Individual investors

Professional Management Few investors have the time or knowledge to analyze companies and securities, study forces that influence the economy, and assess trends in financial markets. With mutual funds, individual investors gain access to professional portfolio management at bargain rates. 

In this report, we look at the different types of alternative sources to determine which are the most viable over the longer-term and, as a result, have the greatest growth potential. We also review the investment vehicles that can enable individual investors to take advantage of this potential. 

How does the individual investor gain access to such funds First, you need to be accredited You and your spouse must have over 1 million in investable assets or earn more than 300,000 per year if you are an unmarried individual, you must earn more than 200,000 per year. 

The discussion so far has focused on asset allocation as generally applicable to a broad cross-section of investors. In reality, the vast majority of individual investors face special restrictions that limit their flexibility to implement optimal portfolios. For example, many investors hold real estate, concentrated stock holdings, VC or LBO partnerships, restricted stock, or incentive stock options that for various reasons cannot be sold. For these investors, standard MV optimization is stiU appropriate and they are weU advised to target the prescribed optimum portfolio. They should then utilize derivative products such as swaps to achieve a synthetic replication. 

One of the most successful applications of multi-criteria decision making has been in the area of portfolio selection, an important problem faced by individual investors and financial analysts in investment companies. 

Gamblers individual investors who are driven more by the business plan than the balance sheet often they are from the netwoiking of the entrepreneur, and are the heart-and-soul of many new venture projects. 

The principal is the amount of money that you lend to the issuer of the bond, most of the time, this principal is set at a relatively simple 1,000 so that institutions can more easily market an issue (it makes it easier for us individual investors, tool). Also included in the indenture is the coupon, which is the stated interest rate that the borrower promises to pay you. To make things easier, many bond investors think of coupons as the annual rate of interest expressed as a percentage of the face value of the bond. This rate is fixed when the bond is first issued (although there are some bonds with floating coupons), most issuers make semiannual payments based on this fixed rate. 

It is important to point out that most individual investors do not trade bonds on the secondary market as do institutions— the general strategy is to buy and hold to maturity. However, some knowledge of how bonds are traded in the general marketplace can give a clearer understanding of fixed-income products in general. 

Again, most individual investors don t worry about wild gyrations in interest rates because they generally buy bonds and hold them to maturity. By buying shorter-term bonds, individuals can have the opportunity to move in and out of securities with interest rates they feel are favorable. Many individual investors have adopted this strategy to protect them from interest rate risk. 

To assess credit risk, individual investors are made aware of the issuer s creditworthiness by agencies such as Standard Poor s, Moody s, Fitch, and other bond-rating firms. Often, to make an issue more attractive, an issuer— usually a company or a municipality—will seek the stellar reputation of an underwriter (Salomon Smith Barney, Merrill Lynch, etc.) and now, as additional strength, will include a layer of insurance in the deal—all to reassure investors that credit risk is minimal. 

Corporate bonds fall into two broad credit classifications investment-grade and high-yield (or "junk") bonds. The largest holders of corporate bonds are institutions,- the complexity as well as the fact that corporate bonds are fully taxable at all levels (federal, state, and local) usually makes individual investors shy away. 

As discussed earlier, retail investors play only a small part in the market for U.S. fixed-income securities. Individual investors represent only 6 percent of the 15 trillion debt market,- the major customers are institutions, like mutual funds, asset managers, regional banks, pension funds, and other large investors. As such, large brokerage firms, while wanting to sell any product they can, do not view individuals as the big spenders—or the preferred customers. 

But the figures belie the concept that the individual investor category is not considered a potentially formidable segment in the bond market. For a long time, individuals have been extremely active in the municipal securities market, due to the... 

Since there is no central U.S. Bond Exchange where brokers can go to obtain a bond on behalf of an individual investor, individual investors must buy smaller bond quantities (less than 1—5 million) from dealers. 

The executable inventory system is absolutely the trend in online retail brokerage. As technologies improve and online brokerages have been able to prove to dealers that individual investors are buying bonds online, more dealers are feeling increasingly comfortable commingling their inventories for display and sale to retail investors. 

More important, all three allow participating dealers to private-label the system so that the individual investor gets a searchable database of bonds as well as real-time execution in a seamless environment. In other words, you have no idea where the selection of bonds comes from or how your trade gets executed— but it s all done perfectly within the confines of your online broker s web site. And you know you are getting the best selection at the best price. 

But it is still important to realize that e-bonds were kept quiet to individual investors. Too much money was already being made between Wall Street and institutional clients (like mutual funds and asset managers) for companies to risk creating a platform or system simple enough for the individual investor to use. This, of course, has changed. 

The U.S. Treasury sells four types of fixed-income securities to individual investors ... 

The Public Debt web site is the most comprehensive, efficient Treasury security investment platform available to individual investors today. 1 cannot stress the value and facility that have been created by the government with the use of this web site. Any questions or inquiries concerning any of the issues can be sent electronically and someone will get back to you promptly (they did for me). You can manage your investments neatly online, and periodically review your portfolio. Even if you already have a live broker, or an account with any of the online brokerage firms, 1 strongly urge you to open an account with the Public Debt online. You ll be glad you did. 

Many individual investors are aware that the biggest multinational companies issue bonds,- yet, despite many of the companies blue-chip reputations, individuals, by and large, avoid investing in them. This is primarily because corporate bonds— issued from companies of any size or reputation—are still taxable and smart investors know that they can get a safer, tax-free alternative elsewhere. 

However, bonds make for much more of an interesting investment subject—there is so much to learn about and choose from for an investment portfolio. Since there is so much that is known about a bond when it is issued, the individual investor is actually empowered with information that can never be known for a stock. 

Individual investors are now searching for extremely conservative securities in which to place their money—whatever they... 

The other problem with bonds is that they are generally thought of as "complicated," or at least that s what brokers have told individual investors over the years. Investors claim, "1 don t have a quant background—1 can t figure it out for myself."... 

The "Investor Information" page (http //www.sec.gov) contains general, straightforward information on subjects relevant to the individual investor who is committed to investing online. The bond information is not as strong as that for stocks. 

Rated as a Top Investment Website by the American Association of Individual Investors, this Seattle-based company... 

While the research from e-finance analysts may somewhat be outside the scope of the individual investor s interest, you may want to check it out from time to time, just to keep abreast of developments in the industry. (See Figure 7.2.)... 

Bonds can be insured a number of different ways. The bond can be issued as an insured bond, or insurance can be bought after the bond is in the secondary market (individual investors usually do not participate in the latter—insurance is available only for extremely large bond quantities). 

Due to strong economic times and healthy competition among insurers, as many as half of all new municipal bond issues are insured. This is a good thing for individual investors. 

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