Saturday, 26 November 2016
Options trading sometimes seem cloudy in secrecy, when really it is a straightforward method of investment, being employed by big expenditure companies and by individuals. Sometimes, the world media takes pleasure in growing the fear because a wayward worker has made secret and stupid investments utilizing derivatives such as options, and thereby dropped a massive amount of cash.
This kind of press exposure has resulted in trading options having a poor status. The reality is that most honest buyers use options as a means of relieving risk, not increasing it.
How does this work? A good investment company, say, may have purchased a big number of stocks in a particular business for its clients.
If the market crashes for some reason or any other, this will have an effect on the prices of this company's stocks, even if the company is fundamentally sound. Most purchasers will attempt to sell the shares as soon as possible, but often cannot find a purchaser to stop the carnage.
Nevertheless, if the investment firm buys a 'put' contract on the shares that it holds, this gives it a solid guarantee that they'll be able to sell the shares at a certain fixed cost, even if those shares are investing much lower at the time. In effect, the firm is purchasing a kind of short term insurance to ensure that its investment is protected to a particular amount. In this way, it protects its customers from heavy losses, and at one time guarantees its status.
On the other hand, say a major company plans on creating a new widget in the future. The anticipations can make quite a lot of interest in the stock, and stock prices develop as a result.
In this case, an investment firm may want to purchase up large blocks of stock for its purchasers, but at the greatest achievable price. So, before the madness starts, the company may purchase the right to purchase the stock in the future at a set cost (this is called a 'Call Option' contract).
This then is a guaranteed cost that it can pass on to their clients. Normally, if the stock has increased in cost over that period, the clients will gain from the foresight of the expenditure company, and will make an immediate income.
We at Global Diversified Partners, partner with your to re-claim your decision making, and ultimately your future.
Our goal is to be the investment firm of choice for individuals seeking to diversify their portfolios into tangible assets, not just paper ones. Daniel Kalenov, Global Diversified Partners has a global focus and we're opportunistic, but prudent. We help people take control of their financial well being by educating them on the benefits of investing in tangible assets and by altering their perception of what “smart investing” means.
To know more please visit: http://globaldiversified.wixsite.com/blog/about
Monday, 21 November 2016
Ever wonder how to become a financial advisor? A key part in advisor training is to complete a mutual fund education which provides a clear understanding of the thought processes of fund managers. Since the relationship between advisors and managers is very important, understanding this psychological maneuvering helps advisors to accurately plan their connections with managers. Investors dealing with fund managers must be aware that some funds come with incentive fees, which are offered to the manager of a mutual fund based upon performance.
In theory, incentive fees for active fund managers should result in better fund returns. While some studies reflect this belief, others indicate that such incentives lead to additional risk. For those learning how to become a financial advisor, an incentive fee might encourage the manager to take more risks than he or she otherwise would in pursuit of maximum return. The backward-looking nature of performance fees is one reason many investors object to them, as they are unsure of how daring the manager will be in his or her choices.
A second advantage of a mutual fund education is that advisors are informed on the specifics of various fund categories. One popular type is managed-payout funds, where the main objective is to provide a steady income stream without incurring the costs of variable annuities with living benefits. Some managed-payout funds tie their distributions to market interest rates, while others determine payouts based on historical returns. A large number of these funds make distributions from income and principal. Managed-payout funds generally invest in a sampling of the sponsoring firm's mutual funds. Some advisors view a managed-payout fund as just one of several building blocks that make up a client's retirement income (i.e., annuities, pensions, Social Security, etc.).
In addition to managed-payout funds, funds known as "go-anywhere" are also popular among advisors. These funds contain investments that can be spread throughout the world among various asset classes. One concern surrounding "go-anywhere" funds is that investors have no idea how the portfolio will change if the market suddenly changes, which means advisors do not know if such a fund will complement other investments in the client's portfolio. Some of these flexible funds focus on stocks; others shift between stocks, bonds, and cash, and some invest in assets ranging from private transactions and commodities to real estate, emerging markets and derivatives.
Relations between investors, advisors, and managers can be tricky. As of February 2011, new rules for money market funds had been put into effect. This means that the SEC releases monthly snapshots of money market funds' "shadow" prices that reflect the actual market value of fund holdings as opposed to the $1 NAV at which investors buy and sell shares. It is always a good idea for financial advisors to complete a mutual fund education in order to retain strong relationships with both investors and fund managers.
Daniel Kalenov, Global Diversified Partners has a global focus and we're opportunistic, but prudent. Each of our investors is a partner in the project and the key to a successful partnership is great communication. Global Diversified Partners investor outreach program is second to none. We saw a need in the marketplace for a down-to-earth, smart, accessible investment firm that finds great deals, treats clients like family, and puts the investor first. It’s that simple.
Wednesday, 16 November 2016
I'm not allergic to paper assets. To my mind there is nothing inherently evil about them - they serve a purpose, and when bought at the right price for the long term can provide very decent (even excellent) returns on investment. Ask Warren Buffet.
The rub, of course, is buying them at the right price. This has become incredibly difficult in recent years as the aftershock of post 2008 quantitative easing and near zero interest rate policies has seeped into equity and bond markets, inflating prices to levels that if not unsustainable are certainly unattractive.
Bill Gross, known as the "Bond King" and former manager of the PIMCO total return bond fund, the largest of its kind in the world, has voiced his opinion on the matter following a recent solid consumer spending report:
“Individual investors have little choice but look at real estate and gold given current bond yields, he said. “Bonds are not an asset, they’re a liability in a negative interest rate environment. Why would someone want to own them?”
The immediate thought is that it does not bode well when the guy who’s managed more money in the bond market than anyone alive publicly asserts that he thinks both bond and equity markets are overpriced.
For those unfamiliar with Gross however, it is worth noting that despite his outstanding long term record, he’s been touting that bonds are over-priced consistently for five years now.
The adage that "the market can stay irrational longer than you can stay solvent" proved accurate, as he was shown the door from PIMCO in 2014 to join the much smaller Janus group.
Whether or not Gross is right this time around, the reality is that if you're heavily invested in paper assets, particularly fixed income, you're potentially in a lot of trouble either way.
If he's right (which he will be eventually) then you stand to suffer considerable losses on your capital when the tide goes out.
If he's wrong (which is actually possible - Japan has wallowed with sub 1% bond yields for nearly 20 years), then you've actually got an even bigger problem, and it's a problem that could decimate the retirement planning of an entire generation.
Specifically, the problem is that retirement plans are almost universally modeled on an average future compounded return of approximately 7%. Gross, and countless other financial advisors argue that we now live in an age where we can't take that for granted.
There were nearly $25 trillion dollars in combined US retirement funds as of 2015, with the bulk (over 60%) in equity funds. The majority of the remainder is allocated to bond and money market funds, and other conservative options.
The issue is that as people age it is standard practice to shift the weighting from majority equities toward a more even allocation with bonds.
Although logical at the individual level (capital preservation and income take precedence over long term returns as we age), this screws everyone collectively when you've got an entire demographic bulge moving in the same direction.
Equities begin to slump as capital gets sucked away into less volatile, "safer" bond funds, while at the same time the money pouring into bonds forces yields down even lower than they already are.
It is difficult to see returns averaging 7% per year in this environment - equities cannot go up forever in the absence of earnings growth, and bond returns to date have been driven by the book value of longer term bonds rising as yields are bid down. These bonds will eventually mature, forcing funds to reinvest the principal at current, much lower market rates.
If, as Gross expects, we now live in a world where 4% is the new 7%, the compounding effect makes for an extraordinary gap between the already insufficient levels of retirement savings and what we can expect in the future.
A quick calculation tells us that $500,000 compounded at 7% for 20 years becomes $1,934,842. At 4% it becomes a meager $1,095,561 - little over half. These are nominal, non-inflation adjusted figures. Factoring inflation obviously makes things far worse.
Gross goes on to specifically suggest, almost surprisingly, that he favors real estate as a haven from this barren wasteland of low yields. It’s surprising because he has little to gain from talking up the real estate market and plenty to lose via redemptions out of his own Fund by talking down bonds.
Wall Street has not been asleep to the real estate idea, and large, class-A properties suitable for large REITs have already been bid down to absurd cap rates as low as 2.5% in some markets. Strip out the REIT's management fee (usually 2%), and you're again left with virtually no yield.
As smaller investors however, we have an advantage over the bloated institutions that currently subsist on cheap money and have little utility beyond extracting fees and commissions. We are agile. We are not liable to appease our boards. We are not slaves to quarterly earnings reports, and we need not worry about being fired by our superiors (unlike Gross).
Smaller investors are able to act independently and intelligently, moving into areas of opportunity and distress that larger actors cannot - or dare not - consider. We can attack smaller opportunities with greater yields, unconcerned about the need to seek assets and markets that can absorb billions of dollars. In short, against the big boys we may have less money individually, but we can make it work much, much harder.
If your financial planning has been based on an assumed 7% average compounded rate, as almost everyone's has, then the cold hard truth is that such returns must now be earned, not collected as a birthright. The market has for 8 years stubbornly refused to provide returns without prodigious quantities of cheap finance to fuel them.
Further, the returns on offer are almost entirely driven by capital growth, and achieving actual regular income without selling to capture it is near impossible. When money is cheap, the market doesn't care that you have it, and won't pay you to hold it.
Should such forced selling occur en masse, it creates a self reinforcing downward spiral that would ultimately restore value to asset prices and restore yields, but not before crushing the air from retirement portfolios. Catch 22.
What the market cares about now is finding new productive ways to deploy capital - and high yielding real estate is one area where the little guy has the upper hand. Real estate investors with specific market expertise are among the few that can reliably generate the returns they have planned for and are relying on.
If your portfolio has become bloated with paper and light on real assets (like real estate and gold), be sure to speak with your financial advisory team for some ideas to get back in balance.
Monday, 14 November 2016
Every investor worth their salt knows to protect their assets with a Limited Liability Company (LLC). Chances are, you’ve got one or more LLCs and are leveraging their accompanying tax advantages. You’re also well aware of the liability protection that an LLC provides. Like I said, you’re a smart investor.
But here’s something you may not know: LLCs come with Charging Order Protection. Even in an LLC, members’ assets are still potentially at risk from creditors and judgments. And let’s face it, successful businesses are claim magnets, especially if you have outstanding debts or judgments elsewhere.
The key point of Charging Order Protection is to protect your business and its assets from the debt of any of the LLC members. With it, a creditor of a member of an LLC cannot put a claim against the assets of the LLC, but can only obtain a charging order against distributions made to the member under judgment. This protects the assets of the LLC itself as well as its members.
However, a creditor cannot force the LLC to make a distribution to its members. This may leave the creditor with nothing from the LLC and gives the member under judgment a strong negotiating position to settle with the creditor for less than the whole debt. This last point, however, depends upon the situations of both the creditor and the member.
Say, for example, that the creditor is another individual that needs the proceeds of the settlement. She will likely be willing to settle the debt at a discount. On the other hand, if the creditor is a bank, the bank will likely not need to have the money in hand at any specific time and so may be less inclined to settle.
But what about the halt in distributions to the member(s) of the LLC? It’s true that a creditor can’t compel a distribution, but the member(s) may be reliant upon distribution for financial viability. In that instance, the possibility of discounting the debt will depend on who needs the money more.
Also, different states enforce the Charging Order with varying levels of vigor, so be sure to speak with your legal team about domiciling your LLC in the proper jurisdiction. Either way, the Charging Order is an essential component to protecting your assets and a key benefit to any properly structured LLC.
Daniel Kalenov, Global Diversified Partners goal is to be the investment firm of choice for individuals seeking to diversify their portfolios into tangible assets, not just paper ones. When it comes to your finances, if you don't know where you're going, any road will get your there.
Check out some of the other blogs at www.globaldiversifiedpartners.com/blog