When a new client who had recently received an inheritance opened up an account with me, he transferred this new portfolio from a well-known brokerage firm. After the transfer was completed, we sat down to review his current holdings and adjust the portfolio. Some of the client’s stocks were showing large losses. However, he explained that since he had received them as an inheritance, he felt awkward about selling them. He felt attached to them and didn’t think they should be sold. He then said that as he realized that such attachments were not beneficial to investment, he was going to wait for them to move back up to the price for which his recently deceased father had bought them. Then, he would sell them.

This is a very common scenario. Children often refuse to make changes to a portfolio that they have received as an inheritance. Very often, this is due to sentimental reasons. In other cases, investors stick with a losing position for years in the hope that it will return to the original price they paid for it. However, this is not the best approach to investing.

We All Make Mistakes

Sometimes you may have a little extra money at your disposal, and you decide to invest it. Maybe a friend gave you a handy stock tip, or you read about a company that sounded like an interesting prospect. After doing some research, you decide to invest in this company because it seems like an obvious winner. But when you receive your first statement, you see that the stock has dropped. So you decide to follow the policy of being patient. As time goes by, you keep checking, but the stock keeps dropping. Eventually, you become living proof of the old adage that patience is a virtue. The stock market may be moving up, but you are stuck with a loser.

In fact, chances are that if the stock starts dropping by 10, 15 or 30 percent, there could be problems with the company, and it may potentially pay to sell. However, many of us find it psychologically difficult to admit that we have picked the wrong stock. It’s hard for us to say that we made a mistake.

Opportunity Cost

Very often, the longer you hold onto an under-performer, the more money it costs. The reason for this is that the investor could have put his funds into something that actually made money. Therefore, stubbornly holding onto a losing stock will only cause financial harm to the investor. In economics, this situation is referred to as opportunity cost. Opportunity cost is defined as the cost of an alternative that must be forgone in order to pursue a certain action, or the benefits that could be received from taking an alternative action.

Profit from Losses

Never think that all is lost. Some good can actually be derived from losing stock positions. When the position is sold, the investor realizes the loss, which may have certain tax advantages. The loss can be used to offset other gains, thus lowering the tax bill. In fact, although they may not realize it, for many investors tax-loss selling may be the most important way to reduce their tax bill. If done correctly, receiving the appropriate advice before making any trades, it can save the investor money and help diversify the portfolio in various ways.

Working with licensed and experienced financial advisers can help you evaluate objectively whether you are holding bad positions. It is then worthwhile working with an accountant to create a tax-efficient portfolio. Many professional investors live by the credo that you should ride your winners and dump your losers. The reason is simple. There may be a reason why the stock is performing poorly, namely, that the company is not executing their business up to its potential. This indicates that is probably a good place for you, the investor, to avoid putting your hard-earned money.

There is a good chance that the relative that left the money for you as an inheritance would like you to gain from it. Speak with your financial adviser to see if your newly inherited portfolio matches your investment goals and needs and whether it is invested in an efficient manner.

Aaron Katsman is President of Global Investments at Profile Investment Services. He is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the U.S. Securities are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, SIA. For more information email aaron@profile-financial.com

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This article is being reprinted with permission from Bizzywomen.com

Although we often hear about the “wonders” of compound interest, many people don’t know what it actually means and they miss out on its benefits.

Two quotes are attributed to Albert Einstein regarding compound interest. Einstein apparently referred to compound interest as “the greatest mathematical discovery of all time,” and on another occasion he claimed that it was the “eighth wonder of the world.” Although we don’t know if these quotes are accurate, there is definitely something magical about compound interest.

What is it?
Compound interest is the ability of an asset to generate earnings, which are then reinvested in order to generate their own income. In other words, the term “compounding” refers to generating earnings from previous earnings. The magic of compound interest transforms your hard-earned money into a very efficient tool for building long-term capital. For compounding to really work, however, it is necessary to reinvest all earnings over time. When an investor gives more time to his investments, he is more likely to optimize the income potential of the original sum.

Example
If an investor had $5,000 in an account that paid 5% annually in simple interest for five years, he would earn $250 a year. This would generate a total of $1,250 in interest. In this case, the interest rate and the yield are the same — 5% per year.
However, the same $5,000 investment paying 5% in compound interest could earn more. In this situation, if the money is reinvested and compounded annually for five years, it would produce a total of $1,381.41 in interest. This is because when the investor earns interest on his interest, the yield — an average of 5.52% per year — is higher than the actual interest rate at which he initially invested. This difference of 0.52% a year may seem insignificant, but we should also consider that the investor did not need to work to receive this money. Moreover, this half a percent could make a significant difference over a longer period, such as 20 or 30 years.
The Earlier the Better
When an investor starts investing at a younger age, he will benefit far more from compounding. To understand this further, let’s take the case of two investors named Tzivia and Moshe Aryeh, who are both the same age. When Tzivia was 25, she invested $15,000 at an interest rate of 5.5%, which was compounded annually. By the time Tzivia reached 50, she had $57,200 in her bank account.

Moshe Aryeh, on the other hand, did not start investing until he reached the age of 35. At that time, he invested $15,000 at the same interest rate of 5.5% compounded annually. By the time Moshe Aryeh reached 50, he had just $33,487 in his bank account.

What happened? Both Tzivia and Moshe Aryeh are 50 years old, and both invested the same amount of money ($15,000) at the same rate of interest (5.5%). However, Tzivia had $23,713 ($57,200 - $33,487) more in her savings account than Moshe Aryeh, even though he invested the same amount of money! By giving her investment more time to grow, Tzivia earned a total of $42,200 in interest while Moshe Aryeh earned only $18,487.

Annual Contributions
The above example clearly demonstrates the positive benefits of compound interest. Taking it a step further, imagine that Tzivia, who invested $15,000 at the age of 25, also adds an extra $2,000 a year to her account, where everything is invested at a rate of 5.5%. If she were to continue this disciplined investment approach until retirement (at the age of 65) she would end up with over $413,000. And if Tzivia were to add some risk to her investment profile in the hope of getting an even higher return, her nest egg at retirement could grow even more substantially.
The Cost of Waiting
As mentioned earlier, the two essential aspects for compounding to work are reinvesting the earnings and time. Each year that goes by without any investment will therefore affect your retirement. If you have 30-40 years until retirement, every year that you forego saving or investing money today may subtract between 1-5 years from your retirement.

Just Start
You don’t have to be wealthy to start investing. If you start saving early and make disciplined contributions, compounding may mean that you, too, can retire with a very large nest egg.

Aaron Katsman is President of Global Investments at Profile Investment Services.  He is a licensed financial professional both in the U.S. and Israel, and helps people who open investment accounts in the U.S. Securities which are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, MSRB, SIFMA. For more information email aaron@profile-financial.com

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Recently Israelnewsletter.com had a chance to interview Jamia Jasper, portfolio manager of The American Israeli Shared Values Capital Appreciation Fund.  This interview shouldn’t be taken as a solicitation or recommendation to buy or sell securities. The views and opinions are solely of the interviewee, and are not  that of Israelnewsletter.com. You should not consider the information  here to consist in any way of investment advice, and you should speak with your own adviser and do your own research before making any investment decisions.

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Jamia, can you tell us about your fund?

Jamia Jasper: The American Israeli Shared Values Fund is an actively managed mutual fund that invests in the stocks of Israeli companies and U.S. companies that do business with Israel. It is a multi-cap fund with about 50% Israeli stocks and 50% U.S. stocks. In addition to the primary goal of long-term capital appreciation for investors, the Fund aims to expand the market for Israeli companies, making it easier for businesses there to raise capital and expand. Lastly, I have pledged to donate 7% of my personal profits from this venture, or a minimum of $5,000 per year, to charities and educational and research institutions in Israel.

How did you get started investing in Israel?

JJ: I have a business education and prior career experience as a credit analyst and a long history of personal investing. I noticed that many interesting technologies were coming out of Israel and that many of their stocks traded in the US. Israeli companies are conservatively managed with low valuations, allowing for significant appreciation potential. I did well with my initial investments and began looking for other ways to invest in Israel. At the time there was one index Fund for Israeli stocks and no actively managed mutual funds. I was very surprised that a big investment house had not already created an Israeli mutual fund. I decided to create one to satisfy the needs of other investors looking to invest in Israel, whether for investment purposes or for a show of solidarity.

Can you tell us about some of the Israeli stocks that trade in the US?

JJ: All of the companies listed below are in the portfolio because they have solid business fundamentals, excellent management, are debt-free, and have good free cash flow.

ESLT– Elbit Systems focuses on advanced solutions in defense electronics. It is a growth company due to the early stage of adoption of its products in the market. The company is experiencing rapid earnings growth and the shares trade at a reasonable multiple of earnings and cash flow. Also, it is a defensive play given its lower exposure to economic cycles. The company is winning an increasing number of contracts from countries outside its traditional market of the U.S./Israel, in places such as Europe, India, and the Far East.

NICE- Nice Systems is a provider of solutions that capture, manage and analyze unstructured data. Its largest clients include the U.S. government for homeland security monitoring and financial companies for compliance purposes. NICE has organic sales growth of 12-15% annually, no debt, and approximately $150 million in free cash flow, which equates to a free cash flow yield of 7-8%. The company can buy back 25% of its outstanding shares, which would increase EPS by 20% or it can institute a dividend of 5% or more. The shares appear undervalued at the current price of $28.

GIVN- Given Imaging Ltd. is a medical device company that specializes in non-invasive, wireless technologies to diagnose gastrointestinal disorders. It has a unique, principal product, the Pillcam SB, which is a dissolvable pill that takes color video of the gastrointestinal tract. It is sold in 60 countries worldwide. The company has a solid balance sheet, with more than $100 million in cash and no debt. Currently the U.S. and Japan have insurance carrier coverage for the products. The French government is expected to provide reimbursement for the product in 2008. Given Systems could be an attractive acquisition target for any of the large GI or diagnostics companies.

TEVA- Teva Pharmaceuticals is the largest generic drug manufacturer in the world. Generic drugs are part of the solution to the world-wide healthcare cost crisis. Their next big leg of growth should be generic biotechnology since the company already has the unique capability to produce protein-based drugs (as opposed to chemicals). Teva also has excellent research capabilities in conjunction with other Israeli research institutions. In addition to organic earnings growth from its generic drugs and proprietary treatments for MS and Parkinsons, the company just reached an agreement to acquire Barr Labs. Barr is a U.S.-based generic drug manufacturer with 25 applications for generics already filed with the FDA. The acquisition of Barr is expected to be accretive to Teva’s earnings shortly after the transaction closes.

Tell us about some of the companies that you hold that do business in Israel? Why is the Israel piece interesting?

JJ: The US companies in the portfolio must have a business relationship with Israel. These include:

MSFT- Microsoft has been in Israel since 1991 with core R&D and start-up incubation activities, as well as venture capital outreach to create partnerships with the local pool of high-tech talent. Windows NT and XP were developed in Israel. Right now, the stock is incredibly cheap at 12x earnings and $23 billion of free cash flow in fiscal 2008 (8% fcf yield).

MDT– Medtronic is a medical device company that, among other things, controls nearly half of a $6 billion global defibrillator market. Its fastest-growing businesses include products for diabetics and small electrical implants used to alleviate pain and to treat neurological disorders. Medtronic has offices in Israel, which are primarily sales offices, but also are used as a base for discussions with Israeli medical device R&D companies. The company has expected earnings growth of 11-15% for 2008 and the shares currently trade at a significant discount to historical valuation.

AMGN – Amgen is one the world’s largest biotechnology companies. The company has a licensing agreement with the Israeli company Gamida Cell Ltd., to share several of its proprietary cytokines in the manufacturing of Gamida’s StemEx, a treatment for hematological diseases. Amgen will receive a minority equity interest in Gamida Cell in addition to royalty payments from future sales of StemEx. Right now AMGN is selling at a low 14x EPS and free cash flow is estimated to climb to $5.4 billion in 2008.

CAT – Caterpillar sells their tractor and trailer equipment to the Israeli military. While it is not a significant part of their business, the company has shown loyalty to Israel by continuing to sell to them despite threats of boycotts. From an investment perspective, CAT is benefiting from the boom in mining companies purchasing large machines. Right now the company trades at 11x earnings. Last year the company had $5 billion of free cash flow, which is nearly a 10% free cash flow yield. This is very high, even for a cyclical company like CAT.

Thanks.

Jamia C. Jasper is the portfolio manager of the American Israeli Shared Values Capital Appreciation Fund and has been responsible for the Fund since its inception in 2007. Ms. Jasper  has committed her own capital to establish and launch the Fund and its investment advisor.

Ms. Jasper’s background includes nearly a decade in investments and financial services and several years as a staffer in the US House of Representatives. Jamia was most recently with the Bank of New York, where her responsibilities included the financial analysis of public companies. Prior to joining the Bank, Jamia worked for Jones Lang LaSalle, a leading real estate and investment management firm. Ms. Jasper holds a BA in International Relations from the University of Southern California and an MBA from Cornell University.

Please see our Disclaimer HERE.

It is important to understand that share price, principal value and return will vary, and you may have a gain or loss when you sell your shares.  All mutual funds can be affected by market and investment style risk.  The Fund’s investments in small and mid capitalization companies could experience greater volatility than investments in large capitalization companies.  Request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and carefully consider before investing.  A prospectus can be obtained by calling your investment professional.

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For the past 10 months or more, most business news reports will tell you that the global stock markets are down again. However, although the media tend to play this up, it is in fact nothing unusual. Generally, though past performance is no guarantee of future returns, markets have a few good years, followed by a less-than-stellar year or two. For example, in the current market cycle, there were four or five good years, and now the markets have dropped. That’s precisely why investors in the stock market need a long-term horizon, as well as to be able to withstand all of the market ups and downs. Below are three investing tips that may help investors remain sane during market downturns:

Diversify

To understand this concept more easily, we first need to define the meaning of diversification. Diversification is an investment technique that uses many varied investments within a single portfolio. The idea behind it is that a portfolio of different kinds of investments may, on average, yield higher returns and pose a lower risk than a single investment. Diversification tries to smooth out volatility in a portfolio caused by market, interest rate, currency and geopolitical risks. In laymen’s terms, don’t put all your eggs in one basket. It’s important to remember that diversification does not assure against a loss.

If you include bonds or FDIC-insured Certificates of Deposit (CDs) in your stock portfolio, it may take away some of the volatility of the portfolio, allowing for potentially, more stable returns over the long run.

Don’t Panic

Keep you eyes glued to your long-term goals. It’s important to remember that markets go up and down, and if you made a financial plan, it would have taken this type of market volatility into account. The worst thing you can do as an investor is panic and sell everything and then wait for the market to recover. The market tends to recover very quickly. Large market gains often come about in quick and unpredictable spurts, and missing just a few days of strong market returns can substantially erode long-term performance. Remember the famous investing principle of buying low and selling high. Investors who panic often end up selling low.

Rebalance

The third principle is for investors to update or re balance their investment portfolios. Rebalancing is necessary for two main reasons. First of all, it keeps your asset allocation in line with your risk level and, secondly, it keeps your portfolio in line with both your short- and long-term goals and needs.

Let’s use the following example: When you first decide to invest, you decide that an allocation of 70% stocks and 30% bonds seems right for your $100,000 portfolio. We can also assume that over the course of the past few years, the stock market moved up strongly, and bonds barely moved up at all.

Based on the assumption that all gains and dividends were reinvested, and you didn’t deposit or withdraw any money, you would find that the stock portion of the portfolio would be worth a lot more than the initial $70,000. On the other hand, your bond holdings would be worth little more than the $30,000 invested in them.

However, while it is true that over the last few years your portfolio in this case would have grown, it would unfortunately have also become riskier. The reason for this is because the portfolio would move from being a 70% stock and 30% bond allocation to an allocation of 80% stocks and 20% bonds.

In this situation, if you don’t rebalance and you have a riskier portfolio, when the market starts to drop, this could lead to a greater loss.

It is a good idea to implement these three tips, as they are a possible means to help you weather the storm of volatile markets.

Past performance is not a reliable indicator of future results. The S&P 500 index measures large-cap stocks and US stock market performance of leading companies in leading industries. An investor can not invest directly in an index.

Please see our Disclaimer HERE.

Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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