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How to Get Investment GPS
Tweet Share on Facebook November 30, 2010 CommentA financial plan is a lot like a GPS in your car. If you don't establish a financial plan—a roadmap that will put you on the right path to reach your goals—you're apt to make bad decisions and get lost. My car has GPS because, quite honestly, I have a bad sense of direction.
Many folks have a mish-mash of investments that can lead them the wrong way. A friend or family member brags about a great fund they recently bought, so you buy it. Then you see a pundit on TV recommend a stock, so you purchase that too. Before you know it, you have pools of money all over the place with no cohesive strategy. Or you're afraid of the markets and are stashing all your cash in a savings or money market account earning very little interest.
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When Advisor Commissions Are Better Than Annual Fees
Tweet Share on Facebook November 26, 2010 CommentCommissions have become a dirty word in the advisory world, but I’m not sure they are as evil as everyone makes them out to be. There are several ways financial advisors can charge for the advice they give or the recommendations they make.
One method is to charge an investor a fee based on the percentage of assets under management. This fee can and should be adjusted up or down depending on the services that the advisor provides. The benefit to an investor is that as his or her assets grow, the advisor makes more money. If the account goes down in value, the advisor makes less money. There is obviously an incentive for the advisor to grow the assets under management and minimize losses.
This is a pretty good deal for everyone, and a lot of investors and advisors prefer this fee structure.
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Is Your Broker Looking Out for Your Best Interest?
Tweet Share on Facebook November 24, 2010 CommentThe last three years have prompted most investors to rethink their strategy ... or maybe their broker's strategy. The question is, do you have the right person or company helping you make the most important decisions of your life—decisions about your money?
Here are five simple ways to determine whether you should look for a new broker:
Does he only call to sell you something? Many commission brokers will make money when you buy or sell a security, providing them an incentive to encourage trading. That leads to an industry no-no called "churning." Not all brokers churn their clients' accounts, but it does happen. The best way to determine if this is an issue is to consider the reason your broker calls you. Does he usually call to review your account or to sell you something?
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Mutual Funds Are Not Buy-and-Forget Investments
Tweet Share on Facebook November 23, 2010 CommentMany people believe that they can reach their investment goals by simply buying mutual funds. After all, investing in a group of funds that hold different kinds of stocks, bonds, and commodities is supposed to provide diversification, which can give some protection when the markets are down and better returns when prices rise. That's not necessarily true. All funds aren't created equal; some are better than others. Investors have to pay attention to all of the funds in their portfolio regularly, because even good funds can go bad.
It's not easy to distinguish the good funds from the bad ones. The main things to consider are the fund manager and performance. You've heard the disclaimer that's on every investment product: "Past performance does not guarantee future results." Don't listen to that. In my view, past performance—that is, the fund manager's past performance—is the most important factor when deciding to buy a fund. Reviewing a fund manager's performance over different time periods gives an idea how that fund behaves in various market environments.
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7 Money Tips for Twentysomethings
Tweet Share on Facebook November 19, 2010 CommentIt's easy to look back, ask,"What if?" and second guess all the decisions I've made in the past 43 years. I have been fortunate to have no major regrets and a whole lot to be thankful for. However, there are some things I would have paid more attention to and done differently if I could go back and relive my early 20s.
Here's a list for all of you in your 20s, as well as for some parents to consider if you have children graduating from college soon:
1. Don't rack up credit card debt, and pay any debts off quickly. Seems simple and downright obvious, but taking on debt is easy to do. The transition from college to the working world can be expensive—new clothes, shoes, apartment, furniture, and other business-world expenses can make it easy to quickly pile on debt. Budget for these expenses, and if credit must be used to get going, have a plan in advance for paying it down.
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ETF Basics: Investing in Corporate America
Tweet Share on Facebook November 18, 2010 CommentStocks represent an ownership piece of corporate America. No other basket has grown as much during the last 100 years. From 1925 through 2004, large and small company stocks appreciated 10.4 percent and 12.7 percent per year, respectively. To illustrate the magic of compound returns, between 1925 and 2004, large companies appreciated 2,860 times. That extra 2.3 percent return for small companies allowed them to grow 12,650 times their value!
That's not to say stocks will reward you without some ups and downs along the way. The S&P 500 has been flat from 2000 through this year. And from the stock market's peak in October 1929 (right before the crash), it took investors more than 21 years to match the returns of bond investors. And while stocks protect you over the long term from inflation (companies can raise prices to fend off that threat), in the short term, stocks often decline in value when there is a fear of inflation. That double whammy occurred from 1973 to 1974, when inflation rose by 37 percent, stock prices declined by 22 percent, and investors watched their stock portfolios decline on an inflation-adjusted basis by about 50 percent. It's a bumpy ride, but in the long run, you get higher returns owning stocks.
As Warren Buffett has always said, "it is a bad idea to bet against American business." There are four basic ways investors can use ETFs to invest in U.S. stocks:
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3 Reasons to Finish Your 2010 New Year's Money Resolutions Today
Tweet Share on Facebook November 17, 2010 CommentMost people wait until the last minute for almost everything ... including their 2010 New Year's resolutions. But often, procrastinating can cause a real loss, especially this year.
In 2010, there were several major changes to the U.S. tax code that will significantly impact your tax liability and investment planning.
First, the Roth conversion rules have changed for 2010. For the first time ever, there is no income limitation (maximum) for those planning to convert their IRA or 401(k) to a Roth IRA. This new rule will also apply in 2011 and beyond. Investors will now be able to spread their conversion tax over two years. If you process the conversion in 2010, you have the option of paying the tax in 2010 or splitting the tax over 2011 and 2012. That could provide a great benefit for budgeting purposes.
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5 Mistakes You May Be Making in Your 401(k)
Tweet Share on Facebook November 16, 2010 CommentSome might believe that making contributions to a 401(k) plan during your working years will provide enough money for retirement. Somewhere over the rainbow, there's a pot of money waiting for you. Unfortunately, no one is going to hand over a lump sum that will cover all of your living expenses when you stop working. This is just one of the common mistakes that people make when it comes to their 401(k) plans. Here are some of those blunders, and how to improve your chances of reaching your retirement goals.
1. You don't make any changes in your 401(k). Many workers sign up for a 401(k) plan when they start a job, and then don't pay any attention to their investment selections afterwards. Studies have shown that just 1 in 6 401(k) participants ever changes investments in their plan. Your retirement plan is not a "buy and forget" investment. Be proactive with your 401(k) by checking your investments every quarter, and making sure the funds you own are still meeting your expectations and are still the best of those available. It's a lot like getting your car serviced—every few months, your car needs an oil change, and maybe a tune up.
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6 Investing Habits To Dump Now
Tweet Share on Facebook November 12, 2010 CommentThe news is rife with analysis about interest rates, inflation, and the dollar, leading many to speculate that the next impending bubble to burst will be in the bond market. Looking at the flow of money over the past 18 to 24 months, it seems that investors have been loading the boat with bonds at the expense of equity. That has me nervous.
There are a few things that investors should be considering right now if they think that interest rates will be heading higher in the future and they own bonds.
Dump your active bond manager. Managers who "manage" bonds are usually appropriate when they can manage a portfolio of bonds for total return as interest rates decline (and bonds increase in value). With interest rates as low as they are, what's left to manage (and pay for) when they start to increase? Not much.
[See the Best Large-Cap Value Funds for the Long Term.]
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What Foolish Investors Believe
Tweet Share on Facebook November 11, 2010 CommentIn their 1978 album, Minute By Minute, the Doobie Brothers tell the tale of a man who is self-deceived, believing a lie of his own fabrication. Somehow, this poor sap has convinced himself that he is a Casanova, the apple of some woman's eye, when in fact he has never been so much as a blip on her radar. This pathetic chap just doesn't get the facts. As one anonymous person quipped, "What seems to be is always better than nothing." Unfortunately, this guy has bought into this ethos of ignorance and prefers his fantasy to the sobering reality that, if properly understood, could set him free to move on with his life.
This fictitious character's predicament is not much different from what many retirement investors face. In love with the Wall Street fantasy of trouncing the markets through laser beam equity selection, many investors prefer to see themselves as a type of Warren Buffett—glasses slung low into the bridge of their nose, astutely gazing past today's Journal while processing terabytes of random data with super-computing accuracy to distill the investment insight of the day.
