This article will aid inexperienced investors in getting started with just $1,000 saved toward maximizing their returns while minimizing costs. When you are still new to the business, it is important choose wisely on what to invest and how to go about investing.
Account minimums: All financial institutions have requirements for minimum deposit. If you have only $1,000 to start with, understand that some firms will deny you in opening an account.
Stocks: Choosing a compatible stockbroker is important, and they usually come in two types: discount and full-service. Someone with a $1,000 investment amount has the option of the discount broker. Though they have low fees, you do not get as much service or investment advice. Other options include direct stock purchase plans (DSPPs), which have over $100 to $500 minimum investment restrictions and online brokers that have low or no minimum deposit restrictions but do impose higher fees for specific types of trades.
Mutual Funds and Bonds: If you are interested in mutual funds, you can purchase through brokerage firms or through the local bank. If you fancy government bonds, which feature a minimum purchase ranging from $100 to $1000, you can go to TreasuryDirect.
Investment Costs: Know the costs attached to an investment. Every investment you purchase will cost you money in commissions. When you trade frequently, you will incur trading fees that range from $10 to $30. Mutual funds have the management expense ratio (MER) charged by the management team annually. For the newbie investor, mutual funds are advantageous because of dollar cost averaging (DCA) where fees remain the same regardless of the amount of investment.
Diversification: Another important thing to consider is diversification. With a $1,000 deposit, getting a well-diversified stock portfolio is difficult and risky. Go for mutual funds instead since they tend to include a large number of stocks within the fund.
Monday, November 30, 2009
Monday, November 23, 2009
The Real Deal About Valuing Real Estate
Dr. Steve Sjuggerud of Investment University gives two valuable real-world rules on selling or buying real estate.
The first rule: do not pay too much for good old earth. If you are after real estate stock, do not pay more than a 10% premium to the properties’ market value. If you want to buy a house, determine the comparable home values in the area and think carefully before you consider paying a 10% premium. The best advice in buying real estate is getting a 20% discount. It is hard, but not impossible to do, particularly if you are willing to groom up properties after buying them.
The second rule: do not pay too much for real estate “business.” Consider “price-to-earnings” (P/E) to determine your property’s true “intrinsic” value. Earnings take the form of rent. A good yardstick for real estate is the “1% above Treasury bond” rule. The nationwide net rent averages 6.15% (earnings-to-price ratio). In order to get P/E, inversing this value would mean that the “fair” value of your property should have a P/E ratio of 16. Forbes suggests that in order to get P/E for your property, one should get comparable rents data from relocation departments of large real estate firms. If you compute a low P/E, this means you got a sweet deal out of your property or you can expect high rental collections from it. If you compute twice as high as 16, then you should consider selling.
This is not however, a fixed guide. Real estate is liquid, unlike stocks, so there is a lot of guessing involved. Applying these rules does not guarantee success for you on a regular basis but it can improve your chances significantly by applying stock market rules to real estate. Just like the 1-2-3 model used in stocks, one always bears in mind that making money in the long run is impossible when the P/E is above 17.
The first rule: do not pay too much for good old earth. If you are after real estate stock, do not pay more than a 10% premium to the properties’ market value. If you want to buy a house, determine the comparable home values in the area and think carefully before you consider paying a 10% premium. The best advice in buying real estate is getting a 20% discount. It is hard, but not impossible to do, particularly if you are willing to groom up properties after buying them.
The second rule: do not pay too much for real estate “business.” Consider “price-to-earnings” (P/E) to determine your property’s true “intrinsic” value. Earnings take the form of rent. A good yardstick for real estate is the “1% above Treasury bond” rule. The nationwide net rent averages 6.15% (earnings-to-price ratio). In order to get P/E, inversing this value would mean that the “fair” value of your property should have a P/E ratio of 16. Forbes suggests that in order to get P/E for your property, one should get comparable rents data from relocation departments of large real estate firms. If you compute a low P/E, this means you got a sweet deal out of your property or you can expect high rental collections from it. If you compute twice as high as 16, then you should consider selling.
This is not however, a fixed guide. Real estate is liquid, unlike stocks, so there is a lot of guessing involved. Applying these rules does not guarantee success for you on a regular basis but it can improve your chances significantly by applying stock market rules to real estate. Just like the 1-2-3 model used in stocks, one always bears in mind that making money in the long run is impossible when the P/E is above 17.
Friday, November 20, 2009
Ten Ways of Evaluating Your Broker
There are 10 things to consider in choosing a broker or in evaluating whether your broker measures up.
1. Trading commissions: Cheaper may not be better. The price per trade may be indicative of the level of customer service executed. If you go cheaper, you may find yourself at the end of the line with your questions unanswered, whereas paying more would most likely mean excellent service.
2. Other fees: It is important to know that brokerages charge other fees for services, such as for transferring assets into the account, wire transfer, IRA custodian, etc. Know what you need first so you won’t have to pay for unnecessary services.
3. Minimum initial deposit: Beginning investors should consider the initial investment amount they’re most comfortable with. Since some brokers have account minimums, choose one that suits your budget.
4. Customer service: Research on the services offered before signing up. Consider website performance and interface, speedy service, and a good phone service.
5. Traditional banking services: Look for a brokerage account that can adjust to your banking needs.
6. Research: Decide whether or not you have to pay for research (analyst reports, financial data, and real-time quotes) when you can do it yourself online.
7. Mutual funds: Check whether you have to pay for no-load mutual funds since some brokers charge fees. If you have a particular mutual fund family in mind, ensure that your broker offers that.
8. Investment product selection: Check so that the broker you choose offers investment vehicles you wish to use.
9. Other methods of getting your trades executed: Determine whether your broker has contingency measures such as touch-tone phone trading; things like this will prove helpful in the event you have no access to a computer.
10. Freebies: Though not entirely a big deal, free money is free and stress-relieving.
A final word: if you make less than 20 trades annually, never mind the cost; focus instead on customer service.
1. Trading commissions: Cheaper may not be better. The price per trade may be indicative of the level of customer service executed. If you go cheaper, you may find yourself at the end of the line with your questions unanswered, whereas paying more would most likely mean excellent service.
2. Other fees: It is important to know that brokerages charge other fees for services, such as for transferring assets into the account, wire transfer, IRA custodian, etc. Know what you need first so you won’t have to pay for unnecessary services.
3. Minimum initial deposit: Beginning investors should consider the initial investment amount they’re most comfortable with. Since some brokers have account minimums, choose one that suits your budget.
4. Customer service: Research on the services offered before signing up. Consider website performance and interface, speedy service, and a good phone service.
5. Traditional banking services: Look for a brokerage account that can adjust to your banking needs.
6. Research: Decide whether or not you have to pay for research (analyst reports, financial data, and real-time quotes) when you can do it yourself online.
7. Mutual funds: Check whether you have to pay for no-load mutual funds since some brokers charge fees. If you have a particular mutual fund family in mind, ensure that your broker offers that.
8. Investment product selection: Check so that the broker you choose offers investment vehicles you wish to use.
9. Other methods of getting your trades executed: Determine whether your broker has contingency measures such as touch-tone phone trading; things like this will prove helpful in the event you have no access to a computer.
10. Freebies: Though not entirely a big deal, free money is free and stress-relieving.
A final word: if you make less than 20 trades annually, never mind the cost; focus instead on customer service.
Wednesday, November 18, 2009
Socially Responsible Investing (SRI): The Basics
Some people see investing as more than a rate of return but as a way where one’s values and beliefs are reflected and practiced. Socially responsible investing or SRI is a growing strategy that integrates financial with social and environmental objectives. Those who are considering investing in SRI need to know ten basic tips.
1. Define goals: Determine what you want to achieve based on your values and principles.
2. Choose an approach: SRI has three non-mutually exclusive approaches: 1) Portfolio screening either excludes (negative screening) or includes (positive screening) some companies from your list of prospective investments; 2) Best practices classification chooses firms that rank high in environmental, governance, social, or financial criteria; 3) Shareholder status usage to monitor and influence management through direct engagement of proxy voting.
3. Select an Appropriate Benchmark: Use either SRI or traditional benchmarks to evaluate a business’ performance according to whether they adhere to your defined goals and principles.
4. Choose an SRI Rating Firm: Select the best firm that can supply SRI ratings that help you implement a feasible SRI strategy.
5. Investigate SRI Vehicles: Pick individual securities that rank high based on realistic criteria and expectations.
6. Evaluate SRI Options in Your 401(k) Plan: Check your 401(k) plan to evaluate whether mutual funds screened are consistent with your goals and values.
7. Fees: Bear in mind that socially responsible mutual funds or ETFs pay higher management fees, ranging from about 0.40-1.00% of portfolio value.
8. Be realistic in performance expectations: Like other investment vehicles, be realistic in the performance of your investments. While possessing similarities, realize that an SRI does not perform like your traditional mutual funds.
9. Diversify: Come up with a well-diversified portfolio to reduce risk.
10. Consult an Investment Professional: It is important to consult with a competent and trust investment adviser to help you navigate and execute SRI goals.
1. Define goals: Determine what you want to achieve based on your values and principles.
2. Choose an approach: SRI has three non-mutually exclusive approaches: 1) Portfolio screening either excludes (negative screening) or includes (positive screening) some companies from your list of prospective investments; 2) Best practices classification chooses firms that rank high in environmental, governance, social, or financial criteria; 3) Shareholder status usage to monitor and influence management through direct engagement of proxy voting.
3. Select an Appropriate Benchmark: Use either SRI or traditional benchmarks to evaluate a business’ performance according to whether they adhere to your defined goals and principles.
4. Choose an SRI Rating Firm: Select the best firm that can supply SRI ratings that help you implement a feasible SRI strategy.
5. Investigate SRI Vehicles: Pick individual securities that rank high based on realistic criteria and expectations.
6. Evaluate SRI Options in Your 401(k) Plan: Check your 401(k) plan to evaluate whether mutual funds screened are consistent with your goals and values.
7. Fees: Bear in mind that socially responsible mutual funds or ETFs pay higher management fees, ranging from about 0.40-1.00% of portfolio value.
8. Be realistic in performance expectations: Like other investment vehicles, be realistic in the performance of your investments. While possessing similarities, realize that an SRI does not perform like your traditional mutual funds.
9. Diversify: Come up with a well-diversified portfolio to reduce risk.
10. Consult an Investment Professional: It is important to consult with a competent and trust investment adviser to help you navigate and execute SRI goals.
Monday, November 16, 2009
Five Changes to Post-Recession Investment Thinking
After the recession, several traditional modes of thinking about investing have changed. Below are five examples that investors can learn from:
1. Asset Allocation
CONVENTIONAL WISDOM: Traditional thinking says mixing stocks and bonds in a portfolio should be done according to an investor’s age and risk tolerance. Hence, young investors were encouraged to own growth stocks before transitioning into the more secure bonds and blue-chip company investments.
NEW THINKING: Bonds are the way to go. Barclays Capital U.S. Aggregate Bond Index indicates a 14% increase in bonds since 2007 October, while stocks dipped 28%. This is why investors have poured in $209 billion into bond mutual funds compared to the 200% more attractive stock funds before.
2. Stock diversification
CONVENTIONAL WISDOM: Maintaining a diversified portfolio will arm you in bear markets and assure the best returns. In the event of a downturn, rely on “value” stocks, while during the good times, maximize your gains by investing in “growth” stocks.
NEW THINKING: The fact remains that it will take several years before a full economic recovery. Experts predict more volatility and an unsteady recovery, instead of a consistent climb upward. It depends on what kind of economy emerges after the downturn.
3. Alternative Investments
CONVENTIONAL WISDOM: Build your portfolio around stocks and bonds and minimize investing in other assets.
NEW THINKING: Tangible assets like real estate and gold are the more secure option. Consider not only your home, but other forms of real estate and gold bullion.
4. Dividends
CONVENTIONAL WISDOM: Dividend-paying stocks assure you steady income.
NEW THINKING: This is no longer a certainty after companies made several dividend cuts to conserve cash. The only thing still certain is taxes.
5. Risk
CONVENTIONAL WISDOM: Choose risk-free investments to protect yourself.
NEW THINKING: Nothing is risk-free anymore. Large money-market mutual funds like the Reserve Primary Fund have proven to be vulnerable to the financial crisis.
1. Asset Allocation
CONVENTIONAL WISDOM: Traditional thinking says mixing stocks and bonds in a portfolio should be done according to an investor’s age and risk tolerance. Hence, young investors were encouraged to own growth stocks before transitioning into the more secure bonds and blue-chip company investments.
NEW THINKING: Bonds are the way to go. Barclays Capital U.S. Aggregate Bond Index indicates a 14% increase in bonds since 2007 October, while stocks dipped 28%. This is why investors have poured in $209 billion into bond mutual funds compared to the 200% more attractive stock funds before.
2. Stock diversification
CONVENTIONAL WISDOM: Maintaining a diversified portfolio will arm you in bear markets and assure the best returns. In the event of a downturn, rely on “value” stocks, while during the good times, maximize your gains by investing in “growth” stocks.
NEW THINKING: The fact remains that it will take several years before a full economic recovery. Experts predict more volatility and an unsteady recovery, instead of a consistent climb upward. It depends on what kind of economy emerges after the downturn.
3. Alternative Investments
CONVENTIONAL WISDOM: Build your portfolio around stocks and bonds and minimize investing in other assets.
NEW THINKING: Tangible assets like real estate and gold are the more secure option. Consider not only your home, but other forms of real estate and gold bullion.
4. Dividends
CONVENTIONAL WISDOM: Dividend-paying stocks assure you steady income.
NEW THINKING: This is no longer a certainty after companies made several dividend cuts to conserve cash. The only thing still certain is taxes.
5. Risk
CONVENTIONAL WISDOM: Choose risk-free investments to protect yourself.
NEW THINKING: Nothing is risk-free anymore. Large money-market mutual funds like the Reserve Primary Fund have proven to be vulnerable to the financial crisis.
Monday, November 9, 2009
Seasonal Patterns: A Helpful Tool for Investment Analysis
When doing am overall market analysis, the primary factor must always be price or price movements, or the market trend. However, seasonal tendencies can be used as a secondary factor when performing your analysis as they reinforce your chances of securing a stronger position in the market. The technique to successful market analysis is to consider as many factors as possible. Supplement this with effective money management, and you have what it takes to become a successful investor.
There are recurring market cycles each year that create the so-called seasonal patterns. These seasonal tendencies are a major force in the market. You will be successful trading the markets when you work the odds to your favor prior to making a position. For instance, sugar tends to be priced lowest in September and highest in December every year. A smart investor would use this pattern to develop a good trade setup. The price of sugar starts hitting bottom-level in August to consolidate on a narrow channel through September before breaking out in October. To gain a strong position on the market, buy on the breakout in order to influence the price movement in your favor and gain protection in case the market opposes you. If the price of sugar monumentally drops, you can even make a fortune.
Other seasonal patterns of other markets include:
• soybeans are likely to be at their highest price level from May to July to drop from September to October;
• crude oil prices are at their highest in September and October and at their lowest from December to February; and
• the U.S. dollar is at its strongest within the first half of the year before regressing into year end.
The catch: seasonality is not the only factor to consider. One should also ponder on the cash basis and other fundamentals.
There are recurring market cycles each year that create the so-called seasonal patterns. These seasonal tendencies are a major force in the market. You will be successful trading the markets when you work the odds to your favor prior to making a position. For instance, sugar tends to be priced lowest in September and highest in December every year. A smart investor would use this pattern to develop a good trade setup. The price of sugar starts hitting bottom-level in August to consolidate on a narrow channel through September before breaking out in October. To gain a strong position on the market, buy on the breakout in order to influence the price movement in your favor and gain protection in case the market opposes you. If the price of sugar monumentally drops, you can even make a fortune.
Other seasonal patterns of other markets include:
• soybeans are likely to be at their highest price level from May to July to drop from September to October;
• crude oil prices are at their highest in September and October and at their lowest from December to February; and
• the U.S. dollar is at its strongest within the first half of the year before regressing into year end.
The catch: seasonality is not the only factor to consider. One should also ponder on the cash basis and other fundamentals.
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