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One thing I have noticed since I started doing some online investing is that I get notices all the time, both in my e-mail “in-box” and as flagged messages when I sign in. There are notices for dividends (I like getting those) notices for purchases, sales, quarterly statements for each company, annual reports, etc, etc. Most people just don’t have any use for all the information, and they certainly don’t need to keep copies of it. But some people will.

I used to keep all the confirmations for my buys and sells and I printed out monthly statements to track gains and losses. Soon I realized I needed a new filing cabinet, just for all of those. So I got one. And then I got one of those nifty wire racks that hold the manila folders. That was great for all the information I needed ‘right at my fingertips.’

But, WHY did I need all that? The answer was that I really didn’t. I was hording my files and never looked at them past the first day. I was printing things out, maybe reading them once and filing them for ‘future reference.’ That was for the future reference that never arrives.

The point I am making is that most paperwork never needs to get to paper. Electronic copies of documents is enough, and even most of those probably aren’t ever going to be accessed again, and, here’s the kicker, all those documents probably have a lot of information that is confidential. Leave the files alone. Don’t print them out, unless you are taking them to your financial consultant or your accountant. Even then, you need to prioritize and make sure you are only taking what you need, and shredding it all when you are done with them.

The ideal state is a paperless one, and keep in mind that documents from an on-line account will probably still be available on-line, unless you delete them, and documents necessary for your accountant or financial consultant will be kept at their office (and they will know what is really needed, if they are true professionals.)

Bottom line, if you really need to print documents, make sure you keep them secure and well organized.

Dollar cost Averaging is a means of investment whereby you invest a set amount of money at regular intervals. For most people this means having a payroll-deduction credited to your investment account. More familiar to a lot of folks is their 401K (or 403B for those in the non-profit or public sectors.) Those plans allow you to make choices among their various funds and allocations to each fund.

To explain in simple English, you can have a payroll deduction of $100 dollars and have half go into one fund and half go into another fund. That’s $50 per fund. (Many plans offer a wide variety of choices. I’m making it really basic for illustration purposes)

One fund may be a more conservative one, and the other a growth fund. When the market is ‘up’ your $50 might buy 2 shares of the fund (at $25 per share) while when the market is down the $50 might buy 5 shares (at $10 per share.) Over time, the price you pay per share will lean toward the lower price because you are getting more shares per investment period when the market price is less.

Continuing with that example, if the market is up 5 weeks out of ten with the same fluctuation in price that means you are buying 2 shares for 5 weeks at $25 dollars, and 5 shares for 5 weeks at $10 dollars, average price per share is 35 shares over the ten week period at $14.28 per share.

This is an extreme example just to make the point. Given investments tend to go up over time, dollar cost averaging is a strategy that really works well over long investment periods. Of course, regular investing is the key to wealth, and dollar-cost-averaging is a good strategy to use.

“Dollar” cost averaging is merely an American term. Cost Average Investing would be a more universal phrase, and one I am going to use.

In the latest round from Detroit Chrysler is undergoing one of the more radical and speedy bouts with bankruptcy ever. How will this change the way that corporations do business? Will other companies look at the deals that the big three auto makers are getting and expect to get the same deals? OR instead of expect, perhaps they will demand, and end up in court to try to press their case for ‘equal treatment.’

Ok Now how will all this effect you, or your investments? It is a volatile time in the world of finance. No one will deny that. To make matters worse, if you look to the ‘gray beards’ of the investment industry you will hear all kinds of theories on the why’s and wherefore’s and — what we are all most interested in — when will we reach the bottom? When will this turn around? When can we expect recovery? When will it be safe again for me to put my money somewhere other than bonds or my mattress?

The answers are varied, depending who you talk to. The people I most admire in the investing world all seem to think the speculation is vapid and we just need to press on. What can you do? Following the principals that have made many a man (or woman) rich, the thing to do is deep and thorough due diligence. Yes, I am still on that bandwagon and I really don’t see myself ever jumping off.

Due diligence will, in the end, prevent foolish investing and will likely keep your investments from tumbling. Is anything a sure thing? No. Of course not. But, it is a sure thing that if you follow the right investment strategy, the majority of your investments will continue to grow until you reach the point where you know you need to part ways. Some stocks and companies never reach that point in my book.

Warren Buffett, and I know some people don’t agree with him, but I do, doesn’t buy any stocks that he foresees selling. He is a ‘buy and hold’ sorta guy. In the big picture I am totally with Warren, but when you get down to brass tacks, as an individual investor, you should have some sort of sell point, analyzing the stocks in your portfolio and when they numbers reach a crucial figure, you let them go. Set free your assets when the time is right.

When is it right? That is for you to say. In my opinion, whatever criteria you use when you decide to buy should also be the same criteria you use to sell. Do you look at the dividends when you buy? Look at them when you sell. Do you look at return on net assets when you check out last quarter’s numbers? Do you buy when they are above a certain percentage? Do you sell when they drop below that percentage of return? Or do you look at what you will replace that stock with and only sell when you find that?

What do you think of Chrysler? Is the “Chrysler Group” going to be an investment you look at when the restructuring is done? Do you look at a company owned mostly by the union in the same way you looked at it prior to that point?

On that same note, will the “Union” look at it’s members in the same light, now that they also are forced to look at how their demands impact the bottom line?

Like Forrest said, “you never know what you are going to get” but like I said, if you do enough analysis, without getting to paralysis, you can make informed jumps, and right now there are some delicious choices out there.

figures adding up?

I have gone into some level of detail regarding different designations for financial planners (see Financial Certifications ), but I didn’t really go into advantages and disadvantages of having a financial planner. I know there are some people upset that their financial planner wasn’t omnipotent regarding the latest plunge, but they probably did as well as can be reasonably expected; in other words, don’t expect miracles. Now onto the meat of this post.

First, I will say that I believe that with enough reading and research anyone can gain the knowledge needed to determine their financial needs. You can determine what levels of insurance you need, how much you ought to be saving and where you should be putting your investment dollars. If you are only looking at different funds, you can do this last part fairly easily (and hope to choose the right funds for you.)

The difficult part of that equation is the time it takes to do a really good job at it, and also to keep on top of events so you update your choices and keep abreast of new developments. The other factor is the commitment to your choices and following through with your plan. Of course there can also be self-doubt creeping in to make you question the choices you have made, which also impacts your commitment.

If you choose to consult with a financial planner, that act in itself might help you to stay the course and make the commitment. It also frees up the time you would have spent becoming an expert in this area, and takes the burden out of second guessing yourself on what funds or investments are right for you. Making a commitment to yourself and your family, your insurance coverage, your children’s educational funding, and your retirement may be a whole lot easier with someone else to help with your decisions.

I am not saying you need an advisor, but I will say that might make your decisions a lot easier without impacting your wallet too much. The return on the investment in advice could pay off well in the long run.

No matter which road you go down, striking out on your own and making solitary decisions, or consulting with professionals, you should maintain connectedness with your choices and keep well informed on happenings and the workings of the financial world. A watched pot never boils, but watched assets don’t disappear without your knowledge.

Hope you found this week’s letter valuable!

One way of getting into investing without having much experience is to pool resources with other investors and form an investment club. You can also join an existing club if there is one in your area with openings for new members.

Investment clubs came to national attention a few years ago with a group of ladies in Illinois (The Beardstown Ladies) who managed to gain substantial returns on their money and ended up appearing on some syndicated TV and radio shows. (There was some calculation error on the part of the ladies (unintentional, I am sure.) that caused their returns to look better than they actually were, but that’s a whole other story.)

The purpose of investment clubs, generally speaking, is to share knowledge and risk. The money invested comes from two different places. One is the initial investment (a lump sum investment) and then some regular contribution (such as $50 per month, or whatever the rules dictate for the individual club) Once an investment pool has been established members search out and do “due diligence” on different investment options. Members then share the information and vote on what to invest in, and when to sell and buy. These clubs are generally set up as a partnership or a limited liability company. To get the lowdown on the rules and regulations about investment clubs straight from the horse’s mouth visit www.sec.gov/investor/pubs/invclub.htm

Most investment clubs are set up as long-term groups and will have well defined rules regarding research, investing,  joining, and departure of members. They can be excellent sources of social interaction and learning.

Investment clubs are not limited to the stock market. Today you can find real estate investment clubs and stock market clubs. You can use a search engine and probably find other variations on these two themes.

I had a question on the e-book I sell regarding how to fine tune the process. I’ll also answer it here; perhaps others are wondering the same thing.

One principal of my stock selection process is looking for real value in a company. This is taking all the hype out of the equation. Warren Buffett has the same approach, so this isn’t anything new for anyone who has been studying him (and that is a wise move.) He is one of the few people around who have consistently made money whether the market is up or down, and a firm believer in the buy and hold principal. I like to hold’em myself, but I also know you have to know when to cash in your chips.

So to put it simply if you are looking at a book to face value ratio, tighten that up to screen your potential selections down to an easier to evaluate number.

I want to make something else clear. The purpose of my book is education, and no where do I promise to teach you how to select stocks (although there is a short section on that) My book starts with the premise that you have some stocks in mind to buy, but you don’t know how to evaluate what they are really worth and if they have the right stuff to make you money.

That being said, making money is only done when you actually sell your stock. I did an article a while back on being a paper millionaire, and if you haven’t read that you might want to dig into my archives.

In a few words though, you only truly make or lose money when you sell a stock. Your portfolio value may be up or down (most likely down in today’s economy) but you haven’t really made or lost until you have sold and have cash value in your hand. –That’s also why there aren’t taxes taken out or losses to deduct until that has happened.

I know this entry sort of wandered around a bit, but if you read between the lines, there is good stuff here once again.

Take care and invest wisely.

The Almighty Dollar

The next thing to be said is that your actual gains are only taxed if they are realized. I have written about this before, distinguishing between gains/losses on paper and in actuality. Paper gains are not taxed whatsoever. To dive just a little further into that, unless you actually sell a stock, gains or losses do not count toward your tax base.

Now to get back to the short vs. long term, if you buy 1000 shares of company A for $10 each and 364 days later you sell them for $20 each (hey, why not have a meaty big gain example?) the gain you realize is $10,000. If you are in the 28% tax bracket, the tax you would pay on that would be (gulp) $2,800. (28% of $10,000) If you were to hold that for 365 days the tax rate would only be 15% and Uncle Sam’s cut is (smaller gulp) $1,500.

Now I know the tax tables might not be universal, and might not be accurate today. (Maybe they were yesterday and maybe again tomorrow) but the point is that the US government encourages long term holding by giving this lower long term tax rate.

The other effect that this has is to potentially rob you of the power of investing, if you don’t immediately re-invest the money you got from the realized gain. To get the most out of your investment, your money has to be working for you full time, not part time, so you want to keep the ‘cash’ in your investment funds low, and have it working for you by being in your stocks, mutual funds or whatever investment you choose. Although your cash balance still earns interest (probably) the interest rate is definitely less than what you hope to earn with your investment selections.

I was reading an article today with the headline “Those getting richer probably don’t include you.” It was an interesting article pointing out that the top 1% of households in 2004 had 19.8% of the entire nations pre-tax income with an average income of $326,720. The top tenth of a percent had 9.5% of pre-tax income.

What was one of the underlying causes? It really is no surprise to learn that they have money in the stock market. The average portfolio for the top 10% was $110,000, while the stocks held by 90% averaged a value of $8350. This becomes even more interesting when you think that many people don’t own any stocks at all.

Reading into the data, I would venture a guess that out of the 90% probably the top half owns twice the $8350 number and the bottom half owns none. The other factor that I thought was interesting was that those with higher education earned on average nearly twice what those without higher education. (This has been shown many times. Note to the younger generation; Stay in school, graduate from college, have a richer life. My older son likes to point out that some of the richest people don’t have a college education, but those folks are definitely the exception.)

The bottom line to all of this is to invest in the stock market, and stay in the market. The wealthy get wealthier, and those climbing into the wealthy category are most likely to get there and stay there by investing in the market. I know this probably sounds crazy to people who have lost money in the recent downturn (or drop, recession, whatever you want to call it) but the truth is that money invested in the market, even with the ups and downs, is money that grows substantially with time. As long as you have a few years (Ok, maybe 4 to 8 years at this point in time) Your loses will be recovered and new money invested now will have substantial returns within just a few years. The rich know that the time to invest is when the market is down. So the question is do you want to stay with status quo, or are you interested in growing your money?

Now, what are you planning to do with ‘extra’ money? Go get a big screen TV and a larger house? Run out and buy the latest CD from the newest sensation? Invest in the stock market? I guess your answer depends on your goal for the future.