I remember reading an article in 2006 about a big producer at another American firm that shifted 70% of all his client’s assets into China, but all through Chinese mutual funds. I hate mutual funds and the thought of owning mutual funds in emerging markets (but that’s an article for another time). People should always own stocks, not mutual funds. Mutual funds are the lazy way out and you’ll get punished for being lazy. It’s just not the way to benefit from these rapid growth markets. In fact, I’m fairly certain that when the Chinese markets corrected these past couple of weeks , all of this manager’s client portfolios were severely punished.

So where should your money go? Due to all the political unrest, I’m looking at the defense sector. And due to all the geopolitical unrest, I’m looking at precious metals. Given the global market corrections, I’m looking for continuing opportunities in China of course, as well as some in Brazil, Mexico, Vietnam, France, Australia, the U.K. and Canada. However, the best protection in turbulent markets is really yourself.

What do I mean?

The single most critical factor for building wealth is undoubtedly to learn how to do it yourself.

If you think about it, when was the last time a friend of yours ever told you, “my financial consultant saved me so much money during these recent corrections it’s unbelievable!”. All I ever heard when I worked at these firms during strong downturns, was “every single one of my clients is down 25% this year.” Yet I know lots of individual investors that manage their own money that will come out of these recent corrections just fine.

To tell you the truth, the best protection your stock portfolio has against a strong market downturn is your own brain. Financial consultants that work at large firms neither have the time to adequately protect your portfolio against strong downturns and the bottom lines of the firms they work for are not adequately motivated by protecting accounts against market turbulence.

When turbulent markets happen, all the myths that global investment firms propagate are exposed. Market timing is bad; diversification is bad; foreign markets are risky; and asset allocation, not individual stock selection is important- all come to light for what they are – myths. Even if the Shanghai markets corrected 9% in one day of which some of these losses were recently recouped by rebounding markets, this correction is irrelevant if all the stocks you’ve bought in the Chinese markets were up 70% to 100% at the time the correction came.

During turbulent times, you’ll see that diversification is not important, but that selecting the right individual stocks in the right individual markets at the right time is what is truly important. Most financial consultants will try to spin losses by saying that diversification saved your portfolio from further losses, but the fact of the matter is that if they had been focused on the right stocks in the right asset classes in the right markets, instead of possibly having all profits wiped off the board by this recent correction for the fiscal year 2007, you would still be sitting on some decent profits. So what’s the best advice I can give you for protecting your stocks during turbulent times? Three words - Do it yourself.

 

How To Build Wealth During Turbulent Markets, Part II

I’m not really sure why but the private client wealth divisions of large investment firms by and large seem to ignore year after year investments in precious metals such as gold, silver, palladium, zinc and others. However, in turbulent times, this asset class is one of the most valuable. It’s not that the news doesn’t report on it. In fact, every night, in financial news reports, the closing price of commodities including gold is reported. However, at the end of the day, ver...

safest places to invest money, achieve financial freedom, advanced wealth planning techniques

I’m not really sure why but the private client wealth divisions of large investment firms by and large seem to ignore year after year investments in precious metals such as gold, silver, palladium, zinc and others. However, in turbulent times, this asset class is one of the most valuable. It’s not that the news doesn’t report on it. In fact, every night, in financial news reports, the closing price of commodities including gold is reported. However, at the end of the day, very few people ever seem to benefit from investing in the stocks that benefit the most during precious metal bull markets.

The average person does not understand the upside of investing in metals because it has never properly been explained to them. Many myths cloud the truth about metals as an investment vehicle.

Gold, silver and metals are NOT risky speculative investments if you invest in them properly.

The definition of speculation according to Webster is the following: “the assumption of unusual business risk in hopes of obtaining commensurate gain”. Speculation is one of the most incorrectly used terms in investing. Investors in general stay away from trying to profit from bull markets in precious metals because of its speculative stigma. However, what is never explained to most investors is that the great majority of risk can be mitigated by employing intelligent analysis and intelligent buying and selling strategies.

Therefore, these investment opportunities should not be rated speculative but more accurately explained as moderate risk, high return opportunities. If you don’t perform intelligent analysis and intelligent buying and selling strategies, then investing in large company stocks, typically described as the “safest” of all investments, can become highly speculative as well.

Large companies such as energy conglomerate Enron went belly up and investors lost every penny they had invested in this company. And in case you’ve forgotten the other “high quality” accompanies accused and investigated for fraudulent activity, in 2001 and 2002 alone, these companies included Adelphia, AOL Time Warner, Arthur Anderson, Bristol-Myers Squibb, Citigroup, ImClone, General Electric, JP Morgan, Lucent, Parmalat, Freddie Mac, Duke Energy, Dynergy, Enron, Global Crossing, Halliburton, K-Mart, Merck, Qwest Communications, Reliant Energy, Tyco, Worldcom, and Xerox to name a few. All were accused of falsifying their financials to make revenues or cash flows look better than they actually were.

Recently Hyundai, General Motors and Apple were all forced to restate their financial because they were inaccurate. In fact the flow of highly inaccurate financial statements from companies for the past several years seems to be non-stop. In fact, the financials of so many major companies have been such fantasy, presenting pictures of what they would like their company’s financial picture to look like versus what it really is, that I’m not even sure how much credence I want to give them when evaluating stocks.

How China and India are Likely to Affect Gold Markets

People are unaware of how deregulation in major markets like India and China, will advance the gold market in the next five to ten years. Like every other asset, precious metals go through cycles. However, the cycles precious metals experience tend to be much longer and much more drawn out than the cycles that stock markets undergo. For example I can only recall two great bull markets for gold and silver in my lifetime, including the one we are in the middle of right now. The last one was when gold rose in price from about $100 an ounce in 1976 to $850 an ounce in 1980 and silver peaked at about $50 an ounce that same year.

Over the next 21 years, the metal markets declined. Gold declined from its peak of $850 to a low price of about $250 and silver slid from its high of around $50 to $4. If we take the rate of gold and silver in 1980 and adjust those prices to today’s dollars for inflation, gold’s peak price was over $2,000 and silver was over $100. Looking at these figures, it is easy to see that it is not far-fetched for gold and silver to increase much higher than their current highs in mid-2006, although we will undoubtedly see one or two big pullbacks in price before it climbs higher.

Now let’s consider the huge new markets gold has been exposed to recently. Recent studies show that very few Americans still invest in gold as a long term holding. However, this is not the case in Asia. As a driver of gold prices, several things stand out about Asia. First of all, Asia is a saving culture, unlike the debtor culture of America. Aggregate saving deposits in India banks in 2002 was estimated to be about USD $200 billion, and in China, USD $1.2 trillion. Indians regard gold as the second most important asset of wealth storage after savings deposits. Up until 1990, gold bar holdings had been forbidden in India.

In 1993, the Indian government started allowing foreigners to bring 10kg of gold into the country on an annual basis, and in 1997, they increased this annual allowance to 20 kg. To complete the deregulation of gold in India, in the 2000’s banks introduced futures contracts, commodity contracts, and gold accumulation plans. As a result, from 1992 to 2002, India and Japan (spurred by investor’s fears of the Japanese banking crisis) hoarded half of all gold bar purchases in the world. With gold such an important part of India’s culture and with such vast amounts still held in savings deposits (USD $200 billion), the potential for significant growth of gold purchases in India still remains.

Now let’s look at China. In China, the Shanghai Gold Exchange, which established the gold spot market in China, only opened for live trading in October, 2002. Furthermore, up until August, 2001, the Chinese State Price Bureau fixed the prices for all gold retail purchases. Now gold retailers are allowed to set their own price dependent upon the quality of the gold and the associated craftsmanship. Finally, other barriers to the international gold trade in China were removed in March, 2003, effectively allowing the price of gold in China to mirror prices in the international market for the first time in their history. If Chinese appetite for gold approaches India’s, much of the private world’s gold supply could be removed from the public market.

But China’s similarities to India don’t stop there. Similar to India, China also has a deeply-entrenched savings culture. Private savings estimates several years ago were about USD $1.2 trillion, with USD $81 billion of these cash deposits believed to be held in U.S. dollar deposits. In India, after the government deregulated the gold trade market, jewelry and gold bar demand respectively exploded from 281 tonnes and 10 tonnes in 1991 to 658 and 116 tonnes in 1998. This reflects an average annual growth rate of 16% for gold jewelry and 30% for gold bars. If we look to the deregulation of India’s gold market as a model for behavior in China, then indeed, the potential for China to drive global gold market prices much higher remains very realistic.

As we stated there are at least six different asset categories that you can invest in to benefit from a precious metals bull market. Some categories will actually most likely lose you money, some will earn you decent returns, some will earn you phenomenal returns, and some will yield legendary returns that may allow you to retire early. Just knowing that gold stocks is a great place to invest your money in is not nearly enough. Sometimes there literally can be differences of several hundred percent in returns between the major gold stocks. You won’t likely see such huge differences in any other asset class. For this reason, ensure that you learn everything you can about gold stocks before you take the plunge. Many companies just add the word “gold” to their name to try to capitalize on the naivete of investors and are terrible investments. So though there are phenomenal opportunities, buyer beware!

 

How To Evaluate a Good Stock Market Timing System

How to evaluate a good stock market timing system to enhance your investment returns.

stock market timing, timing the market, market timing, investment

Copyright 2006 Equitrend, Inc.

No matter what investment discipline you use, there are three important variables for measuring your success - peak-to-valley drawdown, beta, reward/risk ratio. The first and most important factor is your measure of risk. Performance volatility is a measure of the variability of an investment's rate of return.

Specifically, it is the standard deviation of the sample set of monthly returns that have been observed for the investment over the interval being considered. A simple way to measure a good stock market timing system is to calculate the largest peak-to-valley drawdown that has or would have occurred in the last five years. This drawdown is your measure of risk.

Second, is your beta to the overall market. Beta is an important variable that measures portfolio or timing system volatility as compared to an index. Most Betas are calculated based on the S&P 500 index. A beta of one tells you that the system has the same volatility (i.e. risk) as the S&P 500 index. A beta of two tells you that the system has twice the volatility as the S&P 500 index.

By actively managing your money, your stock market timing system should allow you to reduce the beta of your portfolio as compared to the index you are trading and substantially improve your returns over time.

Third, is your reward/risk ratio, which calculates your reward as compared to your risk. In order to calculate this, you need to know your average rate of return. A rule of thumb is that your return should be at least twice as large as your risk. For example, if your largest peak-to-valley drawdown percentage over the last five years is 15%, your average rate of return should be at least 30%. In other words, your reward/risk ratio (30%/15% = 2) should be 2 or greater.

The best stock market timing system for you will depend a lot on your personality, specifically your tolerance for risk. You might think a trend timing system that averages 80% is a great system, but what if I told you that system had a risk potential of 35%?

Most people cannot tolerate a system that decreases their investment capital more than 20%. Your tolerance and ability to accept risk should help you identify a stock market timing system that’s right for you.

There are only a few systems available that really work. Most come and go like mayflies on a warm summer’s day. When evaluating a timing system, it’s important to consider all of the above factors plus whether or not the system has survived and prospered over at least a five year period. If they’ve made it through the last five to six years, you’ve likely found a good stock market timing system.




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