How did Warren Buffett get started in business?

How did Warren Buffett get started in business?

By BRENT RADCLIFFE.
Warren Buffett may have been born with business in his blood. He purchased his first stock when he was 11 years old and worked in his family’s grocery store in Omaha.
His father, Howard Buffett, owned a small brokerage, and Warren would spend his days watching what investors were doing and listening to what they said. As a teenager, he took odd jobs, from washing cars to delivering newspapers, using his savings to purchase several pinball machines that he placed in local businesses.

His entrepreneurial successes as a youth did not immediately translate into a desire to attend college. His father pressed him to continue his education, with Buffett reluctantly agreeing to attend the University of Pennsylvania. He then transferred to the University of Nebraska, where he graduated with a degree in business in three years.

After being rejected by the Harvard Business School, he enrolled in graduate studies at Columbia Business School. While there, he studied under Benjamin Graham – who became a lifelong friend – and David Dodd, both well-known securities analysts. It was through Graham's class in securities analysis that Buffett learned the fundamentals of value investing. He once stated in an interview that Graham's book, The Intelligent Investor, had changed his life and set him on the path of professional analysis to the investment markets. Along with Security Analysis, co-written by Graham and Dodd it provided him the proper intellectual framework and a road map for investing.

Benjamin Graham and The Intelligent Investor.
Graham is often called the "Dean of Wall Street" and the father of value investing, as one of the most important early proponents of financial security analysis. He championed the idea that the investor should look at the market as though it were an actual entity and potential business partner – Graham called this entity "Mr. Market" – that sometimes asks for too much or too little money to be bought out.

It would be difficult to summarize all of Graham's theories in full. At its core, value investing is about identifying stocks that have been undervalued by the majority of stock market participants. He believed that stock prices were frequently wrong due to irrational and excessive price fluctuations (both upside and downside). Intelligent investors, said Graham, need to be firm in their principles and not follow the crowd.
Graham wrote The Intelligent Investor in 1949 as a guide for the common investor. The book championed the idea of buying low-risk securities in a highly diversified, mathematical way. Graham favored fundamental analysis, capitalizing on the difference between a stock's purchase price and its intrinsic value.

Entering the Investment Field.
Before working for Benjamin Graham, Warren had been an investment salesman – a job that he liked doing, except when the stocks he suggested dropped in value and lost money for his clients. To minimize the potential of having irate clients, Warren started a partnership with his close friends and family. The partnership had unique restrictions attached to it. Warren himself would invest only $100 and, through re-invested management fees, would grow his stake in the partnership. Warren would take half of the partnership’s gains over 4% and would repay the partnership a quarter of any loss incurred. Furthermore, money could only be added or withdrawn from the partnership on December 31st, and partners would have no input about the investments in the partnership.

By 1959, Warren had opened a total of seven partnerships and had a 9.5% stake in more than a million dollars of partnership assets. Three years later by the time he was 30, Warren was a millionaire and merged all of his partnerships into a single entity.
It was at this point that Buffett’s sights turned to directly investing in businesses. He made a $1 million investment in a windmill manufacturing company, and the next year in a bottling company. Buffett used the value-investing techniques he learned in school, as well as his knack for understanding the general business environment, to find bargains on the stock market.

Buying Berkshire Hathaway.
In 1962, Warren saw an opportunity to invest in a New England textile company called Berkshire Hathaway and bought some of its stock. Warren began to aggressively buy shares after a dispute with its management convinced him that the company needed a change in leadership..  Ironically, the purchase of Berkshire Hathaway is one of Warren’s major regrets.
Understanding the beauty of owning insurance companies – clients pay premiums today to possibly receive payments decades later – Warren used Berkshire Hathaway as a holding company to buy National Indemnity Company (the first of many insurance companies he would buy) and used its substantial cash flow to finance further acquisitions.

As a value investor, Warren is a sort of jack-of-all-trades when it comes to industry knowledge. Berkshire Hathaway is a great example. Buffett saw a company that was cheap and bought it, regardless of the fact that he wasn’t an expert in textile manufacturing. Gradually, Buffett shifted Berkshire’s focus away from its traditional endeavors, instead using it as a holding company to invest in other businesses. Over the decades, Warren has bought, held and sold companies in a variety of different industries.

Some of Berkshire Hathaway’s most well-known subsidiaries include, but are not limited to, GEICO (yes, that little Gecko belongs to Warren Buffett), Dairy Queen, NetJets, Benjamin Moore & Co., and Fruit of the Loom.  Again, these are only a handful of companies of which Berkshire Hathaway has a majority share.
The company also has interests in many other companies, including American Express Co. (AXP), Costco Wholesale Corp. (COST), DirectTV (DTV), General Electric Co. (GE), General Motors Co. (GM), Coca-Cola Co. (KO), International Business Machines Corp. (IBM), Wal-Mart Stores Inc. (WMT), Proctor & Gamble Co. (PG) and Wells Fargo & Co. (WFC).

Berkshire Woes and Rewards.
Business for Buffett hasn’t always been rosy, though. In 1975, Buffett and his business partner, Charlie Munger, were investigated by the Securities and Exchange Commission (SEC) for fraud. The two maintained that they had done nothing wrong and that the purchase of Wesco Financial Corporation only looked suspicious because of their complex system of businesses.
Further trouble came with a large investment in Salomon Inc. In 1991, news broke of a trader breaking Treasury bidding rules on multiple occasions, and only through intense negotiations with the Treasury did Buffett manage to stave off a ban on buying Treasury notes and subsequent bankruptcy for the firm.
In more recent years, Buffett has acted as a financier and facilitator of major transactions. During the Great Recession, Warren invested and lent money to companies that were facing financial disaster. Roughly 10 years later, the effects of these transactions are surfacing and they’re enormous.

A loan to Mars Inc. resulted in a $680 million profit.
Wells Fargo & Co. (WFC), of which Berkshire Hathaway bought almost 120 million shares during the Great Recession, is up more than 7 times from its 2009.
American Express Co. (AXP) is up about five times since Warren’s investment in 200813
Bank of America Corp. (BAC) pays $300 million a year and Berkshire Hathaway has the option to buy additional shares at around $7 each – less than half of what it trades at today.
Goldman Sachs Group Inc. (GS) paid out $500 million in dividends a year and a $500 million redemption bonus when they repurchased the shares.

Most recently, Warren has partnered up with 3G Capital to merge J.H. Heinz Company and Kraft Foods to create the Kraft Heinz Food Company (KHC). The new company is the third largest food and beverage company in North America and fifth largest in the world, and boasts annual revenues of $28 billion. In 2017, he bought up a significant stake in Pilot Travel Centers, the owners of the Pilot Flying J chain of truck stops. He will become a majority owner over a six-year period.
Modesty and quiet living meant that it took Forbes some time to notice Warren and add him to the list of richest Americans, but when they finally did in 1985, he was already a billionaire. Early investors in Berkshire Hathaway could have bought in as low as $275 a share and by 2014 the stock price had reached $200,000, and was trading just under $300,000 earlier this year.

Comparing Buffett to Graham.
Buffett has referred to himself as "85% Graham." Like his mentor, he has focused on company fundamentals and a "stay the course" approach – an approach that enabled both men to build huge personal nest eggs. Seeking a seeks a strong return on investment (ROI), Buffett typically looks for stocks that are valued accurately and offer robust returns for investors.
However, Buffett invests using a more qualitative and concentrated approach than Graham did. Graham preferred to find undervalued, average companies and diversify his holdings among them; Buffett favors quality businesses that already have reasonable valuations (though their stock should still be worth something more) and the ability for large growth.

Other differences lie in how to set intrinsic value, when to take a chance and how deeply to dive into a company that has potential. Graham relied on quantitative methods to a far greater extent than Buffett, who spends his time actually visiting companies, talking with management and understanding the corporate's particular business model. As a result, Graham was more able to and more comfortable investing in lots of smaller companies than Buffett. Consider a baseball analogy: Graham was concerned about swinging at good pitches and getting on base; Buffett prefers to wait for pitches that allow him to score a home run. Many have credited Buffett with having a natural gift for timing that cannot be replicated, whereas Graham's method is friendlier to the average investor.

Buffett Fun Facts.
Buffett only began making large-scale charitable donations at age 75.
Buffett has made some interesting observations about income taxes. Specifically, he's questioned why his effective capital gains tax rate of around 20% is a lower income tax rate than that of his secretary – or for that matter, than that paid by most middle-class hourly or salaried workers. As one of the two or three richest men in the world, having long ago established a mass of wealth that virtually no amount of future taxation can seriously dent, Mr. Buffett offers his opinion from a state of relative financial security that is pretty much without parallel. Even if, for example, every future dollar Warren Buffett earns is taxed at the rate of 99%, it is doubtful that it would affect his standard of living.

Buffett has described The Intelligent Investor as the best book on investing that he has ever read, with Security Analysis a close second. Other favorite reading matter includes:
Common Stocks and Uncommon Profits by Philip A. Fisher, which advises potential investors to not only examine a company's financial statements but to evaluate its management. Fisher focuses on investing in innovative companies, and Buffett has long held him in high regard.
The Outsiders by William N. Thorndike profiles eight CEOs and their blueprints for success. Among the profiled is Thomas Murphy, friend to Warren Buffett and director for Berkshire Hathaway. Buffett has praised Murphy, calling him "overall the best business manager I've ever met."
Stress Test by former Secretary of the Treasury, Timothy F. Geithner, chronicles the financial crisis of 2008-9 from a gritty, first-person perspective. Buffett has called it a must-read for managers, a textbook for how to stay level under unimaginable pressure.
Business Adventures: Twelve Classic Tales from the World of Wall Street by John Brooks is a collection of articles published in The New Yorker in the 1960s. Each tackles famous failures in the business world, depicting them as cautionary tales. Buffett lent his copy of it to Bill Gates, who reportedly has yet to return it.

The Bottom Line.
Warren Buffett’s investments haven't always been successful, but they were well-thought-out and followed value principles. By keeping an eye out for new opportunities and sticking to a consistent strategy, Buffett and the textile company he acquired long ago are considered by many to be one of the most successful investing stories of all time. But you don't have to be a genius "to invest successfully over a lifetime," the man himself claims. "What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

August 04, 2020

How Bitcoin Disrupts the Finance Industry

How Bitcoin Disrupts the Finance Industry .

Cryptocurrencies and their underlying blockchain technology are being touted as the next-big-thing after the creation of the internet. One area where these technologies are likely to have a major impact is the financial sector. The blockchain, as a form of distributed ledger technology (DLT), has the potential to transform well-established financial institutions and bring lower costs, faster execution of transactions, improved transparency, auditability of operations, and other benefits. Cryptocurrencies hold the promise of a new native digital asset class without a central authority.

So what do these technological developments mean for the various players in the sector and end users? “Blockchains have the potential to displace any business activity built on transactions occurring on traditional corporate databases, which is what underlies nearly every financial service function. Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications. DLT is therefore both a great opportunity and also a disruptive threat,” according to Bruce Weber, dean of Lerner College and business administration professor, and Andrew Novocin, professor of electrical and computer engineering, both at the University of Delaware.

Earlier this year, Weber, Novocin, and graduate student Jonathan Wood conducted a literature review on cryptocurrencies and DLT for the SWIFT Institute. Based on this review, the SWIFT institute recently issued a grant to conduct new research on DLT and cryptocurrencies in the financial sector. Weber and Novocin noted that just as disruptors like Amazon, Google, Facebook and Uber built software platforms and thriving businesses thanks to the connectivity provided by internet standards, next-generation startups will build new services and businesses with blockchains. “Many pundits expect blockchain, as a distributed technology, to become the foundation for new services and applications that have completely different rules from those running on hierarchical and controlled databases. Cryptocurrencies are an early example but many others will follow,” they added.

Kartik Hosanagar, a Wharton professor of marketing and operations, information and decisions, pointed out that the financial services sector is full of intermediaries such as banks that help create trust among transacting parties like lenders and borrowers. Blockchain, he said, is a mechanism to create trust without centralized control. “The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”

Regarding cryptocurrencies, Hosanagar pointed out that most of the value today is tied to speculative buying rather than actual use cases. But having a currency without a central authority offers “certain unique kinds of protections especially in countries with troubled central banks.” For example, Venezuela’s currency is rapidly losing value. For people who stored their savings in crypto, there was greater protection against such rapid currency devaluations. “Of course, cryptocurrencies have their own instabilities, but they aren’t tied to actions by central banks and that’s particularly relevant in countries and economies where citizens don’t trust their governments and central banks,” he said.

“Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications.”–Bruce Weber and Andrew Novocin

Hosanagar expects the first wave of applications to be rolled out in “private” blockchains where a central authority such as a financial institution and its partners are the only ones with the permission to participate (as opposed to public, permissionless blockchains where participants are anonymous and there is no central authority). Applications in the private blockchains, he said, will be more secure and will offer some of the benefits of decentralized ledgers but will not be radically different from the way things work at present. However, over time, he expects smart contracts (self-executing contracts when requirements are met) to be offered on public blockchain networks like Ethereum. “When securities are traded, intermediaries provide trust, and they charge commissions. Blockchains can help provide such trust in a low-cost manner. But trade of securities is governed by securities laws. Smart contracts offer a way to ensure compliance with the laws. They have great potential because of their ability to reduce costs while being compliant,” says Hosanagar.

According to Weber and Novocin, one area ripe for transformation is reaching consensus on important benchmark rates and prices. At present, they point out, different proprietary indexes are used to determine interest rates and the price of many mainstream assets. Blockchain can transform this. “Think of the London Interbank Offered Rate (LIBOR) and the recent scandals involving manipulation of benchmark values when they are controlled by a single entity that may not be capable of detecting false or fraudulent data. Blockchain could provide greater transparency around the process of creating agreed upon reference prices, and allow more people to participate in the consensus process.”

Weber and Novocin expect that in some areas intermediaries will find their roles reduced as blockchain allows for automation through greater transparency and traceability. In other areas, intermediaries will find themselves well-placed to take advantage of changing needs of their clients, as firms will need help to manage the shift to new standards as well as the greater complexity of open and traceable blockchain infrastructure. Intermediaries in areas that could potentially be disrupted, they said, “should get involved with projects seeking to set the standards, so that they can stay informed and position themselves to profit from becoming the leaders in the operations of the new markets that will emerge.”

Kevin Werbach, Wharton professor of legal studies and business ethics, and author of a forthcoming book The Blockchain and the New Architecture of Trust,  said that it’s usually not helpful to focus on what aspects of a major existing market will be “transformed” or “disrupted” by new technologies. Important technologies, he said, are far more likely to be integrated into the system than replace it. According to Werbach, while some firms will fail to make the transition and some new ones will take hold, “over the long-run, virtually every historic innovation that eliminated some forms of intermediation also created new forms.”

Blockchain will reduce the massive duplication of information that creates delays, conflicts and confusion in many aspects of financial services, Werbach added. For example, when a syndicate of lenders participates in a loan, having one shared ledger means they don’t all need to keep track of it independently. International payments and corporate stock records are other examples where there are huge inefficiencies due to duplicate record-keeping and intermediaries. “End users won’t see the changes in the deep plumbing of financial services, but it will allow new service providers to emerge and new products to be offered,” said Werbach.

Bumps Along the Way

Angela Walch, professor of law at St. Mary’s University School of Law and a research fellow at the Centre for Blockchain Technologies at University College London, offered another perspective. She said there is a lot of excitement about blockchain as a distributed ledger technology for the financial sector because many believe that it offers a better, more efficient and more resilient form of recordkeeping. However, making use of the blockchain is not as simple as just buying new software and running it. “Blockchain technology is, at core, group recordkeeping. To reap its full benefits, one needs all the relevant members of the group to join the system. This requires collaboration with and across businesses, which is a potentially big hurdle, and may be the hurdle that most limits adoption.”

Governance is the biggest challenge in decentralized organizations, said Weber and Novocin. Members participating in a blockchain-supported financial function may have misaligned incentives, and can end up in gridlock, or with a chaotic outcome. They cite the example of the ‘DAO Hack,’ which was the first prominent smart contract project on the Ethereum network to suffer a large loss of funds. The Ethereum community voted to conduct a hard fork (a radical change to the protocol that makes previously invalid blocks/transactions valid or vice-versa) — reversing the transactions after the hack and essentially refunding the DAO investors. This was in effect a breach of Ethereum’s immutability and it left a sizeable minority of the community bitterly dissatisfied. This group viewed the Ethereum community as forsaking its commitment to immutable, permanent records. They refused to acknowledge the hard fork, and maintained the original Ethereum blockchain, now known as Ethereum Classic (whereas the forked version supported by the Ethereum Foundation is simply Ethereum).

“The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”–Kartik Hosanagar

“Distributed organizations serving an open community need to take care to design their governance systems, incentive structures and decision-making processes to create consensus without unduly slowing down the decision-making,” said Weber and Novocin. “Scenario planning or war gaming are worth exploring at the beginning of blockchain projects. Forward planning enables organizations to swiftly respond in a predictable way that is supportive of stakeholders. Publicizing these plans in advance can also build trust and user confidence.”

Cryptocurrency Risks.

Werbach listed a variety of risks and vulnerabilities related to cryptocurrencies: Bitcoin has shown that the fundamental security of its proof-of-work system is sound, but it has major limitations such as limited scalability, massive energy usage and concentration of mining pools. There has been massive theft of cryptocurrencies from the centralized intermediaries that most people use to hold it, and massive fraud by promoters of initial coin offerings and other schemes. Manipulation is widespread on lightly-regulated cryptocurrency exchanges.

For example, roughly half of Bitcoin transactions are with Tether, a “stablecoin” that claims to be backed by U.S. dollars but has never been audited and is involved in highly suspicious behavior. Money laundering and other criminal activity is a serious problem if transactions do not require some check of real-world identities. “There are major efforts to address all of these risks and vulnerabilities. Some are technical, some are business opportunities, and some are regulatory questions. There must be recognition among cryptocurrency proponents that maturation of the industry will require cooperation in many cases with incumbents and regulators,” added Werbach.

Hosanagar cautions that while decentralization offers significant value — and a significant number of miners/validators must verify the transaction for it to be validated — it is still susceptible to collusion. If one or a few companies running lots of miners/validators in a small network collude, they can affect the sanctity of the network. The big risk with cryptocurrencies, he added, is that most activity as of today is ultimately tied to speculation. It’s important for cryptocurrencies to discover a “killer app soon so there is some underlying value created beyond speculation of its future value,” Hosanagar concludes.

The Way Ahead?

Given all these challenges, what is the current mindset in the financial sector towards adopting these new technologies? And, importantly, should one push for wide acceptance and deployment, or is there need for them to stabilize first?

According to Werbach, “It’s not an either-or” choice. Cryptocurrencies and blockchain technology in general, he noted, are immature currently. However, there are some areas where they are already able to be deployed effectively. The best way to work through today’s problems, is “to build working systems and see where difficulties arise,” Werbach said. Looking ahead, integration with law, regulation and governance will be critical. Blockchain and cryptocurrencies represent a new form of trust, he added. They will only succeed if they become sufficiently trustworthy, beyond the basic security of the distributed ledgers. “Law, regulation and governance are three major mechanisms to produce trustworthy systems that scale up to society-wide adoption. We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables. I’m optimistic about that process over time.”

“We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables.”–Kevin Werbach

Walch noted that while there are claims that some consortia are putting ‘blockchain’ systems into production, in many cases it appears that what they are calling a blockchain bears little to no resemblance to the original blockchain technology behind Bitcoin. In many instances, she said, existing shared databases are being called ‘blockchain’ for marketing purposes. “If people do use something they call DLT or blockchain technology in important financial systems, my hope is that they make the decision based on actual capabilities of the tech rather than its widely hyped and generally overstated capabilities,” Walch said. “Permissioned blockchains, which are the variation most likely to be used for financial systems recordkeeping, are very different from public blockchains like Bitcoin or Ethereum. I hope that a more modest and accurate understanding of the actual characteristics of permissioned blockchains sinks in before they are widely adopted.”

Regarding cryptocurrencies or cryptoassets, Walch said that the financial sector’s interest is “less about recordkeeping and more about a new financial asset that it can make money off of.” She pointed out that at present there is no clarity on how power and accountability work in these systems. The ongoing operation of crypto systems and the value they embed and support is reliant on the competence of, and ethical behavior by, unaccountable software developers and validators. “The financial sector believes it understands and can manage the risks of cryptoassets, but I am less certain and worry that hubris and greed are driving the push to create cryptoassets as a real asset class. This has been a bad mixture in the past,” says Walch. “I think it would be more responsible to let cryptosystems exist on their own for a while longer to let more of the kinks get worked out — if they can be; I’m not sure the governance ones can — rather than to rapidly integrate them into the financial system as we seem to be doing.”

“I … worry that hubris and greed are driving the push to create cryptoassets as a real asset class.”–Angela Walch

Conversely, Weber and Novocin feel that the financial industry is cautious about the new DLT technology. According to them, to build confidence in new blockchain systems there needs to be transparency around how the processes work and what the benefits are, and in order to secure adoption, they need to be straightforward to use. “Pundits have drawn parallels to the open source Linux operating system. Although only a few individuals use Linux directly, it quietly runs the vast majority of servers and cloud processors across the world. Similarly, early adoption of blockchain will likely happen in the background of business processes. Companies should get involved now, even if it is just to experiment with the concepts. By gaining familiarity with these new tools, they will be ready as the space continues to develop.”

Weber and Novocin expect that in the next few years, many more businesses will implement private blockchains to improve the transparency and traceability of their financial operations, supply chains, inventory management systems and other internal business systems. Clearer standards will be adopted and a few high-profile projects will emerge. Meanwhile, they said, R&D will continue among the many decentralized blockchain projects to invent more scalable public ledgers whether it be blockchain, Tangle, Hashgraph or something new. “Work is needed on better and more efficient consensus models, whether it be a new form of proof-of-stake or proof-of-work, or something else. There are many established groups, startups, companies and research teams that organizations can join, partner with, or support in order to contribute to research and expand their capabilities.”




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July 16, 2020

How the Blockchain Will Impact the Financial Sector

How the Blockchain Will Impact the Financial Sector.

Cryptocurrencies and their underlying blockchain technology are being touted as the next-big-thing after the creation of the internet. One area where these technologies are likely to have a major impact is the financial sector. The blockchain, as a form of distributed ledger technology (DLT), has the potential to transform well-established financial institutions and bring lower costs, faster execution of transactions, improved transparency, auditability of operations, and other benefits. Cryptocurrencies hold the promise of a new native digital asset class without a central authority.

So what do these technological developments mean for the various players in the sector and end users? “Blockchains have the potential to displace any business activity built on transactions occurring on traditional corporate databases, which is what underlies nearly every financial service function. Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications. DLT is therefore both a great opportunity and also a disruptive threat,” according to Bruce Weber, dean of Lerner College and business administration professor, and Andrew Novocin, professor of electrical and computer engineering, both at the University of Delaware.

Earlier this year, Weber, Novocin, and graduate student Jonathan Wood conducted a literature review on cryptocurrencies and DLT for the SWIFT Institute. Based on this review, the SWIFT institute recently issued a grant to conduct new research on DLT and cryptocurrencies in the financial sector. Weber and Novocin noted that just as disruptors like Amazon, Google, Facebook and Uber built software platforms and thriving businesses thanks to the connectivity provided by internet standards, next-generation startups will build new services and businesses with blockchains. “Many pundits expect blockchain, as a distributed technology, to become the foundation for new services and applications that have completely different rules from those running on hierarchical and controlled databases. Cryptocurrencies are an early example but many others will follow,” they added.

Kartik Hosanagar, a Wharton professor of marketing and operations, information and decisions, pointed out that the financial services sector is full of intermediaries such as banks that help create trust among transacting parties like lenders and borrowers. Blockchain, he said, is a mechanism to create trust without centralized control. “The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”

Regarding cryptocurrencies, Hosanagar pointed out that most of the value today is tied to speculative buying rather than actual use cases. But having a currency without a central authority offers “certain unique kinds of protections especially in countries with troubled central banks.” For example, Venezuela’s currency is rapidly losing value. For people who stored their savings in crypto, there was greater protection against such rapid currency devaluations. “Of course, cryptocurrencies have their own instabilities, but they aren’t tied to actions by central banks and that’s particularly relevant in countries and economies where citizens don’t trust their governments and central banks,” he said.

“Any financial operation that has low transparency and limited traceability is vulnerable to disruption by blockchain applications.”–Bruce Weber and Andrew Novocin

Hosanagar expects the first wave of applications to be rolled out in “private” blockchains where a central authority such as a financial institution and its partners are the only ones with the permission to participate (as opposed to public, permissionless blockchains where participants are anonymous and there is no central authority). Applications in the private blockchains, he said, will be more secure and will offer some of the benefits of decentralized ledgers but will not be radically different from the way things work at present. However, over time, he expects smart contracts (self-executing contracts when requirements are met) to be offered on public blockchain networks like Ethereum. “When securities are traded, intermediaries provide trust, and they charge commissions. Blockchains can help provide such trust in a low-cost manner. But trade of securities is governed by securities laws. Smart contracts offer a way to ensure compliance with the laws. They have great potential because of their ability to reduce costs while being compliant,” says Hosanagar.

According to Weber and Novocin, one area ripe for transformation is reaching consensus on important benchmark rates and prices. At present, they point out, different proprietary indexes are used to determine interest rates and the price of many mainstream assets. Blockchain can transform this. “Think of the London Interbank Offered Rate (LIBOR) and the recent scandals involving manipulation of benchmark values when they are controlled by a single entity that may not be capable of detecting false or fraudulent data. Blockchain could provide greater transparency around the process of creating agreed upon reference prices, and allow more people to participate in the consensus process.”

Weber and Novocin expect that in some areas intermediaries will find their roles reduced as blockchain allows for automation through greater transparency and traceability. In other areas, intermediaries will find themselves well-placed to take advantage of changing needs of their clients, as firms will need help to manage the shift to new standards as well as the greater complexity of open and traceable blockchain infrastructure. Intermediaries in areas that could potentially be disrupted, they said, “should get involved with projects seeking to set the standards, so that they can stay informed and position themselves to profit from becoming the leaders in the operations of the new markets that will emerge.”

Kevin Werbach, Wharton professor of legal studies and business ethics, and author of a forthcoming book The Blockchain and the New Architecture of Trust,  said that it’s usually not helpful to focus on what aspects of a major existing market will be “transformed” or “disrupted” by new technologies. Important technologies, he said, are far more likely to be integrated into the system than replace it. According to Werbach, while some firms will fail to make the transition and some new ones will take hold, “over the long-run, virtually every historic innovation that eliminated some forms of intermediation also created new forms.”


Blockchain will reduce the massive duplication of information that creates delays, conflicts and confusion in many aspects of financial services, Werbach added. For example, when a syndicate of lenders participates in a loan, having one shared ledger means they don’t all need to keep track of it independently. International payments and corporate stock records are other examples where there are huge inefficiencies due to duplicate record-keeping and intermediaries. “End users won’t see the changes in the deep plumbing of financial services, but it will allow new service providers to emerge and new products to be offered,” said Werbach.

Bumps Along the Way

Angela Walch, professor of law at St. Mary’s University School of Law and a research fellow at the Centre for Blockchain Technologies at University College London, offered another perspective. She said there is a lot of excitement about blockchain as a distributed ledger technology for the financial sector because many believe that it offers a better, more efficient and more resilient form of recordkeeping. However, making use of the blockchain is not as simple as just buying new software and running it. “Blockchain technology is, at core, group recordkeeping. To reap its full benefits, one needs all the relevant members of the group to join the system. This requires collaboration with and across businesses, which is a potentially big hurdle, and may be the hurdle that most limits adoption.”

Governance is the biggest challenge in decentralized organizations, said Weber and Novocin. Members participating in a blockchain-supported financial function may have misaligned incentives, and can end up in gridlock, or with a chaotic outcome. They cite the example of the ‘DAO Hack,’ which was the first prominent smart contract project on the Ethereum network to suffer a large loss of funds. The Ethereum community voted to conduct a hard fork (a radical change to the protocol that makes previously invalid blocks/transactions valid or vice-versa) — reversing the transactions after the hack and essentially refunding the DAO investors. This was in effect a breach of Ethereum’s immutability and it left a sizeable minority of the community bitterly dissatisfied. This group viewed the Ethereum community as forsaking its commitment to immutable, permanent records. They refused to acknowledge the hard fork, and maintained the original Ethereum blockchain, now known as Ethereum Classic (whereas the forked version supported by the Ethereum Foundation is simply Ethereum).

“The power of eliminating intermediaries is the ability to lower transaction costs and take back control from powerful financial intermediaries.”–Kartik Hosanagar

“Distributed organizations serving an open community need to take care to design their governance systems, incentive structures and decision-making processes to create consensus without unduly slowing down the decision-making,” said Weber and Novocin. “Scenario planning or war gaming are worth exploring at the beginning of blockchain projects. Forward planning enables organizations to swiftly respond in a predictable way that is supportive of stakeholders. Publicizing these plans in advance can also build trust and user confidence.”

Cryptocurrency Risks.

Werbach listed a variety of risks and vulnerabilities related to cryptocurrencies: Bitcoin has shown that the fundamental security of its proof-of-work system is sound, but it has major limitations such as limited scalability, massive energy usage and concentration of mining pools. There has been massive theft of cryptocurrencies from the centralized intermediaries that most people use to hold it, and massive fraud by promoters of initial coin offerings and other schemes. Manipulation is widespread on lightly-regulated cryptocurrency exchanges.

For example, roughly half of Bitcoin transactions are with Tether, a “stablecoin” that claims to be backed by U.S. dollars but has never been audited and is involved in highly suspicious behavior. Money laundering and other criminal activity is a serious problem if transactions do not require some check of real-world identities. “There are major efforts to address all of these risks and vulnerabilities. Some are technical, some are business opportunities, and some are regulatory questions. There must be recognition among cryptocurrency proponents that maturation of the industry will require cooperation in many cases with incumbents and regulators,” added Werbach.

Hosanagar cautions that while decentralization offers significant value — and a significant number of miners/validators must verify the transaction for it to be validated — it is still susceptible to collusion. If one or a few companies running lots of miners/validators in a small network collude, they can affect the sanctity of the network. The big risk with cryptocurrencies, he added, is that most activity as of today is ultimately tied to speculation. It’s important for cryptocurrencies to discover a “killer app soon so there is some underlying value created beyond speculation of its future value,” Hosanagar concludes.

The Way Ahead?

Given all these challenges, what is the current mindset in the financial sector towards adopting these new technologies? And, importantly, should one push for wide acceptance and deployment, or is there need for them to stabilize first?

According to Werbach, “It’s not an either-or” choice. Cryptocurrencies and blockchain technology in general, he noted, are immature currently. However, there are some areas where they are already able to be deployed effectively. The best way to work through today’s problems, is “to build working systems and see where difficulties arise,” Werbach said. Looking ahead, integration with law, regulation and governance will be critical. Blockchain and cryptocurrencies represent a new form of trust, he added. They will only succeed if they become sufficiently trustworthy, beyond the basic security of the distributed ledgers. “Law, regulation and governance are three major mechanisms to produce trustworthy systems that scale up to society-wide adoption. We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables. I’m optimistic about that process over time.”

“We need to find ways to address the legitimate concerns of governments without overly restricting the innovations that blockchain technology enables.”–Kevin Werbach

Walch noted that while there are claims that some consortia are putting ‘blockchain’ systems into production, in many cases it appears that what they are calling a blockchain bears little to no resemblance to the original blockchain technology behind Bitcoin. In many instances, she said, existing shared databases are being called ‘blockchain’ for marketing purposes. “If people do use something they call DLT or blockchain technology in important financial systems, my hope is that they make the decision based on actual capabilities of the tech rather than its widely hyped and generally overstated capabilities,” Walch said. “Permissioned blockchains, which are the variation most likely to be used for financial systems recordkeeping, are very different from public blockchains like Bitcoin or Ethereum. I hope that a more modest and accurate understanding of the actual characteristics of permissioned blockchains sinks in before they are widely adopted.”

Regarding cryptocurrencies or cryptoassets, Walch said that the financial sector’s interest is “less about recordkeeping and more about a new financial asset that it can make money off of.” She pointed out that at present there is no clarity on how power and accountability work in these systems. The ongoing operation of crypto systems and the value they embed and support is reliant on the competence of, and ethical behavior by, unaccountable software developers and validators. “The financial sector believes it understands and can manage the risks of cryptoassets, but I am less certain and worry that hubris and greed are driving the push to create cryptoassets as a real asset class. This has been a bad mixture in the past,” says Walch. “I think it would be more responsible to let cryptosystems exist on their own for a while longer to let more of the kinks get worked out — if they can be; I’m not sure the governance ones can — rather than to rapidly integrate them into the financial system as we seem to be doing.”

“I … worry that hubris and greed are driving the push to create cryptoassets as a real asset class.”–Angela Walch

Conversely, Weber and Novocin feel that the financial industry is cautious about the new DLT technology. According to them, to build confidence in new blockchain systems there needs to be transparency around how the processes work and what the benefits are, and in order to secure adoption, they need to be straightforward to use. “Pundits have drawn parallels to the open source Linux operating system. Although only a few individuals use Linux directly, it quietly runs the vast majority of servers and cloud processors across the world. Similarly, early adoption of blockchain will likely happen in the background of business processes. Companies should get involved now, even if it is just to experiment with the concepts. By gaining familiarity with these new tools, they will be ready as the space continues to develop.”

Weber and Novocin expect that in the next few years, many more businesses will implement private blockchains to improve the transparency and traceability of their financial operations, supply chains, inventory management systems and other internal business systems. Clearer standards will be adopted and a few high-profile projects will emerge. Meanwhile, they said, R&D will continue among the many decentralized blockchain projects to invent more scalable public ledgers whether it be blockchain, Tangle, Hashgraph or something new. “Work is needed on better and more efficient consensus models, whether it be a new form of proof-of-stake or proof-of-work, or something else. There are many established groups, startups, companies and research teams that organizations can join, partner with, or support in order to contribute to research and expand their capabilities.”




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July 16, 2020

How to Fundraise

How to Fundraise.

There's no question that charities, nonprofits, PTAs, clubs and many other groups need to raise funds. The question is, how to do it effectively. This article introduces several ways that your group can raise funds for its projects.

Method 1 Preparing to Fundraise.
1. Define your needs. This is the most important first step in fundraising. To effectively raise money, you have to know what you're fundraising for in the first place. Take the time to figure out your group's needs and budget the costs to meet them.
2. Develop the language. Now that you have identified your needs, you need to articulate them. Develop some language describing what you need, why you need it, how it will help the community you serve, and how much it will cost. You may not need all of this written language for every fundraising effort, but you'll appreciate having it on hand when it's required.
3. Develop a method to track donations and donor information. For legal, accounting and internal tracking purposes, you will need the capacity to record and track donations and donor information. Your method can be a simple spreadsheet, or a complex, custom database, but you must have a usable tool.
4. Get staff or volunteers to do the work. Fundraising is work, no doubt about it. You will need capable, reliable people to manage records, staff events, stuff envelopes, solicit donations, write emails, update websites and more. Your board should definitely be involved in fundraising. You can also recruit volunteers from your constituency, from local service organizations, colleges and universities, or from online services like Volunteer Match.

Method 2 Legal Issues.
The intricate legal issues surrounding fundraising are governed by the IRS code and individual state laws. Here is an overview of the most critical issues.
1. Understand tax deductibility. Many donations to charity are tax deductible, but not all are. In order to do so you must be a 501 c 3 or have the right to use another group's 501 c 3 to process your donations.
2. Disclose whether goods or services were provided in exchange for the donation. If your organization provided anything in exchange for the donation, you must say that in your acknowledgement letter. This is called a quid pro quo contribution. An example of a quid pro quo contribution would be if you made a donation of $100 and got a cookbook valued at $30 in exchange. Only $70 of this contribution is deductible.
You usually need not worry about very small items like a refrigerator magnet or a pen.
For quid pro quo contributions, you must provide an acknowledgement if the cash donation is $75 or greater, even if the deductible part is less than $75.
3. Provide acknowledgement letters. Acknowledgement letters are important for a few reasons. They are the right thing to do, of course, but they also provide the donor with a record of their donation for tax purposes. The IRS requires that an acknowledgement letter be provided for any gift of $250 or more.
Acknowledgements must be written, but can be electronic or printed.
Although the threshold is $250, it's good practice to acknowledge every gift you receive, even if it's $5.
4. Register your charity (optional). 40 states in the U.S. require charities to register with a state agency in order to solicit donations from residents of those states. Solicitation can include any type of request, whether by mail, online or by phone. Check online to see whether you are required to register.
5. Talk to a professional. The best way to understand the legal issues in fundraising is to get professional advice. Check with your financial staff, an attorney or an accountant who specializes in nonprofit finance if you have any questions at all about the law.

Method 3 Fundraising Events.
1. Understand the method. A fundraising event is a party or gathering intended to raise money for an organization, ranging from formal NGOs to informal clubs. Typically, revenue comes in through ticket sales, and in some cases, corporate sponsorships. Although events are notorious for being expensive, time consuming and not terribly cost effective, they don't have to be that way. Here are some ideas for simple fundraising events that don't require a lot of money or energy.
2. Hold a house party. House parties are a tried and true method of fundraising. A house party is a small event hosted at the home of someone close to your organization. The host invites friends and contacts whom he or she believes might be interested in donating to your program. After mingling and refreshments, the president or director of your organization makes a short presentation about your group. Guests have an opportunity to ask questions, then, the host invites them make a donation. Some tips on house parties.
A house party does not have to be fancy. It can be a dinner party or a cocktail party. It can have 20 guests or 6. Refreshments can be catered, or as simple as coffee and cake.
Make sure that the host of the party directly asks guests to donate.
Have staff and board members on hand to mingle and answer questions.
If appropriate, consider asking a program participant to attend. It can be very powerful and compelling for donors to meet and speak with someone who has received your organization's services.
3. Make a booth. If you go to the manager of a store, like Walmart, the you can ask to make a booth in front of the store. This can be very successful.
4. Hold a restaurant fundraiser. Many restaurants have established fundraising programs whereby nonprofits can receive a percentage of sales on a designated day. These programs are very common among big chain restaurants, but smaller establishments offer them too. Search online to find out what restaurants in your area offer this fundraising tool. Once you've identified a restaurant, follow these tips.
Understand the terms. Restaurants have different guidelines and rules for fundraisers. Some donate a percentage of the entire bill; some exclude alcohol sales. Some require that customers present a coupon or other document for your group to receive a donation, others don't. Make sure you are clear on what's expected so you can take full advantage of the event.
Get the word out. Make sure your constituents and everyone in your group knows about your event. Encourage them to invite their friends too.
Provide materials. Set out brochures, postcards or other items to let diners know that their purchases are supporting your organization.
5. Hold a dessert party. A dessert party is a fun, simple and inexpensive event. Hold the party at the home of a board member or other friend of your organization. Ask volunteers to make desserts in single serving sizes. Provide coffee, tea and soft drinks. Sell tickets at a modest price. Enjoy the sweets!
6. Hold a craft fair. A craft fair is an easy and very inexpensive fundraising event. Your organization rents table space to vendors to display and sell their products. If you like, you can also ask vendors to donate a percentage of their sales to your group. If you have a facility you'd like to show off, a craft fair is a great way to get the community to visit.
Add to the fun and interest of the event by scheduling performances, speakers or other entertainment throughout the day.
Make sure there are opportunities for customers and visitors to learn about and make a donation to your organization during the event.
Consider holding a raffle as an additional way to generate revenue at the craft fair.
7. Sell your passion. If you want a fun and passionate fundraiser that doesn't take a lot of planning, consider using LoveMyHeart.org. It's simple, fun, and everyone loves the Love My Heart shirts you sell! Not to mention there are no out of pocket costs like the other events listed here!

Method 4 Fundraising Online.
1. Understand the method. In some ways, fundraising online is not much different than fundraising in the physical world. You still need to be able to effectively communicate your needs, tell stories that illustrate your work, and motivate people to make a donation to your cause. The difference is that while in the physical world you may have time to build a relationship with a potential donor, that isn't always the case online. They may only come across your website once, so you may only have one shot at convincing them to give. Therefore, it's even more important to communicate your message in a compelling way. Here are some ways to do it.
2. Set up a web page. The most basic way to raise funds online is to set up a webpage for donations, then let people know to go to that page to make a contribution. Include the link in written and electronic communications you send to your members or constituents. Make sure it's accessible from your home page, and other pages of your website. Keep these tips in mind.
Most donations made online are done by credit card transaction. If you are not already set up to accept credit cards, there are a number of companies that provide credit card donation processing services for a fee.
Offer the option of recurring donations. Recurring donations can benefit your organization in a few ways. Many donors find it easier to make a larger donation if its split up into quarterly or monthly payments; some very committed donors may want to make an annual donation to you. Make this as easy as possible by setting up recurring payments. Ask your online donation processing service how to offer this to your donors.
Some organizations opt to accept online donations through PayPal. Visit PayPal's website to learn more.
3. Sign up with an affiliate program. Fundraising with an affiliate program is a lot like making commissions off sales. An online merchant or shopping portal provides the charity with a unique affiliate link. Shoppers use the link to access the merchant, make purchases, and the charity receives a percentage of the sales. Here are some tips for affiliate fundraising.
There are dozens of merchants and portals that offer this fundraising tool. You can sign up for more than one to maximize your potential donations.
Consider your constituents. When you select a merchant, consider where your constituents are likely to shop online. It might be a good idea to do a survey or ask a few key players to make sure you're choosing well.
Get the word out. Most affiliate programs offer widgets or banners that are easy to drop into your website. Include these on your website and in electronic communications to let your supporters know how they can help.
4. Consider crowdfunding. Crowdfunding combines online fundraising with social media to help individuals and organizations raise funds. it's a way for many individuals to pool their resources and donations to get projects funded. Donors can typically contribute as little as $1.00, making it easy for lots of people to participate. There are several websites set up for crowdfunding. Funds-seekers create a campaign page describing their project or organization, and explain how the funds will be used and what, if any, benefit donors will receive for participating. Here are some tips on fundraising using crowdfunding.
Crowdfunding is particularly well suited for funding discrete projects. Rather than launch a campaign asking for all the money you need to operate a program, consider how you can break it up a bit. For example, a school music program could launch a campaign to purchase 10 instruments for low income students.
Articulate your needs and your project clearly. The clearer you can be about why you need the money and how you will use it, the better.
Get creative. Add media to your campaign page to increase readers' interest. Videos, images and success stories are great for telling your story, so use them to your advantage.

Community Q&A.

Question : How old do I have to be to start a fundraiser?
Community Answer : You can do a lot of these fundraising activities at any age, but you'll probably want an adult around to help you manage the money and make sure it goes where it is supposed to. The crowdfunding websites may require you to be 18.
Question : What other types of fundraising are there?
Community Answer : Bottle drives, bake sales, car washes, donation jars at local stores, yard sales, an action of donated goods from local stores, etc.
Question : My church has to gather funds (about 9-10 thousand) to be able to pay for a youth mission trip. They rely mostly on donations, and other methods may be wrong. Do you have any suggestions for this situation?
Community Answer : You can always advertise your fundraising idea as a way to create fellowship and bring new members into the church. Have a community potluck where your church members bring in dishes to feed a large group and outsiders make donations to eat.
Question : How do I fundraise in an apartment?
Community Answer : You can ask your landlord or super if you can use some space in the lobby. You can also organize a fundraiser outside or at a nearby park or other facility.

Tips

There are many ways to raise funds, but some ways are far better than others. If you want a quick, free fundraiser that doesn't take a lot of planning, your options are limited.
You can host a sports match between two teams and charge an entrance fee. That way you can ask for donations from the guests.

May 07, 2020

How to Create a Profitable Property Portfolio

How to Build a Diversified Portfolio.

“Don’t put all your eggs in one basket” is sound advice in life as well as in finance. Diversifying an investment portfolio can help cushion the ups and downs of the market and the broader economy. You can diversify by investing simultaneously in different asset classes. These classes include stocks (or "equities”), bonds, the money market, commodities, precious metals, real estate, gemstones, fine art and any of several other valuable assets. Because most growth in wealth comes from owning stock, equities also represent the most risk in a portfolio, so you will want to diversify your stock holdings. The following article presents a number of commonly acknowledged steps in building wealth through a diversified investment portfolio.

Method 1 Diversifying in Stocks.
1. Invest in many different companies. When you buy stock, you buy a share of the ownership of a company. You can buy stock in individual companies by using an online broker, such as E-Trade, Charles Schwab or TD Ameritrade (among many others). Do not, however, commit a large portion of your money to any single company. If such a company were to get in trouble, you could lose most of your money.
For example, Snap Inc. received a lot of press when it went public in March 2017 with shares priced at $27. However, by the following August the stock price had fallen to $11 per share. That's a drop of about 60%, which would have really hurt someone who had invested a large amount of money at the opening price.
To avoid such a disaster, limit your investment in any one stock to 5% or (preferably) less of your total portfolio.
2. Invest in different sectors. Entire industries often rise and fall as a unit. If the price of oil surges, most oil-related stocks will rise as a group. When the price of oil dips, oil-company stocks tend to fall together. You can protect yourself against this risk by investing in several different industries or sectors of the economy.
Major sectors include technology, health care, financial services, energy, communication services, utilities and agriculture.
The industries or sectors you choose should have a low correlation to each other. That is, invest in various sectors whose stock prices tend to fall at different times.  For example, technology and communication services might be too closely related. On the other hand, energy and health care are not closely related and might be expected to rise or fall separately.
3. Look at foreign stocks. As the economy in one country falters, the economy in other countries might be doing well. For this reason some experts recommend that you diversify by buying foreign stocks in addition to the domestic stocks you own.
Buying stock in multinational corporations automatically exposes you to international markets. For example, if you buy McDonald’s stock, you are already investing in foreign markets, since McDonald’s has expanded into more than 100 countries.

Method 2 Investing in Other Assets.
1. Diversify with bonds. When a company or government need to raise money, they may borrow it by issuing bonds to the public. A bond is a promise to repay borrowed money, accompanied by a certain amount of interest. Owning bonds is a good way to hedge against equity risks, because bond values tend to move in a direction opposite to stock values in general.
You can buy individual bonds or invest in a bond mutual fund. A bond fund holds a portfolio of many different corporate or government bonds. Research a fund to see how diversified its holdings are before buying shares. As with equities, bond diversification is very desirable.
Bonds are rated based on the issuer’s creditworthiness. Find bond ratings at Moody’s or Standard & Poor’s credit-rating services. A highly-rated bond will offer a lower interest rate but a higher likelihood of repayment. Choose bonds or bond funds that reflect your tolerance for risk. An aggressive investor (whose risk tolerance is high) might choose bonds with a higher interest rate but a lower safety rating.
2. Invest in U.S. Treasury bonds or bills for increased safety. U.S. Treasuries are the safest securities you can own. You lend money to the U.S. government and receive a promise for repayment. Treasury bonds often rise when the stock market falls, so they are a good way to diversify your portfolio.
3. Consider money market funds. Such a fund is similar to a savings account. The fund invests money in low-risk vehicles such as certificates of deposit and government securities. You can buy CDs and government bonds yourself, but a money market account can be more convenient, because it will do the investing for you at a nominal fee.
As an added benefit, some money market accounts let you write checks (or use a debit card) on the account. However, you will be limited in the number of withdrawals you can make per year.
4. Forget commodities. Some experts recommend diversifying by buying commodities such as oil, wheat, gold, and livestock. These commodities have no correlation to the stock market, so the value of these commodities should be unaffected if the stock market collapses. However, commodities are a poor bet if you are looking to buy and hold investments. Commodities are meant to be traded regularly and are therefore considered speculation (gambling) rather than investment.
5. Invest in real estate. One way to do this is to buy an apartment building and rent it to tenants. However, you may not have the time or energy to involve yourself in what can be a complicated endeavor. Instead you might invest in REITs, real estate investment trusts. With this option you invest in companies that own real estate. In exchange for your investment, you receive a share of the companies' income.
Many REITs charge very high fees, so they might not be the best way to diversify your portfolio.
Another option is to invest in a mutual fund that invests in REITs. This can save you a lot of research time by letting the fund managers do the research for you. You do pay for that service, of course, but it may be worth it to you if you value your time.

Method 3 Investing in Mutual and Other Funds for Diversity.
1. Diversify easily with mutual funds. A mutual fund is a portfolio operated by a fund manager. Buying into a mutual fund is a great way to diversify because each portfolio can hold multiple equities and other assets. For example, a mutual fund might hold stocks and/or bonds from 40 companies in various sectors. By buying into a fund, you can get instant diversification.
However, mutual funds are not automatically diversified. Everything depends on the assets held in the portfolio. Carefully analyze the individual holdings in the portfolio. Some mutual funds will be better diversified than others.
If you invest through an employer-sponsored plan (such as a 401k or an IRA), chances are you are investing in mutual funds.
2. Invest in an exchange traded fund (ETF). An ETF is like a mutual fund, except you buy it on a stock exchange, not from a fund. ETFs generally have lower fees than mutual funds, so they are a good option for investors.
As with mutual funds, an ETF is not automatically diversified. For example, you might buy an oil ETF, which is concentrated in one industry. Carefully analyze the underlying investments to make sure the ETF has the necessary diversity.
3. Consider an index fund. An index fund is a mutual fund designed to track an index, such as the Standard & Poor’s 500 Index or the DJ Wilshire 5000, which tracks the entire U.S. stock market. It is an easy way to get broad market exposure and thus diversify.
Remember that you want to diversify across asset classes. Don't forget bonds, Treasuries and the money market. Some funds do invest in these other assets.
Remember, too, that all mutual funds and ETFs charge fees for their service. Investigate the size of those fees before committing money. There are many good funds that charge total fees of less than 1% of your account balance, so there is no valid reason to pay more than that.  If you do your research, you should be able to find funds that are properly diversified.
With respect to equities, aim to hold at least 20 stocks spread across various sectors. You can invest by picking individual stocks, or you can more easily diversify by investing in a fund that contains hundreds of stocks and/or bonds.
4. Get expert advice. Every person’s situation is different, and there’s no one right diversification approach for everyone. Instead, you should meet with a "fee-only" financial advisor who can help you analyze your situation. Look for an advisor who is a certified financial planner (CFP). To earn this designation, candidates must meet certain experience, education, and ethics standards. The advisor should also be a fiduciary, someone legally bound to work primarily in your best interests. (Just ask, "Are you a fiduciary?" If you don't get an immediate "yes" for an answer, find another advisor.)
You can find a fee-only financial advisor through the National Association of Personal Financial Advisors. A fee-only advisor is one who does not earn a commission by recommending the purchase of specific financial products.
Discuss your investment goals with your advisor. Many people invest for retirement, and what qualifies as a well constructed portfolio will change over time. As an investor gets older, they will want to increase the ratio of bonds to stocks in their portfolio in order to diminish risk. (Some mutual funds can do that for you automatically.)

Method 4 Buying and Selling Intelligently.
1. Analyze your risk tolerance. How comfortable are you in taking financial risks? The more aggressive an investor is (the larger the rewards they hope to achieve), the larger the stock portion of their portfolio -- and the greater their risk tolerance -- will have to be.
A conservative portfolio might have only 20% in equities, 70% in bonds and 10% in cash and cash equivalents (including certificates of deposit, banker's acceptances, treasury bills and other money-market instruments).
A person more tolerant of risk might invest 70% in equities, 20% in bonds, and 10% in cash or cash equivalents.
2. Invest on a periodic basis. Let’s say you have $6,000 to invest in a year. If you invest all of that money at once, you might inadvertently buy into the market at a moment when equities are priced relatively high. A better option is to invest $500 a month. You would invest the same amount of money in a year's time, but as prices rise and fall, it's likely you would acquire a larger number of shares by year's end.
This type of investing is called “dollar-cost averaging,” and it allows you to take advantage of the inevitable price dips that regularly occur in the market.
3. Avoid market timing. You might dream of getting into the stock market at a price bottom and then selling at a peak. Many people who try to "time" the market in this way end up losing money, because recognizing a market peak or bottom isn't possible until after the fact.
4. Choose appropriate assets based on when you plan to withdraw investment income. For example, if you have 40 years before you plan on retiring, you can ride out peaks and valleys in the stock market. There’s less reason to worry if the market falls when you are in your 30s, because you have plenty of time to recoup your losses. A younger person can afford to be more aggressive in their investing than an older person.
5. Rebalance your portfolio when necessary. Building a diverse portfolio is not a one-time event. Instead, you may need to rebalance your portfolio periodically. Review your investments once a year, and see if they still align with your investment goals.
You might need to rebalance if some assets outperform others. For example, your equities might be on a hot streak for six years. Although they were 50% of your portfolio when you started investing, they now make up 70% through price appreciation. Assuming you still want stocks to form 50% of your portfolio, you’ll need to sell some stocks and replace them with bonds or other assets in order to maintain your preferred ratio.
Rebalancing might trigger tax consequences or transaction fees. Carefully analyze the process with your financial advisor before going ahead.
If you invest through a "balanced" mutual fund, they will typically do this rebalancing for you automatically. (A "balanced" fund invests in both stocks and bonds.)

Warnings.

Diversification can manage risk, but it cannot completely eliminate it. Diversification won’t save you if the entire market goes into a tailspin, as it did in 2008 and 2009. Nonetheless, diversifying is a critically important tool for all investors

April 01, 2020