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Where to Invest for 2014

What asset classes were the leaders in 2013? Small cap stocks as represented by the Russell 2000 Index led the way with gains of 38.8%. Growth stocks did well posting gains of 34.2% as represented by the Russell 3000 Index. International stocks also reported double-digit gains (represented by MSCI EAFE NR USD Index), while bonds experienced net losses for the first time in a decade.

What are the expected winners for 2014? Probably not the winners of 2013.

That is why diversification in a portfolio among different asset classes is important. And this is why rebalancing your portfolio periodically is critical. Small cap is a higher risk asset class than large cap or bonds. The rush up in small cap in 2013 may have also increased your risk exposure. Rebalancing helps manage that risk.
Think of it as selling high – trimming gains off the best performers. And buying low – repositioning into assets that did not perform as well.

So what about Bonds?

Interest rates have been flat to non-existent for several years. Rates are expected to rise over the next few years.

Interest rates will rise as the Federal Reserve Bank continues to taper – or buy fewer treasuries each month. The Feds have a delicate balance to strike. Taper to fast and the constriction could slow the economy. Taper too slow and rates rise and we see increases in inflation.

While the Feds are doing their balancing act, the investor in bonds will have their own balancing act. Interest rates and bond prices have an inverse relationship. Bonds received the benefit as the interest rates were dropping, their bond prices were increasing. Now we will experience the reverse. As interest rates increase, bond prices will drop.

If you own individual bonds, selling your bond in an increasing interest rate environment will see a drop in your bond value. However, holding the bond until maturity and you will get the face amount of the bond. Holding steady may be your best course of action.

In a bond mutual fund, rarely are bonds held to full maturity. Money managers are moving bonds in and out of the portfolio. As interests rate rise, bonds are purchased with a higher coupon rate. In a bond mutual fund, your value will bounce around on rising interest rates, and hopefully your interest payment will increase.

However, in 2013, bonds experienced a year where loss in value was not completely offset with dividend/interest payments. This picture is not likely to change much in the next few years.

What does an investor do? This past year has seen an exodus from bonds to stocks. Do you hold bond funds or not? It depends. Much depends on your risk tolerance, age, and cash flow needs.

Bonds with shorter durations will have less value fluctuation with interest rate changes. The opposite is also true – bonds with longer maturity will see more price volatility with interest rate changes.

Lower credit quality bonds pay higher interest, as they have more risk of defaulting on payments. Since they have a higher interest rate, they will do better weathering rate changes.

Floating Rate Loans Funds have come into existence in the last decade, providing short term loans for corporations. They pay a little more than a money market account, but they also come with more credit risk.

Short duration bond funds have seen an influx of monies. These funds tend to have less credit risk and short durations. They are positioned to quickly respond to interest rate changes.

High yield bonds have weathered the impending interest rate changes better than most bond categories. They tend to have longer durations over 4 years. They pay a ‘high yield’ compared to other bonds because there is greater risk of defaulting on payments.

With the city of Detroit’s bankruptcy in the news, many investors are staying away from municipal bonds. Yet the default rate on municipals has declined over the last 3 years. If you are in a high tax bracket, you may want to consider this option as interest on municipal bonds is federally tax free.

Regardless of where new opportunities are to be found in 2014, investors should stay within their risk temperament. The pain of investment loss lives longer in our memories than the reward of investment gains. There is value in being able to sleep soundly at night.

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Women Should Consider Forex Trading As a Home-Based Business

Women looking for a way to be able to stay at home and simultaneously contribute to the family income should consider foreign currency trading as one among many home-based business possibilities. This also applies to stay-at-home dads, financially struggling college students, minimum wage workers or anyone else who would like to supplement their income or even create a new full time career.

FOREX trading requires very little startup capital, knowledge that can be acquired from excellent online sources for only a modest investment, a computer and an internet connection. It is one of the easiest businesses for an individual to get started in. Note and caution: in addition to the previously stated items, successful trading also requires intense self-discipline and risk management. It should not be considered a get-rich-quick project, but a source of steady part time (or full time) work with good income potential.

In 1978 the International Monetary Fund mandated the free-floating of currencies. That means that a currency, like the U.S. Dollar, Swiss Frank, or Euro changes in value minute to minute based on the laws of supply and demand. That decision also opened the currency markets to more participants than before. The volume of currency traded each day has grown dramatically, and this is a good thing for small traders who want to take small risks and get in and out of the market fairly fast. In 1977 the daily value of currency traded between banks was about U.S. $5 billion. By 1987 this had grown to U.S. $600 billion, and by the year 2000, it was up to U.S. $ 1.5 trillion.

Eventually corporations joined the banks in trading. This added to the volume and also added to the liquidity of the currency markets. Liquidity is important to keep from getting trapped in a losing position without being able to get out, or riding a nice profitable move and then seeing it disappear while you attempt to get out. The ideal market to trade is one that lets you in quickly and also lets you out quickly.

Now, even individuals can compete on relatively even footing with large central banks. The key is access to online information and online trading services. It may sound risky and complicated at first, but can actually be quite simple if you don’t get greedy and invest the time and money needed to learn the basics.

An advantage of currency trading over trading something like stocks is that currency markets are open almost 24 hours per day, so you can work whatever hours you choose, even the middle of the night. Also important is the fact that you don’t need much money to start. Many brokerage companies will allow you to open an online trading account for only $1000, and most of them will also let you practice for free with simulated trading accounts.

It is very important to learn the basics and also to have a well-practiced plan before you put real money into your new part-time business. Go to the library and read all the books you can find on trading and investing, then take time to surf the internet looking at forex trading courses (if you want to be a profitable trader, you need to invest a little money up front in education in order to avoid learning the ropes the hard way: by losing real money in the market) and selecting a good forex broker.

After you learn everything you can from a good online course and set up a trading account, be sure to trade “on paper” in real time without real money for a month or two to get all the bugs worked out of your strategy before you put real money on the line. Don’t let anyone tell you it is easy, but with hard work and discipline you can enjoy a nice supplemental income by trading.