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Dow Reaches All-Time High: Is Now The Time To Invest?

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This article could be consider “Part 2” of the article I posted a few weeks ago, Is It Time for the Market to Crash

Write it down: March 5, 2013 the Dow reached it’s all-time high at a close of 14,253.77. Remember the last “all-time” high?  It was in 2007, October to be exact.  The bear market low of 2009?  That was almost exactly four years ago, March 6, 2009.  So the question becomes: Is now the right or wrong time to invest?

First, let’s take a look at where we are.  The markets are up over 100% since the Great Recession, but why?  Isn’t the economy still in shambles here and overseas?  Job growth is anemic, currency and debt issues abound, right?

True.  All true.  But stocks aren’t priced based on what the currency markets are or aren’t doing.  They’re not priced based on the trade balance between Argentina and Botswana.  They’re priced based on expectation of future earnings.  It’s that simple.

Or it’s not.

 

The Case For Now IS The Right Time To Invest

 

There are of course, other factors – for example, stocks have been (and probably will continue to be for a while) a better overall value than bonds and other fixed income securities like CDs.  Interest rates continue to be low and investors are generally tired of their paltry 0.50% interest on their cash in the banks.  Just this week I had a conversation with a client who has $50,000 in cash reserves, earning a whopping 0.75% dividend at his local bank.  Those factors also drive stock prices higher.

We should ask this question: How are the largest companies of the U.S. and the world doing?  Some other questions that will lead you to a rosy future: Look at free cash flow (that’s at an all time high) corporate balance sheets (exceptionally flush with cash) company stock buy-backs (trending higher) dividend payouts (and the ever increasing rate of those payouts).

That mutual fund of yours? Based on these numbers, it appears we’re headed higher.

 

The Case For Now ISN’T The Right Time To Invest

 

That doesn’t mean there won’t be major pullbacks.  A few weeks ago, I talked about having a “It’s time for the market to crash” kit ready to go.  Investors are piling money into the market again after sitting on the sidelines while things looked lousy, and that’s not a good sign.

Just because you’re planning for a pullback doesn’t mean you can’t also be planning for the next leg up.  As I talked about then, planning is important, but plans are not. (So said the wise Winston Churchill…just a few years before I wrote it here).

 

My Overall Take

 

When I evaluate the strength of earnings potential of the greatest companies here and abroad I see great things ahead.  That doesn’t mean there won’t be market swings.  It doesn’t mean there won’t be a pullback of some kind.  But when I look to the future, I see a world that continues to get bigger, faster, and stronger, and I’d rather own the companies that are leading the charge.

So yes, now’s the time to invest.  But so was yesterday and the day before and so it will be tomorrow.  As long as you believe in the future and think tomorrow will be better than today, it’s always a good time to invest. Don’t stop your investment plan because of CNBC hype or Wall Street Journal headlines.

…but, if I’m wrong – and Lord knows I probably will be more times than not – I’ve still got a back up plan on the shelf ready to execute at a moments notice, and you should, too.

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How To Increase Your Yield Through Microloans

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Sometimes it takes a little creativity to reach your destination.

The world economy continues to slowly gain traction but many cash investors aren’t seeing that translate to increased yield in their short and mid-term cash investments.  According to Bankrate.com, the average yield for a $10,000 money market investment was a paltry 0.52%.  That’s a whopping $52 per year, excluding any fees or costs, and definitely excluding inflation.  Last year, the Social Security Administration increased retiree benefits by 1.7% to offset increasing costs.  Based on that inflation adjustment, investors are losing purchasing power each and every year by doing what at first glance appears to be the right thing: investing in a reliable money market account.

Imagine an investment that guarantees you’re going to lose money – that’s what a traditional cash reserve is doing today. That’s why so many bloggers lately question the need for an emergency fund at all. Don’t fall into that trap.

Microloans: A Primer

Microloans are very small loans made to borrowers who typically lack collateral to support the loan.  Sometimes, microloans are also made to those who don’t have steady employment or even verifiable credit.   There are two well-known microloan organizations – serving a completely different market. The most well known peer-to-peer lender is Prosper.com.  They have over 1.6 million customers and have funded over $400 million in loans to their members.  Prosper.com helps connect borrowers who have reasonable credit with lenders who are trying to earn a higher return on their money.  The other micro-lending site is Kiva.  They primarily help people and families across the world to “create opportunity and alleviate poverty.”  Between the two, Kiva seems altruistic, whereas Prosper seems more capitalistic.

How To Earn Money

While both Kiva and Prosper offer the opportunity to lend money to whomever you wish (and for whatever purpose you wish), Prosper created a system to help those who want to use Prosper as an investing tool.  On their website, they breakdown all the financial metrics for the different types of loan ratings.  Prosper also provides advice on how to create a “diversified” portfolio of microloans.  (Diversification is important when investing in loans – some are going to default!)

Returns on these investments are beyond enticing – Prosper’s best members, those they rate AA – have an average credit score of 808 (well above the national average).  Those AA loans have a historical loss rate of 1.70% – but have an average return of 5.50%!  That’s leaps and bounds above our Money Market rate listed above.  The lowest rated Prosper members (credit score 683) have a 14% loss rate and a 13.29% average return.  A well-diversified portfolio of Prosper loans could make an attractive portfolio.

It’s Not All Roses

This may seem like a great “fire-and-forget mission” and in some ways it is, but there are some things you’ll need to recognize before you invest in microloans at a place like Prosper.  First, the loans are three years long, and there’s no way to get your money back early if you truly need it.  Secondly, you will experience some defaults.  As I mentioned above, even the highest rated consumers still default.  You need to realize you’re becoming the bank!  Prosper recognizes that their traditional model doesn’t suit everyone, so they have created their Prosper Trade Notes program, but even that comes with it’s own long list of pros and cons.

Sum It Up

If you have some extra cash reserves – money that you know you aren’t going to use for at least three years – Prosper.com could be a viable solution to increase your yield.  If you want to loan money for a more altruistic purpose, consider Kiva.  Both of them serve a specific purpose, but Prosper has a greater chance to provide a consistent income stream for the investor.

Photo: Philip Taylor PT

5 Great Stock Buying Tips To Practice Today

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Care enough about your portfolio to practice, practice, practice.

Small investors are a mess. Too many of us want to have a portfolio that looks clean and tidy, but we don’t want to be bothered to practice learning the skills it’ll take. Why not? I just left the Texas High School State Swim Championships, where my kids both swam with the best of the best. Do you know how they got there? Would it surprise you if I told you that it wasn’t walking around saying, “I think I can swim a really fast time this meet?”

Of course it wouldn’t surprise you. People who don’t care don’t read financial blogs, do they? You’re ready to rock!

Since they were 7 years old, my kids have been in the water practicing for this last weekend. Sure, at the time they were just looking to get through the next meet, but because they’re seniors in high school, there’s a big chance that neither will go beyond the speeds they swam in the pool this weekend ever again. All of that work culminated in this last chance at the pool. My daughter swam her fastest time ever and my son swam in 2nd fastest times in all of his 4 events. Practice didn’t make perfect. Perfect practice made perfect. Lots of hours of perfect practice.

 

What does this have to do with stocks?

 

When I see failing investors, it’s often because they want success in the moment. Because anyone can buy a stock, it looks easy, doesn’t it? Who can’t pick the next big winner?

Watching pros trade and then observing Main Street trade you begin to understand the difference. The pro takes a ton more time and care when picking than just asking the dude next to him at work what’s rockin’ for him!

You too can become a better stock picker if you take the time to learn identifiers of a reliable investment. You can pull the trigger on your investments in a better way once you’ve picked the stock.

 

5 stock buying tips to practice today to become a better investor:

 

1)   Practice comparing stocks in a category and read the annual report. I actually love to read the message at the beginning of annual reports. Why? I get a feeling for the business and their focus. You’ll learn who the competitors are, what the product does, and what their concerns are.

Several years ago I happened to be reading the annual reports of GE and a casino back-to-back. Jack Welch, then CEO of GE, wrote about how the company needed to improve on all fronts. He wrote about how empowering their workforce was the #1 goal of the company. He also wrote that someone asked him about the end customer, and why that wasn’t his focus. He said that if he focused on his people, they’d do a better job with customers, and everyone would win. The casino? They talked about the current economic climate and how it was difficult to do anything when people weren’t gambling. They focused on regulatory changes and travel costs. Guess which one won my hard earned money that day?

Don’t stop at the fluff messages written by PR people, though. Take one statistic each week and become familiar with it. Start with PE ratio, then Price-to-Book. Learn to compare revenue and earnings numbers. Dive into insider trades (not the illegal variety…stick with watching what the “big wigs” at the company are purchasing).

2)   Learn to make watch lists, and watch them.  When I created my first watch lists, they were WAY too long and unorganized. I learned through my experience, though. Good stock picking is about creating crude systems and then working your system to improve.

3)   Buy stocks at the market, and avoid the open. How egotistical is it to think that a stock that’s been rocketing (those are the ones you should focus on, by the way), will turn around and reverse course just long enough to descend to YOUR CHOSEN SPOT and then turn around again and shoot to the moon? How omniscient do you think you are?

A key part in realizing the danger of the market is in knowing that you are a little itty-bitty part of a much bigger financial market that you cannot possibly understand. As much as CNBC and Fox Business try to tell you “why” the stock market moved, they have no clue. If you understand that you have no idea where the market is going to go tomorrow you’ll do two things better: 1) you’ll buy stocks you really like on an up-trend, and 2) you’ll pay a hell of a lot more attention to your downside risk.

4)   Buy an option. One time, write a covered call. We’ve written about how these work already. If you haven’t done it yet, what are you waiting for? Sure, you may lose a dollar or two, but what’s the price of education? You’ll never know how it works REALLY until you REALLY do it. Jump in and sell a covered call. It’s the least risky option available.

5)   When you screw up (and you will), don’t think “I’m never doing that again.” Sadly, that’s the message most investors receive when markets turn against them. This is the market teaching you a lesson! Use the lesson! Don’t go off and mess up some other area where you’re clueless!

Photo: Jim Bahn

What “Golden Rules” do you practice when investing outside of “buy and hold?” Put your 5 Stock Buying Tips out there so others can learn!

5 Smart Money Moves For Young Families

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Even a small step in the right direction counts. The best Valentine’s gift for young families? Getting on the same page.

As a Certified Financial Planner™ practitioner, I meet with clients from all walks of life.  One of the things I say to all my clients is, “I’m never too busy to meet with anyone you’d recommend.”  Which, of course, is a nice way of saying – “l’ll meet with anyone as a favor to you.”

Usually clients have a pretty good idea who we’re after from a prospecting standpoint, but on occasion, I am asked to meet with a client’s grandson or nephew – someone who may not be in our “target audience” as it relates to practice growth.

But, I’ll always gladly help them.

 

Why I’m Telling You This Story

 

Last week, I had the privilege of meeting with a young couple – Jack and his lovely spouse…Jill.  (We’ll change the names to protect the innocent).  They were the typical American young family – just out of college, a young child, tons of college debt, a handful of credit card debt, no real savings, and a meager job just to pay the rent.  They looked like deer in the headlights when they walked into my office.

I know the type – I used to be Jack and maybe you were (or are) too – young, arrogant, (heck, I’m still that one), confused, unsure of oneself – so much unknown, you don’t know even where to start.  That was Jack and Jill, except they wanted help, but they had no idea where to start.

And frankly, hiring our firm wouldn’t help them that much either, and I told them as much.  They looked exasperated – I could see it on their faces – “if this guy can’t help, we’re doomed.”  So we sat down and started making a list of all the small things – things you can do with under $1,000 – to get the ball rolling in your financial and personal life.  I’m narrowing them down to my top 5:

 

Build a portfolio early

 

If you search around, you can find a nice discount broker who won’t rob you in commissions, and then buy two exchange traded funds (ETFs): one which tracks the S&P 500 and another that follows a bond index.  For example, 5 shares of SPY or IVV (S&P 500 funds) and 2 shares of AGG (Aggregate Bond Index) will give you a 70% equity / 30% fixed income portfolio.  That’s quite a start.

I explained to Jack and Jill that if they start early, a little guy called “gains” can work in their favor. Make your money work for you as quickly as possible and you’re reap huge rewards down the road.

 

Pay attention to tax shelters

 

If you need the money, save it into a spot where you can get it. But taxes can drain from your returns, so if possible, shelter the funds.

Small steps…investing even $1,000 in a Roth IRA and adding $100 a month from age 22 to 65 would turn into $478,000!  As we’ve mentioned several times, you can access your contribution at any time so it could double as a little cash reserve if you need the money.

There’s also good news at the end of this tunnel: in most families, they’re able to contribute more later as they earn more cash. Set a good foundation with small amounts today and

 

Cash is the key to your debt repayment

 

I’ve seen too many people attack debt with every dollar, only to find the dishwasher broken or the muffler dragging behind the car. Where do you go for cash then if you’ve drained all of your funds?

Right back into debt.

Don’t start the habit of pulling plastic out of your wallet. It gets easier and easier every time you do it. Keep a cash reserve. By cash, I mean cash. With our increased reliance on ATM machines, credit cards, etc., a simple power outage can cause quite the disruption.  Live through the next Zombie apocalypse by keeping $500 or $1,000 in cash at home in a safe.  But remember, this is for emergency only! I’ve met too many new investors who spend their emergency funds on vacations or credit card repayment. That’s not why that money’s there.

Speaking of emergencies…with a young family, don’t forget insurances. I told Jack and Jill to focus on disability insurance at work and cheap term life insurance.

 

Manage your energy

 

Huh?  Are you talking about vacation?  Jack and Jill can’t afford anything! Are you nuts?

They thought I was crazy at first, but like I’ve said…I’ve been there before. Let me explain. When you’re buried in debt, the last thing you need is an expensive, week long trip. But you need to keep a clear head to move the ball forward, so take smaller vacations…but still take some!

These vacations aren’t because you deserve them. You don’t. They won’t help your debt in a direct way. But indirectly? You’ll notice a huge difference in your ability to attack your problems when you’re fresh and relaxed.

Find a deal to hop the train to Toronto or Chicago for the weekend if you’re in the Midwest, or Austin if you’re in Texas.  Use a travel site like Hotels.com to book your reservation and save money.  Take a quick cruise to the Bahamas.  Remeber to do whatever it takes to keep away the cobwebs and return fresh. It doesn’t need to be expensive…it just has to be “away.”

Recent studies have shown a direct correlation between physical health and monetary wealth (unintended rhyme…happy Valentine’s Day!) If you’re lucky enough to have short commute – try a different method for a week and see how you feel.  Could you walk?  Ride a bike?  Adding a little cardio exercise to your day will make you feel better and will improve your work attitude and output.  Give it a try –if you rode your bike to work only 3 days a week and it was 5 miles each way, you’d ride 1,500 miles a year!

 

Educate your children

 

I told Jack and Jill that this was the most frustrating part of my job: meeting too many new investors who had no idea what moves to make first. Stop the cycle by helping your kids become money-savvy. Most people think I’m going to say, “Invest in a 529 plan.”  Wrong.  IF you do invest in a 529 plan, teach them to track the funds with you. Play board games that help them think about strategy and money. Let them sit in on your budget meetings. Track electrical output in your house and make it a game. Heck, invest in a Kindle from Amazon.  They’re $150 or so, and if they’re young enough, sign them up for Amazon Free Time, (a service that pre-screens kid-approved content for one low monthly cost of $3). Don’t leave them alone with the stuff and expect your kids to learn. Make it family time with the Kindle, or heck, with a book. Remember those?

Recent studies have shown a direct correlation between physical health and monetary wealth (unintended rhyme…happy Valentine’s Day!) If you’re lucky enough to have short commute – try a different method for a week and see how you feel.  Could you walk?  Ride a bike?  Adding a little cardio exercise to your day will make you feel better and will improve your work attitude and output.  Give it a try –if you rode your bike to work only 3 days a week and it was 5 miles each way, you’d ride 1,500 miles a year!

 

Bonus:  Communicate

The closest we’ll get to a good Valentine’s gift today is this: communicate. Especially communicate if you’re worried, but also when things are going well. Practice our weekly meeting plan. Real budgets are about keeping the family on the same page, not about dollars on a spreadsheet. Especially in married or cohabitating couples, I find that one generally knows what’s going on with the money while the other is in Fantasyland. Don’t make this mistake. When you both own your financial life,

Jack and Jill left looking relieved. They didn’t have to hire an expensive financial advisor and had a pretty clear road map on how to start down the road to prosperity.

 

Who delivered your first financial lesson?

Holiday Games and Finance: What Can the Game “Dominion” Teach You About Money?

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While Joe’s playing Dominion with his sister, brother in law and spouse (we all l.o.v.e. this game at our house), Erin Shanendoah of The Dog Ate My Wallet fame holds down the fort at the blog. Hope you’re enjoying some quality family time like we are!

Dominion is hands down the favorite game in our house. Set up is minimal, and you can get through a 2 player game in as little as 10 minutes if both the players know the cards. Every game is different, which means that players need to be open to different kinds of strategies if they want a chance at winning.

Even forgetting that you have money within the game (copper, silver, gold & platinum(in the expansions)), you can learn a lot about finances from Dominion.

Every game is different. Just like every person’s financial situation is different. Because of this, there is no one strategy works for every game of Dominion, and there is no one size fits all solution to personal finance. You have to look at the cards that have been  dealt and figure out the best plan for this game, this situation. Only by responding to the uniqueness of each situation can you hope to consistently do well.

Multiple strategies can be viable options. My husband and roommate both love playing games, and for the most play well together. But they have different outlooks on life and will often see the exact same set of cards and come up with two completely different ways to win. They each go with the strategy that they are the most comfortable with.

Just because someone has a similar financial situation to you does not mean you have to both take the same financial strategy. Find what works for you and what you’re comfortable with, and you’ll have a much greater chance of “winning”.

Diversity is good. Too much is not. Currently, there is the base set and 7 expansions for Dominion. While you can play with as many expansions as you want, we’ve found the best games are limited to 3 sets- usually the base plus two expansions. 3 sets gives you lots of options, but you don’t lose the synergy between cards.

Diversifying your holdings financially helps mitigate your risk, but if you diversify too much, you lose the power of “buying in bulk” so to speak. (Average Joe and The Other Guy can both speak about this much more eloquently than me.)

Sometimes you just need more money. Other times, you need your money to work harder for you. Within Dominion, you use money to buy other cards. You can buy more money, action cards, or victory point cards. Sometimes, the best strategy is to use your money to buy more money, especially in the early stages of the game. But later, you’ll want to use that money to buy action cards. Those cards allow you to advance your strategy, hinder the strategy of others, and sometimes even buy the highest value victory card, even though you started the hand with only 2 coppers.

Early on in your life, often the best solution to money problems is just to get more–go out and work a second job, find a way to earn passive income, etc. But once you get to the point where you’re not struggling to pay the bills, you need your money to work for you. By making smart moves with your money, you can open new doors for yourself or your family, and eventually “win” the game by having a comfortable retirement. (I do hope that in real life, you won’t use your money to hinder others. That should be a game strategy only.)

Just sitting on money can slow you down. One might think the one strategy in Dominion that would work in every game would be to use your money to buy more money until you had enough to buy victory cards, and just keep doing that. It doesn’t work. While you obviously need victory cards to win the game, they don’t do anything else. You can’t spend them. You can’t take an action from them (well, in some expansions there are victory cards that have actions, but those are very special cases). Instead, they just take up valuable space in your hand and do nothing, slowing you down.

While sometimes it seems the safest way to save money is just to stick it in the recliner and sit on it, your money can’t grow that way. It can’t actually do anything for you. It’s a strategy that just slows you down.

The cards aren’t always your friends. There are good cards and bad cards in Dominion. There are cards that are good for the person who plays them and awful for others. There are thieve and militias, there are curses and witches. You can be forced to destroy your victory point cards or have a platinum stolen by the player to your left. Sometimes, you just get negative victory points. In order to win, you have to have a strategy to weather or eliminate the bad.

Bad things happen in real life. You need to have the tools to survive them. Sometimes it’s just in making smart decisions and protecting yourself. Getting yourself out of debt and carrying the right kinds and amounts of insurance can also protect you against the vagaries of the world.

Luck always plays a role, but it’s not everything. Because every player of every game of Dominion starts out with the exact same 10 cards, and a five card hand, there’s a limited number of opening hands you can have. But which one you get and how well it works for that particular game, is all a matter of luck. If two good strategies are going against each other, it’s really just going to be luck that decides the winner of the game. But it’s very rare for a well thought out strategy to lose to no strategy at all. Just depending on luck isn’t likely to win the game.

Some people start life luckier than others. Some people get lucky later on. And some people make their own luck by coming up with a well thought out strategy. And in life, it’s not really going to matter if you retire with $2 million while your buddy is ending with $2.1 million. You’ve both “won”.

Don’t forget to have fun. Dominion is a game. The husband and roommate are both competitive people and love to win. I care much more about enjoying the game. But I can’t enjoy the game if I feel ineffective. I will enjoy myself just as much putting together a strategy that comes “this close” to winning as I will winning the game. I will even enjoy a failed strategy if I find a single good combination within it.

How much money you die with matters only to the people you leave it too. You can’t use it anymore. Don’t put your life on hold just to reach some arbitrary savings goal. If you never take vacation until you’re 75 years old, are you going to be able to climb the island stairs at Tintagel? Yes, you want to save for the future and make sure you have enough to retire in comfort, but there’s no counting up victory cards at the end of your life, declaring you the “winner”, so make sure you have some fun along the way.