Eight Simple Steps to Start Investing


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Maybe you’ve been working on your personal finances for a while.  You’ve got a budget. You’ve paid off all of your debt (or never had any in the first place).  You’ve gotten your emergency fund together and have about $10,000 in cash sitting there.  At this point you’ve got a line in your budget called “Investing” and you’re starting to siphon money out of your income to a bank account that you’ve created to store up your investing funds until you have enough to get into the markets. But now you’re worried about what you should do, where you should invest, and even how you go through the actions needed to buy stocks and bonds.

Luckily, investing is a lot easier today than it was before about the year 2005.  Where in the past you would need to have a fairly large amount of money before brokers would even work with you, the mutual fund industry has answered the need for the common man (and woman) to invest and discovered that there are a lot of people out there needing such services.  At places like Vanguard you can set up an account and start investing with as little as $3,000 ($1,000 if you’re starting a retirement account like a traditional or Roth IRA).  You might be able to invest with even less at places like Charles Schwab and/or if you set up autodraft from your checking account.  With these accounts, you have access to a wide array of mutual funds, and even individual stocks and ETFs, all with a few clicks of a mouse.

Still, there are a lot of options and it is probably fairly intimidating for the new investor.  That is why I’m providing the Simple Steps needed to get started in investing.

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Step 1:  Pay off all credit cards.

Before you even think about investing, get rid of your credit card debt.  During a really good period in the stock market, you’ll get a return of 15% per year.  Long-term returns average around 10% (which is 7% after inflation).  You just can’t compete with a 19 or 25% interest rate on a credit card balance.  Just think of yourself getting a 25% return on the money you use to pay off credit cards.  Then, cut up your cards and get debit cards instead so that you won’t go into credit card debt again.

Step 2:  Start with a retirement account.

Someday you will want to retire, which means that you need to have retirement savings to last you for about thirty years, plus something like $500,000 to $750,000 to pay for healthcare expenses beyond what Medicare covers.  If you have a 401k or 403b at work, start there, putting in at least as much as your company will match.  Putting in less means that you are leaving free money on-the-table.  If your company matches the first 5%, you can effectively increase your salary by 5% by just putting 5% of your pay into your 401k.  If you don’t have a 401k plan at work, sign up for the pension plan if one exists.  Regardless if there is a plan at work, go to Vanguard or Schwab and start a Roth IRA.

Fund your retirement plans with 15% of your salary.  Start by putting whatever the company matches into your work plan (or whatever is required by your pension plan), then fund your IRA up to the yearly maximum.  If there is anything left over, put it into your work retirement plan.  Still have money left over?  Start a standard, taxable account at Schwab or Vanguard and fund that account.

Step 3:  Determine your retirement fund asset allocations.

Assets are things like stocks and bonds.  They are things that pay you money, adding to your income.  Standard asset types for investing include stocks, bonds, and real estate.  To determine you asset allocation:

  1.  If you’re less than age 40, start with 100% stocks.
  2. If you’re over age 40, start with your age minus 20% in bonds, 110% minus your age in stocks, and 10% in real estate.   For example, if you’re 45, you would start with 25% bonds, 65% stocks, and 10% in real estate.
  3. If you’ve worried about losing money and are very nervous, increase your bond allocation by 10% and reduce your stock allocation by 10%.  This will smooth things out somewhat.  For example, someone who was 45 would increase their bond allocation to 35%, reduce their stock allocation to 55%, and still have 10% in real estate.  Someone who was 20 would reduce their stock allocation to 90% and add 10% bonds.


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Step 4:  Select your retirement account stock funds.

Go through the funds you have available and try to find index funds.  If you can, select a total stock market index fund.  If that is not available, try to find a large-cap (like an S&P500 fund) and a small-cap (like a Russell 2000 fund) fund.  If index funds are not available (for example, in a 401k plan without the best choices), find the lowest cost stock funds available (try to find funds that charge less than 1% of assets invested) and select one that invests in all sectors of the market or one that invests in growth and one that invests in value.  Also find a fund that invests in international stocks, hopefully something like a total international stock fund.  Read the fund descriptions to find what the fund invests in and manager’s style, as well as total fees.  

Step 5:  Find your retirement account Bond and Real Estate Funds

Go through the same process in selecting your bond and real estate funds.  Try to find a total bond index fund and an REIT index fund.  If you don’t have an REIT fund available, just add 10% to your bond allocation.

Step 6: Buy your retirement account funds.

You should be able to buy your funds using the website for your 401k or IRA.  Many sites will allow you to specify specific percentages of the account to put into each fund.  If that is the case, go ahead and set those percentages based upon the asset allocations you determined in Step 3.  If not, you’ll need to pull out a calculator or spreadsheet, do the math, then enter the dollar amounts.  Note that you will want to set your investment percentages in two different places, one for how to allocate the money you have in the account already, and the other for how to invest new funds.  Set both of these the same and matching the allocations you determined.

Divide the money within an asset category (stocks, bonds, real estate) equally to each of the funds in that category.  The exception is international stocks, which should be 20% of your stock allocation (so if you are investing 80% stocks, you would put 16 % of your account (80% x 20% = 16%) into international stocks and then 64% into US stocks and 10% into bonds and 10% into real estate.

Step 7:  Setup taxable brokerage accounts with Vanguard or Schwab if you have more money to invest.

Hopefully, after you are through putting money away for retirement, you’ll still have more money to invest.  Unlike your retirement funds, which you won’t be able to touch until retirement, money you invest in taxable accounts can generate additional income to enhance your life and hopefully make you financially independent before retirement.  Put 100% of your taxable investing accounts into stocks and only sell when you want to generate cash for something since you’ll be taxed each time that you do. As long as you don’t sell the shares, you won’t be taxed on the increases in value of your account due to increases in price of the funds in the account.  You will be taxed on the dividends and capital gains that the stocks in your funds are generating, but these should be small amounts if you buy index funds investing in the whole stock market.

If you want to, you can set these accounts up to spin off cash when the stocks in the funds pay dividends or there are capital gains.  You’ll then just magically see money appearing in your money market account with the fund company, with a larger amount n December (fund companies tend to move money around and realize capital gains at the end of the year.  This money will be taxable, but then can be used as you wish.  This is a great way to get extra cash without needing to sell shares.

Step 8: Wait until January 15th, then rebalance.

You should rebalance your accounts – set them back to your desired asset allocations – about once a year.  You should also adjust your allocations for changes in your age at this time (as you get older, you should be shifting more into bonds).  Luckily, most mutual fund companies also have tools to let you rebalance.  Just set the percentages you want into the tool and press the button.  Do this again every January 15th (or a date somewhere near then).

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or 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.

Using Floors and Ceilings for Selecting a Buy Price for the Purchase of Shares

Using charts as criteria for buying and selling stocks is foolish.  Charts give a lot of information on where you are but give little information on where you are going.  Humans innately look for patterns even where there are none, and just because a pattern resulted in a certain price movement in the past does not mean it will repeat the same way again.  Good stock selection starts with good fundamental analysis of the company.  Still, there is some merit to using charting once you have selected a stock to buy for setting a buy price.  The same techniques can also be used to determine a good exit point if the fundamentals of the company you have purchased begin to change or you just need to raise cash for some purpose.

Continuing the series of posts on how to use charting in your stock trading, today I’ll discuss how to use charting to determine how to set a buy or a sale limit price for a stock.   To see the start of the series on charting, go here.

In previous posts I discussed floors and ceilings, as well as trends.  As said, floors tend to offer support for the price of a stock, particularly if the stock price has bounced off of that floor several times.  The reason is that people trying to value the stock tend to see the fact that the stock tends to trade no lower than a certain price to indicate that the floor price is at the low range for the stock.

Likewise, if a stock has traded within a given range for a long period of time and then drops in price, a lot of people will have bought the stock while it was trading within the upper range.  these individuals will sell the stock as it gets back to that price again since they’ll want to get out without a loss.  They also will begin to think that it is unlikely to go past the ceiling price because it did not in the past.

Realize also that there is a fair market price for a stock at any given time.  This price is based on the expected return which is a function of future earnings and the risk of the company not meeting those future earnings.  If a stock drops too far in price below that fair market price, it will be bought up by value investors who recognize the bargain price.  Likewise, if a stock moves too far above that fair market price, value investors will sell the shares, rightly seeing that the potential return on the stock is no longer worth the risk.

To use a floor in setting a buy price, first determine a round number around the average price of the floor.  No calculators are needed here – just eyeball the chart and round to the nearest 1/2 dollar.

Next, pick an odd amount somewhat above the average price.  For example, if the floor price is $21 per share, you might pick $21.07 as a buy limit price.  The reason to pick an odd value goes into the way order are executed.  If a trader enters a sell order at the market, the brokerage house will match it with a corresponding buy order with the highest offer price.  If there is more than one order at a given price, the first order at that price is executed first.

If you were to set a limit price of $21 even, there would probably be a lot of other buy orders at that price.  Even though the stock trades at that price, your order may not be executed.  By setting an odd number for a limit, it is unlikely that there will be other orders at the same price.  By setting a price above the floor price, it is more likely that yours will be the high offer.

Placing a sell price is exactly the same except you would set a price just below the ceiling price.  Use caution, however, when setting a sell limit because if you miss it, you could see a lot of your profit evaporate as the stock falls in price.  When it is time to sell, it is often wise to simply enter a market order and get out.

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.com or leave in 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.

Common Mistakes when Buying and Selling Stock

Everyone, from new investors to seasoned pros, make mistakes when investing.  Losing money at times it a part of investing.  Some lessons individuals will not believe, no matter how many times they are told, until they personally lose money.  I call this “paying tuition to the market.”  Other people might call it “stupid tax.”  Whatever you decide to call it.  An individual with the right temperament for investing will accept these mistakes, learn from them, dust himself off, and then move on.

I have taken my personal share of losses and made my share of mistakes.  As I’ve said, some things you cannot learn without losing money personally, but maybe some of my readers out there will take these lessons to heart and therefore not need to lose money-making the same mistakes I did.

1)  Stocks will go down and stay down much longer than you will expect them to.  At times I’ve had a great stock that I was following fall out of the sky.  Sometimes I have rushed in to buy shares, thinking that there was no way that they could go lower.  Some of these times the stock dropped to an even lower price and then sat there for years.  The lesson to learn here is that stocks do not fall for no reason.  Just because you may not see the immediate cause does not mean that the whole world except for you has had a momentary lapse of judgement.  A stock may have had a great quarter but issued guidance that future sales may slow.  There may be some shenanigans going on at the company that you have not heard about.  Markets tend to be very good at setting prices based on current news.  If one of your favorites tumbles, even if the price seems unbelievable, it is best to give it a little while to wait for the other shoe to drop.  If you must buy in, buy about half as many shares as you are planning to buy so that you can buy more later if prices continue to drop.

2) Stocks will stay up far, far long er than you expect them to.  It is amazing how some of the Wall Street Darlings, for example, Krispy Kream, Outback Steakhouse, and more recently, Google, can rise to astronomical prices.  Then, when you think that they can rise no more, they continue to rise higher.  Even worse, in cases like Snapple or AOL, they are bought out by another company for those astronomical prices and then give the company that bought them out heart burn.  Always be careful when looking to short stocks.  Just because the price is high does not meant that the price cannot go higher.  I was short Golden West financial in 2008.  Then, just before the mortgage bubble began to burst, they were bought out, causing me to lose about $10 per share in one day.  The fact that the company that bought them out later regretted the decision was of little solace to me since I’d already realized the loss.

3) To make $1million in options, start with $10 million.  Buying options is for the stupid.  I repeat, buying and selling options is for the stupid – you will lose your money.  In college I thought I could play the options game.  I took up positions in equity options and index options.  Within three months I had lost all that i intended to risk and about 4 times more!  In buying options, the odds are stacked against you because you do not only need to be right about the direction, but also the timing.  Even when you are right the spreads and commissions will kill you.  Every time you make money the fees reduce your winnings.  Every time you lose money the add to your losses.  If you want to gamble, head to Vegas.  At least you’ll get free drinks.

4) Never buy stock in a buy-out candidate.  I bought shares of a stock called stop-and-go back in the 80’s, hearing that they might be bought out.  Sure enough, a buy-out was announced — for $2 per share less than I had paid!  Once the rumors are flying, you will be too late to get in at a decent price.  Find some other stock to buy.

5) When management changes in a long-term successful company, watch out.  Citizen’s utilities (now citizen’s communications) was once an untouchable company.  They owned all of the utilities (telephone, water, electricity, waste water) for rural communities all over Arizona.  The company had not missed increasing earnings for a quarter for decades.  A person who had bought 1000 shares in the 1970’s would be a millionaire by the 1990’s.  Then, management changed and an individual who was fond fo starting telecom companies was installed as CEO.  He changed the character of the company into that of a wireless phone company, sold off the other assets, and the steady earnings increases stopped.  At that point the stock price, which would go up and split like clock-work, stalled and dropped by 50%.  Whenever a company that has done well under a certain manager or groups, it is generally a good idea to think seriously about leaving if that manager departs. 

6) If you’ve got a profit and are ready to sell, sell — don’t fool around.  It was around 2000 and we were caught up in the middle of the dot-com bubble.  I had purchased shares of a small internet companyat $4 per share and seen the shares climb up over $20 per share in a short period of time.  I was reading the yearly report at the airport and the realization came to me — this was just a pile of fluff and marketing.  There was nothing of substance there.   I called my broker from a pay phone.  The stock had dropped a couple of dollars from its high, but I figured it would return so I set a limit near the old high.  The stock never returned and proceeded to fall through the ether.  If I had simply put in a market order I would have been out.  As it was I don’t remember if I even made a profit. 

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

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. In addition the writer of this blog is not an accountant and writings should not be taken as tax advice which should be left to a CPA.  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.