1. What exactly is a mutual fund?

A mutual fund pools money from hundreds and thousands of investors to construct a portfolio of stocks, bonds, real estate, or other securities, according to its charter. Each investor in the fund gets a slice of the total pie.

2. Mutual funds make it easy to diversify.

Most funds require only moderate minimum investments, from a few hundred to a few thousand dollars, enabling investors to construct a diversified portfolio much more cheaply than they could on their own.

3. There are many kinds of stock funds.

The number of categories is dizzying. Some examples: growth funds, which buy shares of burgeoning companies; sector funds, which buy shares of companies in a particular sector, such as technology or health care; and index funds, which buy shares of every stock in a particular index, such as the S&P 500.

4. Bond funds come in many different flavors too.

There are bond funds for every taste. If you want safe investments, consider government bond funds; if you’re willing to gamble on high-risk investments, try high-yield bond funds, also known as junk bond funds; and if you want to keep down your tax bill, try municipal bond funds.

5. Returns aren’t everything – also consider the risk taken to achieve those returns.

Before buying a fund, look at how risky its investments are. Can you tolerate big market swings for a shot at higher returns? If not, stick with low-risk funds. To assess risk level, check these three factors: the fund’s biggest quarterly loss, which will help you brace for the worst; its beta, which measures a fund’s volatility against the S&P 500; and the standard deviation, which shows how much a fund bounces around its average returns.

6. Low expenses are crucial.

In order to cover their expenses – and to make a profit – funds charge a percentage of total assets. At no more than a few percentage points a year, expenses may not sound substantial, but they create a serious drag on performance over time.

7. Taxes take a big bite out of performance.

Even if you don’t sell your fund shares, you could still end up stuck with a big tax bite. If a fund owns dividend-paying stocks, or if a fund manager sells some big winners, shareholders will owe their share of Uncle Sam’s bill. Investors are often surprised to learn they owe taxes – both for dividends and for capital gains – even for funds that have declined in value. Tax-efficient funds avoid rapid trading (and high short-term capital gains taxes) and match winning trades with losing trades.

8. Don’t chase winners.

Funds that rank very highly over one period rarely finish on top in later ones. When choosing a fund, look for consistent long-term results.

9. Index funds should be a core component of your portfolio.

Index funds track the performance of market benchmarks, such as the S&P 500. Such “passive” funds offer a number of advantages over “active” funds: Index funds tend to charge lower expenses and be more tax efficient, and there’s no risk the fund manager will make sudden changes that throw off your portfolio’s allocation. What’s more, most active mutual funds underperform the S&P index.

10. Don’t be too quick to dump a fund.

Any fund can – and probably will – have an off year. Though you may be tempted to sell a losing fund, first check to see whether it has trailed comparable funds for more than two years. If it hasn’t, sit tight. But if earnings have been consistently below par, it may be time to move on.

The above post is from the CNN Money series called “Money 101.” See the rest of lesson 6 here.

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1. Stocks aren’t just pieces of paper.

When you buy a share of stock, you are taking a share of ownership in a company. Collectively, the company is owned by all the shareholders, and each share represents a claim on assets and earnings.

2. There are many different kinds of stocks.

The most common ways to divide the market are by company size (measured by market capitalization), sector, and types of growth patterns. Investors may talk about large-cap vs. small-cap stocks, energy vs. technology stocks, or growth vs. value stocks, for example.

3. Stock prices track earnings.

Over the short term, the behavior of the market is based on enthusiasm, fear, rumors and news. Over the long term, though, it is mainly company earnings that determine whether a stock’s price will go up, down or sideways.

4. Stocks are your best shot for getting a return over and above the pace of inflation.

Since the end of World War II, through many ups and downs, the average large stock has returned close to 10% a year — well ahead of inflation, and the return of bonds, real estate and other savings vehicles. As a result, stocks are the best way to save money for long-term goals like retirement.

5. Individual stocks are not the market.

A good stock may go up even when the market is going down, while a stinker can go down even when the market is booming.

6. A great track record does not guarantee strong performance in the future.

Stock prices are based on projections of future earnings. A strong track record bodes well, but even the best companies can slip.

7. You can’t tell how expensive a stock is by looking only at its price.

Because a stock’s value depends on earnings, a $100 stock can be cheap if the company’s earnings prospects are high enough, while a $2 stock can be expensive if earnings potential is dim.

8. Investors compare stock prices to other factors to assess value.

To get a sense of whether a stock is over- or undervalued, investors compare its price to revenue, earnings, cash flow, and other fundamental criteria. Comparing a company’s performance expectations to those of its industry is also common — firms operating in slow-growth industries are judged differently than those whose sectors are more robust.

9. A smart portfolio positioned for long-term growth includes strong stocks from different industries.

As a general rule, it’s best to hold stocks from several different industries. That way, if one area of the economy goes into the dumps, you have something to fall back on.

10. It’s smarter to buy and hold good stocks than to engage in rapid-fire trading.

The cost of trading has dropped dramatically — it’s easy to find commissions for less than $10 a trade. But there are other costs to trading — including mark-ups by brokers and higher taxes for short-term trades — that stack the odds against traders. What’s more, active trading requires paying close attention to stock-price fluctuations. That’s not so easy to do if you’ve got a full-time job elsewhere. And it’s especially difficult if you are a risk-averse person, in which case the shock of quickly losing a substantial amount of your own money may prove extremely nerve-wracking.

The above post is from the CNN Money series called “Money 101.” See the rest of lesson 5 here.

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1. Over the long term, stocks have historically outperformed all other investments.

From 1926 to 2010, the S&P 500 returned an average annual 9.8% gain. The next best performing asset class is bonds. Long-term U.S. Treasurys returned, on average, 5.4% over the same period.

2. Over the short term, stocks can be hazardous to your financial health.

On Dec. 12, 1914, stocks experienced the worst one-day drop in stock market history — 24.4% . Oct. 19, 1987, the stock market lost 22.6%. More recently, the shocks have been prolonged and painful: If you had invested in a Nasdaq index fund around the time of the market’s peak in March 2000 you would have lost three-fourths of your money over the next three years. And in 2009, stocks overall lost a whopping 37%.

3. Risky investments generally pay more than safe ones (except when they fail).

Investors demand a higher rate of return for taking greater risks. That’s one reason that stocks, which are perceived as riskier than bonds, tend to return more. It also explains why long-term bonds pay more than short-term bonds. The longer investors have to wait for their final payoff on the bond, the greater the chance that something will intervene to erode the investment’s value.

4. The biggest single determiner of stock prices is earnings.

Over the short term, stock prices fluctuate based on everything from interest rates to investor sentiment to the weather. But over the long term, what matters are earnings.

5. A bad year for bonds looks like a day at the beach for stocks.

In 1994, the worst year for bonds in recent history, intermediate-term Treasury securities fell just 1.8%, and the following year they bounced back 14.4%. By comparison, in the 1973-74 crash, the Dow Jones industrial average fell 44%. It didn’t return to its old highs for more than three years or push significantly above the old highs for more than 10 years.

6. Rising interest rates are bad for bonds.

When interest rates go up, bond prices fall. Why? Because bond buyers won’t pay as much for an existing bond with a fixed interest rate of, say, 5% because they know that the fixed interest on a new bond will pay more because rates in general have gone up.

Conversely, when interest rates fall, bond prices go up in lockstep fashion. And the effect is strongest on bonds with the longest term, or time, to maturity. That is, long-term bonds get hit harder than short-term bonds when rates climb, and gain the most when rates fall.

7. Inflation may be the biggest threat to your long-term investments.

While a stock market crash can knock the stuffing out of your stock investments, so far — knock wood — the market has always bounced back and eventually gone on to new heights. However, inflation, which has historically stripped 3.2% a year off the value of your money, rarely gives back what it takes away. That’s why it’s important to put your retirement investments where they’ll earn the highest long-term returns.

8. U.S. Treasury bonds are as close to a sure thing as an investor can get.

The conventional wisdom is that the U.S. government is unlikely ever to default on its bonds – partly because the American economy has historically been fairly strong and partly because the government can always print more money to pay them off if need be. As a result, the interest rate of Treasurys is considered a risk-free rate, and the yield of every other kind of fixed-income investment is higher in proportion to how much riskier that investment is perceived to be. Of course, your return on Treasurys will suffer if interest rates rise, just like all other kinds of bonds.

9. A diversified portfolio is less risky than a portfolio that is concentrated in one or a few investments.

Diversifying — that is, spreading your money among a number of different types of investments — lessens your risk because even if some of your holdings go down, others may go up (or at least not go down as much). On the flip side, a diversified portfolio is unlikely to outperform the market by a big margin for exactly the same reason.

10. Index mutual funds often outperform actively managed funds.

In an index fund, the manager sets up his portfolio to mirror a market index — such as Standard & Poor’s 500-stock index — rather than actively picking which stocks to purchase. It is surprising, but true, that index funds often beat the majority of competitors among actively managed funds. One reason: Few actively managed funds can consistently outperform the market by enough to cover the cost of their generally higher expenses.

The above post is from the CNN Money series called “Money 101.” See the rest of lesson 4 here.

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1. Narrow your objectives.

You probably won’t be able to achieve every financial goal you’ve ever dreamed of. So identify your goals clearly and why they matter to you, and decide which are most important. By concentrating your efforts, you have a better chance of achieving what matters most.

2. Focus first on the goals that matter.

To accomplish primary goals, you will often need to put desirable but less important ones on the back burner.

3. Be prepared for conflicts.

Even worthy goals often conflict with one another. When faced with such a conflict, you should ask yourself questions like: Will one of the conflicting goals benefit more people than the other? Which goal will cause the greater harm if it is deferred?

4. Put time on your side.

The most important ally you have in reaching your goals is time. Money stashed in interest-earning savings accounts or invested in stocks and bonds grows and compounds. The more time you have, the more chance you have of success. Your age is a big factor – younger people (who have more time to build their nest egg) can invest differently than older ones. Generally, younger people can take greater risks than older people, given their longer investment horizon.

5. Choose carefully.

In drawing up your list of goals, you should look for things that will help you feel financially secure, happy or fulfilled. Some of the items that wind up on such lists include building an emergency fund, getting out of debt and paying kids’ tuitions. Once you have your list together, you need to rank the items in order of importance.

6. Include family members.

If you have a spouse or significant other, make sure that person is part of the goal-setting process. Children, too, should have some say in goals that affect them.

7. Start now.

The longer you wait to identify and begin working toward your goals, the more difficulty you’ll have reaching them. And the longer you wait, the longer you postpone the advantage of compounding your money.

8. Sweat the big stuff.

Once you have prioritized your list of goals, keep your spending on course. Whenever you make a large payment for anything, ask yourself: “Is this taking me nearer to my primary goals – or leading me further away from them?” If a big expense doesn’t get you closer to your goals, try to defer or reduce it. If taking a grand cruise steals money from your kids’ college fund, maybe you should settle for a weekend getaway.

9. Don’t sweat the small stuff.

Although this lesson encourages you to focus on big-ticket, long-range plans, most of life is lived in the here-and-now and most of what you spend will continue to be for daily expenses – including many that are simply for fun. That’s OK – so long as your long-range needs are taken into consideration.

10. Be prepared for change.

Your needs and desires will change as you age, so you should probably reexamine your priorities at least every five years.

The above post is from the CNN Money series called “Money 101.” See the rest of lesson 1 here.

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Financial literacy...not just for bookworms

In a recent report referenced by Southern Methodist University, in a study called “Economic Factors and the Debt Management Industry” by Richard Briesch PhD, 41 percent of households give themselves a C, D, or F in financial literacy.

That’s not good.

What’s your level of financial literacy?

1. 57 percent of households do not have a budget. DMB Financial starts every engagement with clients by jointly developing a budget. Knowing where you are, where you begin, is the first step towards better financial literacy.
2. 32 percent of households admit they have no savings. DMB Financial helps you set up an independent savings account at an FDIC insured institution. This is your savings account. It holds your savings. Creating a savings mechanism is a critical. It gives you the tools to make good financial decisions. You have a budget and, over time, develop a healthy savings amount. Now you just have to put that plan into action.
3. 77 percent of households admit they’re saving less this year than they saved last year. Even in tough economic times, with a good budget and the right savings plan, you can improve your savings situation over last year. The average DMB Financial client is saving over $700 a month by the time they graduate our debt settlement program! That’s amazing, especially considering the average income is around $50,000 a year.
4. There is no long-term plan for wealth creation. Rich people have financial plans, investments, and advisors. Are financial plans, investments, and advisors only for rich people? Or, are those people rich because they have a financial plan, investments, and advisors! Many graduating DMB Financial clients transition to our partner’s financial planning services. They start retirement savings, college funds, and some even start buying stocks and bonds. In just a few short years they go from being buried in debt to having a plan that gets them to $100,000 in the bank or more. Hello retirement. Hello paying for kids’ college. Hello new home.

Financial literacy isn’t something just for the rich and famous. DMB Financial enters every client into its 36-month financial literacy series of email newsletters. We partner with a major financial planning service. They provide our clients with free financial planning consultations to help identify their goals, their dreams, and put a plan in place to reach them.

Get out of debt. Then create wealth. Come join the financial literate!

—————————————————————-

For a free debt analysis and preliminary budget, call a Program Consultant at (866) 869-6959. You’ve got nothing to lose, except the debt.

 
This article is for informational and educational purposes only.  It is not intended to provide legal, tax or financial analysis.  Please consult your attorney, accountant or tax advisor if you have legal, financial planning, or tax related questions.

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One great way to begin saving towards retirement is to set up a Roth IRA personal retirement account. Roth IRAs (or Individual Retirement Accounts) allow you to set aside after-tax income up to a specified amount each year. Earnings on the account are tax-free, and tax-free withdrawals may be made after age 59 and a half. Funds are used in much the same way as traditional investment programs, and can either be managed by your selected investment manager, or managed personally, whichever suits your individual needs.

 Setting up a Roth IRA account is fairly simple and straightforward. The first step in the process is to identify exactly where you should open your account. Many financial institutions offer IRAs, each with its own strengths and weaknesses. It’s important to search for a company that suits your needs. Questions to keep in mind when researching IRA offerings include the following:

•  Is there a minimum initial investment? Minimum contributions?
• What sorts of fees are assessed to the account?
• Does the company offer automatic contributions?
• What investment options are available? Can you invest in stocks? Mutual funds? Real estate?
• How reputable is the provider?

 If you already work with a financial advisor, they can assist you in selecting an appropriate financial institution to work with. A good starting point is the three leading American investment institutions — T. Rowe Price, Fidelity, and Vanguard. These large investment firms have more investment options than smaller institutions, and can support both aggressive and conservative investment plans.

 Actually setting up the Roth IRA account involves little more than filling out a detailed application (similar to a credit card application). You will need your social security number, banking information, and funds to cover an enrollment fee and initial investment into the account. Automatic fund transfers can also be selected to automatically transfer funds from your bank accounts into the Roth IRA each month, making investment that much easier.

 The only thing to do now is to sit back and watch your investment grow.  

 This article is for informational and educational purposes only.  It is not intended to provide legal, tax or financial analysis.  Please consult your attorney, accountant or tax advisor if you have legal, financial planning, or tax related questions.

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Here are four steps that can set you up for a successful future once your credit card debts are a thing of the past:

1. Pay Down Your Mortgage: Most people don’t view a mortgage as a debt, but rather as an investment. Technically, it is still a form of debt. And interest rates on home mortgages can make paying off the actual principal amount extremely difficult. Send the mortgage company as much as possible each month to ensure that you are paying down the principal as opposed to pure interest. The sooner you can pay off the mortgage, the sooner you can be entirely debt free.
2. Increase Your Emergency Fund to 12 Months: Although the standard emergency fund is capable of covering 3-6 months worth of bills, increasing the fund to cover a full year gives you additional protection. This is particularly true in today’s tough job market, with many unemployed workers requiring 8 to 10 months or more to find a new position.
3. Purchase Adequate Disability Insurance: Viewed by many as a luxury they just can’t afford, disability insurance is a smart move to make sure you and your loved ones are taken care of in the event of an accident or illness. Select a plan that gives your family comfortable coverage without breaking the bank.
4. Begin Preparing for Retirement: You may think you are far too young to even begin contemplating retirement. The fact remains that the sooner you begin preparing for retirement, the better off you will be when the time comes. Many companies today offer employer-matched 401k programs, and the sooner you can begin to put money into these accounts, the sooner the lump sum can begin to steamroll and start to amount to a sizable amount.

This article is for informational and educational purposes only.  It is not intended to provide legal, tax or financial analysis.  Please consult your attorney, accountant or tax advisor if you have legal, financial planning, or tax related questions.

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If retirement is in your plans during the next two-to-three years, it is clear that the dramatic market downturn that started in late 2007 could not have come at a worse time. Like many in this situation, you may have found that your retirement nest egg is worth less than it once was, maybe a lot less. Can you still salvage your original plans for retirement?

It is possible, but it may take a bit more work to determine how you can make it happen. Some changes to your initial retirement strategy may be in order to recover some of the losses in your retirement savings. One lesson of today’s market environment is that the closer you get to your dreams/goals (whether for retirement, college or any other major goal) it may be wise to reduce the portion of your portfolio invested in the stock market.

Today’s reality may be reduced retirement savings compared to what you might have expected a few years ago. You also may want to consider other steps that will allow you to maintain your plans for retirement, possibly with some minor modifications. Consider the following options, or combine some of the strategies together.

Boost your ongoing retirement plan contributions

One solution to combat low investment returns is to start saving more money. For example, if you were investing $250 per month in an IRA and at one time estimated you could earn 10 percent per year, you might consider that to be an unrealistic return expectation in today’s environment. If you adjust your return assumption to a more attainable 7 percent per year, you would need to make monthly contributions of $300 to accumulate a comparable amount of savings after ten years. If your expectations for investment returns are more conservative given recent market performance, making larger contributions can help overcome some of the difference.

Revisit the timing of your retirement

One reality for many individuals is that your retirement may need to be delayed and you may need to work longer. This can be beneficial by allowing you to continue earning income and accumulate additional retirement savings before you actually retire.

Alternatively, you can consider taking on part-time employment or consulting work to help supplement your income to decrease the amount of money you need from your retirement savings.

Reconsider the cost of your retirement

What were your plans for retirement? Did they involve significant expenses for a new retirement home or vacations on a regular basis? Did you envision a life of relative luxury in retirement? It might be necessary to scale back your plans if your retirement portfolio has been losing ground in recent years. If you can’t make up your losses by the time you leave the workforce, it is important to revisit your retirement income and what you can afford to withdraw from your savings. Avoid taking too much money out of your savings in the early years of retirement and risking a potential shortfall as you grow older. Some ways to cut your monthly expenses include: refinancing your mortgage (if you have not paid off the loan on a house), downsizing your home and cutting back on extravagances such as high priced vacations or daily lattes at Starbucks.

Become a tax-efficient investor and spender

Managing your retirement assets in a tax-efficient way can make a significant difference. For example, many retirees forget that withdrawals from their workplace retirement savings are almost always taxable, at their ordinary income tax rate. But if you have dollars saved in a taxable account (investments that are not in a tax-deferred savings vehicle), those should be tapped first when you retire. There is likely to be little or no tax on withdrawals. At the same time, dollars in tax-advantaged accounts (like IRAs or your workplace plan) can continue to grow in value with no current tax impact. This should help you stretch the value of your nest egg, especially when nest eggs are decreasing in size. A financial planner can help you work toward your retirement goals.

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This column is for informational purposes only. The information may not be suitable for every situation and should not be relied on without the advice of your tax, legal and/or financial advisors. Neither Ameriprise Financial nor its financial advisors provide tax or legal advice. Consult with qualified tax and legal advisors about your tax and legal situation. This column was prepared by Ameriprise Financial.

Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA & SIPC.

© 2009 Ameriprise Financial, Inc. All rights reserved.

File # 84848

6/09

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1. Try to save approximately 15 percent of your salary each year toward retirement. These savings should include monies that your employer might match toward your contributions in addition to monies you invest or contribute to IRAs or other investments. Saving at this 15-percent savings rate will generally result in assets that will produce about 50 percent of your current salary.
   
2. When calculating your potential retirement income, take into account your investments, Social Security, pensions, part-time employment and other income sources such as rental property.
   
3. If you think you’re lagging behind, try to increase your annual contributions above 15 percent and consider putting annual raises, bonuses, cash gifts or inheritance money into retirement investments rather than spending these windfalls.
   
4. You can avoid or defer taxes by contributing to IRAs or investing in tax-deferred annuities. Talk to a financial planner for assistance.
   
5. If you’re not satisfied with the size of your retirement nest egg when you approach age 65, consider delaying retirement for a few years.
   
6. If you work for an employer offering a retirement plan such as a 401(k), 403(b), 457, SEP-IRA or ESOP, maximize your employer’s matching funds.
   
7. If you change jobs, do not cash out of your retirement plan. Roll the proceeds over into the new company’s retirement plan or into a rollover IRA. If you’re approaching age 55 and wish to retire early and begin taking withdrawals, then leave it where it is. You can tap a company retirement plan at that age, but would have to wait until age 59 ½ to withdraw penalty-free from an IRA.
   
8. Diversify your portfolio among many asset classes. This helps you maximize your return on investment while decreasing volatility.
   
9. This is tricky, but try to determine what percentage of your current income you want to live on. Although 70 percent is sometimes given as a rule of thumb, there is no set amount, and it will vary from individual to individual. Keep in mind that although you may be able to decrease certain expenses (debts) such as mortgage and car payments, your medical bills may increase.
   
10. Finally, when you do retire, plan on withdrawing only about 4 percent of your savings during the first year. Then, give yourself a cost-of-living raise each year by increasing the amount withdrawn in the first year by 3 percent. This low withdrawal rate will increase the probability that your assets will last for 30 years.

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Saving money does not necessarily have to involve elaborate savings accounts, CDs, IRAs, or stocks and bonds – especially for those of us who do not have extra cash just lying around. Rather, saving for the future sometimes begins with the fundamentals. The following offers small measures that families can take to cut costs and actually start saving for their future.

Benjamin Franklin once said; “A penny earned is a penny saved.” Well, let’s see.

Small Change

If you are like many who find it difficult to save, forget about the financial advisors, analysts and brokers for now, because saving for retirement starts with the change in your pocket – literally. Grab a jar or canister of some type. At the end of every day, empty all of your pocket change into this container. If you collect even $1 worth of change a day, that adds up to $30 a month or over $350 a year…and that’s just the beginning!

Moreover, there are many other ways to save a buck here and there without having to significantly change your lifestyle. For instance, that Starbucks coffee that costs you $2.50/day could be money in your pocket. That $2.50 becomes $17.50/week or over $900/year. Let’s say, instead of stopping at the local coffee shop, you buy a travel mug ($10) and a pound of coffee for the month ($10). Bottom line: Making your own coffee at home will cost you about $130/year…a savings of ~$770!

Smart Choices

Other ways to jump start your savings might include carpooling to work; not only would you save on gas money but you’ll be helping the environment as well. Additionally, if public transportation is available, you might want to consider this alternative on occasions, which will not only cut down on your transportation costs, but will reduce the mileage and maintenance on your car.

And then there’s that food thing – just budgeting for groceries can eat you alive! Since food is a necessary and recurring expense, just saving, for example, $20 a week on your purchases can convert to over $1,000 in savings over the course of a year. Eating out a lot at work? Bring your lunch to work and save bundles of cash. Research also indicates that you are more likely to eat something healthy when you bring it from home.

For MANY more money savings ideas, see the “Money Management Makes Cents” blog article.

Are We Saving Yet?

So let’s see. Pocket change, a change in coffee habits, and grocery savings (alone) can add up to over $2,000 a year in savings! With this cash in hand, you may NOW want to think about investing these dollars since your savings can be converted into many more thousands of dollars with the right investment. For example, if you invest this same $2,000 every year for 10 years, you’ll have earned $11,725 (with a quarterly yield of 8%) for a total of $33,725. Kick in the same investment dollars for 25 years with the same estimated yield, and your investment dollars would now be worth $165,999!

So you see, over time, the small choices we make can end up making us large amounts of money. And, what’s more, you don’t have to give up coveted items or drastically change your life style. With just a little bit of planning and prudence, saving for retirement will be as easy as making a cup of coffee…literally.

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