Investment Playground.NET

With the advent of technology, sometimes it might feel better to avoid purchasing individual stocks and instead just “buy the entire market”. Is this possible? With index investing, it is. Index investing is one method to avoid the madness of Mr. Market, and slowly watch companies’ earnings grow over time. Indexes such as the S&P 500 are the benchmarks which mutual funds compare themselves against. If a mutual fund manager earns 10% in any given year - but the overall indexes have earned 20% - this guy might be on his way out the door (with a grossly large and undeserved bonus). After all - he underperformed the market by 10%.

Outperforming the market or picking phenomenal stocks every time is not easy. Very few people have succeeded. This is precisely why a staple in every investors’ portfolio should be an index fund. The easy way of understanding indexes - basically they are the entire market.

All the stocks in the entire market trade in what is called an index. An index is not an individual stock, but a basket of many different stocks. The weighting of each stock depends on their market capitalization - a complicated term describing “size”. The Dow Jones - the thing everyone talks about - is itself an index. You can not buy the Dow Jones - it is simply an indicator of how 30 carefully selected companies are all together performing. The S&P 500 is a summary of the top 500 companies trading in the markets (those 500 companies are decided by a board of really smart and overpaid people). NASDAQ is a listing of tech-related companies. The Russell 2000 is similar the S&P 500 - except for it includes 2000 of the top companies (rocket science, I know).

How do I invest in an index?

The short answer is that you can’t invest directly in an index, per se. But what you can do is invest in an index FUND - a fund developed which mirrors the index. These are not actively managed funds - they are simply computer programs that create a vehicle for you to dump your cash in. If the target index tanks - your index fund will sink as well. These are passively managed funds which have drastically lower expense ratios.

Can I make more money by having a computer do it for me instead of someone really smart?

Firstly, “smart” is relative. Making money doesn’t make you smart, it makes you rich. And being smart doesn’t always make you money. Most geniuses die before they’re 40, or end up on the streets because following the corporate game is “below them”. But I digress.

Here are the simple stats: since the 1929 crash, the market has returned an average of 11% per year. Some years its gone down 10%, others its gone up 20%. But if you stayed firm and held course, you always gained 10% annualized over eight decades. A mere $1000 investment into an index fund in 1930 would be worth $3.4 million today. There are some “smart” people who have done better, but generally not over several decades. Humans are emotional, and emotions drag down your returns. Investing in an index fund over a long period of time generally will make you enough money to be free.

How much do index funds cost me?

Because index funds are passively managed, they are signficantly cheaper than managed funds. An average managed fund’s expense ratio might be 1.5% (or others can go up to 4%). In addition, some funds carry a one-time “load” fee of 4.5% or so. Contrarily, index funds never carry higher than 0.5% expense ratios. Obviously, running a managed fund carries additional expenses. But you’ve got to achieve some pretty high returns in order to justify a couple percentage points of costs. Only the best managers return that much higher than the market every year (and that list keeps changing).

So how do I invest in an index?

Now the meat of the post. Check out this link at Vanguard’s website. Scroll down to the bottom for the stock index fund listing. You’ve got your S&P index fund, Total Stock Market Fund, High Dividend Yield Fund, International Stock Index, etc. With the repressed levels of today’s market, I recommend you buy into one or perhaps a few of these funds. Further I recommend you enroll in an automatic investing plan to keep on investing additional funds. History shows that over time, you’ll earn an average 10-11% annually.

Another option is what’s called SPDR ETFs. These essentially are index funds that you buy and sell just like stock. There are no minimums, but you do pay standard commission charges. I strongly suggest you put down larger amounts of money into a proper fund such as Vanguard. If you’re investing with $500 or so, maybe you shouldn’t be in the market quite yet. With that said - I did decide to purchase shares in the SPY, just to take advantage of the Dow at 11,300. Check out www.spdrs.com for more info on SPDR investing.

As we explained already, outsourcing is not some easy plan of having someone do everything for you. You have to make sure you partner/hire the right person or team with the right skills, and it’s cost efficient.

I signed up to AskSunday.com last week. Long story short, I have already unsubscribed and I’m in the midst of seeking out other virtual assistants. I just didn’t feel as if they would meet my needs. What I need is someone to help me out with all the wonderful and lucrative ideas floating through my head. For example, can you please find key manufacturers of this type of product, or can I have some assistance in attaining financials from top outsourcing firms. I signed up with AskSunday’s LITE plan for $19 per month and includes 10 free tasks per month. There other two plans, Silver and Gold at $30 and $60 per month for 15 and 30 tasks per month.

Here’s the problem. The only tasks included in the $20 p month plan are the most menial and easy tasks. I was explained that in general they should only take 20 minutes or less. Specifically, they provide:

• scheduling appointments and meetings
• making restaurant reservations
• 411 info
• access to messenger services (only available in Manhattan)

If you look closely at the list, they don’t do much! Making a restaurant reservation takes literally 8 seconds to do. And hiring them to do so would take up one of your precious ten requests per month. Scheduling appointments may save you one to two minutes each. And 411 info? Give me a break. Text message GOOGLE at 466453 for anything you need - free. As far as messenger services, only ten million of the country’s 300 million residents live in Manhattan - so this is a moot point.

$20 per month buys you squat at AskSunday. But I gave them the benefit of the doubt. The other plans of $30 and $60 per month buy you phone calls that need to be made (store hours, directions, customer service), travel reservations, finding services, making purchases on your behalf, and that’s about it. This is a huge addition - but I can not justify $30-$60 per month to have them do this for me. If you feel like you can - by all means go for it. But I won’t be in your boat. Bear in mind - all requests must be less than 20 minutes.

All plans give access to something they call SUNDAY PROJECTS - time-intensive or heavy tasks. This is particularly what I’ll need. Creative, detailed, and thorough results to be delivered to me so that I can use them. For example - provide a list of ten manufacturing companies with ten phone numbers which all work, and all ten companies will be interested in my product idea. And so on. The catch is, Sunday Projects bills you at $15 per hour, in addition to the monthly charge. $20 per month buys you nothing, as we already know. So I really couldn’t justify spending $20 per month just to have the option of paying an additional $15/hour. I might as well call up my sister-in-law in India and ask her to do me a favor.

A fair starting salary in India for a virtual assistant could be $2400 per year or $200 per month (8000 rupees monthly). Turnover is very high with India’s fast paced environment, so you can expect to pay more to retain good people. So the way that I see it - paying $2 per hour for wages and an additional $3 per hour for maintenance is a fair price to pay hourly. NOT $15.

Sorry AskSunday - the services you offer for the prices you charge are not nearly competitive enough for my liking. You’re fired.

About two years ago - I read a fantastic article by the chief editor of Esquire magazine and what he’s manage to outsource. Since then - I’ve been wondering how I can take advantage of having a virtual assistant. They’re based internationally to take advantage of currency differences, so all their assistance is based via phone, email, and Internet.

I signed up with a company called ASKSUNDAY.COM. However I’m still testing them out. So far they have two major strikes against them. Their “Sunday Lite” program at a mere $19 per month apparently only includes the easiest tasks. I’d imagine that I can outsource the tasks that are preventing me from following through on my entrepreneurial ventures (contacting manufacturers, finding competitor data, etc.) I’ll write a detailed review after this period ends.

Outsourcing tasks to a different culture is hard. But if you can master the delegation art, you’ll be saving valuable time. It’s difficult to justify the costs - which is why I’ve giving this a trial whirl. As investing - everything requires thorough research in order to succeed. This is no different.

The biggest reason why most of the planet’s six billion people fail on their entrepreneurial ideas is because of a lack of follow through. The story’s been told at least six billion times - you’ve got this great idea and never put it into action. Why?  “Just because. I dunno.” Or something similar. “Just too busy working an intense dead-end job!”

I have three entreprenuerial ventures I’m looking at. A foolish method is to attack all three at once. Investments and new ventures take hard work. An unswaggering focus, you will find, is probably your most important tool when putting your ideas into work.

The first is what you’re reading - this blog. It occurred to me about a year ago that a blog serves several purposes - a place to document my investment ventures, a tool to help people learn about investing, and itself being an income generator. Now I’m not planning on making millions of dollars blogging. Perhaps hundreds. But if I can secure a regular $500 per month and a committed audience such as you all - I can satisfy all three goals.

The second is a spin off of the first. Providing an actual interactive investor education class. Details are quite grey as of now. You can find some of these online - however the key question that any entrepreneur must ask themselves: “What differentiates my company/idea/shop/website from all the others?”

The last is a new product idea. Everyone has great new product ideas - but rarely are they put into action. There actually are ways to successfully do this! Firstly - you can patent the product and build a prototype. Definitely this is the hardest and most cost prohibitive route. 90% of people stop there. The second option is to apply for a provisional patent (ever seen something say PATENT PENDING?) for a $100. You then go shopping direct to manufacturers and have one of them agree to manufacture your product. Once you have the trigger ready to start manufacturing - now you build up the demand. How are you planning on selling the product? Through a website? Placing an ad in a newspaper or magazine (preferably nationwide)? Running a TV ad? Regardless - once your orders come in - give your manufacturer the green light. Either your manufacturer provides “drop ship”, meaning for a fee they’ll directly ship to the customer, or you set yourself up with what’s called a “fulfillment shop”. Fulfillment shops store inventory, ship, and track packages for you (all for a fee). This method is cheapest from a manufacturing standpoint because no fees are incurred until orders actually come in. But going to market, advertising, and arranging for fulfillment all gets pricy. Now the last method offers the least amount of revenue but the far least amount of work as well. It’s called ‘licensing’. Basically - Mr Manufacturer likes your idea and agrees to manufacture and sell it. He takes ownership but pays you an ongoing royalty fee for all revenue they earn - usually maximum 5% depending on negotiations. The key in both methods two and three is going shopping - finding the manufacturer that’s willing to do it. If you’re able to sell 1000 units of your product at $100 sticker price each month - you net $5000 in royalty fees per month. Not bad. This is an oversimplification of course. At the end of the day - every dollar you earn is hard work.

Now that I have my three ideas documented - let’s get to work. I haven’t succeeded in any of these three. However I’ll let you know my progress going forward.

Better late than never.

All investments need management. On a monthly or quarterly basis, track where and how your cash is coming in and going out, and how your investments are performing.

Firstly - cash accounts. My cash has dropped this month by a whopping 13%. This is predominantly due to some awful and heart-breaking expenses incurred from my rental property. I’ll be posting a detailed real estate story on this site soon. Consider it a lessons learned and real estate sob story in the making. On the upside, we’ve maintained consistency and dropped an additional $700 into our emergency account at igobanking.com. We’re about $5100 in with a long-term goal of $10,000. $7000 is the priority, $10k is the nice to have. This is particularly for ME and my personal needs. I suggest you examine your own needs and decide how much your emergency fund should be.

Our total asset value fell about 2% (home and vehicle value). Meanwhile our liabilities on these two key assets fill only 0.5%. It’s excellent practice to make sure your liabilities (i.e. debt) fall faster than your assets do, which wasn’t the case in May. However, my story is the same as the rest of America, as real estate value is dropping way faster than your mortgage payments. Nonetheless - if you have the means to make sure you’re paying off loans faster than the value’s dropping, you’re protecting yourself from an awful phenomenon known as negative equity. This refers to when you owe more money than your asset is worth. Most of America has fallen into this problem with real estate. Try and get ahead of it.

Now the meat of our investments. In April, we had investments in cash, Hewlett Packard, T. Rowe Price Africa and Middle East Fund, and my 401K. I allocated an additional $4000 into investments in May.

• For HPQ - I was up 1.5% for the month of May. This is great but unfortunately this stock is weighing on my portfolio, down 9% since the purchase. We’re down quite a bit, but as a long term hold I’m very happy to be a shareholder.
• My T. Rowe Price Fund gained 1.3% in May. Overall we’re up 3% since the purchase in April. Emerging markets all the way!
• We opened up an account at Fairholme Funds with $2700 plus additional investments monthly. We’re up 2.2% for the month.
• My Brasil Telecom was up nearly 10%for the month. Of course since then it’s plummetted along with the rest of Brazil. Brazil and all other emerging markets are volatile areas - don’t invest unless you have the ability to walk away and be confident of your choices.
• The 401K was up 1.2% in May. After a 9% drop in the first quarter of 2008 and a 7% rise in April, I welcome the slow growth of 1.2%. In total, we’re up 3.6% for the year to a shade over $6,000. I deposit 6% every pay period as my company matches 100% up to 6%. You can’t get much better than a 100% return.
• None of our investments lost money during the month of May.
• Total return for the portfolio was +2.7%.
• Total net worth fell 6% including real estate; excluding real estate we were up 19%.

I’m pleased with our progress this month despite such a rocky economy.

A buddy of mine, we’ll call him Joe G., emailed me this morning:

“Hey. I want to buy stock in a company. Do you think you can advise me on the best way to do this? Through a broker? The Internet? How do I research?”

As great investment ideas this website - I’ve failed to address that fundamental question. How do I get started? We’ll do this in three parts. The first will be the basics of how to get started. The second will be how to research stocks, and the third will be how to research funds.

The first thing I advise you to consider is how much money can I make? This is a fundamental question - set your expectations realistically and you’ll never be disappointed. Before diving in, most people think you can deposit a few hundred dollars, and double it in a couple hot companies. Investing is HARD WORK. Don’t expect to make tons and tons of money. The general rule is to expect 10% returns annually for most, 20% if you’re good. That means - $2000 in investments may earn you roughly $300 in twelve months. Sure there are many exceptions because many companies rocket through the roof (and others sink like a boulder in a fresh water lake). But the general rule and how to guide your expectation is 10%-20% (between 1930 and 2008, the market has returned an average annual return of 11%).

WIth that out of the way, how much money do I need to get started? The answer to this question depends on your costs and fees, such as commissions. A company such as Scottrade charges $7 per trade (one buy or one sell is considered a trade). If you’re spending $14 and investing $500, that means you’ve already lost 2.8% in commissions. This may not seem like a lot, but when you return back to your expectations and realize that 10% is what you can expect - 2.8% is a lot worse than you realize. Your goal is to minimize the percentage lost to fees and commissions. Good mutual funds have expense ratios less than 2%, you should maintain that as well.

So what does that mean? My personal rule is I never invest less than $1000 when I’m paying $14 in commissions. I prefer to invest moreso - but I’m not as rich as all you faithful readers. So $1000 per trade, i.e. per company. That’s the bare minimum - a grand. However, I strongly suggest you start with several holdings, so you should technically have at least $2000 to $3000 to get started. But if you’re antsy, $1000 will get you by for now, until you beef up your cash holdings. See diversification below.

I’ve got my $3000. What do I do now? Next step is to find a brokerage house. I use Scottrade. They’re cheap and provide all the necessary tools that a part-time/small-time investor needs. Graphing options, research options, online deposit and withdrawals using MoneyDirect, live streaming quotes, etc. Contact me to sign up for a new account and receive three free trades. Seriously - Scottrade is offering this new feature where you and I will both get three free trades after referral. A value of $21. Seriously - I don’t care who emails me - all I need is your name and email address. I give it to Scottrade, within minutes you have an invite in your inbox. Sign up and you’re already up $21. It’s really easy to sign up. The typical application form items including your social security number and banking info. The first deposit may have to be by check for security purposes, but after that it’s really convenient. I’ve never seen anyone cheaper than Scottrade - and I haven’t ever had a need for some extensive expensive tool.

I’ve got my money deposited into my Scottrade account. What do I buy? Stay tuned for part II, where we dive into how to properly and efficiently research a company.

Contact me for questions - or for your referral bonus of three free trades at Scottrade.

I’m not one for doomsday scenarios and melodrama. But I do sincerely believe that one should always protect the downside, and the upside will take care of itself. This doesn’t mean running away from any type of risk faster than Hillary from the White House. What I mean is to err on the side of caution and build nets in place to protect yourself from the downside. With that said - the first part of protecting the downside is KNOWING the downside.

Consumers and corporations have been irrationally spending and borrowing for far too long. The end result of what we’ve seen in the last ten years is going to bite us in the ass hard. And the timing just couldn’t be more awful. Previous slowdowns in the economy hit a low point and then bounce off faster than Michael Jackson in DisneyLand. But this time things are bound to be a bit different. Michael’s in Bahrain, DisneyLand is polluted, and a slew of other problems will make this recession last a bit longer (potentially).

I’m not giving my opinion on the economy. To be honest I don’t have one. But the facts are clear. The economy is facing a serious credit crunch. Consumers and corporations need money now more than they did in earlier years, yet banks are hesitant to lend. Interest rates as low as they are aren’t spurring enough motivation for banks to lend their capital, and in turn are fueling inflation. The housing crisis has left millions of people owing more to the banks than their property’s are valued (including myself). Consumer money is kept on the sidelines as people are terrified of buying homes, and further are unable to sell theirs (including mine). Falling home prices and the negative equity effect has seen an increase in foreclosures, rising inventories, and also has made refinancing a lot tougher. The homeowner is screwed.

High oil prices in an inflationary state have resulted in a very large band aid being taken off little by little. I was quite proud of myself last December when I bought a luxury car - my arrogance made me feel like I’m unaffected by the credit crunch. $70 to fill up my ridiculous loan-on-wheels has made me realize what we’re up against. Most of the country has already begun making ultimatum decisions: do we fill up on gas or do we pay the rent? Sounds dramatic - but its true. Go ahead and try this - ask a coworker that hates your guts if you’d like to carpool with him. Positive response? I thought so. A match made in heaven.

As far as the corporation is concerned - the overall business cycle is dragged down by consumers refusing to buy (see Starbucks’ latest earnings release), otherwise known as weakening consumption. This coupled with low investment has resulted in every company in the country cutting costs (including mine). There’s only so much a company can do. Subsidized lunches? Gone. Free coffee? Deposit quarter here. Health club free for employees? New low price! Need a new piece of equipment? HA! After all these avenues have been trudged through - there’s one place left to go. Lose the employee. The average employee makes over $95,000 per year. If we get rid of merely ten of these guys who aren’t working hard enough - despite the fact that they all have babies and mortgages and ridiculous new car loans - we as a company can save a million dollars a year.

The moral of this story: 1) Watch your back. 2) Work harder now than you ever have before. In an age of outsourcing and cost-cutting, you better be sure that the company declares you damn near irreplaceable. 3) Hedge yourself, find alternative methods of income. and 4) We haven’t seen the end of this downturn quite yet. Again - I’m not forecasting the economy. Leave that to the overpaid Bernankes of the world. All I’m saying is - know the downside and start to protect yourself.

IP