How I would Invest $10,000


 

FireAlarm

So you’ve come into a little money or maybe you’ve just been saving for a while and would like to invest.  Equities are one of the best ways to invest because they are hassle free (unlike real estate) and grow faster than inflation (unlike treasury notes and bank CDs).  One of the easiest ways to invest in equities is to use mutual funds.

In a mutual fund, investors pool their money together and have a professional manager buy a set of assets (stocks, bonds, etc…).  The investors then get a portion of the profits proportional to the amount of money they put in the mutual fund.  For example, if you put 1/1000th of the money into the fund and the fund made a million dollars profit, your share of the profit would be a thousand dollars.  In many cases a large portion of the profits for any given year would be remain invested, rather than being paid out to the investors, in which case the value of the portion of the mutual fund that the investor owned would increase.  That portion could then be sold back to the mutual fund for the increased value, so the investor would get a return on his money when he sold the fund.

The biggest considerations when choosing a mutual fund is the investing style of the fund.  For example, a fund may invest in large companies (called large caps), small companies (called small caps), utility companies, foreign stocks, stocks expected to grow rapidly, or stocks that pay large dividends.  There are also funds that invest in bonds and real estate.

A good portfolio will contain funds that invest in different things.  The creates what is called diversification.  Diversification reduces the probability for large losses since usually when one portion of the market falls another will rise.  For example, if one held 50% of one’s portfolio in an American large cap fund and 50% in a foreign large cap fund, the American stocks might be doing well during a slowdown overseas and vice versa.  This is not a guarantee that losses will not occur – there are such things as global recessions – but it reduces the level of fluctuations in general.

When choosing among different funds that invest in a given area, the most important factor is the fees charged.  Because most funds have a lot of money to invest, they will end up buying a lot of different stocks in the market.  This makes differences in the holdings of different funds very minor, so they will each have about the same performance over long periods of time (many years).  The one that charges the lowest fees will therefore outperform one that charges more.

Index funds, which invests in a way to mimic a given stock index rather than use a professional money manager to choose investments, generally have very low fees.  They don’t need to pay the large salaries of the money manager, or pay for their research materials, travel, and other expenses.  They also trade infrequently, which is another source of expenses.  One of my favorite mutual fund companies for index funds is Vanguard because they have a wide array of funds which are very low-cost.

Given $10,000, if I were in my early thirties I would invest as follows:

$4000 in a large-cap index fund such as an S&P500 fund

$3000 in a small-cap index fund

$3000 in a foreign stock index fund

This portfolio spreads money out to both large and small US companies and also has a significant foreign exposure.  There are no bonds – you don’t need them when you are this young and especially when interest rates are this low.

Someone who is in their fifties would need more protection from a market correction.  I would therefore invest as follows:

$4,000 in a large-cap index fund

$3,000 in a foreign stock index fund

$3,000 in an REIT fund

This portfolio doesn’t have small stocks, which are more volatile than large caps.  It still has foreign stock exposure.  It also has an REIT fund, which invests in real estate.  Normally this would be a bond index fund, but bonds are way too expensive right now to justify an investment.

These are just suggested mixes.  These can be infinitely tailored depending on personal taste and level of experience.  It is also just a starting point.  After the initial investment, one should continue to add to positions and buy additional funds.  Buying a growth fund and a value fund would be good next steps.  Another possibility would be a mid-cap fund.

To ask a question, email vtsioriginal@yahoo.com or leave the question in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

 

Why Don’t We Have the Fair Tax Yet? A Late Night Rant.


IMG_0123About three years ago I published Ten Reasons that you should like the Fair Tax.   I gave ten great reasons that we should enact the Fair Tax – yesterday.  Things like not needing to keep records in case the IRS calls and asks.  Not needing to deal with the IRS at all.  Not needing to spend any time filling out forms.  Not needing to have special tax-sheltered accounts for anything.

How simple is this:  You walk into a store, buy something, and pay your Fair Tax when you pay your bill.  About 20% is added on to your purchase (assuming we stay with the same amount of government revenue).  This is compared with having 15% of your full income taken before you get it, plus another 12.4% for Social Security and 6% or whatever it is for Medicare.  If you spend all of your income, you pay 20% for the Fair Tax or about 30% with the income tax and payroll taxes.  If you spend less than your income and actually save, you pay even less with the Fair Tax.

The income tax punishes earning money.  The Fair Tax punishes spending money.

And it even gets better.  Because the company you’re buying stuff from doesn’t need to do fancy maneuvers to avoid taxes, like have a corporate headquarters in Barbatos, the price you pay for the things you’re buying are 10% less.  So you end up paying less than you pay now with the income tax.

So why don’t we have it yet?  Do you like keeping receipts?  Do you like funneling your child care money through a flexible spending account, and then risk losing it at the end of the year if you don’t spend it all?  Perhaps you like a check that is 25-50% smaller than it would be with the Fair Tax.

Maybe you’re worried that it doesn’t zap the evil rich guy enough and punish him for employing all of those people and making all of those products you use every day.  But then you forget about the prebate – money that comes to you to cover taxes up to a certain income level.  If you’re making $30,000 per year, you would still not be paying any taxes.  That evil high earning guy would be paying it all.  Ha ha haaaa….

So come on, what gives?  Why haven’t you called, emailed, and shown up on your Congressman’s door, demanding the Fair Tax?

Do you just like your accountant too much?  Do you like buying TurboTax every year?  ( Their ads talking about  your taxes being the story of your life do make it sound kind of exciting to spend an afternoon with your W2 forms and receipts.)

Tell me, please.  I’d like to know.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picking Stocks for Long-Term Growth


autumn river

As I’ve said before, it is very difficult to predict the near-term future.  It is much easier to predict the long-term future, at least in the investment world.  This is not to say that it is difficult to predict if a given stock will go up or down the next day when some news is heard.  If a scandal breaks out, obviously the stock will fall in price.  Likewise, if a large drug company gets a new wonder drug approved, the stock will go up.  Sometimes a stock will still trade in an unpredictable way, such as when the price of the stock has already gone up so much on the expectation that the drug would be approved that it falls a bit after the actual announcement comes.  (This behavior is the reason for the old axiom, “buy on the rumor, sell on the news”.)  But in general the reaction of a stock’s price to news is fairly predictable.

The issue is that just as you can predict the direction of the stock due to the news, so can everyone else.  You will therefore never be able to profit off of the news since you’ll be in a long line to buy or sell the shares, and the people on the other side of the trade will have heard the same news and adjusted their prices accordingly.

The long-term side, on the other hand, does not seem to suffer the same fate.  While everyone has the same information and is able to do the same analyses, there still tend to be differences in price between what a company trades at and what it should be trading at given its future earnings.  Probably the reasons for this are that 1)it is more difficult to predict with certainty future earnings, so there is a “risk premium” included in the price and 2)people tend to get bored and therefore don’t have the patience to wait long enough for the mis-pricing to be resolved.  Whatever the cause, the behaviour of the markets works in the favor of the long-term investor.  It is normally fairly easy to pick stocks that will probably be worth more in the future (due to future earnings and dividends) and yet the price of the stock will not always fully take in these future earnings into account.  Buy buying a set of good prospects, the chances are good that one will outperform the markets, which are made of both good and not-so-good prospects.

So what are the traits for which to look?  I always look for as many of the following traits as possible:

1)A steadily growing stock price (a nice, steady increase over several years),

2) Earnings that have been growing steadily (which tends to cause the steadily growing stock price),

3)A respectable Return on Equity (15% or more),

4)Room for the company to continue to grow — the market is not yet saturated,

5) Consistency in the management team (don’t buy a stock when the people who made the business successful are moving on).

6) A strong cash position (low or no debt and a low debt/equity ratio).

7) A P/E ratio that is not high compared to historic values for the company.

Basically the idea is to find stocks that have been growing, have a management team that knows what they are doing, are well-functioning businesses that invest capital well, and whose share prices have not gotten out of line with future prospects.  In future posts, I’ll go into more detail on each of these traits.

 

 Your investing questions are wanted. Please leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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