Wiley Investing Online For Dummies, 7th Edition
Contents
1. or brokerage Quicken also costs you 60 for the Deluxe edi tion Intuit will refund your money if you don t like the software after using it for less than 60 days though It s also important to note that Quicken s online features including stock quote downloads stop working unless you upgrade to the latest version every three years If you were using Microsoft Money and want to switch to Quicken it s much easier than it used to be In 2009 Quicken added a converter that does a good job of importing Money files I ve tested the converter and it works very well Quicken does more than help you set and stick to a budget It helps you with more advanced topics such as managing your portfolio and taxes stuff I cover later in this book 16 a Figure 1 1 Intuit s Quicken allows you to slice and dice your budget and find out where your money is going Part I Getting Started Investing Online Quicken might be the big kid on the block but it isn t completely alone Be sure to check out these other options some of which are free 1 Moneydance www moneydance com comes in versions for Windows Macintosh and Linux If you re already using Money or Quicken no worries Moneydance can translate your files It s comparably priced at 40 and offers a trial that lets you use the software until you hit 100 transactions 1 Money Manager Ex www codelathe com mmex tries to make the power of softwa2. s not a cheap tool though and will set you back 130 a year although you can consider the 30 day free trial or a two year plan for 190 1 Wesabe www wesabe com lets you enter your budget and track it But it has a twist Other Wesabe users can see where your money is going and offer suggestions on ways to save more It s free too which saves you some money right away 18 Part I Getting Started Investing Online NING RY ar 1 MoneyStrands www money strands com tries to make saving your money hip if that s possible The site is full of colorful cartoons making it appear fun to use which might make it seem less intimidating to some The site not only helps you track how you re doing financially but also compares you with others and provides savings tips 1 Geezeo www geezeo com is designed for people who want to track their spending but are more likely to use a cell phone than to sit in front of a computer With your permission the site pulls in your account bal ances from all your financial institutions That way when you re shop ping you can send a text message to Geezeo and get a message back that shows all your account balances Hopefully that will remind you to not spend money you don t have Other users also offer tips on the Web site on how to save money Putting all your financial data online is simple and convenient but it can be a bad idea for many investors First there are the s
3. The greatest force all investors have is time Don t waste it The sooner you start to save and invest the more likely you will be successful To explain take the example of five people each of whom wants to have 1 million in the bank by the time they retire at age 65 The first investor starts when she is 20 followed by a 30 year old 40 year old 50 year old and 60 year old Assuming that each investor starts with nothing and averages 10 percent returns each year more on this later Table 1 1 describes how much each must save per month to reach his or her goals Table 1 1 How Much Each Must Save to Get 1 Million Part I An Investor Who Is Must Invest This Much Each Month to Have 1 Million at Age 65 20 years old 95 40 30 years old 263 40 40 years old 753 67 50 years old 2 412 72 60 years old 12 913 71 See youth has its advantages A 20 year old who saves less than 100 a month will end up with the same amount of money as a 60 year old who squirrels away 12 914 a month or 154 968 a year That s largely due to the fact that money that s invested early has more time to brew And over time the money snowballs and compounds which is a concept I cover later in this chapter Learning the Lingo Just about any profession hobby or pursuit has its own lingo Car fanatics chess players and computer hobbyists have terms of art that they seem to learn through osmosis Online investing is no different M
4. asp Kenneth R French s Web site at http mba tuck dartmouth edu pages faculty ken french data_library html Hist Benchmarks This site is complicated but worth the effort French a professor at Dartmouth along with University of Chicago s Eugene Fama faculty chicagobooth edu eugene fama revolutionized investing with an analysis that found that essentially three things move stocks what the general market is doing how big the company is and how pricey the shares are Both profs keep statistics on their sites on how stocks move Index Funds Advisors www ifa com compiles much of the research done by Fama and French and helps explain it in plain language You can order a colorful book from the site Index Funds The 12 Step Program for Active Investors by Mark T Hebner IFA The book explains how differ ent types of stocks perform in the long term and shows how much you can expect to gain It also shows long term returns of bonds You can download the book for free if you take the site s Risk Capacity Survey explained later in this chapter 1 Robert Shiller s Web site www econ yale edu shiller contains exhaustive data on how markets have done over the long term You can view the data and make your own conclusions Shiller is a well known economics professor at Yale University Standard amp Poor s Web site www standardandpoors com indices market attributes en us contains a full record of the returns
5. can save the excess That means you must retrain yourself from being a consumer to being an investor Many beginning investors have trou ble getting past this point because being a consumer is so easy Consumers buy things that they can use and enjoy now but almost all of those objects lose value over time Cars electronic gadgets and clothing are all examples of things consumers invest their money in You don t even have to have money to spend plenty of credit card companies will gladly loan it to you Consumers fall into this spending pattern vortex and end up living paycheck to paycheck with nothing left to invest Investors on the other hand find ways to put off current consumption Instead of spending money they invest it into building businesses or goods and services that can earn money rather than deplete it The three main types of investments are stocks bonds and real estate although I cover others in the later chapters Here are a few things you can do now to help you change from being a con sumer to an investor 1 Start with what you can manage by putting aside a little each month 1 Keep increasing what you put aside If you do it gradually you won t feel the sting of a suddenly pinched pocket ar Chapter 1 Getting Yourself Ready for Online Investing 15 Hunt for deals and use coupons and discounts Put aside the saved money 1 Buy only what you need Don t be fooled into buying things you
6. don t need because they re on sale Using personal finance software The word budget is a real turnoff It conjures up images of sitting at the kitchen table with stacks of crumpled up receipts trying to figure out where all your money went As an investor who prefers to do things online this image probably isn t too appealing It s worth your while to find other ways to see how much money is coming in and how much is going out Fortunately you have a painless option available personal finance software which helps you track your spending and investments There used to be two big names in personal finance software Microsoft Money and Intuit Quicken However in 2009 Microsoft made a surprise move and discontinued Money ceding the entire market to Quicken Quicken is a great tool for measuring how much money you can afford to invest It helps you determine how much money you spend where it goes and how much excess you accumulate each month that you can channel into investing You can view the results in charts such as the one shown in Figure 1 1 Quicken can also create a budget for you essentially at the click of a button The software alerts you if you re spending more on a certain cat egory than you budgeted for The biggest gripe against the software is that you have to get your transactions into it first You can type them in by hand which is kind of a pain or you can download them from your credit card company bank
7. invest in odd get rich quick schemes like pay phones only to be disappointed Others assume that all they need to do is open a broker age account and start madly buying stocks But as you ll notice if you look at the Table of Contents or flip ahead in this book I don t talk about picking a broker and opening an account until Chapter 4 You have many tasks to do before then But don t let that fact intimidate you Check out my easy to follow list of things you ll need to do to get started Follow these directions and you ll be ready to open an online brokerage account and start trading 1 Decide how much you can save and invest You can t invest if you don t have any money and you won t have any money if you don t save No matter how much you earn you need to set aside some money to start investing Think saving is impossible I show you computer and online tools later in this chapter that can help you build up savings that you can invest 2 Master the terms The world of investing has its own language I help you to understand investingese now so that you don t get confused in the middle of a trade when you re asked to make a decision about something you ve never heard of Chapter 2 has more on the language of online investing 3 Familiarize yourself with the risks and returns of investing You wouldn t jump out of an airplane without knowing the risks right Don t jump into investing without knowing wha
8. news found in last 30 days ane TopDogTraddeg con o o2 o3 q 1 item remaining intamet Protected Mode On f Ricoe gt ar Chapter 1 Getting Yourself Ready for Online Investing 29 What the past tells you about the future Exhaustive studies of markets have shown us that stocks in general return about 10 percent a year Through the years 10 percent returns have been the benchmark for long term performance making it a good measuring stick for you and something to help you keep your bearings But long term studies of securities also show that to get higher returns you usually must also accept more risk Table 1 3 shows how investors must often accept more risk to get a higher return Table 1 3 No Pain No Gain Investment Average Annual Relative Risk Return Stocks 9 8 based on S amp P Riskiest 500 since 1926 Corporate bonds 5 9 Moderately risky Treasury bills loans to the U S 3 7 Least risky government that come due in a year or less Source Morningstar Don t make the mistake of thinking that investing in stocks guarantees you a 10 percent return every year like a savings account That s not the case Stocks are risky and tend to move in erratic patterns and they test your con fidence with sudden drops In fact each year stocks typically posted a total return including dividends somewhere between a loss of 10 percent and a gain of 28 7 percent according to the folks at the Index Funds Advi
9. of where you should invest your money based on your risk preference Passive or Active Deciding What Kind of Investor Vou Plan to Be Investing might not seem controversial but it shouldn t surprise you that anytime you re talking about money people have some strong opin ions about the right way to do things The first way investors categorize themselves is by whether they are passive or active Because these two approaches are so different the following sections help you think about what they are and which camp you see yourself in Where you stand not only affects which broker is best for you as discussed in Chapter 4 but also affects which chapters in this book appeal to you most 32 Part I Getting Started Investing Online How to know if you re a passive investor Passive investors don t try to beat the stock market They merely try to keep up with it by owning all the stocks in an index An index is a basket of stocks that mirrors the market Passive investors are happy matching the market s performance knowing that they can boost their real returns with a few tech niques I discuss in Chapter 9 You know you re a passive investor if you like the following ideas Not picking individual stocks These investors buy large baskets of stocks that mirror the performance of popular stock indexes like the Dow Jones Industrial Average or the Standard amp Poor s 500 index so that they don t worry about whether a small up
10. you understand the concept already If you put 100 in a bank account paying 4 5 percent interest you know that by the end of the year you will have received 4 50 in interest You earned a 4 5 percent annual rate of return Rates of return are useful in investing because they work as a report card to tell investors how well an investment is doing no matter how much money is invested You can calculate rates of return yourself with the following y A formula Subtract an asset s previous value from its current value divide the difference by the asset s previous value and multiply by 100 If a stock rises from 15 to 32 a share you would calculate the rate of return by first subtracting 15 from 32 to get 17 Next divide 17 by 15 and multiply by 100 The rate of return is 113 3 percent 1 Financial calculators You can use the Hewlett Packard 12c that financial types always carry If you have this calculator you can find out how to crunch a rate of return with an easy to follow tutorial located at http h20331 www2 hp com Hpsub downloads HP12Cpercents pdf Look for Example 5 YY Microsoft Excel spreadsheet software This software which is avail able on most computers calculates rates of return fairly easily You can find out how with the instructions at www office microsoft com en us excel HP011225061033 aspx y Financial Web sites Many handy sites can calculate rates of return for you including www moneychimp com calcu
11. Chapter 1 Getting Yourself Ready for Online Investing In This Chapter Analyzing your budget and determining how much you can invest Taking the basic steps to get started Understanding what returns and risks you can expect from investing Getting to know your personal taste for risk Understanding your approach to investing Passive versus active Finding resources online that can help you stick with a strategy f you ve ever watched a baby learn to walk you ve seen how cautious humans are by nature Babies will hold themselves against a wall and scoot along before actually going toe to toe with gravity and trying to walk That skepticism stays with most people as they get older Before doing something risky you probably think good and hard about what you stand to gain and what you might lose Surprisingly many online investors especially those just starting out lose that innate sense of risk and reward They chase after the biggest possible returns without considering the sleepless nights they ll suffer through as those investments swing up and down Some start buying investments they ve heard others made money on without consider ing whether those investments are appropriate for them Worst of all some fall prey to fraudsters who promise huge returns in get rich quick schemes So I ve decided to start from the top and make sure that the basics are cov ered In this chapter you discover what you can expect to gain from invest
12. al of these in more detail in Chapter 9 where I discuss how to create an investing road map called an asset allocation For now these questionnaires are worthwhile to take right away so that you can understand what kind of investor you are Vanguard s Investor Questionnaire https personal vanguard com us FundsInvQuestionnaire asks you ten salient questions to determine how much of a risk taker you are with your money It deter mines what your ideal asset allocation is Take note of the breakdown The closer to 100 percent that Vanguard recommends you put in stocks the more risk tolerant you are and the closer to 100 percent in bonds the less risk tolerant you are 1 Index Funds Advisors Risk Capacity Survey www ifa com SurveyNET index aspx offers a quick risk survey that can tell you what kind of investor you are after answering just five questions You can also find a complete risk capacity survey that hits you with a few dozen questions Whichever you choose the survey can characterize what kind of investor you are and even display a painting that portrays your risk tolerance 1 SmartMoney Asset Allocator www smartmoney com investing basics the smartmoney one asset allocation system 17605 couldn t be much easier to use You slide a variety of bars to indicate your financial goals ranging from your desire to leave money for heirs to the number of years to retirement The site then gives you a general breakdown
13. any terms like stocks and bonds you might have heard but not completely understood As you read through this book and browse the Web sites I mention you ll prob ably periodically stumble on unfamiliar words Chapter 1 Getting Yourself Ready for Online Investing 23 Don t expect a standard dictionary to help much Investing terms can be so specialized and precise that old Webster might not be a big help Fortunately a number of excellent online investing glossaries explain in detail what investing terms mean Here are few for you to check out Investopedia www investopedia com has one of the most compre hensive databases of investing terms with more than 5 000 entries The site not only covers the basics but also explains advanced terms in great detail It s also fully searchable so that you don t waste time getting the answer YY Yahoo Financial Glossary http biz yahoo com f g is all about quick answers The database written by Campbell Harvey a professor of finance at Duke University explains most basic investment terms in one or two sentences InvestorWords www investorwords com has a fully searchable database of investment terms but it also makes the dictionary a bit more interesting with unique features like a term of the day and a sum mary of terms that have recently rewritten definitions Investor Glossary www investorglossary com covers all the basics but also attempts to describe some slang ter
14. b based investment information and low cost online trading you get to work a lot harder by taking charge of your investments Lucky you So is the additional work worth it In my opinion taking the time to figure out how to invest online is worthwhile because Investing online saves you money Online trading is much less expen sive than dealing with a broker You ll save tons on commissions and fees Say why not invest that money you saved Investing online gives you more control Instead of entrusting someone else to reach your financial goals you ll be personally involved It s up to you to find out about all the investments at your disposal but you ll also be free to make decisions Investing online eliminates conflicts of interest By figuring out how to invest and doing it yourself you won t have to worry about being given advice that might be in your advisors best interest and not yours Getting Started I can t tell you how many investors just starting out write me and ask the exact same question Maybe it s the same question that s running through your head right now I want to invest but where do I start Chapter 1 Getting Yourself Ready for Online Investing Getting started in investing seems so overwhelming that some get confused and wind up giving up and doing nothing Others get taken in by promises of gigantic returns and enroll in seminars subscribe to stock picking newslet ters or agree to
15. ding methods help you determine how much you can save But the following sites help you determine how much you should save to reach specific goals Y Vanguard s retirement calculator https personal vanguard com us insights retirement saving set retirement goals helps you figure out how much you should save by measuring how much you will need The site prompts you to enter how much you make and how long you have until retirement to help you figure out how much you need to save Vanguard offers similar tools to help you decide how much you need to save for other goals such as paying for a child s col lege tuition 1 T Rowe Price s Retirement Income Calculator www3 troweprice com ric ric public ric do uses advanced computerized model ing to show you how much you need to save no matter what the stock market does It runs your variables through a Monte Carlo simulation which simulates what happens to your savings no matter what and gives you the odds that you ll have enough money Nationwide s RetirAbility Check www nationwide com retirability check jsp wtgo retirability asks you some questions and then rates your ability to retire when and how you plan to It also suggests tips on improving your odds of saving as much as you hope Financial Calculators www financialcalculators com can help you calculate just about any financial goal you might have from buying a home to saving for college vy ESPlanne
16. e another hot manager to take Miller s place though Sites for the active investor to start with Ever hear of someone trying to learn a foreign language by moving to the country and picking it up through immersion The idea is that by just being around the language and through the necessity of buying food or finding the restroom the person eventually gets proficient Chapter 1 Getting Yourself Ready for Online Investing 35 If you re interested in active investing you can do the same thing by hitting Web sites that are common hangouts for active investors By lurking on these sites you can pick up how these types of investors find stocks that interest them and trade on them These sites can show you the great pains active investors go through in their attempt to beat the market A few to start look ing at include the following Yahoo Finance http finance yahoo com is the finance section of this general purpose portal and a great resource for all investors It turns out though that the portal contains several elements of particular interest to active investors such as the Investing Ideas section near the bottom of the page Here you can find stocks of interest to active inves tors for certain reasons The site also offers active chat rooms on almost every stock under the Message Board heading on the left side of the page I talk about chat rooms in more detail in Chapter 7 TheStreet com www thestreet com coll
17. ects trading ideas and tips from writers mainly looking for quick moving stocks and other investments TradingMarkets www tradingmarkets com explores the details of complicated trading philosophies The site highlights stocks that have moved up or down by a large amount which is usually something that catches the attention of traders Seeking Alpha http seekingalpha com provides news and com mentary designed for investors of all skill levels who are trying to beat the market 36 Part I Getting Started Investing Online
18. ecurity concerns with entrusting all your financial data to strangers over the Internet But beyond that if a Web site calls it quits one day you might lose access to the historical financial and investing records you kept on the site Cake Financial is a case in point The investment tracking site was bought by E TRADE in January 2010 and without warning shut down leaving investors without access to their financial information This is a big reason why personal financial software like Quicken may be preferable because your data is stored on your computer s hard drive where you can always access it Personal finance information sites don t track your transactions but they re still able to give you the big picture The following sites are worth checking out 1 The Financial Planning Association s Life Goals www fpafor financialplanning org LifeGoals lets you click on financial goals like Saving for Retirement and get advice 1 Smartaboutmoney org www smartaboutmoney org provides vari ous tips on how to save more and boost your financial strength US Financial Literacy and Education Commission www mymoney gov is a government run site that steps you through everything from saving more to avoiding frauds It s also a good directory of useful infor mation that s available from other government agencies Many financial information Web sites are designed for older investors who are looking for infor
19. ed many aspects of the banking system To stabilize the system the U S government borrowed heav ily Many investors worry that the government might print large amounts of currency in the future to pay its bills which could also cause inflation Even if you put your extra cash in a sav ings account you re not doing much better Because savings accounts usually give you access to your money anytime they pay low levels of interest around 1 to 2 percent Even high yield savings accounts and certificates of deposit CDs typically pay only slightly higher interest than the level of inflation or even below meaning that you re barely keeping up if not falling behind If you want your money to grow you need to move money you don t need for a while out of savings and into investments Investments have the potential to generate much higher returns Note The Federal Reserve Bank of Minneapolis offers a free calculator that tells you how much something you bought in the past would cost today www minneapolisfed org Measuring How Much Vou Can Afford to Invest O gt EMBER Online investing can help you accomplish some great things It can help you pay for a child s college tuition buy the house you ve been eyeing retire or travel to the moon Okay maybe not the last one But you get the idea Investing helps your money grow faster than inflation And by investing online you can profit even more by reducing the com
20. ethods are as follows 1 Automatic withdrawals Ever hear the clich pay yourself first It s a trite saying that actually makes sense The idea is that before you go shopping for that big screen TV or start feeling rich after payday you should set money aside for savings Some people have the discipline to do this themselves but many do not For those people the best option is to set up automatic withdrawals which is a way of giving a brokerage firm or bank permission to automatically extract money once a month When the money is out of your hands you won t be tempted to spend it 1 Retirement plans If your goal is investing for retirement you want to find out what retirement savings plans are available to you If you re an employee you might have access to a 401 k plan And if you re self employed you might consider various individual retirement accounts also known as IRAs When you re starting to invest taking advantage of available retirement plans is usually your best bet I cover this in more detail in Chapter 3 On your own If you have money left over after paying all your bills don t let it sit in a savings account Leaving cash in a low interest bearing account is like giving a bank a cheap loan Put your money to work for you Brokers make it easy for you to get money to them via electronic transfers 22 Part I Getting Started Investing Online Want to Be a Successful Investor Start Now
21. ey of course But how much do you want to make Understanding what you can expect to earn is where you need to start Whenever you hear about an investment and what kinds of returns it promises you should be able to mentally compare it with the kinds of returns you can expect from stocks bonds and other investments That way you know whether the returns you re being promised are too good to be true How do you do this By relying on the hard work of academics who have done some heavy lifting Academics and market research firms have ranked investments by how well they ve done over the years And I m not just talking a few years but for decades in many cases going back to the 1920s and earlier The amount of work that s gone into measuring historical rates of returns is staggering but if you re using online resources you re just a click away from finding out how most types of assets have done What you expect to earn is a number that can affect most of your invest ment decisions usually rather dramatically The following table is a revised version of Table 1 1 the one that showed how five different people could expect to save 1 million Table 1 2 looks at how much they must save to make their goal changes based on how much they think they will earn from their investments 26 Part I Getting Started Investing Online Table 1 2 How Much Each Must Save to Get 1 Million Part Il An Investor Must Inve
22. from the Standard amp Poor s 500 index going back for decades This is invaluable data because you can understand how markets tend to move instead of worrying about things that have never happened Click the arrow to the left of where it says S amp P 500 Monthly Performance Data Click the Monthly and Annual Returns link which then prompts you to open an Excel file Scroll down the spreadsheet s annual returns That can give you an idea of how volatile stocks can be but also what returns are possible if you stay invested 28 Part I Getting Started Investing Online ar PCs Figure 1 2 FreeStock Charts com lets you download long term historical prices of stocks and market indexes using drop down lists PCS FreeStockCharts com www freestockcharts com allows you to download the stock trading history of most investments Just enter the name or symbol of the investment you re interested in and click the OK button If you click the Export Chart icon which looks like two small cyl inders you can download data into Excel Figure 1 2 shows you what the charts look like The site keeps data on most stocks going back to 1985 1 MSN Money http moneycentral msn com is another source of historical stock price data downloads Enter the investment symbol in the Name or Symbol s blank and click the Get Quote button Next click the Historical link on the left side of the page You can customize how far back the s
23. ing method of processing dozens of annual returns of stocks and analyzing the data Luckily some academics and industry pioneers have done much of the work for you and you can access their findings if you know where to look And I just happen to know a few places where you can start your search Bogle Financial Market Research www vanguard com bogle_site bogle_home htm1 is the Web site maintained by the founder of Vanguard John C Bogle Bogle revolutionized the investment indus try by creating the world s largest index mutual fund the Vanguard 500 which is designed to mirror the performance of the S amp P 500 stock market index Stock market indexes such as the Standard amp Poor s 500 Chapter 1 Getting Yourself Ready for Online Investing 2 7 index and Dow Jones Industrial Average are benchmarks that let you track how the market is doing Bogle s site is invaluable because he explains that the market on aver age returns about 10 percent a year That benchmark will be very important later as you evaluate different stocks Indexes are covered in more detail in Chapter 8 1 Russell s Web site www russell com lets you look up how all types of stocks ranging from small to large in addition to bonds have done over the years You ll find a handy Index Returns Calculator that lets you see how different types of stocks have done at different points in history www russell com Indexes data calculator index_ calculator
24. ing online and at what risk so that you can decide whether this is for you You also find out how to analyze your monthly budget so that you have cash to invest in the first place Lastly you find out what kind of investor you are by using online tools that measure your taste for risk After you ve gotten to know your inner investor better you can start thinking about forming an online investment plan that won t give you an ulcer 10 Part I Getting Started Investing Online It s only natural if you re feeling skittish when it comes to investing espe cially if you re just starting out After all it s been a brutal past 10 years even for veteran investors First came the dot com crash in 2000 then the nasty bear market in 2007 and then a vicious credit crunch in 2008 that threatened to drop kick the economy The stock market even short circuited in May 2010 due in part to computerized trading causing its value to plunge and largely rally back in just 20 minutes Don t let these scary events though scare you off Prudent investing can be a great way for you to reach your financial goals You just need an approach that will maximize your returns while cutting your risks And that s where this book comes in Why Investing Online Is Worth Vour While Investing used to be easy Your friend would recommend a broker You d give your money to the broker and hope for the best But today thanks to the explosion of We
25. lator discount_rate_ calculator htm When you calculate the rate of return for a portfolio you ve added money to or taken money from you must take an extra step I explain how to do that in Chapter 8 The power of compounding Famous physicist Albert Einstein once called compounding the most powerful force in the universe Compounding is when money you invest earns a return and then that return also earns a return Dizzy yet When you leave money invested for a long time the power of compounding kicks in Chapter 1 Getting Yourself Ready for Online Investing 25 Imagine that you ve deposited 100 in an account that pays 4 5 percent in interest a year In the first year you d earn 4 50 in interest which brings your balance to 104 50 But in the second year you d earn interest of 4 70 Why Because you ve also earned 4 5 percent on the 4 50 in interest you earned The longer you re invested the more time your money has to compound ar You can enter your own information and see how powerful a force compound ing is at this site www dinkytown net java CompoundSavings html Compounding works on your side to fight against inflation Financial data and news provider Bloomberg has a Web based calculator www bloomberg com invest calculators returns htm1 that tells you whether your rate of return is keeping you ahead of inflation Determining How Much Vou Can Expect to Profit Why bother investing online To make mon
26. mation on homes kids and retirement If you re a parent hoping that your kids will be more responsible with money check out Young Money www youngmoney com You can find advice that s more targeted for young adults such as managing credit card debt or avoiding campus scams Chapter 1 Getting Yourself Ready for Online Investing 9 Saving with Web based savings calculators If personal finance software or sites seem too much like a chore or too Big Brotherish you might consider these free Web based tools that measure how much you could save in theory based on a few parameters that you enter vy MSN Money s Savings Calculator moneycentral msn com personal finance calculators aim_to_save_calculator home aspx asks you a series of questions to help you analyze your spending and find out how much you can save how long it ll take you to save a certain amount how much you must save to meet a goal or how long it will take to save 1 million Young Money s Home Budget Calculator www youngmoney com home budget helps you break down where all your money is going so that you can determine how much you can save It steps you through all your major expenses and helps you find ways to waste less Bankrate com s Saving for a Goal Calculator www bankrate com calculators savings saving goals calculator aspx asks you what you re saving for be it college or buying a car It then breaks down your financial objective and
27. missions and fees you must pay to different advisors and brokers One thing online investing cannot do is make something out of nothing To make money investing online you have to save money first Don t get frus trated though because you don t need as much to get started as you might fear If you have a job or source of income building up ample seed money isn t too hard 14 Part I Getting Started Investing Online Even fastidious savers have unavoidable basic expenses Investors though find ways to be smart about even these routine costs These sites can help you boost your savings 1 Feed The Pig www feedthepig org urges you to stop wasting money and offers tips to help you get out of debt by cutting excess spending The site can calculate how to get out of debt and even how much you can save by packing a lunch instead of buying one Scouring the Web for savings help Get Rich Slowly www getrich slowly org provides tips calculators and online tools to help you save more so that you can invest more The site s front page has daily entries of note to savers and investors The Consumerist www consumerist com offers tips to educate consumers It explains how to play hardball with service providers like cell phone companies that sock you with monthly fees Turning yourself into a big saver If you want to be an investor you must find ways to spend less money now so that you
28. ms in the industry such as an investing philosophy known as the Dogs of the Dow Setting Vour Expectations Have you ever talked to a professional investor or financial advisor One of the first things you ll hear is how much experience he or she has I can t tell you how many times I ve been told I ve been on Wall Street for 30 years I ve seen it all Some of that is certainly old fashioned bragging But these claims are common because in investing experience does count It s easy to say you could endure a bear market until you re watching white knuckled and sweat ing bullets as your nest egg shrivels from 100 000 to 80 000 or 50 000 Experience brings perspective which is very important But if you re new to investing don t despair Online tools can help you acquire the brain of a grizzled Wall Street sage And don t forget that I m here to set you straight as well In fact I m set to start talking about how much you can expect to make from investing And you ll be hearing a great deal about a little something called the rate of return 24 Part I Getting Started Investing Online ANG P Keeping up with the rate of return Don t let the term rate of return scare you It s the most basic concept in investing and you can master it Just remember that it s the amount mea sured as a percent that your investment increases in value in a certain period of time If you have a savings account
29. nvestors make bad decisions Active investors believe they can out smart the masses and routinely capitalize on the mistakes of the great unwashed 1 Understand the risks Most active traders underperform index funds some without even realizing it Before deciding to be an active trader be sure to test out your skills with online simulations as I describe in Chapter 2 or make sure that you re measuring your performance correctly as I describe in Chapter 8 If you re losing money picking stocks stop doing it Be sure to know how dangerous active investing can be to your portfolio by reading a warning from the Securities and Exchange Commission here http sec gov investor pubs onlinetips htm Many investors try but very few are able to consistently beat the market Consider Bill Miller portfolio manager for the Legg Mason Capital Management Value Trust mutual fund Miller had beaten the market for 15 years and turned into a poster child for active investors and proof that beat ing the market was possible if you were smart enough But even Miller s streak came to an end in 2006 That s when his Legg Mason Value Trust fund didn t just trail the market it lagged by a mile returning just 5 9 percent while the market gained 15 8 percent The fund lagged the market by 12 2 percent in 2007 and again in 2008 by 18 1 percent While the fund beat the market in 2009 active investors had already lost their hero There will certainly b
30. o understand the tax ramifications of selling stocks which I cover in Chapter 3 Boost your knowledge After you have the basics down you re ready to tackle the later parts of the book where I cover advanced investing topics This involves pick ing an asset allocation covered in Chapter 9 researching stocks to buy and knowing when to sell covered in Chapter 13 and evaluating more exotic investments the stuff you find in the chapters contained in the bonus chapters on the Web Chapter 1 Getting Yourself Ready for Online Investing The danger of doing nothing After reading through the 11 steps for get ting started you might be wondering whether you ve taken on more than you bargained for Stick with it The worst thing you can do now is put this book down tell yourself you ll worry about investing later and do nothing Doing nothing is extremely costly because you lose money if you don t invest Seriously Even if you stuffed your cash under a mattress and didn t spend a dime each year that money becomes worth on average 3 percent less due to inflation Suppose you won 1 million in the lottery and stuffed it in a hole in your backyard with the plan of taking it out in 30 years to pay for your retirement In 30 years all 1 million greenbacks would still be there but they d only buy 400 000 worth of goods The risk of infla tion is even more relevant in the wake of the financial crisis of 2008 which paralyz
31. r https basic esplanner com helps you make many of the estimates you ll need to forecast your retirement needs in the future Developed in part by Laurence Kotlikoff professor of econom ics at Boston University ESPlanner steps you through what your actual spending might look like when you re retired and uses that information to help you set savings goals Chapter 1 Getting Yourself Ready for Online Investing Being prepared for emergencies When creating your budget and moving money from savings to an investment account be sure to keep an emergency fund on hand This is money that s readily available in case of an emergency stored in an account you can access immediately such as a bank savings account A decent guideline is to always have enough cash handy for at least six months of each month on necessities such as housing rent or mortgage and property taxes food utilities and transportation Multiply by six to get a general idea of how much you should have for emergencies During the 2008 financial Crisis Some experts increased their recommen dation for an emergency fund to 9 to 12 months of cash on hand 21 living expenses Add up how much you spend Deciding How Vou Plan to Save After you ve determined how much you need to save and how much you can save you need to put your plan into action The way you do this really depends on how good you are at handling your money and saving The differ ent m
32. re like Money and Quicken free It s open source personal finance software programmed by hobbyists and offered to the public as a service If you like it you can donate to the programmers who have created it GnuCash www gnucash org has one big thing going for it It s free The software is updated and maintained by a host of freelance programmers much like Money Manager Ex Be warned though that Gnu Cash lacks the polish of some of the other personal finance software and is harder to navi gate Some versions of the software are considered unstable even by the programmers who coded them at least until all the bugs are fixed 1 XeCheck www xecheck com is surprisingly slick and well designed given that it s not from a massive software company like Intuit The pre miere version which costs 32 reminds me of Money visually making it an option for former Money users 1 Buddi http buddi digitalcave ca index jsp is another free option But unlike the other personal finance software Buddi is designed to track budgets and spending not investment portfolios Tarna Pees soning torestng mee C rem rom geaen eon 3 tankan sman T All Reports amp Graphs Fl My Money gt E o gt E MyHome Page howe edn Reports See Where Your Money Goes Boptkas v LAST YEAR S SPENDING 2009 a 1233 TOTAL SPENDING ee 29 634 S Property amp Debt 44 779 Le Hare 222 009 in all coleq
33. returns When that happens it s even more important to stick with your philosophy Following the crowd at this moment undermines the value of your strategy Chapter 1 Getting Yourself Ready for Online Investing 33 That s why even passive investors are well served going to Web sites where other passive investors congregate 1 Bogleheads www bogleheads org is an electronic water cooler for fans of Vanguard index funds and passive investors to meet encourage and advise each other They call themselves Bogleheads in honor of the founder of Vanguard John Bogle Indexfundfan Indextown www indextown com is a blog written for investors who believe in the long term success of buying mutual funds tied to indexes Y The Arithmetic of Active Management www stanford edu wf sharpe art active active htm is a reprint of an article by an early proponent of passive investing William Sharpe who explains why active investing can never win Vanguard s Web site www vanguard com contains many helpful stories about the power of index investing and offers them for free even if you don t have an account 1 Mad Money Machine www madmoneymachine com is an Internet radio show that tries to make the seemingly boring world of passive investing more exciting The host Paul Douglas Boyer weaves jokes music and facts in a way to keep you investing passively The site also includes articles for your reading pleasure Ho
34. sful in fact that Intuit bought the company in 2009 shut down its own Quicken Online site and turned Mint into its online personal finance site Mint pulls in all your bank and brokerage accounts and imports all your financial information For users just looking to get up and running fast Mint is tough to beat It s also free Mint however lacks many of the powerful investment tracking features in Quicken including the ability to precisely track how much you paid for certain investments your cost basis which is very important as you dis cover later And you ll need to be comfortable handing over all your account numbers and passwords to a third party 1 Mvelopes Personal www mvelopes com can be your spending cop that tells you you re spending too much Mvelopes is a Web based spending tracker that tries to be the digital version of envelope based budgeting Rather than stuffing cash in envelopes set aside for certain expenses Mvelopes lets you decide before you get a paycheck how much you re willing to spend in certain categories such as dining out and plan your spending for the month As the month progresses you download all your spending from banks and credit card companies and subtract each trans action from the envelopes you set aside That way if you re spending too much on restaurants for instance you know to cut back or to skimp in other areas It also comes with some electronic bill payment services It
35. sors Web site www ifa com And get this since 1926 the Standard amp Poor s 500 index has gained between 10 0 percent and 10 9 percent only four times and returned 10 percent only once in 1966 The market s brutal decline in 2008 which chewed up a third of stocks value is a good reminder of how violent stocks can be in the short term Don t let short term swings in stocks derail your long term plan but do be aware ahead of time of the fact that markets move in violent ways That way you won t be tempted to do something that you ll regret later Volatility is the price you must pay to get returns Table 1 4 shows you just how crazy the market s movements can be in the short term using the history of the popular Standard amp Poor s 500 index since 1928 Part I Getting Started Investing Online Why knowing the past is valuable By studying how investments have done in the past you get an idea on average of what to expect for the future This gives you perspec tive that lets you not only decide whether an investment is worthwhile but also gives you a B S meter If you get a flyer in the mail talking up a promising new company that s expected to generate 10 percent returns walk away Why would you take a chance ona shaky company if you can expect the same return by investing in a lower risk diversified index fund Similarly a return that s much higher than 10 percent must be much riskier no mat
36. ssle of trying At the end of this chapter you find out how to distinguish between these two types of investors active and pas sive so that you re in a better position to choose which one you are Find out how to turn your computer into a trading station If you have a computer on your desk and a connection to the Internet you have all you need to turn it into a source of constant market infor mation You just need to know where to look which you find out in Chapter 2 Take a dry run Don t laugh Many professional money managers have told me they got their starts by pretending to pick stocks and tracking how they would have performed It s a great way to see whether your strategy might work before potentially losing your shirt You can even do this online which I cover in Chapter 2 Choose the type of account you ll use You can do your investing from all sorts of accounts all with different advantages and disadvantages cover them a little in this chapter and go into more detail in Chapter 3 Set up an online brokerage account At last the moment you ve been waiting for opening an online account After you ve tackled the preceding steps you re ready to get going This important step is covered in Chapter 4 Understand the different ways to place trades and enter orders In Chapter 5 I explain the many different ways to buy and sell stocks each with very different end results You also need t
37. st This Must Invest This Must Invest This Who Is Much Each Month Much Each Month Much Each Month if She Earns 5 if She Earns 10 if She Earns 15 20 years old 493 48 95 40 15 28 30 years old 880 21 263 40 68 13 40 years old 1 679 753 67 308 31 50 years old 3 741 2 412 72 1 495 87 60 years old 14 704 57 12 913 71 11 289 93 The 20 year old must save nearly 500 a month extra if she thinks she will earn only 5 percent a year from her investments instead of 15 percent But even scarier if she saves 15 28 thinking she ll earn 15 percent a year but earns only 5 percent she ll have just 30 963 instead of the 1 million she was counting on Studying the past If someone asks you how stocks are doing he often means how much they went up or down that day Financial TV stations reinforce this preoccupation with the here and now by scrolling second by second moves in stock prices across the bottom of the screen But second by second moves in stocks don t really tell you much If a stock goes down a bit and a company didn t report the news did anything really change during that second Watching short term movements of stock prices doesn t mean much in the overall scheme of things To understand how investments behave it s more helpful to analyze their move ments over as many years as you can That way recessions are blended with boom times to get you to a real smooth average Doing this requires the pains tak
38. start company they invested in will release its new product on time and whether it will be well received Owning mutual and exchange traded funds Because passive investors aren t looking for the next Microsoft they buy mutual and exchange traded funds that buy hundreds of stocks I cover mutual and exchange traded funds in more detail in Chapters 10 and 11 respectively Reducing taxes Passive investors tend to buy investments and forget about them until many years later when they need the money This can be lucrative because by holding onto diversified investments for a long time and not selling them passive investors can postpone when they have to pay capital gains taxes I cover capital gains taxes in more detail in Chapter 3 Not stressing about stocks daily monthly or even annual movements Passive investors tend to buy index or mutual funds and forget about them They don t need to sit in front of financial TV shows read maga zines or worry about where stocks are moving They re invested for the long term and everything else is just noise to them Sites for passive investors to start with One of the toughest things about being a passive investor is sitting still during a bull market when everyone else seems to be making more than you Yes you might be able to turn off the TV but inevitably you ll bump into someone who brags about his or her giant gains and laughs at you for being satisfied with 10 percent market
39. t to expect either Luckily online resources I show you later in this chapter and in Chapter 8 can help you get a feel for how markets have performed over the past 100 years By understanding how stocks bonds and other investments have done you ll know what is a reasonable return and set your goals appropriately I can t stress how important this step is nvestors who know how invest ments move don t panic they keep their cool Panic is your worst enemy because it has a way of talking you into doing things you ll regret later 4 Get a feel for how much risk you can take People all have different goals for their money You might already have a home and a car in which case you re probably most interested in saving for retirement or building an estate for your heirs Or perhaps you re starting a family and hope to buy a house within a year These 12 Part I Getting Started Investing Online 10 11 two scenarios call for very different tastes for risks and time horizons how long you d be comfortable investing money before you need it You need to know what your taste for risk is before you can invest I show you how to measure your taste for risk later in this chapter Understand the difference between being an active and a passive investor Some investors want to outsmart the market by darting in and out of stocks at just the right times Others think doing that is impossible and don t want the ha
40. tells you how much you need to save to meet said objective y Financial Industry Regulatory Authority s FINRA s Savings Calculator http apps finra org Calcs 1 Savings lets you enter differ ent combinations of variables such as how much you ve saved already and how much additional money you intend to save It then gives you a realistic estimate of how much you can expect to save 1 USATODAY com s The Real Person s Budget www usatoday com money perfi financial diet real person budget xls isa spreadsheet developed by a personal finance advisor to help you inter actively figure out where your money is going Relying on the residual method Are you the kind of person who has no idea how much money you have until you take out a wad of twenties from the ATM and check the balance on the receipt If so you re probably not the budgeting type and the preceding options are too strict For you the best option might be to open a savings account with your bank or open a high yield savings account and transfer 20 Part I Getting Started Investing Online in money you know you won t need Watch the savings account over the months and find out how much it grows That can give you a good idea of how much you could save without even feeling it You can find out where you can get a high rate of interest on your savings from Bankrate com www bankrate com funnel savings Using Web based goal savings calculators All the prece
41. ter what the flyer says Also investments that claim they return 10 per cent a year guaranteed are also suspicious because you should expect some major ups and downs to get that double digit return Table 1 4 Wild Days for the S amp P 500 Event Amount Number of days up 11 217 average gain 0 75 Number of days down 9 984 average loss 0 79 Best one day percentage gain March 15 1933 up 16 6 Worst one day percentage loss Oct 19 1987 down 20 5 Best year 1933 up 46 6 Worst year 1931 down 47 1 Best month April 1933 up 42 2 Worst month Sept 1931 down 29 9 Source Standard amp Poor s Gut Check Time How Much Risk Can Vou Take It s time to get a grip a grip on how much you can invest that is Most beginning investors are so interested in finding stocks that make them rich overnight that they lose sight of risk But academic studies show that risk and return go hand in hand That s why you need to know how much risk you can stomach before you start looking for investments and buying them online Chapter 1 Getting Yourself Ready for Online Investing 3 Several excellent online tools can help you get a handle on how much of a financial thrill seeker you are Most are structured like interviews that ask you a number of questions and help you decide what kind of investor you are These are kind of like personality tests for your investment taste I cover sever
42. tock history should go Click the Max button to get the longest trading history possible on the stock or investment Next scroll down quite a bit and you ll see a small link in the lower right corner labeled View price history with dividends splits Click the link and you can see the price data which can be downloaded One of the site s great est strengths is that it keeps data on many stocks going back to their first days of trading Don t get too hung up if you don t understand everything on these sites Several get pretty sophisticated especially French s Just scan through the annual returns so that you can get a general feel for how markets behave over time the idea here is for you to gain perspective not cram for an econ Ph D FreeStockCharts com Web s Best Streaming Realtime Stock Charts Free Internet Explorer nee B E hitpy waw freestockcharts com 4 x lo Bina Pp J Favorites lt 5 Bsuggestec sites W Get More Add ons W m Page Safety W Tok w Gy FreeStockCharts com D Scan Brokers Tools View Help 08 V 0 26 CAT 56 7 St Standard and Po al wecek How To eti Change t Pg Momentum W 5 Day Video Course Gives You Winning Momentum 53 12 31 8M a Trading Setup Portfolios Sign In to create and see your own portfolios Sign Jn Don t have a Sign In aeii i Latest News amp Notes For SP SOD Chck Story to Open v No
43. uriew Ceres tries 1 952 F uno Laan Ny Mortgage 237 512 amine Your Spsnding Stay On Top of Monthly Bills options BILL AND INCOME REMINDERS NEXT 14 DAYS dA WHATS LEHI 83 802 in ynur checking aennunts fact Worth ssn abo intil nest inname in 11 daya eooooooe Ae Accent R otis a tovo reip ar Chapter 1 Getting Yourself Ready for Online Investing 7 Microsoft also provides several helpful budgeting spreadsheets which you can find by entering the word budget in the search field of the Microsoft Office Templates home page http office microsoft com en us templates default aspx The Web site It s Your Money www mdm proofing com iym excel htm also provides several spreadsheets to help you manage your money Perusing personal finance Web sites Before you can put personal finance software to work you often need to download and install it on your computer You then need to spend some time figuring out how to actually use it If that s exactly the kind of thing that scared you away from making a budget in the first place you might want to consider personal finance Web sites Personal finance Web sites main benefits include the fact that they let you see your information from any PC connected to the Internet and you generally don t have to install software to make them work Here are a few to check out Mint com www mint com built a loyal following with its simplicity Mint was so succes
44. w to know whether you re an active investor Active investors almost feel sorry for passive investors Why would anyone be satisfied just matching the stock market and not even try to do better Active investors feel that if you re smart enough and willing to spend time doing homework you can exceed 10 percent annual returns Active investors also find investing to be thrilling almost like a hobby Some active investors try to find undervalued stocks and hold them until they re discovered by other investors Another class of active investors are short term traders who bounce in and out of stocks trying to get quick gains You re an active investor if you Think long term averages of stocks are meaningless Active investors believe they can spot winning companies that no one knows about yet buy their shares at just the right time and sell them for a profit 34 Part I Getting Started Investing Online ANG RS Are willing to spend large amounts of time searching for stocks These are the investors who sit in front of financial TV shows analyze stocks that look undervalued and do all sorts of prospecting trying to find gems Believe they can hire mutual fund managers who can beat the market Some active investors think that certain talented mutual fund managers are out there and that if they just give their money to those managers they ll win 1 Suspect certain types of stocks aren t priced correctly and that many i
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