REINVEST YOUR DIVIDENDS

With interest rates at historic lows and increasing volatility in major stock indexes, dividends have become the rallying call for investors. Blogs devoted to dividends proliferate and investors believe that dividend stocks are the best equity investment. Don’t get me wrong, dividends are fine, but just because a stock pays a hefty dividend does not mean it is a great investment. And the dividends the stock throws off are not “free money”.

What is a Dividend?

Dividends are earnings a company is electing to pay to the shareholder in lieu of reinvesting in the company. If the company does not pay a dividend, the earnings are used within the company to fuel growth initiatives, which if successful, will lead to higher share prices. If a company pays out a portion of those earnings, they are communicating that they believe you have a better use for those funds than the company does.

Wait a minute. Dividend paying companies are out of growth ideas?

Not exactly, usually dividend paying companies are older more established firms with a decent track record. These companies are confident that they will continue to grow into the future and decide to allow shareholders to participate in their profits now  instead of waiting until the shareholder sells their stock to benefit.

Why You Shouldn’t Spend Your Dividends?

Let me preface this statement by saying, if you are in the retirement phase of your life and living off of your investments, there is absolutely nothing wrong with spending your dividends. This message is directed at those in the accumulation phase of their lives and building their net worth.

Case Study

Marlon holds shares in Awesome Industries. He bought 100 shares at $10.00 per share, for a total outlay of $1,000.00. Awesome pays a 1.5% dividend. Annually, Marlon receives $15.00 from his investment in Awesome.

If Marlon spends that $15.00 per year, that’s it, the money is gone!

If Marlon is a savvy guy and decides to reinvest his dividends and use them to purchase more shares he’ll have a lot more cash at the end of 10 years. Assume that both the company and its dividends grow at 7% per year.

After 10 years, at 7% annual growth, if Marlon spends his dividends, his stock is worth $1,967.00.

But Marlon decides to reinvest his dividends each year in more shares of Awesome.

At the end of 10 years, Marlon’s initial $1,000.00 investment is worth $2,282.60. For an annual compound rate of growth of 8.6%.

By reinvesting his dividends, he earned an additional $315.60 or 1.6% annual  return.

The Takeaway

REINVEST YOUR DIVIDENDS AND YOUR MONEY WILL MAKE MORE MONEY. Spend your dividends and the money is lost.

Some of my Favorite Dividend Blogs

Dividend Ninja

Buy Like Buffett

Dividend.com

Dividend Monk

For those out there with dividend income, do you spend or reinvest?

MSN Money selected their Top Money Stories of 2011. Initially, I began to dissect their list and intended to write about them all. But, I got stuck on the low interest rates for savings. This is a huge topic and decided it warranted an entire article. In fact, The Huffington Post suggests this environment, instead of helping the economy is actually keeping consumers from spending.

ANEMIC RETURNS ON SAVINGS

This one impacts anyone with money to invest in a savings account, CD, or short term bond. The historically low savings rates are slashing retirees lifestyles. All the folks looking to earn a return above 0.9% on their savings need to do some digging around.

LOW INTEREST RATES

As I updated our familys’ asset allocation this week, I was smacked in the face with the deplorable return. As we keep a hefty 20% of our portfolio in cash investments and 20% in bond type investments, I relentlessly searched for some sort of return on the fixed portion of our portfolio.

TIPS

I decided I would pursue investing in Treasury Inflation Protected Securities (TIPS). After all, at least they will keep up with inflation. Much to my dismay, Charles Schwab had none yielding a positive return. I certainly am not investing in a TIPS fund right now, because as soon as interest rates rise, the principal value of the fund will fall, netting a certain loss. In fact, the TIPS fund we currently have is priced at $117.00. Fortunately, we bought the shares when it was priced at $100.00. I decided to wait and put in a bid for the April auction and hopefully, buy individual TIPS at par. With individual TIPS, you always receive the principal payment back when the bond matures plus an adjustment to compensate for inflation.

SERIES I GOVERNMENT BONDS

Series I (for inflation) Governement Bonds are similar to TIPS. With I bonds you not only get a FIXED (does not change) rate of interest, but you get a BONUS; you receive an ADJUSTABLE rate of interest that changes along with the inflation rate. So the combined interest rate includes a fixed interest rate (currently zero) plus an inflation adjusted rate for a new combined interest rate which adjusts every six months. These bonds can be bought at your bank in small denominations up to $10,000.00 per year. They are among the best choice for inflation protection.

SHORT TERM BONDS

Next, I went on to Schwab and searched their fixed listings for bonds with terms of between 2 and 4 years. I found a great A rated bond paying close to 3% and maturing in  2013. When I went to purchase, I realized the minimum investment was $100,000.00. That was a bit steep for us! None of the other short term bonds paid more than 2%.

CERTIFICATES OF DEPOSIT

On to CDs to find out what type of interest rate I could snare for the next 2 to 3 years. At Bankrate.com the best interest rate I found was 1.29% for 2 years. For a 3 year CD, the top rate shot up to 1.53%. Although the Federal Reserve Bank alluded to keeping rates steady into 2013, there is something upsetting about settling for such a low rate.

Personally, I would rather keep our uninvested cash and fixed funds totally liquid in case rates rise in the next six months. Or maybe I’ll bite the bullet and buy a one year CD. I’ll keep you posted.

SAVE THIS ARTICLE

Although the returns on these investments are presently quite low, they will go up. Print this list out and save it. These are some good ideas for your short term funds. One thing I’ve learned from decades in the financial markets, rates go up and down. For those borrowers out there, there will come a time when you are crying for these low interest rates. For the savers and fixed investors, rates are bound to rise.

In sum, get the best rate you can but don’t tie your money up for too long as rates will eventually go up.

Where are you parking your short term cash?

image credit; Doug88888

Many of my readers have specific personal finance questions. The extra information in the WEALTH TIPS NEWSLETTER (sign up on right) seems to spur even more questions. I love sharing my financial experience with others, so here is this weeks question.

John wrote in and asked for advice for himself and his daughter;

HISTORICAL RETURNS

I would like your opinion and advice on how I should allocate my investments and my daughter’s investments among mutual funds. Both our accounts are with Fidelity. I am 56 and plan to retire at 60. I have $400,000 in IRAs (Traditional and Roth). My daughter is 24 and has $65,000 in an individual acct and $50,000 in both Roth and rollover IRA. There are so many funds to choose from and I feel overwhelmed. Any suggestions would be helpful.

Caveat; This article will touch on the topics to consider when choosing mutual funds. Please do not take this as personal advice for your individual situation. There are many considerations when planning an investment portfolio. For any specific investing information, please contact your own investment advisor or CPA. Fidelity has advisors on staff that can help with investment questions as well. Personal disclosure-I have an account at Fidelity.

Too Much Information is Not Always Better

There is scientific evidence that it is more difficult to make a decision when confronted with a large number of choices, than when given just a few choices. I think this is particularly true when it comes to investing in mutual funds. Did you know there are more individual mutual funds than individual stocks? How is someone able to decide among the over abundance of offerings?

Determine Your Risk Level First

Before considering how many and what type of funds to choose, you must figure out how much volatility or risk you can stomach. Those who cannot sleep when their investment portfolio goes up and down, should have less invested in stock investments and more in fixed or bond type investments. Additonally, the more time available before you need access to your funds, the more agressively you can invest.

Stocks and stock mutual funds are quite volatile and over the short term (which can be up to five years) can go up or down in value. Over periods of more than ten or twenty years, their normal trajectory is upward.

Never put any money in stock type investments which you will need within the next five years.

Bonds are less volatile, yet long term historical data suggests that they offer lower levels of return than stocks. Contrary to the past few years.

In general, if you are close to retirement and cautious about risk you should have a more conservative portfolio with a larger percentage of your funds in bond type investments than stock type investments.

John’s 24 year old daughter has a long working life ahead of her, time to make up any investment losses and should think about investing a bit more agressively.

Which Mutual Funds to Choose?

Actually, this is a much easier question than you would think. You only need a few index funds to have an optimal portfolio. Since John’s accounts are at Fidelity, I’ve included some Exchange Traded Funds (ETFs) which can be bought commission free at Fidelity. Most of these funds and ETF’s are generic index funds with low expense ratios.

Most low cost, broad based index funds of the same type are comparable. Vanguard has the largest selection of low fee index funds.

Pick an index fund from each category:

Total U.S. Stock Market Index Fund

• Vanguard Total Stock Market Index Fund (VTSMX)-Fidelity charges a fee to buy this mutual fund
• Russell 3000 Index Fund (IWV)- Exchange Traded Fund with no commissions from Fidelity

Broad-based International Index Fund

• Fidelity Spartan International Index Fund (FSIIX)

Diversifed Bond Index Fund

• Vanguard Total Bond Market Index Fund (VBMFX)-Fidelity charges a fee to buy this mutual fund.
• Barkleys Aggregate Bond Fund (AGG)-Exchange Traded Fund with no commissions from Fidelity

The percentages invested in each fund depend on your risk tolerance and preferred asset allocation. To learn more please sign up for my Wealth Tips Newsletter and get a free e-copy of 20 Minute Guide to Investing (top right of this site). There are sections on determining your risk tolerance and asset allocation.

The most important factors in investment wealth building are to pick an asset allocation and stay invested through thick and thin. The chart of historical returns illustrates that long term asset performance is generally positive. If history is any guide and if you believe the USA and world economies will continue to prosper, your investments will increase in value over time.

For more commentary on Index Funds:

Save Money with Index Funds at Invest it Wisely

Index ETF’s vs Index Mutual Funds; Which are Better? at My Personal Finance Journey

Money Help for Christians provides a Beginner’s Guide to Index Funds, Mutual Funds, and ETFs.

Are Actively Managed Funds a Fools Game Compared to Index Funds? at Squirrelers.

Consumerism Commentary offers a sophisticated debate; John Bogle and Jeremy Siegel Debate Index Funds.

What are your preferred investments?

SIMPLE ASSET ALLOCATION

MBA Series #1

“Don’t put all of your eggs in one basket.”

The beginning of the year is portfolio rebalancing time for investors. I write a lot about investing as I believe it is an achievable path to long term wealth. If you don’t know what asset allocation is or much about investing at all, then this article is for you.

Modern Portfolio Theory is the science that drives most of the writing about investing today. As I put the finishing touches on the university class I’m teaching this winter in Investments, I’m going to share some of the basics with you; FOR FREE!

Tried and True Investing

Diversification in investing means don’t put all of your money in one investment or one type of investment.

Why?

When that investment goes down, there goes the value of your invested assets-down.

Buy different types of investments, so that when one goes down in price, the others may go up, or at least remain stable.

Diversification smooths out the ups and downs of the value of your investments.

For example, it is rare for bonds and stocks both to go down at the same time. During the past decades bonds have outperformed stocks, an historically unusual occurrence. Over long periods of time stocks have outperformed bonds, but a combination of both asset classes reduces your portfolio volatility.

There are all types of asset classes such as, international stocks, country specific stocks, small cap stocks, commodities, real estate, corporate bonds, government bonds, international bonds and many more. All of these types of assets can be bought as individual holdings, or combined in mutual funds and exchange traded funds (ETF). But, you don’t need to worry about the wide variety of asset classes unless you are passionate about investment management. You can obtain a satisfactory amount of diversification with just  two ETFs or mutual funds.

Asset Allocation means selecting specific asset classes and choosing the percentage amount invested in each asset class. The chart above illustrates a simple asset allocation model.

Simple Portfolio Management

The research abounds that a basic asset allocation of a certain percent in stock investments and a certain percent in bond investments has led to long term wealth creation.

With annual rebalancing to make sure the percentages in each asset class remain in alignment with your stated preference, you can grow your assets with little time spent in managing them.

Index funds and ETFs are perfectly suited to a simple and effective portfolio management approach. The two asset portfolio shown in the chart above combines a world stock market index ETF with a total US bond fund. Depending upon your age and risk tolerance, place more or less in each asset class.

Rebalance your portfolio at the end of the year to get back to your originally selected asset allocation. In other words buy or sell from each holding to get back to the desired percentage amount invested in each fund. Paul B. Farrell of Market Watch has a wonderful series called the Lazy Portfolios with several asset allocations and performance metrics. For more ideas on this topic, it’s worth a read. The ten year annual returns of the 8 Lazy Portfolios ranged from 4.8% to 6.8% versus a ten year return of the S & P Index of 2.86%.

Consider this easy approach to investing to grow your wealth over time. This method is ideally suited for use with a workplace retirement fund.

For more on this topic, subscribe to my Wealth Tips Newsletter and receive a free ebook, 20 Minute Guide to Investing. (Sign up on the right)

Caveat; This article is for information purposes only and is not a recommendation to buy or sell any specific securities. For investment advice see your own personal advisor.

If You Can’t Get Enough Asset Allocation, Here’s More

Asset Allocation by Age at Couple Money

Doug Warshau wrote about Asset Allocation for People in their Twenties at Sweating the Big Stuff

The Absolute Importance of Asset Allocation at Money Help for Christians

My Personal Finance Journey shares his Asset Allocation

For those asset allocators out there, what is your asset allocation and why?

Many readers, especially those recipients of my Wealth Tips Newsletter (sign up on right) write in with money questions. Recently a reader asked What to do with Retirement Funds When I Switch Jobs?

Today, SN wrote in asking about investing in bond funds. This is a really important topic right now.

Dear Barb,

While re-reading your simple but powerful book – 20 Minute Guide to Investing (free when you sign up for Wealth Tips Newsletter on right)– I came across the list of Bond Index Mutual Funds. For the last few weeks, I have been thinking about and researching different options of investing in a bond fund, and so the list was quite handy and timely.

My current overall portfolio asset allocation has grown lopsided over the last two years, and is skewed more toward equities – 90% equities and 10% bonds. My target asset allocation was 80% stocks and 20% bonds. To get back to my target allocation, I am not planning to sell off my equity portion; instead, I am planning to direct my new cash toward bond/bond fund purchases.

It’s with this backdrop that I am planning to direct my Roth IRA contribution of $5,000.00 toward the purchase of a bond fund. As I already have a total bond fund in my account, I am considering buying inflation protected securities, i.e., Vanguard Inflation Protected Securities Index (VIPSX), as recommended in the guide.

I’m not sure what I should do at this stage, and so would like to seek your
expert advice. SN

Bond Characteristics and Interest Rates

Bear with me while I switch on my “professor” hat. A basic characteristic of bond investing is that when interest rates fall, bond prices rise. Conversely, when interest rates rise, bond prices fall. As any savings account owner realizes, interests rates are at an all time low. Thus, when interest rates rise, the direction of any bond fund net asset value is down.

Bond returns consist of two parts;

1. Coupon payment (similar to interest payments)
2. Price appreciation or depreciation

For example, buy an individual bond and hold it until maturity, your total return consists of the coupon payments and the return of the principal purchase price. Unless the bond issuer defaults, you are promised the coupon payments and return of principal. Although while you hold the bond, the actual “price” may go up and down, if held to maturity you won’t lose any principal value. If you sell before maturity, you might garner a capital gain or loss.

Bond Funds versus Individual Bonds

Buy a bond fund and there is no end date like with an individual bond.  For example, buy ABC Bond fund today for $10.00 per share. At the time of purchase the fund pays dividends of 3% per year or $0.30 per share. But here’s the difference, if interest rates RISE, the price for the bond fund will FALL. Thus, assume interest rates go up a percent or two over the next few years, the bond fund price will most likely decline from $10.00 to a lower price. You will experience a LOSS when you sell the fund.

So, if you buy a BOND FUND when interest rates are very low, when interest rates rise and the bond fund price falls, you will experience a loss on your initial funds when you sell since there is no end or maturity to a bond fund!

To Invest or Not in Bond Funds?

Currently, I am not investing in any bond funds. For the “bond” portion of a portfolio I would recommend buying individual Treasury Inflation Protected Securities (TIPS). These are the same investments that are included in the Vanguard Inflation Protected Securities Index (VIPSX) you mentioned in your question. The only difference is that when you buy the individual bonds, you can hold them until maturity thereby avoiding the decline in principal value.

How does the TIPS investment work?

• With TIPS, the interest rate is set at the purchase date. It always stays the same. Today, the interest rate will be negligible.
• PRINCIPAL value of the investment goes up and down with the inflation rate.
• When the principal increases (decreases) you will get a LARGER (smaller) interest payment on the new principal amount.
• When the TIPS security matures, you get the higher or original principal amount; At maturity, you never get a smaller principal.

Buy TIPS directly from the government at TreasuryDirect.gov.

If you are looking to fund the bond or fixed portion of your asset allocation, buying TIPS will ensure that your funds match the inflation rate thereby preserving your principal contribution and matching future increases in inflation.

If you have a personal finance or investing related question, write in and it will be considered for a future column.

How are you funding the fixed portion of your portfolio today?

image credit; chicken tender

How Do You Analyze Invesment Performance?

In investing, you feel great when your statement shows a nice fat annual return like 12% or even 13%. Conversely, when you have a “bad” year with a negative return, you’re disappointed.

What is a benchmark? “A standard used for comparison. For example, the NASDAQ may be used as a benchmark against which a technology stock is compared.” Investorwords.com

What are the Correct Benchmarks to Use For My Investments?

What Does Index Mean? “A statistical measure of change in an economy or a securities market. … An index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value. Stock and bond market indexes are used to construct index mutual funds and exchange-traded funds (ETFs) whose portfolios mirror the components of the index.” Investopedia.com

How Did My Stock Fund Perform; year-to-date?

The Takeaway

Forget about absolute performance, if you seriously want to evaluate how your investments are performing. Find the benchmarks for your mutual funds, they are listed in the prospectus or on the web-site. Then look at how your investments did in comparison with their unmanaged index benchmarks. If you are besting the indexes over time, great. If not, consider switching your money into a low cost unmanaged index fund. You’ll be certain not to underperform the market!

I’ll let you in on a secret, many years ago, someone told my dad to buy gold. And he did. But after decades of no upward movement he sold. I know he is sorry now. The lesson is that in investing you have some hits and some misses.

ACTION PLAN:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

• Choose a mutual fund or etf that you own or are thinking about buying. Go to the web-site of the holding.
• Look at it’s recent recent and long term performance.
• Compare the performance with it’s benchmark.
• If you fund is underperforming it’s benchmark, think about whether to keep it or switch into a related unmanaged index fund.
• Be sure to consider tax consequences.

(Remember, do not take this article as investment advice, but as educational information)

Top Investing Yakezie Blogs

• Buy Like Buffett
• OilandGasETFs
• Darwins Finance
• Financial Success for Young Adults
• Investor Junkie
• Money Mamba
• PTMoney
• The College Investor

Top Investing Websites

• Seeking Alpha
• Morningstar
• Investopedia
• Yahoo Finance
• CNN/Money

How are your investments performing?

image credit; ryanpyle.com

For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed or email subscription and follow me on twitter so you get the word immediately.

Welcome to encore month at Barbara Friedberg Personal Finance. We are caravanning across the country to our new home in a new land. During this major transition, please enjoy guest articles and some of my best previously published posts. Please be patient with my responses and keep visiting!

This first week of July, check out my MBA series and get some of the same material I taught my Portfolio and Investing students.

a version or this post originally published; June 13, 2010

BONDS

“The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future” John Maynard Keynes

One of the foremost economists of the last century succinctly states a reason to invest. Learn the simple principles of investing through this MBA series taken directly from the graduate course I’m teaching in Investing & Portfolio Management.

Main Topic: What are BONDS & do I Need Them?

Earlier in the week I talked about risk versus reward. In investing, the greater the risk, the more opportunity for reward or a high return.  Risk means that your investment is going to go up and down in value; with higher risk investments  exhibiting greater volatility.

A BOND is a loan to a corporation, municipality, or government. When you buy a bond you are making a loan to the bond issuer. In exchange for the loan, you receive an interest payment. The amount of interest you receive is directly related to amount of risk you are taking. (Bond interest is called a coupon payment).

Buy a corporate bond from a corporation with financial troubles, you get a high interest rate because if that company goes bankrupt, you might lose all of your initial investment.

Buy a U.S. government bond, you usually receive lower interest rate, because your money is invested with a secure government who will pay you back your original investment when the bond matures.

A government bond is the safest bond to buy; it also has the lowest interest rate. Riskier bonds pay higher interest rates.

Here’s why you need bonds:

Jose is 33 years old, married, with term life insurance, 6 months cash in a savings account, and pays off his credit card bill in full every month. Three years ago, he and his wife invested in 2 index mutual funds:

1. Vanguard total stock market index (VTSMX)
2. Vanguard total international stock index (VGTSX)

He believed that since these 2 funds held lots of different companies from various parts of the world, he was sufficiently diversified and did not need any other investments.

Look what happened to the value of his investment portfolio during the past 3 years.

What if he added BONDS to the portfolio 3 years ago?

Notice, with no bonds, Jose’s portfolio returned 0.74% over 3 years; with bonds, his portfolio garnered 2.44%.

PRACTICAL APPLICATION: What is the takeaway?

• Investing is only for money needed in 5 years or more, because in the short term, the returns are volatile. These last 3 years prove that point.
• As long term returns of stocks and bonds are almost always positive and greater than returns in savings accounts, these investments are beneficial for generating long term wealth.
• Combine bonds, stocks, and some cash to an investment portfolio to lower risk (volatility).
• A combination of stocks, bonds, and cash will likely beat the investment returns of a cash savings account over the long term.

Wouldn’t it have been preferable to invest all his money in bonds?

It’s always a great idea to invest in the highest performing asset. But, there’s a problem with this approach; unless you are a psychic, you don’t know what the best performing asset will be IN THE FUTURE. That is why you divide your assets about among varying asset classes.

Remember these Investing Maxims

• Historically long term returns for stocks are about 9%, bonds near 5%, and cash in the low single digits.
• Combine the three assets, reduce risk, and increase returns over cash alone.
• Invest in mutual funds to simplify. No need to pick individual stocks or bonds.

ACTION STEP:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.

Learn more about bond investing at Money Chimp.

What percent of your portfolio is invested in bonds?

For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed or email subscription and follow me on twitter so you get the word immediately.  

In a recent article, How Long Until I’m Wealthy?, I received such a depthful comment the response cried out for an entire article.

Little House commented:
I like how you broke down the stocks and bonds percentages. Do you really think we can expect an average return of over 7% over the next 30 years? My husband and I were just discussing how savings rates are so low and have been for 10 years. We remember when we were kids in the 80′s that they were up to 12%! We can’t fathom them returning to this rate any time soon. Of course, savings rates aren’t the same as stock returns, but still. Am I being to gloom-and-doom? Will we see these returns again? I hope so!

HOW ARE STOCK MARKET RETURNS CREATED?

Economic growth is propelled by innovation, commerce, and invention. Here’s how it works:

•  A company creates products and services.
• Individuals and other companies buy these items.
• Eventually the goods and services may be sold internationally.
• The company makes more money and gets bigger.
• As the company grows, they purchase more from others just as others are buying from them.
• Then, the company sells shares (ownership in their firm) to the public and the stockholders can participate in the profits (losses) of the company.

This is the stuff that “economic growth” is made of.

These steps create more wealth in the participating economy.

Smaller companies can grow faster than larger ones. And smaller (developing) countries can grow faster than larger ones.

IS 7% RETURN ON A BALANCED PORTFOLIO POSSIBLE IN THE FUTURE?

Assume you have an investment portfolio consisting of stock and bond mutual funds (or ETFs). Further, you include some international index funds as well. Finally, toss in some holdings from developed and emerging markets.

Consider these questions and answers to determine whether a 7% investment portfolio is possible in the future.

Will interest rates on bonds and cash increase in the future? It’s likely that interest rates will rise since they are at a historical low point.

Will China, India, and Brazil continue to grow rapidly in the future? There is little evidence to suggest their rapid growth is slowing. These emerging markets (and others) with quickly growing economies will offer higher stock market returns than the slower growing countries.

Will European and North American markets continue to grow? As long as these developed markets continue to innovate and grow goods and services available for consuming and exporting, they will expand. 

BARB’S TAKE

I AM NOT A SOOTHSAYER, but if I had to predict; the world economies, over the long term will expand. Will they falter at some points? Absolutely, as economic growth is cyclical.

History has rewarded those who invested in stocks and bonds. If you have more than 10 years until you need your investment funds, and world markets continue to grow, a balanced allocation of stocks and bonds representing various size companies from around the world could very likely reward you with a 7% annualized return.

And if you’re looking for higher returns on cash, with upcoming inflation, ballooning interest rates will likely pump up your returns on money market funds and certificates of deposit as well.

Readers, what do you think. Is a future 7% return on a balanced portfolio plausible?

image credit; CreativeApril

“Cash confiscates capital. Long term, after taxes and inflation, the return on cash is negative.” Catherine Keating

Since my mid-20’s, I made financial net worth goals for our family. I’d calculate our current net worth, add additional savings, and punch in an expected rate of return over the period, usually five to ten years. Occasionally, I go back and review prior goals. No matter what the market, over the long term we have met or surpassed the objectives.

Learn how long it takes to meet or surpass your financial goals.

Assumptions:

• Save monthly.
• Divide Savings among STOCK (60%) and BOND (40%) investments. The historical average annual return of 60% stock funds and 40% bond funds is 7.4%. To be on the conservative side, I’m going to assume an annual return for this portfolio of 7%.
• Investment returns over the next 20-40 years approximate historical averages; STOCKS 9% BONDS 5%

HOW LONG WILL IT TAKE?

At an annual return of 7% per year, how long until you are wealthy?

If you save $100 per month, in 40 years you will have $242,481.00. Increase that to $800.00 per month and you’ve got over 2 million dollars after 40 years investing.

Drop your monthly investment to $500.00 and invest for 30 years. You still wind up with a nest egg of over $600,000.00. Not bad.

Empowerment-It’s in your Hands

There are no guarantees in life-but regular savings and investing will DEFINITELY make you wealthier than SPENDING!

Finding the balance between spending and saving leads to pleasure now and future security.

LEARN ABOUT INVESTING

Download my free eBook from the form on the top right of the site. It’s not hard and will get you started to prosperity.

Barbara Friedberg Personal Financeteaches WEALTH BUILDING SKILLS. Pay attention, be patient, don’t overspend on stuff that doesn’t last; save, invest, and you can become rich. Take action to hit your wealth target.

Print out this list!

“Access to information is great; access to too much information is overwhelming!” Barb Friedberg 

I’ve been a long time subscriber to the Individual Investor Journal, a publication of the American Association of Individual Investors

 

This information is ideal for you and in line with my objectives to provide easily digestible personal finance information. Print this article out and keep it handy for comprehensive personal finance information inspired by the February/March 2011 Individual Investor. 

1. Comprehensive Personal Finance

Most of these sites include resources on banking, insurance, investing, savings, taxes, healthcare and financial planning. There is enough information on each of these sites to keep you occupied for hours! Check out the entire sites or pick and choose the most relevant parts. 

•  MSN Money-Comprehensive site with a superb columnist Jim Jubak. The stock scouter tool offers an easy to use metric for use in evaluating individual stocks.
• CNN Money-This collaboration between Money Magazine and CNN has a wealth of money news and information. This site has more “news oriented” information.
• Smart Money- The companion website to the magazine is loaded with resources. I clicked through from the personal finance tab to the bank notes section. What a wealth of bank related articles!
• Yahoo Finance- I’ve had this one bookmarked as my home page for a long time. It’s great for a start to a basic stock analysis. Anything finance related is here.
• Google Finance- I’ve since become a fan of Google Finance as well.
• Morningstar-Morningstar is the gold standard for mutual funds with both a free and premium (for pay) service. I’ve subscribed to the premium service for years and use it to investigate both mutual funds and individual stocks. The portfolio x-ray is an awesome tool to drill down and see the overlap in your entire portfolio.
• Bankrate- I’ve long favored this site for it’s great collection of calculators. But in addition to the calculators it is known for monitoring interest rates. More than that, there are numerous personal finance sections to the site as well.

2. Exchange Traded Funds (ETF)

Growing in popularity, these hybrids of mutual funds and stocks offer access to a multitude of investment categories from vanilla index funds to exotic new investment combinations. 

• ETF Database- Just had my first visit to this site. Clean organization with simple educational course and articles. Offers database and screening tool as well.
• XTF.com-I don’t know if it’s my second cup of coffee or that this site is awesome. Fascinating metrics, ratios, and comparisons for etfs. Add the commentary, and this is a unique site offering real value. First comment I came across was from an old investing contact, Lowell Herr with some practical comments!

3. Bonds

Bonds are tricky to research and might be considered a “dealer’s market.” There’s no go toresource for all bond listings. For newly issued Treasuries and savings bonds you can go to the source, TreasuryDirect. Most investment companies also have a “bond” department. 

• FINRA Bond Market Data -The Financial Industry Regulatory Authority has tons of investment related information. Their bond section provides detailed data about individual issues as well as the market in general.
• Investing in Bonds – Created by the Securities Industry and Financial Markets Associationcould just as easily be called everything you wanted to know about bonds but were afraid to ask. This resourse is suitable for novice and experienced investors alike.
• Treasury Direct – Is the place to go for new government bond issues of all varieties, from TIPs to Savings Bonds. After purchase, they will even record and maintain bond proof of ownership. Dig out your old savings bonds and find out what they’re worth!

What are some of your favorite personal finance resources?