Beating Broke

Personal Finance from the Broke Perspective

Investing Made Simple

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Investing Made Simple: Index Fund Investing and ETF Investing Explained in 100 Pages or Less

investing made simple
Amazon

By: Mike Piper (ObliviousInvestor.com)

I had the opportunity to meet Mike at the first FINCON in Chicago last year.  He’s a thoroughly nice guy.  I knew him from his blog and website, but for some reason I hadn’t known the extent of his authorship.  I found out at FINCON that he’s written several books (9 of them if I count right) on personal finance.  They mostly lean towards the topics of investing, but even encompass Social Security and business structure.  After meeting Mike, and learning about his books, I made it a point to pick one of them up to read and review.  Well, over a year later, I finally made it to the reading and reviewing part.

Since I’m not much of an investor, I thought that it would be a double good idea to pick up the Investing Made Simple title he wrote.  I can review something he’s written, while probably learning a few things along the way.  Investing made Simple is an excellent book.  It’s short, which makes it an easy read, and the writing style is light, without all the technical investing jargon that’s typical to investing books.

It’s not an in depth book on investing, but it wasn’t intended to be.  What it is intended to be is a short (100 pages or less) book that will give anyone the basics of investing while setting them on the right track to a successful investing portfolio.  I think he accomplished that.

I think one of the things that many beginning investors, including myself, get bogged down in is that the world of investing is a pretty big world.  There’s all these different ways to invest in something.  There’s shorts, longs, calls, margin, options, commodities, ETF, bonds, and the list goes on.  And on.  But, when the beginning investor, who knows little to nothing about investing goes looking for information to get them started, it’s a whole lot of overwhelming.  Piper lays it out simple and easy.  He gives you the meat of what you need to successfully invest for the long term, while quietly informing you that you’ll likely be better off ignoring most of the  stuff that’s confusing you.

What you end up with is a book with all the basics of investing in a small package.  But, you also end up with something that, for most people, is also a complete investing manual.  Keep it simple, and invest wisely is the order that I took away from reading Investing Made Simple.  I think it should be recommended reading for all beginning investors.

 

Are Certificates of Deposit (CDs) Still a Valuable Tool?

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Read just about any personal finance article on saving and you’re likely to also read something about certificates of deposit.  Heck, I’ve covered what a certificate of deposit is, how to create a CD ladder, and mentioned CDs several other times.  But, as much of a mainstay as they are in the typical savings mantras, are they still a valuable tool for savings?

Recent economic changes have certainly not been kind to many of us, and our methods of savings haven’t been treated well either.  The interest rates on savings accounts is terrible.  My local credit union doesn’t pay enough to even make it worth my while.  And online savings banks that used to be the poster children of high-yield accounts are paying less than 1%.  It wasn’t that long ago that a 5 year CD would have been paying 6-7%.  Now?  Closer to 1%, even at the online banks.  My local credit union is paying 0.25% on a 12-month.  (they apparently either don’t offer  5 year, or they don’t post the rates for them)

There are still some good rates out there though, if you take the time to look.  Well, better rates than what some are offering.  In the current economic situation, you can’t ask for much.  Click here to read more information on one such certificate of deposit.  But, even with rates that are closer to 2%, are they worth your time?  If we assume that the rate of inflation is somewhere around 3%, (I think it’s higher) aren’t you losing money by only earning 2% on the CD?  Yes and no.  If the money would just be sitting around in a savings account and making little to no interest, the CD at near 2% would be better than nothing.  Literally.

So, back to the question at hand.  Are CDs still a valuable tool for savers?  The answer, again, is yes and no.  No, because they aren’t the best tool.  There are other ways for you to make your money work for you.  They all make better returns than you would with a CD.  However, they all carry some caveat that you have to know about if you’re going to use them.  In many cases, the risk is higher.  Investing the money in stocks, or in something like Lending Club can get you much higher returns, but the risk is also much higher.  Investing the money into real estate, while a good passive income idea, is also a higher risk investment, plus the money is locked away in a non-fluid investment.  Treasury bonds can have higher returns, but often only at the cost of tying the money up for a long time.

If there are so many higher yielding investments to make, why are CDs still sometimes a valuable tool for savers?  There’s two really good reasons.  The first is that the money is not tied up for very long.  Even if you purchase a 5 year CD, you can still cash the CD out and only pay a small fee.  That fee is usually something like 3 months of interest.  As long as you’ve held the CD 3 or more months before cashing it out, you don’t lose any money.  So, the money remains pretty fluid.  The second reason is that a CD is an ultra secure investment.  That’s also why the rates are lower.  A CD is what is called a secured investment.  You deposit (hence it’s name, certificate of deposit) an amount of money into the account, and agree to leave it there for a certain period of time (the term of the CD) in exchange for a guaranteed return rate.  There’s very little risk at all.  Even if the bank you open the CD at goes bankrupt, you’ll be covered by the FDIC or NCUA insurance.

While I wouldn’t suggest putting a huge chunk of your retirement into CDs, (unless you’re nearing retirement) I would suggest putting something like your emergency savings into them.  They’re also a good tool for squeezing a bit more interest out of a new car savings, or a similar savings that has a mid-range use date. Just pick a CD with a term shorter than the length of time you’ll be saving up to avoid any extra penalties.

CDs don’t offer the greatest rates, that is for sure.  But, their lack of risk, and higher fluidity make them great for short and mid range savings.  And that makes them a mostly valuable tool for savers.  You just have to know where and when to use them.  Just like any other tool.

Do you agree?  What savings would you use a CD for?

Dollar Cost Averaging; Not Just For Stocks

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Most of the time, when you hear or read the phrase “Dollar Cost Averaging”, it’s being applied to the stock market.  It’s the practice of buying a set amount of stock at a regular interval whereby the average cost per share of stock ends up normalizing.  So, if you buy stock high one time, and low the next, and then high, your average cost is going to be lower than the high cost and more than the low cost.  So long as the stock doesn’t pull an Enron, and slowly increases in value, you come out ahead in the long term.

But, does it have to apply to just stocks?  Absolutely not.  It really can apply to anything that you buy on a regular basis.  Gas for example.  A couple of weeks ago, I filled up the car at about $3.89 a gallon.  Today, as I drove by the gas station, it was at $3.69 a gallon.  I filled up at $3.89, so I don’t really need any gas right now, but I seriously considered stopping and topping off the tank to bring the overall cost of the gas I bought over the last several weeks down a few pennies.

There might be some argument that dollar cost averaging doesn’t work very well for consumables.  After all, if I had bought a few gallons at $3.69, my overall reserves of gas would not increase.  I’ve already consumed those few gallons that I paid $3.89 a gallon for.  But, I would have increased the total amount I had bought, and the average price would have been less than $3.89.

Dollar cost averaging works especially well for things that regularly fluctuate in price.  If you’re building a stockpile of food in your basement, it’s chili bean season.  There’s sales all over the place for chili beans.  Now, you could buy 50 or so cans at the sale price, but you might be tight on storage space.  Or, they might expire before you get to use them all.  Instead, you can use dollar cost averaging to buy slightly more than you might normally buy, and bring down the average cost of the ones you have to buy later in the season when they aren’t on sale any more.

O.K.  This does seem a little silly.  After all, who’s going to go out and figure out the average cost of a can of chili beans in the basement?  But, there’s a point in there.  There’s a certain rationality in buying things in set increments over time rather than trying to time the market (or chili bean sale) and buying a whole lot of the item at once.  How many times have you bought something only to find that it was on sale the next week?

And, don’t forget that the same principle goes the other way.  There are many normal things that we do on an everyday basis that can apply to the stock market too!  When we shop, we tend to stick to the brand names we know.  Even if those brand names are generic names.  Go far enough out of town and stop at a grocery store and try and convince yourself that the generic brand at that store is the same as the generic at home.  It takes a bit of thought!  Sticking to companies (brands) that you know when investing can be beneficial too.  More often than not, those brands and companies are companies that have been around for a long time and built a certain amount of trust in the marketplace.  They’re unlikely to just be an overnight sensation, or to quickly fall from favor.  In short, they’re stalwart investing options.

What other everyday habits do we all have that can be carried over to the stock market?  And what other stock market habits do we have that can carry over to everyday life?

img credit:Nick Harris1, on Flickr