portfolio http://www.wisebread.com/taxonomy/term/7611/all en-US Think Outside the Index When You Rebalance Your Investment Portfolio http://www.wisebread.com/think-outside-the-index-when-you-rebalance-your-investment-portfolio <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/think-outside-the-index-when-you-rebalance-your-investment-portfolio" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/businesswoman_using_tablet.jpg" alt="Businesswoman using Tablet" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>As the year winds down, it's common for investors to examine their portfolios and consider some rebalancing. This means looking at your investments to make sure you're not over-invested or underinvested in certain areas.</p> <p>Many investors will simply buy shares of a mutual fund that mirrors the performance of the S&amp;P 500. You can do well with this simple approach, but you will lack exposure to many smaller or midsize companies, and will be heavily invested in some industries (such as technology) but not others.</p> <p>Here are some sectors and asset classes that you can invest in to make your portfolio truly diverse.</p> <h2>1. Utilities</h2> <p>They aren't the sexiest investments, but this sector contains many great dividend stocks that can boost your income while offering the stability your portfolio might need. Consider that during the market tumble between 2007 and 2009, the S&amp;P 500 lost about half its value, while the Dow Jones Utility Average index lost about one third.</p> <p>Right now, utilities make up around 3 percent of the S&amp;P 500, so many investors don't have much exposure. Consider mixing in some utilities by investing in mutual funds like the Vanguard Index Utilities Fund [VUIAX] or ETFs such as the iShares Global Infrastructure ETF [IGF].</p> <h2>2. Materials</h2> <p>This is another underappreciated sector that deserves more love from investors. What are &quot;materials&quot; in stock market lingo? This refers to companies that discover and process raw materials. Think of steel manufacturers, mining companies, or chemical producers. The materials sector also makes up about 3 percent of the S&amp;P 500, but has outperformed the broader stock market over the last year. Materials also outperformed the S&amp;P 500 during the Great Recession.</p> <p>Well-performing materials mutual funds include Vanguard Materials Index Fund [VMIAX] and the Fidelity Select Materials Portfolio [FSDPX].</p> <h2>3. Telecommunications services</h2> <p>This sector includes companies such as Verizon, AT&amp;T, and T-Mobile. Companies like these have not been the best performers in recent years, but they can bring stability to your portfolio and offer a very healthy dividend yield. Investors might earn an annual dividend of 5 percent or more with these stocks, which is helpful income during this time of low interest rates. Older investors who are willing to sacrifice growth for income and stability may want to take a hard look at telecom services, which currently make up about 2 percent of companies in the S&amp;P 500.</p> <h2>4. Energy</h2> <p>This sector comprised more than 10 percent of the S&amp;P 500 as recently as three years ago, but that's down to about 6 percent now. That's a shame, because the sector includes some very strong companies including ExxonMobil and Chevron. It's been a very volatile few years for the energy sector due to the tumble in oil prices, but there are bargains to be had, and the world is not going to cease demanding energy, especially from developing countries. Investing in green energy can offer some growth opportunities, and you'll be helping the planet in the process. Energy stocks can also offer higher dividend yields than many sectors.</p> <h2>5. Consumer staples</h2> <p>This sector likely has some of the most familiar stocks you can think of. Currently making up over 8 percent of the S&amp;P 500, consumer staples includes firms like Coca-Cola, Procter &amp; Gamble, Unilever, and Walmart. And yet, this sector is somewhat underrepresented in the S&amp;P 500. This sector is considered a safe haven for investors, because it often performs better than other sectors during times of market uncertainty. That's because even during the worst of times, we all still need basic household products. This sector also has an average dividend yield of nearly 3 percent, making it attractive to income investors.</p> <p>To get more exposure to consumer staples, take a look at ETFs such as the iShares Consumer Goods ETF [IYK] and Vanguard Consumer Staples ETF [VDC].</p> <h2>6. Small cap stocks</h2> <p>When you invest in the S&amp;P 500, you're investing only in the largest companies. These companies may offer solid returns, but it's never good to be invested too heavily in companies of a similar size. To build a truly diversified portfolio, it helps to invest in a healthy dose of smaller companies as well. Small cap stocks are generally those with market capitalization between $300 million and $2 billion. These firms tend to be more volatile, but their gains can be more dramatic. Consider that the T. Rowe Price Small Cap Fund [OTCFX] has averaged a return of around 20 percent over the last year, compared to about 16 percent for the S&amp;P 500. Small cap value stocks &mdash; comprised of small companies generally considered undervalued by fund managers &mdash; have performed even better over the last year.</p> <h2>7. Mid-cap stocks</h2> <p>Not too big and not too small, mid-cap stocks include some very well-run companies in a wide range of industries, and they can bring growth and stability to your portfolio. If you want to invest in midcaps, forget the S&amp;P 500 and go with the S&amp;P 400, which includes the top mid-sized companies and routinely outperforms the smaller and larger asset classes.</p> <p>The Vanguard MidCap ETF [VIMSX] has seen a 10 percent annual return since 2004, and the T. Rowe Price Midcap Growth Fund [RPMGX] has seen a 13 percent annual return since the early 1990s.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/tim-lemke">Tim Lemke</a> of <a href="http://www.wisebread.com/think-outside-the-index-when-you-rebalance-your-investment-portfolio">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-3"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/bookmark-this-a-step-by-step-guide-to-choosing-401k-investments">Bookmark This: A Step-by-Step Guide to Choosing 401(k) Investments</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-too-much-investment-diversity-can-cost-you">How Too Much Investment Diversity Can Cost You</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-costly-mistakes-diy-investors-make">9 Costly Mistakes DIY Investors Make</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment diversification mid-cap stocks portfolio rebalancing returns s&p 500 sectors small cap stocks Mon, 20 Nov 2017 09:30:10 +0000 Tim Lemke 2054955 at http://www.wisebread.com How the Risk Averse Can Get Into the Stock Market http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-the-risk-averse-can-get-into-the-stock-market" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/business_team_thinking_about_risk_management.jpg" alt="Business team thinking about risk management" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>The stock market can be risky. Just 10 years ago, due to the financial panic and subsequent Great Recession, stocks lost half their value in the course of not much more than a year. But the stock market is also a great investment: Long term gains are large, and even the biggest losses are routinely reversed in a matter of a few years.</p> <p>The upshot is that you should almost certainly have at least some money in the market.</p> <p>But since it's always either rising or falling, and since nobody wants to be foolish, it's often hard to get into, or back into, the market. And yet, because of the large gains the market routinely offers over the long term, it's absolutely worth doing &mdash; even for those terrified of risk. (See also: <a href="http://www.wisebread.com/how-to-get-over-these-5-scary-things-about-investing?ref=seealso" target="_blank">How to Get Over These 5 Scary Things About Investing</a>)</p> <h2>Figuring out how much to invest</h2> <p>The best way to think about your portfolio when you're risk-averse is by recognizing that a significant amount of your money is <em>not</em> part of it and should not be invested at all. If you cover your other important financial bases first, you may feel better about investing.</p> <p>First, make sure you have adequate liquidity balances &mdash; that's cash on hand to deal with the fact that your income arrives on one schedule (biweekly paychecks, perhaps) while your bills arrive on a different schedule (some monthly, others perhaps annually or semi-annually).</p> <p>Second, make sure you have an adequate emergency fund to deal with events like an unexpected loss of income, or expenses that come out of the blue. (See also: <a href="http://www.wisebread.com/7-easy-ways-to-build-an-emergency-fund-from-0?ref=seealso" target="_blank">7 Easy Ways to Build an Emergency Fund From $0</a>)</p> <p>Third, make sure you have a plan to fund medium-term expenses (a savings account or CD or maybe an intermediate-term bond fund). These are things you know you're going to buy in the next few years.</p> <p>Once you've got those bases covered, the rest of your money is your investment portfolio.</p> <p>By identifying how much of your money is <em>not</em> part of your investment portfolio, you may find yourself much more comfortable thinking about committing some fraction of the rest of your money to the stock market.</p> <p>However, maybe you've done that and you're <em>still</em> not comfortable. That brings us back to where we started. In particular, it raises the question: If you know the market is the right place for a sizable chunk of your portfolio for the long term, why are you hesitating to commit funds now?</p> <h2>Ask yourself why you're afraid</h2> <p>There are probably two big reasons why people hesitate to get into the stock market: Either because the market seems &quot;too risky,&quot; or because they're &quot;waiting for the right time.&quot;</p> <p>The way to get yourself to make the move into the stock market depends on which reason is blocking you right now.</p> <h3>Too risky</h3> <p>If it's just that the market seems too risky, you can often get started investing by going small. If you can't bring yourself to put 70 percent of your portfolio into stocks (which is actually a reasonable allocation if you're fairly young), can you bring yourself to put 5 or 10 percent in?</p> <p>When I was first starting to invest, most mutual funds had minimum investments that were pretty large (compared to the size of my portfolio), but there are now ways to invest amounts as small as just a few hundred dollars into stocks.</p> <p>If the market seems very risky, pick a very small amount of money &mdash; small enough that you could absorb even a 50 percent loss without endangering your long-term goals &mdash; and take the plunge. Put that small amount into the market. Better yet, set up some sort of automatic investment (a payroll deduction into a 401(k) or an automatic transfer to a mutual fund or brokerage account) that would send a small amount away every month or every paycheck.</p> <p>If you can find an amount small enough that you're willing to risk it &mdash; and especially if you can set up some sort of automated further investments &mdash; you set yourself up to get past your risk aversion the easy way: By seeing gains start piling up right away. And if they don't &mdash; if your investments start off by losing money &mdash; you'll still be OK, for two reasons. First, you'll know that your losses are so small that they scarcely matter over the long term. Second, you'll know that your future investments are buying stocks at a lower price (and buying low is an essential part of &quot;buy low/sell high&quot;). (See also: <a href="http://www.wisebread.com/how-to-invest-if-youre-worried-about-a-stock-market-crash?ref=seealso" target="_blank">How to Invest If You're Worried About a Stock Market Crash</a>)</p> <h3>Waiting for the right time</h3> <p>If the issue is that you accept that the market is the right place to be for the long term, but <em>right now</em> is the wrong time to get in (perhaps because the market seems kind of high, perhaps because it has recently dropped and you worry it might drop further, perhaps because you see major risks to the economy from business conditions or the international situation or Congress), I have two thoughts.</p> <p>First, understand that it hardly matters. I saw a study some years back that compared two hypothetical brothers. Each had invested $2,000 a year in stocks in his IRA, but each year one brother had the good luck to make his investment on the day the stock market hit its low for that year. The other brother had the bad luck to make his investment on the day that the market hit its high for the year.</p> <p>The result? After 10 years, it barely mattered. The lucky brother had a tiny bit more money, but both of them had a lot more money than the guy who kept his money in cash waiting for a &quot;better time&quot; to invest that never came.</p> <p>Second, approach it just as I advised the person who thought the market was too risky: Start small.</p> <p>Maybe now isn't the right time to jump in with 70 percent of your portfolio, but surely having 0 percent of your portfolio in the market is the wrong choice.</p> <p>Go ahead and put a little money in. It doesn't have to be a lot. (And, once again, even better if you set up some sort of automated investment so you're continuing to put money into the market regularly over time.)</p> <h2>Finding the right balance</h2> <p>Suppose you do start small, but through a combination of further investments and growth in the market, find yourself a few years down the road with a sizable portfolio and with a large portion of it invested in stocks. When do you have too much in stocks?</p> <p>One answer is that you have too much if it's worrying you. If you're having trouble sleeping at night, or if hearing the market report on the news ruins your appetite, then by all means sell some stocks and put the money into a CD or something. If you're still anxious a month later, sell some more. (See also: <a href="http://www.wisebread.com/find-the-investing-style-thats-right-for-you?ref=seealso" target="_blank">Find the Investing Style That's Right for You</a>)</p> <p>I would advise that you <em>not </em>use this as an excuse to time the market. The market will always be going up or down and neither circumstance is a good reason to change your mind about having stocks in your portfolio.</p> <p>Instead, you should probably have a target asset allocation. Figure out what you want in stocks (and bonds, real estate, gold, cash, etc.) and buy and sell as necessary to return to that target allocation from time to time &mdash; usually annually is good. This is a process called rebalancing your portfolio. (See also: <a href="http://www.wisebread.com/the-basics-of-asset-allocation?Ref=seealso" target="_blank">The Basics of Asset Allocation</a>)</p> <p>An old rule of thumb is to set your stock allocation percentage at 100 minus your age, and invest the rest in bonds. So someone in their 20s would put 70 to 80 percent into stocks while someone in their 60s would put 30 to 40 percent into stocks. That's a perfectly good rule, although with people living so much longer now than even a generation ago, it should probably be a bit more aggressive for people in the years just before and just after retirement. (See also: <a href="http://www.wisebread.com/7-reasons-to-invest-in-stocks-past-age-50?Ref=seealso" target="_blank">7 Reasons to Invest in Stocks Past Age 50</a>)</p> <p>Your asset allocation is important, but don't let that paralyze you. The worst thing you can do is agonize over your asset allocation to the point that you never get around to investing.</p> <p>Put a little money in stocks right away. Set up some sort of automatic investment. Once you have a tidy sum invested in stocks, start putting some of the new money in bonds. Only after those investments start getting large do you need to think about whether it's time to add some more exotic choices.</p> <p>Start small. Start simple. But above everything else: Start.</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2Fhow-the-risk-averse-can-get-into-the-stock-market&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2FHow%2520the%2520Risk%2520Averse%2520Can%2520Get%2520Into%2520the%2520Stock%2520Market.jpg&amp;description=How%20the%20Risk%20Averse%20Can%20Get%20Into%20the%20Stock%20Market"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/How%20the%20Risk%20Averse%20Can%20Get%20Into%20the%20Stock%20Market.jpg" alt="How the Risk Averse Can Get Into the Stock Market" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-secret-to-successful-investing-is-trusting-the-process">The Secret to Successful Investing Is Trusting the Process</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-types-of-investors-which-one-are-you">8 Types of Investors — Which One Are You?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-most-important-thing-youre-probably-not-doing-with-your-portfolio">The Most Important Thing You&#039;re Probably Not Doing With Your Portfolio</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-crucial-things-you-should-know-about-bonds">5 Crucial Things You Should Know About Bonds</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment asset allocation bonds gains investing fear portfolio rebalancing risk averse stock market stocks Mon, 06 Nov 2017 08:30:15 +0000 Philip Brewer 2045391 at http://www.wisebread.com The Secret to Successful Investing Is Trusting the Process http://www.wisebread.com/the-secret-to-successful-investing-is-trusting-the-process <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/the-secret-to-successful-investing-is-trusting-the-process" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/financial_chart_on_chalkboard.jpg" alt="Financial chart on chalkboard" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>To a great degree, the biggest threat to your success as an investor is <em>you</em>. Making investment decisions based on fear, greed, a hot tip from your brother-in-law, the headline of the day, or any of many other flawed inputs can wreak havoc on your results. What's needed instead is a trustworthy investment <em>process. </em></p> <p>It should be rules-based, time-tested, easy to understand and execute, and it should be one you have enough confidence in to stick with in good markets and bad.</p> <p>Here are three broad types of investment processes to consider making your own.</p> <h2>1. DIY</h2> <p>You can absolutely invest on your own. The recommended process involves following traditional rules of asset allocation, using an online calculator or questionnaire to determine your optimal stock/bond mix, choosing investments accordingly (index funds that represent each desired asset class are the easiest way to go), and rebalancing annually. Or, you could choose an appropriate target-date fund, which would simplify the asset allocation process.</p> <p>DIY is the least expensive investment process, but also the one that leaves you most vulnerable to emotion-driven portfolio tinkering. After all, the process I just described, whether you choose your own index funds or use a target-date fund, is essentially a buy-and-hold strategy. That means you need to have a strong enough stomach to handle the losses that will come with a bear market, trusting that the process will deliver respectable gains over the long haul. (See also: <a href="http://www.wisebread.com/9-costly-mistakes-diy-investors-make?ref=seealso" target="_blank">9 Costly Mistakes DIY Investors Make</a>)</p> <h2>2. DIY with help</h2> <p>You could subscribe to an investment newsletter that takes a rules-based approach to implementing an investment style you agree with (value, momentum, etc.). This process is DIY in that you maintain your own account at the broker of your choice and you make the trades, but it's &quot;with help&quot; in that the newsletter tells you exactly what to buy or sell.</p> <p>This is more expensive than a pure DIY approach because you have to pay for a subscription to the newsletter (from as little as $100 to more than $1,000 per year). Newsletters typically aim to beat the market through a more active process, providing buy and sell recommendations based on objective, rules-based criteria designed to identify undervalued, high-momentum, or otherwise attractive investments. They can also better protect you from being swayed by emotion because a trusted outside authority is guiding your decisions.</p> <h2>3. Work with an adviser</h2> <p>Here the key is understanding the <em>adviser's </em>process. First, does he or she work as a fiduciary? That means the adviser has formally agreed to only recommend investments that are in <em>your </em>best interest and to disclose all fees and commissions. Next, how does he or she make investment decisions? Again, you're looking for objective rules you understand and agree with and the adviser's discipline to follow the rules.</p> <p>Working with an adviser is usually the most expensive process you could employ (typically, you'll pay 1 percent of the value of the portfolio they manage for you). However, it <em>may</em> also provide the best protection from yourself. For one thing, a good adviser acts as a therapist during times of market stress, talking clients out of emotional buy or sell decisions. For another, the adviser typically has direct control over your portfolio; you don't. (See also: <a href="http://www.wisebread.com/ask-these-5-questions-before-deciding-on-a-financial-advisor?ref=seealso" target="_blank">Ask These 5 Questions Before Deciding On a Financial Adviser</a>)</p> <p>Each of these processes could guide you through any market. But you have a role to play as well. Here are two ways you can tip the scales further in your favor:</p> <h3>Manage your expectations</h3> <p>The market ebbs and flows and so will the performance generated by even the best investment process. Your willingness to accept some down months, and even some down years, will go a long way toward helping you stick with your chosen process.</p> <p>Having some sense of what to expect will help. If you're taking a DIY approach, you can see how various allocations have performed over the years (see Vanguard's <a href="https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations" target="_blank">portfolio allocation models</a>). By the same token, you should understand how a newsletter's strategy, or an adviser's, has performed during past bull and bear markets.</p> <p>While past performance won't tell you exactly how each process will perform in the future, it can help manage your expectations. That may not make riding out a downturn <em>easy</em>, but it should make it <em>easier</em>.</p> <h3>Tune out the noise</h3> <p>Adopting a trustworthy investment process will not silence the headline writers, investment analysts, or your coworkers who like to brag about their latest investment conquest. However, it should help you turn down their volume and keep you focused on following your chosen process. (See also: <a href="http://www.wisebread.com/want-your-investments-to-do-better-stop-watching-the-news?ref=seealso" target="_blank">Want Your Investments to Do Better? Stop Watching the News</a>)</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2Fthe-secret-to-successful-investing-is-trusting-the-process&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2FThe%2520Secret%2520to%2520Successful%2520Investing%2520Is%2520Trusting%2520the%2520Process.jpg&amp;description=The%20Secret%20to%20Successful%20Investing%20Is%20Trusting%20the%20Process"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/The%20Secret%20to%20Successful%20Investing%20Is%20Trusting%20the%20Process.jpg" alt="The Secret to Successful Investing Is Trusting the Process" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/matt-bell">Matt Bell</a> of <a href="http://www.wisebread.com/the-secret-to-successful-investing-is-trusting-the-process">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-essentials-for-building-a-profitable-portfolio">5 Essentials for Building a Profitable Portfolio</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-costly-mistakes-diy-investors-make">9 Costly Mistakes DIY Investors Make</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-easiest-way-to-invest-in-the-worlds-biggest-companies">The Easiest Way to Invest in the World&#039;s Biggest Companies</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment decisions diy investor expectations financial advisers gains portfolio stock market strategy Mon, 23 Oct 2017 08:30:06 +0000 Matt Bell 2038342 at http://www.wisebread.com 4 Portfolio "Blind Spots" That Are Ruining Your Investments http://www.wisebread.com/4-portfolio-blind-spots-that-are-ruining-your-investments <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/4-portfolio-blind-spots-that-are-ruining-your-investments" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/confused_executive_man_looking_at_documents.jpg" alt="Confused executive man looking at documents" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Ignorance definitely isn't bliss when it comes to your investments, and yet we all seem to be hard-wired with blind spots, or as psychologists call them, <em>behavioral biases</em>. Here are some of the more common ways we tend to make irrational and unprofitable investment decisions. (See also: <a href="http://www.wisebread.com/this-one-mental-bias-is-harming-your-investments?ref=seealso" target="_blank">This One Mental Bias Is Harming Your Investments</a>)</p> <h2>1. Assigning too much value to the most recent news</h2> <p>Try to remember what you had for dinner on each of the past seven nights. Assuming there was nothing unusual about any of the meals, which one do you think you'll remember most easily? Last night's dinner, right?</p> <p>That makes sense. It's only natural that we would remember most clearly what happened in the most recent past.</p> <p>But here's the problem when it comes to investing: It isn't just that we most easily remember what happened in the recent past; we tend to assign greater significance to the most recent events as well, viewing them as indicators of what's likely to happen in the future. That's called <em>recency bias</em>.</p> <p>For example, let's say you're thinking about buying a particular stock. Before placing a buy order, you check its performance today and are pleased to see that it's up. Without consciously thinking about it, your built-in recency bias sees this as added confirmation that the stock is worth buying. It might be a good stock to buy, and it might not. One day's performance means very little.</p> <p>What to do? Make sure you're basing your investment decisions on something more than just the most recent news. What are analysts saying about the company's long-term prospects? Where will the company's future growth come from? How much competition does it have?</p> <h2>2. Reacting too strongly to bad news</h2> <p>Recency bias can be magnified if the recent news is bad. That's because of <em>loss aversion</em> &mdash; the tendency to feel the pain of loss on a much greater magnitude than the pleasure of an equal gain. According to some studies, losses can feel twice as bad as the good feelings that accompany comparable gains.</p> <p>This can lead to many forms of bad investor behavior. During a steep market decline, some investors can't stomach the pain and decide to sell. But that often makes matters worse because selling locks in their loss. When the market eventually cycles back up, fear keeps them on the sidelines and they miss the rebound.</p> <p>How to combat loss aversion? Don't monitor your portfolio so closely. People who check their holdings frequently have been found to trade more (because of fear-based selling) and generate lower returns than those who monitor their portfolios less often. (See also: <a href="http://www.wisebread.com/your-loss-aversion-is-costing-you-more-than-your-fomo?ref=seealso" target="_blank">Your Loss Aversion Is Costing You More Than Your FOMO</a>)</p> <h2>3. Seeing only what you want to see</h2> <p>As the old saying goes, if you're a hammer, everything looks like a nail. By the same token, if you have a hunch about a stock, and especially if you've become emotionally attached to the idea of owning it, you may tend to notice only news that supports your point of view.</p> <p>When <em>confirmation bias</em> gets its claws in you, it becomes very difficult to see things differently. You will ignore contradictory information, selectively remember conversations or articles about the investment you are considering, and even read ambiguous commentary as favoring your point of view.</p> <p>Confirmation bias goes a long way toward explaining the existence of &quot;perma-bears&quot; and &quot;perma-bulls&quot; &mdash; market analysts who <em>always </em>see a bear or bull market on the horizon and can point to evidence supporting their opinions.</p> <p>To avoid confirmation bias, proactively seek opposing points of view. Feeling strongly attached to the idea of investing in XYZ Corp? Look for reasons <em>not </em>to invest in it.</p> <h2>4. Using the wrong benchmarks</h2> <p>When you walk into a car dealer's showroom and see one of its most expensive vehicles on display, the model you had in mind probably looks like a bargain. That's a type of bias called<em> anchoring </em>in action, with the expensive car serving as a very influential point of reference.</p> <p>When it comes to investing, it's common for people to anchor their portfolio's performance to &quot;the market.&quot; Even if they have 40 percent of their money invested in bonds, the fact that the market generated a 30 percent gain makes them feel bad about their paltry 18 percent. It might even prompt them to change their portfolio and take on more risk than they should.</p> <p>What's the solution? Create a written investment plan tailored to your age and risk tolerance, including a realistic assumed average annual rate of return, such as 7 percent. Using <em>that </em>as your anchor, an 18 percent return wouldn't be a disappointment; it would be amazing.</p> <h2>Other ways to combat behavioral biases</h2> <p>The ideal emotional state for an investor is <em>unemotional. </em>However, we're not robots. So, awareness of our many biases is a good starting point for preventing them from steering us in the wrong direction.</p> <p>Perhaps the most helpful step of all is to press the pause button. Since it's impossible to time the market, waiting a couple of days before executing a buy or sell order isn't going to make much difference in that investment's performance. However, using that time to question your assumptions may make a <em>big</em> difference in helping you more rationally decide whether the investment should be bought or sold in the first place. (See also: <a href="http://www.wisebread.com/5-mental-biases-that-are-keeping-you-poor?ref=seealso" target="_blank">5 Mental Biases That Are Keeping You Poor</a>)</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2F4-portfolio-blind-spots-that-are-ruining-your-investments&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2F4%2520Portfolio%2520Blind%2520Spots%2520That%2520Are%2520Ruining%2520Your%2520Investments.jpg&amp;description=4%20Portfolio%20Blind%20Spots%20That%20Are%20Ruining%20Your%20Investments"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/4%20Portfolio%20Blind%20Spots%20That%20Are%20Ruining%20Your%20Investments.jpg" alt="4 Portfolio &quot;Blind Spots&quot; That Are Ruining Your Investments" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/matt-bell">Matt Bell</a> of <a href="http://www.wisebread.com/4-portfolio-blind-spots-that-are-ruining-your-investments">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-secret-to-successful-investing-is-trusting-the-process">The Secret to Successful Investing Is Trusting the Process</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-easiest-way-to-invest-in-the-worlds-biggest-companies">The Easiest Way to Invest in the World&#039;s Biggest Companies</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-types-of-investors-which-one-are-you">8 Types of Investors — Which One Are You?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment anchoring blind spots buying cognitive biases confirmation bias loss aversion mental biases portfolio recency bias selling stock market Tue, 17 Oct 2017 08:30:10 +0000 Matt Bell 2035896 at http://www.wisebread.com 7 Things You Need to Know About Investing in Company Stock http://www.wisebread.com/7-things-you-need-to-know-about-investing-in-company-stock <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/7-things-you-need-to-know-about-investing-in-company-stock" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/surging_business.jpg" alt="Surging Business" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>If you are employed by a public company, there is a chance that you will be offered the option to invest in company stock in your 401(k) or purchase company shares at a discount. This can be a nice perk for employees, and a possible incentive for them to work hard and remain loyal to the company.</p> <p>But investing in company stock is not without its pitfalls. You may recall stories about workers from Enron, Lehman Brothers, and other firms who lost much of their retirement money when those companies went bankrupt.</p> <p>If you have the chance to purchase company stock, consider taking advantage of it. But also be aware of some of these key pieces of information beforehand.</p> <h2>1. Sometimes you get company stock for free or at a discount</h2> <p>Companies distribute stock to employees in a number of different ways. Sometimes, it's simply given to workers as part of compensation plans. Other times, it's in the form of options that allow workers to buy shares at a certain price. (For example, you may be able to lock in shares at $45 per share even if they are selling at $60 on the open market.) This can be a nice benefit to employees beyond the normal salary, and it's often designed as an incentive to make them feel more invested in the company's success. If the company does well and share prices rise, employees can benefit financially. But the flip side is also true. If the company performs poorly, you could lose.</p> <h2>2. You already depend on your company</h2> <p>Your financial well-being is already heavily dependent on the success of your employer. The company pays your salary, offers you health benefits, and may match your contributions to your retirement plan. If you accept company stock, even more of your financial future is tied up with the health of the company.</p> <p>&quot;By using one's financial capital (i.e. 401(k) balance) to purchase employer stock, an individual is effectively over-allocating to the future success of his or her current employer,&quot; Morningstar said in a research report on the issue. This may be fine when the company is doing well, but bad news if the company is struggling. If you do accept company stock, take steps to diversify your income and investment holdings so your success and the company's success are not so intertwined.</p> <h2>3. Company stock should not be your sole retirement strategy</h2> <p>Many people have found themselves in trouble when they've decided to put all of their retirement plan contributions into company stock. Or, they've accepted company stock as compensation without contributing their own money into a diverse set of investments. This is dangerous because it places all of your retirement money into a single company that could go bust at any time.</p> <p>This is what happened with many Enron employees, who were left with nothing for their retirement when the company collapsed. Company shares should only be viewed as one component of a broader investment portfolio that includes a healthy mix of stocks from various industries and asset classes.</p> <h2>4. There may be tax implications</h2> <p>Unless your employer allows you to buy company stock as part of a tax advantaged retirement plan, you will be asked to pay taxes on any dividends you earn, and on capital gains when you sell. So keep this in mind at tax time.</p> <p>If you own a large amount of company stock, those shares could represent a sizable tax bill that you will have to plan for. And if you decide to sell shares shortly after acquiring them, remember that capital gains could be taxed at the normal income rate rather than the long-term capital gains rate, which is lower.</p> <h2>5. Companies that offer stock aren't necessarily stronger</h2> <p>You should not assume that a company's stock will perform well just because they are offering shares to you. In fact, there is some evidence to suggest that companies that dish out a lot of stock to employees actually perform worse than companies that don't. You may feel like you are cheating if you invest in companies other than your own, but your future self will thank you.</p> <h2>6. You may end up with more company stock than you realize</h2> <p>If you've acquired company stock over the years and it's performed well, you may find that over time it has taken on a disproportionate share of your investment portfolio's value. On one hand, it's good that the share price has risen, but now your portfolio is way out of balance and a big bulk of savings is at risk if those shares drop in value.</p> <p>It always makes sense to check your portfolio frequently and rebalance when you find yourself overweight with any one investment. This is especially true when dealing with company stock. As a general rule, avoid letting company stock make up more than 10 percent of your total investments.</p> <h2>7. Owning company stock has become less popular</h2> <p>Offering company stock used to be more common than it is now among organizations looking to attract top talent. The percentage of company stock in 401(k) plans has declined over the last decade. Back in 1999, company stock made up about 17 percent of the assets in 401(k) plans, but that figure has declined to 7 percent, according to the Employee Benefit Research Institute. And it appears that newer employees are less likely to place company stock in their retirement plans; EBRI reported that just 30 percent of new workers placed company stock in their 401(k) plan, compared to 44 percent of all planholders.</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2F7-things-you-need-to-know-about-investing-in-company-stock&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2F7%2520Things%2520You%2520Need%2520to%2520Know%2520About%2520Investing%2520in%2520Company%2520Stock.jpg&amp;description=7%20Things%20You%20Need%20to%20Know%20About%20Investing%20in%20Company%20Stock"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/7%20Things%20You%20Need%20to%20Know%20About%20Investing%20in%20Company%20Stock.jpg" alt="7 Things You Need to Know About Investing in Company Stock" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/tim-lemke">Tim Lemke</a> of <a href="http://www.wisebread.com/7-things-you-need-to-know-about-investing-in-company-stock">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/bookmark-this-a-step-by-step-guide-to-choosing-401k-investments">Bookmark This: A Step-by-Step Guide to Choosing 401(k) Investments</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-costly-mistakes-diy-investors-make">9 Costly Mistakes DIY Investors Make</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-investment-moves-that-prove-youre-finally-a-grown-up">5 Investment Moves That Prove You&#039;re Finally a Grown-Up</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-essentials-for-building-a-profitable-portfolio">5 Essentials for Building a Profitable Portfolio</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment 401(k) company stocks employee discounts portfolio pros and cons rebalancing retirement risks taxes Mon, 16 Oct 2017 08:30:10 +0000 Tim Lemke 2035892 at http://www.wisebread.com Bookmark This: A Step-by-Step Guide to Choosing 401(k) Investments http://www.wisebread.com/bookmark-this-a-step-by-step-guide-to-choosing-401k-investments <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/bookmark-this-a-step-by-step-guide-to-choosing-401k-investments" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/real_estate_agent_working_with_client_online.jpg" alt="Real estate agent working with client online" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>It's no secret that 401(k) fund options are notoriously opaque. While target-date funds provide convenience to investors, they often come with higher fees than alternative investment vehicles, have highly variable returns, and aren't a good fit for many retirement savers. Let's simplify things, and review a low-stress strategy for building a solid two-to-three-fund portfolio for your 401(k).</p> <h2>The downsides to target-date funds</h2> <p>Designed to gradually adjust your investment mix as you approach retirement age, target-date funds have exploded in popularity since their designation as qualified default investment alternatives by the 2006 Pension Protection Plan. The upsides of target-date funds are that they're easy to select (96 percent of Vanguard plans make it the default investment option), they automatically rebalance, and they offer appropriate investment diversification. (See also: <a href="http://www.wisebread.com/what-you-need-to-know-about-the-easiest-way-to-save-for-retirement?ref=seealso" target="_blank">What You Need to Know About the Easiest Way to Save for Retirement</a>)</p> <p>However, all that convenience comes at a high price. A 2015 review of over 1,700 target-date funds by FutureAdvisor determined that their average expense ratio (the annual fee charged to shareholders to cover operating expenses) was a relatively high 1.02 percent, meaning that you'd pay $51 every year for every $5,000 in your balance. Assuming an average investment return of 7 percent per year, you would miss out on an extra $4,998 in retirement savings over a 30-year period.</p> <p>On top of high fees, some target-date funds' returns barely cover their high annual expense ratios. The same review of 1,700 target-date funds pointed out that the lowest five-year average annual returns were 2.9 percent. (Returns are expressed net of expense ratios.) As of September 2017, 2.9 percent is not that much higher than the rate of a five-year CD at a credit union.</p> <p>Here's a better alternative to target-date funds.</p> <h2>Your guide to choosing your 401(k) investment options</h2> <p>In his 2013 letter to Berkshire Hathaway shareholders, Warren Buffett (aka The Oracle of Omaha) provided an investment strategy that would &quot;be superior to those attained by most investors who employ high-fee managers.&quot; Buffett recommended putting 90 percent of one's investments in a very low-cost S&amp;P 500 index fund, and the remaining 10 percent in short-term government bonds. This is the same advice that he has set in his will. (See also: <a href="http://www.wisebread.com/the-5-best-pieces-of-financial-wisdom-from-warren-buffett?ref=seealso" target="_blank">The 5 Best Pieces of Financial Wisdom From Warren Buffett</a>)</p> <p>More and more 401(k) plans are offering passively managed index funds that track a benchmark, such as the S&amp;P 500. And for good reason: The Vanguard 500 Index Investor Shares Fund [Nasdaq: VFINX] has an annual expense ratio of 0.14 percent, just a $7 annual fee for a balance of $5,000. That's $44 in annual savings when you compare it to a target-date fund with a 1.02 percent annual expense ratio.</p> <p>Worried that this approach doesn't provide you enough diversification? Think again: An index fund tracking the S&amp;P 500 is investing in 500 large-cap companies. That's as diversified as you can get. (See also: <a href="http://www.wisebread.com/how-too-much-investment-diversity-can-cost-you?ref=seealso" target="_blank">How Too Much Investment Diversity Can Cost You</a>)</p> <p>Let's use Buffett's advice to build your 401(k) plan's portfolio.</p> <h3>Step 1: Check your plan for a U.S. equities index fund</h3> <p>There is a good chance that your 401(k) plan offers a low-cost S&amp;P 500 index fund. Buffett personally recommends an S&amp;P 500 Vanguard index fund. Vanguard is an investment management company known for having very low fees compared to competitors, especially on its index funds. In 2016, close to 60 percent of Vanguard plans offered an index core giving you access to broadly diversified index funds for U.S. stocks. In truth, you can do just as well with other index funds tracking the S&amp;P 500, such as the Fidelity 500 Index Investor [Nasdaq: FUSEX] and the Northern Stock Index [Nasdaq: NOSIX].</p> <p>In the event, that you don't have access to a low-cost index fund tracking the S&amp;P 500 through your workplace 401(k), you have two action items. First, see if your plan offers another large cap index fund (one investing in large U.S. companies based on a market index). This type of fund normally invests at least 80 percent of its assets in securities within its benchmark index, such as the Fidelity Large Cap Stock Fund [Nasdaq: FLCSX] and the Vanguard U.S. Growth Fund [Nasdaq: VWUSX]. Second, contact your plan administrator and request adding a low-cost S&amp;P 500 index fund.</p> <h3>Step 2: Check your plan for a fund of short-term investment-grade bonds</h3> <p>Just like there are index funds for investing in equities, there are also index funds for investing in bonds. For example, there is the Vanguard Short-Term Investment-Grade Fund [Nasdaq: VSFTX], which has an annual expense ratio of 0.20 percent, or $10 in fees for a balance of $5,000.</p> <p>Don't have access to such a fund? Look for a low-cost fund giving you the most exposure to high- and medium-quality, investment-grade bonds with short-term maturities, including corporate bonds, pooled consumer loans, and U.S. government bonds. Why short-term maturities? Short-term bonds tend to have low risk and low yields, ensuring that one portion of your nest egg remains stable at all times &mdash; something you'll really benefit from during any recessions.</p> <p>Then, request that your plan administrator add a low-cost index fund for domestic bonds.</p> <h3>Step 3: Allocate 90 percent to the equities index fund and 10 percent to the bonds index fund</h3> <p>Now you're ready to rebalance your portfolio. Using your online portal, look for an option that says &quot;exchange funds&quot; or &quot;transfer money between funds&quot; to move your nest egg dollars from your existing investments into the equities index fund and bonds index fund. (Note: Depending on your plan rules, including vesting rules, you may not be able to move 100 percent of your balance until a certain date. In that case, move everything that you can and the remaining once it becomes eligible.)</p> <p>Exchange your entire 401(k) balance and allocate 90 percent of that amount to the equities index fund and 10 percent to the bonds index fund. Confirm your transaction.</p> <h3>Step 4: Adjust your future contributions</h3> <p>To keep future contributions going into the right place, adjust your paycheck investment mix so that 90 percent of withholdings go to the equities index fund and 10 percent go into the bonds index fund.</p> <p>If your 401(k) offers an automatic rebalance feature, opt-in for it so that your portfolio is automatically readjusted to the 90/10 without you moving a finger. If your 401(k) doesn't offer that feature, plan to manually rebalance your account once a year.</p> <h3>Step 5: Revisit the 90/10 allocation at important life changes</h3> <p>Marriage. Birth of your first child. Purchase of your first home. Being able to start making catch-up contributions. Reaching age 59 1/2. These and more critical milestones in your life may require you to adjust your 90/10 allocation. As you get closer to retirement age, you should gradually shift from a growth strategy (selecting funds that exhibit signs of above-average growth) to an income strategy (picking funds that provide a steady stream of income) so that you hold fewer stocks and more bonds. The beauty of a target-date fund is that is does all of this for you automatically as you age. Without one, you'll need to stay on top of this occasional rebalancing yourself.</p> <h2>The bottom line</h2> <p>One of the main reasons that your 401(k) will perform better is that you're minimizing fees. If you were to allocate 90 percent of a $5,000 401(k) balance into the Vanguard 500 Index Investor Shares Fund [Nasdaq: VFINX] and 10 percent into the Vanguard Short-Term Investment-Grade Fund [Nasdaq: VSFTX], you would just pay $7.30 in annual fees. That's $43.70 in annual savings over putting the entire $5,000 in a target-date fund with a 1.02 percent annual expense ratio. It doesn't sound like a large amount of savings, but compounded over the years it can add up to thousands of dollars more in your retirement fund.</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" data-pin-save="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2Fbookmark-this-a-step-by-step-guide-to-choosing-401k-investments&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2FA%2520Step%2520By%2520Step%2520Guide%2520To%2520Choosing%2520Investments.jpg&amp;description=A%20Step-by-Step%20Guide%20to%20Choosing%20401(k)%20Investments"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/A%20Step%20By%20Step%20Guide%20To%20Choosing%20Investments.jpg" alt="A Step-by-Step Guide to Choosing Investments" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/damian-davila">Damian Davila</a> of <a href="http://www.wisebread.com/bookmark-this-a-step-by-step-guide-to-choosing-401k-investments">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-warren-buffett-says-you-should-invest-in-index-funds">Why Warren Buffett Says You Should Invest in Index Funds</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/think-outside-the-index-when-you-rebalance-your-investment-portfolio">Think Outside the Index When You Rebalance Your Investment Portfolio</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-make-sure-you-dont-run-out-of-money-in-retirement">How to Make Sure You Don&#039;t Run Out of Money in Retirement</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-ways-to-get-the-most-from-your-employer-s-automated-retirement-plan">5 Ways to Get the Most From Your Employer’s Automated Retirement Plan</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment Retirement 401(k) bonds equities expense ratios fees index portfolio rebalancing s&p 500 short-term bonds target-date funds Warren Buffett Thu, 21 Sep 2017 08:31:06 +0000 Damian Davila 2023013 at http://www.wisebread.com 8 Types of Investors — Which One Are You? http://www.wisebread.com/8-types-of-investors-which-one-are-you <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/8-types-of-investors-which-one-are-you" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/businessman_reading_a_newspaper.jpg" alt="which type of investor are you" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Do you tend to invest in a particular way? Identifying which type of investor you are can help you understand the potential pitfalls of your investment approach &mdash; and how to improve your chances for better investment returns. Which type of investor are you?</p> <h2>1. Automatic investor</h2> <p>The automatic investor is all about convenience. Everything related to investing is set on autopilot. Automatic contributions to investment funds come out of every paycheck or are withdrawn from the bank account on a certain day of the month. This type of investor doesn't spend much time or effort thinking about investing, and doesn't need to since everything is automatic. They don't have to remind themselves to invest; it's checked off their financial to-do list.</p> <p>The potential downside for the automatic investor is losing touch with where investment funds are going and how the investment portfolio is performing. If you are not paying attention, you may not have investment selections that meet your current goals, and you may not identify and remove low performing investments or funds with high fees. If you don't check in at least occasionally, this hands-off approach may cost you. Rebalancing your portfolio once or twice a year by transferring funds to maintain your desired proportions of stocks to bonds should be sufficient to keep your investment portfolio on track. (See also: <a href="http://www.wisebread.com/the-most-important-thing-youre-probably-not-doing-with-your-portfolio?ref=seealso" target="_blank">The Most Important Thing You're Probably Not Doing With Your Portfolio</a>)</p> <h2>2. Daily Dow watcher</h2> <p>The Dow watcher is constantly up to speed. They know at any time if the stock market is up or down. The current market price and chart is only a tap away on their smartphone. This type of investor knows how much their portfolio is worth and worries about how much they are losing when the market has a bad day. Nothing goes over the Dow watcher's head.</p> <p>The risk for the Dow watcher is that he or she can easily get stressed out by day-to-day ups and downs in the market. They may even get discouraged when the market is going down and decide to sell stock when the price is low &mdash; the worst time to sell! It's good to be informed, especially when it comes to your investments, but if you find yourself too glued to the Dow's daily performance &mdash; it might be a good idea to <a href="http://www.wisebread.com/want-your-investments-to-do-better-stop-watching-the-news" target="_blank">step away from the news</a> for a bit. Checking in on the stock market and your investment portfolio quarterly is probably more than frequent enough, and you can use the time you save for something more productive and enjoyable.</p> <h2>3. Active trader</h2> <p>The active trader is a studious investor. This type of investor tries to time the market by figuring out that a stock is going up before other investors realize it &mdash; and then selling when it is near the peak price before most investors figure out that it is going down. This type of investor pores over market and economic data, reads business articles, and is well-informed about business trends and news. He or she is willing to take risks for a chance at big returns.</p> <p>If you're an active trader, tread carefully; you can easily lose significant money if your timing is off. Trading fees can also get expensive if your investment approach requires making a lot of trades. You are much more likely to make money from buying good stocks and holding them for the long haul.</p> <h2>4. Conscientious investor</h2> <p>Conscientious investors put their money where their morals are. They have limits to what activities and products they are willing to be involved with in order to make a buck. For example, some conscientious investors invest only in socially-responsible or environmentally-responsible companies, and avoid owning shares in companies that promote values or products contrary to their moral principles. This type of investor is likely to exert economic influence through consumer purchasing decisions as well as through their stock picks.</p> <p>This type of ethical investing unfortunately can limit a person's investment options, which may result in lower returns. But some things are worth more than money to conscientious investors. (See also: <a href="http://www.wisebread.com/a-simple-guide-to-socially-responsible-investing?ref=seealso" target="_blank">A Simple Guide to Socially Responsible Investing</a>)</p> <h2>5. Property investor</h2> <p>Not every investor owns stocks. The property investor owns real estate, collectibles, gold, and maybe even bonds. He or she wants to invest in things that they can understand and control to some extent. This type of investor may not trust Wall Street and avoids the volatility of stocks.</p> <p>Historically, however, stocks have had great investment returns compared to other investment types, so property investors who shy away from the stock market could be missing out. Large cap value stocks can be a relatively safe way to start off in stock investing for first-time stock investors.</p> <h2>6. Bargain investor</h2> <p>This is the kind of investor that pounced on GM stock when it was $1 per share in 2009. Of course there is risk that bargain stocks could become worthless, but there is potential for the stock price to bounce back. The bargain investor looks carefully at P/E ratios to check the share price relative to earnings per share when deciding what stock to buy.</p> <p>Bargain hunters should be wary though &mdash; sometimes stocks with low prices are trading at a low price for a good reason. The bigger the bargain, the more research is merited into why the price is so low before you buy.</p> <h2>7. Company loyalist</h2> <p>The company loyalist owns a disproportionate amount of stock from an individual company. This could be a trendy stock that inspires loyalty like Apple or Tesla, or the company loyalist could own a large amount of his or her own employer's stock.</p> <p>Owning a large amount of any single company stock can be risky. The company could <a href="http://www.wisebread.com/how-these-8-company-stocks-fared-following-scandal" target="_blank">experience a major scandal</a> or product failure and the stock price could tank. Remember Enron? Owning a lot of stock in the company you work for is even riskier, because if something goes wrong you'll not only lose value in your stock fund, but you may lose your job at the same time. Some financial advisers suggest that owning more than 10 percent to 15 percent of your company's stock may be too much.</p> <h2>8. Portfolio tweaker</h2> <p>The portfolio tweaker is not really an active trader, but likes to adjust and fine tune his or her portfolio frequently by making transfers between funds to get the desired balance between large cap, mid cap, small cap, foreign, domestic, growth, value, and bond investment categories.</p> <p>While it is good to adjust your portfolio occasionally to meet your investment goals, frequently selling investments that are performing well just to meet an arbitrary &quot;balance&quot; in your portfolio may not be the best move and could hurt your overall return. As we advised the automatic investor, portfolio rebalancing once or twice per year is a good interval for most investors.</p> <h2 style="text-align: center;">Like this article? Pin it!</h2> <div align="center"><a data-pin-do="buttonPin" data-pin-count="above" data-pin-tall="true" data-pin-save="true" href="https://www.pinterest.com/pin/create/button/?url=http%3A%2F%2Fwww.wisebread.com%2F8-types-of-investors-which-one-are-you&amp;media=http%3A%2F%2Fwww.wisebread.com%2Ffiles%2Ffruganomics%2Fu5180%2F8%2520Types%2520Of%2520Investors%2520Which%2520One%2520Are%2520You.jpg&amp;description=8%20Types%20of%20Investors%20%E2%80%94%20Which%20One%20Are%20You%3F"></a></p> <script async defer src="//assets.pinterest.com/js/pinit.js"></script></div> <p style="text-align: center;"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/u5180/8%20Types%20Of%20Investors%20Which%20One%20Are%20You.jpg" alt="8 Types of Investors &mdash; Which One Are You?" width="250" height="374" /></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/dr-penny-pincher">Dr Penny Pincher</a> of <a href="http://www.wisebread.com/8-types-of-investors-which-one-are-you">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-too-much-investment-diversity-can-cost-you">How Too Much Investment Diversity Can Cost You</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/want-your-investments-to-do-better-stop-watching-the-news">Want Your Investments to Do Better? Stop Watching the News</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-essentials-for-building-a-profitable-portfolio">5 Essentials for Building a Profitable Portfolio</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment automatic company stock dow ethical investing portfolio property investors returns risk stock market stocks types Fri, 08 Sep 2017 08:00:05 +0000 Dr Penny Pincher 2017190 at http://www.wisebread.com Why Warren Buffett Says You Should Invest in Index Funds http://www.wisebread.com/why-warren-buffett-says-you-should-invest-in-index-funds <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/why-warren-buffett-says-you-should-invest-in-index-funds" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock-465649794.jpg" alt="Learning why Warren Buffett says you should invest in index funds" title="" class="imagecache imagecache-250w" width="250" height="142" /></a> </div> </div> </div> <p>About nine years ago, Warren Buffett <a href="http://www.usatoday.com/story/money/personalfinance/columnist/2017/03/08/buffetts-best-investment-tip-everyone-index-funds/98525306/" target="_blank">made a $500,000 bet</a>. He wagered that a simple index fund would outperform an actively managed hedge fund run by expert investors. Which would you pick?</p> <p>Before you decide, here is some additional information about the fund contenders:</p> <ul> <li>Index funds buy a mix of stocks in a proportion that represents the overall stock market or a particular market segment. Index funds are typically managed automatically by a computer algorithm, and management fees for this type of fund are usually very small &mdash; around 0.1 percent or sometimes even lower.<br /> &nbsp;</li> <li>Hedge funds put money into alternative investments that can go up if the stock market goes down. Of course, hedge funds also try to provide maximum returns and beat the stock market if possible. Hedge funds may invest in real estate, commodities, business ventures, and other opportunities that fund managers think will hedge against potential stock market losses and produce good returns. These funds are actively managed and have high management fees of around 2 percent or more.</li> </ul> <p>Buffett picked a simple S&amp;P 500 index fund for the wager. He bet against an investment manager who picked a set of five hedge fund portfolios. After letting these investments play out for nine years, Buffett announced the results of this wager in the chairman's letter in this year's annual report for the holding company he controls and runs, Berkshire Hathaway: The index fund outperformed the actively managed funds. (See also: <a href="http://www.wisebread.com/the-5-best-pieces-of-financial-wisdom-from-warren-buffett?ref=seealso" target="_blank">The 5 Best Pieces of Financial Wisdom From Warren Buffett</a>)</p> <p>Buffet's experience mimics numerous studies that have shown that index funds consistently beat the results of actively managed funds. Why does a simple and essentially automatic investment strategy (the index fund) outperform sophisticated investment funds managed by active expert investors?</p> <h2>Low fees</h2> <p>Fund fees, also known as expense ratios, are much lower for index funds than for actively managed hedge funds or mutual funds. You can find index funds with fees under 0.1 percent, while actively managed hedge funds can have fees of 2 percent or more.</p> <p>Although the wager Buffett made concerned hedge funds with high expense ratios, the same principle applies when comparing index funds to actively managed mutual funds, which can have fees as high as 1 percent. Higher fees mean that actively managed funds have to outperform the market significantly to offset them. Over the long run, actively managed funds may not consistently outperform the market by enough to make up for the higher fees.</p> <h2>Investment errors</h2> <p>Another reason actively managed funds can fall behind index funds is investment errors. In active funds, someone is making investment decisions and moving money around trying to get higher returns. Sometimes an investment manager can outperform the market and get higher returns, but this doesn't always work out. It only takes one mistake to wipe out a lot of investment gains. In an index fund, the only investment decision is to adjust the ratio of holdings to match the market segment of interest.</p> <p>Index funds accurately reflect the performance of the market they are mirroring. The investment strategy is simple, and there is no opportunity for investment error. If you invest in an index fund, you will reliably receive similar returns to the market that your index fund represents.</p> <h2>How to buy an index fund for your portfolio</h2> <p>During my research for this article, I moved around $10,000 of my own investment funds from actively managed funds into index funds with much lower fees. I figured if index funds are good enough for Warren Buffett, they are good enough for me!</p> <p>You can log in to your investment account website and view the expense ratios for your current investments and for other available funds. I found that my investment choices had expense ratios ranging from 0.02 percent to 0.83 percent &mdash; a difference of more than 40-fold. This is definitely a big enough difference to worry about.</p> <p>A good first step is to check your own investment funds and find out how high the fees are. You may be happy with what you find, or you may decide you want to move to index funds with much lower fees.</p> <p>Of course, when choosing your investment funds, you shouldn't look only at the expense ratio. You should balance your portfolio to include a strategic mix of large cap, medium cap, and small cap investments and an intentional balance of foreign and domestic stocks to meet your investment goals.</p> <p>When I moved my investment money into index funds with very low fees, I picked funds that made sense to balance my portfolio. For example, I moved some funds from a mid-cap growth fund with a 0.3 percent expense ratio into a mid-cap index fund with a 0.07 percent expense ratio &mdash; over four times lower fees. In the long run, I think this is a bet that will pay off.</p> <p>Even if you don't have $500,000 to wager, you might as well minimize what you are paying in fees by moving from actively managed funds to index funds. You'll keep more of your money working for you instead of having it go to work for someone else.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/dr-penny-pincher">Dr Penny Pincher</a> of <a href="http://www.wisebread.com/why-warren-buffett-says-you-should-invest-in-index-funds">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/bookmark-this-a-step-by-step-guide-to-choosing-401k-investments">Bookmark This: A Step-by-Step Guide to Choosing 401(k) Investments</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-too-much-investment-diversity-can-cost-you">How Too Much Investment Diversity Can Cost You</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/11-investing-tips-you-wish-you-could-tell-your-younger-self">11 Investing Tips You Wish You Could Tell Your Younger Self</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-are-income-stocks">What Are Income Stocks?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment actively managed funds expense ratios fees hedge funds index funds mutual funds portfolio returns stock markets Warren Buffett Mon, 10 Apr 2017 09:00:08 +0000 Dr Penny Pincher 1922477 at http://www.wisebread.com The 3 Rules Every Mediocre Investor Must Know http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/the-3-rules-every-mediocre-investor-must-know" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/iStock-508414008.jpg" alt="Learning three rules evert mediocre investor must know" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Mediocre financial advice can earn you mediocre investment returns &mdash; and mediocre investment returns are all you need to save for a house, send your kids to college, and fund your (potentially early) retirement. <a href="http://www.wisebread.com/why-you-should-take-investment-advice-from-a-mediocre-investor" target="_blank">Mediocre investment advice</a> is pretty straightforward. In fact, the only thing that's complicated about getting mediocre financial results is the stuff that comes before investing: Things like earning money, keeping your debt in check, finding a career, living frugally, and most crucially, building an adequate <a href="http://www.wisebread.com/a-step-by-step-guide-to-creating-your-emergency-fund" target="_blank">emergency fund</a>.</p> <p>Once you've got those things taken care of, you're ready to start investing. If you're at that point, here's my mediocre investment advice: Create a diversified portfolio of low-cost investments and rebalance it annually.</p> <h2>Diversified Portfolio</h2> <p>It's important to have diversity at several levels. Eventually you'll want diversity in investment types &mdash; not just stocks, but also bonds, real estate, precious metals, foreign currency, cash, etc. More importantly, you want finer-grained diversity especially in the earlier stages of building your portfolio. Don't let your portfolio get concentrated in just one or a few companies. (For what it's worth, don't let it get concentrated in the stock of your employer, either. That sets you up for a catastrophe, because if your employer runs into trouble, the value of your portfolio can crash at the same time your job is at risk.)</p> <p>In the medium term &mdash; after you've got a well-diversified stock selection, but before it's time to branch out into more exotic investments &mdash; you'll want to expand the diversity of types of companies. Not just big companies, but also medium-sized and small companies. Not just U.S. companies, but also foreign companies. Not just tech companies, but also industrial companies and financial companies, and so on.</p> <p>Diversity wins two ways. First, it's safer: As long as all your money isn't in just one thing, it doesn't matter so much whether it's a good year or a bad year for that thing. Second, it produces higher returns: No one can know which investment will be best, but a diversified portfolio probably has at least <em>some </em>money invested in <em>some </em>investments that will do especially well. (Of course retrospectively, there will have been one investment that does best, and risking having all your money in that would have produced the highest possible return &mdash; but that's exactly what a mediocre investor knows better than to attempt.)</p> <p>Of course, you don't want a random selection of investments, even if such a thing might be quite diverse. You want a reasonably balanced portfolio &mdash; something I'll talk about at the end of this post.</p> <h2>Low-Cost Investments</h2> <p>The less money you pay in fees and commissions, the more money you have invested in earning a return.</p> <p>Getting this right is so much easier now than it was when I started investing! In those days, you could scarcely avoid losing several percent of your money right off the top to commissions, and then lose another percent or two annually to fees. Now it's easy to make a stock trade for less than $10 in commissions, and it's easy to find mutual funds and exchange-traded funds that charge fees of only a fraction of 1%.</p> <p>Still, it's easy to screw this up. Any investment that's advertised is paying its advertising budget somehow &mdash; probably with fees from investors. Any investment that's sold by agents or brokers is paying those agents or brokers somehow &mdash; probably with commissions or fees from investors.</p> <p>All those costs come straight out of your return. Keep them to a minimum.</p> <h2>Rebalance Annually</h2> <p>Your diversified portfolio will immediately start getting less diversified: Your winning investments will become a larger fraction of your portfolio while your losers will become a smaller fraction. In the short term, that's great. Who doesn't want a portfolio loaded with winners? Pretty soon though, you start losing the advantages of diversification. Last year's winners will inevitably become losers eventually, and you don't want that to happen after they've become a huge share of your portfolio.</p> <p>The solution is to restore the original diversity. Sell some of the winners, and use the resulting cash to buy some more of the losers. It's the easiest possible way to buy low and sell high. (Maybe you don't want to buy exactly the losers &mdash; not if their poor performance leads you think there's something really wrong with them. But buy something kind of like them. Health care companies probably belong in your portfolio, even if many of them did badly this year.)</p> <p>There are costs to rebalancing &mdash; costs in time and effort (figuring out what to sell and what to buy), and actual costs in commissions and fees. Because of that, you probably wouldn't want to rebalance constantly. You could make a case for monthly or quarterly rebalancing, but even that seems like a lot of effort for a small portfolio. Annually seems to hit the sweet spot.</p> <h2>What Goes Into a Diversified Portfolio?</h2> <p>What I'm going to suggest is that you start with a balanced portfolio of stocks and bonds.</p> <p>It's not that there aren't plenty of other worthy investment options &mdash; cash, gold, silver, real estate, foreign currencies, etc. &mdash; it's just that they all have complications of one sort or another, and you can get started on earning your mediocre returns without them.</p> <p>My mediocre investment advice then is that your portfolio should be a balance of stocks (for maximum growth) and bonds (for income and stability).</p> <h3>Finding the Right Balance Comes Down to Age &mdash; Yours</h3> <p>What's the right balance? An old rule of thumb was that 100 minus your age would be a good target percentage for the stock portion of your portfolio. At the start of your career, you'd have nearly 80% of your investments in stocks, and that fraction would gradually decline to about 35% as you approached retirement. The theory was that a young person can afford to take big risks, because he or she has time to wait for an eventual market rebound (and because during the early phase of building up a portfolio, even a large percentage loss is a small dollar amount). This makes a certain amount of sense. In fact, you could argue that a stock market that collapsed and then stayed down just when you started investing would be great &mdash; it would give you decades to buy stocks cheap.</p> <p>That rule of thumb isn't bad, although with people living longer these days, it probably makes sense to keep a higher portion of stocks in your portfolio during the last years before and first years after retirement. Once you hit 50, maybe only cut your stock portfolio by 1% every two years.</p> <p>When you're just getting started, feel free to keep it very simple. Perhaps just start putting money into a broad-based stock fund (such as an S&amp;P 500 index fund). You can add a bond fund right away if you want, or wait until your annual rebalancing.</p> <p>There are mutual funds that will manage this balance for you, holding stocks and bonds with a balance that shifts over time to some target date, at which point they'll hold a portfolio suitable for someone who has retired. You don't need them. In particular, they tend to have higher expenses, violating the &quot;low cost&quot; principle. You can do it easily enough for yourself. (Of course if you find that you don't do your annual rebalancing, then maybe paying a fund to do it for you is worth the expense.)</p> <p>As an alternative to mutual funds, you can use exchange traded funds or ETFs. It doesn't matter.</p> <p>Once your portfolio of stocks is large, you probably want to move beyond a single fund. Look at the other low-cost funds offered by the same fund family that provides your S&amp;P 500 index fund. Consider adding a fund that includes foreign stocks (especially if the dollar seems strong at the time you'll be buying). Consider adding a fund that includes dividend-paying stocks (especially if interest rates are low relative to dividends).</p> <p>Follow these mediocre tips, and you'll be racking up mediocre returns in no time! And remember &mdash; mediocre returns are all you need to live well and retire well.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/are-you-choosing-the-right-fund-for-your-portfolio">Are You Choosing the Right Fund for Your Portfolio?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-types-of-investors-which-one-are-you">8 Types of Investors — Which One Are You?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-to-build-an-investment-portfolio-for-under-5000">How to Build an Investment Portfolio for Under $5000</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/11-investing-tips-you-wish-you-could-tell-your-younger-self">11 Investing Tips You Wish You Could Tell Your Younger Self</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment advice balancing bonds diversification ETFs mediocre investments mutual funds portfolio returns stock market stocks Mon, 27 Feb 2017 10:30:46 +0000 Philip Brewer 1896815 at http://www.wisebread.com The Easiest Way to Invest in the World's Biggest Companies http://www.wisebread.com/the-easiest-way-to-invest-in-the-worlds-biggest-companies <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/the-easiest-way-to-invest-in-the-worlds-biggest-companies" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/invest_money_476336804.jpg" alt="Learning how to invest in the biggest companies" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Here's a classic way to build up an investment portfolio: Regularly invest modest amounts of money in growing companies. Do that for a few decades, reinvesting the dividends as you go along, and &mdash; if you've picked the right companies &mdash; you will end up with sizable holdings. Perhaps even real wealth.</p> <p>If you want a diversified portfolio, and you really should, there are a lot of cheap ways to get one. Any number of mutual funds will let you open an account with a modest initial deposit, and the minimums for subsequent investments are quite reasonable for even a small saver.</p> <p>But what if you don't like someone else's idea of a diversified portfolio? What if you have some strong opinions about which companies are worth investing in, and out of the thousands of mutual funds available, none of them focuses on those companies? What if you really want to invest in specific companies picked by you?</p> <p>One option would be to open an account at an online brokerage and make your purchases there. That will work great if you have ample money to invest. But what if your free cash for investing is small?</p> <p>Even small investments can add up to a lot of money, if you've got both time and a good annual return working for you. If the companies you pick can average an 8% annual return for 40 years, just $20 a week will build to a fortune of over $300,000.</p> <p>But the online brokerage solution is no good for investments that small, because of commissions. Even the cheap online brokers charge $5 on a trade, and plenty of them charge closer to $10 &mdash; there's half your investment gone right there.</p> <p>Fortunately, there's an alternative that's tailor-made for this situation: Direct Stock Purchase Plans, or DSPPs.</p> <h2>Direct Stock Purchase Plans</h2> <p>Back in my day they were called Dividend Reinvestment Plans, or DRIPs, but they're basically the same thing: Big companies hire somebody &mdash; usually the stock transfer agent &mdash; to create and manage accounts that let individuals buy small quantities of stock &mdash; usually for no commission &mdash; and reinvest their dividends.</p> <p>It's a win for the investor, because they get to invest in the stock for free. It's a win for company, because they get a dependable stream of new capital, and a stable base of shareholders who are aren't likely to sell out at the first sign of bad news or to go chasing after the next hot trend.</p> <p>Besides charging no commissions, they also solve another problem for the very small investor: the cost of whole shares. Suppose you want to invest $20 out of every paycheck, but the stock you want to buy is $63 a share. It would take you four paychecks to save up enough money to buy one share. With a DSPP you'd get 0.317 shares with the first contribution, and a similar amount each paycheck after.</p> <h2>Things to Know</h2> <p>There are a few caveats.</p> <p>First, only certain companies go to the trouble and expense of offering a DSPP. Happily, as suggested by the title of this article, they're mostly the largest companies on the U.S. stock exchanges. The web has plenty of lists of companies that offer DSPPs or DRIPs. Alternatively, if you know which company you're interested in, go to the company website and look for a link like &quot;investors&quot; or &quot;shareholder information.&quot; If there's a direct investment program, you'll find the information about it there.</p> <p>Second, buying stocks this way &mdash; through numerous small purchases &mdash; may make figuring your taxes a lot more complicated in the years that you sell. (This may be less true than it used to be, now that brokers are required to track your cost basis for you.)</p> <p>Third, be aware that these sort of plans don't offer the services of a broker. They are basically just for accumulating shares in one specific company. They will probably let you shift from reinvesting your dividends to receiving them in cash, something you might want to do when you retire and will be living off your investments. They usually let you take delivery of your stock (if at some point you want to transfer it to a regular broker) or sell it (if you have found a better investment, or need the money to live on). They won't let you borrow against it, they won't have cash management tools, they won't be interested in holding any other shares you own, or selling you bonds, or advising you on other investment opportunities.</p> <p>Fourth, investing in just one company won't give you a diversified investment portfolio. You'd need a dozen carefully chosen companies to get something reasonably diversified. Of course, as an adjunct to some well-diversified mutual funds, a DSPP in a company that does very well, can provide a considerable boost to your total return, without completely unbalancing your portfolio.</p> <h2>History</h2> <p>Plans like these used to be a much bigger deal. Especially before 1975 (when minimum commissions were abolished), but continuing right up until Internet brokers got big in the 1990s, the costs to trade stocks were high enough that it was completely impractical for a small investor to gradually accumulate shares in a growing company. Investing in individual stocks was a game only for the wealthy.</p> <p>It's generally not important these days, but there's a technical difference between DRIPs and DSPPs. Back in the day DRIPs usually required that you purchase your first share from a broker (or acquire it some other way, such as by inheriting it). Then you could reinvest dividends, or even make additional cash purchases of shares, but that first share had to come first.</p> <p>Starting in the mid-1990s, the SEC relaxed some rules, making it practical for companies to offer DSPPs that could sell you your first share, as well as shares beyond that.</p> <p>It's kind of a technical point, but that's the difference between the two kinds of plan.</p> <h2>Small Versus Tiny Investors</h2> <p>With internet brokers, even a fairly small investor can buy and sell stocks. You need a certain amount of capital &mdash; a few thousand dollars &mdash; to make it possible to buy a round lot of 100 shares and to make the $5 or $10 commission a small enough percentage of your total investment.</p> <p>But if you're a tiny investor &mdash; if your investable capital is only a few hundred dollars &mdash; something like a DSPP makes it possible for even the smallest investors to accumulate sizable portfolios through frequent, modest investments made over a long period of time.</p> <p>It's what they were designed for.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/philip-brewer">Philip Brewer</a> of <a href="http://www.wisebread.com/the-easiest-way-to-invest-in-the-worlds-biggest-companies">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-5"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/what-are-income-stocks">What Are Income Stocks?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-secret-to-successful-investing-is-trusting-the-process">The Secret to Successful Investing Is Trusting the Process</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/4-portfolio-blind-spots-that-are-ruining-your-investments">4 Portfolio &quot;Blind Spots&quot; That Are Ruining Your Investments</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-essentials-for-building-a-profitable-portfolio">5 Essentials for Building a Profitable Portfolio</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment direct stock purchase plans dividend reinvestment plans DSPP large companies portfolio small investors stock market Mon, 28 Nov 2016 10:00:06 +0000 Philip Brewer 1839210 at http://www.wisebread.com 5 Essentials for Building a Profitable Portfolio http://www.wisebread.com/5-essentials-for-building-a-profitable-portfolio <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/5-essentials-for-building-a-profitable-portfolio" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/growing_money_trees_84090749.jpg" alt="Finding essentials for building profitable portfolio" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>For many people, investing is the most complicated and intimidating aspect of managing money. But it doesn't have to be. Here are some of the essentials for building a successful investment portfolio.</p> <h2>1. Know What You're Investing For</h2> <p>Investing is best done with a purpose in mind. Investing for a child's <a href="http://www.wisebread.com/when-should-you-start-saving-for-your-child-s-education">future college costs</a> is not the same as investing for your retirement. You would use different investment vehicles &mdash; a 529-plan account or Coverdell Education Savings Account for college, and an <a href="http://www.wisebread.com/401k-or-ira-you-need-both">IRA or 401K</a> for retirement.</p> <h2>2. Know Your Time Frame</h2> <p>Investing is for goals you want to accomplish in five or more years. Anything shorter than that and you can't afford to take much, if any, risk, so you would be best served by a savings account.</p> <p>Still, a &quot;five or more years&quot; time horizon contains a wide range of options. Someone planning to retire in 10 years should invest quite differently than someone planning to retire in 30 years. The first person can't afford to take as much risk as the second person. By the same token, the second person can't afford the risk of playing it too safe.</p> <h2>3. Know Your Temperament</h2> <p>This has to do with how well you sleep at night when the stock market is in free fall. Vanguard has a decent <a href="https://personal.vanguard.com/us/FundsInvQuestionnaire">free assessment</a> that combines your investment time frame with your temperament to suggest an optimal asset allocation &mdash; that is, what percentage of your portfolio you should allocate to stocks and what percentage to bonds (or stock, or bond-based mutual funds).</p> <h2>4. Know How to Choose Specific Investments</h2> <p>If investing is the most complicated and intimidating aspect of managing money, choosing specific investments is the most complicated and intimidating aspect of investing. Very few people have the wherewithal to do this on their own. It's helpful to acknowledge that. As Clint Eastwood's Dirty Harry character noted, &quot;A man's got to know his limitations.&quot; Of course, the same is true for women!</p> <p>There's just too much to know. There are thousands of different investments to choose from. And it can be crazy confusing (and dangerous) to make these decisions based on the all-too-common articles about &quot;Last Year's Best-Performing Mutual Funds&quot; or &quot;Where to Invest to Take Advantage of Advances in Wind Power.&quot;</p> <p>The crucial decision you need to make is not so much about which investments to choose; it's about which investment process to use. Here are three options.</p> <h3>Go With a Target-Date Fund</h3> <p>The simplicity of such funds has made them tremendously popular. Most of the big mutual fund companies offer them. You just choose the fund with the year closest to the year of your intended retirement as part of its name (Fidelity Freedom 2050, for example). The fund is designed with what the fund company believes is the ideal asset allocation for someone with that retirement date in mind, and it even changes the allocation as you get closer to that target date, becoming increasingly conservative. It's a very simple process, but <a href="https://www.soundmindinvesting.com/articles/view/target-date-funds-the-devils-in-the-details">all target-date funds are not alike</a>. So, be informed.</p> <h3>Go With an Investment Adviser</h3> <p>He or she will get to know you and your goals and then tailor an investment strategy to you. Along the way, you will typically pay 1% of the amount of money you have the adviser manage for you each year. Also, advisers usually won't work with anyone with less than $100,000 to manage. If you go this route, ask friends for referrals and opt for a fee-based adviser (as opposed to one compensated by commissions) who works as a &quot;<a href="http://www.wisebread.com/who-to-hire-a-financial-planner-or-a-financial-adviser">fiduciary</a>.&quot;</p> <h3>Go With an Investment Newsletter</h3> <p>Whereas an investment adviser works with clients one-on-one, an <a href="https://www.soundmindinvesting.com/articles/view/what-investing-newsletters-do-that-financial-magazines-dont">investment newsletter</a> works with investors on a one-on-several thousand (or however many subscribers they have) basis. There are hundreds of investment newsletters, each with their own investment strategies. Subscribers gain access to the strategies along with the specific investment recommendations needed in order to implement the strategies. Subscription costs range from less than $200 per year to over $1,000 per year.</p> <h2>5. Know Some Market History</h2> <p>One of the biggest threats to your success as an investor can be seen in the mirror. When the market falls, it's easy to give in to fear and sell. When the market is booming, it's easy to give in to greed, and invest too aggressively.</p> <p>Far better to understand that the market cycles between bull markets and bear markets (growing markets and declining markets). Even within a specific year, there will be ups and downs.</p> <p>That's why it's so important to have a trusted investment selection process. With a good process in place, you should have some sense as to how your portfolio is likely to perform under a variety of market situations and you should be content to stay with it in good times and bad.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/matt-bell">Matt Bell</a> of <a href="http://www.wisebread.com/5-essentials-for-building-a-profitable-portfolio">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-secret-to-successful-investing-is-trusting-the-process">The Secret to Successful Investing Is Trusting the Process</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-types-of-investors-which-one-are-you">8 Types of Investors — Which One Are You?</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-costly-mistakes-diy-investors-make">9 Costly Mistakes DIY Investors Make</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/your-loss-aversion-is-costing-you-more-than-your-fomo">Your Loss Aversion Is Costing You More Than Your FOMO</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment advice college fund financial advisers money management portfolio retirement risk stock market target date funds Wed, 26 Oct 2016 10:00:11 +0000 Matt Bell 1820715 at http://www.wisebread.com What Are Income Stocks? http://www.wisebread.com/what-are-income-stocks <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/what-are-income-stocks" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/money_investments_71091499.jpg" alt="Learning the basics of income stocks" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>You may think that investing in stocks is all about share price increases over time. In reality, you may be surprised to find out that the price of some stocks can vary little over time and still provide an ever-increasing stream of income. These types of securities are known as income stocks.</p> <p>Let's review the seven things you need to know about income stocks and their ability to provide a high payout to investors.</p> <h2>1. They Pay a Dividend</h2> <p>The defining feature of an income stock is that it pays a regular and predictable dividend, which often increases over time. For example, Caterpillar Inc. [NYSE: <a href="https://finance.yahoo.com/quote/cat">CAT</a>], a leading manufacturer of construction, mining, and transportation equipment, has <a href="http://www.caterpillar.com/en/investors/stock-information/dividend-history.html">paid a dividend to its stockholders</a> every quarter since 1933. For the last 22 years, Caterpillar's cash dividend has consistently increased and it stands at $0.77 per share of common stock &mdash; up from $0.35 in 1996, and without adjusting for the two-for-one stock splits of 1997 and 2005.</p> <p>A predictable, steady, and ever-increasing stream of income makes income stocks attractive to those retirement savers who're close to retirement age.</p> <h2>2. They Are Often Large Companies</h2> <p>While income stocks can be found in many industries, they are most often part of the real estate, energy, utility, natural resource, and finance industries. One example of an income stock in the energy sector is Phillips 66 [NYSE: <a href="https://finance.yahoo.com/quote/PSX/">PSX</a>], which has been in the news due to its spinoff from ConocoPhillips back in 2012. It doubled its stock price in the first year after the spinoff, and attracted Warren Buffett's investment (a <a href="http://www.barrons.com/articles/buffet-bets-1-billion-more-on-phillips-66-1472470538">15.2% share of the company</a> as of late August 2016). (See also: <a href="http://www.wisebread.com/the-5-best-pieces-of-financial-wisdom-from-warren-buffett?ref=seealso">The 5 Best Pieces of Financial Wisdom From Warren Buffett</a>)</p> <p>The Houston-based multinational energy company generated $161.2 billion in revenue in 2014, a figure that is bigger than the GDP of some nations around the world. Since its 2012 spinoff, Phillips 66 has been consistently paying a quarterly dividend that started at $0.20 per share of common stock and stands now at $0.63 per share of common stock.</p> <h2>3. They Have Been in Business for a Long Time</h2> <p>Generally speaking, the less established a company, the more likely that company can experience extraordinary growth per quarter. Think of 12-year-old Facebook or 13-year-old Tesla, whose current stock prices are seven and 10 times, respectively, their original prices after going public. Both Facebook and Tesla would be considered growth stocks. On the other hand, income stocks are those of companies with a long history. Caterpillar and Phillips 66 were originally founded back in 1925 and 1917, respectively. (See also: <a href="http://www.wisebread.com/what-are-growth-stocks?Ref=seealso">What Are Growth Stocks?</a>)</p> <h2>4. They Are an Alternative to Fixed-Income Securities</h2> <p>If you have a 401K, chances are that you have a target-date fund. In 2014, 48% of 401K plan holders <a href="https://www.ebri.org/publications/ib/index.cfm?fa=ibDisp&amp;content_id=3347">had target-date funds</a>, which gradually lowers exposure to risk as you get closer to retirement age and helps maintain a steady stream of income during your retirement years. However, dialing back your risk doesn't necessarily mean that you will stick to municipal bonds and money market accounts from now on.</p> <p>Legendary investor Peter Lynch said it best: &quot;Gentlemen who prefer bonds don't know what they're missing.&quot; The appeal of income stocks is that they provide a steady stream of income while providing some exposure to corporate profit growth. Many investors use the yield of a 10-year treasury bond rate as a benchmark to grade the performance of income stocks. As of October 10, 2016, the yield of a <a href="http://data.cnbc.com/quotes/US10Y">10-year treasury bond</a> was 1.77% and those from Phillips 66 and Caterpillar were 3.13% and 3.48%, respectively.</p> <h2>5. They Have Modest Annual Profit Growth</h2> <p>That being said, don't expect companies behind income stocks to have ambitious goals of profit growth. Due to its long business history, some income stocks may have limited future growth options and provide only a moderate annual profit growth. However, this is the main reason why these companies are able to pay a dividend in the first place. Since there may be no need to aggressively reinvest in new infrastructure, research, or development, then the company can afford to issue a dividend every quarter to its shareholders.</p> <h2>6. They Have Low Stock Price Volatility</h2> <p>Among the many statistics that analysts report on stock tables, <em>beta </em>is one of the most relevant ones, besides dividend and yield, to incomes stocks. (See also: <a href="http://www.wisebread.com/beginners-guide-to-reading-a-stock-table?ref=seealso">Beginner's Guide to Reading a Stock Table</a>)</p> <p>Since the beta of the market as a whole is 1.0, a stock with a beta below 1.0 would move less than the market, and a stock with a beta above 1.0 would deviate more than the market. Often, income stocks have betas below 1.0. For example, machinery manufacturer Deere &amp; Company [NYSE: <a href="https://finance.yahoo.com/quote/DE/">DE</a>] has a beta of 0.63, and retailer Wal-Mart Stores Inc. [NYSE: <a href="https://finance.yahoo.com/quote/WMT/">WMT</a>] has one of 0.09.</p> <h2>7. They Are Available in Mutual Funds and Index Funds</h2> <p>Even though throughout this article we have only focused on individual companies, you can still buy a basket of several income stocks at the same time. You can do this through either a mutual fund or a low-cost index fund. One example of the second category is the Vanguard High Dividend Yield Index Fund Investor Shares [Nasdaq: <a href="http://finance.yahoo.com/quote/VHDYX">VHDYX</a>], which holds many income stocks, such as Microsoft, Exxon, Johnson &amp; Johnson, and General Electric.</p> <p>Two advantages of using index funds to include income stocks in your portfolio are diversification (e.g. 420 holdings in the mentioned index fund from Vanguard) and low cost (e.g. 0.16% annual expense ratio for the same index fund).</p> <h2>The Bottom Line</h2> <p>Before buying an income stock, make sure to evaluate it using your current investment strategy. While an income stock can offer you a way to get higher yields than those of treasury securities or certificates of deposit, you may be so far away from retirement age that you could afford a higher exposure to risk through value or growth stocks. Consult with your financial adviser to discuss more about your investment objectives and the appropriate ways to achieve those financial goals.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/damian-davila">Damian Davila</a> of <a href="http://www.wisebread.com/what-are-income-stocks">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-reasons-millennials-should-stop-being-afraid-of-the-stock-market">7 Reasons Millennials Should Stop Being Afraid of the Stock Market</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-easiest-way-to-invest-in-the-worlds-biggest-companies">The Easiest Way to Invest in the World&#039;s Biggest Companies</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/why-warren-buffett-says-you-should-invest-in-index-funds">Why Warren Buffett Says You Should Invest in Index Funds</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-essentials-for-building-a-profitable-portfolio">5 Essentials for Building a Profitable Portfolio</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment dividends fixed income securities growth income stocks index funds large companies mutual funds portfolio profits retirement stock market volatility Thu, 20 Oct 2016 09:30:23 +0000 Damian Davila 1815776 at http://www.wisebread.com 9 Costly Mistakes DIY Investors Make http://www.wisebread.com/9-costly-mistakes-diy-investors-make <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/9-costly-mistakes-diy-investors-make" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/man_ripping_paper_69469761.jpg" alt="Man making costly mistakes DIY investors make" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>With the right approach and education, it's possible for people to handle their own investments. But it's also easy to make mistakes that could cost you large sums of money in the long run.</p> <p>If you're a do-it-yourselfer, ask yourself whether you're making any of these mistakes below. If so, it may be worth seeking professional advice from a certified financial planner.</p> <h2>1. Trading Without Considering Fees and Taxes</h2> <p>For many investors, it's fun to trade stocks. The actual buying and selling can be a bit of a rush, especially when things are going well. But all of that activity can come with a cost, in the form of transaction fees and capital gains taxes. If you are finding that the returns on your portfolio seem a bit lackluster, it may be because you're investing without taking these costs into account. More experienced investors and financial advisers understand how to avoid extra fees and maximize returns as a result.</p> <h2>2. Getting Emotional</h2> <p>Investing your own money can sometimes be hard on the psyche. You may go through stretches where you see your portfolio shrink. Stocks that you personally selected may not always perform the way you predicted. Markets can be volatile, and not everyone can stomach it. If you find yourself getting stressed out by the investing process or buying and selling based on emotion, you may want to consider having a financial adviser take over the reigns.</p> <h2>3. Not Investing Enough</h2> <p>When you invest on your own, you may only be guessing as to how much you need to save. And it's common for investors to feel a little skittish and invest too little if the market is down. A financial adviser may be more tuned into the appropriate level of risk an investor can take on, and will usually advise a more aggressive approach for someone far out from retirement.</p> <h2>4. Not Diversifying Enough</h2> <p>Most do-it-yourselfers understand the basics of diversification, and will invest in index funds that track the S&amp;P 500 or broader stock markets. And that's perfectly fine. But often, these funds are heavily weighted toward larger companies or certain industries. If you are investing only in basic index funds, you may not have good exposure to international markets or smaller companies, for example. There may be entire industries that will be underrepresented in your portfolio.</p> <p>To achieve true diversification, you can have an S&amp;P Index fund as a base, but should also look for funds and stocks that fill in the gaps.</p> <h2>5. Failing to Rebalance</h2> <p>You may think you're creating a diverse portfolio based on the investments you've selected. But have you checked the balances recently? Over time, portfolios can get out of whack if certain investments are performing better than others. For example, you may think you're investing in 50% large cap, 25% small cap, and 25% mid cap stocks. Until one day, you check your account and realize that small cap stocks make up 40% of the portfolio. Financial advisers will recommend when to rebalance, and offer advice on how to avoid taxes in the process.</p> <h2>6. Trying to Beat the Market</h2> <p>Some investors insist on doing things themselves, because they believe they are expert stock pickers and can beat the performance of the overall stock market. In most cases, they are wrong. Numerous studies have shown that even professional investment managers can't beat the market on a regular basis, and that most investors would be best off with a portfolio of index funds.</p> <h2>7. Falling in Love With Shiny New Things</h2> <p>Do-it-yourselfers can become enamored with whatever the hot stock is at the moment. They go for name brands and flash rather than looking closely at a balance sheet. They also tend to go with what's familiar, rather than doing some research and finding investments that are less well known but of sound quality.</p> <h2>8. Having No Backup Plan</h2> <p>If you are an older DIY investor, do you have a plan for what happens to your investments if you are incapacitated? Are you sharing your investment accounts with your spouse or other loved ones? Many DIY investors are too stubborn to seek help from anyone, and thus run into problems when they are no longer in a position to manage things themselves. It's fine to handle your own investments if you're confident enough to do so, but it's wise to have a plan for how things will be dealt with if you're no longer in charge.</p> <h2>9. Becoming Too Consumed</h2> <p>Realistically, the average person can handle their own investments while checking in only periodically each week. A properly balanced portfolio does not need a lot of maintenance. But investing can be like an addiction to some people, and it's possible to spend hours a day buying and selling and becoming obsessed with the movement of the markets. If you're finding that your investing is having a negative impact on your relationships and other aspects of your life, it may be best to back off and let someone else handle things.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/tim-lemke">Tim Lemke</a> of <a href="http://www.wisebread.com/9-costly-mistakes-diy-investors-make">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-too-much-investment-diversity-can-cost-you">How Too Much Investment Diversity Can Cost You</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-secret-to-successful-investing-is-trusting-the-process">The Secret to Successful Investing Is Trusting the Process</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-things-you-need-to-know-about-investing-in-company-stock">7 Things You Need to Know About Investing in Company Stock</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment beat the market diversification DIY emotional investing fees financial advisers financial planning portfolio rebalancing stock market taxes Wed, 05 Oct 2016 10:30:08 +0000 Tim Lemke 1805247 at http://www.wisebread.com How Too Much Investment Diversity Can Cost You http://www.wisebread.com/how-too-much-investment-diversity-can-cost-you <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/how-too-much-investment-diversity-can-cost-you" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/man_suit_thinking_53925384.jpg" alt="Man wondering if too much investment diversity can cost him" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>Financial experts agree that you shouldn't to put all your eggs in one basket. But just like with everything else in life, moderation is essential to truly reap the benefits of diversification. Spread out your investment funds into too many funds and you'll end up with a subpar portfolio bogged down with excessive charges and, even worse, potentially more risk than you're willing to bear. Here are four warning signs that you may have your investments in too many baskets &mdash; and how to fix it.</p> <h2>1. Paying Too Much in Investment Fees</h2> <p>The more that you branch out of plain vanilla investments, the more likely that you'll end up paying more investment charges and fees. Take, for example, the portfolio that Warren Buffett has <a href="http://www.berkshirehathaway.com/letters/2013ltr.pdf">laid out in his will</a>: &quot;Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&amp;P 500 index fund.&quot;</p> <p>Let's take a look at the potential investment fees of such a portfolio.</p> <p>Since the Oracle of Omaha prefers Vanguard and chases low fees, let's assume that both investments are in index funds. It's safe to assume that he meets the $10,000 minimum investment required for the Vanguard Admiral index funds. So, he allocates 90% of his portfolio to the Vanguard 500 Index Fund Admiral Shares [Nasdaq: <a href="http://finance.yahoo.com/quote/VFIAX/?p=VFIAX">VFIAX</a>], which has a 0.05% expense ratio, and 10% of his portfolio into the Vanguard Short-Term Government Bond Index Fund Admiral Shares [Nasdaq: <a href="http://finance.yahoo.com/quote/VSBSX?p=VSBSX">VSBSX</a>], which has a 0.10% expense ratio. For a $10,000 portfolio, Buffett would pay $55 in investment fees.</p> <p>If Buffett were to start diversifying into other types of investments, he would very likely run into higher expense ratios. For example, the Vanguard New York Long-Term Tax-Exempt Fund Admiral Shares [Nasdaq: <a href="http://finance.yahoo.com/quote/VNYUX/?p=VNYUX">VNYUX</a>] has a 0.12% expense ratio (despite its $50,000 minimum investment requirement!) and the Vanguard Interm-Tm Corp Bd Index Admiral [Nasdaq:&nbsp;<a href="http://finance.yahoo.com/quote/VICSX/?p=VICSX">VICSX</a>] has a 0.25% purchase fee on top of its 0.10% expense ratio. Assuming that he were to allocate 50%, 30%, 10%, and 10% to the New York muni bond fund, S&amp;P 500 index fund, short-term government bond index fund, and the intermediate-term corporate index fund, respectively, Buffet would pay $220 on investment fees!</p> <p><strong>How to Fix It: </strong>Calculate your current total of investment fees across all your holdings. If the total is above what you're willing to pay (a useful rule of thumb is that anything beyond 1% of your total investment is too much), then it's time to focus your investments in lower-cost options.</p> <h2>2. Rebalancing Portfolio More Often</h2> <p>Speaking of fees, there is a higher chance that you'll run into more of them when you hold lots of investment categories. In the 90%-stocks-and-10%-bonds portfolio example, you only need to keep track of two funds. This means that figuring out when your portfolio is no longer meeting your target asset allocations is straightforward &mdash; and you may not need to do it as often. For example, you could set a target to rebalance when 80% of your portfolio is in stocks and 20% in bonds.</p> <p>On the other hand, spreading your money out too thin can complicate keeping track of asset allocations and make you trade more often. Here's an example: Assuming a target 3.5% allocation in an emerging markets index fund, big market swings could force you to buy or sell many times throughout the year, triggering many charges. From front-end loads to back-end loads, there are plenty of investments to keep an eye on. And yes this even applies to 401K accounts! (See also: <a href="http://www.wisebread.com/watch-out-for-these-5-sneaky-401k-fees?ref=seealso">Watch Out for These 5 Sneaky 401K Fees</a>)</p> <p><strong>How to Fix It: </strong>Tabulate how much you're incurring in fees on top of the regular annual expense ratios of your portfolio holdings. If that percentage is too high, or consistently increasing throughout the years, you need to consolidate your portfolio into fewer holdings.</p> <h2>3. Experiencing Diminishing Returns</h2> <p>Of course, you might be thinking that the extra returns of a very diversified portfolio may more than compensate for those additional fees and charges.</p> <p>Let's bust that investment myth.</p> <p>In a joint-study by The Wall Street Journal and Morningstar, the portfolio that generated the highest return over a 20-year period was a 70-30 mix of U.S. stocks and bonds, yielding a <a href="http://www.wsj.com/articles/is-your-portfolio-too-diversified-1408032582">9.1% annualized return</a>. A portfolio with 40% in U.S. stocks, 20% in U.S. bonds, 10% in foreign developing market stocks, 10% in international bonds, and the rest in a mix of investments, including emerging market stocks, commodities, and hedge funds, yielded only an 8.8% annualized return.</p> <p><strong>How to Fix It: </strong>Measure each of your funds against its respective benchmark. If an investment has been missing the benchmark for too many quarters or years, it may be time to cut that fund loose.</p> <h2>4. Owning Too Much of the Same or Wrong Type of Investments</h2> <p>Another issue with putting many eggs in many baskets is that you can unintentionally end up with more eggs than you thought in a particular basket or, worse, a wrong basket.</p> <p>Let's assume that you hold an index fund tracking the S&amp;P 500. As of August 8, 2016, that means that your portfolio would hold about 3.08% on Apple Inc, 2.40% on Microsoft Corporation, and 1.53% on Facebook Inc. Class A shares. If you were to also hold an index fund on the technology sector, you'll probably end up increasing your holding on each one of those investments. For example, the Vanguard Information Technology Index Fund Admiral Shares [Nasdaq: <a href="http://finance.yahoo.com/quote/VITAX/?p=VITAX">VITAX</a>] has those same three stocks among its top four largest holdings.</p> <p>Additionally, if you're open to throwing more money around investments, you could end up buying some investments that fail to meet your investment objectives. Remember the late 1990s dot-com bubble? How about 2008's housing bubble? During those times, too many individual and institutional investors were buying financial instruments that they shouldn't have been purchasing. If you force yourself to allocate 5% &quot;somewhere,&quot; then you could end up with the wrong type of investment.</p> <p><strong>How to Fix It: </strong>First, read the prospectuses of your mutual funds and other accounts and understand their actual holdings. Using this information, you can spot whether or not you hold too much of the same investment. Second, review your investment objective (ie; income vs growth) and evaluate whether or not your current investment funds qualify for that objective.</p> <h2>The Bottom Line</h2> <p>Holding all of your money in a single stock is definitely not a good idea because it would have a 49.2% average standard deviation (a measure of risk). At 20 stocks, your portfolio risk is reduced to 20%. However, every additional stock added to your portfolio will only further decrease your portfolio risk by about 0.8%.</p> <p>The evidence suggests that due to greater returns, very marginal risk reductions, and lower fees over time, you would be better off with simpler diversification on stocks and bonds. Some financial advisers suggest that when you have more than <a href="http://money.usnews.com/money/personal-finance/mutual-funds/articles/2011/02/17/diversification-can-you-have-too-much-of-a-good-thing">20 stocks or mutual funds</a>, you're actually minimizing returns instead of maximizing them. So, before adding that extra holding, keep in mind that an index fund tracking the S&amp;P 500 is already splitting your investment into 500 baskets!</p> <p><em>How many different types of investments is too many?</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/damian-davila">Damian Davila</a> of <a href="http://www.wisebread.com/how-too-much-investment-diversity-can-cost-you">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-2"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-types-of-investors-which-one-are-you">8 Types of Investors — Which One Are You?</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/9-costly-mistakes-diy-investors-make">9 Costly Mistakes DIY Investors Make</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/8-surprising-ways-confidence-can-hurt-your-investments">8 Surprising Ways Confidence Can Hurt Your Investments</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment fees portfolio rebalancing returns risk stock market too diverse warning signs Thu, 25 Aug 2016 10:30:14 +0000 Damian Davila 1778732 at http://www.wisebread.com 8 Money Moves to Make Before You Start Investing http://www.wisebread.com/8-money-moves-to-make-before-you-start-investing <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/8-money-moves-to-make-before-you-start-investing" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="http://wisebread.killeracesmedia.netdna-cdn.com/files/fruganomics/imagecache/250w/blog-images/coins_growing_plants_67145371.jpg" alt="Finding money moves to make before you start investing" title="" class="imagecache imagecache-250w" width="250" height="140" /></a> </div> </div> </div> <p>I'm a staunch advocate for investing &mdash; especially if the alternative is piling up money in a savings account just to have &quot;savings.&quot; Savings are great, but you only need so much in that offensively low-interest account. Put the excess to work, hopefully making even more money out of your investment. Before you take that plunge, however, there are a few financial matters you need to mind.</p> <h2>1. Organize Your Budget and Expenses</h2> <p>If you're considering making an investment &mdash; whatever it may be &mdash; you should have a solid handle on how much money is coming in and going out on a monthly basis. You want to make sure you can afford the investment without teetering on the edge of debt, but this also is a good time to find any weak spots in your budget so you can address them accordingly. Online money-tracking services like Mint.com can make this task much easier on you, and help you stay on track over the long term.</p> <p>&quot;When you know where your money goes, you are in control and can be thoughtful about aligning spending with priorities,&quot; says Carla Dearing CEO of SUM180, an online financial planning service. &quot;Mint, for example, gives you complete access to your data through the website and your mobile device, whether you use iOS or Android. Better yet, Mint keeps an eye on your money for you. It even sends alerts to remind you to pay your bills or when you go over budget.&quot;</p> <h2>2. Get That Emergency Fund in Order &mdash; Stat!</h2> <p>In almost every &quot;money moves&quot; article I write, the &quot;emergency fund&quot; usually pops up somewhere. That's because it's a critical and indispensable part of your overall financial picture. You should have a sizable cushion in the bank to cover life's little mishaps, and that &quot;should&quot; becomes a &quot;must&quot; when you add investing to the equation. If you don't have an emergency fund, you have no business investing &mdash; bottom line.</p> <p>Just how much dough are we talking for an emergency fund to be considered satisfactory? Six times your monthly expenses, according to Dearing.</p> <p><strong>&quot;</strong>Be disciplined about saving a little every month until your emergency fund is where it needs to be, even if it means sacrificing little luxuries once in a while,&quot; she says. &quot;Remember to replenish the account every time you use it. Having your cushion ready whenever you need it will give you a great sense of security and freedom. It will also free you up to work on other savings goals without getting derailed by unexpected expenses.&quot;</p> <h2>3. Pay Off Your High-Interest Debts</h2> <p>You don't need to be completely out of debt before you start investing. Many financial advisers argue that you should be debt free before you start investing, but that's just not true. Most people don't pay off their homes for up to 30 years, and you wouldn't want to wait that long before you start a retirement fund.</p> <p>You should, however, pay off your high-interest debts. They'll drag you down faster than the Titanic.</p> <p>&quot;Whether it's a credit card or student loan, it doesn't make any sense to invest and make a market average return of 7% annually while you're paying 20% on credit debt,&quot; says Nick Braun, founder of a pet insurance company. &quot;Pay off your high-interest debts first, then start using excess income to save for the future.&quot;</p> <p>See also: <a href="http://www.wisebread.com/fastest-way-to-pay-off-10000-in-credit-card-debt?utm_source=wisebread&amp;utm_medium=seealso2&amp;utm_campaign=article">Fastest Way to Pay Off Your Credit Card Debt</a></p> <h2>4. Contribute to Your Retirement Savings</h2> <p>Retirement savings <em>is</em> an investment. It may not seem like it now, because what you're funding seems so far away &mdash; but you'll see it as such when you reach retirement age. Which is why, before you start throwing money at other investment opportunities, you need to invest in yourself. If you don't have a retirement account set up yet, make that a priority. If you have one currently, like a 401K, for instance, take advantage of free, pretax contribution opportunities where available, like matching funds from your employer. Then max those contributions out so you don't miss a single cent.</p> <h2>5. Contribute to an HSA</h2> <p>If you have a health insurance policy that comes with a qualifying Health Savings Account, take full advantage of it and fully fund it.</p> <p>&quot;Most contributions are tax-deductible, and withdrawals to pay qualifying medical expenses &mdash; at any time in life &mdash; are tax-free,&quot; explains Kevin Gallegos, vice president of Freedom Financial Network in Phoenix. &quot;These accounts are essentially emergency funds devoted to health care costs, and so savings have a double benefit of tax relief and savings.&quot;</p> <h2>6. Refinance Your Student Loans</h2> <p>Are student loans holding you back from building your savings or investment accounts or from making other types of investments? Free up some of your budget by <a href="http://www.wisebread.com/should-you-refinance-your-student-loan?ref=internal">refinancing your loans</a> for a lower monthly payment.</p> <p>&quot;The average Class of 2016 graduate owes more than $37,000 in student loan debt,&quot; says financial expert Michael Blattman, professor at University of Maryland. &quot;With 43 million borrowers nationwide, Americans owe nearly $1.3 trillion in student loan debt. Individually, this crushing debt delays borrowers' life decisions, such as getting married, investing in the stock market, buying a house, or having children. Collectively, it's hampering the U.S. economy.&quot;</p> <p>You don't, however, have to be part of these statistics. Take back some of your financial freedom by making a call to your loan provider(s) to discuss refinance options that are right for you.</p> <h2>7. Get Started on a Taxable Investment Portfolio</h2> <p>After you've maxed out your retirement accounts, Dearing suggests starting a taxable investment portfolio. You can get started investing with just a few simple steps.</p> <p>To get set up, call one of the high-quality, low-fee money management companies, like Vanguard, Fidelity, or T. Rowe Price, tell them about yourself, and ask them to tell you what type of account or fund you need, and what minimum investment requirements apply. These companies, which are the gold standard in the financial services industry, are extremely knowledgeable and committed to serving their clients (who, in the case of Vanguard, are also their shareholders).</p> <p>&quot;Companies like this get you started with a comprehensive, diversified, low-cost fund that will serve you well as a beginning investor,&quot; says Dearing. &quot;Follow their recommendations and you won't go wrong.&quot;</p> <h2>8. Set Savings Goals for Your Taxable Investment Portfolio</h2> <p>Once you have your taxable investment portfolio established, set goals &mdash; $10,000, then $25,000 and, eventually, $100,000.</p> <p>&quot;When you are just starting out, choose one or two tax-advantaged funds, like the Vanguard Total Stock Market ETF or the Vanguard Small Cap Index ETF, or similar index funds,&quot; Dearing suggests. &quot;These passively managed funds do a minimum amount of buying and selling &mdash; what the industry calls 'churning' &mdash; which translates into significantly less taxable investment income for you to deal with each year. They also tend to outperform most actively managed mutual funds over time.&quot;</p> <p>Revisiting the goal aspect of this equation, it helps to have a contribution target in place so you have a solid idea of what you're trying to achieve. Likewise, make sure that it's a goal that you <em>can</em> achieve. $10,000 may take a while to reach, but you can do it. If that goal is too steep for you right now, start smaller. There's no harm in that. The most important part of this is that you set the bar just high enough to accomplish it and be motivated by your success to continuing striving further.</p> <p><em>Do you have additional suggestions on money moves to make before investing? I'd love to hear your thoughts in the comments below.</em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="http://www.wisebread.com/mikey-rox">Mikey Rox</a> of <a href="http://www.wisebread.com/8-money-moves-to-make-before-you-start-investing">Wise Bread</a>, an award-winning personal finance and <a href="http://www.wisebread.com/credit-cards">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-money-moves-to-make-as-soon-as-you-conquer-debt">7 Money Moves to Make as Soon as You Conquer Debt</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/the-3-rules-every-mediocre-investor-must-know">The 3 Rules Every Mediocre Investor Must Know</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/5-essentials-for-building-a-profitable-portfolio">5 Essentials for Building a Profitable Portfolio</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/7-money-moves-every-new-college-student-should-make">7 Money Moves Every New College Student Should Make</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="http://www.wisebread.com/how-the-risk-averse-can-get-into-the-stock-market">How the Risk Averse Can Get Into the Stock Market</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> Investment advice emergency funds health savings account money moves Paying Off Debt portfolio retirement savings stock market student loans Wed, 17 Aug 2016 09:00:08 +0000 Mikey Rox 1771628 at http://www.wisebread.com