Before you can develop a successful plan to build your retirement savings, you need to reasonably estimate how much money you will need to enjoy the kind of retirement you’re hoping for. Effective retirement planning takes into consideration the threat of inflation, which can erode your savings and jeopardize the lifestyle choices you will be able to make once retired. Retirement planning involves three basic phases- accumulation, preservation, and distribution- inflation should be factored into all three phases as you determine how much you will need to retire comfortably.

Accumulation: During the accumulation phase, the investor is building up savings with the intention of having an adequate amount of money for retirement. In deferring spending in favor of investing, individuals are growing their savings over time. In general, the longer the accumulation phase, the better their chances of meeting financial goals for retirement.

Preservation: As the individual approaches retirement age, there is a shift in importance from continued accumulation of savings to the preservation of those accumulated savings. Preventing the erosion of principal and making plans for distribution become the priority.

Distribution: In the distribution phase, the structure of invested assets is modified to provide income in post-retirement. The distribution phase begins at retirement and lasts through the rest of the individual’s life.

• The average inflation rate over the past 10 years or so has been between 2%-4%.

• While the percentage of income needed in retirement depends on the individual, many financial experts recommend planning for a minimum need of about 70%.

Inflation is the persistent increase in consumer price levels that leads to a corresponding decline in consumer purchasing power. For working individuals, inflation is typically factored into ongoing pay structures and wage increases. For retirees and others living on fixed-incomes, inflation simply erodes purchasing power.

Accounting for the impact that rising prices will have over the course of many years is a significant part of retirement planning, one that many individuals do not consider.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

The Price/Earnings to Growth and Dividend Yield (PEGY) Ratio is a variation of the price-to-earnings (P/E) ratio where a stock’s value is further assessed through a calculation that considers the company’s projected earnings growth rate and dividend yield. Once calculated, the figure is compared to ratios of the company’s competitors or against any group that has similar financial characteristics to determine whether the stock is fairly priced.

The P/E ratio is the most widely used way to measure relative valuation between two stocks. The ratio provides investors with a measure of how much Wall Street is willing to pay for each dollar of company earnings. By inverting this measure, you can determine the earnings yield and make comparisons against other types of investments, such as bonds. A known limitation of the P/E ratio is that it does not account for the underlying earnings of the company. For this reason, the PEGY ratio (which factors in a projected company growth rate and dividend yield) is often seen as a more useful valuation measure.

The PEG ratio is a simple valuation that says the P/E ratio of a company will equal its growth rate if that stock is fairly priced. A PEG ratio of 1.0 would indicate that the stock is fairly priced. A ratio of greater than 1.0 would mean that the stock is currently overvalued, while a ratio of less than 1.0 could indicate an attractive buying opportunity. The PEGY ratio is similar to the PEG ratio, except that it is commonly used for dividend-paying stocks as it accounts for dividend yield. While the PEG ratio considers earnings growth, it ignores the dividend yield. The PEGY ratio includes both dividend yield and projected earnings growth in its measure.

Go to Yahoo! Finance and enter the stock symbol in the Get Quotes window.

To collect growth estimates, click on Analyst Estimates under Analyst Coverage on the left-hand side.

The formula for the PEGY ratio can be written as:

As with the PEG ratio, you should bear in mind the figures are based on future projections; the value of the output is dependent on the accuracy of the input.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

A forex trading system is a strategy implemented to help determine the timing and price levels at which to open and close forex trades. Most trading systems leverage signals that are generated by fundamental or technical analysis. The trader evaluates and acts on these signals to decide whether they should buy or sell a specific currency. Used properly, a forex trading system will filter for just those signals that offer relevant information to the trader. The trader should evaluate the level of success or failure of their trading system on an ongoing basis and make strategy changes if necessary.

Generally speaking, there are two types of trading systems:

Discretionary: Discretionary trading systems rely on the judgment of the trader to properly interpret signals and take appropriate actions. For this reason, the use of discretionary trading systems is typically recommended for only for professional forex traders.

Mechanical: Mechanical trading systems can offer less experienced forex traders an automated way to interpret signals and execute a trading strategy. The development of these mechanical systems requires the creativity of professional traders to monitor a fixed number of fundamental or technical signals and generate triggers to the system user.

Expectancy is a formula used by forex traders to assess the reliability of their trading system. To calculate expectancy, the trader will collect data regarding winning and losing trades to determine how profitable winning trades were versus losses taken on unsuccessful trades.

The formula for expectancy can be written as:

Where:
W= Average winning trade
L= Average losing trade
P= Percentage win ratio

A positive expectancy of 20%, for example, would mean that your trading system will (over the long-term) return 20 cents for every dollar.

Expectancy offers forex traders a good way to analyze and compare systems and revisions. Any system that brings a negative expectancy ratio should not be used.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Mutual fund turnover ratio is a measure of the changes in a mutual funds assets for a given period of time, usually one year. Mutual fund turnover is calculated by dividing the value of both the purchase and sale transactions for the period by two and dividing that figure by the total holdings of the fund. The ratio is used to measure trading activity with higher ratios usually indicating higher associated expenses. In addition, high turnover often means higher tax consequences (assuming the fund is not part of a retirement plan). A fund’s turnover ratio can vary from year to year, so it can be a good idea to look at average turnover over several consecutive years. All else being equal, investors usually prefer funds with low turnover ratios.

Growth funds tend to have high turnover ratios as managers of those funds seek companies and industries that demonstrate promise for growth. The challenge for growth fund managers, or manager of any high-turnover funds, is in achieving performance that compensates for the tax consequences associated with high turnover.

Value funds, on the other hand, offer an example of a type of mutual fund that typically has low turnover as managers of these funds tend to buy and hold stocks they believe to be undervalued.

Of course, the fund turnover ratio should not be the only factor for consideration when choosing a mutual fund for investment. Equally important are the fund’s objectives, management, historical performance, fees and expenses.

For many mutual fund investors, the tax bill for their mutual fund holdings can catch them off guard as, unlike holding individual stocks or other securities where you pay taxes on gains after shares are sold, distributions from the fund can create a taxable event. When fund managers sell securities within the fund, it can mean distributions and tax consequences to the fund investors.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Determining risk tolerance should be one of the first parts of an investing and asset allocation strategy. Without an understanding of the level of risk you can tolerate, it is difficult to know if you are building a portfolio that is consistent with your financial goals. Most investment advisors seek first to classify a new client by risk profile and then use an asset allocation model that corresponds with that profile. Risk tolerance is a relative thing, but the more investment risk you are willing to take on, the higher your expected investment returns are likely to be.

Investment risk simply refers to the possibility that the return on an investment will be lower than expected; including the possibility of losing all of the original investment. However, because investors need to be compensated for taking on higher levels of risk, they should expect greater potential returns from their riskier investments.

The primary elements of risk for any particular investment might include:

Business risk: The potential for an investment to decline in value due to increased competition, bad business management or unforeseen changes in market conditions.

Valuation risk: The potential for an investment to lose value because the purchase price exceeded its intrinsic value.

Force of sale risk: As an investor, you cannot always know when a security will increase in value. Given that, you need to make sure you build in a satisfactory time horizon to hold the investment.

The level of risk an investor is willing to tolerate can depend on a number of factors, including:

Personality: It is critical for investors to know themselves well enough to predict how well they can tolerate market fluctuations and the emotional toll they can take. Even investors with long-term horizons can struggle with (often temporary) declines in portfolio values.

Time Horizon: Generally speaking, investors with longer time horizons can take on higher levels of risk than those who are hoping to retire in the next few years. Investors who are working with longer timeframes have more of a chance to recover from financial setbacks.

Financial position: Investors who are working from strong financial positions may be better suited to take on higher levels of risk since they have greater resources to fall back on if things do not go as well as expected.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

The Cost of Equity (COE) is the minimum rate of return shareholders require for their investment in common stock of a corporation. This expected future return to the investor consists of both capital gains (share price appreciation) and dividends. The cost of equity formula helps investors determine the cost of capital which equates the current share price with the discounted value of future dividends from the company in perpetuity. The cost of equity is an input of the Weighted Average Cost of Capital (WACC) to calculate the real cost of capital for a firm using account debt and equity funding.

The formula for the cost of equity can be written as:

The data needed to perform the calculation is often included in the company’s financial reports. Investors may also obtain the information through various online sources or through financial analysts.

The cost of equity measure provides investors with a relatively simple way to monitor the status of their investment and helps ensure that investment in those shares continues to be a sound strategy.

For individual investors, the COE also reflects the opportunity cost of investment and will differ among companies due to varying levels of risk. A higher cost of equity indicates a higher level of risk. Investors should expect a higher rate of return to compensate for an elevated level of risk.

There are a number of other ways to estimate the cost of equity, including the Capital Asset Pricing Model (CAPM).

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

The effective annual interest rate refers to the rate of interest when compounding is applied more than once per year. The effective annual interest rate is used to annualize the interest rate after taking into account the effects of compounding. The concept of an effective annual interest rate is important for anyone who carries debt that compounds more than once a year to understand.

The nominal or “stated” interest rate is the periodic interest rate multiplied by the number of periods per year. You cannot compare nominal interest rates unless they have the same compounding period and a nominal rate is not fully defined without its compounding frequency. The effective annual interest rate enables borrowers and investors to effectively compare loans or investments.

This calculator enables you to arrive at the effective annual interest rate either by inputting the periodic or the nominal interest rate. The calculator assumes monthly compounding.

The formula for the effective annual interest rate can be written as:

Where:

i = nominal annual rate of interest
n= number of compounding periods in one year

Because the effective annual interest rate accounts for compounding, it is usually higher than the stated or nominal annual interest rate. The effective annual interest rate calculation is useful to evaluate the real return on an investment or the real interest rate to be paid on a loan.

A nominal interest rate of 5% with monthly compounding is equal to an effective annual interest rate of 5.12%. 5% is credited annually as 5%/12 = 0.5% each month. After a year, the initial capital increases by the factor (1+0.005)12.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Mutual fund fees and expenses refer to those charges investors of mutual funds incur associated with the fund’s advisory fees, marketing fees and transaction and distributions costs. These costs are passed from the mutual fund company to its investors and have a negative impact on overall investment performance. The higher a fund’s costs, the greater the return the fund must achieve to beat market indexes and benchmarks.

A mutual fund expense ratio (MER) is a measure of the cost associated with running a mutual fund. Specifically, it is the percentage investors pay in fees to the mutual fund company for the operation and management of the fund (excluding sales charges). The expense ratio can vary greatly among mutual funds with the fee investors pay for the management and advisory of the fund serving as the largest component. Among actively-managed funds, the average expense ratio is about 1.25%.

The other costs associated with mutual fund investing are the loads and redemption fees.

While every fund passes its operating expenses on to its investors, some funds also levy “shareholder fees” directly on the investors whenever they buy or sell shares of the fund.

Loads: A sales load is the percentage a fund charges for the purchase or sale of shares. Depending on the fund, these charges might be incurred at time of purchase (front-end), when shares are sold (back-end). No-load funds are mutual funds that do not charge any type of sales load.

Transaction Fees: The transaction fees associated with a mutual fund include purchase and redemption fees to defray the costs associated with investors buying and selling shares. Unlike loads, which are paid to brokers, these fees are paid directly to the fund.

Management Fees: Management fees are paid to the fund’s advisor for providing professional portfolio management. Management fees may also include other administrative types of services associated with running the fund.

12B-1 Fees: 12b-1 fees are assessed for the sales and marketing expenses of the fund. 12B-1 fees cannot exceed 0.75% of the average net assets of the fund for a given year or 0.25% for no-load funds.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Most financial experts will tell you that one of the first and most important ways to take control of your financial life is to get a handle on your credit card debt. The high finance charges associated with credit card debt can put a real strain on your personal finances and keep you from achieving your goals and dreams. For many people, excessive credit card debt comes about not from one large purchase, but through many smaller purchases over a long period of time. You can apply this same principle and the tips below to work your way out of this debt.

The average credit card debt is currently estimated at over $5,000 per household. At an interest rate of 18%, this translates into a $150 monthly minimum payment. Paying just the monthly minimum on this level of debt and interest rate would mean paying about $2,000 in interest by the time the debt is paid off. Given this, it’s easy to see why minimizing or (ideally) eliminating your credit card debt is one of the best financial moves you can make.

Even if you don’t think you have extra money to start paying down your credit card debt, there are immediate steps you can take toward achieving this worthwhile goal.

Stop Using Credit Cards: The first step is to “stop the bleeding”. It is critical that you start by curbing your credit card spending. Use cash or debit cards as much as possible.

Transfer Your Balance to a Lower Interest Rate Card: There is no reason to be paying 18% or more when you could move your balance to a card that offers 10% or less. You should first ask your current card issuer for a lower rate. If you have consistently paid your bills on time, they should be willing to work with you on this. If not, shop around for a better rate. Making the same monthly payment on a lower interest rate will save you interest expense and get you out of debt faster.

Leverage Your Savings: If your savings are earning anything less than the interest rate you’re paying on credit cards, you will get a better return by applying that money toward credit card debt. It’s a risk-free way to achieve a high rate of return.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

Pivot points are technical indicators used to predict the support and resistance levels and to offer cues for trade execution. Pivot point calculations are derived from previous day trading prices and can help traders spot key levels that, when broken, may indicate a breakout (prices passing through areas of support or resistance toward new highs or lows). Many technical traders start their trading day by putting support and resistance lines are in place then watching for securities to strike those entry points. Pivot point strategies are used in a variety of markets, including individual stocks, bonds, commodities, futures contracts, and foreign exchange.

Pivot point trading is based on the tendency of securities to “trade between the lines” and seeks to leverage reversals in trends. Pivot points are used as price-based indicators to represent points of rotation and are derived using the high, low, and closing prices from the previous trading day. The following are the most commonly calculated in using pivot points:

• Central pivot point
• First level of support
• First level of resistance
• Second level of support
• Second level of resistance

The pivot point itself represents the primary point of support/resistance, meaning the largest price movement is anticipated to occur at this price point. The other points of support and resistance, while less significant, can still trigger considerable price actions.

Pivot Points can provide traders with exact entry and exit points and can be used in two ways:

• If the pivot point is broken in an upward move, the market is seen as bullish
• If the pivot point is broker in a downward move, the market is seen as bearish

In determining entry and exit points, the trader might choose to place a limit order if the price breaks through resistance or a stop-loss order if a price breaks through support.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.