How I Will Be Rich

Archive for the ‘Investing’ Category

Last Tuesday I made a post called “A List of Great Things.” It was a list of ten blog posts that I thought were just exceptional. I decided I’d do it again this week. In fact I think I’ll do it every week. I’ll give it a clever name… Something like “Top Ten Tuesday.” I currently have 21 blogs in my blog reader and throughout the week I separate all the posts that I think are really good that I just need to share with other people. Then I narrow it down to ten.

Anyway, without further ado, I present the second installment of “Top Ten Tuesday”:

Generation X Finance discussed adding more tools to your investment arsenal. They point out that there are much more investment options available out there than what people traditionally think about.

The Digerati Life posted an article about keeping things in perspective when things get rough with the stock market. This has been a big theme in the financial blogging community lately and I can’t get enough of it.

Stock Trading to Go posted a great article relating life lessons to the stock market. Very good read!

Simply Thrifty posted a great list called 100 things you can make yourself. Some of this stuff looks really fun to make.

Simply Thrifty then posted a follow up called 100 more things you can make yourself… More Fun! They put so much time in to these lists. It is Simply Incredible.

Five Cent Nickel basically describes how to buy happiness with money (or at least a more pleasant form of misery)

Finance is Personal explains why you should keep your money invested in a declining market.

Shoemoney has a guest post from a 13 year old affiliate marketing genius about link cloaking. I don’t implement this here but it is interesting nonetheless.

John Chow Dot Com featured a guest article about how to achieve high traffic on your blog.

ProBlogger posted 5 Comment managing tools for blogs. I plan on setting up at least two of these real soon.

Those are my top ten from this week. Once again, I want to say that if you comment on our blog, you’ll most likely end up in my RSS reader. I love reading new blogs and give pretty much every one a chance. So comment and there’s a good chance one of your posts will end up here.

Enjoy.

-M

I have two separate accounts for investing. I have my IRA account and I have my discretionary account. In my discretionary account I mainly hold stocks and I typically practice the method that I explained back in my first attempt at investing advice. In my IRA account, however, I want to hold funds. I want that account to be less volatile and to steadily grow over the years. Holding index funds has been proven to return about 10% annually averaged out over several years. Lately I have been hearing a lot about something called ETFs or Exchange Traded Funds. I used to trade these in my discretionary account based on tips from various websites that I’d read. I knew that they mimicked various markets and that they were traded like stocks but that was about the extent of my knowledge. I’ve since done quite a bit of research and am in a much better place to discuss the differences between no load mutual funds and exchange traded funds.

Exchange Traded Funds
ETFs Can be traded like Stocks. The benefit of this is that you can quickly move in and out of them if you would like. You can essentially day trade or actively trade on the performance of an entire market sector, an index, such as the S&P 500, or the entire stock market for that matter. ETFs can also be bought on margin and sold short. The negative to this is that you have to pay any brokerage commissions associated with the trades. There is, however, a new discount brokerage called Zecco. I don’t know how new it is but I just discovered it a few days ago. By using this brokerage you can actually trade ETFs without a commission. However, if you read in to their pricing, they do have account maintenance fees for retirement accounts. So just be aware of that.

ETFs also typically have an expense ratio that is lower than the average mutual fund. This is very slight and typically shouldn’t be a big factor in the decision between mutual funds and ETFs. It just means that a little less money goes to the management of the ETF than in a mutual fund.

A negative aspect of the ETFs is that when you purchase or sell shares, you must pay half of the bid-ask spread. This is the difference between the market buy price and the market sell price of the ETF. This spread can be very large and makes it difficult to buy and sell in short periods of time. While this is good to know, it doesn’t really apply to someone who wants hold long term.

Mutual Funds (No Load)
Mutual Funds are traded at the price of the fund at the closing of the day that you bought in. If I bought into a mutual fund today, my brokerage would wait until the end of the trading day today and then purchase my shares of the fund at whatever that closing price was. Typically mutual funds also have a minimum amount of time that you have to have your money invested before you can sell, or else you will have to pay a penalty. One of the nice things about a mutual fund is that you can invest a dollar amount as opposed to buying a certain amount of shares. For example, I can purchase exactly $2000 worth of a mutual fund and it will get me something like 30.25 shares. This is especially beneficial if you are going to set up an automatic investment plan or if you plan to reinvest the dividends. If you want to reinvest dividends in an ETF, you are subject to whatever brokerage commissions apply every time.

For someone who plans to invest for the long term in a retirement account, I would prefer a No Load Mutual Fund. I think the two biggest factors that contribute to my decision are; 1. I can set up an automatic payment plan and I will not get charged commissions every time I add more money to it and 2. I can have dividends automatically reinvested without having to pay commissions and without having to wait to buy an exact amount of shares.

ETFs are, in my opinion, a little over hyped. Short term trading does not make too much sense due to the bid-ask spread issue and long term trading does not seem all the great due to all the commission fees you will end up incurring.

This is based on some of the research that I have done. If anything here is inaccurate or you have a different opinion (or you share my opinion for that matter). Please Please Comment!

Now get out there and set up a Roth IRA.

-M

It seems like every single blog that I’ve visited in the last week or so has at least one post about what is going on in the stock market and what you, as an investor, should do. I’ve read so much different advice and theories over the last week or so and everything is so contradicting. One article I read claims that everyone should pull all their investments until the market turns around, another article claims that you should start shorting everything, and another states that you should just hold out.

To tell you the truth, I have no idea what the best move is right now. Personally, I look at indicators that help me figure out the right time to get in to the market. The hard part is finding the indicators of when to get out of the market. Lately, I’m a fan of the third option. I like to go long with my stocks. Markets are cyclical and in the long term, the current drop off in the market will be merely a blip on your overall stock chart. Just for the hell of it though, I’m going to look at all three of these ideas.

1. Pull all your money from the market and hold cash. The idea is that you can pull all the money you have invested in the stock market and put it in a savings account and earn about 5% a year. This is not a bad idea but what if you are sitting on a loss. The market is a crazy animal and can turn around out of nowhere. I just don’t like the idea of not holding on to investments just because we have a little downturn in the market. I will be kicking myself if the market turns and I wasn’t along for the ride.
2. Start Shorting Everything. This idea is risky but it made a lot of people rich in the tech bubble burst. The idea is that you start borrowing shares of stocks at that current price and if the stock drops further, you profit off it. You are basically borrowing shares from someone at the current price and when the market drops further you cover your position by buying shares of that stock at the lower price. It is something that is hard to explain but in this strategy you are basically shooting to buy high, sell low. The reason this is risky is the potential for loss is unlimited. With a regular stock purchase, the absolute most you can lose is the amount of your initial investment. With a short sell, there is no limit to how much you can lose. If you buy at one point and the stock turns around and starts increasing in price, there is no limit to how high it can go.
3. Hold out. Long term investors tend to ignore markets like the one we are having right now. They pick good companies that they are confident in and hold them for years and years. If you have a good grasp of the fundamentals and you have done all your homework, there should be no reason for your stocks not to turn around when the rest of the market turns around.

Of course the best strategy would have been to sell everything three weeks ago when the market peaked, short sell for the last three weeks and reinvest when the market hits it’s lowest point but I don’t know anyone who’s that good at market timing. I guess hindsight is 20/20.

On an up note, Stocks are up today due to the fed. cutting the discount rate. Hopefully they will continue in that direction and everyone will start wondering what the heck they were getting so uppity about anyway…

So I have compiled a list of great blog posts that I have read over the last few days. I will probably do this about once a week because I’m constantly out there reading everyone’s blogs. If you have commented on my page, I guarantee, I’ve been to your blog.

Generation X Finance discusses shorting ETFs. The market has not been doing to well lately. If you are interested in gaining off of a falling market check out this post. It slightly safer than shorting individual stocks and may be an option for a diversified portfolio.

Finance is Personal describes a method for obtaining a mortgage without a credit score.

The Digerati Life has an article that helps people shrug off a stock market slide.

Stock Trading to Go posted a hilarious video of Jim Cramer in an interview by Steven Colbert on the Colbert Report.

Lazy Man and Money posted an excellent guest post about DRIPs (Dividend Reinvestment Plans). It is a great way to get started in the stock market with very little funds. Highly Recommended!

DailyApps has a very informative post for all you bloggers about Optimizing Wordpress for Best Performance.

I Will Teach You To Be Rich has an interesting post about how much people spend for their own weddings but declare that everyone else is crazy for spending that much.

One Man’s Goal discusses how he generated over 3,000 backlinks and how you can do it too.

ProBlogger, the one site that most people all ready read and know about, has a great post about Analyzing your blog’s “Competition.”

Young And Broke has some great tips on being Frugal. Check them out.

That’s all I have for today. These are all the blogs that I have been reading a lot lately. Check out some of their other posts. They all write great content.

-M

If you have not read Matt’s previous post about Roth IRA’s, I’d suggest scrolling down to read his first and then skipping right back up to here…

With that said, we should all now have a basic idea of how a Roth IRA works and a few simple reasons why they are not as scary as once thought. Holding off on starting a Roth IRA until you “think” you have enough money to afford to invest is simply being in the wrong mindset. From the beginning of your working career at that first job, by saving about $500 would have been enough to start putting money away for the future. At such a young age (teens-20s), time is on your side and the magic of compound interest should be your very best friend. Play around with this snazzy little calculator if you don’t believe me.

I have heard many of my friends say their school loans, car payments, and the monthly rent sucks up all of their salary. As many of us pay these on-going expenses, there is a simple solution to continue our desire to invest for the future: automatic money transfers. This innovation is a wonder that online banking has allowed all of us to utilize. If it wasn’t for the internet, many of us would continue to pay the typical bills and occasionally throw some extra cash into our very low interest paying savings accounts, but only if we’re feeling really loaded! The power of automatic money transfers to a Roth IRA account makes investing and saving absolutely painless. By starting with a measly $20 transfer each week, you’ll never know that money was ever in your checking account. Setting up this automatic flow of money is the most essential step in the beginning to fund your new Roth IRA, especially while feeling a financial pinch from the bills. Sooner than you know it, you’ll want to bump up that weekly amount to $50 or more while noticing you’re inching closer to maxing out your yearly limit; it’s a good thing!

Now the option is to figure out where to sign up for this Roth IRA. There are many online brokerage sites that all offer fairly the same options and perks. The key here is to never get overwhelmed; you’ll always be able to transfer money from one brokerage to another, and you’ll always be able to shift how you want your money invested within your Roth IRA. Compare companies like Vanguard, Fidelity, and T. Rowe Price. Look closely at the amount they require to begin investing, yearly fees, and the required monthly transfer amounts. I would say a good initial investment is $500, hopefully finding a plan with no yearly fee, and $50 or less monthly transfer requirements.

Once that’s figured out, you need to decide how you will invest your money within your Roth IRA. If you are in your 20s, investing the money in the stock market is the way to go. Finding a well diversified mutual fund is much better in this case than diversifying through various stocks. Try to find a no-load mutual fund with a broad-based market index. The key here is to pay the least in fees as you can and diversify enough to cover all bases to ride the market as it shifts up and down. Check out Morningstar’s mutual fund screener to easily evaluate which funds would best suit you.

There’s not much of anything left to do now that you’ve completed all of this. Figuring out where you want to open the account is the most difficult step, but it’s no more challenging than deciding which credit cards you want to sign up with. Now just let that automatic money transfer let it do its thing, and sit back and enjoy watching that Roth IRA balance grow!