MY INVESTMENT THOUGHTS

The following information is my own judgment and is worth exactly what you have paid for it….nothing.
This information merely attempts to equip you with some concepts for considering your investment options.

Introduction:

Everyone wants to make money. Most of us work for it and save as much as we can for the future. Some of us put it in a Bank or Credit Union while others seem to make more by investing it. I've found that those who are not investing fail to do so simply because they do not know what their options are. At the same time some of those who do invest make some wrong choices. I'd like to share a few things with both of these people. I'm not a financial advisor or involved in any activity where I make money from other people's investments. I'm not trying to sell you anything and I am not an expert. I just know a few things that I'd like to share because someone once shared them with me. So let's explore some things you can do with your investable cash.

Preparation:

It is wise to FIRST determine what your investment objective is. The objective ranges from the conservative (providing maximum protection of your funds) to the aggressive (seeking to maximize the growth of your funds). Conservative holdings might include CDs, insured passbook accounts, U.S. Treasury issues, fixed annuities, and of course cash. Junk bonds, commodities, options and speculative real estate are on the other end of the spectrum. As you probably already know, the greatest gains come from the greatest risk. For example, compare an FDIC insured passbook account at the bank paying 3.5% to a Corporate bond paying 6 percent. The bank deposit is insured by the federal government but the only security you have with the corporate bond is the value of the company and its future ability to pay its debt. Since you have more risk with the bond it pays greater interest. Pretty simple .... but don't be fooled into thinking you're getting ahead with the bank account. Let's take a minute and examine this.

Remember, you want your money to grow at a rate which keeps ahead of inflation and provides for after tax growth. ie; If you invest $1,000 which earns only 6.0% and inflation is 4% and your tax rate is 28% then a total of $56.80 is consumed in tax and inflation leaving you with real earnings of $3.20 or a mere .003 % return. If you are in the 36% bracket initiated by the Clinton administration, $61.60 will be consumed leaving you with a negative return of $1.60 (minus .016 %) for the risk you take. Imagine the poor soul (the middle class?) who sees a passbook account return 3.5% each year and thinks he or she is making money simply because the balance keeps growing. The earning power has been eaten up by inflation and the federal government will tax the interest when you file your income taxes .... not to mention the state. In this example the new balance is $1,060 but the true wealth has been marginal at best and, in the latter case, has been a loss. Many people (perhaps most) do not understand this phenomenon.

Let's look at how these numbers work:

Convinced? O.K. So where do you fit into the spectrum? How much risk can you afford to take on? Only you can answer those questions. However, a general rule of thumb is to subtract your age from 100 and the result is the percentage of growth maximizing exposure (risk) you should reasonably take on. The remainder is then applied to more conservative income producing investments. The concept here is that at an early age you have more time to make up for any potential losses that occur. O.K. so you have decided on a percentage of risk you feel you can take on .... now what?

Asset Allocation:

It makes a great deal of sense to allocate your money across a variety of investment vehicles. This way, not all of your funds are subjected to the same market (economic) forces in the same direction at the same time. This concept minimizes your risk exposure. Some of the choices you have include:

We won't go into each of these but you should be aware of their availability. We will talk about Mutual Funds and Stocks since they are the most popular investment vehicles.

Diversification:

No matter what you do with regard to Asset Allocation you should diversify your investments within each asset type. Depending on your present financial position you may want to purchase two or three good mutual funds not just one. You should also purchase several (no more than 10 or so) stocks rather than one or two. Buy several different types of bonds. Try to keep from investing in one segment of the economy no matter how appealing it might be. For example; don't buy only computer stocks and computer company bonds because obviously a downturn in the computer industry would affect both investments negatively. The same is true of the insurance industry, the financial industry, the beverages, telecommunications, etc. Spread your investments around.

The easiest way to spread your assets is with a Mutual Fund. Mutual Funds are professionally managed and typically invest in a wide range of stocks. You buy shares in the fund making you a part "owner" of the underlying stocks. As the value of the stocks goes up, the value of your shares in the fund go up.

O.K. so how do I select a good Mutual Fund? Go to the business section of the public library and read Morningstar Reports on Mutual Funds. Do not just take the advice of magazines such as Money, Forbes, etc. Don't forget the Mutual Funds advertise in those magazines. Will a magazine honestly turn you away from it's own advertisers? When it comes to stocks, read Value Line reports at the library. These two periodicals provide excellent picture of the investment you are contemplating. Value Line also publishes a mutual fund report.

Dollar Cost Averaging (DCA):

In a mutual fund, it is considered wise to employ "dollar cost averaging" with your contributions. This means you spread your contributions over a period of time to take advantage of the average price of the fund shares as opposed to jumping in at the high point in share price. The key is to make regular payments (which can be set up automatically) on a set day each month or every other month or whatever schedule pleases you. Although you could be lucky and jump in at a low point, the conventional wisdom is that Dollar Cost Averaging is the better strategy.

Timing:

I recommend that you do not buy or contribute to mutual funds at the end of a year. At year end the mutual fund companies are required to make their earnings distributions to the fund members. The money they distribute to a new investor is that investor's own money since the Net Asset Value (NVA) is reduced to coincide with the distribution. Consequently, those "earnings" you get in December are taxable in April - and if you are a new investor IT'S YOUR OWN MONEY THEY GAVE YOU BACK! Any money manager who doesn't advise you of that peculiarity is not looking out for your best interests. He or she could be blinded by the commission to be earned from the sale. Wait till January to invest that November or December windfall in your Mutual Fund. When your Mutual Funds are in an IRA (and I hope they will be) make your yearly contributions as early in the year as you can even if you have to take money out of savings to do it. (Don't forget to replenish the savings account throughout the year) The longer it is in the IRA account the greater the compounding effect.

Individual Retirement Accounts (IRA):

Since I opened the subject, let's talk about IRAs for a minute .... I think a self directed IRA is best and you might want to consider it. That way you can make adjustments as market conditions dictate. If you can do so, make the maximum yearly contribution ($2,000). Income on it is still tax deferred although you may still have to pay income tax on some portion of the yearly contribution.

Don't put tax free or tax deferred investments in an IRA. The purpose of the IRA is tax deferral so it is of no value to place a non-taxable or tax deferred investments into the tax deferred IRA. In fact, they may lose their identity as tax free investments when you start withdrawals from your IRA unless you take on a lot more bookkeeping responsibility than otherwise necessary.

Typically, a management fee is charged for each IRA, so although you can have several IRAs, each one can cost you as much as $50 per year. You can, however, get an IRA at some brokerages (Charles Schwab offers one for example) and not pay an annual maintenance fee. Shop around for the best deal.

If and when you move money from one IRA or 401K to another, make sure you have the gaining IRA management company accomplish your funds transfer or "roll over" by electronic means - no matter what you may hear, do not take the distribution in your own possession. If you do take possession, even for one minute, your Congress has decided that 20 percent must be withheld for potential taxation.

I suggest some of the funds in your IRA (perhaps 5% - 10%) be temporarily placed in Money Market Mutual Funds. This will afford modest income (presently 3% - 5%) while giving flexibility for dollar cost averaging into mutual funds or to purchase a stock that has captured your interest.

Always know as much as possible about a company and the industry it is in, before you invest in it. The XYZ company may be the greatest insurance company in the country but when weather disasters such as a hurricane, hail storms in Kansas, etc. occur you can bet they will be paying a lot of claims - thereby diminishing profit, and subsequently income to you. The trick is in trying to anticipate the direction of industry movement and getting in or out at the best time.

The Stock Market:

When you buy stock in a company you are in fact becoming an owner of the company. The President of the company and the Board of Directors work for you .... at least in theory. The trick is to buy stock in companies that will be profitable over the long haul. Now a lot of money can be made by actively trading stock but it takes a lot more effort and insight than buying stock in a solid company and hanging on to it. What is a solid stock? Well, you can't go too far wrong buying McDonalds, Coca-Cola, General Motors or Microsoft. These are solid companies which have made their stockholders good money over the years.

Some companies pay their stockholders a periodic dividend from their profits while others take their profits and reinvest them back into the company. Microsoft is one of the latter. It doesn't pay a dividend but the value of the company has grown exponentially and as a result so has the price of the stock. The stock of those companies that do pay dividends will also appreciate but the growth in stock price may not be as spectacular. Instead you will receive a periodic income from them based on the number of shares you own.

You can buy into a Mutual Fund directly from the fund company but you must go through a broker to buy and sell stock. There are full service brokers and discount brokers. The full service brokers will maintain contact with you and give you advice to either buy or sell a particular stock. The account executive who handles your account makes a commission on every trade. He or she earns a weekly paycheck by generating trades. Now I don't want you to think they aren't interested in earning you money ... they are. But if you take the time to do your own research and learn as much as you can about a company to invest in it ... then you should be dealing with a discount broker. You don't need to pay the higher fee for research that duplicates your own. There are several discount brokers such as Charles Schwab and Quick & Reilly.

Normally, you should buy stock in what are called "round lots" or 100 share packages. Round lot trading is cheaper from a broker fee standpoint than an "odd lot" trade. You can buy (or sell) "at the market" price which means you will pay (or get) whatever the price is when the trade is executed by the broker. You can also place a "limit order" which means you will not buy or sell beyond a certain price level.

You have an option to actually have your stocks sent to your home or you can have the broker hold them in "street name". When held in street name, the company doesn't know who you are and so quarterly and annual stockholder reports and proxy voting ballots are sent to the broker and they are then forwarded to you. BUT you have less hassle when selling your shares since it only takes a phone call to your broker instead of carrying (or mailing) your shares to him for sale. AND the broker can execute your trade immediately instead of waiting for you to get the certificates to him while the price is changing. AND they are safeguarded from fire, theft and loss. Do you get the idea I suggest holding the stocks in street name? RIGHT!

There is a lot of data you'll want to review before buying a stock. You'll certainly want to know what the company produces ... it might surprise you to find out that Phillip Morris, known for making cigarettes, is very heavily engaged in the packaged food business. You may be surprised to find out that Sarah Lee owns Playtex and that Pepsi-Cola owns Pizza Hut and Frito-Lay. You'll want to know the financial standing of the company ... how much debt it has and what have the earnings been over the past few years. You'll want to know what influences have occurred, or will take place, on the company's profitability. You'll want to know how many other people view the stock potential such as how many shares are held by mutual funds ... and by company officers. Don't forget the effects of proposed and pending Government regulation. One good source for this information ... and a lot more is Value Line.

A Few Final (Miscellaneoous) Thoughts:

Insurance policies are not investments! It is smart to buy insurance to provide for your family if you should die but don't let an insurance salesman tell you that its an investment. Likewise, great caution should be exercised with annuities. I may be wrong but I don't like them in general. They sound great now but inflation is a killer. An annuity advertisement as late as 1975 said "Retire on $350 per month" it sounded pretty good back then but $350 a month isn't much now. In my judgment, the only person to make money on an insurance policy or annuity is the company that sells it.....buy their stock ... not their policy!

Treasuries are not mysterious. You can buy U.S. Government bonds (not U.S. Savings Bonds) paying semi-annual interest over a long period and T-bills which are generally short duration both of which pay face value at the maturity date. These can be purchased directly from a Federal Reserve Bank at no cost. You can purchase them through a broker or bank and pay a fee or you can do it yourself by mail and you will avoid those fees. Which would you rather do, pay 32 cents for a stamp or $25 to have your "representative" do it for you? The bonds and bills are sold at discount so you tender say $10,000 and at auction the discounted rate is determined and you get a rebate for the difference ($527 assuming the 5.27% rate recently offered on the one year "T-Bill") which can then be reapplied to another investment vehicle. Treasury bonds and T-bills are not taxed by the states but are taxed federally. You must pay attention to interest rate changes when investing in Treasury bonds since the secondary market for these investments is interest rate sensitive. The conservative investor might be smart to consider T-bills to lower the volatility of interest rate fluctuations particularly when interest rates are declining.

This page provides only an exposure to financial concepts - it is not intended to be advice on your specific financial situation.