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Financial Tips Articles

5 Reasons Why I Lost Over $300,000 in the Stock Market

March 6, 2009 | Financial Tips | My Ramblings | Stocks | 5 Comments
moneyfire

In the late 1990s to early 2000’s when Internet stocks were blowing up, I went along for the ride and was exhilarated like most other investors.  Those were the good old days when everyone was making money.  

You didn’t have to know anything about investing in the stock market – just purchase some Internet stocks and you were almost guaranteed to make money.  Never mind if a company had no earnings, just buy it and watch your money double within days or weeks!  It was that simple.  

In the 3 years I spent investing in Internet stocks I invested about $40,000 and watched my portfolio (taxable and IRA) balloon to about $365,000 when the NASDAQ hit 5,000.   With my margin account, I had over $477,000 in stocks and felt my portfolio could hit $1 million in a matter of months.  Looking back, when the NASDAQ hit 5,000 (in March 2000) I should have sold everything because that was the beginning of the end of the ride! 

See screenshots of my stock statements before the downturn

waterhouse-account-1  waterhouse-account-2

Unfortunately, I ended up losing most of that money for 5 main reasons listed below:  

Reason one – I got greedy and started borrowing money to invest, using a margin account.  When the market started tanking, the value of my portfolio dropped faster with the margin account and I ended up having to sell fearing a margin call.  A margin call is when the value of your portfolio drops to a certain point to where the brokerage house wants their money back ASAP.  If you don’t sell your stocks to pay back the money or deposit extra funds in your account, the brokerage house will liquidate your stocks for you.

Reason two – I listened to the so-called experts and company executives in the news and on CNBC telling investors to hold on and to ride it out.   They all ended up being wrong. Looking back, many of the company executives pretty much lied so you wouldn’t sell their company stock.  They would paint a rosy picture of their company’s future, but many of them ended up bankrupt or were sold off.

Reason three – I got emotionally attached to my stocks.  There were many times I looked at my portfolio and thought about dumping all my stocks, but just couldn’t.  I liked my companies and I rationalized that it was just a market correction and soon the good old days would come back.  

Reason four – I didn’t want to send Uncle Sam a big tax check.  If I sold about $326,000 in profit, I would get killed with taxes.  I didn’t want to pay at least 40% (or $130,000) to Uncle Sam.  That would have been one hard check to write.  Looking back, I should have happily paid the money.

Reason five – Nothing goes up in a straight line forever.  A good friend of mine kept warning me that the Internet bubble would eventually burst and I should take some money out the market.   I wish I had taken his advice.

To this day, I’m still amazed that I rode the market all the way up and rode it all the way down, losing most of the money.  For a few years when I think about it, I would get this warm tingly feeling all over my body of anger at myself.  But today I’m over it. I’ve learned from my mistakes and hopefully I will not repeat them in the future.

The lessons I’ve learned about investing in the stock market are:

It’s never a profit until you sell – If you invest in the stock market, whether it’s in individual stocks or mutual funds, it’s never a profit until you sell.  Looking at your portfolio and feeling happy that it’s worth a certain amount is great, but remember until it becomes cash by you selling, the money can vaporize almost overnight.

Have an entrance and an exit strategy – It’s easy to buy a stock, but for many people it’s hard to sell.  If a stock goes up and makes you money, you may hold on hoping it goes up further.  If a stock goes down, you may not want to sell at a loss and you might want to wait for a recovery that may never come.  

Set Stop Orders – In your brokerage account it’s a good idea to set Stop Orders to automatically sell a stock if it falls below a certain point.  This will protect your money from substantial losses.

Don’t be greedy – If you purchase a stock looking for a 30% return and you get it, sell it and be happy.  Why risk losing your nice profit?

Don’t become emotional, it’s all about business – Money is very emotional.  If you lose it, you will be unhappy, if you gain it, you will be happy.  Develop an investing strategy and stick to it no matter what.  If your strategy is to sell a stock that falls 15% below the purchase price, then stick to that strategy no matter what.  If you strategy is to sell if you earn a 30% return, then stick to it no matter what.  Don’t get emotional and deviate from your strategies.

Buy the best stocks – Many amateur investors look for cheap stocks or stocks that have been beaten up (i.e., the current auto stocks).  They figure they can get a lot of shares for cheap.  This is backwards thinking.  The fact is, you should look for stocks that are going up with great financial performance and don’t worry about share price or number of shares you can purchase.  Worry about the return on your investment.  (See Related Article: Find the Best Stocks Using Investors.com Screening Tools)

Never put all your eggs in one basket
– Diversify your portfolio.  Never put all your money in one thing.  I’ve heard countless stories of people putting all their 401K money in their employer stock (Lucent comes to mind) and for years enjoyed watching their portfolio balloon, and then all of a sudden it’s wiped out, leaving them penniless. (i.e., the current Bernard Madoff story also comes to mind).

No Risk Stock Market Investing with Absolute Return Notes

March 2, 2009 | Credit Reporting | Financial Tips | Stocks | 2 Comments

Do you know you can invest in the stock market with no risk of losing the money you initially invest?  There’s a fairly new type of security called Absolute Return Notes which offers investors a chance to earn investment returns tied to the stock market’s performance, without risking any of the money invested.  Your principal investment is 100% guaranteed.

Absolute Return Notes started in Europe and have recently become popular in the U.S. as investors struggle to cope with the depressing stock market.

During a set time period, the notes pay the absolute value of the performance of a stock market index, within a specified range.  As an example, if the S&P 500 goes up or down 8%, the note will pay 8%.  However, if the market goes out of that range, for example 20%, you will make no money but will get back 100% of your principal.  Now if the index gains 25%, you still get no money but it may hurt thinking you could have made a nice return.

Issuers of Absolute Return Notes include UBS, Barclays and Merrill Lynch.  Fees for the notes are typically included into the formula that determines the payout.  If you pay $10K for a note that offers 100% principal protection, you will get at least $10K at maturity.

Absolute Return Notes is a good short-term investment strategy if you believe the stock market will trade flat or sideways and you want to capitalize on its volatility in either direction with very little risk of losing your money.

Where’s the Money Going in Obama’s Stimulus Package?

February 23, 2009 | Financial Tips | No Comments

After much debate, President Barack Obama’s $787 billion economic stimulus package was finally by Congress. The package calls for spending $185 billion this year, which should increase GDP (Gross Domestic Product) by 1.4% to 3.8% and create 1 to 2 million jobs. The plan is to shorten the recession, which is defined by a negative GDP growth. The stimulus package should also calm the stock market.

So what does the stimulus package actually cover? Below is a basic breakdown of 7 areas of where the money will be spent.

Relief for Families – $260 billion over 10 years

  • $2,500 college tuition tax credit
  • $8,000 tax credit for first-time homebuyers in 2009
  • A tax deduction of sales tax on new car purchases
  • Extension of unemployment benefits
  • Suspension of taxes on unemployment benefits through 2009
  • Reduce taxes by $400 for individuals and $800 for families
  • Pay $250 to each recipient of Social Security, veterans pension and SSI benefits
  • $70 billion to continue the Alternative Minimum Tax (AMT) tax shelter
  • For the working poor Greater access to child tax credit
  • Expand earned-income tax credit to families with 3 children


Expand Health Care

  • $24 billion: Subsidize COBRA benefits for laid off workers
  • $87 billion: Assist states with Medicaid
  • $10 billion: National Institute for Health
  • $17 billion: Modernize health (IT) information technology systems


Improve Education

  • $54 billion: School districts and states
  • $21 billion: School modernization
  • $17 billion: Increase Pell Grants
  • $13 billion: Head Start
  • $12 billion: Special Education programs


Modernize Federal Infrastructure

  • $46 billion: Transportation and mass transit projects
  • $31 billion: Modernize federal buildings
  • $6 billion: Water projects


Increase Alternative Energy Production

  • $17 billion: Renewable energy tax cuts
  • $5 billion: Weatherize homes


Invest in Science Research and Technology

  • $10 billion: Science facilities
  • $4 billion: Increase broadband infrastructure
  • $4 billion: Science research and physics


Assist Small Businesses

  • $54 billion: Assist small businesses by various tax incentives and write-offs


The basic overall plan for spending all this money is to:

  • Encourage consumer spending via tax rebates.
  • Help businesses revitalize the economy, especially small businesses.
  • Assist states from raising property taxes or cutting needed services.
  • Create public works construction to retain or add 3 million jobs, and lower transportation costs.


Once the danger or a recession is over, all incentives should be removed, and then Obama’s plan is to reduce the deficit and avoid future inflation. Only time shall tell if President Obama’s plan will work. The next few months will be very interesting!

Find the Best Stocks Using Investors.com Screening Tools

February 20, 2009 | Financial Tips | 7 Comments

If you are an amateur investor thinking about investing in the stock market, beware! Over the years, I’ve spoken to many people about investing in the stock market and I cringe when I hear people get excited about buying stocks that are cheap or have dropped a lot. I’m certainly no expert, but I’ve learned a lot of what “NOT TO DO” when investing in the stock market.

A few months ago, I had a friend tell me that now may be a great time to buy Ford stock. Of course I immediately cringed and  asked him why he would take such a risk on a company  in an industry that’s doing so poorly. He stated the stock was cheap and he “felt” Ford would rebound one day. I then asked him; why not find a company that was performing excellently? He answered, “That’s a good point.”

I then went on to tell my friend my basic philosophy of buying a stock. It’s quite simple. Buy the best stock you can find. Not number 2 or 3, find the best – number 1. Don’t worry about the share price, or how many shares you can purchase, worry about the % return. There are many expensive stocks that can double giving you a 100% return. Would you prefer to buy a stock for $5 and have it go to $6, for by a stock for $75 and watch it go to $150?

Below is a screen shot of Ford’s stock and NetFlix’s stock? Which one would you take a chance on? I sure wouldn’t be buying Ford’s stock.   I would have a much better chance with NetFlix, just by looking at the stock chart.


Ford vs. NetFlix

(Which stock would your take a chance on?)

NetFlix vs. Ford

 

So the question is, how do you find the best stock? Over the years, I’ve tried many techniques such as online screening tools, reading newsletters that recommended stocks, visitng forums/chat boards to get ideas, and creating my own system to identify great stocks. Then one day I ran into Investors Business Daily’s (at Investors.com) website and was really impressed with how easy and quickly they made it to screen the market to identify the best stocks. I’ve used their service in the past and have purchased stocks based on IBD screening tools, which made me money. Their system really works!  Now, I’m not saying that every stock identified as an A+ did well.  But out of every 10 stocks I purchased, 6-8 of them did well over a 6-month period. The other 2-4 didn’t do so well, but I didn’t loose that much money. Overall, my portfolio was profitable.

One of the tools I like to use is the IBD Stock Checkup. You enter the stock symbol and it gives you an overall ranking. The stocks are ranked from A+ to E; A+ being the best stock and E being the worst stock. The rank is based on the stock’s technical rating, fundamental rating, attractiveness rating, and the stock’s group technical rating and fundamental ratings.

Let’s say you are considering purchasing Ford. You can get a ranking using IBD Stock Checkup.


IBD Stock Checkup for Ford Motor Company
Screen Shot of Investors Daily Checkup for Ford

Would you purchase Ford based on the information above? I would not; I want to find an A+ stock! . See the IBD Stock Checkup for NetFlix below.

 

IBD Stock Checkup for NetFlix
Screen Shot of Investors Daily Checkup for NetFlix

I would certainly consider taking a chance with NetFlix’s stock.

Investors.com also features several other tools to find A+ stocks which include:

  • The CAN SLIM Select tracks market–leading stocks that in general show strong earnings growth, positive institutional sponsorship, excellent industry strength, and solid sales growth, profit margins and return on equity. I’ve purchased stocks from this list that did well.

  • The IBD 100 List the daily top 100 stocks based on their ranking system. (See example here).

  • Daily Stocks on the Move lists the top performing stocks for the day.

 

Investors.com is filled with tons of educational material on how to be successful in investing in stocks and really helps individuals identify top rated stocks. You can sign up for a 4 week free trial to check out their service. If you are looking to purchase stocks, I highly recommend Investors.com. Good luck; but remember it’s never a profit until you sell!

For more information visit Investors.com.

Think and Act Like a Business Owner

February 11, 2009 | Financial Tips | 1 Comment

Are you a business owner?  You might say no, but if you have a job, you are selling your services to a company and that makes you a business owner.  According to Wikipedia, a business is “a legally recognized organization designed to provide goods and/or services to consumers. Businesses are..…formed to earn profit to increase the wealth of owners.”  Do you see how this definition can easily apply to you?  We all work, “to earn profit to increase wealth!” The main reason any business exists is to maximize profits for the shareholders.  Why shouldn’t you have that same philosophy?

Even though you may not have a legally recognized company, you can still operate as a business.  Businesses have goals. They require planning, budgeting, forecasting, cost cutting, investing, and more.  To measure performance, they take periodic financial “snapshots” to determine how they’re performing. They use three primary financial statements; an Income Statement, a Balance Sheet and a Cash Flow Statement.  You can apply these same financial statements to yourself to see how you are doing.

Track Your Performance


An Income Statement is a statement of income and expenditure for a period of time.  For an individual with an income, it’s basically your take home pay.

A Balance Sheet is a summary of a company’s balances.  This includes assets, liabilities and equity (assets – liabilities = equity).  As an individual, your assets would be your savings, 401K, IRA, home value, and auto value.  Your liabilities would be your debt, which includes your mortgage, car loan, and credit card balances.  You take all your assets and subtract your liabilities and this gives you your equity.  The goal here is to build equity.  Maximize your assets and minimize your liabilities and you will maximize your equity!

A Cash Flow Statement is company’s cash receipts and cash disbursements over a period of time.  It lists cash to and cash from operating, investing, and financing activities, along with the net increase or decrease in cash for that period.  For an individual this is basically,(remove comma) how much money you made for the month minus how much money you paid out in expenses.  What’s left over is your savings.

In my opinion, the cash flow statement is the most important financial statement, because it drives how well you will do financially.  It’s all about how much cash you have at the end of the month.  Every heard the phrase “Cash is King”? The goal here is to maximize your cash receipts (income) while minimizing your cash disbursements (expenses).  If your cash flow is negative every month, there is no way to build equity and eventually you will be bankrupt.

I personally take a monthly snapshot of how I’m doing financially with these very same statements.  I also create financial goals and create a budget to help me get there.  I have a spreadsheet going back 4 years showing my progress.  Download Sample Financial Statement Spreadsheet.


First Thing’s First, Set Your Goals


Being able to track your financial performance is great.  But in order to know if you are doing well, you must first have a goal.  Let’s say your goal is to maximize savings.  How much do you want to save?  First, you have to figure out how much money you can save with your current income and expenses.   Download Sample Budget Spreadsheet.

As previously discussed, subtracting your monthly expenses from your net pay will determine the amount you have left over for savings.  Now, ask yourself if this will meet your goal.  If your goal is to save $500 per month, and based on your income and monthly expenses (remove comma) you can only save $200 per month, then you will have to look at your budget and make some changes.

  • Things you may have to consider are:
  • Cutting your cell phone bill from $75 to $50, saving you $25 per month
  • Reducing your cable/satellite bill from $80 per month to $50 per month.
  • Fixing that leaking water facet that is costing you an extra $20 per month.
  • Eating out once per month instead of once per week, saving you $120 per month.
  • Bringing your lunch to work (remove comma) instead of eating out every day, saving you $75 per month.
  • Downgrading your car so your car loan is $300 per month, instead of $500 per month, saving you $200 per month. (How do you do that?)
  • Shopping around for new auto insurance, saving you $30 per month.
  • Cancelling the gym membership you never use, saving you $25 per month.


The point here is; most people can’t control their income, but they can control their expenses.  This is where you can save a ton of money.  From our examples above, if you were to cut your expenses so you could save an extra $300 per month, after just one year, you will have saved an additional $3,600.  Over 10 years that’s $36,000.  If you managed to save $500 per month, you would have $60,000 in ten years. That is a significant amount of money!

This may sound easy, but most people fail.  This is simply because they fail to plan by creating a budget, setting a goal and measuring their performance.  They fail to act as if they own a business!

See related article“Keep Expenses Low for when the Hard Times Hit”

Analyze Your Medical Insurance Plans & Save Money

February 6, 2009 | Financial Tips | Save Money | No Comments

You have started a new job and have to make a decision of which medical insurance plan to sign up for. Or you are about to re-enroll in your medical insurance plan. You are offered multiple options with various monthly premiums, annual deductibles, and maximum out of pocket costs.

When I started my last job, I did an analysis as to what option would save me money. I was basically offered the 3 options listed below:

Insurance Plan Choices

This is an 80/20 plan. Once your deductible is met, the plan pays 80%, I pay 20% until the maximum out of pocket is met, and then the plan pays 100%.

The question is; which plan will cost me less money? Will like most things, it depends. However, per my analysis most people will save money with Plan C, unless their medical costs for the year is over approximately $17,000.

To figure this out, I created a spreadsheet that you can DOWNLOAD HERE and play with. You can change the spreadsheet to analyze your medical insurance options.

As an example, if your medical cost for the year is $5,000, you will save $1,744 with Plan C, or $1,040 with Plan B (see screenshot of spreadsheet below).

Screenshot of Spreadsheet Showing Medical Plan Options

Medical Insurance Plan Comparison

The lower your medical costs for the year the more money you will save with Plan C.

Most of the saving with Plan C comes from the yearly premium. Plan C will costs $216 for the year, while Plan A costs $2,400 for the year, a savings of $2,184. That’s a big difference!

Although, the annual deductible is $800 for Plan C, one strategy to lower that cost is to put at least $800 in a Flexible Spending Account (if your plan offers it), which is not subject to payroll taxes thus lowering the cost.

See related article: Staying Healthy is Money in the Bank

Make Money Online with Free Open Source Software

February 3, 2009 | Financial Tips | 1 Comment

You hear it everyday!  People are making money on the Internet.  You would love to also make some money on the Internet to supplement your income but you don’t know where to start.

There are numerous ways to make money online.  The main ones are eCommerce, Blogging and Affiliate Marketing.  So how do you get into this stuff, you ask yourself.  Well believe it or not it’s not that hard.  If you have patience, know how to use the computer and have a deep desire to learn, you can teach yourself.

The cool thing about the Internet is that there is so much free and cheap stuff to help you gets started.  It’s very possible to start an Internet business and within several months or maybe years start to make some decent money.  There is no need to get a loan (like staring a franchise) to get started.  There are many people making a living by working full time on their websites.

Web Hosting

The first thing to get started is a shared hosting account to store your website.  Forget the free websites because you will not own the domain name.  If you start a blog on lets say Google Blogger, you will not own the domain name.  You must own your own domain name because one day you may want to sell the site.  The good news is, it’s extremely cheap to get a hosing account.  You can get a hosting account for less than $7 per month.  When you purchase an account, you will get loads of disk space and bandwidth.

Some good hosting companies are follows:

Bluehost (currently host this website)
Hostmonster
Hostgator
Inmotion
Lunarpages
Startlogic
Midphase
Anhosting

Blogging

Ok, so the first option to make money is Blogging.  If you have something to write about that can create a buzz and traffic to your site, you can make money by placing ads on your site and affiliate links (to earn a commission from sending traffic to other websites).  The great thing about Blogs is that search engines love them.  Done right, you can quickly get free traffic from the search engines.

The top two free Blog platforms are as follows:

WordPress (this site is built using WordPress)
MovableType

eCommerce

If your desire is to sell stuff online.   You can setup your own store for free (once you have a hosting account like Bluehost) for free.  Forget eBay Stores; build your own store where you have all the control control.  eBay Stores will charge you for every little thing you want to add to your store.   You can then list your products on Google Products for free to get free traffic.  Of course you can pay for advertising using services such as Google Adwords or Yahoo Search Marketing.

The top 5 free eCommerce platforms are as follows:

osCommerce
Zen-Cart (easier upgraded osCommerce)
Magneto
VirtueMart
DashCommerce

Affiliate Marketing

The third technique to making money online is via Affiliate Marketing which is basically promoting products/services for a commission that you don’t own or provide.  You register with an Affiliate Company to get an account which gives you access to hyper-links to products/services.  You take the link and place it out in the Internet world to send traffic to your affiliate.  When an action is taken (sale or lead generation) you get a commission.  There are people that have mastered this marketing technique and are making hundred and thousands of dollars per day.  They use paid advertising, e-mails, and websites to send traffic.  With paid advertising it’s all about spending less than you make from commission and a very quick way to generate traffic.  If you have a website that gets traffic, then you can send traffic to your affiliate as well for free.

Some of the top affiliate companies to consider are as follows:

Commission Junction (CJ)
AzoogleAds
ClickBank
PepperJam Network
Sharesale