Investing Articles

Article / Updated 09-15-2022

Investing appears to be complicated and complex. But if you can take some relatively simple concepts to heart and adhere to them, you can greatly increase your success. Here are ten time-tested principles of investing success. Following these principles can pay you big dividends (and capital gains) for many years to come. Regularly save and invest 5 percent to 10 percent of your income: Do this as soon as you begin earning money on a regular basis. Preferably, invest through a retirement savings account to reduce your taxes and ensure your future financial independence. Understand and use your employee benefits: Often, the most valuable benefit you have through your employer is a retirement savings plan, such as a 401(k) plan that enables you to make contributions and save on your current income taxation. Thoroughly research before you invest: Be sure you understand what you're investing in. Don't purchase any financial product that you don't understand. Ask questions until you understand the risks and returns of the product. Shun investments with high commissions and expenses: The cost of the investments that you buy is an important variable you can control. All fees must be disclosed in a prospectus, which you should always review before making any investment. Invest the majority of your long-term money in ownership investments: With your long-term money, focus on investments that have appreciation potential, such as stocks, real estate, and your own business. When you invest in bonds or bank accounts, you earn a return that probably won't keep you ahead of inflation and taxes. Avoid making emotionally based financial decisions: Successful investors keep their composure when the going gets tough. You need the ability and wisdom to look beyond the current environment, understanding that it will change in the months and years ahead. Be especially careful about making important financial decisions after a major life change, such as marriage, the birth of a child, a divorce, job loss, or a death in your family. Make investing decisions based on your plans and needs: Your investment decisions should come out of your planning and your overall needs, goals, and desires. This requires looking at your overall financial situation first and then coming up with a comprehensive plan. Tap information sources with high quality standards: You need to pare down the sources you use to keep up with investing news and the financial markets. Give priority to those that aren't afraid to take a stand and recommend what's in your best interests. Trust yourself first: Look in the mirror. You'll see the best financial person that you can hire and trust. What may be missing is enough education and confidence to make more decisions. If you need help making a major decision, hire conflict-free advisors who charge a fee for their time. Work in partnership with advisors. Never turn over control. Invest in yourself and others: Don't get so wrapped up in making, saving, and investing money that you lose sight of what matters most to you. Invest in your education, your health, and your relationships with family members and friends.

Article / Updated 09-15-2022

Bond investing has a reputation for safety, not only because bonds provide steady and predictable streams of income, but also because as a bondholder you have first dibs on the issuer’s money. A corporation is legally bound to pay you your interest before it doles out any dividends to people who own company stock. If a company starts to go through hard times, any proceeds from the business or (in the case of an actual bankruptcy) from the sale of assets go to you before they go to shareholders. However, bonds offer no ironclad guarantees. All investments carry some risk, such as tax risk. When comparing taxable bonds to other investments, such as stocks, some investors forget to factor in the potentially high cost of taxation. Except for municipal bonds and bonds kept in tax-advantaged accounts, such as an IRA, the interest payments on bonds are generally taxable at your income-tax rate, which for most people is in the 25 to 28 percent range but could be as high as 35 percent . . . and, depending on the whims of Congress, may rise higher. In contrast, stocks may pay dividends, most of which (thanks to favorable tax treatment enacted into law just a few years back) are taxable at 15 percent. If the price of the stock appreciates, that appreciation isn’t taxable at all unless the stock is actually sold, at which point, it’s usually taxed at 15 percent. So would you rather have a stock that returns 5 percent a year or a bond that returns 5 percent a year? From strictly a tax vantage point, bonds lose. Paying even 25 percent tax represents a 67 percent bigger tax bite than paying 15 percent. (Of course — getting back to the whims of Congress — these special rates are also subject to change.) Tax risk on bonds is most pronounced during times of high interest rates and high inflation. If, for example, the inflation rate is 3 percent, and your bonds are paying 3 percent, you are just about breaking even on your investment. You have to pay taxes on the 3 percent interest, so you actually fall a bit behind. But suppose that the inflation rate were 6 percent and your bonds were paying 6 percent. You have to pay twice as much tax as if your interest rate were 3 percent (and possibly even more than twice the tax, if your interest payments bump you into a higher tax bracket), which means you fall even further behind. Inflation is not likely to go to 6 percent. But if it does, holders of conventional (non-inflation-adjusted) bonds may not be happy campers, especially after April 15 rolls around.

Article / Updated 09-14-2022

Bond investing has a reputation for safety not only because bonds provide steady and predictable streams of income, but also because as a bondholder you have first dibs on the issuer’s money. A corporation is legally bound to pay you your interest before it doles out any dividends to people who own company stock. If a company starts to go through hard times, any proceeds from the business or (in the case of an actual bankruptcy) from the sale of assets go to you before they go to shareholders. However, bonds offer no ironclad guarantees. All investments carry some risk, such as downgrade risk. Even if a bond doesn’t go into default, rumors of a potential default can send a bond’s price into a spiral. When a major rating agency, such as Moody’s, Standard & Poor’s, or Fitch, changes the rating on a bond (moving it from, say, investment-grade to below investment-grade), fewer investors want that bond. This situation is the equivalent of Consumer Reports magazine pointing out that a particular brand of toaster oven is prone to explode. Not good. Bonds that are downgraded may be downgraded a notch, or two notches, or three. The price of the bond drops accordingly. Typically, a downgrade from investment-grade to junk results in a rather large price drop because many institutions aren’t allowed to own anything below investment-grade. The market therefore deflates faster than a speared blowfish, and the beating to bondholders can be brutal. On occasion, downgraded bonds, even those downgraded to junk (sometimes referred to as fallen angels), are upgraded again. If and when that happens (it usually doesn’t), prices zoom right back up again. Holding tight, therefore, sometimes makes good sense. But bond ratings and bond prices don’t always march in synch. Consider, for example, that when U.S. Treasuries were downgraded by Standard & Poor’s in 2011 from an AAA to an AA rating, the bonds did not drop in price but actually rose, and rose nicely. Why? In large part, it was because of the credit crisis in Europe and the realization of Japan’s rising debt. In other words, although the United States appeared to be a slightly riskier place to invest vis-à-vis other nations, it actually started to look safer.

Cheat Sheet / Updated 09-01-2022

If you want to invest in bonds, you need to know how to read the bond ratings that the big three rating companies use and how to figure whether a taxable or tax-free municipal bond is the better investment. Knowing the right questions to ask about a bond can save you money, and you can find answers to many of those questions on the Internet.

Article / Updated 08-17-2022

Buying and selling an exchange-traded fund (ETF) is just like buying and selling a stock; there really is no difference. Although you can trade in all sorts of ways, the vast majority of trades fall into these categories: Market order: This is as simple as it gets. You place an order with your broker or online to buy, say, 100 shares of a certain ETF. Your order goes to the stock exchange, and you get the best available price. Limit order: More exact than a market order, you place an order to buy, say, 100 shares of an ETF at $23 a share. That is the maximum price you will pay. If no sellers are willing to sell at $23 a share, your order will not go through. If you place a limit order to sell at $23, you’ll get your sale if someone is willing to pay that price. If not, there will be no sale. You can specify whether an order is good for the day or until canceled (if you don’t mind waiting to see if the market moves in your favor). Stop-loss (or stop) order: Designed to protect you should the price of your ETF or stock take a tumble, a stop-loss order automatically becomes a market order if and when the price falls below a certain point (say, 10 percent below the current price). Stop-loss orders are used to limit investors’ exposure to a falling market, but they can (and often do) backfire, especially in very turbulent markets. Proceed with caution. Short sale: You sell shares of an ETF that you have borrowed from the broker. If the price of the ETF then falls, you can buy replacement shares at a lower price and pocket the difference. If, however, the price rises, you are stuck holding a security that is worth less than its market price, so you pay the difference, which can sometimes be huge. For more information on different kinds of trading options, see the U.S. Securities and Exchange Commission discussion.

Article / Updated 08-16-2022

Many real estate investors pick inspectors as an afterthought or simply take the recommendation of their real estate agent. But inspect the property inspectors before you hire one. As with other service professionals, interview a few inspectors before making your selection. You may find that they don’t all share the same experience, qualifications, and ethical standards. For example, don’t hire an inspector who hesitates or refuses to allow you to be present during the inspection or won’t review the findings with you upon completion of the inspection. The inspection is actually a unique opportunity for most property owners and, because you’re paying, we strongly recommend that you join the inspector while he’s assessing your proposed purchase. What you learn can be invaluable and may pay dividends throughout your entire ownership. When an unscrupulous contractor later tries to tell you that you need to completely replumb your property, you can recall that your property inspection revealed only isolated problems that can be resolved inexpensively. (Of course, inspectors, especially ones who aren’t good, can make mistakes, so you should also dig into discrepancies raised by different real estate–related people. In other words, get a second opinion.) About half of the states now have a license or certification requirement, whereas a few only have trade practice guidelines. This regulation is all relatively new because in 2000 virtually no governmental licensing or supervision of inspectors existed. Regardless of whether your state has strict licensing or certification requirements, every real estate investor needs to look out for her own interests and look for telltale signs of potential problems. Red flags include inspectors who are affiliated with a contractor, offer a special discount if you call who they recommend, or credit their inspection fee toward work. Only consider full-time, professional inspectors. Hire an inspector who performs at least 100 comprehensive inspections per year and carries errors and omissions insurance. Such coverage isn’t cheap and is another key indicator that the person is working full-time in the field and is participating in ongoing continuing education. Many inspectors are licensed general contractors, but not all home inspectors have designations or credentials specifically relating to inspecting real estate. One of the best certifying trade associations for professional property inspectors is the American Society of Home Inspectors (ASHI), which was founded in 1976. In addition to home inspections, many ASHI members are qualified and experienced enough to assist you with your due diligence physical or structural exterior and interior inspection of multifamily residential properties and all types of commercial properties. You can find certified inspectors and more info about the inspection process including tips and checklists at the ASHI website. Some individuals or companies adopt names that at first glance may indicate adherence to certain professional practices. For example, a fictitious but potentially misleading name is “Professional Property Inspection Association.” Do some research to find the best state or regional association and one whose qualified members adopt a code of ethics. For example, in California, the California Real Estate Inspection Association is the group that offers education and designations for real estate inspectors. Review a copy of inspectors’ résumés to see what certifications and licenses they hold. A general contractor’s license and certification as a property inspector are important, but also find out whether they’ve had any specialized training and whether they hold any specific sublicenses in areas such as roofing, electrical, or plumbing. These can be particularly important if your proposed property has evidence of potential problems in any of these areas. For example, if a property has a history of roofing or moisture intrusion problems, an inspector who’s a general contractor and roofer is an extra plus. The inspection report must be written. To avoid surprises, request a sample of one of the recent inspection reports that has been prepared for a comparable property. This simple request may eliminate several potential inspectors but is essential so that you can see whether an inspector is qualified and how detailed a report he will prepare for you. Check out the following figures for a sample interior inspection checklist. Source: Robert S. Griswold Sample interior unit inspection checklist (page 2 of 2). The advent of digital photography is a boon to property inspectors and makes their sometimes mundane and difficult-to-understand reports come to life. Select a technologically savvy inspector and require her to electronically send you her report, including digital photos documenting all the conditions noted. Recently, some inspectors have begun using advanced, non-invasive technology via an infrared or thermal imaging camera to produce images of heat radiation and identify energy efficiency concerns and electrical issues, as well as moisture intrusion scans inside walls or around plumbing fixtures. With the report in the electronic realm, it’s a simple process to email this information as needed. Although the cost of the inspection should be set and determined in advance, the price should be a secondary concern because inspection fees often pay for themselves. Just like many other professional services, there is a direct correlation between the pricing of your inspection and the amount of time the inspector takes to conduct the inspection and then prepare the report. If the inspector only spends a couple of hours at your new 20-unit apartment building, the report will surely be insufficient and your money not well spent. Finally, require the finalists to provide the names and phone numbers of at least ten people who used the company’s services within the past six months. Randomly call and make sure that these clients were satisfied and that the inspector acted professionally and ethically.

Article / Updated 08-16-2022

Using these resources will help you keep up to date on major events that move commodities markets. Although not all of these resources deal specifically with commodities, they are indispensable sources of information because they help you get a sense of where the financial markets are heading. The Wall Street Journal For daily intakes of financial news, nothing beats The Wall Street Journal. If you want to be a successful trader, you need to keep abreast of all the information that’s worth knowing. The Journal does a good job of presenting solid analysis and in-depth coverage of the day’s main events. Its coverage of the commodities markets in its online edition is actually fairly extensive, with interactive charts and graphs for both cash prices and futures markets. Also, keep an eye out for the section “Heard on the Street”. It includes a wealth of information to help you develop winning strategies. Bloomberg The Bloomberg website at is one of the best sources of raw information and data available to investors. Visiting this site once a day keeps you up on important developments in the markets. The website’s commodity section contains comprehensive information on all the major commodities, including regular price updates on the futures markets. If you trade futures, this is an indispensable resource. Nightly Business Report Tune in every weeknight to your local PBS network to watch NBR’s Paul Kangas, Susie Gharib, and the gang analyze the day’s events. Their special features are insightful, and the market analysts they bring in are usually knowledgeable about the issues at hand. Plus, it’s commercial free! Check your PBS station for local listings. Morningstar Morningstar has a plethora of information on the latest mutual funds, exchange traded funds, and other investment vehicles popular with investors. If you want to invest in commodities through a managed fund, make sure you consult the Morningstar website. Yahoo! Finance Yahoo! Finance includes many different sources of information all conveniently located in one site. You have market analysis updated on an hourly basis, regular news alerts, and one of the best chart services on the web. If you’re considering investing in companies that produce commodities, Yahoo! Finance is your one-stop-shop to get information on the stock’s technical performance as well as its fundamental outlook. Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC) is the federal regulatory body responsible for monitoring activities in the commodities markets. Before you do anything related to commodities, make sure you look at the website. Before you invest, you need to know your rights as an investor and the CFTC is the best source of that information. Also make sure to check out their very comprehensive glossary. The Energy Information Administration The Energy Information Administration (EIA) is part of the U.S. Department of Energy and is the official source of energy statistics for the U.S. government and your number one source for information on energy markets. They cover everything from crude oil production and consumption to gasoline inventories and natural gas transportation activity. If you want to invest in energy, make sure you check out their Country Analysis Briefs, which give an overview of the global energy supply chain country by country. Stocks and Commodities Magazine If your desire is to become a serious commodity futures trader, then Stocks and Commodities magazine is a must read. Its articles include market-tested trading strategies to help you place and execute trades. Oil & Gas Journal The Oil & Gas Journal is a subscription-based magazine that features in-depth articles about the energy industry. If you want to trade the energy markets, make sure to read O&G. National Futures Association The National Futures Association (NFA) is the industry’s self-regulatory organization. If you are interested in investing in the futures markets, check out the website before you start trading. Specifically, make sure to check out the database of registered investment advisors if you’re going to go through a manager. NFA has comprehensive information on all managers through its Background Affiliation Status Information Center (BASIC) service.

Article / Updated 08-16-2022

Here’s how you start thinking about how to achieve your investment goal, whatever it may be. You may be saving and investing to buy a new home, to put your kid(s) through college, or to leave a legacy for your children and grandchildren. For most people, however, a primary goal of investing (as well it should be) is to achieve economic independence: the ability to work or not work, to write the Great (or not-so-great) American Novel… to do whatever you want to without having to worry about money. For now, the pertinent question is this: Just how far along are you toward achieving your nest-egg goal? Estimate how much you’ll need Please think of how much you will need to withdraw from your nest egg each year when you stop getting a paycheck. Whatever that number is ($30,000? $40,000?), multiply it by 20. That is the amount, at a minimum, to have in your total portfolio when you retire. (Or even 25 times, preferably.) Now multiply that same original-year withdrawal figure ($30,000? $40,000?) by 10. That is the amount, at a minimum, to have in fixed-income investments, including bonds, when you retire. We’re assuming here a fairly typical retirement age, somewhere in the 60s. If you wish to retire at 30, you’ll likely need considerably more than 20 times your annual expenses (or else very wealthy and generous parents). Assess your time frame Okay. Got those two numbers: one for your total portfolio, and the other for the bond side of your portfolio at retirement? Good. Now how far off are you, in terms of both years and dollars, from giving up your paycheck and drawing on savings? If you’re far away from your goals, you need lots of growth. If you currently have, say, half of what you’ll need in your portfolio to call yourself economically independent, and you are years from retirement, that likely means loading up (to a point) on stocks if you want to achieve your goal. Vroom vroom. If you’re closer to your goals, you may have more to lose than to gain, and stability becomes just as important as growth. That means leaning toward bonds and other fixed-income investments. Slooow down. For those of you far beyond your goals (you already have, say, 30 or 40 times what you’ll need to live on for a year), an altogether different set of criteria may take precedence. Factor in some good rules No simple formulas exist that determine the optimal allocation of bonds in a portfolio. That being said, there are some pretty good rules to follow. Here are a few: Rule #1: You should keep three to six months of living expenses in cash (such as money market funds or online savings bank accounts like EmigrantDirect.com) or near-cash. If you expect any major expenses in the next year or two, keep money for those in near-cash as well. When you read near-cash, think about CDs or very short-term bonds or bond funds. Rule #2: The rest of your money can be invested in longer-term investments, such as intermediate-term or long-term bonds; or equities, such as stocks, real estate, or commodities. Rule #3: A portfolio of more than 75 percent bonds rarely, if ever, makes sense. On the other hand, most people benefit with some healthy allocation to bonds. The vast majority of people fall somewhere in the range of 70/30 (70 percent equities/30 fixed income) to 30/70 (30 percent equities/70 fixed income). Use 60/40 (equities/fixed income) as your default if you are under 50 years of age. If you are over 50, use 50/50 as your default. Tweak from there depending on how much growth you need and how much stability you require. Rule #4: Stocks, a favorite form of equity for most investors, can be very volatile over the short term and intermediate term, but historically that risk of loss has diminished over longer holding periods. Over the course of 10 to 15 years, you are virtually assured that the performance of your stock portfolio will beat the performance of your bond-and-cash portfolio — at least if history is our guide. It shouldn’t be our only guide! History sometimes does funny things. Most of the money you won’t need for 10 to 15 years or beyond could be — but may not need to be — in stocks, not bonds. Rule #5: Because history does funny things, you don’t want to put all your long-term money in stocks, even if history says you should. Even very long-term money — at the very least 25 percent of it — should be kept in something safer than stocks.

Cheat Sheet / Updated 08-15-2022

Are you surprised that it's so hard to consistently earn money on the stock exchange? The explanation is as simple as it is sobering: It's because we are all human beings, with all the associated genetic dispositions that come with that fact. The neural structure of the human brain is the result of our evolutionary development. Your thought and behavior patterns, such as the deep-seated fight-or-flight response, continue to influence your decisions today on the financial markets. Your nature is not particularly well-suited to trading, but you can learn to do it. The human brain is capable of change and development. You can learn the mental prerequisites for brain-compatible trading. With the right mindset, you can recognize and avoid errors before they occur. The innovative discoveries of modern neurofinance research will lead the way to success factors for brain-compatible and, therefore, successful trading

Article / Updated 08-03-2022

The vast majority of bond offerings are rather staid investments. You give your money to a government or corporation. You receive a steady flow of income, usually twice a year, for a certain number of years. Then, typically after a few years, you get your original money back. Sometimes you pay taxes. A broker usually takes a cut. Beginning and end of story. The reason for bonds’ staid status is not only that they provide steady and predictable streams of income, but also that as a bondholder you have first dibs on the issuer’s money. A corporation is legally bound to pay you your interest before it doles out any dividends to people who own company stock. If a company starts to go through hard times, any proceeds from the business or (in the case of an actual bankruptcy) from the sale of assets go to you before they go to shareholders. However, bonds offer no ironclad guarantees. First dibs on the money aside, bonds are not FDIC-insured savings accounts. They are not without some risk. For that matter, even an FDIC-insured savings account — even stuffing your money under the proverbial mattress! — also carries some risk. Interest rates go up, and interest rates go down. And whenever they do, bond prices move, almost in synch, in the opposite direction. Why? If you’re holding a bond that pays 5 percent, and interest rates move up so that most new bonds are paying 7 percent, your old bond becomes about as desirable to hold as a pet scorpion. Any rational buyer of bonds would, all things being equal, choose a new bond paying 7 percent rather than your relic, still paying only 5 percent. Should you try to sell the bond, unless you can find a real sucker, the price you are likely to get will be deeply discounted. The longer off the maturity of the bond, the more its price will drop with rising interest rates. Thus long-term bonds tend to be the most volatile of all bonds. Think it through: If you have a bond paying 5 percent that matures in a year, and the prevailing interest rate moves up to 7 percent, you’re looking at relatively inferior coupon payments for the next 12 months. If you’re holding a 5 percent bond that matures in ten years, you’re looking at potentially ten years of inferior coupon payments. No one wants to buy a bond offering ten years of inferior coupon payments unless she can get that bond for a steal. That’s why if you try to sell a bond after a period of rising interest rates, you take a loss. If you hold the bond to maturity, you can avoid that loss, but you pay an opportunity cost because your money is tied up earning less than the prevailing rate of interest. Either way, you lose. Of course, interest rate risk has its flip side: If interest rates fall, your existing bonds, paying the older, higher interest rates, suddenly start looking awfully good to potential buyers. They aren’t pet scorpions anymore — more like Cocker Spaniel puppies. If you decide to sell, you’ll get a handsome price. This “flip side” to interest rate risk is precisely what has caused the most peculiar situation in the past three decades, where the longest-term Treasury bonds (with 30-year maturities) have actually done as well as the S&P 500 in total returns. The yield on these babies has dipped from over 14 percent in the early 1980s to just a little over 3 percent today. Hence, those old bonds, which are now maturing, have turned to gold. Will this happen again in the next 30 years? Not unless long-term Treasuries in the year 2042 are being issued with a negative 8 percent interest rate. Of course, that isn’t going to happen. More likely, interest rates are going to climb back to historical norms. Interest rate risk has perhaps never been greater than it is today. You would be foolish to put your money into 30-year Treasuries and assume that you are going to get 11.5 percent a year annual return, as some very lucky investors have done over the last 30 years. Chances are, well . . . anything can happen over 30 years, but keep your expectations modest, please.