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Thursday, 11.20.2008 |
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| Stay Mad for Life |
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Product Details
Notes
getting rich isn't the end goal, you need to stay rich
you're not going to get long term wealth off your paycheck, even if it's high
you must save some of your income no matter what
and the money you save must be invested in the right assets to grow
pursue capital preservation when the stock market is down
an ordinary investor should just be trying to avoid losses here
other times you need to adjust to capital appreciation in an up market
but over the long term, capital preservation is more important
a person is rich if they can stop working and maintain their lifestyle
everyone will deal with some uncertainty in their money
money can buy peace of mind and freedom
the first step is always to save some money
people think saving is about self-denial and self-restraint
but saving is a way of equipping yourself for prosperity
it's your tool that gives you the ability to build wealth
saving is not just putting away money to live off in retirement
don't think of saving as a passive process, saving is all about activity
it's not saving for a decade later, it's money you can put to work right now
it's the little stuff day to day that makes most people poor
you must create a budget for yearly, monthly, and daily expenses
you must have health insurance
medical expenses are the number one cause of bankruptcy
you cannot carry a balance on your credit card
good debt is at a lower interest rate than the return you generate with it
but interest rates are constantly changing, so you have to be careful
a lot of people say, "I deserve to treat myself"
but really you need to ask, "Can I afford this?"
don't budget for the short term like one month
budget for your lifetime and how you plan to get rich
you cannot assume that your income will be higher in the future
Step 1 - Learn from the past
put together a record of your past income and spending
Step 2 - Judge your past
determine how much less money you could have spent
Step 3 - Create your short-term budget
budget for the next three months and the next year
Step 4 - Create your long-term budget
think about events in the next five years, like buying a house
Step 5 - Hold yourself accountable each month
compare your actual spending with your budget
Step 6 - If you fail, take drastic measures
automate bills and investments if necessary
four columns: investments, income, necessary expenses, discretionary
figure out your income and expenses for the last month and year
any extra money you spent could have been turned into investment capital
compound the extra spending amount over years to see the difference
an ideal goal is to invest 20% of your net income after taxes
the median household income in 2006 in the U.S. was $46,000
a mortgage or rent will require a large monthly payment
make sure you can afford this even if you lose your income
three types of disability insurance:
1) own-occupation disability insurance
most expensive, but covers you even if you go work somewhere else
if your employer doesn't offer this, get outside insurance
2) income replacement insurance
this is cheaper but less desirable because they can decrease payments
if you make money from your own investments, they pay you less
3) any occupation coverage
never get this, it's the cheapest but they get to decide whether to pay you
you only get paid if you aren't capable of doing any occupation at all
get a non-cancelable policy, not a guaranteed renewable one
get one with a waiting period of no more than six months
and make sure it covers you until retirement, not for a fixed term
this is all for long term disability insurance, you don't need short term
you should have enough money to live for six months without working
the future is cheap, a small amount of money now is worth a lot later
inflation means that future costs will be higher
but if you start paying for it today, compounding makes it cheap
look at it as getting a great price on retirement
you'll have to pay for it anyway
the 401(k) gives us the freedom to manage our own funds
that's good if you know what you're doing, but most people don't
it gives you tax-deferred earnings
look at the 401(k) prospectus, there are hidden fees and limited funds
five common 401(k) mistakes:
1) don't ever buy your employer's stock
2) avoid a stable-value fund unless you're close to retirement
3) the mix of funds is not representative of the actual market
4) if you quit, always roll over your 401(k) into an IRA
5) don't take automatic enrollment into bad default funds
most people still buy their employer's stock
but your job is also levered to the company, don't own a single share
stock options for a startup are high risk, not for retirement
the average worker in the U.S. will switch jobs 11 times in their lifetime
you have 30 days to decide after you quit
do not cash out your 401(k), always roll over into an IRA
make sure it goes straight, not through a check to you first
target date and lifecycle funds are not good
the stock/bond mix varies a lot between different funds
so you still need to pay attention and adjust your asset allocation
in general, target date funds are way too conservative
they own way too many bonds
if you're 25 and planning to retire at 65, you should be 100% stocks
finally, the expense ratio of most target date funds is way too high
four ways to exploit your 401(k) plan:
1) contribute a regular amount every month
when the stock market drops by at least 10%, double your investment
2) invest heavily in stocks
even near retirement, you should still have 30-40% stock exposure
you should be 100% stock in your 20's
and no more than 10-20% bonds in your 30's
increase the amount of bonds by 10% with each decade
3) invest in index funds or the lowest-cost mutual funds in your 401(k)
4) don't contribute the maximum amount to your 401(k)
you want to contribute the maximum that is employer-matched
but the max is $16,000 in 2008
anyone making more than $100,000 is a highly compensated employee
then there may be a different limit on your contribution
as soon as you max out the matching part of your 401(k), switch to IRA
you get to control your IRA and invest in the entire market
the max for an IRA is $5,000 in 2008
you can only have a Roth IRA if you make less than $110,000 a year
or less than $160,000 a year if you're married filing jointly
you should also build a nonretirement fund or discretionary portfolio
stocks are good if you have a lot of time and you're really interested
you can take more risk in your nonretirement fund
a diversified portfolio should have every stock in a different sector
you should have between 5-10 stocks in your portfolio
remember that 50% of a stock's movement depends on its sector
diversification does not mean mixing stocks, bonds, and mutual funds
a bond is essentially like an interest-only loan
mutual funds don't usually beat the market
but that's because they manage a huge amount of money
so every time they buy or sell, they move the market itself
you can beat the market if you spend an hour a week on each stock
listen to company calls, reach reports and study performance
always use a limit order, never a market order
speculative stocks have a price under $10, small cap under $2 billion
they are not making a profit, but there is some catalyst ahead
you should speculate on no more than 20% of your portfolio
high quality stocks have company buyback and large dividends
they also have a low P/E relative to growth
treasury bills mature in a year and are the least risky bonds
treasury notes mature in 2-10 years and pay their coupon every 6 months
treasury bonds mature in 10-30 years
agency bonds are by Freddie Mac, Fannie Mae, and Ginnie Mae
corporate bonds let bondholders call assets in case of bankruptcy
there are also unsecured bonds, convertible bonds, and preferred stocks
treasury bonds are generally better than a CD
there's no penalty for cashing out early, and the yield is similar
money market funds give you a cashlike return on your money
municipal bonds are by state and local governments
don't use these in your IRA since they are already tax-advantaged
these are good if you're rich
see www.treasurydirect.gov for Treasury bonds
it's usually better to just buy into a bond index fund
study mutual funds to pick one with a manager you like
if the mutual fund manager leaves the fund, you should leave too
as funds get more assets, their performance usually declines
ETFs can be even cheaper than mutual funds
don't buy an ETF in a single sector, stick with an S&P 500 index
note that the description of the mutual funds means nothing
even if it says growth or value or large cap or small cap
the fund manager is just trying to pick stocks that will make money
they won't follow the limited description and only pick in that range
you want to invest in the best fund manager if you can
otherwise stick to an index fund or ETF
take advantage of the child tax credit if your income is within the limit
there are adoption credits if you adopt a child
teach your children about money when they're young
teach them about good spending habits
but also teach them how to make money
you can't just talk about it, you have to show them by example too
show them how to comparison shop for things they want
get them a debit card so they can learn to budget on their own
teach them about saving and compound interest
but also buy them one share of a stock so they can learn to invest
don't exclude your children from family discussions about money
stocks for children under six:
1) Disney (Pixar, High School Musical, theme parks)
2) Viacom (Nickelodeon, SpongeBob)
3) Hasbro (toys and games)
4) Gap (clothing)
5) Gymboree (fashion but also classes)
6) McDonald's (food for kids)
two options to save for college:
1) Coverdell Education Savings Accounts
2) 529 Savings Plans
Coverdell is better but there are income limits
invest in a good S&P 500 index fund
more than 80% of students at private colleges get financial aid
other options:
Hope Credit
Lifetime Learning Credit
Tuition and Fees Deduction
don't buy a home as an investment, buy it because you want to live in it
get a fixed rate mortgage and refinance if the rates drop
to minimize your mistakes, keep a diary of your trades
at the exact moment you buy or sell, write down why you did it
you'll see patterns in your trading style
there are twenty rules for long term investing (not short term trading)
1) Don't invest like a hedge fund manager
don't look for short term movements and events
your goal is long term wealth, not quarterly gains
2) Don't quit when you get back to even
you may keep buying as it drops and fight to get back to even
but if you still believe in the stock, it may go much higher than that
you can buy more stock when it drops if you're investing long term
3) Never say never when it comes to a takeover
analysts will think that a company can't be bought out
but it's always possible, so don't rule it out
4) Don't let the market shake you out of a good long-term thesis
if you make a profit but the market suddenly drops, hold on
market volatility will shake up stock prices, but look at the long term
5) Piggybacking can be a winning strategy if you stay on the pig
if you are following an expert's stock pick, keep it until they sell
look at stockpickr.com for ideas
6) Try to play with the house's money
you can sell off part of your position as the price goes up
recoup your initial investment, then let the rest ride
you don't have to worry about it then, and that part may go way up
7) Never turn an investment into a trade
if you have a long term thesis, don't take a quick profit
wait until your thesis plays out or you see a reason to change your mind
8) Trust your instincts, not your friends
pay attention to your own ideas
don't be influenced by others
9) Don't let short-term bad news scare you out of a good long-term stock
remember your long term thesis on the company
don't let short term market events make you sell early
10) If you buy a position to fill a need in a portfolio, don't drop it too quickly
sometimes you buy a stock as a hedge
don't sell it because it's not working at that time
11) Uninformed low-dollar-amount speculation can wipe you out
a low price doesn't mean it's a good deal
you need to have a reason why you think it will go up in 12-18 months
12) Love the product, don't love the stock
watch out if you're coming in late in the product cycle
this is especially important with tech products
13) Never buy the best house in a bad neighborhood
if you think the whole sector is going down, don't buy the best company
it doesn't matter because the company will be affected by the sector
14) You are not an index fund, you don't "need" any one kind of stock
don't worry if you're underweighted in a big sector
you don't need to own every sector like the S&P 500
tech often bottoms out in July or August
15) Be suspicious of high dividends--they often don't get paid
outsize dividends may be a sign of worry, not a sign of safety
16) Pay attention to local papers--the Web is your secret weapon
use the web to find local papers online and read about news
you'll hear about things that will affect stocks of companies you own
local problems may eventually reach a national level
17) Be suspicious of technical analysis, it may miss the big turning points
all the brokerage sites have these capabilities now
but investing is more about psychology and fundamentals
18) Companies can change their stripes when you least expect it
companies can cut divisions that are doing poorly
so you can't assume that they are tied to a losing sector
19) It just can't be this bad--the curious case of Yahoo
even if you think you own the best of breed, don't be overconfident
any company can be ruined by bad management, it can go to zero
20) Don't let the media panic you out of a good holding
the media can overhype problems with one product line
but the company may have lots of solid products
so once the media hype passes, the company stock can still be strong
there are ten things pros do right but amateurs get wrong
1) Pros always have cash
amateurs tend to be fully invested
you should always keep 5% in cash
especially after a big run in the market, you should have lots of cash ready
unless there's a big decline, you should be buying in small amounts
think of yourself as fully invested if you have 10% left in cash
2) Pros learn to start living and stop worrying about the quarterly report
don't buy during earnings season, it's too hard to predict the event
the three weeks after the end of each quarter are the worst to buy
if you're investing for the long term, the quarterly results won't matter
3) Pros try not to invest in things they don't know
taking a pass is one of the best things to do
if you don't know the products and industry well, don't try to trade it
4) Pros recognize that not everything is analyzable
some company financials are nonexistent or hidden from the public
this can be true for some Chinese stocks
if you can't figure out what something is worth, don't buy it
you should be able to price it online using a Web service
5) Pros want to know the downside, not the upside
amateurs always think about how much the stock might go up, not down
look at dividends and buybacks as downside protection
6) Pros always look, they never avert their eyes from a downturn
amateurs tend to stop watching when the market goes down
the good stuff takes care of itself when the market is going up
when things get ugly, you need to pay more attention, not less
7) Pros accept that not everything works or is going to work at once
the price of diversification is owning losers
some stocks will go down on an up day
if everything moves in the same direction, you aren't diversified
8) Amateurs worry they don't make enough, pros worry they make too much
if you are gaining big percentages, that means you are taking too much risk
the problem with a big gain is you'll probably take an even bigger loss
you want to beat the market incrementally
protect the downside, and the upside will take care of itself
9) Pros know that not doing homework makes you an amateur
don't just pick stocks you know without analyzing them
10) Pros understand the upside, but they know things can go wrong
remember that every stock was bad from 1999 to 2001
just because a company goes public doesn't mean it's any good
five sectors that should grow in the next five years:
1) aerospace and defense - Boeing
2) agriculture - Deere, Monsanto
3) oil and oil service - Exxon
4) minerals and mining
5) infrastructure
these are rest of world stocks, the U.S. economy will have slow growth
twenty stocks for the long term:
1) Caterpillar (CAT) - infrastructure
2) Goldman Sachs (GS) - finance
3) ConocoPhillips (COP) - energy
4) XTO Energy (XTO) - energy
5) Transocean (RIG) - energy
6) Hologic (HOLX) - health care
7) Inverness Medical Innovations (IMA) - health care
8) CVS Caremark (CVS) - health care
9) McDonalds (MCD) - food
10) Freeport-McMoRan (FCX) - minerals
11) Hewlett-Packard (HPQ) - tech
12) Corning (GLW) - tech
13) Google (GOOG) - tech
14) International Game Technology (IGT) - gambling
15) Pepsi (PEP) - food
16) Procter & Gamble (PG) - consumer products
17) New York Stock Exchange (NYX) - finance
18) Union Pacific (UNP) - railroad
19) Boeing (BA) - aerospace
20) Sears Holdings (SHLD) - retail
don't pick a mutual fund based on how it performed in the past year
remember that if all your stocks are going up, you're not diversified
eventually you'll lose way more than you gain
avoid any select fund that focuses on a specific sector
you shouldn't have 5-10 mutual funds, that's a fund of funds
you need to pick one or two funds, research it, and watch it over time
do one hour of homework each week for each mutual fund you own
fund categories don't matter, the fund manager is the key
index funds outperform most actively managed funds, but not all
remember if your fund manager leaves, you should leave too
look for funds that make money when the market is down
you want a money manager who can avoid declines
anybody can make money in a bull market
ideally you want to own one fund, unless it's all small cap
top aggressive growth mutual funds and fund managers:
1) CGM Focus Fund (CGMFX) - Ken Heebner
2) Dreyfus Premier Strategic Value (DAGVX) - Brain C. Ferguson
3) Bridgeway Aggressive Investor (BRAGX) - John Montgomery
4) Rice Hall James Micro Cap Portfolio (RHJSX) - Thomas W. McDowell, Jr.
5) Legg Mason Partners Aggressive Growth (SHRAX) - Richie Freeman
top growth funds:
1) Buffalo Small Cap (BUFSX) - Kent Gasaway
2) FBR Small Cap (FBRVX) - Charles T. Akre, Jr.
top value funds:
1) Putnam Small Cap Value (PSLAX) - Edward T. Shadek, Jr.
2) Heartland Value (HRTVX) - William J. Nasgovitz
3) Berwyn (BERWX) - Edward A. Killen
4) Muhlenkamp (MUHLX) - Ronald H. Muhlenkamp
honorable mentions:
1) SSgA Agressive Equity Fund (SSAEX) - Michael Arone
2) Robeco Boston Partners Small Cap Value II (BPSCX) - David Dabora
the easiest option is to put all your stock investment in VFINX
Vanguard 500 Index Fund has low cost and tracks the market
if you need bond exposure, buy some VBISX
Vanguard Short-Term Bond Index
if you're rich, get a Vanguard's Admiral fund that invests in municipal bonds
see if rates on longer-term bonds (more than 10 years) go above 6%
or if short rates fall below 4% due to aggressive rate cutting
in either case, adjust the duration of your bonds to go out longer-term
right now, shorter-term bonds are better
the other easy option is to put 1/3 in each of these stock funds:
CGMFX, FBRVX, and BERWX
you should check at least once a month to make sure managers stay the same
then invest in the same bond funds as above if you need bond exposure
10-20% bonds in your 30's
20-30% bonds in your 40's
30-40% bonds in your 50's
40-50% bonds in your 60's
and 60-70% bonds once you've retired |
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