Tag Archives: Long Term Investing

Become An Owner Instead of a Worker

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When we’re young, we trade our health for money.  We work long hours.  We lift heavy things and wear down our tendons. We spend hours typing or doing other repetitive motions that cause carpal tunnel syndrome.  We spend hours on our feet and wear down the disks in our backs and develop heel spurs.

We trade this wonderful gift of youth and health that we’ve been given, the ability to keep pushing it for may hours, to bounce back when we fall down and heal fast when we get cut, for cash by working way too many hours.  We go in before dawn and leave after dark, never getting out to see the sun and the woods and the oceans.  We work hard to go on a vacation, which is then rushed and filled with work thoughts and emails back to the office the whole time.  We buy large, beautiful homes that we spend all of our free time maintaining and cleaning when we aren’t working to pay the mortgage.  We buy things on credit and then spend a quarter to half of our time working to pay interest payments.

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While we’re young we can make extra money by just pushing it a little harder.  We can make that car payment if we work overtime on weekends so we can drive that shiny new car to work and have it sit in the parking lot all day, slowly decaying away.   We can take on that second job and get all of the cable packages and five different web streaming services.  We can keep buying clothes to impress people we don’t like and buying all of the latest gadgets to look good for people we don’t even know.

When we get old, we trade our money for health.  Any money we’ve saved up through those long hours of work goes to treatments, surgeries, and drugs to reduce the pain our weary bodies feel.  We spend money to try to have the ability to walk and run and jump and heal like we did so easily while we were young.  We get surgeries to be able to walk after long hours of carrying heavy loads have destroyed our knees.  We buy prescriptions to lower our blood pressure after years of sitting idle at a desk, eating poorly, and letting our health decay.

Stop.  Stop today.  Stop right this minute and change your life.

Become an owner instead of a worker.  Instead of getting that new car, drive your old one for a few more years and send those car payments you would have made into a stock mutual fund and become an owner in a group of companies.  Buy a smaller house for cash and invest the money you save on interest.  Stop buying things to impress people and just buy what you need so that you can spend time with your family who don’t care what the label on your blouse or jeans says.

Start building a portfolio so that you will be getting dividend payments and capital gains instead of paying interest payments and penalties.  Let others work for you so that you don’t need to work those extra hours.  Expand your lifestyle by waiting a little while to buy things, instead investing the money in mutual funds, then using the distributions from those mutual funds to add to your income.  Direct some of that money back into buy more mutual funds, and your income will expand on its own.

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Everybody can become an owner.  You can start a mutual fund account with Schwab for only $1.  You can start investing through Vanguard funds for only $3,000 ($1,000 if you start a retirement account).  Start an account and start sending a little of your paycheck in each month to build your wealth.  Own things.  Build things.  Stop just using all of your effort to generate entropy.  Stop having your money flow into your back account through direct deposit and then back out again to bills through auto pay without your even seeing it.

The next SmallIvy book, Cash Flow Your Way to Wealth, will be coming out in about a month.  It gives the game plan to go from worker to owner.  Subscribe to this blog to make sure you get your copy when the time comes and don’t miss out.

Click here to view the Cover.

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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.

How to Place an Order to Buy or Sell a Stock

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So you’ve decided to take the plunge and buy your first individual stock.  Now what?  In order to place a stock order, it is important to learn the lingo of stocks trades.  This allows you to communicate clearly with your broker to avoid misunderstandings.  If you’re buying online, knowing what the different orders are and which ones to uses is equally important.  Learn these terms and you’ll be sounding like a pro in no time.

Here are the types of orders for buying or selling stocks and other securities, plus some other ordering terminology, that every investor should know:

Buy – An order to buy a security.

Sell – An order to sell a security.

Bid price:  The highest price at which someone is willing to buy shares at a given time.  For example, someone may be out there ready to buy 500 shares of XYZ corporation for $30.25 per share.

Ask price:  The lowest price at which someone is willing to sell shares.

Market Order – An order to buy or sell a security at the current market price.  Because at any given time the market price includes the Bid price (the price someone is willing to pay for a security) and the Ask price (the price at which someone is willing to sell), if you put in a market order to buy you will pay the ask price, and if you put in a market order to sell you will sell at the bid price.  The difference between the Bid and the Ask is called the Spread.  In actuality, professionals in the markets will buy shares from someone at the bid price and then sell it to others at the ask price, so they will get to keep the spread as profit.

Limit Order – An order in which a price is set as a threshold for the sale.  For example, a buy order with a limit of $50 would execute when the Ask price of the stock was at $50 or lower.


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Stop– An order to buy or sell a stock if it passes through a specific price.

All or None – An order which is executed only if all the shares can be bought or sold in one lump.

Good ‘Til Canceled (GTC) – An order that will stay open for a month after it is entered.  Normal orders are only open for the trading day and must be reentered if not executed on that day.

So, if you wanted to buy 100 shares of XYZ corp, which was currently trading with a bid price of $50 and an ask price of $50.25, and you wanted to pay mno more than $50.50 per share, you would tell your broker:

“Buy 100 shares of XYZ corp with a limit of $50.50.”

Because the ask price was below your limit, assuming there were 100 shares available at that ask price and there were no one else in front of you, you would end up buying 100 shares at $50.25 since that was below your limit price. If there were only 50 shares available at that price and 50 more at $50.50, you would get fifty shares at each price.

The above terms can be combined.  For example, one would say “Buy 100 shares of XYZ at the market” to buy 100 shares of XYZ corporation at the market price.  One could say “Buy 100 XYZ, limit of $50 or better, GTC” to put out an order that would stay open for a month in which 100 shares of XYZ corporation would be bought if the Ask price dropped to $50 or lower during that month.

Note that stop orders can be stop limit or stop market orders.  If you place a stop limit order, it will create an order to sell (or buy) if the stock price reaches your limit with a minimum (maximum) of your limit price, where a stop market order will sell (or buy) at the market price if your limit is reached.


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You may be thinking that this is all well and good, but which orders should I uese and when?   Let’s now go into the strategies I use when selecting the type of order to use.

The investing strategy I use and that I promote with this blog is to invest for the long-term and make a lot of money with each successful trade.  We’d like the stock to go up 1000% or more over the time period that we hold it.  Because of the long time period involved, we are not that concerned with getting a few extra pennies per share on a trade.  For this reason, I generally use a market order when buying.  This will cause the order to be filled within the next few trades (we may need to wait a few trades if there are people ahead of us with market orders).  On a stock that trades a lot, said to be “liquid,” market orders are generally fine and we won’t get a crazy price, which can happen in stocks that trade rarely and therefore are illiquid.  There,  a limit order is needed to prevent getting a bad price.  Buying stocks at-the-market prevents us from missing a good buying opportunity and seeing the stock shoot up out of range be cause we’re waiting for the price to drop by a few cents.  If you make $30,000 from a stock trade, it won’t matter much if you pay an extra $50 for the shares.


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When I’m looking sell because I’ve made a good profit and I’m worried it may evaporate, I also find that it is best to use a market order and get out.  I’ve had the experience before when a gain turned into a loss because I set a limit and it didn’t fill before the bottom dropped out.  Again, it is usually best not to quibble over pennies.

If I’m in the process of accumulating shares and I feel that the stock has good long-term prospects but there is probably nothing to cause it to shoot up in the near-term, I may set a limit order and wait.  I may also enter with a market order to get some shares, and then place a limit order a little lower to buy more shares if the price then dips.  (Note with a limit order I also tend to use Good-Til-Canceled since it may take a few days to execute.)  When setting a limit, I pick an odd amount (for example, $20.16 per share or better) because there will generally be other people with limit orders in and people tend to like round numbers.  With a limit order, the first in line at the price gets the shares.  If the stock is thinly traded, or illiquid, I will never place anything but a limit order.  This is because if there are only a few buyers or sellers, the price may easily change by 10% or more between trades.  Looking at the typical spread for the stock (difference between the bid and the ask price) and the volume is a good way to tell if the stock is illiquid.   I also always use a limit order when selling stocks short or covering a short position, generally setting the limit slightly above the ask price in the latter case to make sure it executes rapidly, but giving me protection fram radical price movements.

Stop orders, often called “stop loss” orders, are sometimes recommended as a way to limit losses.  For example, you buy 100 shares of xyz, and then set a stop loss order at $36 so that if the stock drops by 10% you’ll get out automatically.  I generally don’t recommend stop loss orders for two reasons.  The first is that the market will set all kinds of prices based on rumors, news, and just fluctuations driven by trading (the stock goes down a little so more people jump out, causing it to continue down).  These fluctuations really mean nothing about the underlying business, and we don’t want to get out of a good company just because it becomes temporarily unpopular.  The second reason is that various traders use stop loss orders to make profits and get shares at lower prices.  A stock may move down temporarily, hit your stop causing you to sell your shares, and then shoot back up, leaving you behind.

One case where I may use a stop order is when a stock has gone up a lot and I’m looking to take some of the money off of the table and move it somewhere else (the stock has gone up enough that I don’t want to risk the loss).  In that case I may set a stop loss a few dollars below the current price, and then move the stop up if the stock rises until it eventually hits.  This is nice psychologically since you don’t feel like you’re selling a stock that is a winner and will climb higher, but in general I’ve found I end up just losing a couple of dollars when my stop gets hit and I should have just put in a market order and sold the shares.

As said above, there is what is called a stop market and a stop limit.  A stop market will sell the shares at the market price if the stop price is reached.  The stop limit will put in a limit order at the stop price if the stop is reached.  Never use a stop limit because if the stock falls below your limit price, the order will not be executed and you will still own the shares.

Finally, I may use an all-or-none order for a thinly traded stock to avoid getting a few shares and having to pay minimum commissions on more than one trade.

So there you have it.  Time to buy some shares.

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

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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.

 

Kindle Edition of SmallIvy Book of Investing on Sale Starting Monday

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The SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy

The SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy

You probably spend most of your day looking at your phone.  Maybe you’re texting friends, browsing the web, or paying solitaire.   What if you could be using some of that time learning how to improve your future?

The electronic version of my book on investing and money management, The SmallIvy Book of Investing, Book 1: Investing to Grow Wealthy, is going on sale starting Today for only $1.99.  This book starts by giving you all the information you’ll need about stocks, bonds, and other types of investments, including the risks involved.  It then tells you how to manage that risk to use investing the generate additional income so that you can grow your wealth more quickly than you can with a job.

The middle chapters discuss what you should be doing at each stage of life if you want to become financially independent – that magical state where you don’t need to work to support yourself and your family.  It also provides a plan for cash-flow management – how to budget your money and start your savings compounding and so that you’ll have the money you need for things like new cars, college bills, and retirement.

Next, the way to invest if you’re serious about making money, not just playing around with investing, is discussed.  Here the information about risk and reward given in the first chapters is put to use to show how you can take reasonable risks for a chance to beat market returns with the portion of your wealth beyond what is needed for necessities.

Finally, mutual funds are discussed, including their use in IRAs and 401k plans.

Take a look at the book on Amazon and be ready Monday to get your copy at this special price.   Download a copy for just $1.99, then use some of that time you spend starting at your phone to be learning about investing and money management.  Also, if you do buy a copy, please consider leaving a review on Amazon to let me know what you think.

Thanks!!  SI

Questions?  Comments?  Let me know what’s on your mind by using the comment form below!

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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.

 

Should I Add Bonds to my 401k?

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FireAlarm

Jeffery Bogle, founder of Vanguard mutual funds, is credited with what has been come to be known as the “Bogle rule,” which says that you should invest your age in bonds.   In other words, if you’re 25, you should have 25% of your investments in bonds and the other 75% in stocks.  If you’re fifty, you should be 50%-50%.  The idea is that as you get older and closer to needing the money, you should add bonds since they have a more predictable rate-of-return than stocks and will hold up better in down markets since the interest payments they provide will both offset any loss in price, plus will tend to keep the price from going down as much.

In addition, if you hold a bond until it matures, no matter where the price has gone during its lifetime, the company or government that issued it will pay you the face value, usually $1,000 per bond for corporate bonds.  Because of this, the closer to maturity the bond is, the closer it will stay to the redemption value.  If you buy short-term bonds (or a short-term bond fund), the potential return you’ll receive will be less than you’ll find with long-term bond funds, but the volatility of their price will also be less since the bonds will be near redemption.

The issue with holding all bonds is that your return will be less than it will be with stocks over long periods of time (about 5-8% versus 10-15% annualized per year).  With a middle-class salary, if you contributed 15% of your salary to your 401k but only bought bonds  your whole career, you’d end up with millions of dollars less than someone who put all of their money into stocks for the first thirty years.  Holding 100% bonds can also make your portfolio more volatile during periods where interest rates are rising rapidly or inflation takes off because bond prices are very sensitive to changes in interest rates and inflation.  It is therefore safer to have a portfolio consisting of 80% bonds and 20% stocks than a 100% bond portfolio.

So with bonds, you tend to want to add them to your portfolio as you get closer to needing the money, which is usually your retirement date.  The Bogle rule assumes that you always want a few bonds, just to reduce volatility, but that you’ll want to have the majority of your assets in stocks until you’re entering retirement.   Having some stocks even in retirement is needed because it helps fight inflation, keeping your spending power from declining late in retirement, so even at age 70 you would still have at least 30% of your portoflio in stocks.  As you got older, you’d sell some of those stocks and buy more bonds to increase the amount of cash you’d receive each year to make up for the reduction in spending power you’d have if you kept receiving the same amount of cash each year due to inflation.    Because life expectancies are longer than they used to be, such that people are living twenty to thirty years into retirement, the Bogle rule has also been adjusted to “buy your age minus 10% in bonds” so that you’ll have a bit more in stocks when you enter retirement.

An alternative to having bonds in retirement is raising cash by selling stocks and putting the money into a money market fund or bank CDs.  Because it is very rare for the stock market to be down for more than 5 years, and because the level of declines that do extend beyond five years tend to be very minor, having five-years worth of cash in your portfolio can help you avoid needing to sell right after a market crash because you need to raise cash.  This kind of strategy, where you have a larger cash position and forego bonds, can make sense at times like right now where interest rates are very low, such that bonds really aren’t paying enough to generate enough income for living expenses, and rates are expected to rise.  You can also mix in alternative income investments to bonds, such as high dividend paying stocks like utilities, real estate through REITs or by buying rental properties directly, and investments like limited partnerships which pay out a large percentage of the money they make through pipelines and the like.  (Be cautious with this last one, as you could end up filing taxes in multiple states with limited partnerships.)

Good times to buy bonds are the following:

  1.  You’re nearing retirement (age 45+) and interest rates are in the range such that quality bonds are paying at least 5-6% with junk bonds paying in the 8-10% range.  Savings accounts would be paying 2-3% interest.  In this case you might be able to generate enough income from interest payments to avoid needing to sell stocks or bonds to raise cash for living expenses.
  2. Interest rates are very high, such that even quality bonds are paying in the 10% plus range and rivaling the potential returns from stocks.
  3. Interest rates are relatively high, the economy is slowing, and interest rates are therefore likely to begin heading down.

If at least one of these conditions were not met, I would probably forego buying any bonds until I was within about five to ten years of retirement since the returns I would get from the stock market would be so much better.   I instead would accept the larger volatility in exchange for the better returns.  Then again, I have an iron stomach when it comes to stock market fluctuations, knowing that as long as I have several years until I need the money that the market will likely come back from any drop.  If seeing your portfolio decline in value really affects you, however, such that it would make it hard to sleep at night, mixing in a few bonds even early in life with the understanding that you’re reducing your future returns in exchange for less volatility may be worth the sacrifice.

Finally, if you buy a target date retirement fund, they do the bond/stock ratio adjustments for you.  Just pick a portfolio with a date near when you will retire and let it go.  If you want to be a bit more aggressive, pick a date ten years after you’ll retire.  If you want to be more conservative and reduce volatility, pick one ten years before you retire.

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.

 

How is Your Stock Picking Working? How to Measure Your Returns.

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jam

Most people who’ve been trading stocks for a while think that they are excellent stock pickers.  They will have all sorts of stories of stocks that they bought and then turned around and made a quick profit.  Or maybe they have a stock or two that they’ve held for ten or twenty years where they have a 500% or even 1000% profit.  They forget about the losers they’ve had.  The stocks that went nowhere.

Really, if you honestly compare your returns to “the market,” many people will find that they would have been better off just investing in a set of mutual funds and following “the market” than they were investing on their own in individual stocks.  But how do you tell?

Well, one common way to judge your performance is to compare your returns against those of an appropriate index.  For example, if you were buying individual stocks, you might compare your progress against the returns of the S&P500 or S&P100 index.  If you were buying small stocks, you might compare your returns against the Russell 2000 index.  You could also compare your performance against the return of index funds, such as the Vanguard Total Stock Market Index fund or the Vanguard S&P500 Fund.

Of course, comparing year against year does not always give the clearest picture.  For example, here are the returns for the S&P 500 for the last five years, along with the returns for one of my accounts:

S&P 500:

Year Return
2016 8.02%
2015 -0.73%
2014 11.54%
2013 29.60%
2012 13.29%
2011 0.00%

 

My Account:

Date Return
2016 6.28%
2015 0.15%
2014 20.73%
2013 27.16%
2012 7.40%
2011 4.84%

Note, to calculate these returns, I just subtract the value at the start of the year from that at the end of the year, then divide the result by the value at the start of the year.

Looking at the returns together, you see that I beat the S&P500 in 2011, 2014, and 2015, but the S&P500 won out in 2012, 2013, and so far in 2016.  Should I have just invested in index funds, or is my stock picking actually doing something useful?  Well, let’s look at thing s a different way.  Let’s say that I invested $1.00 in the S&P500, and also invested $1.00 in my portfolio.  Here are the results:



S&P 500:

Year Return Value of $1 Invested
2016 8.02% $1.76
2015 -0.73% $1.63
2014 11.54% $1.64
2013 29.60% $1.47
2012 13.29% $1.13
2011 0.00% $1.00
Start of 2011 $1.00

My Account:

Date Return Value of $1 Invested
2016 6.28% $1.84
2015 0.15% $1.73
2014 20.73% $1.73
2013 27.16% $1.43
2012 7.40% $1.13
2011 4.84% $1.05
Start of 2011 $1.00

To calculate these results, I multiplied the value at the end of the previous year by one plus the return for the present year,  For example, the 2012 value is just:

($1.05)*(1+0.740) = $1.13.

Now it is clear that I’m beating the S&P500 over the period.  If you had invested $1.00 in the S&P500 at the start of 2011, you would have $1.76 now, where by investing in my portfolio over the same period,  you would have $1.84.  This isn’t much of a difference, but it does show that my efforts at least do mean something.  A lot of mutual fund managers do not beat the S&P500.  My values also include my brokerage costs and account fees, where the indexes include no fees.  It might be more fair to include representative fees in the indexes as well when doing your own comparison.

Another thing to consider is the time period over which you’re comparing.  My investing style, which I consider to be the only style worth doing if you’re picking stocks, is long-term investing.  I could not tell you which stocks will do better over a year or two, but I can do pretty well at picking stocks that will do well over five or ten years.  The fact that I beat the S&P500 in 2011 therefore meant little.  It was just good luck.  It also didn’t matter that the S&P500 did better than me in 2012.  Now that we have five years under our belts, however, we can start to make some real comparisons.  Comparisons at ten years would make even more difference, since that will allow my stock picks to really flourish, hopefully, and outpace the market in general.

But, wait a minute, you may say.  If you need to wait five or ten years to decide if what you’re doing is working, isn’t that a lot of time lost?  After all, you don’t want to go for 20 years, only to discover that you’re a bad stock picker and would have been better off in an S&P500 fund.  The answer is that you don’t need to choose one or the other.  Instead, put your 401k funds and a good portion of your taxable portfolio into index funds.  At the  same time, pick a few individual stocks that you think will shine over long periods of time, buy substantial quantities (acquiring 500 to 1000 shares over a period of time).  You will then be playing both sides.  If you’re a bad stock picker, your index funds will bail you out.  If you’re a good stock picker, your individual picks will add to the returns from your index funds, perhaps substantially if you catch something like the next Home Depot or Microsoft.  It doesn’t have to be an either-or proposition.

Questions?  Comments?  Let me know what’s on your mind by using the comment form below!

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.

 

With Bond Investing, It’s About Income, Not Price

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FireAlarmEveryone hates to lose money.  It’s not fun to look at your portfolio value and see that it has gone down.  Yet if you are investing in bonds for income, portfolio value really isn’t all that important.  What is important is income.

Before going further, let’s talk about what a bond is.  When a company (or government) needs money, they can get a loan from investors.  Unlike a consumer loan, where you are lent some amount of money and then pay it off over a number of years, companies issue bonds.  With a bond, the investor will be paid a fixed amount of money for a period of several years.  At the end of the period, the company then pays back the loan.

Normally corporate bonds are issued in $1,000 increments and have a period of ten to twenty years before maturation – when the loan is repaid.  The first investors pay $1,000 per bond, but then they are able to sell these bonds to other people for more or less than $1,000.  The price they are able to get depends on interest rates and how safe people think the bonds are.  If interest rates go up after the bond it issued, the price will decrease, and vice-versa.  In really low interest rate environments like today, bonds may actually sell for more than the maturation price ($1,000) because people are willing to lose money when the bond matures because the interest they will receive in the mean time is worth the loss at the end.  They might buy a bond for $11,000 that they know will be repaid at $1,000 in a few years.

If the company has great finances and is almost sure to repay the loan at the end, the price fo the bond will tend to also stay around $1,000.  If things get dicey, where the company may default on the bond, the price will decline.  People want to make sure the interest rate they receive is worth the risk of a default.  Because bonds pay a fixed amount of money each year, the effective interest rate you get for your investment goes up if the price you pay goes down.

So right now, interest rates ae very low and the Federal reserve is indicating that they may raise interest rates soon.  If that happens, the price of bonds is sure to go down, so the value of your bond portfolio may decline.  If you are speculating, planning to sell your portfolio in a year or two, you should be concerned.  If you are planning to hold on for a long time, such that the bonds in that portfolio will have time to mature, price fluctuations between now and maturity date won’t really matter – you’ll get $1,000 per bond when the bonds mature regardless of what happens to the price between now and then.

So if you’re investing in bonds, don’t worry about what happens to the value of the portfolio.  It will go up and down with interest rates.  In fact, if the value declines and you have some cash sitting around, you can buy more bonds at a discount.  You’ll then get a better interest rate plus a little gain at the end when the bonds mature.  Instead, just focus ont he income you are receiving.  So long as the income stream remains in place, the rest is just noise.

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.

 

How to Get Started with Mutual Fund Investing

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FireAlarmMutual fund investing requires the least amount of effort and knowledge when it comes to investing.  With single stock investing you need to research stocks, learn how to put in different types of orders, track price movements periodically to find stocks that have gone south or that have grown too much, and spend time on taxes each year entering your capital gains.  With mutual funds, you just need to spend an hour or two once finding funds that meet your needs, then send in a check periodically.  The goal of this post is to give most of the information you need to know to start investing in mutual funds.

 

What are stock and bonds?

Stocks are ownership stakes in corporations.  You actually are buying a part of the company in which you’re investing.  If the company does well and starts making more money, the value of your part of the company normally increases.  Once a company gets large enough that they don’t need all of their income for expansion and growth, often they will start giving you a portion of the profits they make in what is called a dividend.

A bond is a loan to a company (or a city, federal government, etc…).  In exchange, they agree to pay you interest for a certain period of time, and then give you your money back at the end.  (This is assuming that you bought the bond directly from the company.  If you bought the bond from someone else, you get paid whatever the first person who bought the bond paid the company.  This is called the par value and is normally $1,000 per bond for corporate bonds.)  The price of a bond will depend on interest rates at the time, how long it is until the loan is to be repaid, and how likely people think the company is to repay the loan.

What are mutual funds?

Mutual funds are collections of stocks, bonds, or other investments.  When you buy into a mutual fund, you are giving money to a manager who then invests the money for you.  Your money is pooled with that of many other people, such that you can own a small amount of a lot of different companies and investments.  This would be impossible investing on your own outside of a fund since it would cost way too much to buy that many different stocks unless you had a lot of money to invest (several million dollars).  The main reason for buying mutual funds is to get diversification, which is where you spread your money out to several different investments.  This reduces your risk of taking a large loss due to a significant event at a single company since each company only makes up a small amount of the fund and there are other companies that will generally do well during the same period.  Think of it this way – if you buy one home without insurance, you run the risk of a fire causing you to lose your whole investment.  If you buy homes all over the country, one fire would only cause a small percentage loss.

What are the risks of buying mutual funds?

Mutual funds are not like a bank account.  There is no guarantee that you will get a specific return on your investment or even get all of your money back.  They are safer than individual stocks and bonds, but there is still investment risk.  Another risk is not that the fund will actually lose value, but that it will not go anywhere for a significant period of time, meaning you would have done better putting your money into a bank CD.

If they’re so risky, why buy them?

If you include inflation, your savings in a bank account will actually decrease with time.  A dollar fifty years ago would buy what $100 does now. Because the value of companies increases (in dollar terms) with inflation, you really need to invest money that you will not be using in the next few years.

Beyond inflation, because companies are growing and expanding, their stock will become more valuable over time.  If you buy a whole set of stocks (as with a mutual fund), some companies may fail or go nowhere, but the ones that do well will make up for the others and then some.  While there are no guarantees, over most long periods of time, like 10-20 years, stocks have returned between about 10 and 20% per year.  This is way better than bank returns.  So long as nothing happens to cause the entire economy to collapse, mutual funds should offer much better returns than bank accounts in the future.  This gives the average worker a way to retire with a great deal of money without actually saving up all of the money.

How do I buy mutual funds?

The easiest way to buy funds is to go to the website for one of the fund companies (Vanguard, Fidelity, Janus, etc…), start an account, and then send in a check or transfer funds electronically from your bank account.  Probably my favorite family of funds is Vanguard, but there are many others.  Most funds have minimum investments, between $3,000 and $5,000.  Some companies allow smaller amounts to start if it is for a retirement account and/or you allow automated future investments from your account.  Note that because the fund companies will probably lose money on your account when you have little invested since their costs to send statements and handle your transactions will be more than they’ll be charging you in fees, they will want you to grow your investments as quickly as possible.

How do I select which funds to buy?

The company should have the funds available on their investing website.  Each of the funds will have a document called a prospectus that tells about the fund.  The most important things to you will be their investment objectives and their fees.

You can tell generally what the investment objectives are from their name normally, but an objective statement should be the first thing in the prospectus.  Read this statement to understand what the fund does.  What sort of things do they invest in?  Are they a managed fund, where a manager picks the investments, or are they an index fund that tries to match the returns of a specific index?  Do they buy stocks, bonds, or a mixture?

You’ll want to have a mixture of funds that invest in different areas of the markets.  A large-cap fund such as an S&P500 fund is a good first fund, as is a small Cap Fund such as the Nasdaq QQQ fund.  You can also just buy a total stock market fund that basically invests in everything.   If you will need the money in the next  ten to fifteen years, or if you just want to the value of your portfolio to be a bit less volatile, you can add a bond fund to the mix.  A rule-of-thumb if you’re investing for retirement is to “invest your age minus ten percent” in bonds, meaning if you’re 50, you’ll be 40% in bonds and 60% in stocks.  In general, the larger the percentage of bonds you have, the less volatile your portfolio will be, but the lower your return will be over long periods of time.  In down markets, bonds tend to not decline as much as stocks.  In up markets, however, they won’t go up as much either.

Rather than dumping all of your money in at once, it is a good idea to buy regularly over time.  If you invest fixed amounts regularly you’ll get a better price since you’ll buy more shares when the funds dip and price and less when they rise.  This is easy if you’re saving up and investing as you go.  Just add more money each time you save up a five hundred to a thousand dollars or so.  If you have a lot to start with, invest it over a year or two, perhaps buying more each time the market dips, but still buying even when the market is rising since there can be some runs that go for a long time.

On the fees, the prospectus will generally give the fees and expenses as a percentage of investment value, plus a table showing how much in fees would be paid over a 5 or 10 year period if you owned the fund.  You generally want fees to be less than 1% of assets.  0.25% of assets or lower is very good.  Unmanaged funds such as index funds generally have the lowest fees since they don’t have a team of managers to pay, a research department, and so on.  When choosing which fund to buy, choosing the one with the lowest fees is usually the best option.  In general, ignore their past returns.  Buying a fund that has done really well in the past may mean that you’re just buying in at the top.

What do I need to do to maintain the portfolio?

In general, there is nothing you need to do after you buy in.  If you’re investing regular amounts, just keep buying as you raise money, purchasing whatever is needed to keep your funds in balance based upon your chosen allocations.  For example, if you want to have 80% stocks and 20% bonds and bonds have risen such that you’re 30% in bonds, direct new money towards stocks.  If things get really out-of-whack you can move money between funds, but you’ll need to pay taxes on any gains for the shares that you sell unless the portfolio is in a tax-sheltered account such as an IRA or a 401K.

Speaking of taxes

If you’re investing in a tax-sheltered account, there are no tax concerns until you start taking the money out.  If you’re in a taxable account, you’ll need to keep track of gains and losses when you sell shares and add them to your income tax forms.  It is best to see an accountant for this since a good accountant will also give you tips on how to minimize taxes, although I’m sure tax software can probably handle most things.  In general, you’ll not want to sell very often in a taxed account, although realize that a small move int he markets can quickly wipe out any tax savings, so don’t let fear of taxes drive youinvestinggn decisions.

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.

 

Help Wanted from the Small Investor Readers

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Ask SmallIvy

The Small Investor Blog is now in its sixth year of existence.  It has grown from about 15,000 views the first year to about 60,000 views per year since that point.  The main goal of the blog is to educate people on how to manage their money and invest to allow them to become financially independent.

I would like to grow readership even more.  I would also love to have a lot more comments and conversation.  I’m sure there are a lot of you out there with some great suggestions.    

At this point, I’m asking for help from the readers.  Specifically, please:

  1.  Tell your friends and family about the blog. Please send them to https://smallivy.wordpress.com.
  2. Send me your honest feedback.  Is the writing too boring or arrogant?  Are the subjects too repetitive?  Please let me know.
  3. Send me your article ideas and questions.  Are there things you want to learn about?
  4. If you write a blog about personal finance, or something else that would complement this blog, please let me know so we can trade links.

Please let me know through a comment or write me at vtsioriginal@yahoo.com.  Thanks!  SI

Don’t Let Imperfection Keep You from Growing Wealthy

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IMG_1836I have a confession.  We haven’t put money into my kids’ Educational IRA accounts yet for 2016, even though the year is about 3/4 over.  We also don’t pull together a budget every month, and haven’t for a few months.

We have done good things like starting IRAs when we first started jobs and have contributed to them most years.  I also got into the 401k at the first opportunity, although I only contributed about 10% of my pay between our IRAs an my 401k the first ten years or so of work.  Today I’m contributing around 15%.

We do eat dinners in most weeks except for one diner out as we have been doing since we were first married, but we have started going to lunch or breakfast after church or if we’re out on a Saturday here and there.  We also probably impulse buy at places like Wal-mart and the guy really saw me coming with that Kirby vacuum.  (I have noted, whenever I decide to just “buy something nice for once,” I usually end up regretting the purchase.)

Obviously, even though I write a blog that is about personal finance about 80% of the time, I don’t have a perfect financial life.  I’m like the fitness guru who has a doughnut and a cup of coffee sometimes before work.  Yes, I know better, but that doesn’t mean I always do better.

We have been able to pay off out home in about 12 years, however.  We have also not had a car payment for something like 15 years now.  I purchased a new car on payments back when I was credit-ignorant, and probably won’t do so again.  But who’s to say, maybe in a weak moment I might.  We also have put away money for our childrens’ college and I’m predicting we’ll have way more than enough for retirement.

The point is that no one is perfect in anything, even when it comes to personal finance.  Often we try to find gurus to improve our lives, but then give up and stop taking their advise when we find we can’t do everything perfectly.  We also watch and wait for those who seem perfect to slip up, then use their failure to be perfect as an excuse for our not even trying.

Yes, you’ll end up better financially if you never buy stuff on credit, put away 15% of your paycheck for retirement religiously, and buy a really inexpensive home.  You’ll be better off if you budget to the penny every month and stock to your budget.  You’ll do better making sure you eat every one of your leftovers and avoid wasting money on food that you throw away.  You’ll probably be better, both financially and physically, if you never buy a car and instead ride a bike to work everyday.  But you probably won’t do these things, or do all of these things, every time.

But don’t let that stop you from making good choices as often as you can.  Don’t think you need to be perfect financially or it isn’t worth doing anything financially.  And just because people who give good advice sometimes fail doesn’t mean it isn’t good advice.  Nobody’s perfect.

Your investing questions are wanted. Please leave a comment and let me know what you think.

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.

It’s never too early to start an IRA

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Lost Cave1My son is currently in Boy Scouts, so I find myself hanging around the scout meetings on Tuesday nights.    A couple of years ago when I finished the first investing book, I gave out copies to the boys in the troop.  Looking back, that was probably mainly a waste of money since many of them were sophomores or juniors and they just weren’t ready to read a book on investing.  I’m hoping a few of them will at least know where the book is when they were finishing college and maybe dive into it someday.

I’ve found myself lately trying to help get the boys who are turning 18 get on the right financial path.  A couple of them have jobs at fast food places.  This makes it possible for them to start an Individual Retirement Account (IRA).  I explain to them that while it may seem like an impossible task now, if they could just scrape together $1,000 to start an IRA, their lives could be so much better.  With $1,000 invested now, they can have something like $500,000 by the time they are ready to retire since their money will have more than 45 years to grow.  If they wait five or six years, that number drops to $250,000 since it will double one less time.  If they wait until they’re forty, they’ll be lucky to see $1,000 turn into $30,000 before they retire.

What I’d really like to see them do is get an account started now so that they can then start to get used to throwing some more money in as they get an extra $50 or $100.  If they got used to putting a portion of their paycheck into an IRA, maybe they would carry this on and be set for retirement by the time they were 30 or 35.  Unfortunately, it takes at least $1,000 to get started, which is a tall order when you’re spending your $7.50 per hour paycheck on your car and gas.  (If anyone from a mutual fund company is reading this, how about a special starter IRA for those under 18 with a $100 starting investment if you agree to contribute $50 per month for the next two years?  You could be collecting fees from several multi-millionaires in 30 years or so. )

For $1,000, you can start an IRA at Vanguard with the selection of two possible funds.  (Actually, you could earn the $1,000 at a job and then have someone contribute $1,000 for you, so you could spend the $1,000 year you earned and have an IRA.  You just need to earn at least as much as you contribute in the year.)  The best choice of the two funds available is their target date retirement funds, a fund that invests in  a ratio of stocks and bonds that Vanguard believes is appropriate for someone who will retire in 40 years, say.   With 40 years to retirement, the fund may be 20% in bonds and 80% in stocks at this time.  They could start there with $1,000, and then add money over the next few years as they were able.  Once they grew that into $3,000, they could then trade that first fund for something like an S&P500 fund or a total stock market fund since they really don’t need to have money sitting in bonds when they’re still in their twenties.

I’ve talked to two of the young men about starting an IRA.  The first one said he really wouldn’t be able to scrape together the money since everything he earns goes into the car.  The second one actually has been thinking about investing and said he would look at starting an IRA.  I’m hoping they both do it.  I was even thinking about matching their contributions or something to encourage them.

If you’re just starting a job, think about starting an IRA as well.  You’ll save about 10% of the money you contribute on taxes, meaning you’ll get to keep an extra $100 if you put $1,000 into an IRA.  If you’re the parent of a teen who is working, think about getting them to start an IRA as well, maybe matching their contributions to encourage them to invest.

 Much as I enjoy writing about investing, it doesn’t make sense unless people are reading. If you’d like to keep the articles coming, please return often and refer a friend – https://smallivy.wordpress.com.  Comments are also greatly appreciated, as is lively and friendly debate.  Also feel free to link to or reference posts – all I ask for is fair credit.

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.