Posts filed under 'Investing'
An important tax law change is coming that expands eligibility for a popular retirement account choice, the Roth IRA. Beginning January 1, 2010, Roth IRA conversion income limits will be eliminated, allowing anyone to convert a Traditional IRA or old 401(k) to a Roth IRA. Question is, should you? You’ll need to talk to an expert to have them assess your individual situation but you should certainly look into it.
There are at least five different kinds of IRAs each with its own rules and regulations. I included information about Education IRAs but they are rare. Two of them must be funded by your employer so I have excluded them.
You need to check them all out, preferably with some expert help, like a CPA or an attorney, family member or other expert before investing in any of them.
Traditional IRA
You are allowed to contribute up to 2,000 dollars per year into a traditional IRA. The amount of the contribution that is deductible on your income tax return depends on your Adjusted Gross Income (AGI) which can be found on your income tax form and whether you are covered under an employer’s plan. So, depending on your filing status (Single, Joint, etc), and your AGI, your contributions may range from fully deductible to totally non-deductible. Even though you are eligible to contribute to your IRA, you may be in a position where none of these contributions are in fact deductible.
Roth IRA
You can also put money into a Roth IRA. Roth IRAs have lots of rules, but if you follow them, any money you put into one is taxed at that time and even if it grows, you won’t have to pay any more taxes on it. For example, if your account doubled in value over the years, even when you cash out at retirement, you’d get half the money tax-free. Also you cannot withdraw your funds within the first 5 years after the establishment of the Roth without a penalty.
Education IRA
You can put away up to $500 per year into an education IRA, the money grows tax-free and receives a preferred tax treatment when the money is used for educational expenses. These plans are not very common in that they are very restrictive on who can make contributions to them, the amount of total contributions allowable each year, and the limitations on what exact education expenses qualify.
Just like you need lots of different shoes, you have quite a few different ways to invest your money. None of these options are mutually exclusive. You can have a brokerage account and a 401K. Or you could have a 401K with your current employer and an IRA which includes money from previous 401Ks.
October 19th, 2009
Learning about investing can be painless and dare I say fun. While treated typically as a dry, jargon filled topic, investing can be more enjoyable and more rewarding than assembling a fabulous shoe collection. Don’t believe me?
Shoes can cost you a fortune: they’re expensive to buy and, inevitably, they go in and out of style. Some even hurt your feet. While it’s true that investments can sometimes hurt – occasionally even worse than a pair of shoes – they can also make you a fortune. Investments can last a lifetime and, simultaneously, increase in value. With that fortune, you can buy more shoes and, if you practice what this blog suggests, you might even be able to buy a dress and bag to go with them.
A great shoe collection takes patience, planning, and strategy. So does investing. A great shoe collection makes you happy. So does a big bank account. A great shoe collection makes you feel good about yourself. So do profitable investments. Rather than become the proverbial little old lady who lived in her shoe, wouldn’t you rather become the smashing woman who used her investments to live her dreams in a fabulous house or condo while wearing stilettos?
October 12th, 2009
Why invest in stocks and not just bonds? Stocks allow you to invest in companies that can create a lot of value more quickly than bonds. If you pick the right stock, you can make a heck of a lot of money. Of course, if you pick the wrong stock, you can lose a heck of a lot of money. That’s why it’s never a good idea to put all your money into one company.
Now that you know the difference between debt (bonds) and equity (stocks), how do you choose a stock to buy? Where do you begin? One begins by starting to pay attention to the stock market. As you have seen, the stock market is just like any other market, except that stocks are bought and sold as opposed to something else. How do you pay attention? And what will the market teach you if you do? What does “pay attention” even mean? The stock market reacts to the world at large and the daily news. The market rises and falls (increases and decreases) depending on lots of different things including how the economy is going, whether people are optimistic or pessimistic about the direction of the world, whether wars are being fought, how much the United States pays for oil and even how much people are shopping.
You can start to watch what happens to stocks in general by looking up the Dow Jones Industrial Average. The Dow Jones Industrial Average tracks the stocks of 30 different companies every day. When you hear people discuss the stock market on television, the radio or on the Internet, they typically say things like “The market dropped 100 points today”. Or, “The market rose 30 points today”. When the term “the market” is used, typically they are referring to the Dow Jones Industrial Average. The performance of the thirty stocks the Dow Jones tracks (how well or poorly they are doing) is considered a bellwether of how the financial markets are doing as a whole.
How do you find out what the Dow Jones Industrial Average is doing? Just like a bond, you can look it up in the newspaper or on the Internet. In fact, you can start to follow the stock market in general and the stocks of individual companies in particular by utilizing the finance section of your home page. For example, if you use Yahoo or Google as your home page, you can add content that shows you information on the stock market. You can even add individual stocks to track and follow. How? Every stock has a trading or ticker symbol, a three or four letter call sign that it is known by on the stock market. The Dow Jones Industrial Average symbol is DJI. You can find stock symbols by Googling “what is the stock symbol for [fill in the name of the company]”. For example, to find the stock symbol for Saks, you would Google “What is the stock symbol for Saks?” The answer: SKS.
As you start to pay attention to the market in general, you should begin to focus on a few companies you know a lot about. For example, if you love your iPhone, start to watch Apple’s stock (symbol: AAPL). If you wouldn’t head to the gym in anything but your Nike’s, start to look at Nike’s stock (symbol: NKE). If you love shopping at the Gap, look at Gap’s stock (symbol: GPS). What are you watching for? Here are a few things: How does the stock price change in relation to the news about the company? How does the stock’s price change in relation to any announcements the company makes? How does the stock’s price change in relation to general news about the economy? For example, some stocks are more susceptible to the world around them than others. For example, when the economy is down, people tend to shop less and for less expensive items. Neiman Marcus and Saks do worse in this type of environment than Target or the Gap.
So you don’t fall off your heels, know that despite all of the risks, as a group, stocks have the highest long-term returns of any investment type. Even though stock markets go up and down and, at times, have even crashed, so far, the market has always rebounded and gone on to new heights. If you look at the all your investment choices, on average, stocks have outperformed bonds in a total return (after inflation). A little height can go a long way!
September 6th, 2009
Let’s review the differences between owning debt (a bond) and owning equity (a stock). When you own debt (you buy a bond), you are guaranteed the return of your money (the principal) plus the interest payments associated with that bond. When you own equity (you buy a share of stock) you are not guaranteed either the return of your money or any interest payments (dividends). Remember: the lower the risk, the lower the return; the higher the risk, the higher the return. That’s why you can make more money from owning stock if the company is successful than you can from owning a bond. Stocks are riskier. However, it is also because of this risk that you can lose money—a lot more money—from owning stocks than you can from owning bonds. In fact, if a company in which you have purchased stock goes bankrupt, shareholders do not get any of their money back until bond holders are paid back. Stockholders are paid back last. By then, there is usually very little, if anything left over to pay back the shareholders. In other words, stockholders are out of luck. Their money is history.
August 28th, 2009
When you a buy stock you are buying a piece of ownership in a company. What does it mean to be a partial owner? What, besides getting the right to brag to your friends that you own a piece of a company, do you have—or get, depending on your attitude—to do?
Well since you are a shareholder, you own a right to everything the company owns. The more shares of stock you own, the more of the company you own. You actually own a slice of all the company’s assets. An asset is anything the company owns that has commercial value. Think of an asset this way: Your personal assets include anything you own which you can sell on eBay. A company’s assets include things like desks, chairs, computers, contracts for business, sometimes the building they are in. Obviously, some things a company owns have more value than others.
As a shareholder (a person who owns stock), you also have the right to your share—hence the name—of the company’s earnings (the money the company makes, its profits), as well as the right to vote at the company’s annual meeting on the board of directors. Once a year, companies hold meetings to review their performance over the previous year, discuss the upcoming year and to elect the people who run the company. One share of stock equals one vote. What you don’t have is the right to run the company, at least day-to-day. Instead, you get to help decide—along with all of the other shareholders—who will run it on a daily basis.
The importance of stock ownership is that you own a portion of the company’s assets and are entitled to a share of the company’s profit, the money left over after the company subtracts all of its bills (its debt) from all of the money it took in. As you learned in previous blogs, bonds pay interest in the form of a coupon. Well, when companies do well they pay a version of interest in the form of dividends, that is, they pay their shareholders some of the profits, usually on a regular basis. Sometimes dividends are paid quarterly; other times, annually. Unlike coupon payments on bonds, dividend payments are not a given. If the company is doing well, the management of the company may decide to pay a dividend. But, they do not have to do so. They can do well and decide not to pay a dividend. If they do pay a dividend, they also get to decide how they are going to pay it. Dividends are most often paid in two ways: Cash or in additional shares of stock.
Fashionista Fact:
In the 16th century, Catherine de Medici was engaged to the powerful Duke of Orleans, who later became the King of France. She was petite (not quite five feet) and felt insecure compared to the Duke’s taller and favorite mistress, Diane de Poitiers (who wouldn’t? Diane was considered exceptionally beautiful). So for her wedding, she asked the shoe maker to add two inches to her shoes which gave her both height and a captivating walk. Needless to say, the shoes were a huge success. Given her status as the Queen of France, high heels quickly became associated with privilege and power. Needless to say, her risk paid dividends (not punny – sorry!).
August 25th, 2009
Just as you need different shoes for different outfits, you need to invest your money in different ways for different reasons. As you have seen, when you put your money in the bank, whether you put it in a checking or savings account, you are keeping it as cash. But, as you have also seen, your money can work harder for you. You could buy US treasuries or corporate bonds. Buying treasuries and bonds is riskier than leaving your money in cash. However, thanks to their higher interest rates and coupon payments, your money is still relatively safe and earns you a better return than you would get from a checking or savings account.
There is yet another kind of investment that is riskier than either cash or bonds but which can earn a higher return. The name for this type of investment is a stock. Buying a stock is buying ownership in an individual company (business); how much ownership depends on how much stock you buy.
For example, if a stock is selling for 110 dollars per share and you ask your stockbroker to purchase 110 dollars worth, you now own one share of the company. If the company has one hundred thousand total shares outstanding, you just bought .00001 percent of the company. If you want to buy stock in shoes, for example, you could purchase stock in Crocs, Heelys, and Nike. Or, perhaps you prefer to own a piece of a shoe store such as Shoe Carnival. When you buy a share of stock, you are buying a small piece of everything the company owns and owes. (You are literally buying a piece of a company.) Ownership in a company, and therefore stocks, are also referred to as equity. Equity means ownership and you now have equity in the company. Remember, bonds are debt—they are a loan to a government or company. With stock, you can not only own a piece of these companies, but you can show your brand loyalty by wearing them.
If a company does well, your stock goes up and you share in their good fortune. Unfortunately, if a company does poorly, your stock goes down and you share in their misfortune. There are few limits on how well or how poorly a company might do. As a result, there are few limits on how well or poorly a share of stock might do and therefore how much money you might make or lose.
This is an important point: Remember, bonds pay a fixed interest rate. You basically know what return you are going to get when you buy a bond. While it is true that interest rates rise and fall and that bond prices rise and fall accordingly, bond prices are not nearly as volatile as stocks are. They do not rise and fall nearly as much as much as shares of stock in a company can.
There are lots of reasons companies do well and lots of reasons they do poorly. Let’s use the company Apple Computers as an example. In 2003, Apple introduced the iPod which was a smashing success. In 2007, they introduced the iPhone which was also a smashing success—two very popular products in a row. People bought lots of both. As a result, between 2003 and the end of 2007, the price of Apple’s stock increased approximately 700%! (It depends on which exact days in those two years you use to figure it out.) So, one dollar invested in Apple stock in 2003 would be return seven dollars in 2007. (The more money you invested, the more money you could make: 1,000 dollars invested in Apple stock in 2003 would return 7,000 dollars in 2007). Cha Ching. Apple made good products, sold a lot of them, and their stock increased. But then, Steve Jobs, Apples’ founder and CEO, became ill and took a leave of absence. The company’s future was in doubt and its stock went down. So a company’s stock can go up or down for a variety of reasons.
Sometimes companies come out with un-popular products and their stock goes down. For example, in 2006, Revlon developed a line of cosmetics called Vital Radiance, was aimed at women over 50 and did not sell well, at all. Revlon continued to launch other new products some of which also did not do so well. If you had purchased one share of Revlon stock in the middle of 2006, at the end of 2008, just two and half years later, you would have lost approximately 44 percent of your money. One dollar invested in Revlon stock in 2006 would have returned only fifty six cents in 2008. (The more money invested, the more money you would have lost: 1,000 dollars invested in Revlon in 2006 would return 560 dollars in 2008). Cha No-Ching.
So, companies that issue stocks can earn and lose money for lots of reasons. As their fortunes go, so does their stock price. And, by owning their stock, you make or lose money right along with them. It is because of this relatively un-limitless ability of companies to earn or lose money that stocks are considered less safe than bonds.
August 21st, 2009
When you buy a bond, the elements I mentioned in my last post create a language which might sound/read like this: This bond has a face value of 1,000 dollars, a coupon of 6 percent, and a maturity of 10 years. The total principal of the bonds to be issued is $10,000,000.
If you bought this bond when the company originally issued it, you would pay 1,000 dollars to the company, receive a total of 60 dollars (1,000 dollars times six percent) of interest per year for the next 10 years, by check, from the company. When the bond matures, after the ten years are over, the company will send you back your 1,000 dollars. So the total amount of money you stand to earn on this bond is 600 dollars (the interest the company paid you over 10 years.) Plus, you will get your original principal back as well.
Remember how I have written about opportunity costs ? (See May 5, 2009.) Understanding the difference in the risk/reward profile between treasuries, and bonds is an example of just how important this concept is. Let’s assume you have 1,000 dollars to invest. Which should you choose: A CD, a US treasury or a corporate bond? Since the amount of money you have available to invest is finite, you have to make your decision based upon your risk tolerance and the interest rate, and therefore the return you can expect to receive. The CD will pay the lowest interest rate, but is federally insured so you do not run any risk of losing your 1,000 dollars. The US treasury will pay more interest than the CD and is an obligation of the federal government, but it is not insured or guaranteed by anyone. So it is possible, although highly unlikely, that you could lose some of your principal if the US government decided it couldn’t pay all its debts.
The corporate bond will pay more interest than either the CD or the treasury, but is neither insured nor backed by the federal government. Instead, it is backed by an individual company, and depending upon the financial health of that company, the bond might not repaid in full when it matures. As we’ve discussed, you will get paid more interest for loaning to a borrower who is less likely to pay back the loan. The less likely the borrower is to pay you back, the riskier the loan and the higher the interest rate. So while choosing a safe low paying investment is fine, it also means you will miss out on the opportunity to earn more if you can learn to pick healthy borrowers who pay a higher interest rate.
For now, know that bonds, whether from the US government or a company, are a sensible and versatile alternative for the beginning investor. Like flats, they can make almost any outfit look good and ensure comfortable feet!
Fashionista Fact:
In the United States, women spend approximately two billion a year to make their feet more comfortable from surgery correcting problems generated by tight-fitting shoes and bunions. There is even a treatment to help make high heels more comfortable which combats pain by injecting collagen or DermaFiller into the fat pad in the ball of the foot.
Generally, the higher the heel, the higher the risk for future foot problems. Comfort offers a lower return, while the return from style is much higher. But remember there is an opportunity cost!
August 14th, 2009
In addition to treasury bills, treasury notes and treasury bonds, the US government also issues savings bonds. There are two kinds of savings bonds: “I” savings bonds and “EE/E” savings bonds.
I savings bonds can be purchased for as little as 25 dollars up to a maximum of 5,000 dollars. They pay an annual interest rate which is adjusted twice a year based on the consumer price index. The consumer price index is a measure the government uses to calculate inflation. As the index changes, your interest rate rises or falls during the time period of your bond. This is how the amount of money your money earns for you keeps up with the rate of inflation: when inflation is high, you earn more interest; when inflation is low, you earn less interest.
Note: Inflation is the reason keeping your money in a shoe box or under the bed is a bad idea. A dollar today will buy more than that same dollar tomorrow. If you put your money in a shoe box, and decide to spend it ten years later, the amount of money you put in will be worth less (you will be able to buy less with it) than you would have at the time you tucked it up in your closet.
Note #2: Fashionista Fact:
Manolo Blahnik’s first shoe collection appeared in 1972, when after presenting the legendary Vogue editor Diana Vreeland with some theater design sketches, she advised him to “go with the shoes”. Today, a pair of his fabulous shoes (known to Fashionista’s everywhere simply as Manolo’s) start at 500 dollars. In 1972, they would have cost 102 dollars—102 dollars in 1972 is the same as 500 dollars today. That’s inflation at work.
The interest paid is added to the value of the bond each month and is paid to you when you cash the bond I savings bonds must be held for one year but can be held as long as thirty years. There are some penalties if you hold them less than five years, but the maximum penalty is the forfeiture of three months interest.
EE/E savings bonds have many of the same characteristics as I savings bonds: they, too, can also be purchased for as little as 25 dollars up to a maximum of 5,000 dollars. They also must be held for one year but can be held for as long as thirty years. They have the same penalties as I bonds, forfeiting three months interest, if you hold them less than five years. However, unlike I savings bonds, EE/E savings bonds pay a fixed interest rate. Instead of calculating the interest rate based on the consumer price index as Series I bonds do, the interest rate is a combination of a fixed rate, which applies for the life of the bond, and a semiannual inflation rate which is calculated on an average six-month rate of interest on US government treasuries.
So the biggest difference between the two kinds of savings bonds is how the interest is calculated. And how the interest is calculated determines the interest rate you receive and, of course, reflects how hard your money is working for you.
You can buy savings bonds or treasuries, learn what interest each type of savings bond is paying, and otherwise get additional information at www.treasurydirect.gov. This website is managed by the Department of the Treasury. Reviewing this site is a good way to determine which of the two Series are best for you.
July 21st, 2009
The lowest risk investment class is those which are either federally insured or backed (meaning “guaranteed”) by the United States government.
Continue Reading July 14th, 2009
Let’s continue the last post. Why is an understanding of your personal risk tolerance important? Because if you decide to invest your money in anything more complicated than a CD, you’ll need to know how much risk you can stomach without getting queasy. Your risk tolerance helps determine what kind of investments you will be most comfortable with and where you should focus your attention.
Risk tolerance is different for everyone. You need to choose the risk level which feels comfortable to you. Most of the investments we will cover in this book are not federally insured. This means that if you lose any money, it’s gone. Obviously, some people tolerate this knowledge better than others. How do you know how much risk level you can stand? This quiz will help.
- Which Sex and The City Character do you most identify with: (a) Samantha, (b) Carrie, (c) Miranda, or (d) Charlotte?
- Which is your very favorite pair of shoes: (a) Stilettos, (b) Stacked heels, (c) Wedges, or (d) Flats?
- You are in Vegas! and you are down 500 dollars. How much money would you be willing to risk to break even? (a) Whatever it takes, (b) 1,000 dollars, (c) 500 dollars, or (d) nothing – you are done for the night!
- When do you stop to fill up the gas tank in your car: (a) not until I have to, (b) when the light comes on, (c) when the tank is one-quarter full, or (d) when the tank is half full?
If you answered mostly (a) you have a fairly high risk tolerance, (b) you have a moderate risk tolerance, (c) you have mild risk tolerance and, (d) you have very little tolerance for risk.
Note:
Any woman who regularly wears high heels understands the saying “no pain, no gain”. We all endure pain and discomfort in the name of fashion—and great looking legs—but we also know that those had to have them high heels could cause blisters, calluses, corns, bunions, lower back pain, and ankle sprains. Women everywhere know flats are inherently more comfortable. We balance—pun intended—how much we want the higher heels against the possibility of any pain or discomfort. Going after higher returns on our money requires the same balancing act. You must consider the risks of placing your money in less secure and more volatile investments against the security of federally insured but possibly lower returns. If you decide that your risk tolerance is low, that is perfectly okay. Flats are always “in” for a reason!
June 29th, 2009
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