SmartInMoney: Investing

INVESTING

Stock Market Anomaly: January Effect

Updated:January 3, 2010

Historically stocks of small-cap companies had seasonal tendency of outperforming the large-caps around the turn of the year, specifically during January. The existence of this January Effect of stock market return has been widely known. In back testing, researchers have found that it existed in many prior decades.

There are some theories behind this stock market anomaly. Two possible explanation on the January effect are that investors’ activity of buying back into beaten-down small-caps, which were probably sold for tax loss harvesting and window dressing reasons late in the outgoing year. Others speculate that the phenomenon has something to do with less information flow of small cap stock during the year. Continue reading

Tax-Loss Harvesting

December 15, 2009

From a tax standpoint, dumping losing-money security prior a year end is not a bad idea. The tax advantages of setting your gains against your losses can be enormous as long as you follow all the rules and implement a few tricks of the trade.

Tax-loss harvesting, also commonly known as tax selling, is one of the ways to avoid taxes on some of your portfolio gains. Tax-loss harvesting is the selling of securities, usually at year-end, to realize portfolio losses, which an investor can use to offset capital gains and therefore lower personal tax liability. Continue reading

Stock markets are entering into the mysterious September

September effect mystery of anomalous phenomenon on stock returns

September 1, 2009

Investors are cautious as stock markets are entering their seasonal, puzzling September. It has been known that September is historically the worst month for stocks. Lehman collapse in September last year is still fresh in investors’ memory. The collapse dragged the world stock markets down to their lowest point in March 2009, a level not seen in the past decade.

Bullish mood in the past five months has spread over the globe. The U.S. stock markets shot up above 40% from their March low as they cheer up improving economic news. Home sales in July jumped 9.6% for newly built single-family homes and 7.2% for existing homes. The S&P/Case-Shiller U.S. National Home Price Index rose in the second quarter from the previous quarter, the first time in the past three years. Real operating earnings at big U.S. companies have climbed back to levels first hit in 1998 and the majority of S&P 500 companies have surpassed earnings targets. Continue reading

Unbeatable way of doubling your wealth

July 25, 2009

The certain champ of doubling your money is that matching contribution you receive in your employer's defined contribution retirement plan.

In the defined contribution plan, you and your employer contribute money to your individual account in the plan. In many cases, you are responsible for choosing how these contributions are invested, and deciding how much to contribute from your paycheck deductions. Your employer adds to your account by matching a certain percentage of your contributions. The value of your account depends on how much is contributed and how well the investments perform. At retirement, you receive the balance in your account, reflecting the contributions, investment gains or losses, and any fees charged against your account. The 401(k) plan is a popular type of defined contribution plan. Continue reading

A Framework for Successful Investing

Mastering investment framework is primary element contributing to accomplishment of your investment success. This framework shows major steps in managing your investment that, in turn, will become an investment roadmap to achieve your financial objectives. Read more

Investment Risk and Return

Risk refers to the degree to which an investor may lose his or her investment. Return refers to how an investment performs; that is how much it gains or loses over a period of time. Read more

Risk Measure: Standard Deviation

Standard deviation is probably used the most to measure security's risk. It simply quantifies how much a series of security's returns varies around their mean, or average. Standard deviation is a way of putting a security's performance swings into a single number, regardless whether the security delivers good or bad return. The more a security's returns fluctuate from month to month, the greater its standard deviation, the riskier the security is. Standard deviation contains both systematic (market) and unsystematic (specific) risk. Read more

Risk Measure: Beta

Beta is a relative risk measurement, because it depicts a security's volatility against a benchmark. It's common that professionals calculate betas for stocks using the S&P 500 index as the benchmark. You should calculate betas using a security's best-fit index. Read more

Low-volatility caveats

February 8, 2009

Fund managers are judged on whether their return beat benchmarks, which are the industry or the stock market average returns. But beating the average was not enough; it was possible to outperform in the short term, simply by taking a lot of risk.

Every investor knows that high volatility associated with an investment is a bad thing. The more an investment’s returns fluctuate from month to month, the greater its volatility, the riskier the security is. Big fluctuations also suggest fear, because they mean that investors are frantically changing their minds about what stocks are worth in the face of great uncertainty. On this ground, the CBOE volatility index, also known as VIX, is often referred to as the "fear index”. Continue reading

Volatility Index: Contrarian Indicator

According to an investor proverb, the time to buy stocks is when there is “blood in the streets.” The proverb has been attributed to Baron Rothschild centuries ago during the Panic of 1871 in Paris. During that time when everyone was selling, Baron Rothschild was buying.

Volatility Index, known also as the VIX, helps investors measure the blood in the streets. Peaks in the VIX are closely associated with market bottoms. That's because climaxes of fear are times when everyone who's ever going to sell has sold. And when all the sellers are out of the way, the buyers have the field all to themselves. Read more

Expected Market Volatility: A Way To Gauge Fear

In the current bear market, especially during the last quarter of 2008, Volatility Index has come under spotlight when financial news outlets invoked the index in their market commentary. Unfortunately most of the general public was blissfully unaware about it.

Volatility Index, known also as the VIX, was introduced by the Chicago Board Options Exchange (CBOE) in 1993 and later was revised in 2003 when the underlying securities was changed from S&P 100 Index to S&P 500 Index. Read more

Managing Risk by Diversification

Risk is a fundamental part of investing. While risk cannot be eliminated, it can be managed. For most investors, the principal concern is to reduce their risks without penalizing their potential returns. Over the longer term, one of the best ways to lower a portfolio’s risk of share price declines while still earning attractive returns is to diversify. Read more

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