Investor Junkie » Investing

How to Choose an Online Broker

Miranda Marquit — Thu, 02 Feb 2012 17:31:55 +0000

The Internet has made it easy for just about anyone to begin investing. An online broker can provide you with the ability to trade stocks and funds, as well as open some types of retirement accounts and even engage in options trading.

Before you sign up for an online broker, though, make sure you do your research. Consider your personal needs and investing goals and choose a broker that is likely to provide you with the best service for you.

Things to Look for in an Online Broker

As you make your decision about an online broker, consider what the broker has to offer, as compared to others. Here are some items to pay attention to:

Investment Choices: Your first consideration should be the investment choices offered. Does the broker offer what you are looking for? Stocks, bonds, various funds (including ETFs) and other assets should be considered. There are some brokers that offer currencies and that offer futures and options. You can also find many brokers that can help you open an IRA or other type of retirement account. Figure out what investment options you want, and look at brokers that offer what you want.
Costs: Different online brokers have varying fee structures. Find out about the commissions, the flat-fees for trades, and other costs. Some of these costs include extra fees for trading funds, getting phone advice, and more. You want to choose an online broker that is going to provide you with good value, with lower costs.
Research Tools: Understand what tools are available with your broker. You might be able to access additional tools with a “premium” account that costs extra. Or, you might find that the free tools are sufficient. Go through the research tools and choose an online broker that provides you with the information you need to make informed decisions.
Customer Service: Even though your investment choices and the costs you pay might be the most important points to you, don’t forget to consider customer service. Read reviews of different online brokers to get a feel for how well they serve customers. Also, you can look for items such as phone help, and 24/7 online chat. You want to ensure that you will be able to get the help you need with your broker.
Other Perks: Consider the other perks that an online broker might offer. Some of these perks might include banking services (including an ATM card to access your cash account). Look at all that the online broker has to offer, and whether or not you require it.

For a list of discount brokers, please visit our best stock brokers web page.

Figure out which items are most important to you, and which you are willing to be flexible on. No online brokerage is going to be ideal for everyone, so you will need to prioritize the characteristics that are most important for you. You might be willing to pay a little more for a wide variety of investment options and first-class customer service. Or, if you are more of a do-it-yourself investor with basic needs, something with rock-bottom prices and basic investment choices might work best. When ready to sign up, visit our stock broker promo codes section. We are constantly updating the promotions offered.

The important thing is to understand what you want in an investment broker, and then compare your options so that you get will be the best value in your situation.

Morningstar Ratings — Are They Meaningful?

Miranda Marquit — Mon, 30 Jan 2012 17:02:46 +0000

One of the resources that many investors turn to when evaluating funds is Morningstar. Morningstar has built an entire business on rating funds, using the famous five-star system that many of us are familiar with. But, while funds like to tout their ratings and investors rely on them to determine what constitutes a “good” fund, these ratings may not be terribly meaningful.

How Does Morningstar Figure Its Ratings?

Funds with a three year history all have ratings ranging from one star (lowest) to five stars (highest). In order to determine its star ratings, Morningstar looks at risk-adjusted trailing performance. As part of the formula, Morningstar does include costs, considering returns that come after fees are deducted. However, the fact that past performance is a huge part of Morningstar’s rating system means that there is a big problem with how meaningful the ratings actually are.

Past Performance and Future Results

Investors are familiar with this common chant: “Past performance does not guarantee future results.” This means that it becomes necessary to ask yourself how meaningful a star rating system based on what has happened in the past is. If past performance can’t be taken as an indicator of future results, Morningstar ratings based on these performances might not be as meaningful as expected.

It is true that past performance can provide clues about a company, and its likely health. From that standpoint, looking into the past isn’t a bad idea. But relying heavily on Morningstar ratings to help you choose a fund that will perform in the future might not be in the best interest of your investment portfolio.

Could Expense Ratios Be More Meaningful?

Instead of relying on Morningstar ratings, you might actually be better off checking into expense ratios. In 2010, Russel Kinnel, Morningstar Director of Research, actually addressed the issue of star ratings vs. expense ratios (you need a Morningstar free membership to read it). He basically hedged on the usefulness of the ratings from Morningstar, and pointed out that expense ratios offer a better gauge of how a fund is likely to perform in the future.

The problem is that many funds, especially index funds, are going to deliver average returns when compared to the market. A lower cost fund, therefore, provides you with the best chance of doing well. When shopping around for a fund, therefore, you might be better off taking a look at the expense ratios, and not paying as much attention to what star rating Morningstar provided.

Bottom Line

Morningstar’s ratings can provide you with helpful information about a fund, and can be one of the tools that you use when considering where to put your money. However, it’s a mistake to put too much faith in Morningstar ratings. They are not as meaningful as Morningstar — and the funds that tout their four and five star ratings — would have us believe.

Use Morningstar ratings as one indicator in selecting a fund. Don’t forget to look for other variables, including expense ratios, fund management, underlying investing methods, and economic factors. Not withstanding, Morningstar’s premium membership is still very useful. It has a 10-year performance history and many tools that can be used in aiding your investment decsions.

What is ETF Contango?

Miranda Marquit — Tue, 24 Jan 2012 01:31:41 +0000

Contango isn’t a latin dance move; rather, it’s when an investment drifts as compared to the underlying investment.

In recent years exchange-traded funds (ETFs) have increased in popularity. These investments are collections of shares in multiple investments, but, unlike mutual funds, ETFs can be traded fairly easily on stock exchanges. ETFs are generally low-cost, and many consider them an easy way to diversify easily while maintaining the ability to easily carry out stock-like transactions.

ETFs aren’t limited to stocks, either. There are ETFs that include a wide range of investments. You can find bond, currency and commodity ETFs without too much trouble. However, when you start getting into ETFs that contain more complex investments, such as commodities or leveraged ETFs, you run into some very interesting issues.

ETFs and Contango

Investing in commodities can provide you with diversity, and add an element of growth to your portfolio. Plus, commodity ETFs get rid of some of the complexities that come with dealing with a futures account. Commodity ETFs have made commodity investing more accessible to more people. However, the fact that these ETFs are dealing in futures means that there are some issues that need to be addressed.

Perhaps the biggest issue with investing in commodity ETFs is contango. Contango is an issue that comes into play with any investment that is futures-based. Contango is a situation in which the near-month futures are actually less expensive than those that expire later on. As a result, when the roll process is underway, it can easily result in selling low and buying high. This is a situation that investors don’t want to be in, since it means losses.

Contango becomes more obvious when investing with leveraged ETFs. Leveraged ETFs are ETFs that are designed to magnify gains or losses compared to an index. So for example, if you invest in ProShares Ultra S&P500 (SSO) it’s designed to give 2x return of the underlying S&P 500 index. The issue is this: Every day the indexing is reset since the ETF is futures based. Over time your returns do not match S&P 500 multiplied by two. Because of this, a leveraged ETF should only be used as short term (a few weeks) investment.

When it comes to commodity ETFs, contango can be an issue also. When you compare a contangoed ETF to the spot prices of the commodities involved, you might find an unfavorable situation. Over time, if the commodity contracts underlying the ETF are exhibiting contango, eventually the ETF loses value. And the situation continues — with your commodity ETF’s value being eroded — as long as there is contango in the commodities.

Paying Attention

While ETFs make it easier to invest in a variety of asset classes, using an ETF does not release you from your obligation to pay attention to what is happening with your investments. It also doesn’t release you from the obligation to understand investments before you put your money in. Before you invest in a commodity ETF — or any ETF — you should not only understand how ETFs work, but also know how the underlying investments function.

Before you invest in a commodity ETF, you should know how commodities contracts work. You should understand concepts related to the futures market. Consider ETFs as futures investments, and not just as a clever way to trade commodities as if they are stocks. It’s important that you consider the fact that, as underlying investments become more complicated, so, too, do ETFs. While ETFs can be valuable tools, and help you add diversity to your portfolio, you should remember that they are not completely safe, and investing them won’t protect you from what is happening with the underlying investments.

How Do You Become A Great Investor? Learn How To Shop!

Larry Ludwig — Wed, 18 Jan 2012 20:14:15 +0000

Active investing can be hard. While it’s difficult to beat the indexed averages over the long haul, it’s not impossible. I believe this is more true as an individual investor, than a professional. Let me explain in more detail. An individual investor doesn’t have to worry about annual performance results, your job isn’t on the line, or are you beating your peers. In addition, actively managed funds have the issue of redemptions, taxes, expenses, shear size and size of companies they can legally invest in that all drag down their performance. In many aspects they simply mirror an index they are trying to beat. As an individual investor you are much smaller and nimble, and can follow your own game plan. Picking individual stocks can be hard, but it’s not impossible if you are a great shopper.

Why Active Investing?

Let me first state our portfolio isn’t mostly active stock picking. It is actually quite the opposite. My family has most (over 80%) of our investments in passive indexed based funds. It’s actually quite boring. Our asset allocation will always remain that way. I’ll only adjust asset allocation percentages as we increase in age, or feel a need to stabilize future returns based upon new research data I’ve read.

I’ve designed our asset allocation in case we cannot do beat the averages. Our active investments it will not dramatically hurt returns. Yet it is also possible to get some alpha by actively picking stocks. A completely passive portfolio does not have this option. Like what we saw for the past ten years where the S&P 500 was flat, so would your portfolio.

Another way to look at our investment strategy is I’m hedging my bets between passive investing and active investing – favoring the belief of passive investing works better.

Quite honestly, the other aspect of stock picking is it’s an active hobby for me, and one of the primarily reasons I created this investing blog. It gives me something to do than with a completely passive stock portfolio. To me a passive portfolio is like watching the grass grow. My investment strategy does introduce some increased risk with our portfolio, but with the potential for a higher rate of return. As long as you know and understand this, you should be ok for some part of your portfolio for active investing. The only way to increase your wealth is by increasing risk, though not by betting the farm.

Learn To Become A Better Investor By Shopping

I say to become a better investor, you should first learn how to be a better shopper. I mean this quite literally. When shopping for consumer goods or at the supermarket, would you overpay for something knowing you could get it somewhere else cheaper? I actually find it pretty amazing that people will trample over each other to save a few dollars during black friday, yet run away in fear when stocks tank. Mark Cuban stated right now middle class individuals should focus on saving money when shopping than the low returns they are getting in the market. I somewhat agree with this statement, but feel now’s the time to also become an expert shopper in the stock market.

Learn what’s a good price for the products you buy on a weekly basis. Learn when something is a good deal, or when it isn’t. If you believe in value investing, then you should understand when a stock is a great price, and when it’s expensive. Using Warren Buffett’s analogy to baseball, only take swings at stocks you like. For the individual investor, unlike the professional, there is no pressure you must buy a stock.

As a kid I always loved watching the game show Price Is Right, especially the game Cliff Hangers. How many times have you watched the show, and a contestant doesn’t understand how to play the game? While this is happening you are yelling at the TV? I know I have on a number of occasions. Be it in the game Beat the Clock, or when on contestants row not outbidding the others by a dollar? Many people don’t study how to be good shoppers of consumer goods, so it doesn’t surprise me that most aren’t good at investing.

What’s The Two Factors For Value Investing?

In my mind, value investing really comes down to understanding only two aspects. When investing in a stock I ask these two questions:

Is the stock cheaply priced?
What’s the prospect of future growth for the company in the next five to ten years?

Everything else is secondary. While there are many quantitative data to help determine the answers to these questions, it all boils down to these two questions. Only having one of these factors when stock picking you might do ok, but having both is critical for good long term investing success. Is the stock a good value?

The important aspect when buying a product is are you getting the best value for your money. Notice I didn’t say the cheapest price. This philosophy also applies to investing. Would you buy a stock that’s priced expensively because everyone else is rushing into that stock? Technical trader do, but I think it’s silly way to look at the stock market by a rearview mirror. Would you buy a stock that has no growth prospects yet is cheap? For me, the answer is a resounding no on both counts.

For example, Microsoft’s (MSFT) stock price (not including dividends) has basically gone nowhere in the past ten years. Some value investors say Microsoft is a great deal, and should be picked up. I agree it’s priced cheaply. In my opinion the prospects for future growth are weak at best unless there is some massive leadership changes. I believe Microsoft has a leadership issue, and has it’s hands in too many low/no profit buckets. Microsoft has lost it’s way, and has missed many technology paradigm changes. Unless those factors change, I will not invest in Microsoft.

On the other hand, Apple’s (AAPL) stock has recently been valued cheap. But it’s growth prospects are much greater than Microsoft. This is even including the many headwinds it will experience in the next five – ten years:

The passing of Steve Jobs. Will the current CEO or future CEOs be as iconic and a strong leader to help push innovation?
Will Google’s (GOOG) Android operating system become the Microsoft Windows of smart phones killing into Apple’s profit margin?
Can Apple keep it’s large profit margins?
Will Apple continue to grow (though definitely slower)?
Has Apple tapped out it’s growth with existing products?
Will Apple continue to innovate with new products and in new categories?

I believe all of these factors are still positive for the company. I’ll continue to keep my Apple shares. For me, I will only sell Apple when these factors become a major detriment for the company.

In Summary

So when it comes to value investing, know when a stock is a good deal and it’s future prospects for growth.

Disclosure: I own shares of AAPL.

What are DRIPs?

Miranda Marquit — Fri, 13 Jan 2012 14:06:40 +0000

One of the ways that many investors like to earn money from their portfolios is through dividend investing. Companies that pay dividends to their shareholders are often considered solid bets — especially dividend aristocrats. When companies pay dividends, they are returning some of their profits to shareholders. These dividend payouts are different from stock appreciation, so you receive them regularly, as part of the company’s desire to share profits around, rather than as the result selling your shares.
While receiving cash is nice, you can actually put your dividends to use with the help of dividend reinvestment plans, which are known as DRIPs. These plans allow you to reinvest the dividends to buy more shares of the stock.

Reinvesting Your Dividends

Companies that offer DRIPs allow you to, instead of receive a check for your dividends, automatically use the money to buy more shares. If you own a stock that pays 20 cents a share each quarter, and you own 100 shares, that’s $20 each quarter. Without a DRIP, you get that $20, and you have to decide what to do with it. If you decide to invest it, though, you will likely have to pay a transaction fee.

If you are signed up for the company’s DRIP, that $20 buys more shares in the company automatically. If the stock price is $15 a share, instead of getting a check for $20, your dividend payout is used to automatically purchase another 1.33 shares of the company’s stock. Most of the time, shares bought with reinvested dividends don’t come with transaction fees. Even many online brokers won’t charge you fees for reinvesting dividends.

Over time, these extra shares can add up. As you acquire more shares, your dividend payout increases as well. DRIPs allow you to boost your payout. In our example above, the next quarter you now have 101.33 shares to base the payout on, so that now you get $20.27, and you can purchase 1.35 more shares (if the price hasn’t changed from $15), bringing your total to 102.68 shares, with your reinvested dividends.

While it seems like a small difference now, the cumulative effects can be much bigger. You are constantly buying shares, which increases the amount of money you receive in dividend payouts. Plus, you are building your portfolio up with very little effort. Later, if you decide to sell some stock, you will have more shares that you can sell at a (hopefully) higher price. All the way around, DRIPs can help you maximize your dividend investing efforts.

How to Start DRIP Investing

Find out if the company of interest to you has a DRIP plan. Many dividend paying companies offer some sort of plan. You can contact the company for information. You will either be directed to an in-house representative who can set you up, or you will be directed to a transfer agent who handles multiple company DRIPs. You can also go directly to a transfer agent for a list of companies it manages DRIPs for. It is also possible to check with your broker to become involved in DRIP investing.

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2011 WTF Fund Update

Larry Ludwig — Fri, 06 Jan 2012 14:57:06 +0000

I haven’t given an update an performance update with my WTF Fund to my readers in awhile. The last time I gave an update was in April 2011. At the time I was in the read, and I’ve done much better since then.

2011 Results

As of January 5th 2012 I am up 14.5% from my initial $10,000 investment, mostly because of owning Apple (AAPL). The account is now currently worth $11,454.92. I sold my shares of Cisco (CSCO) in July at a loss of 16.84%. If I still owned the stock today, I still would be negative even after dividends.

Investments

I traded only Apple during the remaining part of the year. Since last year the stock market was very volatile, and I was able to buy more shares during the dips. Apple is $10,450.75 of the fund. The remaining $1,004.17 is in cash.

I believe Apple has much more room to grow, though at a slower pace. Not including the $82+ Billion they have in the bank, their forward P/E is 10.7. This is almost unheard for a tech stock like Apple. With the passing of Steve Jobs, this is a critical year for Apple to prove themselves in the post Jobs era.

Many fear Apple will languish without Steve’s persona, and perform like they were during the 90′s. Apple is a much different company since then. Not only do they have a very capable management team on board, their existing and planned products should last at least for the next 3-5 years. Apple isn’t going anywhere, and at worst case will coast along. Though many would love to be like Apple, and exist with the profit margins and cash flow they have. I plan to own the stock at least this year, and more than likely at least the next 3 – 5 years.

Keep in mind their competitors like Amazon (AMZN) or Google (GOOG) are not keeping idle. Although it seems they are creating some neat technology, they still have the issue of the fat profit margins Apple creates. The competitors, while can replicate just about everything technical, they just can’t seem to replicate their profits, the Apple ecosystem, and marketing buzz.

A perfect example of this is Amazon’s Kindle Fire. At $200 a pop, they have a very slim profit margin, and it’s rumored they are selling at a minor loss. Amazon (like Gillette) hopes to make up for the difference in the “razor blades” they sell.

I bought the Kindle Fire for my mother for Christmas. It’s great for someone who needs an electronic reader, but ok for other functions. It lacks the finesse of Apple’s iOS. I still see the Kindle line as primarily e-readers, with some lite web surfing or E-mail reading. While it no doubt will eat into Apple’s sales, I don’t see it affecting consumers who need the full features of an iPad. Keep in mind also it’s rumored that the iPad 3 will soon come out, and the iPad 2 models will be sold at a discount. If Apple sells the lowest iPad at $300, I can see how buyers could easily justify the $100 more to buy the iPad instead.

Future Plans

I currently have a open order to buy Oracle (ORCL) at $25/share. I just missed that price point a few weeks ago, and kicking myself because the price Oracle is now at $25.50/share. I am seeing many technology companies fitting the value investment profile. Which is great for me since I’m a value investor, and a lover of technology. I’m on the hunt this year, and hope to find some good stock deals. Oracle is one of them.

Funds at the moment are little tight, and want to fully fund retirement and 529 accounts first. I do plan on adding additional $10k to this fund sometime this year. In the mean time will investigate possible stocks to purchase.

REITs vs. Real Estate Investing

Miranda Marquit — Sat, 17 Dec 2011 15:13:32 +0000

Many investors recognize that it’s important to diversify their investments, and include different types of assets. As a result, the idea of including real estate in an investment portfolio comes up.

For the investor, there are two main ways to include real estate in a portfolio: REITs and direct investment in real estate.

What are REITs?

Real Estate Investment Trusts (REITs) are traded like stocks on the market. They are collections of real estate related assets. They might include residential, commercial, industrial or agriculture real estate. Some REITs include storage units, or mortgages, or malls, or a mix of investments.

The idea is that you have exposure to real estate without actually owning, directly, the property. (The discussion about whether REITs actually represent “owning” real estate, rather than just owning a stock, is one for another day.)

For those who want exposure to real estate, but don’t have the capital for direct investment, REITs can be a reasonable choice for a financial plan. There are REITs that provide you with the ability to diversify across property type, geographic location, and more. Plus, there are REITs that pay dividends, so they can included in income portfolios.

Liquidity can also be an issue. Because traded REITs (make sure you know the difference between traded and non-traded REITs) can be bought and sold like stocks, they are fairly liquid — unlike direct real estate, which can be difficult to sell quickly if you decide you need to. However, at the same time you do run the risk of losing quite a bit of money if the manager makes a poor decision, or if some of what’s in the REIT tanks.

The other aspect of REITs over owning real estate is taxes. Based upon the way they are taxed, REITs are best suited to be placed in retirement accounts. Though there is nothing preventing you from investing in REITs in taxable accounts.

Directly Owning Real Estate

Direct investment in real estate does have some advantages, though. If you can put down a decent down payment, and you have the ability to manage the real estate effectively (or hire someone else to manage it), direct rental property can be a great asset. It is usually best to think of owning a rental property as an investment and business. It’s not truly passive compared to owning a REIT, but the amount of direct work can be minimized.

When you own a property, you have more control over of the investment. Additionally, you have something physical to fall back on. Even if the market tanks, and the property loses financial value, the fact that you still have a tangible asset that you could live in (or on in the case of farmland), or use in some way, remains. As long as the property has tenants, you have a monthly income.

On the down side, though, directly owning real estate means you are responsible for it. You are in charge of addressing tenant problems, and you have to deal with trying to collect rent, and choose tenants that aren’t going to destroy your property or rip you off. (One way to avoid this is to invest in land that is just sitting there, and that you don’t expect income from right away.)

Which is Better?

Investing in REITs and direct investment in real estate both come with advantages and disadvantages. In the end you have to weigh the options and decide which better fits your style. Some investors prefer a mix of REITs and directly owned real estate. Others prefer one type over the other, for whatever reasons. Before you invest, though, make sure you know what you are doing, and understand the risks.

Could Disney Make a Good Addition to Your Income Portfolio?

Miranda Marquit — Mon, 05 Dec 2011 16:31:16 +0000

A number of dividend increases were announced in the week leading up to December 2, and on December 3, Disney announced what amounts to a huge dividend increase. DIS announced a 50% increase, from 40 cents a share to 60 cents a share.

The move brings Disney’s yield up to 1.6% — and it’s only an annual dividend, so many think that the stock doesn’t make a good choice for an income portfolio. And, in a sense, this might be the right assessment. However, when building a successful long-term portfolio, sometimes a huge income in the form of dividends isn’t the only thing to consider.

Is Disney a ‘Buy’ Right Now?

Even though dividend payout is somewhat lackluster, especially if you’re aiming for the 3% to 6% yield target that results in a more stable income, it doesn’t mean that a company like Disney would be a bad addition to your portfolio. After all, some thing that it’s a good deal right now. Lawrence Meyers, at InvestorPlace, offers this analysis of DIS:

If we put an 15 P/E on Disney, then, on projected 2015 earnings of $4.43 per share, and factor in 1.2% compounded dividend yield reinvested, we get a price target of $72. That’s an amazing total return of 120% from here, suggesting Disney falls into the category of both a value and a growth stock.

It’s an interesting analysis, and there might be other companies in a similar position to Disney right now. If it’s a good deal, you could buy now, and receive a little bit of income from the dividends in the interim, waiting for Disney stock to rocket higher. However, holding on to the stock might make it more valuable in the long run – if it really does appreciate as some expect.

Adding a few such investments to your portfolio might make sense, since they can be sold later for higher profits. And, of course, along the way you can see some addition to your income.

A dividend says a lot about a company, and the big Disney increase could be seen as an indication that Disney feels secure in its situation. The fundamentals at Disney, with its various entertainment properties, appear to be strong. Even the stinker that was Cars 2 doesn’t seem to be causing a lot of problems for the company. After all, it’s got Marvel and ESPN and a number of other popular shows.

So, even though income is important to an income portfolio, it’s worth considering companies that will provide earnings down the road. Disney just might be one of them.

What Is The IRS Wash Sale Rule?

Miranda Marquit — Sat, 15 Oct 2011 21:46:15 +0000

Now that the year is coming to a close, many investors are looking for ways to improve their tax efficiency. As you prepare your investment portfolio for year end, you might be thinking of selling, and locking in a capital loss. This can be a great way to offset some of your capital gains — and even some of your other income. However, you do need to be careful. Your brilliant tax strategy can backfire if you fall afoul of the IRS wash sale rule.

What is the Wash Sale Rule?

One of the tempting ideas that many investors have is this: Sell a stock, lock in the capital loss for tax purposes, and then turn around and buy that stock again at the low price. You’ve got a great deal, since the stock might run up again, and you’ve locked in losses. It seems like a great plan, but the IRS is already ahead of you. When you follow this path, it’s considered a wash sale.

The IRS wash sale rule stipulates that you can’t repurchase a “substantially identical” security within 30 days and be able to use the capital loss to your tax advantage. So, if you sell your stock for the loss, you won’t be able to use the loss to offset your capital gains and/or income if you repurchase within 30 days. Before you sell a stock, make sure that you are willing to wait the 30 day period before buying it again if you plan to use the loss to your advantage.

What Is a “Substantially Identical” Stock?

Obviously, you can’t repurchase the same investment if you don’t want to run afoul of the IRS wash sale rule. But what about other definitions of “substantially identical?” The IRS isn’t terribly forthcoming, but there are some things that you can keep in mind.

You can actually buy a new stock in the same sector. Just because you sold Coke doesn’t mean that you can’t buy Pepsi within the 30 day period. This is a strategy that some employ; they sell for a capital loss, and then buy something else in the same industry — something that is likely (but not guaranteed) to move in the same direction as the stock you just sold.

However, it is important to realize that you might not have the same luck if you decide to buy stock in a company that plans to buy the company whose stock you just sold. The IRS considers that if one company’s stock performance is linked in a direct way to another’s they are “substantially identical.” A merger between two companies means that the price of one is reflected in the price of another. For the IRS, that’s enough to be considered “substantially identical.” Buying the company could mean a wash sale in the eyes of the IRS.

Mutual funds are a bone of contention. However, to be on the safe side, my accountant recommends that you not purchase index funds pegged to the same index within 30 days after selling a loser. So, if you sold a loser pegged to the Russell 2000 from one broker, you might reconsider before going to a new broker and buying Russell 2000 at a bargain price. (It is worth noting that some think that a managed fund and an index fund would not be considered “substantially identical.”)

Bottom Line

As you prepare to sell stocks at a loss, make sure you understand the wash sale rule — and make sure that you are prepared to avoid buying what you just sold for at least 30 days.

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Preparing Your Portfolio for the End of the Year

Miranda Marquit — Wed, 12 Oct 2011 13:29:54 +0000

As the end of the year approaches, it’s time to consider your investment portfolio. Your portfolio can get a little stale over the course of the year, especially if you haven’t rebalanced it, or considered it in the context of the next stage of your financial plan. Plus, now is the time to consider the tax implications of your portfolio, and figure out whether or not your investments could help reduce your tax liability.

Taxes!

The time to prepare for tax season is now, before you get down to the wire and become frantic in your efforts. Take a look at where you are likely to fall in terms of tax liability. Then, look for ways that your investment portfolio can help.

Do you have some losers in your portfolio right now? The past couple of months have been brutal to a particular stock, or you might have some lackluster investments that just haven’t been performing for you. Your capital losses directly offset your capital gains, and you can use $3,000 of your losses to directly offset your income. (Your losses carry over to another year as well.)

Also, consider the gains situation before you sell at a profit. Remember that short-term capital gains are taxed at your marginal rate, while long-term capital gains can be taxed at a lower rate (depending on which bracket you fall in). If you want to sell for a profit, consider what you are selling, and make sure you understand the method for selling your holdings. Is it first in, first out? Or is it some sort of average holding time? If you need to, wait a little longer to avoid short-term capital gains tax rates.

If you have been thinking of boosting your retirement account, now is a great time. If you have a non-Roth, tax-advantaged retirement account (and you aren’t already maxed out on contributions), you can add to it and deduct the amount. So, you can beef up your portfolio and use your efforts to reduce your tax liability.

Re-Balancing

Take a look at your current portfolio. How does it fit into your plans? Is the asset allocation still what you need to reach your financial goals? You might be surprised to look at your portfolio and find that it is outdated. Carefully consider your financial plan, where you are at, and where you want to be. Is your current asset allocation keeping you on track? If not, it’s time to shift.

It’s also a good time to really consider the diversity in your portfolio. Look through your fund holdings for duplicates; as holdings are added and removed, it can change the makeup of a fund over time. Double check to make sure your investments are still doing what they should.

Consider Your Needs for Next Year

While you’re re-balancing, don’t forget to consider your needs for next year. Are you planning on having more kids? Is someone going to college? Are you getting close to retirement? These life milestones can impact what you need to do with your investment portfolio. Look ahead, and shift your assets to ensure that you’re where you need to be in the new year.

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When Should You Sell A Stock?

Miranda Marquit — Thu, 29 Sep 2011 21:45:39 +0000

It’s no secret that the stock market has been exceptionally volatile lately. You might be tempted to unload right now, and get out, afraid of what will happen next. Or you might hold on to a stock, sure that it will turn around when the market does, stubbornly clinging to the “hold” part of buy and hold.

Unfortunately, neither of these options is likely to lead to any sort of true investing success in the long run. When trying to decide when to sell a stock, you need to take a step back and figure out how selling (or not) might affect you in the long run.

Why Do You Want to Sell Your Stock?

The first question you have to ask yourself is this: Why do I want to sell? Do you want to sell because everyone else is selling? Are you holding because you feel you have to keep the stock because of loyalty, or because you don’t want the loss?

Take a few minutes to examine the situation, and yourself. Be honest about why you want to get rid of a stock. From a value or fundamental investor viewpoint, answer the following questions:

Has something changed fundamentally? Look at the fundamentals of the stock. Is something different? If the market in general is tanking, then it is likely that even the best stocks will drop as well. However, if the company still has strong fundamentals, there is a good chance that it will recover when the stock market does. It might not make sense to sell in such a case. It might be a time to buy more stock than sell it.
What’s changed? If there is something different fundamentally, ask yourself what has changed. Has there been a shake-up in management? Are you concerned about a new direction for the company? Perhaps profits are dropping and the company is losing market share. In cases where something is disquieting fundamentally, it might be time to sell.
Could you gain an advantage by selling? Even if you have to sell at a loss, there might be an advantage in unloading. Perhaps you have some capital gains or other income from earlier in the year to offset. If this is the case, a calculated decision to sell might be the right thing to do. You can gain a tax advantage — and if you don’t use your entire advantage, it carries forward to additional years.
Where are you at in your financial plan? You also need to consider your financial plan. Perhaps you need to rebalance your portfolio. Maybe your investing goals have changed, and a particular stock no longer fits the bill. In such a case, it might be worthwhile to sell, and then use the proceeds to purchase an investment that better fits your current goals.
Did you made a mistake in buying the stock in the first place? Maybe you thought the company would grow faster than their annual profits have shown. Maybe that new product or service they offered wasn’t as big as you expected. Maybe you outright didn’t understand the investment.
Could your capital be better invested somewhere else? This is a not so obvious, but important consideration. Would you better off using the capital for other investments that could earn higher returns? Investments you currently own should always be compared to other possible investments. Not only comparing to stocks but to bonds and other alternative investments.

Making a Reasoned Decision to Sell

There are plenty of legitimate reasons to sell a stock. However, selling out of panic, because everyone else is selling, is not one of those legitimate reasons. Before you sell a stock, you need to reason through your decision. If the stock retains the same fundamentals, and if it still helps you reach your goals, there is no reason to sell just because the market is in a panic. However, if something has changed fundamentally, or if your goals can be better reached with another investment, don’t keep holding on — sell.

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ETRADE Enhances ETRADE Pro Platform

Larry Ludwig — Sat, 17 Sep 2011 17:17:09 +0000

E*Trade recently announced the launch of their new E*Trade Pro Elite program for active traders. See our previous review of E*Trade, for more information about their service. E*TRADE Pro offers advanced traders real-time access to the markets along with idea generation tools, customization capabilities, and charts and screeners.

According to their press release, they have added these new services:

Options strategies: Customers can now trade all option strategies, including multi-legged orders, and weekly options are fully supported (as available on etrade.com)

Expanded CNBC content: Video-on-demand capabilities, as well as additional live content from CNBC Europe and Asia, are accessible to customers

Logarithmic charts: The E*TRADE Pro chart window includes a logarithmic scaling option, giving investors a powerful new tool to analyze price trends

Cloud-based layouts: The same personalized layout and experience can be enjoyed by investors from any desktop computer

E*TRADE Community: The platform is integrated with E*TRADE Community, offering direct access to an exclusive network where E*TRADE customers can exchange ideas and insights with like-minded investors

The company announced separately today the availability of Portfolio Margin, also accessible on E*TRADE Pro, which offers qualified investors risk-based margin to increase their buying power at competitive rates.

“Active traders have specialized needs, and we continue to invest in E*TRADE’s Pro platform to ensure customers have the tools, features and access they need to make informed, real-time trading decisions,” said Michael Curcio, President, E*TRADE Securities. “E*TRADE’s Pro Elite program combines this premier trading platform with competitive pricing and priority service and support to deliver the best investing experience.”

The enhanced E*TRADE Pro platform is part of E*TRADE’s new Pro Elite program. In addition to no-fee access to E*TRADE Pro, exclusive benefits for Pro Elite customers include:

Elite service and support: Priority call-routing to a specialized service team

Low commissions: $7.99-$9.99 stock and options trades, $0.75 per options contract and low margin rates

Access to all key markets: Stocks, options and futures, including access to dedicated trading specialists

This sounds similar to the recently announced Zecco Elite service. Though E*Trade has always been after the more active investor, and technical stock traders.

For other discount broker reviews, please visit our top stock brokers web page.

Readers: What do you think of these enhancements from E*Trade to their Pro platform?

Peak Oil – Is It A Real Problem?

Larry Ludwig — Thu, 15 Sep 2011 09:18:31 +0000

On last weeks’s Consuelo Mack WealthTrack they had on guest Charles Maxwell. Charles Maxwell is senior energy analyst at Weeden & Company. On WealthTrack he discussed the peak in oil production, and possible investment strategies. He has some strong points for peak oil, and why you should invest in that sector.

Visit here, if you cannot watch the video on this web page.

Maxwell has some very interesting analysis about the United States oil capacity, and peak oil theory. Unfortunately the outlook does not look very positive.

The United States has a low margin of safety that could dramatically affect our oil prices.
Believes $70-90 is currently an acceptable price range, with prices going up to $110-120 within the next year or two.
Alternative energy will continue to play only a minor role in energy consumption.
In the United States Hubbert Peak oil production is expected to be 2015-2020.
Higher prices in oil will help for new oil exploration.
Nuclear and coal aren’t viable alternatives.
We have only two viable ways to satisfy our need for more energy consumption. Natural gas or from conservation (notice “green” energy isn’t mentioned). So that means more fracking.
Expect problems in the next 15-20 years with energy prices until the viable alternatives get online.
Many oil companies have their oil reserves in unstable geopolitical parts of the world.
Recommends stock Suncor Energy (SU) or Cenovus Energy (CVE). Both have a large reserve of oil that makes only a small portion of the stock price, and both have reserves in friendly Canada.
Energy independence is not realistic.

Is Peak Oil Hype?

With all of this said by Maxwell, my argument against peak oil is the role of technology. Not only for conservation as he states, but also for finding more oil.

The book “Unlimited Wealth” mentioned this years ago. When a commodity increases in price, alternative means are found. Either directly replacing that commodity, or finding means to make that commodity more efficient.

It was stated back in the 1970′s we only had enough oil to last until the 1990′s. The doom and gloom gang didn’t realize we would develop new methods to extract oil from places never thought possible. The group also didn’t expect us to use technology to make oil consumption more efficient. Within 10 years we replaced carburators, with more efficient fuel injected engines – effectively doubling MPG. Does this then debunk the peak oil theory?

Readers: What is your take on peak oil? Is it a real problem? As an investor, should we be buying stocks in the energy sector?

Zecco Announces Zecco Elite

Larry Ludwig — Fri, 09 Sep 2011 19:17:36 +0000

Zecco recently changed their pricing from their commission free service. Zecco are now offering more personal service for higher-end investors with some net worth to invest. With Zecco Elite they are now focusing more on services and features, than purely pricing.

The requirements while not low, they are reasonable. In my opinion are actually pretty easy. You must meet one of these requirements:

Have at least $250,000 in all accounts with Zecco for at least least three months
Average 25 or more trades per month over a three month period

What do you get with this service?

A dedicated team of our very best agents that jump on your every email, call or chat.
Broker assistance is on the house. Stock and ETF trades are $4.95,
options trades are $4.95 + $0.65 per contract. Just like online.
Real-time, streaming quotes direct from the exchanges with the full version
of Zecco Streamer. Others pay monthly for this state-of-the-art tool—you’re comp’d.
No annual fee for IRA accounts, charges for research requests and statement copies.
Getting hit by bank fees for making a wire transfer in to Zecco? We’ll pick up the
tab on deposits of $5,000 or more.

Read our Zecco review for our experience with their service. From their blog post, it sounds like the service isn’t ready yet, but will be announced in the near future.

Readers: What do you think of Zecco Elite? Would you transfer from an existing broker because of this new service?

How to Become Wealthy

Larry Ludwig — Wed, 07 Sep 2011 13:56:52 +0000

This is something I consider important, at least when I define my financial goals. This post isn’t about how to get rich quick, but how to get rich slowly via savings and investing. In my opinion, over 20 – 30 years everyone should be able to at least achieve some level of financial independence, but most don’t. A recent survey showed 64% of Americans don’t have $1,000 in savings. Which means many are living pay check to pay check.
Of course how each person achieves their wealthy goal is unique. Most should become wealthy from savings alone. At least for the purpose of this article, I don’t discuss owning a business or via other means. You should start saving when you are young, and save often. If you are still in your twenties, start saving now!

I break down savings into three discrete steps. I consider setting up three goals to meet - emergency savings, when are you financially free, and when would you be wealthy. Since everyone defines these terms slightly differently, I’ll state what I mean:

Emergency Savings – You have to last at least one year without income.
Financially Free – Enough yearly income from investments to match your yearly expenses
Wealthy – If you took out 4% of your net worth annually, your net worth would outlast your life expectancy.

It’s common for people to save for retirement, but not think about how much they will need when they retire. This is akin to driving without knowing where to go.

First Step – Emergency Savings

If you are starting from no, or negative net worth, you need a savings cushion. Most financial experts recommend 3 – 6 months. I recommend one year of emergency savings. Yes I understand this could mean $60-70k in emergency savings. Having this amount, gives you much more financial flexibility. For many having this much in savings takes off quite a bit of financial stress.

This money should be invested very safe and liquid investments, should you lose your job or have a financial emergency. I understanding this is somewhat hard in the current economic environment, but diversify and pick your investments wisely.

Unlike most, I recommend setting up at least 2-3 months of savings before pre-payment of other debt. In my opinion, the ironic thing is when you have enough net worth, you no longer need a specific fund for emergency savings. Your emergency savings can be rolled into your other fixed income investments. What matters with emergency savings: is how often you use it, and how long does it take to unwind your investments. Based upon this, with your fixed income investments, you’ll need a portion set aside that is very liquid.

As I’ve stated from one of my first posts, what’s more important is cash flow, than net worth. In the race between the tortoise and hare, the tortoise won because of longevity.

Second Step – Financially Free

How much income do you need from your investments yearly before you are financially free? It’s a lot less than you think. For most people $60,000 – $70,000 is all that is needed to meet your typical yearly expenses. This is where creating your budget comes in handy. Create your budget, and figure out how much you need on a annual basis. This is your starting point for how much you need per year from your investments.

Let’s assume the money is invested conservatively at 5% return. How much do you need before investments equal $70,000 in returns? You only need $1,470,000 to generate enough cash flow to equal $70,000 in a year. Let’s round it up to $1.5 million. It’s an amount most can easily achieve over someone’s investing lifetime. This is another reason why you should invest often, and invest early.

This of course does not take into account inflation, and taxes. I’m not suggesting you shouldn’t invest past this amount either. Quite the opposite. The goal of this exercise is when can you say you have at least enough saved where if you couldn’t work another day in your life, you would at least have a decent sized safety net. This is the point when you tip the scale, so to speak. After this point will generate more income with your savings, than what you will need on a yearly basis to live.

Final Step – Wealthy

Once you’ve past the first goal, the wealthy goal is the fun part. Unfortunately many people in the United States don’t get past the first goal, let alone the second.

This goal is where you have enough savings you can take out less than 4% of your total saved. Using the numbers above: this is around $3.5 Million. So you need at least $3.5 million, and your money should outlast you, instead of you outlasting your money. For more details, see one of my first posts: How Wealthy Are You?

Once you have enough investment income, you should be locking in capital gains. Your sole investment objective is to make sure you keep up with the hidden tax – inflation. This isn’t to say you should be investing for growth, but your primary objective is to keep risk to a minimum.

Of course these number vary from person to person, but the basics still apply. Having these target goals is important because you know what you are shooting for. If you don’t, you are wandering aimlessly.

Readers: How much do you need to be considered wealthy?

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Trading Execution – Does it Happen Instantly?

Larry Ludwig — Wed, 31 Aug 2011 13:25:13 +0000

Barron’s has a story this week about TD Ameritrade changing Thinkorswim’s clearing house. They changed from Penson to TD Ameritrade’s own in-house system instead. This makes sense since they have more control over trades, and efficiencies with more trading volume. During this switch over there have been a few customer complaints, and possibly some trading delays occurred.

Most traders don’t realize this, but Penson is one of the most popular firms used by discount brokers. TradeKing, and Zecco for example both use Penson. So while each broker has their own unique user interface, behind the scenes your trade is executed the same way.

Most traders don’t take this into consideration when picking a discount broker. While the web site interface is very important, what also is important is the accuracy of the trade. Who cares if the web site has a pretty interface, when it takes 10 minutes to execute your trade?

In case you didn’t realize this, trades are not necessary executed instantly when you click on that button.

Clearing firms work with exchanges to confirm the trade, deliver securities and ensure that paperwork is in order. The clearing firm also holds your equities if you don’t get an actual stock certificate.

There are many factors that affect the speed in executing your trade. It depends upon the relationships with the exchanges, and various electronic and/or manual processes that could delay your transaction. There are also other factors such as lot size, and the exchange your trade executed with. The broker may also decide to exchange shares from within the brokerage first (otherwise known as internalization), before going to the open market. All of these factors can affect when your trade is actually executed, and at what price.

Bottom line, once you click on that order, it can be from a few seconds, to minutes until your order is completed. This could mean drastic changes in the price from when you initially placed your order. The SEC has a web page with additional details on the topic.

While a long term investor shouldn’t be too worried in minor differences in the executed price, it can be a big difference with thinly traded securities. This is why I’m for HFT (high frequency trading), as long as no manipulation in the stock price occurs. It’s been said, 53% of the daily trading volume is attributed to HFT. I think we got a glimpse with the flash crash, what could happen when the trading volume completely disappears. Liquidity “is a good thing”, and decreases the bid/ask spread.

Readers: Have you ever had a delay in a trade you’ve executed? What was the cause?

There’s No Such Thing as a “Risk Free” Investment.

Larry Ludwig — Thu, 25 Aug 2011 13:09:31 +0000

I love when I read investment articles that state bank CDs, or government treasuries are risk free. Yes you’ll get a return OF your money, but will you get a return ON your money in real dollars? Especially in today’s low interest rate environment. Isn’t is somewhat ironic when you hear of “risk free” investments from individuals, people automatically think it’s a scam. Yet why would a risk free government investment be any different?

One of things I’ve learned over the years in owning a business is risk assessment. Everything in life has risk. The only known is you will die someday, and you’ll pay taxes. Maybe from panic attacks I’ve had in the past it’s helped me be better at risk assessment, and in the process become a better investor.

In business planning it’s critical to know the possible risks, determine the possibility of those risks, and eliminate (or if not possible minimize) them. Successful business owners do risk assessment on a daily basis. Otherwise they are soon out of business. Some risks aren’t in your face obvious either. Just like the economist theory popularized by Milton Fredman, “there’s no such thing as a free lunch“. In investing:

There is no such thing as a risk free investment.

Every investment has risk. It might not be apparent what the risk might be.

Traditional textbook investment books list these possible risks when investing:

Credit Risk
Market Risk
Liquidity Risk
Operational Risk

In my opinion missing from this list is inflation, and opportunity risk.

Credit Risk

This means the chance that the investment will default. Governments, such as the United States, have a fiat currency. They are also a reserve currency and have no risk to default. The debt limit debate was all theatrics. The problem then isn’t credit risk, but inflation risk (see below) with the government printing money. Businesses on the other hand can go bankrupt.

Market Risk

Market risk is the price can vary from day to day, and can depending upon when you sell your security could lose principal. Most investors think this risk only applies to stocks, but it can apply to bonds. For example, if you own a bond and sell it before maturity, it is possible you can lose principal.

Liquidity Risk

Lending Club for example is a great investment (see my Lending Club review), but currently isn’t a very liquid investment. If I needed the money, it could take months before I could liquidate all notes I own. In addition, I could take a significant haircut (market risk) in the process.

Operational Risk

This type of risk happens from the running of a business, and the most common risk when owning one. Operational risk in a business can be in many forms, and varies from business to business. Related to investing this could cause a loss in principal, or future gains from say a server failure.

Inflation Risk

This one is missing from traditional financial text books, and the one that’s the most subversive. The way I define it is you can lose money in real terms. So if a bank CD earns 2% APR annually, yet the annual inflation rate is 3% – you’ve lost 1% of your money in real terms. So while the credit risk is low for government issued treasury bonds, it does have inflation risk. In many cases (but not all) inflation is a man-made monetary policy. So the same government who issues those bonds, has also the power to inflate it’s currency. This then renders the real yield to be negative.

Opportunity Risk

This is another risk not commonly discussed when investing. This risk is could your money be working harder for you in another investment? So while you might be satisfied with earning 3% in a CD that’s “risk free”, would you be better of investing in a high yield bond that earns 8%, with a less than 5% risk of default to maturity? It’s always important to get the best value for you money when you shop, why should it be any different with investing?

No related posts.

TradeKing – Trade Free On Friday

Larry Ludwig — Thu, 11 Aug 2011 13:30:31 +0000

TradeKing is becoming Zecco for a day. On Friday August 12th, TradeKing will be a commission free trading day. TradeKing is doing this because of the technical problems they had on Tuesday August 9th. For the details, you can read the CEO’s blog post.

I personally was not affected by their outage, because I do not trade that often. Here is the E-mail TradeKing sent out to customers.

When we founded TradeKing in 2005, we set a high bar: to do everything in our power to help support our clients’ trading strategies. The past few days of historically unprecedented market volatility have been rough on all of us. We know many of you are uncertain of what comes next and how to react. Frankly, we could all use some extra TLC.

In appreciation of your business, this Friday we’ll be offering a special free trade day for all clients. Any trades placed throughout the day on August 12 will be absolutely free of commissions.

How it works is simple. If you trade on Friday 8/12, you’ll see the commission charged as usual. As of Saturday, 8/13, you’ll still see the trade in your Account Activity page with all commissions waived. (Some fees still apply – see disclaimers below for details.)

Ensuring a satisfied client is always our number one goal at TradeKing. We thank you again for your business – and rest assured that helping our clients is what gets us out of bed every day. As always, if you have any follow-up questions, feel free to contact us at [redacted] or call 877-495-5464. We’re glad to help.

I think it’s great they are giving free trades. It shows they care about their customers, and admit their mistake. I’ve had unexplained delayed executions with other discount brokers, and got bupkis for the loss. It would have been nice though if they gave out a set amount of free trades, instead of just for one commission free day. Say 5 or 10 free trades that could be used at anytime.

I believe this applies to every customer. Even new customers that sign up after this outage. Which, in theory, could mean you sign up using a TradeKing Promotional Code, fund the account, and could trade free on Friday.

Stock Market Down: What To Do Next?

Larry Ludwig — Mon, 08 Aug 2011 23:29:31 +0000

The stock market blew up today big time. The Dow Jones was down today 634.76 points. It was the sixth biggest loss ever. Last Thursday we had another epic 500+ point loss. In stock market losses like today, I’m always reminded of the useless government propaganda films during the cold war. Specifically the “Duck and Cover” film comes to mind. As a child of the 1970′s we had to do these inane fire drills every few months. Somehow covering your head and ass under a desk would protect yourself from nuclear annihilation. At least with Indiana Jones he stood a better chance in a refrigerator. The stock market losing streak of the past few months is no different, and you need protection.

Just like “Duck and Cover”, there is really no where to hide when the stock market takes a plunge. Unless of course you have cash, cash like investments, and defensive investments like gold. The time to prepare for any emergency is BEFORE it occurs, not after. So if you are looking at your accounts today and saying “oh shit”, it’s just a little too late. Hopefully you’ll learn something from today, and gain an education in the process.

In looking my personal retirement accounts today, I was thinking are there any investments we could sell off? Like everyone else, the problem is with most retirement accounts it is mutual fund based which means at least one trading day before the order can be completed. So like today where you execute a sell, you are already down 5.6%. The axiom of you make money in stocks is when you buy it, not when you sell them rings true. So unless you are expecting the market to go lower (who knows what will happen) you might miss out on the next upswing in the process. Though it could be said, owning ETFs instead of mutual funds can be to your advantage should you need to get out quickly.

I’m a big believer of proper asset allocation. This makes investing much less emotional, and much more logical. This doesn’t mean though you must stick completely ridged to your asset allocation plan. A few months ago I increased our cash position to 12% from our previous 3% allocation. I felt based upon the PE10 metric the stock market was getting just a little too forthy. This doesn’t mean the stock market could have gone higher. It did and lost some gains in the process. What it meant to me was I happy with the gains I got, and took some of the profit off the table. I did just exactly that.

I don’t believe in timing the market, but I DO believe there are better times to add money to the stock market. The 10-year price earnings (otherwise known as PE10) recently was as high as 25. By the historical standards of 16 the market was not cheap, and was overvalued by approximately 30%.

Keep in mind this isn’t necessarily a direct predictor of the future returns, but in general PE returns to historical averages. Why is this? Markets cannot keep increasing forever. Markets must return to the average. Economies can only grow so fast, and productivity can only increase so much. Just like the law of gravity, this also applies to company growth. So ignore this law at your own peril.

Is the market cheap now? NO, but it is cheaper than before. As of today the PE 10 is at 19.32. This doesn’t mean the stock market MUST go lower. Stocks are also compared to other investments. Are bonds a better deal than stocks? Is gold a better investment than stocks? An investment is always compared to other possible investments.

The stock market could go lower, but it could also go up from here. Right now, with his lame speech today, it’s possible stocks may go down until President Obama is out of office.

The market could also go lower than the historical average. Over it’s history, the stock market has a few times. It did this during the Great Depression, and also when the “Death Of Equities” magazine article was published.

What any value investor should be looking in stocks, (or an individual stock) is how are they priced. Are they on sale, or are they priced fairly? At the moment stocks are still somewhat expensive.

My Suggestion

I’m not suggesting be a market timer, and do complex put and call options with your investments. That’s for the advanced trader, and for most people it does not end well. What I am suggesting is you always have a certain amount of cash on hand. Think of it as emergency savings for your investments. You never know when you need it, and should be ready to pounce at a moment’s notice.

What is the right amount of cash? That depends upon a lot of factors. I will leave that decision to the reader. What I will say is you should always have a decent amount of cash available, at least 3-5% of your total asset allocation.

If you don’t have a decent discount stock broker, now might be time to get one.

Recently, I’ve updated of the stock broker promotions going on. Specifically two of the brokers:

If you don’t have cash on hand with a discount stock broker, I suggest learning from this experience and have one ready for future opportunities. TradeKing appears to be the best of the bunch. They are offering a $100 signup bonus until the end of August.

No related posts.

Is E*Trade Up For Sale?

Larry Ludwig — Mon, 25 Jul 2011 14:00:08 +0000

I’m seeing more chatter around the web about the selling of E*Trade. The Wall Street Journal mentions today: TD Ameritrade (see our TD Ameritrade review) is looking into acquiring E*Trade (see review of E*Trade). Last week, the hedge fund firm Citadel suggested E*Trade should put itself of the selling block. Citadel is the largest shareholder of E*Trade Financial Corp (ETFC). In the past week, E*Trade stock has been up over 21%.

From previous experience, when there is a discussion of a sale, many investors transfer out of their existing discount broker. It appears this time is no different. I’m seeing an increase in web traffic to Investor Junkie because of this. From the looks of it, most visitors are opening an account with TradeKing. TradeKing is a good fit for fleeing E*Trade customers.

If you are thinking about switching, I would suggest looking at our top stock brokers list.

If TD Ameritrade acquires them, I think most existing E*Trade customers would be very happy. They offer very similar services and features. Pricing is similar to E-Trade, and as an existing customer it might be best to wait and see what happens.

Even then, as most research has shown, I would suggest open trading accounts with multiple discount brokers. If you only have one brokerage account, I suggest opening an account with another discount broker. Each broker has their own specialty niche, and cannot be a jack of all trades (pun intended). In our case, we have most of our accounts with Fidelity, but also have an account with TradeKing for taxable investments.

Investing – Sometimes It Pays To Think Small

Guest Author — Fri, 22 Jul 2011 14:17:28 +0000

The very word ‘investing’ can throw the most savvy person into a cold sweat, with the thought of complex and time consuming funds, stock market purchases and complex financial products often first springing to mind.
Certainly there has long been a certain mystique attached to investing – the idea that it’s an activity best left to the experts, the rich, the professional management funds, or those with vast tracts of spare time and resources available.

However, this happily isn’t the case. Quite simply, investing means putting away your money for a future goal. It tends to be on a longer term basis and different risk levels and products are available.
You can invest in almost anything – stocks, shares, bonds, property, gilts, gold, mining, antiques, wine, and collectibles – every month a new opportunity emerges.

Sometimes large sums are required, but in other cases – very small amounts can lead to valuable returns and are a great way to get started and build your investing confidence.

As a first step, invest in credit score monitoring, which costs just a few dollars. You can buy it online and check all your spending history to date including credit cards, loans, mortgages and other credit forms – and keep alerted for any ID fraud.

The large credit agencies including Equifax and Experian also offer credit monitoring services for a small monthly subscription, which you can sign up to and monitor your spending, credit record and in and outgoings.

Get into the habit of tracking your spend. Set a budget and stick to it. By cutting out unnecessary spending, you’ll likely find a pot of available cash each month to invest.

Focus first on clearing debts from loans and credit cards and prevent yourself from taking out more credit or loans. Once you’re debt free – or have nearly paid off loans – then the fun begins.

Look at tax efficient savings to begin with. The government allows tax free savings vehicles every year, up to a limit. Find the one with the best interest rate and the terms that suit you.

Start building up your savings until you have a safety net. This will prevent you needing to take out loans or using your credit card in emergencies.

A safety net should be between 3 to 6 months of your earnings and allow you a cushion should you fall unemployed or your circumstances change. With that buffer in place, you need not fear the short term impact of a change in circumstance.

Once you have your safety net, look at investment options that allow you to put in a small amount each month – a unit or investment trust, or online share purchases for example.

These will give you the skills and confidence to learn what investing is and see the effects of risk, reward and other changes on your investment sums. Read up and learn about investing, so you can decide from the start if you’re investing for income or growth and learn what type of investor you are in terms of risk.

This is a guest post from moneysupermarket.com

Is Bank Of America Screwed?

Guest Author — Mon, 18 Jul 2011 10:46:21 +0000

On Friday, July 15th, Bank of America (Ticker: BAC) dipped to $9.88, and the only major bank in the single digits. If they wanted to raise their share price, all they’d have to do is conduct a reverse stock split like Citibank to trick investors into thinking it’s worth more than it is. Out of all the banks I’ve done business with, Bank of America was the worst in terms of customer service and rates and it’s interesting to see how it’s playing out.

During the financial crisis in 2008, I spread my money purposefully to Bank of America given that I was afraid any and all banks could fail, and the FDIC only insured up to $250,000. Before BoA, I had been banking with Citibank, USAA, First Republic, and a little bit at Chase. As the markets began to recover in 2010, I withdrew all my money and refinanced a mortgage away from Bank of America because I just couldn’t take how uncompetitive BoA was and how poorly I was treated.

Why Bank Of America Bummed Me Out

I was stood up by the Bank of America mortgage refinance guy not once, but twice. For the second time, he even confirmed with me 45 minutes prior that he would be at his office waiting. When I got there, I waited for 30 minutes and his boss had to apologize on his behalf. Being late is a pet peeve of mine already. But, to actually flake on a customer after confirming just moments ago is inconceivable.
When I successfully refinanced away from Bank of America at a rate much more competitive, Bank of America made me fill out extra forms and charge me several hundred bucks for access to my own records. I remember thinking what a bunch of crock, and unnecessary delay in paperwork because no bank had ever required this when I refinanced in the past i.e. more fees and paper work. Also wondered to myself why the hell they just didn’t give me a rate mod, or offer to match the refinance fee so that they could still make a spread off me.
I lost my online password, and when I went to reset it, they said I needed to input my ATM card number, even though I destroyed it 18 months prior and didn’t have it. Instead, I had to call customer service for 30 minutes to retrieve.
Their CD and savings rates were simply uncompetitive. We’re talking at least 0.5%, and often a full 1% lower than other banks at that time. You’re losing out on $1,250 to $2,500 a year on $250,000 for example. When you can simply move your money to any other bank that is offering more, you might as well, especially since the financial storm had passed.
My personal banker was let go. She was actually really good and responded quite quickly over e-mail. She tried her best to push things along and get the best rates possible for me, but she was running into internal walls everywhere. When she let go of her, I decided I definitely have not one shred of allegiance to Bank of America anymore.

Too Big To Fail Doesn’t Mean It’s Not Too Big To Go Nowhere

After the massive bailout, I never thought that Bank of America would get back into financial trouble. However, with its poor service, uncompetitive rates, and more poor service, perhaps there might very well be a good old fashion bank run again. All these settlements ($8.5 billion on June 29th with mortgage bond holders), limits on what it can do (government denied the bank could pay a dividend), and massive drag on earnings (Countrywide), make Bank of America a lame duck company to own. We all know about its empire building history, but now, the world is seeing what poor management and customer service can do to a company.

If an average Joe like me fled the bank 1.5 years ago when it was supposedly on its upswing, how many folks are fleeing the bank now as its back on a downswing? There were certainly some good people at Bank of America too. But for the most part, I felt like such a second class citizen that I had to go.

Note: The value investor in me wants to buy BAC in the single digits. But, the customer in me is still pissed off about getting stood up twice. Any good or bad experiences with Bank of America on your end?

This was a guest post from Sam at Financial Samurai, where he helps readers slice through money’s mysteries. He’s also the founder of the Yakezie Network, a group of the best personal finance blogs on the web.

What I’m Investing In Now

Larry Ludwig — Wed, 22 Jun 2011 13:21:13 +0000

For the past few months the stock market has seen some wild swings. My WTF Fund so far has done poorly (10% loss), because my primary investments (Apple (AAPL) and Cisco (CSCO)) have taken a dive. Though I think they are both stocks are great bargains now. By historical standards the market overall isn’t cheap. I suspect we will continue this secular bear market with high unemployment, and problems like the Greek debt crisis continue to happen for the next few years.

With the recent 5% drop in the stock market there are some bargains in the market, but not many. Though I do plan on to continue buying more stock on the dips. We have approximately 15% in our asset allocation in cash, and use it for when corrections occur. Though fixed investments continue to give back poor returns in comparison to their risk. With the best 5 year CDs earning just 3.10% there is too much inflation risk baked into the equation. Though I do consider IBonds to be the best fixed income investment out there at the moment and have added more to our portfolio. At least for the next year in which you can earn at minmum 2.51%. Some of the dividend aristocrats are also good bargains right now that earn higher returns than some fixed rate investments.

So where should I invest new money now?

I’ve decided in this point in time, investing in my business is the best investment that will yield the highest returns. So I’ve decided to invest in my human capital. You may have noticed I haven’t written as many post as I have had in previous months. That’s because I’ve been focusing on my “day job”. I’ve taken on some massive programming projects within my company, and been busy refacting code. With my business I’ve decided to add some additional services and slightly change it’s business direction. With the amount of work needed, it’s taken more of my time than I expected. No this does not mean I’ll stop posts on Investor Junkie. I will continue posts on a regular basis, though it may mean less frequent posts for the next few months.

The other investment I’m seriously considering in is prepayment of any of our outstanding debts. Yes I understand it’s not truly an “investment”, but it does give an assured fixed return. We really don’t have much debt though. My business doesn’t really have much debt left, and the debt I do have left is below 3.5% APR. In my personal life we only have mortgage debt, and one car loan (ur Hyundai Genesis purchase). All these loans also have real APR below 4.0%. I’ve been hesitant in the past to not prepay any of these loans since I was able to get secure or somewhat stable investments at much higher APR. With some CDs coming due soon, and new money to be invested I might be tempted to prepay some of our debts. At minimum our car loan since it’s a deprecating asset.

Readers: What are you investing in now?

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Fidelity Commission Free ETFs

Larry Ludwig — Thu, 02 Jun 2011 22:39:38 +0000

Fidelity has done it again. Fidelity adds five additional iShares ETFs to it’s list of commission free trades. They now have 30 commission free ETFs. This is why I continue to keep most of our investments with them (see Fidelity review). The ETFs they added are great for diversification.

They’ve expanded the number of iShares® ETFs you can trade commission free online from 25 to 30. Among the five additional ETFs are funds focused on generating interest, and dividends to help create a regular income stream. This is prefect during this time of low interest rates. The newly commission-free funds are:

iShares iBoxx High Yield Corporate Bond Fund (HYG)
iShares Dow Jones Select Dividend Index Fund (DVY)
iShares Dow Jones International Select Dividend Index Fund (IDV)
iShares Dow Jones US Real Estate Index Fund (IYR)
iShares MSCI ACWI ex US Index Fund (ACWX)

Their expense ratios, like many ETFs, are rather low. The lowest is 0.35% (ACWX), and the highest expense ratio is 0.50% (IDV and HYG). For a complete list of commission free ETFs from Fidelity please visit their web site.

Smart Money 2011 Broker Survey

Larry Ludwig — Fri, 13 May 2011 17:17:42 +0000

Once again SmartMoney magazine released their annual broker review. They state this year the rankings were closer than ever. They broke down the winners into six categories. Similar to the Barron’s article (see Barron’s 2011 Broker Survey), which also is owned by the Wall Street Journal, they state discount broker prices cannot get any lower. The article mentions brokerage houses are offering full service features that normally were available only to high net worth individuals. In my opinion is a good thing, as long as it doesn’t come with the traditional high net worth fees.

For the second year in a row, they ranked Fidelity as the best discount broker. See my review of Fidelity, and reconfirms the reasons why most of our assets are there. For a full service broker, they gave the award to Raymond James. See below for the summary of best, and worst in each of the six categories:

Commissions and Fees

Best: ShareBuilder
Worst: OptionsXpress

I’m not sure how OptionsXpress got rated one of the worst in commissions. Based upon my reviews brokers like Vanguard are much more expensive, and ShareBuilder isn’t much cheaper than OptionsXpress. Most of it depends how often you trade, and the amount of money you have invested at that specific brokerage.

Customer Service

Best: TradeKing
Worst: ShareBuilder

TradeKing, as of recent, is my favorite brokerage house and use it for my WTF fund (see TradeKing review). Their prices are decent, and have had a great experience every time I’ve interacted with them. ShareBuilder, while I have an account with them also (see ShareBuilder review)

Research

Best: E-Trade
Worst: ShareBuilder

I also have an account with E-Trade (see my review of E-Trade) and agree their research is very good. With ShareBuilder the research is nonexistent, so this rating is no surpise. Though I personally prefer doing most of my research with Morningstar. The interesting quote from the article:

The Synovate poll found that half of self-directed investors use these tools, and among those who do, nearly 85 percent say it has prompted them to take investment actions thus generating fees and commissions. Providing research also helps brokerages stay “sticky”: Clients who view videos or use asset-allocation tools on their brokers’ sites are less likely to shop around for a better deal, says Lo, the J.D. Power investment analyst.

Trading Tools

Best: Fidelity
Worst: Vanguard

Remote access is where it’s at. Investors want to be able to trade at any time and any place. From my experience I believe E-Trade is more of a leader in this category with others catching up very quickly. Vanguard on the other hand, has no mobile app for trading.

Mutual Funds and Investment Products

Best: Fidelity
Worst: ShareBuilder

This is where Fidelity shines, and ShareBuilder definitely does not from my experience. Fidelity has a wide array of investment products. Interactive Brokers is better, but is more geared towards investment professionals and not retail clients. ShareBuilder on the other hand is better at stocks, than mutual funds. Many discount brokers offer no trading fees for specific mutual funds, or ETFs. This makes firms like Fidelity, and TradeKing much cheaper than ShareBuilder.

Banking Services

Best: Fidelity
Worst: Vanguard

In the wake of the 2008 meltdown, many people have reassessed their need for a traditional bank. E*Trade used to be very big into this, but over the years has become more and more just a brokerage than a bank. It’s no suprise that Vanguard does not offer banking services because they are primarily a mutual fund house.

Source: SmartMoney

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