With the amount of full service assets management firms available, many investors are using advisory firms for full money or assets management on their investments. A money manager can handle all of investor's financial investments under one umbrella account. A good financial advisor will spread investor assets over a diversified field of investment choices to create a well diversified portfolio.Asset Management . Securities and Investment. Trust account set up. Contracts and Fees .
Asset Management can vary with each advisor or money manager. Usually, a full service asset management program is a for fee management based on the total assets the firm is advising for investor. Many large Asset Managers provide to investors Asset Management based on paying per transaction(commission).
Should a Money Manager is paid on a percentage of assets under management usually there is no monetary incentive for the advisor to do any trading. Should such Money Manager is paid on a percentage of the profit there is a monetary incentive for the advisor to do any trading which makes sense. There is also a comfort level should all of investor's assets are managed in one place by a trustworthy Money Manager whose profit rely on investor's profit.
When a financial advisor manages assets for investor, investment in each field can be made with the other investment fields in mind. Should the Asset Manager is in touch with investor's entire financial situation Asset Manager is able to know how each investment decision affects investor' s entire investments.
Choosing a Money Manager. When choosing a money manager investor must find such that is willing to do a free review of investor's current assets and/or investments. This will allow investor to see how deep the money manager do his work and the advice he is giving. It can be very educational, investor is under no obligation and investor may decide to go with that particular money management firm.
Investment Portfolio Management. Most full service asset management firms offer full or active portfolio management for their investors.
The investment management could include, stocks, bonds, funds, etc. A firm who provide asset management for investor gives such investor a full line of products and allows the investor to have his entire portfolio managed and kept by such firm.
Active. When an assets manager or advisor is involved in active management, this normally means the investor is frequently investing or changing assets. It also could mean the firm is involved in every financial assets the client has.
Bonds and Fixed Income Portfolio. Many large investors or institutional clients like Banks and insurance companies have large holdings of bonds and other fixed income product.
The active management of these portfolios include seeing the maturities of these investments, and managing interest rate risk. A good bond money manager will work to make sure there is limited interest rate exposure and will offer management of the cash flow from these bonds.
A fixed income portfolio specialist will also survey the entire market for the best product available through many broker dealers. This is especially important when dealing with municipal bonds - since most of those are held by firms in each state. New issues of mortgage backed securities and corporate issues should also be part of most large bond product holdings.
Proper asset management should be a successful arrangement for the investor and the portfolio manager.
Asset Management Prospectus. A prospectus is a document that describes the investment being involved. In the case of hedge funds, a prospectus would be distributed to potential investors informing them about the fund objectives, investment philosophy and risk tolerance as well as fee structure, reinvestment and divestment. For instance, a hedge fund prospectus may disclose that the fund charges 20-50% of profits (when there are not charges or fees based on the total assets under management, disregarding the investment performance) as a management fee and only allows capital withdrawals once a year at a set time.
These items are only the most basic, though often most scrutinized, elements of a hedge fund prospectus. Investors must have the choice to discuss the Prospectus at any time.
Money Market For Cash.
Cash available is invested in a fund that is comprised of short term debt securities, known as money market fund. Investor account will have money in this type of fund with the brokerage firm. Money market yields will vary based on the performance of securities in such fund.
Securities in the Account. The Money Market fund will be comprised of short term notes and other early maturing debt. These would include:
Treasury Bills
Municipal Notes
Commercial Paper
Banker's Acceptances (BA's),
Fed Funds,
Negotiable CD's
Private Placement Investments. Stock offerings offered only to wealthy or seasoned investors are private placements. Under Regulation D of the SEC, these investment offerings can be sold to no more than 35 non accredited investors. These normally carry a stock holding period requirement. Brokerage firms that handle wealthy clients that are looking for investment opportunities may offer private placements. The investors would be made aware of the risks regarding the holding period, after market potential and other risks. There are many private placement offerings covering a broad spectrum of the investment market.
Market Timing Strategies. Market timing sounds easy. These strategies involve moving between risky assets, such as stocks or bonds, and less risky short term securities like Treasury Bills based on "technical", "fundamental" or "quantitative" analyses. Reduced to its core proposition, market timing means "buying low and selling high." Identifying high or "overvalued" versus low or "undervalued" is the complicated thing. Since riskier assets usually have higher returns over longer periods, staying "out of the market" or invested in less-risky short term securities can mean a considerable sacrifice of overall return.
It was Issac Newton who in 1768, after being wiped out in one of the many stock market crashes of his era, said:
"I can calculate the motions of the heavenly bodies but not the movements of the stock market".
His lesson has been learned by most active investors since then. The pricing of long term financial assets like stocks or bonds involves all components of the human condition; fear, greed, optimism, pessimism, crowd psychology. Politics, economics, revolution, natural disaster, technology also have impact.
Vain attempts to divine the direction and outcomes of "the market" have involved astrology, superstition and the supernatural. Academics have surrendered unconditionally. After quantitative techniques and supercomputers proved duds in predicting the financial future, the most highly educated and qualified financial researchers ran up the white flag of the "efficient market".
In their rational world, everyone knows everything and it is only random chance that moves markets in a dice-throwing "stochastic process". Basically, they reasoned, no one could predict the market since there were so many smart people trying to do it. They then set about proving this, hopefully making their insulated lives easier since they would never have to stick their necks out with market predictions.
For most investors however, market timing is too attractive to let pass by. If one could participate in all the 25% up years in the stock market and pass by the -25% years in TBills with a modest 5% return, the rewards would be huge. Even capturing a little of this outperformance would lead to a superb performance compared to a "passive" or fully invested strategy.
A market timing strategy is conceptually easy to understand. Stay invested when the market is up or flat. Avoid the downturns. The market timer develops signals to identify what condition a market is in. An overvalued market is called "expensive", "overbought" or "overextended". A normal market is "fairly valued". An undervalued market is "cheap". The market timer can use a variety of measures to judge the status of the market. These techniques are a combination of technical, fundamental and quantitative indicators and measures.
Technical Indicators
The technical indicators are based on "price" and "volume" movements and patterns. The technical analyst looks at the patterns and movements independently of their causes. It is patterns alone that tells the state of the market. For example, the analyst might see a "topping" pattern developing in the overall market or one of the important sectors from his charts. A "head and shoulders" formation would see the market index rise steeply, fall and then rise again. This would be a very "bearish" or negative signal pointing to a large and sudden drop in the market. The analyst might discern the depth of the fall from the length of the neck or relative height of the shoulders. Other technical indicators involve the "volume" statistics or trading activities of investors. A sudden drop in trading activity or a large differential between smaller and larger stocks would be an indication of a potentially large move, with the direction dependent on what "expert" investors are doing compared to individuals.
Asset Mix
Asset mix is the allocation of a portfolio between asset classes, it balances return and risk. Returns are a combination of the income from an investment and the price appreciation over the period. Risk is usually proxied by the "standard deviation" of returns, how much the return changes about the long-term average.
Returns are calculated on a nominal (dollar) basis or as "real" returns, the nominal return less inflation. Inflation is usually taken as the change in the Consumer Price Index (CPI) over the observation period. Long-term studies have demonstrated that equities have the highest overall returns over longer periods of time, but they also have the highest volatility. Bonds have lower returns, but greater stability. Cash and short-term securities have very certain returns, but very smaller long-term returns. Other asset classes such as real estate, mortgages and inflation-linked bonds have different risk and return patterns. To the extent that asset class returns tend to move together, they are said to be "correlated". The overall risk of the portfolio can be reduced by combining asset classes with differing return patterns.
Establishing an Investment Policy
A long-term "investment policy" is usually established based on the investor's long-term objectives and constraints of the investor. The return objective is the key variable. A high return objective can only be obtained by investing in asset classes with a higher return. Based on historical experience, without constraints equities have by far the highest return. An asset planning study which sought to obtain the highest overall return would recommend an investor's entire portfolio be invested in equities.
Investor Constraints
Constraints state the risk preferences of the investor. The time horizon of the investor dictates the time frame for the investor's portfolio. For example, since equities have a high long-term return but higher volatility in the short term, the return from equities very uncertain over shorter time periods. Risk averse investors (those without the capability of absorbing capital losses) would have a higher cash and short-term component. Investors with a higher tolerance for capital risk should favour equities. Investors with a high income requirement would tend to favour a higher fixed income weighting.
Accredited investor:
An accredited investor is a person or institution that the Securities and Exchange Commission (SEC) defines as being qualified to invest in unregistered securities, such as privately held corporations, private equity investments, and hedge funds.
The qualification is based on the value of the investor’s assets, or in the case of an individual, annual income.
Specifically, to be an accredited investor you must have a net worth of at least $1 million or a current annual income of at least $200,000 with the anticipation you’ll earn at least that much next year. If you’re married, that amount is increased to $300,000.
Institutions are required to have assets worth $5 million to qualify as accredited investors. The underlying principal is that investors with these assets have the sophistication to understand the risks involved in the investment and can afford to lose the money should the investment fail.
ADR Stock. Foreign stock traded in the US are known as American Depository Receipts or ADR's. An ADR is a negotiable (traded) share of stock of a foreign company, where the international company has registered an ADR to trade in the United States. Allowing an international company to have a way for it's stock to trade in America makes it easier on the issuing company. Although the American Depository Receipt must register with the SEC, the issuing foreign company does not. These can trade OTC or on an exchange. This can give a sense of stability to the stockholder.
Although, as with any stock - the risk still lies with the performance of the stock and the financial well being of the company overseas.
ADR Dividend Declaration and Payout
The securities of the foreign company are deposited in a foreign branch of a US Bank. ADR holders will receive dividends in American dollars based on this banking and conversion arrangement.
Since this is still considered shares of stock in a company, the corporation will declare and pay it's cash dividend in it's natural currency, whether it is in Yen, Euro or whatever currency they use. The dividend of the ADR is then converted into American dollars and paid out to the American shareholders.
Many securities investors own American Depository Receipt shares. It can offer you the chance to own stock in an international company, while getting the comfort of the investment being safe-kept in the US and traded on US stock exchanges.
Fundamental Indicators
Fundamental indicators are financial and economic measures that affect the overall valuation of the market. A good example of this would be money supply.
Generally, a loose monetary policy and expanding money supply indicate healthy financial markets. When monetary policy is tightened, as in 1994, the price of longer term assets like stocks and bonds fall as money and credit become scarcer. Another fundamental measure would be the dividend yield on stocks, the dividend divided by the stock price, both the absolute level and the relative level compared to bonds. From a historical standpoint, when the overall dividend yield on the stock market is below 2%, independent of other factors, this means that the stock market is expensive. When the dividend yield on stocks is low relative to bond yields, this means investors are willing to pay more for stocks relative to bonds than has generally been the case historically.
Quantitative Measures
Quantitative techniques involve associating different market measures or "variables" in quantitative equations or "models". For example, an analyst might "build a model" that related the movements in stock prices to money supply, dividend yields and economic activity. From this, he would attempt to identify the periods when the market had setbacks. The analyst would then develop some "decision rules" or guidelines to dictate his trading positions that would be programmed into his model. This type of investing is formally called "Tactical Asset Allocation"
(TAA). It has become very popular and results in large flows in modern financial markets.
Does Market Timing Work?
It has become accepted wisdom in financial circles that it is impossible to consistently "time the markets". This has resulted partly from the theoretical academic arguments that no one can have such an advantage (legally!) in their "efficient markets". In practice, the complexity of modern financial markets means that it is very, very difficult to predict the vast number of variables that can affect the markets. Who knew that Saddam Hussein planned to invade Kuwait in 1990 and the price of oil would soar? An investor predicting the unification of Germany and its resultant affect on the capital markets would have been shipped to the funny farms only a couple of years before it happened.
It is possible to establish a valuation level for the markets, like a stock. Compare these tasks. A small company might have a few competitors, a known product line and management. The cash flows can be identified and assessed. Even so, where we can value this company, its stock might not be appropriately valued for years and its future prospects depend on the economy in general. What about the market overall? Who is the management? What matters most, monetary policy or fiscal policy? What are demographics doing to demand? What about international considerations?
That is why most market mavens have one or two great predictions before they are hopelessly out to lunch in the forecasting wilderness. While it is possible to tie it all together a few times, it is virtually impossible to do it consistently.
Most good market strategists only try to identify "extremes" when things are very overvalued. They stay invested until these periods, knowing the smaller swings are "noise" that usually work themselves out. Even so, staying in cash until the eventual crash comes gets harder and harder as the markets run ahead. Usually the final charge of the bull market results in public "bears" being hopelessly discredited and throwing in the towel at exactly the wrong moment.
Should you time the markets? Only if you have the necessary insight and discipline to know when to "hold" and when to "fold" as the song says. Both of these are very hard to come by. For most of us risk is having your money available when you need it. If you can't afford a 30% drop in value, you shouldn't be in longer term assets in the first place. If you decide to time the markets, remember one thing. Those who are really good at market timing aren't going to do television and newspaper interviews just before the crash. You'll only know what they did a few months after the fact. If you can't do it yourself, you probably shouldn't try.
If you only invest in stocks when the guys at work have made lots of money or your GICs aren't paying anything, you probably are doing exactly the wrong thing.
Investing when newspaper headlines are doom and gloom and the boys have been blown away would be a better timing strategy. At the peak, it's impossible to find a bearish forecast. At the bottom its impossible to see the upside. S: Financial Pipeline