Newly added: Quotes Section

Check out the new quotes section on the right hand side of the blog. I think it is a good addition. If you have a quote that relates to finance, let me know, by adding a comment and I'll put it on the page.

Quotes section

One of the comments I received included a great quote and so I thought it would be beneficial to have a quote section. Thus, you can find this newly situated on the right hand side column of the blog. Enjoy

Most Important Investments

For the majority of people, investing in stocks and bonds is foreign, especially in a basic brokerage account. The only exposure to investments many people receive is that of a work retirement account, usually a 401(k). It's amazing, and a little bit sad, how many people that I have talked to, who do not know about IRAs and their eligibility for other retirement options.

If you are the typical employee that has a company sponsored retirement plan, you have a couple ways to invest for your future.
1-Contribute to your work 401(k).
2-Open and contribute to an outside retirement account, i.e. an IRA.
3-Open a brokerage account with a broker-dealer like E-trade, Fidelity, Morgan Stanley, Merrill Lynch etc...
4-Buy oil. (meant to be a joke but right about now that looks like a great investment)

In any fashion, I want to express how important it is to save for retirement and more importantly let you know how to go about doing so.

First off, the most important way to save, by far, is your company 401(k), if you have one. The reason for this is that, most of the time, the company matches a portion of your investment. This company match is FREE MONEY. Yes, free money. ALWAYS contribute enough to get the full company match. Always. Why would you not take advantage of free money? There is no excuse or reason. (Most of the time the company that you work for will match up to $x and then 1/2 of the next $x. Always contribute enough to get every penny from them.) The reason it is so important to take money out of each check and contribute to your retirement funds is obvious: so that you have money working for you to become financially independent later in life. Another reason is that having some money withheld and invested every paycheck allows you to continually invest and dollar-cost average (see previous post of dollar-cost averaging for benefits).

Secondly, you want to open an IRA. If you make below 100k/year and don't see yourself making above that for much of your work life, open a Roth IRA. If you make, or will soon make, above 100k, open a Traditional IRA. (I won't get into the details as to why in this post)

Now, there are many reasons for opening an IRA, but the most important is that you will be able to contribute an extra $5k/year if you are under 50, and $6k/year if you are over 50 to your retirement. This money will grow tax deferred, which means that there will not be any tax consequences when you purchase or sell securities, for a profit or loss. This is a huge advantage over a normal brokerage account in which you have tax consequences after each transaction.

Lastly, if you have extra money left after taking care of necessary expenses and fulfilling the above investments, I would suggest opening a basic brokerage account and depositing that extra money so that you have the freedom to invest it in stocks or other investments.

In summary, take advantage of the free money your employer is offering. Once you've done that, do all you can to save and invest for your retirement. Even if you only have an extra $50-100/month, save it. It will go a long way for your future.

Always remember: "A penny saved, is a penny earned." This is a priceless tidbit of information that pays off in the longterm.

Example of how a dividend can grow your holdings

I re-read my previous post and wanted to add an example of how a dividend can help grow your holdings in a stock. I thought that a real world example would make it clearer as to why dividends are beneficial. See below:

Let's keep the math simple....

You buy 100 shares of Washington Mutual when it is at $10. Your original investment is $1,000. Let's assume that the yield of WM is 10%, this means that WM pays dividends that add up to 10% annually. (Usually, dividends are paid quarterly, but they are measured in yield per annum.) Let's also assume that WM stays at $10/share for 5 years with absolutely no appreciation in stock price. This is not really realistic but helps keep my example clear. Even with the share price of WM staying flat over 5 years, you would have increased your holdings because of the compunded dividend growth, assuming you reinvested those dividends. Let me show you.

Year 1: Own 100 shares at $10.
Year 2: (after 10% annual dividend reinvested) Own 110 shares at $10.
Year 3: (after 10% annual dividend reinvested) Own 121 shares at $10.
Year 4: (after 10% annual dividend reinvested) Own 133.10 shares at $10.
Year 5: (after 10% annual dividend reinvested) Own 146.41 shares at $10.

Isn't this crazy? Even with 0% growth in the actual price of a stock, your value of investment went up from $1000 in year 1 to $1464.10 in year 5. A 46% return over 5 years with no growth in the stock OR the dividend. The best part about this is that we all know most stocks will go up over the long term as the business grows and becomes more profitable AND when the businesses become more profitable they in turn usually raise the dividend to share that profit with shareholders. That means that the original investment that you make will grow even more than my example. This just goes to show how powerful dividends are.

Once again, this example was a little extreme, but just goes to show the added value of dividends, if reinvested. I highly recommend that you take some time and research dividend paying companies. Just google dividends and stocks and there will be myriad links to sites listing some good names.

Any questions or comments that you may have are always welcomed, drop a line below.

Dividends. They are a great way to slowly accumulate wealth.

So, dividends are very important. What are they? Here is the simplest definition I can come up with: a dividend is the distribution of additional company shares to its shareholders.

A little overview: Many companies and financial organizations offer shares to generate funds for the company. The investors invest in the company through these stock purchases. The investment decisions also depend on the reputation of the company. Getting some good returns in the form of a dividend is the motive behind these investments.

The shares bought by the investors provide them the status of an owner of the company. When the company makes a profit, a certain percentage of the profit is distributed among the shareholders according to the amount of shares of the company they own. These dividends are provided in cash or in the form of additional shares. These additional shares are known as a stock dividend.

There are several reasons for providing a stock dividend to the share holders. The company may have a shortage of cash. Because of this it becomes impossible for the company to provide cash to every shareholder. On the other hand, it is also possible that the company wants to invest more money from the earned profit into the company to raise the production level, thus they issue stock instead of cash.

There are several benefits of a stock dividend. Most importantly, no tax is charged on such dividends. If a shareholder receives some kind of stock dividend he or she is not entitled to pay any kind of tax on that until the additional shares are sold. On the other hand, this type of dividend provides the shareholder with additional ownership in the company which can provide more profit in the future. These are big pluses and the main reason why investors are attracted to the long term growth prospects of high-dividend yield stocks.

Another form of dividend that is provided to the shareholders is known as cash dividend. This dividend is paid in hard cash form or by check. The rules of this type of dividend is more or less same as the stock dividend. Here also the shareholder receives a certain part of the company's profit, which is decided according to the number of shares the shareholder holds. The investor can then decide whether or not to reinvest the cash into the company, by purchasing more shares, or simplay take the cash as a deposit into the brokerage account. Most of the time, people reinvest the money as to grow their investment, especially if the company's future looks bright.

Here are some dividend paying stocks that are popular buys.

-Pfizer (PFE)
-Duke Realty (DRE)
-Bank of America (BAC)
-Sempra Energy (SRE)
-Johnson and Johnson (JNJ)
-General Electric (GE)
-Pepsi (PEP)

Obviously, there are thousands of stocks that yield dividends. I would suggest doing a google search for dividend paying stocks and go from there.

Good luck!

highly recommended article

Instead of me just writing endlessly about retirement, which I could do, TRUST ME, I am simply going to give you a link to a great article about understanding your retirement. It is short and sweet and to the point, so check it out. There are also many other fantastic articles about all aspects of money and finance that are quite helpful as well.

http://www.fool.com/retirement/retirement01.htm?source=ifltnvsnv0000001

This article is on the Motley Fool website. This site is great. There is a section called 'Caps' that I frequent. It allows you to make stock picks and track your portfolio of picks. I check this site at least once a day and everytime I am interested in a stock for purchase or out of curiosity. Many people use this and present great insight into companies that you may not have been privy to on your own.

I'd recommend taking an hour or so, if you have the time, to navigate the site and see what parts could be useful to you.

Happy Reading,

The Guru

Dollar Cost Averaging..... a very very important concept for continued growth/profit from your investments!

In short, dollar cost averaging is an investment technique used to reduce market risk through the regular purchase of securities at predetermined intervals and set amounts. Many successful investors already practice this without realizing it. Many others could save themselves a lot of time, effort, and money by beginning a plan.

Dollar Cost Averaging: What is It?
Instead of investing assets all together in a lump sum, the investor works their way into a position by slowly buying smaller amounts over a longer period of time. This spreads the cost basis out over several years, providing insulation against changes in market price.

So how do you set up your own dollar cost averaging plan?
In order to begin a dollar cost averaging plan, you must do a couple things:

1. Decide exactly how much money you can invest each month or period.
2. Make certain that you are financially capable of keeping the amount consistent; otherwise the plan will not be as effective.
3. Select an investment that you want to hold for the long term, preferably five to ten years or longer.
4. At regular intervals (weekly, monthly or quarterly works best), invest that money into the investment you’ve chosen. If your broker offers it, set up an automatic withdrawal plan so the process becomes automated.

For example: You own a mutual fund and invest $100/month into it. If the mutual fund goes up over the long term, which we assume and hope will happen, your average price per share will steadily go up. On the other hand, if the mutual fund declines for a time period of over one month, your price per share will decline.

Here are the numbers. Let's say the mutual fund share price is $50/share to start.
Purchase 1 - $100, 2 shares at $50 each
Purchase 2 - $100, 1.96 shares at $51 each (can only buy 1.96 shares b/c price has appreciated)
Purchase 3 - $100, 1.92 shares at $52 each
Purchase 4 - $100, 1.88 shares at $53 each

In this case, you would now have $400 invested in this mutual fund and you would own just under 8 shares (7.76 shares to be exact). The average price paid would be $51.50. Therefore if the mutual fund goes below that you are at a loss but if it is above that then you have gains.

Dollar cost averaging works even better when a fund decreases in value after you buy it. For instance, you buy 1000 shares of a stock at $50. It goes down to $25 and you buy another 1000 shares. At that point, you would own 2000 shares at $37.50. This helps b/c then the stock doesn't have to make it all the way back to $50 for you to break even, it only has to get to $37.50. Obviously it is useful if you believe in the prospects of a stock. If you bought a stock that has been downgraded or isn't attractive anymore, then you may just want to cut your loses.

Godspeed.

Insider buying and selling......what does it tell us?

Insider Trading

Insider buying and selling is a very, very powerful tool in helping to determine whether a company is a good investment or not. Insiders are the executives, directors, and 10% owners of public companies. They know more about the health of the company than the average or everyday investor because they run it on a day to day basis. Studies have shown that companies that have significant insider buying have beaten the market time after time. This is no accident. Insider trading tends to lead the market by anywhere from six months to a year because of the knowledge that the executives have of their business model and how well the outlook is for the future. Insiders of a corporation obviously know more about the individual company they work for, the industry/sector that that company is in, and its competitors. This information not only helps them determine how the company is doing but also how much the company's stock should be valued at.

On the other hand, insider selling has not been shown to lead to a decline in the stock price because an insider may sell stock for myriad reasons: a child going to college, a new home purchase, or any life event.

Taking this into consideration, how is it that we can profit from this? Simple. Keep up with the news and look at investment vehicles in the market that take advantage of this information. Remember: every time and insider buys or sells, there is a process that they must follow and that involves following many SEC regulations that are eventually publicized so that each one of us can find out who is doing what. One way to capitalize is to keep your eyes open for headlines in the news that say a public company's executive is purchasing a block of shares or exercising options. This could be a sign that you need to look into the transaction to get more info. Another way to benefit is to invest in a company, or a group of them, that have insider buying. NFO is a managed ETF, an exchange-traded fund which is similar to a mutual fund, that holds companies whose high level executives and directors are buying company stock. There are also proprietary products that many of the brokerage houses, Smith Barney, Merrill, and Morgan Stanley, design to allow their clients to invest in these companies.

I would suggest 'googling' insider buying/selling and seeing if you can come up with a list of companies to look into.

Here is a preliminary list:
CABOT OIL & GAS CORP
MOSAIC CO
ST JOE CO
NUCOR CORP
COMCAST CORPORATION CLASS A
LABORATORY CORP OF AMERICA
MASSEY ENERGY CO.
OM GROUP INC.
ONEOK INC.
KAISER ALUMINUM

All it takes is a little research and turning over a couple of rocks to find the right company and the right time to invest.

Comments are welcomed!

Feel free to make any comments that would help make the blog more useful, i.e. any topics you are interested in or any other info I have neglected.

Thanks.

Is there an end in sight for gold and oil prices?

The above charts show oil and gold prices over the past year. Pretty similar increase; both going through the roof. A couple questions that come to mind are, Why are both oil and gold increasing at the same time? and Why would someone want to own gold? I'll answer these below.

1- Why are oil and gold prices rising together?

Oil, Inflation and Gold

Although the prices of gold and oil don't exactly mirror one another, there is no question that oil prices do affect gold prices. If oil prices rise or fall sharply, investors can expect a corresponding reaction in gold prices, often with a lag. There have been three major upward moves in the price of gold, one of which we are currently experiencing. The first occurred in the early '70s when oil prices tripled. During the same period, gold prices rose 2.5x. The second major price move occurred later that decade, when oil prices doubled. Over the same period, gold prices rose another 2.5x. The third period has been during the last year. As the charts above show, one year ago (5/1/07) oil and gold prices were about $65/barrel and $675/ounce respectively. Today, oil is trading at just over $119/barrel and gold is just under $900/ounce.

2- Why Own Gold?

There are six primary reasons why investors own gold:

1. As a hedge against inflation. Gold is renowned as a hedge against inflation. The most consistent factor determining the price of gold has been inflation - as inflation goes up, the price of gold goes up along with it. Since World War II, the years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%. Coincidence? I think not. Today, a number of factors are conspiring to create the perfect inflationary storm: stimulative monetary policy, a declining dollar, a spike in oil prices, a mammoth trade deficit, and America’s status as the world’s biggest debtor. This has caused commodity prices to reach all time highs across the board.
2. As a hedge against a declining dollar. Gold is bought and sold in U.S. dollars, so any decline in the value of the dollar causes the price of gold to rise. The U.S. dollar is the world's reserve currency i.e. it is the medium for international transactions, the principal store of value for savings, the currency in which the worth of commodities and equities are calculated, and the currency used as reserves by the world's central banks.
3. As a safe haven in times of geopolitical and financial market instability. There are myriad problems occurring around the world, any of which could erupt with little warning. Gold has often been called a 'crisis commodity' because it tends to outperform other investments during periods of world tensions. The very same factors that cause other investments to suffer cause the price of gold to rise. A bad economy can sink poorly run banks. Bad banks can sink an entire economy. Both of which we are currently seeing, along with gold soaring. As banking crises occur, the public begins to distrust paper assets/money and turns to gold for a safe haven. When all else fails, governments rescue themselves with the printing press, making their currency worth less and gold worth more. Gold has always risen the most when confidence in government is at its lowest.
4. As a commodity, based on gold’s supply and demand. Demand is outpacing supply across the board. Gold and other precious metals production is declining. It is very difficult to open new mines because it takes a long time, making it hard to address the supply issue quickly. There is growing demand in China and India, the largest gold-consuming nations.
5. As a store of value. One major reason investors look to gold as an asset class is because it will always maintain an intrinsic value. Gold will not get lost in a market collapse. It actually becomes a go-to investment during problematic markets. Historically, gold has proved to be an effective preserver of wealth for investors.
6. As a portfolio diversifier. The most effective way to diversify your portfolio and protect the wealth created in the stock and bond markets is to invest in assets that are negatively correlated with those markets. Gold is the ideal diversifier for a stock portfolio, simply because it is among the most negatively correlated assets to stocks. Although the price of gold can be volatile in the short-term, gold has maintained its value over the long-term, serving as a hedge against the purchasing power of paper money. For these reasons, exposure to gold in one form or another, is essential to having a truly diversified portfolio.

With that said, there are several ways to invest in gold. You can buy gold mining company stocks (ABX, AUY, GOLD, NEW are a few), mutual funds of these stocks (INIVX), closed end funds that mirror the gold price (GLD), or gold bricks or coins itself. If you think that oil will continue to increase you may want to look at the US oil fund (USO).