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Why You Need to Diversify Your Portfolio Now

Ever heard of the term diversification? A common phrase heard in the financial world is “diversify your portfolio”. Many have heard it and the next phrase would come up, “is it important?” It’s actually key for most financial successes. So, let us explain why.

Diversification is the practice of spreading your investments around so that your exposure to one type of asset is limited. Essentially, if you have your money all-around, you’ll be able to cushion yourself for riskier investments with safer ones. By diversifying your portfolio, your risk and reward in your investment portfolio would be more balanced.

It reduces risk and is designed to help reduce the volatility of your portfolio over time. Most investment professionals agree that diversification is the most important component of reaching long-range investment goals while also minimizing risk.

Balancing a diversified portfolio may be complicated and expensive but there are many options to widen your diversification without having a difficult time. These options are specially designed for beginners or for people who would like to be more hands-off with their portfolio.

A great example would be found in mutual funds. There are so many choices to mutual funds to fit your preferences, goals, and needs. By investing in mutual funds like real estate funds, sector funds, and commodity-focused funds, you will instantly have a diversified portfolio.

Because market risk is generally unavoidable, diversification is a great way to soften the blow. In practical terms, diversification is holding investments that will react differently to the same market or economic event. Being able to invest in different assets reduces the consequences of a wrong forecast. This is very important in investing because markets can be volatile and unpredictable.

With this practice, you’ll be able to spread your risk across different types of investments, the goal being to increase your odds of investment success.

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Help! My Account Balance is ALWAYS ZERO! (How to be Faithful to Your Savings)

Are you having trouble saving your money?

Yung kaka-sweldo mo pa lang, kinabukasan, ubos na agad?

Maybe you just want to learn how to save better. Let us give you some realistic tips on how to save and to faithfully stick to it.

STOP THE IMPULSE BUYS

The culprit for most useless spending is the impulse buy on things we don’t need and sometimes things we don’t even want. The term “budol” is commonly used with our budding online culture. Nowadays, impulse buys are getting easier and easier with some just a click away.

The best way to stop this habit is to give yourself time before hitting add to cart. For smaller purchases, 24 to 48 hours would suffice but for larger purchases, give yourself a week to research the product further. It’s up to your discretion on what you consider a small and large purchase.

LESSEN THE WINDOW SHOPPING

Shopping sites make window shopping inevitable. As soon as you open the site, you are immediately greeted by multiple deals for things you don’t necessarily need or want. Sometimes, we don’t even notice we’re window shopping with simple scrolling or checking out a popup ad of a product.

With this in mind, make sure you really want to spend money on what you find. Don’t use sales and discounts as a way to justify buying things you will not use.

REGULARLY CHECK YOUR ACCOUNT BALANCE

Sometimes, the best wake-up call is checking your bank account and regularly seeing how much you spent in a day or a week. With the budding of the online culture, it isn’t necessarily a bad thing. With buying made so easy, checking your balance has been made easier as well.

Depending on your bank, download the corresponding app to have a real-time update on your purchases. Regularly looking at your account balance is a great habit to keep yourself in check with frivolous spending.

LOCK YOUR MONEY AWAY

The final tip sounds less drastic than it what it actually is. The basic thought process is if you don’t have extra money to spend, you won’t be tempted to buy useless things. How exactly do you “lock your money away”? Well, a suggestion could be making use of time deposits.

Think of time deposits as piggy banks that earn money the longer you leave it in. It’s there to keep your money safe so instead of collecting dust or you being tempted to use it, time deposits can help you save better while earning you money. This is a great incentive to keep “locking your money away”.

Ka-Investa, saving is realistically hard. We have our own responsibilities and desires. But remember, savings can save you especially during rainy days. It’s always good that we have something to use during emergencies and other urgent expenses.

You can start by saving even at least Php 500 per pay day. That relatively small amount can compound in the long run. The amount you save is not a problem. What’s more important is the habit of saving & that you start now. Happy saving, Ka-Investa!

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Short-Term Investments You Can Start Now

Do you have liquid assets you want to see grow? Short-term investments might be exactly what you’re looking for. A short-term investment is a temporary investment that can be easily converted to cash. These investments are typically stored between 6 months to 5 years. The end goal of this type of investment is to gain more money quickly mostly through a passive income.

MONEY MARKET FUNDS

Money market mutual funds are a type of mutual fund that invests in low-risk and short-term debt securities. This is definitely a good choice for liquid assets because it still earns small returns without having to wait a long time. This type of fund takes about 6 months to 1 year to mature. It’s considered one of the least risky investment options because of its high liquidity.

Some of the things that need to be taken into consideration with looking into which money market fund options might be right for you are the minimum investment needed, the administrative fees, the maturity period, and the early withdrawal fees.

TIME DEPOSITS

Another good investment option is a time deposit. Time deposits are a kind of bank account that earns a fixed interest over a period of time. During the specified term, the money cannot be withdrawn. In some cases, it can be withdrawn with but it will have an early withdrawal fee.

The selection of lock-in periods can range from 30 days to 5 years. Interest rates of time deposits are higher than savings accounts. This could be a good investment if you have passive money that you would like to grow. Just like savings accounts, these are options often given by traditional banks but digital banks have better rates.

STOCKS

Investing in stocks can be for the long-term or for the short term. Short-term stocks mean more attention but with the right research, you should be able to get a good return. A disclaimer would be that stocks do not always guarantee a return.

Some things to consider when looking for short-term stocks would be the stability of the company and understanding the risk involved for each stock bought. If you would like to learn more about stock trading and the stock market, definitely check out the free lessons at Investa University.

ONLINE SAVINGS ACCOUNT

The most common option in this list would be a savings account, more specifically a savings account opened in a digital bank. To be honest, traditional banks’ savings accounts often provide the worst interest rates. Instead of investing your money there, look for higher interest rates in digital banks.

Digital banks can offer fewer fees which means more profit for the customers. Some things to keep in mind when looking for an online savings account would be to make sure they don’t have a minimum deposit, check if they have fees per deposit, and no hidden fees.

Remember Ka-Investa, there is no better investment — only the one that fits your lifestyle. Whatever you choose among all of these, the most important thing about investing is to START NOW.

 

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Financial Ratios for Beginners

Introduction 

  • What are Financial Ratios? 
  • What are they used for? 

Examples of Financial Ratios 

  • P/E Ratio 
  • EPS 
  • ROE 
  • PEG Ratio 
  • Dividend Yield 

Experienced investors and bankers talk about Financial Ratios all of the time. You may be familiar with a couple of them like P/E Ratio and EPS, but have no idea what picture they paint. Financial ratios are values derived from financial statements to come up with useful information about a company.

The numbers from the financial statements are used to conduct quantitative analysis and assess a variety of things such as growth, profitability, rates of return etc. The information derived from these ratios would help you create decisions and more accurately predict the performance of a stock. 

There are a lot of financial ratios out there, financial analysts and accountants may use every single one of them everyday, but to help you ease into the concept of Financial Ratios it would be best to focus on these five financial ratios: 

P/E Ratio 

This is perhaps one of the best and most used financial ratios. If P/E Ratio seems familiar to you, maybe it’s because it’s commonly shown in the stock’s summary along with other useful information such as the Open, Close, Market Cap, and Volume. The Price/Earnings ratio is used to value a company by comparing its current share price to its per-share earnings or EPS which we would discuss later.

This can be used to compare a company to its historical record. A high P/E ratio signifies a company’s stock is overvalued, meaning investors are expecting high growth rates. Companies that have a net loss do not have a P/E ratio since nothing would be put in the denominator. 

EPS 

EPS is another common financial ratio because it tells us about the company’s profitability. Earnings Per Share is derived by dividing the company’s profit by the outstanding shares of its common stock. A company with higher EPS means that it is considered profitable. Investors consider stocks with higher EPS as stocks of greater value since the company has shown to have higher profits relative to its share price. EPS can be in different forms such as excluding extraordinary items or discontinued operations, or on a diluted basis. 

ROE 

Return on Equity calculates a company’s financial performance by dividing net income by the shareholders’ equity. ROE is a measure of profitability in relation to the stockholders’ equity. An ROE value of a particular stock is good or bad depending on the ROE of similar stocks. The rule of thumb is to

target the ROE that is just above or equal to the average. Growth rates and dividend growth rates can also be estimated ung ROE. 

PEG Ratio 

The price/earnings to growth ratio is one of the more unheard of financial ratios as compared to the ones that I have talked about. The PEG ratio is derived by dividing the P/E ratio by the growth rate of its earnings for a specific period. The PEG is useful in determining a stock’s value while also considering the company’s expected earnings growth. It is considered to give a better picture than just the P/E ratio. The difference between the two is that the PEG ratio adds in expected earnings growth into the formula. It is usually used as an indicator of a stock’s true value. 

Dividend Yield 

This financial ratio shows the amount a company pays out in dividends per year relative to its stock price. This is a very good indicator for investors who are looking to position themselves for the long term. Compared to the other financial ratios, this financial ratio is more straightforward in what the result of the ratio tells us. It is worth mentioning that higher dividend yield doesn’t automatically equate to a good investment opportunity as high dividend yield can be attained by declining stock prices. 

In sum, just like indicators and many investing strategies, different financial ratios are more useful to specific types of investors. These are very useful when making decisions and add an extra layer of thought before going into a position. These tools provide an inside glance at the position of the company you are going to invest on. What technical analysis and fundamental analysis cannot predict may be seen when comparing these financial ratios.

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Do I Need a Trading Break?

When we want to do things for a prolonged period of time, it is necessary that we take the appropriate amount of breaks at the appropriate times. But how exactly would a trader determine when to take a break when the markets trade for 5 days a week? Before we move on to the “when”, let us first discuss the “why”. 

For starters, taking trading breaks is necessary for the long term sustainability of your trading. Let’s say that you are on a losing streak  and you are trying to decide whether to take a break or not. On the one hand, taking a break for one week will let you evaluate your system.

On the other hand, continuing to trade despite your losing streak might be what you need in order to end the streak. Although continuing to trade might sound like a compelling option, there is a possibility that you’ll end up with more losses thereby by lowering your spirits which eventually leads to the end of your trading journey.

Journaling

Now that we have established the importance of taking breaks, let us discuss exactly when you should take breaks. It is worth noting that these tips are only possible through journaling or the act of recording your trades. You can use anything from Investajournal to simply using a notebook to record your trades as long as the journal contains your entry and exit prices as well as your entry and exit reasons. Now that we have our journal, we must discuss two important metrics: VAR (Value at Risk) and Exit Notes.

Value at Risk

Value at Risk (VAR) is actually a statistical measure used by financial institutions in order to determine the risk involved in a certain portfolio. However, in the context of retail trading, VAR pertains to the amount that you are risking relative to the size of our portfolio. So lets say that you have PHP 100,000 in your portfolio, 1 VAR is equal to PHP 1000. This means that if a trade involves the risk of losing PHP 1000, then you are risking 1 VAR. 

So how can we use VAR to determine when to take a break? Well, it can be as easy as taking a break when you are down 10 VAR. This means that if your initial capital of PHP 100,000 has turned to PHP 90,000. This is the perfect time to take a break because it shows us that there is something wrong with our system. Losing 10% of your portfolio is not something that you should take lightly. This requires an evaluation of your system that usually entails virtual trading and continuous learning. 

Another metric that you can use is if you lose 5 VAR in consecutive trades. So if your capital is PHP 100,000 and you raise it to PHP 120,000 but lost PHP 5000 in consecutive trades (net PHP 115,000), then maybe there’s something happening to the market that requires you to adjust your system. In summary, you can either take a break when you’re down a certain number of VAR from your capital (regardless of win/loss ratio)  or you can take a break when you lose a certain number of VAR to consecutive trades. 

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Exit Notes

Aside from the amount that we gain/lose, we also have to look at WHY we lost/gained money. Basically, if you are losing for the same reasons (e.g. failed breakout, whipsaw) then maybe you need to adjust your system in relation to that.

An example is adding Average True Range (ATR) to your system to avoid further whipsaws. It’s easy to say that you don’t need to take a break to adjust your system but in reality, you cannot be objective with your trading setup if you have open positions.

Conclusion

It does not matter if you are a beginner or an experienced trader, everyone goes through losing streaks. In the end, we have to remember that bouncing back from losing builds character which is the primary tool that we need in order to find success. However, you do not need (nor should you)  bounce back right away. Oftentimes, a break is necessary in order in order to avoid making the same mistakes that brought us to our downfall in the first place.

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Bottom-up Approach: An edge to navigate the markets

Amidst the Stock Market crash across the globe last March of 2020, novice traders have turned a blind eye in the markets since then. It somehow makes sense. The pandemic has caused tremendous financial damage across the world.

Although, the financial markets, especially the US stock market, started to rise a few days after the market crash of 2020. In the context of measuring the March low and the September high, the $NDX rose 84%, the SPX rose 63.5%, and the DJI rose 61%. Within six months, the stock market presented loads of opportunity to those traders who used the Bottom-up Approach to navigate the markets.

As introduced by Mark Minervini in his book “Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market, ” the Bottom-up approach is a type of method in selecting a stock. It is where a market participant shifts their focus on individual stocks first, then its respective industry group or sector, then its separate market index.

Through this approach, the index and any adverse event do not discourage the market participant from trading. If you have applied this method during the April recovery, then the said trader would have maximized the US market’s up move.

Figure 1: Example of a VCP pattern

The key to identifying market leaders through the bottom-up approach is to spot names hitting 52wk highs or All-Time highs exhibiting a VCP pattern in its price behavior. It is a pattern that displays contraction in its volatility from its previous data to the following or present data.

Moreover, the said stock should be in the confluence of a surge of volume when creating a new move on the upside. Various names that have hit such parameters in a respective sector will often be the leaders.

Also, during a bear market, spotting names that are creating new highs with enormous volume, while the market is doing otherwise, is a good indication that when the bull market comes, the stocks that were unveiling such features are bound to become the overall market leaders for that period. They correct the least during a general market correction and rebound the fastest during a market recovery.

On the other hand, the Top-down approach is the opposite of that of the Bottom-up approach. This method’s problem is that a market participant gets discouraged from the overall indices and market sentiment. The top-down approach would limit the trader from the outliers or the potential market leaders that would move oppositely to its respective index.

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If a said market participant adheres to the Top-Down approach, the chances are that the specific trader has loosely participated in the April 2020 rally. Wherein, these types of traders may have only grasped 5% of the overall opportunity that was offered by the financial markets.

There is no right or wrong approach to trading the financial markets. As Mark Douglas always exclaims, trading is an activity that offers the individual unlimited freedom of creative expression. Although aspiring market participants should be aware of the pros and cons of both methodologies.

Although professional traders use the bottom-up approach, wherein a trader does not rely on the opinions of other market participants; instead, they rely on their own bias towards individual names. 

Are you a trader who employs the Top-down approach or the Bottom-up approach? Let us know in the comments section below!

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Featured Trader of the Week: One Shot

We would like to congratulate our featured trader for this week: Oneshot a.k.a @franzjion!

One Shot was able to eye I-Remit, Inc. a 19 year old remittance company that is one of the top here in the Philippines. One shot a.k.a @franzjion, is a deadly breakout trader who actively contributes to the Investagrams community with his expertise in using Technical Analysis to predict and time entries just before breakouts.

One shot had his sights on $I for a while before entering his position about a month ago. He skillfully used historical data since 2017 to perfectly time I-Remit’s breakout from the very strong resistance level at the 4.00 mark.

He also utilizes fibonacci levels and historical peaks to forecast possible breakout levels that can be reached. Moreover, he uses MA Cross 50 and 200 to indicate possible starting breakouts. One shot’s prediction is nothing short of skillful technical analysis as the price dipped down to the centavos before rocketing up and above the 2-peso level.

Besides $I, One shot also spotted breakouts from $APL and $FNI. He really has an eye for breakouts as his forecasts for the two are also spot on. One shot’s philosophy is all about smart positioning and entry at safe entry levels and letting the price action do the work for him.

By entering at very low and safe entry levels, he minimizes risk as the stock has nowhere else left to dip. After entry, stop losses below the support level is set, with Take Profit levels around the Fibonacci levels he plotted. Trail stops are then implemented once the initial Take Profit level is reached, ensuring a risk free trade with unlimited upside potential.

One shot is lethal with Technical Analysis in spotting breakouts, but he is nowhere near lacking in Fundamental Analysis. Fundamental Analysis is crucial for One shot to be one step ahead from other investors and entering a trade before a breakout. One shot displayed his Fundamental Analysis skills with $APL as he extracted news to support his prediction.

Congratulations to those who were able to profit from breakouts of $I, $APL, and $FNI, and kudos to One Shot a.k.a @franzjion. Your FREE 1-Month InvestaPRO is on its way!

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