Your Take 
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Your take: Is stock investing for suckers?

Do you still believe in stock investing?I don’t blame people for wanting to give up on investing in stocks.

In the last 20 years, we’ve had a massive tech bubble burst, two recessions and a financial crisis that cut the value of the S&P 500 by more than half in a matter of months.

If stocks were a party guest, they’d be the rowdy drunk who you finally stop inviting to things after they break their third lamp.

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 Investing 
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Basics of Stock Market Investing

Wall StreetUntil a few years ago, the stock market was a mystery to me. I understood how it worked but I was always concerned about taxes, not getting ripped off, and the sums of money it seemed to take to “make” anything in the market. This was way before the huge market gyrations of the last few years, especially the pops and drops during the “Great Recession,” and I didn’t commit myself to learning until a few years into personal finance blogging.

I thought it would be valuable to put together an article on the basics of stock market investing. This won’t explain everything about the market, that’s just too difficult, but hopefully it’s a good start that will be the basis for additional research. Let me know if you see anything missing and I can add it.

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 Your Take 
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Your Take: Faith in the Stock Market

Game of LifeHere’s what every stock market expert will tell you – slow and steady wins the race. Keep your regular contributions going, lean on the benefits of time and compounding, and you will be financially set when you retire. Ignore the daily swings of the stock market, those are based on the whims of traders and market makers, just keep at it and you will be just fine. Statistics will be quoted, including the infamous “the stock market has returned XYZ since 19-whenever,” and those are supposed to buttress the argument that the stock market is just fine… as long as you ignore the daily gyrations.

Here’s the problem I have with that line of thinking – the market may have offered a reasonable rate of return since the Great Depression but a lot has changed since then. With the sheer number of electronic trading, including emotionless computer algorithms that follow their independently programmed instructions, and events such as the flash crash, it’s obvious we aren’t in the same era as before. High frequency trading accounts for almost 75% of all buying and selling of equities, according to Bloomberg.

The first arrow that pierced the sanctity of the stock market was when I read Trading with the Enemy by Nicholas Maier, which chronicled Maier working at Cramer’s hedge fund. In that book, Cramer finds out about a newspaper article before it gets published and trades based on that information. Is it insider information? Perhaps. Does this happen all the time? Very likely. Does this make you believe that us buy and holder suckers are really just buying into a Ponzi scheme?

Do I believe the stock market is the easiest way for you to save for retirement? Yes. You really can’t beat getting into and out of a fairly liquid position for only a few dollars. When I buy shares of Apple, and I have, I’m not worried I can’t find a buyer in the next ten seconds. I might have to adjust my expectations, which should be in line with demand at the moment based on Bid/Asks, but I can find someone fairly quickly… much quicker than any other asset.

Is my faith somewhat affected by the hundred+ point swings in the market that seem to happen on a daily basis these days? Also yes.

How about you?

(Photo: psycho-pics)


 Investing 
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Does Automatic Dividend Reinvestment Make Sense?

I’ve been a fan of dividend stocks for a few years now, ever since the Great Stock Market Sale of 2008 (I picked up a few more in the Less Volatile Sale of Mid-2011). With my longer time horizons and my hardy stomach for volatile stock prices, I found it easy to be patient and purchase shares in solid companies with good earnings and a dividend policy that was consistent and not overreaching. With a basket full of dividend stocks paying out once every quarter (or twice a year), one of the bigger questions on my mind was whether I wanted to reinvest my dividends.

Many brokerages now let you reinvest your dividends without charge. It’s a nice feature that was, many many years ago, only available through company-specific DRIPs. The question is whether automatic reinvestment makes sense?

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 Investing 
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Are Bonds a Safe or Risky Investment?

You’ve probably heard of the 120 minus your age diversification rule: subtract your age from 120 and that’s how, as a percentage of your investments, much you should have invested in stocks. The rest should be in bonds. The idea behind that rule is that stocks are “risky” and bonds are “safe.” Are bonds really any safer than stocks?

At it’s core, a bond is a simple instrument. You are basically buying a debt instrument and loaning a company or municipal government or some other entity some money. The bond has terms like a regular interest payout (coupon rate), a life span, and a par (face) value. The bonds are themselves guaranteed by the entity that issued them and riskier entities typically offer higher interest rates to offset the risk that the entity defaults.

As you’d expect with any financial instrument, there are all sorts of variations on this general theme. For example, there are bonds that let the issuer “call” them, or pay them off, early. There are zero coupon bonds sold at a discount to face value (so you pay $80 for a $100 bond, get no interest, but you get $100 when it matures).

So does that make them riskier or safer than stocks?

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 Investing 
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Buy and Hold Investing Works

The tech boom of the late 1990s and very early 2000s made day trading a household term. Before the days of cheap stock trades and even cheaper real-time information, buy and hold was the norm. For regular folks, buying and selling stocks during the day was both expensive and fruitless because you didn’t know the exact price (you just called your broker to fill an order) and you wouldn’t until the next day, when it was printed in the newspaper. The internet changed all that.

However, buying and holding is still the smartest strategy, despite lower transaction costs, because the vast majority of people are terrible at picking stocks. We don’t do enough research, we aren’t as knowledgeable about a company as we should (it takes more than reading their income statement and balance sheet – a lot more), and we aren’t able to research as much companies as we should (we should know the company, it’s competitors, it’s suppliers, it’s distributors, it’s regulatory environment, etc.). We have day jobs!

I came to this realization because I’ve been reading Crossing Wall Street for at least a year. It’s written by Eddy Elfenbein, a self-proclaimed stock market addict and named by CNN/Money as the best buy and hold blogger. His “thing” is his annual Buy List of stocks that he changes once a year and frequently puts up against the S&P500. He’s beaten the S&P500 each of the last four years and his site, and his list, is completely free (so no “fee” so to speak).

All that is well and good but when you read his posts, and his email newsletter, you’ll probably realize how little you know about the companies you own. He has an uncanny way of predicting a company’s earning’s results and is rarely surprised (if there is every a surprise, it’s usually with annual projections or some other surprise), which is a sign that I don’t know enough!

One example, his buy list, doesn’t necessarily “prove” that Buy and Hold investing works but it certainly doesn’t hurt when you have a well informed person making up that list. (I don’t have anything patterned about the Buy List, I do own a few companies on it, but I do like reading his posts – and he responds to email)


 Investing 
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Be Wise to Investment Taxes

When it comes to investing, there are two things you can control – how much you pay in fees and how much you pay in taxes. With fees, it’s pretty straightforward because fees are disclosed up front. A brokerage charges you $x per trade, a mutual fund company pulls x% in expenses, and both are required by law to make those very clear.

Taxes are slightly different. The tax code can be complicated and it doesn’t help that there are so many different “types” of investment accounts from 401(k)s to Roth IRAs to your plain vanilla brokerage account. When it comes to investing, what you buy and where can be just as important as what you buy.

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 Investing 
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Finances in 55 Seconds: Choosing an Index Fund

One of the ways that you can diversify your portfolio, while at the same time limiting some of your risks, is to invest in index funds. An index fund is a group of investments that follows a specific index. If you invest in an all market index fund, then you get a little share of everything on the stock market. There are funds that follow the S&P 500. You can find index funds that follow specialty indexes, such as those for alternative energy, or small business. You can even find index funds for bonds and other investments.

While investing in index funds isn’t everything, this strategy can provide you with a way to earn market returns, pay low fees (index funds cost much less than actively managed mutual funds), and build up your nest egg. Choosing index funds, though, can be somewhat daunting. If you have a little less than a minute, though, you can get a head start on the process:

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