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Understanding the Bond Market by Kevin Wright

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Many beginning investors and even some moderately experienced investors may have issues with understanding the exact workings of bonds and the bond market as a whole. The bond market may be intimidating, but it doesn’t have to be. Understanding a few key concepts and a little bit of terminology will help you navigate the ins and outs of bond investing.

 

Bonds are simply a way for governments and companies to borrow money. Instead of seeking financial resources from a bank or other lending facilities. These institutions can seek to sell bonds to a large group of investors in an attempt to raise the necessary capital it requires to operate or grow. Typically, issuing a bond can be less expensive than a bank loan and tends to offer more flexibility.

For the investors, it’s helpful to just think of yourself as a lender when you invest in bonds. Investors buy bonds from the company/government that issues them, and the company/government promises to pay back investors the principal amount plus interest. Interest payments are paid regularly (usually quarterly, semi-annually or annually) until the bond “matures” or reaches the end of its agreed term.
Bonds are issued in varying terms of lengths, they may mature in the very short term (days or months), short term (one to five years), medium term (six to 10 years) or even long term (more than 12 years). Typically, the longer the term of the bond, the higher the coupon rate. The coupon rate is the key indicator to the investor on the amount of interest he or she will get over the life of the bond. For example, a bond with a 5% coupon rate and a $1,000 face value will pay the bondholder $50 each year.
Bonds also have a credit rating based on how likely they are to be paid back in full. These may vary between different bonds, but they generally range from AAA for the highest quality bonds down to D for bonds in default or non-payment.

The lower the credit rating, the higher the risk of default. For the investor, this can also translate to taking on higher potential returns for taking on more risk.

How the Initial Bond Market Works
Bonds issued in primary markets are similar to a company’s initial public offering (IPO) of stock. Companies looking to raise money via bonds coordinate with investment banks to set the coupon rate, the terms of the issue and the total amount of money the company is going to raise.
The investment banks then sell the bonds usually to large institutional investors (who make up the bulk of bond buyers) through an initial offering. These bonds are issued by the borrowing company at an offering price that is uniform for all investors. This standard price is known as the par value, which is usually $100.00 per bond. However, it is also important to note that it is common for a company to issue bonds at a discount (for example, selling a $100.00 bond for $99.50) or at a premium (for example, selling the instrument at $100.10 which constitutes as above par).

Secondary Markets
After the initial offering, investors may buy or sell bonds on the secondary market through brokers. Think of a secondary market like a used-car market, where once “new” bonds are sold secondhand to other investors.

Secondary markets are much more accessible to smaller investors, and you don’t have to be an investment banker to take part. However, it’s vital that investors understand how bond prices move when interest rates change. As a rule, when interest rates rise, bond prices fall. The opposite is true as well — as interest rates decline, bond prices increase.
However, the change in interest rates impact bonds differently depending on many factors, including time to maturity. Individual bond investing can at times be more complex and requires much more diligence and research than stock investing.

As with all investments, it is important to assess risk when purchasing bonds. Analyzing the price, interest rate, yield, redemption features, taxation and the company’s credit history and rating when weighing which bond to choose.

Investing in individual bonds can also at times be expensive, especially if you desire to buy several different bonds to create a diversified portfolio. Many bonds are associated with minimum buy in amounts and this can range from around (but are not limited to) $2,000 USD up to $200,000 USD.

Bond Exchange-Traded Funds
For those interested in a bond investment with lower expenses, a bond ETF makes a great alternative investment. These securities may hold/ track the performance of several bonds, diversified by term/ market segment, credit risk, and/or type.

Bond ETFs are much like stocks in that they are traded on the stock exchange. Similarly to stocks, bond ETF prices fluctuate with demand and may also be sold at any time.

As the characteristics of stocks & bonds differ, both can yield a number of benefits for clients, but most importantly it is about matching your investment strategy/ goal and risk attitude with a proper mixture of securities.

When Should I Start Saving? by Philip-George Pryce

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Many people often delay saving by saying “I’ll begin saving in a few years, it won’t make a big difference.” This is a problem for two reasons. Firstly, “in a few years” may never come. It is not unusual for people to delay saving year after year until suddenly a decade or two have passed and a person still has very little in savings. The second problem with this mindset is that, contrary to popular belief, saving early actually makes a massive difference, even if the delay in saving is only by a few years. For example, let us consider a person that decides to save $10,000 a month every year for 30 years. We’ll assume this person saves $120,000 a year, and his savings are compounded annually at a rate of 7% a year over the 30 year period. At the end of the 30 year period, this person would have saved a total of roughly $11,335,294. How does this amount saved change if the person instead decides to delay saving by only five years? Well, if a person saves $120,000 a year at 7% a year compounded annually for 25 years, at the end of the period the person would have saved $7,589,884. By delaying saving for five years the person would have lost $3,745,410 – which is close to $750,000 for every year the person chose not to save, or over $2,000 for every day the person delayed saving!
Why is this? Why does delaying saving by only a few years have such a major impact on the total amount saved? This is because of the effect of compounding. The money you save continues to earn interest year after year, and over time the amount it earns in interest becomes even greater than the $120,000 contribution you make. For example, the amount of interest earned in the final year of the scenario above (from year 29 to year 30) would be over $730,000!
The total amount you save gets a lot bigger if you increase your contribution over time. Suppose you decide that every year you want to increase your contribution by 5%. This is similar to deciding to save $10,500 a month in your second year of saving, rather than the same $10,000 you saved in your first year. Using the same interest rate above, if your contribution increases by 5% a year you would have saved almost $20 million at the end of 30 years!
So the best time to start saving is today, but now you’re probably thinking “Okay, how do I save?” Talk to a financial advisor or investment firm about the options available to you. Ideally, you would have your money invested in a mixture of stocks and bonds – depending on the level of risk you are willing to take and the interest, or what we call return, you are seeking. What exactly are these stocks and bonds I mentioned earlier? By purchasing a stock you basically purchase a very small share in a company, and you make money when the company increases in value or pays out excess cash to its investors. You essentially become a part owner of the company! A bond is slightly different; by purchasing a bond you lend a company money and in return the company gives you fixed payments over time. Don’t worry if this looks like a lot to take in, your financial advisor can explain both to you in more detail and will even manage your entire portfolio for you hassle free. Your financial planner will buy any stocks and bonds that he/she thinks are a suitable investment for you, and decide the best times to sell the stocks you own. Your actual involvement in the investing can be as hands on or hands off as you would like.
The last thing you need to do is ensure that when you save, your portfolio is well diversified. This means that rather than invest in one stock or one bond, it would be best to invest in a large basket of stocks and bonds. As the old phrase goes, “don’t put all of your eggs in one basket”. Ensure that your financial planner doesn’t put too much money into a single financial instrument, but instead invests in a large variety of stocks and bonds. This will make it so that any single stock/bond losing value will not significantly impact the return earned on your portfolio. Being properly diversified will significantly reduce the risks you face as an investor.
The best time to start saving is right now. Every little amount counts, and a small investment today will be worth a large sum of money years in the future!

Driving in your Financial Lane by Ashleigh Elliott

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Many people are fascinated by the idea of being ‘rich’ or to a lesser extent, financially stable. However, what is being done to achieve this goal? Is it possible? and what can be done?

Wealth is measured relative to an individual’s current financial status, how they live relative to their income and what he or she believes is wealth. Example: A and B are two persons earning the same amount of money per month, but, the obligations A could be significantly more than B, hence, B having more disposable income would, therefore, be classified as being wealthier than A.

Yes, we do know that with the state that the economy is in and the constant rise in prices of products that are essential to everyday living, it is very hard to set aside money for the future. However, it needs to be done!

Knowing the priorities in your life and setting financial goals are key factors in financial success. When I say priorities, I mean, living within your means and not allowing how other person’s lives look, or what they do, to influence how and what you spend your money on. A lot of persons put on a façade, “flossing” money without hesitation, allowing outsiders looking in, to think they are wealthy and thus wanting to match up to them so they aren’t being called “lame”. What will be “lame” is when your monthly bills come in and you cannot afford to pay them, or when your child is ready to go to school and you are unable to pay their school fee much less give them lunch money. Where will those persons be to help you? You need to help yourself!

I’ve found that the more you are secure within yourself and what you want out of life, the less you have to prove to persons and can then build yourself quietly.

Every individual has to mentally condition their minds to save. If you are the type of person that is not disciplined enough to see and not touch, here are a few pointers for you.

  • Have separate savings account from your current account so that you can transfer money into.
  • Get a savings pan that cannot be opened unless full.
  • Give your money to a trustworthy person to hold until needed.

Personally, I allocate a specific amount of money to be used for a particular day, depending on my activities. If I end up using it all, (which is never the aim) then fine, however, if I don’t, I would then drop any extra there is, even if it’s $5, into my savings pan.

Making a conscious effort to be able to say no to yourself is most important. You see a nice shirt you want to add to your closet? A new pair of shoes that catches your eye? You need to ask yourself if it is necessary to get that at that very moment. I am of course not saying no one should treat themselves because everyone works hard, so treating yourself is necessary, but when and how often is the question. Some persons will be able to treat themselves more often than others but a good tip to this is if you do really want the shirt and it costs $2000, put down $1000 per month and at the end of two months you would be able to buy that shirt. The aim, however, is to be able to buy what you want, how much you want and when you want it, of course with also being able to satisfy your obligations.
It is very important to know yourself and what you are able and unable to do. However, it would not be wise to put all your eggs in one basket. The majority of the wealthiest persons in the world or specifically Jamaica, have different streams of income. Therefore, investing in stocks and bonds, real estate, opening your own business, spending wisely or even savings, aids in how comfortable you feel about your financial security.
Of course, everyone has different levels of income, responsibilities, and goals, but no matter the amount, make an effort to save a percentage or a fixed amount of your income every month for emergencies or just future plans. It is better to put down money in small portions to mitigate the impact it has on your pocket than to take a big chunk out of your pay in one go. Depending on your financial status and availability of startup funds, investing or starting a business will not be easy, the benefits may not come quickly but once there is persistence, you will see your wealth grow. Risks and sacrifices have to be made for everything in life but the more you put your mind to achieving something, the easier it gets even with failure. Failing means to try a different strategy or simply try harder. Step out of your comfort zone and always tell yourself that you can be where you want to be financially. Life is about making mistakes and picking yourself back up from it and then keep pushing. However, one mistake you don’t want to make is to never make that next step in securing your future. No one wants to be living pay cheque to pay cheque. Everyone wants to be able to do the things they love while tackling the things they must do, so everyone needs to take that next step and put aside fear and negative thoughts so that their tree may bear fruit. You do not have to start big but start somewhere. Start small and keep growing.

Make 2017 your year!

The Truths About Wealth by Daniel Wong

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Can I become wealthy? How do I become wealthy? Should I invest in the stock market?

These are all questions that we might find ourselves asking at some point or another in our lives. Unfortunately, these questions are not easily answered with a yes or no and there is no wrong or right answer to these questions. However, there are some things you should know before attempting to answer these questions and they are ‘The Truths About Wealth’. Before you start investing, it’s best to first be informed.

Truth #1 – Wealth is accessible to All but, not all will access it!
This is a fact, but if you have already been deterred by this harsh but true statement then you have already started off on the wrong foot or rather, no foot at all because it is likely that you would not even bother to make that first step. In order to access wealth, you have to put yourself in a position to do so; by starting now, not later, whether it is spending less, saving more or investing in stocks or other securities.

Be a ‘go getter’ and make wealth accessible to you even if it means taking risks. Don’t be afraid to lose, because it is imperative to believe that you can always get it back and even more. Being proactive also means a change in your mindset, your mentality and the way you think. Be optimistic and don’t limit yourself. If you never see yourself as having your dream house, then chances are you will never work for it or put yourself into the position of attaining it. Remember, small efforts lead to small results so think wealthy, think big.

Truth #2 – There is no universal formula to become wealthy!
The path to wealth is nothing short of being a maze. There are many ways of generating wealth and what works for me may not work for you, nor do we all have the same opportunities to begin with. However, one recommendation by the experts that would appear to work for all is diversification. Diversification surrounds the idea of “not putting all your eggs in one basket”. Although saving is a big part of accumulating wealth, it is not enough. One needs to have multiple streams of income or earnings.

Your income should be active as well as passive. An active income would include your earnings from your job and, for most of us, this is definitely not enough to make us wealthy. Passive income, on the other hand, follows the concept of making your money work for you. One good example of making your money work for you is investing it, whether it be in stocks and securities or real estate. So think about earning your salary (active income), while getting rent from property or dividends from stocks (passive income).

Truth #3 – Most wealth is accumulated over generations!
Another truth is that most wealthy persons or families are where they are today because of generational wealth. Wealth inherited and passed down from generation to generation. This, therefore, gives credit to the statement that “the rich will always get richer” because it is easier to make more money when you already have money. As a result, the wealth that we would probably like to amass in our lifetime would have to have started from your ancestors and won’t be entirely for our benefit.

Wealth is about hard-work and sacrifice. A sacrifice made now so your children and their children will have a better start. Even if you were not one of these wealthy “generational fortunates”, you still have the chance to allow your successors to be one. This is not to say that those who have inherited wealth enjoys the spoils without hard-work and sacrifice, which leads me to my next truth.

Truth #4 – It is easier to become wealthy but harder to maintain it!
A teacher once told me that it is easier to get an A and harder to keep it. Anyone can get lucky and win the lotto, but chances are they will lose it even quicker, ‘easy come easy go’. It takes foresight, a sound plan and good management to maintain your wealth. I am not asking you to be a prophet, but only to be aware and informed, don’t be one of the ones who say “ if only I did this when I was younger if only I knew better”. So be honest with yourself, if your forte does not involve good money management and planning, don’t be afraid to go to the professionals, they are not all profit hungry. If you are interested in investing in stocks and securities, go somewhere where not only are you appreciated, but where your investments appreciate.

Truth #5 – Wealth is freedom but more responsibility!
Wealth can be good and bad. It offers you financial freedom but you might find yourself with more desires and more expenses. The term “more money, more problems” comes to mind. However, I also believe in working hard and playing hard, so I encourage you to enjoy the fruits of your labour and don’t be a miser. Spend but don’t be greedy, know when to hold and know when to fold. Don’t make spontaneous financial decisions that satisfy your need for instant gratification. Start making wise financial decisions that will benefit you for the rest of your life.

Truth #6 – Wealth is achieved not perceived!
Don’t spend too much time looking at other people’s wealth. Quite often, the persons who appear to be wealthy have a surplus of loans and negative credit card balances. Be guided by wealthy people but don’t be deterred by them. Don’t let someone tell you that your plans are not worth it. After all, some people will always want to see you do well but never better than them. True wealth is earned, and it is not always about working hard but working smart. Let your money do the work for you. Be committed to your plans and investments and don’t be haphazard.

Truth #7 – Wealth is not only monetary!
Finally, invest in your wellbeing, your health, your body, your mind, your family, your friends, and your passion. Remember being wealthy doesn’t always mean having money, it involves being happy with what you have.