Dollar-Cost Averaging: More Shares @ a Lower Price?

We all know that investing is always risky. But in crazy markets such as the one we’re in now, it’s as risky as ever.

So, what can you do to cut down on risk while still being invested in the market?

Well, one thing you can do is use an investing strategy called Dollar-Cost Averaging.

With Dollar-Cost Averaging, you invest a fixed amount of money in a certain stock or fund at regular intervals. This way, when your stock/fund goes up in price, you’ll buy fewer shares. But when it goes down in price, you’ll buy more shares. The idea is that over time, you’ll own more shares and you’ll pay a lower average price per share.

This will help you reduce the risk of investing by letting you accumulate shares at a lower average price while also taking the emotion out of investing.

Here’s an example of the difference between Dollar-Cost Averaging and a one-time lump sum investment in the same mutual fund. Both investors have $1200 to invest. The lump-sum investor buys $1200 in shares of a mutual fund on Jan. 1. The Dollar-Cost Averaging investor invests $100 in the same mutual fund on the first day of each month of the year.

Source: Charles Schwab

In this example, the Dollar-Cost Averaging Investor bought more shares at a lower per share price than the Lump-Sum Investor. As you can see, this Dollar-Cost Averaging strategy can be pretty beneficial in a volatile market like we’re in now. So, what do you think? Is Dollar-Cost Averaging something that you’ll consider? Let us know.

How to Determine if You Can Afford Your Mortgage

Remember back in the good ol’ days of just a few years ago when anybody with a pulse could qualify for a mortgage? Well, welcome back to reality.

With the current housing debacle going on all around us, a lot of us are finding it much much tougher to get a mortgage. That is, if we’re even thinking about buying a house.

But, let’s say that you want to buy a place in this buyer’s market. The big question then becomes “Can you afford the mortgage you want?”

Well, Peter McDougall posed that same question today in a great article on TheStreet.com.

He gets into the 2 guidelines that lenders use to decide if you can qualify for a loan:
1. the housing-expense ratio
2. the total-obligation-to-income ratio

According to the article, your housing costs shouldn’t exceed 28% of your monthly income (he doesn’t clarify is that’s GROSS income or NET income. And your total obligations (housing plus other liabilities like credit card debt, loans, alimony, etc) shouldn’t be higher than 36% of your monthly income.

In addition to this info, Peter also links to a great Mortgage Required Income Calculator from BankingMyWay.com. This calculator will show you how much you need to make in order to afford the mortgage you want. It’s very cool. You gotta try it out.

So, if you’re thinking of buying a house either now or in the future, you have to check out this article. And when you do, let us know what you think.

What is T. Boone Picken’ Right Now?

Ever wonder what the really successful investors invest in? I mean the really super super successful investors?

Well, I just read an article today on TheStreet.com about T. Boone Pickens, the world-class investor and one of the top hedge fund managers in the universe.

Seems that Ol’ T. Boone picks some darn good investments. In fact, in 2005, his hedge fund BP Capital returned about 300% for its investors. And T walked away with $1.4 Billion in pay! Yeah, that’s BILLION.

OK, so what’s in the old man’s portfolio?

According to Stockpickr, some of the stocks he owns include:
• Titanium Metals (TIE)
• Denbury Resources (DNR)
• Occidental Petroleum (OXY)

The article gives a nice snapshot of these investments, such as their price-to-earning ratios (P/E), P/E-to-growth ratios (PEG) and yields.

If you want a quick insight into what one of the best investors is putting his money into, check out the article. And let us know your take on the pickens of T. Boone.

Lazy Portfolios for Lazy Investors.

This market is tough enough to invest in if you’re an experienced, educated, involved, active investor.

But what if you’re a PASSIVE investor? One of the 95 million in the U.S. who doesn’t take an active role in managing his/her portfolio? What do you do them?

How about investing in a “Lazy Portfolio”?

What’s a “Lazy Portfolio” you may ask? Well, it’s an already-built portfolio of funds/stocks/bonds/etc. that you just invest in – passively. You don’t have to time the market or actively invest. You just put your money in and let it ride.

That’s the premise behind the portfolios that Paul B. Farrell wrote about today on MarketWatch.com.

Paul put the idea out there that in a bad market, such as the one we’re in now, investing in a passive “Lazy Portfolio” just might be a good idea.

To prove his point, he highlighted 8 portfolios created by a wide range of people – from super successful investment managers to top brokers to an 8-year-old second-grader! Read more

Lock in Stock Profits with Trailing Stops.

If you’re like most stock traders/investors, you trade or invest in stocks to make a profit. But how can you improve your chances of making a profit?

Well, one way is by using “trailing stops” in your stock trading.

I bring this up because today I read a great article on InvestmentU.com by Floyd G. Brown about trailing stops.

So, you might be asking yourself: what is a trailing stop? And why should I use it?

According to Investopedia.com, a trailing stop is a stop-loss order set at a percentage level below the market price – if you have a long position (you want the stock price to rise). As the stock price moves up, the trailing stop price moves up at the same percentage level as was set in the beginning.

For example, if a stock is trading at $10 a share and you have a 10% trailing stop, the stop-loss would be set at $9 ($10 x 10% = $1. $10-$1 = $9). If the stock moves to $12, the trailing stop (stop-loss) would be set at $10.80 ($12 x 10% = $1.20. $12 - $1.20 = $10.80). By using trailing stops in this example, if the stock drops from $10 to $9, the stop-loss order kicks in, your broker sells your stock and you have a loss of only 10% or $1. Read more

Inflation and Stocks: What’s the Deal?

I believe that if you really want to create and build wealth, you have to have a plan where your money is growing steadily in both good times and bad.

One of the things that I always thought was deadly for stock investments was inflation. For me, inflation was bad for stocks and good for bonds. And with inflation higher than it was last year, I’m concerned about what rising inflation can do for my stocks.

So, when I saw an article by Paul J. Lim on today’s NYTimes.com, I had to read it.

And as for my belief that “inflation is bad for stocks and good for bonds”, this article proved me wrong – to a point.

It said that inflation is “not necessarily” bad for stocks.

In fact, it said that in the 23 years between 1926 and 2007 when inflation was more than 4% (that seems to be the magic number), stocks returned an average of 6.9% while long-term government bonds returned a measly 2.8%.

The article goes on to give a pretty detailed analysis of what happens to stocks when inflation is low or high, and whether it’s moving up or down.

It uses 1980 to show us how even with high inflation, stocks can still do well. Extremely well in this case. In 1980, the Consumer Price Index rose more than 12%, but stocks gained an average of 32%. The reason? It could be because the year before, 1979, inflation was higher at more than 13%.

Very interesting.

If you want a good primer on the effects of inflation on your portfolio, check out the article. And let us know what you think. Inflation just not be the portfolio killer that I always thought it was.

Emergency Cash: Where to Get It if You Need It

I don’t have to tell you, that cash is pretty tight for a lot of us, no matter how good our financial situation is. And for those of us who haven’t paid close attention to our finances over time, cash is probably even tighter.

So, what can you do if you need some cash? Well, Christine Benz gave 8 great options on today’s Morningstar.com. And she ranks them from the easiest to live with to the toughest to swallow.

And guess what? Not one of those options includes getting one of those Payday cash loans. Whew, I’m glad about that.

OK, so then what does Christine talk about? Well, she begins in the obvious place – your emergency cash fund or short-term securities. But let’s be honest, a lot of us don’t have an emergency fund or short-term securities, or we have a small amount of money in either one.

So, then where can you turn? How about long-term assets in taxable accounts. Yeah, you can sell some stocks or bonds or mutual funds. But you have to beware of their tax implications. If they appreciated since you bought them, you might have to pay 15% in long-term capital gains tax. And if you sold a mutual fund that we owned for just a short time, you might have to pay a redemption fee.

That might not be too tough to live with. But what about the other options? Well, here they are in Christine’s order. Read more

Asset Allocation to the Max for Your Retirement Portfolio

For me, my retirement portfolio is the most important one I have because it’s what I’m going to have to live on later on in life. So, I keep a pretty close eye on it and have it set-up in what I think is a good way.

But then I read an article by Roger Nusbaum on TheStreet.com today that suggested a much different retirement portfolio than I have. This one had a really detailed Asset Allocation.

In fact, Nusbaum’s piece was about an article in Barron’s this past weekend that featured a suggested portfolio by Mohamed El-Erain from Pimco, a major investment management service. Usually, I don’t write about an article based on another article, but this information was so interesting I just needed to share it with you.

It’s extremely detailed, much more than I’ve ever seen. And El-Erain really gets into specific investments in each asset class. So, what kind of allocation does he suggest? Here it is:
• Domestic Equities: 15%
• Foreign Developed Equities: 15%
• Emerging-Market Equities: 12%
• Private Equity
• Domestic Bonds: 5%
• Foreign Bonds: 9%
• Real Estate: 6%
• Commodities: 11%
• Inflation Protected Bonds: 5%
• Infrastructure: 5%
• Special Opportunities: 8%

Yeah, I know, it doesn’t add up to 100%. It’s just 91%. There’s no % next to Private Equity. But thru subtraction, I’m going to guess that it’s 9%.

The one thing about this portfolio is that only about 30% of it would be in domestic stocks. That’s a lot different from what I’m used to seeing. But I’m willing to consider and continue researching the suggestions El-Erain makes in his asset allocation. What do you think about this? Let us know.

Peer-to-Peer Lending: Crazy Idea or Smart Investment?

Would you give $1,000 to a stranger? Who’ve you’ve never met in person? Who lives on the other side of the world?

Well, as crazy as this may seem, this is the concept behind the hot investment called Peer-to-Peer lending or P2P for those in the know. And I just read a great article about it by Farnoosh Torabi on TheStreet.com.

Yes, the idea is that you lend someone somewhere in the world a certain amount of money, say $1,000. And they promise to pay it back to you plus interest that can reach up to about 12%. And you do it all online.

So, you’re probably asking yourself two questions right now. The first one probably is “Are you crazy?” And the second one probably is “OK, how can I do it?”

Well yes, this could seem like a crazy, risky idea. But a lot of people have been doing it successfully for a while now. And with minimum loans as little as $50 and with average returns higher than your average savings accounts or CDs, P2P could be a way for you to make a nice return on your money. Read more

11 Ways to Become a More Successful Stock Trader

Do you know the difference between a stock trader and an investor? I didn’t know until I lost a ton of money of some unsuccessful trades.

At that point, I learned that a trader is someone who “speculates” on a stock in an effort to make a great gain – usually a short or medium-term gain. An investor is someone who “buys a good company” through its stock and looks for a longer-term gain.

This article is about stock trading. Here is that I learned the hard way.

1. Write a Trading Plan, sign it and follow it religiously.
What’s a Trading Plan? It’s your partner in your effort to become a more successful trader. When you write your plan, make it as specific as possible. For instance, your plan should spell out:
A. How much of your trading account are you willing to spend on one trade
B. What type of stocks to consider
C. The reason a certain stock is a smart buy now
D. What share price you’ll buy that stock at
E. What rate of return you’re shooting for
F. How much loss you’re willing to take
G. What share price you’ll sell the stock at

After you write your plan, sign it to show that you’re committed to it. Then follow it to the T. Read more

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