Five Phenomenal Investing Tips

 

On Wednesday, May 25th, I had an awesome teleconference about investing with Bahiyah Shabazz from Brown Girls Do Inve$t. If you missed it, here are the highlights from the call.

“We don’t buy toys; we buy stock.”

The road to investing with your children starts with saving. Whenever you give your child money, encourage them to put 10% away. Also, encourage a desire to own companies and not just things. When they say, “Mommy/Daddy, can I have…?” Respond with, “If you like it, let’s see if we can own it.” Can we buy into Disney? Can we buy into Apple? And how much will that cost?

401(k) and 403(b) v. Roth IRA: You don’t have to pick just one.

A Roth IRA and an employer-sponsored account are two components of a balanced retirement plan. Employer-sponsored accounts- 401(k), 403(b), 457- traditionally allow contributions before taxes. Pre-tax contributions lower your current taxable income while saving for retirement. When you withdraw the money from this account, the money is taxed at your ordinary income rate. Conversely, a Roth IRA allows after-tax contributions. The bonus is that the money comes out in tax-free.

Employer-sponsored accounts have higher contribution limits. For 2016, the maximum contribution for employees under 50 years old, is $18,000. The contribution limit for IRAs for individuals under 50 years old is $5,500.

Utilizing both types of accounts provides the opportunity to “mix” up your tax liability in retirement. If you don’t have $5,500 to contribute after taxes during the year, use your tax refund. Bahiyah said it best, “I know our economy needs to thrive but at the same time we need to make sure that we have a secure financial future.”

Picking your first stock is as easy as 1,2,3…

I love this quote from Bahiyah, “Stocks are not a one size fits all.” Finding the “right” stock starts with researching brands you frequently use. As an investor, it’s imperative that you have a basic understanding of the company you wish to purchase. Understanding the company enables you to decide if it is either on “on sale” or if the low price is an accurate reflection of company’s value.

For a step by step process, “Picking your first stock in three steps.”

If you find good companies, dividends will come.

When a company pays dividends, it is sharing its profits with shareholders. Companies that do not offer dividends aren’t necessarily bad companies. However, Bahiyah shared that she seeks out companies because “it’s like they are paying [her] to invest.” Great point. Additionally, regular dividend payments are an indication of a company’s good financial health.

Savings: There are levels to this.

When you are saving, it’s important to make sure you are earning interest on your money. If not, inflation will certainly eat away at your buying potential. Paying down debt is important but don’t forget to take the first 10% for yourself. Consider contributing 5% to retirement and 5% to general use savings. Regarding where to save, for time periods shorter than a year, a regular savings account is fine. For periods greater than a year where you might consider a CD (Certificate of Deposit), consider purchasing a high-quality corporate bond. CDs tend to be illiquid and provide a low rate of return.

For the playback of the call, dial (515) 604-9009, Code: 362566#.

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Three steps to picking your first stock

Investing in the stock market can be overwhelming. It doesn’t have to be; the stock market is a just another market. At the supermarket, you consider both price and value. Bananas for .99 per pound?! That’s expensive. The stock market requires that same evaluation. If you understand a stock’s “price tag,” you will be able to properly evaluate if the company is a good buy. You have made decisions on where to bank, your internet search engine, and even which cell phone to buy. If you can successfully make these decisions, you can successfully purchase stock. By following the instructions and examples in this post, you will have successfully picked your first stock.

Like most markets, the Stock Market has operating hours. It is open Monday through Friday, 9:30 am to 4:00 pm EST, excluding federal holidays like Christmas and Labor Day.

Let’s get started.

1. List the top 10 products you use on a weekly basis.

Warren Buffet advocates investing in companies that you know and trust. If you are a faithful consumer of a product, chances are you know and trust that company.

Here’s my Top 10 Products.

2. Research

(1) Who makes the products on your list? This may be obvious or might require a bit of digging.

(2) Is this company publicly traded? In other words, does it have a ticker symbol? A ticker symbol, or stock symbol, is a series of letters, which identifies publicly traded companies.

Here’s more information on the companies I researched.

3. “Price Tag”

Below is a sample stock quote for Sunoco (SUN) which is traded on the New York Stock Exchange (NYSE). The following prices and metrics are as of the market’s close on March 29, 2016. Please note that each financial site will look slightly different but have the same information.

		SUN (NYSE)	$32.56
Prev. Close	$32.28		Vol.	462,827
Open	$32.41		Beta	0.89
Bid	$32.52		Market Cap.	3.20 B
Ask	$32.54		P/E	16.04
Day’s range	$31.75-32.88		EPS	2.03
52-week range	$22.86-54.82		Div. Yield	9.84%

a. How much does the stock cost?

You can enter the stock’s ticker on either Google or Yahoo! Finance to find the relevant information. The current price, $32.56, is the price of SUN’s last trade and is displayed to the right of the ticker and the exchange. The bid price, $32.52, is what you could sell SUN for if you owned it. The ask price, $32.54, is what you could buy it for. As you can see, the current price is the result of buys and sells in the market.

Here’s my list.

b. Is the stock valuable?

A stock’s price or value is determined by its earning potential, profitability, and price movement. Although P/E ratio (earning potential) and EPS (profitability) are important factors in evaluation, the most straight-forward is the 52-week range.  To avoid “paralysis by analysis,” I will focus the on 52-week range. I will discuss P/E ratio and EPS in an another post.

The 52-week range provides the stock’s highest and lowest price over the past 52 weeks. It helps determine if a stock, at its current price, is overvalued. As the commentary of The Intelligent Investor states, “[S]tocks become more risky… as their prices rise- and less risky… as their prices fall.” Therefore, I want you to focus on the stocks on your list that are 75%, or less, of their 52-week high.

(Current price)/(52-week high)= percentage of the 52-week high

Using SUN ($32.56)/($54.82)= .593

SUN is 59% of its 52-week high.

Here’s my updated list.

c. Combining price and value.

Being successful in the stock market is directly related to the number of shares you own; it dictates how much can you benefit from price movement. You could buy 1 share of Google (GOOG) for $744.77. Or you could buy 22 shares of Sunoco (SUN) for $744.77. If GOOG goes up $2.00 a share, you make $2.00. If SUN goes up $2.00 a share, you make $44.00.

Purchasing stock is about buying a good company at a great price. When starting out, you want to purchase as many shares of a valuable company as possible. Therefore, you should pick the cheapest, most valuable company on your list and purchase as many shares as you can afford. Here’s my final list.

Pick your own stock. I have provided blank worksheets DIYStockPickingWorksheets.

Disclaimer: Company, or stock tickers, used in this article are for illustrative purposes only and do not constitute a recommendation to engage in any particular securities transactions.

Stock image via CreateHER stock.

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Rolling, rolling, rolling… How to do a 401(k) rollover

A few blog posts ago I spoke about retirement with a brief conversation about rollovers.  I wanted rollovers to have its own, more in depth, conversation.  You can rollover your employer account for two reasons, (1) You leave your job OR (2) You reach the age to withdraw without penalty (59 ½) and you are still working.  For the purposes of today’s blog post, let’s combine these circumstances and call them a “rollable” event.

When a “rollable” event occurs, you have three options: (1) Stay in your plan; (2) Cash out; or (3) Roll your account over. Let’s talk about the first two circumstances. If you have over $5,000 (each plan’s amount might vary slightly) in your 401(k) after separation from your employer, you have the option to stay in your plan.  Under $5,000 but over $1,000, your employer can roll your money into an IRA to avoid the administration costs of keeping such a small about in the company’s plan. Under $1,000, your former employer can legally “force you out” if you don’t make other arrangements for the money in your plan.  A force out is when your employer sends you a check for what’s in your account minus the mandatory 20% withholding.

Since we are on the subject of receiving checks from your 401(k), let’s discuss the cash out option. The cash out option is when you decide to take your money and run.  You receive a check for whatever is in your 401(k) minus mandatory 20% tax withholding. That sounds great, who couldn’t use some extra money in their pocket? Well, I will ask you the question that my father asked me as a child whenever I was in trouble, “[Is] it worth it?” And on this occasion, it isn’t.  There’s no such thing as a free lunch. With the cash out, even though you had 20% held immediately, (1) the amount you received is calculated into your income and in most cases, you have to pay MORE taxes on that amount and (2) you are subject to a 10% early withdrawal penalty if you are under 59 ½ at tax time.  On top of that, you are shorting your retirement goals. With that being said, who has money just to give away to the government?

So what’s the best option? ROLLOVER.  Rolling your 401(k) to an Individual Retirement Account (IRA) is a great move.  It gives you a wider range of options that are often less expensive that YOU pick. However, you also have the option of rolling your old 401(k) into your new 401(k). But for today’s post, I’m just going to discuss the process of rolling over into an IRA.

1. Decide where do you want your IRA. 

(a) Bank- some people like the convenience of having all their accounts in the same place.  However, many banks only offer banking options such as CDs and savings accounts. Some banks can provide investment options through their investment arm but I do caution you that these options tend to be more expensive than an online account.

(b) Online account- if you don’t mind having your banking accounts in separate places, I prefer online options.  They tend to be cheaper. (Although if you want to move your banking relationship, many of these online investment firms have banking options.) Look around for deals (i.e. get $600 when you roll your account over) and  make sure you read the fine print!

2. Decide what kind of an IRA will it be.

You should roll your 401(k), or other qualified plan, into a qualified account, a traditional IRA. I know that Roth conversions are very    popular now. But it is easier to do a Roth conversion once your funds are in your traditional IRA. Before making that jump, I strongly suggest speaking with your tax advisor.

3.  ROLL IT! 

(Most people want to handle this ASAP after they leave a company, but it can take up to 60 days for your separation to show with your 401(k) provider)

(a) Tell your IRA provider that you intend to roll a 401(k) over. They will either give you a form or provide you with the information needed  to tell your 401(k) provider to execute the rollover

(b) Call your 401(k) provider or go to your 401(k) online, most providers allow you to verbally request a rollover, and  handful of providers will send your check directly to your IRA company. If they don’t, and send the check to you, just forward the check with the proper paperwork to your IRA.

Note: The general rule in rollover land is this, “As long as you don’t get the money in your hands, then it is not taxable.” So most people get upset when they have a check in their hands from their 401(k). But with a rollover the check should read, “ (Your IRA Company) FBO (Your name).” The real question is, can you take the IRA check and deposit into your bank account. With a FBO, “for benefit of,” check, you cannot because the check is written to the IRA company for your benefit.

            My money’s rolled over. What should I do next? Invest! 

Getting started with investing

Today’s blog will be featured in Pull Magazine’s print version.

The costliest mistakes, in life and investing, are usually fear based. Successful investing does not require a specialized degree.  It does, however, require time and a plan. Many people believe that wealth and financial freedom is unattainable unless they win the lottery. That is not true.

When I present individuals with tools to produce long-term wealth through investing, I usually hear two things: “I can’t figure that stuff out” or  “I’m afraid I’m going to lose money.” I can’t figure that stuff out usually means, I’m afraid of making a mistake. Aren’t we all?  However, if you do not invest, you WILL lose money by losing out on the opportunity to earn money. Not investing could be the costliest mistake you make.

How? In 2000, if I purchased an item for $100.00, that same item would cost $135.28 in 2013.  Inflation decreases the value of money over time and erodes its buying power. If your money is not earning at that same rate as inflation, you are losing money. You must actively do something to counteract inflation.  This also means that in order to “make” money, you need to invest in something that will exceed inflation over the long term.

There are several financial products available; however, many will not exceed inflation. Bank savings accounts, money market accounts, and Certificates of Deposit typically do not exceed the inflation rate. In order to consistently exceed inflation, you must look to the stock market. Overall, the United States stock market has had positive returns during any 20 year period since the 1920s.  Considering that time period included the Great Depression, the stock market should not seem as scary over the long term.

Five Rules for investing

1. Stocks are risky.

The best way to guard against risk is time. In the short term, there can be jaw dropping, blood pressure rising, catrospic swings     in the market.  That’s why rule #2 is so important.

2. Patience is paramount.

  Investors who use a buy and hold strategy for 10 years or more, do well. Warren Buffet, the owner of Berkshire Hathaway and the world’s greatest investor said it best,  “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”

3.  Educate yourself.

Do not invest in a business that you cannot understand. The great thing is, we know more about businesses than we think we do. Look at your habits. Where do you do your grocery shop? Where do you buy gas? Where do you buy your morning cup of coffee?  Do you drink Pepsi or coke? We tend to be ardent supporters of certain brands. Why don’t you own a piece of them? Google is a highly useful tool to use when getting more information about companies.

4.  Use index mutual funds. Here is a great piece about finding good index funds from one of my favorite guides to personal finance, Kiplinger’s.

In most years, many standard mutual funds do not beat the market. As a result, an investment strategy that works well is buying a Standard and Poor’s (S&P) 500 index fund or a Wilshire 5000 index fund instead of paying a manager significantly more in investment fees to select what he or she believes to be the best funds.

5. Don’t overdiversify.

 When investing, many individuals spread their money too thin.  When too little money is spread over too many investments, you don’t realize many gains and it’s generally hard to evaluate how your account as a whole is doing.

Pick an index mutual fund and one or two stocks to begin investing.  If you aren’t able to reasonably purchase more than one stock, then don’t. I’m a proponent of purchasing round lots, which are 100 shares of a stock, when feasible. However, I do realize this can be hard considering the per share price of any given stock. My main point is to buy a large number of shares, as many as you can. You should feel comfortable buying a large number of shares if you follow rule numbers 2 and 3.

Investing is not hard.  It requires educating yourself and patience.  Many of the online brokerage firms such as Ameritrade, E-trade, Scottrade, Merrill Lynch, have great investment commentary available to read.  Find other people who invest and talk to them, exchange ideas. The key to investing is life long learning and patience.  If you can master those things, you will have a good time making money.