The Story Continues

After you finish reading this article, please visit Budgeting in the Fun Stuff to read my guest post entitled, I’ve Got the Time-How do I Get the Money?  

“Although it’s easy to forget sometimes, a share is not a lottery ticket… it’s part-ownership of a business.” Peter Lynch 

One of the most successful investors of all time, always focused on the business and investing basics. His tenure at Fidelity at the helm of the Magellan Fund was historic. 

Not Investing

MAIN TOPIC; From Bonds to Stocks

In the first article of this series, I talked about my investing FEARS. As I continued to invest, my interest and confidence in investing grew. I took advantage of the opportunity to contribute to the 403(B) retirement account, through my job as a Career Counselor & Student Employment Administrator. During lunch, I snuck out to the San Diego State University Library to check on my investments. My investments continued to grow as I faithfully contributed MORE than we could afford. (Good trick for building wealth, but requires some lifestyle creativity). See how Jacob at Early Retirement Extreme cuts costs! 

At this point, I chose a guaranteed fund paying a fixed 7% interest rate (now pays about 3%) and the CREF stock fund from the TIAA-CREF family. EVEN AFTER I LEFT THAT JOB, I continued to hold these investments and still have them in my portfolio today. And if you’re looking for investing motiviation……my initial contributions doubled several times over! 

PRACTICAL APPLICATION; Individual Stocks vs. Funds

After leaving San Diego, we moved to Indianapolis where I felt knowledgeable and confident enough to start investing in individual stocks on my own. 

El Carino was not so sure. 

In 1993, in order to convince him, I researched and wrote a paper entitled, Investment Returns; Long Term Road to Independence. The Cliff Notes version posited that over the long term, stock returns beat out all other asset classes and were likely to do so in the future. I suggested a conservative asset allocation and “proved” that investing in stocks made good sense. 

El Carino bought it! 

With lots of enthusiasm, some knowledge, determination, and savings, I studied how to research individual stocks, read countless books, and bought my first stock. 

Although I can’t remember the name of the first stock I bought, I do remember that I paid about $1,000.00 and within 2 years it was taken over by another company for $2,500.00. Easy money, right? Not exactly, for every stock or two that showed a profit, there was another that went the other way. 

As I continued investing in individual stocks and bonds, I made more than I lost and earned a respectable return. I loved the challenge of stock picking and eventually began working as a Portfolio Manager. But don’t even think it was EASY. Choosing individual stocks requires a tremendous amount of time in order to research and follow the company as well as the emotional fortitude and intelligence to make buy and sell decisions. 

I DO NOT RECOMMEND PURCHASING INDIVIDUAL STOCKS; and in the next article or 2 in the series, you will find out why! Continue reading and you will learn how I invest our family assets TODAY. 

BEFORE YOU INVEST YOU MUST READ 10 STEPS YOU MUST TAKE BEFORE BEGINNING AN INVESTING PROGRAM. 

Caveat: This article is for information purposes only and may not be appropriate for your individual situation. 

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.  

Visit your human resources office at work and get information about the retirement plan. 

image credit; Monti 

Upcoming Activities 

On Saturday I am thrilled to publish a book review at Yakezie.com, premier Personal Finance website on The Investment Answer by Goldie & Murray.  

For more about the authors there will also be an interview on this site on Saturday with Daniel Goldie,an author of The Investment Answer. 

Let me know what you think about the “investment focus” this week and next. What other personal finance topics would you like to read about? 

YAKEZIE PERSONAL FINANCE BLOGS 

After every article for the next several weeks, you will be introduced to several Personal Finance web sites in the Yakezie network. Each one has their own unique voice and style. The consistency in all is their desire to help others. Consider visiting a few each day! 

Money Funk
Money Help for Christians
Money Reasons
More Style Than Cash
My Budgeting
My Financial Objectives
My Journey to Millions
My Money Minute

Originally published on March 21, 2010

“Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”
Peter Lynch   

One of the greatest investors of our time attests to the simplicity of investing in the stock market. Read this post and find out why. Following is the “Cliff Notes” version of why you need to put part of your long term investment dollars in the stock market. 

Main Topic; Stocks  

The historical long term growth of American business is amazing. American business is frequently represented by the Standard and Poor’s 500 Stock Index (S & P 500). This index of 500 stocks is considered a barometer for the complete US Stock Market. 

Forget about the recent recession and downfall of the stock markets for a minute and take a peak at some historical returns of the S & P 500. Although historical returns do not guarantee future returns, take a look anyhow. When looking at these returns, think about the stock market as a collection of U.S. businesses, not mutual fund or brokerage account statements. Then ask yourself if you think U.S. businesses and the economy will grow over the next 20, 30, or 40 years?

The first time I really studied this type of data was in 1993.  Although I had been investing for a while prior to that time, my husband was still skeptical. I wanted to convince my husband of the importance of putting money into the stock market so I prepared some data for him. Fortunately, for us he was convinced by the historical information, so we boosted our investing at that time and have watched our investments grow over time while continuing to contribute regularly to our investment accounts. 

 But what does this return mean in real dollars? 

Consider this, if you are in your 20’s, 30’s, or 40’s you have many years until retirement. You can stick some money in a brokerage account at one of the discount brokers (like Fidelity, Vanguard, Schwab, or  TD Ameritrade), invest that money in an S & P Index mutual fund or ETF and forget about it. Fast forward 20, 30, or 40 years, it is highly likely that your investment will have grown substantially! Even Rumplestilskin could try this and probably wake up a rich guy after sleeping for a really long time! 

Certainly, it is better to INVEST REGULARLY and not just one time! 

Now, I don’t recommend that you run out and stick the money into the account tomorrow unless you have a bit more financial knowledge. Continue to read BarbaraFriedbergPersonalFinance and before you know it you will have the skills to grow your net worth. 

Practical Application; How do I Proceed?     

• Here is the takeaway from this post: 
• The more time you have, the greater chance you have to get wealthy. 
• Over time, the stock market has been a wonderful way to accumulate wealth. 
• Since the stock market is very volatile, only put money into the market that you can leave there for 5 years or more. 
• Invest only in stock index mutual funds or exchange traded funds (ETF’s) unless you have a lot of money and want to devote hours per week to researching individual stocks. 
• For the best low effort long term returns, AUTOMATE! Have a regular amount automatically transferred in to a brokerage account each month from your paycheck or bank account.    

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. 

Grow your emergency savings to 6 months of living expenses in a bank savings account or money market fund by transferring automatically from your paycheck or checking account to a savings account. 

CAUTION: This post if for educational purposes and is not advice to run out and buy a stock mutual fund! Before investing, it is really really important to gain some basic financial education. And before sticking any money in investments you need to have savings for emergencies and no consumer debt! Think of this post as part of your lessons in “financial literacy.” Read this blog regularly, try out the action steps, and learn the basics before you start investing. Keep reading and become financially smart!

How has the recent stock market volatility affected your investing activity?

Active vs. Passive Management

Categories: investing, wealth, stocks, mutual funds

“Wall Street Pares Gains as Bargain-Hunters Retreat,” Associated Press, July 6, 2010

Today we are focusing on stock investing only. Unfortunately, many of you out there read headlines such as this one and believe you must rush out and BUY OR SELL. After all, if the headline is screaming at you, it must mean something.

Act on the headlines at your own peril.  

You might see your stock investment plummet, get nervous and want to ACT. Read on and see how being passive works out in the long run.

MAIN TOPIC: Why you Must Ignore the Investment Headlines

Raise your hands if you watch CNBC, Jim Cramer, or any investing program. Who here checks on their stock and mutual fund prices daily; and scours Yahoo Finance and MSN Money for financial news?

Now, don’t be shy, you know who you are. You think you are being very diligent and keeping up with the market and your investments. Well, you’re wrong.

• Are you trying to beat the market performance?
• Find the hottest stock?
• Get rich quick?

Stop right now. There is a better way, with a greater chance of yielding long term wealth.

In this class, you will learn:

• The historical performance of the stock market and why it matters.
• Stock market facts & what they mean about getting wealthy.
• How being passive leads to wealth.

PRACTICAL APPLICATION: Active Managers are Losers

 Over 20 years, the S & P Index beat 68% of all actively managed funds.

In other words, most investors in actively managed mutual funds with “professional money managers” (who regularly bought and sold stocks) had worse returns than investors who stuck with unmanaged INDEX FUNDS.

Active managers believe they can outperform the indexes with their superior stock picking ability. In reality, any fund with an active manager(s) has higher costs than an index fund. That means right off, they have to beat the index substantially in order to cover their larger expenses.

Active managers frequently demonstrate superior performance for a year of two. Do you think it typically continues for the long term? NO it does not. Many research studies show that actively managed mutual funds with outstanding performance one year have subpar results the next.

Active managers are the ones who listen to the headlines and jump in to buy or sell based on “the news.”

 This ACTIVE strategy yields long term UNDERPERFORMANCE.

The economy goes up and down and so does the stock market. Expect these ups and downs and do not be surprised by them.

Since 1960 there have been 9 Bear Markets (decline of 20% or more in the overall stock market). In spite of these declines, the S & P 500 had an annualized return of 10.05% from 1926 to 2007.

Let’s look at the Active vs. Passive investing debate another way.

HOW MUCH WEALTH MIGHT YOU HAVE EARNED BY INVESTING IN THE STOCK MARKET as represented by the S & P 500 Index? 

What about the longer term, does this theory still hold?

DO NOT JUMP IN AND OUT OF THE MARKET.

Do you know when the market will have the biggest increases? Of course not, no one can predict the future! The lesson is this; active management leads to worse returns than simple index investing.

TIME IN THE MARKET is the best way to get rich.

Start now and continue investing. Buy an index fund  or two, continue with regular investing, and if history is any guide, over time you will become rich.

Investing terms:

Stock Market: Usually refers to an index of many stocks or bonds which serve as a proxy for the total stock market. The most common index for stocks is the S & P 500.

Active management: Buying and selling stocks or bonds in an effort to outperform the overall market.

Passive investing: Invest in index funds in order to minimize fees and expenses and match the overall market performance.

Are you an active or passive investor? How is your investing strategy working out?

ACTION STEPS:

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.

Read this article before investing any money.

When you are ready to invest, commit to regularly  contributing to a stock  mutual fund as part of your overall investment plan.

Caveat: This article is for information purposes only and may not be appropriate for your individual situation.

YAKEZIE SHORT CARNIVAL:

What’s a good car price and why should you keep it a secret? @Car Negotiation Coach

Condom Factory and Bonds: What’s the Connection  @The Millionaire Nurse Blog    

Bankruptcy is not a Sin @ Financially Poor

The 4 Worst Ways to Impress Your Boss @ Sweating the Big Stuff

BONDS

Categories: investing, mutual funds, 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. Don’t be intimidated, grasp important investment concepts in an easy to understand format.

After reading this article you will gain a useable investing skill.

As I mentioned previously, please follow these steps before beginning any investment program.

Main Topic: What are BONDS & do I need them?

Last class we 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 are paid is directly related to amount of risk you are taking. (The interest in bonds 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 get 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 from 2007-present.

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

 Notice, with no bonds, Jose’s portfolio LOST 8.97% over 3 years; with bonds, his portfolio lost only 3.45%.

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 over a cash savings account over the long term.

Why invest at all, the 3 year returns were NEGATIVE?

• 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.
• Although 3 year returns were negative, had Jose continued to invest monthly, instead of just once at the beginning of the 3 year period, his returns would have been higher.
• It is highly likely that in 10 years and longer, his investment value will be much greater. 

Caveat: This article is for information purposes only and may not be appropriate for your individual situation.

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. 

Yakezie Short Carnival: Personal Finance Lessons Learned from Bambi @ Personal Finance Firewall;  The Cost of Making your House a Home; Average Spend in your First Year of Home Ownership @ Frugal  Confessions; Post Transaction Marketing; Helpful Links or Ripoff @ The Millionaire Nurse

Risk versus Reward

Categories: investing, mutual funds

“When the weather changes, nobody believes the laws of physics have changed. Similarly, I don’t believe that when the stock market goes into terrible gyrations its rules have changed.” Benoit Mandelbrot

This brilliant mathematician speaks to the fact that the price of common stocks goes up and down. Plain and simple, that is where the risk comes from.

I’m teaching an 8 week course in the MBA (Master of Business Administration) program at a local College. I thoroughly enjoy the information I am teaching as well as sharing it with the 15 students in the class. This knowledge is so important that each week, I’m going to take one of the basic concepts from the class and distill it for you.

After reading the article you will gain a useable investing skill.

As I have mentioned in a previous article, please follow these steps before beginning an investment program.

Main Topic: What is the relationship between investing return and risk?

Understand the relationship between risk and reward and become a smarter investor. There is an unavoidable trade off between risk and reward. If you desire a higher return on your investment, you must take greater risk.

Reward=More money back from your initial investment

Risk=Possibility that your payback won’t be what you expected, but less than you expected.

 NO ONE IS UNHAPPY IF THEY MAKE MORE MONEY ON AN INVESTMENT THAN PLANNED!

So the risk is really that your investment will be worth less in the future than when you started.

How to get a reward from investing?

1.  Buy a financial asset such as a mutual fund which hold common stocks. One of my favorites is Vanguard Total World Stock Index Fund Investor Shares (VTWSX).
2. Receive periodic dividends (cash payments) along the way.
3. Watch your investment increase in value.

How much might I earn?

1. Over the last 80 years, U.S. stocks returned a bit over 9%/year.
2. There is a strong probability that holding this stock mutual fund for 10 years or more would produce a greater return than keeping your money in a savings account.
3. If you invested $1,000 in year 1- received a 7% return for 20 years, you would have about $4,006.00 at the end of 20 years.

How can I get this terrific return?

1. Open a brokerage account at Vanguard.com.
2. Arrange to have money transferred to the account from your bank account.
3. Purchase a diversified stock index fund (a fund that holds lots of different stocks from a variety of industries).
4. Reinvest the dividends; instruct Vanguard to buy more shares of the fund with the dividends.
5. Wait 10-20 years.

What is the risk?

1. Stocks, like those in the mutual fund you bought go up and DOWN in price. The risk is almost certain that during those 10-20 years, some years, the value of your investment will go down.
2. There is a possibility that you might have less money than you started if the historical trend of the stock market shifts and becomes negative.

How do I decide whether investing in a stock mutual fund is for me?

If you answer YES to these questions, investing in a stock mutual fund may be

right for you:

1. Do you have 6 months of living expenses in cash in a safe savings account?
2. Do you have term life insurance for your dependents?
3. Are you without credit card debt?
4. Can you leave the money in the stock mutual fund at least 8-10 years?
5. Do you want to earn a greater return than the inflation rate for future goal(s)?
6. Can you sleep at night and not panic if your investment value declines sometimes?

PRACTICAL APPLICATION: Why Take the Risk?

In investing, the greater the potential reward, the greater the risk. Common stocks have the potential to offer high returns in the long term. In the short term their values move up and down so much that it is impossible to predict whether your return will be positive or negative.

If you want a way to finance long term goals such as retirement, home renovations, down payment on a home, and college expenses for your child, then stock mutual funds are an excellent vehicle. However, if you cannot cope with an investment that goes up and DOWN in value, do not invest in common stock mutual funds.

Caveat: This article is for information purposes only and may not be appropriate for your individual situation.

ACTION STEP:

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

 If you are interested in investing, and want to read more, check out these resources:

Vanguard investing truths

Get Rich While you Sleep with the Magic of Compounding

 Little Known Investing Secrets: How to Buy Low (Always)

 Please check out the PERSONAL FINANCE CARNIVAL list on the right. Every week I participate in these wonderful events jam packed with entertaining and informative information about money and life. Click on any one of the titles and enjoy a personal finance festival!

Categories: investing, stocks, saving, mutual funds 

“Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.”
Peter Lynch   

One of the greatest investors of our time attests to the simplicity of investing in the stock market. Read this post and find out why. Following is the “Cliff Notes” version of why you need to put part of your long term investment dollars in the stock market. 

Main Topic  

 Stocks  

The historical long term growth of American business is amazing. American business is frequently represented by the Standard and Poor’s 500 Stock Index (S & P 500). This index of 500 stocks is considered a barometer for the complete US Stock Market. 

Forget about the recent recession and downfall of the stock markets for a minute and take a peak at some historical returns of the S & P 500. Although historical returns do not guarantee future returns, take a look anyhow. When looking at these returns, think about the stock market as a collection of U.S. businesses, not mutual fund or brokerage account statements. Then ask yourself if you think U.S. businesses and the economy will grow over the next 20, 30, or 40 years?

The first time I really studied this type of data was in 1993.  Although I had been investing for a while prior to that time, my husband was still skeptical. I wanted to convince my husband of the importance of putting money into the stock market so I prepared some data for him. Fortunately, for us he was convinced by the historical information, so we boosted our investing at that time and have watched our investments grow over time while continuing to contribute regularly to our investment accounts. 

 But what does this return mean in real dollars? 

Consider this, if you are in your 20’s, 30’s, or 40’s you have many years until retirement. You can stick some money in a brokerage account at one of the discount brokers (like Fidelity, Vanguard, Schwab, or  TD Ameritrade), invest that money in an S & P Index mutual fund or ETF and forget about it. Fast forward 20, 30, or 40 years, it is highly likely that your investment will have grown substantially! Even Rumplestilskin could try this and probably wake up a rich guy after sleeping for a really long time! 

Certainly, it is better to INVEST REGULARLY and not just one time! 

Now, I don’t recommend that you run out and stick the money into the account tomorrow unless you have a bit more financial knowledge. Continue to read BarbaraFriedbergPersonalFinance and before you know it you will have the skills to grow your net worth. 

Practical Application    

Here is the takeaway from this post: 

ü      The more time you have, the greater chance you have to get wealthy. 

ü      Over time, the stock market has been a wonderful way to accumulate wealth. 

ü      Since the stock market is very volatile, only put money into the market that you can leave there for 5 years or more. 

ü      Invest only in stock index mutual funds or exchange traded funds (ETF’s) unless you have a lot of money and want to devote hours per week to researching individual stocks. 

ü      For the best low effort long term returns, AUTOMATE! 

ü      Have a regular amount automatically transferred in to a brokerage account each month from your paycheck or bank account.    

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. 

Grow your emergency savings to 6 months of living expenses in a bank savings account or money market fund by transferring automatically from your paycheck or checking account to a savings account. 

CAUTION: This post if for educational purposes and is not advice to run out and buy a stock mutual fund! Before investing, it is really really important to gain some basic financial education. And before sticking any money in investments you need to have savings for emergencies and no consumer debt! Think of this post as part of your lessons in “financial literacy.” Read this blog regularly, try out the action steps, and learn the basics before you start investing. Soon, I will cover other investing topics such as: Bond investments, international investing, dollar cost averaging, diversification, and asset allocation. Keep reading and become financially smart!