Archives for Investments category
24
Oct
Posted in Investments, Mixed Bag Monday by Roger, the Amateur Financier |
It’s another Monday, and that means it’s time to scour the far corners of the world for various personal finance topics to discuss. This week, though, I’m not going to go too far, and instead, focus on one of the basics of personal finance, finding appropriate investments in which your money can grow. There’s been plenty written on this subject (including plenty by me), but it’s a very broad subject, and I could definitely write much more about it.
Of course, one of the best pieces of advice I can give in this area is that no one investment mix is right for everyone. Numerous factors will determine what sort of investments you should make, from how old you are to how much (if anything) you expect to earn from Social Security, pensions, or other such retirement programs. As a result, the investments that I use myself are not the same investments that someone who is 65 and preparing for retirement would use, or that I intend to use when I reach 65. (And I’m getting ever closer; my 29th birthday is this Thursday, after all.) Still, there are some general principles that can be applied by almost everyone, and some of those principles include:
DO Keep Some Stocks Throughout Your Life – You’ve probably heard that to figure out how much of your money you should keep in stocks, you should take your age and subtract from 100 (sometimes you hear 110 or 120 used, for more aggressive investors). So, I would be expected to have 100-29 = 71% in stocks, with 29% in bonds or cash. This works pretty well when you are middle aged, mostly stocks, with a gradually increasing amount of bonds, but it’s not perfect. When you are young (less than 40 or so), you’re fine keeping all or nearly all of your money in stocks; similarly, once you’re well into retirement (at least 70, definitely by 80), you can actually afford to be more aggressive with your investments, as the money you have doesn’t have to last as long. Having a goodly portion of your money in stocks (I’d recommend at least 50% of your investments) throughout your life is a pretty good approach.
DON’T Take Unnecessary Risks – On the other side of the coin, it might be tempting to keep a high level of stocks as long as possible, to maximize your retirement income, or to invest more in riskier (but potentially higher yielding) stocks to boost your returns. While I can’t say that I’d blame you for wanting to do so, bear in mind that it’s considered a risk for a reason; you might do well, but you might also get hammered right when you need the money the most. If you’re getting near retirement (or school, for 529 plans, or whatever the goal is for which you are trying to invest), be sure to scale back on your stock or other growth investment allocation and put more money into bonds and cash. You might cut down your growth for the last few years, but you’ll be sure you won’t lose all the money you’ve saved up to that point.
DO Diversify into Alternate Investments – As you read about investing, you’ll likely get the impression that the only types of investments available to you are stocks, bonds, and cash (and mutual funds that invest in the same); heck, this very article already has several such references in it. But that’s just the start of the investment options that are available. From REITs to options to futures to hedge funds, there are plenty of options out there for the adventurous investor, and incorporating them into your portfolio can help improve your returns. Just make sure you check out the next tip:
DON’T Invest in Something You Don’t Understand – There are a lot of investments out there; many are good, a few are great, but some are simply horrible. While there’s no way to know for certain beforehand which investments will be the best (and which will be the best for you), if you don’t know what you are getting into, you’re all but guaranteed to do poorly. Before you invest any money in ANY investment, be sure you read through all the appropriate paperwork and do your homework so you know exactly what you are getting into. You’ll save more money via this method than with just about anything else I can suggest to you.
DO Keep Investing – I know that particularly for my fellow Gen Yers, the events of the past decade have put a decidedly view of investing into your head. Heck, I was just turning eighteen when the tech bubble was about to burst, and lost my first real job as a result of the 2008 downturn; I can definitely commiserate with having a negative view of the economy and the results of investing. But if you don’t invest, that means you’ll have save much more, spend much less, and generally work that much harder to reach your financial goals. While you should take a close look at your investments and make sure they are as high quality as possible, stopping your investments completely is almost never a good idea.
DON’T Let the Media Scare You – While we’re talking about the effects that bad investment news can have on your willingness to invest, let’s get this point out of the way: the media exists to draw your attention. All media (including, in case you think I’m being a clueless hypocrite, blogs) work to make you pay attention, usually so they can turn that attention into profit in some way (the advertisements you’ll see on this blog or any other form of media, for example). In many cases, drawing your attention results in trying to create the most shocking stories possible, which, when it comes to money related issues, can mean making it sound like any where you put your money other than under your mattress will result in losing it all. It takes some effort at times to ignore this din of disaster floating around you, but you’ll need to do so if you hope to make the best money decisions you can.
There you go, some advice on finding the best investment mix. Do you have any advice on coming up with the best mix of investments in your portfolio?
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25
May
Posted in Charity, Investments by Roger, the Amateur Financier |
There are many things you can do with your money, which is one reason why so many people want more of it. Among your options are investing it to (hopefully) increase your wealth and donating it to charity to help other people. The ability to both gain more money and help others, though, has proven surprisingly difficult to achieve.
That might be changing, though. There is a new development in the funding of social programs, known as Social Impact Bonds (also known as ‘Pay for Success’ Bonds, at least in the United States). Although the term ‘bond’ is used to describe them, they don’t work like the bonds issued by companies or governments to fund their activities, where an investor receives interest on a regular basis until their initial investment is returned.
The first social impact bond revolved around, you guessed it, jail.
Instead, with a Social Impact Bond, the investors’ money is used to fund the initial stages of a socially oriented program, attempting to solve social issue. If the program is a success, meeting an objective measure of success (such as decreasing recidivism rates amongst a prison population, as with a United Kingdom pilot program), the government will then pay the investors back, possibly with a bonus (a bit more on that later). If the program isn’t a success, then the government owes nothing.
The Advantages of Social Impact Bonds
You can probably see one of the main advantages of Social Impact Bonds, the fact that the government only pays for success. Rather than the current funding model, where the government spends first and hopes for desired results later (and seldom even bothers to check whether the program had the desired effect), Social Impact Bonds enable the government to only pay for successful programs. This means that not only will the government not have to pay up front when trying to accomplish a set goal, but it might not even have to pay at all. It’s possible that a program could even be a partial success, but if it does not meet the agreed upon goal, the government would not owe anything.
Social Impact Bonds would also enable more creativity in fixing social problems. Because they focus on the end goal, rather than the process used (as many government directed efforts tend to do), it gives entrepreneurs and others the chance to try different approaches to solving a problem. If they can get investors to provide the money by offering a plan with a reasonable chance of success, such Social Impact Bonds could open the doors to a wide variety of approaches, many of which might not even be considered by traditional government program funding mechanisms.
Of course, there are advantages to the investors, as well. As mentioned at the beginning of the article, normally you have to choose between giving your money to charity or having the potential to turn a profit. If you invest in a social impact bond, though, you could do good while still having the possibility of getting your money returned to you (possibly with a bonus, even a substantial bonus, attached). This could increase the amount of money given to social programs; if such giving turns into something more like investing, there might be more people (and organizations) who considered such investments as a valuable way to diversify their portfolio.
The Potential Downsides
With such advantages, why did it take until last year for anyone to consider this method of funding social programs? Well, as with all good things, there are some downsides. Firstly, it only works with social programs that have measurable, quantifiable results that can be attributed to a single cause. The UK program mentioned above uses the recidivism rate of a population of a specific prison, which will be measured compared to the rate of similar prison populations. Trying to create a social impact bond without specifying the population or controlling outside factors would make it difficult to ascertain whether the program funded by the bond is having the appropriate impact.
The results also have to be assessed by trusted, independent professionals. There need to be a method for determining when results have been achieved, as well as what the results would have been without the intervention. Given that there is incentive to both exaggerate the success (by the investors) and downplay it (by the government, seeking not to reimburse the investors), being sure to find an auditor of the results whose conclusions will be acceptable to all parties involved is necessary for these bonds to function properly.
Finally (at least of the issues I will discuss) there is the potential that the bonds could cost the government more than running the program themselves. If the social impact bonds are seen more as an investment, and particularly a high-risk investment, then investors will likely demand a high potential return (much as you would demand more for a junk bond compared to a safer investment). If the one-third failure rate speculated by the Center for American Progress is accurate, there might need to be rates of return on the remaining projects as high as 20+% annualized rates to induce investment in them. Such high rates could end up costing the government a sizable amount for successful programs, and thus, lead to higher tax rates. (On the plus side, in such a situation investors could find themselves considering social impact bonds as a sizable portion of their portfolio, greatly increasing the amount of money available for such projects.)
My Thoughts
I’m definitely quite interested in seeing what happens with social impact bonds in the future. They seem to provide an interesting alternative to direct government funding for a variety of programs, and depending on the levels of risk and return involved, could prove a decent investment opportunity, as well. It’ll be interesting to see how many projects get funded with this mechanism in the future.
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25
Apr
Posted in Investments by Roger, the Amateur Financier |
If you’ve been following my blog for a while, you’re probably well aware that I don’t tend to invest in individual stocks. My Net Worth Updates show a nice collection of mutual funds (as well as more debt, both credit card and student, than I would prefer), but no individual stocks. There’s quite a few reasons for this, from my lack of time to do the needed research in order to make intelligent investments to my generally conservative nature. For me, for now, investing in individual stocks just doesn’t make too much sense.
But I’m not the only person in the world (which is probably for the best; as much as I like my alone time, I would probably go insane with absolutely nobody else around). I realize that some of my readers might want to invest in individual stocks, whether to expand their investing horizons, to help diversify their portfolios, or simply for the fun of trying to pick winners. So, to provide you with what help I can, here are a few tips on how to go about investing in individual stocks that should hopefully help to keep you in the black:
1. Don’t Invest Money You Can’t Afford to Lose in Stocks: This should be the first consideration you make when considering individual stock investing. Unlike mutual funds, which hold dozens, hundreds, or even thousands of stocks or other investments, and are thus unlikely to lose all their value for any reason short of the complete collapse of civilization as we know it, individual companies can and do sometimes declare bankruptcy, leaving your stock worthless. While this hopefully will not be the case, you should take care to avoid investing any money whose loss will materially affect your life, either now or in the future. When you have a solid emergency fund, have paid down your credit card debt, and are fully invested for retirement (using mutual funds or similar very safe investments), then you can consider investing in individual stocks.
If you do it right, stock investing doesn't have to be a gamble.
2. Decide How Much Risk You Want to Take: Even within the realm of individual stocks, there’s a range of risk levels depending on the type of stock that you decide to invest in. A giant, well-established company like Coca Cola (stock icon: KO) has a much lower chance of going bankrupt than does a small company just starting out. The larger company stocks, then, are much less risky than smaller stocks, and you can decrease the chance of serious money loses by sticking to more established companies. (Although, you still have some risk; there are any number of large, seemingly stable companies that end up going bankrupt, due either to poor luck, poor planning, or because they weren’t forthcoming about their true financial situation *Cough*Enron*Cough*.)
3. Consider Your Investment Goals Carefully: To (over) simplify things, there are two basic ways to make money from stocks: dividends (regular payments from the company to its owners, that is, the stockholders) and capital gains (the increase in the stock price over time). These two goals require different approaches to investing. If you are investing for dividends, you’re going to want larger companies, ones that have a history of paying out dividends for quite a while, and have solid financial ability to keep doing so in the foreseeable future. On the other hand, for capital gains, particularly in the short term, you’ll likely need to look at smaller, still growing companies; the titans of their field have a tendency to be pretty stable in their stock prices. Finding the right combination of stocks to meet your needs is one of the trickier parts of stock investing. On a related note…
4. Know What To Do When Circumstances Change: Things change; the great stock investment today could be a horrible mistake tomorrow. You need to know what your plans are for various situations that could arise. What will you do if your stock’s price drops by 20%? Will you sell and take what money you can get for it, thankful that you got out in time? Will you buy more shares, using the cheaper price as the opportunity to stock up (pun intended)? Will you do nothing and just ride out the lower price? What happens if the price goes up? Do you sell, and if so, how much? If you don’t have a plan for each stock you buy, you’re going to eventually run into trouble when an event arises that you weren’t considering and you have to make an uninformed decision. To avoid that, and make sure that you choose the right stocks, you need to do…
5. Research, Research, Research: You’ve likely gotten the idea by now, but investing in individual stocks requires a lot of time and energy to put into research. Figuring out your priorities is only the start; then you need to find the stocks that meet your needs from the thousands that are available. It doesn’t end when you make the purchase either; you need to continue to track your stocks over time. Jim Cramer recommends one hour per stock per week, a good metric to use to compare your own stock research. If you can’t (or won’t) put in that level of research, putting your money into mutual funds will enable you to get the stock market’s benefits without quite so much hassle.
6. Be Wary When Investing: The unfortunate fact of life is that bad things happen, and bad people try to take advantage of you. If you keep up with your research, hopefully you won’t be blind-sided by an unexpected event that drops your stock’s price. You also need to watch out for unscrupulous people who will try to feed you improper information in order to take advantage of you. Make sure that you get your information from a trusted source, and don’t put too much money into any one investment. (Particularly when investing in individual stocks, you need to diversify, making sure that no one stock makes up too great a portion of your portfolio. I would suggest no more than 20% of your individual stock investment money in each stock, and no more than 5-10% of your total investment money in each stock; that way, one or two bad stocks can’t sink your entire portfolio).
There you have it, several tips to make individual stock investing easier. Here’s hoping you have success while investing in stocks, and success in investing, period!
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10
Feb
Posted in Investments by Roger, the Amateur Financier |
My ETF profile, my only investment outside my retirement accounts, are based on the ideal portfolio pitched on the MoneyChimp. They go over how to create a complete stock account, using either index mutual funds or ETFs, following some sound financial principals and the Fama and French test portfolios. They cover the complete foundation of the portfolio they suggest starting here. If you’re pressed for time, here’s the quick version:
1) The largest portion of your portfolio should be invested in the Total US market.
2) Small value stocks perform best historically, and holding a portion of your investments in a small cap fund will improve your performance without adding much volatility.
3) Adding ‘some portion’ of foreign stock will help to diversify your holdings.
4) Total Market funds are overweighed in large cap stocks (the Pareto problem) and total foreign market funds are overweighed in the stock from developed countries (Pareto, again). Thus, it is recommended that you add an extended market fund and an emerging market fund in order to get more representative market coverage.
The final profile they recommend is found here, and looks like this:
50% Total US Market
25% Extended Market
15% Foreign Market (including an undefined amount of an Emerging Market fund)
10% Small Cap Value
This was the starting point of my own ETF portfolio, but I made a few modifications to it, based on my thoughts and other research. First, I doubled the amount of foreign market exposure; I’ve heard a wide range for the proportion of foreign stock to hold, from 15% to 50%, and I think that increasing my exposure to foreign markets will help with my diversification. Second, I bumped up my extended market investment to 30%; I don’t think the MoneyChimp portfolio went far enough in compensating for the Pareto problem (plus, small and mid cap stocks tend to outperform large cap stocks). By taking this amount out of the Total US stock fund and leaving the small cap value allocation, we get a final allocation as follows:
40% Total US Market (TMW)
20% Extended Market (VXF)
10% Small Cap Value (VBR)
20% Total Foreign (VEU)
10% Emerging Markets (VWO)
I feel this will serve me well as I continue to work and invest for the future.
(Note: This post has been overtaken by events! Check Here for my new ideal portfolio.)
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