Archives for Lists of Five category
8
May
Posted in Lists of Five, basics by Roger |
I imagine that most of my readers already have a pretty good grasp on personal finance; most of the people who have commented on my posts are financial bloggers themselves, after all, so there’s the sense that I’m preaching to the choir (or to a group of other preachers, which might be more accurate). But for much of the population, there seems to be a number of persistent myths that keep them from taking action toward improving their financial situation. So today, I attempt to address some of those myths, and if I can change just one person’s mind about investing and other personal finance issues, it’ll be a successful column.
1) Understanding my finances is too complex – Nonsense. Yes, it requires some time and effort to learn about things like Net Asset Value, annualized return, and ask-bid spreads. But it’s no more complex than researching the performance of baseball players for your fantasy league. A little bit of basic reading to learn how to interpret your financial statements, and you should have no problem following your investments.
2) Keeping up with my accounts takes too much time – This one has an element of truth; if you have three savings accounts, five checking accounts, four IRAs, two brokerage accounts, and a half dozen 401(k)s from various old jobs, then yes, it will take time to monitor them. The one word solution: Consolidate. Roll over your old 401(k)s, combine your IRAs at your favorite mutual fund company, and close down extraneous accounts. Yes, all this consolidation will take time, but if you can cut down the number of accounts to a minimum, you’ll have a much easier and quicker time reviewing your account information in the future.
3) You need to be an expert to invest properly – This one is clearly false; just take a look at how many hedge funds ended up closing last year to see how even experts can make errors. It’s not too difficult to assemble a simple portfolio of mutual funds with a major fund family; just use some broad based index funds to build a portfolio that meets your needs. If that’s still too much trouble, most major fund families offer target date funds that will automatically adjust to your changing investment needs for your whole life. Just regularly contribute to one, and you’ll do well financially.
4) I’m too broke to invest – I might let this one slide, if you are genuinely poor and not just broke. If your household income falls below the poverty line, you could genuinely have trouble meeting all your living expenses and still having money left over for investing (especially if you live in an area with a high cost of living). If you are making more than that amount, then for the most part, having money to invest is more about having control over your spending and less about how much you actually earn.
5) Why should I deprieve myself now by locking up my money for decades? – Possibly the most pernicious myth, particularly among younger people. The simple fact is that compound interest means every dollar you invest at twenty will be worth thirty-two dollars by the time you turn sixty-five (assuming a somewhat conservativea 8% annual return on your investment). A five thousand dollar investment will turn into $160,000 without another dollar being added. Delay saving for only five years, and that total shrinks to $108,000; put off saving until you’re thirty, and you’ll have only $80,000, half of what you end up with had you started a decade earlier. The lesson to be learned: small sacrifices when you are young can lead to large potential profits by the time you are ready to retire.
If you can get past these and the other savings and investment myths that exist, you’ll be well on your way to
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7
May
Posted in Lists of Five, books by Roger |
It’s Book Club time here on The Amateur Financier. If you have even a passing interest in personal finance, you’ve likely browse through the money and investing books available. There are thousands of books covering these topics, ranging from the good, well-researched books, to the bad, unhelpful books, to the ugly, downright fraudulent books. How can you know where to get good information?
Enter this book club; I am sharing five personal finance books that I’ve found particularly interesting and helpful. I can’t claim that these books will be the best for every one of my readers, in fact, it’s all but certain that some people will find these books downright unhelpful. But, particularly for those people who are just getting involved in personal finance and investing, these books are a good place to begin your research.
1) The Money Book for the Young, Fabulous & Broke
by Suze Orman – A good all-purpose personal finance book, this covers most of the major money issues facing people in their twenties or early thirties. Ms. Orman covers a variety of topics, ranging from using credit cards properly to paying down student debt. One feature I particularly like is the detail she gives to saving for a house downpayment and getting a mortgage; too many personal finance books skip over any mention of buying a house (perhaps assuming that their readers would already have a mortgage). It’s a good starter book for any young person who would like to get a handle on their expenses.
2) The Automatic Millionaire
by David Bach – David Bach is big on making all of your financial transactions automatic, from saving up an emergency fund and paying down debt to investing. As a result, he spends a lot of time showing methods to set up automatic deposits and withdraws into bank accounts or mutual funds. The information is a bit on the simple side, but if you need a hand-holding guide to setting up your finances, this book is a good place to start. The chapter on automatic tithing (that is, regularly giving to charity) was particularly interesting; I’ve been using the information he provided on investigating charities to find out information for my Charity Spotlight posts.
3) Yes, You Can Get A Financial Life! by Ben Stein and Phil DeMuth – This book is rather different from either of the previous books, both in layout and content. It’s organized as a decade by decade blueprint to spending, saving, and investing, from your twenties into retirement. It’s a bit wonky; you should expect lots of graphs and detailed calculations based on the average salaries and savings in the US. If you’re mathematically inclined, or like of lots of detail in your PF books, this makes an excellent overview to how to organize your finances and change that organization over time.
4) Investing Online For Dummies
by Matt Krantz – I’m going to be honest: this is my favorite investing book. It’s simply filled with helpful information on how to invest, as well as numerous web addresses for financial advice and services. The comparison information provided about online brokerages and mutual fund companies helped me to decide on Vanguard and Sharebuilder. If you’re ready to begin investing, especially if you intend to do so online, reading this book is a must.
5) Dave Barry’s Money Secrets
- Alright, this isn’t exactly a serious investment book. But Dave Barry skewers everything from late night real estate commercials to stock investing techniques (his plan involves detailed historical research and a time machine; of course, most people aren’t willing to do the research). And if you’ve been reading a lot of personal finance information (a fairly dry subject by nature), chances are you could use a few laughs. Plus, he answers some of the burning questions of the day, like why there’s a giant eyeball on the back of the dollar bill. It’s definitely a fun read.
Those are some of my favorite personal finance books. What are some of yours?
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6
May
Posted in Lists of Five by Roger |
There are numerous investments out there, ranging from the common ones like stocks, bonds, and mutual funds to much more exotic vehicles like collateralized debt obligations and master limited partnerships. Most of these vehicles have advantages that make them useful investments, at least under certain circumstances.
But there are other ‘investments’ which are, simply put, bad. They have few good points, and those are more than overwhelmed by the negatives involved. Given the wealth of more profitable, easier to understand investment opportunities, there’s really no good reason to put your money in any of the following:
1) Gold Bullion – Investing in gold is a losing proposition; the price of gold historically just keeps up with inflation over the long-term, and gold doesn’t pay dividends while you’re holding it. Owning physical gold only increases the problems, as you have to worry about theft, misplacing the gold, and reselling the bullion when you want to take your profits. For most people, the better option is simply to use mutual funds or ETFs if you want exposure to gold.
2) Collectibles – Collectibles cover a wide range of different objects, from comic books and baseball cards to art and vintage wine. Collecting something you’re passionate about can be a good hobby, but don’t expect to make a killing from your stamp collection. You have to consider the markups when purchasing quality collectibles, the costs of keeping your collection in pristine condition (card protectors, comic book covers, a temperature controlled wine cellar, etc.), and simple deterioration over time. Furthermore, unless you have expert knowledge on how to examine and evaluate the subjects in your collection, there is the possibility that you will end up purchasing a flawed or fraudulent item. If you like a particular type of collectible, by all means, buy them if you have the money to spend, but don’t consider them investments.
3) Penny Stocks – Penny stocks are low cost (below $5), highly speculative securities, as noted by the SEC. They are typically traded on over-the-counter, largely unregulated exchanges, like the Pink Sheets or the OTC Bulletin Board. The SEC requires that the firm issuing penny stocks must submit a form to the potential investor that they might lose their entire investment.
One big problem with penny stocks is the low prices and limited number of outstanding shares make them vulnerable to manipulation. A con artist can buy most of the outstanding shares, tout the stock repeatedly, and sell off the shares to unsuspecting investors who think they are getting unbiased advice. It’s a textbook example of a pump-and-dump investing scheme, building up a worthless stock and then leaving other people holding overvalued paper.
4) Timeshares – Basically, timeshares are arrangements where you pay for the use of a piece of real estate for a limited period of time (typically in one week increments), as well as a share of the maintenance and other costs associated with the property. The problems with timeshares include the high annual fees, the heavy pressure tactics used at the timeshare sales, and the low resale values. Furthermore, the cost for one week in a timeshare greatly exceeds 1/52th the cost of purchasing a similar property outright. If you want to own a timeshare, the best way to do so is to find someone who wants to sell their timeshare and buy it used; you can avoid many of the pitfalls listed above, and will still end up with the same timeshare you would get at retail price.
5) Anything You Don’t Understand – Not so much a specific investment as a general warning: if you invest in things you don’t understand, there’s a much greater chance you will make a bad decision and put your money at risk. If something sounds too good to be true, if you can’t decipher the paperwork and explanations you are given, or if someone attempts to get your money while saying, ‘trust me, this is a sure thing’, you will undoubtedly be in much better shape by saving your money and putting it into a simple investment, like an index fund.
Stay away from these investments and do proper due diligence on any investments you do utilize, and your investment path will be much smoother.
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5
May
Posted in Investing 101, Lists of Five by Roger |
This week we’re going to do something a bit different with the Investing 101 post. We’re not going use a question and answer format this week (Q and A, together: Awwww…). Instead, keeping with my lists of five theme, we’re going to look at five different investments that can fill the cash portion of your investment portfolio. We’ve covered stocks and bonds, now it’s time to complete the trifecta of basis investment categories.
All of these methods are relatively low risk, and have correspondingly low returns. They are used for stability in your portfolio, for specific saving goals and for emergency funds. They make a good anchor for your financial life, rather than an engine for growth.
There are numerous different types of low risk accounts, each with different roles in your financial life. Five popular ones include:
1) Checking Accounts – A basic type of account offered by banks and credit unions, which allow you easily transfer money into and out of the account. Frequently accompanied by a check book, allowing you to write paper checks against the balance.
Pro: It’s quick and easy to transfer money into and out of these accounts, whether by cash (as in, currency) deposits, printed checks, or automated fund transfers. Checking accounts are also federally insured up to $250,000, at least for the foreseeable future, so unless you are holding a large amount of money in your account, you don’t need to worry about bank failures.
Con: Checking accounts offer very low interest rates, if any. Money held in these accounts will generally not grow at all.
Best Used For: The ease of money transfer makes these funds ideal for paying bills or depositing checks; just don’t keep more money than you need to cover your outstanding bills in these accounts, as you’re giving up interest.
2) Savings Accounts – These accounts are used for, yes, savings. They offer the same protections as checking accounts, generally with higher interest rates. (Online-only banks will offer higher interest rates than those available from brick and mortar banks.)
Pro: These accounts offer the same protections as mentioned for checking accounts (up to $250,000 in protection for the amount in your account) and higher interest rates than checking accounts. Again, this holds especially true for online accounts.
Con: These accounts are less flexible than checking accounts, typically limiting how easy it is to withdraw funds from the account. They also have lower interest rates than CDs.
Best Used For: Savings accounts are great for general savings and building up an emergency fund.
3) Certificates of Deposit (CDs) – CDs are financial vehicles that lock up your money for set period of time, and give you a set rate of interest. In essence, they allow you to fix the interest rates that you earn on your money. CDs come in a variety of durations, with longer duration CDs offering greater interest rates.
They can be laddered, when a group of CDs is purchased with different maturation dates, allowing the invested money to be continually rolled over. If you have CDs that mature one, two and three months from now, you can wait one month, take the CD that will mature then, buy another three month CD, and again have CDs that expire one, two, and three months from now.
Pro: CDs usually (but, not always) offer higher interest rates than regular savings accounts. Also, they allow you to secure a set interest rate for the lifetime of the CD.
Con: CDs typically have some rather steep penalties (three to six months worth of interest) if you try to withdraw the money before the CD matures. Furthermore, because the interest rate for the CD is fixed, it’s possible that the interest rates for other accounts could rise, making the CD’s fixed rate less attractive. And, as with checking and savings accounts, the FDIC guarantees these accounts.
Best Used For: CDs are great vehicles when saving for a specific goal with a defined date, as they allow you to increase the interest you can get for your savings. A CD ladder also makes a decent way to build an emergency fund.
4) Money Market Funds – Money market funds are mutual funds that invest in ultrashort investments, such as commercial paper. These funds tend to be very safe and secure; only twice in history have any money market fund lost money.
Pro: Money Market Funds typically (but not always) offer higher interest rates than regular savings accounts. Since they are offered by mutual fund companies, it’s also easy to use money market funds as sources of funds to make automatic purchases of other mutual funds.
Con: Money Market Funds aren’t FDIC guaranteed, so there is the potential for money loss. (Although, as mentioned, this is very rare.) The interest rates on these funds also change much more frequently that the previously mentioned accounts, making it harder to determine exactly how much interest you will earn.
Best Used For: Money Market funds are great for holding money you’re going to invest in other mutual funds. If the interest rates are higher than what you can get from a high yield savings account, you can use them for emergency funds, as well.
5) Stable Value Funds - Stable value funds are basically funds that hold short or intermediate term bonds with insurance if the returns dip below a preset level. As a result, these funds can offer returns at or above those of money market mutual funds with virtually no risk.
Pro: Stable value funds can provide quite good returns. The insurance backing also makes their returns quite safe and secure.
Con: As with money market funds, stable value funds aren’t backed by the FDIC. Furthermore, it’s hard to invest in stable value funds outside of a company retirement plan, which makes them rather inconvenient for things like emergency funds.
Best Used For: If you want to add some cash to your retirement portfolio, investing in a stable value fund in your 401(k) is one good method.
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4
May
Posted in Lists of Five, basics by Roger |
Welcome to List of Five week. All this week, I’m going to be dispensing my usual advice and commentary in the form of lists of five (hence the name of the week).
To start off this week, we’re going to take a closer look at five of the many financial clichés that are out in the ether. Unless The Amateur Financier is one of the first things you are reading on the subject of investing and personal finance, chances are you’ve read or heard these gems of wisdom already, perhaps many times. But what do they really mean?
1) Pay Yourself First – Probably the most famous advice about retirement saving of them all, pay yourself first relates to how you should save for retirement. Basically, you should take 10% of your gross salary (or more; depending on your age and other data, some experts would recommend 15%, 20% or more) and invest it for your retirement. In essence, you treat your retirement funding like a bill from your future self, and make sure you pay that bill before any others.
Why is this such popular advice? Well, retirement is possibly the only big goal for which you can’t get a loan. Unlike college loans or a mortgage, there aren’t retirement funding loans you can get for your golden years. (Which should make sense; you would need to have such loans last until you shuffle this mortal coil, at which point it would be hard for them to collect what you owe.) Furthermore, treating your retirement savings as a regular expense makes it harder to blow off saving, and the decreased money available for spending will help you to live within your means. It’s the investment advice equivalent of a hat trick.
2) Buy Low, Sell High – Ah, the classic advice on how to get rich; buy (whatever) at a low price, then sell (that same whatever) at a much higher price. But the question is, how do you know when the (whatever), such a stock, is at a low price and when it’s at a high price? You could get all kinds of answers, depending on who you ask; value investors would tell you to compare the current price to the fundamental value of the company, technical traders would rely on signals from the stock price, and other investors would share yet more advice.
One good, and fairly simple way, to buy low and sell high is to create an asset allocation that meets your needs and rebalance it when it gets too far from your desired allocation. If you want a portfolio that is half US stocks and half foreign stocks, you could buy two mutual funds that track those respective groups of stocks. Then, if some time went by and you found that the US allocation was only about 40% of your holdings, you could put all your new investment money into buying more shares of the US-invested mutual fund (buying low) or sell off some shares of the foreign invested mutual fund (selling high) to get your portfolio back in alignment.
3) Diversify, Diversify, Diversify – Not quite as famous as ‘Location, Location, Location’, encouragement to diversify your holdings is widely considered a good way to hedge your investments. If you diversify between asset classes, that is, holding a mix of stock, bonds, and other investments, you can help to cushion the blow if one or more of your holdings takes a hit. (Even in the nasty investment climate of the past several months, there were still some investments that increased in value, like Treasury bonds.)
Diversifying within each asset class can also benefit your returns. If you buy only one stock, you have the risk that the company could go bankrupt and you’ll lose all your money. Hold ten stocks of companies that are in a variety of fields, and the chance that you will lose all your money goes down substantially. Hold all the roughly 8,000 publicly traded US companies, as in a US Total Market mutual fund, and nothing short of a total financial Armegeddon will destroy your investment completely.
4) A Fool and His Money Are Soon Parted – Not a cliché that deals with investing directly, but a broader money comment. There are people who rely on the lack of financial and investing knowledge to take advantage of those who need advice and help with their money. If you don’t know what you are investing in, don’t invest. There are plenty of easy to understand investments out there; there’s no need to jump into something that doesn’t make sense to you.
5) It’s Not Where You Start, It’s Where You End Up That Matters – To end on a more positive note, keep in mind that saving and investing is not a single event, it’s more of a journey. Even if you’ve never invested a penny up to this point, starting now can have a huge impact on your future finances. It’s never too late to start investing in your future.
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