level 3, mark to model

i had been writing a ton of stuff about investing, ideas, strategies and so forth, for some pals - all with the disclaimer that i am a god awful investor - but as these pals are newer in the game than me, they might benefit from my tales of financial woes. so there are much stuff - not aided by, as is my fashion, non succinct writing style - regarding lessons painfully learned and my evolving investing thoughts. all the while, i have been trying, by sharing my thoughts, to pick the brain of others who - from the little i've heard - have been doing okay with their cash money in the game. which is to say that i had hoped to accelerate my blog writing by a copy and paste from the long ass emails i have occasionally or habitually sent.

i had targeted some emails i wrote on p/e ratio, which is, despite suffering from many and major drawbacks as an analytical tool, is one of the most basic and required item for investment research. eh, basic stuff but not quite elementary enough if i were to say anything at all about investing. new material instead: some general throught points, some actionable steps, but obviously, it is your money, do your own homework.

1. max out your contribution in whatever your employer offers in term of retirement plan: 401, 403, pension, whatever. your employer might match to a certain point, but max out anyway - even where your salary level/grade might be such that day to day living may seem a tad tight - whatever goes into the retirement account will not be too much missed if it never enters the disposable cash stream. that's the way those type of things go.

2. get an IRA (investment retirement account) and max out on the yearly contribution. whether it is traditional or roth versions, it is silly not to have one and not to maximize contribution. the way the tax system works, an IRA is free money. free. money. really. so go get it. and preferably, roth over traditional, or roth over traditional as much as possible.

3. if you have been in the work force world for a little bit, consolidate your various, if any, retirement plan stragglers to a rollover IRA. it's okay to let your employer handle your investment while you are working for that employer, because normally you got no choice. but you want control once you leave.

4. do 1 to 3 asap. that’s the way investing works, via compounded returns. a hella lot of it is tied to timing: the mo' sooner the mo' better. and do not worry about retirement savings interfering with possible future home purchase, higher education decisions, there are some penalty-free early withdrawal options for certain alternative investments, which includes first home and tuition.

5. choose an age appropriate portfolio mix (and to a lesser degree, personal risk tolerance appropriate too). the younger, the more risk that can be taken. or, if you not old, bring more international, more small caps and more emerging markets flavors to your portfolio; if you old, less international, less small caps and less emerging markets.

6. with regards to selecting the right vehicles in your portfolio, unless you have time, interest and attention to do a hella lot of research, choose mutual funds or ETFs that track indexes. picking the right companies for stocks involves a lot of work. picking the right mutual funds involves a lot of work. picking something that tracks a market index is mucho easier.

the right company or mutual fund will or should out pace the market index. unfortunately, with regards to picking the right individual stock(s), the reward comes with considerable risk; and i don't got much more to add if that is your choice aside from be careful and good luck. mutual funds wise, in any given year, roughly 75% underperforms, and that 75% likely changes year to year. some homework might turn up the right fund(s) among the other 25%, so good luck as well with that if that is where you want to go.

index trackers are not ideal if your plan is to smoke the financial markets and make thousands or millions galore. but at the same time, these type of funds will hardly ever do worse than the market. why? because the sole function of index tracking is to replicate the performance of the market. oh, the reason the market - or the equity markets, which is what i am talking about when i say market – is important is because in the long run equities (companies) are the best wealth generation for us everyday folks in terms of investment. so while there may be better opportunities within (and outside) the market, at the minimum, investing in market performance is mighty decent; and will help in one important aspect: prevent you from making bonehead mistakes as you probably won't know enough (especially when you are starting out) to avoid them.

and when considering index tracking funds, between mutual funds or ETFs (or exchange traded funds), ETFs are better chiefly because they cost less to run (and thus you get a slightly better return), have some considerable tax based advantages, and trade like stocks on the stock exchange so they are a little easier to follow.

to be more specific, in many cases the vanguard run ETFs offer a better value (and as a result, performance) than comparable ETFs: VV for USA large caps, VEU for rest of developed world markets, and VWO for emerging markets. you can opt for some sort of total global ETF, but this three headed ETF alternative allows you some personal allocation customization leeway with little effort. obviously, do your homework.

7. always, always, always reinvest dividends. that’s the way investing works; you gots to compound your returns.

8. buy and hold. do not trade. if you were so smart to time your trades, well, would you have to really read this far in here? equity markets is the best place for us main street josephs and josephines in the long ass haul, so you have to think long ass hold for your investment horizon. it is possible to ignore the daily financial market turbulence, and advisable.

9. fine. assuming you feel you are all that, for mutual funds: minimally, check the fund's historical performance (even if past performance ain't the ideal indicator for future performance); the person managing the fund to double make sure he or she helmed the fund during that historical performance and is still managing the fund; the associated fees/expenses (look for no fees and low expenses, obviously); the content in the fund's portfolio (no harm in peeking at the companies in the fund); and repeat until you find attractive mutual funds for US large cap, international markets, and emerging markets (and probably small cap too). morningstar.com is a not bad place to start your homework. and don't forget, i said minimally.

10. fine. assume you feel you are even more all that, for stocks: minimally, lower risk by making sure your prospective companies have some competitive advantages such as growing revenues, growing earnings, strong margins (all relative to competitors), high barriers to entry in their markets, expanding markets, dominant positions in those markets, good inventory turnover, low (or no) long term debt, and so forth. and look over management ownership levels as a reflection of their confidence/commitment to the company. obviously most companies will not have all these factors/advantages, but the more advantages your companies have, the more better. and you need to repeat until you got several companies across industries and geographic areas. or look for good diversification; you can mix it up with mutual funds, ETFs, and stocks depending on the workload you think you can put up with. by the way, competitive advantages do not guarantee anything, but at the same time, it should lend much, much more stability, less sensitivity to exterior influences to your companies and better chance of outperforming. you also have to make sure you figure out all the wall street ebonics like P/E, ROE, debt to equity ratio (yo!), as well as hopefully inspect financial statements and conference calls. don't forget, i said minimally.

11. if you do not have a broker, get a reputable online discount broker, like schwab, etrade, or similar ilk. it is tough to believe i know, but the 20th century is over, and lots of productive things can be done online.

12. most of the above applies to non retirement or personal type accounts. if you got a job and make an okay salary or have some cash money stashed under the mattress, consider investing it. invest an amount you can stomach a drop (hopefully temporarily) of 20%-50% in value, or even an entire lost. there are several places and vehicles that allow you to make smaller investments if you cannot start off with a huge chunk of change. and smaller periodic contribution, or dollar cost averaging, is a good way to start personal investing while reducing risk some.

shit, this was not too non succinct. well, this is about the bulk of what i got to write about investing for ultra newbies. the main gist of is, go do it and be careful. these modern times make it easy to get more information and to ramp up the learning curve. so if you aren't caught up, get caught up. what i have offered i hope is something of a starting guideline point. of course, if you got any specific questions, whoever you happen to be, i'll definitely write something back - keeping in mind god awful, mistake prone investor track record - if you ask. and i suppose i can always copy and paste off of this. so big woop.

impromptu "bonus" part 2? sure.


part 2s


time's up!

or, now you'll finally know the thing you hadn't cared about knowing for over 2 months.

exciting!

lise meitner said it.