The Handy Investing Answer Book. Paul A Tucci

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СКАЧАТЬ investors trying adequately to plan for their retirement. Unexpected expenses—such as medical expenses and home care expenses—may also occur later in life, and may greatly decrease your available resources during retirement.

BETA

      What is the “beta” of a stock or mutual fund?

      The beta of a stock/mutual fund is the result of a mathematical equation that measures the volatility of that stock/mutual fund when compared against some benchmark, such as other stocks of similar qualities or, in the case of a mutual fund, a benchmark index. Beta measures how the price of a stock or mutual fund might react to changes in price of the benchmark. The benchmark and the investment vehicle may be highly correlated; if the benchmark price increases, so does the investment vehicle, and vice versa. Accordingly, an investment such as a mutual fund with a beta of 1.0 will have a price that will, more likely than not, move with the market. It is closely matched with its benchmark, but a mutual fund with a beta less than 1.0 will not move with the market. A mutual fund or stock with a beta of 1.2 will be about 20% more volatile than its benchmark.

      Why do stocks and mutual funds have different betas?

      Investments with betas less than zero will move in the opposite direction of the market. Investments with betas of 1.0 will move in the same direction as the market. Investments with betas of 1.0 may also be a major contributor to the benchmark itself. And investments with betas above 1.0 will be more volatile, and may be more affected by minute-by-minute news and market trading activity.

      How is beta calculated?

      Beta is calculated by analysts using statistical analysis techniques, and is often provided for you when you are analyzing different investment choices, such as individual stocks or mutual funds. Typically, beta is derived by analyzing how an investment choice’s volatility compares to some broad index—in many cases, the S&P 500.

      What is the relationship between beta and risk/rewards?

      Beta relates to the risk and rewards that might be attained through entering into an investment because a specific investment that has a high beta (more volatility compared with some index) would imply a higher reward or return for the investment. That makes it rather easy to determine if the betas of various investment choices are worthy of further study if their rewards match the implicit volatility.

      How do I use beta to analyze an investment choice?

      You use beta calculations by first looking at the beta of a benchmark and the expected return of this market index. If the beta of the market as a whole is 1.0, and this broad index returns to investors 8% per year, an investment choice with a beta 50% greater (1.5), should provide a return of approximately 12% (since 12% is 50% greater than the 8% return of the broader index). If, through careful analysis, you do not see this investment choice providing this level of return, it is typically filtered from the list of possible investment choices.

      How is beta analysis misused or misinterpreted?

      The use of betas in analyzing possible investment choices may be misused or misinterpreted in a number of ways. Typically, high-tech investments may have high betas, yet may be good long-term investments. Utilities typically have lower betas by comparison, but offer very good returns in many investor portfolios. Beta also reviews the past, and past performance is not always an accurate indicator of future performance. Beta may not take into account current or upcoming changes to the company, or broader market shifts that may positively or negatively affect the earnings of a typical investment vehicle. Beta also does not necessarily take into consideration what happens when markets advance forward, whereby a company with a beta greater than 1.0 may outperform the market as a whole.

      How can I use beta analysis to help in my investment selection?

      Many experts assert that it is good to use beta analysis when you are engaged in shortterm analysis, such as when you are planning to acquire/sell an investment vehicle within a short period of time. However, for longer-term investing, it is more prudent to use a variety of analytical tools to assist in filtering various investment choices.

CREATING WEALTH

      What is “wealth”?

      Wealth is the state of your abundance of assets in terms of marketable or saleable value, minus any liabilities owed, and is often examined in comparison to others in some reference group. Assets of value include cash, investments, home equity, and other valuables such as jewelry, art, and precious metals. The term “net worth” is also used in place of the term “wealth” when it comes to personal finance and investing.

      How much must I accumulate in order to be considered wealthy?

      According to experts at CNBC, citing a 2013 study by UBS Investor Watch wherein individual investors were asked “Are you wealthy?”, the survey revealed that 60% of respondents who had more than $5 million in net worth described themselves as wealthy, while 28% of respondents with a net worth between $1 million and $5 million described themselves as wealthy.

How do respondents describe the state of being wealthy?

      Fifty percent of the UBS survey respondents believed that being wealthy meant “having no financial constraints on activities,” 16% believe it constituted “surpassing a certain asset threshold,” and 10% believed it meant “not having to work again.”

      What percentage of American households lack an emergency fund with enough cash to cover three months of living expenses?

      Financial experts at Time Inc. assert that roughly half of all American households do not have such an emergency fund.

      You don’t have to be worth $76 billion dollars like computer business magnate Bill Gates to be wealthy; a million or more should suffice.

      How do I attract wealth in my life?

      You have to look first at your attitudes toward money, and understand how these attitudes contribute to your financial situation today. By recognizing these attitudes, you can see which are helping you, and which are blocking your goals. You may have to change some of your beliefs about money and finances in order to begin to attract wealth. Your imagination is very important. In fact, your imagination drives your desire to buy items, since you have a mental picture of the new car or cell phone that you want, you see images of it in commercials, your friends talk about it, and then you buy it. It is a little more difficult to imagine a pile of money 20 years from now that you will use to pay for your kids’ tuition. So you have to teach yourself how to envision personal financial goals, and actually visualize them. You have to give yourself permission to be wealthy, that it is not something reserved only for other people. By having a vision of how it feels to have wealth, it makes you more able to use behaviors and see opportunities that create wealth. Some people think of wealth like water, something that flows to you. If you begin to act as if you already have financial security and have the discipline to meet your goals, financial security and wealth will occur.

      How important is the place where you live influencing your perception of wealth?

      According to researchers at The Wall Street Journal, attitudes about being wealthy in a rural part of America may be far different from attitudes about being wealthy in Manhattan, perhaps because it requires much more income to live in Manhattan than in rural America.

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