Learn Investment

Building a Solid Foundation
Investing successfully is more about attitude than about money. Even an imminent inheritance and a good-paying job offer little hope of financial success without a positive, constructive attitude that leads to a rational, systematic investing approach. The solution to avoiding a stressful retirement and enjoying financial freedom starts by examining your attitudes. With a thorough self-assessment under your belt, you can begin learning sound investment fundamentals.

Profit by Understanding the Risk and Return Relationship
What is something you do really well -- better than most people? Whatever it is, your special skill or knowledge is probably characterized by two critical attributes: • It's rewarding. Whether the reward is financial or simply the satisfaction of doing something worthwhile, you profit by it in some way. • Developing your special skill or knowledge required some type of sacrifice.
Investment reward is called return. Return is the financial benefit of risking your money in the market. It is expressed as "rate of return." Investment sacrifice is called risk. The essence of investment risk is the chance you take that the value of your investment will decline. Investment risk is usually expressed in terms of volatility in the value of the investment. The value of some investments, such as government bonds, does not change much, so the chance of losing money is slight. On the other hand, the value of stocks issued by many Internet companies rapidly rises and falls and may not recover. After analyzing your personality and grasping the concepts behind risk and return, you are ready to tackle the one simple fact that underlies the importance of investment risk and return: they are both positively and linearly related.
In order to earn higher returns, you have to assume higher risk. If you are unwilling to accept high risk, your returns will be relatively low. In the long term, all investment securities and portfolios operate this way. The key to successful investing lies in a plan that is not only well thought-out and consistently applied, but one that accounts for and manages risk as well. A risk management plan expresses your personal tolerance for risk in terms of the kinds of investments you should own.

Assessing Your Risk Tolerance
Your risk tolerance is about personal preferences and goals. The cornerstone of a consistently applied risk management plan lies in an assessment of your own tolerance for risk and volatility. This leads to an investment plan reflecting both your personality and tolerance. A thorough risk tolerance assessment taps two key attributes: cash flow needs and your attitude about short-term fluctuation in the value of your investments. Cash flow is money coming in and then going out for expenses. If you depend on investment income to fund your cash flow, your investments should include safe stocks and bonds paying high dividends and interest. If you depend on employment income to fund your cash flow, you can invest in riskier, low-income stocks and bonds with greater potential to grow in value over the long-term.
Your financial obligations and preferences determine cash flow needs. If you are approaching retirement, you may not currently have large cash flow needs. But upon retirement, your income source may shift from salary to earnings on your investments. It is at this moment when knowing yourself becomes extremely important, since you will be able to anticipate your reaction to seeing the value of your portfolio take occasional dives and experience long periods of no growth. By anticipating your reaction, you'll be prepared either to adjust your investment strategies or to sit back and ride out the storm. Matching Reward Expectations with Risk Tolerance .
If stock prices rise, it means the market believes profits will rise at roughly the same rate. In the long run, the economy cannot grow fast enough to sustain high double-digit profits. Therefore, stock prices could not sustain the high double-digit returns we witnessed in some recent years.
A reasonable long-term return expectation hovers between 8 and 10 percent if the investor's risk tolerance permits allocating 60 to 80 percent of the portfolio to stocks and the remainder to fixed income investments. Investors with lower risk tolerance should expect less of a return.
It can take both discipline and foresight to put money in low-risk investments. Nevertheless, a mismatch between realistic expectations and risk tolerance is a sure formula for disappointment. A well-conceived risk management plan matching risk tolerance and realistic expectations can prevent disaster while yielding respectable long-term returns. Getting a Good Start With Sound Strategy

The Big Picture: How Investments Dovetail With Assets
A balance sheet is a cumulative record of finances recorded at a single point in time. It is a three-part compilation of everything you own, everything you owe and everything you have left over. The difference between what you own and what you owe -- known as assets and liabilities, respectively -- is your balance sheet equity, also known as net worth.
A balance sheet provides a bird's-eye view of finances in a way that lets you see how all of the pieces make up the whole and whether any adjustments need to be made. Balance sheet equity offers an objective measure of financial freedom. Each addition to assets, without an offsetting addition to liabilities, directly increases net worth. And here lies the ultimate goal of investing: increasing your net worth.
The first step toward financial freedom demands sufficient liquid assets to fund short-term liabilities and foreseeable obligations, such as home repair or a car replacement fund. Your balance sheet should include categories devoted to specific future obligations. Once these categories have been funded, you can then devote your attention to increasing your net worth through investments.

Asset Allocation
Asset allocation is a process of continually dividing your assets into categories to maximize returns and control the risk of lost principal. As we move through this course, you'll see how the concept behind asset allocation can also be applied to investments. Effective asset allocation includes liquid asset categories to fund contingencies such as unexpected car repairs. You should also have funds devoted to foreseeable obligations such as insurance co-pays and deductibles. However, you may not want to allocate all the funds up front for long-term obligations. It's a better idea to pay for these in smaller installments.
Your personal judgment is also central to how these funds are actually invested. Liquid investments can be converted to cash at any time without losing any of the money you initially invested. Contingency funds should be in cash or highly liquid investments, such as money in a savings account. If you put contingency funds in stocks, an illiquid form of investment, there's no telling what the fund will be worth if you eventually decide that you need the cash to pay your bills. Likewise, funds devoted to short-term foreseeable obligations should be liquid, though with these funds you have a little more latitude in your decision-making process. If you know beforehand when you will need the money, you can invest in higher-earning certificates of deposit or short-term bonds whose maturities match the timing of your obligations.

Diversification: Capitalizing on Diversity
The markets offer many kinds of investments that differ in their risk and return characteristics. Before thinking about your many choices, it is important to have a clear idea of the advantages of diversification. By sampling many different types of investments and including a proper mix in your portfolio, you ensure stability and a well-rounded portfolio.
Diversification allocates investment assets into categories that respond differently to economic events. This helps preserve your portfolio's value, mainly because some investments rise while others fall. Investors also practice diversification to capitalize on unforeseeable growth and increase their net worth. For example, only a few investors anticipated in 1998 that oil service stocks would triple over the next two years. But, if you had a balanced and diversified portfolio that included many different types of investments, there's a good chance that you too might have capitalized on the growth of oil service stocks.
Diversification not only provides protection, but it also offers an opportunity for profit.

Fixed Income vs. Equity Investments
All investments can be categorized as either fixed income or equity. When discussing investments, equity is not quite the same as balance sheet equity. Equity, as it relates to investments, is something you own, such as stock or rental property. Fixed income is a loan you make to somebody who promises to repay principal and interest. Bonds, the most common form of fixed income investment, promise a specified amount of interest and specified maturity date when the loan is to be repaid.
Fixed income and equity respond somewhat differently to economic events. Changes in the interest rate directly influence the value of fixed income investments. While rising interest rates reduce their value, falling interest rates will increase their value. Although interest rate increases do tend to suppress stock values, equities are far more sensitive to anticipated future corporate earnings than anything else. This distinction is important because stock prices change even when interest rates are stable, and the value of fixed income can change even when corporate profits are stable.
Within the two general investment categories of fixed income and equity, there are many possibilities for diversification, all of which possess different properties. For example, bonds with long maturities (e.g., 10 to 20 years) are more sensitive to interest rate changes than shorter-term bonds. You may want to select several different types of investment to protect yourself from any unforeseeable benefits or problems. Among equities, stocks issued by utility companies, for example, are less sensitive to economic changes than stocks issued by retail companies.

An Overview of Asset Categories
Successful diversification depends on your knowledge of your own asset categories and how each category responds to economic events. A useful approach conceptualizes investments along two dimensions: equity and fixed income investments, and international and domestic investments.
Your personal preferences and goals drive asset allocation and diversification. If your overall financial plan requires income from your investments, your portfolio should have only a few investments that risk principal and more with fixed income investments. If your plan seeks portfolio growth and you have a long time horizon, use fewer fixed income investments and more equities and international investments.
Here is a list of the chief investment categories with a brief summary of their properties:

Equity
• Real estate -- Yields rent payments and capital gains, which are the profits you earn when you sell equity at a price higher than the price you paid for it. Prices vary with changes in rental demand and business outlook.
• Stocks -- Issued by corporations, confer corporate ownership.
• Income stocks -- Pay high dividends, which are the payments many corporations pay to owners of stock. These stocks commonly have low price volatility, which means that the market value does not change much from day to day, compared with that of most stocks.
• Growth stocks -- Pay low, if any, dividends. Prices rise faster than for other stocks, but fall faster on bad news. Examples: technology stocks, small company stocks.
• Value stocks -- Have prices low in relation to "true" value that are often suppressed because of market attention to other sectors or temporary corporate/industry problems. Examples: Oil service stocks in 1998, some technology stocks.

Fixed Income
All of these prices vary with changes in the prevailing interest rates.
• Corporate debt -- Generated when companies sell debt to investors. They are essentially IOUs; they carry stated interest rates and maturity dates. Notes are another form of corporate debt. The difference? Notes are short-term, and bonds are long-term. Values vary with ratings based on a company's ability to repay.
• Junk bonds -- Usually corporate stock issues that pay high interest rates because of market concern over the company's ability to repay. • Government debt -- Issued by federal, state and local governments, usually at lower interest rates and with tax benefits. Examples: Treasury issues, municipal bonds.
• Money market debt -- Usually issued by corporations. Debt with maturity less than one year, low interest, high safety.
• Domestic -- Any investment issued by U.S. companies. These prices are influenced by economic growth, the prevailing interest rates and by corporate, industry and regional business prospects.
• International -- Issued by non-U.S. companies. Prices are influenced by currency valuation, political stability, local and regional economics.

Investing in Stocks
Rules to Follow Before Considering Individual Stocks
While it's tempting to buy stock in the companies we like, the only reason to buy a stock is if it relates and contributes to your risk and return goals. Owning stock is not an emotional investment, and you should only consider it to be a source of income. Remembering this fact will help you to keep your perspective so that you can focus solely on your financial goals. In addition to distancing yourself from the corporation emotionally, below you'll find a few more rules that will prove useful for you:
• A portfolio of individual stocks should consist of at least nine stocks from a wide array of industries.
• Stocks should be purchased in 100-share lots (called round lots). • At an average price of $35 per share of individual stock, you'll need more than $3,500 before you can start investing.
• If you're just starting to invest or if you don't have at least $50,000 to invest in individual stocks and bonds, invest in mutual funds (mutual funds will be discussed in detail in Lesson 5).
• Ignore the hot tips you hear on the street and thoroughly research the companies you're interested in before making any investment decisions.
• Be careful with the news you find in the paper and on TV. By the time you read the headlines, professional traders have most likely already reaped the benefits, and the stock price will probably reflect the changes already.
• Apply common sense. If it sounds too good to be true, then it probably is. • Start with a detailed investment plan and stick to it.
• Evaluate your plan at least quarterly.
• Minimize costs by avoiding excessive turnover of stock. Fundamental vs. Technical Analysis
Fundamental analysis seeks a discrepancy between intrinsic and market value -- that is, trying to buy stock that is being sold for less than it is worth. Intrinsic value is the actual value that you believe a stock to have, regardless of what it is being bought and sold for on the market. Individuals who are more comfortable with fundamental strategies use a wide array of economic, industry and corporate information to calculate the corporation's "intrinsic value." If you determine that the intrinsic value of the corporation's stock is more than its market value, it is said that a buy opportunity has presented itself.

While fundamental analysis places importance on some of the factors underlying the price of stocks, technical analysis tends to focus on outcome data, such as the stock price itself and stock trading volume. Technical analysts believe that the stock price and other measures such as volume behave in patterns that can then be used to anticipate future price directions. Technical analysis seeks to detect patterns and discrepancies in the way the market functions in order to be able to make educated guesses about certain stocks. Technical analysts hope to "predict" market moves in order to take advantage of them quickly.

While neither approach has proved to be superior, if you apply a consistent strategy, you will attain your goal more often than if you had no strategy at all. In other words, a necessary element for investment success is a consistent strategy based on sound principles.
Mining Annual Reports and Financial Statements for Information
• The annual report is a convenient way for the corporation to put its best foot forward. If you want to learn more about a company, this is a very good place to start. But if you've tracked the company for a while and already understand what it does and what it plans to do, you can skip all of the flashy public relations sections and go to the back of the annual report, which is where the financial statements appear.
• The balance sheet is a snapshot of a company's assets and liabilities. It helps you answer such questions as how much cash the company has available, how much debt it has assumed and how much the corporation's net worth is.
• The income statement reports revenue, expense and net income for a defined period of time. It provides answers to questions regarding the company's net income and will explain how this will affect the budget.
• The cash flow statement, in conjunction with the income statement, tells you if the company is making money. Net losses on the income statement aren't necessarily bad. Net cash outflow on the cash flow statement isn't necessarily bad. A combination of the two for an extended period of time, however, spells doom for any company.
• The analysis of financial statements relies on accounting data.

Accounting Data and Ratios: Measuring the Corporate Pulse
How can you use the information from the financial statements to help you invest wisely? By comparing numbers to each other by means of ratios. These ratios can help you compare the company with its competitors or with its own performance in prior years. All measures should be compared with five to 10 years of historic data and with industry averages to detect if any trends to the information are present.

Profitability
• After-Tax Net Income and Net Income Per Share (after-tax net income/number of common stock shares outstanding): For corporations with seasonal business -- a predictable ebb and flow in revenues that's tied to changes in climate, holidays and vacations -- be sure to compare the same quarters across the years.
• Return On Assets (after-tax net operating income/total assets): Operating income is income earned from doing business, not the sale of assets or investment returns. This ratio is directly related to the productivity of assets, and a low ratio suggests that the company's assets have not been well managed.
• Asset Turnover (revenue/total assets): This ratio is the amount of assets the company needed in order to generate a dollar of sales. Liquidity • Debt to Equity (long-term debt/total equity -- current liabilities): This measures whether the corporation can satisfy its obligations to its creditors. Long-term debt shouldn't include accruals or accounts payable. It should only be IOUs that the company owes a bank, or has issued publicly to investors. Long-term debt will usually be labeled "Long Term Debt." Equity should be total stockholders' equity. The higher this ratio, the more this company relies on debt. A higher number isn't necessarily bad, but should be able to be rationally explained. If the replacement will help the company make a profit in the future, then the debt isn't so bad.
• Current Ratio (current assets/current liabilities): This ratio measures the corporation's ability to fund its current liabilities, such as day-to-day operating expenses and short-term debt. Companies with dependable cash flows can more safely maintain lower current ratios than companies without.
• Quick Ratio (cash + marketable securities + accounts receivable / current liabilities): Marketable securities are simply investments that the company has made in other companies. Marketable securities must be easily marketed, or converted into cash. So this ratio lets you evaluate at a glance how a company would fare if sales stopped. It compares cash and cash equivalents -- such as investments and sales that have been made but not converted to cash -- to current liabilities in order to measure the company's capacity to pay its current obligations and to fund its day-to-day operations.

Evaluating Stock Performance
Plans with hard and fast target allocations and buy-sell rules govern most stock performance evaluations. It pays to evaluate and assess your success at making investment decisions periodically. Even if you're following your plan, do your decisions yield acceptable results? If not, you may want to re-script your buy-and-sell rules. You can evaluate your investment performance by comparing stocks in your portfolio with appropriate indices, baskets of stocks that represent a certain category of stocks. For example, the Dow Jones Industrial Average represents established, high-dividend stocks.

The S&P 500 index is composed of 500 large, well-established U.S. companies. Other indices represent industries and segments. You can find indices for small-capitalization stocks (stocks issued by small companies), precious metals stocks, Internet stocks, even funeral company stocks.

When you buy a stock, assign it to an index. Then, once every year or so, lump the performance of all the stocks you assigned to the same index and compare your group with the index. Assume for a minute that you assigned two stocks to the same index. You bought 100 shares of each stock and on a preset date, one closed the trading day at $5 and the other at $10 per share. This group was worth $1,500. On the same day, the selected index closed at 10,000. One year later, you owned the same number of shares in both stocks and had added no more stocks to the group. Their combined value including dividends was $1,600 and the index closed at 10,050. Your stock value rose (1,600 - 1,500) / 1,500 =) 6.7 percent while the index rose only ((10,050 - 10,000) / 10,000 =) 0.5 percent. In this instance, you're either lucky or doing something right. Repeat this process for all groups and corresponding indices.

Investing in Bonds
Bonds vs. Stocks
When a government or corporation needs money to pay for a special project or expansion, it can fund operations with cash saved in the organization or with cash raised by selling securities. If the organization chooses to sell securities, it can sell bonds. Bonds represent a promise made by the issuer to repay principal and interest to the bondholder at prescribed intervals during a prescribed time period. When you think bond, think loan. And think of yourself as the lender because you supply the bond issuer with money that will usually be repaid to you as periodic interest payments. Bonds mature when the prescribed time period elapses.
Bonds are more defined and stable than stocks. Whereas the life of a bond is time-limited, your stocks can be passed on to your heirs and to your heirs' heirs for generations after you buy them. Bond payments are also more fixed than stock payments because the issuer promises a fixed interest payment at prescribed intervals. Dividends, which are the cash payments made to owners of stocks, can rise and fall unpredictably -- or even cease entirely -- for any given stock.
Unlike bond interest payments, the value of bonds can fluctuate just like stock values, but the changes are less volatile and the reasons for those changes are different. Stock values change as a result of market perceptions about the success of the stock issuer. Bond values fluctuate in response to changes in the issuer's ability to repay and to changes in the prevailing interest rates. For example, if a bond issuer suddenly encounters reduced sales that restrict its cash flow and ability to fulfill its promise to pay interest and principal to the bondholder, the market will treat the bond as a risky investment. And rising interest rates suppress bond values, while falling rates pump them up.

Governments back the payment of interest and principal with their taxing authority, but corporations back bonds with the corporation's ability to earn money. Corporate bonds are, therefore, generally riskier and pay higher interest than government issues. When the market questions a bond issuer's ability to repay interest or principal, the bond is called "junk." Junk bonds usually pay high interest to compensate buyers for the high risk they assume when buying them.

Bond issuers can choose, before they issue their bonds, how to time repaying their debt. Most bond repayment timing consists of bi-annual interest payments and principal repayment when the bond matures. Alternatively, bond issuers can postpone payments until maturity when they pay all interest and principal. Even if the bond issuer selects either of these, a brokerage firm can buy the bonds and resell the cash flows in different formats. For example, they can take the principal portion of a bond and sell it at a deep discount and not pay any interest on it. Then they can take the interest portion of the bond and sell that as a separate security that promises only interest payments without any principal payment.

Types of Bonds:
Corporate Bonds
• Mortgage bonds -- Issued for the purchase of certain assets that are pledged as collateral • Equipment Trust Certificates -- Serial bonds secured by specific equipment
• Debentures -- Unsecured promissory notes
• Income bonds -- The indenture states that interest will be paid only if the issuer earns the money to make interest payments
• Convertible bonds -- Can be exchanged for prestated number of issuer's common stock
• Variable Interest bonds -- Pay interest rate tied to an indicator of prevailing rates such as Treasury bills
• Zero-Coupon bonds -- Pay all interest and principal upon maturity; also known as discount bond
• Euro-bonds -- Issued outside the United States and denominated in U.S. dollars Government Bonds
• U.S. Treasury bills -- Zero-coupon issues with maturities less than one year
• U.S. Treasury notes -- Bonds with maturities from one to 10 years
• U.S. Treasury bonds -- Bonds with maturities greater than 10 years
• GNMA -- Mortgage pass-through bonds issued by the Government National Mortgage Association, a U.S. federal government agency
• FHLMC -- Mortgage pass-through bonds issued by the Federal Home Loan Mortgage Corporation, a U.S. federal government agency
• Collateralized Mortgage Obligations -- Fixed income securities created from mortgage-backed securities (like GNMAs) designed to control risks
• General Obligation Municipal bonds -- Local or state government issue backed by the taxing authority of the issuer, pay federally tax-free interest
• Revenue Municipal bonds -- Local, state or agency issues backed by the revenue earned on the funded project
• Series EE and HH bonds -- Issued by the U.S. Treasury in small denominations to appeal to individual investors

How to Value Bonds
Bond issuers promise to repay the face value of their bond. Face value is the amount borrowed by the issuer, and is usually expressed in increments of $1,000, $5,000 or $10,000. Since the bond market assesses prevailing and expected interest rates, the interest paid on comparable issues and the issuer's ability to keep its promise, the market might not value the bond according to its face value. If it considers the bond to be a risky investment, it might only be willing to pay a percentage of face value, which is called a discount. If the market thinks this issue is a great deal, it might pay a premium for the bond.

The value of a bond is the "present value" of future interest and principal payments. Present value is absolute cash payments adjusted for the timing of the payments. Since a future payment is worth less than a payment made today, timing is important. If you have to wait a year for a payment, you are losing the interest you could have earned by investing in a bond with quarterly payments and then using those payments to invest in something else. For example, say that you are considering buying a bond that pays both interest and principal upon maturity one year from now. The absolute cash payment will be $1,100 and today's market price, according to your broker, is $1,020. You do some research and find bonds with the same maturity and risk that yield 5 percent. This little formula calculates the present value of the bond:

Future payment / (1 + yield)
If payment will not come for two or more years, the denominator (1 + yield) is raised by an exponent equal to the number of years before payment. In the example above, the present value is ($1,100 / (1 + .05) =) $1,047.62. Since the present value is greater than today's market price, this bond is a bargain at the broker's quoted price of $1,020. This formula can be applied to the future interest and principal payments of all bonds. Evaluating Bond Performance
As we've seen in previous lessons, sound investment practice includes the periodic evaluation of your investment performance. The two-step process below compares the performance of individual investments, grouped into categories, with available indices. An index is a group of bonds selected to represent a certain type of bond. Examples of indices include high-grade (safe) corporate bonds and Treasury bonds.

In the first step of the process, you compare the performance of all bonds you own with an appropriate index. If, for example, your high-grade corporate bonds earned 5 percent during the prescribed period, which is usually a year, and a good high-grade corporate bond index earned 2 percent, you can conclude that your corporate bonds are performing well.

The second step compares individual bonds with appropriate indices. This step identifies high- and low-performing investments and helps you to decide whether you should sell or stand pat.
The decision to sell is driven by the goals and preferences expressed in your investment plan. If you don't have the time and expertise to do this kind of evaluation yourself, mutual funds offer an outstanding and potentially lucrative alternative to investing in individual bonds and stocks.

Investing in Mutual Funds
What Is a Mutual Fund?
A mutual fund is an investment cooperative managed by an investment company. As in other cooperatives, (such as credit unions), mutual fund investors pool their assets together and employ an investment company with investment professionals and administrators who conduct the day-to-day business of managing the fund. Each mutual fund is distinguished by an investment objective. For example, the Vanguard 500 Index fund invests only in stocks comprising the Standard & Poor 500 index.

The popularity of mutual funds exploded in the 1980s and 1990s, mainly because they offer more benefits to individual investors than individual stocks do. They reduce investment costs and provide professional investment management while enabling individual investors to diversify portfolios very easily.

Reduced Costs & Diversification
Brokers charge commissions on individual security prices that can quickly add up in a well-diversified portfolio, eating into your returns. Most Internet discount brokers charge $20 to $50 commissions to buy and sell one round lot (100 shares). Full-service brokers, who also provide investment advice, charge much more. If you owned 20 stocks, their round-trip discount commission could total approximately $1,000. Since investors pool all their money into mutual funds, they enjoy economies of scale in management and transaction fees, which usually lowers the cost of broker fees.

Mutual funds also enable investors with small- and medium-sized portfolios to diversify in an efficient manner. You could create a minimally diversified portfolio on your own with $50,000, but some experts say that you'd need to invest $100,000 to do the job right. In contrast, a mutual fund will allow you to invest in all 500 stocks comprising the S&P 500 Index with only $1,000.

The Impact of Fees and Loads
Mutual fund investors still need to pay attention to fees and loads despite the economies of scale they enjoy. The cost of mutual funds assumes two forms: periodic fees and transaction fees.
Periodic fees, which are also known as management fees, are assessed at least annually as a percentage of the value of your investment. The percentage varies significantly from one investment company to another, depending on whether the fund invests in stocks or bonds and whether it tracks an index or is actively managed to beat an index.

Fixed-income funds and index funds charge the lowest fees. Fees exceeding 1 percent are common, though you can find funds charging less than 0.25 percent. Actively managed stock funds charge the highest periodic fees, often exceeding 2.75 percent per year.

Transaction fees, known as loads, are also expressed as a percent of investment value. The charge applies when you buy and/or sell the investment. Most loads are less than 5 percent. No-load mutual funds charge periodic fees and, as the name implies, don't charge any transaction fees. These periodic fees, however, are often higher than load fund fees, so you need to be careful.

Culling Useful Information From the Prospectus
Investment companies are required to offer a prospectus when offering mutual fund shares for sale. The prospectus details everything about the fund. Though the prospectus is filled with legalese and technical terms, a novice can cull the vast majority of essential information by following these five simple steps:

1. Select a prospectus from one of the widely known investment companies.
2. Read the investment objective on the first page. The objective states whether the mutual fund invests in fixed income, equity or both, giving clues about how risky the fund is. Be on the lookout for an elaboration of the objective deeper in the prospectus.
3. Identify the cost of the mutual fund. Loads are usually stated on the inside cover. Periodic fees are reported in a table, which is usually found in the first few pages. Look for a tabled column or row entitled "Ratio of expenses to average net assets." Data are grouped to report annual results. While you're here, also find the turnover rate, the percent of the portfolio replaced each year. A 100 percent turnover rate means everything in the portfolio at the beginning of the year was sold and replaced once during the year. Higher turnover increases costs and may indicate excessive turnover due to bad investment decisions. You should favor income stock funds and fixed income funds with turnover rates less than about 100 percent. As you approach more risky investments such as small growth stock funds, 150 percent is not uncommon.
4. Examine historic investment returns. Usually you can find a table or chart illustrating returns. If you can't find this, go to the table you examined in step 3 and find either the two columns or rows (depending on the table's format) with these headings: net asset value at end of year and total from investment operations. To calculate annual return, divide one year's total from investment operations by the immediately previous year's net asset value at the end of the year. Compare annual returns with an appropriate mutual fund index to evaluate how well the fund has performed in relation to its peers.
5. Find a section with the word "risk" in the title. Risk discussions are usually straightforward, and lay out worst-case scenarios.
There's more in the prospectus, but these steps will be more than enough to get you started. The investment policy section is usually technical, but with time, practice and more experience you'll catch on. Be sure to keep the prospectus whenever you decide to buy a fund.

Taxes and Mutual Funds
Mutual funds have one major drawback: unlike taxes on individual investments, the federal income tax applies to all mutual fund earnings, even if you don't sell your shares.
And it doesn't take a CPA to imagine how painful this can be to an investor. Let's say you buy a growth fund and hold it for at least two years. In the first year, it earns 10 percent, and in the second year it earns 15 percent. You dutifully pay tax on your earnings without a second thought. But, since you could have reinvested this money, you should consider the taxes you pay for mutual funds as lost income.

If your mutual funds are invested in tax-favored accounts, you'll only have to pay taxes when you start drawing on your account. Adopt a Consistent Mutual Fund Selection Process
With 10,000 mutual funds available, how are you going to find the best funds to achieve your goals? By the time you're finished researching all of them, you'll already be retired!
The best advice is to find a good book and use it until the pages get worn. The NEW Commonsense Guide to Mutual Funds by Mary Rowland delivers sound guidance and practical advice on selecting and managing mutual funds. Her list of 75 "Dos and Don'ts" lays the groundwork for a sensible approach to mutual funds.

Chaos characterizes the retail financial products industry. Every firm has a story to tell. While some tell it with colorful charts, others pummel us with performance data and index comparisons. Investors familiar with mutual fund advertisements would probably agree that it seems like most mutual funds are well aware of these two strategies and readily bombard us with them.

The investor's only defense is a written plan. A plan that identifies specifics and a firm strategy cuts through the blitz of advertisements and all the smooth sales pitches. A written plan leads to consistently applied mutual fund selection criteria. Get a book and write your plan.

Investment Considerations
The Effects of Taxes
Taxes reduce investment returns in two ways. First, federal and state taxes take a significant percentage out of each dollar an investor earns. Second, when the government takes its cut, you are unable to earn any returns on the money you paid in taxes.

When it comes to municipal bonds and treasuries, the issue of taxes present a small problem -- their interest payments are generally less than those of taxable bonds. A high-grade corporate bond might pay 6 percent, while a muni or Treasury with the same maturity might pay only 5 percent. You have to ask yourself one question: "Which investment yields a higher after-tax return?"

You'll only need to know two things and have access to a calculator in order to answer this question. The first piece of information is your marginal tax rate. The second is a little formula enabling conversion of taxable interest to non-taxable interest, and vice versa.

Calculating Your Marginal Tax Rate
The marginal tax rate is the rate you pay for each additional dollar of taxable income. To figure this out, you'll have to go digging through your files and find last year's federal and state tax tables. Find the row with the taxable income you expect this year. Subtract the lower "At least" value from the higher "But less than" amount. You'll need to use this number in the next step, so jot it down and hold onto it for a while.

Next, locate the associated income tax amount and then subtract from that value the tax owed for the range of incomes immediately below yours. Add the federal and state marginal tax rates, and you will arrive at your state and federal marginal tax rate.

Translating Taxable and Non-Taxable Rates
The non-taxable equivalent of a taxable interest payment is the stated payment rate multiplied by one minus the marginal rate. Let's say your marginal rate is 30 percent and a taxable bond pays 6 percent. The non-taxable equivalent is .06 times (1 - 0.3) = .042. The result of this calculation tells you that a muni issued in your state paying more than 4.2 percent will earn more after taxes than a taxable bond paying 6 percent. Looking at this from the other direction, the taxable equivalent of a non-taxable interest payment is the stated non-taxable payment rate divided by one minus the marginal rate. Continuing with the scenario we used in the example above, a muni from the state where you reside paying 4.2 percent is .42 divided by (1 - .3) = .06. The result of this calculation tells you that a taxable bond paying more than 6 percent will earn more after taxes than a non-taxable bond paying 4.2 percent.

Use only your state marginal tax rate for Treasuries, and only use the federal marginal rate for munis issued outside your home state.

Dollar Cost Averaging
Dollar cost averaging is one of the most powerful and simple wealth-enhancing techniques ever devised. Put the same amount of money into your investments at preset intervals. Consistently apply the practice indefinitely, and do so without respect to whether the market rises or falls.
Dollar cost averaging draws its power through consistent application and by forcing you to buy more shares when prices are low and fewer shares when prices are high. Here's an example of how dollar cost averaging works: Each month you write a check for $100 and deposit it into your stock fund. Let's say that in the first month you begin the plan, shares of a stock cost $10 dollars, so you buy 10 shares.

The second month, the stock market has skyrocketed. You buy 6.67 stock fund shares at $15 with your $100. So now, after the second month, you own a total of 16.67 stock fund shares. At this point, even though stock fund shares sell for $15, your average cost is only $12.
The markets will rise and fall from month to month. But over the long run, markets will rise in value. By practicing dollar cost averaging over a long period of time, you will always buy more shares when prices are low and fewer shares when prices are high. As a result, your cost per share will be less than their current market value. Besides instilling discipline in the investing process, dollar cost averaging results in more shares purchased at lower prices than prevailing prices. That translates to a sound long-term strategy for wealth enhancement.

Records: Keeping It Simple and Organized
It is a taxable event whenever you sell an investment or your investments pay a dividend or interest. Keeping good records helps you avoid paying more tax than you have to. Brokers and investment companies do most of the record keeping for you. They send you statements itemizing all of your transactions on, at the very least, a quarterly basis. Put all of these statements in chronological order, keeping a separate file for each individual investment. But even a good filing system serves only half of the record-keeping task.

Since files can get thick and unwieldy after a few years, you should also maintain a chronological journal by investment that records each transaction. If you make it a regular practice to record the transaction each time you receive a statement, you can save yourself a lot of trouble later on when you need to call on your records in an emergency situation.

It pays to keep things simple whenever possible. Avoid buying two mutual funds with the same objective unless you have a good reason to duplicate your investment. To keep from becoming overwhelmed, minimize the number of brokerage firms you employ so that the information comes from as few sources as possible. Using brokers that supply reports via the Internet can also lessen the burden if you can download the reports and file them electronically. Just be sure they are safe in case harm comes to your computer.

Evaluating Portfolio Performance
The investor's ability to apply his or her investment plan is an essential element of evaluating a portfolio. A good investment plan starts with an introspective assessment of your risk tolerance and financial goals. These can be at odds with each other, so it's important to reduce them to objective terms.

Let's say your goal is to become rich -- really rich. How will you know when you've become really rich? Define "rich" in terms of the value of your assets or income and a time horizon for achieving it. For example: My goal is to own investments worth $1,000,000, fixed assets worth $500,000 and liabilities not exceeding $250,000 by June 30, 2020.

You'll use investments as one of the means for achieving your goal. But before you begin investing, you need to nail down your risk tolerance and reconcile it with your goals. Risk tolerance places an upper limit on the rate of return you can expect to earn. So if your goal requires above-average returns, your risk tolerance must also be above average. Reconciling risk tolerance and goals requires adjusting your risk tolerance upward or adjusting your goal downward, depending on the situation you find yourself in. Your tool for this reconciliation is the investment plan, where you write down your risk tolerance and goals.

The investment plan states, with as much objectivity as possible:
• Investment categories and their allocations
• Rejected investment categories
• Target rates of return
• Intermediate goals
• General policies, such as broker selection and tax strategies
• Investment strategies including decision rules that govern buying and selling
• Procedures for evaluating your plan and goals

A well-conceived plan establishes your blueprint. The implementation of the plan consists of periodic performance reviews, usually on a semi-annual basis, and your ability to follow through with your plan. During the review, examine your plan. Does it still reflect your risk tolerance and goals? Compare each element of the plan with the status of your portfolio. Does the portfolio allocation match the plan? Have portfolio elements matched your targets? Are returns likely to achieve intermediate goals? Have you worked within your policies? Your answers to these questions will govern the implementation of your decision rules for buying and selling.
Evaluation takes time and effort. But like anything worthwhile, effort devoted to planning and evaluating performance yields financial success. Implementation relies on both the plan and the knowledge you have acquired about investing and strategies for success.

Circulated by : http://www.wonderoffice.com

Fifteen Ways to Save Money on Gasby by Cynthia Brodrick

Gasoline prices across the nation topped out at an average of $3 a gallon as April came to a close. That's the news from the Energy Information Agency who tracks fuel costs across the country.

The last time most motorists saw prices over $3 at the pump was August 2006.

These gasoline prices send many of us into panicked flashbacks of the fuel crunches in the summer of 1980 and the mid-1970s. Thankfully, we learned a few good habits back then. Many Americans traded in their eight-cylinder gas-guzzlers for pipsqueak cars with small engines and better mileage.

Then came the boom of the late '90s, and, oh, how quickly we forgot. Though most of us still pump our own gas, we've fallen into bad habits again. We've embraced the gas-guzzling SUV and dawdle, idling, in drive-through lines.

But you can hold down the number of times you have to stand at the gas pump, aghast, watching the numbers spin. These 15 tips will help you cut fuel consumption:

Car maintenance
Keep the tires inflated properly. This one is simple and a potential lifesaver. Underinflated tires waste fuel and wear out the tire tread. Also, check tires regularly for alignment and balance. A well-tuned engine burns less gas. Get regular tuneups and follow through with routine maintenance. The right parts and fresh oil keep your engine happy and less thirsty for gas. Get the junk out of the trunk. A weighed-down car uses more fuel. For every extra 250 pounds your engine hauls, the car loses about one mile per gallon in fuel economy. Carry only the basic emergency equipment and items you really need.

Gas shopping
Buy the lowest grade (octane) of gasoline that is appropriate for your car. Check your owner's manual for this information. As long as your engine doesn't knock or ping, the fuel you're using is fine. You can save hundreds of dollars a year. Pay cash at stations that charge extra for credit cards. Don't top off the gas tank. Too much gas will just slosh or seep out. Why waste those extra pennies?

Driving
Drive intelligently; don't make fast starts or sudden stops. You're just overexerting your engine and burning extra fuel. Gradual acceleration also helps automatic transmissions run better. Engine-revving wastes fuel, too. Lighten up on the accelerator. The faster you drive, the more gas you use. Speed limits have gone up around most of the nation, but you don't have to see your fuel consumption go up drastically as well. For example, driving at 55 mph rather than 65 mph can improve your fuel economy by two miles per gallon. Avoid long warm-ups. Even on cold winter mornings, your car doesn't need more than a minute to get ready to go. Anything more and you're just burning up that expensive fuel. Combine errands into one trip and plan your stops for the most efficient route. You'll save yourself time and money. Do not rest your left foot on the brake. The slightest pressure could cause a drag that will demand additional gas use -- and wear out the brakes sooner.

Other good habits
Tighten up that gas cap. Make sure it's on securely. Buy a new one if your current cap doesn't fit snugly. Gas easily evaporates from the tank if it has an escape. Buy a fuel-efficient car. When pricing cars, factor in long-term fuel costs. Keep in mind that sunroofs add to wind resistance, lowering the mileage per gallon. Be smart with the air conditioning. On the highway, closed windows decrease air resistance, so run the air conditioner. But in stop-and-go traffic, shutting off the air conditioning and opening the windows can lighten your fuel use. Air conditioning can lower your fuel economy by 10 percent to 20 percent. Remove snow tires in good weather. Deep tread and big tires use more fuel.

Article circulated by http://www.wonderoffice.com

Copyrighted, Bankrate.com. All rights reserved.
About the AuthorCopyrighted, Bankrate.com. All rights reserved.

Becoming a Millionaire

Many people don’t know about the largest traded market in the world. Currently over 1.2 trillion dollars is traded on a daily basis in the forex market. Forex, or the foreign currency exchange market was a market that only large investors could play in and until just recently has become available to smaller investors.

For those of you that don’t know, here is an example of how the forex market works. If one were to take a vacation to Europe from the United States, you would have to exchange your US dollars into the Euros. When you came back to the United States, you would then have to exchange your Euros back to US dollars. During the time you were on vacation market news may have caused the US dollar to strengthen against the Euro. Therefore, when exchanging your Euros back to US dollars, you may have made a bit of money.

What makes the forex arena so popular is the leverage one can use when trading in this market. Most brokers offer a 100:1 leverage. Traditionally a trader needs 100,000 US dollars or we say 1:1 leverage (trading cash). However, with 100:1 leverage, a currency trader is only required to deposit 1/100th of the amount needed, 1,000 US dollars. Some brokers offer as much as 400:1 leverage.

Learning how to trade forex and using the leverage available, it is very possible to make good money. However at the same time it’s very possible to lose a lot of money. Approximately 95% of forex traders lose when they decide to play in the forex market. There are many reasons for this, your psychology, discipline, greed and fear will have a major impact on your trading success.

When looking at the forex market, the price is constantly changing every second. Forex traders measure the price fluctuation in pips also known as the minimum fluctuation or smallest increment of price movement. One pip could be $1, $5, $50, or $100, whatever you decide to risk on each trade.

Using good money management with a well thought out plan can easily turn into profits in the forex arena. Learning to cut your losses and let your winners run is the key to success. A simple money management system to follow is to always look to win 3 times the amount you plan to lose. Yes, you will lose and it’s important to accept losses when trading. For example, if you set a stop-loss to 10 pips, you need to look to win 30 pips. If you set a stop-loss to 20 pips, then you need to look to win 60 pips. This way you only have to be right 33% of the time to be profitable in this market.

Source : http://www.wonderoffice.com Money matters!

How to Control Your Expenses to Eliminate Debt

This sounds simple, but to control your expenses you first must understand what they are. The only way to be sure you know what you spend is to record everything. This is hard to do. Then you will need to do something even more difficult, Sacrifice and Live on a Budget. Ouch, all people including you and me hate those two words. But it will take sacrifice to get out of debt. The good news is that it will be worth it.

Every time you make a sacrifice and stay on budget you will be investing in your future. Always keep that in mind. Every step you make towards getting out of debt means you are closer to having your money work for you.

The major expenses you can control on a day to day budget are:

General Expenses It could be music equipment, car washes, computer games, anything. Any things you can figure out which are not your needs. Maybe there isn't anything you can think of, but there probably is. Maybe at least once a month, when you go to buy something on impulse, you force yourself not to do it.

Food Expenses Stop going out to eat. This will be a huge sacrifice for most, but you have to stop going out to eat;it's too expensive. You need to bring your lunch to work and, if you have a Starbuck's addiction, stop buying $2 cups of coffee. Many people can save $50 a month just by brewing their own coffee, another $100 by bringing their lunch to work, and another $200 by not going out to eat for dinner.

Clothing Expenses Always decide what you are going to purchase before you go into the store and stick to it. Do all your "shopping" at home. If you truly need a new jacket because the old one has a hole in it and it's really cold outside then you can go get a jacket. But don't start looking around for the skirts and hats while you are there. Get the jacket and run! Entertainment Expenses You like to have fun and you need to have fun. However, if you are in debt then, you need to sacrifice at least one major entertainment expense a month. Whatever it is you like to do (movies, concerts, plays, out to eat, sports, etc.) you need to reduce the frequency by at least once a month.

Gasoline Expenses As everyone is aware,gas prices have grown astronomically in recent times. For many years gas prices had been relatively level and it seems that they are making up ground ina short period of time. At $3 and more per gallon, gasoline has become a major expense for most households and needs to be specially addressed when looking at ways to control expenses. Getting a car with a good gas mileage and reduce your total driving miles can save you some significant amount of money. If you have colleagues leave close to you, then get them to carpool with you and share the gasoline expenses. If you follow some basic rules on each of these tips on reducing debt and budgeting expenses and are willing to sacrifice you can save a good significant amount of money each month. That will put a dent in your credit card debt in no time.

Source : http://www.wonderoffice.com Money Matters!

10 Tips for Saving Money and Earning Interest

10 Tips for Saving Money and Earning Interest
Source of article : http://www.wonderoffice.com

Saving money and paying off debts can be difficult, but cutting back on day to day expenses makes the process easier. Implementing one or two ideas is all that’s needed to get you started on the path to better banking. And you’ll be rewarded with more money in your pocket at the end of the day. Here are a few simple tips that will help you get more of your money in the bank and working for you.

1. Avoid the lottery
Winning millions is a nice dream, but the chances are extremely slim. Instead of attempting to win the jackpot each week, invest that money and earn interest on it. Over 30 years you’ll have built up a sizable jackpot for yourself.

2. Review your vacations
Taking an extravagant vacation more than once a year starts to add up fast. Plan ahead, especially if you have many people going on vacation with you.

3. Old fashioned music
Music is everywhere, and convenient to purchase online. But you can easily spend a lot of money on songs you may not listen to regularly. Try listening to the radio, or if you want to stay digital, look into the multitude of free online radio stations broadcasting all your favorite genres and songs for free.

4. Working out
Gym memberships are expensive, and you must be honest about its worth. If you’re not getting any value out of it, take a walk outside; explore your neighborhood or a local park.

5. Luxury drinks
When winding down in the evening, a glass of wine feels like it helps. But even if you limit the wine to just 2 nights a week, make sure the cost over a year is worth the feeling.

6. Pack a lunch
Eating out is expensive, and your local sandwich deli is charging twice as much as it costs to make a sandwich at home. You’ll also be eating healthier and saving money at the same time.

7. Watch the home improvements
Improving your home is a favorite activity of many home owners, but expenses add up fast. So unless you’re adding considerable value to your home, your time and money may be better spent on gardening or growing your own healthy foods.

8. Credit cards
Credit cards make impulse buying easier. Watch what you spend your money on, especially if there are fees associated with charging big ticket items to your card.

9. Give up coffee
For a cup of coffee every day before work, you could easily spend more than $800 a year. Try a less expensive beverage, or look to alternatives for that morning caffeine rush.

10. Cut back on TV
If you don’t watch TV very much, there’s no need to pay for it. A monthly cable bill for more than what you need is not necessary. Especially with a solid internet connection, there are plenty of other ways to relax, both online and offline.

For other 100's of money saving tips, please don't forget to come visit Wonder Office Business Resources : http://www.wonderoffice.com