If you’re not aware of the possible investment tax deductions one that you should think about is investment loss – the losses that result from your investments can offset some of your income.

Offsetting Capital Gains

First of all, your investment losses should be used to offset your capital gains. You pay capital gains when you see a net profit with your investments. However, if you have investment losses in other areas, you can use them, dollar for dollar, to offset your gains.

So, if you sell an investment for a $5,000 gain, and you sell another investment and end up with a $6,000 loss, your losses completely offset your gains. You owe no capital gains tax on your increase! When figuring out whether you have a gain or a loss overall, make sure that you start off by pairing off long-term gains with long-term losses, and short-term gains with short-term losses.

This is important, since short-term gains are taxed differently than long-term gains. If you have a net loss over all, though, it makes the situation a little easier. Double check your work with the IRS or with a knowledgeable tax professional before filing your tax return.

Offsetting Other Income

In the example above, there are losses “left over” from offsetting capital gains. If you still have losses after offsetting your capital gains, you can use those, up to $3,000 a year, to offset other income. So that left over $1,000 becomes a tax deduction from your “regular” income.

But what if your net losses are much bigger? In some cases, you might find that you have $4,000 left over after offsetting your capital gains. Well, you can still only use $3,000 of your left over losses to reduce your income. However, you can carry forward losses indefinitely.

So, you can carry the remaining $1,000 to the next tax year, and use that to reduce some of your tax liability. When deciding what to sell, think into the future. While it’s a benefit that you can carry forward losses, you don’t want so many losses that you are constantly carrying them forward with no end in sight. Make sure you carefully consider your situation, and decide on a strategy that works best for you.

Selling Your Losing Investments

As you prepare to sell your losing investments and harvest the tax loss, it is important to make sure that you do it right. First of all, understand that you can’t use losses on paper. The sell transaction has to actually be complete before the end of the year if you want it offset your income.

Also, if you want to gain a tax advantage from selling your losing investment, you have to avoid violating the wash sale rule. The IRS wash sale rule is simply that you can’t buy back a “substantially identical” investment within 30 days of selling your investment.

It’s not illegal to buy back an investment within that time period, but it will prevent you from claiming your losses as a tax deduction. So, if you decide to sell, make sure you don’t re-purchase the investment within 30 days. Your losing investments can be turned to your advantage with the right strategy. Take a look at the options, and consider that you might be able to benefit by reducing your taxable income by harvesting investment losses.

What is Investment Cost Basis?

Cost basis is simply the price you pay for a share or asset, including any sales charge that is paid. It is used to determine if you will be paying a capital gains tax or if you will be able to deduct the loss when that occurs. Cost basis also includes any reinvested dividends and capital gains distributions.

For example, if you bought 100 shares today in a mutual fund and the per share price was $20 and you were charged $10 to buy the shares, your cost basis would be $2,010. (You would also factor in your brokerage charge to sell the shares at some point in the future.) You would use this cost basis to determine if you made a profit or loss on your investment whenever the investment is sold in the future.

If you bought at $20 per share and the shares rise to $30 per share when you sell, you’ve made a profit. Your capital gains tax would be factored off of: $3,000 (100 shares x $30/share) – $10 (selling brokerage charge) – $2,010 (initial cost basis including purchasing charge from broker). Your profit would be $980 and capital gains tax would apply to that amount.

What is Changing to Mutual Fund Cost Basis Rules?

Mutual fund companies have, in the past, only reported the cost basis to the investor and not the IRS. This will change in January 2012 and cost basis will be reported to the IRS for all shares acquired after January 1, 2012 (to be called “covered shares”). Fund companies will report this information on Form 1099-B to both the IRS and the investor.

Traditionally the cost basis has been calculated using an average cost (the average price of all shares purchased). However, investors will now have the option to choose one of seven ways to calculate the cost basis.

• Average Cost -  typically the default method for fund companies; the average price for all the shares you currently own is calculated and used when your shares are sold
• High Cost, First Out (HIFO) - the shares with the highest purchase price are sold first
• Low Cost, First Out (LOFO) - the shares with the lowest purchase price are sold first
• Specific Identification (SpecID) - the investor chooses which shares are to be sold, this determines the gains or losses for that particular share.
• First In, First Out (FIFO) -  the oldest shares are sold first
• Last In, First Out (LIFO) - the newest shares are sold first
• Loss Gain Utilization – shares are sold by those with losses first and then gains last

Each company will provide you with a way to choose a method for calculating the cost basis method. Typically, if you do not make a choice, the average cost method will be chosen for you. You are given additional options so you can tweak your tax strategy moving forward. It might be beneficial for you to hold onto the shares you first purchased many years ago at a lower price while selling your most recent shares that were acquired at a higher price because your capital gains would be lower.

For example if you have been investing in a mutual fund whose price was initially $10 per share and has now risen to $60 per share, you would want to sell your $55 shares first rather than your $10 shares. The difference in capital gains could be huge. However, managing your specific shares you are selling to maximize your tax benefit requires you to be very hands on with your investments.

Covered vs. Non-covered shares

The IRS is only changing the rules for a certain set of investments. For mutual funds, the covered shares (or the shares the changes will begin impacting) are those that are acquired on or after January 1, 2012. If you invested in a mutual fund earlier than that, your cost basis rules will not change on those shares.

Does the Change Only Impact Mutual Funds?

The new regulations are impacting cost basis reporting for all securities: individual equity positions (stocks), mutual fund shares, ETFs, fixed income products, and options. However, not all of the changes are impacting all of the investments at the same time. Stocks acquired anytime on or after January 1, 2011 will be considered covered securities. Mutual funds and ETFs are considered covered as of January 1, 2012, and options and fixed income securities are covered beginning January 1, 2013.

1. Balance Sheet Problems
One of the first courses I took when I got my Masters Degree years ago was Financial Accounting, it turned out to be one of the best classes I’d ever taken.  Not that the instructor was that great but I loved learning about how to read financial statements (balance sheets, income statements, cash flow statements) and all the ratios you could use to analyze the financial health of a company.

Here’s a good overview of how to read a balance sheet. While nearly every company is going to do a certain amount of borrowing, it is important to make sure that the growth of debt isn’t outpacing the growth of assets. Also, look for evidence that cash is getting rather scarce. Also, keep in mind not to put your full faith in a company’s financial statements.  Just use this as one measure of researching an investment.

2. Bungling Management
While the company might be doing okay, does managerial incompetence pose a major risk? Look at how management runs the company, especially if there has been a shake up. If you think that the change is for the better, then consider investing. However, if the change appears for the worse, pass on it. And, of course, if things have been getting steadily worse, even without a shake up, it could be a sign that management is ill-equipped to deal what’s going on right now.

3. Lagging Behind in the Industry
Another consideration is where the company stands with regard to other companies in its industry. Find out why the company is lagging. If management, research, product, or some other item appears to be responsible for industry lag, you might be in trouble if you invest in that company.

4. High P/E Ratio
When a company has a high price to earnings ratio (P/E), it means that investors are paying more in relation to each unit of net income. If a company has a high P/E ratio, especially compared to its peers, it could be a sign that it is overvalued, and that you might consider staying away.

5. It’s “Hot” Right Now
It may seem strange to think that a “hot” stock (or other investment) might be a bad idea. However, the fact of the matter is this: If something is “hot” right now, you are likely too late to get it at a good price. In fact, the fact that something is exploding right now could be a sign of a bubble, and that it could be on the edge of bursting. You don’t want to get stuck with a burst investment bubble just as you buy something at a peak price.

6. You’re Getting an “Inside Tip”
Whether the “inside tip” comes from an email, from your brother, or from a co-worker, anytime you are offered the “inside track” on some investment, it is usually a red flag. Sometimes “insider” tips are used to help pump up a stock price so that someone else can dump it when it gets to a higher price. The worst part is that, if you are getting your “tip” from a family member or friend, they are probably being duped as well. Be wary of such “inside” information.

7. You Only Have a Limited Time to Get In
Good, solid investment choices are usually going to be around next week. Beware the amazing investment opportunity that your buddy has brought up that requires you to come up with a large amount of capital within a day or two.

A good investment should be a good investment next month, and you can generally buy partial shares through a low-cost, online brokerage. Anytime someone is pressuring you to go in, with a great deal of capital, right now, that’s a sign to run the other way.

What are some of the signs you look for help you know not to invest your money?

The Reason for Betterment

It was interesting to hear Jon Stein’s story (the CEO & co-founder) about how he used to consult for big financial institutions and saw first hand how their accounts and products were designed solely with the interest of the bank or brokerage in mind – not the customer.  His experiences were what led him to help create Betterment; to offer everyday investors a simple & relatively low-cost option for regularly investing their money.

Something else I got out of our talk was a feel for all the behind the scenes work that Betterment does for investors in terms of asset allocation, investing efficiency, and portfolio rebalancing. 

Investing & Trust

One of their challenges so far has been earning the trust of new customers. I didn’t have any great suggestions for them in that area other than to highlight all the information they have on their site about how the investment baskets are setup – who chooses the investments and what method they use to analyze and select the ETFs.

Something that Jon did share was that once people decide to try out Betterment, the percentage of investors that keep using the service is pretty high – a decent indicator that people using Betterment are happy with what it’s providing them.

Prior to our meeting at the conference, Jon had answered the two questions I’ve been asking others about financial bullies.  Here are his answers.

Describe a time that a person or company tried to take advantage of you financially and what you did to stop them.

A topic that has been top of mind for me since founding Betterment is the fact that financial institutions have long been taking advantage of regular consumers. 

Modern Portfolio Theory tells us that everyone should be invested in the same portfolio – the market portfolio. Yet, if you look around, there are so many trading sites and so much emphasis on beating the market and creating the right portfolio for an individual. I realized through my training in psychology and behavioral economics that all these alternatives exist because we humans are predictably irrational – we tend to think we’re better than average, on average. We see patterns where they don’t exist. We remember our winners and forget our losers (even though the losers pain us more). We intuitively think that we can outperform.

The whole brokerage and investment industry has grown to serve these irrational behaviors – and as a result it doesn’t serve our best interests very well. What makes trading fun and addictive is exactly what makes it harmful to our wealth – that it’s driven by irrational impulses.

I founded Betterment to steer people away from being taken advantage of in this regard. I knew a better investment company would start with the assumption that what people really want, when we consider things rationally, is the best return (factoring in costs) for the least risk. It should help people avoid the temptations of alternative strategies and bad ideas.

Describe a time you were bullied into a financial decision (by a person or a company).  How did it end up impacting you and if you could go back in time how would you handle it differently?

When I graduated from Harvard, I went out and started investing on my own. The first thing I did was to invest in Enron, a company whose growth seemed remarkable, but which had just hit a road bump, and its share price had fallen. I thought I was getting a great deal – buying something at half price!

Of course, the stock soon fell to zero, and I lost that first investment.

It taught me an important lesson – I’m no smarter than thousands of others looking at the market, and I don’t have better information. And I had forgotten the cardinal lesson of Modern Portfolio Theory – that there’s no better portfolio to own than the market portfolio.

If I could go back in time, I would make sure to remember those important financial lessons I learned in school. I would realize that individual investors often underperform the funds in which they invest. And I would in no way try to “beat the market.”

Betterment Bonus

Thanks to Jon, Brittany, and Johanna  for sitting down with me in Chicago and answering all my questions.   They are offering a bonus to new customers who want to try out Betterment.  There are no account minimums for the service but if you open an new account and deposit at least $250 to try it out, they’ll give you $25 – Click here for the bonus.

What is MarketRiders?

MarketRiders is a subscription service that offers you the ability to create ETF portfolios based on asset allocation. With the right asset allocation, the theory goes, you should be able to meet your investing goals, whether you are looking for growth, income, or have some other end game in mind.

This service allows you to put together portfolios using information about your goals. There are more than 1,000 ETFs that MarketRiders helps you choose from. After creating your portfolio, MarketRiders will send you periodic alerts about further steps you should take, as well as offer helpful hints on rebalancing.

MarketRiders comes with a 30-day free trial, after which you must pay $9.95 a month to continue the service. Signing up also allows you the option to receive a weekly newsletter about investing.

How to Build a MarketRiders ETF Portfolio

After you set up an account and log in, you can begin to build your portfolio. This is quite easy to do. You start out with two options:

1. Have MarketRiders build a portfolio for you
2. Create your own portfolio

MarketRiders portfolio: If you decide to have MarketRiders build a portfolio for you, you start out by answering some basic questions. MarketRiders has an algorithm that takes into account your age, when you expect to need the money, your level of investment experience and your risk tolerance. You also enter how much you have to invest right now, and MarketRiders goes to work.

I like how MarketRiders provides you with the reasoning behind the portfolio, explaining why the selected ETFs complement your investing style, and how they can be useful as you work toward your goals.

Additionally, MarketRiders lets you know how much the fees will cost you each year — and compares them to what you are likely to pay if you go the managed fund route. The difference is astounding. If there are dividends being generated, MarketRiders tells you that information, based on the last 12 months.

Create your own portfolio: If you are satisfied to have MarketRiders generate a portfolio for you, no worries. The recommendations made appear to be solid. However, more advanced investors might want to tweak a portfolio to more closely mirror their requirements. When you choose the “let me build it” option, you have three choices as you begin:

1. Start with a template
2. Start from scratch
3. Start with ETFs you already have in your portfolio

The templates start you out with the ability to narrow your types to growth, balanced or income. You can also choose “specialty.” The specialty portfolios are rather interesting, allowing you to choose from different specialty funds, such as a rising inflation fund, an energy hedge fund, or a reweighted S&P sector portfolio. You also have the option to specify what ETF provider you are most interested in (Vanguard, iShares, etc.).

Once you choose what type of portfolio you are interested in, you are taken to a page that breaks down the initial asset allocation. You can then tweak the allocation to fit what you are looking for. If the suggested portfolio doesn’t have just the allocation you want, or if you want to add something to the mix, you can adjust the numbers to fit your goals.

The other options, starting from scratch and starting with what you already have, can also help you build a portfolio. You start out with your asset allocation, and then tweak your portfolio to the allocation you want.

Generating Your Portfolio

Whether you have MarketRiders build a portfolio for you, or whether you build your own using the asset allocation technique, MarketRiders will then generate a portfolio for you. If you have indicated a preferred brand of ETF, all of your recommendations will come from that.

If you are building your own portfolio, you will have the option to add or remove different ETFs before the final portfolio assembly. Then, all you have to do is tap the “continue” key, and your portfolio will appear.

You will get a list of ETF symbols, and the number of shares you should buy, based on how much you have to invest. You are even provided a printable version, if that makes things easier for you. Then, all you have to do is head to your broker and enter the trades.

Tracking Your Portfolio

You can continue to update your portfolio by entering in changes you make as you buy and sell. Right now, MarketRiders does not have broker integration, so everything has to be done manually. This is something you’ll have to remember to do, kind of inconvenient for those who are used to complete financial integration. However, MarketRiders hopes to include broker integration in its next release, making it possible for trades to be automatically confirmed.

MarketRiders also sends you a monthly email update that summarizes the performance of your portfolio.  Here’s an example of the monthly email that you’d receive for the ETF’s you’re tracking:

Another nice feature of MarketRiders is that they’ll let you know how your portfolio is doing in terms of the target asset allocation that you setup.  The example above represents ETFs for Bonds, Commodities, Currencies, TIPS, Real Estate, US Stocks, and World Market Stocks.  When those holdings are no longer in balance with the asset allocation you specificed you’ll get an email from MarketRiders.  The example below is a MarketRiders email showing how the ETFs in your portfolio fall into your asset allocation targets and where you might need some rebalancing.

Bottom Line

If you are interested in using ETFs to build an investment portfolio that will help you meet your needs, MarketRiders can be a great choice. You have the ability to build multiple portfolios, so you can create different profiles for immediate income, retirement and other goals.

MarketRiders is good for DIY investors who want to invest their money themselves but would like some recommendations in terms of quality ETFs and asset allocation – for a 30 day trial Click Here .

What is Betterment?

Betterment is an online investment option that offers an alternative to companies like E*Trade, Charles Schwab, TradeKing, and Scottrade. As you’ve seen in the broker reviews the discount brokerage market is full of options each with their own positives and negatives.  What makes Betterment different than these other brokers is that they focus on keeping costs low and making investing simple.

Betterment Investment Options

Betterment aims to reduce your barriers to investing. Many people are intimidated when it comes to investing and putting their hard-earned money at risk. They see a bunch of acronyms (401k, 403b, Roth IRA, Traditional IRA) and too many options.

In some ways, the hardest part of saving for retirement is deciding where to invest your money and just getting started.  Being confused by the process or your options increases the odds that you will put it off. Betterment is trying to tackle this issue by making saving and investing incredibly simple. The company offers only two investment options in what they call baskets:

• Treasury Bond Basket
• Stock ETF Basket

Each basket is made up of a mix of ETFs chosen by the Betterment investment commitee.  The Betterment website explains how they choose which ETF’s to include in the bond basket.  Here’s a snapshot of the current allocation:

The Stock ETF basket holds a grouping of exchange traded funds to that’s designed to give you a growth option to your portfolio while not taking on excessive risks.  The Betterment site also explains how they select the ETFs with a key goal ofdiversification .

You are given the ability to change your overall asset allocation between the Stock and Bond baskets. You could do 10% in Treasuries and 90% in stocks today, change your mind, and switch to 50% Treasuries and 50% stocks.

That’s as complicated as it gets. Decide what percentages you want in risky investments versus conservative investments. Your focus becomes regularly investing funds rather than deciding what mutual funds, ETFs, or individual stocks to choose.

Hiding Complexity

If you haven’t noticed yet, simplicity is one of the key factors of the investing options that Betterment offers.  They do a good job of hiding some of the complexities from you, for example:

• Re-balancing every quarter, or, when an allocation is more than 5% from the target 
• Creating a diversified portfolio comprised of over 3,000 different companies inside cost efficient ETFs

• Dollar based, fractional share investing into ETFs

Things like these combined with automatic deposit and regular contributions over time help investors avoid the roadbumps that keep people from investing in the first place or prevent them from following some of the investing best practices such as diversification and proper asset allocation.

Betterment Investing Fees

Unlike other discount brokerages that charge a per trade cost (ranging from $5 to $20), Betterment has a different take. Instead of charging per trade, they add an expense ratio to your account. The level of the percentage is based on the amount of money you have invested with the firm.

The lowest level accounts (under $25,000) are charged 0.9% of the total invested. If you invested $10,000, you would pay $90 per year. The expense ratio gradually decreases as your balance increases. At the top end of the range — anything over $500,000 — you pay 0.3% per year.

Room for Improvement 

One of the ways I see Betterment being useful is for people who want to save for retirement but haven’t started because they’re uneasy with the whole investment process.  Unfortunately, Betterment doesn’t have the option of opening a retirement account.  Of course you can save for retirement outside of an IRA but then you give up the tax advantages of a retirement account.  I spoke with someone at Betterment regarding retirement accounts and was told they’re a high priority and will be coming soon.

Another pretty standard feature for mutual fund companies and brokerages is the ability to open a joint account.  Betterment doesn’t offer joint accounts right now; it sounds like they will be available at some point but there’s no timeline for when that will be. 

Another nice to have would be the ability to create multiple investment accounts with a different asset allocations for each.  So if you wanted to have two investment funds, each with a different time frame, you could set the investment allocation separately for each of them – Update: I’ve heard from Betterment and a feature that supports this is being released later this month.  You’ll be able to create sub accounts and each will have it’s own allocation.

New Account Bonus

Betterment is offering new customers a $25 bonus for trying it out.  Betterment doesn’t require any account minimums, however, if you sign up for Betterment and deposit at least $250 into your account to try it out, they’ll give you $25 – Click here for the bonus.

1. Reduce the Emotion Involved in Investing

One of the worst things you can do is let emotion rule your investing too much. While you can’t get rid of emotion entirely, you can control it so that you don’t make as many mistakes. Don’t get caught up in euphoria and buy when the price is high, and certainly don’t let blind panic induce you to sell just because the price is lower – read the book “Why Smart People Make Big Money Mistakes”.

2. Consider the Fundamentals

Part of reducing the emotion involved with investing is considering the fundamentals. Before you buy, consider the strength of the company, and find out more about the “big picture” items that can influence long term strength for the investment, such as management, profit margins and industry growth. If nothing has changed in your fundamental analysis, and a price drop is due to a general market decline, selling based on panic could cost you in the long run.

3. Appropriate Diversification

In order to help protect your investment portfolio from drops in one sector, some diversification is important. Figure out a good asset allocation, and figure out how you can limit your exposure to one sector. Make sure all of your eggs aren’t in one basket.

4. Watch Out for High Fees

Investment fees can erode your returns over time. When you pay fees, it cuts into what’s available to invest, as well as how much you end up with. Look for brokers with low fees so that you keep more of your money.

5. Don’t Confuse a Broker with a Financial Advisor

You need to be aware when getting investment advice from a broker that they don’t have a fiduciary duty to you as an investor. This means that he or she does not have to look out for your best interest first. A financial advisor, on the other hand, is required by law to look out for your best financial interest.

6. Avoid Over-Reacting to Big Market Movements

Sometimes, in the short term, we see big drops or big gains. In the short term, the stock market is volatile, but over the long term a lot of the volatility has historically evened out to an overall upward trend. Before you buy or sell based on a big market movement, take a step back and think about your reasoning. A measured response to short term volatility is important. – Again, read the book “Why Smart People Make Big Money Mistakes”.

7. Understand What You’re Buying

Before you buy a stock, you should undertand it. What does the company do? How does it make money? Why do you want to purchase the stock? Find out about what you are buying, and make sure you understand the industry so that you can evaluate the stock on its merits.

8. Avoid Buying Based on Hype or “Hot Tips”

Watch out for investments that have a lot of hype. Also beware of “insider” tips from friends and family. Realize that often hype is used to generate interest in an investment. You don’t want to buy in during the “dump” phase of a pump and dump. Do your own research and don’t rely only on what others are saying.

9. Don’t Be Too Risk Averse

While you do want to protect against excessive risk, you do have to realize that some risk is necessary if you want to make money. Only by taking on some risk will you be able to realize adequate gains for your investing goals over the long term.

This month’s TradeKing promotion earns you $100 for opening a new account with the online broker. The number of people using the online brokerage has been growing quickly over the last few years, not due just to the TradeKing promotions but also because they make it cheaper and easier for their customers to invest their money in a number of ways.

Low Trading Commissions

With $4.95 trades and $0.65 per option contract and no account minimums TradeKing is one of the best options when it comes to low cost trading commissions.  Of course the TradeKing bonus where you earn a $100 signup bonus don’t hurt either, basically they’re equivalent to 20 free stock trades.

Options Trading Education

Low cost trades have an impact on your returns but TradeKing also offers a ton of trader education videos and webinars on stocks, bonds, and options that can help you with your investment decisions.  I’ve gone through the first few options trading webinars and have been working my way through their Options PlayBook, written by their options expert, Brian Overby.

Another kind of trading education are the forums and groups, called the Trader Network, where you can interact with the experts who do the webinars, as well as other TradeKing members.
If you’re looking for ideas and strategies for your portfolio or even to understand some of the concepts the pros use to analyze and evaluate their investments you can get answers in the forums. I haven’t taken advantage of this feature myself but this promotion reminds me I need to spend some time there.

If you don’t have a TradeKing account and want to try out their training and trader’s network you can earn the $100 bonus by signing up here.

Online Stock Trading Tools

Another feature I haven’t made good use of yet are their calculators, reports, and screens.  For example, here are some of the tools I’ve been meaning to spend more time with:

• MarketGrader Research Reports
• Probability & Profit and Loss Calculators
• Stock and Option Screeners
• Technical Analysis Tools

TradeKing also provides the Maxit Tax Manager to help sort things out with your accountant or tax software come tax time.

Customer Service

Those kind of tools are something you’d expect of any online brokerage but one cool thing about TradeKing is that they’re willing to help you out with questions you have about them.  Their online broker chat option lets you ask questions when you’re stuck or trying to figure something out; I’ve also gotten fast email responses to my inquiries.

I’ve never called in so I can’t speak to their telephone hold times but SmartMoney and Kiplinger’s rated TradeKing tops for customer service in recent online broker surveys.

TradeKing Promotion

The TradeKing promotion runs through the end of the month, after you open an account with $2,500 and make your first 3 trades, you’ll earn the $100 bonus.  There’s no promotion code needed but you do have to sign up through the following promotion link to earn the bonus – Click Here for Bonus

Although the world of investing is always changing, and I am certainly not an investing expert (unfortunately I’m more of an expert on student loan debt), I feel that these six choices were the best I have ever personally made.

Investing Success #1: Not Investing Money I Couldn’t Afford to Lose 

I learned early on that investing money I couldn’t afford to lose was a big mistake.  I was constantly pulling money out of the market to pay routine things like groceries or car insurance.  This cost me a ton of money in transaction fees.  When I started to pay myself first, and yet simultaneously only invest with disposable money, I was able to really start investing intelligently.

I didn’t get too excited by the ups and downs in the market, because I knew I was in the market for the long term.  This led to the modicum of investing success that I have since enjoyed.

Investing Succes #2: Going With Vanguard 

Vanguard is a great company because they’re dependable, well-run, and also inexpensive.  I have a lot of faith in Vanguard and they have never done wrong by me.  My investing strategy is simple: I put my money into appropriate Vanguard funds, and then I sit back and let them take care of the rest.  My favorite move is funding my IRA’s largely with Vanguard’s target retirement 2050 fund.  

There are other no-load (i.e. no individual sales commissions per transaction) giants such as T Rowe Price and Fidelity.  The important thing is that cutting down on transaction costs makes it so your rate of return doesn’t have to be so large for you to make money from the market.  Vanguard has been great in this respect.

Investing Success #3: Focusing on Taxes 

When I first started investing, I often ignored the tax consequences of my investments.  Who could really blame me, as a college student, I generally didn’t earn enough money to be taxed on it anyway.  But with age and maturity (and a real job), I’ve learned to love IRA’s, 401(k)’s, and any other retirement financial vehicles that the government (at least up to this point) has allowed tax breaks on.

Investing Success #4: Reinvesting Dividends 

Dividends are one of the investors best friends, and perhaps the purest source of passive income.  Why?  Because they’re generally legitimate and can be almost fully automated.  With time, by reinvesting your dividends, your number of shares should increase. All without you even missing any extra money out of your wallet.  It’s really a beautiful thing, and the best part is that the benefits tends to increase as time goes on.

Investing Success #5: Investing in Businesses 

This isn’t really the same as using the stock market, but it’s the greatest form of diversification that I have undertaken in my own life during the past few years.  I didn’t go out and start a huge business or anything, I simply began blogging and running a freelance writing business.  These efforts have not only allowed me to meet or work with great people I otherwise never would have met, but have also provided me with extra income.  

When you build a business you are in a sense creating income in two ways: 1) any profits you generate; and 2) increased value in your business should you in the future decide to sell.  It’s a lot more work than sitting back and collecting dividends, but it’s another fun “investment” that more people should consider.

Investing Success #6: Being Fearless 

Perhaps this will lead me to financial ruin one day, but as soon as I started being fearless in my investments is when I started making money.

I research, diversify, make the calls that I think are right, and then pretty much sit back.  When the market hits rock bottom, I tend to keep buying.  When the market comes back up I have to this point enjoyed an even greater success.

Perhaps someday the market will hit rock bottom and never come back.  That’s the risk that I, as a buy and hold investor take.  But by being fearless, I allow paper losses to stay that way.  By being fearless I’ve seen a 28% return the past two years (lucky for me I mostly bought in at rock bottom).  But note, I don’t believe you can time the market.  The best you can do is try and pay yourself first.  And then keep investing.

Conclusion

My failures outnumber my successes, of that there is no doubt.  But hopefully some of the above will be helpful for when you plan your investing strategies.

What do you agree and disagree with?  What are the keys to your investing successes?

Best of luck in your investments.

1) There are many people who are not expert investors and need this information.
2) Regardless of how experienced you are, this is a legitimate technique, especially for people who do not have the time or resources to monitor their own portfolios.

What Are Index Funds?

Index mutual funds are funds that mirror a specific “index.” For example, an S&P 500 Index Fund consists of the 500 individual stocks and their weightings in the index itself. If you invest in the fund and check the financials, whatever happens to the index in terms of performance, happens to your fund.

Index Fund Benefits

Index funds are “passively managed.” This means that compared to other mutual funds where portfolio managers make decisions on when to buy and sell holdings, a passively managed fund can only make investment changes when the index itself changes. Index funds have very low turnover rates because the indexes do not change all that often.

This makes this type of investment more tax efficient than actively managed funds. Index funds also have much lower expenses than actively managed funds. Index funds typically have 0.1%-0.35% in management expenses compared to 1%-2.5% for actively managed funds.

Index Fund Returns

Now some of you will say the goal is not to get index-like returns. The goal is to beat them. What most people don’t realize is that roughly two-thirds of all actively managed mutual funds fail to match the investment returns of index funds.

Index Fund Examples

So how do you use this information? What kind of funds should you use for a portfolio? Here are some examples of index funds you could use in your portfolio:

Vanguard Total Stock Market Index (VTSMX) – This fund is more than just the S&P 500 index. This fund encompasses the entire US stock market. This will give an investor exposure in both mid-cap & small-cap funds as well.

Vanguard Total International Stock Index (VGTSX) – Full international exposure in one fund.

Vanguard Total Bond Market Index (VBMFX) – Tracks the Barclays US Aggregate Bond Index, gives exposure to the bond market.

Vanguard Intermediate-Term Tax Exempt (VWITX) – This fund invests in high-quality municipal bonds, and is a good option for taxable accounts.

These funds could also be used as a starting point for people who want to combine index funds with other investments. Like any other investment though, these index funds should be treated as long-term investments.