With graduations just behind us we often think of offering guidance to young people as they embark on life's journey. Here are two thoughts to pass along which I found in a WSJ column.
The path to long-term wealth includes:
- living within your means,
- a commitment to putting away so much money each year,
- allocating those long-term savings wisely among stocks, bonds and cash using low-cost, passively managed mutual funds, index funds and ETF's,
- and keeping costs (fees and taxes) associated with those investments as low as possible.
Be aware of "life-style creep".
As you climb the corporate ladder or wend your way through a career, each pay raise will bring new opportunities and choices.
How you handle those raises can be critical.
Think about spending the new money in ways that will bring enjoyment, but not commit you to an immediate and future higher spending level.
Commit to spending "just" half the raise for enjoyment and allocating the other half to ongoing savings.
Reaching financial independence will get easier and come sooner as well.
Be $ Smart - Over-spending and over-eating have consequences; diets are never fun.
Showing posts with label mutual funds. Show all posts
Showing posts with label mutual funds. Show all posts
Wednesday, July 15, 2015
Tuesday, April 14, 2015
Diversification in Investing
In any given day or any given year we have no idea which part of the market will perform well or under perform. The purpose of diversification (not putting all your eggs in one basket) is to have some money in several different areas to take advantage of an upward move and to protect against a downward move.
Asset allocation allows you to divide your money into:
Stocks,
Bonds,
Cash and
Alternatives.
And, within each of those categories are several smaller subcategories.
Stocks may include:
- large companies - large cap,
- mid-size companies,
- small companies.
Stocks may be bought in different "sectors" such as:
- Drugs (pharmaceuticals) & health care,
- Transportation,
- Consumer Products,
- Utilities - gas, electricity, telephone,
- Advertising, marketing, social media,
- Financials - banks, brokerage houses,
- Real Estate - office building, malls, apartment buildings.
Stocks may also cover different geographic areas:
- Domestic, meaning only U.S. companies,
- Foreign or international - outside the U.S.,
- Developed countries - in U.S., Europe, South America or Asia,
- Emerging markets, may be found in Africa, Indonesia.
And you may purchase mutual funds that include combinations of all those listed.
A diversified portfolio means holding some of these many choices so you have the exposure to both grow and protect your money. How do you know which ones to buy? It can be quite a challenge! Do the research yourself or find an advisor whom you trust to make the task easier but you still must play an active role of asking questions and reading statements.
Be $ Smart - plan a diversified portfolio for both opportunity and protection.
Asset allocation allows you to divide your money into:
Stocks,
Bonds,
Cash and
Alternatives.
And, within each of those categories are several smaller subcategories.
Stocks may include:
- large companies - large cap,
- mid-size companies,
- small companies.
Stocks may be bought in different "sectors" such as:
- Drugs (pharmaceuticals) & health care,
- Transportation,
- Consumer Products,
- Utilities - gas, electricity, telephone,
- Advertising, marketing, social media,
- Financials - banks, brokerage houses,
- Real Estate - office building, malls, apartment buildings.
Stocks may also cover different geographic areas:
- Domestic, meaning only U.S. companies,
- Foreign or international - outside the U.S.,
- Developed countries - in U.S., Europe, South America or Asia,
- Emerging markets, may be found in Africa, Indonesia.
And you may purchase mutual funds that include combinations of all those listed.
A diversified portfolio means holding some of these many choices so you have the exposure to both grow and protect your money. How do you know which ones to buy? It can be quite a challenge! Do the research yourself or find an advisor whom you trust to make the task easier but you still must play an active role of asking questions and reading statements.
Be $ Smart - plan a diversified portfolio for both opportunity and protection.
Friday, September 12, 2014
Dual Purpose - Roth IRA
Saving for retirement can be tough while you are trying to build an emergency fund, pay off student loans, car loans and other expenses. But we all know the importance of saving early. The earlier you start saving for retirement, the faster your money will compound and grow.
Here is where a Roth IRA (Individual Retirement Account) can serve two functions. The principal (original money invested) may be withdrawn without penalty and taxes at any time making that money available for emergencies. (It's the earnings - dividends and interest - that would be subject to taxes and penalty if you are under 59 1/2.)
Aim for three months emergency fund in a savings account and three months in your Roth.
How to open a Roth IRA:
You may open an IRA at a bank, credit union, brokerage house (e.g. Fidelity, Vanguard, Merrill Lynch) in person or online.
Questions to ask:
- What is the minimum investment?
- What fees are charged for the account and for transactions?
- What investments are available? Stocks? Bonds? Mutual funds? Exchange Traded Funds (ETF's)?
- How may I arrange for monthly automatic transfer from my savings or checking account?
Your biggest stumbling block may be the required initial deposit. Some firms require only $500 where others $1000 or $3000. Subsequent investments may be as little as $25 or $50. If you are expecting a bonus or a tax return, it may be a good use of that money. Otherwise, keep the emergency money building in your savings account until you reach the required minimum amount then open the Roth.
Using the Roth as part of your emergency fund means taking NO big risks with the money. Choose a very conservative investment for the emergency portion. As your balance grows, start to invest the difference more aggressively.
Keep in mind a Roth IRA is not for everyone. Only those individuals with earned income may contribute. And individuals earning under $112,000 and couples under $178,000 may contribute $5500 (if over 50, $6500). Remember it's not all or nothing. If you cannot contribute the max, contribute some amount.
Be $ smart - use the flexibility of a Roth IRA to your advantage in building your emergency fund.
Here is where a Roth IRA (Individual Retirement Account) can serve two functions. The principal (original money invested) may be withdrawn without penalty and taxes at any time making that money available for emergencies. (It's the earnings - dividends and interest - that would be subject to taxes and penalty if you are under 59 1/2.)
Aim for three months emergency fund in a savings account and three months in your Roth.
How to open a Roth IRA:
You may open an IRA at a bank, credit union, brokerage house (e.g. Fidelity, Vanguard, Merrill Lynch) in person or online.
Questions to ask:
- What is the minimum investment?
- What fees are charged for the account and for transactions?
- What investments are available? Stocks? Bonds? Mutual funds? Exchange Traded Funds (ETF's)?
- How may I arrange for monthly automatic transfer from my savings or checking account?
Your biggest stumbling block may be the required initial deposit. Some firms require only $500 where others $1000 or $3000. Subsequent investments may be as little as $25 or $50. If you are expecting a bonus or a tax return, it may be a good use of that money. Otherwise, keep the emergency money building in your savings account until you reach the required minimum amount then open the Roth.
Using the Roth as part of your emergency fund means taking NO big risks with the money. Choose a very conservative investment for the emergency portion. As your balance grows, start to invest the difference more aggressively.
Keep in mind a Roth IRA is not for everyone. Only those individuals with earned income may contribute. And individuals earning under $112,000 and couples under $178,000 may contribute $5500 (if over 50, $6500). Remember it's not all or nothing. If you cannot contribute the max, contribute some amount.
Be $ smart - use the flexibility of a Roth IRA to your advantage in building your emergency fund.
Friday, May 16, 2014
Financial Jargon
Most professions have their own terminology or lingo. Unfamiliar financial terms can be very intimidating or confusing. Here are a few translations you may find useful:
Equities - stocks.
Fixed Income - bonds, CD's.
Volatility - the inevitable, daily ups and downs of the markets. (not good or bad)
Standard deviation - risk. It graphically maps historical returns.
ROI - return on investment - how much your money has grown.
Mutual funds and Exchange traded funds (ETF) - pools of stocks or pools of bonds. Vehicles which give access to multiple stocks (or bonds) at one time
Correlation - Choosing investments that do well at different times by determining the relationship of one investment to another. A way to avoid putting all your eggs in one basket.
Cap (as in capitalization) - size.
Mid-cap or large-cap stock are terms that classify the size of a company.
A way to measure the size of a company by multiplying the number of outstanding shares by its share price.
Alternative investments - other than stocks, bonds or cash. May include precious metals, art, real estate, commodities (e.g. coffee, corn, soy beans, pork bellies).
Alphabet Soup:
ETF - exchange traded fund (grouping of stock or bonds)
IRA - individual retirement account (tax-deferred savings for retirement)
SEP - simplified employee plan (retirement plan for small business)
REIT - real estate investment trust (groupings of different types of real estate- e.g. shopping malls, office buildings, senior housing).
CD - certificate of deposit (issued by banks for a set time, a set interest rate and a set amount of money).
EFT- electronic funds transfer - a means of transferring money from one account to another.
Be proactive. Learn the language or ask for a translation. Be $ smart.
Equities - stocks.
Fixed Income - bonds, CD's.
Volatility - the inevitable, daily ups and downs of the markets. (not good or bad)
Standard deviation - risk. It graphically maps historical returns.
ROI - return on investment - how much your money has grown.
Mutual funds and Exchange traded funds (ETF) - pools of stocks or pools of bonds. Vehicles which give access to multiple stocks (or bonds) at one time
Correlation - Choosing investments that do well at different times by determining the relationship of one investment to another. A way to avoid putting all your eggs in one basket.
Cap (as in capitalization) - size.
Mid-cap or large-cap stock are terms that classify the size of a company.
A way to measure the size of a company by multiplying the number of outstanding shares by its share price.
Alternative investments - other than stocks, bonds or cash. May include precious metals, art, real estate, commodities (e.g. coffee, corn, soy beans, pork bellies).
Alphabet Soup:
ETF - exchange traded fund (grouping of stock or bonds)
IRA - individual retirement account (tax-deferred savings for retirement)
SEP - simplified employee plan (retirement plan for small business)
REIT - real estate investment trust (groupings of different types of real estate- e.g. shopping malls, office buildings, senior housing).
CD - certificate of deposit (issued by banks for a set time, a set interest rate and a set amount of money).
EFT- electronic funds transfer - a means of transferring money from one account to another.
Be proactive. Learn the language or ask for a translation. Be $ smart.
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