The Oxford Club’s Guide to Smart Investing · 2016-09-15 · The Oxford Club 105 W. Monument Street • Baltimore, MD 21201 • 443.353.4540 If you have any questions about your

by The Oxford Club Research Team

The Oxford Club’s

Guide to Smart Investing

Sixth Edition

by The Oxford Club Research Team

The Oxford Club’s


The Oxford Club105 W. Monument Street • Baltimore, MD 21201 • 443.353.4540

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TABLE OF CONTENTS

Why Invest at All? ..................................................................................... 1Getting Started: “Get Rich Quick” Doesn’t Exist .........................................1The Oxford Club Investment Advisory Panel ...............................................3Building Your Own Investment Strategy ......................................................7

Recognizing Risk ........................................................................................ 9The Five Faces of Risk ..................................................................................9How Much Risk Can You Stand? ...............................................................10What Mitigates Risk? Time ........................................................................10

Asset Allocation: Don’t Put All Your Eggs in One Basket ........... 12Balancing Your Investment Diet .................................................................12

The Perfect Portfolio for You ...............................................................................13A Simple Rule of Thumb That Could Save You Big $$$ ...........................14What History Tells Us About Asset Allocation ...........................................14Diversify Within Asset Classes to Ratchet Up Security ...............................15

The Importance of Keeping Cash on Hand for Investing .............. 17

The Skinny on Stocks and Markets ..................................................... 19Order From Chaos – How the Stock Market Works ..................................19Bulls and Bears – Understanding the Market Animals ................................20How Is the Market Doing? Look to the Indexes .........................................21 Accumulating Wealth – How You Make Money in the Market .................22Choosing Individual Stocks ........................................................................24 Investigate Before You Buy .........................................................................25 Taking the Confusion out of the Prospectus ..............................................26 You Can Never Know Too Much When Making Investment Decisions .............................................................................27 Using International Stocks to Reduce Volatility .........................................30Two Ways to Buy Safe Foreign Shares .......................................................31Last-Minute Advice from the Experts .........................................................33

Buy Bonds – Your Best-Fixed Income Investment Option .............. 34The Many Flavors of Bonds .......................................................................34Four Essentials for Purchasing Bonds .........................................................36Credit Ratings – How to Tell Darlings From Dogs ....................................38And the Experts Say ...................................................................................39

Meet the Mutual Fund and Gain Instant Diversification ............ 40The Lingo ...................................................................................................40A Great Place to Start .................................................................................41Four Mutual Fund Misunderstandings .......................................................41

Introduction...........................................................................................i


What Types of Funds Should You Consider? .............................................42 Low-Cost Funds Earn Market Returns .......................................................43 Select the Fund That’s Right for You .........................................................44 Special Tax Issues for Mutual Funds ..........................................................45

When to Get In/When to Get Out – The Investment Two-Step .... 46 Taking Our Trailing Stop System to the Next Level ..................................48 Position Sizing Protects You From Risk .....................................................48

A Brief Look at Derivatives: Margin Accounts, Short Selling and Options .................................................................... 50 Margin Accounts: More Bang With Their Bucks .......................................50 Selling Short: Win Big on a Losing Company ............................................51 Stock Options: Puts and Calls ....................................................................52 Two Low-Risk Options Trading Strategies .................................................53 Big Jumps in Portfolio Value With Conservative LEAPS ...........................53 Writing Covered Calls... Slashing Downside Risk ......................................54 Where to Trade Options and How to Buy Them ......................................55

Now That You’re Ready to Invest, Where Do You Go? .................. 56 Buying Direct – Your Cheapest Investment Option ...................................56 Full-Service Brokers ....................................................................................57 Discount Brokers ........................................................................................58 Online Brokers ...........................................................................................59 Who Our Experts Choose ..........................................................................59

Conclusion: We’ve Covered the Basics, Now It’s Up to You to Start Making Money ..................................... 60

The Oxford Club Advisory Panel Investment Strategies ........................... 61 Alexander Green’s Momentum Alert ............................................................61 The Insider Alert ..........................................................................................61 The True Value Alert ...................................................................................61 Marc Lichtenfeld’s Oxford Systems Trader ...................................................62 Lightning Trend Trader ...............................................................................62 Dividend Multiplier .....................................................................................62 Dave Fessler’s Advanced Energy Strategist ....................................................62 Steve McDonald’s Oxford Bond Advantage .................................................63 Matthew Carr’s Prime SystemTrader ...........................................................63 The VIPER Alert ................................................................................... 63

Appendix: The Four Pillars of Wealth – How to Achieve Your Financial Goals in the New Millennium ................................. 64 Pillar I: Stick to The Oxford Club’s Asset Allocation Model ......................65 Pillar II: Adhere to the Oxford Safety Switch .............................................67 Pillar III: Size Does Matter... Understand Position Sizing ..........................69 Pillar IV: Cut Investment Expenses and Leave the IRS in the Cold ...........71


IntroductionA Letter from The Oxford Club

“An investor needs to do very few things right as long as he or she avoids big mistakes.” – Warren Buffett

Dear Fellow Investor,

After almost three decades of investing success, The Oxford Club has whittled down the secrets to profiting in the market to a few key concepts.

That’s exactly why we created The Oxford Club’s Guide to Smart Investing – to help you determine right from wrong by understanding the basics of investing.

But the Guide goes a step further – it builds upon these basics by bringing you outside-the-mainstream insights from The Oxford Club’s Advisory Panel.

The Guide then serves a twofold purpose. For less-experienced investors, it explains the ABC’s of investing, providing a Rosetta Stone for decoding the often incomprehensible jargon related to the investment process.

For more sophisticated investors, the Guide also features individual strategies from our successful investment team.

At times, our approaches may vary a bit, but this merely presents different sides of the investment coin – allowing investors to choose among a myriad of different investment philosophies and disciplines.

The bottom line is this: The Guide offers investors of all types a one-stop resource to create a better personal knowledge base for investment decisions.

After reading it and referring to it time and again, you’ll be able to more easily see how the Club’s investment team distances itself from the white noise of the mass media and Wall Street’s incessant chatter.

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With that, I’ll let you begin your trek to greater investment knowledge... and total financial independence.

Sincerely,

Julia C. Guth CEO and Executive Director The Oxford Club


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Why Invest at All?

The simple answer is: to make money, of course. But it’s not really quite that simple.

To invest properly, you need to have specific goals – like saving for college or a luxurious retirement. You also need money to invest. The old saying is true: It takes money to make money.

But that’s not all. You also have to decide what to invest, how much to invest, how long to invest, when to buy and when to sell. Or if you should use a full-service broker, a discount broker or make trades online. That’s a lot to think about.

It’s so much easier to throw up your hands, open a savings account and hope for the best. Of course, most savings accounts can’t even keep pace with inflation. You may end up actually losing purchasing power – which is losing money.

The reality is you have to invest just to stay above water. And that’s exactly why we created this guide – to teach you in no-nonsense language about investing and how it can help you achieve your financial goals.

Getting Started: “Get Rich Quick” Doesn’t Exist

The only way to ensure wealth and reaching the good life is to have a solid investment philosophy in place and stick to it over the long run.

If you’re an Oxford Club Member, you already have an advantage over the investing masses. You have some of the world’s leading experts at your disposal. And you have access to an entire team of resources to help you determine your investment path.

But even with all this support, you still have to understand the basics of investing. That’s one of the main purposes behind this book. But there’s another...

We’ll also provide you with insights not available to the investing


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masses – alternative investment ideas contrary to conventional buy-and-hold advice. The insights are provided by our investment advisory panel, which will be introduced to you in a moment.

It’s important to keep in mind that no single investment philosophy is best suited for all investors. After all, no one philosophy seems to dominate over time and yield consistent winners. A strategy that works for one investor who is patient and has substantial capital to invest may not work for another investor with unpredictable cash needs and a smaller portfolio.

Each of the following experts has his own special investment strategy that is battle-tested to perform in all economic and market environments. They’ve all been through bull markets and bear markets without missing a beat – and with portfolios intact. So you’ll want to consider each of their investing approaches equally as you continue learning the basics of investing and developing a system that fits your individual needs.

You’ll find each of the experts’ strategies laid out at the very end of this book. Your knowledge of their strategies alone will put you a giant step ahead of the vast majority of individual investors. But first you need to meet the experts...


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The Oxford Club Investment Advisory Panel

Julia C. Guth, CEO and Executive Director and Publisher

Julia Guth is the Founder of Investment U, the educational arm of The Oxford Club. She has been the CEO and Executive Director for The Oxford

Club for more than 20 years. She helped create and still consults with other financial publishing teams, such as Wall Street Daily and Money Map Press. She’s also the Founder and Executive Director of the non-profit Roberto Clemente-Santa Ana Health Clinic in Nicaragua.

Julia credits her success to the Club’s global perspective and the talented advisory and member services teams she put together on behalf of its Members. Julia graduated from CU, Boulder with a BA in Latin American Studies and holds an MBA from Thunderbird, The American Graduate School of International Management in Phoenix, Arizona.

Andrew Snyder, Editorial Director

Andrew was originally an advisor at one of the nation’s largest investment firms. He has since earned his MBA, authored an award-winning book and been published in numerous publications – with over 1,500

articles and columns in his name. He has also appeared on Fox News and other media outlets. With his background in research combined with his hedge fund-style education and knowledge of the market, Andy is acclaimed for his no-nonsense style of writing and his sharp, deep-thinking analysis.

As Editorial Director, Andrew works with Chief Investment Strategist Alexander Green, our contributing editors and The Oxford Club staff to provide the most accurate and relevant information possible to members.


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In his spare time, Andy’s passion is the outdoors. He spent two years living in the Alaskan wilderness, 50 miles by floatplane from the closest grocery store or ER. If he had any other job, it would be guiding anglers in Alaska, where he met his wife and many of his closest friends.

Alexander Green, Chief Investment Strategist

Alexander Green is the Chief Investment Strategist of The Oxford Club. A Wall Street veteran, he has over 25 years of experience as a research analyst, investment advisor and professional portfolio manager. Under his direction, The Oxford Club’s portfolios have beaten the Wilshire 5000

Index by a more than a 3-to-1 margin. The independent Hulbert Financial Digest has ranked The Oxford Communiqué, whose portfolios he directs, in the top five nationwide for risk-adjusted returns over a five-year period.

Alexander Green is also the Editor of The Momentum Alert, The Insider Alert and The True Value Alert. Mr. Green has been featured on Oprah & Friends and The O’Reilly Factor and has been profiled by The Wall Street Journal, BusinessWeek, Forbes, Kiplinger’s Personal Finance and CNBC, among others. He is Chief Investment Strategist of Investment U, an Internet-based research and education service with over 400,000 readers.

Mr. Green is also the author of four books on wealth building: The Gone Fishin’ Portfolio: Get Wise, Get Wealthy... and Get On With Your Life, The Secret of Shelter Island: Money and What Matters and Beyond Wealth: The Road Map to a Rich Life” and An Embarrassment of Riches: Tapping Into the World’s Greatest Legacy of Wealth.

Marc Lichtenfeld, Chief Income Strategist

Marc Lichtenfeld is the Chief Income Strategist for The Oxford Club, and also Editor of Lightning Trend Trader and Oxford Systems Trader. Marc also serves as Senior Editor for The Oxford Income Letter. The “10-11-12 System” he uses to guide his investment

strategies in the newsletter was detailed in Marc’s 2012 book, Get Rich


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with Dividends: A Proven System for Double Digit Returns. He is also a regular contributor to Investment U.

After starting out as a trader at Carlin Equities, Marc moved onto the contrarian Avalon Research Group as a senior analyst. He also obtained his NASD Series 86 & 87 licenses (required for all sell-side analysts). At Weiss Research, he co-managed the Real Wealth Portfolio and beat the S&P 500 by 17% over a six-month period. Marc joined the team following a successful stint as senior columnist at TheStreet.com. A contrarian investor by nature, Marc loves to shoot holes in conventional thinking and take profits where nobody else is looking. He’s broken several major stories on biotech companies, and his investment approach blends thorough fundamental research with the timing tools of technical analysis.

David Fessler, Energy and Infrastructure Strategist

David Fessler is the Energy and Infrastructure Strategist for The Oxford Club, Editor of Advanced Energy Strategist and Co-Editor of Oxford Resource Explorer. He

contributes frequently to The Oxford Communiqué and to Investment U.

David is a successful long-term investor, entrepreneur and renowned specialist in the energy and infrastructure business. With 25 years of experience in sales, marketing and business development, David has served as vice president of LTX and Quality Telecommunications Inc., specializing in all aspects of business development and startups.

He now runs an international import business, manages his portfolio and does investing research and analysis for The Oxford Club.

Steve McDonald, Bond Strategist

Steve McDonald is the Editor of Oxford Bond Advantage and Contributing Editor to The Oxford Income Letter. Steve adds his insights on bonds to Wealthy Retirement and also serves as video host for the Club’s


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popular Market Wake-Up Call and Two-Minute Retirement Solution videos.

For 10 years prior to joining Agora, Steve was a professional broker. On an annual basis, Steve led 30 to 40 investment-focused workshops for conservative/retired investors. He has been an active bond and stock trader for 20-plus years and specializes in ultra-short-maturity corporate bonds. Before entering the investment industry, Steve spent eight years in the Navy as a Naval Aviator in both fixed and rotary winged aircraft, and as a Surface Warfare Officer.

Matthew Carr, Emerging Trends Strategist

Matthew is the Club’s Emerging Trends Strategist and also oversees his VIP services, Prime System Trader and The VIPER Alert. Matthew’s proprietary Prime System identifies stocks that move in cycles or seasons

where the shares can be bought and sold for large short-term profits. He is a regular contributor to The Oxford Communiqué newsletter, Investment U and the thrice-weekly Oxford Insight.

Before joining The Oxford Club, Matthew wrote about the oil and natural gas sector for Natural Gas Week, Natural Gas Market Reconnaissance and Oil Daily (all three are published by Energy Intelligence Group). Matthew’s articles focused on energy developments in the Rocky Mountain Front, exploration and production activity in the U.S. Gulf of Mexico, and unconventional oil and gas (shale gas, oil shale, liquefied natural gas).

He also wrote about the changing face of energy markets in emerging markets like the BRIC countries (Brazil, Russia, India, China). Matt also wrote extensively for Business Credit, keeping its readers up to date on exports, international trade finance and business-to-business credit. His areas of expertise include emerging markets, congressional policy and commodities, as well as accounting regulations and corporate bankruptcies.


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Sean Brodrick, Resource Strategist

Sean Brodrick is the Co-Editor of Oxford Resource Explorer and contributing editor to The Oxford Communiqué and Investment U.

Sean’s an accomplished analyst with extensive boots-on-the-ground experience. He’s traveled from diamond fields north of the Arctic Circle to an ancient city of silver (and mummies) in Mexico to a gold project on the frigid southern tip of Argentina – and just about everywhere in between.

His reports on precious metals, energy, agriculture and more have garnered accolades from investors and even top industry insiders. And Sean’s best-selling book, The Ultimate Suburban Survivalist Guide: The Smartest Money Moves to Prepare for Any Crisis, helps readers prepare for all sorts of physical and economic crises.

Building Your Own Investment Strategy

The strategies used by our experts carry varying levels of risk – low, medium or high. But all have proven over and over to be highly successful.

The best advice we can give you is: Read this book. Along the way, you’ll discover the level of risk you are comfortable with and your own investment strategy. Then take what you’ve learned and embark on your path to profits. And as always, we encourage you to share your successes with us at the Club. In this way, we create more wealth for everyone involved.


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Recognizing Risk

One of the fundamental truths of investing is this: The higher the risk, the higher the return. If you can stomach the rollercoaster ride of high-risk investing, the potential high returns can build your wealth quickly. But the potential lows can ravage your savings.

On the other hand, playing it safe can protect your principal but leave you lagging behind in the gains department. Finding the right balance will help you to define the type of portfolio you’ll build.

To construct a portfolio that will earn you high returns without keeping you up at night, you have to assess your risk tolerance. For many investors, risk tolerance can be determined with one question: How will I feel if I lose some money? If this question alone makes you queasy, you have a low risk tolerance.

If losing money doesn’t bother you at all, you can stand to invest in the riskiest of securities. Most of us fall somewhere in between – and walk a fine line between the risk we can stand and the returns we desire.

The Five Faces of Risk

There are five basic types of risk that you face as an investor. Once you understand them, you’ll be able to determine what risk level is comfortable for you.

n Market Risk refers to the volatility of the market as a whole. This instability is due to both company-specific and global issues. Market prices are affected by company performance, political conditions and changes in the world economy. Just look at the market reaction to the demise of heavyweights like Enron or Lehman Brothers, the sting of consecutive government bailouts in past years, or the fallout from investment scandals like the one perpetrated by Bernie Madoff, and you’ll have a pretty good idea of how almost everything can affect the market.

n Inflation Risk is the possibility that you will actually lose


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purchasing power if your returns aren’t high enough. This risk comes from playing it too safe: your principal is protected but it loses actual value. For example, say hypothetically you can earn 3% with an FDIC-insured savings account at your local bank. If inflation hits 4%, you’ve lost purchasing power.

n Interest Risk comes into play with fixed-income instruments like bonds. This is the chance that you’ll buy a fixed-rate investment and then rates will go up, causing the price of your investment to fall. What also happens is that your principal is now tied up so it’s not available to buy new investments at the higher rate.

n Credit Risk is the risk that the issuer of a bond will default and you’ll lose both the regular expected interest payments and your original investment. Credit ratings on securities can help to mitigate some of the risk – at least you know what you’re getting into with shakier investments. But even the best companies can go bust and leave you with worthless bond certificates.

n Liquidity Risk refers to the ease with which you can convert your investment back to cash. For example, if you’re holding fixed-rate instruments such as bonds, and rates rise, you won’t be able to recover your purchase price; in fact, you may not be able to sell at all.

Stocks

Bonds

CashInvestments

Low High

High

Pot

enti

al R

ewar

d

Risk

Investments that carry the least risk alsotend to offer the lowest potential reward.

The Risk/Reward Trade-Off

Source: Vanguard


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How Much Risk Can You Stand?

Now your personal risk tolerance comes into play. How much can you afford to lose and how much time do you have to make up any losses?

For example, how would you feel if your investments declined 10% overnight? Would you panic? Or would you just shake it off and see what the new day brings? How much loss can you deal with: 5%, 10%, 20%? Would you rather have $10,000 in your hand today, or the opportunity to have $20,000 in your hand tomorrow?

There’s no right or wrong answer. Most of us fall somewhere between total risk aversion and throwing caution to the wind. You’ll have to decide this for yourself, whether or not you speak to a trusted financial planner.

But knowing how you will react to possible economic setbacks will help guide your tolerance for risk.

What Mitigates Risk? Time...

Another essential piece for solving your personal risk puzzle is the amount of time you have to accomplish your financial goals. Generally speaking, the longer your time horizon, the more risk you can afford to take.

For example, if you’re 55 years old and planning for retirement at age 65, your investment time frame is 10 years. You can afford more risk (for higher returns) than someone who’s 62 and planning for retirement. That person has only three years to play with and probably shouldn’t put any of his or her funds at risk.

Also, over longer time periods (five years or more), riskier assets (like stocks) have historically provided higher returns than guaranteed investments (like CDs).

Even after considering all of the above, you need to know this: Before you invest, you should have all of your high-rate debt (like


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credit cards) paid off. You should also take full advantage of any tax-deferred investment opportunities, like a 401(k) plan at work. Once all that is taken care of, you’re ready to hit the market.


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Asset Allocation: Don’t Put All Your Eggs in One Basket

According to the Club’s Chief Investment Strategist, Alexander Green (and backed up by the 1990 Nobel Prize-winning study performed by Harry M. Markowitz), asset allocation (how you distribute your investment dollars) is the single most important factor for determining your portfolio’s return – even more important than what you invest in!

And the key to asset allocation is diversification. By diversifying your investments, you eliminate the chance that your entire investment portfolio could be affected by a single event or market occurrence.

Basically, there are two ways to diversify your portfolio: investing in different asset classes (such as bonds, stocks, cash, precious metals, etc.), and investing in different sectors within an asset type (for stocks: high-tech, blue chips, mid-caps, health-related, etc.).

Balancing Your Investment Diet

The message of asset allocation is simple. But it is the most important lesson in investing: HOW you divide up your assets among the three main classes (stocks, bonds and cash) that is infinitely more important than WHICH stocks, bonds or mutual funds you choose...

Think of asset allocation as you would your diet. A diet of ALL meat would literally kill you. But a diet of all vegetables, while it may not kill you, will likely lead you to inferior overall performance. We all know this. And we know that some balance of these is optimal – hence the phrase “well-balanced” diet.

The same holds for investing. Investors with “all-stock diets” have been hit hard in the recent past. We know that a mix of stocks and bonds over the long run must be the “optimal” mix, to give us healthy gains AND (at the same time) ward off portfolio heart attacks.

The following chart is an example of the basic Oxford Asset


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Allocation model. For investors interested in a more sophisticated portfolio mix, The Oxford Club’s asset allocation model is explained in greater detail at oxfordclub.com.

The Perfect Portfolio for You

If only you had the PERFECT PORTFOLIO... one that grew 12% every year like clockwork – without a losing year – then you’d be set for life. But just what is the perfect portfolio for you? And what’s the easiest way to get there from where you are now?

We wish we could just snap our fingers and give you 12% a year while you sleep.

But it’s not that easy. Like one-size-fits-all shoes, the idea of the perfect portfolio simply doesn’t make sense. Everyone’s financial situation is different.

For starters, when you’re young, you need growth. You can afford to take risks because even if you completely blow it, you’ve still got years to make up that money you lose.

And when you’re older, you don’t want to have to go back to work. So you’ve got to be much safer with your investments.

Go to www.oxfordclub.com and click on “Asset Allocation Model” to learn more about this critically important strategy.

30%U.S. Stocks

30% ForeignStocks

5%PreciousMetals

5% REITs*

10%High-GradeBonds

10%High-YieldBonds10%

InflationAdjusted

Treasuries

*Real Estate Investment Trusts

Example: Oxford Asset Allocation Model


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A Simple Rule of Thumb That Could Save You Big $$$

The simplest rule of thumb to use to account for these different investment needs is this:

ONE HUNDRED MINUS YOUR AGE IS THE PERCENTAGE YOU SHOULD HAVE IN STOCKS. (Particularly in a “set it and forget it” portfolio.)

So if you’re 30, you could have up to 70% of your investable funds in stocks (held as individual stocks or in mutual funds).

And if you’re 70, you could have 30% in stocks. This is because stocks are less safe than the alternatives, so the older you get, the less stock you should have.

This rule of thumb is very rough, but it’s not just pulled out of the sky. It comes from studying nearly 80 years of stock-market returns. Now let’s take it to the next level; let’s get closer to the perfect portfolio for you...

What History Tells Us About Asset Allocation

Take a look at how the three particular portfolios listed below have performed over the last 76 years. While you look at them, consider which one is most appropriate for you. Consider things like, “Is it worth it to take more risks to improve my investment returns from a ‘safe’ 7% a year to a ‘risky’ 10%?”

This makes a big difference over the long run. But no one can answer that question for you. You are the only one who knows what level of risk lets you sleep at night. Arm yourself with the facts: Know whether you should choose a safe or a risky portfolio. Here are the facts, as history tells us:

One Example of anAge-Allocation Model

(55-year-old person)

Stocks45%

Bonds& Cash55%


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n SAFE PORTFOLIO – 20% stocks, 80% bonds Over the last 82 years, this portfolio has averaged 6.4% a year. Its WORST year was a loss of 10.8%. It lost money 14% of the years.

n BALANCED PORTFOLIO – 50% stocks, 50% bonds Over the last 82 years, this portfolio has averaged 8.08% a year. Its WORST year was a loss of 23.2%. It lost money 22% of the years.

n RISKY PORTFOLIO – 80% stocks, 20% bonds Over the last 82 years, this portfolio has averaged 9.76% a year. Its WORST year was a loss of 35.5%. It lost money 28% of the years.

So what’s appropriate for you? To find out, you’ve got to answer tough questions, like, “Can I handle a 35% loss in a year if I held the risky portfolio?” or “Do I really need to risk it all, when the difference between being safe and being risky is only 3%?”

Diversify Within Asset Classes to Ratchet Up Safety

Diversity further mitigates risk in your portfolio – and while you should diversify in each asset class (stocks, bonds, alternative investments), we’re going to first discuss diversity as it pertains to the most volatile section of your portfolio: the stock portion.

How should you diversify your stock portfolio? First by quantity. There is no magic number of different stocks you should own to make your portfolio diversified. But there are a number of other consider-ations...

Diversity by quantity doesn’t mean owning many stocks within a single sector.

For example, if you owned 10 Internet stocks at the end of 1999, you probably had a robust portfolio. But when the entire sector began to tumble back to earth, the facade of in-sector diversity was crushed with it.

Diversifying means investing across:

n Sectors (high-tech, finance, services, food and beverage, etc.)


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n Company size (large caps, mid-caps, small caps)

n Profit goals (growth or income)

n National boundaries (domestic and foreign)

The more diverse your portfolio, the less vulnerable it is to an overall value loss.

To take diversity a step further, let’s consider hard numbers regarding asset allocation and diversity.

You should never allocate more than 4% of your investable assets into any one stock.

So if you allocate your assets based on the age method and you’re 40 years old, 60% of your assets should be in stocks. That means you’d need to own at least 15 different stocks (4% of the 60%) to be diversified enough.

If you don’t have enough capital to spread out your stock investments and achieve true diversity right now, you may want to consider investing in a mutual fund.

Mutual funds are like mini-portfolios – they’re a bundle of companies wrapped into a single investment (see the Mutual Fund section on pages 43 to 48).


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The Importance of Keeping Cash on Hand for Investing

So now you’ve got an idea of the risk you can handle, how to allocate assets within your portfolio and the importance of diversifica-tion to protect your hard-earned dollars. You’re ready to invest, right? Not yet.

You know you’ll need to have the cash to buy into investments. But do you know the best place to maintain your cash until you’re ready to use it?

In savings accounts? Definitely not – especially at times like these, when savings account rates can be less than 1%. So where should you keep it?

Well, two good options for cash are money market accounts and money market mutual funds. These are investments that will let you immediately access your cash and at least keep pace with inflation.

A money market account is a type of savings account offered by banks and credit unions. These FDIC-insured accounts require minimum balances – often $500 to $2,500, but sometimes as high as $10,000. With these accounts, you can write up to three checks per month, as long as the check is for at least $250. Money market accounts offer higher rates of return than regular savings accounts. Tiered money market accounts require a higher opening deposit, but they pay you higher interest rates as your account grows.

Money market mutual funds are not bank accounts and are not FDIC-insured. These are funds in short-term loans of the government and certain corporations. These funds usually require $500 minimum balances. Unlike other mutual funds, this type strives to keep its Net Asset Value (NAV – see Page 43) at $1 per share (although this is not guaranteed). Returns depend on the yields of the underlying investments, so they do fluctuate. Even though these funds are not guaranteed, they are considered to be very safe investments. Most come


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with check-writing privileges; some even come with ATM cards.

A lot of investors think Certificates of Deposit (CDs) are cash investments. They do guarantee principal and returns (albeit a low rate of return). And today you can choose among different types of CDs such as variable rate or long-term plus high-yield, and even some with special redemption features like calls. But if you evaluate them in terms of liquidity, they fall far short due to penalties for early withdrawal or other bank-specific requirements. So while these safety nets are technically cash, they can’t be used at a moment’s notice.

Bottom line: CDs aren’t a great place to park your cash, especially when their rate of return is so dismal.

For investments that are just as safe but will provide higher returns, look into debt securities like bonds. If you’re going to tie up your cash, you may as well make it worthwhile.


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The Skinny on Stocks and Markets

The stock market can make or break you. Unless you know about the basics of investing in stocks, you take a high risk of seeing your money go down the drain.

Whether or not you actually have money in the stock market, it still affects you every day. Every time you go to the store or fill up at the gas station, you’re interacting with the stock market. You’re affecting the price of a company’s goods or services, which indirectly affects share price. As share prices change, companies react.

Since 1926, when the market as we know it today was created, stocks have posted higher returns than any other type of investment.

The members of our OC Investment Advisory Panel all agree that, generally speaking, investing in the stock market is the best way to increase your wealth. From that point, their investment styles diverge, but all center on the extraordinary returns the stock market can produce. Stocks are a must for any investor.

Order From Chaos – How the Stock Market Works

On television, the New York Stock Exchange looks like a chamber of chaos, with people in dark-gray suits throwing up their arms and yelling at one another. It’s hard to imagine how trades get completed in this pandemonium. But the market pros really do have everything under control.

These floor brokers ease the exchange between buyers and sellers, and actually make the market run smoothly. Also, more orderly, computerized exchanges (like the Nasdaq) are becoming more popular; these exchanges don’t use floor brokers.

To buy (or sell) a stock, you simply contact your broker and tell him what you want to do. For example, if you have money to invest and you like XYZ Corp. (NYSE: XYZ), you would tell your broker exactly that. He’d come back and let you know the current trading


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price, his fee and the number of shares you could buy.

Example: if you want to buy $5,000 worth of XYZ Corp. and it’s currently trading at $49 per share, and your broker charges $100 commission, then you’d be able to purchase 100 shares and pay his fee.

Should you decide to make the trade, the broker would then send a message to his floor broker who actually executes the trade. You give your broker the money, and you get the stock (although you usually won’t get the actual paper stock certificates – the brokerage generally holds onto these and just transfers ownership to you).

The following list explains the most common orders when investing in the stock market. Once you understand them, you can contact any broker and communicate your intent without confusion. And as complex as investing is, nobody wants to miscommunicate his or her intent.

TYPES OF ORDERS

Market Order: An order to execute the trade at the current price

Limit Order: An order to complete the trade only at a specific price

Stop Order: An order to sell your shares if they fall to a certain price (to avoid extreme losses)

Day Order: An order that expires at the end of the day if not filled

GTC (Good ‘Til Cancelled): An order that remains open until it is either filled by the broker or cancelled by you

All or None: An order to buy or sell only if the entire order can be completed at once (i.e., no partial fills accepted)

Fill or Kill: If an order is not executed immediately, it’s automatically cancelled

Bulls and Bears – Understanding the Market Animals

To truly make money investing, you also need to understand the cycles the market can experience. The two most common are bull and bear markets.


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During the time we saw Internet and dot-com companies shoot way, way up – or more recently when housing took us higher – that was an extreme case of a bull market. In a bull market, everybody’s buying, and the market outlook is rosy. It seems everyone jumps on the bandwagon during a bull market – it’s easy to make money when everything is going up.

But this can be dangerous, especially for new investors. Bull markets don’t last forever, and popular stocks run the risk of becoming overvalued – leading to large-scale losses when the market corrects itself (moves back down to realistic price levels).

The flipside of a bull market is a bear market. This is characterized by falling stock prices, recession and (often) rising inflation. In the worst-case scenario, a bear market evolves into a crash, as it did in 1987, in 2000 to 2002 and again in 2008 to March 2009.

Bear markets often cause investors to shy away from stocks, but sometimes when prices are depressed you can actually make a killing. You can truly buy low, sell high. Savvy investors use bear markets and even crashes as opportunities to get in at rock-bottom prices... but only after they’ve first learned to recognize pricing opportunities for what they really are. So next we’ll begin to unravel the mystery of market pricing.

How Is the Market Doing? Look to the Indexes

Generally when you hear people discussing what’s happening on Wall Street, they’re rarely talking about individual investments. Rather they’re talking about the movement of large segments of the market. And to determine this, they talk about indexes.

n Dow Jones Industrial Average (DJIA, or “The Dow”) The Dow is the most commonly used index to describe how the market is doing – in fact, it’s the best-known index in the world. When people say the market is up 20 points, they’re referring to the DJIA moving from, for example, 10,621 to 10,641. When Charles Dow created the index in 1896, it was made up of 12 stocks. Today, the DJIA is the average of 30 major stocks


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listed on the New York Stock Exchange (with two companies – Microsoft and Intel – from the Nasdaq). These are mainly large corporations like McDonald’s and GE that represent different sectors of the economy. When taken together, these 30 stocks represent the total U.S. stock market.

n Standard & Poor’s Index (the S&P 500) The S&P 500, made up of 500 stocks, is another popular benchmark used to describe market performance. Again the index follows stocks from a variety of industries and economic segments, including railroads and utilities.

n Nasdaq Index The Nasdaq Index captures the price movement of all the U.S. common stocks listed on the Nasdaq exchange – more than 5,000 companies. Although many economic sectors are traded on the Nasdaq, the emphasis is on technology-oriented stocks.

n Russell 2000 This index follows the price movement of 2,000 small cap companies from a variety of market sectors. This index is one of the most diverse, covering industries from technology to healthcare.

n Wilshire 5000 This index is named for the nearly 5,000 stocks it contained at launch. The number of stocks included varies over time, but this index is accepted as the largest in the world. It is also the most diverse of all the U.S. indexes, since it includes all U.S.-based publicly traded companies. Securities included in the S&P 500 make up about 70% of the Wilshire 5000’s net worth.

Accumulating Wealth – How You Make Money in the Market

There are basically two ways you can make money on stocks: dividends and capital appreciation.

Dividends are periodic payments made by corporations to their owners, the shareholders. With a dividend-producing stock, figuring


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the yield is simple: divide the annual dividend by the stock price. For example, if ABC Corp. is paying out $0.40 per share per year (usually in the form of $0.10 per quarter), and the stock is trading at $8 per share, the yield is 5%. Stocks with high yields are considered income stocks.

Some companies pay low or no dividends to their shareholders. Essentially what these companies do is reinvest their profits in their businesses – for expansion, new product development or new delivery systems. As business increases, the company grows and (hopefully) profits increase, leading to capital appreciation or higher stock prices. Stocks that follow this pattern are referred to as growth stocks.

The way you personally make money on individual stocks also depends upon which types of stocks you own. There are two types: common stocks and preferred stocks.

n Common Stocks represent ownership of a corporation. When you own common stock, you share the profits and losses of a company with the other shareholders. When the company is profitable, you benefit by receiving dividends and through the stock’s appreciation (rising share price). As an owner, you also have the right to vote at shareholders’ meetings.

n Preferred Stocks are more like a fixed-income investment. Preferred stockholders usually don’t have voting rights. They generally receive guaranteed, fixed dividends (rather than the variable dividends that the common shareholders get).

There are a few more general categories that stocks can fall into:

n Blue Chip Stocks: These companies have had, and expect to keep having, good track records. You would buy a blue chip if you wanted a safe investment that has some growth potential.

n Cyclical Stocks: These companies respond to changes in economic cycles. They generally do well in strong economies and fade when the economy slows.

n Speculative Stocks: Just like the name implies, these stocks are


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the equivalent of the roulette wheel in Vegas. These extremely risky investments are not for those with weak stomachs – you’re as likely to lose your shirt as make a dime. Penny stocks generally fall into this category.

n Defensive Stocks: These are used as recession protection, as these companies remain stable even in economic downturns (like food and tobacco companies).

Choosing Individual Stocks

Stock selection is one of the most elusive elements of successful investing. To increase your chances of making a profit, you must understand what you’re investing in. Everyone from your next-door neighbor to your banker will have tips for you – don’t follow them unless you’ve done your homework first.

Most people don’t truly realize that when they’re buying a stock, they’re actually buying part of a company. And you would never buy a company that you knew nothing about. So you need to put in the time to learn about any company you intend to own.

So where do you start?

According to Alex Green, “You should only invest in businesses and industries that you understand. This is critical, since you bear the responsibility for investing your money. If you only follow the advice of others without doing any due diligence yourself, then you run the risk of being left out in the cold.”

Marc Lichtenfeld suggests you capitalize on your particular knowledge of an industry or a company: “Buy what you know. If you have a competitive edge, use it so you can outperform the markets.”

A word of caution, though: Newer investors sometimes test the waters by investing in stocks via mutual funds instead of immediately diving into the deep end with individual stocks. Mutual funds give instant diversification and reduce your risk. When you do decide to invest in individual companies, look for quality. And Alex takes that a


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step further: “Buy the companies with the best value, the leaders with the most momentum in prospering industries.”

Investigate Before You Buy

No matter which method you use to select stocks, it’s imperative that you research a company before buying into it. Drinking Coca-Cola is not enough of a reason to buy its stock – you need to know the company inside and out before you put money into it.

First stop: the company’s annual report. This report is put out by the company itself (although it has to be audited by a CPA firm) and contains basic information about the company, its finances, where it’s been and where it’s going. Typical annual reports are thick, glossy and full of pictures – and, of course, try to show the company in a positive light.

Annual reports include some basic components you should look at:

n Financial Highlights – Usually five or 10 years of statistics, including charts and graphs.

n Financial Statements – The meat of the report and usually the section readers spend the most time on. The four basic financial statements include: statement of profit or loss, balance sheet, statement of stockholder’s equity, and statement of cash flows. In addition to the current year’s statements, most companies also provide comparative statements including several years of data, so you can assess performance over time.

n Notes to Financial Statements – This key section is one that most people overlook, but you should focus on it. It contains:

1. Summaries of significant accounting policies – or how they come up with the numbers in the financial statements

2. Explanatory notes – to amplify key items in the financial statements, such as details of long-term debt, stock options and foreign operations

3. Supplemental information – additional information required by


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the SEC, including unaudited quarterly reports (a.k.a. interim financial statements) and segment information for companies that engage in more than one line of business.

n Management’s Discussion and Analysis – Here management explains fluctuations from one year to the next and discusses the results of the current year’s operations.

Other items you’ll find in these reports include a Letter to the Shareholders, a Report of Management’s Responsibilities and the Report of the Certified Public Accountants.

While last year’s performance is no guarantee of success (or failure) in the year to come, it does help give you a sense of the company’s strengths and weaknesses, and what they’re doing about them. Reading the annual report is an important step in learning about any company you plan to buy. To get a copy of a corporation’s annual report, you can either call or visit its website, and the company will provide you with the report free of charge.

If you want even more detailed financial information, your next stop is the company’s Form 10-K. This report, required by the SEC, contains more financial information than the company’s annual report, and it’s in a standardized format.

In addition to more detailed (and audited) financial statements, the 10-K also includes historical stock performance and earnings analysis. You can get this report (free of charge) from the SEC by using its EDGAR database (sec.gov).

Taking the Confusion out of the Prospectus

Another avenue is to find out if your investment choice has a prospectus. Specifically if you call any mutual fund company about investing, the first thing they’ll do – even before taking your money – is send you a prospectus.

And thanks to some standards set by the SEC, these once-impossi-ble-to-read documents are now a little easier to understand – but they


27

can still be very confusing when you’re not sure what you’re looking for. These reports are jam-packed with useful information, so it’s important to read through them before parting with your money.

The typical prospectus is broken out in sections, starting with the Investment Objective. This section – usually found right in front – is basically a summary explaining what the company’s goals are and the strategies used to reach them.

The Financial Highlights section is another must-read. This section details historical returns, turnover rate, volatility and expense ratio. There will also be a discussion of dividend payments and capital gains. This section is usually laid out in table format with a couple of graphs and charts alongside it.

To understand how expenses will affect your return, look at the Fee Table. You’ll find an itemized listing of all the fees charged, from management fees (usually ranging from 0.5% to 3%) to 12(b)-1 fees (which often range between 0.25% and 1%).

Sales loads – commissions paid whether back-end (when you get out of the position) or front-end (when you get into the position) – will also be laid out in this section. This section is as important as the financial highlights. No matter how well an investment performs, high fees could eat away at your earnings.

The prospectus will also have several other sections including a discussion of management, shareholder services, account features and investment risks. You should read through the entire prospectus before you make an investment decision, but pay special attention to the sections described above – especially when comparing investment options.

You Can Never Know Too Much When Making Investment Decisions

Aside from the prospectus, there are other sources of information you can use when checking out investments. One of the best is


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Morningstar (morningstar.com).

The “premium” or (fee-based) membership gives you access to tracking and analyzing investment portfolios, daily market updates and more: for just $195 a year, you’ll be privy to specialized analysts’ research reports. As with stock information services, any fees you pay to help you invest are tax deductible.

Another great source of information is financial newspapers, like The Wall Street Journal and Barron’s. Every day these papers publish information about mutual funds, bonds and all the listed stocks. The stock listings look confusing at first glance – just like a long string of numbers – but they are crucial to tracking stock performance.

Stock listings like the following contain several columns of information, including:

n 52-Week High and Low – this information shows you how volatile the stock is. The bigger the difference between the high and the low, the more risk potential the stock has.

n Company Name (STOCK) – abbreviated and listed alphabetically.

n Symbol (SYM) – the company’s stock “nickname,” generally three or four letters. For example, the symbol for Motorola is MOT.

n Dividend (DIV) – the amount of cash dividend the company pays per share per year... including (e) for expected or (f) for forward-looking.

HI LO STOCK SYM DIV % PE 100s HI LO CLOSE CHG

5625 1393 Motorola MOT .16 1.1 24 104855 1494 1405 1416 + 004

3425 1956 Muellerind MLI ... 11 763 2834 2785 2786 – 014

1343 1069 Muniassets MUA .81e 6.3 ... 135 1287 1274 1280 – 003

1300 1081 MuniAdvntg MAF .72 5.6 ... 120 1290 1281 1281 – 011

915 731 MuniHilnco MHF .58 6.7 ... 678 875 857 863 – 011

2450 1869 MuniMtgEq MMA 1.69f 7.8 19 400 2225 2175 2180 – 030

1295 1088 MuniPrtnrs MNP .73 5.6 ... 13 1299 1298 1298 + 003


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n Percent Yield (%) – the dividend divided by the current closing price.

n P/E Ratio (PE) – shows the relationship between a stock’s price and the company’s annual earnings, calculated by dividing the current closing price by the earnings per share of the stock.

n Volume (100s) – the number (in hundreds) of shares that were traded yesterday. (If a “z” appears before the number, then it is the actual number of shares traded.)

n High, Low, Close (HI/LO/CLOSE) – the highest, lowest and last price for yesterday.

n Net Change (CHG) – the difference in the stock price from day to day shows you whether the stock price is rising or falling.

Another valuable tool is the stock chart, which is a graphical presentation of the stock’s price fluctuation. Flatter lines mean less volatile securities and therefore less chance for explosive gains or losses.

And of course the Internet is a vast source of financial information. There is a lot of data out there. But beware: Make sure you know the source before you rely on it.

For information on a particular company, the first website you should visit is its own. Other sites we recommend – and know to be accurate and reliable – include:

n Bloomberg: (bloomberg.com) has up-to-the-minute market information, plus a wealth of investment education and information. Free.

n Hoover’s Online: (hoovers.com) has extensive company research, in-depth company profiles and timely market info. Subscription service.

n Value Line: (valueline.com) has a strong stock research center, in-depth mutual fund analysis and real-time market data. Subscription service.


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Some of these sites charge a subscriber fee and then allow unlimited access to their information; others provide data with fees on a per-use basis. Remember any fees that you pay for investment research are fully tax deductible (when you itemize deductions).

Using International Stocks to Reduce Volatility

In addition to expanding growth opportunities outside the United States, international markets help cushion your portfolio against market downturns through diversification.

International investments are also a great way to potentially lower the overall risk of your portfolio because U.S. and international markets rarely move in tandem – if one market is down, the other is often up.

If you invest exclusively in the U.S. market, you miss the opportunity to share in the potential growth of some of the leading companies in the world.

On the other hand, foreign investing may not be as “foreign” as you think. Scan the list of products below, and you’ll see many manufactured by non-U.S. companies – companies whose products you already buy in America...

Stock Price Chart

$95

$90

$85

$80

$75

$70

2013 2014 2015


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Product Int’l Owner/Location

Adidas Shoes Adidas AG/Germany

Alka-Seltzer Bayer Schering Pharma AG/Germany

Aquafresh GlaxoSmithKline Plc/UK

Baskin-Robbins J. Lyons & Co./UK

Carnation Nestle SA/Switzerland

Dannon Yogurt Group Danone/France

Panasonic Panasonic Corporation/Japan

As you can see, these international companies are hardly “foreign” at all. You and others buy their products every day.

Fortunately, you don’t have to fly around the world or open a foreign bank account to become an international investor. You simply have to know about ADRs and ETFs.

Two Ways to Buy Safe Foreign Shares

1. American Depositary Receipts (ADRs)

American Depositary Receipts (ADRs) are shares in foreign-based companies that trade on U.S. exchanges like the NYSE. They make buying stock in foreign countries as easy as picking up shares in companies stateside.

ADRs are receipts issued by U.S. banks for foreign securities. They are almost the equivalent of holding the foreign shares.

The bank collects the dividends for the entire block it holds, makes the currency conversion and then pays out the dividends to the ADR holders. American brokers can then buy or sell ADRs in the same way as any U.S. stock.

ADRs have almost the same advantages and disadvantages as investing in U.S.-based international mutual funds. Since the underlying security is foreign, you do get economic diversification.


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But since the actual security you hold (in this case, the ADR) is issued by a U.S. bank, it is legally a U.S. security, just as the share of a U.S. mutual fund is a U.S. security.

All of the records are available in the United States, and the bank reports the dividends to the IRS on Form 1099.

An ADR is not necessarily a one-for-one receipt for the foreign shares. Typical stock prices in other countries are often different from the typical ranges U.S. stocks trade in. So to make transactions more convenient for Americans, the ADR may be issued in a ratio that makes the price closer to American securities.

2. Exchange-Traded Funds (ETFs)

If you want to invest in a certain country but don’t want the risk of owning a single stock, you can start with an Exchange-Traded Fund (ETF).

Exchange-Traded Funds hold many different stocks, like mutual funds, but they trade on an exchange with a single symbol, just like regular stocks.

For example, country-specific ETFs (like the iShares Australia Fund [NYSE: EWA]) let you buy a piece of the biggest banks, commodity producers and media companies in one country.

ETFs are an excellent vehicle for most investors to diversify their portfolios, not only domestically but also abroad. Indexing offers the individual investor three compelling attributes not seen in actively managed mutual-fund products:

1. ETFs have lower expenses.

2. ETFs are very liquid and provide increased flexibility (ETFs have no minimum investment requirement and can also be shorted).

3. ETFs offer greater tax efficiency (no mutual fund distributions to deal with).

And because ETFs are traded on stock exchanges, they can be


33

bought and sold at any time during the day (unlike most mutual funds, which can only be purchased or redeemed at the end of the day).

On the negative side for ETFs:

1. There is no active management, so exceeding the market return isn’t going to happen.

2. You need to be aware of ETFs with low trading volume, which can create a large bid-ask spread and cause you to pay too much.

3. International limitations – many countries only have limited ETF offerings, which may not represent the broad market.

Last-Minute Advice From the Experts

Marc: “Despite the general uncertainty in the markets today, money can be made by applying the right strategies to both protect and grow capital.”

Dave: “Don’t obsess about the direction of the market. It’s impossible to predict. Instead, focus on buying high quality assets on the cheap. Over the long-haul, you’ll be rewarded.”

Alex: “Forget about the economy. Forget about the market. If you’re a long-term investor, asset allocate, keep a close eye on taxes and expenses, and rebalance annually. If you’re a short-term trader, buy great businesses set to report better-than-expected earnings and run a trailing stop behind each position. It’s really that simple.”


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Buy Bonds – Your Best Fixed-Income Investment Option

Bonds are forms of debt – like IOUs. These fixed-income securities play an important role in your overall portfolio: they add regular income, provide defense against principal losses, and (at times) can be used for capital appreciation.

So when you buy a bond, you’re simply giving someone a loan – whether it’s a company or the government. And you get interest on your loan until you get paid back.

Simple enough, right? So why are so many people confused by bonds?

In its simplest form – sometimes called “plain vanilla” – a bond acts as a straightforward loan. The issuer promises to pay a stated rate of interest at specific intervals during the life of the bond, and then repay the entire face value when the bond comes due (its “maturity”). But there are many twists that can make these debt instruments much less predictable.

The Many Flavors of Bonds

While not quite up to Baskin-Robbins standards of 31 flavors, there are a number of different choices for investing in bonds. Each carries with it a different degree of risk – and therefore a different degree of return. Naturally, higher-risk bonds generate higher returns.

Risk, in terms of bonds, is the risk associated with any outstanding loan. The lendee (issuer of the bond) might default on the loan – rendering that bond worthless. So, by knowing about the different bond types and the risk involved, you’re better positioned to make bond choices.

n U.S. Government (Treasury) Securities: Backed by the full faith and credit of the U.S. government, these bonds are considered the safest of their investment class, and that safety is reflected


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in the relatively low interest rates you earn by owning them. Interest on these securities is federally taxable, but free from state and local taxes. Capital gains, though, are fully taxable. Treasury securities are generally grouped by maturity:

• Treasury Bills: 91 days to one year • Treasury Notes: one to 10 years • Treasury Bonds: longer than 10 years

n Federal Agency Securities: These bonds are indirectly backed by the U.S. government. They enjoy the highest credit rating, along with Treasurys, because of the implied obligation of the government. But since they’re not actually guaranteed by the government, they carry higher interest rates than Treasurys.

n Municipal Bonds: Looking for tax-free income? Then look at “Munis” (as they’re often called). Munis are issued by state and local governments, and other public entities (like schools), to raise money for long-term projects. Risk-wise, they’re on par with Federal Agency Securities. But these investments earn interest that’s guaranteed 100% federal income-tax free. In some cases, interest is also free from state and local taxes, making them even more attractive. Like Treasurys though, capital gains earned by selling the bonds are fully taxable.

n Corporate Bonds: When corporations need capital and don’t want to water down ownership by issuing more stock, they issue bonds. Corporations can issue one of two kinds of bonds: collateralized (backed by specific assets) or debentures (backed by the good name of the company). The rates on these bonds are largely determined by their credit quality. Again, lower-quality bonds (from higher-risk companies) offer higher interest rates.

n Mortgage-Backed Securities: Individual mortgages are pooled together to serve as collateral for these unique securities. Unlike typical bonds, which pay you on a fixed schedule, payments on these securities are based on the underlying mortgage payments. When mortgages are paid off early (like when interest rates


36

drop and people refinance), you’re paid. Because the timing of payments is uncertain, these bonds generally offer higher yields than others of equal credit quality and stated maturity. Many mortgage-backed securities are issued by U.S. government agencies (like FHLMC and FNMA), but they can also be issued by major mortgage lenders like Prudential.

n Asset-Backed Securities: Similar to mortgage-backed securities, these bonds pay down as the underlying assets are paid off. What backs these securities? Credit card debt, car and truck loans, business leases – almost any kind of debt can be securitized these days. The credit quality of the asset-backed securities depends on the quality of the collateral... and that varies greatly. Defaults on the underlying loans are much more common than on mortgages, and that can cause your bond payments to be delayed or missed entirely.

n Foreign Government Bonds: Investing in international bonds can be a great way to diversify the fixed-income portion of your portfolio without significantly increasing your risk factor – if you choose securities issued by developed nations. Investing in emerging nations will increase the return on your bond, as the investment is considered less secure, especially in countries undergoing political or economic upheaval. Also, currency fluctuations can alter your bond’s value in U.S. dollars, even if its actual price remains stable.

Four Essentials for Purchasing Bonds

Regardless of your investing experience, you need to know what the following terms mean when discussing bonds:

n Maturity n Interest rate

n Price n Yield

Maturity refers to the date on which your principal will be repaid – consider it the “payoff date” for any of your own loans. Maturities are


37

usually grouped by time span:

• Short-term Notes – matures in up to four years • Medium-term Bonds – matures in five to 12 years • Long-term Bonds – matures in more than 12 years

When interest rates move, they affect the amount of money you make in bonds. Unfortunately, this is where people turn their brains off... But they shouldn’t.

Think of it like this: When interest rates go down, it’s great to be a bondholder. But be careful. The reverse is also true: When interest rates rise, you don’t want to hold bonds.

Maturity and interest rates have a special relationship. Generally, the longer the maturity, the higher the interest rate. Longer terms call for higher rates because of the greater risk for price and yield fluctuation.

This correlation is demonstrated by the yield curve, shown most commonly for U.S. Treasury securities. A normal yield curve is steep, showing that the rates on short-term securities are much lower than those for longer-term ones.

A flat yield curve indicates very little difference between short-term and long-term rates – at these times; wise investors buy short-term securities to earn the same rates with less risk. On rare occasions, you’ll see an inverted curve (as reflected in the chart to the right), meaning that short-term rates are higher than long-term rates.

The bond price (alternatively called the market value or present value) depends mainly on the prevailing market interest rate. The price depends on most of the factors listed above, plus the usual supply and demand. When bonds are issued initially, they usually sell for close to face value; it’s when they hit the secondary market (are sold any time after initially offered) that all bets are off. These prices fluctuate widely based on the prevailing interest rate.

If the market rate for similar bonds is higher than the bond’s stated interest rate, you would purchase the bond at a discount – meaning less than the face value.


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If the market rate is lower than the stated rate, the bond would be offered at a premium, and you’d pay more than the face value for it. Bond price has an inverse relationship with the market interest rate: As the market interest rate goes up, the bond price goes down (and vice versa).

Current yield refers to the rate you actually earn based on the price you paid for the bond. You calculate this by dividing the interest payment by the price you paid for the bond. So on a 9%, $10,000 bond that you paid $9,000 for, the yield would be $900/$9,000 or 10%. Even more important are the two other kinds of bond yields: yield to maturity and yield to call.

The yield to maturity is what you’ll earn on the bond if you hold it to maturity. You can calculate this by summing all the interest payments you’ll receive from the time you bought it to the maturity date, plus the discount (or minus the premium), divided by the price.

Yield to call is calculated based on the assumption that the bond will be called earlier than maturity (each bond will have specific call dates). You can use these yields to compare bonds with different maturities and rates, and determine which has the best return.

Credit Ratings – How to Tell Darlings From Dogs

Inverted Yield Curve:The Best Buy for the Short-Term

6.2

6

5.8

5.6

5.4

5.2

50 5 10 15 20 25 30

Years to Maturity

Yiel

d


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Every bond issued has a credit rating assigned to it. This rating tells you the level of risk associated with each bond.

Ratings depend on the ability of the issuer to pay back the money borrowed. They are usually shown on a letter grading scale, with AAA being the highest rating, going down to AA, A, BBB and so on through C.

Two of the best-known rating agencies are Moody’s and Standard & Poor’s. Just remember, the closer the rating to AAA, the safer the bond.

And the Experts Say...

Steve: “Bonds are a great diversifier. They provide steady returns with much less risk than stocks. In this low-interest rate environment though, it’s important to invest in shorter maturities (three to five years). Otherwise, when interest rates rise – and they have to – you’ll get hit with a double whammy – a loss of principal value and a below-market yield.

“Bonds have rallied sharply; indicating that investors feel there is a major long-term slowdown for the US economy. That being said, locking yourself into a long-term return of 3% for 30 years is not a good idea. For those of you seeking income, short maturities in U.S. corporate bonds combined with higher yielding bonds from countries like Canada might be a better bet.”

Alex: “Don’t buy Treasury bonds at all. We’re experiencing a bubble there. Try high-grade corporates and muni-bonds if you’re in a high tax bracket.”


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Meet the Mutual Fund and Gain Instant Diversification

For the novice investor, mutual funds are a good place to start. They offer entry into the marketplace with instant diversification.

In fact, mutual funds are some of the most popular investments there are, accounting for over $5 trillion investment dollars. To invest in mutual funds, you need to get a handle on the lingo...

The Lingo

n Net Asset Value (NAV): The price of a fund share, not including sales charges or commissions, calculated by taking the fund’s total assets, subtracting its liabilities and dividing the difference by the total number of shares outstanding. The NAV can be found in the financial pages of the newspaper.

n Load: A sales charge, which can be either front-end (a fee when you buy shares) or back-end (a fee when you sell). Funds with no sales charges are called no-load funds.

n 12(b)-1 Fees: The fund’s marketing expenses deducted from the assets. These fees include brokers’ fees and promotional material.

Alex Green is a strong proponent of mutual funds (particularly index funds – see Page 46), especially for those new to the investment game. He reminds us to mix up fund types to keep our asset-allocation plan consistent. Or you can buy an asset-allocation fund – just make sure to find out what its asset mix is.

Members of The Oxford Club can follow Alex’s “Gone Fishin’” mutual-fund portfolio in the monthly Communiqué, or by visiting the Club’s website at oxfordclub.com. The Gone Fishin’ Portfolio, made up of low-cost Vanguard Mutual Funds, was specially designed for conservative investors who need to exceed inflation while taking as little risk as possible.


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A Great Place to Start

A mutual fund basically pools money from large numbers of small investors, then uses that money to establish a diversified portfolio.

When the fund’s investments gain or lose, so do you. When the fund earns money, it pays you dividends – either as straight cash or as a reinvestment into the fund. When securities within the fund are sold, the gains or losses are passed on to you.

A third way you can make money is if the fund share price goes up – like any other paper profit, you have to sell your shares to actually benefit. The three together make up the mutual fund’s total return.

Buying a mutual fund is as easy as writing a check. The simplest way is to contact the fund directly (although you can also purchase shares through a broker) to get an enrollment kit. You send them money, they issue you shares.

Getting your money out is just as easy: You simply call the fund and cash in some or all of your shares.

Four Mutual Fund Misunderstandings

Unfortunately, as mutual funds have gained popularity, they have also gained a level of confusion. The following are common mutual-fund mis-understandings – and what’s really happening:

1. MYTH: Mutual funds are safe investments because they are diversified. TRUTH: The safety of a fund is based on the investments it holds. A speculative fund, even if it holds 100 different stocks, is still considered risky because of the nature of the securities it holds.

2. MYTH: Mutual-fund shares are guaranteed like bank deposits. TRUTH: Mutual funds are not insured or guaranteed. Even if you buy the shares through your bank, they are not covered by the FDIC. No matter what kind of mutual fund you buy, no matter what bank you buy it from, your shares can decline in value.


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3. MYTH: Mutual funds are a low-cost way to buy a lot of securities. TRUTH: This can be true or false, depending on the individual fund. Some funds have high sales commissions and high operating expenses, which can seriously eat away at your returns. Yes, it’s still probably cheaper than buying as many individual securities from your broker, but high fund fees can still add up to lower returns.

4. MYTH: Mutual funds are tax-advantaged investments. TRUTH: Unless you buy tax-exempt funds (which typically offer low-er-than-average returns) or purchase your funds through an IRA or 401(k) plan, you will pay taxes every year. In fact, some funds with high turnover can actually cause you a tax disadvantage by hitting you with a lot of capital gains at year-end.

What Types of Funds Should You Consider?

Before you buy any type of mutual fund, you have to decide what kind of securities fit in with your asset-allocation plan, risk tolerance and investment goals. Once you know the kinds of securities you want to own, then you can find a fund that holds them. So if you’ve decided that Treasury bonds are the right investment for you, don’t throw your money into a small-cap stock fund.

As mentioned before, if you want to just put your money somewhere, sit back and let it grow without paying too much attention to it, Alex offers a special strategy – the Gone Fishin’ Portfolio.

Alex’s Gone Fishin’ Portfolio involves a combination of Vanguard funds outlined in “The Gone Fishin’ Portfolio” report that can be downloaded for free on our website (oxfordclub.com), in the Investor Reports section.

Marc favors sector funds, such as healthcare and biotechnology, “because there are so many companies in these sectors that require tons of research and due diligence – it’s all but impossible for an individual investor to make good calls consistently, especially since these sectors


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move up and down rapidly. Why struggle with due diligence when you’re better off paying someone a couple of percentage points to do this for you? However, do try to invest in no-load funds; almost every load fund has a no-load counterpart.”

Sean also recommends index funds, since “most managed funds underperform the benchmarks and carry higher expenses.” He also recommends using exchange-traded funds (ETFs) as an inexpensive way to add exposure to a particular sector, industry or country in your portfolio.

And Marc says on the subject: “I don’t see any reason to ever pay a load. Stick with no-load funds and, whenever possible, no-load index funds since index funds’ performance beats 85% of actively managed funds.”

Alex says that inexperienced investors may prefer investing in funds over individual stocks and bonds until they’re comfortable with market volatility.

Low-Cost Funds Earn Market Returns

Index funds hold the securities that make up the major market indexes. Instead of trying to beat the market, they match it.

However all index funds are not alike. Even two different funds that use the same index may have different stock holdings, and therefore different returns. This is because each fund allocates the stocks from the index in its own proportions. Whatever method of allocation they use will be detailed in the prospectus.

Beware of funds that hold themselves out to be index funds but are not. These funds are actively managed, buying and selling only securities included in the index, to try to beat the benchmark. Since the point of index funds is no management and limited trading, these funds don’t fit the bill.

The big plus of index funds is that they require no (or very little) active management – and that means low or no management fees.


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Another benefit is low turnover, which means less capital gains taxes. The downside to index funds is that they can’t outperform the market.

Select the Fund That’s Right for You

The first thing to remember about mutual fund investing holds true for all investment types: Past performance is no indication of future returns. All the rankings and ratings – and advertising – hype just shows how well the fund has done in the past.

But often, last year’s No. 1 fund can easily turn into this year’s loser. One thing past performance can tell you is the volatility of the fund – and more volatility usually means more risk.

The second thing is to stick with your asset allocation plan, and buy funds that fit in with your goals and risk tolerance. Remember, stock mutual funds count as stocks in your portfolio and if your risk tolerance is low, stay away from aggressive or specialty funds. Before you look at individual funds, decide what types of funds you want to own.

Once you know which kinds of funds you want to buy, you can then compare them to one another. The basic items you should use for comparison are:

n The fund’s total return, which measures the change of your investment’s value over time, minus costs. You can find this in the Financial Highlights in the prospectus.

n The variability of the total return – looking at the year-to-year changes can show you how volatile the fund’s returns are. Look at 10 years of annual return rather than the 10-year return – which can look deceptively high if there’s one spectacular year in a sea of average returns.

n The fund’s costs – these can significantly lower your return, so know what they are. Funds that have high loads and expenses have to do better than low-fee funds just to stay competitive. Always make sure to check the fee table to see if any or all of the


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fees have been waived – they may increase considerably when the “free” period is over.

The SEC – via its website – offers a free “Mutual Fund Cost Calculator” for comparing funds. To use this free tool, go to sec.gov/mfcc/mfcc-int.htm. This application levels the playing field for similar funds, helping you decide which will provide you with the best real return.

Another item to consider is the fund’s management. Has the investment advisor been with the fund for two months or 10 years? Has the investment strategy changed recently? Big modifications in fund management can drastically affect future returns, rendering information about past performance almost useless.

Special Tax Issues for Mutual Funds

When you own shares in a mutual fund that aren’t held in a tax-deferred account – like an IRA or 401(k) – every time you earn money (whether you take it as cash or not) you have to pay taxes. So whether you take your dividends and capital-gains distributions as cash or reinvest them in the fund, you will pay taxes on them. Plus, any time you sell shares for a gain, you’ll have to pay a capital gains tax.

Funds with low turnover (meaning the portfolio is kept pretty stable) also offer fewer tax consequences. Generally speaking, if you’re looking for a fund without a lot of trading, you should look into index funds.

Some advice: Keep a record of your mutual fund statements, especially those on which you’ve bought or sold shares. They’ll help you pay taxes at the end of the year.

The only exception to this rule is investment in a tax-exempt fund – such as one that invests in municipal bonds. With that type of fund, your dividend earnings will be exempt from federal taxes, and most state and local taxes. Capital gains however are still taxable.


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When to Get In/When to Get Out – The Investment Two-Step

Asset allocation, research and knowledge each have an impact on the success of your portfolio. However, knowing when to get in and when to get out can mean the difference between caviar on the Mediterranean and tuna from a can in Toledo.

We’re not talking about trying to time the market here – no one can do that successfully. We’re talking about an investment system that helps you buy when it’s right and sell in time to protect your profits or limit your losses. By following the Club’s strategy consistently, you’ll be able to build your wealth to unprecedented levels.

Here are three opinions on when to get in...

Alex: “You’ll never know the perfect time to get in until you’re looking in the rearview mirror. I suggest adding to your market holdings at regular intervals.”

Marc: “With markets in a flux, great opportunities have arisen in the technology and biotechnology sectors. Many names are now the cheapest they have been in 12 months and they may get cheaper. But if you are looking for growth with risk, then the time is right to begin scaling into positions in these areas. When scaling in, your goal is to buy smaller lots of shares every month so as to avoid a massive down-move if you buy all at one time. This is also known as dollar cost averaging.”

Matt: “Always buy at a reasonable price. This criterion is subject of course. But a good general rule of thumb is that a stock trading for more than 30 times earnings does not qualify as cheap. In addition to valuation, look to buy into a stock in an uptrend. Momentum is a powerful force that you want to put on your side, not combat.”

And when to get out...

Generally our experts agree to always use a trailing stop to tell you when to sell a particular stock. As shown in the chart on the next page,


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the Club’s recommendation is to sell or close any investment position when the value of the position falls more than 25% from its highest closing price since you purchased it.

Here’s how the trailing stop works: sell any stock if it falls more than 25% from its highest close or from the point at which you bought in. Remember though, these prices are based on the stock’s closing price: the price at the end of a trading day. For example, if you bought a stock at $95, its trailing stop would be $71.25. Later in the week, if it hits a closing high of $100, then your trailing stop would move up to $75. So if it closes below $75 later on, you would sell it the next day.

This strategy takes out all the aggravating decision making from when to sell. All you have to do is monitor your stock’s price and sell when the number hits. This method cuts your losses and allows you to let your winners ride.

The key to our proven investment strategy is discipline. You’ll only see Oxford Club-style growth by consistently following our system. That means not holding on to stocks because you like them or feel loyalty to a company... and not letting your emotions tell you when to hold or sell.

Too many people use their instincts to tell them when to cut an

SodaStream International Ltd.

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20Sep 12 Jan 13 May 13 Sep13 Jan 14 Sep14 Jan 15May 14

Bought Stock

Initial Stop

New Stop PriceEstablished

Avoided This

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investment loose. But Club Members have the benefit of our time-tested system. To take full advantage – to minimize losses and let your winners ride – you have to faithfully use our trailing stop exit strategy.

Taking Our Trailing Stop System to the Next Level

Using trailing stops is the best first step you can take to improve your portfolio returns. You will be able to outperform your friends, neighbors and even most fund managers.

Using trailing stops is the first step to having a system – one where you know when to sell ahead of time so you can sleep at night. Using trailing stops puts you much further ahead of the game than the average investor. And now that you know you’re ready to go to the next level...

Position Sizing Protects You From Risk

Position sizing answers the important question, “How much should I put into this investment?” If you risk too much on any given trade, your trading account will get blown out of the water.

When you’re first starting out, we strongly recommend not risking more than 1% of your total equity. For example, if your equity account has $30,000, you should only risk $300, or 1%, on that first trade. It’s not a bad idea to consider starting even more conservatively, risking only 0.5% of that $30,000 (or $150 per trade). Remember, this is the amount you risk – the amount you would lose if the trade goes against you and hits your trailing stop.

So let’s look at how the math would work. Take the dollar amount you want to risk (for the 1% case, that would be $300) and divide by the amount of the recommended trailing stop – let’s say this is $0.15 for our example trade. So $300 divided by $0.15 equals 2,000 shares. To check our math, how much would you lose if you bought 2,000 shares of stock and you got stopped out for a $0.15 loss? 2,000 shares x $0.15 equals $300, our desired risk amount. Here are some more


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examples:

Risk Amount($) Trailing Stop Amount # of Shares to Trade

$300 $0.30 1000 $300 $0.10 3000 $150 $0.10 1500 $150 $0.30 500 $150 $0.12 1250

One of the key features of position sizing is that you equalize your risk across each trade. The number of shares is based on the size of your trailing stop, not the share price of the stock. If you’d like more information on position sizing, read the book Trade Your Way to Financial Freedom by Van K. Tharp.


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A Brief Look at Derivatives: Margin Accounts, Short Selling and Options

Before we get started with these sophisticated investment vehicles, let us make one thing perfectly clear: These investments are not for beginners. That being said, you’ll still need to know what these are so you can possibly use them in the future. Even when you have five years of investing under your belt, these complex securities can get the better of you. So if you do choose to take on the incredible risk involved, make sure you know what you’re doing.

A derivative is a security whose value is based on (derived from) an underlying asset. The derivative serves as a temporary lower-cost substitute for that underlying asset. The additional risk involved in trading derivatives stems from trading them through margin accounts – where the broker-lender can loan you up to 50% of the value of the dollars you wish to invest.

Margin Accounts: More Bang With Their Bucks

In short, a margin account is a line of credit with your broker. He holds some cash and/or securities as collateral while you essentially buy stocks with his money. Of course, he charges you interest on the loan so you need to take that into account when you’re figuring out your potential earnings.

Generally you put up half the purchase price of the stock you want to buy, and your broker puts up the rest. So if you have $10,000 in your margin account, you can buy up to $20,000 of securities. And the marginable securities you’ve bought count as collateral.

The problem is this: If the value of the securities drops, you’ll be getting a call from your broker.

When the equity in your account (the collateral minus what you


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owe) falls below a certain percentage, you have to make up the balance. Right away. And if you’ve picked a turkey, you could end up losing a lot of money.

On the plus side, if your margined stocks rise in value, your purchase power rises too. That means you can buy more stocks without selling off any of your existing positions. You can keep reinvesting without having to cash out any of the securities you already have (or pay that nasty capital gains tax). Of course, no one is going to pick winners indefinitely.

One thing is sure: if you have a margin account, there will be times when you dread a call from your broker.

Selling Short: Win Big on a Losing Company

Market players use short sales as a hedge against losses in an investment they’re holding, and sometimes to make money when the market is going down. You would sell short when you think the price of a stock is going to drop drastically.

Here’s how it’s supposed to work: You borrow a security from your broker and sell it at today’s price. When the price drops, you buy it at the low price and return the security to your broker. For example...

January 1 – Stock PQR is trading at $25/share. You borrow 100 shares from your broker, and sell them for a total of $2,500.

January 26 – Stock PQR is trading at $15/share. You buy 100 shares for a total of $1,500 and return them to your broker.

You’ve just made $1,000.

Of course, if the stock goes against you, you could have a loss. If you guess wrong and the stock goes up, you have to buy it at a price higher than you sold it for. For example, instead of dropping to $15/share, PQR could have climbed to $40/share, causing you to lose $1,500.


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So, you may think, why wouldn’t I just wait until the stock falls again? Because cutting losses is as essential to shorting stocks as it is to buying them.

Stock Options: Puts and Calls

Simply, a stock option lets you buy (the call) or sell (the put) a specific amount of stock at a specific price within a certain period of time. Options grant you the right to buy or sell, but not the obligation.

If you think a stock will go up, you’d buy a call option to increase your profit; if you think the price will go down, a put option increases your gains.

Options – of either kind – can really bump up your income when they work, but the potential upside comes with a lot of risk – potentially a 100% loss.

A Call Option Example

January 1 – Stock ABC is trading at $50/share. You think it will go up by March.

You buy an ABC March $55 option for $10, which means you’re paying $10/share for the right to buy ABC for $55/share. Since options are sold in lots of 100, the transaction costs you $1,000.

If the stock price rises to $75, you can either sell the option back into the marketplace and pocket your profit of $1,000, or you would exercise your option and buy 100 shares for $55, then turn around and sell them for $75 – a quick $2,000 gain. Either way you’ve just made a real 100% profit on your investment.

The problem is if the stock doesn’t climb higher than the option price by March, the option expires and you’ve just lost $1,000.


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Put options work the opposite way – you buy them when you expect stock prices to go down.

The put option allows you to sell shares at the predetermined price, so when the stock falls below, you can still sell high. Again, if the stock price doesn’t drop, you lose 100% of your investment when the option expires.

Two Low-Risk Options Trading Strategies

Buying and selling options can be a complex and tricky business. Novice investors cannot – and should not – trade options without some help.

If and when you are ready to trade options, it’s best to start off with less cash at risk, using a leveraging strategy that will ensure that your profits are always greater than your risk.

Two low-risk ways to trade options are the LEAPS and covered call strategies.

Big Jumps in Portfolio Value With Conservative LEAPS

While you may get the impression that buying or selling options is a gambler’s game, there is one technique of buying and selling options more in keeping with investing.

This technique involves the use of LEAPS options (Long-Term Equity Anticipation Securities). These options have a lifespan of up to three years and can be an effective way for you to own underlying shares of stock for a period much longer than that allowed with regular options.

You are still risking money in a position that could expire worthless, but you have a longer timeframe for the underlying shares to move in the direction you want.

Perhaps more importantly, with LEAP options, any upward movement in the share price will be exaggerated in the price of the LEAP option itself... depending upon the strike price chosen and the


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expiration date.

So although the strategy is more conservative and allows for a longer investment timeframe, spectacular profits can be made quickly.

Writing Covered Calls... Slashing Downside Risk

Other uses for options include generating income on quality holdings in your portfolio through the use of covered call writing. This is done by selling call options (instead of buying them) against the underlying shares of stock that you own.

Unlike LEAPS and regular options, covered calls rarely result in large returns. In fact, the goal of many covered-call recommendations is to make profits in the neighborhood of 1% to 2% per month.

Here’s an example of how covered calls work...

Say you own 1,000 shares of Microsoft and your cost was $20 per share. You could sell an option into the market that gives someone the right to buy your shares from you at $25 in 12 months.

For that right, you would receive a premium (instead of paying one to buy an option). Let’s assume the premium you receive is $4 per share. Your adjusted cost for the underlying shares of Microsoft is now $16 ($20 share price, minus your $4 premium for the option), giving you an automatic 20% downside protection on the stock.

In other words, if the stock drops to $16, you are still even, whereas someone who owned the stock outright would be out 20% of their investment.

That’s not all. If you use a 25% stop loss on your shares of Microsoft, their price would have to drop to $12 for you to pull the plug. For an investor who owns the shares outright, a plunge from $20 to $12 would mean losing 40% of the investment. That’s huge.

Of course, selling an option on shares of stock that you own limits your upside as well. In this case, if you sold an option with a strike price of $25, then you’re limited to $25 on the shares, or a 25% gain


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before the person who bought your option would exercise it.

But that’s still not the end of the story. If Microsoft fails to hit the strike price by the expiration date of your option, you keep the shares, as well as the premium received for the option. Not bad.

Where to Trade Options and How to Buy Them

Options trade on five exchanges: Chicago, Philadelphia, American Exchange, Independent Exchange and the Pacific Exchange. Options trade like stocks; they have a bid price and an offer price.

However, options trade in lots of 100 shares for the most part. Each 100-share lot is called a “contract.” So when you see an option bidding $2.20 and offering $2.35, you are looking at 100 times $2.20, or $220 per contract.

The price that you see quoted by your computer or your broker may not be the best price. ALWAYS ask what the price is on the other exchanges.

To trade options, you will require a margin agreement and funds in your account to cover your trades. You will also have to demonstrate (through a questionnaire) that you have experience trading options. The only time this will not be the case is when you are practicing a covered call strategy where you already own the shares.

Covered call strategies are also the only types allowed in retirement accounts. ALL other options strategies must be executed in non-retire-ment accounts.


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Now That You’re Ready to Invest, Where Do You Go?

There are a few different ways to buy investments: directly from the source, using discount brokers, using full-service brokers or using online services. Which you choose depends on what you’re buying and what services you’re looking for.

If you’re buying stocks, you need a broker. For buying things like no-load mutual funds or Treasury securities, you’re often best off going directly to the source – there’s no point paying broker fees when you don’t have to.

However, if you plan to buy funds from a variety of fund families, using a brokerage account will make your life easier, as your investment information will be all in one place instead of scattered about.

Investors who know exactly what they want to buy and sell and just need someone to place the trade, are best off with discount or online brokers. If you’re looking for advice, education and a little bit of handholding, a full-service broker will fill your needs.

Buying Direct – Your Cheapest Investment Option

No-load mutual funds can be purchased right from the fund company. Just call them up, tell them which fund(s) you’re interested in and they’ll send you out an investment kit faster than you can say “prospectus.” Then all you really have to do is fill out the account form, write out a check and mail the whole packet in.

As soon as they get the mail, you’re an investor. If you bought the same fund through a broker, you’d generally have to pay his commission – taking the “no” out of the no-load fund.

To save fees when purchasing Treasury securities, go right to the source – TreasuryDirect. This service lets you buy T-bills, notes and bonds directly from the government with no middleman and no


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commissions. You can purchase securities through the U.S. mail, by phone or over the Internet. It’s extremely easy whichever way you choose. For more information, you can call TreasuryDirect at 800.722.2678 or go to the website at treasurydirect.gov.

Full-Service Brokers

Yes, full-service brokers charge the highest commissions, but you get what you pay for. Full-service brokers come in very handy when you’re unsure about which securities to buy or sell and when. And these days, you’ll get a whole host of other services all in one stop, like:

n Tax planning n Mortgages

n Estate planning n Banking

Most importantly, you’ll get professional guidance, advice and someone to track your investments for you. These guys are backed by teams of researchers and industry experts to provide you with the most comprehensive, up-to-the-minute data available.

If you don’t have time to dedicate to managing your portfolio, it can be well worth the cost to have someone do it for you.

And this is where your good judgment is paramount: unscrupulous brokers are out there. They want to make money for themselves, not for you. They know they earn commissions only when you make trades – so they make a lot of trades.

It’s up to you to keep on top of this by using an honest, experienced broker and by paying attention.

There are some very knowledgeable brokers out there who will work both for you and with you. You just have to take the time to find the right one.

Discount Brokers

If you have time and energy to devote to your portfolio and you’re


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confident about your investment choices, using a discount broker makes a lot of sense. And these days, with all the competition out there, discount brokers are offering more services than ever before. Some benefits include low minimum initial deposits, regular banking services and wider investment selection... more so than ever before.

While using a discount broker will always cost you less in commissions than a full-service broker, their fees can range from $5 all the way up to $50 (or more) per trade. And be careful – some may charge additional fees (for example, if you don’t use their automated services to make trades). Find out what other fees may apply, so you can avoid paying for services you don’t need. Typical additional-fee services include wire transfer fees, IRA custodian fees – and even account inactivity fees.

You also want to make sure that the brokerage gives you the kind of service you want: if talking to a live person makes you more comfortable, make sure they have brokers answering the phones. If you prefer face-to-face contact, make sure there’s an office reasonably close by.

Online Brokers

If you are confident that you understand enough about investing and want to dramatically reduce commissions and fees, then it makes sense for you to consult an online broker.

And even though The Oxford Club does not favor one online investing service over another, we’ve done our research and Charles Schwab (schwab.com) passes all the in-depth tests of online brokers.

Schwab offers account holders point-and-click access to U.S. financial markets, stellar online assistance in case you have any questions and an impressive database of the very latest stock research reports.

Now Schwab may not be the cheapest or the fastest in trade executions, but it’s a great value for what you get.

Once you’ve decided on potential providers, like Schwab, test their services by taking advantage of demos (if present) and evaluating the


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following: product line (availability of futures or options trading), minimum deposits or account balances (penalties for not maintaining), account information updates (real-time vs. delayed), and additional benefits.

You’ll find that taking the time to check out potential online brokers will pay off with investment security and with timely, accurate trades. Choose your broker based on a careful analysis of your needs, not on the basis of who has the best TV or magazine ads.

Who Our Experts Choose

Alex: “New investors often need questions answered, someone to talk to – and that means a full-service broker. But if you can be totally unemotional about your portfolio and you don’t really need any advice or guidance, a discount broker would serve you well.

“In addition, don’t forget about using our trailing stop strategy. Most brokerages are now letting clients use a percentage trailing stop. However, if your broker doesn’t, contact Richard Smith at Trade Stops(tradestops.com) and sign up for his inexpensive service to monitor your trailing stops.”


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Conclusion – We’ve Covered the Basics, Now It’s up to You to Start Making Money

When investing, your returns are best served by time. The sooner you start investing, the more your money will grow. It’s our hope that what you’ve learned from this report will help you to begin investing today. Or if you’re already an investor, we recommend you keep this book handy – and refer to it time and time again.

Also you’ll undoubtedly benefit from keeping this report nearby when making investment decisions. The advice from our experts offers you the ability to consult the pros and gain a better understanding of...

n How to allocate the funds you want to invest

n The importance of understanding your level of risk tolerance

n The benefits and strategies of diversifying your portfolio

n The necessity of having access to cash quickly

n The basics of stocks, bonds and mutual funds

n Where to look for more information regarding your investments

n When to get in and when to get out

We’re confident that The Oxford Club’s Guide to Smart Investing will help you accomplish all of the above. But if you want to go beyond the basics...

We highly recommend that you take the next step and pursue a higher education in investing. Learn about the subtle nuances of investing that can help you ratchet up profits, greatly reduce risk and take advantage of more sophisticated investing techniques.


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The Oxford Club Advisory Panel’s Investment Strategies

At The Oxford Club, we believe the key to achieving great wealth – the kind of wealth where money is no longer an object, where you leave a real legacy to your children and grandchildren – is to follow a system that gives you the statistically highest chance of success.

Truth be told, the perfect strategy or “get rich quick” schemes don’t exist in the investment world. But if they did, one of these four experts would be the most likely to find it...

Alexander Green’s Services

The Momentum Alert is a trading service dedicated to identifying the fastest-growing companies in the market. Generally these companies are in the top 3% of all stocks in terms of earnings growth, price action (appreciation) or both. This service identifies such elite companies, points out the best time to get in and alerts you when to take your profits. The goal is to generate maximum short-term gains.

The Insider Alert is a trading service based on identifying companies with sound fundamentals and significant insider buying. Insiders are a company’s officers, directors and 10% shareholders. Since they know more about the company’s business prospects than anyone on the outside looking in, we feel that heavy insider buying is a highly significant leading indicator. Our research shows that sound companies with widespread insider buying tend to outperform the market by a substantial margin. These are the companies we recommend in this fast-moving service. We also follow a disciplined trading system to protect our profits as these stocks move up.

The True Value Alert focuses on deep value stocks. A True Value Alert stock is characterized by a price that is low compared with the underlying company’s net worth or performance. True Value stocks are generally misunderstood and unwanted by the investing public. However we’ve found a way to identify those companies in which the


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market has overreacted to bad news or underreacted to good news. Stocks chosen on the basis of our True Value indicators churn out winning investments with remarkable consistency.

Marc Lichtenfeld’s Services

Oxford SystemsTrader’s mission is to produce significant gains for subscribers, regardless of whether the overall market is in a bull or bear phase. We expect to accomplish this goal by utilizing the Stock Trading Analytical Research System (S.T.A.R.S.), which is able to crunch thousands of stock market variables and identify the best stocks to buy right now. By using a specific set of criteria that, based on a 10-year backtest, beat the S&P 500 by 1,568%, S.T.A.R.S will generate a list of specific stocks with the best possibilities for maximum appreciation in the current market conditions.

Lightning Trend Trader aims to take advantage of opportunities in the expanding technology, healthcare, and biotech sectors. Over 65 million baby boomers will turn 65 in the next 18 years. And they will need diagnostic tests, lab work, medicines, surgeries, devices and services. Then there’s the incredible new medical technologies just starting to appear, such as regenerative medicine... DNA sequencing... and new potential cures for brain cancer, diabetes and heart disease. Overall, some $4 trillion will flood the healthcare and biotech sector in the next several years, and some businesses stand to soar above all the rest. Lightning Trend Trader shows you the best stocks to buy – and exactly when to sell them for maximum gains.

David Fessler’s Service

Advanced Energy Strategist researches the energy sector as it is enters a transition period not seen in over a century. Government leaders are spending billions on new, renewable forms of energy like lithium, geothermal and wind power. At the same time, traditional forms of energy like oil and coal still provide the majority of the world’s power. So where do you invest? The Oxford Club’s Energy and Infrastructure Strategist, David Fessler, pinpoints exactly where we are on the “peak energy curve” and shows you the absolute best


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way to profit from the trend.

Steve McDonald’s Service

The Oxford Bond Advantage service allows you to invest in America’s best companies. But unlike traditional stock investing, you’ll always know the expected annual return before you invest and exactly when you’ll receive it. In addition, your initial stake is contractually obligated to be returned in full. After a decade of zero returns, and in many cases huge losses, many people have realized you do not have to take enormous risks to build a secure future or retirement. It is possible to get the double-digit returns of fast-moving stocks – but with a fraction of their risk and volatility. This service will show you how to do it.

Matthew Carr’s Service

Prime System Trader is a trading service based on Emerging Trends Strategist Matthew Carr’s personally developed Prime System. This system has been proven to increase market returns by 300% to 600%, while cutting risk by as much as half. A study by The Pepperdine School of Business confirms that trading only with Prime would generate returns “five times greater than the buy-and-hold strategy. Risk would have been reduced by half.” Matthew will show you how to use prime to increase your returns severalfold while dramatically reducing your risk.

The VIPER Alert service is fairly simple. He uses a mathematical scoring system to pinpoint only those stocks that excel in Value... Income... Price... Earnings per share... and Revenue. A perfect score using this system indicates a powerful outperformance. Historical testing has proven it. In back tests, stocks that scored well on his VIPER scale outperformed the markets by 580%. With this system, Matthew Carr will alert you to the stocks set to outperform so you can get in before the price movement begins.


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Appendix: The Four Pillars of Wealth – How to Achieve Your Financial Goals in the New Millenniumby Alexander Green, Chief Investment Strategist, The Oxford Club

Our philosophy of investing is this: You can’t go too far wrong if you get the big questions right.

The big questions are not, “When will the economy recover?” or “Where will the market go next?” True, these are the questions that most investors obsess over. But they’re a misallocation of your time.

The big questions – the important ones that you can take action on – are these:

1. How can I get the highest return with the least amount of risk?

2. How can I protect both profits and principal?

3. What can I do to GUARANTEE my investment portfolio will be worth more in the future?

The answers to these questions are found in The Oxford Club’s Four Pillars of Wealth. Here’s how this philosophy can make this year – and your future ones – very prosperous.


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Pillar I: Stick to The Oxford Club’s Asset Allocation Model

Successful investing begins by conceding that, to a degree, uncertainty will always be your companion.

You can guess what the market is going to do and be right, or you can guess and be wrong. Or you can let some self-styled “expert” do the guessing for you. But no one guesses right consistently, so we don’t waste time here.

Instead, we follow an investment formula that won Dr. Harold Markowitz the Nobel Prize in finance in 1990. His paper promising “portfolio optimization through means-variance analysis” demonstrates how you can maximize your profits – and minimize your risk – by properly asset allocating and rebalancing your portfolio.

Diversity Doesn’t Mean Different Tech Stocks

Sometimes Members tell me: “Oh, that means diversify. I already do that.” But that’s not what asset allocation is about. Back before the 2008 crash, you could have diversified into Citigroup, Wachovia and Bank of America... and gone right off the cliff.

Asset allocation refers to spreading your investments among different asset classes, not just different securities or market sectors. Having a proper asset allocation has allowed us to survive and maintain our wealth during bear markets, then thrive and prosper during the bull markets.

We’ve had money invested in high-grade bonds. While the stock market has gone down, these have gone up. We’ve also had money invested in real-estate investment trusts (REITs). They’ve also given us a positive return. The same is true with our high-yield investments, our inflation-adjusted treasurys, and our precious metals recommendations.

Because different asset classes are imperfectly correlated – some


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zig while others zag – our model allows you to boost returns while reducing your portfolio’s volatility.

In layman’s terms, proper asset allocation means you sleep better.

The Foundation of Our Philosophy

Asset allocation should be the foundation stone of your whole investment program. It’s critical to your long-term financial health. To learn more about it, pick up a copy of William Bernstein’s excellent book, The Intelligent Asset Allocator.


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Pillar II: Adhere to the Oxford Safety Switch

Anyone can buy a stock or publicly traded fund. The real art of investing, is knowing when to sell.

The Oxford Club doesn’t rely on point-and-figure charts or tarot cards or Elliott Waves. Instead, we adhere to a time-tested trailing stop strategy. That means no Member takes one of our stock recommenda-tions without knowing in advance exactly where we’ll get out.

This takes the guesswork out of investing – and guarantees that both your profits and your principal are always protected. Here’s a quick review...

Let Your Winners Ride

We start all of our trading positions with a recommendation that you place a sell stop 25% below your execution price. As the stock rises, we raise the trailing stop. In other words, if you buy a stock at $20, your stop loss is $15. When the stock hits $32, your stop loss (still trailing at 25%) will be $24.

As long as the stock keeps trending up, we’re happy to hang on. If the stock pulls back 25% from its closing high, we sell. No questions asked.

And Cut Your Losses Early

You protect the profits you’ve earned on the way up – and protect your principal – when things go awry. Everyone knows you should cut your losses early and let your profits run. But very few investors actually do it. The Oxford Safety Switch, our trailing stop strategy, guarantees that you do.

During the bull market of the 1990s, many investors watched as their stock portfolios grew bigger and bigger. There was only one


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problem: They never took any profits. They had no sell discipline whatsoever.

And consequently, they watched many of those profits evaporate entirely. Sometimes they even turned into losses.

Other investors bought stocks early in the bear market, with high expectations. And they were crushed to see those shares drop to levels they never would have imagined.

In both cases, the fault was the same: They failed to have a sell discipline. Investors without one are simply flying by the seat of their pants. And that rarely ends in award-winning results.

Use a trailing stop on all your individual stocks, and have the gumption to stick with it.


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Pillar III: Size Does Matter... Understand Position Sizing

Often, when I recommend a particular stock at a chapter meeting or seminar, someone in the audience will ask how much he or she should invest in it.

Of course, I know nothing about that individual’s net worth, investment experience, risk tolerance or time horizon. But I do have a position-sizing formula you can use to determine how much to invest in a particular stock: 4% of your equity portfolio. If you want to be conservative, invest less.

If you want to be aggressive, invest more. But not too much more.

Don’t Fall in Love With an Investment

The saddest stories I hear in the financial press come from the people who took a serious financial hit late in life because they were overconfident. In short, they liked an investment so much they plunked too much in it. Big mistake.

Yes, you could hit the jackpot that way, and I suppose some people have. But that’s a roll of the dice and I don’t recommend it.

Look at the thousands of people devastated during the recent bear market because their entire pension was tied up in their employer’s stock. More often than not, these folks had the option of putting the money into a diversified stock fund or safer alternatives.

Not spreading the risk might have felt like the right thing when the stock was rising... but it sure hurts on the way down.

You Can Afford the Hit

That’s why position sizing is important. It’s not just about the size of your initial position, it’s also about how much of your portfolio the


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position becomes. As a money manager, I had clients who refused to diversify even when a single stock became a substantial percentage of their entire portfolio. They always had the same excuse, “I just can’t afford the tax hit.”

But taxes should never be the first priority in running your investment portfolio. Former blue chips like WorldCom, Enron and United Airlines have taught us that – in hindsight – the federal tax bite can look like a kiss on the cheek.


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Pillar IV: Cut Investment Expenses and Leave the IRS in the Cold

Unless you run or sit on the board of the companies you invest in, there’s nothing you can do to affect your stocks’ performance once you own them. But there is a way to guarantee that your stock-portfolio value will be worth more five, 10 and 20 years from now.

Cut your expenses... and stiff-arm the taxman.

Let’s start with expenses.

Just Say No... To High Fees

For example, we opted for the closed-end Templeton Emerging Markets Fund (NYSE: EMF) instead of the open-end Templeton Developing Markets Fund (Nasdaq: TEDMX). Both funds invest exclusively in emerging markets. Both are run by Mark Mobius, the top manager in the sector.

But the Templeton Developing Markets Fund has a 5.75% front-end load. The Templeton Emerging Markets Fund – like all closed-end funds – has none. And whenever possible, buy these funds at a discount to their net asset value (NAV). (You can never buy an open-end fund for less than NAV.)

In fact, there is nothing in our Oxford Portfolios that has a front-end load, back-end load, 12b-1 fees or surrender penalties. Furthermore, you can act on any of our recommendations through a no-load fund company, or a deep discount broker who charges you no more than $8 a trade.

In short, we’re cutting portfolio expenses to the bone. Lower investment costs are the one sure-fire way to increase your net returns.

Five Tax-Managing Tips

The second way is through managing your investments. That means


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handling your portfolio in such a way that there is simply nothing there for the IRS to take.

Here’s how you do it:

1. Stick to quality. Higher-quality investments mean less turnover. And less turnover means less capital gains taxes. The less you trade your core portfolio, the fewer tax liabilities you incur. As Warren Buffett warns, “The capital-gains tax is not a tax on capital gains; it’s a tax on transactions.”

2. Try to hang on for 12 months. Anything sold in less than 12 months is a short-term capital gain. And short-term gains are taxed at the same level as earned income, which can be as high as 39.6%. But long-term gains are taxed at a maximum rate of 20%. Even better, do your short-term trading in your IRA where the gains are tax-exempt.

3. When you stop out in less than 12 months, offset your capital gains with capital losses. The IRS allows you to offset all of your realized capital gains by selling any stocks that have joined the kennel club. You can even take up to $3,000 in losses against earned income. Not selling your occasional losers is not only poor money management; it’s poor tax management.

4. Avoid actively managed funds in your non-retirement accounts. Managed funds often have high turnover and Federal law requires them to distribute at least 98% of realized capital-gains each year. You can get hit with a big capital gains distribution, even in a year when the fund is down. This is known as “the double whammy.”

5. Own high-yield investments in your IRA, pension, 401(k) or other tax-deferred account. There’s no provision in the tax code to offset your dividends and interest. So do the smart thing, own big income-payers like bonds, utilities and real-estate investment trusts (REITs) in your IRA.

Your remaining choices are simple ones, like owning tax-free rather


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than taxable bonds if you’re “fortunate enough” to reside in the upper tax brackets.

If you reduce your annual investment expenses and tax-manage your portfolio, the effect will be dramatic.

For example:

The Vanguard Group of mutual funds conducted a study, which discovered that the average investor gives up 2.4% of his annual returns to taxes. If you trade frequently, it’s likely much higher. We can also estimate that most investors give up at least 1.9% a year in commissions, management fees, 12b-1 expenses and other costs.

By reducing your expenses to 0.3% annually and tax managing your portfolio, you’ll retain an additional 4% of your portfolio’s return each year.

Here’s how our strategy will affect your portfolio over time. The difference is not subtle. The U.S. market has returned roughly 11% a year over the past 200 years.

In other words, after 20 years, our cost-efficient, tax-managed portfolio is worth $419,000 more. (A million-dollar stock portfolio, of course, would be worth almost $4.2 million more.) This is without factoring in any superior investment performance whatsoever! It’s simply the difference achieved when watching investment costs and taxes.

Armed with our Four Pillars of Wealth, a little diligence and the discipline to stick with the program, we can all look forward to sub-stantially higher real-world returns. And that should make for a very happy and prosperous year.

Notes:

Documents

The Oxford Club’s Guide to Smart Investing · 2016-09-15 · The Oxford Club 105 W. Monument Street • Baltimore, MD 21201 • 443.353.4540 If you have any questions about your