PinoyMoneyTalk.com

You usually read it in the news:

Shares are expected to open higher Thursday, supported by Wall Street's advance and fund managers window dressing their portfolio before the third quarter ends.

- Philippine Daily Inquirer, September 27, 2007 

What is window dressing?

Window dressing is arguably a deceptive strategy employed by fund managers in which they try to make their portfolio look as attractive as possible before presenting it to clients or stockholders.

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On September 18, 2007, the US Federal Reserve (Fed) cut half a percentage point from its target Fed funds rate to 4.75%, giving a boost to stocks markets worldwide.

The Fed also cut its discount rate by another half of a point to 5.25%.

(September 18 official statement of the Federal Reserve below.)  

What is the federal funds rate?

The funds rate is the rate that banks charge each other for overnight loans of federal funds, which are bank reserves at the US Federal Reserve System. Reserves are held at the Fed to meet reserve requirements of banks and to clear financial transactions. Banks with excess of reserve requirements can lend to institutions with reserve deficiencies. These loans are usually made for 1 day only, that is, "overnight," and the interest rate at which these transactions are done is called the federal funds rate.

How does the funds rate affect the economy?

Lower interest rates stimulate economic activity by lowering the cost of borrowing, making it easier for consumers and businesses to buy and build. Higher interest rates slow the economy by increasing the cost of borrowing.

How exactly does it affect consumers?

The rate influences the amount of interest that financial institutions charge for various types of debt, such as credit cards, home equity lines of credit, and auto loans. In the US, the rate cut is expected to help some beleaguered home borrowers who are set to see monthly payments on adjustable rate mortgages rise later this year.

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Global stock markets are down, investors are on selling mode, and almost all of 2007’s stock gains have been wiped out. The culprit, analysts say, is the current US subprime lending problem.

The subprime — what? And if it’s supposed to be a problem in the US, why is it affecting markets in Europe and Asia?

Read below to view a simplified explanation of the US subprime lending problem.

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You've taken the Type of Investor quiz, determined your investment objectives, and learned different investment options available to you. Now it's time to take a refresher course on some fundamental concepts related to investing.

Diversification 

No matter how trite this saying is, it still applies to you: Don't put all your eggs in one basket. Diversify your portfolio to ensure that funds are distributed among several different investments or instruments in order to spread out the risk. The more diversified a portfolio is, the less vulnerable the investor will be to the poor performance of a single investment.

Risk and Return

Risk refers to the uncertainty of the outcome of an investment. Typically, the higher the potential return of an investment, the less predictable is the return. In short, higher returns are accompanied by higher risks. It is therefore important for an investor to match his risk appetite with his chosen investment.

Long-term vs. Short-term investing (Investment Horizon)

Before making an investment, an investor should first assess for how long he intends to hold on to the investment. Generally, holding an investment over a long period of time works in favor of the investor because risk and uncertainty tend to reduce over time. If one prefers to invest only in the short run, he should place his funds in less risky and highly liquid investment products such as time deposits, treasury bills, and money market funds, among others. But if the investor is willing to accept a certain degree of risk and wish to invest for a long period of time, he may feel comfortable investing in relatively high yield but also high risk products such as equity mutual funds, Unit Investment Trust Funds (UITF), forex trading pool, etc.