Stocks: The Long-Term Still Shows Promise

My husband and I have some money invested in the stock market. We used to have quite a bit more invested, but the same thing happened to our stocks that happened to the rest of the stock market. This situation bothers my husband: every so often, he mentions that we could pull that money out and use it for something else — at least until the market recovers. But the situation doesn’t bother me. Actually, I’m working on setting aside more money to invest.

We Plan for the Long-Term

One of the biggest reasons that I don’t worry is that we’re a long way off from retirement. I know I’d feel differently if retirement was right around the corner and we had been counting on those stocks for money. But the fact of the matter is that stock market does go through ups and downs and there’s plenty of time for both valleys and peaks before we’ll really need that money. This means that we’re not active traders. We have one strategy and that’s to buy and hold.

I’m absolutely confident that stocks will go back up — that’s one of the reasons that I’d love to add more to our investments now. Sure, there’s a distinct possibility that some sectors haven’t hit rock bottom. I’d really prefer to wait until rock bottom before investing, but I’m confident that prices will go back up far enough to make investing at current prices well worth my while.

We Pick Stocks Carefully

I’m very confident that our stocks will start rising again, for a number of reasons: we’ve invested in companies that are solid. I actually read annual reports and other business news — we do our best to pick investments that will remain solid for years to come. We certainly don’t have the most exciting of investments, but we also don’t have to worry about actively trading. Since we plan to hold on to all of our investments, we pretty much ignore any companies that would require us to time buying and selling. As long as our stocks remain on a general upward trend over the years, we’re doing okay.

We Minimize Stock Stress

I’m the first to admit that some scary things have happened in the stock market over the past year and a half. But it hasn’t become an impossible situation, for most people. I know more than a few people who had invested in the market and now seem to think that dropping stock prices mean the end of the world. But the fact of the matter is that what stocks do in the short term looks nothing like what they do in the long-term. If you can ride the current situation out, most stocks will recover in the long-term. Some specific companies (particularly in the financial sector) may not make it through the short-term, but companies that have a strong base will do just fine.

I’m not a financial adviser, and I’m sure that other approaches to investing work just as well for other people. But I’ve found that our system actually does very well for us and keeps us, aside from my husband’s occasional comments, from worrying too much about our finances for the short-term.

Free Accounts Make All the Difference

Any checking account you have to pay for is a raw deal: banks make their real income off of money deposited, by lending it out. That means that any fees you pay for your personal checking account are just icing on the cake. You may think that it’s just a few dollars every month, but think about how long you plan to have a checking account for. It’s pretty likely that you’ll have an account for your entire life — and five bucks a month for the rest of your life will add up to far more than pocket change.

Getting That Free Account

The banking business is competitive enough, even with the continuing trend of banks buying up one another, that every bank and credit union offers at least one free personal checking account. It can take a little effort to get it, but it’s more than worth the savings. A common tactic at some banks is to direct customers to accounts with fees when ever possible: it’s up to you to act as your own advocate and keep asking for a free account until you get it. Remember, there are worse things than moving your money to another bank, and one of them is a monthly fee just to offer a bank the privilege of using your money.

Bluffing can get you in trouble here. You want to be ready to withdraw your money and head to the next bank if your current financial institution can’t help you out. There is always a next bank, by the way. In the past, you may have been limited to those banks in your area, but with the growth of online banks like ING Direct, you can get banking services just about anywhere. In fact, it’s definitely worth considering online banks: ING offers a free checking account, and better interest rates than most brick-and-mortar banks can match. Another good option is likely to be the local credit union. Most credit unions do not charge fees for their accounts, and can actually get you better deals on mortgages and other financial products.

Don’t Limit Yourself to Banks

While you can’t find a free option for every type of financial account under the sun, you do have plenty of low fee options. Consider your IRA — you may not be in the driver’s seat for a 401(k) but you certainly are if you have an IRA — you can often use a discount broker with minimal fees to buy and sell your securities. Unless you do a lot of active trading, you don’t need the expensive offerings that many banks or insurance companies offer. Even if you do a higher level of trading, a discount broker may be able to cut your costs.

Spend some time looking at your financial service providers: take a look at their fees and those of the competitions. I’m not suggesting you switch service providers — but take in those lower fees and see if you can get a matching rate.

5 Tips For Taking The Long View With Money

Being able to take a long view of your finances is important: if you can focus on the long view, you’ll be better equipped to make decisions about mortgages, investments and other crucial factors in your finances. The simple fact is that if you can focus on finding the best long-term solutions — the best investments over time, the cheapest mortgages and so on — you’ll have more money in th long run, as well as the time to enjoy it.

But making the switch to long-term thinking isn’t always easy. We’re used to think about today, tomorrow — maybe as far as next year. Most days, we just feel like we have more pressing concerns than years from now. But the following tips can help you make the shift.

1. Keep your mind on the interest. When we’re talking about long-term anything, it boils down to interest. What kind of interest are you going to pay on your mortgage? What rate of return can you expect on an investment? It’s crucial to understand interest — and stay focused on it.
2. Forget a set retirement age. The fact is that most of us won’t actually retire anywhere near the age we’re currently planning on. Even if we have the money to do so, the likelihood that we’ll actually just quit working cold turkey is decreasing. Instead, it’s important to think about the lifestyle that we want for the rest of our lives. Think about whether you’re going to want some flexibility and what you’ll need to make work less necessary.
3. Practice adaptability. We all know that things change: our expectations of tomorrow (let alone 20 years from now) are probably not going to prove true. But if you practice adaptability in your day-to-day life, adjusting to those changes that affect your long-term plans is much easier.
4. Don’t look at the numbers too often. While having a good idea of what your money is doing is good, knowing every move it makes can actually do you more harm than good. You can get caught up with the day-to-day movements of your money and forget about the forest in favor of the trees.
5. Set short-term goals consistent with long-term plans. Your short-term plans have to help your long-term plans along, which means that you’ll want to set at least some basic short-term goals that will support your long-term plans. Something as simple as getting an extra $500 into an investment account this year can help your long-term plans along (remember compound interest!).

How do you keep yourself focused on long-term goals and plans? If you have anymore tips, please share them: even though I’m convinced of the importance of long-term planning, I know that I struggle to keep myself working for the long-term, rather than some short-term goal that might not actually do me all that much good. I’m always looking for a little more long-term inspiration, and I’d love to hear your suggestions.

Skip the Get Rich Quick Schemes

Every day, I see a poster or an ad for some great opportunity: “Make $1000s in your spare time!” is only one example of these ads that promise impossible results for very little effort. Most people avoid these get rich quick schemes like the plague. But there are plenty of schemes out there that are harder to recognize.

In a way, the housing boom that led to our current situation was a get rich quick scheme: banks thought that they could make money quickly by extending credit to a whole list of people who couldn’t buy homes previously. They forgot that there was a reason those borrowers didn’t qualify for normal mortgages. And borrowers also saw an opportunity to make money on the quick: home prices had an upward trend and many home buyers figured that they could buy a house, live in it for a few years and turn around and sell it at a profit. Sure, quick meant three or four (or even more) years in this example, but it was a way to get a whole lot of money than a person could otherwise.

Recognizing Get Rich Quick Schemes

The problem seems to be that everyone wants the opportunity to get money for less effort than they’re used to putting out. And, in many cases, there are ways to do so. But there is rarely just money for free — and it’s necessary to remember that fact when you’re looking at an opportunity. Returning to the housing market for a moment, think about the sense of free money that accompanied many home sales even a few years ago. Some people managed to successfully cash in on rising home values, but there was practically no consideration of the risks that went along with the purchase of a house — risks that went far beyond dropping home prices.

I’m not suggesting that a house is a bad investment. However, I am suggesting that treating the purchase of a home as a get rich quick opportunity — as anything less than a long-term investment — is just looking for a way to make money without much work. And that sort of situation is risky at best.

Scams Versus Schemes

Those ads I mention often fall into the category of outright scams. Unfortunately, when someone offers you an opportunity with returns on either your time or your money that are just too good to be true, it usually is. There are plenty of get rich quick schemes out there which are legitimate, however. Although they are legal, they’re still not a great idea. In general, they carry a level of risk that could wipe you out if you don’t make the big win. It’s a matter of gambling something you can’t afford to lose. If you can’t afford to take on the level of risk associated with a plan, it’s probably worth skipping — even if it seems like a really good idea. If you can afford it — well, it’s up to you.

Municipal Bonds: Investments With Tax Benefits

There is an investment that is often exempt from federal income tax and state income tax, making it a useful tool for investors concerned about their tax burdens. Even better, this investment has minimal risk, making it a worthwhile option these days. The investment is the municipal bond — a bond issued by local governments and their agencies. Cities, counties, school districts, publicly owned airports, redevelopment agencies and other local government agencies can all sell municipal bonds.

Because of the wide variety of bond issuers, the terms of a municipal bond can vary. Repayment schedules, interest and even taxability can all vary between bonds, so it’s very important to research any bond you’re considering buying — perhaps more so than some other kinds of investments. Among other things you might want to consider before purchasing is the bond rating, which is assigned by one of the three main rating agencies in the U.S.: Standard & Poor’s, Moody’s and Fitch. The bond rating addresses the liklihood that the bond will be repaid — that is, whether you’ll make money.

The security of a municipal bond can vary based on how the bond is secured. A bond is secured by its repayment source — where the money will come from to repay the bond. There are a wide variety of repayment sources, but three show up particularly often:

• General obligation bonds: These are the bonds with the most security (and lowest payouts) because the issuer promises to repay based on its full faith and credit.
• Revenue bonds: These bonds must be repaid from a specific stream of income (such utility fees). If money is not available from that income stream, bonds may not be repaid.
• Assessment bongs: These bonds are repaid based on property tax assessments within the issuer’s boundaries. Because tax assessments can vary, repayment is less secure.

The drawback to municipal bonds is that they generate lower amounts of interest than other investments — or even other bonds. Because corporate bonds are riskier, they pay a higher rate of interest to investors. Some municipal bonds are considered comparable to corporate bonds because, when you consider the tax advantages, an investor can walk away with the same amount from a municipal bonds as from a corporate bond with a higher interest rate. Despite this fact, many investors consider municipal bonds a less than ideal investment, because few bonds really offer an interest rate that compares with many corporate bonds. Municipal bonds have a level of security, however, that can make them a better choice for investment during times when other investments seem a little too risky.

For more information about municipal securities, I would suggest MSRB’s Electronic Municipal Market Access, which has an excellent set of educational materials. The site also has up to date information about recent trades as well as a tool to search for municipal bonds. It’s certainly worth doing research before you make a decision regarding municipal bonds — you may want to consult with a financial advisor as well, due to the fact that is impossible to offer investment advice that will work for everyone.

5 Holiday Gifts That Can Help Build Wealth

The holidays are just around the corner. If you’re still looking for ideas for gifts, we’ve got a couple that can give your loved ones a head start on improving their finances and building wealth.

1. Personal finance books: there are plenty of books that can provide a basic introduction to personal finance, as well as those that can provide a more advanced education on investing and other money topics. There are a quite a few different authors and companies that routinely crank out books on financial topics. In particular, I would recommend the many Motley Fool books — there’s a book for just about every financial situation and they’re high quality with sold information.
2. EE Savings Bonds: The U.S. Treasury recommends EE Savings  Bonds as gifts — they’re reliable and low-risk investments. Personally, I think savings bonds are a particularly good gift for children, especially if you explain how the investment works. You can purchase EE Savings Bonds on the Treasury’s website, which we have discussed in depth. The site does not offer paper bonds, however — if you want to purchase the paper version, you will need to do so through a local financial institution.
3. Time: For some people, time (or lack thereof) is making it harder for them to achieve their goals. Maybe a friend or relative needs a babysitter or someone to cook up a few meals so that they can just get ahead of things. If you’re a little short on time yourself, you can purchase an absolutely amazing list of services both online and locally. A personal chef will come by, cook up a few meals and stick them in the freezer. A maid service will come by and take care of the laundry. Most companies will allow you to buy services for a friend or family member in a block and save them some time.
4. Money management software: I’m not talking about Quicken or other big software packages (although if it’s on someone’s holiday wishlist, more power to them). There are plenty of small money management tools that can help out in a big way. Shoeboxed, for instance, can get all your receipts organized for you. Expensr can help track expenses. There are thousands of other tools and at least one is probably perfect for your friends and family.
5. Anything business-related: If you want to give a gift to a family member with even the slightest entrepreneurial bent, ask what they need for the next step of their business. Maybe a year’s worth of website hosting can help them more than anything else, or maybe there’s something even more useful. Asking can help you find a gift that truly can move the recipient along the path to his or her goals.

Note that I didn’t actually include money in the list above. For some people it might make an ideal gift, but I know that others feel that a gift should be selected with a person in mind. I do think that money makes a better gift than a gift card, financially speaking: gift cards have so many limitations that cash isn’t subject to. Money is just more useful than a gift card.

3 Steps To Keep Your Investments Safe

We’re all becoming a little used to watching our investments tick downwards. It’s disheartening at best, but you can take a few steps to protect yourself. You can’t change the value of your investments, but you can reassure yourself that you’ve done everything you can to protect yourself from a problematic market. The three steps below can help ease your mind — at least a little — about what’s happening with most investments.

1. Know Your Rights: Depending on where your savings account is, there might some changes going on beyond the name on the building. However, making sure you’re aware of just what the bank is allowed to do with your money — and what rights you have — can help ensure that a sudden change won’t put your cash accounts in danger. You should also understand the protection the FDIC offers you for savings accounts, CDs and other cash accounts. If you’re not quite sure what the FDIC does, you can read up on it on the FDIC website: I’d recommend reading the bank closing information for Silver State Bank or another failed bank, rather than the various ‘About the FDIC’ pages. You’ll get an example of exactly what happens, rather than wading through hypotheticals. The FDIC actually protects more than you might think, including IRAs and money market accounts.
2. Minimize Movement: Unless you are truly not confident in an investment’s ability to ride out the recession intact, try to minimize moving your money around. That’s actually a fast way to lose money — with all the fees that can be associated with a move, you can wind up losing far more than you might expect. For most investments, the current downward trend is nowhere near permanent. Once the economy becomes stronger, stocks and other investments will regain value. It’s a waiting game. There are a few exceptions, of course. If you do need your money now, it’s reasonable to pull it out of an investment, although it’s worth discussing the matter with a financial planner in order to protect your investment as much as possible.
3. Save and Diversify: While it can be harder to sock away money during a recession, creating a bigger cushion of savings can reduce your worries about the current financial situation. It may seem counterintuitive to invest any of your savings during a recession, but it’s worthwhile to do so as long as you invest conservatively. CDs and other insured investment vehicles can keep your money safe while the market evens out. Do your research before investing anything, of course, and diversify where you place your savings to increase their safety as much as possible.

There is no perfect way to protect your investments, unfortunately. Even putting all of your money in a mattress at home is risky — and that money is certainly uninsured. However, you can ease your mind by taking the steps available to you: if you’ve done everything you can to protect your investments, you can rest a little easier when it comes to money matters.

Make Sense of Stock Quotes, Part Two

On Tuesday, we covered the left-hand side of a stock quote in Make Sense of Stock Quotes, Part One. In Part Two, we’re tackling the right-hand side — where the good stuff is kept. The statistics listed on this side of a stock quote give a solid indicator of how the stock has performed recently and whether it’s a good purchase (or a good sale).

Day’s Range: Over the course of a day, a stock’s price can rise and drop significantly. The day’s range shows just volatile a stock has been over the course of the day, helping an investor judge whether it’s moving around too much to be a solid investment.

52wk Range: The 52 week range provides the same information as the day’s range — but for the last year. It’s not unusual for the range to be wide over the course of a year (especially with a stock market as problematic as we have today), but it’s worth checking to why a stock reached the extremes.

Volume: This number describes the total number of shares of a particular stock traded throughout one day.

Avg Vol (3m): The average volume is the average number of shares traded daily over the past three months. If today’s volume differs significantly from the average volume, it’s worth looking into why before buying or selling a stock.

Market Cap: Market capitalization is the total dollar value of the company, as determined by multiplying the cost of a share as of the last trade by the total number of shares.

P/E: The price/earnings ratio is a projection of a stock’s earning potential. The ratio is calculated by dividing the cost of a share as of the last trade by the amount the stock’s price has increased by over the past year. If a stock has a P/E ratio over 25, it’s expected to perform very well in the future.

EPS: EPS stands for earnings per share. This number is calculated by determining how much money you would have earned if you purchased a share of a particular stock last quarter and sold it today.

Div & Yield: The dividend is the payment made to shareholders based on the company’s profits. The yield is the dividend expressed as a percentage of the price per share. Extremely high yields often indicate companies on the verge of financial distress.

With the statistics listed on the right-hand side of a stock quote, you can tell not only how well a stock has done for investors but also learn how heavily it’s being traded and get an indicator of how a company will do in the future. There are plenty of reasons to research a stock further before purchasing it — after all, if you are going to risk your money, you want to do so in a good investment — but a stock quote provides the absolute basics you need to know before trading a particular stock. They’re easy to find, as well. Even Yahoo! provides up-to-date stock quotes.

Investing with TreasuryDirect: A Conservative Option

With the stock market’s fluctuations, many investors are looking for conservative opportunities. If you’re among that group, your first stop should be TreasuryDirect. The federal government operates this site to make investing in the various treasury securities very simple. Those securities include treasury notes, treasury bills, treasury bonds, or TIPS — all of which are backed by the U.S. government. While treasury securities rarely have a high rate of return, they all have a fixed rate of return that is guaranteed.

It is unbelievably easy to invest in treasury securities these days: setting up an account on TreasuryDirect takes only about five minutes. You will have to wait for the government to mail you an ‘access card’ — the card itself is relatively unimportant, but this method allows the government to confirm your mailing address (and your identity).

Once TreasuryDirect has confirmed that you are who you say you are, you can like a bank account — either checking or savings — to your TreasuryDirect account. When you’re ready to invest, you’ll need to purchase a certificate of indebtedness, which is just a fancy way of saying that you’ll transfer money into your TreasuryDirect account. From there, it’s just a matter of purchasing the treasury security of your choice.

You’ll need to invest a minimum of $25 in order to purchase savings bonds and $100 for treasury notes, bills or bonds. TreasuryDirect allows you to place your order and the site will fulfill your request at the next treasury auction. All treasury securities are sold at auctions, but the process is fairly pre-determined. You can get deals occasionally, but they may not be especially large.

After you’ve purchased your securities, you’ll receive returns every six months for the life of the security. For those purchased through TreasuryDirect, your payments are automatically deposited into the account you used to initially purchase your investments. You can purchase securities for virtually any length of time you wish through TreasuryDirect. Your options range from 28 days to 30 years, with a wide variety of choices in between.

There are some definite benefits to investing in treasury securities — among other positives is the fact that you won’t need to pay state or local taxes on the returns — although there are some equally significant drawbacks. Because treasury securities are among the most stable investments available, there is not as significant a return on them as you might wish for. You can get a comparable rate just by leaving your money in a savings account or a CD. The main difference is the fact that while something may happen to a savings account, it’s highly unlikely that anything could happen to an investment in treasury securities.

In the past, investing in treasury securities required quite a bit more effort than it does today. TreasuryDirect has streamlined the process, making it simple enough for any individual investor to handle on his own. It’s just a matter of sitting down at your computer and getting started.

Take Advantage of Your 401k Match — While You Can

401(k) matching is a wonderful perk — who would ever turn down free money? These days, the answer seems to be ‘a lot of people.’ With the financial difficulties many people are facing, a lot of people have stopped contributing to their 401(k) plan. I can’t say that the choice doesn’t make sense: paying your bills today certainly makes more sense than going broke now in hopes of saving for retirement.

But if you can take advantage of a 401(k) matching program from your employer, I’d recommend doing it. Many companies are looking for places to cut costs and that free money is going to disappear quite quickly. Not every employer is looking at cutting 401(k) matching in the near future, but a few have already started. General Motors is just one example of a struggling company which has announced plans to temporarily stop matching contributions for its 32,000 eligible workers — although it seems quite possible that ‘temporary’ may turn into ‘permanent.’

For a lot of employees, a cut or suspension of your 401(k) matching benefit amounts to an unofficial pay cut. While not everyone contributes faithfully to their 401(k) plans, many companies offer it as a key component of their employee compensation plan. It’s definitely not something most employees want to see cut. With the current economic situation, I don’t think that all companies will feel the need to suspend any employee benefits programs but some — like GM — are going to cut everything they can think of, just to hold on a little longer.

If your employer announces plans to reduce or suspend 401(k) matching, the crucial question is when — you can often make a few more contributions before your window of opportunity closes. If that’s the situation, do whatever you can to contribute up to the matching point to your plan. Through the rest of the year, the upper limit for contributing to your 401(k) account is $15,500. In 2009, that number will rise by $1,000. If you’re 50 or over, you can currently contribute an additional $5,000 — and in 2009, that number will go up to $5,500.

When I say anything, I do mean it. You’re in a place where you have bills to worry about, but if making your full contribution to your 401(k) means taking on a second job, it’s likely to be worth it. It’s hard to picture just how crucial your 401(k) will be after your retirement, but a few contributions now may make a major difference after compound interest does its job.

The decision to suspend 401(k) plans is a good indicator that a company is struggling. While I wouldn’t go so far as to say that a company that feels forced to cut employee benefits is probably going to move on to something more drastic, it might not be a bad a idea to brush up your resume if you get word of some changes to your employer’s 401(k) plan. Even if you don’t need to worry about layoffs, it may be worth considering your options.

Inner8: Learn Before You Invest

With all the opportunities you have to trade stocks online, it’s tempting to just jump into the deep end. We all have a few companies that we’re absolutely sure are on the verge of making it big. It’s worth taking a moment, though, before investing everything in our ’sure thing.’ Take a step back, take a deep breath, get a little more information. Rather than staring at complex analyses of the stock market until you go cross-eyed, though, you do have a few other options. One new website is currently standing out in particular: Inner8. While Inner8 is still in beta, it already has some useful tools available for investors who sign up for free accounts.

One of the major benefits of Inner8 is the fact that rather than simply offering up stock picks, this site has built in an element of social networking. You can follow other investors and see their opinions on the stocks they’re considering. You can also see stocks that have been specifically recommended by members of the site. For the most part, information is divided up in to sectors (energy, telecommunications, etc.) on the site, and by looking at just a few profiles, you quickly discover that there are a few members who are particularly vocal about each sector — those individuals are worth following if you have an interest in that sector. Take a close look at other users’ accuracy ratings: it’s very easy to make a prediction on the site, and Inner8 tracks which users’ predictions are right on a regular basis.

You can find Inner8 members through a number of methods: those with high levels of activity, those interested in particular stocks, and even through a matching program ran by the site. You can also search for members based on their user name. The wide variety of investors you can find on Inner8 can be a real benefit: because they all have different investing styles and goals, you can get a wealth of information about a particular course of action — as well as all the arguments against it.

Beyond the social networking aspect, Inner8 has the standard information needed by any investor: you can customize your own dashboard with forecasts, trading information (about a 15-minute delay) and news from the Wall Street Journal, among other sources. While you can’t invest on Inner8, the site does provide you with many tools to keep up with all the information about not only your preferred stocks but those recommended by other investors.

The Inner8 name comes from a key concept in investing: when you hold eight stocks or other assets, your portfolio is considered diverse. In much the same way, the website provides diverse sources on information about investments, including tips from a wide variety of other investors. The site’s goal is to empower investors to move beyond relying on professionals to give them expensive advice on which stocks are up-and-coming — as well as to provide ways for investors to check out those tips and find out if they’re really worthwhile. The team behind Inner8 helped pioneer E*TRADE, and the two sites make for a symbiotic relationship.

It’s Time to Give Your Financial Planner a Call

Right now, financial planners are just as scared of an economic crisis as the rest of us. If you work with a financial planner, he or she may be offering up plenty of advice right now that majorly differs from what they’ve told you before. Unfortunately, a lot of that advice may be bad — based on getting your cash out of the market as fast as possible.

In good economic times, financial planning can be relatively easy: find some investments with growth potential, sit back and watch the cash roll in. I’m over simplifying, but keeping a client from losing money in an economic downturn can be much harder.

Doing Their Best

Financial planners are in a pretty tough position when investments dip even a little bit: if a client opens a monthly statement and sees that his investment’s value has dropped by even a small amount, his financial planner will be hearing about it. So financial planners have to make sure that their clients believe that they’re doing everything they can think of. In a down market, that might involve moving money in and out of investments rapidly.

It isn’t your financial planner’s fault if market prices drop the value of your investments. But if your financial planner knows his business, even a major change in the market won’t require a lot of changes in your portfolio. Your investments should be based on your financial goals and needs — and those investments should be fundamentally sound. Sure, if you’re invested in the banking and credit industries, you may need to be making a few changes. Your investments should, hopefully, be diversified. That means not all of your money should be invested in those two industries — and those other investments should be fine, even if the price has dropped a bit.

Keep In Touch

A good financial planner probably isn’t calling you every day or every week to get permission to change your portfolio. That doesn’t mean that you should keep in touch. One of the services you pay a financial planner for is explaining how market changes will affect you and your investments. Your financial planner is a good source of reassurance about your investments — ask why they’re still good and your planner should be able to explain why those companies are still solid.

It’s worth the effort to make sure that you understand every step your financial planner takes. You may not be able to locate those steps on your own — if you could, why would you want a financial planner? — but it’s perfectly possible to understand the logic behind a particular set of investments. If your financial planner can’t explain why a certain set of investments better matches your goals than another, perhaps it’s time to research another financial planner. Give your financial planner a chance to talk you through things first, though. It’s easy to overreact when you are shocked by the current value of your investments.

Watching A Scary Stock Market

I’ve own a few stocks and, right now, I’m sweating. If you own any stocks, even through mutual funds or retirement plans, you know the feeling. Basically every industry is feeling some pain now. As an investor, it’s pretty typical these days to be wondering if it’s time to get off the stock market roller coaster: sell, even at a loss, and put your money into something safer.

But is it really time to sell off your stocks?

The ideal way to invest in stocks is to buy low and sell high. That rule is based on the fact that stock prices fluctuate. They don’t grow steadily — if they did, the rule would be buy now, sell later. Instead, if you want to earn money as an investor, you need to ride out the low periods.

Now, we happen to be in a low period. I know you’re thinking that we’re in a particularly low period — but that doesn’t change the rules. It just means that you shouldn’t sell stocks right now if you can avoid it. A few companies are probably going to go under due to financial difficulties — if you know in advance, yes, get what’s left of your money out now (and give me a head’s up as well!). If you don’t have psychic powers, though, it’s probably best to leave your money where it is… doing otherwise would be buying high and selling low — the opposite of a good investment strategy.

Why do you want to sell?

If you’re seriously considering selling your stocks right now, I’d like you to step back, take a deep breath and ask yourself why you really want to sell. Do you actually know that something is wrong with a company you have invested in? Or have you just seen the price falling, day after day and gotten worried? I know that watching my stocks’ prices tick downwards is terrifying. Just the same, I’ve invested in fundamentally solid companies. Though their prices have dropped, there is not even a rumor of bankruptcy, layoffs or other troubles. I’ll be holding on to my stocks, even as I’m holding my breath to see how low stock prices drop.

When do you need the money?

Not all of this holds true if you need your money soon. If you were planning on cashing out of the stock market fairly soon, you may not be able to afford to wait. I encourage you to wait if you can, but we’re talking about a wait of years, not months. I know that’s not a feasible length of time for some people to wait, and if you’re among them, perhaps it would be better to get out of the stock market before anything else happens.

There’s no guarantee that the stock market will go one way or the other. I have no special insight one way or the other. All I can say is that I think that staying in the market is better than selling, at least for the moment.

The Secret To The Stock Market

Not too long ago, CNN Money posted “The smartest advice I ever got.” The article is really just a list of forty really good pieces of financial advice. In that list, Whitney Tilson described the secret to learning how to invest — the secret of the stock market:

About 12 years ago I was trying to learn more about personal investing. My good friend Bill Ackman, currently a hedge fund manager for Pershing Square Capital Management, told me, “Read all of Warren Buffet’s Berkshire-Hathaway shareholder letters. That’s all you need to know.”

The Berkshire-Hathaway shareholder letters are available as PDFs from Berkshire Hathaway’s website. They date from 1977 and were all written by Warren Buffett. If you aren’t familiar with the ‘Oracle of Omaha,’ the simplest explanation is his net worth: $62 billion. Buffett’s father was a stock broker — comfortable, but not exactly rich.

I can’t recommend enough that you take the time to read these letters. Investing in the stock market seems like black magic, but in addressing his shareholders, Buffett boils down the matter to the principles of sound investing.

One of the reasons that I think Berkshire Hathaway has done so well under Buffett’s leadership is the fact that he can look at investments clearly. As a rule, most investors let their emotions — at least their optimism — affect their decisions. But Buffett can simply state facts and move on. Consider his predictions for insurance (the cornerstone of Berkshire Hathaway’s ability to generate revenue) for 2008:

That party is over. It’s a certainty that insurance-industry profit margins, including ours, will fall significantly in 2008. Prices are down, and exposures inexorably rise. Even if the U.S. has its third consecutive catastrophe-light year, industry profit margins will probably shrink by four percentage points or so. If the winds roar or the earth trembles, results could be far worse.

Personally, my first reaction to the idea that the best part of my investment will soon be facing trouble is to worry. Maybe I should sell. Maybe it won’t be too bad. Maybe I should never have made that investment in the first place.

Maybe I should just calmly consider the situation and look at the numbers. Buffett spends two pages explaining how Berkshire Hathaway becaame so heavily involved in the insurance business — and why it was a good move. He is confident in the company’s overall investments because he has done the research to know not only what makes a good investment, but also what factor affect an investment and how strongly.

Buffett saw the housing bubble coming. Personally, I’m willing to bet that insurance companies are going to have a tough time in the next couple of years, too. That doesn’t mean I’m going to assume that insurance makes for a bad investment. I’ve been listening to Buffett: “If you’re an investor, you’re looking on what the asset is going to do, if you’re a speculator, you’re commonly focusing on what the price of the object is going to do, and that’s not our game.”

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Responsible Investing – Putting Your Money To Good Use

Investing hard earned money is something that many Americans tend to shy away from. There are a variety of reasons why, perhaps it’s too risky, too complicated, or we think we don’t have enough money to invest at all. Our attitude towards investing needs some adjustment. We shouldn’t look at investing as something power hungry suit wearing tycoons from the 80’s do, rather we should look at it as an opportunity to help out companies and causes that have the same ideals we do.

Companies We Can Believe In
The first thing we should realize when we start investing is that we are giving our money to someone else. Generally, we wouldn’t give money to someone we didn’t like, right? So supposing you were against Big Oil, would you give your money to an oil company? No, you would most likely give your money to an alternative energy company, like solar or wind power. The reason why some people hesitate to do this however, is that the cash return on investment with solar or wind power would be significantly less than returns from an oil company.

As investors, we need to determine what our goals are. Are we trying to make money, or are we trying to help out a cause we believe in? If we are simply trying to make money, then we don’t have to worry about what those companies are doing with our investment money, as long as we get our return. If we’re investing in something we believe in, then return on our investment may not come in the form of dividends, but as advances in the field we bought into. My choice to invest in solar power may not net me much in cash returns, but hopefully in the future the technology will have developed enough to change the way this nation uses energy. Personally, I find that outcome much more rewarding than a check for a few dollars every month.

Returns Other Than Cash
The term ‘investing’ often conjures the image of climbing stock market charts and cash returns. But when you think of it in broader terms, investing can take many forms. Investing something implies that you are willing to help out a cause simply because you agree with its goals. Whether it be your time, your money, or your resources, investments are sometimes the only way those causes can realize those goals.

Nonprofit organizations are a major player in world change, and often they are solely supported by the contributions of individuals of like mind. If your goal is the same as these organizations, you may consider investing in them. Benefits from the government like tax credits are of course a major benefit, but more than that you’re working to help a cause that otherwise couldn’t succeed without your help. Investing doesn’t mean you have to give money to corporations, it means you give money to anyone who you deem worthy.

Are Green Stocks The Next Dot Com Boom?

Wall Street is buzzing these days with talk about environmentally responsible companies and alternative sources of energy. Investment companies are starting to realize that the old adage “you can save your money or you can save a tree” doesn’t apply anymore. These new Green companies are working on ways to produce clean energy and products, and are turning a very nice profit doing it. But some investors are weary. Will these “Greenchip” stocks be the next Dot Com boom?

Green Isn’t Just For Hippies Anymore
With the oil crisis in full swing and the well being of the environment finally in the public eye, Green companies are finding it easier than ever to find support from investors. However, more than just investment brokers looking for a buck are buying. Through easy access to online trading, individuals are putting their money into companies that have the same environmental concerns as they do. People who have long said that Green technology and energy are the future are now able to put their money where their mouths are.

Get In On The Ground Floor
Often these companies are still in the startup phases, and their initial offering prices are very affordable. This makes them very attractive to investors who may not have the capitol to buy larger stocks. Despite being cheap, these stocks have very bright projections from analysts. Solar power in particular is a field that is seeing massive growth, and solid return projections. It is estimated that in the next few years, almost 10% of the total power produced in the world will be solar. In addition, the technology behind solar power is well established, having decades of well funded research behind it. Now we’re seeing less and less experimental solar power applications, and more and more practical solar applications. Research in this field has turned from “how can we get it to work” to “how can we make it work better.”

Another Dot Com Fiasco?
Like the Dot Com boom in the late nineties, there are many small startup companies with a lot of potential to choose from. The question is, of course, which one to choose? A form of natural selection occurred in the Dot Com era, where some companies became stronger and put the smaller, weaker companies out of business quickly. Nervous traders, eager to make a quick buck, also added to the problem. If a company was having difficulties, the investor money would dry up, plunging the stock price and sending the business under. Eventually only the very large companies, Google, Yahoo, and eBay to name a few, were left standing. So what’s to stop that from happening in the upcoming Green boom?

Stability In The Long Run
The one thing that calms most investors about Green stocks is that this field, while new in its approach, is old in its function. The main focus of the environmentally responsible energy producers is simply to produce electricity, a utility that we all use. Green product manufacturers are using cheap, recyclable materials to make commodities that we use every day, like hairbrushes or TVs. While the approach to producing these things is new, the things they are actually producing are the things we have been using and will continue to use in the future. With a solid base of consumers to back these Green companies, the value of their shares will continue to rise, and one day be as powerful as big oil is today.

One Tool You Can’t Go House Hunting Without

As you prepare to go house hunting, there is one tool that I can’t recommend enough: a digital camera. Odds are that, during your search for the perfect home, you’ll look at enough houses that they’ll quickly start to melt together in your mind. Photographing a house thoroughly can help you remember which house had the gorgeous wood floors, and which needed new carpeting.

You don’t need a big expensive camera, but it may be worth investing in a large memory card: if you’re checking out several houses in a day, you may want to take lots of photos. As long as your camera has a flash, though, it should work just fine. The flash is especially necessary with an empty house — without plenty of light, your camera may not record all the details of a house. And you should be planning to record details: something small, like the placement of a closet, can be a deciding factor between two houses.

Beyond taking pictures of features that stand out in a house, you’ll want to make sure to get clear shots of anything that would need to be repaired — this sort of information is crucial if you do decide that you want a particular house. You may be able to get the sellers to agree to make repairs before turning the house over to you, of you may be able to convince them to accept a lower price for the house. You will do later walk-throughs in order to ensure that you’re getting a house in good condition, but noting such issues now can save you both time and money in the long run. There are plenty of home owners that had to struggle with previous owners to get even small problems repaired.

As you visit each house, start by taking a picture of the house number or address, so that you can tell where pictures of one house end and the next start. You may always want to take a few pictures of the surrounding houses and areas, just so that you have a memory aide when you start trying to narrow down your selection to one house.

Not all sellers will be comfortable with you taking photos of their homes — even if it’s a house they’re in the process of selling. It is, of course, polite to ask, and, if they ask you not to take pictures, you should refrain from doing so. Some real estate agents may be able to provide you with pictures of homes you are interested in, as well, which can save you some effort. However, those photos are usually shot in such a way as to make a house look as good as possible. A seller may not be trying to hide something, but, as a responsible buyer, it’s up to you to look for (and record, when possible) any potential problems with a house.

Five Mistakes Made By Newbie Stock Investors, Part One: They Buy After The Price Rises

This is the first of a five part series on mistakes that I feel are made by new and inexperienced stock investors. I have either personally made these mistakes or seen others who have.

Mistake #1: They buy stocks after the price rises. If the name of the stock investing game is to buy low and sell high, than the single biggest mistake made by newbie investors is buying at a higher price.

You see, the money you make from investing is made when you buy, not when you sell. Smart investors figure out what the investment is worth well in advance - i.e. before they buy. Then, the make sure they buy at a price less than what it’s worth.

This idea of buying at a price less than the stock’s “intrinsic value” guarantees you a profit. It’s like buying a car for half of the sticker price, except a stock can actually help grow your net worth.

Example: I shared a stock pick with a friend last year. I was ecstatic about this particular stock. The friend took note, but did not actually buy the stock when I did.

A few months later, after some movements and gains of more than 300% on this pick, I began selling off a portion of my position to lock in the gains and cash out my original investment capital.

I almost fell out of my chair when, completely out of the blue, my friend said, “I just bought some shares of the stock at price X - what do you think?”

Carnival of Investing, 8th Edition

Welcome to the 8th edition of the Carnival of Investing! For those that are new to it, the Carnival of Investing is a weekly guide to some of the best predictions, strategies, and analysis by financial investment blogs. You can view submission guidelines and the hosting schedule here.

We’ve got a great selection of reading this week. Let’s get started!

Free Money Finance submits Managing Your IRA For Maximum Gain, a discussion of how to get the most out of your IRA.

Pacesetter Mortgage discusses the free market economy and the international traffic watching it, in Bloggers: The World is Watching.

Jim from Blueprint for Financial Prosperity submits Super Bowl Stock Market Indicator. Jim says, “If the Steelers win this week, the stock market will be up on the week… we’re 85% sure of it if past performance is an indicator of future performance (which it isn’t). And the Steelers will win.”

Amanda from Young and Broke examines the foolishness of purchasing lottery tickets in Lottery, Investing at odds.

Ironman from Political Calculations offers Exploiting Child Interest Income - a new tool to help you run some numbers to see if you can cut your tax bill by investing on behalf of your kids.

Dan at Search Light Crusade says that nearly every adult that buys life insurance buys the wrong policy at the wrong time for the wrong reason. Read Life Insurance - Proper Prior Planning Prevents..

Barry from The Other Bloke’s Blog discusses some Hot Topics, noting, “some say our financial behaviour may be governed by our brain’s pleasure centres, just like sex.”

Harrison from Journey to Financial Freedom submits Invest to Financial Freedom - Put Your Money Into Bank if You Lost Your Direction!

Michael from Bike Mike’s Contrarian Investing Blog submits Why I Blog About Investing.

Mighty Bargain Hunter notes that investing in gold should get more respect than it does, and offers a discussion in The Golden Hoard.

Tom Hanna from Financial Options submits The Week Ahead: Your Financial Roadmap for February 6-10, 2006.

David Jackson from Seeking Alpha submits The Most Important Two Minutes From Google’s Conference Call.

From Old Niu’s Blog we have Statistical Investing Using the Magic Formula, a discussion of the most controversial points of Joel Greenblatt’s “Magic Formula”.

Ed from Daily Dose of Optimism compares American versus Japanese CEO salaries, and discusses Graef Crystal’s 1991 book, “In Search of Excess”, in Graef Crystal - International CEO Comp Comparison.

And last but certainly not least, Kirby on Finance submits An ETF Primer, Part #1, the first in a series that will cover the basics of investing in exchange-traded funds.

Thank you for reading the Carnival of Investing. Next week’s Carnival will be hosted at Trader Mike.

Thanks to everyone that contributed to the carnival this week! It was a pleasure hosting!

From The Mail Bag: How People Pick Stocks

M.S. sent me this e-mail about a week ago. It is a loaded question, but really got me thinking about the stock market.

Alexander: If you folks say to learn to pick your own stocks, how do you do it? I have subscribed to the IBD for about 2-3 months now and I have not yet figured out how to pick stocks from the newspaper. I also need to learn how to read the charts before I invest. How do I do that? With so many stocks to chose from, I get confused and just end up doing nothing. Besides I really don’t have time to spend hours on the PC every day going over stock picks. So what shall I do? Are you against all stock picking services? I am sure that some research firms are legitimate. Thanks.

What you’ve asked is a loaded question. There are a million ways to pick stocks, and everybody has a different answer. So I’ll take my own crack at it. Please remember, though, that I’m just an amateur investor and not a financial advisor.

The way I see it, there are three possible paths someone could take to pick stocks.

#1: PEOPLE BUY STOCKS BECAUSE SOMEONE ELSE SAYS TO BUY.

This covers the majority of people in today’s stock market. Whether you got the idea to buy from SmartMoney Magazine, your uncle, or your favorite primate’s stock-picking service, most people don’t understand stocks. So they usually buy a stock when someone tells them to.

This might work sometimes - heck, it works a lot of the time - but there are a few problems with this strategy.

1. A lot of people might be “listening” to the story. The guys on CNBC can move stock prices. That’s not necessarily because they picked a great investment, but because people that listen often buy. I’m not against any stock picking services, but I think they can be misleading; if everyone on Wall Street subscribed to their service and did what they said, who would profit?
2. You might not understand the story. Are you familiar with the company’s business? Do you know how they make their widgets, and how their business could be affected by everything in the news? A thirty second soundbyte is not the same as reviewing a year of 10Q and 10K filings.
3. There might be “cracks” in the story. Your resource might have analyzed the company’s discounted cash flow or noticed that it was highly leveraged. But it might not have, and so there might be things about the company you don’t know.

How could I do something so foolish–taking the advice of someone who calls himself the Gorilla? … I have no idea why I purchased the damn stock in the first place. And this is galling because it makes me feel helpless. I mean, I’m not even making my own mistakes. I’m making someone else’s mistakes.
-from “Just Monkeying Around” by Andrew Feinberg, Kiplinger’s Personal Finance, May 2004

4. If the story changes - when will you find out? The company might report a great deal in the works. But it could say that its largest wholesale customer just fired them. When you are following their story, news like this could signal a time to buy - or it could mean you should sell. So, the million dollar question is: who is keeping their finger on the pulse of your investment? Do you keep an eye on these factors? And, if you follow someone else’s advice - do they?
5. There is a lot of uncertainty. Since you may not understand why the stock is a good buy, you might have even more difficulty understanding it if you see it drop in price. If you are overcome by fear, you might unload it just before the market sends it soaring. Can you handle the idea that you might never feel calm and confident about what is happening to your investments?
6. When do you sell? Investing is all about buying low and selling high. But if you don’t understand the company and its business, you might never know when things are too good. If you wait until the folks on TV tell you, you’ll probably be selling too late. Some investors wait until it drops, and others sell when they believe it is overvalued. But if you buy just because someone else tells you to, you’ll probably never know when to sell - because you never understood why to buy in the first place.

#2: PEOPLE BUY STOCKS BASED ON TRENDS, MOMENTUM, AND TECHNICAL INDICATORS.

This could mean it has an upward trend, its candlestick charts look great, it is below its moving average, or that an alphabet soup of technical indicators all point to the stock. The big picture is the same - some people invest based on what they believe the market is telling them about one particular stock.

This also works - hedge funds and day traders make a living of this type of analysis. But there are a few problems, too:

1. The indicators can change quickly. Hundreds of millions of shares trade each day. Most active traders are tuned in to the market continuously.
2. To excel, you must really understand it. If you want to work with candlestick charts, you need to understand the reversal patterns, what they are telling you, and which ones are more reliable than others. If you look at price and volume data, you need to understand what the data is telling you so you can take immediate and decisive action if necessary. That is not impossible - plenty of people make money doing this type of analysis - but it will take time and effort.
3. You’ll spend more in fees. Depending on the data you’re looking for, you might need access to additional market data. You’ll also be trading stocks more often. This will cost you more; but it is a moot point if you’ll be making more money.
4. The more trades you make, the more mistakes you are likely to make. Let’s say that you were the world’s greatest investor, and that every time you made a trade, there was a 99% chance you were right. That also means there is a 1% chance you were wrong per trade - and, after five trades, it multiplies to a 5% chance you were wrong. This statistical probability of error can build quickly if you are trading every day.

#3: PEOPLE BUYS STOCKS BASED ON PRICE VERSUS PERCEIVED VALUE.

This applies to anyone that looks at a stock, understands it enough to think it is worth more than its current price, and then buys on that reasoning. Some people perform an in-depth analysis of the company’s discounted cash flow, and some people just look at the Price to Earnings (P/E) ratio.

Some people focus on industries that they understand - like restaurants, or pharmaceuticals, etc. It helps if you understand the industry you are investing in because you might have some inside knowledge into the companies you work with. A pharmacist, for example, should invest in pharmaceutical companies and health care businesses because they have inside information the average guy on Wall Street doesn’t have: they know what customers are buying, what pills have bad reactions, and the ‘latest drug’ that area doctors are prescribing. With that kind of industry information staring them at the face every day, why should a pharmacist buy stock in Cisco systems?

Buying what you know about is a very sophisticated strategy that many professionals have neglected to put into practice.
–Peter Lynch, from “One Up On Wall Street”

Other people use screens to come up with a starting list of stocks. One good resource that I use is Morningstar, which has a great stock screener. I also recommend checking out the American Association of Individual Investors (aaii.com).

One screen I use from time to time is John Dorfman’s “Robot” screen. He looks at several criteria, but the last is that he takes the stocks with the lowest P/E values. For more info, see “Robot Portfolio Chugs to Fifth Straight Victory” (PDF).

There is a whole style of investing that fits in this box called “Value” investing. It takes the idea of investing and makes it academic instead of emotional. The whole goal here is to buy stocks at a discount to their value - things the market has not figured out yet. This is the style that Warren Buffett, his mentor Benjamin Graham, and a large number of successful money managers use. Warren Buffett has argued that it is the most successful style of investing.

There are problems with picking stocks this way, too:

1. There is a lot to read and understand. Not everyone can or is willing to commit the time to it.
2. There is a lot of data to sift through. There are lots of screens out there. Some magazines have new screens in each issue. I used to read a month’s worth of personal finance magazines and have dozens of stock ideas to research, and I used to change my screens constantly. You also have to read company filings, look at their balance sheet and cash flow statements, and make sense out of them. This is not easy - but, once you know what to look for, it really isn’t that hard, either. Warren Buffett can do the numbers in his head, and I think this gets easier with experience.
3. Depending on how you come up with your “perceived” value - you could be wrong. Of course, you could be wrong no matter how you pick a stock - unless you buy with a margin of safety.

If I could suggest two books for you to read, they would be:

1. One Up On Wall Street by Peter Lynch
2. The Intelligent Investor by Benjamin Graham - be sure to get the 4th edition with commentary by Jason Zweig.

The first is an easier read than the second, and will give you a lot of ideas on how to pick stocks. The second, however, is Warren Buffett’s favorite investing book, and is definitely worth a read too.

Investing requires work. Successful investors buy things when they are out of favor - so if you don’t have time to think about what could be out of favor, perhaps you shouldn’t be investing?

I’m not against any stock-picking service, but it is my opinion that a stock picking “service” can only get you so far. When you lose money, it will be because you made a decision that wasn’t even your own. And when you do gain, you won’t even understand why - so you have little chance of repeating that performance again and again.

Buying stocks is about taking the time to make clever and educated decisions weeks, months, or years before the chumps on Wall Street come to the same conclusion. By using a stock picking “service”, you are taking away one of your most powerful tools - your brain.

If you can’t spare the time to read a few books, learn a few things, and make educated decisions about your nest egg - you shouldn’t be trying to invest it in individual stocks. Instead, you should put your money into an index fund and hope you can get 10% every year like the rest of the mainstream.

At the end of the day, each of us is on his or her own path. No one knows where we will all end up, but they will all be different places.

But remember, there is no easy path to riches. How many billionaires do you know? How many of them became wealthy by joining a stock-picking service?