Archive for June, 2009

Last week, I have given you some basic tips on stock market investing. Here are some more tips to help you out:

11. Diversify. Divide your money into different investment vehicles (i.e., money market, stocks, bonds, mutual funds, ETFs, etc.), as well as different asset class (i.e., large US companies, small US companies, global, etc.) and sectors (i.e., financial, utilities, technology, etc.). Base on your decisions to invest on your time frame and risk profile. Never risk more than 10% of your capital on any one investment especially for individual stocks.

12. Establish an emergency fund. Do not invest everything. It is wise to keep a small amount of cash that you can use for emergencies as well as other opportunities.

13. Keep costs low. Save money by using a discount broker instead of a full-service broker. If you have done your homework, then you know that there is no reason why you shouldn’t. It is also recommended that you stick with mutual funds with no load and low expense ratio. You can also try ETFs .

14. Reallocate once a year. Different investments grow at different rates. This can throw your asset allocation out of whack. It is a good idea to reallocate your portfolio at least once a year depending on the degree of misalignment and expenses involved.

15. Manage your risks. In addition to diversification, do not risk the money which you know you will need in the near future in high volatility investments.

16. Use Limit Orders. Most of the time, a market order is fine. However, for some investments, a limit order gives you greater protection from price fluctuation. With a market order, you cannot control the price at which your order will be filled. But do keep in mind that your limit order may never be executed. If you want to use market order, do so while the market is open.

17. Use Stop-Loss Orders. Create a plan to limit your loss. For example, set up stop-loss orders at reasonable price limits. A good range is 10-20% depending on the volatility of the investment.

18. Lock in your profit. As your investment value rises, increase your stop-loss limit to lock in the profit.

19. Be wary of a bargain. Never buy just because the price of the investment is “low,” or sell just because the price is “high.” Study the factors that are driving the price. Understand why this is happening. Buy and sell based on your research.

20. Stay your course. Never change your investment strategy without a good reason. If you did your research and executed accordingly, everything should be fine despite short-term set backs. If your investment drops significantly, the stop-loss order will take care of you. Never let greed or fear take control over you.

Watch out for the final installment of the Stock Market Investing Tips next post.

When it comes to investing, it pays to know what you are going into.  Here are some tips to get you started -

1. Pay off your debts before you invest. Clean up your finances before you invest. You are guaranteed to save money on interest when you pay off your bad debt. Remember that when investing money, there is no guarantee that your investment will grow. ; especially when you are new at it.

2. Understand the market. Do your homework and get to know the market. Do not trade until you have sufficient knowledge and understanding of the pros and cons. Learn what it has to offer and understand the risks involved. Know the different types of investment before you jump in.

3. Know your risk tolerance. Understand your risk tolerance and formulate your investment strategy based on your risk profile, goals, and time frame.

4. Create a plan. Have a solid strategy and always remain true to your plan. While you may be tempted to follow what others are doing, it would be in your interest to follow the style that works best for you.

5. Research. Learn how to read Cash Flow Statements, Balance Sheets and Income Statements. Never buy and sell if you do not understand what you are buying or selling. When starting out, you may opt to use asset allocation and rebalancing strategy with investment vehicles like ETFs (Exchange-Traded Funds) and mutual funds.

6. Choose investments that are easier to cash in. Limit your exposure to investments such as collectibles, commercial real estates, and limited partnership. They are difficult to sell quickly at a price close to its market value. On the other hand, investments such as stocks and bonds give you greater flexibility and have great historical performance.

7. Time equals money. The more time you have to invest, the more money you will make. Imagine the difference a decade will make. Start as soon as you can and watch your investments grow.

8. Patience is a virtue. Learn how to control yourself. Never get into the market because you are eager and never get out of the market just because you are panicking or losing your patience.

9. Do not be an active trader. Buy and hold on to your investments for a longer period. You are paying more taxes if you sell your winning investments less than 1 year and 1 day from your date of purchase.

10. Be tax efficient. Invest high yield investments or funds with large distribution in your tax-sheltered account. With taxable accounts, consider trading out your losses before the end of the year to offset your gains.

Watch out for part two of stock market investing tips.

For those who want to invest their money but don’t know where to start, here are the top three things that you should consider before you make the plunge.

1. Only Invest Money That You Can Afford To Lose

Investing money often has some risks involved. This is why it is never a good idea to put in all your money in any investment. Investing money is not the same as putting money into a high yield savings account or a certificate of deposit. Know that you can lose money so it is to your benefit to use money that you don’t mind losing.

2. Choose a Financial Institution

Find a financial institution that can handle and manage your financial investments for you. It is always a good idea to do your research before signing up with any financial institution. It is important that you get to know them. Make sure that you are comfortable with them and most importantly, that you are able to trust them.

You can invest through any of the three main types of financial institutions:

• bank
• discount brokerage firm
• full service brokerage firm

Banks and full service firms generally charge more than a discount brokerage firm. Personally, I prefer using a discount brokerage firm because of the lower fees they charge compared to the others. Beware of companies who recommend products that may not seem right for you. Know that they are working on commissions. So, it would be to your advantage to understand the products that they offer you. Do not be pressured into any product that you feel are not suitable for you.

3. Choose Between a Taxable Account versus a Tax-Advantaged Account

Before investing, you need to decide whether you want to have a taxable account or a tax-advantaged account. Here are some details to help you identify which one is right for you:

• Taxable Account

  Taxable account allows you to have control as to when you want to liquidate your investment or get your money back.  You can get it any time.  However, one disadvantage to this is that you have to pay taxes on capital gains yearly.

• Tax-Advantaged Account

  Tax-advantaged accounts, on the other hand, do not allow you to withdraw your money until a specified period or age is reached.  Examples of a tax-advantaged account include 401k, Traditional IRA and Roth IRA.

  The advantages of a 401k and a Traditional IRA is that it includes tax deductions on the amount you contributed.  Further, your investment grows tax free until you start to withdraw the money.  Roth IRA, on the other hand, do not provide tax deduction however, your investment grows tax free and the withdrawal is also tax free.

  One drawback to a tax-advantaged account is that there are limits on how much you can contribute each year.  In addition, there is also a 10% early withdrawal penalty if you withdraw your investment before the specified time or age.