Why you Should Consider Buying Index Funds Instead of Stocks

Index funds investment is often referred to as a passive investment. Funds invested do not need an active management like other funds. There are many reasons as to why an investor may opt for one particular form of investment as opposed to another. However, if you are considering investing and is torn between investing in Stocks and buying Index funds, below are a few reasons why you should  consider buying index funds instead of stocks.
Lower costs of investment
Analysis of historical data is just enough to make you as an investor realize that to get the best out of an investment, you should minimize costs. Buying an Index fund is a convenient way to lower these costs. A good choice in this case is a passive index fund investment; the active stock investment is quite costly.
Buying stocks require a great deal of research, this results in a a higher turnover. Indexed funds have low turnover which means reduced brokerage and trading fees unlike in stocks. The limited research costs and lower trading fee associated with indexed funds is one good reason you should buy an index fund. In the long run, this lowers the cost of investment translating to a higher ROI.
Lower risks involved
Buying index funds sounds a safer investment, because your portfolio can be invested in different companies. This will translate into translation a well-diversified portfolio of your stocks. You can invest in ten companies or have your stock portfolio investment spread in several in thousands of other companies from the ten companies. This provides an investor a chance to diversify risks associated with single stocks by constructing your investment from index funds. In overall, buying index funds lower the overall risks of your investment portfolio.
Lower tax base
Index funds have lower turnover compared to stocks and other mutual funds. This passive investment buys and sells within the portfolio than actively managed stock funds. Because of the lower turnover, index funds attract lower tax rates. This is accrued to the long term distribution of capital gains and minimized distribution of capital.
Additional bonuses
With index funds, you will understand what you own; you will know exactly what your investing manager is investing in unlike an active stock. This will earn you a lot of bonuses

Are You Saving or Investing?

There are usually two kinds of people – those who have something extra after paying all their monthly expenses and those who don’t.

Let me assume that you belong to the former; otherwise the discussion which follows may be a bit advanced. Now, what do with the left over cash?

1. Do you stash it in your bank account and spend it whenever you need to buy something big like an iPod, a camera, an LCD TV?
2.  Do you make a fixed deposit once you get that lump sum payment?
3.  Do you buy houses, shares, mutual funds or other investments?

3.  is an Investment, 1. is a Saving 2. is, according to me, a Saving  but others will think that it is a form of investment. There are some differences.

The difference between saving and investment is quite clear to comprehend but with citation of relevant examples to support the aspect of each case. It could be simpler than ever imagined even though some people still equate savings to investments. However, given their intrinsic value makes them very distinct financial disciplines.

First, when you invest you create a greater chance of losing what you have invested in case of a calamity unlike when you save, your money remains in banks and federal securities. Money in an investment receives no compensation as a result of a calamity that may lead to loss of your principal. However, saved money must be fully compensated for inclusive of interests if a loss occurs.

In an investment, your money become unavailable to you for use in an emergency unlike in a saving plan where the cash saved is readily accessible. If you are not going to need money in the nearest future, invest in stock markets etc. But if you are going to need the money, don't invest. Instead save it.

Investments generally yield high rate of returns depending on the nature of the activity you have invested in. On the other hand, savings have low rate returns as it relies on bank interest rates or returns on deposit securities.

What you are doing with that extra cash will only be considered as an investment if, and only if, it can significantly grow your money above inflation, after taxation. Remember, when inflation is quoted at around 5%, it’s actually around 6.5% per annum. Therefore, to realize any real returns on your investment, your money will need to grow above that.

I know someone is ready to present evidence that some financial institutions pay around 8% interest on fixed deposit. Reduce that interest by 30% (tax) and you will notice you are only having 5.6%. This still falls below benchmark (6.5% inflation rates).

The focus of every investment is increasing your net worth and achieving financial goals in the long term basis. It offers an opportunity for a greater ROI. However, as the amount of ROI increases and so is the risk of potential loss of the principal invested. This is quite the opposite to your savings i.e. the risks involved with the amount saved are minimal. Majority of savings are insured with the federal deposit security insurance companies.

Value appreciation is quite evident with investments like purchase of market bonds and securities. These investments earn some intrinsic value with time depending on how much you invest. (Note iPods, cars, computers etc, are not investments, they depreciate rather than grow in value.)

Equity/balanced mutual fund units and shares are investments. Their risks are high, but have the potential to grow far beyond inflation. Gold and other commodities are investments too, and so is paintings (art), real estate etc.

Investment can also give returns in terms of cash flows, which are earned on a regular basis. Cash flows are often described as “passive investments” as you do not have to work for it. Dividends (from shares), royalties from books, rent (from real estate) etc are some sources of regular income.

Savings, however, depend on currency value which in reality depreciates with time.

In a nutshell, savings are all that money you have stashed in your bank account, under your pillow and in fixed deposit accounts. The money is often easy to access, are less risky, earn little or no interest and gradually eaten away by inflation.

Savings are your present. Investments are your future. Bestride the two – invest around 40 – 60% of your earning and save the rest. You will always need your savings for your heavy purchases and to help you pay those extraordinary bills (like hospitalization, wedding, pregnancy etc), but do not do without investment either.

For a stable future, invest more. So how do you know that what you are doing is investment no saving? Checks:

1. It should be able to grow above inflation
2. It should have some element of risk
3. It should appreciate in value – through value appreciation or cash flows
4. It should have limited access

More on investment and savings: Differences Between Saving and Investing:

'via Blog this'

How to go Through an Interview Process?

 Following our graduation and the immediate introduction into the "Job-search Market", many questions crossed our minds, which is the best way to apply for a job? How do you write that killer CV? Who is employing inexperienced graduates e.t.c And when all these are said and done, the one major challenge we faced was "how to go through an interview process?", in case you get called for one (which was very rare).

The interview process is a new one to many of us but we are at that stage that they shall start coming in fast and furious. So what should you expect in an interview? I have attended only one interview after sending out a blanket application. But before I went I spoke to some of the people I know who have attended interviews before (including my attachment boss who was seeking a promotion in the company) and this is what they told me to expect:

1. Aptitude tests:
These are general-knowledge questions that are used to ‘gauge your IQ.’ These may cover a broad range of areas such as numerical prowess, word tests, reasoning tests and current affairs. Aptitude tests are common with firms such as PwC, Unilever, EABL, Bamburi and Deloitte who have an elaborate recruitment program. There are some online resources which offer practice on common aptitude tests.

2. Technical questions.
If you are called for an interview to a road construction company, best go fishing for Dr. Ndegwa’s (or whoever your lecturer was) Road Notes and read them! In an interview several questions will be thrown at you in regards to engineering. You may be asked for example, to “describe the several layers in constructing a road.” You may also be asked more technical things like what is the difference between a laterite and murram, but often it is the basics.

3. Your academics:
Remember the Chief Justice interviews? During interviews you will be placed on the hot seat. They will ask you why you got a D in structural dynamics. They will ask you why you had a straight A in high school and downgraded to Ds in campus and you expect to land the job. Kaa radar! You may also be asked how your training suits the company and answering this relates to No. 5 below. You may also be asked if you have undergone other training (computers, CPA, EIA etc). Another common question is “what new ideas/thing will you bring to the company if given the position?”

4. Trick questions:
These are usually just intended to knock you off balance and to see how you respond under pressure. I spoke to someone who went to an interview and was asked; “You have a 3 litre water bottle and a 5 litre water bottle, you want to fetch only 4 litres. How do you measure exactly five litres without pouring any water?” There is a right answer, yet depending on how sharp you are, you really do not have to give them the right answer. But DO NOT give a wrong answer, go round the bush and explain that you are nervous but if they gave you five minutes with a pen and paper you will answer it. Other common trick questions are the famous Google Interview Questions (Google this up for more).

5. What you know about the company:
Before you go for an interview go to the About Us page of the company if they have a website. Look up all the activities they do and how they do them. If they do water sewers, Google the process of water sewer design and be ready to explain it. Find out the directors, organization structure, date of formation of the fir, client profile etc. These questions will show you have an interest in working at the firm and it was not just a blanket application.

6. Salary expectations:
I still do not know how to answer this one! I mean, how much money do I want? Like ten million a month dammit! But my attachment boss advised me that you should first state “within your salary scale for entry level engineers”. If they insist you give them a figure, you say that you need to be comfortable at night; to cover your lunch and to pay for fare to work every morning so based on the current economy, X amount would be fine.

Watch out, you may get a call or email inviting you for a “small discussion” as it happened to me, but do not forget your papers (originals). Good luck in your interviews (they always end by saying we will contact you!)

==Courtesy of Bjey

Investment Option: Investing in Penny Stocks

What are Penny Stocks?

Perhaps you have asked yourself this question and many others in your quest to understand this investment option, penny stocks. Are they for first time investors or not? What is the risk of this investment options? And most importantly, are penny stocks for me?

Penny stocks, as the name suggests, is a stock with a value of $5 or less per share. Unlike regular stocks, penny stocks are not traded in the New York Stock Exchange.  They are, instead, traded through on over-the-counter markets via pink sheets (electronic quotation systems). Smaller companies with less than $5 million in assets or those that do not possess tangible assets like equipment and buildings are more likely to issue penny stocks than larger more established corporations.

Trading

When dealing in regular stocks, you are more likely to find their trading prices in your daily newspapers or online. However, determination of penny stock’s share prices is a bit complicated. In an archetypal transaction, your agent (broker dealer) , arranges a trade for you based on the bid price (the amount you are willing to pay for that particular stock) and the ask price (the price the seller is willing to sell the stock). The difference between the ask price and the bid price is the spread and it determines how much money you lose or make.

Risk and Profitability

The major risk with penny stocks is the complexity of the transaction. The fact that the commission to the broker is determined by the amount of spread can make it difficult for you to make money through penny stocks. For instance, the broker my further his/her own interest, not yours. Another risk is the fact that penny stocks are offered by start-up companies with no proven track record. This is risky, as you can lose your money faster than you invested it. Surprisingly, the gambling nature of penny stocks attracts investors who are eager to make some quick bulk cash and move out.

Why Invest in Penny stocks?

The reasons why a trader may want to get involved in penny stock trading is as diverse as the traders themselves.

Sometimes you are a new investor who would want to learn the basics of trading shares, and the low-priced penny stock investment seem to be the best starting place.

Advanced investors may also try their luck in this investment option to play pay with some risk money or hedge a position.

Maybe you have an inside information of the potential and prospects of a company you work at, and you want to invest in their stock before the business takes off.

Penny Stocks are exciting and fun, which is another motivating factor for others. It is kind of high-stakes hobby.

Despite all these varied reasons and ambitions, the main reason investors get involved in penny stock trading is to make some money to get rich or richer.

A combination of the above reasons may act together to push you into the penny stock market.

Why would you get involved in Penny Stock Trading?

• To make money

• Enjoyment/excitement

• You have inside information of the profitability of the issuing company

• To increase your portfolio risk/reward exposure

• To hedge strategies

• To diversify your portfolio

• The ones big stock you held took a price drive forcing you into unintended penny stock holder

• To learn how to trade in penny stocks or just stock trading in general

• You do not want to be left out, penny stock is the talk of town

• You strongly believe the issuing company’s value will explode

So, are Penny Stocks Suitable for Me?

The suitability of penny stocks as an investment option will depend on many factors, and you are the sole person who can ascertain if you need them in your investment portfolio.

Factors to consider include, but not entirely limited to:

• Your investment and financial position

• Your risk tolerance

• Your investment experience level

• Your expectations as far as returns are concerned.

My take

As the famous saying goes, a penny saved is a penny earned. However, when it comes to the high-risk penny stocks world, a penny invested can turn into a penny easily lost. If you don't have sufficient amount of money to invest in big stocks, you may be tempted by the low cost and invest penny stocks. However, you should do so with extreme caution.

Financial Independence: How Much Money you Require to Retire?

Everybody is wishing to reach the ‘illusionary’ state of financial independence. I say illusion because, to some, we do not see it coming soon.
A few different paths can deliver you there, and I have always stayed focused on the fastest, straightforward path, which has reserved it top of my mind. I have stayed focused on reaching financial freedom. I look forward to that day I will simple say “I have made enough”. That day I will stop going to the office. The day I will sit down to ponder, not how to make more money, but how to spend the much I have. I long for this day, I really do.
It is not that I dislike my job and I am desperately seeking an escape route. Rather, I am a number-focused, goal-driven individual who enjoys and acknowledges the value of thrifty lifestyle. I truly believe that the world we live in would be a much better place if more individuals could achieve financial independence, allowing them to arrive at their full potential in the society by having more time to focus on their passion. If that involve keeping their present job, more power to them.
People often react differently whenever we discuss this topic, financial independence. Each time I initiate this discussion with family and friends (any gender and age) and tell them my aspiration to achieve financial independence at any age before 50, I regularly face a whole lot of doubt, a healthy dose of mockery, discomfort and even a bit of anger. And whenever you reach the part “around how much should have to retire?” the discussion heats up more.  Therefore, I sat down and thought, “why not bring up this topic in my blog and hear other people’s opinions?”
How Much Money Should I Have to Retire?
I know you are scratching your head, thinking of what you want and what you may need in the future. Relax! The math behind retirement is very simple – if you know some of these variables:

• Your expenses
• Your income
• Your savings
• Your age
• The average inflation rate

Now you can come up with some rational estimate of how much money you should have to retire (or attain financial independence if you are so much scared of this word, “retirement”. To remain palatable to all the audience, let’s use these two phrases interchangeably). Retirement calculators like CNN Money’s retirement calculator or Firecalc will make your calculations simpler. What these resources help you solve is basically the quantitative computation of financial independence.
The Retirement Reality
Regardless of the hard numbers suggesting an objective amount of money to retire, reaching that number simply do not satisfy most of us (if not all). We (humans) keep our noses to the grindstone, and very few retire when they reach that number.
But why? It is often one or some combination of these factors:

1. Ignorance or Disbelief: I may be poking into the eyes of some but, truth be said, the idea of early retirement or financial independence is not something have always considered. This mainly because, more often than not, we see people only retire when their reach the mandatory retirement age.
2. Addiction: We are consumption addicts. We cannot split wants from needs and foresee our retirement years focused on expensive SUVs, golf courses, pricey travel, and whatever else we suppose we deserve.
3. Fear: We have done the math and got the number, but we remain scared that we will still run out of money, the expenses for healthcare will blow up, inflation will speed up, or we may live to be ludicrously old. This has been fueled by some scary examples we have witnessed or playing the worst-case scenario in our heads.
4. Contentment: We have done the math, and we have accumulated enough, but our jobs don’t suck that awful. A few of us in fact like them. Why not keep pegging away to put together that safety margin?

How Much Money do you require to Retire?
This begs the knowledge of:
“What you REQUIRE to retire, the savings level you want to ACTUALLY retire at, and what brings the difference between the two?”
By using the scary word “retire” all I mean is walking away from your current career/job. After that, what you choose to do with yourself is entirely up to you – whether it sitting at home, basking at the beach or starting your business!
For instance – I may know that I will achieve financial freedom when I hit $800,000 in savings. Am I going to walk away from my career once my savings hit that level? I can easily say I will now, but my situation in life and fear of some of the aforementioned might result in me not retiring until I garner $1 million or more.
The gap between what we need to retire and what we want to actuate the move is extremely fascinating to me. It essentially takes the numbers we have computed and then say “To hell with the numbers, it’s far from enough!” We then keep plugging away so that we can build that psychological cushion that will trigger us to call it quits one day.
You can now go ahead and determine what the calculators say you need to retire, subtract it from the saving level you will actually want to retire at and then ask yourself why the difference (if any)?

Investment Strategy: Portfolios and Diversification

It is always necessary to understand the different forms of securities, but it is even more important to clarify how their different characteristics can be harnessed to accomplish an objective.

Portfolio

Portfolio is a collection of different financial assets mixed and matched by an investor for the purpose of achieving an investment goal.  Items which are considered part of your portfolio include any personally owned assets like real estate, bonds, stocks and even cash. A portfolio, like any other financial management, can be done by the individual investors or by banks, financial professionals and other institutions which are connected to the finance industry. In all cases, when making the portfolio, the investor's time frame, risk tolerance and the investment objectives are often considered. The value of an individual asset can be an influence to the risk ratio of a portfolio which is referred to as an asset allocation. In other words, a portfolio is a very important collection of files which includes the list of financial assets.

Basic Types of Investment Portfolio

The aggressive investment strategies are particularly suited for those who are willing to stomach high fluctuations in stocks value (high risk takers). It will be composed of stocks with propositions of high risk or high reward. The stocks in this type of portfolio are highly sensitive when it comes to the overall market.

The second investment strategy is the defensive strategies which are somehow the opposite of the aggressive portfolio. This strategy is not highly sensitive to the overall market and it is not usually risky. The defensive or conservative strategy is particularly suitable for risk averse investors who put safety before any prospective gain. Conservative portfolios will generally consist mainly of cash and cash equivalents, or high-quality fixed-income instruments.

The income portfolio is more focused on the ways in making money via dividends or other kinds of distributions to the stakeholders. The companies which are included here are somehow the same to the companies in the defensive portfolio. However, they should be able to offer higher yields. Income portfolio is meant for individuals with a longer time horizon and an average risk tolerance. Investors who find these types of portfolios attractive are seeking to balance the amount of risk and return contained within the fund.

The speculative investment strategy is the riskiest investment portfolio. It is often considered as the closest kind of portfolio to pure gambling. This kind of finance portfolio is known to have more risk than all the other types of portfolios. A typical speculative portfolio would consist of high risk stocks and forex trading.

Portfolio Diversification

More often, investors do not usually employ a single investment strategy. They tend to mix and match their investment to come up with a hybrid portfolio which includes combination of various investments strategies. The hybrid portfolio is known to be the most flexible investment strategy.

Portfolio diversification involves the distribution of an individual's wealth to other various classes of asset such as debt, cash, property, equity, gold and more. Portfolio diversification can provide both benefits and risk to an individual. Now, many people would ask why they should use portfolio diversification. One major advantage of this is that they will not experience much loss if ever one of their portfolios experienced a problem because it will be counterbalanced by their other portfolio.

Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. When your stocks go down, you may still have the stability of the bonds in your portfolio.