Building a portfolio
December 24th, 2006A common question for new investors, especially those with low investible funds, is “How do I build a portfolio?”. Typically, there are minimum lot sizes for any stock; coupled with the price per share, it does mean that investing in that share requires a certain amount to be committed.
Typically, when you look at market favorites, prices could be quite high - for instance, Google trades at around $400 + per share or IBM at $95 per share. Buying even one lot becomes difficult when you’re starting off, and have small amounts to save every week. And once you’ve done that, 100% of your portfolio is in one stock, not diversified.
There are a variety of solutions; but all of them do have one common factor. You don’t start investing in the high priced stocks, you look at alternatives to keep your money invested and growing until you can add them to your portfolio.
A number of providers offer options to automatically invest in mutual funds - you sign up and arrange to have a predetermined amount withdrawn automatically from your checking or savings account to invest in your mutual funds. You can choose the date, amount and frequency of withdrawals based on your financial objectives.
A few online stock brokers also offer a similar option for direct investment in stocks, rather than through a fund. Sharebuilder has a list of penny stocks and exchange traded funds that you can select from, for an automatic portfolio building strategy.
A third option is to save up until you have sufficient funds to invest in a particular stock directly; over time, with regular savings, you could plan on diversifying your portfolio.
Whichever option you choose, remember this is for the long-haul; this isn’t an “in today, out tomorrow” kind of investment approach.
Qualified advisors?
December 19th, 2006If you’re still not comfortable with the idea of looking for information, and prefer to go with someone who dispenses advice, you need to be careful. There is no way to evaluate an advisor’s capability upfront; and you don’t want to learn from bitter experience that he or she wasn’t really good.
One important thing to remember is that there aren’t any qualifications that are relevant to being a good stock investment advisor. Your CPA for instance, has to be good at taxes and accounting; but that doesn’t mean the expertise translates to good stock picking skills. So if you do come across someone who claims to have a qualification, watch out!
Finding Investment Advisors
December 15th, 2006Where should you look for investment advice, if you’re not going to a full service broker?
A variety of choices are available.
- TV and news channels such as CNBC carry market reports, analyses and recommendations.
- Magazines like Forbes, Fortune and SmartMoney provide information about businesses.
- The Wall Street Journal is another good source of information
- Several web portals like Yahoo and MSN as well as specialty investing oriented sites like CNN Money and The Motley Fool provide advice
- There are also a variety of mailing groups and discussion boards available that allow people to share ideas and information
In fact, the problem today is not that information is scarce; rather, there’s a surfeit of it. Too much is as bad as too little, when it comes to investment decision making.
Choosing A Broker
December 14th, 2006If you’re investing in stocks, you need to go through a stock broker. Years ago, there was only one kind of broker; a “full service” broker, who in addition to trading stocks, would also provide personalised advice and planning services.
Some people find this worthwhile, others believe that it adds little or no value. Full service brokers typically charge higher fees and commissions for stock trade, to cover their expenses incurred in providing a personalised service.
Charles Schwab was among the earliest of the “discount brokers” - brokers who charged significantly lower fees, but only provided the trading service, no more. With the growth of the internet, numerous discount brokers are accessible, with the ability to trade any time, any where.
Unless you’re having huge blocks of shares to trade at a time, chances are you’ll find a discount broker makes more sense. All the more so given the plethora of financial information accessible through the internet, through sites like ours.
By and large, most discount brokers tend to have similar offerings; but there can be some differences in the tools provided and the online experience. Try out a few, to decide on which one you’d like to use. Broker reviews and ratings may also help you select the best one for your needs.
Churning
December 11th, 2006Why do you need a strategy for investing? The answer’s very simple;
- You’re looking for returns; the more, the better
- Different opportunities have varying return profiles - ideally, you’d like to have the freedom to cherry pick the best at all times
- Yet, to maximise your return from a particular opportunity, you need to commit resources for some time; and breaking those commitments incurs a cost. Sometimes, the cost of breaking free is more than the expected gain from a better investment.
- Again, taking up new investments involves costs; broker fees, sales fees, fund management, fund transfers and so on.
The problem gets complicated, because investment advisors usually have an axe to grind; the “it’s a good investment for you” actually means it’s a good income for them! Several investment advisors run insurance and fund marketing activities, and get a commission for business generated.
If you’re shifting your portfolio around in response to such advice, they make the money; you may or may not. This kind of “churning” as its called, rarely benefits the investor.
Properly Using a Reverse Mortgage
December 7th, 2006Recently a question was posed to us by a retired gentleman from California about how he could use a reverse mortgage to fund his retirement. As I pondered his question, I decided to post the response here. He is the situation.
He’s a 69-year-old widow and I receive about $1,200 a month from Social Security and a small pension check. I own a small home valued at about $300,000, and no other assets. I have about $15,000 in debt that requires payments of $500 a month.
A California reverse mortgage could be your answer. What’s great about a reverse mortgage for retirees is that it allows you to pull out the money that’s built up in your home while you’re still living there - you don’t have any mortgage payments and you don’t have to worry about repaying the loan as long as you are living in your home.
To discuss your reverse mortgage options you can check out Reverse Mortgage California. They specialize in helping folks in similar situations get the funds they need to fund their retirement.
Holiday Shopping for Your Wallet
December 5th, 2006The holiday season is here and many people are opening their wallets and shelling out the cash or laying down the plastic to buy all those presents. All those presents add up to a big dent in your savings or monthly budget. But did you know that holiday shopping should also include your personal finances?
Shopping for things like car insurance and personal loans can pay big dividends in 2008. Many companies offer promotions from now through the first of the year to win over new customers. By getting multiple quotes on auto and home insurance can cut your premiums by 30% to 40%. Shopping for loans or consolidating that holiday debt can save you thousands over using credit cards.
Just remember that when shopping around for rates, be mindful that some deals are only introductory offers and may cost more in the long run. Be sure that you are getting long term savings before signing a loan commitment or switching insurers. Also, shopping for a loan doesn’t mean everywhere you inquire means getting your credit pulled. By requesting a credit report with your credit score, you can provide a copy of this info to lenders to get preliminary rate quotes.
Stock Strategy Mistakes
December 5th, 2006The one thing that marks out a novice stock investor is whether there’s been adequate thought to the investment strategy. More often than not, this is where new investors fail; and in failing, lose more than they can afford.
By far, the most common mistakes are of two kinds :
1) Not having a strategy
“I don’t know where I’m going, or where I am right now; but I do believe I’ll get somewhere. ”
If someone told you that, would you think that he’d get anywhere? But funnily enough, people believe that stock investing works that way - you throw enough money, and some of it should stick.
Yes, there is a “dartboard” theory of investing, that random investments do as well as well-researched options - but do you want to take that chance? Random probability works best when you have a large enough portfolio and enough money to ride out the troughs; sadly, when you start small, one random downturn is enough to wipe you out.
2) Investment tips
This is where it goes from bad to worse. Some people believe that depending on stock tips pays off. Especially when it comes from a pal’s girlfriend’s hairdresser who got it from another customer dating a stock broker.
In reality, most stock “tips” serve the tipper’s purpose; of generating some interest sufficient to drive up the price in the short run, giving him an opportunity to sell out at a profit. Most tips don’t pay off; if they do, it’s more from random chance than from any other factor.
Employer Stock - Risky?
December 1st, 2006Employee stock programs or stock options are easier to invest in, and may seem to be quite lucrative, given the discounted price. Plus, you know all about the company; why not concentrate ALL your investment just in this one?
It’s risky, from three points of view :
- Quite often, employees are the last to find out any bad news; Enron was a classic example, as many employees found out.
- It needn’t be as bad as a collapse; but when business is down, if you’re on the chop list, you need your investments and savings to keep you afloat. If those are in the same boat ….
- Even if nothing untoward happens - you may still be missing out on possible opportunities elsewhere, by sticking to one stock.
The best investment strategies diversify risk; don’t put yourself in a position where your success hinges on one or just a very few options. Ideally, any single stock or investment option shouldn’t account for more than 5 - 10% of your portfolio’s value.
Employee Stock Programs
November 30th, 2006Most large corporations have programs for employees to invest in company stock. If you’re a novice to investing, this can be a good place to start.
Typically, these programs involve
- Sign up for a monthly deduction from your paycheck; it’s usually limited to around 10% of your gross pay.
- Your savings from the monthly deduction above are accumulated and used to buy the company stock
- Typically, this happens every quarter or half year, and at a price that’s discounted to the share price; discounts vary from 5% to 20% of the prevailing price.
These combine two good strategies - regular savings, and dollar cost averaging - together with a discount, and can be an extremely good investment option. If your employer offers such a scheme, check it out!