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Overview
Product Details
| ISBN-13: | 9780471324294 |
|---|---|
| Publisher: | Wiley |
| Publication date: | 12/01/1999 |
| Series: | Getting Started In... , #21 |
| Pages: | 241 |
| Product dimensions: | 6.32(w) x 9.45(h) x 0.65(d) |
About the Author
Read an Excerpt
When you're deciding where to invest your hard-earned money, your most valuable tool is information. People who create and grow their wealth in the market look for investment information from a variety of sources. It's not brain surgery, but like most worthy pursuits, it's not as simple as it looks, either. If it were, we could all just pick the stock or mutual fund that's been doing really well for the past year. Since past performance is no guarantee of future results when you invest, you really need to know the who, what, where, when, and why of an investment before you put your check in the mail.
It's your money, after all, which is why it's so important that the information you use to make a decision is accurate, timely, and concise. In fact, with Internet trading growing more widespread every day, instant information has become the norm. The problem is that there's just so much of it. How do you know what information to take in and what to ignore? To make things more interesting, some professionals, like Thomas Greeves, a Bethesda, Maryland- based financial planner, maintain that the decades-old rules of the investing game--such as buy low, sell high, and you'll make money--are changing. "I know people who have been waiting five years to buy some of the better technology stocks because they think they're not priced low enough," Greeves says. "They'll be waiting forever." In the meantime, investors like Greeves have cashed in on some so-called overvalued stocks--turning the shares of companies like America Online (which he bought for $22) into the workhorses of their portfolios (as we went to print, America Online stock was valued at $100 a share).
That's why good information has to be relevant and thoughtful and why you have to be in the driver's seat when it comes to using the information. After all, a hot Internet stock might have seemed like the best thing since sliced bread last year, but not if it's overtaken by a competitor, its price tumbles by 50%, and you need the money to buy a house or to pay a tuition bill in the fall. On the other hand, an Internet stock, or a mutual fund that invests in Internet stocks, might be a fine place for a portion of your long-term investments, your retirement plan, or your individual retirement account (IRA). Problem is, there are hundreds of Internet stocks and a growing number of Internet mutual funds. How do you compare them and how do you zero in on the ones that best suit your needs, tastes, and investment horizon?
Investments are not one-size-fits-all. They can have very different potential for performance and risk.
A stock is not just a stock; it's a culmination of everything a company is and produces as well as investors' perceptions of what it is and produces. For instance, online giant America Online soared more than 580% in 1998 while bread maker Sunbeam Corporation stumbled, losing investors 83% in the same 12-month period. Obviously, not all stocks are alike. So how do you find those investments that will work best for the money you want to sock away for your goals? How, at the end of the day, without having to get a Ph. D. in investing, do you find the kind of relevant information you need to make sound decisions?
THE FUTURE IS RIGHT AROUND THE CORNER
At no time in history has relevant financial information and intelligence been more crucial than it is today as some 76 million baby boomers move toward retirement age and confront their need to plan and invest. Behind them stand younger generations of Americans, computer-savvy, Internet- aware, and financially oriented. The younger among us already grasp the value of socking away substantial amounts of money for their retirement--and do just that. Their motivation? They really believe that their personal savings will be their most important source of retirement income. As importantly, they know how to get the information they need quickly, right from the comfort and convenience of their computer, whether it happens to be at home or in the office. In short, they get the information from the Internet. It's not surprising, then, that in survey after survey they say they are confident that their investment activities will provide them with a comfortable retirement. They've realized the profound truth of compound interest.
It works like this: If as a 30-year-old you start tuck-ing away even $20 a week--the cost of about six gourmet caffè lattes--in a mutual fund or stock that pays a not-unrealistic 10% average annual return, you'll have a nest egg worth over $260,000 35 years from now. Of course, as your income increases and you pay down college loans and other debt, the money you'll be able to put to work in investments will increase, too. The lesson for all of us is that you don't have to be rich to make money; you just have to be diligent and find some decent investments-- which all starts with the right information.
Together baby boomers, Generation Xers, and those edging toward retirement or already in it are pumping trillions of dollars into the financial markets. Regardless of which group you're in, if you're investing, you fueled much of the phenomenal rise in the U. S. stock market in the 1990s. In effect, millions of us have become would-be Wall Street players, whether we know what terms such as volatility mean or not.
IF YOU DON'T PLAY, YOU CAN'T WIN
We're investing in droves because we can and because we must. We know the past decade has produced scores of real-life investment success stories. A onetime initial investment of $10,000 put into the Vanguard Index Fund on January 1, 1988, would have grown to $47,099 by December 1998. A $10,000 investment socked away in financial services juggernaut Charles Schwab Corporation in 1988, with its 10-year track record of 63.5%, would be worth $635,000 today. That's the beauty of compound interest, which allows you to earn interest on your interest, and so on and so forth. As you'll see for yourself, compound interest can really produce impressive results over time.
But while thousands of people retire comfortably each year--by using the knowledge they acquire to decide what investments will best serve their needs and by investing regularly in those vehicles--not everyone secures financial independence in their so-called golden years. Some don't invest or even save--and they pay the price. Cold hard fact: A whopping 25% of current retirees have a retirement that has fallen short of their expectations, according to the Employee Benefit Research Institute (EBRI), a nonprofit think tank in Washington, DC, that studies Americans' retirement and investment habits. In fact, a significant 20% of current retirees report that their standard of living is worse than they anticipated it would be in retirement. About 42% of current retirees don't think they'll be able to pay for long-term care, 22% worry they won't be able to cover medical expenses, and another 29% doubt they'll have enough money to travel or pay for the recreation or entertainment they had hoped for.
That's not so surprising when you consider that almost half of those who are currently retired say that Social Security payments are their most important source of income. Without a good bit of social engineering on the part of our politicians, future retirees probably won't find that Social Security is able to make payments large enough for them to survive on. The sad news is that there really are still people out there, a small percentage of mostly middle- aged, middle-class individuals, who believe that they will be able to depend on Social Security for the main chunk of their retirement income in the next quarter century and beyond. If you're thinking, "Fat chance," you're on the right track. Marilyn Bergen, president of Capital Management Consulting, a financial planning firm in Portland, Oregon, says that while she usually counsels investors to wait until age 59 1/2 to start tapping their retirement plan, she makes an exception for Social Security benefits. "The first time you can start taking a nickel from Social Security, take it," Bergen says. "Obviously we have our doubts it will be there for future generations."
The moral of the story is that it's better to invest a little bit more than you'll need to ensure financial independence than it is to tuck away little or nothing. And that's exactly what those retirees who have a poorer lifestyle than they anticipated did--invested little or nothing.
BUILDING CONFIDENCE
How important is vital investment information? It seems the more Americans realize that they need to invest some of their own money to retire comfortably, the more they discover they don't know about investing. Is the glass half empty or half full? While 72% of Americans have saved something for retirement, that means that 28% haven't saved dime one, EBRI has found. It's also interesting to note that workers' confidence in their own financial preparations and prowess has dropped, even in the face of the longest-running bull market in history, and with all the readily available information floating around out there.
To get to the heart of the matter, EBRI asked American workers how confident they were in their investment prowess (see Table 1.1).
You in Your Investment Skills?
| Confidence Level | 1997 | 1998 |
| Very confident that I am doing a good job |
33% | 25% |
| Somewhat confident | 44% | 47% |
| Not confident | 23% | 28% |
The good news is that more people, just like you, are taking matters into their own hands. They realize that it's never too early or late to start learning about investing so they can put their money to work. Of course, everyone knows what a struggle finding the money to save and invest can sometimes be. Some of you are embarking on new careers, starting your own business, or even going back to school. Some of you have been diligent savers all your lives, but not necessarily savvy investors. Others are late bloomers who may still enjoy living from day to day, but have started thinking about investing for a variety of reasons.
Why invest now? Some people are prompted to take the first step when they see the shaky efforts of their elders who attempt to retire. After all, fear can be a powerful motivator. Some people are concerned that their own time and opportunities are slipping by. Still others have watched neighbors and coworkers invest their money successfully and want to put their own money to work. Maybe you've accumulated a tidy nest egg in your retirement plan at work and now want to do the same in a non-retirement account. Regardless of which camp you're in, you'll benefit from the kind of straightforward investment information that encourages intelligent decision making.
JUMP ON THE BANDWAGON
It's heartening to discover that as a nation we in the United States are getting smarter about our need to save and invest. The number of people who have attempted to figure out how much they'll need to save by retirement is also increasing. Already almost half of baby boomers, who are recognizing the fact that they may spend 20 or more years in retirement, have attempted to calculate their own future financial needs themselves, EBRI has found (see Table 1.2).
How Much They'll Need to Retire?
| Year | Preretirees | Older Boomers |
Younger Boomers |
Generation Xers |
| 1998 | 45% | 50% | 47% | 33% |
| 1997 | 44% | 38% | 32% | 30% |
There's more good news where that came from. We have access to investment vehicles our ancestors just didn't have. The rise of the 401( k) plan in the 1980s, and its growing role as the primary retirement savings vehicle for workers across the country, has given millions of individuals the impetus they need to try to understand Wall Street and how it impacts their own personal finances.
No longer will millions count on company pensions and Social Security checks to fund their retirement years. They're making decisions now about how to invest their 401( k) s, their individual retirement accounts (IRAs), and their regular investments. By doing so, they're actually deciding how much they'll have to live on today, tomorrow, and down the road into retirement.
SO MUCH TO CHOOSE FROM
Serving all of us eager investors is a burgeoning mutual fund industry, which already offers more than 7,000 funds and adds another 500 funds for investors to choose from each and every year. All told, in the United States some 66 million people have poured more than $5 trillion in hard-earned cash into their mutual fund accounts.
Stock pickers weren't left out of this investment explosion, either. A sea change in technology and a booming economy created thousands of initial public offerings (IPOs) of stock in the 1990s that boosted by some 2,000 the number of companies that are traded on the major stock exchanges. Now you can choose to invest in the stocks of more than 11,000 domestic companies. More than 60 million Americans do just that.
Companies and municipalities also gave investors a large offering of bonds to choose from. Not interested in individual bond investments? Look for one of the thousands of mutual funds that invest in different types of bonds.
WHERE WE GET THE SCOOP
So where do people turn when trying to decide where to put their hard-earned dollars? (See Table 1.3.) Newspapers lead the way. The ever-growing financial press includes the Wall Street Journal, the Financial Times, Investor's Business Daily, and maybe even your local newspaper if it covers personal finance topics.
Newer magazines like Individual Investor, Smart-Money, and Worth have joined old-line publications like Money and Business Week to spread the word about decent stock, bond, and mutual fund offerings. Television programs such as Wall Street Week and the Nightly Business Report vie with CNBC and CNNfn to be the first to explain market changes and new investment opportunities to you. Morningstar, Value Line, and other analytical services that focus on mutual funds and their performance are moving to provide more news, analysis, and portfolio-tracking services than ever before. Financial news is now an integral part of almost every news broadcast.
for Investment Information
| Newspapers | 78% |
| Television | 47% |
| Investment magazines | 44% |
| Recommendations from friends or relatives |
35% |
| Internet | 31% |
Your financial library and local bookstores shouldn't be ignored, either. They bulge with dozens of well-written books on investing, saving for retirement, and understanding how to keep your home and family financially secure. Investment clubs that open up membership to mom, pop, and even kid investors have grown in number and attractiveness in the past decade. Despite the less-than-market-beating investment results of the best-known investment club in the country, the Beardstown Ladies', thousands of other investment clubs are delivering solid returns as a result of the real-money decisions members make based on their own investment research. As for the recommendations of friends and neighbors, well, as you can see from the table, lots of people use the thoughts and ideas of those around them as a basis for making investment decisions. If you're interested in the investments being suggested, however, take the time actually to see if the investments are worthwhile or just another stock or mutual fund that doesn't benefit your investment strategy or portfolio.
INFORMATION CENTRAL
And then there is the Internet. It's clear even now while it's still in its infancy that the Internet has democratized investing by giving every Dick and Jane who's interested access to company and investment information that not so long ago only professional money managers were privy to. For those of you who have caught the wave, you know the Internet has profoundly heightened your ability to do financial planning by giving you access to vital data, information, and even useful calculators that can tell you nifty things like how much you need to invest at what interest rate and over what period of time to rack up a $1 million portfolio.
INVEST--NOW
We also have the ability, with the online trading services that many brokerage firms now offer, to act on our investment decisions almost instantly. Online trading may make the act of investing easier, but some critics allege that it presents huge risks to individual investors for that very same reason--because it makes investing so very fast and easy. Critics contend that as a result too many people will jump the gun and buy or sell stocks, bonds, and mutual funds without doing adequate research. Of course, if you're following the advice in this book you'll be able to tell those critics that you've already done your homework on the investments you buy and sell, and that online trading is just a tool you use to take some of the unnecessary paperwork out of buying and selling.
That's because in the proper hands the Internet can give you more information than you've ever had before to make decisions. For boomers wondering how much money they'll need to retire, how small company mutual funds are performing, or what Treasury bonds are paying, the answers are only a few computer keyboard strokes away. Those answers should make you a more--not less-- thoughtful, competitive investor.
We're a long way from the days when a mainframe computer took up the whole office. There is growing evidence today that tells us that the Internet will become the principal way that in the not-so-distant future many people do the bulk of their financial research, if not their actual investing. Banks, brokerage firms, insurance companies, and mutual funds have all invested millions in their Internet sites to ensure that we find the investments and services we are seeking quickly. Of course, how you invest is incidental. There are many very successful investors who don't use a computer to find their next stock or mutual fund. The phone and U. S. mail work just fine for them, and if you're sick of hearing about all this computer stuff, they can work fine for you, too.
The downside of all of this information is the potential for overload. Search for a decent growth mutual fund that invests in U. S. stocks, and you'll find 500 that appear to do the trick. Do you know what questions to ask to narrow down the competition until you find the right fund or funds for your goals? Some mutual fund managers are downright aggressive, buying and selling stocks every day. Others are satisfied to hold on to the stocks or bonds they already have and earn smaller profits, if they don't have to take on too much risk. All those mutual funds that look alike may in fact be very different when you scratch the surface.
Whether you're searching through hard copies of newspapers and magazines or doing your investigating online, with so much information at your fingertips finding the right facts can be a daunting task if you don't know what you're looking for or how to qualify the investments your search turns up. In the past, finding relevant answers used to mean a simple hunt at the library, or a visit to your broker's office to review an analyst's reports. Today, you can sit in your pj's if you want to and use your computer to sort through a jungle of information to find what's relevant (and what isn't) to your investment decisions.
DON'T BELIEVE EVERYTHING YOU READ
Of course, as choices loom, so do fool's gold and investment scams--those so-called investment opportunities that sound too good to be true precisely because they are. Without accurate information, it's easier to fall prey to scam artists, especially those that operate online, providing investors with hot tips in e-mail and chat rooms.
The Securities and Exchange Commission (SEC), which regulates the U. S. stock market and many of those who issue and sell stock, has accused more than 23 different companies and individuals of using the Internet to commit fraud, often by acting as independent, unbiased sources of information when in fact most were getting paid by the companies issuing the stock, which was often worth just pennies. Other online scam artists have been caught attempting to induce a large number of unsuspecting investors to buy the stock they're touting so that there will be a price run-up that will allow them to sell their shares for a hefty profit. Unfortunately, as the owners of large chunks of a penny stock sell, the price of such stock usually tumbles, leaving unfortunate investors with just pennies on their dollars or, worse, nothing at all. By educating yourself and asking the right questions, you'll be able to steer away from these kinds of money-losing deals and toward legitimate investments.
IN CONTROL
When you have the facts, you're in control. Sure, it takes some time and effort to do your own research. But there is concrete evidence that investment education has a measurable and positive impact on individuals' savings habits and behavior. People who seek out financial education or get it at work are much more likely to figure out how much money they'll need to finance a sound retirement and much more likely to invest to get there. That's what the rest of this book is aimed at doing: turning you into an inquisitive and skeptical researcher so you can ask the right questions and find the right answers on your journey to becoming a successful investor.
Table of Contents
Why You Need Relevant Investment Information.Good Investing Starts at Home.
The Basics of Being an Investor.
The 10 Things You Must Know about Your Investments.
How Analysts Look at Investments.
How Performance Is Measured.
The Great Benchmarks of Market Performance.
All the Business News That Fits.
Personal Finance Periodicals.
Measuring the Value of Newsletters, Brokers' Advice, andAnalysts' Reports.
The Big Hitters: Morningstar and Value Line.
Television and Radio.
Annual Reports and the Rest of the Mail.
Going on the Internet for Information.
Hands-On Investing.
One Lean Investing Machine.
Glossary.
Index.