Investing online for beginners
Everything the beginner needs to start investing online (or offline for that matter). About investing in stocks, mutual funds, index funds, real estate, or any other forms of investing.
After spending a good chunk of change on my wife’s engagement ring a few years ago, I was a little bit annoyed to read this article about new diamond technology. Evidently, the diamond farming technology has improved to the point where experts can no longer tell the difference between a real and a lab grown.
Growing diamonds like crops
The natural process for creating a diamond requires a lot of pressure, heat and time. Scientists have been trying to duplicate and speed up this process and unitl recently they have been small and impure. But, over the past decade they have had pretty good success.
Researchers have perfected a process called chemical vapor deposition (CVD) which grows pure and comparable sized diamonds in a matter of months. They are so good in fact that the writer of the article went to a jeweler with one of the stones to get an unbiased assessment of the diamond’s quality:
…The next day, I place the .38 carat, princess-cut stone in front of Virgil Ghita in Ghita’s narrow jewelry store in downtown Boston. With a pair of tweezers, he brings the diamond up to his right eye and studies it with a jeweler’s loupe, slowly turning the gem in the mote-filled afternoon sun. “Nice stone, excellent color. I don’t see any imperfections,” he says. “Where did you get it?”
“It was grown in a lab about 20 miles from here,” (he) replied.
He lowers the loupe and looks at me for a moment. Then he studies the stone again, pursing his brow. He sighs. “There’s no way to tell that it’s lab-created.”
So this begs the question: If diamonds will soon be able to be mass-produced on demand, won’t real diamonds be worth a lot less?
Unless they can figure out a fail-proof method of telling them apart, I think it is inevitable. The challenge is that unlike a Gucci handbag and a knockoff, both diamonds are made from the same materials: carbon. One is just created a lot faster than the other.
What good could come out of grown diamonds?
- The positive to this is that those involved in the exploitation of people in this movie may see their profits dry up. I haven’t seen Blood Diamond and I really don’t know much about the whole situation, but hopefully this would help bring it to an end.
- You may be able to get a fat rock for your honey for a fraction of the price. If it is just the sparkle of the gem that you are interested in, it will still be there.
- There are endless technological advancements that can come from the cheapening of diamonds. Some experts think they could, “become as significant as steel or silicon in electronics and computing.”
I will not be pawning my wife’s ring anytime soon, but it may be something to keep in mind before spending your hard-earned cash on a new diamond.
This article was featured in the Carnival of personal finance.
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Should I save for retirement or pay off student loans?
This is a question that I have been asked a lot. Yesterday a reader (Megan) left a comment…
“Hi Bob. I have a question for you. I am a recent grad who had a job and a retirement account during the two years of post-college to starting grad school. Now I’m just starting grad school with student loans and I wanted to find out if it’s best to stop adding to it until I graduate.”
I kind of touched on this in a post I wrote about financial advice for newlyweds.
In the post I was talking about our decision to continue funding our retirement accounts while paying down our debt. I said…
“…I have come to understand the impact that time has over investments. Without getting into too much detail, I will just say that getting started investing early puts you at a high advantage. It is not just a little bit better than waiting, but a HUGE amount better. Having enough for retirement can be a breeze if you get started while in your 20’s. It was for this reason that I wanted to get the ball rolling with my investment portfolio.”
401k’s, Roth IRA’s, and student loans
My student loans were locked in at about 3%, but I don’t think rates that good are available today. I assume a 10% return on my retirement savings, so even if you are paying 5% on your student loans and earning 10% (or even 6%) you still come out ahead. Mathematically, this seems to be the much stronger answer. However, Dave Ramsey’s method -based on our behaviors rather than math - would eliminate any and all debts before investing for retirement.
Personally, if it were me, and I could get 5% or better on my student loans I would be funding an Index Fund within my retirement accounts (401k and Roth IRA). But, at the same time I really hate debt and try to avoid it at all costs.
Do you have any suggestions for Megan? What would/did you do?
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I found this article about Roth IRA’s and I think it is worth posting. It goes over the basics of Roth IRA’s and why you should consider one, if you don’t already have one. If you are thinking, “what’s an IRA?” then you should probably start here.
Right now, you may be wondering why you should invest in a Roth IRA if you currently have a retirement plan (401k, 403b, etc.) with your employer. The Roth IRA has many benefits that other retirement plans don’t have, and chief among them is the fact that your investment earnings may accumulate tax-free. In other words, your Roth IRA has the opportunity to grow without incurring any taxes and can be distributed to you tax free, if some certain conditions are met.
While there are advantages to owning a Roth IRA, there are also some rules you should think about before you decide this is the account for you. First, not everyone can take advantage of a Roth IRA. You or your spouse must have earned income or compensation – this includes wages, tips or salary. However, be aware that earned income or compensation does not include rental, interest, dividend, pension annuity or deferred compensation income. Second, your modified adjusted gross income cannot exceed certain limits. For single people, your modified adjusted gross income must be less than $114,000 and $166,000 for married couples filing jointly.
Contributions you make to the account are not tax deductible, but may be withdrawn any time without tax or penalty. Before taking withdrawals from your Roth IRA you need to determine if you are receiving a “qualified distribution.” Any withdrawal that is not a “qualified distribution” can result in income taxes and IRS penalties. For example, any earnings on your principal will be subject to income taxes should you decide to withdraw them prior to the five-year holding period or before age 59 ½ (contact your state department for state tax rules). In addition, these earnings are also generally subject to a 10% IRS penalty.
Tax and penalty free withdrawal of your Roth IRA earnings for “qualified distributions” can be made once a five-year holding period is satisfied and one of the following applies: you have reached the age of 59 ½, you have become disabled, the funds are used for a first-time home purchase (subject to a $10,000 lifetime limit) or the funds are distributed to a beneficiary after your death.
After thinking over the rules, if you are eligible for a Roth IRA you may be wondering how much you can contribute. For 2008, you may make regular contributions that do not exceed $5,000. If you are 50 or older, you can also make “catch-up” contributions of up to $1,000 per year for a total contribution of $6,000.
A couple of other important items worth noting – contributions to your employer’s retirement plan do not exclude you from making contributions to a Roth IRA, and owning a traditional IRA does not prevent you from setting up a Roth IRA either (although contributing to a traditional IRA for the same year will limit the amount you can contribute to your Roth IRA).
Whether or not you decide a Roth IRA is the right retirement account for you, it’s always smart to plan ahead and save money for the future. Never underestimate the importance of saving for the future and using a variety of investment vehicles to achieve your goals.
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I think mutual fund investing is a good way to get started investing. I own two mutual funds currently and there are a few good ones out there, but most mutual fund managers still don’t beat the average market returns. It is for this reason that I recommend Index funds. Actually anyone who looks at the numbers and isn’t trying to sell you something will tell you the same thing.
Index funds give you the market returns
To put it simply, investing in Index funds is like buying a tiny share of each company in the market. So, for example, if you bought an Index fund that tracks the S&P 500 (which is a good choice) you would own a tiny amount of each company listed in the S&P 500.
The S&P 500 index includes 500 large companies that do a good job of representing the US economy as a whole. So, by investing in the S&P 500 index, you are essentially betting that US stocks will go up.
History can never be a tool for perfectly predicting the future, but it is about the best tool we have to work with. Historically over the last 100 years US stocks have gone up about an average of 11% a year. Some years have been down 25% and some up 40%, but averaged together they come out to about 11% a year.
What is the difference between a mutual fund and an index fund?
With mutual funds you pay a manager to pick a bunch of stocks that you (the shareholder) will be invested in. If there were more great managers out there this would be a great idea, but since the great majority of them fail to beat the market returns, index funds are a good choice.
So, by owning all of the stocks in the market rather than just the ones that most money managers suggest - you win. I know it seems crazy that most money managers with all of their education and experience still can’t beat the market, but it is the sad truth and the secret that they don’t want you to know.
The mutual fund industry secret
Mutual fund companies don’t want you to know that an Index fund will outperform most of their funds. They spend millions of dollars in advertising and number crunching to show you a chart that shows how their fund returned 13% on cloudy Tuesdays of every month except January over the last 2.4 years. I am exaggerating. A little bit, but not much.
Many work very hard and advertise a lot to convince people to buy their products, even though they are not as good as having an index fund.
Oh, and guess who pays for that advertising and the money manager’s yacht who failed to beat the market returns. Yep, you the shareholder. Which is yet another reason why index funds are so great. They don’t need a money manager since the stock-picking has already been pre-determined. Because of this, index funds generally charge much lower fees than managed mutual funds.
Can it really be that most money managers fail to beat the market?
Have you ever been stuck in traffic and realized that the lane next to you was moving faster than yours? You quickly dart into that lane, only to come to a stop while the cars in your old lane start moving faster. Then you go back to the original lane only to have the same thing happen again.
Just like staying in your original lane during a traffic jam often yields the best results, so too with investing. Many investors do the “grass is greener over there” approach. They are always chasing last year’s biggest returns. Well, many money managers in the mutual fund industry follow the same pattern. To add to it, they have to pay fees each times they “switch lanes.” Every time they buy or sell out of a security, they have to pay commissions. This ultimately comes out of the shareholder’s pocket.
Should you never buy mutual funds?
Don’t get me wrong there are some good mutual funds out there that frequently beat the market, but they are few and far between.
Oh, and be warned, most brokers you talk to about index funds will tell you why mutual funds are so much better. Examine the points of their argument very carefully. Keep in mind that most brokers make a lot more money off of mutual funds than index funds (if they even offer them) and I will let you decide.
Technorati Tags: index funds, mutual funds
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The Advantages of Mutual Fund Investing
The goal of this post is to go over the basics of mutual fund investing. To start, a mutual fund is a company whose main objective is to professionally invest a pool of money in securities and earn a positive return for shareholders. By doing this, these companies allow you to share the rewards and risks of investing.
So when you buy shares in a mutual fund you are essentially buying stock or bond holdings in various companies, based on the underlying investments. Your shares are pooled together with the other investors’ shares, which allows for a high level of diversification.
Mutual fund investing has a few advantages:
- The funds are managed by full-time money managers. They research market and economic trends, and then use this information to make decisions about buying, holding or even selling securities to enhance returns.
- Diversification is one of the first things that anyone learns about investing. “Don’t put all of your eggs in the same basket, just in case you drop it you won’t lose them all.” The folks at Enron learned this the hard way as many of them who were fully invested in the company stock lost all their 401k savings when the company folded. Mutual funds help minimize this risk by spreading your money over a number of investments. By doing this the impact of one poor performer on your entire portfolio is greatly reduced.
- Many mutual fund companies offer convenient features, like automatic reinvestment, systematic payments and no-cost exchanges of funds. If you choose to, you can automatically reinvest any dividends and capital gains (profits) to purchase more mutual fund shares .
- Many mutual funds can be purchased with a low minimum investment. After an initial payment of $250, most mutual funds require as little as $25 or $50 at a time for additional investments.
- Liquidity is another nice benefit of mutual funds. Most funds offer you the ability to sell any or all of your fund shares on any business day the markets are open.
I think mutual funds are a great way for beginners to get started investing, (but even better would be index funds) Generally the risks are lower than investing in stocks, but of course the reward is more limited as well.
Anyone have any suggestions for beginners purchasing a mutual fund?
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Answering a reader question
I received a message the other day from a fellow newlywed-er (am I still a newlywed at year 3?) She was asking for a little financial advice. So, I will share what I have and hopefully we can get some input from some of the readers.
Here is an excerpt from what she wrote:
As a newlywed, I just started to plan my life with a person.
I really like your advice about using the Roth IRA to save early.
I am wondering could you write more about those?
I really want to know what you would recommend a new married couple should save up for? A house, a baby, pay off loans,Roth IRA…or what else?
Well, I guess I will just share what my wife and I are currently doing. Since we are transitioning out of the newlywed phase (having been married almost 3 years) we are likely in a similar place.
My financial story
My wife and I (look to the right) both brought a decent chunk of debt into the marriage from our past mistakes and education expenses. Since we got married we have been focusing most of our energy on paying off all of our debt. I really like the debt snowball method for getting out of debt and for the most part we have been using it. The variation that we have made is that we have been funding a Roth IRA as well as our 401k’s.
By not putting all of our financial energy into paying off our debt, we realize that it will take a little bit longer. All of our debt is at 3% interest rate or less, so paying it off quickly is not a major issue for us.
Having learned from a few wise mentors in my life, I have come to understand the impact that time has over investments. Without getting into too much detail, I will just say that getting started investing early puts you at a high advantage. It is not just a little bit better than waiting, but a HUGE amount better. Having enough for retirement can be a breeze if you get started while in your 20’s. It was for this reason that I wanted to get the ball rolling with my investment portfolio.
I say all that to say: everyone’s financial decisions of what to save up for should be based on their personal situation.
For us, our current priorities (always subject to change) are:
- Getting out of debt
- Having plenty of cash for retirement
- Home ownership
- Kids and all the expenses they bring
Because of this we have been focusing about 75% of our financial energy to paying off debt and 25% to retirement. My goal is to finish paying off our student loans this year, which will allow us to start saving for the other priorities.
Personally, I hate debt. I can’t stand the feeling of being a “slave” to lenders as Proverbs puts it. I also don’t want to have to work when I am 75. My strong feelings with both of these issues guide my financial decisions.
So, do you have any financial advice for your fellow newlyweds? What do you think young married couples should be saving for?
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Joel Greenblatt’s “Magic Formula” for investing giveaway
If you are wondering what the heck I am talking about, then let me explain. In Joel Greenblatt’s book The Little Book that Beats the Market he explains his “magic formula” for beating the market.
“The Little Book…” is fairly basic guide to investing in stocks. If you know anything about stock-market investing, you know that if you “beat the market” by earning more than the stock market averages, then you are doing very good.
Anyway, let’s get to the point. I liked the book a lot. Joel lays out some very convincing evidence that this system for investing will work IF you stick with it for the long haul. I plan on getting started on his system as soon as I knock out the remainder of my debt. But, since I have not actually tried his system I can’t fully recommend it.
Since I liked it so much, I decided to give it away…
What do I have to do to win Joel Greenblatt’s “Magic Formula”?
If you would like to be entered for a chance to win “The Little Book that Beats the Market” just type “Magic Formula” in the comments below before 7:00 p.m. CST on February 24th, 2008.
A few more notes about the Joel Greenblatt book giveaway…
- From those comments entered I will randomly select a winner using random.org.
- Go ahead and enter each week, but only enter once (per household) for each one. (Duplicate entries or IP addresses will be disqualified)
- Make sure you enter your email address when adding your comment so I can contact you if you win.
- The winner will be announced on February 25th in the comments section of this post!!
- To be sure you hear about the next giveaway why not subscribe?
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Video Lessons from Warren Buffett
If you have been a regular here for any length of time, you will know that I have a strong appreciation for Warren Buffett and his wisdom on business, investing, and life. I have written about a few things I learned from Warren and some famous Warren quotes as well.
I found a series of videos from a talk Warren gave to MBA students at the University of Florida. It never ceases to amaze me how large of a goldmine of wonderful information is available for FREE. He still hasn’t written a book, so you have to soak up his wisdom via other methods (like this). If you are even remotely interested in investing or business these would be a good use of your time. (each one is a little under 10 minutes)
YouTube - Warren Buffett MBA Talk - Part 1
YouTube - Warren Buffett MBA Talk - Part 2
YouTube - Warren Buffett MBA Talk - Part 3
YouTube - Warren Buffett MBA Talk - Part 4
YouTube - Warren Buffett MBA Talk - Part 5
YouTube - Warren Buffett MBA Talk - Part 6
YouTube - Warren Buffett MBA Talk - Part 7
YouTube - Warren Buffett MBA Talk - Part 8
YouTube - Warren Buffett MBA Talk - Part 9
YouTube - Warren Buffett MBA Talk - Part 10
Technorati Tags: Warren Buffett Video, Warren Buffett
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It is so SIMPLE to retire well off, if you make just a little sacrifice now. The alternative is making a huge sacrifice later on (in your 40s) and still probably not doing as well as if you made a small sacrifice now.
You just finished your degree and you are probably looking for your first “real” job. This is the perfect opportunity to decide how you would like your financial life to be. You have the choice to spend and buy whatever you feel like which will likely put you in heaps of debt. If you choose this path, you will be in good company. You can be sure most of your peers will take this path.
Or, you can take the road less traveled. You can be one of the “weird” people out there who refuse to believe that they have to be in debt all their lives. You can get motivated by the thought of the freedom that comes with being debt free. This road can sometimes feel like a lonely road, when everything and everyone around you is yelling, “Spend! Spend! Spend!” But, be assured, those who go down this road get the last laugh. They experience freedoms that most people only dream of.
If you are like I was, you will think, “oh, I can spend now, because I will be making more money later.” Well, the truth is that it doesn’t matter how much money you make. Expenses rise to meet income. So, as your income increases, you can be sure that, by default, your expenses will increase as well. Believe it or not, there are people out there with $500K annual salaries filing bankruptcy and in the same moment, you have people who never made more than $50K a year retiring as millionaires. It is not about how much you make. It is about how much you keep.
So, I say all of this to say, if I could teach a college grad only one financial lesson it would be to:
Max out your Roth IRA for five years
By maxing out ($4000 for 2007 and $5000 for 2008) your Roth IRA for the first 5 years after you graduate - you will likely have over $24,000 by the time you are 27. If you add NOTHING else to it, when you are 67 and ready to retire it will be worth over $1,000,000 (assuming 10% growth). If you can keep adding to it, you can really watch the puppy grow!!
But don’t wait, if you wait until you are 27 to start rather than 22 - the million is now down to $675,000 when you retire. Still not bad, but definitely not a million. And if you wait just 5 more years until you are 32 - you are looking at about $415,000 when you retire. So, you can see the importance of doing this right away - no matter what age you are. You can make this retirement figure a lot larger if you keep adding to it, rather than just doing it for 5 years.
Figures calculated with the savings calculator at CNN.com.
Invest the money in an Index fund
Buy an Index fund that follows the S&P 500 - The average performance of U.S. stocks over the last 80 years is over 10%. You may find a few stock mutual funds that occasionally beat the index, but very few consistently beat the average. This is the big secret of the industry - you will never (yes, I can pretty safely say never) have a financial advisor tell you to buy an index fund, because the fees are a lot smaller with an index fund than with a managed stock mutual fund. Therefore everyone involved in the sale of the mutual fund is getting paid a lot less than if you bought a managed mutual fund. The fact is that the great majority of managed stock mutual funds fail to beat the index.
Bottom line: Buy an Index fund in a ROTH IRA account, max it out for your first 5 working years and forget about it until you retire. If you can’t afford to max it out, don’t worry about it, just do the best you can. The purpose of the article is to emphasize how important it is to START EARLY!!
What I wouldn’t tell the grad (but I am thinking)
The reason this is the one thing I would teach them, is because it will probably help them to spend less than they earn - which is the KEY to financial well being. Secondly, if they can do it for five years - it will likely become a habit that they should be able to continue for the rest of their lives. And lastly, there are a bunch of things I would love to teach the grad, but this was the lesson that got me interested enough in money to learn the other lessons that I needed to learn.
Technorati Tags: college grad, financial advice
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He probably wouldn’t now, but he may have 18 months ago…
One up on Wall Street
A few years back I read Peter Lynch’s classic One up on Wall Street
One of the points that Peter mentions in the book is that often times the biggest winners pop up around us (in the shopping mall, grocery store, etc.) and the smaller investor stumbles upon them before Wall Street ever takes notice. If the smaller investor buys into the winning stock before the Wall Street investors do - they are going to benefit greatly from being in early. As he mentions, Wall Street generally has a herd mentality so once a stock is discovered by one Wall Street firm as a good buy, it is likely that many more big firms will be buying it as well. It is this process when all the “Big Money” is buying shares that causes the stock’s price to go up dramatically.
I am still trying to find a “ten-bagger” as Peter calls them (a stock that goes up 10x its value). I am disappointed to share that I missed one that was right under my nose.
Crocs
Crocs - you know the attractively challenged, yet extremely comfortable shoes that seem to have grown famous at mall kiosks. Well, over the last few years I have watched them start popping up all over the place. I saw continued expansion in the company as they started offering a wider range of styles and products. But yet, it NEVER crossed my mind that I should look into investing in these guys. Well, since their IPO (Initial Public Offering - when the public can first buy shares of a company) their shares have gone up 6x what they started at.
The chart below shows the growth of the stock price since the IPO last year.
This is just about exactly what Peter Lynch was talking about. It was a company that I saw in action long before the wall street analysts took any notice. If I would have been more attentive, I could have made a nice chunk of change investing in Crocs. Well, one thing I am determined to do is to learn from my mistakes - I would suggest you do the same, I missed this one, learn from my mistake and catch the next one that comes by.
One of my favorite Warren Buffet quotes is, “there are no called strikes in the game of investing.” So, if you miss one or two or three, just get the next one. You do not LOSE any money by missing them. And if you wait and get the right one, you have a whole lot to gain.
Is it too late to invest in Crocs?
Well, as I was talking about, Wall Street is heavily invested in the stock (about 50%), so the chance for those big gains is past. Regardless, if it is a good company and a good price it still could be a good investment. I think I agree with Kiplinger’s that is a faddish company that probably will not be able to sustain the momentum that it has produced, therefore I will not be buying right now.
As you can see in the chart above, there was a major decline a few weeks back - which could create a buying opportunity, depending on what the reason was for it. I honestly have not thoroughly researched the stock, so I really don’t know many of the business details of it. If anyone has any insight about the stock, please share with us.
Technorati Tags: invest in Crocs, Peter Lynch, Crocs stock
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