Personal Profitability

Personal finance for hustlers and entrepreneurs

Investing

Picking An Asset Mix

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I talk about investing a lot on this blog. One tricky part of investing is picking your asset mix. Every person will have a different mix based on different needs. The biggest factor in your mix is age.

I am in my twenties. As a twenty-something, single male, I can realistically afford to lose 100% of my portfolio and be fine for retirement. I have over thirty years to retirement (though I would like to earlier), so I can rebuild if something goes wrong in my investments.

If you are sixty, you are getting ready to retire. If you lose even 20% of your investments, you are probably not going to be able to make that up before you retire.

How do you plan for this? You pick an asset mix. Traditional mixes include cash, stocks, and fixed income investments. Cash is money in the bank. This includes CDs, money market funds, and traditional checking and savings accounts. Stocks are any equity investment. This includes regular company stock or a mutual fund composed of stocks. Fixed income securities are bonds (company, government, or any other investment that pays a fixed rate). Cash is the least risky investment. Fixed income are also fairly low risk. Stocks are volatile and can change value daily.

As a young investor, I am heavily weighted in stocks. I also have a lot of cash on hand as I will be paying for school for the next two years. I have no fixed income investments as I can take the risk of owning stocks, and will hopefully gain an increased return on those risks.

Taking risks is not always bad. Higher risk investments usually lead to greater returns. The volatility of your investments is something to watch. Do not think that just because you are young you should not be diversified. Do not invest in one sector or one company. Spread the money around.

Just remember, it is worth taking a risk for a reward, but take a risk appropriate for your age. Someone in their late fifties should not have a huge portion of their assets in the stock market, but they should have some. Any good investment adviser can help you pick the right mix. There are great websites that can help you out too.

How are your investments weighted? Tell us why in the comments.

What Dollar Average Investing Really Means

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Have you ever heard the term “dollar average investing” and wondered what it means? If so, read on. If not, read on anyway.

Dollar average investing refers to averaging the purchase price of stock (or other investments) with other purchases of the same security. For example, if you buy 1 share of WalMart at $50 and 1 share of WalMart at $60, your average cost is $55. That means $55 is your break even point, and every change above or below $55 is a profit or loss. This is deceiving though.

I purchase stock in my company every month at the end of the month as part of a stock purchase plan. I have bought shares for a wide range of prices. My “dollar cost average” is $3.30 per share. However, I bought shares above $5 and below $2.50. If the price today is $3.00, I have made money on share purchased for less than $3 and I have lost on purchases above $3.

That is why dollar cost averaging is deceiving. Just because you broke even on the entire investment does not mean you did not lose on the initial (or later) investment. I like to look at my investment purchases separately, not lumped together, for this very reason. Some months I made a good investment decision (to date), some months I made a bad decision (to date). I expect the stock to go up toward $10 in the long run, but stock valuation is for another post.

Just be wary of an investment advisor that tries to convince you to invest more in a stock that you have lost on. It may be a great idea, as the stock should be going up. But it might be a bad idea. The concept was brought up in the movie “Boiler Room”, and it was a bad deal in the end. The stock just kept going down. By staying out, the investor could have cut his loss. By buying back in to increase his “dollar cost average”, he just lost more.

Majoring in Getting a Job

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This one is for the college students and parents of college students (or soon to be college students) in the audience.

As an undergraduate, I majored in finance. As a business major, I knew that I would have opportunities for a job no matter what happens in the economy. My friends who were in engineering had a similar post-college job mentality. Friends majoring in political science were generally law school bound. Friends in a science were going to medical school. However, I have some friends who majored in something that they could not get a job.

A degree in economics is also sure to be useful in any economy, as an increasing number of private businesses, government agencies and non-profit organizations are hiring these people to forecast sales and analyze market trends. In fact, jobs in this industry are expected to grow significantly by 2020 because organizations are looking for any advantage that they can find over the competition.

If you are about to go to school, think of it as an investment. You might enjoy classes in sociology or history (I enjoyed those electives), but can you get a job in them? Without grad school, no. That is unless you want to be a teacher.

As you spend your money or your parents money on school, think about it as an investment. What is the ROI? (Return on Investment) As a finance major in state, my four years of college cost about $60,000-$65,000 including room, board, tuition, books, etc. The college investment of my time and money were intended to lead to a return.

Upon graduation I got a job. I worked at a bank for 6 months before becoming a financial analyst. Lets say I make about $40,000 per year (roughly the average starting salary for a finance major). At that rate my break even point will happen in 1.5 years.

English majors paid less for tuition, but still spend roughly $60,000 for the college experience. A history major has fewer job options and will make far less. At $25,000 per year the break even point is over 2 years. Many English majors have trouble finding a job. If you could have made the same $25,000 per year without your degree, why even get it?

Engineering, business, pre-med, and pre-law have a career path. If you want to be a teacher history, English, and other liberal arts degrees have a future career as well. If you don't know what you want to be when you grow up, get a business degree. With that, you can do almost anything. If you do know, major in it. Pick a degree that will give you a good ROI. My MBA program now will cost over $80,000 for two years. An low end MBA graduate makes $60,000 per year. That makes the break even period 1.3 years. I think that is a good financial decision. The costs are high now, but the lifetime returns are far greater.

As you make your way through college or have kids going through school, make sure that your investment is a good one.

My First Trade and What You Need to Know About Buying and Selling

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I started my brokerage account, and now I am trying to figure out what to do with my first $500 in the market. (I have already been investing in company stock and a fund in my 401k. For more see my intro to investing.)

I entered my first trade Friday morning, and it was exciting, though it has not executed yet. I have been following a few stocks recently, and I picked a bottom for one of them. I decided to enter a limit trade on the stock.

If you don't know what a limit trade is, this is a good time to keep reading. If you do know what a limit trade is, you should keep reading anyway.

There are several types of trades you can make at your brokerage. The most common are market, limit, and stop.

A market trade is a purchase at the current market price. Your stock broker will purchase the desired number of shares as quickly as possible. If the price is on the way up or down, you get it at whatever they can get it for. Usually large firms can guarantee the current price for you at the time you enter your trade.

A limit order, what I did this morning, sets a limit on the purchase price. For example, if you are watching a stock trade around $7.50 but you would not pay more than $7 for it, you can enter a $7 limit. When the stock hits $7 per share, the trade will execute. From there, the stock can go up or down in value, but you bought it for $7 or less. If it never gets down to $7, you don't buy it. My limit order has not executed yet, and may never execute. I think, though, that the stock is worth more than the limit I entered and it can only go up from there. I am protecting a loss.

A stop trade order is a protection barrier from a drop. If you own a stock that is trading at $20 per share, you can set a stop anywhere below that $20. If you enter a stop at $17, the stock will automatically sell if it hits $17 or below. A stop prevents losses below a certain point. If the stock rises in value you can cancel the stop and set a new one at a higher price.

Knowing how to use these tools is vital to making money, and not losing money, on the stock market. While we never know what a stock is going to do, we can set our trades to protect ourselves. If you use a limit order to buy a stock at $2 and watch it rise to $10, you can set a stop at $8 and sleep easy knowing you made at least $8 per share. In that scenario, or any other, make sure to trade smart and diversify your portfolio.

In the long run, the market always goes back up. Stocks are down, it might be a good time to start buying so you can sell high later.

My Automated Plan

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I keep telling you how you should invest, stop spending, and do more for yourself financially. I can not justify doing so without doing so myself. I want you all to see how I am doing it today.
That is my breakdown. You might note that I did not include a budget for my living, fun, and other savings. That is for next time. I did want you to see, however, that I do put 10% into investments first. The trick to automating your investing is that you can live on what is left. If you are feeling a crunch, make a lifestyle adjustment.

A very rich man once told me that the trick to being happy is living below your means. This multi-multi-multi millionaire drove the same Toyota Corolla he bought in the 1980s over twenty years later.

Now that you have seen how I do it, it is time to do it yourself.

Intro To Investing

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Warren Buffet, possibly the most savvy investor in history, makes more sense than just about any other investor I have heard speak. He looks for companies that are under priced that are poised to go up in value in the long term. He said that you should be afraid to invest when people are greedy, and you should be greedy when people are afraid.

That said, it is time to start buying. The markets are going crazy. No one knows what will happen in the short term. In the long run, however, stocks always go up. Time to open your investment account.

There are two types of investment accounts everyone should have. If you think you don't have enough money to start investing, stop going to Starbucks. Everyone can invest. Everyone has enough money, you just have to pay yourself instead of paying someone else.

The first investment account you need is a retirement account. This can be in one of several forms. The standard for employees of large companies is a 401(k), or a 403(b) for non-profits. This account is a pre-tax investment, meaning that you do not pay taxes on the money that goes it. Most companies match your investment (mine matches 100% of up to 3% of my pay). I invest the full 3%, which is equal to 6% of my pay. In this type of investment, you probably have a handful (about 10) of investment fund options. I am in a “destination” fund. This is a fund with volatility tied to my retirement year. As I am about 30-45 years from retirement, I have a lot of volatility. As you get closer to retirement, you want less volatility.

Retirement accounts can also be an IRA, or Individual Retirement Account. The traditional IRA is a pre-tax investment. A Roth IRA is an after-tax investment. In 401k, 403b, and traditional IRA investments, you pay taxes on withdrawals. In a Roth IRA, withdrawals (capital gains) are TAX FREE! If you are not going to retire for about 7 years or more, this is a great investment choice.

The other investment account you should have is one that you manage for yourself. I have a 401(k), a Roth 401(k), which is a Roth IRA managed through my 401(k) company, and will soon be opening a personal investment account. I will talk about that process in a future post. Don't miss it, subscribe.

When making investments for your future, you have to make it a priority. Set a goal. Set somewhere to start. I started with only that 3% (pre-tax) which turned into 6% with the company match. Next I added 2% more (to make 8% total) in company stock at a discount. I then started my Roth (2 weeks ago) with another 2%. My goal was to invest 10% of my pay into retirement. I am there. If it is a priority for me and I am in my twenties, it should be a priority for everyone.

My goal after completing my MBA is to raise this number to 15%. Set a goal as a percentage, not as a total amount. A percentage means that with every raise, your retirement savings will grow. Don't think about this as money spent, think about it as paying yourself for your future.

I want to retire at 40. To me retire doesn't mean stop working, it means stop having to work. At 50 I want to be a recreational entrepreneur. To do it, I need money in the bank. To do that, I am saving today. I have a 25 year retirement goal, I will keep you all up to date as I go using the Net Worth widget on the top right. Click on it to see the detail. It is small now, but I am persistent.

If you invest like Warren Buffet today, you can relax like Jimmy Buffet in the future.