The benefits of compounding

As a hedge fund firm we consistently achieve a double-digit ROI. At Firstconinvest is ROI not only a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments.

One of the main reasons new investors lose money is because they chase after unrealistic rates of return on their investments, whether they are buying stocks, bonds, mutual funds or real estate. This happens due to a lack of experience. Most folks just don’t understand how compounding works. Every increase in percentage profit each year means huge increases in your ultimate net worth. For example, $10,000 investing at 10% for 100 years turns into $137.8 million. The same $10,000 invested at only twice the rate of return, 20%, turns into $828.2 billion. It seems counter-intuitive that the difference between a 10% return and a 20% return is 6,010x as much money.

Answering what is a “good” rate of return on your investments is probably easiest if we examine the nearly 200 years of data from Ibbotson & Associates, a data research firm that tracks financial market history. The first thing we need to do is strip out inflation. The reality is, investors are interested in increasing their purchasing power. That is, they don't care about “dollars” or “yen” per se, they care about how many cheeseburgers, cars, pianos, computers, or pairs of shoes they can purchase.

If you expect to earn 15% or 20% compounded on your blue chip stock investments over decades, you are delusional. It isn't going to happen. Basing your financial foundation on bad assumptions means you will either do something stupid by overreaching in risky assets or arrive at your retirement with far less money than you anticipated. Neither is a good outcome so keep your return assumptions conservative and you should have a much less stressful investing experience.

We remain on Real Estate – Without using any debt, real estate return demands from investors mirror those of business ownership and stocks. The real rate of return for good, non-leveraged properties is roughly 7% after inflation. Since we have gone through decades of 3% inflation, over the past 20 years, that figure has stabilized at 10%. Riskier projects require higher rates of return. Plus, real estate investors are known for using mortgages, which are a form of leverage, to increase the return on their investment.

Alternative investments gaining ground

According to the financial market, more financial advisors indicated that alternative assets will “become as important or more important than traditional investments in the next five years.”

Additionally, baby boomer investors are scrambling to make up for retirement funds lost in traditional markets, and are demanding new solutions.

The aggressive central banks reaction to the financial crisis and public debt explosion could result in a less benign inflation environment. In our meeting we acknowledged that inflation at around 3% - 5% cannot be ruled out for the developed markets in the medium term. Negative real rates on core government bonds are the new normality. For this reason the primary objective of long-term investors should be protection of purchasing power. So, it is not surprising that some investors are moving towards real assets.

Some of these real assets, such as property investments, are already part of investor’s asset allocation, others, like infrastructure investments, are gaining ground in the current environment. Read more

Why Choose Hedge Funds as Investment

There are a variety of reasons to include hedge funds in a portfolio of otherwise traditional investments. The most cited reason to include them in any portfolio is their ability to reduce risk and add diversification.

We have mentioned before how many hedge funds claim absolute return mandates whereby returns are minimally correlated with the equity market. In such a case, hedge funds provide a great diversifier, particularly in times of increased market volatility and/or an outright bear market.

Risk Reduction
In any case, a hedge fund that provides consistent returns increases the level of portfolio stability when traditional investments are under-performing or, at most, are highly unpredictable. There are many hedge fund strategies that generate attractive returns with fixed-income-like volatility. The difference between a hedge fund and traditional fixed income, however, is that during times of low interest rates, fixed income may provide stable returns, but those are typically very low and may not even keep up with inflation.

Hedge funds, on the other hand, can use their more flexible mandates and creativity to generate bond-like returns that outpace inflation on a more consistent basis. The drawback, as previously mentioned, is that hedge funds have certain terms that limit liquidity and are highly opaque. That said, a carefully analyzed hedge fund can be a good way to reduce the risk of a portfolio, but we stress again the importance of proper due diligence. Read more

Hedge Funds Aggressively Sell Volatility, Treasuries and Ags

Hedge funds seem convinced that stock market is going through a lull period or at least that is what the level of negative bets on S&P 500′s volatility index shows.

Societe Generale’s Hedge Fund Watch notes that hedge funds have bet a large number of shorts on VOLATILITY S&P 500 (INDEXSP:.INX) futures. The total number of short contracts were up to 104,000 contracts, just below the December 2012 peak. This seems a very crowded bet considering the fact that markets are expected to once again slip into turmoil as Fed’s mid-September meeting takes place. After the recent lull in VIX, the index is once again looking up and has gone above to 13.5% now. Read more

Commodities Of The Future

One of the long-term trends facing our planet is the fact that our world population continues to grow at a rapid pace.

The United Nations predicts that the global population will increase by 11% leading up to the year 2020, and will jump by 20% by the time we hit 2030. This population growth will continue to place a greater strain on the limited supplies of the world's natural resources. Metals and other materials will be needed to build vital infrastructure. Vast amounts of energy resources are needed to provide electricity and to power western-style transportation. Tons of soft and agricultural commodities will be required to meet the world's growing middle-class demand for meat and other foods. As emerging and frontier markets continue to grow, commodities sector will continue even more important. Read more