Finance – Aspiring Nirvana

Help – Stock market is falling off the sky!!

When will the stock market hit the bottom?

Stock market corrections have been happening for ages. Trying to predict market bottom is a useless exercise. Historical scenarios and models can be deceiving. Keep an eye on the bigger picture. Are we going in a recession where market may enter bear market or is it a mid correction for an overheated market?

Bear market is defined as stock market going down by 20% or higher. Corrections is defined as stock market going down by 5% to 10%.

Recessionary corrections are usually steeper and last longer. Whereas corrections that occur in healthy market are usually shallower and shorter. Of course, the tricky part is predicting are we heading into recession or not.

We wish we would have a magic lamp to predict market top and bottom, but we don’t. Though stock market has gone up over a long time period, some people panic during market downturn and sells at the wrong time. We have no control over the market direction. The only thing we can control is our response to such events.

Have a proper stock and bond allocation based on your risk tolerance. The rule of thumb is to put 60% in stocks and 40% in bonds and perform annual rebalancing. Talk to your financial advisor to have appropriate allocation and stay the course.

Beginners guide to investing in Index Funds

An Index fund is a group of individual stocks that is designed to mimic the composition and thus performance of a sector within a stock market.

Index Funds

Individual stock picking can be overwhelming to many folks for varies reasons including number of choices, time commitment, volatility, financial acumen and so on. For such individuals picking an index fund for investment is the best and easiest choice.

What is an Index Fund?

An Index fund is a group of individual stocks that is designed to mimic the composition and thus performance of a sector within a stock market. The most famous index funds are based on companies that makes up S&P 500. By investing is an index fund that mimics S&P 500, you get access to 500 stocks, thereby reducing volatility of returns.

Index funds also enables an investor to compare how their specific investments are doing compared to an index.

There are many index funds that mimics different sectors of the stock market. One can choose index funds that are focused on specific group like country, international, bonds, or a sector. One can also choose an index funds that is either a mutual fund or Exchange Traded Fund (ETF).

Advantages of Index Funds

Investing in index fund is considered one of the best way of passive investing. Investing is an index fund reduces volatility of returns. Index funds usually have one of the lowest fees. You can be assured that your returns will be similar to the overall market.

Disadvantages of Index Funds

With index funds you will get returns similar to the market but will not beat the market. To get above average returns you may have to invest in high-risk individual stocks. Although index funds usually have low fess but some may have higher fees that will hinder your returns.

Final Verdict

Investing in an index funds allows an individual to get easy access to the overall market.

We hope the information in this post will be helpful in your journey of aspiring nirvana!

Ultimate Guide to understanding Bonds

A bond is simply a loan given to government or corporation in return for interest on the loan.

What is a bond?

When a government entity or corporation needs money to grow, it can access that money via multiple options, one of which is by issuing bond. A bond is issued for a fixed timeline, price and interest rate. An entity or individual who buys the bond is called bondholder and is paid interest over the timeline of the bond and gets the principal back at the end of term.

What are different types of Bonds

Government Bonds – Issued by federal government
Municipal Bonds – Issued by state or local governments
Corporate Bonds – Issued by corporations

Why should I buy bonds?

Bonds pay a steady stream of interest payment over their lifetime and return full principal at the end of the term. This enables the bondholder to easily predict the rate of return on their initial investment. Bonds are thus considered safer investment than stocks and reduce overall risk of your investment portfolio. Additionally, interest earned on certain bonds may be tax free thus increasing their overall return.

How can I buy bonds?

The easiest way to buy bond is by opening an account in an online brokerage firm. You start by depositing cash in your account, research on what bond funds (Mutual Funds or ETFs) you are interested, buy and hold them, and sell as per your financial needs.

Is there no risk to owning Bonds?

Bond investing is considered safer than stock investing. However, they also provide lower returns compared to stocks. You will always get fixed return on your investment no matter how well the company may be doing.

In some cases, you may not get timely payments if the borrowing entity is experiencing hardship. In rare cases, you may completely lose your money if borrowing entity declares bankruptcy.

How can I mitigate risk?

There are multiple options to lower risk of bond investing:

Buy Index Funds (basket of multiple bonds)
Buy Mutual Funds or Exchange Traded Funds ETFs (basket of multiple bonds in one category)
Buy bonds that are rated high quality and investment grade

Final Verdict

Bond investment provides stable returns and is thus considered safer than stock investment. However, keep in mind that they provide lower returns than stocks. Make sure you discuss your financial situation with a registered financial advisor before making any investment decision.

Helpful Links:

https://en.wikipedia.org/wiki/Bond_(finance)