THE SECRETS OF INVESTING ( A GUIDE TO INVESTMENT)

Investing begins with a strategic plan based on; age, personal risk tolerance, cash flow needs and how
actively you intend to manage your portfolio. Before a plan can be devised an investor must make
some personal decisions. The following information will help in this decision making process.
1. READ THE OPERATING MANUAL
An understanding of the terminology and knowledge of
the security types in the ISI is important when using
the Newsletter. The importance of this cannot be overstated.
Common stocks are all about the same, t h ey all represent a
percentage of ownership in a company. This is not true with
income securities .
Each bond or preferred is unique, having its own characteristics
or features. Bonds and/or preferreds issued by the
same company can be vastly different from each other.
These differences must be understood even before the
health of a firm is evaluated . For a successful bond or preferred investment , the issuer must only be able to pay interest
or dividends. It does not have to prosper.
2. DETERMINE YOUR RISK TOLERANCE
In the context of ISI, risk refers primarily to loss of principal
or income because the company was unable to meet
its obligations. This is also known as credit risk and does
not refer to other risks associated with income securities
such as changes in interest rates or market risk . ISI identifies
each are commended security by its risk level . The best
measure for determining your risk level is “how well your
portfolio lets you sleep at night.”
For ISI purposes the Low Risk category
usually consists of investment grade securities, Medium
Risk has a mixture of investment grade and high no investment
Grade securities and High Risk are usually
Below investment grade and non-rated securities.
N O T E: For common stock (equity) investors it may be instructive to compare the risks of equities
Vs. income securities. The most salient difference is volatility that is the price movement of
The security. Equities tend to jump up and down at the slightest change in a company’s fortunes,
While income securities mostly ignore these reports and don’t react unless the change potentially
Threatens the company’s survival. Typical equity risk would be equivalent to our high-risk portfolio,
Since these income securities are already concerned about a company’s survival prospects.
3. DETERMINE YOUR INVESTMENT NEEDS
Every investor should have a re a s on to invest in a give n
Security. Needless to say we all want our portfolios to
Grow but how this is accomplished depends on the type of
Securities we buy.
I N C O M E: Investors seeking a steady cash income and principle
Protection usually buy and hold low risk bond s, preferred or hybrids. These are usually high-level investment
Grade securities with ratings at or above Baa1/BBB.
GROWTH AND INCOME: Investors looking for cash income
Along with growth frequently turn to convertibles or
Dividend paying com m on stock s . For those willing to
Take more risk, bonds, preferreds or hybrids trading below
Par value may be an option.
G R O W T H: Investors seeking growth where cash income is
not a factor usually go to com m on stocks or convertibles
with low conversion premium.

4. PACKAGING YOUR INVESTMENT FUNDS
An investor should carefully plan their investment go a l s
Before buying securities. Packaging or creating mini
Portfolios with funds available are an important step in planning.
Two key elements in this planning process are:

T I M I N G: Package funds based on when they will
Be needed.
A. Long term - needs such as retirement are met with on e
Investment package.
B. Shorter term - needs such as; saving for children’s college
education, future purchase of a new home, automobile,
RV or that long dreamed about boat are usually
Addressed with a medium term package of securities.
C. Immediate needs - such as petty cash or unexpected
expenses should be met from a package made up of ca sh ,
money markets or other types of liquid securities.
R I S K: Package funds by risk. Age is a key element
in this process.
A. Low Risk - packages aim for principal protection first,
Income second and usually consists of investment grade
Securities. Lon g - term portfolios are com m only saturated
with low risk securities.
B. Medium Risk - packages have a balance between
principal protection and income. They have a mixture
of investment grade and high non-investment grade
Securities.
C. High Risk - packages are created with income and
or growth as their primary goal. They usually consist of
Below investment grade securities. Principal protection
is low priority.
5. DIVERSI FY
In d u s t ries go through business cycles , company’s get into,
and out of financial trouble, interest rates go up and down
and, believe it or not, Investors cash needs can change
overnight . To protect against these and other risk and
uncertainties it is imperative an investor not only “pack a g e”
their funds but also diversify their investment risk by
investing in different types of securities and various companies
in different industries. Example: An investor who has a
$100,000 portfolio invested in one security is at 100% risk
to the fortunes of that company. A $10,000 position in 10
diversified securities lowers the risk to 10%. Thus if on e
security went sour the investor would still have 90% of their
capital remaining.
A. Industries - Instead of investing in 10 different Utility
companies spread the risk over 5 or more industries.
B. Companies – Here again spread your risk by keeping in
mind your percent of exposure to any one company.
While you’re at it try to get companies in different geographical
locations. Disasters affect all businesses in a
region.
C. Security Type – Keep in mind that Fixed Income securities
are more price sensitive to interest rate changes than
Convertibles and Common Stocks.
The communist reflects!