Tue, September, 30, 2008 at 09:38 AM No really. Please. Stop it. The media is TERRIBLE at choosing stocks or even predicting the market (a serious consideration to those of you who want to or even think they can time the market). Let’s look at a bunch of notable examples:
Investments, Mutual Funds, Savings, Stocks Thu, July, 12, 2007 at 03:37 PM Jonathan Clements of the Wall Street Journal writes a good article that everyone should take a look at and thing about how it applies specifically to their own lives. His advice has solid grounding, but the execution of the advice could be a potential pitfall for some people.
http://biz.yahoo.com/wallstreet/070701/sb118323893642354294_id.html?.v=1&.pf=banking-budgeting
You are reading part 1: Amass cash
As Mr. Clements notes, “some financial experts, your top financial priority should be amassing an emergency reserve equal to six months of living expenses, with this cash tucked away in conservative investments like money-market funds and certificates of deposit.”
I fully agree with the paths and ideas Mr. Clements takes and find this section of the article to be rock solid. There are circumstances, however, where following Mr. Clements advice can be extremely dangerous.
Let’s say you’re great about your spending habits and regularly sock away 10% of your income for a liquid savings account for your emergency funds. Let’s also say your living expenses are roughly $25,000 a year. You would need to save $12,500 to make up your 6 month reserve. If you’re making $50,000 that would take a little more than two years, and if you’re making $30,000 it will take nearly four years.
Why do the numbers seem larger than they really are? I didn’t just do simple division, but took into account savings growth compounding of four percent, a three percent annual raise in income, but also TAXES. Therein lies the key word why you shouldn’t focus on an emergency stash. Taxes.
Chances are if you focus solely on building your emergency stash you’re not contributing anything to a 401(k) nor an IRA of any sort, and that is the key mistake Mr. Clements focuses on. By doing this you are giving up too much of your hard earned money to taxes and potentially losing out on some FREE money.
By contributing to your 401(k) you get the free money your employer gives you as a match. You also lower your taxable income for the year by the amount that you contribute. A Traditional IRA will lower your taxable income as well, but the advantages of a Roth IRA clearly win in the end. You do pay the taxes on the money you put in, but when you take the money out during retirement (this is called a distribution) you pay no taxes on the distribution. That means that any gains and growth the account accumulated gets paid to you tax free! You potentially have hundreds of thousands of dollars in tax free money here.
There are plenty of reasons that can cause a loss of income and this is the key area to analyze before figuring out how much of your potential retirement money you should sacrifice for the relatively low yield, non-tax advantageous liquid emergency stash.
Can you move in with your parents? If your answer to this is yes, then you have a huge advantage in not needing to save as much for emergencies. Moving back home will provide you a huge sum of money for savings. Notice the key word is CAN. The question is not is it EASY to move back in with your parents. It, likely, will not be easy. You may even have to throw all your stuff in storage and move back to your home state, but it’s something that can save you boatloads of money.
Are you a contract worker or otherwise unstably employed?. An emergency stash is insurance. It’s there should you ever need it, but you may never need it! If you’ve got a pretty stable job (no one can predict layoffs or a sour economy) you probably don’t have to save so much for emergencies. If you know you’ll be without income soon or know that your income isn’t always guaranteed (commission, sales, etc) then you’re going to need a bigger stash.
Do you have other sources of emergency stash? Perhaps your parents gave you a life insurance policy you can borrow against? Maybe you finally lost your source of income a little later in life and your wise decisions allowed you some equity in your home you can borrow against? Even as a last resort you could borrow against your 401(k) after all. Your stash may already be pretty large without it being so obviously cash.
Do you have the urge to spend cash? Be honest with yourself here. If you see cash and spend it, then an emergency stash is a poor choice for you. The point of it being liquid is so you can get access of it quickly and easily. However, if you spend it, you’ve wasted your tax advantage and your stash as well. The other problem is that the cash you sock away is likely to touch your hands first before it gets put away. 401(k)s are taken directly from your paycheck and you never have the temptation to touch the money.
Swallow your pride Sometimes to make a living you have to do something beneath you or a job you don’t really like. If you’re fed up with your job, that’s fine! Find another one, but don’t quit your previous job until you have to. Put up with it just a little longer and it might save you from needing a stash or taking out loans. Also, full time grocery store workers get health benefits (pretty good ones I hear) which may just carry you through.
Change your lifestyle! It’s really amazing how much crap and junk we amass as consumers. Sell off the stuff you don’t need to raise some income and change your spending habits to match your new lower income.
Take advantage of government programs. Make the effort to qualify for as many programs as you can. It may be degrading, but it’s money available to you. Technically it’s YOUR money that you’ve been paying in taxes. That means take advantage of unemployment, disability, Medicaid, food stamps ,COBRA, whatever.
Again, the usual holds true: no advice is one-size-fits-all. Everyone is different and needs to take their own circumstances into consideration before deciding what’s best for them. This includes risk tolerance. If you can stand the risk, by all means live on the dangerous side, but understand your situation and make plans just in case. It’s one thing to live dangerously, it’s a whole other thing to live stupidly. If not having that cash there will cause you insecurity and lost sleep, then by all means make yourself happy.
Your money works for you so you can live life the way you want. You do not work for money. If you ever find yourself working for money, think about what you’re doing. Chances are there is a flaw in your plan somewhere.
401(k), Investments, Mutual Funds, Retirement, Roth IRA, Savings, Stocks, Taxes, Traditional IRA Thu, July, 12, 2007 at 03:34 PM Jonathan Clements of the Wall Street Journal writes a good article that everyone should take a look at and thing about how it applies specifically to their own lives. His advice has solid grounding, but the execution of the advice could be a potential pitfall for some people.
http://biz.yahoo.com/wallstreet/070701/sb118323893642354294_id.html?.v=1&.pf=banking-budgeting
You are reading part 4: Go For Growth
As Mr. Clements notes, “Those in their 20s are encouraged to invest heavily in stocks, because they have decades until retirement and thus plenty of time to ride out market declines. This is good advice -- in theory.”
Mr. Clements article is too much shock and awe and is far too cautious and conservative.
This part I fully agree with. This is you’re retirement. You cannot count on Social Security and no one has pension plans anymore (well… yeah no one – not really anyway). You need to save for yourself and therefore you need to be as careful as you WANT to be.
That being said, when you’re starting out you want to be able to gradually learn what you want, what you like, and how you like things.
This means a number of things. Here we go:
Stocks and Bonds. Really quickly… when stocks tend to do well, bonds don’t do well. Conversely when stocks tend to do poorly, bonds tend to do well. This is really, really simplified, but overall mostly true. This is why people diversify between stocks and bonds. Stocks are more risky, but with higher risk usually comes higher returns. When you have lots of time to ride through fluctuations, you can take these risks. The general rule of thumb is (100%-your_age) = %in_stocks. If you’re 20 you should look for 20% bonds and 80% stocks. Again this is a general rule of thumb. You may choose to be more or less conservative. But I would think (90%-your_age) = %in_stocks is a great place to start off if you don’t know what you want to do.
If you so want you can go after TARGET FUNDS or RETIREMENT DATE FUNDS which automatically change the investment in the fund moving towards more bonds and income the closer you get to the fund target date. Just to note the FIDELITY FREEDOM 2050 fund has about 92% in stocks and 8% in bonds to give you some idea.
This is great because you don’t have to think and you minimize expenses with only one fund. However there are risks. The fund may be more or less aggressive than you like. Your fund manager may not be that good (you’re not diversified in the respect all your eggs are in one managers basket). Depending where you hold the fund there may be tax consequences. The fees may be above your liking.
Markets You can invest in funds focusing on large, well established companies (large-cap or blue-chip), middle sized companies (mid-cap), or most risky the small businesses (small-cap). You can invest in companies that tend to use their dividends to reinvest into company growth (growth funds) or you can invest in companies that pay you the dividends (value or income funds). You can invest in companies in specific markets (air transport, energy, software, telecommunications, biotech). You can invest in specific locations (US only, foreign only, emerging markets, specific countries).
My recommendation would be to try to find an INDEX TRACKING TOTAL MARKET FUND. Do this because:
· You only need a few funds to be well diversified (minimize fees)
· Index tracking does not require active management and fees are nearly 3-4 times lower
· You’re well diversified over the entire market
· It’s a great place to start and you have more control over what you choose
If you can’t meet the minimum fund requirements consider an index tracking total market ETF which is like a hybrid between a stock and a mutual fund.
He is right in that you should be smart about your investments and ease your way into these new waters. He is right in avoiding growth overall because this is a more risky investment. He is also right in avoiding loading up on value/income as well. You want a good blend of things to start out with. Total market gets you that. Some growth, some income. Some large, some small. Some biotech, some energy, some transportation. You may want to further diversify between US Total Market and Foreign Total Market, however.
I feel he is, however, far too conservative in his recommendation of 40% bonds. If you find yourself perturbed by the market, then try a set it and forget it Target Fund and let them do the worrying. You really have no need to be so conservative until you’re in your late 30s. 40% bonds will rob you of potential growth and really cut down on the potential compounding of your life savings… unless he knows of a HUGE recession no one else does… I think he’s just being overly conservative.
Unless you’re some sort of time-traveling genius, don’t bother. You stand to risk far more than you will ever gain. The S&P 500 tends to out gain most all actively traded mutual funds in the long term.
Don’t panic or day-trade. Again you stand to lose far more than you will ever gain… unless you have some inside information which isn’t a good idea (ask Martha Stewart why). Ride out the fluctuations.
Do not let the tax consequences or losses prevent you from getting out. If you really think there are better funds to be in (be intelligent not emotional here) then take the loss and make your portfolio SMARTER. Warning: only do this to make it smarter. Far too many people panic and jump when it would be much better to stay on the boat. See THE STOCK MARKET IS A HUGE AIRPLANE.
Investments, Mutual Funds, Stocks Thu, July, 12, 2007 at 03:33 PM It’s hard to demonstrate exactly why you should ride out the fluctuations and be in the stock market for the long term, but maybe this will help.
Imagine that the stock market is a gigantic airplane. The investors are the passengers. The volume of the stock market are the number of available seats on the plane and passengers can buy as many seats as they want.
There are some fees involved since some nut (a broker) has to get you on this flying airplane and that’s hard to do… it’s flying after all. The broker also finds the seat you get from someone who sold. When you sell, you wait for a broker to come and find someone to sell your seat to. When the broker delivers them to the plane, you get off and the broker takes you home.
Now if you’re always buying and selling you’re paying the broker an awful lot for their services. You better be hoping to be picking your seats really well. Without a seating chart and without knowing where the plane is going… it’s hard to pick a choice seat. In fact, very rarely does it happen as planes are filled with plenty of lousy seats. Not everyone can fly first-class.
Let’s say someone looks out the window of the plane and sees a mountain dangerously close to the plane!!! He screams and causes a panic and everyone wants off the plane. There aren’t enough people to sell to so people start selling their seats for ridiculously low prices just so they can get off the plane. Others start jumping out of the plane without regard to their own safety. Some people get really lucky and land on a trampoline or awning or swimming pool or something, but most people aren’t so lucky.
Eventually by statistics as people bail there runs out of pilots among the general populace who can fly the plane and the whole thing crashes. However, if people saw the mountain and as a team went to inform the pilot and flight attendants and calmed everyone down the plane may just fly around the mountain. Oh sure, some dips and price fluctuations may occur for seats as some people may decide that air travel isn’t for them and they go off in search of trains (savings accounts) or boats (bonds) or maybe high speed bullet trains (CDs) or maybe they won’t travel at all (real estate).
But the point is as long as people help each other out, avoid jumping out of flying planes without parachutes, and allow pilots to fly the plane to their best ability, then everyone onboard benefits.
And that’s my plane analogy.
Oh, by the way, sometimes the plane goes up and down cuz it needs to land for gas or fly over mountains, but over all it flys pretty smoothly. Sometimes there’s unstable air which causes turbulence and panic – maybe the plane even drops a thousand feet! Sometimes the bathrooms get clogged and the bad press makes people want to stay out of the airplane. Sometimes even the expensive first-class seats are crappy. Sometimes a coach seat turns out to be an amazing experience on a trip.
See… an airplane.
Investments, Mutual Funds, Stocks Thu, June, 14, 2007 at 10:52 PM 
The funds we assembled in 2005 averaged a one-year return of 16 percent, vs. 10 percent for the S&P 500 index.
Last year we updated our picks, and the portfolio returned 21.2 percent from June 7, 2006, through June 5 of this year, vs. 23.4 percent for the S&P (our four equity funds averaged a 24.2 percent return, and our capital preservation fund returned 9.2 percent).
Given that success, we kept the basic building blocks in place this year.
The anchor of our lineup remains a total-market index fund, which invests in companies of all sizes. To complement that core holding, we have an actively managed large-cap fund along with more specialized small-cap and international picks for diversification and return potential. There's also an alternative-asset fund for additional balance.
Bonds, Investments, Mutual Funds, Stocks Mon, June, 11, 2007 at 11:27 AM I've been reading MSN money and I noticed something in the investing section. It's called investing basics. I went to that section and this link particularly caught my interest.Start Investing with just $100
http://articles.moneycentral.msn.com/Investing/Start Investing/StartInvestingWi thJust100.aspxIs this a good tip for beginning investors?Thanks!
Pros:
Sat, May, 12, 2007 at 02:02 PM My wife and I want to buy some stocks. Especially stocks in companies we buy products from. We have narrowed down our interests to 4 stocks. Is that too many to invest to? Should we decrease the amount?
I want to try another type of investment. I figure I have time to just let my money sit in a brokerage account. I want this money to appreciate and help pay a small amount of a down payment. If anything a vacation or even just reinvesting it would be nice. It would also be good as a security basket. I think we can put about $1500-$2000.
1. Make Your Company Match
Make sure to take all the free money that you can by socking away up to what your company matches in your 401(k). Nothing beats free money.
2. Take Advantage of Your IRA and Spousal IRA
Make sure to put away the maximum contribution for your IRA ($4000 for 2007). Even if your spouse is not working she can have an IRA in her name by way of a spousal IRA as long as you're making more than $8000 year. Of course if she's working she can contribute her own earnings.
3. Liquid Emergency Funding
The experts say that you should have enough in liquid savings to live for 6 months without income. Since you still have strong family support and do not have much by the way of monthly expenses, this shouldn't be a problem for you, but for most people this is a good sum of money to have in a liquid asset and will take some time to save up the required amount.
4. Life Insurance and MAYBE LONG TERM CARE Insurance
Here I would say that single people in their 20s probably don't NEED Life Insurance but it may still be a good idea if you can afford it for the following reasons. If one spouse makes more than the other an unexpected death or debilitating injury the loss of in addition to the emotional grief may derail the surviving spouses life for months if not YEARS. Even a small policy (term if you can't afford GUL) can help pay for all the unexpected (or expected) expenses of death like funeral expenses or lawyer fees if anything goes wrong.
Long Term Care insurance protects you from the expenses of Long Term Care (Hospice, Convalesce, etc.) and may be something to look into. The costs of such care could run hundreds of dollars per day. It's a consideration in this world of rising health care costs where it can seem like one cannot afford for such care.
5. Brokerage Account
Here we can discuss your stocks...
Let us make that assumption and say you invest $2000 evenly in 4 stocks and you hold it for 2 years to sell in 2009. This means you have $500 and put $480 into the stock (the fee to buy). You make 10% in the first year now have $528. You make another 10% the second year and have $580.80 where you sell and get $560.80 after the fee to sell. You have capital gains of $60.80 (I don't believe they count the fees) and pay $6.08 leaving you with $54.72 or $218.88 for all four stocks.
Now let us make the assumption you invest $2000 in 1 stock and hold it for 2 years to sell in 2009. You make the purcase and have $1980 in the stock. It grows the same 10% and is worth $2178 after year one. It grows another 10% and is worth $2,395.80 before the $20 fee to sell. You end up with$2,375.80 and pay taxes of $37.58 leaving you $338.22. All because of the fees you had to pay for the more trades.
Obviously it pays to try to minimize your fees, but the more you diversify (smartly) the less risky your investment becomes. Smart diversification means a blend of value (income) and growth and a blend of sectors. Buying four transportation companies (even if you use all of them) leaves you at great risk if gas prices go up. Buying four tech companies leaves you at risk in a recession. Companies who produce every day products like Proctor and Gamble or Johnson and Johnson do very well in a recession because they produce products people won't stop buying in a recession.
Of course to achieve diversification, you can buy a mutual fund although many have minimums of $2500 which is slightly higher than what you're looking at right now. The downside is that you pay for your fund manager to actively manage the fund (buy this stock, sell that stock to try to make an even gain every year - capital gains hopefully offset by capital losses to keep the fund performing). This fee eats away at your growth! You also have to hope that your fund manager is good and can actually beat the overall indicies.
For this reason you can try an index fund. These funds just buy whatever is in the index that fund is tracking. For example Fidelity has FSMKX which tracks the S&P 500. If you can invest $10,000 Fidelity will even drop it's expense ratios 30% to 0.07%. Vanguard has a similar program in place dropping it's expense ratios by half to 0.09%. FSMKX is a no load fund which means you don't pay anything either at the front end or back end.
If you want to do lots of research in purchasing your stocks, I recommend starting at The Motley Fool and reading and reading and reading. Remember that buying a stock is really trading. What you think is a good idea to buy, someone else thought was a bad idea to stay in that stock. If you can figure out why someone is selling, you'll have an advantage in figuring out whether the stock will do what you want it to or not.
Mon, April, 30, 2007 at 04:05 PM I have a question–if I so wished, how do I sell SOME of my mutual funds to say, invest in something else? I went to American Funds website, but they seem to only allow you to sell ALL of it.
I'm not sure how American Funds works but most brokerage accounts I've worked with allow you to sell a set number of shares or all of your shares. From reading their website the only limitation I see is that you cannot sell more than $75k in one day:
You may withdraw money from your account at any time, although online and phone redemptions are not available for certain types of accounts. You should always talk to your financial adviser before selling shares. He or she can offer advice and help you make decisions that fit your long-term financial plan.
You can sell shares on our website by visiting Your Accounts, by calling us or via mail. See Options for managing your account for details.
When you sell shares, the price you will receive is the next closing net asset value. This value may be more or less than your original purchase price, so please keep in mind that the sale may trigger a gain or loss for tax purposes.
The maximum daily redemption amount is $75,000. Redemption checks will be mailed to the address on your account, provided that address has not changed in the last 10 days. If sending funds directly to a bank account, any new instructions or updates will be subject to a 10-calendar-day hold before using this option. It will be mailed the next business day if the request is received before 4 p.m. Eastern time, the close of the New York Stock Exchange®, or it will be automatically deposited into your bank account within three business days if you have enrolled in American FundsLink®.
http://www.americanfunds.com/account/managing/selling.htm
Keep in mind there may be fees associated with selling your shares (especially if sold within 2 years of purchase) depending on the fund. Also any sale of a mutual fund will generate Capital Gains which you will have to pay Income Tax on.
Also note that if your financial advisor works for the same company that manages the fund, make sure to get a feel for whether they are giving you biased opinions (some FAs get bonus commission for selling their own company's fund and may also get bonuses based on the dividends of all the clients who hold the company's fund).
I would also recommend that if you plan to sell and are not planning to spend the money (down payment on a house for example) you should do some research into the fund you want to buy next to minimize the time your money spends "not working" for you. Exceptions if you feel your fund is really underperforming or possibly about to lose value.
Also keep in mind that a fund's performance is only as good as it's manager. If the fund you're looking into has a solid track record make sure the fund manager is still managing that fund. If he/she left the fund, the past performance of the fund has no bearing on the future performance of that fund.
Also make note of what kind of fees the fund has (if it's a managed fund - index tracking funds often have no fees), what kind of tax implications the fund has, and what kind of dividends the fund pays out. In a few days I'll post an article on Target Funds which may be a good option for you.
Investments, Mutual Funds Mon, April, 23, 2007 at 11:50 AM By Penelope Wang, Money Magazine senior writer
April 17 2007: 10:24 AM EDTNEW YORK (Money Magazine) -- Still smarting over the shocking sum you doled out to Uncle Sam for 2006? If only you'd known at the start of last year what you know now.
Well, at least it's not too late to save 2007. "You have time to make adjustments that can reduce taxes for the current year," says American Institute of Certified Public Accountants vice president Tom Ochsenschlager.
Read over your 1040 to see if you got snagged by any of these common traps - and learn from experience.
Lines 8, 9 and 13
You hit the jackpot on interest, dividends and capital gains. Too bad.
In 2006, for the fourth consecutive year, most stock funds made money - the average domestic equity fund was up 12.5 percent. At the same time, many of them used up the losses they'd been carrying forward from the 2002 bear market, which had offset previous years' gains.
That means you were probably hit with a bigger investment tax bill than you'd seen in years. Interest income and short-term gains were levied at your federal tax rate, up to 35 percent depending on your income.
Granted, long-term capital gains and qualified dividends were taxed at a modest 15 percent. But even that's a lot if you weren't expecting it.
Lesson>> On your equity funds, switch to tax-efficient entries, such as tax-managed or index funds. For the fixed-income portion of your portfolio, move to tax-exempt municipal bond funds. (Recently a five-year muni was yielding 3.7 percent, equivalent to 5.1 percent for someone in the 28 percent bracket, at a time when five-year T-bonds yielded just 4.6 percent.)
These changes may trigger a gains bill for 2007, but they'll almost certainly help you pay less in 2008.
Line 44 (of your 1040 or your child's)
Your kids earned a lot of interest. For decades, parents stashed cash for their kids in custodial accounts, since investment income earned by children was taxed at a lower rate. But starting in 2006, kids up to age 18 began paying taxes at their parents' rate on amounts of more than $1,700.
The result: a bigger tax bill for those who amassed accounts in the mid-five figures.
Lesson>> Reduce the tax bill by spending down the account in ways that benefit your kid -camp, say, or college visits. Then use the money that would've gone to those expenses to fund a 529 college savings account, which is tax-free if used for higher education.
Bonus: Your state may let you deduct your 529 contributions.
Line 45
Surprise! You get to pay the rich man's tax. The alternative minimum tax, or AMT, is a complex parallel tax code originally designed to prevent the richest households from dodging Uncle Sam. All taxpayers are technically supposed to calculate their bill two ways (the regular way and the AMT way) and pay the higher amount.
But the AMT isn't indexed to inflation, so many middle-class Americans end up in its grip. They pay considerably more, since the AMT caps or disallows favorite breaks, like the deduction for state taxes or the exemption for kids. Alas, once the AMT has you by the ankle, it's hard to shake loose.
Lesson>> Get a sense of whether you'll be hit again using H&R Block's AMT calculator (hrblock.com; click on Calculators). If you may fall victim, set aside some money to cover yourself. And book an appointment with a C.P.A. While you usually can't avoid the AMT, a pro may be able to help you reduce its impact.
Line 73
You got a really huge refund. What's so bad about that, you ask? By overpaying, "you made a free loan to the government," says Mark Luscombe, principal analyst at tax law publisher CCH. "And you missed out on the interest you could've earned on that money."
Lesson>> Ask your HR manager for a new W-4 and reduce your withholding. Remember, more exemptions means more cash in your pocket - and less in Uncle Sam's.
There is lots of sound advise in here. I would also recommend using tax calculators to figure out how to help minimize the money you lose to taxes. For example, TurboTax includes tools to help you modify your exemptions claimed and witholding on your W-4 coupled with your 401(k) deductions to find an ideal way to contribute more money to your 401(k) without impacting your take home pay. Ideally looking at the fact that increasing your 401(k) contributions descreases your taxible income such that you don't end up oweing at the end of the year.
Also pointing out that if you are not maxing your contribution to a Roth IRA, I would recommend it. There are limitations of course, but remember that a Roth IRA takes after-tax contributions and any gains you make are NOT taxed upon distribution. This makes it a great (although there are limitations) vehicle for hitting the jackpot on interest, dividends, and capital gains.
Alt Min Tax, Bonds, Investments, Mutual Funds, Stocks, Taxes 