1. Maintain three to six months of savings in your account. “As a contractor or part-time worker, your income will tend to ebb and flow,” Gugliuzza says. “Having an emergency fund with enough savings to cover three to six months’ worth of your critical expenses can help ensure you can pay your bills, even during times of low employment.” Figure out what this necessary dollar amount is and make sure your bank account is ready to go before you take the full leap into the gig economy.
2. Keep a handle on your debts. As part of the gig economy, you’re still responsible for paying taxes on what you earn, and bad news: You don’t have an in-house HR or accounting department to make that happen for you. “If you’re doing contract work and don’t want taxes withheld from your pay, you’ll need to make quarterly estimated state and federal tax payments,” Gugliuzza says. You’ll save yourself a lot of stress comes tax time if you are careful to put away a portion of each payment you receive and flag it as a tax payment before you accidentally spend it. Consider reaching out to a professional now to walk you through the specifics of the tax code in the area where you live.
3. Understand how much you need to save. While you may be feeling somewhat removed from your pals who are working in more traditional jobs (go on with your bad self!), the truth is that many of your financial needs are still the same as theirs. Take some time to establish some goals for what you’ll need to save for retirement or other long-term goals. There are plenty of tools and calculators available online to help you crunch these crucial numbers on your own.
4. Investigate investment opportunities. You can still take advantage of investment opportunities, even if you’re not working in a traditional full-time job. A 529 college savings plan can help you stash away funds to further your own education (and is a good way to save for your children’s future tuition as well). You should also do your homework on IRAs, which can help you grow your retirement nest egg so you’ll be sittin’ pretty when the time comes for you to quit that side hustle life. There are a lot of misconceptions out there about IRAs — for one thing, that you need to work a corporate nine-to-five to invest in one — so be sure to do your research!
5. Seek expert advice. There’s no shame in asking for help, especially if you’re new to working in the gig economy. A financial or business adviser will be able to help you figure out what your specific goals are, and they can help you put together a plan to make them happen. An action plan like this should make it a whole lot easier for you to follow through on the other four tips — and to do it effectively.
Money is something that individuals usually need more of but frequently find in short supply.
People worry about money.... a lot. According to the YouGov poll for the Institute of Financial Planning and National Savings and Investments in Great Britain, nearly two-thirds of respondents worried about their finances, with 43 percent saying they worried about money "more often than not." Things aren't much different in the United States, where a recent survey from Lincoln Financial Group showed that 53 percent of respondents worried about having enough money for retirement.
Taking charge of personal finances may seem like a difficult undertaking, but you don't have to make drastic lifestyle changes to grow your savings. Try these tips to save more and live a more financially-conscious life.
· Keep financial records. It's hard to determine your financial standing if you do not prioritize record-keeping. Find a method that you can stick with consistently. Some people prefer old-fashioned bookkeeping with pen and paper, while others may like the convenience of software and mobile apps. Having financial matters clearly visible in black and white can show a clear picture of how much money is coming in and how much is being spent.
· Explore auto-withdrawal and deposit. Many financial institutions offer several services to customers that can make banking and money management easier. You can set up a savings account and have money automatically deducted from your paycheck and deposited into this account. Even small deposits add up over time. You also can arrange for automatic bill pay so you don't have to worry about accruing late fees for missed payments. Check with your bank or credit union about these types of services.
· Put a change jar in your house. Change might not be popular, but it is money. Having a jar or bucket in a location of the house where you set your wallet or purse may encourage you to save that loose change for something larger. Place loose change in the jar and watch it add up. Some banks have coin-counting machines, which can make it even easier to cash in your change.
· Sign up for shop-and-earn programs. Everyone from credit card companies to major retailers offer incentives to repeat customers. These include cash-back or other perks for a percentage of the money spent on purchases. These programs equate to built-in discounts and can help you squirrel away even more money without making a conscious effort.
· Consider investing. Investing can put your money to work in exchange for a return. There are many different types of investments available. If you are an investing novice, work with a financial planner or broker who can help you find a level of risk you are comfortable with.
· Pay off debt. The earlier you can get rid of outstanding debt, the better. Put money toward high-interest loans and credit cards so you aren't paying so much in costly interest charges. Afterward, you can start saving in earnest.
Learning to take charge of personal finances early on can set you on a course for financial stability throughout your life.
The equity market is on a high these days. The Sensex hit 31,291 on June 22 2017, rising about 17 per cent from a year ago and about 19 per cent year to date (YTD). Given the phenomenal rise, should investors continue to park funds in stocks?
Different people have different investing styles. While some follow aggressive styles with shorter investment horizons, most believe in investing for the long term with a minimum of three- to five-year outlook.
During a discussion at work, a colleague made an interesting point - his equity mutual fund SIP opened in January 2008 (the high point of that market cycle) has yielded him an annual compounded return of 12 per cent till date; he continues to hold on to the same.
While one may argue that this is no great feat as the return in absolute terms is not much to write home about, the key takeaway here for readers is that despite investing at a time when valuations and markets were at a peak, this particular investment has yielded him 1.5 times returns of what he would have otherwise got had he invested in a debt instrument at the time. That too pre-tax!
What we are trying to infer is that long-term investing works. And taking such an approach, especially now, would be the right way to go about things.
One may raise a point, the fund my colleague invested in may be one of the few that have done well over the long term, thanks to the fund manager whose wisdom allowed the unit holders to garner such returns.
While that may be true, here are some interesting data points that seem encouraging enough for an investor to take up this approach on his own.
From the market peak on January 10, 2008, the Sensex has risen by around 4.5 per cent per annum. The comparable number for the BSE500 index is about 4.8 per cent per annum. But if we look at the returns of the constituents of the BSE500 index since then (considering only 80 per cent of the index companies were listed nine-and-a-half years ago), some interesting data points can be observed.
A little less than a fourth of the stocks continue to trade below their January 10, 2008 closing levels. About 11 per cent of the stocks have given positive returns, but underperformed the BSE500 index i.e. compounded returns have been positive but less than 4.8 per cent. About 9 per cent of stocks have outperformed the BSE500 index, but have generated returns less than what they would have otherwise got through debt instruments (assumed at 8 per cent). A little more than 8 per cent of the stocks have beaten the returns on debt instrument, but have been lower than the minimum return that one should expect from Indian stocks (1.5 times of 8 per cent).
What is particularly interesting is that 48 debt instrument of the index stocks have given compounded annual returns in excess of 12 per cent. The median of this basket of stocks was a high figure of 20.8 per cent.
What does all of this point towards? Three things I believe -
First, equities have the tendency to outperform other asset classes over long periods.
Second, one should have a long-term investment horizon.
And finally, stock selection is critical.
But how should a lay investor go about doing the same?
We believe the Indian economy is at an inflection point, with strong structural changes being observed within the economy. And thus, growth levels are only going to remain firm, if not rise, going forward.
All one needs to do is weed out the companies with poor fundamentals. A simple approach one can follow is to invest in companies that have a long runway of growth: companies that possess pricing power; companies whose strong historical performances are likely to remain intact in future; companies where disruption and competitive pressures are unlikely to hamper their quality of earnings; companies that are market leaders in their respective domains.
We recommend a systematic transfer plan-like structure wherein investors can park their lump sum fund in a short term debt fund, with the funds getting systematically transferred from such accounts to directly purchase shares of the shortlisted companies on a monthly or quarterly basis, thereby allowing the investors’ idle money to work for them while making the most of the market movements.
This process also helps in keeping the market noise out in the decision making process, while allowing regular financial savings – those that would form the basis of long-term wealth creation.
We are currently investing in an extremely noisy political and economic environment. While markets have remained remarkably subdued during recent times, it is inevitable that greater volatility will emerge. The question is: how should we respond?
As investors, our natural impulse when faced with arresting news or growing uncertainty is to react. Our instincts tell us to take action to protect portfolios or to profit from a particular outcome. This adrenaline fuelled ‘fight or flight’ response is deeply ingrained within us and exists for good evolutionary reasons as early humans who did not have these instincts were less likely to have decedents.
However, this impulse towards action causes a real challenge for investors.
There is an abundance of great research on this topic; however one of the most relevant was a study by Barber & Odean which shows a clear link between portfolio turnover and the results generated by individual investors.
Those portfolios in the highest quintile of turnover delivered returns more than a third lower than those in the lowest quintile of turnover. To say this simply, the impulse towards action is not beneficial to returns.
The Impulse to Action
Alongside the evolutionary impulse and incentives, action is also being encouraged by an array of behavioral biases that revolve around overconfidence, the rejection of opposing views and a preference to recall the recent past.
Most vividly, the ‘recency bias’ makes our recent experience easier to imagine than those experiences that are more distant. This leads us to believe that current trends will continue indefinitely. In contrast, the ‘law of small numbers’ is another behavioral trap that creates an expectation of mean-reversion in small sample sizes, thus encouraging investors to risk too much capital on positions designed to capture small market deviations.
In view of this, it is hardly surprising that most portfolios managers and advisers are far too active in their investment operations. We typically see this via increased costs and poor performance.
Overcoming the Impulse towards Action?
To get practical, there are several strategies to help overcome this impulse to action. The key is to prepare rather than react, as it is likely too late to address the impulse for action when it arises. For the portfolio manager or adviser to overcome the urge to make unnecessary changes to the portfolio, it is important to initiate the strategies beforehand. A good example of how to do this is provided by the story of Odysseus facing the Island of the Sirens as he returned from the Trojan War.
Our hero knew the encounter with Sirens was both inevitable and dangerous and so he prepared himself beforehand.
In this sense, the best preparation was education. Most clients are unaware of both their behavioral biases and the impact that those biases have on a portfolio. A basic education in behavioral science is therefore the first step, as investors who are aware of their biases are less likely to fall foul of them and more likely to be understanding of the adviser’s attempts to overcome them.
Second, one should ensure they have good navigation aids. Our biases create structure to our decision-making that results in predictable mistakes, much like a poorly drawn chart creates repeated navigation errors. In order to overcome this, we need to ensure that we use navigation tools that are fit for the job and enable us to overcome the inevitable obstacles in our path. One of the more popular ways is to create a core set of investment principles that are drawn from the observations of how great investors overcome their biases.
The third is to change the narrative of market movements. Much of the impulse to action comes from the type of investment data we consume and how we consume it. For example, many investors are drawn to recent past performance with an upward moving graph and green numbers. In contrast, red numbers and falling charts create a negative connotation. This naturally exposes us to loss aversion.
Avoid overhyped financial news and broker research designed to prompt action. Instead, one should be incentivised to focus on long-term prospective returns using a fundamental valuation framework.
By doing so, we change the itch to ‘buy high and sell low’ and turn it into a compulsion to ‘buy low and sell high’. Said another way, a rise in prices is viewed as a fall in prospective returns. While this helps address the recency bias, it also reduces exposure to the law of small numbers as most daily movements in asset prices appear to be vanishingly small in the context of a decade long return expectation.
With $1 million to invest, do some comparison shopping and look at average costs.
I would rather have a million friends than a million dollars.--Eddie Rickenbacker
Mr. Rickenbacker is entitled to his preferences, but many of us would rather have the million dollars -- and perhaps just 10 or 20 or even 100 friends. Some of us even have a million dollars -- by having saved and invested over many years, via a lucky inheritance, or by some other means.
When you have a lot of money, you need to be sure to invest it wisely, preserving much or all of its value. That's where private asset management or an account management advisor can come in handy. It's smart to do a comparison of your options, assessing the cost and fee schedule and typical charges for each one. You may also want to invest the money on your own, with a potential focus on dividend-paying stocks, annuities, and other income-generating assets.
Here are some key ways to invest $1 million.
Private asset management or account management advisory services
One option for investing your million dollars is to let someone else do it -- or have someone tell you what to do. Lots of companies, including very possibly your own brokerage, offer wealth management services, ranging from having professionals manage your money for you to simply holding your hand and offering advice.
What they charge will vary, and if you're interested in such services, you should do some comparison shopping -- comparing not only their average fees but also the specific services offered.
Some companies' wealth management services define wealth rather specifically, seeking clients with at least several million dollars. A mere million might not let you in every door. That's OK, because many services can be rather costly, charging you 1% or 3% or more of your total assets under management each year. (Some do charge less than 0.50%, so it's well worth doing comparison shopping of typical charges.)
If you parked your million dollars with an outfit charging 1% or 2% annually, they'd be charging you $10,000 or $20,000 per year for their services. That kind of fee can sometimes be worth it, if they're delivering more than that in value, but many financial pros find it hard to outperform the overall stock market -- when you can earn the market's average return simply by investing in a low-cost broad-market index fund. Many services charge 0.25% or less per year in fees.
Be sure to also consider independent financial advisors -- especially "fee-only" ones who have few or no conflicts of interest and earn no commissions from steering you into specific investments. (You can look up such pros at www.napfa.org.) A good one can serve you quite well, reviewing your overall financial health and coming up with a plan to help you meet your financial goals, such as having sufficient retirement income. They might recommend strategies such as dividend-paying stocks or annuities -- which you can read about below.
Investing on your own
You can invest the money on your own too, of course, calling your own shots. If you're a young millionaire, you'll want your money to grow, and the stock market is where it's likely to grow the most quickly over the long run. One or more simple index funds could work well here -- ideally ones focused on the broad market, such as the S&P 500 or the total U.S. or world stock market. They will likely outperform most managed stock mutual funds. There are bond index funds, too. Even Warren Buffett recommends S&P 500 index funds for most investors.
If you're approaching retirement, you'll be most interested in preserving those million dollars, or deploying it in ways that will generate income.
Consider dividend income
Another good option for wisely investing a million dollars -- or a significant portion of it -- is to buy dividend-paying stocks. It's true that dividends are never guaranteed, but if you stick with healthy and growing companies that have a good track record of paying dividends, and you spread your money among a bunch of them, you'll likely do well over the long run.
If you park, say, $500,000 in healthy, stable, dividend-paying stocks with an overall dividend yield of 4%, you can look forward to $20,000 annually, while expecting the dividends and the stock prices to rise over time. Put the entire million dollars in the dividend payers, and you might enjoy $40,000 or more in annual income.
Just to give you an idea of what's out there, here are a few well-regarded stocks with significant dividend yields:
Invest in annuities
Another smart way to invest a million dollars (or a big portion of it) is in an annuity or two (or three). Since an annuity is only as reliable as the company paying it, it's wise to divide your annuity investment among several top-rated insurance companies, to minimize any risk.
In exchange for a big bundle of money, fixed annuities (as opposed to the more problematic variable or indexed variety) can start paying you immediately or on a deferred basis. Below are examples of the kind of income that various people might be able to secure in the form of an immediate fixed annuity in the recent economic environment. (You'll generally be offered higher payments in times of higher prevailing interest rates.)
If you have a million dollars and you take just half of it -- $500,000 -- and invest it in annuities, you could be collecting about $38,000 annually, if you're a 70-year-old man. Spend the whole million and you're looking at almost $76,000, a very respectable income in retirement, especially when complemented by Social Security.
If you're a 65-year-old couple, you could get about $28,000 in annual income for $500,000, and more than $56,000 if you spend the whole million. It might not seem worth getting a joint annuity instead of two separate single ones, but remember that when one spouse dies, the survivor will be left with a substantially lower income. A joint annuity can keep payments steady until both parties die.
If you're fortunate enough to have a million dollars, invest it wisely so that it lasts and serves you well -- perhaps even continuing to grow over time. Remember that you might opt for all of the options above, devoting a chunk of your million to each.
Whether you are saving for a retirement that is still decades away or building a college fund for your high school student, developing a smart, diversified investment strategy to also include real estate will not happen by accident. If you want the finances of your future to be better than the finances of today, you need to work hard to make it happen.
You do not have to be a savings savant or a real estate expert to develop a smart, effective and safe investment strategy. All you need is the dedication and desire to get it done, and here are a few tips you can use to make your plan more successful.
1. Lay out your goals. Before you start on this road, you need to know where you are going. Lay out your short-term and long-term goals and determine your investment personality. Do you prefer to flip real estate for profit or are you the type of investor that enjoys cash flow from single-family rentals?
2. Explore your options. Know what your options are, from the retirement plan at work to an individual retirement account, IRA, or 529 plans for education. Laying out all the available pieces will make it easier to develop a comprehensive investment strategy.
3. Pay yourself first. Instead of waiting until the end of the month and seeing how much is left to invest, put your investments first. Whether that means investing automatically in a 401(k) or 403(b) or transferring money from your checking account to ensure you have capital ready to invest in a real estate deal, paying yourself first is a winning strategy. Remember, your income is the greatest wealth generator.
4. Be smart about diversification. Diversifying your investments should be part of your investment strategy. If you are investing for retirement and have decades to go, you can probably afford to take more risk. If you need the funds in just a few years, reducing or eliminating that risk can keep your money working without the danger of loss. Given where the real estate market is right now, I would consider a 40/40/20 strategy. My colleague Rick Melero from HIS Capital Group and I discuss this at length because it truly is a smart strategy to deploy. Forty percent of your activity should be in real estate flips, 40% of your activity should be in buying cash-flowing assets (e.g. single-family rentals) and 20% of your activity should be in high-risk, high-rewards opportunities.
5. Keep your costs low. Investment costs can eat into your investment portfolio, so look for the lowest cost products that meet your needs. If you want to play it safe, index funds are low cost and provide exposure to a wide universe of stocks and bonds both domestically and internationally, making them excellent choices for most investors. In the real estate game, consider flipping one home and with the profit, buying two rental properties.
6. Invest consistently. It can be scary to keep investing when the real estate market is falling, but the down years are actually the best times to buy. When the market falls, every dollar you invest buys more property, and that can make a huge difference when the market eventually recovers. Remember, this is a long-term game; don't be swayed by short-term fluctuations.
7. Do not be a micromanager. Micromanaging your real estate investments will do nothing but increase your stress level, so avoid daily checks of your account balance. It is important to review your passive investments once or twice a year, but micromanaging your accounts will get you nowhere.
8. Be smart about taxes. When you make money on your investments, Uncle Sam will want a cut, but there are things you can do to reduce the pain. Keeping your real estate investments in self-directed retirement accounts, which are taxed when you take the money out, is one smart way to reduce your tax bill and keep your investments growing.
9. Ramp up your savings. Getting started is often the hardest part of investing, but once you are started, it is just as important to ramp things up. If you are currently investing 6% of your earnings into your real estate investing strategy, make it 7% next year and 8% the year after that. This escalation can give you the discipline you need to ramp up the savings over time, and that will be good news for your portfolio.
Developing a smart investment strategy will not happen by accident, but if you work hard and consistently, it will happen over time. The tips listed above can help you get started, and as your comfort level rises, you can up the ante and invest even more.
Many investors find themselves experiencing extreme emotional shifts in concert with the unpredictable rises and falls that come with stock market investing. Anxiety may hit like a ton of bricks when prices fall, while excitement sets hearts racing with exhilaration when they rise.
Those who choose to invest in long-term dividends, however, will not feel this same angst as stock prices shift. These investors know that the financial success of their investment is not based on the vagaries of the market itself, but rather on the long-term success of the company. They believe that the stock price and dividend will eventually rise over the long haul, resulting in huge gains over a long period of time.
So, what type of investor should you be? Should you ride the rollercoaster of short term investing, or settle in for the long haul? Really, it’s all about your personality and financial goals. Read on for some of the how’s and why’s of long-term dividend investing.
What Is a Dividend?
When a publicly traded company earns a profit, the management generally has three choices:
Frequently, fast growth companies will keep the proceeds and either reinvests their income in the long-term growth of the company or offer a share buyback. Share buybacks increase each investor’s proceeds in the future by decreasing the outstanding shares of stock.
Other companies will issue a dividend, or a share of the company’s profits, which is paid out to investors on a quarterly basis.
Long-Term Dividend Investing
Dividend stock investing does not often provide the short-term capital appreciation of hot penny stocks. Nor does it match the excitement of day trading, which during rapidly rising markets can make these investments seem like stodgy, slow money stocks. Moreover, dividend-paying securities often fall out of favor in rapidly rising bull markets, subsequently regaining a fervent following during turbulent and unpredictable markets. This is due to the relatively moderate growth nature of these securities as well as the slow compounding nature of dividends that can be achieved through a long-term, buy and hold philosophy of dividend stock investing.
However, during slow growth bear markets, more and more investors seek shelter in dividend growth stocks such as blue chip stocks. In addition, the stability that these stocks can offer makes them an attractive class of security to include as a component in any portfolio during both harsh and thriving economic times.
Now that you know what dividends are, and how they work in the market, is it the right investing route for you? Here are a few things to consider:
1. The Power of Dividends
When choosing whether or not to begin this type of investing, it is important to understand the hidden power of dividends. Take these dividend facts into account:
2. A Strategy for Investors, Not Traders
When choosing a dividend investing strategy, it is important to develop a long-term investor’s mindset. To the dividend investor, a share of stock is a living, breathing piece of a company, not solely a vehicle for capital appreciation. By looking at the investment as such, you will not be disappointed by what will likely be a slower growth rate than non-dividend-paying stocks. The most important factors in their overall investing strategies are:
3. Successful, Long-Term Investors Choose Dividends
Warren Buffett has been called a value investor. Indeed, he has historically purchased shares of companies when they are being sold at a discount to their inherent worth. But, if you review the top 10 holdings of Berkshire Hathaway, you will also find each position constitutes a dividend paying security. If dividend stocks are the investment of choice for the most successful investor in history, shouldn’t they be good enough for your personal investment portfolio? Buffet loves dividend-paying stocks because they add another, more stable form of capital appreciation above and beyond share price increases.
How to Choose the Best Dividend Stocks
As with any investment, it is imperative to do your research when choosing a dividend stock. The most important things to consider when determining the correct dividend stock for your portfolio are:
1. Long-Term Prospects
Dividend investing is a long-term investing strategy. When asked what his favorite holding period for stocks is, Warren Buffett is reputed to have replied, “Forever.” This is a dividend investor’s mindset.
As a dividend investor, you never want to sell because this ruins your long-term investing strategy. So you must carefully choose companies with the long-term staying power and ability to thrive despite economic conditions. Seek corporations that grow, regardless of external economic conditions. Even dividend investors have to sell from time to time, when the underlying business or strategy changes.
If you can’t read a balance sheet, research the company’s bond ratings. You want to invest in the companies with the best credit ratings (investment grade or above). If you are familiar with reading financial statements, you will want to look at all of the traditional valuation tools, including the P/E ratio, price/sales ratio, Enterprise Value/EBITDA, and book value.
The company’s outstanding debt structure will also be important to understand, as a corporation’s creditors will get paid before the shareholders in any financial downturn.
3. Management and Dividend History
Look for companies with management teams that have a reputation for being investor-friendly. Consider the management’s historical treatment of dividends and share buybacks, as well as the ability to navigate difficult financial times. Has management ever suspended or lowered its dividends? Has the company ever missed a dividend payout? Or has the company consistently grown its cash reserves and increased its dividend yield over the years?
If someone will be putting this company out of business in a few short years, there’s no point in owning the shares as a dividend investor. Remember, fads come and go, but excellent companies with long-term staying power have the ability to navigate difficult financial waters while emerging as a leader in their industry. Look for industry leaders with staying power.
Long-term dividend investing can be an excellent choice if you are looking to gain big over time. While it doesn’t necessarily provide the instant gratification (or complete devastation) of short-term investing, it does promise a more stable investment strategy. Take a page out of the playbooks of big investors like Warren Buffett, think long-term, research the companies you’re investing in, and your portfolio will significantly benefit.
There are no flashing lights, no clatter of coins hitting the metal bins of slot machines, no raucous shouts of victory or envious looks when a winner hits it big. But some believe that Wall Street is no different than the Las Vegas Strip – less glamor, less glitz, but still a place for gamblers to risk all where the house has the edge.
Dr. Leon Cooperman, the noted hedge fund founder and president of Omega Advisers, Inc., warned President Obama on CNBC television that “the best capital markets in the world were turning into a casino.” And The Motley Fool, a popular newsletter for individual investors, said in November 2011 that “market volatility had become so erratic this summer that it often felt like a rigged game.”
But what does this mean to the individual investor? Is the age of analyzing and picking your own investments passé? Should you be working with a new investment strategy? Knowing how to invest today requires, at minimum, two things: an understanding of how the market has changed, and strategies for survival in the new environment.
Fundamental Changes in the Equity Markets
Beginning in the 1970s, the composition of Wall Street participants – those who worked in the industry and those who invested in corporate securities – began to change. According to the Conference Board, an internationally known independent research association, institutions (pension/profit-sharing, banks, and mutual funds) owned 19.7% of the total U.S. equity value ($166.4 billion) in 1970. But by 2009, the institutional share had grown to 50.6% ($10.2 trillion) of the total value. According to Stat Spotting, a website that tracks the identification of stock buyers and sellers, professional or institutional funds accounted for more than 88% of the volume in 2011, with retail investors being only 11%.
Investors who purchase stock in individual companies – once the source of the majority of trading volume – have become increasingly rare due to the disadvantages resulting from the transition to institutional investor dominance. In fact, top performing stocks are likely to be sold by individuals and bought by institutions. What this means is that individuals are liquidating too soon, while institutions are picking up these stocks en masse, increasing their positions, and capitalizing on the subsequent appreciation and rise in profit.
Predominance of the Institutional Investor
The decline of investors buying individual stocks is due to a number of factors, including:
Despite the changes in the fundamental nature of the equity market, many people continue to believe in a market of stocks, rather than the stock market. They believe that good research and a fundamental, long-term approach to investing enables them to pick stocks that appreciate even if market averages go down. Others are content with the returns of the market as a whole, buying a fund that owns stocks of the same identity and proportion as in a popular benchmark index, such as DJIA or the S&P 500.
It is true that not all stocks go down or up on a single day or in any single period. There are always winners and losers. If you feel that you have the stomach, the brains, and the fortitude to thrive in this market, there are strategies that might keep you on the winning side.
Stock Investing Survival Techniques
One of the most successful investors of the modern era is Warren Buffett. Buffett recently told people at the Berkshire Hathaway annual meeting, “The beauty of stocks is that they sell at silly prices from time to time. That’s how Charlie [Munger, an early partner] and I got rich.” He has always taken a long-term perspective, sought companies that were overlooked and undervalued by the market, and exercised patience, believing that good management would deliver results that would be ultimately reflected in the stock price. There is no better example to follow if you elect to purchase stock in individual companies, rather than mutual funds.
Warren Buffett’s rules of investing include:
1. Invest in Yourself
Learn the rudiments of stock market analysis by reading and studying “Security Analysis,” a classic book written by Benjamin Graham and David Dodd in 1934 and still considered the bible for investors. Study annual reports of companies to become familiar with accounting and financial reporting, and subscribe to “The Wall Street Journal” to get a financial perspective on the nation.
2. Focus on the Long-Term and the Value of Good Management
On any given day, some industries and companies attract the attention of the public with the promise of untold riches and worldwide dominance. While the popular picks rarely deliver hoped-for profits, they often explode in price on the upside following by an equally spectacular implosion. When selecting long-term investments, consider the following:
Concentrate on industries that are stable and will remain vital to the economy into the future. Buffett’s current investment portfolio includes insurance, entertainment, railroads, and his much publicized investment into the automobile industry.
Look for companies with a long-term future in products that people use today and will continue to use tomorrow. For example, Buffett’s biggest winner has been Coca-Cola, which he purchased in 1988 and still holds. As part of his analysis, he seeks to understand the industry in which the company operates, its competitors, and the events that are likely to affect it over the next decade. The management team is important with a track record of long-term growth in profits.
Buy companies that are undervalued relative to their competition. Plenty of companies with a history of improving earnings year after year and have lower price-to-earnings or price-to-sales ratios than their competitors are being overlooked in the market. Since this condition tends to correct itself, identifying these companies can represent an opportunity for profit.
3. Diversify Your Holdings
Even an investor with the prowess of Buffett can be wrong with regards to a company or its stock price. In 2009, he admitted taking a loss of several billion dollars on ConocoPhillips when he failed to anticipate the dramatic fall in energy prices.
Spreading your risks is always a prudent course to follow. Most professionals recommend a minimum of six positions or companies, but no more than 10 due to the work necessary to remain informed. It is also wise to vary investments across industries with the expectation that a general recession will not affect all of the companies and industries in the same manner or amplitude.
4. Act like an Owner
Be sure you’re on the company’s mailing list for announcements of new products and financial results. Buy the company’s products and services, and recommend them to your friends. Attend company board meetings and other public events where the company will be present. Learn the name of the security analysts following the company, and read their analyses. Treat the investment as your company and not just as numbers on a brokerage account statement.
5. Be Patient
The market is full of examples where companies rise, fall, and rise again, demonstrating the underlying fundamentals and the value of a competent, if not outstanding, management team. Apple Inc., the company with the highest stock capitalization in the world, sold on March 1, 2002 for $21.93 per share. On March 1, 2007, the stock sold for $122.17, but fell to $78.20 by February of 2009. An investor selling at that time would have missed the stock at $621.45 during March 2012.
If the reasons you purchased a company initially remain in place, keep the investment no matter how long or how short you’ve held it. The fact that the stock price goes up and down is not justification by itself to sell or buy.
While the stock market attracts more than its fair share of gamblers, investing doesn’t require taking extraordinary risks. Fundamental investing is based primarily on safety of principal with the knowledge that good management in an undervalued company will pay better than average returns to investors over time.
Do you use any of these principles? What has your experience been with them?
It is a common belief among most investment experts that the fastest way to financial growth is to invest in long-term ventures or to set a gestation period of at least 10 years for enhancing one’s prospects for bigger revenues instead of building a portfolio of short-term assets (for example, bonds and mutual funds). Hence, experienced leaders recommend diversifying investment portfolios with top-quality stocks that pay high dividends. This strategy has proven to be an efficient approach for investors to gain high long-term revenues that can sustain a stable retirement future for them.
Remember that this investment option is suitable only for investors who can have the patience and endurance to go for the long haul and choose to invest back dividends into the firms that offer payouts. For novice dividend investors, these primary advantages of investing in dividend-paying stocks on a long-term basis:
1. Highly rewarding with a potential return of a maximum of 45% when you re-invest.
2. You stand to gain a large number of shares, resulting to greater returns when you finally retire.
3. Dividends provide a lower volatility than earning over time.
4. Companies offering dividend stocks are most often well-managed, stable businesses in their particular areas and can, therefore, sustain their operations through unpredictable market conditions.
Nevertheless, be ready to apply many approaches of investing in dividend stocks in order to maximize your opportunities to gain big returns. Visit websites or consult experts to find out other essential investing tips any dividend-growth investor should implement to enhance your portfolio’s long-term viability.
Aim for the overall return
Investing in stocks that produce high revenues does not readily bring in your expected overall returns; the process all hinges on the results of capital growth and the actual dividend outcome. However, do not give up on dividend returns. The top dividend-producing stocks have the highest payout ratios, although it also means having less money to invest back with below-average dividend growth in the future. Hence, the best strategy would be to aim for the overall return rather than aiming for high yields; this is due to the fact that dividend growth depends heavily on the future outcome and not on the present performance.
Dividend growth has nothing to do with time; therefore, persevere as you implement your long-term strategies. Wait patiently as you hold on to your stocks over a long period of time, not panicking even when market values dip. Buying and selling on impulse could cost you more than you have to because of the burdensome expenses, such as brokerage fees and taxes; and, moreover, you lose the compounding benefits of potential returns from high-yielding dividends. Nevertheless, when stock prices decrease in times of recession, stocks offering high-quality dividends can sustain large payouts to investors. Remember that firms that consistently provide sizeable returns yearly will help you accumulate stable revenue on the long-term basis.
Well-known investment guru Jeremy Grantham was quoted by Reuters as saying this: “Be patient and keep your eyes on the light ahead…. Endure the pain in the meantime since an excellent investment will grow eventually. More often than not, individual stocks will recover; and all markets eventually do.”
Measure the risks involved
Besides persevering over the long-term, investors must also know when they have to invest and when to reduce any losses, the common qualities possessed by well-seasoned industry traders. FXCM recommends that traders must fully understand their trading personality, or, as in your situation, your investing personality. Ask yourself this: “Am I a risk-taker?” for it will show the type of investor personality you have to maintain and the best strategy to build wealth. As in all investment ventures, investing in dividend growth stocks likewise demands measuring risks and using your instincts often. All investors must learn to cut their losses and to let profits roll. Avoid the common human weakness to cling on to one’s losses and calculate early both the degree of risk and the potential returns to diminish or eliminate the effects of human emotions on your investment decisions.
Finally, it is important to stick to a well-designed strategy (meaning, the dividend income need you have set as your goal, investment approach to apply), as a dividend growth venture lends well to a systematic investment approach. From here on, you are all set to raise your investment portfolio to a higher level of performance by using these recommendations. All the best in your investment journey!
With the New Year with us, it is appropriate to consider your retirement savings and find out if you are benefitting at all from any applicable tax law with regard to your retirement future.
Melissa Sotudeh, a certified financial planner in Washington, D.C., offers tax-savvy advice on retirement savings.
What is the most vital aspect in retirement accounts tax-planning?
To a certain degree, you can control your income tax bracket by maximizing salary deferrals — for instance, by maxing your retirement accounts, such as 401(k) and IRA plans; hence, reducing your taxable salary. On the other hand, you can become tax-efficient when you invest money for college education, retirement or other objectives.
If you are in a lower tax bracket, take advantage of specific deductions, such as those for seeking a job or relocating for work, and tax credits, such as the education credit or the child-tax credit. Contribute to a Roth 401(k) as well, allowing you to pay lower-rate taxes today and then take out your Roth funds free of tax when you retire.
When you reach a higher tax bracket, salary deferral could be the best choice for a lower taxable income. Maximize your contributions to 401(k) or Health Savings Accounts.
Approach your investment planning as tax-efficiently as you can. This has nothing to do with tax brackets, rather, with the tax treatment of your portfolio investments. Strategies involve keeping the right investments in the right account (e.g., keeping tax-advantaged investments such as municipal bonds in a taxable account), annual tax loss harvesting and selecting funds with tax-effective features, such as low turnover ratios.
What is the most common pitfall in terms of income and tax brackets?
People do not leverage tax-advantaged savings instruments before they are phased out -- which is a common error with Roth IRAs. Although a great savings tool, your capacity to contribute starts to get phased out beyond specific earning levels. For 2017, the Roth IRA salary limits start once you begin receiving more than $118,000 ($186,000 for married, filing jointly). At the $133,000 income level ($196,000 for married, filing jointly), you are not qualified to contribute.
Likewise, not using the catch-up allowance for tax-deferred retirement accounts and HSAs, which allows you to contribute way above your retirement account when you are 50, is a big mistake. If you can, take full advantage of this chance to rev up your saving and limit your taxable salary. The catch-up contribution for retirement accounts, for instance, 401(k)s, is presently $6,000, aside from the regular $18,000 limit. It should give you a total maximum contribution of $24,000 every year for 50-above individuals.
$1,000 catch-up contributions for HSAs are permitted beginning at age 55, aside from the maximum yearly contribution of $3,400 for individuals or $6,750 for families.
What else can people do about optimizing their tax status?
Giving to charity through Donor Advised Funds is an efficient way to optimize tax management in any particular tax year. Using these funds, you will be able to give money or appreciated assets and avail of the tax deduction for your donation during the year that you contributed the amount. Nevertheless, you need not choose a recipient beneficiary for your donation within that year. You may let assets in the fund to increase in time and contribute to any 501(c)(3) charitable group any time you desire.
No matter what investment method you choose, choose the appropriate tax strategy needed to optimize investment taxes.