A Primer on Investment Basics
01-21-2007, 01:43 PM
#1
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A Primer on Investment Basics
This is a collaborative effort with another member on the forums and born out of our sincere desire to help members of our APC family. It is not meant to be comprehensive, but something to get you started on investing wherever you are in life. The overarching message is that you are never too young or too old to put money away for retirement, whether it is in stocks, mutual funds, IRAs or real estate. And always remember diversification.
Stocks. You can own shares of any company listed in one of the stock exchanges. Many people go through a brokerage such as Charles Schwab or Fidelity, which charges you a fee for buying or selling shares. Do some research and decide on the brokerage that is right for you. They almost always have the capability for you to research the stock you would like to purchase and actually purchase it at the time of your choosing. One option available is to purchase at Market Price, or you can have a Limit Order. The next question is which stock you should buy. Again, do some research, ask a lot of questions, talk with people you trust, talk with some people in the company itself if you have to. Personally, I pick stocks that I intend to keep for the long haul and stocks in companies that I know hold long term promise in sales, growth, return on equity (ROE), return on assets (ROA), return on investments (ROI) and cash flow. One easy way, if you simply do not know which to pick, is to build a portfolio that mirrors the S&P 500.
Mutual Funds. A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities. Mutual funds come in several varieties: index funds, stock funds, bond funds, and money market funds. Investing in mutual funds a less risky than owning the company stock itself primarily because a mutual fund is a pool of money and managed by a professional. In the past, there have been many good mutual funds that grew more and faster than the Dow Jones, for example. Alas, they were so popular that they are now closed to new investors, but there are still many good ones out there from which to choose. A final note - check for management fees ("12b-1" fees or charge loads are some that come to mind); many do not charge a fee and those that do charge one does not necessarily mean they are better.
401(k). If you are lucky enough to work for a company that has a 401(k) plan, you should maximize your contributions here before putting any extra money into an IRA. This is particularly true if your company matches your contribution to any extent. There are several threads out there discussing the 401(k) vehicle.
Individual Retirement Accounts/Roth IRA. You can contribute to a 2006 IRA (Roth or traditional) up until April 15th OR when you file your income tax return WHICHEVER occurs FIRST. A Roth IRA is a non-deductible IRA, meaning you pay the tax up front by using post tax income as contributions, for the "promise" of tax free withdrawals later. Whether to go with a Roth or a traditional depends on several things, the largest consideration of which is your marginal tax bracket. The break even point depends on many factors, but simplified it seems to shake out at about the 25% bracket. If you are below that, generally the Roth is a no brainer; 25% and above, and the older you are, the less sense it makes to put post tax money away at 25% only to later withdraw it at say 15% (why not let the tax money be deferred and work for you until you withdraw it). Another nice feature of the Roth is that your principal contributions can be withdrawn at anytime penalty free, and can even be used for the purchase of a first home.
Real Estate. Buying a first home (or second or third home) is always a nerve wracking time. The bottom line rule of thumb is to buy a home because you want to live in it, and not for an investment or a tax break. And try to live in your home for at least 5 years or more. So if you know you are going to move in a year or two, you are probably better off renting and putting the putative mortgage payments into a money market account or mutual fund. Real estate is one of the most illiquid of investments. If you choose not to purchase a home, but would like your portfolio to include real estate, consider Real Estate Investment Trusts (REITs). An REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. They can offer high yields as well as being a highly liquid method of investing in real estate.
Gold. Well, let's not go there for now.
Stocks. You can own shares of any company listed in one of the stock exchanges. Many people go through a brokerage such as Charles Schwab or Fidelity, which charges you a fee for buying or selling shares. Do some research and decide on the brokerage that is right for you. They almost always have the capability for you to research the stock you would like to purchase and actually purchase it at the time of your choosing. One option available is to purchase at Market Price, or you can have a Limit Order. The next question is which stock you should buy. Again, do some research, ask a lot of questions, talk with people you trust, talk with some people in the company itself if you have to. Personally, I pick stocks that I intend to keep for the long haul and stocks in companies that I know hold long term promise in sales, growth, return on equity (ROE), return on assets (ROA), return on investments (ROI) and cash flow. One easy way, if you simply do not know which to pick, is to build a portfolio that mirrors the S&P 500.
Mutual Funds. A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities. Mutual funds come in several varieties: index funds, stock funds, bond funds, and money market funds. Investing in mutual funds a less risky than owning the company stock itself primarily because a mutual fund is a pool of money and managed by a professional. In the past, there have been many good mutual funds that grew more and faster than the Dow Jones, for example. Alas, they were so popular that they are now closed to new investors, but there are still many good ones out there from which to choose. A final note - check for management fees ("12b-1" fees or charge loads are some that come to mind); many do not charge a fee and those that do charge one does not necessarily mean they are better.
401(k). If you are lucky enough to work for a company that has a 401(k) plan, you should maximize your contributions here before putting any extra money into an IRA. This is particularly true if your company matches your contribution to any extent. There are several threads out there discussing the 401(k) vehicle.
Individual Retirement Accounts/Roth IRA. You can contribute to a 2006 IRA (Roth or traditional) up until April 15th OR when you file your income tax return WHICHEVER occurs FIRST. A Roth IRA is a non-deductible IRA, meaning you pay the tax up front by using post tax income as contributions, for the "promise" of tax free withdrawals later. Whether to go with a Roth or a traditional depends on several things, the largest consideration of which is your marginal tax bracket. The break even point depends on many factors, but simplified it seems to shake out at about the 25% bracket. If you are below that, generally the Roth is a no brainer; 25% and above, and the older you are, the less sense it makes to put post tax money away at 25% only to later withdraw it at say 15% (why not let the tax money be deferred and work for you until you withdraw it). Another nice feature of the Roth is that your principal contributions can be withdrawn at anytime penalty free, and can even be used for the purchase of a first home.
Real Estate. Buying a first home (or second or third home) is always a nerve wracking time. The bottom line rule of thumb is to buy a home because you want to live in it, and not for an investment or a tax break. And try to live in your home for at least 5 years or more. So if you know you are going to move in a year or two, you are probably better off renting and putting the putative mortgage payments into a money market account or mutual fund. Real estate is one of the most illiquid of investments. If you choose not to purchase a home, but would like your portfolio to include real estate, consider Real Estate Investment Trusts (REITs). An REIT is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. They can offer high yields as well as being a highly liquid method of investing in real estate.
Gold. Well, let's not go there for now.
01-21-2007, 04:01 PM
#3
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Joined APC: Jan 2007
Position: PA-44/Instructor
Posts: 54
And finally, leave it to the professionals! If you want a ditch dug, call the ditch digger...If you want to invest, leave it to your wife! But always, always, keep a little cash stash on the side, your little piece of mind!
01-24-2007, 02:18 PM
#4
Gets Weekends Off
Joined APC: Jan 2007
Position: 757/767
Posts: 579
2006 Annual Report of UPS MPP/401K
On the large Cap stocks Vanguard Value Index Inst finished the best
with 22.27% versus the S&P 500 at 15.79%. Vanguard Value Index also
had the best risk vs. return of the large caps also. Contra had a slow
third quarter which held it back for the year, but it almost matched
the S&P 500 in the fourth quarter. Alger Capital Appreciation beat
the S&P 500 for the year but carried almost 44% more risk than the index.
In the Mid Cap sectors neither Janus Enterprise or Spartan Extended
Index were able to beat the S&P 500 and both carried considerable more
risk than the index.
In the Small Cap sectors only TRP Small Cap Index was able to barely
beat the S&P 500 in performance, but carried over double the risk of
the index.
International - All funds easily beat the S&P 500 in performance, but
only Spartan International Index was able to do it with 22% less risk
on a risk versus reward basis.
Fidelity Real Estate continued to do well with 32.84% for the year while
only carrying 88% of the risk the S&P 500 carried. Puritan also had
a fantastic year almost matching the S&P 500 with 23% less risk.
Both bond funds increased their performance this year after a tough
year on 2005.
7-Day yield on the Money Market is 5.10%
On the large Cap stocks Vanguard Value Index Inst finished the best
with 22.27% versus the S&P 500 at 15.79%. Vanguard Value Index also
had the best risk vs. return of the large caps also. Contra had a slow
third quarter which held it back for the year, but it almost matched
the S&P 500 in the fourth quarter. Alger Capital Appreciation beat
the S&P 500 for the year but carried almost 44% more risk than the index.
In the Mid Cap sectors neither Janus Enterprise or Spartan Extended
Index were able to beat the S&P 500 and both carried considerable more
risk than the index.
In the Small Cap sectors only TRP Small Cap Index was able to barely
beat the S&P 500 in performance, but carried over double the risk of
the index.
International - All funds easily beat the S&P 500 in performance, but
only Spartan International Index was able to do it with 22% less risk
on a risk versus reward basis.
Fidelity Real Estate continued to do well with 32.84% for the year while
only carrying 88% of the risk the S&P 500 carried. Puritan also had
a fantastic year almost matching the S&P 500 with 23% less risk.
Both bond funds increased their performance this year after a tough
year on 2005.
7-Day yield on the Money Market is 5.10%
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