Archive for the ‘Investment Advice’ Category

Start Investing With Just $100

Sunday, January 28th, 2007

While there really is no comparison to a professional investment adviser to help make investing decisions, for most people it’s just too expensive to get that advice. Further, most advice centers on investing with $1,000 or $10,000, and most just don’t have that to risk in the stock market.

We’re going to tell you how to do it with as little as $100.

Ultimately, whether you have $100 or $1,000,000, the story is the same: create a diverse portfolio of stocks and bonds that will withstand stock market dips while increasing in value over the long term.

Here are three simple steps to achieve this with $100:

  1. Open a brokerage account with a discount broker that has no investment minimums and low transaction fees. We recommend Zecco, which offers 40 free trades per month and no hidden fees or account minimums.
  2. Fund the account. This is where you send money to the account by check, wire transfer, or automated clearing house (ACH). ACH is preferred because it is faster than a check and wire transfers are relatively expensive.
  3. Make your first investment.

You’re going to want, as mentioned earlier, a widely diverse portfolio that covers all sectors and countries. You can’t exactly do that with $100 if you’re going to invest in stocks. Also, corporate bonds and mutual funds are out, since they require more capital than $100.

ETFs (Exchange Traded Funds), however, are like mutual funds that trade on the stock market, and you can purchase partial shares. Many ETFs track widely diverse indices, such as the S&P 500 or the MSCI-EAFE global index, or the Lehman Brother Aggregate Bond Index.

If you were to invest $100 in a different ETF every month for three months, you could have a well-diversified portfolio of stocks and bonds that would withstand most market volatility while steadily growing as the market does over time.

Of course, you would want to add to your investment on a regular basis, and I would invest no less than $100 at a time to keep transaction fees from limiting your growth. And when your account reaches $10,000 you’ll want to seek professional advice or at least move your funds over to traditional mutual funds, which typically have lower cost structures and are easier to manage.

But this is a pretty simple, inexpensive way to start investing.

Housing, Bond Rates Attack the Stock Market

Thursday, January 25th, 2007

The National Association of Realtors announced a sharp drop in existing home sales in December 2006. According to the report, existing home sales fell by over eight percent in 2006. Also, a number of homebuilders released sobering forecasts for 2007.

Heavy selling in the bond market led to the highest yields in five months. The 10-year Treasury finished the day at 98 3/32, with its yield at a lofty 4.867%.

Turbulence in the housing and bond markets seeped into the broader market, sending the Dow down 1%, while the S&P 500 and the Nasdaq slipped by 1.1% and 1.3%, respectively.

The day’s winners were eBay and Nokia, up 8.2% and 4.5%, respectively. eBay posted sales growth of 29% while Nokia announced a 19% increase in profits.

Can You Hold IRA Accounts With Different Companies?

Wednesday, January 10th, 2007

This is a question I recently got, and the answer is simple: yes, but the maximum annual IRA investment is a total (cumulative) amount, not per account. In other words, if you have four different IRAs with four different companies and your maximum IRA contribution is $4,000 for the year, you can only contribute $4,000 total, to all four accounts.
A more important question is: should you have different accounts?

Most investment advisors will tell you no, partly because it will be too difficult to manage, and partly because they want all of your money to be going to them and their funds.

While there is more to pay attention to when holding multiple accounts, there is usually little active management that goes on in an IRA. You open the account, buy the securities (usually mutual funds or money markets), and hold.

There isn’t really a lot of management with an IRA. Every year you’ll want to make sure your asset allocation is appropriate. You’ll add funds as you can.

The benefit of holding multiple accounts is no different than the benefit of holding different investments: diversification. Maybe one company is offering low fees but has a limited selection of mutual funds available. Another company may have slightly higher transaction costs but a wider variety of funds.

Sometimes, opening a new account is the only way to invest in a mutual fund you really would like to hold in an IRA. If your current broker (or 401(k), or SEP IRA, etc.) does not offer a particular fund, for example, you may have to open an account with another broker just to hold a fund in a tax-deferred account.

The downside is cost… maybe

Each company you have an account with will likely charge you a fee for management, but some discount brokers only charge for purchases and redemptions. As a result, you should have as few accounts as possible.

So, take a look at account fees and determine whether it’s worth it to pay each company the fees it is deducting from your bottom line.

The important thing is that you are satisfied with your investments and the way the management company reports your holdings, returns and losses.

What Are the Risks Involved with Investing in Bonds?

Wednesday, January 10th, 2007

Bonds are considered a low-risk investment vehicle and, therefore, offer a relatively modest rate of return. But there are risks involved that every investor should know about.

The two main risks that bond investors face are Default Risk and Interest Rate Risk.

Default Risk is the possibility that an issuer will not be able to meet the obligations of its bonds, namely, that it won’t have the money to pay its coupon (interest) or to repay the principal upon maturity. When an issuer defaults, investors will usually lose all or most of their investment.

Default risk is what determines the coupon, or interest rate, on a bond. A financially strong company with a history of meeting its obligations will issue bonds with a relatively low interest rate; conversely, a startup that has never reported profits and has defaulted on obligations in the past will issue bonds at a higher interest rate because there is a higher likelihood that it will default.

Diversification is the key to managing default risk. “Don’t put all your eggs in one basket,” is the applicable saying here. While credit reporting agencies like Moodys and Standard and Poors offer bond ratings that give investors an idea of the likelihood of default, no company is immune to the possibility: not Enron, not Argentina, not Ford, and not General Motors.

High yield bonds (junk bonds) should be kept to a minimum, unless your portfolio is extremely diverse and your investment style has a high risk for volatility, while investment-grade (highly rated) bonds should make up the majority of your bond portfolio. Government bonds should range across a wide spectrum of countries and governments. We all like the tax benefits of municipal bonds, but they have a much higher default risk than federally-issued Treasuries.

Also, pay attention to the duration of bonds. A short-term bond will have a lower risk of default than a long-term bond, since there is less time for an issuer to meet its obligations. As a result, short-term bonds will have a lower interest rate.

Interest Rate Risk is the risk that your investment will lose money because market interest rates have risen. Everyone talks about this every day in the financial press, and it’s how bond traders make their living. It is widely known that higher interest rates mean lower bond prices, but it is little understood.

Every time Fed Chairman Bernanke sneezes it affects the bond market, but few know exactly why.

So, here’s the lowdown:

When an investor buys a bond he or she is expecting a fixed rate of return for a specified period of time. Let’s say I buy a 20-year US Treasury bond for $10,000, and it has an annual coupon of 5%. From my $10,000 investment, I expect to get $500 a year (5% of $10,000) for the next 20 years, at which point I’ll get my $10,000 principal back.

Easy, right?

Well, if interest rates go up and the US Treasury now issues 20-year bonds for 10%, I made a bad investment. Now, my $10,000 investment could have bought a bond that yields $1,000 a year, twice as much as my piddling $500 annually. The result is that, if I were to sell my $10,000 bond, I would get less than half of my investment, since the same issuer (the US Treasury) is now issuing bonds at twice the interest rate.

This example is simplified and exaggerated. Treasuries don’t double their coupon overnight. Also, there is only one issuer in the example given above.

Imagine the scenario above played out across the entire bond universe: short-term, medium-term, long term; municipal, government, and corporate bonds; high-yield, emerging market, and investment-grade…

Throw oddballs like asset-backed securities, convertible bonds, and mortgage-backed securities and you can begin to see how interest rates affect the entire bond universe: when interest rates rise, bond prices fall. It’s that simple.

The only hedges against inflation risk are liquidity (cash) and hard assets. The ability to purchase bonds when interest rates are high is the important thing: new issues have a high interest rate, and the secondary market is depressed (think about that $10,000 bond I bought that could now be bought for $5,000).

There are other risks of bond investments, and I’ll go over them briefly.

Inflation Risk is the possibility that the coupon on your bond will not meet inflation. For instance, if inflation is 4% and your bond investment only returns 3%, you effectively lost 1% annually by investing.

Country Risk is the risk that a government bond will go into default because the issuing government is unstable or insolvent.

Call Risk, unique to callable bonds, is the risk that an issuer will call a bond, thereby canceling it, by repaying the principal before maturity.