One of the free traffic sources I use in Entrecard. I really like the "barter" network there and I've found some really good blogs, as well as having a pretty good exposure to new and varied audiences through their advertising platform.
Plus, did I mention, it's FREE?
Well, I just encountered a bump in the road with Entrecard's policies, one of which is your blog has to remail "current."
Totally my fault, of course. I haven't been updating this site because it was created primarily to complement the creation of my free ebook, Stock Investing Basics, and I just haven't had the ambition to finish it due to the underwhelming performance of the stock market.
So, when my account was deleted, I fired off an email, saying, basically, that while it's your policy, it would be really cool - and easy - if you could just send a reminder before you just cut me off at the knees.
And, oh, by the way, the currency of Entrecard, "credits," disappear.
I was more than a little perturbed. I never expected anything to come of my email.
But, something did come out of it. I got in touch with a really nice fella there named Matt, who is doing all he can to get me back to where I was.
I REALLY appreciate that!!!
It seems that nowadays, customer service has gone out the window, or to India, and I'm always pleasantly surprised when customer service actually embodies the values companies purport to have.
In this case, Entrecard made a bad customer experience into a good one. One of the conditions of getting my account restored is that I write 5 new posts. This is number 4.
Next post, rapid fire from here, will get me back on the Entrecard saddle.
Lesson to be learned here - read the Terms and Conditions or Terms of Service. It's YOUR fault if you don't follow them.
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Okay, I'll admit it, with the crummy economy and cruddy stock market that goes with it, I haven't had the heart or desire to work on Stock Investing Basics.
But I feel - or least hear - change in the air. Is it Phil Collins? Or is it Barack Obama?
Time will tell. And in time, I'll complete the book and start giving away a finished product.
Thanks for your patience!!!
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Now, I'm not talking about suffering from debilitating disease where you spend all your money, sell your assets, etc. to pay the medical bills, only to lose your job and its income...that would be a real hardship!
But what if you made a colossal mistake and lost everything?
What would you do?
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It's like he took some basic econ in his college coursework! Now, if only members of Congress actually lived in the real economy, we'd get something done.
Don't forget that the economy back in the '30s actually had a few false starts, then spiraled down deeper than the last cycle. It could happen here, though I think there are other factors at play this time around.
Bottom line: If Consumer spending and Investment are down, Government spending must go up a concomitant amount just for zero growth.
Republicans: Read that last sentence twice, starting at Bottom line!
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Chapter 7
Portfolio Basics
Remember Axiom #7? The one about putting all of your eggs in one basket? Yeah, that one. If you want to minimize your risk while maximizing your return (optimizing your risk/reward ratio), you'll want to diversify. Diversifying your portfolio takes out a lot of the risk without significantly affecting your reward.
To diversify means to spread your portfolio out into more than one or 5 stocks. 7-10 is a good number. You can certainly over-diversify, too, by investing in too many individual stocks. You also suffer because the more stocks you own, the harder it is to keep track of them and do your homework.
An easy way to diversify is to buy a mutual fund. The fund management team has already done some of the homework and has chosen dozens, if not hundreds, of stocks, taking a lot of the risk out. Don't think that you've diversified simply because you own a mutual fund or two (or ten). Many mutual funds are heavily weighted in one sector or another (or a country). For example, many mutual funds were heavy in technology stocks in 2001, and we all know what happened there!
Such non-diversity really ate into a lot of people's portfolios.
People who run their own businesses could be thought of as ultimately putting all of their investment eggs in one basket. But there is a difference. To say that you've put all of your eggs in one basket is a definite understatement. That business is your livelihood and you really have a vested interest in keeping it afloat and growing. However, we're talking about investing your extra dollars here, not building a business. So, take it from me: Own at least 7 stocks or a well-diversified set of mutual funds.
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Goals, Risk Tolerance, and Objectives
At its most basic level, investing in stocks, or equities, is exchanging your some money now for more money later and if you choose your investments wisely, you can earn 8, 10, 12, or 15 percent annual returns, or more.
If you had invested $1,000 in Wal-Mart in 1971, you'd now have well over $2 million. Now, hindsight is 20-20, so its safe to say that you don't even know what the next Wal-Mart, Dell, Microsoft, or Google might look like. (If you do, tell me!)
You, and ONLY you, can determine what your goals are, how much risk you can tolerate, and how you can best get to where you need to go without driving yourself batty.
Here are some things to consider. First, it's riskier NOT to put your money in an equity. Here's why: Inflation. Inflation is the tax on everyone and everything that reduces your wealth every single day. If you're not earning at least the inflation rate in your savings and investments, you're losing money. Typically, this meant you had to earn, after taxes, at least 2-3 percent every year. Currently, savings accounts are yielding 3 percent and inflation rose at a 12 percent annual clip last month (1.1 percent for the month); you lost 9 percent.
You also have to take into consideration your risk tolerance. Ask yourself this: If I were to invest in company XYZ, and it lost 50 percent of its value overnight (or just pick WM, which has lost 90 percent in one year and whose dividend was cut twice, all the way down to a penny), how would you feel? Would your blood pressure rise precipitously? Would you toss and turn at night, unable to sleep? Or, would you chalk it up to a lesson learned and go on your merry way? (Remember Axiom #1!)
Now, how do you propose to get from A to B and all the way to your ultimate goal of Z? Only by balancing your goals and risk tolerance, taking into consideration all the market forces and stock fundamentals, can you succeed.
The easy way is to allocate more than you need and accept lower returns with lower risk. This brings us to a concept called the “Risk/Reward ratio,” which is your personal tolerance for risk given a return, or conversely, your expected return for a given amount of risk.
Many people have little patience for the ups and downs of the stock market; they simply want to put their money somewhere and let it grow. Investments that may be suitable to these types of folks are saving accounts, bonds and bond funds, or index funds that attempt to mirror an entire “market” or index like the S&P 500 (listed in order of riskiness).
Later, we'll talk about Scenarios and how this balance between risk and reward factors into your investment portfolio.
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Chapter 5
Investment Accounts
We touched on this a little earlier. You can buy investment securities (stocks and bonds and all their variants) in various investment accounts:
- Brokerage account (see eTrade, Scottrade, and Sharebuilder). Can be taxable or tax-sheltered
- Mutual Fund company account
- 401k retirement account (or an equivalent like a 403b)
If you open an account with Fidelity, T. Rowe Price, or Vanguard (three of the most popular mutual fund companies), you can open a taxable or retirement account, with the investment vehicles being mutual funds. Some mutual fund companies are also brokerage companies (and some offer 401k services as well), so the water can get a little muddy; however, if you choose a company like Fidelity, you can conceivably manage ALL of your investments with one company and one logon.
Your 401k, if you're so lucky to be enrolled in one, is one of the better retirement plans concocted by the federal government. Named after the IRS tax code that enabled it, 401k plans allow you to shelter pre- and/or post-tax income in mutual funds, stocks, bonds, and conceivably any other security investment you can think of. This money grows until you retire and begin withdrawing funds. Fidelity, Hewitt, and Merryl Lynch are the three biggest 401k plan administrators.
IMPORTANT NOTE about your 401k: Choose your investments wisely! Many HR departments, for some reason, don't want you to have many choices. It's as if they think their employees are stupid and if given too many choices they'll not choose anything at all, or – WORSE YET – invest in the default instrument, the company stock.
DON'T EVER INVEST IN YOUR COMPANY STOCK WITH YOUR RETIREMENT FUNDS.
If you do, and your company pulls the same stunts as Enron, you deserve what you get: NOTHING. I'm sorry to be so harsh, but it's just foolhardy to put your employment and 401k in the hands of a single employer. If the company's prospects go south, you could lose your job and your retirement!
In each of these types of accounts, you can invest in the “stock market,” and, in general, it won't really matter which one we're talking about because the mechanisms are similar (buy, sell, hold). Surely, there are specific strategies that you could employ to minimize the tax bite or mitigate risk, but, in the grand scheme, these considerations are rather insignificant.
Except for one thing: Your time horizon. Assuming you're in your 50s or younger, you may want to have a longer time horizon (or holding period) in your retirement funds (invested in a form or IRA or 401k/403b) compared with a shorter time horizon in your taxable accounts. You may.
It all depends upon your goals and risk tolerance. For example, if you are 25, have a baby, and want to fund his college education, your time horizon for an ESA or 529 is about 18 years (assuming your child goes off to college as soon as he graduates high school), whereas your time horizon for retirement might be 30-40 years. You can obviously take on less risky investments if your time horizon is shorter. However, you also have less time to earn money so your objective might be to earn a cumulative return of 12 percent on your ESA money but an 8 percent return on your IRA money, for example.
