Tag: markets

  • The Barbell Portfolio – Strategy Of A Balance

    The Barbell Portfolio – Strategy Of A Balance

    The Barbell Portfolio - Strategy Of A Balance
    The barbell portfolio holds only short term and long term bonds and generates fixed income. A flattening yield curve situation is the best time to use this strategy, while a steepening curve is harmful to the strategy.

    The barbell portfolio was invented by bond traders. The strategy means to hold safe short-term bonds and riskier long-term bonds. Put them together and that is the barbell portfolio. This also means that you are betting on both sides. But your barbell portfolio gives you protection since you have extremely safe short-term bonds. Yes, they will provide you with less profit but the profit is compensated from the other side of your portfolio – by long-term bonds that are extremely risky but provides a great profit.

    Building a barbell portfolio, you will give your investments a balance that can run you through different circumstances, even extreme ones. The barbell portfolio is a very simple investment allocation actually. But the barbell portfolio is heavily weighted on two ends, just like a barbell. This concept is easy to understand and we want to explain it by using bonds. You can create this kind of portfolio with cash and stocks, also it can be a nice substitute to a 60/40 stock/bond portfolio.

    How to structure barbell portfolio 

    Let’s say the short-term bonds are risk-free. But you will not earn a lot by holding only them. To have a profit you must add something riskier to your portfolio. So, you can do it by holding long-term bonds. You see we are not considering mid-term bonds. There are long-term bonds to provide the yield to your portfolio. 

    Yes, they are the riskiest but also give the highest returns.

    The idea of this kind of portfolio is to bypass and avoid the risk on one side of the barbell portfolio and to do it as much as possible but to put more risks with long-term bonds.

    For every investor, the risks diversification is one of the most important parts. So how to do that with a barbell portfolio? For example, you can build it if one half of your portfolio is in bonds with 5 years maturities and the rest is in bonds with 15 years maturities. The point is to put weight on both ends of your portfolio. But it hasn’t to be equal weight. it can be turned in one direction or another. Of course, it depends on an investor’s vision and yield demands.

    You have to pay attention to the bond barbell strategy. It isn’t a passive strategy. You will need to monitor short-term bonds and adjust them frequently. Also, the other end with long-term bonds should be adjusted from time to time because of their maturities shorten. Some investors will just add new bonds to replace the existing.

    Barbell Investing

    It is all about aiming to balance risk in your investment portfolio. For example, if you put bonds on the left end of the barbell portfolio you might be faced with rising interest rates. So, the value of the bonds could decline. In order to balance the weight, you can replace them or part of them with, for example, with dividend-paying stocks, or some other ETFs. This left side has a great role. It has to protect your wealth so the savvy investor will always choose low-volatile and low-risk assets for the left end.

    The right side’s role in your barbell is to give you high profits. That is your financial goal. So you can add some aggressive stocks there instead of long-term bonds.

    The barbell strategy is actually a simple investment allocation. Two ends, two sides of your portfolio are designed like opposite ends. What you have to do is to allocate your capital between safe and aggressive sides. Some experts recommend holding 80% treasury bonds and 20% stocks.

    Some may ask why to diversify like this. Here is why. Let’s say you have invested 100% in different stocks. Yes, you have a diversified portfolio but you are, at the same time, 100% exposed to downside risk and you are at risk to lose all your capital invested.

    But if you build a barbell portfolio with 80% bonds and 20% stocks your downside risk can arise on your risky part of the portfolio. That is 20% of stocks. But the point is that the majority of your portfolio will be in safe investments. Moreover, bonds will give you interest too.

    Why use this strategy?

    Because it can lower risks for investors. At the same time, it can provide exposure to higher yield bonds. Higher yields will compensate for the higher interest risk rate. So that is the first benefit. This strategy allows investors to have access to higher yield long-term bonds. The other benefit is that this strategy reduces risks because the short-term and long-term bonds’ returns favor being negatively correlated. In other words, when short-term bonds are doing well, the long-term bonds will have difficulties. When you hold bonds with different maturities it is more likely to have less deadfall risk. Let’s say when interest rates grow, the short term bonds are rolled over and reinvested. Of course, at a higher interest rate.  That will compensate for the drop in the value of longer-term bonds. Opposite, when interest rates are lower, the value of the longer-term bonds will grow. Simple as that.

    But remember, it’s so important to manage the weight of both ends. And to do it actively. The contrary will never produce long-term returns. If you notice that the assets on one end of your barbell portfolio somehow look expensive you have to change it and balance by leaning toward less expensive assets on the other end. Well, if the prices are expensive on both ends, you will need to reduce overall portfolio risk.

    Is there any risk?

    Yes, interest rate risk no matter do you hold both long term and short term bonds. If you buy the long-term bonds while the interest rates are low they may lose value quickly when the interest rates increase.

    An additional risk of the barbell strategy comes from the investors’ limitation, this portfolio doesn’t include intermediate-term bonds so you will not have exposure to them. And we all know that intermediate-term bonds give better returns than short-term bonds. Yes, they are riskier but not too much. In comparison with long-term bonds, intermediate-term bonds will offer a bit lower returns. That is the downside of the barbell portfolio because you don’t have an opportunity to earn on these returns.

    Well, the main risk of the barbell strategy lies in the longer-term bonds. They are more volatile than their short-term bonds. As we said, you will lose if rates rise and you choose to sell them prior to their maturity date. If you keep the bonds until the maturity date, the fluctuations will not influence negatively.

    The worst scenario for the barbell is when long-term bond yields are rising faster than the yields on short-term bonds. That is the steepening yield curve. The bonds that make up the long end of the barbell drop in value. So, you may be forced to reinvest the profits of the lower end into low-yielding bonds, to balance the portfolio.

    But the flattening yield curve, if yields on shorter-term bonds rise faster than the yields on longer-term bonds you will earn. That is an advantageous part of the barbell strategy.

    Bottom line

    The benefits of the barbell investing strategy are numerous. Firstly, you will have a better diversification of your investments. Also, you will have more potential to reach higher yields with less risk. If interest rates are falling all you have to do is to reinvest at lower rates when the maturity date of that bond comes. In case the rates are rising, you will have the chance to reinvest the profits of the shorter-term securities at a higher rate. Since the short-term bonds mature frequently, that will provide you the liquidity and adaptability to solve emergencies.

  • Female Entrepreneurs Enjoy More Trust Than Male

    Female Entrepreneurs Enjoy More Trust Than Male

    Female entrepreneurs enjoy more trust than males in later stages
    Female entrepreneurs are faced with rude questions about private life, family, marital status, or children. At the initial stage, investors implied they are a greater risk of loss. 

    By Gorica Gligorijevic

    According to a new report from the Female Founders Forum, female founders are bringing more venture capital funding. More than male founders.
    Startups led by female founders raised extra rounds in the percentage of 52, while the male result is 51%. This is data from the UK. It isn’t a big difference but we can learn something from this data.

    First of all, female entrepreneurs are faced with investors skepticism when starting the business. But as time goes by they gain more trust. So, we can say that the biggest difficulty for female entrepreneurs happens in the beginning stages of setting up a business. Later, when they break that wall, it becomes easier.

    To illustrate how difficult is for females in the early stage of their businesses there is an additional statistical result. The numbers in funding in the early stage are horrible for female-led startups. Only 21% of them have access to any investment. But when they succeed to get it, their startups raise cash faster than males’. 

    The stats show: after 4 or 5 years from the first raise round, 66% of female-led startups are winning second funding round. On the side without a female founder, the result is 62,8%. 

    Female entrepreneurs success

    Female entrepreneurs have long been underrepresented in entrepreneurship. Male entrepreneurs had an advantage but that bias is changing now. Actually, since 2007, for example, in the US the number of female entrepreneurs has grown over 30%. In the moment of the census 2012, females were on the head of 36% overall US businesses. 

    If we take a look at the global entrepreneur scene, according to the Global Entrepreneurship Monitor, entrepreneurship amid women grew bt 13%. In the same period, male entrepreneurship grew by 5%.

    The fact is that females are starting their businesses harder and with more barriers, but when they jump over them they show better results. Some studies revealed that if there could be more gender parity in entrepreneurship, US GDP might grow by $28 trillion by 2025.

    And the picture is almost the same all over the world.

    The worst places for female entrepreneurs

    A study by HSBC Private Banking has exposed that over 30% of female entrepreneurs felt gender bias while seeking investors. Also, females get about 5% less funding than males while trying capital funding. The survey titled ‘She’s the Business’, studied 1200 female and male entrepreneurs in 8 distinct markets. The focus was on the entrepreneurs who have gained a minimum of £100,000 worth of funding. The study titled ‘She’s the Business’, taken by the HSBC Private Banking pointed: “Our research identifies the particular hurdles faced by women in the start-up community at critical points along the way, and explores the underlying, often subtle reasons why female entrepreneurs feel negatively impacted”

    Gender bias

    The scary fact is that some female entrepreneurs were questioned about marital status, children, suggesting them they are a bigger risk for investors. This study reveals that the UK is probably the worst place for female entrepreneurs to try to raise funding. More than half of them said they felt gender bias. The next worst country is the US. The interesting thing, in China, only 17% of female entrepreneurs said they faced similar bias. 

    Women entrepreneurs have made changes that can lessen gender inequality. First is an expansion in business networks for women. That should help them to make connections. 

    The gender inequality can decrease when more women make their wealth. Female entrepreneurs are inviting investors to take effort by making the fundraising process more transparent, incorporating at least one women in the panels, presenting precise criteria, and complete feedback after. 

    The gender disparity between entrepreneurs will not bring progress.

  • Margin Call – How to Profit From The Trade

    Margin Call – How to Profit From The Trade

    Margin Call - The Dangerous Behind
    Every second in your account you must have 25% of the total price of the stock you hold to cover the maintenance margin.

    By Guy Avtalyon

    A margin call is something that every trader would like to avoid.

    • Buying on margin means borrowing money from your broker to buy stocks.
    • There is no profit without the risk involved.

    Have you ever seen a better movie than Margin Call? A movie about the Financial Crisis? It just crossed my mind when I started to write this. 

    Okay, never mind. The subject of this article is a margin call in the stock market. 

    Let’s start from the beginning.

    What turns around and around the stock market is a risk. I know that is the major problem for most of you. How to take the risk? Because the risk has its bright and dark side and you know that. For example, you are trading some stock without guarantees that it will perform well. 

    The identical risk that boosts stock prices one day can lower them tomorrow. Yes, the identical. Pretty scary. 

    But here we come to the bright side of the margin call. For investors who want to profit a lot and quickly nothing is better than buying on margin.

    Buying on margin means borrowing money from your broker to buy stocks. Basically, it’s a loan from your broker. 

    How “buying on margin” works?

    You can borrow from your broker up to 50% of the price of a stock. 

    For example, when the stock price is $20,000 you will pay $10,000 and your broker will lend you the rest which is another $10,000. 

    Let’s look at the possible scenarios. 

    Assume the stock price grows at $24,000. The return on your investment will be 40%. You invested $20,000, but you have to give back to your broker $10,000 and you will end with $14,000 in your hands. But you invested yours $10,000 so you will have $4,000 of profit. This is good and you can be happy because you made a profit.

     

    But things may go in another direction. 

    Assume the stock price went down at $16,000. You will end up with a 40% loss on your investment. Even more, you have to give back the borrowed money to your broker increased by charges, fees, and interest on the loan, of course. 

    Buying on margin may be extremely risky. You may lose your entire investment. But you may lose more because of something known as a margin call. 

    Every second you must have an adequate amount in your account to cover the maintenance margin. That amount is 25% of the total price of the stock you hold. 

    What can happen if you don’t have enough cash in your account? Your broker will issue a margin call. That means, your broker is demanding you to cover the difference with more deposit and reach that 25% maintenance level.

    Let’s go back to our example and situation when things went wrong. What will happen if the stock price drop at $12,000? Your loss is $8,000 and now you have only $2,000 in your account. The rule is that you MUST have 25% and $2,000 is not enough to cover that. So, you lost $8,000 and at the same time, you have to deposit an additional $500 in your margin account to stay in the market. Also, you have to pay back the money to your broker.

    Is margin call dangerous to investors? 

     

    It can be extremely dangerous. In our example the missing deposit is small as the money invested isn’t big, but you can count how it is an enormous loss when the value of the investment is $200,000, $500,000, or million dollars.

    The most frightful detail about margin call for you as new investors is that your broker has no obligation by law to warn you that your margin account is too low. So, what the broker will do?

    The broker will sell your stock and liquidate your assets if it is necessary. He or she needs to ensure the maintenance level in your margin account. Even more,  the broker can begin selling your stock even the margin call is issued. Such will not wait for you and will not give you a grace period. Damn, you are dealing with a un-patient broker. This is an extremely painful and dangerous situation. If you come up to this situation how will you earn your money back when the market turns in your favor. You have nothing to trade with.

    The other danger about margin call is that you do not have an influence on which stock your broker may sell. Of course, the broker will choose the best players to cover fast and smooth the maintenance margin. 

    Moreover, the brokerage may change the rules and issue the margin call based on them. You will not have even zero chances to delay paying the margin call.

    How to avoid the potential risk of a margin call

    First, stay away if you don’t have enough experience in trading. Second, open some other account for an emergency with enough money to cover the margin call.

    I can understand that you are willing to enter the market as a big player. At least to earn a big profit. Nothing is bad with that. Everyone wants the same. Just keep these things on your mind when you want to trade on margin. Buying on margin is an extremely exciting method, risky but with great potential to profit.

    If you are 100% sure that you have a great player in your hands, and don’t have enough money to buy it, do it. Borrow from your broker.  Sometimes, a great risk will bring a great profit. In the end, there is no profit without the risk involved.

  • Wild ride: Dow Jones Rise 250 Points

    Wild ride: Dow Jones Rise 250 Points

    2 min read

    Wild ride: Dow Rise 250 Points
    Stocks rose on Friday amid increasing hopes for a U.S.-China trade deal as equities were on pace to post another solid weekly gain.

    According to CNBC, The Dow Jones Industrial Average jumped 250 points as J.P. Morgan Chase and Caterpillar outperformed. The S&P 500 gained 0.76 percent, led by financials and tech. The Nasdaq Composite advanced 0.4 percent.

    The 30-stock Dow and Nasdaq were both on pace to post their eighth consecutive weekly gain. The S&P 500, meanwhile, was on track for its seventh weekly gain in eight. The indexes were all up more than 1 percent entering Friday’s session.

    Here are the hottest things to know about stocks

    • The Dow Jones Industrial Average, S&P 500 and Nasdaq posted their fourth straight day of gains.
    • The Dow has added more than 1,000 points from Friday to Wednesday.
    • Big gainers on Wednesday included Chipotle Mexican Grill, Fossil Group and Nektar Therapeutics.
    • The Consumer Price Index rose 0.5% in January, the strongest monthly increase since January 2017.
    • The 10-year Treasury note hit 2.91%, a four-year high.

    Stocks ended with sharp gains on Wednesday, February 14, after falling earlier in the session following reading on U.S. consumer inflation.

    The Dow Jones jumped

    The Dow Jones Industrial Average jumped 253 points or 1.03%. The S&P 500 rose 1.34% and the Nasdaq was up 1.86% as technology shares outperformed.

    The leading gainers on the Dow Wednesday were Nike Inc. (NKE – Get Report), Cisco Systems Inc. (CSCO – Get Report) and JPMorgan Chase & Co. (JPM – Get Report). They rose 3%, 2% and 2.3%, respectively.

    Daniel Deming, managing director at KKM Financial said: “I am a bit surprised the market has been able to maintain this upward trajectory at the level that it has… We had a little hiccup last week, but that was quickly priced out of the market. That tells me there is still money trying to seek a higher return, or at least take on more risk.”

    What did cause this Dow Jones jump

    Chinese President Xi Jinping said trade talks between the U.S. and China will continue next week in Washington. This comes after a U.S. trade delegation which was led by Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer visited Beijing this week.

    China and the U.S. are trying to hit a deal before a March deadline. If they don’t reach a deal by then, additional U.S. tariffs on Chinese goods could take effect. President Donald Trump, still, is considering pushing back the deadline by 60 days to give negotiators more time to reach a deal.

     

    Core inflation in the US in January rose 0.3%.

    Wall Street will be looking to the data to help it gain signs about the pace and trajectory of interest rate hikes from the Federal Reserve.

    “This is a strong number. What’s going to be interesting is how financial markets react,” said Luke Bartholomew, investment strategist at Aberdeen Standard Investments.

    “There’s a risk that this could pour fuel on the fire of last week’s market selloff.”

    Bartholomew added that the “Fed is now very likely to follow through on its plan to raise rates again in March.”

    The 10-year Treasury note yield rose to 2.91% on Wednesday, a four-year high.

    The Cboe’s Volatility Index often referred to as the “fear gauge,” fell back below 20.

    U.S. retail sales in January fell 0.3%, but economists had expected a gain of 0.2%. It looks like a not good hint.

    The Friday moves come after the Dow and S&P 500 fell on much weaker-than-forecast retail sales numbers.

    On the data front Friday, industrial production for January fell 0.6 percent. Economists, however, expected an increase of 0.3 percent. They failed once more.

    Consumer sentiment data are scheduled for release later on Friday.

    risk disclosure