You know that past returns are not indicators of future performance, right? You’ve read that on a billion mutual prospectuses. Nonetheless people tend to use their past returns as their primary motivation for selecting new ventures and speculations.

This is probably a combination of everyday human nature, the historical charts and graphs they feed us, and the shortcomings of available information for retail investors, like you and me. You see, mutual funds give very little information for people to evaluate them by, so we take what we can get and we roll with it. This is far from the ideal investment strategy.

Past returns are insufficient primarily because they only paint a very small picture of the overall investment management picture. Past returns are incapable of telling you how those specific returns were made, whether or not they were consistent with the strategy of the investment manager, or even why the investment manager decided to choose the assets that he or she chose.

Given the option to choose, would you choose an investor who made 10% by following his own preferences and investment strategy, or an investor who made 12% but did so without following any clear preference or strategy? The correct answer is to choose the first investor, who followed a strategy. The first investor in the example set out to achieve returns by following a clear path, where the second investor did not. If the second investor made a 12% return, it was purely by luck.

So how do the pros in investing choose their investors?

The best way to answer this question is to turn to the managers of premier endowment funds at prestigious universities such as Stanford, Harvard and University of Pennsylvania. Between them, these prestigious managers oversee more than hundreds of billions of dollars in funds, meaning that they have an obligation to make the right choices.

When choosing stock investment managers, these premier endowments are looking for three specific things:

1. Excellent risk-adjusted returns.
2. Compelling rationale for investing.
3. Adherence to a stated style and preference for investing.

While no one can be completely immune from loses, investment managers that score high on all three of these dimensions are skilled rather than lucky, and therefore are much more likely to exhibit returns that are consistent.

Why should you be settling for less?

kaChing is releasing a brand new proprietary metric that is inspired by premier endowments and that they believe to be a better solution to evaluating rock star investors. They call it the Investing IQ.

There are 3 components making up the Investing IQ:

1. Risk adjusted returns based on the information ratio.
2. Quality of rationale for your positions.
3. Sticking to strategies.

They then combine your individual score for each of these components, assigning a score out of 100, where higher is better just like with school grades. Is it going to the change the face of investing?

Photo Credits: vramak

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I have a passion for personal finance… I can’t get enough…  I read about it, I think about it, and now I write about it.

Why does the Internet need another personal finance blog? 

All personal finance blogs that I have read vilify debt, demonize it even… While such a stance is important for those unfortunate individuals laden with debt without the cash flow to pay it off, in my opinion, the propagation of this ”truth” is the single biggest travesty to occur to the middle and lower classes since the time of feudalism.  What ever happened to the American Dream?  It is being buried in the avalanche of the debt snowball.

The American Dream isn’t about scrimping and saving every penny like a frugal miser to pay your debt (unless it makes you happy.)  It is about Life, Love, and the pursuit of happiness.

Life — Enjoyment of and a passion for are my expectations for my experiences…

Love — Money can’t buy you love. But having money will give you the free time to purse love and romance and passion… See Life.

Pursuit of Happiness — See Life and Love.

I’ll be the first to admit that I am an American consumer.  I have a house, a vacation house, 2 nice cars, a boat, a gym membership, I graduated from a first tier Ivy League institution, I belong to a secret society, I belong to one of the most exclusive country clubs, and hopefully one day at least partial ownership of a personal jet (dare I even dream my very own island?).  That I have used other peoples money for leverage in my pursuit of happiness does not make me a bad person.

To me the American Dream is all about leverage.  Money, income, cash flow, interpersonal connections, and even debt are but resources to be leveraged to create monetary wealth.   Monetary wealth brings freedom of time and freedom of movement.

In the end, even the wealth is a resource to be leveraged.  One personal finance writer I happen to agree with is LazyMan…  He often talks about multiple income streams and alternative income.  Not only should you diversify your assets, but you also need to diversify your income.  The classic networth equation is that net worth equals assets plus income minus expenses.  I actually think that balanced and diversified wealth comes from a 5 part equation, networth equals appreciable assets plus income producing assets plus income producing debt plus asset producing debt minus cost of living minus debt maintenance.

The nuance of this equation is that if one is taking on debt to maintain a cost of living then one is clearly living outside of their means… For these individuals and families, Dave Ramsey and the debt snowball might be important…  If on the other hand you are producing long term net worth gains with your debt then you are living the American Dream.

Ask yourself did the Rockefellers or Carnegie or JP Morgan or Vanderbilt or the Kennedys or the Donald achieve wealth without debt?

Which brings me to the travesty of the debt snowball.  I mentioned above your cost of living must be below your income, but there are two ways to achieve balance.  Cost reduction and the Debt Snowball is clearly one path, but that path also has a limited ability to produce wealth.  The way to wealth is through increasing your income, not limiting your expenses.  The path to stability is diversification of your income, not eating only Top Ramen.  The way to get Rich is to leverage Credit Debt and Loans to build a diversified portfolio of income producing assets, not slave away paying interest on your groceries to a large conglomerate bank.

Good luck on your personal journey and I hope you enjoy my blog.

Originally posted 2008-11-14 16:27:20. Republished by Old Post Promoter

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The average person usually tries to struggle with their finances year after year and only visits an accountant a few days before their taxes are due. By this point, it’s up to the accountant to try to piece everything together and they won’t be able to offer much help when it comes to managing your money. The fact is, most of us could use the help of an accountant or a financial planner. The question is – do you NEED one?

Let’s take a look at a few scenarios that answer this question. Accountants and financial planners definitely serve a purpose but they may not be necessary if you already have a good grasp of solid financial techniques. But, before we go any further, let’s get to the scenarios.

Scenario #1 –

You’re just starting out on your own. By this point in your life, you’ve got a new job, a boat load of student loans and your whole life is years away, right? Wrong! If you don’t have a basic grasp of good financial practices, this is the worst time of your life to sit idly by. An accountant or a financial planner is incredibly helpful during this stage in your life and can start you on the path towards financial independence. If you have trouble balancing a checkbook let alone planning for the future, there really is no question – you need an accountant.

Scenario #2 –

You want to get into investing, but you’re really not sure how to get started. Many people make the mistake of hooking up with a broker that may not have their best interests in mind. You would be better served by visiting a financial planner or an accountant that specializes in handling investments to get an idea of where you need to start and where you want to end up in a few years. By taking the right step at this juncture in your life you can save yourself a lot of heartache and financial woes.

Scenario #3 –

You already have multiple streams of income coming in and you’re pretty much a whiz at finances. In this case, you may not need an accountant, since you’re already capable of handling most things. However, you may want to seek out a financial planner to determine whether or not you’re missing out on some opportunities that could increase your wealth further. If you have not yet diversified, this is a very important step to take. We still recommend using a certified accountant for tax preparation, even if you are a whiz at finances, simply because they have more experience in handling the complex US tax code.

Scenario #4 –

Finance???? I’m lucky to have money by the end of the month! If you’re just getting by, you may not be able to afford an accountant just yet, but you definitely need some help. Your best bet is to visit your local library and start reading everything you can about the art of managing your money. This will help you start out on the right path until you can afford to get an accountant to help you.

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Originally posted 2008-11-12 15:44:31. Republished by Old Post Promoter

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• How to Stay Focused With Multiple Streams of Income One of the main problems facing those that have multiple streams of income is managing them. You can start to feel a bit like a juggler and chances are, you may be neglecting areas that could be performing better and making more money. Focusing can be tough, but there are......
• Managing Your Finances and Your Future One of the hardest things for many of us to do is to manage our finances properly. It can be hard if you’ve had no training and you’re used to just spending freely, whenever you want. There are thousands of people out there that can’t balance their checkbooks let alone......
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• Roundup for week of 13 May 2007 Here you go with some links of interest from this past week:Free Money Finance asks where folks would cut their household budget if they had to.All Financial Matters answers a reader's question as to whether an early 401(k) withdrawal makes sense.Blueprint for Financial Prosperity doesn't want to be rich.Consumerism Commentary......

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With all of the hype surrounding Robert T. Kiyosaki’s book, Rich Dad Poor Dad, I fully expected a life changing read that would open new horizons and unlock the mysteries of the wealthy. What I got was a nice little parable with very little actual advice and a whole lot of pep talk. While there is absolutely nothing wrong with getting people fired up about making money, it won’t do them much good if they can’t put the advice into action right away.

My main complaint with this book is that the techniques mentioned in it are really only useful for those who are in their early 20’s and willing to go the long haul when it comes to making money. I think the majority of readers are those who are already established and need to find a way to get more money for retirement or as a way to break free from their dreary jobs. Most of the focus appears to be on ways to make money that are already well known.

We all know that taking money and putting it into high interest bearing accounts will pay off eventually. We all know that the wealthy usually have many assets. What we don’t know is how they get them, how they keep them and how they keep their money rolling in. You don’t play high stakes poker with interest. You have got to be willing to get out there and put your money on the table and take that chance at winning the pot.

While this book is a great resource for teenagers and those just starting out in life, I really can’t recommend it to those who are looking for a path on the way to becoming wealthy. It’s already pretty much an accepted fact that watching your money and living frugally is a good way to save and amass wealth. But how you do get that wealth in the first place?

In order to get money, you’ve got to have money. For most of us, who don’t have a rich dad, that either means waiting for 20 years to have a savings account that we can actually work with, or it means taking that chance and leveraging debt in a smart way. This book was very anti-debt, which is a good thing for some people, especially if they are caught up in bad debt. However, it did not address good debt appropriately enough and the benefits that it can bring if managed correctly.

Most of the rich got that way by leveraging their debt when they first started out. It’s one thing to be born wealthy, but somewhere along the line in that family, somebody had to take that risk that would eventually pay off to secure the futures of their descendants. Leveraging debt to make money is the oldest method of finding financial freedom. I wish the book had gone into more detail on this premise instead of focusing on what most people already know.

Originally posted 2008-11-13 16:14:19. Republished by Old Post Promoter

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The true, most basic motivation behind investing is to grow our investment. People who have invested before will take their time, looking at the differing companies and the market, trying to predict how a stock will do in a year or two. Those investors whom are without the experience to pick must rely on the advice of others in order to pick the stocks they go with. The market is such that any real proper strategy that is formed with patience and full intent can be very lucrative. Flexibility must be an option, and picks have to be diversified, or eggs may only be in one basket, so to speak. These traits are important for the safety of the newer investor. Listed here are those traits and descriptions of why they are important.

The investor needs to be constantly monitoring their plan and the market, adjusting both as needed. Investing is not like a rotisserie oven where you can set it and forget it, it is an active, living process where flexibility in how the portfolio is treated is needed. The investor needs to be able to go with the market. Some of the best tools for flexibility are in mutual funds and variable annuities.

Another important feature that is needed is to diversify a portfolio. All of the investor’s assets should not be within a single stock. Instead, the risk should be spread out, as the odds of a single stock or investment vehicle failing versus all that make up a diverse portfolio is a significant difference. The kinds of vehicles can be cash, stocks, bonds, mutual funds, and many other techniques.

What is important for the investor is to look at market date and try and find the signal from the noise. The market will go up and down daily for any number of reasons. Investors should have a solid grasp of analyzing the overall trends of the market, and exert discipline so that they do not over react. It is also key that the investor work and follow simple rules instead of trying to rely on any overly complicated scheme. Pick companies or stocks that are well researched and show a high pattern of returns. Always conduct research.

This all leads to the number one thing that all investors should really need to follow, and that is to play it smart. Investments take real amounts of money and can provide real risk to the investor. It is not a passive means to make money, nor is it one which can be approached without staying well informed. Investments need long term and strategic planning to really be viable means of financial growth, which requires a good working knowledge of economics, business and how a company can behave in the market.

More than anything else is to stay informed and keep alert. Long term planning and patience will overcome the risk and fluctuations that can occur. Methodical planning will beat investing on hunches every time. All that is truly needed is a sound foundation of knowledge and staying on top of everything.

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Originally posted 2009-03-12 05:56:21. Republished by Old Post Promoter

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