Investing

CBS Marketwatch published a horrible article today on using leveraged ETFs to beat the S&P 500. In the article, author Bill Donahue discusses a couple of ideas that he thinks are slam-dunks and no more risky than just investing in the index. This sort of reporting not only annoys me, but I find it to be irresponsible.

I thought it was time I go public with my opinion on Global Warming. I've never believed in man-made global warming. Perhaps its easy for me to say that while I watch a late-April winter storm that has lasted a week. I'm sure some of the believer's of man-made global warming will even say it's global warming that is in fact causing this unusually late winter storm. I still don't buy it. Global warming may indeed be occurring, but I don't buy the "man-made" part.

While this is actually a component of investor psychology, it's important enough to have earned spot #9 on our top 10 list of investing principles.

Sounds silly doesn't it, why would any investor hold on to their losers and sell their winners? Oddly, this is what many people do, and not just beginners. Even seasoned investors will fall into this habit occasionally if they're not diligent about sticking to their strategy.

I love making money off credit card companies. I have been getting into a habit of opening up credit cards for sign up bonuses and 0% balance transfer offers haphazardly but there is one method to maximize your results. I have heard it referred to as an App-o-Rama or an application spree but the strategy is the same. Wait until you can maximize your credit score and then apply for all the cards you plan to.at the same time.

More than 20 million investors will be able to tap into the tax benefits of a Roth IRA for the first time under the new tax-law provision beginning on January 1. Should you convert some or all of your traditional IRA into a Roth IRA? If you decide to convert to a Roth IRA, you will be taxed on the conversion amount that hasn't already been taxed. You'll have to weigh the negatives of current taxation against the benefits of future tax-free withdrawals. With that in mind, let's take a closer look at some common questions you may have.

The best time to start investing is ALWAYS right now. When you have money to invest, put it to work, don't try to wait for the perfect moment or the perfect stock because they may never come. It's easy to be optimistic and start investing during bull markets but remember that you can snatch up some great bargains if you start investing in a bear market because everything is on sale.

I've blatantly stolen this from Andy Kessler's Running Money. There's some truth wrapped within the humor.

A man is getting into the shower just as his wife is finishing up her shower, when the doorbell rings.

The wife quickly wraps herself in a towel and runs downstairs. When she opens the door, there stands Bob, the next-door neighbor. Before she says a word, Bob says, "I'll give you $800 to drop that towel."

You've probably been told or heard countless times of the importance of a college education, especially in regards to the increased earnings. However, saving for the college expenses of your children is a daunting task. I am reviewing a chapter from the The Boglehead's Guide To Investing that is titled Savvy Ways to Invest for College as part of the BogleHead Project. It covers some of the strengths, requirements, and tax implications of some of the popular methods.

It's understandable that some investors have come away from the steep market decline in 2008 and 2009 believing that diversification no longer works. They were dismayed that U.S., international and emerging stock markets all declined together and that most bond prices fell, offering only limited protection against the market collapse.

Why does anyone own (or invest in) a company?

Some people start a business to have control over their work schedule or career while others invest in a business to do good things or help a family member out. There are hundreds of answers to the above questions and I don't intend to go through them all (because I can't and who cares about all the reasons!?!). We all have our own reasons. As an investor, the only reason I would want to own (or invest in) a company is if it's able to provide positive returns on my investment or if the business is being used to do good. Nothing new here.

The age old question, should we be investing for dividend growth or dividend yield?

I don't know if my thinking is a little off, but here is my argument (well it's a weak argument, but that's because I'm tired). You may be surprised by the conclusion I'll ultimately reach on this subject.

I'd rather invest for dividend yield over dividend growth but my favorite strategy lies somewhere in the middle. I assume most stocks that operate under a high dividend yield, do so for one of several reasons: The share price has recently dropped (due to bad news? poor outlook?), it might be a risky business, or it could be an old ‘out of favor' cash cow. Either way, I would never invest in a company that isn't solid and at least growing modestly. So that should filter out a bunch of high yield stocks, but not all.

We've all heard it before. BUY AND HOLD FOREVER. It seems like such a simple strategy with some amazing success stories. With people like Warren Buffett (the world's best known investor) praising the buy and hold forever strategy, its no wonder so many people follow it. As easy as it is, it isn't without flaws. I admit this even though I'm primarily a buy and hold investlr.

There have been a ton of PF bloggers posting about emergency funds: Money Smart Life provides a good overview with special guest appearances by other PF bloggers Lazy Man, Binary Dollar, Money Matter and More Musings, Digerati Life, and Sun's Financial Diary. I'm not going to rehash any of the following (so please don't leave):

• Where to keep your emergency fund
• How much to save in your emergency fund
• Whether you should build your emergency fund versus paying debts like credit cards
• How having a big emergency fund will having you beating away members of the opposite sex with a large stick

What I will be doing is telling you why I don't have much of an emergency fund at all.

Before I really get into this, let me just reiterate I'm just some knucklehead with a keyboard. I don't advocate my method over the more traditional prescriptions regarding emergency savings. I'm just giving you another view. Do whatever works for you. And if you're so sick of reading about emergency funds on PF blogs that you're about to throw up, please stop reading if only for your computer's sake.

They always say write for your audience and you probably wouldn't be reading a blog claiming to be 'Advanced' unless you had the basics down. So chances are you have your financial life somewhat to totally under control. You know what you're doing. You most likely don't have credit card debt and if you do, you're working it down. That means you also probably have ample credit available.

Congratulations.

So do I.

That is the core reason why I don't have a large emergency fund. In case of emergency, true emergency, I can tap one of several sources of credit. A HELOC or credit card becomes my second line of defense in the event my small liquid emergency fund cannot handle the expense. This buys me time until I set up some other arrangements. For the record, my definition of 'small' is about three months of living expenses.

Here's why I only have a small emergency fund.

• I have a small pile of cash for unforeseen expenses (again, three months of living expenses). By definition, an emergency comes up infrequently. This isn't for replacing the broken vacuum cleaner.
• If true disaster strikes, I have access to plenty of credit that can provide a quick backstop in the event the emergency exceeds my cash fund.
• I have other assets that I can sell if the emergency isn't solvable within a short period of time.
• I'd rather not tie up a large emergency fund in savings that is, for all intents and purposes, just maintaining its real purchasing power.
• I have great health insurance and disability insurance. If I were to lose my job, we could move to my wife's plan.
• I am not the family's only source of income - my wife works, too.
• I feel confident about keeping my job and believe I can get another one in my industry relatively easily.

I know this method isn't for anyone. Maybe it's not for most people. But like I said, if you're still reading this blog, you're not most people. That said, it is critical you do whatever makes you feel comfortable and able to sleep at night. If you're comfortable sleeping on a large pile of money, keep at it! For me, I can sleep on a thinner mattress.

The U.S. dollar recently touched an all-time low against the euro. Part of the reason is because the financial markets anticipate a rate cut from the Federal Reserve's Open Market Committee. That may not seem entirely clear, though. Why does a Fed rate cut drive down the dollar? (For a great explanation of how a Fed rate cut affects the stock market, see Jim's recent post at Blueprint for Financial Prosperity.)

With the deterioration of the housing market, there’s been an increased interest in ’short selling’ homes. I didn’t know much about short selling, so I did a little research. I should say up front that I don’t have any personal experience in this topic (thank goodness); here’s what I learned, though.

Tired of the same old 401(k)? How about a Super 401(k)?

Some companies have started offering a new defined contribution retirement plan to employees. Here’s how it works. In return to ceding control over how your contributions get invested, you gain a turbocharged contribution from your employer. As this article from Business Week points out, these plans are hybrid of a traditional 401(k) and a pension.

There’s near unanimity in the belief that you should have a cash emergency fund. The problem with that supposedly inviolate rule is that in low interest times like we’re now in, your emergency fund gets smaller and smaller every day. I advocate alternatives to the large emergency fund thesis.

Most of the time when you read about 401(k)s, it's something like, "contribute at least up to the company match," or, "don’t put too much in company stock." But what do you do when your company’s 401(k) sucks?

I once wrote about how I thought that buying a house isn't always the right choice for everyone. It also turns out that not worrying about buying a house affords you some great freedom to make the most of your credit rating. By that I mean, if you're not looking to buy a property in the next 5 years, you can aggressively pursue credit card deals (air miles, cash back, etc.) without worrying about the impact of a low credit rating.

When the economy takes a nose dive, cutting back on investments seems like an easy way to free up cash, but doing that just makes it harder for you to reach your investment goals. Instead, looking elsewhere to save money is a more prudent move. I'm not the only one with this thought. According to a recent survey, eight in 10 adults have taken specific steps to reduce expenditures during these difficult economic times.

It's very likely that you'll try several investment strategies before you find the one that best suits your goals and investing style, but there are some basic investing principles that hold true for all strategies.

This is so true about everything in life and it's especially true about investing. As a beginner, you are probably overwhelmed by the amount of information you need to learn to become a savvy investor. This is a good time to point out an important fact. Your confusion is a result of your lack of knowledge and from the overwhelming amount of new information being thrown at you, NOT because investing is complex and sophisticated.

Have you heard of Peter Lynch? The guy who took over the $18 million Magellan Fund in 1977 that grew to more than $14Billion in assets by the time he retired only thirteen years later in 1990. Peter advises beginners to "invest in what you know", and his message still resonates with working people who don't have the time to learn complicated technical analysis or read financial reports as thick as a phone book.

We define Investor Psychology as the herd mentality that is so obvious when you watch short-term stock market behavior. It seems that most investors are willing to follow each other up mountains and off cliffs simply because that's what everyone else is doing. There are tons of outstanding examples to illustrate this lemming-like behavior, but we'll go with Google (GOOG) since it's a company almost everyone has heard of.

A mistake that you will inevitably make (we all do) is investing in a vacuum. What we mean is that, at some point, many investors quit learning, stop adjusting their investment strategy, and lose touch with the current market and economic conditions. This is a painful lesson to learn and unfortunately most people have to learn from it (or fail to learn from it) over and over again.

One of the most common and costly mistakes that new investors make is not measuring their performance against an appropriate benchmark. Many don't compare to ANY benchmark, much less an appropriate one. What is the danger? The biggest drawback is you will never really know how well or poorly you are investing.

Expenses can quickly eat into your earnings, especially if your portfolio is still relatively small. There are many types of expenses but the most dangerous to your portfolio are transaction costs, taxes, and investing information costs.

Transaction costs come in many forms but they all chip away at your returns, especially if your average transaction is small. This is how regular and online brokerages make money, they charge you when you buy and sell stocks, bonds or mutual funds.

Dollar Cost Averaging means investing a fixed amount of money on a regular basis. For example, if you invest $300 every month regardless of market conditions, you are dollar-cost averaging. The benefit is that you are always buying more stock when prices are low since the market trend is usually upward. The reason this is so important for you to learn is because most investors do the exact opposite. Don't you feel the urge to buy when the market is bullish and rising and feel the urge to wait or sell when the market is bearish and dropping? Most people do, and as a result they buy when prices are high and do nothing or sell when prices are low or falling. This kind of behavior greatly increases your cost basis and decreases your returns, so avoid it, be a dollar-cost averager.

Diversification is a fancy way to say "don't put all your eggs in one basket". If you own the right number of stocks, bonds and funds and they are allocated across several categories, industries and geographies, you can substantially lower the risk of losses to your portfolio and increase returns at the same time. What?! That's right, if you diversify properly, you lower risk AND improve returns at the same time, making this a no-brainer. How does it work? Diversification is the process of finding the investing sweet spot where you optimize risk Vs return.

Many individual investors are moving away from the more traditional broker and planner relationships of the past to self-directed online portfolios. This doesn't mean it's the right choice for everyone or that local planners no longer have anything valuable to offer, it only means that online investing is quickly becoming the most popular way for individual investors to manage their money.

A Mutual Fund is, in essence, a pool of money from several investors that is managed by a professional money manager or “Fund Manager” for a fee. Granted, that's a simplistic description for a complex type of security but from an investor's perspective, it's a pretty accurate definition.

They're a relatively new creation. While King William I created the idea of a pooled investment fund in 1822 for his rich buddies, there really was nothing that closely resembled our modern day mutual funds until after the 1940 Investment Company Act. This Act popularized funds because it required a lot more disclosure and helped to minimize conflicts of interest that were common prior to the 1929 market crash. Investors were finally able to tell what a fund was trying to do and how they were doing it.

I like to share a little history on topics because it makes for a fun introduction and also gives you some cocktail party knowledge that most investors won't know. Humor me, I'm an investment geek and I love this stuff but I promise to keep it short. Only two paragraphs of boring historical reference and then I'll talk shop. Besides, the origin of stock trading is pretty bizarre, you might even be entertained.

There are tons of articles on the web about saving, investing or getting out of debt... but this isn't one of them. While saving and investing are extremely important, many people are feeling pretty beat up by the economy and the market right now and don't want to hear it. Rather than lecturing on great personal finance and wealth building habits, I thought it would be fun and challenging to come up with easy ways to save money without sacrificing your lifestyle or happiness. Besides, this is still a form of wealth building even though it doesn't require any discipline. You have to crawl before you can walk, right?

Investing expenses can quickly eat into your earnings, especially if your portfolio is still relatively small. There are many types of expenses but the most dangerous to your portfolio are transaction costs, taxes, and investing information costs.

There are two other outstanding tax deferred accounts, Individual Retirement Accounts (IRAs) and Roth Individual Retirement Accounts (Roth IRAs). These are especially important if your company doesn't offer a 401K or if you have reached the maximum contribution for the year in your 401K but still have money to invest. Many people choose to contribute to both, just make sure you max out your company's 401K match before any dollars go into an IRA account.

Are you contributing to a 401K, IRA or Roth IRA? You should be! This guide explains everything you need to know about these wonderful tax-free wealth building tools.

Isn't it nice to hear some reassurance during a recession? Especially when the headlines have been doom-and-gloom for months. And it's true, we'll weather this storm, just like we've weathered every other recession for the past 80 years. If you're a long-term investor, your portfolio will recover.

Investors, like others looking to learn something, turn to books to get insights from the successful professionals in the industry. The problem with investment books is that they fall short of actually being able to teach someone to be a good enough investor to consistently beat the market.

Although I believe it's important to be heavily invested in the stock market, I also believe it is important to keep some cash handy. I divide my cash holdings in to two piles. The first pile, which is the smaller of the two, is what I think I'll need day-to-day to cover things like credit card bills, rent, etc. This cash sits in a regular checking account. A checking account is key because it provides near instant access to my cash. However, the drawback with most checking accounts is that they don't pay much interest. In fact most checking accounts don't even keep up with inflation so you're actually losing money. As a result, it's best to keep the amount in checking accounts as small as possible.

My preferred investing style leans towards the buy-and-hold style. On the other end of this spectrum are active investors. The goal of the active investor is to pick winners by timing their purchases and sales. The flaw with the methods employed by active investors is that markets are moved by news. And this news is rarely predictable and quite random. As a result, the movements of stocks are also equally unpredictable and random.

I came across this image that struck me as being wonderful metaphor for the current housing market.

Here's what this image says to me:

• There are so many homes available for sale that even a slow moving snail could come across one.
• Some home owners have been forced to walk away (I see this in the empty shell).
• People that didn't jump into the housing frenzy (i.e. moved along slowly like a snail) are now being rewarded.
• If you've got the resources, now may be a good time to upsize (the empty shell is bigger).
• Even if you've moved like a snail up until now, consider investing in real estate. The deals will probably never be better.

Yeah, yeah I know. It's just supposed to be a funny picture, but hey I can't keep my brain from coming up with these thoughts

Note: This photo came from one of Flickr's talented artists ukaaa.

I have always questioned the motivations of investment advisors. I've also often questioned the value that real estate brokers bring and whether that value justifies their commission. I guess I'm suspicious by nature, but being so seems to have served me well so far. And so it was with great interest that I read this month's Conde Nast Portfolio magazine and came across the story of an investment advisor, Blaine Lourd, that let the cat out of the bag. Here are some of the more telling quotes from the article.

I'm reading Running Money by Andy Kessler. It's a book about the hedge fund industry and how Andy navigated the waters of this chaotic world. I'm only 50 pages in to it, but I've already come across what I think will be my favorite page.

It'd be an exaggeration to say that I'm a fan of Jim Cramer. I do enjoy his show though while at the gym as it makes the 30 minutes on the stationary bicycle go by quicker. I've always considered the show to be entertainment though. Sure there's investment advice, but it's always seemed useless to me what with each episode including a hundred buy and sell recommendations.

This first edition includes a handful of articles about an investor's psyche and how it relates to that of a student. In addition, there is commentary on gold and biotech ETFs along with a general overview of this week's ETF trends.

Whether you're investing in individual stocks or baskets of them via mutual funds and exchange traded funds (ETFs), it's important to understand the terminology used in the investing world. This knowledge can help you decipher the jargon you're likely to encounter from investment-related news in newspapers, blogs, and on TV.

The following definitions are more useful than any stock market news you'll read anywhere else

CEO -- Chief Embezzlement Officer.

CFO -- Corporate Fraud Officer.

BULL MARKET -- A random market movement causing an investor to mistake himself for a financial genius.

BEAR MARKET -- A 6 to 18 month period when the kids get no allowance, the wife gets no jewelry, and the husband gets no sex.

VALUE INVESTING -- The art of buying low and selling lower.

P/E RATIO -- The percentage of investors wetting their pants as the market keeps crashing.

BROKER -- What my broker has made me.

STANDARD & POOR -- Your life in a nutshell.

STOCK ANALYST -- Idiot who just downgraded your stock.

STOCK SPLIT -- When your ex-wife and her lawyer split your assets equally between themselves.

FINANCIAL PLANNER -- A guy whose phone has been disconnected.

MARKET CORRECTION -- The day after you buy stocks.

CASH FLOW-- The movement your money makes as it disappears down the toilet.

YAHOO -- What you yell after selling it to some poor sucker for $240 per share.

WINDOWS -- What you jump out of when you're the sucker who bought Yahoo @
$240 per share.

INSTITUTIONAL INVESTOR -- Past year investor who's now locked up in a nuthouse.

PROFIT -- An archaic word no longer in use.

There are two primary schools of thought regarding security analysis - fundamental and technical analysis. Fundamental analysis utilizes a much wider range of information than does technical analysis and relies on traditional financial statement analysis. Technical analysis, on the other hand, concerns itself with attempting to identify patterns in past price movements. Both consider macro economic trends to differing degrees, but emphasize the use of firm specific microeconomic data.

The Efficient Market Hypothesis, which had its beginnings in the 1960s from Eugene Fama's Ph.D. dissertation, states that at any given time all information about a security has been accounted for in the current price of that security. The logical result of this hypothesis is that securities analysts are unable consistently to pick stocks that produce a return in excess of what is returned by the overall market basket of stocks.

Way back in the summer of 2003, Chris Sells wrote The "Average Return" Myth. His commentary can be quite an eye-opener for some people. I know this concept he discussed surprised me when I first encountered it many years before I came across his post. I'm reproducing a big chunk of his explanation here.

The question of whether it makes more sense to buy a home or rent from someone else is off topic for a blog about exchange traded funds (ETFs). But buying real estate is often cited as the single most important investment that most people make and the more general theme of this site is about investing. So here goes.

Yes, they will recover, especially if you own one of the better banks that wasn't hammered by huge sub-prime write-offs or involved in the CDO speculation circus. The best example is probably JP Morgan Chase, they are eating some mortgage losses, but compared to many of the other major financial institutions, they're in great shape because they weren't taking the nutty gambles that their competitors were taking. Banks like this, whose stock prices are down from guilt-by-association will likely recover in less than five years.

If you're my age, you grew up playing board games and then computer games (my first ones were just text, no graphics). As adults we often look for a different sort of game such as the 0% Interest Balance Transfer Game. You've probably heard about this game and you've probably also heard that it's fun especially that aspect of making real money. And it's this game that I think is the only reason to have a high credit card debt. Some people might call this good credit debt.