Posts Tagged ‘Investment Basics’

So, you’re ready to pick stocks on your own?

What do you need to know if you want to pick stocks on your own? How can you analyze the thousands of investment options available to you? There are a couple of different methods used to evaluate stocks, they are fundamental analysis and technical analysis.

Fundamental analysis takes a more simplified, straight-forward approach in analyzing companies and their stocks. Every public company is required to publish quarterly and annual reports with regards to their financial position. What does this mean to you and me? You have the ability to look at their books, and determine for yourself if their stock is undervalued, right on, or overvalued. By looking at their financial statements you can analyze their profits and losses along with their assets and liabilities. This approach focuses on the long term health and financial postions of companies. We will discuss the tools to help you analyze these statements in later lessons, for now we will stick to the basics.

As for Technical Analysis, this method relies more on market data and relies heavier on investors feelings about particular stocks and knowing the right time to buy and or sell. This method relies on tools and ratios to determine whether or not a stock is a good buy or sell at any particular time. This method is probably better suited for the more advanced investor and is more suited for short term investing, rather than the long haul.

In my estimation, use of both methods will probably result in providing you the best idea of how well a company is doing and whether to buy, sell, or hold a particular stock.

The next two lessons will wrap-up this mini-series when we explore the details of both fundamental and technical analysis. Keep going on to the next lesson! Fundamental Analysis Basics.

Don’t have time to carry on now? Come back at your leisure, but don’t wait too long, every dollar wasted is a dollar not working for you. Also, consider signing up for my daily updates sent right to your in-box. Don’t worry, I hate spammers too.

Making sense of your mutual fund choices, loads and no-loads

My Dear investor,

By now you are asking me to make some sense of all the different mutual fund choices available to you, so I will try. Let’s recap them from our previous lesson; We have Money Market funds, Bond funds, and Stock Funds to choose from. Within each Major fund type, we have in some cases extremely different choices, however, the majority of your decision making will take place in selecting your stock funds. So, let us move our efforts to a discussion around the multiple stock fund choices (growth, value, blend, index, international, sector, and other). Keep in mind, your company has picked the major funds you can invest in, you more or less decide percentages.

While I went into depth in the previous lesson about your stock fund choices, I didn’t discuss how to choose or select the best ones. Your mix of choices should depend on your risk tolerance. For example, as an agressive investor my portfolio (90% of my 401k is in stock funds) is heavily weighted towards growth, small cap, international and index funds.

No matter what you end up selecting, as a general rule pick at least 10 different funds and keep your percentage in each fund around 10% for optimal diversification. In addition, choose only funds with no-loads (unless a loaded fund is outperforming no load funds, which is highly unlikely). No-load funds (such as Index funds) have consistently outperformed loaded funds year after year for many reasons. Loaded funds are actively managed funds (meaning the company pays investment managers to monitor, and in some cases change what stocks they are investing in for the fund), and and no load funds refers to funds that are setup and left alone. Why don’t you want someone else managing the fund your invested in? Because they have proven to do no better than funds that are left alone, in most cases, you will lose money having your funds actively managed rather than left alone. In a nutshell, choose funds with low management expenses, it will mean more money to be invested versus in some investment managers’ pocket.

Use common sense when selecting from the funds available to you that are suited around your risk tolerance. You can request a prospectus (basically information provided about the funds past performance and future expectations) from Investment providers like Vanguard or Fidelity or whomever you are working with. Look and compare fees within the different funds. Compare their past performance with how long you will be investing to see if it fits your risk tolerance. Make sure the fund is what it says, look at the companies it invests in. Take the time to do research for a couple of hours, it will pay off big time in the long run.

Different types of mutual fund options

In our previous lesson, we discussed the three major fund types (stocks, bonds, money markets) and what they consisted of, now we will drill down and talk about them in greater detail (as this lingo will be prevalent when you go to choose your plan).

Money markets (funds) are often used when you sell off your investments and the investment firm deposits your proceeds in an interest bearing account (versus sending you a check and you lose out on the interest, while you decide what to do with your money).

The major types of Bond funds include:

U.S. Government Bond Funds are U.S. treasury or government securities.

Municipal Bond Funds are tax-exempt bonds issued by state and local governments.

Corporate Bond Funds are the debt obligations of U.S. corporations.

Mortgage-Backed Securities Funds are securities representing residential mortgages. (from government lenders like Fannie Mae and Freddie Mac).

Stock funds are by far the most complicated of your fund options (in my case they make up 90% of my 401k portfolio). The investment firms have a number of ways they label their different stock funds, which are supposed to help you categorize the different strategies you can follow depending upon your risk tolerance. They are as follows:

Value Funds – The key here is the investment firm considers these stocks to be undervalued. Think of this fund like a real estate investor does when he finds a home that is way under priced, with a little polish, these suckers could make a ton of money. These funds invest in mid to larger sized companies. Stocks in this fund usually pay dividends (some companies pay cash back to their shareholders on an annual (or a variation of) basis in the form of cash and or additional shares based upon the money that they make (so, instead of the price of the stock going up, they opt to pay the shareholders now). These are considered typically safe investment (as there won’t be too much swing in prices).

Growth Funds – These funds invest in stocks that are thought to be the quickest growing companies in the market. Growth funds hardly ever provide dividend income because they are focused on expanding their businesses. These are considered risky investments with an investment horizon of 5-10 years (meaning you better plan to stick with these guys for that time to get the most out of the stocks).

Blend Funds – These funds are a mix or blend of both growth and value stocks. Below are the different types of blend funds by size:

Large-Cap Funds – These funds invest in companies whose value is greater than $5 billion dollars. These are usually companies that have been around for a long time and have a proven track record.

Mid-Cap Funds – These funds invest in companies whose value is greater than $1 billion, but less than $5 billion.

Small-Cap Funds – These funds invest in companies whose value is less than $1 billion. These companies, like the growth fund companies, reinvest profits to expand, versus raising additional money through other methods.

Index Funds – These funds are representative of different stock markets indexes, like Dow Jones, Standard and Poors, etc. Instead of hand picking stocks from different markets (there are thousands); the investment managers of this fund select portfolios built around the entire market. These are very cost efficient funds with this hands off approach to investing, however, they maybe risky too.

International Funds having been doing quite well as the dollar has plummeted.

Global Funds – invest in stocks around the world.

Foreign Funds – invest in stocks outside of the U.S.

Country Specific Funds – invest in one country or physical region of the world.

Emerging Markets Funds – invest in smaller, developing countries and are considered very risky, however very rewarding in some cases.

Sector Funds invest in different industries or segments of the market. Such as utilities or technologies or healthcare.

Now, keep in mind the above is the extreme basics, and there are multiple types of funds out there that could take me hours to discuss. The point here is, now you have an idea of what you are looking at, when you start to analyze your different 401k plan or investing options.

Check out my next lesson; Selecting which mutual funds suit your needs best should be fairly simple and straight forward now, with what you have learned. This is how I selected mine.

Don’t have time to carry on now? Come back at your leisure, but don’t wait too long, every dollar wasted is a dollar not working for you. Also, consider signing up for my daily updates sent right to your in-box. Don’t worry, I hate spammers too.

Mutual funds, the 401k investors main course

First, let us define a Mutual fund; In a nutshell, a mutual fund is a collection of multiple stocks and bonds and other investments. Basically, an investment firm starts a fund by going out to the stock market and buying a bunch of different shares of companies and various different bonds or some combination thereof. They then sell shares of their funds to you through your company (and out on the stock market).

You start your job and your company tells you to join their 401k plan. For example, my company uses Vanguard (an investment firm), however, their are many more large investment firms used across the country like Fidelity and American Funds. Now, Vanguard has gone out and built a bunch of different funds that invest in very different things. For example, one fund might invest heavily in technology stocks (like Google, or Yahoo!), while another fund may be invested in international food markets, while another fund may be invested in utility companies.

You must decide it’s a great idea to join the company plan as you will defer a portion of your taxes and make free money. It’s not really a hard choice though, with automated deductions you’ll never know the money is gone.

You are then given a list you are supposed to choose from, of different funds. This is where it get’s tricky. What are the major types of funds? What funds should you buy? How to decide what funds are best? Should you choose the growth, value, index, bond, some other fund, or a combination thereof? Don’t worry, we’ll make some sense of this now.

The different major types of funds offered are Stocks, Bonds, and Money Market funds (Cash). Looks familiar huh? We talked about these in previous lessons.

Stock funds are wide and varied based upon economic sectors and geography.

Bond funds consist of various types of government, municipal, and corporate debt obligations (meaning they are additional ways for organizations to raise money for one reason or other.

Money Market funds invest in things mentioned in previous lessons, like CD’s offered by banks along with savings accounts. These are easily converted back to cash, however, they have a hard time keeping up with inflation (meaning the interest you are given for investing in them may be less than the dollars devaluation).

In the nest lessons, we will discuss in greater detail the different types of Bonds offered by your 401k.

But before that, our next lesson will discuss in greater detail the different types of mutual funds (load and no-load) and how you can save money (thus allowing you to invest more) by going with no-load funds. Mutual funds detailed discusses in depth the various types of funds offered by all mutual funds.

Don’t have time to carry on now? Come back at your leisure, but don’t wait too long, every dollar wasted is a dollar not working for you. Also, consider signing up for my daily updates sent right to your in-box. Don’t worry, I hate spammers too.

What stocks should I buy!?!

Many people want to start off investing by building their own portfolio of individual stocks, which is perfectly fine, however, it can be much more confusing and difficult than simply investing in mutual funds (we will discuss mutual funds in the next lesson) offered through your 401k plan and or other defined contribution plan like an IRA or Roth IRA (if your company doesn’t offer a 401k).

Basically, with your 401k plan, you must choose from various mutual funds offered by the investment firm your company is working with (so, you don’t have a choice here, if you want to invest additional money over and above what you are contributing to your 401k plan – you can and should do so by building a larger portfolio of additional individual stocks and bonds).

Back to the question I hear (about picking individual stocks) so often, it’s probably more common than screaming is in my house. “Is this stock a good buy?” The problem is this, I can’t answer that question for you – and neither can anybody else without your specific information, only you can. Now hold on, don’t call me a jerk or retard or whatever else, because I’m not giving you the information you think you want, listen to my reasoning:

Without knowing your age, the amount of risks you are willing to take, what your current portfolio of stocks and bonds are, how long you want to invest, and various other factors – I, nor anyone else could tell you if one stock is better for you than another. In future lessons however, I will teach you much more about investing through buying individual stocks (for those who don’t have a 401k, or whom want to invest additional money outside of their 401k or other defined plan).

An example of my above thoughts: An uncle of mine was asking me about various specific stocks and if I thought they were good buys. In many cases the stocks were good buys for me, but not for him. How could that be? Well, many of the stocks he was looking at required a much longer time commitment than he had. He is only 5 years from retirement and the stocks he was looking at were long term investments (meaning he would have to remain invested with them for a long time – maybe over 10 years in some cases to realize the returns on his investments that he wanted). In his short time frame, it was not likely he would generate the returns he was wanting. On the other hand, I could hold on to the stock for 10 years, and would likely make good money doing so.

It is worth repeating a million times, if anyone gives you advice on specific stocks without knowing a damn thing about you, their advice is pretty much worthless to you. The information you use to decide if one stock is better for you than another should be based upon your needs, not somebody elses or what they think is “the hot stock” of the day, month, year, or whatever.

So, you are asking, “then what good is this site if it can’t help me pick a stock?” Once again, in future lessons, I will help you learn about the tools you can use if you choose to build your own portfolio. But for now, we will move our focus to the options an average new/existing 401k investor or similar has to choose from (mutual funds) when they go to setup their 401k plan.

Please proceed to the next lesson, this will become much more clear after that, I promise. Mutual funds are what 401k investors must choose from, learn what they are in general here.

Don’t have time to carry on now? Come back at your leisure, but don’t wait too long, every dollar wasted is a dollar not working for you. Also, consider signing up for my daily updates sent right to your in-box. Don’t worry, I hate spammers too.