Financial Idea's Blog » Learn To Invest

Why Shouldn’t I Just Buy An Index Fund?

mlarkin19 — Mon, 28 Jun 2010 01:52:01 +0000

Okay, on this one, I’ll start off by noting that, just like the idea of doing-it-yourself, it’s entirely possible that this could work, and in some specific time periods in the past it has worked. Of course, funds which follow the same index but are from different fund families behave a little differently, and within fund families there are funds which track dozens of different indexes. My English teacher would remind me that I should say “indices”, but I do what I do, and she does what she does.(That lesson did actually stick, I’m just having fun today.)

Let’s look at one of the most popular indexes, the S&P 500.

Lots of fund companies offer a version of this, which essentially is designed to take a weighted average of the top 500 performing stocks and roll that into one entity which many of us decide should be called “the market”. The market is actually a much bigger thing, but we’ll go with this common viewpoint for now.

Here’s what happens: the 500 stocks which make up the average are not randomly chosen. They are the best performers at the time, according to the parent firm which runs the index, Standard and Poor’s. Standard and Poor’s (or S&P), decides on a fairly frequent basis whether or not a given stock should be added to the index because of its great performance. The index, however, cannot become the S&P 501, which means simply that in order to add a stock, another one must be removed.

If a company merges with another company or goes out of business, that’s an easy situation. The index cannot become the S&P 499, either, so the next best performer gets added and the weighted average is recalculated.

Now, remember what I’ve said before about buying low and selling high, and, although it can be emotionally difficult, how it doesn’t take much of an intellectual stretch to see why that’s a good idea. Does this index work that way? Or not?

Remember, when there’s a vacancy, the next best performer is added. If a great performer just cannot be ignored, then the index’s worst performer, at the moment, can be removed in its favor. What does that mean? It means that the index is effectively selling low, by removing low performers, and buying high, by adding top performers. Read that again, selling low and buying high. If you own that index, or any other index, that’s what happening, and you don’t have any choice in the matter.

Last but not least, are you comfortable owning all 500 of those stocks? While many investors are okay with whatever they’re invested in as long as it makes money, many other investors have an explicit desire to stay away from certain things that don’t appeal to them. Let’s take the so-called “sin” stocks of alcohol and tobacco. The S&P 500 of April 1^st, 2010, contained Altria (MO, the former Philip Morris), and Phillip Morris International (PMI), formerly part of Altria but spun off to reflect the European market separately from the US. It also contained Brown-Forman Corporation (BF.B), the maker of Jack Daniel’s, Southern Comfort, Canadian Mist, Korbel Champagne and many others.

It also included American International Group (AIG), Goldman Sachs (GS), and Bank of America (BAC) which you may have read about in recent books or on the web and about which you may or may not have an opinion.

What if you personally don’t like energy companies? Would it bother you to own Chevron (CVX), Conoco Phillips (COP), or Exxon Mobil (XOM)? Or maybe you don’t like defense when you discover yourself owning General Dynamics (GD) and Lockheed Martin (LMT).

These are just a few examples of which there are many similar ones in the same industries. I am not saying anything about the companies, or my personal preferences, nor am I accusing them of anything. I’m just mentioning their inclusion in the index. The index also contains other companies, some of which I recommend for certain clients when it is appropriate for them. The question is, are they all right for you, and even if they are, is the index buying (or adding) them at the best possible time for you?

Want to know more? Let’s talk, and create a plan that’s right for you and your family.

Technorati Tags: how to invest, index funds, Invest Stock, learning index funds, What to Invest In

What’s A Dumb Financial Question?

mlarkin19 — Sun, 27 Jun 2010 03:36:12 +0000

Oh good, an easy question! ?

There isn’t one.
Say you came into my office and asked me a question, I explained the answer, and you nodded and went about your business, understanding a little bit of the answer but not really why or well enough even to remember a week later. Would I have done my job? Not really, or at least not yet.

That’s how a lot of information gets “shared” these days though. “Answers” are disseminated across the TV and the Web by people who know what they’re talking about and by people who don’t. Some of them are in official positions and so “should know” and others are not so official, like many bloggers, but could and do really know.

The opposite is also true,but what’s really important to you is, do YOU know? After all, it’s YOUR money.

Here’s my approach: you can ask me whatever financial questions you have. One-on-one. It’s not like you’re at a seminar with 100 other people, and you don’t want to raise your hand because the other questions seem far more advanced. Then you can ask me again, the same way or a different way. Next week you can call me and ask for a little more clarification. I might even encourage you to read another source on the topic as well.
I used to teach a series of technical courses at a community college, and I discovered early on that different people have different learning styles. So, I might explain a concept a certain way, and some of the people got it, and others didn’t, and they were all listening. Because of that, I made sure to tell them not only to ask questions about what I was saying, but if they really wanted to know what the textbook author was saying, to read another text from another writer on the same topic. That other author might be saying the same thing, but in such a different way that it “clicks” with a given person, the way the original information did not.
There are also different styles of learning. Some surveys have established that in the United States alone, some 70% of us are visual learners. The same surveys tell us that about 10% of us are auditory (listening) learners, so for example we might prefer storytellers to books. The remaining 20% of us are “kinesthetic” learners, meaning we learn best via one or more of the other of our five senses: touch, taste and smell. Many of us are a close combination of more than one of these.
The point here is that, because there’s more than one “right” way to learn, then by definition there can be no “dumb questions”. This is a difficult business to understand sometimes, and it’s my job to make sure that my clients who are serious about providing for themselves and their families in the future know what to do next.
Want to know more? Let’s talk, and create a plan that’s right for you and your family.

Technorati Tags: Financial Question, How to Invest Stock, What to Invest In

Financial Idea: Should I Be Buying Gold Or Looking At Emerging Market Stocks?

mlarkin19 — Sat, 17 Apr 2010 19:20:49 +0000

Yes, if you don’t think what you’re doing currently is risky enough.

Both types of investments are what are known as “niche investments”, along with other examples such as high-yield or “junk” bonds, and they can seriously mess up your portfolio by introducing wide price swings that make it very unpleasant to stay invested for the long term.

Warren Buffett has said, among multitudes of things, that you should invest in something with the idea that you can’t trade back out of it tomorrow or anytime in the next three years. In other words, that you should have the confidence in what you’re getting into that you can, while not ignoring it, be comfortable with holding it for the long term.

Taking that approach is going to keep your investment costs down for one thing, even when you’re paying a commission to trade. It’s also likely to help you keep your stress levels down. If you’re the sort of person who has to read the financial pages or watch the financial TV shows every day, you’ve gotten too close to the picture. Imagine being in an art gallery and standing with your nose two inches away from a painting and pretending to able to objectively evaluate it. That’s roughly the same thing.

Now, if you really like gold and/or emerging market stocks (and you understand what those are), it’s okay to have a little tiny bit of them, relative to your whole portfolio. Some people say as much as 5% of your total can be there. I’m more comfortable with 2%. Remember, they have wide price swings, and you’re very likely to get out of them nearly as quickly as you got in, which limits your chances of doing well and increases your trading costs.

Want to know more? Let’s talk, and create a plan that’s right for you and your family.

Technorati Tags: Financial Ideas, Gold Investment Information, how to invest in stock, Investing strategy, Warren Buffett

How did dotcom companies become so overvalued in the late 1990s?

mlarkin19 — Thu, 08 Apr 2010 20:36:28 +0000

A great example of a dotcom company that suffered the classic fate of many in the 1990s was VA Linux.VA Linux specialized in hardware, computers and servers that used the Linux operating system as opposed to the Windows version. The founders, Larry Augustin and James Vera, had discovered a niche in the hardware business. In the throes of the internet boom, when a “back of the napkin” business model was considered too formal for the new paradigm, a profit-making tech company that was not traded publicly was unthinkable. Thus, VA Linux was cajoled into an IPO.

The VA Linux IPO was an extremely hot issue. In retrospect, it has become a good example of just how out of control the dotcom bubble became in 1999. On December 9, 1999, VA Linux shares went on sale at an offering price of $35. By the end of the trading day, they were selling at over $235. Later that week, they broke $300. Normally, a steep rise in share price is to be expected as unseasoned securities are snapped up and traded by speculators. A rise of almost 700%, however, would seem to suggest gross negligence on the part of the investment bank underwriting the issue. Not that the founders of VA Linux were complaining; in a single day, they had gone from owning a company of modest profits to paper millionaires - siliconaires, to use the lingo of the times.

Unfortunately, the VA Linux IPO came just before the dotcom bubble popped. Over the following year, Augustin and Vera watched their company shed value at an alarming rate. By April, their stock was down below $50. By December, it was trading for less than $10. In 2001, VA Linux flirted with becoming a penny stock. In 2002, the stock spent most of the year trading for less than a dollar. From 2001 onwards, VA Linux, renamed SourceForge Inc., reworked its business into a software development firm – a move that helped the company rebuild. In 2006, SourceForge recorded its first profit since its IPO. In 2008, the company has traded around the $1-3 range – a far cry from the $300 it once commanded.

This question was answered by Andrew Beattie.

Resource: http://investopedia.com

Technorati Tags: Financial Ideas, Investing strategy, Retirement

Is Tech Stock Hot? Technology Financial Ideas

mlarkin19 — Sun, 21 Feb 2010 01:38:42 +0000

My goodness… I guess it’s time for that one again.

So, why do I say that? I mean, lots of gurus on the net are saying that. It’s simple, lots of gurus are indeed saying that, and lots of other gurus are saying that this sector is hot or that sector is hot, and you’d be foolish to ignore them (so they say). Other gurus are saying this sector is cold or that sector is cold, and you shouldn’t touch them with a ten-foot pole.

Keep in mind that the reason they’re saying what they’re saying is because they often are trying to sell you their newsletter with even more detail about whatever it is they’re touting, probably with recommendations you’ve never heard of. That can only mean it must be a great secret that hopefully you still have time to cash in on……right? They do this because it’s far easier to conduct their business at arm’s length with no regard for you or your unique purposes.

I, on the other hand, am one of the sort of financial professionals who wants to know about you and what you like, what you don’t like, and what you want your money to do for you. I want to know what you’re thinking so that I can understand what makes the most sense for you. I want to work with you and your family to educate you on how the markets really work in a one-on-one basis, so that you can participate fully in making your money go to work for you.

That said, let’s get back to the question…Is Tech Stock Hot?

Maybe it is! I mean, there are certainly some great companies in the tech sector, although they might not either be the ones that first come to mind, and they most likely are not the big secrets that the gurus will share to every buyer of their respective newsletters.

I know of a few companies which would be great additions to anyone’s portfolio…IF they like that sector, have the appropriate balance in other sectors and investment types, and really have a good purpose for owning that investment.

Hopefully in this really short topic, you can see that the question just IS NOT AS SIMPLE as the headline implies. It’s all dependent on you.

Want to know more? Let’s talk, and create a plan that’s right for you and your family.

Make an appointment at: http://whattoinvestinnow.com or email your questions to John@FinancialIdeasBlog.com

Technorati Tags: hot stock, Learn to invest stock, Technology stock

Financial Ideas for ‘Would-Be’ Small Business Owners

mlarkin19 — Thu, 11 Feb 2010 21:51:27 +0000

Hmmmm….I guess the first question here is “why are you starting a small business?”

You should know that generally speaking I think that starting a small business is a great thing. After all, this country was founded by entrepreneurs running their own printing presses or stables or whatever, and now only about 2% of Americans have their own businesses. Most of us think quite wrongly that we have no choice but to work for “the man”, but guess what? “The man” is just one of us who has already figured it out.

While there are distinct advantages to being a W-2 employee instead of being a 1099 contractor or your own boss, for many people it’s just not the fulfillment or the freedom that they were looking for.

Okay, with that disclaimer out of the way, the answer to the question in the first paragraph might be one of the following:

Like in the disclaimer, I just want to be my own boss and be in charge of my own day. Nobody but me depends on me, so it’s okay for me to get this figured out.
I have a family, but neither I nor my spouse/significant other is happy in the corporate world. So, we’ve agreed that I’m going to take a few years to make it work, and once I’ve made it happen (whatever it is), then he/she can take leave to make a go of it too, either in what I’m doing or in something else they’d prefer.
I’m the stay-at-home part of the couple, and the kids (or cats or dogs) are settled down a bit or even grown, and now I’d like to do something I’ve always wanted to do, like sell flowers or carve boats or whatever it is I love.

If your answer is number one, then we need to talk, because it’s very important to do all the critical thinking and due diligence in order to make it work and not have you get burned. I certainly wouldn’t want to see you soured on the idea when it’s something your soul tells you is right for you. You need to have the right long-term strategies and the right expectations, and you need to have enough money put aside to dedicate to doing this thing right.

If you’re more like number two, then all the ideas above still apply, but you also have to have the proper plans in place to take care of your loved ones, and you need to have protection in place in case something totally unexpected happens, the protection that you might be giving up by going out on your own.

Then, if you find yourself most like number three, all of the above may still apply, but it’s likely that you have a lot more flexibility in making this work in a particular time frame. Even in that case, you still want to make sure the business is protected and your family interests are kept separate.

Now, in all cases including those above and any others you might feel are appropriate, you really need to know how two big things can benefit you. First, how you can turn your efforts into rewards in the tax world, and there are many possibilities for that, and second, how you can benefit and attract employees if you have them, while also benefiting yourself.

Want to know more? Let’s talk, and create a plan that’s right for you and your family.

John@financialideasblog.com

Technorati Tags: Small Business

Some Financial Advisors Are Doing Well In Today’s Economy

admin — Mon, 07 Dec 2009 18:36:54 +0000

Why is this? It’s because they have the presence of mind to step back and look at the big picture. Remember the chart in the last article (below) about saving money in an IRA for 50 years?

Look at the early years in that graph.

That was a test.

What are the early years? The first one, two, three? There’s hardly any difference between that and the start. “You mean I’ve been investing for three years with you now and I’ve hardly made anything? I’ll never get anywhere!”

If only I didn’t hear that, like, all the time! But that’s not the end of the “early years”. I’m not talking about 3 years, or 5 years, or 10 or 15 years. I’m talking about 20 years before you really see the difference in that case, after which the growth really starts to become noticeable and just accelerates from there. This is why you should start as early as possible, build a trusting relationship with a competent advisor, and then be almost impossibly patient. I’m not suggesting that you buy-and-forget. On the contrary, you should be working with an advisor who is not afraid to take time with you and educate you. What I’m suggesting is that you realize that it will take time, but if you do it, time will be on your side.

Now, what if you want your money to grow faster that what we see in the chart? Can you do that without saving anything more? It’s possible, but it involves more risk than you might be comfortable with. A much better approach is to continually add to that savings, every paycheck. If you budget properly, you’ll make that a key part of your planning and you’ll pay yourself first!

Let me say that again. Pay yourself first. I doubt that there are three more important words that anyone will ever say to you, unless they are “I love you”. You don’t need a new car as much as you need to have the choice to retire someday, preferably when you want to.

Want to know more? Let’s talk, and create a plan that’s right for you and your family.

John@financialideasblog.com

http://whattoinvestinnow.com

Technorati Tags: Compound interest calculator, how to invest, Invest young, Rule of 72, the rule of 72, young investors

Don’t Be Apprehensive About The Market!

admin — Mon, 09 Nov 2009 20:58:36 +0000

“Oh, my gosh! Did you see what happened in the stock market today? It was down almost 120 points!”

Ever heard that before? If you haven’t, you will. The question is: should you listen? The answer is: only if you like being really depressed one day and really excited the next day, because that’s typically what happens? Sometimes we get really good days back-to-back and sometimes really bad days a few times in a row, but that’s still not stepping back far enough.

Let’s say you’re 40 years old, and you started putting money into the stock market 20 years ago. The S&P 500 was trading at approximately 340 points, compared to nearly 10,000 today. Or maybe you’re 50 and your start was 30 years ago. The S&P 500 then was trading for about 100 points. So between 1979 and 1989, the market tripled. Between 1989 and 2009, the market grew by 33 times!

Isn’t that a better concept to stick in your mind than what most of the media is alarming you with lately? Like a market down about 33% in the past two years?

The only reason – at all – to be concerned about the short term in the market is if you plan to retire in the next few years. If you’re younger than that or if you like your job, you should be taking advantage of the magic of compounding returns to get you in a position where you have choices! Having the choice to work or not work is a whole lot better than needing to work to make ends meet. That’s when you might have no choice but to be really aggressive, which can hurt a lot if things don’t go the way you hoped.

And don’t listen to people who say you can’t be too conservative, because you can be! Remember my article (below) about the Rule of 72. If you put all your money into CDs right now, your money will grow at a rate lower than inflation. I don’t know about you, but I’d like my money to double sooner than three to four (or more) decades!

Still confused about the right thing to do? Let’s talk, and create a plan that’s right for you and your family.

Email: John@financialideasblog.com

1.888.379.4352 Extension 1000

Technorati Tags: Financial Ideas, how to invest in stock, How to Invest Stock, Interest Only, play the stock market, recovering economy, Stock investing, Stock Market advice, stock trading, US finance, What to Invest In, what to invest in now, young investors

What’s The Difference Between A Stock And A Bond?

admin — Thu, 22 Oct 2009 17:52:07 +0000

This poses an interesting question because it highlights how many people really have no idea about the different type of investment “vehicles”, as they are often called.

*You know what “equity” is, right?

Especially if you own a home, it’s the difference between what you owe and what you own. If you have a $300,000 house and you owe $200,000, then you have $100,000 in equity, or ownership.

Stocks are much the same thing, except that what you own is (typically) a VERY small piece of a major company. In most cases, you’ve already paid for it in full, and therefore you own it outright with no debt. (It is possible to borrow ownership, but that’s a level 200 course).

This is why stocks are often called equities, and vice versa. Think of yourself as a part owner, you can attend the annual meetings and vote on issues as requested by the board of directors – using what are known as “proxy statements”.

You will probably have a very limited impact on the direction of the company unless you own 5% or more of the outstanding stock, what most people buy stocks for is to either a) participate in the growth of the stock price or b) get paid cash dividends as a reward for owning the stock.

In an ideal situation, both will happen, at which point you have to be clear on why you own the stock – is it for the growth, in which case you might want to sell it for a profit – or is it for the dividend (read: the cash flow) in which case you might not want to sell it.
A bond, on the other hand, has NOTHING to do with ownership. A bond is like your mortgage loan or your car or other loan. It is an agreement between you and another party by which the lender gets paid a fixed amount of interest for a fixed period of time. The cool part is that YOU are the lender. YOU are the bank! These are generally not as exciting as stocks, but that can be a good thing! Being the lender instead of the borrower can be a very positive and eye-opening experience!

So, what is a mutual fund then? Fortunately this is easy. A mutual fund is a basket of various stocks, or a basket of various bonds, or in some cases, both. Which of those 3 general approaches, and which specific investments are held by the mutual fund are defined by the fund’s prospectus, which states what their objective is, and what they can and cannot do, so that other people can hold them accountable for doing what they say they will.

Mutual funds are often a little more expensive than individual stocks and bonds, simply because you’re dividing your money among many different investments, a form of diversification, rather than having everything in one basket.
Further questions?

Email me at: John@financialideasblog.com

or go to http://www.whattoinvestinnow.com

Technorati Tags: Bonds, Compound Interest Formula, how to invest in stock, How to Invest Stock, Rule of 72, Stock Market, stocks and bonds, What to Invest In

College Investing – Where Do I Start?

admin — Thu, 22 Oct 2009 17:29:23 +0000

Lifetime Career Earnings: H.S. Graduate Vs College Graduate

Finally, an easy question! I wish I could say that the answer was just as easy to take, but it’s not, because college costs continue to go through the roof.
When I do a forecast for anyone saving for college, whether it’s for themselves later on or for their children or grandchildren, I forecast the college tuition inflation rate to be no less than 7%, which is twice the average inflation rate for the rest of the economy.

So, the biggest and hardest part to get through is going to be how much you might have to save and how early you might have to start.

In my neighborhood, there are dozens of young families pushing around baby strollers. When I ask them about their college savings, they let me know it’s really early and they don’t need to start yet. If only that were true.

Right now, a typical in-state school cost for the state of Washington right now is about $14,600 per year, for tuition, room, board, books and lab fees.
If you have a new child this year who will be starting in the fall of 2027, the cost then is closer to $54,000 per year. Other states are more expensive even for state schools.

We’ll do a specific plan for you when we start working together, but just take away from this discussion that it isn’t something to put off!

What’s the next thing to consider?

What it costs to get the money back out, to actually pay for tuition and the other fees of course! With a state-sponsored 529 plan, you can get your money back out to pay the bills as you need to with, get this, absolutely no federal income tax at all!

Even more, you don’t have to live in the state where the plan is based. “What do you mean, where the plan is based?” Every state has to sponsor at least one plan, and in most cases, they partner with one or more mutual fund companies to actually provide the 529 plan structure and the underlying investments.

So, for example, you could live in California and save in the Virginia plan, or the New Jersey plan or the Arizona plan. In some cases, you can get a state tax benefit by using your own state’s plan, but that isn’t necessarily the only deciding factor.

OK, so what happens if Junior doesn’t go to college? It’s fine. The state 529 plans I work with are accepted by any institution which accepts U.S. Federal Financial Aid. So, if Junior wants to be a pilot or a chef or a professional golfer, the funds are still there.

If Junior gets a scholarship, you can withdraw a matching amount from the 529 and re-use it for your own purposes. If he doesn’t use it for undergraduate school, it’s good for 30 years after high school graduation, so he could use it for a Master’s program or a Doctoral program.

And if there’s money left over when all is said and done?
You can change the beneficiary of the plan to a sibling, or grandkids, or even to yourself, and use the remaining funds that way.

If you would like to discuss college investing ideas and opportunities please email me at John@financialideasblog.com.

Technorati Tags: Financial Ideas, how to invest, Invest in college, Invest young, start investing, Stock Market Education, What to Invest In, young investors