Death of a Chrysler LeBaron

My grandfather's old Chrysler LeBaron died a cruel, horrible, and smoky death today. Since it was not accelerating past thirty five miles per hour or so, I limped it down to the service station first thing this morning to have its transmission checked out.

After several hours of waiting on pins and needles to hear the prognosis, I was informed by the mechanic that the LeBaron's "turbo" had failed and that about a dozen other things were in the process of going out, too. The mechanic politely informed me that it was absolutely not worth it to have the LeBaron fixed and that I should either sell it third party or donate it to charity.

As it turned out, the decision about what to do with the LeBaron was made for me on the drive home from the mechanic when the car began billowing smoke out of its tailpipe! So I pulled over as quickly and as safely as I could, since I didn't want my car to catch on fire, and I called a tow truck to drag my grandfather's car back home to await its ultimate fate.

(On an annoying/interesting side note, while I was trying to find a safe place to pull over, a cyclist riding near me screamed the following into my window at the top of her lungs, "You're killing me!" I presume she meant the billowing smoke and not my reaction to her annoying and presumptuous attitude. It was certainly emblematic of the Central Coast mindset to say the least. Rather than mind her own business and give me the benefit of the doubt, this lady felt obligated to propagate her world view, via her lungs, into my car. Rude is not quite the word. I can think of several more words, but nothing I would be particularly proud to post. Perhaps she needs a refresher course in John Rawls's theory of Mutual Disinterest.)

So I watched with romantic nostalgia as my grandfather's old car was towed home in a most undignified manner (see below). I realize a car is just a car, but it was something tangible that made me think of my WWII pilot grandfather every time I drove it. (He bought the car because the instrument panel reminded him of an airplane cockpit, he said.) So the presence of time is particularly poignant tonight as I mourn the LeBaron, but even more so as I mourn and remember my grandfather.

Here's the last ride of the great LeBaron:

The Seeds and the Soil: An Investment Parable

I feel as though I am trapped inside a personal finance parable sometimes. Below are two real-life money conversations (paraphrased to protect the innocent) that I have had in the past couple of days.


The finance-guru sat down with his disciples:

Coworker Disciple: "I'll start investing when I'm more financially secure."

Finance Guru: "Investing is the way to get more financially secure, not something you do after the fact."


Programmer Disciple: "If I can just get a piece of the KPCB iFund Venture Capital Initiative, then I would be all set."

Finance Guru: "How much money did you spend on that iPhone, and why isn't it in a Roth IRA instead?"

Programmer Disciple: "What's an IRA?"


Simple messages, but I have a hunch they fell on deaf ears. The concepts are simple, but like all good ideas they must overcome some psychological resistance to break through to consciousness. The seed was planted, but like all seeds they will be fruitless if not combined with some genuine action on the part of the soil. Bad soil will yield no fruit.

See Jesus's parable of the sower and the seeds in Matthew chapter 13 for more on this. It is as true for investing as it is for the gospel:

That same day Jesus went out of the house and sat by the lake. Such large crowds gathered around him that he got into a boat and sat in it, while all the people stood on the shore. Then he told them many things in parables, saying: "A farmer went out to sow his seed. As he was scattering the seed, some fell along the path, and the birds came and ate it up. Some fell on rocky places, where it did not have much soil. It sprang up quickly, because the soil was shallow. But when the sun came up, the plants were scorched, and they withered because they had no root. Other seed fell among thorns, which grew up and choked the plants. Still other seed fell on good soil, where it produced a crop—a hundred, sixty or thirty times what was sown. He who has ears, let him hear." Matthew 13:1-9

If you fall in the bad soil category, consider yourself warned: Snap out of it, get your butt in gear, and start investing NOW! If you are worried about taking the first step, you should be following along with my series "Investing for the Absolute Beginner", and I will help get you started.

Have any of you heard any stupid money comments recently? If so, pass them along below.

Chrysler LeBaron Transmission Problems: Still a Bargain

My 1989 Chrysler LeBaron Turbo, a hand-me-down, from my late grandfather by way of my mother, is having a serious transmission problem. This morning, my Chrysler LeBaron would not accelerate past 45 miles per hour, and it was making a loud whining sound whenever I was accelerating.

You might wonder why I am still driving the LeBaron when such a problem could very easily turn into a serious money drain. Well, I am partly very attached to the LeBaron because it was my grandfather's car. (I was with him when he bought the LeBaron. He paid it off with a check outright without financing. Smart man.) And partly I am convinced that a car payment is a gigantic waste of disposable income.

It is true that it will likely cost me a pretty penny to get the Chrysler LeBaron's transmission fixed (i.e. rebuilt or replaced). But when I think of all the money I could be spending every month for the payment on a newer car, I am actually rather glad that I can fix the problem by throwing a few hundred dollars at the LeBaron instead of having a hefty monthly payment.

Keeping up with the Joneses, by trying to have a slick and shiny new car, can be a disaster for your discretionary income, which means less to save and invest and less wealth when you retire.

I have a sneaking suspicion that when my grandfather's old LeBaron finally gives up the ghost, I will trot myself down to the used car lot and pick up another low-mileage old car that will get me there without sucking me dry and without leaving me with nothing to contribute to my retirement accounts.

So tomorrow I will proudly stride into the AAMCO transmission shop (after a conservative 25 MPH drive!) to get the LeBaron's transmission fixed. The LeBaron will probably elicit stares from younger, hipper customers, with newer cars and better paint. But I will hold my head high, secure that my grandfather's old LeBaron will be driving me all the way to the bank for years to come.

Portfolio Update: $300 of EFA

Today was my "Investment Tuesday" at Sharebuilder.com, and I used $300 from my money market fund to purchase an additional 4.2111 shares of my international fund, the iShares MSCI Europe, Asia, and Far East Index ETF (NYSE: EFA). This brings my total number of EFA shares to 13.4492 shares and a total of $965.11 of EFA.

I have just updated my SeeMeGetRich.com Portfolio Page to reflect the new shares of EFA, so check out my portfolio's new totals.

A Look At Some Obscure Tea Stocks

Tea is an important thing in my family. Tea at my grandparent's house was a daily occurrence when I was younger, and even now I am known as something of a teetotaler, or rather a "tea-totaler" (not really, but it sounds good). So today, as I sip my morning tea, I thought I would investigate some tea stocks. While tea is not the worldwide staple industry it once was, nonetheless there is still a thriving tea industry in many parts of the world such as India and Asia.

I wouldn't really consider investing in any of these stocks except for the sheer novelty of owning a piece of the world's most perfect beverage, tea. But if I had some extra money to throw around, I might very well enjoy getting some dividends back from all the tea I have consumed over the years! Many of the following stocks trade on foreign exchanges, such as the Bombay Stock Exchange in India, and there is not much information available. Here is a fairly random sample of some foreign tea stocks:

1) Dhunseri Tea & Industries Ltd. (BSE: 523736)
2) Warren Tea (BSE: 508494)
3) Jayshree Tea (BSE: 506520)
4) Diana Tea Co. (BSE: 530959)
5) Assam Company Limited (BSE: 500024)
6) Tata Tea Limited (BSE: 500800)
7) Ten Ren Tea Company (TPE: 1233)
8) Taiwan Tea Corporation (TPE: 2913)
9) Tanzania Tea Packers Limited (DAR: TTP)
10) Williamson Tea Kenya Ltd. (NBO: GWKL)
11) Ferntea Limited (COL: FERN)
12) Javo Beverage Company, Inc. (OTC: JAVO)
13) Unilever Tea Kenya Ltd. (NBO: UNLT)
14) Kakuzi Limited (NBO: KAZU)
15) Limuru Tea Company Limited (NBO: LIMR)

Those are some of the obscure tea stocks that I could find. Most of the familiar tea companies here in America are either subsidiaries of larger corporations (such as Lipton's being a subsidiary of Unilever). So if you are hell-bent on buying some tea stock, you will likely have to start trading on a foreign exchange or buy one of the more mundane domestic stocks such as Peet's Coffee & Tea, Inc. (NASDAQ: PEET).

Investing for the Absolute Beginner: Part III. Which Account Type?

-Part 1- -Part2- -Part 3-

Now that I have covered the reasons to invest and reviewed the different types of investments, in this installment of "Investing for the Absolute Beginner" I will go over the various types of investment accounts in which to hold those investments. I will be covering the 401(k), the Traditional IRA, the Roth IRA, and the taxable account. Each of these account types has its own advantages and disadvantages, and they are not mutually exclusive insofar as they can be used in conjunction with one another for various tax benefits and purposes.


401(k):

What is it?

The 401(k) is your single most important investment vessel for building wealth through investing. A 401(k) is a retirement investment account set up by most corporations (and some smaller companies) to enable its employees to save and invest a percentage of their income for retirement. The distinguishing characteristic of a 401(k) versus other types of retirement accounts is that the contributions are pre-tax, the benefits of which I will discuss below.

Pros:

The pros of a 401(k) account are numerous. First, many companies will match your contributions dollar-for-dollar up to a certain percentage of your income. This is free money that you would be shooting yourself in the foot not to partake of. Over thirty or forty years, those matching contributions, when combined with the power of compounding, can significantly increase your wealth at retirement. You absolutely, positively, must contribute to a 401(k) if one is available to you through your employer.

Another advantage to a 401(k) is that the contributions are pre-tax, which lowers your taxable income for the IRS, which in turn lowers your annual tax responsibility. A lower tax bill means even more money to save and invest!

Cons:

The main drawback to the 401(k) is that the contributions are tax-deferred. This means that you ultimately will pay taxes on those contributions when you take distributions from your account after retirement. Basically you are being taxed on the money at retirement rather than at the time of income. One must be prepared to cover those taxes at retirement, but as long as one's contributions are adequate before retirement then the returns and the company matching more than make up for any loss here.

The other thing to keep in mind about the 401(k) is that there is an annual limit to the amount of money that may be contributed to a 401(k). The 2008 limit is set at $15,500, which means that if you wish to invest more than this you will have to use another account type to invest the difference. The government also allows an additional annual contribution of $5,000 for those who are age 50 or older and who are seeking to "catch-up" on their savings and investing before retirement.


Traditional IRA:

What is it?

"IRA" stands for Individual Retirement Account. There are two types of IRA's, the Traditional IRA and the Roth IRA. Both types of IRAs are designed for individuals to save an invest with significant tax incentives for the long-term. Since the IRA is not sponsored by a corporation there is no matching incentive, but the tax incentives for both types of IRAs make them attractive as a supplemental investment option, or as a primary retirement account if you are not eligible for a 401(k).

Pros:

The main advantage to a Traditional IRA is that the contributions to a Traditional IRA are tax-deductible. As in the case of a 401(k) this has the effect of potentially lowering your current tax bill. Qualified distributions upon retirement will be taxable as ordinary income, so basically with the traditional IRA one sees an immediate tax benefit while still being liable for taxes on the distributions down the road.

Cons:

With both types of IRAs, including the Traditional IRA, there are 10% withdrawal penalties if one takes early distributions from the IRA before the age of 59 ½. This means that the money invested in an IRA is not liquid, since a 10% penalty will do a good job of wiping out any gains that your account may have enjoyed to-date. So when one puts money into an IRA, one must intend to keep it there, locked away, until retirement. Early distributions basically defeat the purpose of retirement investing anyways, so this is not an issue for conscientious investors with the proper mindset.

Another potential disadvantage to the Traditional IRA is that there are mandatory distributions that begin at age 70 ½, with hefty penalties that apply if the distributions are not taken properly. This is a disadvantage to an IRA that is unique to the traditional IRA but not shared by the Roth IRA.


Roth IRA:

What is it?

A Roth IRA is analogous to a Traditional IRA insofar as it is still an "Individual Retirement Account" that carries certain tax advantages over a regular taxable investment account. The key difference is in the nature of the tax benefits. Unlike contributions to a Traditional IRA, contributions to a Roth IRA are post-tax dollars, which means that you do not get to deduct your contributions from your annual tax responsibility. However, a Roth IRA allows your money to grow tax-free and for you to take qualified distributions post-retirement without taxes.

Pros:

The advantages of the Roth IRA over the Traditional IRA should be clear: your money is allowed to grow and compound, and then you are allowed to take distributions from those gains without any taxes. And over the course of a lifetime, this can amount to a hefty amount of money for which you do not owe any federal taxes.

The Roth IRA does not require mandatory distributions, unlike a Traditional IRA, which gives you a greater control over your investments post-retirement.

While there are other tax advantages to the Roth IRA that are beyond the scope of this introductory article, it is the tax-free growth and withdrawals that make the Roth IRA the preferred type of IRA for the vast majority of retirement investors.

Cons:

The central disadvantage to the Roth IRA is the lack of a tax-break at the time of contributions. If one has a moderate income, then one's tax responsibility can take a sizable bite out of the disposable money that one has available to invest. For this reason, I hold that it is best to combine the Roth IRA with a 401(k) to "smooth out" one's tax responsibility over the course of his or her lifetime.

Another disadvantage to the Roth IRA and the Traditional IRA together is that the annual contribution limit for an IRA is currently set at $5,000 for the 2008 tax year ($6,000 if you are age 50 or over). This means that if you wish to invest more than $5,000 annually, you will either need to use a 401(k), which has a higher contribution limit, or use a taxable account without the tax benefits. The good news is that the annual contribution limit has steadily been increasing from year to year, so this may be less of a factor as the limit is raised periodically.


Taxable Investment Account:

What is it?

A taxable investment account is, as the name indicates, an account in which you may buy or sell investments, but on which one is required to pay federal taxes.

Pros:

The chief benefit to a taxable account is the liquidity of the investments. Investments can be bought and sold without concern for violating any age restrictions, unlike a 401(k) or an IRA. This makes a taxable account ideal for short to medium term investments that one is planning on utilizing before retirement.

Cons:

The negatives for a taxable account, as opposed to a retirement account, are as a result of the tax responsibilities of a taxable account. Since taxable accounts are not tax sheltered, one is required to pay taxes on dividends and on any capital gains that are made when one sells securities within a taxable account. This means that one must be mindful of one's tax responsibility when dabbling with buying and selling stocks or other investments (e.g. day-trading) within a taxable account.

The spoonful of sugar that makes the tax medicine go down, is that the capital gains taxes are significantly lower if one has held the investments for over one year before being sold. This encourages a healthy buy-and-hold strategy that I subscribe to, and allows one to enjoy the benefits of long-term stock market gains at a lower tax rate. My own advice here is that one should stick to individual stocks that one plans to hold for at least a year to enjoy the lower capital gains tax rate (such as the Citigroup [NYSE: C] shares that I bought last week).


Conclusion:

Now that you should have a basic understanding of each of the basic investment account types, I have a few closing remarks to make some sense out of all of this:

First of all, any savings and investing is better than none. It is probably better to do long-term investing badly than not at all. Do not have a fear of making a mistake, since the mistake is always fixable when you have had a chance to learn more about what is best for your unique situation. The most important thing is to develop the habit of saving and investing a portion of your income regularly and reliably. If you do this, you will see the benefits, no matter which account type you use!

Second, the 401(k) company matching is the most powerful element of all above to maximize your wealth before retirement. The sooner you start, the more time your money has to be matched and to compound. So if you are not currently enrolled in your company's 401(k), let me give you the same advice my uncle Mike (my retirement investing guru) gave me: Don't be dumb! 401(k) matching is free money that you would be just plain dumb not to take advantage of after knowing better! Enroll or start an account now!

Third, the order of operations ought to be that you should max out your 401(k) contributions to obtain the company match. Then any additional retirement savings is probably best served inside of a Roth IRA for the retirement tax benefits. Then if you wish to dabble in trading individual stocks, do it sparingly and make sure that you are keeping your retirement savings your top financial priority. Stock trading is fun, but retirement accounts are a more reliable way to ensure a sound financial future for yourself.

That about does it for installment three of "Investing for the Absolute Beginner". In part four I will be discussing the various options you have for how to choose a brokerage company (online or otherwise) and go about starting your first investment account, so be sure to check back for part four of the series. Until then, happy investing!


Here are the entries in this series:

-Part1- -Part 2- -Part 3-

Critique SeeMeGetRich.com

As the readership of SeeMeGetRich.com increases, it is as important as ever to me that I serve the needs and interests of my readers. This is your chance to provide me with any feedback on SeeMeGetRich.com that you like. For example:

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You get the idea, now go to work! No comments are off-limits. No topic is taboo. Constructive criticism and ideas are best, but I'll man it up and take the bad with the good. We are all on this personal finance journey together, and two heads are better than one; so help me help you and make yourself and your ideas known.

I'm looking forward to getting to know you regular readers better, and if this is your first time to SeeMeGetRich.com, the same questions are open to you, so don't be shy. And if you have not taken a peruse through the SeeMeGetRich.com archives (see the menu bar at left), please lurk around the site for a while. Just don't forget to leave some open feedback here before you go and help me make this a better personal finance and investing community for you.

Guest Post: "Can You Profit from Credit Card Arbitrage?" by Linda Bustos

Shortly after college graduation I had a modest line of credit debt that I used a low APR credit card balance transfer to pay down. After transfer fees, I really didn’t save that much money since the introductory period was only 3 months, but it felt good to wipe that credit line clean.

After the balance was paid off, I stopped using that card all together, as I have 2 other cards with longer histories. But from time to time, the low APR credit card company rings me up to ask for my business back. I usually disappoint them, telling them I never carry a balance and have no major purchases on the horizon.

I received such a call yesterday from my once-low APR card (now 14.99%), offering me 0.99% for one year on balance transfers. After the usual “I don’t carry balances, I don’t have major purchases coming up, I have a ton of savings in a high interest account, bla, bla, bla, bla…the caller suggested I borrow money and reinvest it – make money on the spread.

To be honest, I know a lot more about budgeting and using credit wisely than I do about investing. I’m a risk-averse person by nature – you might say I’m quite nervous about investing. So I replied that I’m not interested in investing, I have my safe little high interest savings account (3.75%) and with that, I’m happy.

But after ending the call I wondered, what if I took out a loan, transferred the balance to this 0.99% credit card, invested the money in my safe-and-highly-liquid high interest savings account, and turned a profit? Would it be worth it?

This is one form of “credit card arbitrage” – but it’s not as straightforward as I borrow $X at 0.99% and earn 3.75% therefore I’m 2.76% ahead. There are a few things you need to realize before taking the plunge.

Fees and Interest Charges

When you max out a higher interest rate credit card with a cash advance, you may pay a cash advance fee or higher-than-normal interest with no grace period. You will pay interest from the day you take your advance until the transfer is completed to your low interest card.

You likely will pay a 2-4% transfer fee on the amount of your balance transfer to your low APR card also which chips away at your profits.

Monthly Payments

Don’t forget your 0% APR card may still require a percentage of your transfer be paid each month, reducing your principal but nonetheless requiring timely payments. If you miss one, you could quickly find that low APR skyrocketing.

Taxes

Your interest earned in your savings account is taxable income, while interest charges are not tax deductible. Depending on your tax bracket, this could bring your profit margin to almost nothing after all other fees and charges are taken into account.

Impact on Your Credit Report

Every time you apply for a credit card, the credit lender will make an inquiry of your credit report. If you apply for a number of credit cards at once, that means more credit inquiries. And if you don’t already have a high interest savings account, that means more inquiries when you try to open one.

Your Debt to Credit Ratio

When you max out a credit card, you can dramatically increase your total debt used vs. your total available credit, making you a higher credit risk for any other loans you may need in the future. Higher interest rates on long term financing for cars and homes mean higher monthly payments for many years.

Doesn’t sound worth it in the long term for a couple hundred bucks over 1 year, does it? Personally, I’m just going to continue with my frugal lifestyle and consistent savings.

Still want to play the game? Here’s what you should know:

Look for balance transfer credit card offers with a long introductory period. Chances are if you shop around you’ll find a card with an intro period of 12 months as opposed to 3, 6 or 9 months, no transfer fee and no annual fee. If you have already used a balance transfer card and the
account is still open, call your credit card company and request another transfer with the condition it’s for 12 months. They just might give it to you.

Don’t you dare make any new purchases on balance transfer cards, not only will you be paying high interest on purchases (often with no grace period), your payments will also be applied to your lowest interest balance first, not your most recent purchases. So your new purchases will
accrue interest charges until your whole balance transfer is paid off. Oof!

Never miss a payment on any bill. If any of your credit agreements includes a “universal default clause,” your creditor has the right to bump up your interest rates. You could end up paying more interest on several loans. Because your savings interest is taxable income but your interest
charges are not tax deductible, this can really hurt.


About the guest author:

Linda Bustos is an editor for CreditorWeb, an information resource for credit cards and a credit card comparison.

Investing for the Absolute Beginner; Part II. Types of Investments

In part one of my series "Investing for the Absolute Beginner" I discussed the reasons one should invest money rather than merely save money. The primary reason is the potential for greater returns on an investment than what is possible with ordinary savings accounts and strategies. In this part two below I will discuss some of the many general types of investments while highlighting their various pros and cons and offering my thoughts on what types of investments are appropriate for long-term investors in various situations.


Individual Stocks

What are they?

The idea behind a "stock" is quite simple. A share of a stock is literally a small percentage of a company. By purchasing shares of stock in the company of your choice, you are entitled to share in the proceeds of the company's profits (or losses!) in the form of dividends or an increase in value of your shares.

Pros:

We have all heard of the individual stock success stories such as Google (NASDAQ: GOOG) or Microsoft (NASDAQ: MSFT). If you are fortunate enough to pick the right stock, then your investment can be multiplied many times over. Of course, the majority of companies out there are not as quite as successful as Google or Microsoft, but a healthy company can show a healthy profit that can generate returns far greater than nearly any other investment medium.

Cons:

The cons of individual stocks are their volatility and their unpredictability. Stock prices have a tendency to fluctuate with wide ups and downs due to a plethora of factors. If you are fortunate enough to buy a stock while it is on the downswing, then you can make a lot of money, but the reality is that you are just as likely to pick a stock that will lose you money in the long run.

The sheer number and types of factors that influence stock prices make it nearly impossible to predict the future price of a stock on any time frame. This makes individual stocks the riskiest of the investment types I will discuss here, although if you are willing to hold on to those stocks for a while, it is possible to ride the ups and downs of the market and enjoy the benefits of long-term growth.


Mutual Funds:

What are they?

Mutual funds are collections of individual investments that are bought and sold as a whole rather than individually. When you buy a unit of a mutual fund you are buying tiny fractions of tens hundreds or thousands of individual investments. Mutual funds can be actively managed (fund holdings adjusted actively according to market trends) or passively managed (fund holdings determined by any of various market indexes).

Pros:

Mutual funds allow an investor to enjoy the great potential for gains that the stock market possesses while also alleviating some of the risk inherent to investing in individual stocks. Since each individual holding inside a mutual fund comprises a very small fraction of the fund as a whole, if an individual company begins to lose its value, the fund price remains relatively stable due to the small relative weight of that stock inside the entire fund. In addition, a fund that is actively managed can be upheld by rotating out the failing stocks on a regular basis and replacing them with stocks that have brighter prospects. In short, mutual funds offer the benefits of the stock market without the risk of individual stocks.

Cons:

Do not get me wrong, the benefits of mutual funds far outweigh the drawbacks for long-term investing. But there are a few drawbacks to mutual funds that one must be aware of. First, actively managed funds are unlikely to outperform passive funds that mirror the major stock indexes. Since someone, or a group of someones, must choose which stocks will be included into a mutual fund, the same difficulty in picking individual stocks is inherent in deciding which stocks to include in a mutual fund.

Fund managers are often paid a great deal of money to squeeze every last cent (or percent) of returns from their funds, but the luck factor makes fund managers unlikely to outperform the market indexes as a whole, which have a steady and relatively predictable uptrend. The solution to this difficulty is to stick with those funds that are passively managed, although it is true that actively managed funds sometimes do succeed in generating greater returns than passive funds.

The second drawback to mutual funds versus other forms of investments is the presence of annual management fees. Fees are charged to the owners of the mutual fund units in order to cover the costs of maintaining the mutual fund. Actively managed funds carry higher maintenance fees than passive funds, so this difficulty can again be alleviated by sticking to passive mutual funds. The fees are usually a couple of percentage points at most, but over the course of thirty or forty years, those small percentages can make a serious dent in your overall net worth at retirement. So although mutual funds are safer than individual stocks, they do have serious drawbacks that must be factored into your decision to include them in your long-term retirement portfolio.


Exchange Traded Funds (ETFs)

What are they?

An Exchange Traded Fund (ETF for short) is similar to a mutual fund insofar as an ETF consists of a bundle of individual holdings that are bought and sold collectively. Unlike mutual funds, however, ETFs are divided up into individual shares that are bought and sold as shares on the various stock markets.

Pros:

ETFs enjoy the risk-alleviating benefits of mutual funds while carrying additional benefits. ETFs are much more liquid than mutual funds and can be bought or sold regularly like any other item on the stock market. While this liquidity is not so important for long-term investing, if you want your investments to be easily redeemable (or if you want to be able to invest on a whim at the drop of a hat) then ETFs have a distinct advantage over mutual funds.

Another advantage of Exchange Traded Funds over mutual funds is that most ETFs are passively managed funds. Since the stock market indexes as a whole have a steady uptrend, despite the fluctuations of the market in the short-term, ETFs allow the investor to enjoy predictable returns in a long-term portfolio without the high management fees of actively managed mutual funds. And the liquidity of ETFs means that you can invest in a fund anytime the stock market is open for trading. This makes ETFs perfect for the "impulse investor" (like me) who likes to invest for the fun of it and not just for the benefits of sound personal finance.

ETFs are my favorite investment type in this list due to the ease of setting up an adequate long-term investment portfolio using just a few ETFs. If you would like to see a sample of how ETFs are used in my own Roth IRA portfolio, you can click here to take a look at my portfolio's ETF holdings. In short, ETFs combine the best elements of individual stocks and mutual funds: they are liquid like individual stocks but they are less risky like mutual funds.

Cons:

ETFs have one main disadvantage: trading costs. Since the buying or selling of ETFs must be done via a broker (whether a person, a brokerage company, or an online discount broker), there are usually trading fees associated with the buying or selling of ETFs on the stock exchange. Each trade will usually cost a certain dollar amount in addition to the cost of the securities one is investing in. These trading fees can do a good job of wiping out a good percentage of the gains in a portfolio, so when investing in ETFs care must be taken to minimize trading costs.

One way to minimize trading costs is to use an online or discount brokerage. Since ETFs are often used to invest in passive index funds, there is little or no need to pay someone to invest for you. By cutting out the middleman and investing through an online broker, you are significantly reducing the cost of buying ETF shares. There are several good online brokerages to choose from, but I will be covering those later in this series when I discuss how to choose a brokerage and open an account. There are naysayers who will hold that the trading fees basically eliminate the benefits of ETFs over mutual funds, but if one is careful to minimize those trading fees then ETFs are perfect for the beginning investor.


Bonds:

What are they?

Bonds are basically loans that the investor makes to the government or to a financial institution that will be repaid with a fixed percentage increase after a designated time frame. This of course describes bonds in the most general of terms, but the above description is adequate for the purposes of this post. By investing in a bond (or a bond fund, which is similar to a mutual fund but with bonds instead of stocks), you are guaranteeing a fixed return on your investment after a fixed term.

Pros:

The pros of bonds are obvious: they guarantee a fixed return on your investment that is not subject to the unpredictability and volatility of the stock market. This makes bonds perfect for those investors who are looking to invest for the short-term (and hence who cannot afford to ride out a short-term drop in their investment), and also for those investors who are seeking a predictable and stable return (such as during retirement when a stable income is needed for living expenses). As one gets closer to retirement, bonds should occupy a larger percentage of your portfolio to enable you to keep the returns that your lifetime of investing has generated.

Cons:

The stability of bonds is actually a disadvantage when it comes to maximizing one's investment for the long-term. Although stocks are more volatile than bonds, stocks have been shown to yield reliably greater returns in the long-run than bonds. This means that that value of your investments may not fluctuate as much if you invest in bonds, but you may be cheating yourself out of hundreds of thousands of dollars worth of returns over thirty or forty years of compounded investing.

This makes bonds wildly inappropriate for those investors who are just getting started investing and with decades to go until retirement. As such I consider bonds to be only tangentially related to long-term investing, although some folks advocate having always even a small percentage of your portfolio in bonds to help smooth over the downturns in the stock market and keep your portfolio a tad more stable. If you are in your twenties or thirties, however, those weekly or monthly fluctuations matter little for the long-term; as such I advocate having all of your portfolio in stocks if you have anything over ten years to go until retirement. Falling stock prices mean that you should buy more stock so that you will own even more when the market returns to normalcy, not that you should run for the safety of bonds!


Conclusion:

That about wraps up my account of the various investment avenues. There are, of course, more specialized investments and sectors inside each of these major categories, but that is a topic for another post. Next time I will cover the basics of how to choose an online broker and the various types of investment accounts available to you as a long-term retirement investor. As always, feel free to contact me with any questions, and be sure to follow this entire series if you are new to the world of investing.

Here are the entries in this series:

-Part 1- -Part2- -Part 3-

Investing for the Absolute Beginner; Part I. Why Invest?

Why invest your money? Everyone knows that saving money is a good thing, but why ought one not only save but also invest one's money? After all, banks pay interest on savings accounts, so an ordinary savings account should be enough, right?

Wrong!

There are two key concepts behind investing as opposed to ordinary saving: investment returns and compounding (although in truth compounding and investment return are closely related). The idea behind investing is not just to squirrel away money in a bank, in a jar, or under a mattress. Investing is about putting your money to work for you to make even more money.

Although there are numerous forms of investments, they all share the same basic qualities. When you invest your money, you are actually buying a piece of an enterprise. That enterprise could be a specific company, as in the case of an individual stock, or it could be a complex bundle of enterprises, as in the case of a mutual fund or an index fund. By investing your money, you are supplying the recipient of your investment with capital to pursue a particular project. As such, you become part-owner of the project and are entitled to share in the returns (i.e. the profits) on that project.

The profits from an investment are returned to you in one of two ways. They are either paid back out to the investors in the form of dividends (which may then be reinvested to own a larger share of the project, known as compounding), or the value of the individual shares of the investment may appreciate (i.e. increase). In either case, a profitable investment results in a significantly higher return than can be obtained through the interest in an ordinary savings account.

An ordinary savings account will yield a usual return of three to four percent annually. Long-term investment accounts, by contrast, will usually yield somewhere between six and ten percent annually. It might seem at first glance that a couple of percentage points are not that big of a deal, but over the course of a lifetime (say, 30 or 40 years until retirement), those couple of percentage points can make the difference between being comfortable and being wealthy.

Of course, it goes without saying that investing is also riskier than saving, but increased risk comes with the territory of the potential for increased returns. There are ways to mitigate the risk, however, and I will explain those strategies in later parts of this new series.

In part two of "Investing for the Absolute Beginner" I will be covering the basic types of investments, explaining their advantages and disadvantages, and offering my own view about what forms of investments are appropriate for the beginning long-term investor.

In the meantime, feel free to ask any questions as I enter into this new series. You may use the comments section below, or you may always contact me directly at my email address listed in the right-hand column above. There is no question too silly, since I too was once a novice with the same questions.

The hardest part of investing is taking the initial first step to opening an investment account (more from fear than from anything else), and this series on Investing for the Absolute Beginner can be your guide to taking that first step toward a more prosperous financial future. So if you are looking to join the ranks (in the non-elitist sense) of long-term investors, follow me through this series for the beginning investor and I will guide you through the complete process of opening an account and setting up a simple diversified portfolio that can serve as the foundation of your investment strategy. Part II of the series is coming soon, so stay tuned!

Here are the entries in this series:

-Part 1- -Part2- -Part 3-

The SeeMeGetRich.com Portfolio Page- Updated 4/13/08

This is a sticky post of Zachary's SeeMeGetRich.com retirement portfolio. Check back regularly and see Zachary...get rich!

Grand Total = $5918.47

Roth IRA:

EFA (Euro-Asia Index ETF): 13.4492 @ $72.64 = $976.95
IWM (Russell 2000 Index ETF): 9.7274 @ $68.74 = $668.66
SPY (S&P 500 SPDR Index ETF): 5.4232 @ $133.38 = $723.35
Sharebuilder Money Market Fund = $200.80

Taxable Investment Account:

AAV (Advantage Energy Income Fund): 9.1409 @ $11.53 = $105.39
C (Citigroup): 20.00 @ $23.36 = $467.20

University 403(b):

UC Pathway 2040 Mutual Fund: 141.381 @ $12.57 = $1776.46

University DCP:

UC Pathway 2040 Mutual Fund: 79.559 @ $12.57 = $999.66

Welcome Google Finance Readers

Google Finance has been linking to SeeMeGetRich.com for the past few days, so I would like to officially welcome Google Finance readers to SeeMeGetRich.com. Here you will find information on long-term retirement investing via such pathways as a Roth IRA, a 401(k) or 403(b), and Exchange Traded Funds (ETF's). I am constantly providing updates on my own ETF Roth IRA portfolio, which I began in January 2007 in an attempt to be more financially responsible and to become well-off when I retire. You will also find a host of articles on various topics relating to personal finance and investing. See the "best of" section on the menu bar at left for some highlights from SeeMeGetRich.com, and also see the site archives at left. Finally, if you like what you see here at SeeMeGetRich.com, you may subscribe to the site's RSS feed or by email to automatically receive my latest posts and updates:

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Investment Metaphors

One of my readers' favorite features on SeeMeGetRich.com is my ongoing series on investment metaphors. Whenever I find a seemingly unrelated topic that can serve as a useful analogy for personal finance or investing, I regularly write it up and pass it along, hoping that the metaphor provides motivation and amusement for fellow long-term investors. Here is an up-to-date compilation of my various investment metaphors. This page will be continually updated with the latest entries in the series, so check back often.

Investment Metaphor #1: Cane Toads

Investment Metaphor #2: Fractals

Investment Metaphor #3: Potatoes Revisited

Investment Metaphor #4: Investment Blogging

Investment Metaphor #5: Johann Sebastian Bach

Investment Metaphor #6: Live 24/7 Webcasting

Investment Metaphor #7: Commuters

Investment Metaphor #8: World of Warcraft

Investment Metaphor #9: Truthiness

Investment Metaphor #10: Trout Fishing

Investment Metaphor #11: D-Day

I Took The Plunge: Citigroup (NYSE: C)

As I indicated in yesterday's post about my favorite individual stock picks, I had been debating whether I should put some of my money in individual stocks because of the recent market downturn. One of the stocks I have had my eye on is Citigroup (NYSE: C), due to its very low price point and my confidence in its ability to recover from the market downturn. So this morning I took the plunge and bought twenty shares of Citigroup at just above $18/share.

Citigroup should recover nicely once this sub-prime lending fiasco is behind us, and my $360 investment should show a healthy profit down the road. Of course, it is always possible that Citigroup will go the way of Bear Stearns Companies, Inc. (NYSE: BSC), which was trading at $150/share and is now at a meager $4.50/share. But as one of the world's largest financial institutions, I am confident that Citigroup will be with us for a long time to come.

Was it an emotional decision to finally invest in an individual stock instead of taking that $360 and putting it into my Roth IRA ETF portfolio? Perhaps, but I still maintain that it was a well-thought-out emotional decision. It is true that you should invest with your head and not with your heart, but the two are not necessarily mutually exclusive. I did get some emotional satisfaction from taking on a riskier stock, but Citigroup is a blue chip stock that I plan to buy and hold for the long-term, which significantly reduces the risk of putting a chunk of money into an individual stock instead of an index fund.

To make it perfectly clear, though: my long-term ETF portfolio will still be my primary investment vessel, and I do not advocate putting all of your money into individual stocks. But picking up a few shares of a stock at a good value will potentially increase your investment returns a bit, and I argue that there is no harm in doing so as long as you invest wisely.

Individual Stock Picks: Taking The Plunge?

The recent market downturn has got me thinking about taking the plunge into investing in individual stocks for the first time. Of course, I am a champion of index fund investing, so individual stock picking perhaps goes against my better judgment. But with so many stocks trading at all-time lows, I have been rethinking my prior skepticism about individual stock investing.

I have a natural inclination toward dividend stocks, since dividend paying companies are stable enough to be able to afford to return their earnings to shareholders. Dividend stocks, however, often do not have as much potential for future growth, already being mature companies in their respective markets.

Growth stocks, on the other hand, as the name indicates, have the potential for growth, but no guarantee. There is an element of luck involved due to the lack of foreseeability about which companies will prosper and which companies will struggle. It is this uncertainty that is the cause of my hesitation to take the plunge into individual stock investing.

Despite my reservations, I am attracted to the idea of owning portions of the companies that I care about. Were I to throw a little caution to the wind and put some of my portfolio in individual stocks, I would only be interested in owning pieces of companies that I have an emotional connection to. While emotional investing is hardly a recipe for success, I do think it would be possible to evaluate those companies that one has an emotional connection to in order to determine which ones are truly sound investments and which are train wrecks waiting to happen.

There are several companies that I have an emotional attachment to, which would be the basic pool from which I would attempt to build an individual stock portfolio. Here is a quick summary of those stocks that I am currently considering:

1) Burlington Northern Santa Fe Railway (BNI): Ever since I was a kid I have had an unhealthy obsession with the railroads. Sadly, corporate mergers have all but eliminated many of the railroads that I used to love as a kid. My all-time favorite railroad was the Burlington Northern with its attractive forest green and black color scheme. The Burlington Northern Sante Fe railway is the proud successor to the Burlington Northern; and with the continually promising future of freight railroading, due to its affordability, the BNSF (BNI) has a promising future.

2) RadioShack Corporation (RSH): RadioShack and I have a healthy long-term relationship with one another. While the stock price is far from stable, regularly fluctuating between $15/share and $30+/share, its current low price makes RSH an attractive stock to obtain during the current market slump.

3) Consolidated Edison (ED): I cannot really explain my desire to own some Consolidated Edison stock. Perhaps it is my fascination with all things electricity and my fascination with dividend paying stocks that reach a happy medium in Consolidated Edison. As the major source of power for New York, I figure that Consolidated Edison has a solid future for the foreseeable future. And with a consistent history of increased dividends, Consolidated Edison would be a good stock to own to reap the benefits of dividend reinvestment.

4) Alcoa, Inc. (AA): Since my days as a summer-time professional dumpster diver, I have kept a constant eye on the goings-on of the scrap metal business. With rising scrap metal prices (e.g. aluminum and copper) and increased profitability, Alcoa, Inc. looks to be an attractive stock due to its significant market share in the scrap metal business.

5) Citigroup, Inc. (C): With all the recent problems with sub-prime lending in the banking industry, banking stocks have taken quite a hit. The old adage of "buy low, sell high" would seem to apply to the baking industry as a whole right now. While I believe that any banking stock would be an excellent choice right now, I am constantly drawn toward Citigroup (i.e. Citibank) since I have had nothing but the best experience in dealing with this company. And at the current price point of $19.78/share, Citigroup can safely be called a bargain stock that is sure to rebound once the economy stabilizes a bit.

So there you have it, folks. I would appreciate any thoughts or comments you might have on these individual stock picks, or on the wisdom of taking the plunge into individual stock investing in general. I am not prideful about these stock picks, so please feel free to tell me if you think these stock picks are way off base or if you think I am foolish for even considering deviating from my long-term ETF portfolio as my sole investment strategy.