Duration – Friend or Foe?

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Bond duration is an investment concept that average investors genuinely understand, yet it can have a meaningful impact on how your fixed income portfolio performs relative to the bond market as a whole.

Investors tend to shy away from discussions of bond duration because the underlying math is relatively tricky. The good news is that once you look past the math involved, the underlying concept of duration is easily understood.

To make good use of duration when investing in bonds, you don’t need to calculate it — you need to understand the concept. However, before discussing duration further, consider another bond term related to duration: present value.

Present Value

Present value is what an investment is worth at the moment of evaluation. It contrasts with the value that the investment may have at some future time after it has benefited from compound interest. It acknowledges that investors discount the future value of an investment. Although ten years from now a sum invested at 6 percent compounded annually will be worth much more than the initial investment, investors place a discount on money earned in the future. The basic idea is that money received next year is worth less than cash in hand now and money earned the year after that is worth even less.

Which would you prefer: $100 in your pocket now or the promise of $100 you’ll receive in three years?

Duration

For individual investors, the duration is primarily used as a measure of a bond’s sensitivity to prevailing interest rates. It’s defined as the weighted average of the payments an investor will receive over time, discounted to the bond’s present value.

Duration, which is expressed in years, measures how much a bond’s price will rise or fall when interest rates change. The longer the duration, the greater the bond’s sensitivity to interest rate changes. Duration, then, is a particular expression of volatility.

The Impact of Duration on Bond

Duration, which is expressed in years, is a term that investors will encounter when assessing fixed income investments. Typically, portfolio managers will say their portfolio is overweight or long duration, meaning that their duration is higher than that of the benchmark. Alternatively, the portfolio could be underweight or short duration.

A portfolio with a duration that is above its benchmark can be expected to outperform the benchmark if rates are falling, and underperform if rates are rising. Conversely, a portfolio with a below-benchmark duration will typically outperform when rates are rising, and underperform when rates are falling.

Other factors also impact portfolio performance; most notably, the specific market segments in which it is invested — durations of junk bond funds will exceed durations of treasury funds with similar maturities.

Note as well, that duration should be considered a snapshot rather than a permanent aspect of the fund’s strategy.

Investors need to be alert to the risk/reward trade-offs rather than merely using past performances as a gauge of quality.

Short duration funds can be expected to be lower risk / lower yield, while longer duration funds tend to feature higher risk and higher yields.

For investors, the takeaway is that duration – while just one of many factors that can impact the performance of a fixed-income portfolio – is something that nonetheless warrants attention since it is one of the most important factors in the risk profile of any bond investment you might consider.

 

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Insulating Your Portfolio from Inevitable Market Corrections

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Naturally, investors get uneasy during times of volatility, but rather than see it as something to worry about investors should view volatility as an opportunity to pick up more shares at bargain prices. After most market corrections, clients typically ask how they can construct their portfolio to insulate from dramatic price movement. So here are a few recommendations if you find yourself wondering the same thing:

Consistent dividend-paying stock

The most powerful defence is a stock that has healthy earnings and a good dividend payout ratio and dividend yield, especially when compared to the return that is available on the risk-free treasury bond.

Here’s how it protects you during a down market: As the stock price falls, the dividend yield goes up because the cash dividend is a more significant percentage of the purchase price of each share.  In the midst of a market crash, at some point the dividend yield becomes so high that investors with excess liquidity often sweep into the market, buying up the shares and driving up the price. That’s why you typically see less damage to high dividend paying stocks during down markets.

Go Blue Chip

Seasoned investors are interested in one thing and one thing only: Buying companies with stable earnings at the most attractive price possible. In difficult economic times, the stability of profits is crucial. Often, the most successful stocks are those that have durable competitive advantages.

Identifying these companies isn’t hard. They are often referred to as blue-chip stocks; for example: Coca-Cola, Johnson & Johnson, National Commercial Bank Financial Group, Jamaica Producers  Group Limited, just to name a few. They often have extremely large market capitalisations.

Stocks Trading at Reasonable Valuations

Of course, diversifying your portfolio with stocks that traditionally have low price to earnings ratios, low price to book ratios, low price to sales ratios, and conservative balance sheets, the odds are good that you will emerge from the wreckage unscathed over the long-term.

This is why value-based money management have managed to return such impressive results to their investors for years. For investors lacking experience, this is best achieved through funds such as the Safe Solutions or Money Managers or Collective Investment Schemes.

A Few Other Thoughts

If you can’t analyse financial statements and calculate a conservative estimate of intrinsic value for the assets in your portfolio, it is a wise policy to maintain broad diversification.

Consider keeping a portion of your portfolio in international investments by investing in a highly rated, low-risk companies.

Never invest any capital in equities that you might need within the next five years.

If you can’t handle price volatility, consider reducing the overall gyrations of your portfolio by including a substantially fixed income component. Although this might lower your returns over subsequent decades, if it reduces the chances of you selling everything in a panic, it can provide a workable compromise.

 

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Oil as an Exception to the Rules about Demand and Supply

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The first principle a student learns in their beginner economics lecture is that people’s wants and needs are infinite, while the resources needed to satisfy these needs are limited in nature. This concept is formally known as scarcity. Scarcity has plagued nations for centuries forcing countries like Jamaica, to import significantly more than they export in order to feed the nation. Scarcity is the premise on which prices are set which then drive the laws of demand and supply. It is imperative that everyone understand how these two concepts interact and extends to different economic principles. One worldwide commodity that defies the laws of economics is oil.

Oil has become a necessity in today’s economy like water and air. Basic supply-and-demand theory states that the more of a product is produced, the more cheaply it should sell. The reason more oil was produced in the first place is because it became more economically efficient to do so. Companies created techniques to double supply with only small increments in cost. Since the output of oil has increased over the years along with demand staying static, prices, based on the law, should fall. However, that is not what has been taking place on the world market. What has been happening is the influence of cartels within the industry. OPEC controls 40 percent of the world’s oil supply and are so able to impact the price per barrel. What most of the population doesn’t know is that OPEC was founded in the 1960s to fix oil and gas prices. They achieved this by restricting production, and were then able to force prices to rise, and thereby enjoy greater profits than if its member countries had each sold on the world market at the going rate. Throughout the 1970s and much of the 1980s, it carried out this unethical strategy, possibly out of greed for money and power. We view oil as the exception to the price-demand-supply rule. These economic factors only have strength in determining price when it influences oil futures contracts. Regardless of how the price is ultimately determined, based on its use in fuels and countless consumer goods, it appears though that oil will continue to be in high demand for the foreseeable future.

 

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Decline In Stock Prices Might Be A Hidden Investment Opportunity

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Following the market sell off earlier this year in February, there was a more specific sell off experienced yesterday, concentrating on the Technology industry, and of course people are panicking. There is no need. Stock will be stocks, they will grow in price and they will also fall. Therefore, we suggest 100% equities to aggressive client, because stocks are volatile.

Stock indexes, including the Dow Jones Industrial Average, felt the impact of the fall in prices, where millions of US dollars in market value was lost, causing the Dow to lose over 300 points (the lowest since March 1), S&P 500 to lose over 39 points and the Nasdaq Composite falling more than 137 points (both at its lowest since February 8).

Amidst the increase in interest rates and the slow pace in which the market is building back up its momentum, technology stocks like Facebook [NASDAQ: FB], Netfilx [NASDAQ: NFLX], Amazon [NASDAQ: AMZN] and Google [NASDAQ: GOOGL] are generally all solid companies, some being more aggressive than others.

Facebook stock fell just short of a 7 percent decline, the largest decline in over 4 years, Google fell a little over 3%, closing at USD $1,100.07, Netflix just below 2% and Amazon 1.7%. What does this mean?

BUY MORE!

Purchasing these stocks as the prices go down, will benefit you whether you already hold the stock or not. How?

It will either lower your average cost or put in you a position to make gains when the stock prices increase. Isn’t making money the aim?

Keep in mind that having a portfolio full of technology stocks is however not wise. Diversification is always stressed to balance a portfolio.

Can you imagine if you had all technology stocks during this sell off? Your total portfolio market value would be in the negative!

Avoid this by diversifying and remaining confident in solid companies. GOOGL, AMZN & FB are stocks we at SSL strongly recommend.

 

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Investment Banking in Plain English

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From time to time we’re  asked the questions What is Investment Banking and how does it differ from a commercial bank?

Unless you work in finance, the term investment banking likely did not present itself in your day-to-day life until the 2008-2009 global meltdown began.

So let’s break it down.

What Is an Investment Bank?

To put it simply, an investment bank is nothing like the corner institution you’re used to dealing with to get a business loan or deposit your account. Instead, an investment bank is a particular type of financial institution that works primarily in high finance by helping companies access the capital markets (stock market and bond market) to raise money for expansion or other needs.

Sometimes, investment banks come up with novel solutions to solve difficult problems.

Years ago, Berkshire Hathaway had only a single class of stock.  Because its controlling shareholder, billionaire Warren Buffett, had refused to split the capital, the shares had grown from $8 to $35,400; far out of the reach of the typical investor.

Money managers were creating mutual fund-like structures to buy these shares and then issuing shares in themselves, taking a fee, to make the firm accessible to ordinary families.  Buffett didn’t like these middlemen making wild promises about the potential returns he could generate when he had nothing to do with it, so to take away their business, he worked with his investment firm to create a dual-class capital structure.

Therefore, on May of 1996, Berkshire Hathaway had an IPO for the Class B shares, which traded at 1/30th the value of the Class A shares (the old stock) but had only 1/200th the voting rights and the rest is history.

The Two Sides of Investment Banking

Investment banks are divided into two segments: the buy side and the sell side. The sell-side typically refers to selling shares of newly issued IPOs, placing new bond issues, engaging in market making services, or helping clients facilitate transactions.

The buy side, in contrast, works with pension funds, collective investment schemes and the investing public to help them maximise their returns when trading or investing in securities such as stocks and bonds.

Typical Investment Bank Activities

A typical investment bank will engage in some or all of the following activities:

Raise equity capital (e.g., helping launch an IPO or creating a special class of preferred stock.)

Raise debt capital (e.g., issuing bonds to help raise money for a factory expansion)

Launching new products (e.g., such as credit default swaps).

Engage in proprietary trading where teams of in-house money managers invest or trade the company’s own money for its private account.

Is investment banking an option you would consider for your business?

Let us know.

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After the Market Storm, Comes the Rainbow

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The past three trading days have wreaked havoc on the nerves of investors across the globe. The major sellout that took place on Friday, February 2, 2018, rolling over to the following Monday, saw significant loss in market indices. What many feared was a market crash, was simply a market correction after a two-year period of appreciating of stock prices.

This phenomenon was not unexpected as analysts predicted that eventually, the market would have corrected itself.

Of course, other factors played a role in Tuesday’s panic, for example, the rising bonds yields which people assumed would lead to inflation and higher rates, and eventually erode companies’ profits.

Following the plunge of approximately 1500 points in the Dow Jones index, and the S&P 500 down by 0.9 percent, the market recovered the best they have since 2016 by the end of Tuesday.

The most affected industries such as technology, materials and consumer shares paced a 1.7 percent gain in the S&P 500 Index, while DowDuPont and Home Depot led a 567-point surge in the Dow Jones Industrial Average, the biggest gain in two years.

Notwithstanding the major losses from previous days, the market is starting to see and feel the efforts of investors to bring forth stability and return consumer confidence.

This last market correction does not indicate that investors should become complacent about markets’ volatility. We do believe that without solid economic growth, rising profits and a gradual pace of normalising policy by the central bank, this plunge is one we could experience again. Investors and traders must keep a keen eye on their holdings and the companies on which they have been bullish about for years.

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There is No Need to Panic About Current Activities on the US Stock Market

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Despite many advancements made in trading since the 1940s, investors tend to overreact and may panic whenever the equity market moves down. Most investors are so fearful of another stock market crash, that they do everything humanly possible to prevent it.

What we would like to remind those investors is that making rash judgments and panicking is likely to affect market sentiment and that may directly affect the value of your portfolio.

Over the last few days, the markets globally are experiencing what economists call a market correction – temporary price declines of less than 10 percent. This market activity is predictably interrupting an uptrend in the market; while a market crash is when a stock index loses more than 10 percent over the course of a day or two.

See the difference?

A market correction is necessary to a functioning stock market as air is for us to live. Remember the Dow Jones industrial average increased by approximately 40 percent since the 2016 presidential elections and while the earnings and tax break support the increase. As a result of robust growth taking place in a relatively short period, a slight decrease in equities occurred:  hence a market correction.

So rather than scream, the sky is falling also known as the market has crashed, let us look at the facts:

The Dow Jones declined by less than 5 percent compared to the Great Depression in 1929, where the Dow plunged by first day 13 percent and then 12 percent on the second day.

Why are markets down?

As mentioned before, markets have gone up too far too fast, and shares were ripe for a fall. But more importantly, it is because the bull market has been due to the willingness of central banks to supply copious amounts of money to the markets at ultra-low interest rates.

This correction should encourage all investors to utilise hedging and the necessity of taking gains instead of holding out and getting greedy.

Diversifying your portfolio with a combination of blue-chip companies and some aggressive stock picks is not dull but smart.

The fact about investing and we have advised many clients similarly, is that many times is panic is just as influential as economic factors, be careful of joining the crowd and look to facts, otherwise you may end up absorbing an unnecessary loss.

If you liked this article and want to read other great stories, try our Archives. Also if you are new to investing you can try our Investment Basics Blog.

If you want to start investing with SSL but don’t have the time to monitor the market or to conduct the trades yourself then you can choose one of SSL’s managed Financial Planning products. We offer a variety of products for every type of investor and if you are interested in managing online trades yourself and having complete control over your investment portfolio then you can try SSL’s Brokerage account.

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Buy Apple as Share Price Dips

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With news that Apple will be cutting the production of the IPhone X by half, investors are rushing to sell Apple shares. Apple shares are down almost 6 percent within 5 days of trading with a possible 10 percent decline if the stock price should reach US$162.

Even though the stock price has seemingly decreased in value over the past few days, it is important to note that Apple stock increased by 37 percent over the past year. In a similar case, in the first quarter of 2017, Apple cut the production of the IPhone by 10 percent. Prior to the cut in 2017, the production of the IPhone 7 was cut by 20 percent.

With this news, IPhone sales increased to US$79.29 million, resulting  in the stock price increasing from US$120 to US$140 in a month. This continued with increases in sales for the following quarters in 2017.

Apple releases its annual report on February 1, 2018 and analysts are optimistic that the review will be positive. Reason being, the IPhone X is the most expensive iPhone Apple has made and this should increase the average selling price compared to last year. In addition, customers are still purchasing earlier models.

It is argued that even if the IPhone X is a disappointment in terms of a decrease in sales in 2018, there is no need for investors to panic. Apple has very high cash reserves when compared to other tech companies and should be able to repurchase its own stock and innovate other products in the event it suffers from a terrible decline in sales.

Any decline in a stock price is reason for concern, however, this is a great buying opportunity for many investors. But since these rumours have not yet been confirmed by Apple, would you sell your Apple shares fearing the stock price will continue decreasing?

If you liked this article and want to read other great stories, try our Archives. Also if you are new to investing you can try our Investment Basics Blog.

If you want to start investing with SSL but don’t have the time to monitor the market or to conduct the trades yourself then you can choose one of SSL’s managed Financial Planning products. We offer a variety of products for every type of investor and if you are interested in managing online trades yourself and having complete control over your investment portfolio then you can try SSL’s Brokerage account.

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Beware of Adding these Stock Options to Your Portfolios in 2018

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It is often said that the numbers don’t lie. After careful examination, we earmarked a few stock options that investors should be cautious about investing in, as they diversify their portfolios in 2018. See more below:

Tesla [NYSE: TSLA], has been a favourite among many investors. Some experts fear that the company’s story has reached its pinnacle since it has not transformed itself into the mass auto market. This company is a money loser and its recent delays, plus the almost fantastical vision of the battery-powered truck leads me to believe that CEO Elon Musk is played out and the operations need to start meeting the otherworldly promises of a dynamic economy.

The Long Island Ice Tea Corp. shifted its focus from manufacturing beverages to blockchain technology. The company changed its name to Long Blockchain Corp. [NYSE: LBCC] and its stock shot up on the news. While the stock reached a high of $6.24 on Jan. 9, it is now trading at $4.22. The company appears to be a speculative bet on blockchain technology simply. While blockchain may be a significant innovation and change the way we transact, there is no guarantee.

Elite Diagnostic IPO back and forth is enough to give investors whiplash. The initial prospectus illustrated incompetence from the auditors to the two brokers. The report had a discrepancy of approximately $15 million re depreciation and fixed assets. This profoundly troubled investors, and we are seeing clients withdraw their applications.

Ciboney Group [JSE: CBNY], despite what Errol Campbell believes the stock market is not attracting investors into the now out-of-business entity. As the company sells it last asset, the Culloden Land for $250 million, they are left with significant debt.  Despite the rise in price after the news broke of the transaction, the price has declined by 12 percent. At this point, Ciboney is a placeholder on the stock market and not worth real consideration.

If you liked this article and want to read other great stories, try our Archives. Also if you are new to investing you can try our Investment Basics Blog.

If you want to start investing with SSL but don’t have the time to monitor the market or to conduct the trades yourself then you can choose one of SSL’s managed Financial Planning products. We offer a variety of products for every type of investor and if you are interested in managing online trades yourself and having complete control over your investment portfolio then you can try SSL’s Brokerage account.

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Outlook: Jamaica

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Jamaica continues to enjoy a reputation as one of the top-ranking global destinations for investments. With the macroeconomic environment improving, we are seeing higher values and volumes trading on the Jamaica Stock Exchange as business and consumer confidence increases.

In 2017, the combined index grew by 42.8%, and we expect the index to hit the 400,000 mark by the end of this year. Understandably, investors are concerned about the high valuation of the equity market; this is a global phenomenon.  A market correction is coming; however, we do not anticipate this happening in 2018. Investors are deviating from previous investment tactics, shifting from the now low-yielding bond markets to equities and private placement deals.

It is no secret that the JSE continues to outperform several international markets and many feel that it is time to cash out.  We disagree.

There is money to made in the local market, with several initial public offerings slated for 2018 as well as real estate deals as corporations focus on developing the infrastructure of a growing economy.

With so many local securities outperformed expectations, we remain bullish on the following:

  • Jamaica Money Market Brokers
  • Jetcon Corporation Limited
  • National Commerical Bank Financial Group
  • FosRich Group of Companies
  • Caribbean Producers Jamaica. 
  • Seprod Limited

The country reformed framework will continue to attract investors to the island in 2018 as investors capitalise on a business-friendly environment, special economic zones benefits and competitive tax regime to name a few.

Jamaica has no problems attracting foreign direct investments and has the highest rank in the Caribbean for the ease of doing business.

If you liked this article and want to read other great stories, try our Archives. Also if you are new to investing you can try our Investment Basics Blog.

If you want to start investing with SSL but don’t have the time to monitor the market or to conduct the trades yourself then you can choose one of SSL’s managed Financial Planning products. We offer a variety of products for every type of investor and if you are interested in managing online trades yourself and having complete control over your investment portfolio then you can try SSL’s Brokerage account.

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