Plan to invest only what you can afford to tuck away for years. Even if the stock market crashes the day after you buy your first investment, you stand a much better chance of recovering your dollars if you have five or more years to stay invested, instead of having to cash in investments next month or next year.
Thursday, February 28, 2008
First Steps in Bond Investment
If you’re in or near retirement and consider safety, or reduced risk, a priority, you can buy a bond. Corporate bonds are sold in increments of $1,000, and municipal bonds (tax-free) in increments of $5,000.
Before you buy a bond, determine how long you want to hold the bond, which tells you what maturity date you’re after; how safe the bond you want to own must be; and how much interest (yield) you need.
Short-term U.S. government bonds are the safest, but highly rated municipal bonds and corporate bonds can be almost as safe. To determine if the extra risk is warranted, compare the rates paid by the bonds you’re considering with the rates paid by treasury bills. Because Treasury bills are the safest investment, if other bonds aren’t paying much more, there may be little reason to take on the additional risk. If you’re not sure, comparison-shop. If a bond isn’t issued by the U.S. government, check the issuer’s financial position by its quality rating with Moody’s or Standard & Poors.
Can a bond issuer meet its bond and other debt obligations on time, in full? That’s the question that is analyzed closely by rating agencies such as Standard & Poors and Moody’s Investors Service. Before buying a bond, checking a bond’s rating should become a routine part of any purchase. Ask the broker or bank you’re buying from to see the rating. The consensus, especially for beginning investors, is to steer clear of anything not rated A or above by Standard & Poors or Moody’s.
Be sure to find out how low the bonds or underlying bond investments have dipped in terms of performance over the years. You can then gauge your own exposure, although if you hold a bond until maturity, the mountains and valleys of performance don’t matter.
If you’re buying a government bond or bond fund, you may also want to consider whether you want taxable or nontaxable investments. This decision depends on your tax bracket and your perspective regarding how much you plan to invest and earn over the years.
Before you buy a bond, determine how long you want to hold the bond, which tells you what maturity date you’re after; how safe the bond you want to own must be; and how much interest (yield) you need.
Short-term U.S. government bonds are the safest, but highly rated municipal bonds and corporate bonds can be almost as safe. To determine if the extra risk is warranted, compare the rates paid by the bonds you’re considering with the rates paid by treasury bills. Because Treasury bills are the safest investment, if other bonds aren’t paying much more, there may be little reason to take on the additional risk. If you’re not sure, comparison-shop. If a bond isn’t issued by the U.S. government, check the issuer’s financial position by its quality rating with Moody’s or Standard & Poors.
Can a bond issuer meet its bond and other debt obligations on time, in full? That’s the question that is analyzed closely by rating agencies such as Standard & Poors and Moody’s Investors Service. Before buying a bond, checking a bond’s rating should become a routine part of any purchase. Ask the broker or bank you’re buying from to see the rating. The consensus, especially for beginning investors, is to steer clear of anything not rated A or above by Standard & Poors or Moody’s.
Be sure to find out how low the bonds or underlying bond investments have dipped in terms of performance over the years. You can then gauge your own exposure, although if you hold a bond until maturity, the mountains and valleys of performance don’t matter.
If you’re buying a government bond or bond fund, you may also want to consider whether you want taxable or nontaxable investments. This decision depends on your tax bracket and your perspective regarding how much you plan to invest and earn over the years.
First Steps in Stock Investing
If you’re willing to roll up your sleeves and do the research necessary to invest in individual companies, a stock may be a good fit for your new portfolio. The key is to avoid excessive risk. The best way to minimize risk is to buy a solid company — one that is essentially a blue chip or a largercompany growth stock.
Look for a stock with consistent performance that appears to sustain and even increase over time. The Dow Jones Industrial Average is the index of blue chips, listing the likes of IBM, Kodak, McDonald’s, and Sears. These stocks tend to hedge investors’ first exposure to equity investing by paying dividends that offset any lackluster performance. You may also want to seek out a value stock — a stock that has been underperforming its peers, but that seems poised to turn things around. An index called “Dogs of the Dow,” which is compiled by Dow Jones and printed in The Wall Street Journal, lists specifically those stocks that are on the outs. Of course, none is guaranteed to become the next best stock to own.
You have to judge for yourself by looking at a company’s long-term growth and earnings; its price-to-earnings (P/E) ratio; and any company news that can give you insight into debt level, acquisitions on the horizon, and competitive edge of products, services, and management. (The P/E ratio is derived by dividing a stock’s share price by its earnings-per-share price. The result shows how much investors are willing to pay for each $1 of earnings)
Annual reports, which you can request from a company’s own investor relations department, can give you some of these details; but for the rest, you have to sift through analysts’ reports and check the charts that are available from firms such as Morningstar (www.morningstar.com) and Standard & Poors (www.stockinfo.standardpoor.com). These services can show you a stock’s ups and downs over the years and even over the past month.
Analysts’ reports can project a company’s earnings, dividends, and price growth over the next few months and years. Don’t forget to check on competitors, too. Because all performance data is relative, a company that may seem like a great catch may actually be inferior to its peers, but you won’t know that if you don’t check. For example, if you’re thinking about investing in McDonald’s, make sure that you check out the stocks for Wendy’s, too.
Look for a stock with consistent performance that appears to sustain and even increase over time. The Dow Jones Industrial Average is the index of blue chips, listing the likes of IBM, Kodak, McDonald’s, and Sears. These stocks tend to hedge investors’ first exposure to equity investing by paying dividends that offset any lackluster performance. You may also want to seek out a value stock — a stock that has been underperforming its peers, but that seems poised to turn things around. An index called “Dogs of the Dow,” which is compiled by Dow Jones and printed in The Wall Street Journal, lists specifically those stocks that are on the outs. Of course, none is guaranteed to become the next best stock to own.
You have to judge for yourself by looking at a company’s long-term growth and earnings; its price-to-earnings (P/E) ratio; and any company news that can give you insight into debt level, acquisitions on the horizon, and competitive edge of products, services, and management. (The P/E ratio is derived by dividing a stock’s share price by its earnings-per-share price. The result shows how much investors are willing to pay for each $1 of earnings)
Annual reports, which you can request from a company’s own investor relations department, can give you some of these details; but for the rest, you have to sift through analysts’ reports and check the charts that are available from firms such as Morningstar (www.morningstar.com) and Standard & Poors (www.stockinfo.standardpoor.com). These services can show you a stock’s ups and downs over the years and even over the past month.
Analysts’ reports can project a company’s earnings, dividends, and price growth over the next few months and years. Don’t forget to check on competitors, too. Because all performance data is relative, a company that may seem like a great catch may actually be inferior to its peers, but you won’t know that if you don’t check. For example, if you’re thinking about investing in McDonald’s, make sure that you check out the stocks for Wendy’s, too.
Sunday, February 24, 2008
The minimum fund investment
Do you think that you need a fortune to get started? You’re wrong. Many fund companies have a $250 minimum investment requirement. Others with $2,500 or $10,000 minimum investments waive those requirements if you’re willing to invest $50 or $100 each month or even each quarter. Individual Retirement Accounts are another way to steer around high minimum investment requirements because many mutual fund companies allow you to start an IRA with $1,000.
(A few companies accept $250 as a minimum, but that is becoming more rare.) Almost all mutual funds offer this service to investors in an attempt to capture assets that the funds hope to hold on to for years — until the investors retire. Make sure, however, that you really can use an IRA and aren’t just looking for a way into a fund. You can’t tap the money until you reach age 59 1⁄2 without paying income taxes and a 10% penalty. If you’re investing for retirement, fine. If you’re investing to pay for your child’s college tuition or a beach house and expect to require the funds well before age 59 1⁄2, find a fund that fits your needs.
(A few companies accept $250 as a minimum, but that is becoming more rare.) Almost all mutual funds offer this service to investors in an attempt to capture assets that the funds hope to hold on to for years — until the investors retire. Make sure, however, that you really can use an IRA and aren’t just looking for a way into a fund. You can’t tap the money until you reach age 59 1⁄2 without paying income taxes and a 10% penalty. If you’re investing for retirement, fine. If you’re investing to pay for your child’s college tuition or a beach house and expect to require the funds well before age 59 1⁄2, find a fund that fits your needs.
A large-company growth index fund
A manager of an index fund invests in companies whose stocks are listed in an index such as the Standard & Poors 500. The fund tracks the performance of the index. The S&P has been the index with the best performance in the past decade. If you want even more diversification, try a fund that invests, for example, in the Wilshire 5000, which tracks all of the stocks listed in the American Stock Exchange, the New York Stock Exchange, and Nasdaq.
Rather than trying to predict the direction of the market, the index funds are designed to match the performance of the index. These funds are considered to be unmanaged because they invest and hold the same stocks as in the index. Unfortunately, the fact that index funds match the performance of the index is the worst part, too, because in a bear market (when stock prices drop significantly), index funds have no place else to turn for investments but to the index. Remember, however, that index funds can offer the investor long-term, steady growth.
You can pick a small-company mutual fund, a medium-company mutual fund, a bond mutual fund, and an international mutual fund as you continue building your portfolio, but it’s a good idea to start with a fund that invests in large company stocks. Because, since the late 1920s, these types of stock have historical average annual returns of more than 11%, this type of fund can anchor the rest of your portfolio.
Rather than trying to predict the direction of the market, the index funds are designed to match the performance of the index. These funds are considered to be unmanaged because they invest and hold the same stocks as in the index. Unfortunately, the fact that index funds match the performance of the index is the worst part, too, because in a bear market (when stock prices drop significantly), index funds have no place else to turn for investments but to the index. Remember, however, that index funds can offer the investor long-term, steady growth.
You can pick a small-company mutual fund, a medium-company mutual fund, a bond mutual fund, and an international mutual fund as you continue building your portfolio, but it’s a good idea to start with a fund that invests in large company stocks. Because, since the late 1920s, these types of stock have historical average annual returns of more than 11%, this type of fund can anchor the rest of your portfolio.
Large U.S. growth funds
Large U.S. growth fund managers look for large and mid-size U.S. companies that are fairly stable performers, but have the potential to continue growing. Changes in society, such as the aging of the Baby Boom generation, may be one reason that some companies have good growth potential. For example, some managers like companies in health care, entertainment, travel, and financial services because they have the potential to benefit from the dollars of older, richer Boomers.
Thursday, February 21, 2008
Balanced funds
Although managers of balanced funds invest to earn respectable returns, they manage first and foremost to avoid sizeable losses. To do this, many invest in bonds. In some fund portfolios, bonds account for as much as 30% or more of the balanced fund’s holdings.
Subscribe to:
Posts (Atom)