Posts filed under 'Financial Investments'
So this year the tax return fairy brought you $100, and you finally want to get started with investing the stock market. Good for you!
A friend of mine recently posed a similar question to me about how he can get started in with investing with a small sum. This, in short, was my answer.
The best way to get started in a hands-off way is to buy a stock or instrument that will closely mimic of the stock market as a whole. Because the market as a whole has increased in value over the years, they best you can do is invest in everything. Because you can’t do that, you’ll need to buy shares of an index or spider vehicle. Here are a few suggestions:
- Vanguard Total Stock Market VIPER
- iShares Lehman Aggregate Bond
- iShares Dow Jones US Real Estate
- iShares Dow Jones US Basic Materials
- S&P 500 Spider
Now, if you’d like to take a little more hands on approach, I would recommend putting 50% of your available cash in one of the above vehicles. This will help to ensure that you don’t lose everything.
To pick stocks for investment first make a list of companies you’d like to buy. Once you have a list of 10-15 companies you’re interested in, head over to your favorite finance website (Yahoo! or Google are good choices) and look them up. What you are looking for is a stock with a P/E ratio under or below 15. This basically means that the stocks are undervalued compared to what the company earned in the most recent period.
(For a more in depth explanation of P/E ratios, see http://en.wikipedia.org/wiki/Pe_ratio)
Buy a few of the stocks on your list that meet the P/E requirement and hold them for 1 year. At the end of the year check the stock’s stats again. See if you think you’re going to make more money in the next 12 months, if not, wait for the opportune time to dump the stock. If so, hang on to it!
Whenever you have some extra cash for investing, put half in the spider, and the other half in the next stock on your list.
Try it out and see how it works for you!
April 27th, 2007
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Microcredit involves making small loans to persons who are not ‘bankable’ (meaning they could not get a loan from a traditional bank). This audience often consists of the very poor, unsuccessful entrpreneurs, or unemployed people.
Although the business models differ, there exist many non-profits that supply microcredit, as well as several businesses, and individuals.
Individuals seeking to begin lending in a microcredit situation need to be very careful about who they choose to work with, as it can very risky to invest in this market.
Some businesses exist to assist investors in making micro-credit loans. Often, these businesses provide aggregation and risk-sharing models. This means that if a person requests $10,000 in micro-credit, the business can split it up between 10 investors who each invest $1,000. This helps to spread the risk of deault around, meaning you can invest your money more widely. One such service is Prosper.com.
Non-profits have also shown much success in the micro-credit market. The common idea of success in this arena is that a poor person takes a loan to do something, and then ends up growing their business to employ other poor persons in their neighborhood.
One such example is a woman in India who took a small micro-credit loan to buy some fish from a fisherman at a local wharf. She cooked the fish and then sold it to others in the same area. She then repaid the loan and took the extra money to the wharf to buy more fish. Once again she cooked and sold the fish. After repeating this process quite a few times, she was able to buy her own fishing boats, which she now rents to local fisherman, for the price of bringing her enough fish to cook and sell.
Of course, not all stories can end like this, so do the proper due diligence when investigating this type of investing. Also, keep in mind that a non-profit such as this could make an excellent tax shelter should you find your income too high for your liking.
September 17th, 2006
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Six figures to play with means you are doing something right, so pat yourself on the back. Any of the previous strategies will give you good returns as well, so here are a couple of general tips:
First, make sure you divide your money among different investments. You need to remember that FDIC insurance only protects each account up to $100,000, so never have more than that amount in any one bank.
Second, you need to diversify your investments. You can split this amount of money into many different investments, and you should. Check out our explanation of diversification to familiarize yourself with what to look at.
Third, consider employing a professional money manager if you don’t have time to manage it yourself. The worst thing you can do is make investments and not keep track of them. In theory, if you have made this kind of money, you are better off doing what ever it is you do to make that, and letting someone else help manage your money. This doesn’t mean you don’t stay involved, if anything you should be speaking with your manager weekly, if not daily to discuss strategy and performance. Think of them as your employee, not your guru.
Fourth and finally, have a lawyer review any contract for any kind of investment. Make sure they sign off that everything is normal and there are no special cases that could get you in trouble. See the above tip for why a professional is a better alternative than yourself.
April 24th, 2006
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Short Term – CDs
Buying shorter-term CDs is now going to be more profitable for you, because you now have the ability to roll-over larger amounts. Shorter-term investments allow you to take advantage of interest rates rising (as they currently are).
Medium and Long Term – Real Estate
Looking at medium terms in the real estate market usually means buying notes or REITs. Buying a REIT is the less-involved strategy, but you will want to check in on it about once a month to make sure you are getting your money’s worth.
Buying notes is more complicated, but also more exciting and potentially more profitable. Most local governments hold auctions for tax-liens. When someone does not pay their taxes, the local government can put lien against their real property, and eventually these notes will be auctioned off (see NPV for a discussion of why). At these auctions you bid on notes by the percentage you are willing to accept in interest payments.
After a specified amount of time the person does not pay their lien, you can foreclose on their home and you will acquire the property. This is also a great time to flip your interest in the property to a local investment company, who will pay big bucks for the opportunity.
Long term you should look for an investment property which fits your style. Renting to a student population means more damages and repair calls, but you can be more confident that you will be able to rent the property. There are myriad options here, so check out some of our real estate articles for ideas.
April 24th, 2006
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This amount of money can really get you started down the path to some great investing fun.
Short Term – Banking Bonuses Again
Tying up this kind of money in eBay sales would be a bit much to manage (but is a good diversification strategy), so we’re back to the banking bonuses.
With this amount of money you are looking at some pretty good bonuses. Some banks will offer a couple hundred dollars, some have offered things like PDAs and laptops in the past. Combining these bonuses with your eBay sales is an excellent strategy.
Once again, set up your spreadsheet to keep track of investments. Add columns for tracking numbers for items being shipped and phone numbers to account execs to make sure you are getting all you deserve.
Medium Term – CDs or Stock Market
A one to 5 year CD can be great place to park your money. At the time of this article, you can find CDs in this term around 5% APR. Upon cashing out, you can get between $1,250 and $2,500. Reinvesting your profits increases your earnings. This is another strategy where all you need to do is start the investment, and then check in once in awhile to see how your money is growing.
If you have more time and want to be more involved in your investment, you can begin to invest in individual stocks. The best strategy here is to being looking into companies that are close to the industry you work in, or are based in your area. I know of a class being taught at the University of Arizona that specialized in reporting on companies in the area that were all but ignored by Wall Street.
They found that Taser was ready to go in excess production capacity, so they did site visits and recommended a purchase to the University. Taser did go big, and now it is a big item on Wall St.
So, invest in something you know about, leave your money in that company for 6 months to a year and stay strong. The biggest mistake beginners make is to assume that when the price changes, you have incurred a loss. You do not incur a loss until you sell, so determine a holding-period you are comfortable with, and stick to it. Never buy high and sell low.
Long Term – CDs, Stock Market or Savings Account
While not as glamorous as other investments, a savings account can be a great investment, especially if you have significant money to invest. Banks such as ING offer sign-up bonuses as well as more than competitive interest rates. The reason is that internet banks do not have the same overhead as traditional brick & mortar banks. Plus, at this level of investment, all of your money is completely protected by FDIC insurance.
The CD strategy is similar to the Medium Term strategy, except that you continue to roll over your 5-year investments, reinvesting your profits each time, and multiplying your return each time.
The stock market strategy here is to invest in spiders or indexes again. Once again, you have the ability to “fire and forget” after opening your account. Growing this amount of money at 10% APR is very exciting.
April 24th, 2006
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Many folks will tell you there’s nothing you can do with this amount investment wise, I disagree.
Short Term – Use eBay to Make Money
The internet provides many opportunities for profit on relatively small amounts of money. Websites that provide good deals on merchandise (like FatWallet.com) combined with an auction site like eBay, or a classifieds site like craigslist can create arbitrage opportunities.
The trick in this strategy is in finding a good deal, and timing your listing. As an example, let’s say the Dell offers the following deal on a flat screen monitor: it normally sells for $319, but with the right application of coupons and limited-time offers, you can get it for $249 with free shipping.
Once you receive your new monitor, list it on eBay. You can set your opening bid at $250, so no matter what, you profit. Let’s say that the final bidder knows he can get the monitor from Dell for $319, and the shipping cost is the same from you as from Dell. So, he bids $300 and wins. You have just made $50 on your initial $249 is your spare time.
The downside to this strategy is that it takes time. You will need to be involved in every step in this deal. However, since the formula can be repeated many times over in a year’s time, you stand to profit very well if you are diligent about finding deals.
Medium Term – Open bank accounts for the rewards
The idea here is not necessarily new, but it is exciting. Basically you use your on-hand cash to open new checking/savings accounts where sign-up bonuses are offered. For example, Bank of America in the past has offered $50 for depositing $150 and maintaining that balance for 90 days. After 3 months, you now have $200, a 33% profit.
The downside of this strategy is that you need to be diligent in keeping track of your investments. The best idea is to create an excel spreadsheet listing the institution, the bonus amount, the deposit amount, any special conditions (some places require you to use their bill pay services, etc.), and the “maturity date” of your investment.
Long Term – Invest in the Stock Market
Many will say that investment is too risky, but over a long-term, most risk in the stock market is mitigated, and you stand to make a good annual return on your money. To minimize your risk, consider buying an index fund or spider (such as the SPX).
The S&P 500 has averaged approximately 10% growth for the past 30 years. Leaving your $500 in the market for 5 years at 10% APR will give you around $300 back on your investment (60% profit). Trading stocks will kill your profit. At this level of investment, even $10 per trade means you are spending 4% of your money every time you buy and sell.
The best part is that you don’t need to do anything but check once a month to see how your investment did. This strategy requires no effort from you at all, except to open a trading account and make the purchase.
April 24th, 2006
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