Many investors are skeptical that there exist fund managers who have skill and who can beat the index over the long-term. Other investors believe that there are fund managers who have skill, but that it’s impossible to identify them ahead of time.
There are skilled fund managers that can be identified ahead of time. I know quite a few of them. You just have to look using the right criteria.
When looking at funds, many investors take an objective approach and study recent returns, look at ratings or statistics, or try to forecast which sectors will perform well.
Other kinds of skill evaluations are more subjective and rely on insider judgments, e.g., doctors assessing other doctors, or even actors judging performances of their peers.
The evaluation of a fund manager falls somewhere in between those two approaches, the objective and the subjective. I believe that, to find the best fund managers, you have to study them, not the fund.
Start by finding fund managers that have beaten their index over their career or long periods of time. This could be in more than one fund. They do not need to beat the index every year – just over time. Then study them to find out how they do it. Is it because of stock-picking skill?
Outperforming the appropriate indexes is just one factor in the criteria. Top fund managers are usually not trying to secretly follow the index–they’re more likely to have an effective style (like value investing), and have high “active share,” which means that they’re investing in a way that differs from the index; they also often have great experience and have their own money invested in the funds that they manage, i.e. “skin in the game”.
My All-Star Fund Managers
One of my special skills is identifying all-star fund managers — it’s essentially my main focus related to investments. I’ve found around 50 fund managers over the years who I would characterize as having superior skill, and all of them have beaten their index over long periods of time.
Most of those 50 managers are on my “watch list”. I own only a handful of those funds. Although I’m resistant to the idea of sharing statistics about my own personal investments, mostly because my investment style may not be suitable for every investor, I want to emphasize that it’s possible to identify skilled fund managers early and ahead of time.
Why I Will Never Own an ETF or Index Fund
I won’t ever own an ETF or an index fund because I’m not happy with below-index returns. I choose investments based on the fund managers–I want to invest with the Albert Einstein of investors, the absolute best. ETFs and index funds don’t have fund managers, so I’m not interested. The goal of investing is to obtain the highest long-term return after fees, and a skilled fund manager provides enough value to pay for those fees and more.
There are really two options when you’re pursuing above-index returns: one, you can find yourself an all-star fund manager, or, second, you can choose a portfolio manager who’s paid by performance fee. When portfolio managers are paid by performance fee, they’re motivated to beat their index. If they don’t beat the index, the fees are similar to ETFs. If they do beat the index, the fee pays for itself.
Getting above-index returns is all about finding skill.
What are financial instruments, and how are they used in the world of finance? These are the kinds of questions you might be asking yourself as a newcomer to the market. You will certainly need to know what they are, and how you can make the most out of such assets.
These financial instrumentsare simply the types of assets which can be bought and sold. Such financial instruments are often also regarded as capital packages which are up for trade. The majority of financial instruments will keep a very useful stream of capital which fuels investors all over the world and their various activities in the market.
Making the Most out of your Means
Such assets come in various forms, including as cash, or in some cases as a right stipulated by a contract that the delivery of receiving of cash must be adhered to. They can also be a piece of evidence that one is entitled to ownership of a particular entity.
Financial documents are generally broken down into two forms, virtual or real documents which connote a tangible agreement made regarding any kind of monetary amount. Those financial instruments which are equity-based will provide proof of ownership for a particular asset.
A financial instrument based on debt will obviously be for things like loans which were formed by investors for the sake of asset owners.
More Interesting and Valuable Forms
Then there are the financial instruments that fall under a third and very unique category, that of foreign exchange instruments. Such a division is broken down further into other subcategories, such as common share equity and preferred share equity.
The International Accounting Standards has outlined financial instruments to be any binding contract which will provide financial assets to one party, while to another it will provide a liability which possesses an equity or financial liability.
The Variety in Financial Instruments
There are two main kinds of financial instruments: Derivative instruments and cash instruments. Such cash values will be influenced directly and stipulated by the current markets. The relevant securities need to be easily transferable.
One can also use cash instruments in the form of deposits, as well as loans which were appropriately set up between a lender and a borrower.
The attached characteristics and values seen in derivative instruments will generally be based on what the underlying vehicle factors happen to be, such as indices, interest rates, and of course assets.
The Classes of Assets
There is indeed what is known as an asset class when we look at financial instruments. Such classification will depend on an asset’s formation as an equity-based or debt-based asset. In terms of financial instruments that are short-term and based on debt, you can expect a lifetime of around a year or less.
You need to ensure that you know how this classification system works, especially with the assets you are most likely to encounter the most, depending on the main sectors of the market you may be entering.
Bitcoins are amazing, and we love using Bitcoins for almost everything we work on. However, it is possible that there are many things you do not know about Bitcoins and knowing the same can change the game for you in totality.
So, here are some of the most important points to know before you invest in Bitcoin.
1. Learn about the process
Bitcoins are extremely easy to use, and it shouldn’t be difficult for you to use Bitcoins and complete your transactions at the earliest. However, it is advisable to learn the process in detail, making sure that you have adequate knowledge about everything that is related to the process. To start with, you should know about Mining Bitcoins and transaction fees that are related to every transaction completed by you.
2. Keeping a track of your Bitcoins
We all know that if the transaction is being accounted in the Global letter and so we stop caring for our accounts. Making this mistake because it can cause you serious problems. With this being said, make sure that once you have completed your purchase for Bitcoins, you move them into your wallet instead of leaving them at the exchange. If possible, opt for hardware or paper wallet in order to store your Bitcoins.
3. Buying Bitcoins from reputed exchanges only
Bitcoins are safe and easy to transact, but one should avoid buying Bitcoins from exchanges that have a bad reputation. Transacting at the wrong exchange, you might be at the risk of losing a decent chunk of your money. So, the extremely careful about it and make sure that you’re buying Bitcoins from exchanges that are repeated and trustworthy.
4. Bitcoins are exclusive and not an alternative
Although there are many posts online that consider Bitcoins to be as good as gold, you should know that Bitcoins are exclusive. Gold has its value and considering Bitcoins to be an alternative to gold is not a smart thing to do. The two commodities have their value, and each option should be considered as an exclusive option.
5. Bitcoins are not manipulated by the government
When regular currency gets manipulated by every country’s government, Bitcoins cannot be manipulated. This is one of the biggest reasons because of which it is considered to be one of the best forms of currency available today, and people have faith in it. With this, you should also know that there will be transparency on a global level and it will help us be satisfied with our money being stored in the form of Bitcoins.
If you’ve never heard of a short squeeze, you might want to read carefully, if you’re looking to short stocks. Now, a short squeeze is simply a meteoric rise in the price of a stock due to an excess demand for the stock and a lack of supply, on the long side. Typically, you’ll notice stocks that have gone through a short squeeze have a high short interest and a low float.
Now, don’t worry if you don’t know what those terms mean yet. A low float describes a stock with a low number of floating shares, or shares available to trade on the open market. Short interest is the number of shares short divided by the number of floating shares. Consequently, if a stock has a high short interest, a large portion of its floating shares are held short. In order for a short squeeze to occur, you would want to see a high short interest and low float, as well as a positive catalyst. Let’s take a look at some stocks that could potentially be prime for a short squeeze.
Trader Jason Bond said, “Shares short, floating shares, short interest and days to cover are just some key metrics you’ll want to look at when you’re scanning to see whether a stock is prime for a short squeeze. Keep in mind that these values are all dynamic, and a stock could still experience a short squeeze, even if it doesn’t have an abnormally high short interest.”
Let’s take a look at one stock that might be prime for a short squeeze. Nutanix Inc (NASDAQ: NTNX) had 8.3M shares short and an average daily share volume of 2.45M. Consequently, Nutanix had a days to cover, or short interest ratio of 3.42. Now, the short interest ratio just gives an expectation of when short sellers may close out their position, which could lead to increased buying pressure.
Now, although NTNX does not have a high short interest, it did have a positive catalyst and a relatively low float. Additionally, on the technical chart, it’s forming a bullish reversal pattern.
Nutanix and Dell Solutions recently announced that Vast-Auto Distribution opted to use the Nutanix Enterpriser Cloud on Dell EMC XC Series to achieve faster performance and fewer administrative costs. Not only that, but Nutanix beat its revenue estimates in May, as large companies are opting to use their products and services. That in mind, some traders may view this as a potential short squeeze candidate.
Another stock that could be ripe for a short squeeze is TOP SHIPS Inc (NASDAQ: TOPS). As of May 15, 2017, TOP Ships had shares outstanding of 1.79M, 0.12M shares floating and 0.15M shares short. Consequently, TOP SHIPS had a short interest of over 120%. That in mind, this stock could potentially experience a short squeeze in the event of an extremely bullish catalyst.
If you’re short a stock, you’ll want to look at some of these metrics outlined here. For now, these two stocks are some that you might want to shy away from, if you’re looking to get short, as they may be subject to a short squeeze soon.
“They” say an individual needs $1,000,000 in order to retire comfortably. Though that number may fluctuate from time to time it certainly never goes down. $1,000,000 is a lot of money for many people. It is even more when considering that the average American between the age of 55 and 64 has only saved $104,000.
So, how can one put themselves in the position to live comfortably in retirement? Below are several considerations you should calculate into future planning.
First and foremost, what do you envision your retirement to look like? Do you plan on taking a cruise once a year? Or perhaps you want to open that vineyard like we see in those retirement commercials on TV. Perhaps you just want to buy a small boat and go fishing with the grandkids every weekend. If you want to spend big you will need to save big. If you do plan on taking those cruises to the South Pacific once a year, a millions dollars isn’t won’t likely get you there
Assess what your likely dollar worth will be at retirement age. Easier said than done I am sure. Include items such as your home’s value. Ask yourself if you plan on selling your home and downsizing? Or perhaps you own 30-acres where you thought that vineyard was to go, but are now changing your mind. Take the worth of your assets and subtract any debt you may have. If retirement is still a ways away, make a plan to have your debt paid off beforehand.
Calculate your monthly retirement income. Include Social Security, IRAs, mutual funds, work related pension, and any other means you are owed. Not sure what your monthly income will be when you retire? There are hundreds of retirement calculators on the internet. Just plug the account’s current balance, the dollar amount you are currently contributing per month/year, and the expected rate of return and hit “enter”. Also, and for Social Security estimated benefits, visit “My Social Security” and find out what your monthly payment will be based off of your work history. A great tool to use.
Consider your current money going out weekly, monthly, yearly and adjust it to fit your retirement lifestyle. Perhaps you won’t need to pay for $50 power lunches in order to impress clients and co-workers. Or, maybe you have decided you will eat out 5-days a week post retirement. The point being set your budget and adjust accordingly. Also, don’t forget about taxes. Does your current state tax retirement income? Will the property taxes on your 30-acre vineyard have you living in your car?
So much to consider. It may be beneficial to hire a financial adviser or planner. It goes without saying the earlier one starts to plan, the better. Though one cannot predict the future one can certainly pave their way to retire in financial comfort; regardless if you want that vineyard or just a rowboat and grand kids.
Invest wisely, work smart and spend less. These are the three basic strategies behind building any type of passive income through stockbroking. If these principles are as simple as they sound, why are so many investors failing to turn a profit and build sustainable wealth over time? The truth of the matter is that developing a passive investment strategy can be a bit complicated. While the basic concepts are clear, their implementation may prove to be a bit more of a challenge. It is therefore prudent to take a look at some tips and tricks that will help to leverage the advantages of this approach.
Solid (Digital) Foundation
You may believe that you have developed the best trading strategy. Without being provided with access to the latest investment tools, your approach would still be fruitless. It is therefore crucial to adopt only the most advanced stockbroking platform. Dynamic trading software, numerous technical indicators, concise charting capabilities and mobile-friendly architecture are only a few of the tools which should always be at the disposal of the trader. Thus, it will be much easier to manage an account on a day-to-day basis.
Which Stocks to Choose?
This is one of the most common and most elusive questions. The ultimate choice will depend upon the expertise and comfort levels of the trader. Yet, there are several guidelines which are specifically designed to cater to a passive income strategy. Some of the main hints to keep in mind are:
Maintain a robust base with blue-chip equities.
Diversify into multiple sectors for greater stability.
Allocate a portion of the portfolio to longer-term assets such as properties and commodities.
Diversification will mean little without stability. This approach is one of the best ways to successfully manage both.
A Moderate Level of Risk
One of the most common mistakes is for a trader to believe that risk must be entirely avoided within a passive approach to stockbroking. Risk should not be eliminated, but rather mitigated and managed correctly. This is the primary reason why even conservative investors tend to dabble in more liquid positions such as binary trades and the Forex markets. However, a good rule of thumb is to never let the value of these positions exceed more than ten per cent of the entire portfolio.
The Psychology Behind Earning a Passive Income
According to The Glimpse, Psychology will play an important role behind this strategy. By the very nature of passive wealth management, the stock trader should set his or her gaze on the long-term financial horizon as opposed to becoming too preoccupied with short-term gains (or losses). It is wise to set quarterly benchmarks and analyse whether or not these can be met. Should expectations fall short, it could be a good idea to closely examine technical and fundamental trading methods. This is also the best way to avoid emotion influencing a snap decision one way or the other.
As we may be entering into unknown financial waters, embracing a passive stockbroking investment strategy now could be the most productive way to secure wealth into the foreseeable future.
Everyone agrees that the stock market is expensive, it takes too long to recover from the recession, and central banks seem to have hit their limits regarding their ability to boost growth.
There is no market Armageddon on the horizon, of course, but it’s far from “get rich fast” either. The rumor circulating on Wall Street is that stock and bond returns will be lousy for years to come. This won’t result in you losing money, but the usual 7 to 8 percent return on stocks, or 3.6 percent on bonds, is a thing of the past –at least that’s what investment firm Bernstein thinks. Thins don’t look any different for private equity returns either.
This environment leaves you with three basic options. Your actions will depend on the level of risk you are willing to take.
Stay put. Boring is not that bad. It may not sound too sexy, but for many people, the best choice at this time is to remain invested and keep your portfolio as diverse as possible.
“You should be aiming for a boring portfolio at this time,” says Kate Warne, Edward Jones’s chief investment strategist.
Rebalancing soon is Jones’s best advice. If you haven’t taken a look at your portfolio for a long time, you should better give a call to your 401(k) provider or financial advisor and ensure that your diversification is on the right level.
For many younger investors, their portfolio mix is about 80 percent stocks and 20 percent bonds. Investors of higher maturity are probably looking at something like 60 percent stocks and 40 percent bonds. The problem is the stock market’s huge run-up during the 2009-2014 period, resulting in many people having more in stocks that they even know about. Don’t allow yourself to be caught unprepared; make sure you rebalance if you have to.
Look at a 401(k) plan. Most 401(k) providers will help you with fiduciary work but won’t take on any of the fiduciary risk for you. This is a growing concern for executives and HR Managers because of an increasing wave of employee lawsuits and scrutiny by the IRS and Department of Labor. BenefitGuard is truly different.
They believe that the service providers doing the fiduciary work on a 401(k) plan should be taking on the risks, not you. And we’re not talking about being a co-fiduciary.
Unlike any other provider in the industry, they appoint professional fiduciaries to sign and act in the administrative and investment fiduciary roles for you. They will sign and act as your 3(16) plan administrator, 3(21) named fiduciary, and 3(38) investment manager. They also hold a one Million dollar bond on each and every plan.
With BenefitGuard, there’s no more signing your name on documents you don’t have time to review, and might not understand. And when the IRS and Department Of Labor come knocking, they’ll handle it for you.
Reduce your expenses. Companies adopt this strategy very often. When growth is at a stall, they concentrate on reducing their costs. This way they maintain their “bottom line” virtually unchanged. Investors can also follow this tactic by aggressively going after fee reductions.
There has been and overhaul of inexpensive index funds and mutual funds. Almost every provider is pressured to reduce their fees. Fidelity recently announced that they are lowering their fees for 27 funds. And you now have Robinhood, which is an app that offers trading without fees, a great difference from the standard $9.99 fee that brokers usually charge for stock transactions.
You can make considerable savings by cutting down on the fees you pay. If you don’t know the fees, you are currently paying, you can go to FeeX, a new website that will estimate them for you and propose a course of action toward reducing them.
“Usually, people can cut down their fees by about 85 percent” stated Yoav Zurel, co-founder, and CEO of FeeX.
The take home message according to Masters, investment strategist at Bernstein, is to go for higher diversification when things are uncertain, not lower. “Equip yourself with more than one ways to emerge as a winner.”
As its name implies, in its simplest terms, it means efficiently managing a company’s supply chain, which traditionally consists of three components: customers, a producer, and the producer’s suppliers.
However, many people forget about extended supply chains, which often include a number of additional entities, including the customers’ customers, as well as the suppliers’ suppliers. These subsidiary relationships are just as important as primary ones because they affect the supply and distribution of products.
For example, if you own a shoe company and your customers (shoe stores) lose customers due to street construction or store closure, this affects the number of orders they will place with your company for new merchandise. Reversely, if one your suppliers’ suppliers suffers from a plant closure or logistical issue that affects your business’ ability to manufacture product.
While most supply chain managers only control the immediate chain, they are ultimately responsible for the integrity and efficiency of the entire supply chain.
The art of supply chain management entails three key steps: purchasing, production and fulfilment. Supply chain managers oversee and work to optimize the processes of acquiring inputs from suppliers (purchasing), converting those inputs into a finished product (production), and delivering those products to customers (fulfillment).
In order to manage the extended chain, supply chain managers must ensure the locations where manufacturing and distribution facilities are located are accessible and in politically stable jurisdictions.They must also decide how to organize which goods and materials go to which facilities and from which parts of the world to source the inputs.
Supply chain management is fundamental to a company’s viability.From my experience, I have seen first-hand clients heavily investing in integrating the latest technology into their supply chain in order to promote efficiency and sustainability.
As the world becomes more globalized, the role of the supply chain management has become even more important, especially for companies that source goods and raw materials from around the world. To help ease some of the confusion caused by the vastness of an multinational supply chain, many managers are utilizing a robust array of software to help track, log and monitor each link in the supply chain.
In fact, according to theWall Street Journal, “The market for supply-chain management software grew 11% to $11.1 billion in 2015, on a constant-currency basis, and is estimated to grow to $17.6 billion by 2020.”
Growth in the cloud computing sector has also ushered in a new age of supply chain management that offers better control of logistics and transportation. Monitors on trucks connected to the Internet of Things can notify managers of shipment distributions and transport issues in real time giving managers time to look for alternate solutions.
As the old adage says, you are only as strong as your weakest link — it is the supply chain manager’s job to make sure no links are weak or compromised.
While many are versed on home insurance, life insurance, car insurance and health insurance, few people know about the importance ofAsset Protection Insurance (API™). Asset Protection Insurance protects and safeguards assets from a variety of threats including litigation and creditor claims. Individuals and business entities use asset protection techniques to limit creditors’ access to certain valuable assets, while operating within the bounds of debtor-creditor law.
API™ is a completely legal strategy.However, experts warn effective asset protection begins before a claim or liability occurs, since it is usually too late to initiate any worthwhile protection after the fact. Some common methods for asset protection include asset protection trusts, accounts-receivable financing and family limited partnerships.
In addition to protection, Asset Protection insurance is meant to bridge the gap in coverage between your firm’s Professional Indemnity (PI) insurance policy and the total amount of a third party claim. It offers far wider and more flexible protection to the partners, members or directors than additional excess layer PI insurance on its own.
“It offers a ring-fenced financial reserve, which can be called upon to meet a number of potential costs and financial exposures if the PI insurance limit is insufficient to meet a devastating catastrophe claim,” saysPerkins Slade an insurance company.
You may be asking yourself, “Well, Jeffrey Lipton what are the limitations to API™?”
While API™ is broad and offers excellent protection, it is imperative to know how it works in order to benefit fully.Firstly, creating an Asset Protection Strategy will offer little or no protection against those litigious or creditor situations whereby the event causing the problem happened prior to the setting up of the Strategy.
Only future-oriented protection can be achieved.
Secondly, an iron clad Asset Protection Strategy will not offer enhanced taxation benefits and will likely be, at best, tax neutral in most cases. Although some benefits may accrue to future assets, they are best ensconced in a legal tax deferral scenario.
One of the most important aspects of a successful Asset Protection Strategy is to ensure that the structure itself is transparent. The most effective way to accomplish this besides asset protection is to insure that the assets pass irrevocably as they do in the case of API™.Underan API™ scenario assets legally change title and vest in a licensed, registered, and accountable fiduciary (i.e. the trustee) for the use of the beneficiaries.
By making the asset protection irrevocable and not a structure for tax purposes, all of the elements are declared and the client can then have the ability to use the law to in fact protect the asset. The API™ can then withstand the scrutiny and the test of time by being a program that accomplishes these goals for several generations to come.
Who needs API™?Any one who needs to protect themselves from economic predators, be they shareholders, clients, investors, friends or even family. An API™ strategy is imperative for businesses that carry the potential for litigation. These are the normal at risk businessman, professionals (i.e. doctors) and others who are either in a risk profession or have assets that need succession planning help.
A strong API™ strategy can protect assets and businesses that have been built over a lifetime and can give business owners and executives a deeper level of protection, thus resulting in peace of mind.
Right now it’s no secret that selling merchandise to Americans is pretty lucrative. We also know that it hasn’t always been this way. A relative of mine who sells lighting products to customers the U.S. is a case in point.
My brother-in-law built a very successful business with his wife from the ground up. Their decision to sell to markets in the US worked fine, but the real boost to sales occurred when their son joined the business and talked them into selling on the Internet. Online sales boomed, but of course so did their company’s vulnerability to exchange rate risk.
A few years ago, he was struggling to make his usual margins (which are not that big at the best of times) when the CAD/USD exchange rate approached par. In other words, a C$ was pretty much equal to the US$. Cross-border shoppers from the Canadian side of the border were in heaven (myself included), whereas exporters were beginning to panic. After all, their costs were still in Canadian dollars, which was an advantage when they received sales revenue in a much stronger $US. Converting back into Canadian currency provided a substantial bonus to their profits and quality of life.
Things are great once again, but how can a smaller business owner(s) plan ahead to make sure that currency risk doesn’t threaten their livelihood?
The graph below illustrates the impact currency can have on a business. Imagine a fictional Canadian company that began selling a specialty cheese to the U.S. marketplace in June of 2006. The sale price stays the same (due to competitive pressures) at US$ 2.50. Costs are steady in C$ 1.98 range. Sales made in US dollars must be converted back to Canadian dollars. It is easy to see how just the exchange rate can wreak havoc on a businesses revenues and profitability. Is it possible to anticipate or prevent this volatility? When companies are accustomed to very large orders, it is possible to contact your bank and make arrangements to use the currency forward markets in order to ‘hedge’ your profits. For instance, if one expects to have to convert a significant amount of foreign currency into one’s domestic currency once the order is delivered, you can arrange to lock in the forward exchange rate today, thereby knowing exactly what your margin is (and will be).
However, the orders for most small businesses aren’t large enough to make hedging a viable option. Can you plan for currency fluctuations? Experts agree that there is no robust way to forecast exchange rates. Experts have been frustrated trying to predict exchange rates for years, and the forward markets/futures markets are not very good predictors of the exchange rate that will actually occur in 3 to six months.
One approach that has been around (seems like forever) is the purchasing power parity theory. The price of a consumer product (same materials, can be sourced locally or at same prices) should be the same in different countries, once adjusting for the exchange rate. Below, the table compares the price of the rather ubiquitous iPhone in Canada, Europe and Asia. The price of the iPhone 6s 16GB (unlocked) in the U.S. is about $699, and should be more or less the same in Nanjing, China (their currency (is the remninbi or RMB) adjusting for the exchange rate as it is in Berlin Germany (euros). As you can see from the table, this is not the case (the prices and exchange rates are not 100% accurate due to rounding).
Because Germans and the Chinese have to pay an even bigger price, it suggests the the USD is overvalued relative to those currencies. The Canadian dollar on the other hand, based on this overly simple approach is actually still a bit overvalued compared to our neighbour to the south even at these depressed levels. Of course, our proximity to the US might simply give Canadians a great deal on iPhones not available in other countries.
We should therefore expect the USD to depreciate relative to both the EUR and RMB in due course – the forces of supply and demand (for products, services and therefore currencies) should cause disparate prices to equilibrate. The mobile device in theory should cost the same to the consumer no matter where he/she lives. Should the USD decline significantly (perhaps even compared to the Canadian dollar) then the margin on good and services businesses in those countries are earning today with decline.
The problem, is that historically purchasing power parity is also a poor predictor of exchange rates. The game of international finance is extremely complex. Not only are exchange rates determined by differing interest rates in countries, balance of payments, trade balance, inflation rates and perceived country risks, the rates are also influenced by expectations associated with these variables and more. The bottom line for smaller businesses is that when it comes to foreign exchange risk – they are completely exposed.
So what can be done? Planning. It is tempting to become overly optimistic when exchange rates have drifted in your favour, encouraging further investment to facilitate more sales in the stronger currency. Buying equipment, hiring permanent labour and leasing more space introduces higher fixed costs that might dampen or destroy profitability when the tide turns the other way. It is important to consider ‘what if’ scenarios frequently – and especially before laying out more capital. For entrepreneurs the biggest mistake is to take for granted that the status quo will continue. All of a sudden, you might be buying yourself a bigger house, a fancier car and sending the kids to private school – all based on current income which is linked to the current prosperity of your business.
Currency instability is a fact of life, and the best way to be prepared is to expect the inevitable. Rather than rush to spend more on expanding the business put aside a ‘safety’ cushion during good times that can be drawn upon during bad times. If your commitment to the US, European or other markets is firm, then park the cushion into currencies you are vulnerable too. For example, invest your cushion in US dollar denominated assets – U.S. Treasury bills will provide a natural hedge for your sales. Similarly, if a significant volume of your sales are in Europe and the company borrows funds for operations, borrow some funds in euros as a hedge – then if the euro appreciates you’re able to pay those obligations in the same stronger currency thanks you your euro receivables.
It is widely believed today that the USD is likely to depreciate relative to a number of other currencies, and perhaps imminently. Today might indeed be the ideal time to begin considering ‘what if’ scenarios and the actions you can take to plan ahead.