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.
Covering The Basics
It's great that you have the money to put away to start saving for your future. Since you're married there are some considerations to take into account before we even begin talking about your potential stock purchases.
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...
Capital Gains Taxes
Whether you have stocks or mutual funds in a brokerage account (with certain exceptions) you will be charged capital gains taxes when you sell (assuming you made gains - hopefully you did). With politics playing hell (as usual) on tax rules here are the long term rates as things currently stand:
- Sell in 2003-2007
- Regular tax rate < 25% - 5%
- Regular tax rate >= 25% - 15%
- Sell in 2008
- Regular tax rate < 25% - 0%
- Regular tax rate >= 25% - 15%
- Sell in 2009 or 2010
- Regular tax rate < 25% - 10% (8% for >5 year gain)
- Regular tax rate >= 25% - 20% (18% for >5 year gain)
- Sell in 2011 or later (assuming no further changes)
- Regular tax rate < 28% - 10% (8% for >5 year gain)
- Regular tax rate >= 28% - 20% (18% for >5 year gain)
- Although this looks like a better deal to wait after 2010, it's actually the same since the 25% tax bracket becomes 28% in 2011
If you hold your investment for less than 366 days you will be charged short term capital gains which is the same as your regular bracket. Obviously it pays to hold your investment for a year or more.
Fees and Other Expenses
Whenever you transact a stock you will typically be charged a fee to make the trade. Depending on which institution you're going to do your trading in this could be as high as $20 per trade.
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.
I also forgot to mention dividends which a stock may pay a stockholder's share of the company's profits to you. You can take the money or invest it. Dividends will be taxed the same as capital gains up until 2008. For 2009 and beyond dividends will be taxed like regular income.
Buy and Hold Strategy
This strategy works for most beginning investors because you don't have to time the market. When you hold it for a period of years you can suffer through the losses and reap the gains taking an overall increase by the time you sell. You don't have to do the research required to time the market. Since you're not trading constantly you rarely pay any trading fees. You're postponing paying your capital gains and when you finally do it will be at the long-term rates.
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.