Investment Considerations in a Bear Market

The idea of investing is to make your money grow, but there are times when the stock market doesn’t want cooperate. Regular market fluctuations are common and expected, but extended periods of decline can strike fear in even seasoned investors. These bear markets can last months or even years. So, what should you do when faced with a bear market?

Examine Your Investment Objective

The first thing anyone should do before making changes to their portfolio is to think about what the purpose of the investment is. Is it money for retirement? College savings? A down payment on a house? Each of these investment goals have to be treated differently, and you need take into account what the money is going to be used for before you can decide if any changes need to be made.

The investment objective is important because it primarily deals with a specific time horizon. If you’re 35 years old and saving for retirement, you know that your money has a few decades left to grow. On the other hand, if you’re 35 and preparing to send your child off to college in 8 years, that is a completely different scenario.

Consider Your Risk Tolerance

Most people make changes to their investments because of losses. When you begin to see your account drop in value, it’s only natural to want to stop this from happening. Unfortunately, this type of behavior is reactionary, and it can often do more harm than good.

If the idea of seeing a loss on your statement has you feeling uneasy and ready to make changes, then chances are you’re taking on more risk than you should be. You should be allocating your investments in a way that minimizes risk, maximizes returns, and allows you to sleep at night regardless of what the market is doing. If you’re losing sleep because of a few bad days in the market, it’s time to reconsider how much risk you’re willing to take.

Don’t Chase the Market

You’ve probably heard the saying “buy low and sell high” many times, and we all know that’s how you make money, but the reality is that most people do just the opposite. The average investor will happily put more and more money into the market, and take on more risk when the market and economy is strong, and pull back or stop investing at all when the markets are heading south.

This is the opposite of what you want to do. If you’re only saving and investing when the markets are doing well, and investing little or selling stocks when the markets are down, you’re buying high and selling low, which is a very ineffective way to make money.

If you have a regular investment plan through your 401(k) or individual retirement accounts, keep those investments flowing through good times and bad. Because you’re investing on a regular and frequent interval, you’re buying stocks when they are up, down, and everywhere in-between. This is called dollar-cost averaging, and it is a great way to take some of the volatility out of your portfolio and maximize your overall returns.

Rebalance Your Portfolio

When the markets experience an extended period of growth or decline, it can throw your portfolio out of its original investment mix, or asset allocation. For example, if you’ve determined that a 70% stock and 30% bond portfolio is suitable for you and the stock market has taken a bit of a dive, you might find that after just six months, your investment mix might be at 60% stocks and 40% bonds, or even a 50% mix.

Ideally, you want to maintain your portfolio so that it remains close to your target investment mix. By re-balancing to your target mix, you’re forced to sell some of the investments that have done well, and buy more of the investments that haven’t done as well. This is allowing you to buy low and sell high instead of the reverse.

Shore Up Your Short-Term Investments

Investing your short-term savings takes a different approach from investing for retirement or other long-term goals. The general idea here is not to generate as much money as possible, but instead it is more focused on safety of principal while making as much money as possible.

When the economy is struggling, it pays to have a well-funded emergency fund. A weak economy can put some uncertainty in the air in terms of job security and obtaining credit. This is where your savings can come in handy. If you have the cash on hand in the event of an emergency, you don’t have to worry about using credit cards or possibly hurt your credit score.

So, when it comes to your savings, whether an emergency fund, money for a down payment on a house or a vehicle, or just the extra spending money you like to keep on hand, you want to make sure it’s safe and working as hard as it can for you. There are a number of places to safely keep your cash, so you’ll want to explore all the different options. It’s also a good idea to make sure your money is FDIC insured so that if times get really tough and your bank goes under, you’ll be protected.

Ways to Reduce Principle Balance of Loan Amount

The principle balance of a loan is the total amount owed. When the loan is being granted, amount to be repaid and the term for repayment is determined by the lender and the borrower has to follow it in order to avoid any penalty. The principle amount keeps reducing as the loan amount is repaid every month. Cutting the principle balance further down is indeed very difficult and requires a good budget, but it's not unachievable.

For reducing the principal, the best way is to use cash at hand. If one has any kind of saving such as bonds, investments, stocks, retirement funds or others, now is the time to utilize them. Based on the amount available with the payee, one can cut back a lot on his principle amount.

Another good way is to hike up the standard payment. To do that, one has to cut down his monthly spending such as eating out, frivolous shopping, traveling and other expenses. A little change in the lifestyle for a while will reduce quite a good amount from the principle balance. While beefing up the standard payments, one has to ensure that his lender is aware in order to precisely reduce the principle balance.

It's very important to consider equity amortization. Prior to making extra payments each month, one should consult the lender about paying principle balance without resulting in equity amortization. During the early years of loan repayments, principle balance is significantly lesser and a good amount can be repaid during this time.

Whatever extra amount one is paying a month, it's not supposed to give him relief the coming month. In other words, one has to keep in mind that if he repays good enough amount this month, he still has to make a payment the next month. And missing even a single payment calls for late fee. Therefore, he should plan his payments carefully.

One can make repayments biweekly. Choosing to repay the amount twice a month will help reduce the interest paid on the loan and decrease the principle amount rapidly. Additionally, one can seek financial help from a family member which will have a huge impact on the principle balance.

Reducing the principle amount is beneficial indeed but it will also wipe out the tax benefits. So, if a person is paying low interest, it will be quite beneficial for him to hang on to paying it over the tenure suggested by the bank. This will definitely serve him better plus he can put the extra money to a better use like a retirement fund.

Note: Prior to paying off money early in the tenure, one should ensure that the repayment schedule doesn't come with any penalty regarding prepayments.

The effect of inflation on your financial future

Inflation is a major factor in the realm of personal finance; it’s a risk that affects investment positively or negatively. In broad terms, inflation is the general increase in prices because of a change in the money supply or the availability of goods. It is not merely a macro-economic concept, since it is relevant to the finances of individuals in four primary ways:


· Determining the real return of an investment


· Evaluating the purchasing power risk


· Interest rates for savings


· Effect on financial instruments


The real return of an investment


This concept refers to the discounted nominal interest rate (rate after inflation is discounted). In the realm of investment, this effect is referred to as inflation risk. Although this risk has a significant effect on investors, the combined risks of taxation and inflation are far more serious than inflation risk on its own. A good example is the treatment of deferred annuities, where tax is paid on annualized payments and the payments are typically fixed. Even after discounting for inflation, tax must be levied against the accumulated nominal returns (and not the discounted one – unfortunately). The real return is further eroded by the effect of inflation on the payments received.


Purchasing power risk


Inflation is also influential in this aspect of investment risk. The loss of purchasing power on investment returns is tied to the reduced purchasing power per dollar. Purchasing power risk affects the capital invested significantly. With low-yield investment instruments, the purchasing power of the principal declines rapidly.


Interest rates

In macro-economics, there is a link between inflation and interest rates; a link that filters down to the individual. One of the methods of controlling inflation is to increase prime lending rates in an attempt to discourage borrowing. High interest rates also make investing more attractive than consumption, which reduces aggregate demand in the economy.


Financial instruments


Interestingly, inflation is not always a bad thing. Certain financial instruments benefit from high inflation. Usually these are the types of investments that have intrinsic value, because such assets remain in high demand regardless of the level of inflation. Examples of such assets include art, real estate, gold and other commodities. High inflation increases the absolute returns on such investments. Notice that the opposite happens with regard to cash/income instruments like savings accounts and money market funds. When inflation is low, it is less risky to invest in cash and income options.


While many persons who are risk averse are afraid to “lose,” inflation causes real loss for the ultra-conservative investor. Portfolio diversification is not only important in managing market risk, but can also mitigate inflation risk. While limiting investment in growth options reduces market risk, increasing investment in them reduces inflation risk. It is a trade-off that emphasizes the delicate balance of diversification. Such information can only redound to the benefit of a prudent investor.

Why You Need an Emergency Fund

In life you should expect the unexpected, and this is why you need an emergency fund. The best you can do is to prepare for emergencies that require access to additional money and having an emergency fund is the ideal solution.

Financial emergencies can come in the form of a job loss, significant medical expenses, home or auto repairs or something you’ve never dreamed of. The last thing you want to do is be forced to rely on credit cards or a loan which could simply compound the problem.

How Big Should Your Emergency Fund Be?

Most experts agree that you should keep between three and six months worth of your living expenses set aside in your emergency fund. Depending on your specific situation and whether or not you have children, carry substantial debt and types of insurance coverage will determine what amount is best for you.

The reason you want to have three to six months of expenses saved up is that the most common reason for the need of an emergency fund is due to a sudden loss of income. If you or your spouse loses a job you still have bills to pay and it may take a few months to find suitable new employment. It is best to plan for a worst-cast scenario so that the smaller emergencies such as replacing the hot water heater that just went out will be easily covered.

Start Small

If you currently don’t have an emergency fund or find it difficult to save money the key is to start small. You have to realize that accumulating one month’s worth of expenses will take some time, let alone three to six months. If you set your immediate goals to be small and manageable you will have a better chance in reaching them.

The best way to get started would probably be through your bank. Open up a new savings account if you currently don’t have one and begin to save with this first. The next step is to get into the habit of making regular deposits into this account. Whether it is weekly, bi-weekly or monthly, create a schedule and stick to it. Once you make saving automatic you won’t even have to think about it.

If you feel it is difficult to begin saving simply start with a small amount. Maybe you begin with $10 a week initially. While this won’t amount add up all that quickly the important thing is to start putting something away and to make it a habit. After a few weeks you won’t even notice that $10 missing so you can bump it up to $15 or $20 after a month or so. You will begin to get used to that money not being there and can slightly increase it again.

Where to Keep Your Emergency Fund

You should start with a savings account because it is simple to use and generally does not cost anything. The convenience factor is what is important when getting started. As your account grows you will want to find an account that can earn reasonable interest so that your money is working for you. The next best options to look into are money market accounts or certificate of deposits (CDs).

It is important to keep this emergency fund in a place that will fairly liquid so that you can get to the money quickly in the event of an emergency. You also don’t want to have this money tied into stocks or mutual funds because the volatility of the market could cause you to lose money over the short-term.

Buying a Small House and its Benefits

       Buying a house is said to be a milestone moment of one’s lifetime. Everyone wants the house to be big, beautiful and blissful. The trend of desired house size is changing with the limitation of space and rising property prices. Bigger the better or smaller the best, the question of ideal house size seems to dazzle even the experts. In this article we would analyze the various situations under which the small house outweighs the bigger house. So, if you have a small family and thinking to buy a house, this article is for you.

Before looking at the benefits of buying a small house lets first check out, why people often like to buy a big house despite having a small family:

- Having big house is a status symbol and to impress others

- The property agent’s false explanation and forced convincing

- Mistaken thought that only a big house makes a dream home

- The wrong impression that a builder offers big house at a discount over small one due to lower cost

- Preconceptions that bigger is better

- Many buyers’ thinks that they have spare money so it’s better to buy a big house as it will provide space for living and also fulfill the purpose of investing.

We have discussed the reason for buying a big house; now let’s check the benefits of buying a small house so that we can come to an analytical conclusion.

Buying a Small House and its Benefits

 

- To Save Money

Obviously, the small house costs less than bigger one, so “to save money” is a genuine reason to buy a small house. It needs smaller amount of money to insure the house, less area means low energy requirement, so the electricity bill will be reduced and low maintenance costs.

- To Be Stress Free

Small house takes off the stress of paying huge EMI and also less financial pressure on your budgeting. The loan amount can be paid early and the buyer can keep his financial book to be debt free. One can invest the money thus saved into other avenues for a better return or use it for other important work.

- To Save Time

Less area means less time to clean and maintain the house. Small house makes everything seem to be kept in the easily accessible distance and hence it saves the time which otherwise required in the bigger house.

- Helps to curtail shopping bill

Quite often unimportant things are given space in the home due to useless purchasing, but small house curtails waste spending because the resident understands the space limitations and hence buys only necessary things whenever goes to a shopping.

- For Closer Family Tie up

It helps in developing a strong bond between the family members because everybody stays in a compact area and therefore it eliminates the communication gap between each other. The free interaction due to close living style helps in growing a happy feeling reducing the personal differences.

- Good Resale value

Small house has a very good market and the rate of such property also appreciates steadily. Due to low price involvement, the owner enjoys the choice of changing the house very frequently.

- Environment Friendly

Less area of construction means more space for the nature to grow, so a small house helps the environment and support the greenery.

Conclusion

Buying a house is a personal decision and it depends on numerous factors to finally select a house of one’s own choice. If the family consists of up to four members, then a small house can provide a cozy feeling, sense of security and self contentment to the buyer. Bigger the better is not always true, so buyers should start focusing on a smaller house to live a life of own choice and payback property loans easily.

Safeguard yourself form fake bank notes.

Recently (RBI) informed that there was steady rise in the number of counterfeit notes in circulation. Apart from attempts at detecting fake notes RBI has laid out a couple of other measures to tackle the counterfeit notes nuisance. Some of these are public education campaign for identifying fake notes, improvising on security features of notes and instructing banks to issue only genuine notes at their counters or ATMs.

Fake notes nuisance

In the year 2011-12 alone RBI had detected Fake Indian Currency Notes (FICN) of various denominations in the banking system having value close to Rs 25 crores. Like you’d have guessed this is just a tip of the iceberg. Government agencies have managed to detect about 25% of counterfeit currency notes in circulation. According to one government agency estimate there are about Rs 16,000 crores worth of fake Indian Rupee notes in circulation. Would you be surprised to find some forged notes in your wallet?

Much of the counterfeit notes originate in Pakistan where it is printed and sold for a quarter of its face value. Forged notes are common in real-estate transactions taking place in black. It is important to be vigilant about fake currency notes circulation since it could be a matter of national security. Counterfeit notes can be used by terrorists machineries for their activities as was the case in 26/11 attacks.

Circulating fake notes is an offence

Printing and/or circulating counterfeit notes is a criminal offence punishable with fine or imprisonment (ranging from 7 years to life imprisonment) or both. Of course none of us might be implicated in this, right? But remember that when you buy or sell in exchange for forged notes or tender it at a bank you are essentially circulating it! Relax; as long as you have not done it intentionally you won’t be implicated. But everyone who is aware of fake notes being printed or circulated on intention is required by law to inform the police.

What to do with fake notes?

If you realize your currency note is not genuine produce it at the nearest police station where an FIR is to be filed. Do not destroy the notes; if you do you would be covering somebody’s crime in an indirect manner.

If the bank cashier finds the currency note to be a counterfeit one on examination she would stamp on its face as ‘Counterfeit Banknote’. You would be issued an acknowledgement receipt which must be signed by yourself and the cashier. Thereafter the forged note will be forwarded to the local police station for FIR investigation.

Save all the trouble, identify fake notes before taking possession

Prevention is much, much better than cure. With a little bit of patience you can make out counterfeit notes from the real ones. Especially in case of currency notes of large denominations like Rs 100, Rs 500 and Rs 1000 make a quick look out for identification marks.

Since according to recent RBI figures it is the Rs 500 denomination notes that have the highest number of counterfeits we have mentioned below a few look-outs in a genuine Rs 500 note.

1. Security thread

The silver security thread going through the breadth of the note has the words ‘RBI’ and ‘bharat’ inscribed in it. The thread changes colour from green to blue when viewed from different angles. It is seen as a single line from the back of the note. Fake notes could have gray line printed or an aluminium thread inserted.

2. Alignment in floral pattern

Floral pattern on the front and back of the note in the middle of the vertical band just next to the large blank space (having watermark) has numeral ‘500’ inside it. The numerals on both sides appear as one when held against light. This too is a featured difficult to imitate with accuracy.

3. Watermark

Mahatma Gandhi’s portrait hidden in the large blank space in the front left hand side of the note can be seen when held against light. You can also see multidirectional lines and numeral ‘500’ in the section.

4. Optically variable ink

Colour of the numeral ‘500’ in the front centre changes from green when held flat to blue when tilted.

5. Intaglio print

There is a circle in the centre of the band at the front left hand side. This intaglio printed circle can be felt by touch. Similarly the print ‘Paanch sau rupaiye’ at the front centre is in intaglio.

If you find ink to be smudged, printed lines to be broken, variation in alignment of numerals, inadequate gaps in numerals treat it with suspicion. Identification for notes of other denomination is covered in a separate article. 

Cheque Truncation System or CTS

It might happen that your cheque’s start bouncing and do not get accepted from Jan 1, 2013 . There is a new standard in banking called as Cheque Truncation System or CTS 2010 , which all the banks have to follow now. RBI has issued a circular telling all banks that they should only process and accept those cheques which follow CTS guidelines.

What is Cheque Truncation System or CTS ?

It's just a new improved structure for chqeues and a set of guidelines which will change the way cheques are being processed and cleared. Right now, all the cheques are sent directly physical to the other bank for clearance, but with this new Cheque Truncation System guidelines, the banks will send the digital version of cheques (read scanned image) to the other bank and the clearance will happen almost same day or very fast. Some of the features of CTS cheques would be  

• It would have the wordings “please sign above this line” at right bottom
• All CTS-2010 cheques will have a watermark with the words “CTS INDIA”, which can be seen against a light
• A bank logo will be on cheque with a Ultra Violet Ink , which can be seen only under UV Scanners.
• The Cheque Truncation System 2010 enabled cheques will not allow any alterations. If there is any mistakes, the cheque will be invalid
• “payable at par at all branches of the bank in India” text will be at the bottom of all the cheques
• There will be IFSC and MICR code on the cheque
• You will have to sign the cheque will a darker ink, so that your signatures are valid for scanning.

If you look at these features, you can simply see that these are required for digital processing and once these Cheque Truncation System enabled cheques arrive , the whole banking system will start clearing the cheques in a must faster time. This will improve banking and save paper. Below is a sample of cheque which fulfill CTS criteria’s.

SBI has already told all its customers to get new cheques because all the old cheques will become invalid , In the same way HDFC bank and ICICI bank have also told their customers to get new cheque books.

What you must do ?

Replace your Post Dated Cheques

If you have given any post dated cheques to someone like for your home loan payments or for some other kind of payment, then it's the time to replace them with fresh cheques else it will just bounce and you might have to pay the bounce charges

Deposit any Old Cheque now

At times, we accumulate old cheques and deposit them for clearing only after many days or weeks. If you have any cheque which is to be cleared, better deposit it and encash !

A lot of banks have also asked its customers to give return back the old invalid cheques at their branch and collect new cheques, not sure why they need old cheques , why can't they issue the new cheques directly ? Also note that the cheques will be sent to the last updated address only. Learn more about CTS here .

You already have CTS-2010 compliant cheque books ?

Note that RBI has directed all banks to issue Cheque Truncation System 2010 enabled cheque books already from last many months. So it might happen that your cheque books are already complaint with those standards . So please check it once and don't rush to bank to issue you new cheque books . Like one of the reader found out that he already has the right cheque’s .

    "Banks like ICICI Bank and Axis Bank had already started issuing CTS-2010 compliant cheque books since last year. So please verify whether cheque book you have a already CTS-2010 before rushing to bank to get a new one. "