How Do I Evaluate The Financial Statements Of A Company Before I Invest?

Learning to evaluate the financial statements before investing is beyond the scope of a short article such as this, but we can give you some basics that will help you begin to interpret financial statements and give meaning to the numbers.

Before we begin, just a word of caution: stock picking is an easy way to lose your nest egg. Rather than investing your hard-earned savings immediately into a bunch of stocks you pick on your own—or worse, one stock—consider allocating just 10% of your total investment portfolio to the stocks you pick yourself. Because you’ll want to invest over time in at least a dozen different stocks to create the sort of diversification you get in a mutual fund, you’ll want to have quite a nest egg before you start picking your own stocks. Finally, don’t get caught trading. Buy stocks and plan to hold them for a long time (measured in years, not hours).

Now, let’s begin to look at some basic financial concepts:

1.   Income Statement: The income statement or statement of operations is a financial report that describes what the company generated in revenue over a period of time (typically a year or a quarter) and the expenses associated with generating that revenue. The profit is literally reported on the “bottom line.”

2.   Balance Sheet: The balance sheet is a report that shows what the company has and owes along with the “equity” of the company. The assets are the things the company has as of the balance sheet date and typically include cash, inventory, plant and equipment and other assets. The liabilities or debts owed by the company are also listed and may include accounts payable, accrued expenses, short and long-term debt and other liabilities. The equity is the difference between the assets and liabilities and is generally listed below the liabilities. The equity is the accounting value of the stock held by the stockholders. Note that the accounting value may not have much to do with the market value.

3.   Financial Ratios: There are a number of basic financial ratios that are often used to help financial analysts and investors to compare one company to another to determine which to buy and which to sell.

4.   Price/Earnings Ratio: Commonly called the P/E ratio, the price refers to the stock price and the earnings is a reference to the profit per share (the latter being simply the total profits of the company divided by the total number of shares outstanding). So a stock with a price of $20 and earnings of $1 per share would be said to have a P/E ratio of 20/1 or simply 2The average P/E of stocks in the market varies widely depending on the economic cycle. The higher the number, the more expensive the stock is perceived to be. Fans of Apple commonly comment about how cheap the stock is despite a price well above $500 because the P/E ratio is lower than some other companies in related industries.

5.   Debt to Equity: The debt to equity ratio is a comparison of the total liabilities of the company to its total equity. Banks, which are highly regulated and explicitly backed by Federal Deposit Insurance have very high ratios of debt to equity. Many high margin, technology businesses with virtually no debt have very low ratios of debt to equity. By comparing one company’s debt to equity ratio to other companies in the same industry, you can get a sense of the health of the company.

6.   Profit Margin: The profit margin is equal to the net profit of the company divided by its total sales or revenue, yielding an answer that is usually quoted as a percentage. Margins vary greatly from one industry to another and from one point in an economic cycle to another. Comparing a company’s profit margin to its past profit margin and to other companies in the industry will help you understand more about the performance of a company.

There are countless sources of this information on the internet. Most stock brokerages that have online trading platforms also provide this kind of information in easy to use formats. In fact, they provide much, much more. You can read about companies that interest you to your heart’s content. One independent site that is popular is MSN Money (on-msn.com/eJ05mD).

Keep in mind that understanding how to read and understand financial statements is essential, but it is only a part of learning to pick stocks.

How Do I Diversify My Retirement Savings Appropriately?

Diversification is a key concept in successful investing, especially for retirement. This article will help you understand what diversification really means, why diversification is important for you and your family, and how you can easily create the needed diversification in your investment portfolio.

Definition:

Diversification refers to spreading your investments around among a variety of both asset classes (stocks, bonds, real estate) and individual investments within those asset classes.

Why:

Diversification is important because if you are not careful, you can end up with a bunch of different investments that all move in the same direction at the same time with the same result you’d get from just one, more easily managed investment.

How:

1.   Invest in funds. By investing in mutual funds or exchange traded funds (ETFs), you get the benefit of diversification at the level of individual investments but you may not be getting diversification at the level of asset classes. A “small cap growth fund,” which invests in smaller growth companies with a bias for technology stocks, for instance, may have dozens of stocks in it, but most will be similar companies that face similar risks and will react in much the same way to changes in the economy or to competition.

2.   Invest in multiple funds. In order to improve your diversification, invest in multiple funds, not just one. Don’t invest in five small cap growth funds, spread your money among several funds with different strategies.

3.   Invest in Stock funds and bond funds. To maximize diversification, be sure to invest both stock funds and bond funds. Over the long haul, stock funds typically generate higher returns, but they also swing up and down much more. Bond funds are not only more stable, but will sometimes rise in value when the economy goes into recession—at the same time stocks are falling. When the economy strengthens and stocks rise, the bond funds may show lower returns as their value falls in the face of higher interest rates.

4.   Show caution with Individual Stocks. Owning individual stocks directly rather than through mutual funds can be fun—if you like that sort of thing. Generally speaking, individual investors will do less well picking their own stocks than professional fund managers or the stock market in general. If you want to own some stocks directly, limit those investments to a small portion of your total portfolio. Don’t trade too often. Buy and hold the investments for a long time. To achieve optimal diversification in your stock portfolio, try to own at least twelve different stocks from different sectors or industries.

5.   Skip bonds and buy funds that buy bonds. Owning bonds directly imposes a management burden and logistical problems that most individual investors are better off avoiding. Unlike stocks which can last forever, bonds mature, that is they get paid off. Then you have to reinvest the money, requiring you to do a whole new round of research. As with stocks, you’d want to be diversified, forcing you to be constantly monitoring your bond portfolio. Buy two or three bond funds with different strategies to achieve your bond diversification and simplify the work you’re required to do.

6.   Use the allocation of stocks and bonds to adjust the risk and return in your portfolio. The more stocks you own, the riskier your portfolio and the higher your returns are likely to be over the long haul. For all but the very most aggressive investors, having some bond fund investments helps to balance the risk to allow you to achieve more consistent, albeit, more modest returns over time. As you age, you may wish to slowly shift the balance toward bonds. Most advisors now recommend keeping stock investments (usually through mutual funds) as a key part of your retirement savings even after you retire. With people living past 100 years old, you need your money to last for a long time. That means you need good, consistent returns, which you can only get with a combination of stocks and bonds.

Investing for retirement can be challenging, but by spending just a little time learning, you can master important but basic concepts that will help you to protect your portfolio from risk you aren’t being paid to take.

Six Steps To Pick A Good Mutual Fund To Launch Your Savings

Buying your first mutual fund may seem complicated and risky, but this is something you can do everything by yourself. This straightforward guide will walk you through the key steps to look for the right fund for your objectives.

1. Define your investment objective: before you buy a mutual fund, you need to understand why you are making this investment, when you expect to need the money and how risk tolerant you are—remembering that all mutual funds have risk, some much more than others.

2. Use a mutual fund screener: Yahoo! Offers a mutual fund screener (it.Ly/Khm6m3) that you can use for free to find a fund that suits your criteria. Without using a tool of this sort, you simply cannot find and review all of the available funds to study.

3. Match your objective to the fund: if you are a long investment horizon, that is, you won’t need the money back for a long time, you may be invited to take more risk by investing in a mutual fund that invests in growth stocks. If your investment horizon is very short, you would probably want to invest in a fund that invests in short term bonds or even a “money market” mutual fund that keeps your money liquid, trying never to put your capital at risk at all (in very rare circumstances, some money market investors have lost small fractions of their investments). In between these extremes, you may want to get a fund that invests in both stocks (or equities) and debt (bonds).

4. Consider the costs: mutual fund managers collect their money by charging investors of small fees to enter the fund and the money each year. The “lead” refers to the fee to enter the investment and the “expense ratio” refers to the annual cost. If is there involved in a fund with a 6% load and a 2% expense ratio, your fund will be required to generate an 8% annual return (tough to do) just for you to break even in the first year. Look for “no load” funds and funds with low expense ratios. Many of the lowest cost funds are “index” funds that don’t try to beat a market index. They just try to match it. Given that very few funds consistently beat the market, focusing on fees is an excellent way to keep your money growing.

5. Evaluate Risk: think your personal appetite for risk and screen mutual funds to find those that appeal to your sense of adventure or your fear of falling, as the case may be. Remember that risk is generally compared among funds of the same class. So a risky short term bond fund may be a safer bet than a “low risk” growth equity fund.

6. Investment: generally, you can invest directly with the fund itself by sending them money directly—visit the Fund’s website for instructions. If you plan to invest all of your money in one mutual fund, that’s the best way to be doing. If you plan to invest in multiple mutual funds over time, you may wish to open a brokerage account with Schwab, Fidelity or TD Ameritrade where you can invest in a variety of mutual funds easily.

How Do I Find A Trustworthy Financial Advisor?

Finding someone you can trust in any field can be an issue. Think about the person who does your hair; how long get into you been back to the same person? What would happen if she suddenly left town? You want to take an even higher level of trust and confidence in a financial advisor.
Here are some tips to help you find someone you trust:

1. There are plenty of different types of financial advisors—you’ll need more than one. You may already have an insurance agent for property and casualty, a separate agent for life insurance, an accountant who prepares your tax return, a stock broker who helps with your investments.

2. Check for self-interested responses. Ask all of your financial advisors a basic question, like, how much should I be saving every month for retirement. An advisor you shouldn’t trust will suggest investing with her before finding out how much you are contributing to your 401k and whether you could contribute more. An advisor you can trust, will first find out how much you are investing in your 401k each month, how much you have invested and how much your employer will match if you contribute more. Never invests with someone who doesn’t encourage you to invest first in your 401k.

3. Compare answers among team members. It is reasonable to solicit opinions on any financial subject from all of your advisors. Ask your accountant how much life insurance you need. She has relevant experience and training to give you feedback. Compare that to the answer you might get from your life insurance agent. If they both give you similar answers, that should reassure you. If they are completely dissimilar, keep asking until you determine the correct answer for you—and which advisors gave the best and worst responses.

4. Ask friends for referrals. Ask friends, especially those whose situations are similar to yours, to introduce you to advisors they trust. Ask why they trust their advisors. Ask them to compare them to other advisors they’ve had that they didn’t trust.

5. Beware of high fees. Much of the advice you really need should be low cost or available at virtually no charge. If do not leave an account with a large, discount brokerage like Schwab, Fidelity or TD Ameritrade, you can visit with an advisor in the office at no charge. They won’t do a healthy financial plan for you, but they will help you allocate your investments in a strategy that fits your risk tolerance and objectives. Your tax accountant can give you a lot of financial advice after completing your tax return and may be willing to offer advice for free—or cheap—after preparing your return—for a moderate fee.

6. Your employer can help. If your employer offers a 401k, and most do, you should be able to ask to see or speak with a financial advisor who can help you figure out how much to be saving for retirement and how to allocate your investments within the 401k—all at no charge. Be cautious about offers to manage the rest of your money for a fee. Focus on what she can and should do for you as a 401k participant for free.

As you can see, there is help all around you. Seeking out unbiased help can be a big help. Most financial advisors make money by having more of your money under management. Generally, you can have all the help you really need the big, discount brokers without paying high fees. Your CPA can be a really good judge of proposals that you don’t fully understand. Don’t ever invest a large amount of money without talking to someone knowledgeable about money who won’t make a commission or fee from your doing so. By performing the following elementary steps, you can get affordable, independent and reliable financial advice.

How To Invest Your First $5,000 For Retirement

So you’ve just accumulated $5,000 in your IRA and now you need in order to reverse it. It is not feasible, if not impossible to invest it directly into stocks and or bonds so you’ll want to invest in a mutual fund or ETF.

You could split your investment and invest in two or three funds, but if we presume that you will continue to make contributions to your retirement account and that those future investments can go into other funds, our goal for today is to help you choose your first mutual fund.

Let’s assess your situation.

You do over or under 50 years old? If you are older, you have somewhat less time to invest, making the risk of a reversal greater for you so you’d want to invest more conservatively. If you are younger—or much younger—you can and should tolerate a bit more risk.

How do you believe that about risk? Does the idea that you could check the value of your mutual fund at some point in the future and discover that its value has dropped to send you into a panic? Take care of the idea that it might be worth 20 percent more in a year excite you? Would know that your retirement savings are at risk keep you from sleeping at night?

If you conclude that you can tolerate investment risk well, then you should be considering mutual funds that get involved in stocks. Their values rise and fall more than funds that get involved in bonds, but over the long haul you should be expected to earn more in stocks than bonds. If you don’t tolerate risk well, you may want to do your first investment in a bond fund.

If you feel panicked about risk, please consider that without taking some risk, it is virtually impossible to rescue enough for retirement. Risk free returns don’t earn sufficient interest to keep pace with the value eroding impact of inflation. Money in the bank is better that no money at the bank, but it will be worth less tomorrow than it is today. To retire comfortably you need to go comfortable with moderate risk.

Morningstar is a private company that rates and categorizes mutual funds. There are dozens of categories (it.Ly/TUO79E). Your first mutual fund investment in your IRA could come from one of the following three categories:

Large Blend: A large blend fund invests in the stocks of large companies with a balance of growth and value investments (growth stocks are those projected to grow faster than the market and usually do not pay dividends and value stocks are those that are perceived to be trading below some other measure of value).

Moderate Allocation: A moderate allocation fund invests in both stocks and bonds, with more money invested in stocks than bonds. A portion of the money may also be allocated to cash. These funds expect to achieve some appreciation as well as to generate returns through dividends.

Long-Term Government Bond: These funds invest in treasury bonds that mature more than ten years in the future. Such bonds have no credit risk, that is no risk of not being performed to schedule, but as interest rates change, the value of the bonds will fluctuate.

Each of these fund categories would make a good chief fund for your retirement savings. They offer high expected returns—compared to what you can earn in a bank account. They are shown in order from most risky to least risky. You can decide which of these three best represents your risk tolerance depended on your individual situation.

Once you’ve decided upon a category, you’ll want to choose an unusual fund based primarily on the expenses. Your broker should give you a list of mutual funds you can purchase with no transaction fees. You’ll also want to choose a fund that doesn’t charge a “load” or upfront fee. You’ll also want to avoid marketing and distribution fees called 12b-1 fees. Finally, you’ll want to be for funds with low expense ratios. All of these fees must be disclosed so you can figure out which fund is best for you.

Your broker should provide a screener to allow you to choose a mutual fund that suits your criteria. You may also try the Yahoo (it.Ly/Khm6m3) mutual fund screener.

With that, you’re all set to make your first mutual fund investment in your IRA.

How To Invest $1 Million For Retirement

It may sound absurd to you, but by the time you retire you may need to know how to invest $1 million—or some substantial amount close to that. Talk about a problem you want to have, right?

If you save 10% of your income from every job you ever have and work for forty or more years, you may find that your IRA holds ten to fifteen times your income. Depending on income, that could easily put your savings at over $1 million. If you are young now, let this be motivation. Consistent investing will leave you with over $1 million in your retirement account.
Now, let’s talk about what to do with it:

Allocation: The first key principle to observe is the idea of asset allocation. You’ll wish to allocate your million into three smaller piles. One pile is for this reason that stocks. Another pile is for bonds. Another pile is just for cash. If you are just starting retirement you may want to distribute about 30 to 40 percent to the stock pile, 40 to 60 percent of bonds and 10 to 20 percent in cash. The more is there involved in stocks, the greater risk and greater return you can expect. Cash is risk free, so if you are conservative you’ll wish to obtain more cash and less put into stocks. For retirees, bonds represent the central pillar of your investment program as they generate income you can spend.

Diversification: Do not put your entire stock allocation into one or two stocks. Don’t invest it all in twelve different stocks all from the same industry. Market prices assets as part of a portfolio; when you concentrate your investments you take the risk that no one is paying you to take. Seeking a wide range of stocks is called diversification. You should do the same with bonds, too.

Funds: The easiest way to get diversification is by buying mutual funds or ETFs (Exchange Traded Funds—always known as ETFs). Funds go for dozens of different stocks or bonds, providing good diversification. Each fund is a target. It is a big idea to buy funds with a variety of different objectives. With $1 million you may want to invest in as many as ten separate funds, you may want to use this list of Morningstar fund categories(it.Ly/TUO79E) as a guide for the types of funds you includes. This example would provide an allocation of 40% stocks, 50% bonds and 10% cash.

1. Small Growth: Funds that invest in small, growing companies

2. Sector-Real Estate: Funds that invest in real estate related assets, including REITs

3. Mid-Cap Blend: Funds that invest in mid-size companies, including both growth stocks and value stocks

4. Large Value: Funds that invest in large companies viewed to be undervalued

5. Multi-Sector Bond: Funds that invest in government bonds, foreign bonds, and high yield bonds (junk bonds)

6. Long-Term Bond: Funds that invest in long term corporate bonds

7. Intermediate Term Bond: These funds invest in corporate bond maturing in less than ten years.

8. Short Term Bond: These funds invest in short term corporate bonds.

9. Short Government Bond: These funds invest in short term Treasury Bonds.

10. Money Market: these funds have very low yields. However, your cash is safe here.

There are numerous separate funds available for each category. Seek out funds with no load, no commission through your broker and low expense ratios. All of these factors can be easily screened with almost any “mutual fund screener” (search that phrase on the Internet to locate one).

Here’s the kicker: The same basic rules for investing apply to any amount of money. You may simply want to reduce the number of funds you invest in if you have significantly less than $100,000. You’ll want the diversification and allocation benefits of having at least five funds once you have $10,000 in your retirement account.

Investing 101 For The True Novice

If you are the way many people in America, the very idea of investing is scary because it all sounds too complicated. Good news: you can get it! Everything you really have to know is part of this short article.

Money in savings accounts and certificates of deposit does not generate enough return to provide income in retirement or enough growth over time to help prepare much for retirement. Making additional investments could be a wise choice.
Just a few key words will help you understand all you need to know to start making sound investment decisions:

Stocks: Stock in a company is a unit or share of ownership in that company. Hence, investors often say things like. “I own Ford and IBM, ” by which they simply mean that they own shares of stock in those companies. Stock prices come up and down quite randomly in the short run, but do tend upward over long periods of time. The price you pay for the stock and the price at which you sell the stock are ever so slightly different—you pay a bit more to buy and get a bit less when you sell. Market makers take the difference. You’ll also pay a commission to purchase and sell stocks. Stock prices can go all the way to zero. There is no limit to how high a stock price can go. Some companies pay dividends to all the shareholders (the people who own the stock) and some don’t.

Bonds: Bonds are loans from companies and governments to investors who purchase the loans called bonds. Typically, a bond pays interest but no principal over extended periods of time—at least five years and often up to 30 or more years. At the end of the bond’s life (at maturity), the principal is given. Usually, bonds are emitted with a face value of $1,000 but you are often required to purchase more than one at a time. The bond market is much bigger than the stock market but it gets less attention because the prices of bonds—which do move—move less dramatically than stock prices, giving folks less to speak of. Total investment return on bonds tends to be a little lower than the total return on stocks over very prolonged periods of time because bonds tend to be a bit less risky—but no bonds are truly risk free! (You can even lose money on U.S. Treasury Bonds if interest rates rise and you have to sell them.)

Mutual Funds: Mutual Funds is professionally managed pools of money that invest in stocks of and/or bonds. The professional managers charge a fee but they do all the hard work of researching the investments, deciding when to buy and sell shares and even meeting with the management of the companies that they invest in.
Mutual funds are a critical tool for novices to be used to start investing. Numerous mutual funds enable you to make small, monthly purchases so you can begin with almost nothing and build significantly over time. Choosing a mutual fund can be daunting, however.

To simplify the process, consider opening an account with a large brokerage firm like Schwab, Fidelity or TD Ameritrade (you may simply wish to choose based on which has the nearest office). All offer unique mutual funds that you can invest in without fees and they have people who can allow you to choose. You already know all you need to know to get started so get to it.