Types of Fixed Income Securities

From The Hoss's Mouth

Today, Hoss Cents Free Financial Money Magazine discusses fixed income securities. There are four major types of fixed income securities: Bonds, Debentures, Stripped Bonds and Mortgage-Backed Securities. The Hoss will provide some detail of each, and you can evaluate which are best suited for your risk tolerance level. Somewhat like handicapping a racing form, only with fewer variables. The cost of purchasing any of these fixed income securities is by commission built into the purchase price. You earn money from the interest paid and/or a capital gain. Note: You could also have a capital loss.

Bond: A fixed income security that is a secured loan to a company or government. The security is in the assets of the company or government. Length of term to maturity is usually one to thirty years. Interest is generally paid at a fixed percentage per year. The credit rating of the issuer and interest rates at time of issue will determine the interest rate. The greater the risk, the higher the interest rate. In the event of a default and subsequent disposition of assets, tax authorities, employees and creditors rank ahead of the bondholders. Preferred and common shareholders rank behind the bondholders.

Debentures: The principal difference between bonds and debentures is in the security. Debentures may be secured by the issuer's general assets not specific company assets. However, it is still considered a fixed income security.

Stripped Bonds (Strips): With this fixed income security, the principal portion of the bond and the interest payment coupon are separated from each other and sold as individual investments. Eighteen months to thirty years is the term range of this fixed income security. Regular bonds with similar credit quality and terms usually have lower yields than stripped bonds. Strips mature at face value, but are sold at a discount. The difference between the value at maturity and discounted price you paid for the strips is your interest income. You should expect a greater discount the longer the term to maturity. The income you receive is deferred, so The Hoss suggests it may be wise to seek the advice of a tax consultant before investing in strips.

Mortgage-Backed Securities (MBS): This type of fixed income security is a pool of mortgages in which you have a partial ownership. You should expect a term range of one to ten years. MBS usually make monthly income payments on fixed rates of return. An MBS is fully guaranteed by Canadian Mortgage and Housing Corporation.

That sums up today's post on fixed income securities. Now it's time for The Hoss to munch on some oats.

Stay on track,

The Hoss

Hoss Cents Money Magazine Next Post: Equities

Previous Post: Cash Investments

Cash Investments

From The Hoss's Mouth

This issue of Hoss Cents Free Financial Money Magazine is about cash investments. Investing in cash or cash equivalents is like betting on the favorite in a race. It gives you your best odds on making a profit, but provides a relatively low rate of return compared to other types of investments. The Hoss will get his binoculars out and take a close look at each of the various types of cash investments.

• Interest Yielding Bank Account: Very low risk and a very low rate of return. Provides easy access to your money.

• Savings Bond: A loan you make to the government, usually for a period of a year or more. They can be purchased from banks, credit unions, trust companies and investment dealers. They usually provide a fixed rate of return for each year to maturity. However, some have a variable rate of return dependent on market conditions, and they have a minimum guaranteed rate. Cashability varies, as some must be held to maturity, others can be redeemed at predetermined intervals, and some allow redemption at any time. Savings bonds are guaranteed by the issuing government; and given their taxation powers, there is little or no risk of default. A relatively safe cash investment.

• Treasury Bill (T-Bill): A short-term loan (less than a year) you make to the government. They are sold by investment dealers and come in large denominations. You buy T-Bills for less than their maturity value. The difference between your cost and the value at maturity is your profit, or if you prefer, interest. As with savings bonds, there is little or no risk of default. Although T-Bills are not redeemable before maturity, they can be sold back to the investment dealer, but this will mean a lower rate of return for you.

• Guaranteed Investment Certificate (GIC): A financial institution's certificate of deposit. GIC investment terms usually range from 30 days to 10 years and are sold by banks, credit unions and trust companies. Most provide a fixed rate of return to maturity, but some are based on the performance of a stock market index. This type of GIC provides an opportunity for higher interest, but also could result in little or no profit at all. In most cases, the issuer guarantees the GIC, and an insurance agency, such as the Canada Deposit Insurance Corporation, may insure the principal up to a certain limit. Consequently, it is unlikely (but not impossible) that you will lose the principal on this cash investment.

• Money Market Fund: Available only as a mutual fund, and as such, must be purchased through registered dealers. You may wonder why The Hoss chose to list a mutual fund in the Cash or Cash equivalent grouping. Simply put, it's because Money Market Funds invest in short-term fixed income securities and are usually redeemable at any time. The Hoss will provide in-depth information about Mutual Funds in a later post.

This completes today's issue about cash investments. It's time for The Hoss to put the binoculars away and return to the barn for some oats.

Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: Fixed Income Securities

Previous Post: Types of Investments

Types of Investments

From The Hoss's Mouth

This issue of Hoss Cents Free Financial Money Magazine is about types of investments. Investments, like race horses, come in all shapes and sizes.

• Cash or Cash Equivalents: These investments offer easy access to your money, are low risk and usually offer a low rate of return compared to other investment types. Examples are savings bonds and treasury bills.

• Fixed Income Securities: You are lending your money out for a longer period of time than with cash or cash equivalents so they usually offer better rates, but due to the length of time, they are somewhat more risky. Most come with guarantees and are relatively safe. High rate of return "junk bonds" or their equivalents offer no guarantees and are a high risk type of investment.

• Equities: Equities are stocks. The purchase of a company's stock means you are a part owner of that company and may receive dividends. You may also profit when the stock value increases. Equities can produce high rates of returns, but there is a risk of losing some or all of your investment.

• Mutual Funds: You pool your money with other investors to buy units of an investment fund which has investments in one or more asset class. This enables you to purchase a variety of investments that are managed by a professional manager, for a minimum cost.

• Alternative Investments: These include, but are not limited to, call or put options, futures, income trusts and hedge funds. In exchange for higher than average return potential, you have higher than average risks with these types of investments.

In order to determine what type of investment is best suited to you and your needs, you (if you decide you do not need the services of a financial adviser) or you and your financial adviser must fully understand what your goals are and how much risk you are prepared to take to achieve those goals. Mrs. Hoss has a simple handicapping method for telling her husband, The Hoss, that he has over ran his risk tolerance level: If The Hoss is unable to sleep at night because he is worried about his investments, then his investments have out paced his risk tolerance.

A word of caution from The Hoss. If you are looking for a high return, risk-free investment type, forget it. There is no such animal, and don't let anyone convince you otherwise. The Hoss implores you to remember this basic rule of investment: The greater the risk, the greater the potential of a high return and the greater the potential for a loss.

In the posts to come, The Hoss will explain each of the above types of investment in greater detail.

Stay on track,

The Hoss

Next Hoss Cents Money Magazine Post: Cash Investments

Previous Post: Working With Your Financial Adviser

Working with Your Financial Adviser

From The Hoss's Mouth

Working with Your Financial Adviser

You have done all the necessary leg work, conducted the interviews and have selected a financial adviser. The race for financial freedom is on track but far from over. In fact, you have just entered the starting gate. You and your financial adviser must communicate on a frequent basis. Just like the ongoing communication between jockey and horse, you must let each other know if the pace is just right, or you need to proceed a little slower or a little faster.

Before leaving the starting gate, ensure your financial adviser has a complete and thorough understanding of your financial goals, your current financial situation and your tolerance for risk. This will enable him/her to assist you in producing a strategy for your financial future. Your financial adviser should be providing you with specific and clear recommendations, detail the reasons for the recommendations, and identify the strong and weak points and risks involved.

A word of caution: Do not expect your financial adviser to perform miracles. A quarter horse cannot win a route race, nor can a financial adviser foresee how the markets will perform or always select profitable investments. In other words, do not weigh your financial adviser down with unrealistic expectations.

Remember, this is your money being invested. It is imperative that you stay informed. You and your financial adviser should have a clear understanding of how often you should receive progress reports and statements, and develop a schedule for regular meetings to review your plan. He/she should also know how quickly you expect e-mails and phone calls to be answered. Review all statements when you get them. Make sure the information contained therein is consistent with your agreed upon goals and strategies. If they are not, contact your financial adviser and arrange for a meeting.

It would be to your benefit to stay informed on financial matters by reading newspapers, books
magazines, or blogs such as this one. If you have time, enroll in a few courses. If you see something of interest, contact your financial adviser for his/her opinion.

Last but not least, keep your financial adviser updated with any change(s) in your personal or financial situation. A work promotion, a new child, and a change in marital status are a few examples that could impact your financial situation.

That's enough for today. Time to trot back to the barn.

Stay on track,

The Hoss

Previous Post: Choosing A Financial Adviser

Next Hoss Cents Money Magazine Post: Types of Investments

Choosing a Financial Adviser

From The Hoss's Mouth

Your financial adviser must fit you as perfectly as a horse shoe fits a horse's hoof. This is essential if you are to win the race for financial freedom.

Your choice of a financial adviser depends on your financial knowledge and investment experience:

Do you need help with your family's financial matters - i.e. retirement planning, setting goals and paying less taxes?

Do you have investment experience? If not, you will want an financial adviser to provide you with assistance in selecting the proper investment product for your needs. If you are an experienced investor, choose an adviser who offers a wide selection of investments and discusses the benefits and shortcomings of each.

The Hoss strongly recommends that you choose a financial adviser who is registered with a securities regulator. This provides you with added protection, as only properly qualified firms and individuals can obtain registration.

In order to come up with a list of potential candidates, The Hoss suggests you speak with co-workers, family, friends or any other person you trust for their recommendations.

In addition, you can locate registered financial advisers from a variety of sources:

• banks

• investment firms

• brokerage firms

• online

You might want to make initial contact by phone. This can save a lot of time by eliminating those financial advisers who are not accepting new clients or are not suited to your basic needs.

Once you have come up with a short list, arrange to meet with each one of them in their office. You wouldn't expect a horse to run a race without a warm-up, nor should you approach an interview of this importance without thorough preparation. Ten questions you should ask your potential financial adviser:

1. What are your qualifications and education?
2. Do you have references?
3. Is your company registered with a securities regulator?
4. Are you personally registered with a securities regulator?
5. How long has your company been in business?
6. How long have you been a financial adviser?
7. What is your area of expertise?
8. What type of investment products do you offer?
9. Will these products help me obtain my goals?
10. How do you get paid?

Do not hesitate to add your own questions to ask your potential financial adviser. (Sidebar: If you would like to add to this list of questions to ask, fill in the comments form below so The Hoss can include them.)

Do not be surprised, in fact you should expect, questions from the potential candidate. S/he should ask you what your goals are, what your investment experience is, and what your risk tolerance is. If these questions are not asked of you, gallop, don't trot, to the next candidate.

While in their office, check out the surroundings, as this will give you some indication as to how they conduct business. Also, take note of how well the financial adviser listens to and responds to your questions. Did you feel completely at ease discussing your financial situation with him/her? If not, again gallop, don't trot to the next candidate.

When you have completed all your interviews, and before making a final selection, contact the securities regulator in your area and confirm the potential candidate and his/her firm are registered and have no record of any disciplinary action.

That's enough for today. This post is more like a route race than a sprint, but it is an important topic.

Stay on track,

The Hoss

Previous Post: Beginner Investing

Next Hoss Cents Money Magazine Post: Working with Your Financial Adviser

Beginner Investing

From the Hoss's Mouth

Beginner Investing

Investing, in The Hoss's opinion, should not be considered unless or until you have:

• Eliminated debt or the debt you have is classified as good debt
  

• You and your family have established financial priorities

• Have set up a budget which provides funds for investing

Remember that old cliché: Don’t put the cart before the horse." That is exactly what you would be doing if you start investing before you have successfully completed the above steps.

If you have been reading this blog faithfully, you have already decided what you want to accomplish with your money. Now it's time to refer to your short, intermediate and long term goal lists that you established when setting your financial priorities, and decide on a beginner investing program which will assist you to achieve these financial goals. Increasing your wealth is like building a house; you start with a proper foundation. After the foundation is set, you can expand your investments.

The Hoss understands that the world of investing is indeed complex and foreign to many people. The mere though of comparing stocks, bonds, mutual funds, term deposits and the like can be as difficult as understanding the daily racing form. If you do not understand your investment choices, there are many financial advisors available to assist you with these tough decisions. My next blog will provide information that will aid you in selecting a financial advisor.

You, and/or you and your financial advisor ,will have many things to consider when creating your personal beginner investment plan:

• How much money is available for investing?

• What is your tolerance for risk: high, medium or low?

• Which investment products best suit your risk tolerance level?

• What do you know about the stock markets?

• How familiar are you with mutual funds?

• What asset mix will best achieve your financial goals?

• Will your employment income remain constant or is it subject to change?

• What is your investment time horizon?

The Hoss reminds you that you, and/or you and your financial advisor, must monitor your investment portfolio on a regular basis. When required, make adjustments to keep your portfolio in line with your beginner investment objectives.

Future posts of this blog will contain detailed information on stocks, bonds and mutual funds; what they are and how to purchase them.

Stay on track,

The Hoss

Previous Post: Banking and Finance

The next Hoss Cents Free Financial Money Magazine post: Choosing a Financial Advisor

Banking And Finance

From The Hoss's Mouth

Banking and Finance

Banks or other financial institutions provide a valuable service in our society. The Hoss asks you to consider which option is better: keeping your money buried in the back yard, keeping it hidden in a mattress, or keeping it safe in a financial institution. Unless you are brain dead, you chose the "safe in a financial institution" option.

Horse race owners insure their primary assets: their horses. You insure your house, your car and your life. It only makes Hoss Cents that you insure your money by depositing it in a bank or financial institution of your choice. Federally insured institutions are protected up to $100,000 ($60,000 in Canada).

Selecting a bank or financial institution is similar to selecting a horse to wager on. You gather all available information, do the research and make a selection. You may not always pick a winner, but by doing the leg work you increase the odds of being successful.

The Hoss was extremely fortunate when it came to choosing a financial institution. When he married Mrs. Hoss she worked for a credit union that offered their employees many benefits (reduced fees) not available to non-employees. In all likelihood you are not in such a favorable position, so The Hoss has compiled a list of items for you to consider when deciding which bank or financial institution best fits your priorities. The Hoss points out that these are suggestions only and by no means a complete list of all items that may be of importance to you when choosing a bank or financial institution.

• Location: Do they have branches in areas frequented by you and your spouse?

• Visit each institution and evaluate customer service.

• Do they offer the type of account(s) you require?
  

• Are the hours of operation convenient?

• Do they have ATMs ?

• Do they offer Internet banking?

Compare the rates, fees and service charges on the following:

• bounced check fees
  

• safety deposit box charges

• ATM charges
  

• checking fees

• annual fees

• interest rates for loans

• interest rates on deposit accounts

Please feel free to leave a comment or add any tips you may have by clicking on the comment section of this blog.

Stay on track,
The Hoss

Next Hoss Cents Free Financial Money Magazine Post: Beginner Investing

Previous Post: Money Saving Tips

Money Saving Tips

From The Hoss's Mouth

The Hoss has compiled a number of money saving tips to assist you and your family in planning ways to cut your family expenses. Many of these tips are easy to implement and will result in considerable savings to your budget.

• Money saving Tip 1: The proper use of a programmable thermostat can result in a considerable savings in your home heating bill. Consult your local power company for recommended settings or look for information on the Internet.

• Tip 2: When going on vacation be sure to utilize the vacation setting on your hot water tank.

• Tip 3: Fix leaky faucets.

• Tip 4: Use weather-stripping and/or caulk to plug heat loss from drafty doors or windows.

• Money Saving Tip 5: Seal all energy leaks. Cracks and small holes around windows and exterior walls should be caulked.

• Tip 6: Purchase energy efficient compact fluorescent bulbs to replace standard candescent bulbs.

• Tip 7: Here's one you've never heard before: Turn out the lights.

• Tip 8: Turn of your computer and monitor when not in use.

• Tip 9: Basic cable only. Do you really need all those specialty and movie channels?

• Money Saving Tip 10: Do you really need call waiting, caller ID, voice-mail, call forwarding and three-way calling? Consider cancelling one or all of these services.

• Tip 11: Compare the various long distances providers. Choose a plan best-suited to your needs. Pay attention to their rounding policy. Do they charge by each minute or portion thereof or do they charge for actual time used? If you talk for a minute and a half and get charged for two, that is an unnecessary expense.

• Tip 12: If you are paying for multiple cell phones, this can be very expensive. Eliminate any that are supplemental to your basic needs. Sign up for family plans.

• Tip 13: Automatic teller machines (ATMs) are a great invention. However, you may be charged a transaction fee for using an ATM not associated with your financial institution. Identify which ATMs you can use without incurring a transaction fee.

• Tip 14: Closely monitor all your bank's service charges and identify areas where these charges can be eliminated or reduced, such as reducing the number of times you use ATMs if you are being charged per transaction.

• Money Saving Tip 15: Utilize the coupons in your local supermarkets' sales flyers. This could result in a huge savings in your budget for groceries.

• Tip 16: By store brand rather than name brand.

• Tip 17: Garage sales can also help reduce your expenses. You can pick up quality items for a greatly reduced price.

• Tip 18: End of season clearance sales can provide a huge savings on clothes.

• Tip 19: Where you have the expertise and knowledge, do it yourself. Paying service people can quickly add a great deal of unnecessary cost to your budget.

• Money Saving Tip 20: For special occasions such as birthdays, avoid gift-wrap that is expensive. Shop the dollar stores for good cheap wrapping. Mrs. Hoss does this all the time; she finds gift bags for a dollar, no more than two dollars, depending on the size.

• Tip 21: Learn to change the oil on your car. This can save you a few hundred dollars a year. Otherwise, utilize the many coupons that are available.

• Tip 22: Save on gas by keeping your tires fully inflated and your car tuned.

• Tip 23: Eat at home with meals prepared at home. Pack a lunch for work. Restaurant and take out foods are expensive and greatly increase budget expenditures.

• Tip 24:Eliminate those specialty coffees at the specialty rates.

• Money Saving Tip 25:Be self-motivated: Workout at home. Spa and health club memberships are costly.

• Tip 26: Pay cash. Many stores offer discounts for cash payment.

• Tip 27: Shop for an insurance company that will give you a preferred rate if you carry all your insurance with them. For example: car insurance, mortgage insurance and household insurance.

• Tip 28: Look for free activities: Take your kids to the park for a picnic and feed the ducks. Check your local newspaper for community events that are offered free of charge.
  

• Tip 29: If you go to a movie, make it a matinée or on a discount evening.

The Hoss realizes you may not be in a position to implement all of the above money saving tips, but make the most of as many as possible. This will help you and your family reach the financial goals you have established.

Stay on track,

The Hoss

Next Hoss Cents Free Financial Money Magazine Post: Banking and Finance

Previous Post: Creating a Budget

Creating a Budget

From The Hoss's Mouth

The Hoss says: Creating a budget is a necessary tool which will enable you to meet your financial goals. In order to create a successful budget you must do the following:

Hoss Cents Free Financial Money Magazine Success Tip

• Categorize how and where your money is currently being spent. Collect all your financial statements for the past six months. This includes bank statements, mortgage payments, recent utility bills, gas bills, food bills, insurance bills, credit card bills and all cash receipts. In addition, total all your sources of income. In short, any information regarding income or expenses that will help in creating a budget.

• Evaluate your income and spending to see if your current lifestyle is meeting the priorities you and your family have established to achieve financial success (see establish financial priorities).

• Compare your income versus expenses. I suspect many of you have expenses that exceed your income. Have each family member identify areas where they can reduce their expenses and increase their income. You will note you have certain fixed monthly expenses, such as your rent or mortgage, utilities and insurance payments. It is unlikely that you will be able to significantly reduce these expenses, so concentrate on your family's variable expenses. Expenses such as clothing, transportation, groceries, and entertainment. Cut these variable expenses and produce a budget that adjusts your spending habits so that you and your family will be able to reach your financial goals. The goals you wrote down as per the Hoss's instructions in the previous post of this blog. The Hoss realizes this is not an easy task. His next post will provide you with suggestions that will enable you to identify areas where costs can be reduced and help you with creating a budget.

• Each and every month, review your budget and make sure you are on track with your goals. Identify where you did well and what areas need to be adjusted to meet your target. This is extremely important if you are to achieve the targets set by you and your family. Be honest with yourself; cheating results in failure and you will fail in creating a budget.
  

The Hoss has prepared a budget pie chart which identifies expense categories common to all families, and suggests what percent of your take-home pay should be allocated to each area. The Hoss has also included some examples of the types of expenses in each budget category. The list of expenses below is by no means complete, but is provided as a guide to help you get started. Each and every family will have to construct a budget according to their needs.

Housing: mortgage, utilities, cable, insurance, taxes

Living Expenses: entertainment, miscellaneous items

Savings: emergency fund, investments, retirement

Transportation: gas, insurance, parking, bus

Debt: loans, credit cards, etc.

Food: groceries, vitamins, etc. Note from Mrs. Hoss: Booze is not a food group

Hoss Cents Free Financial Money Magazine Success Tip

The Hoss suggests you seriously consider using an accounting software program. This will enable you to simplify the process of recording your financial transactions and creating a budget. Most of these programs enable you to assign each transaction a specific category, and to compile a report detailing these transactions. This enables you to track how much you have spent on such items as fuel, insurance, car repairs, groceries, clothing, mortgage, etc. Your sources of income are also tracked. In other words, it simplifies the evaluation process outlined above. If you have a Microsoft PC, The Hoss suggests utilizing Microsoft Works, as it usually comes free with the purchase of the computer. It contains a monthly budget template which will help you set up your budget.

The Hoss says: It really is that easy folks. Track your income versus expenses, and then adjust to meet your family's financial goals and you will be successful in creating a budget.

Stay on track,
The Hoss

Next Hoss Cents Free Financial Money Magazine Post: Money Saving Tips

Previous Post: Setting Financial Priorities