Coaching YOUR Investment Team

We work hard for our money!

And at some point, we want our money to go to work for us… Right?   When you buy a product that is intended to INCREASE your money, it is called an investment.  And for some of us, that’s where our know-how ends.  Investments can be great if they increase our personal wealth.  Investments can also be scary and drive your personal wealth into serious hole.

In order to make the best decisions, it is wise to hire an investment advisor of some sort.  But, where do you start?  And what IS an investment advisor anyway?

The University of Montana did a series of webinars called Solid Finances.  (http://www.msuextension.org/solidfinances/webinarschedule.html)

The first webinar addressed exactly this topic.   I highly suggest you listen to this before you go hire someone to advise you.  Below, you’ll find a few of the highlights of the webinar that I thought were very helpful.

My favorite part of this webinar was the idea that instead of looking for an “investment advisor”, you should really be looking for an “investment team.”   You, as the investor, would be the coach of this team, and you’d recruit the necessary people with the necessary expertise to make your team a success.  Below is what an “investment team” would conceivably look like:

Investment  Team:Investment Coach
YOU are the coach!

Team Goals:
Goal setting  (ex. Financial Coach, spouse, pastor, friend)
Select Best Investments (Financial Planning)
Manage Risk (Insurance)
Minimize Taxes (Accounting)
Minimize Legal Complications (Attorney)

In order to pick your winning teammates, you need to look at what qualifications are necessary for each team member.  Some things to keep in mind would be…

What’s required of a good team member?
Knowledge
–In their specific area
–Your unique situation
Effective Communication
Reasonable Fees
Trust

Finally, if you are looking specifically for a securities broker, you can look up any licensed individual or company at the FINRA Broker Check website.  http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/

Happy Investing!

Investment v. Consumption: a $$ debate

Money, despite its reputation for being black and white, does have a very philosophical side to it.   And sometimes it’s fun to have a bit of a debate…

I watched a series of videos on Khan Academy regarding investment vs. consumption.  If you have time to check them out, I’d highly recommend them…or anything on Khan Academy, really.

2011-12-24 S100 Hangover Cure 001

Investment vs. Consumption:  at face value, the debate seems pretty easy.  If you use your money to wisely purchase stocks and bonds, we would call that INVESTMENT. If you run to McDonalds and stuff your face full of a Big Mac and fries, we’d call that CONSUMPTION.

But, the definitions are not always that black and white.    For example:  If you took your family on a small family vacation, would that be investment or consumption?  When I posted that question to facebook, I got an unanimous INVESTMENT response.  And I must agree…for two reasons.  One, like the facebook peeps said, making memories is priceless.  But two, to rest and regroup is an important part of productivity.    So…that one was to too easy.    I then asked on Facebook whether buying a purse at Target would be investment vs. consumption.  That’s a little harder.  I supposed it depends on what the purse if FOR.  Or what about a computer…  if you are buying it just for video games, it’s consumption but if you buy it for work, it’s an investment.

Stock Market

So…what determines consumption v. investment?    If the end result is an increase in productivity (whether your own or somebody else’s) of some sort, than I’d argue for investment.  If the money just stops at pure enjoyment…I’d argue for consumption.   And of course, any purchase can be a combination of both.    So see…money isn’t just black and white…or green.  It’s philosophical…it’s debatable.

Call and Put Options: A bit of gambling…

The #1 Rule of Investing:  Don’t put your money in something unless you understand it!

If you’ve ever dabbled in the stock market, you may have heard the terms CALL OPTION and PUT OPTION.  It may be that you’ve heard really “sophisticated” or “successful” investors use such words and you think to yourself, “Oh my…I wonder if I should be using those things!”  Before you do ANYTHING, always stop to understand it first.  So…here’s the quick/simple lowdown on Call and Put Options.

 

Call Option (American):  When you purchase the right to buy a stock in the future at a particular price.

old phoneSo for example… Let’s say that Kaffenate’s stock is currently trading at $100, and you’ve noticed that Kaffenate is really rockin’ it out of the park.   If you think the price of Kaffenate stock might go up in the next 3-4 weeks, but you aren’t really sure, you could purchase a call option.  This call option, purchased at a price of $10, would give you the right to buy Kaffenate stock anytime within the next month for $120.

If all goes really well…Kaffenate’s stock jumps and 3 weeks later is trading at $150!   Now is a great time to exercise your call option and buy the stock.  If you buy it at $120 and immediately sell it for $150, you’ve made $30 minus the call option price of $10…so you have a lovely $20 profit.

“But Kristiann!” you say “If I had just purchased the stock, and not worried about the call option, I would have made a $50 profit instead of only a $20 profit!”  So, why would anyone want to buy a call option?

Well let’s say (heaven forbid) that Kaffenate tanks in the next 3 weeks and stock prices plummet to only $75, you would have lost your $10 that you used to purchase the call option, but that’s it.  You wouldn’t have lost the $25 fi you had actually owned the stock.

 

Put Option:  The right to sell a stock at a specified price if you think the price of a stock might go down.

I dislike itLet’s take the same Kaffenate stock, trading at $100, and let’s say that you are a bit concerned that Kaffenate may not be keeping up with the competition out there.  In fact, you think, Kaffenate is really about to lose value.  So, you buy a put option.  This put option costs $10 and gives you the right to sell the stock at $75 over the next month.

Augh…you were right!  Kaffenate tanks, and 4 weeks later is trading at a measly $50.  BOOOO!   But that’s okay for you because you have a put option to sell Kaffenate at $75.  So (if you don’t already own it) you run out and buy Kaffenate stock for $50 and turn right around to sell it at $75.  Taking into account the price of the put option ($10), you have just made $15.   (If you do already own Kaffenate stock, you’ve softened the blow a bit by having a put option…but that is a topic for a different blog.)

In short:  A call option is a BET that a company’s stock will go up, and a put option is a BET that a company’s stock will go down.

 

Personally, I’m not much for betting and gambling, so I wouldn’t mess with these.  :)

Bonds and Interest Rates: is there really a connection?

I’ve taught a lot of classes in the past about the difference between stocks and bonds.  (The quick and dirty is that stocks are part-ownership in a company, bonds are when you lend money to a company/agency and get paid back with interest.)

Remember The flag of liberty Support it Buy US government bonds 3rd Liberty LoanAnywhooo… I’ve always known that there was an inverse correlation between interest rates and bond prices, but I couldn’t necessarily articulate what that was.  This video at Khan Academy does a great job at explaining it.    Basically, though, let’s say that you own a bond that is earning 5% interest.  If interest rates go UP and bonds begin paying 10%…the bond you have just isn’t as good (or is worth less) than other bonds that are now available.  Conversely, if you buy a bond that pays 10% and interest rates DROP to 4%, all of a sudden you have one cool bond!  It’s worth more than what is available on the market and you can sell it accordingly.

I’m am NOT into reinventing the wheel, so instead of typing out the entire explanation, I wanted to point you to this video.  It’s only about 10 min long, and well-worth the investment of your time.

 

I thought Short Selling Stocks was for short people?!?

I was all excited when I heard the term SHORT SELLING STOCKS.  ”Woah,” said I, “that’s for me!”  But alas…it’s not for SHORT PEOPLE, it’s a just an unintuitive way of making money…

Here’s how it works….

You’ve heard the adage BUY LOW and SELL HIGH, right?  That’s the way to make money in the stock market.  But, did you know that there is a group of people who make money THE OTHER WAY?  Indeed, there are some who actually make money when stocks go down.  These people are called SHORT SELLERS.  It seems very odd at first, when you hear it, but in a backwards way it can work.

Basically, instead of buying a stock, a short seller will BORROW a stock when it’s high.  (ideally, of course)  Let’s say I borrow a Starbucks stock from Joe when it’s valued at $200 and immediately sell it for $200.  So, I owe Joe one Starbucks stock and I have $200 in cash. Now I’ve been watching Starbucks and I’ve been reading it’s financial reports and I’m really sure that it’s about to take a bit of a dive.  So, I borrow it from Joe, sell it, and wait a bit.  When the stock does take a dive, and is now valued at only $100, I’m really excited!!  Why on earth am I excited?  Because I can now buy the Starbucks stock at $100, give it back to Joe, and pocket the $100 difference.  I’ve just made money when a stock decreased in value.

Before you get this great idea to make money this way, let’s see what happens to this scenario if Starbucks ROCKS the coffee industry right after I borrow Joe’s stock.  Ok… so, I borrow Joe’s stock when it’s valued at $200 and immediately sell it for $200.  Now I’m poised, waiting for the stock value to drop when voila… Starbucks comes out with a brand new fancy dancy coffee drink that has everyone talking and stocks SOAR to $350.  Wow!  OH NO.  Now I still owe Joe a Starbucks stock, but I have to pay $350 to get it.  I only sold it for $200, so I only have $200 waiting to spend on it, which means I now have to use $150 of my own money to make up the difference.   AUGH.

For the common investor, short selling stocks is not a good option.  But, understanding what short selling is and how it works makes one more informed which is always good.

So there you have it… the long and SHORT (haha) of it.

Treasury Bills, Notes, and Bonds… OH MY!

Have you ever wondered…

What’s the difference between a treasury bill, a treasury note, and a treasury bond?

(If you haven’t wondered, that’s okay…you can call me a nerd and I won’t be offended.)

But since I brought it up, and since you are NOW wondering…  Here’s the quick and dirty…

Department of Treasury SealWhen you are dealing with investments, and you see something that says either treasury bill, treasury note, or treasury bond you automatically know 2 things.  First, the term “treasury” indicates that you are dealing with the federal government.  Second, the terms “bill”, “note”, and “bond” indicate that you will be lending your money to the government in return for some type of interest.

 

So, what’s the difference between a bill, note, and bond?  It’s actually quite simple:  time.   If you lend your money to the government for less than 1 year it’s called a treasury bill, for 1-10 years is called at treasury note, and for 10+ years is a treasury bond.  Pretty simple!

And now I’m SURE you are wondering….

 

How is the interest for treasury notes, bill, and bonds determined?

interest ratesPrice for anything in the world is based on the same thing: supply and demand. How much does the government need and how many people are willing to lend money?  This fluctuates as the years go by.  Click on this magic link to see what the rates are now.

Mortgage-Backed Securities–What the heck are they anyway??

Mortgage-Backed Securities:Real Estate India  This is one of those fancy terms that gets thrown around in the news or in social circles…but no one really knows what they are.  (And yet we don’t want to admit that we don’t know.)

We could make a good guess, right?  They have something to do with mortgages, which means houses are involved.  The term “securities” makes me think it’s probably some kind of investment.  But is it a schemey-thing?  Or is it safe like a bond?  (If you think bonds are safe.).  Is it available to normal people or only finance-y people?

Let me take the mystery out of the term and give you the simple (really simple) explanation….

In the 1980s and prior, people would buy houses by going to their local banks for a loan.  The qualification for such loans were typically strict in that one would need at least 20% of a down payment and be able to prove enough income to support a mortgage.

In the 1990s, the idea of Mortgage Backed Securities really took off.   (The first one was actually approved in 1968…fun fact.)  Investment banks would buy a BUNCH of mortgages, package them into one product, and then break that product up into a ton of little pieces to sell to investors.  Therefore, instead of the local bank getting the interest…investors would get it.  Personally speaking, if I were to buy a mortgage-backed security, I’d be making a little tiny bit of interest on a lot of different mortgages.   Ok…sounds good so far, right?

hair, nails, gifts and mortgagesWhen the concept of mortgage-backed securities first began and mortgages had more stringent standards, the mortgage-backed securities were safer.   However, during the housing boom of the 2000s there was a large demand for these new investment instruments. In order to meet the demand and to keep up with the amount of people who wanted mortgages, the banks had to lower the lending standards. (WARNING WARNING) Now it starts to get a bit hairy.  Banks continued to lower lending standards to produce more mortgages to package into more mortgage-backed securities to then sell to investors.  As these standards got lower and lower and lower, the new era of sub-prime lending was born.

(*Note:  See blog on housing bubble.)

After years of sub-prime lending, the mortgage-backed securities became diluted with bad mortgages, foreclosures, and short sales.   The banks that had bought them, sold them, and counted on them were now in serious trouble.  (This is where you start sweating at the thought of bailouts.)

So, are mortgage-backed securities schemey-things or safe?  Well… that depends on how many people are actually paying their mortgages and how many people are defaulting.   Mortgage-backed securities have the potential to be good investments, but only with the proper standards in place.  Given the history, it’s important to exercise caution and do your research! As with ANY investment… If you don’t understand it…don’t put your money there.

For a more in depth look at MBS, visit khan academy.

Kids and Money: Google it..I dare you.

Have you ever googled “teaching kids about money?”  Wait a sec…let me do it…

113,000,000 results in just .16 seconds.   Just in case that number didn’t sink in…that’s over 113 MILLION results.

Can you say OVERWHELMING?  I’m a homeschool mom and a financial counselor.  So of course, teaching my kids to budget is one of my main goals in life.  But, I don’t have time to create an entire program, so I went looking for what was already out there.  (See comment above on OVERWHELMING search results.)

Honestly, a lot of the stuff out there is….hmmm….not so impressive.  You can read my post (rant) about online programs.  (In all the research I’ve done, I have yet to find a computer-based program that even comes close to PARENTS teaching kids AT HOME in REAL LIFE situations)

But, there are some great products out there!  And I really want to spread the word on their behalf.

So far, (I’m still looking!) there are two financy-kid things that I’ve found and have gotten REALLY excited about.  Interested to know more?  Ohhh….you’ll have to stay tuned….  It’s just too much for one blog.

P.S.  If there are ones that YOU love, please comment below so that I can check them out!

Part 2 – How to Get Started with Couponing (A guest post!)

From Melissa Webb, the coupon queen….

 

In Part 1, I talked about the benefits that I and my family have received from couponing.  I remember my mom clipping coupons and taking a few to the grocery store now and then.  Couponing today is drastically different.

No longer are coupons just for food items:  coupons are used for toiletries, paper products, restaurants, recreational activities, even computers and electronics.  Besides traditional paper coupons, there are digital coupons that load to a rewards card and coupon codes you can use when buying something online.   While you won’t make a huge income by couponing, you can easily save your family money on everyday products.

It can easily be overwhelming to step into the world of couponing, so here are 5 tips for getting started:

coupon organizer1.      Get organized – a good organizational system is important for your coupons so that you know what you have.  The type of system should be something that you are comfortable with using.  I personally use a 3-ring binder.  I have tabs separating my sections, and each section has a few baseball card holders for sliding coupons into.  I also keep a pair of scissors, a few pens, and a calculator in my binder for my shopping trips.  Some people like to use a filing method, where they keep their coupons in a box.  Whatever your method is, make sure that it is portable.  The idea is that you bring your coupon system with you to the store.  You never know when you will find a great deal that you can use one of your coupons for!

2.     Finding coupons – there are several ways to start collecting coupons.   The most common is from the inserts in the Sunday paper.  Don’t have a newspaper subscription?  Here are a few ways to get your hands on the inserts:

a.  Ask friends, family, or neighbors who do get the paper to save you the inserts.
b.  Check into a Sunday-only subscription.  It could be cheaper than a full subscription.
c.  Businesses such as the library or coffee shops who receive the newspaper may be willing to keep the inserts for you.  It never hurts to ask!
d.  Surprisingly, Ebay can be a great place to find coupons, especially if you are looking for several copies of a specific coupon.

In addition to the regular newspaper inserts, online printable coupons are becoming more and more popular.  Companies regularly feature high-value coupons on their Facebook pages.  Websites like www.smartsource.com and www.coupons.com have a variety of coupons available for printing.  Many stores now are starting to offer digital coupons that are tied to your shopper’s card.  Digital coupons can be loaded onto your card directly from the store’s website, or from digital coupon sites such as www.cellfire.com and www.shortcuts.com.

3.     Take time to read a few blogs – you’ve got coupons and you’ve got them organized nicely.  Now, what do you do with them?  Back when I started couponing, there were very few “deal blogs”.  These are blogs where the writer posts the hottest deals from various stores, along with what coupons to use.  Here is where you can save a bunch of time.  Bloggers from all over the country make these lists for a variety of stores.  Find a few blogs that you like and start following them (many of them have Facebook pages also – “like” them and the deals will appear directly in your newsfeed).  I can’t stress this enough – don’t reinvent the wheel if you don’t have to.  Use the resources that are available all over the internet.  Two of my favorites:  www.moneysavingmom.com and www.hip2save.com.

4.     Review store policies – before you set foot in a store to try your hand at couponing, take a few minutes and review the store’s coupon policy.  Many of the “deal blogs” will have a section where you can print out the store policy.  This is important because every store has different rules about couponing.  Does your store allow the use of a manufacturer’s coupon and a store coupon together for an item?  What is the policy on digital coupons?  Can you use a coupon for each item in a Buy One, Get One Free promotion?  I print out the store policies for each store that I shop at and keep it in my coupon binder.  That way, if there is a problem at checkout, I can refer to the store’s policy.

Slow Sign5.     Start slow – once you start reading blogs and seeing what kinds of deals are available using coupons, it can be easy to want to try everything all at once.  CVS, Rite Aid, Walgreens, Safeway, Albertsons – these stores have FREE products up for grabs!  It can be overwhelming trying to keep track of deals and store policies, not to mention extremely time consuming to hit 5 or more stores in one shopping trip.  My advice?  Start slow.  Pick just 1 or 2 stores to start with.  When I started out, I stuck with Walgreens for my drug store and Fred Meyer for my grocery store.  I hit those 2 stores once a week for deals, and did only those 2 stores for months until I felt comfortable with what I was doing.  Now, I still do Fred Meyer as my major grocery store, but I will visit Albertsons or Safeway occasionally if there is a really good deal.  I switched from Walgreens to Rite Aid after we moved because Rite Aid was closer.  When looking at which stores to focus on, make sure to factor in how close the store is to your home.

Total Couponing Coolness! (A guest post!)

This is from my long time friend Melissa Webb….
We moved to Oregon in December 2006 with over $600,000 dollars in debt.  This included 2 “investment” houses that went bad, plus almost $50,000 in credit card debt.  We threw around big scary words like “bankruptcy” and “foreclosure”.  We What You Need to Know about Cancellation of Mortgage Debttried a lot of options to get our feet underneath us again – refinancing, consolidating, cutting our budget down to the bare minimum – everything we did still resulted in a loss every month of at least $2000.  The poor financial decisions we had made weren’t just bleeding us dry:  this was a full arterial gushing, and no amount of tourniquets could help. There was nothing that we do to get out of the financial mess we were in, except wait for our 2 houses to sell.  This was a very painful time for me especially, because I’m not the person to just wait around while my financial resources drained out.  I felt that I had to do SOMETHING, even if it was just something small.

And there is where I rediscovered couponing.

I grew up watching my mom clip and use coupons on our weekly grocery trips, and after I got married I used them on occasion when I went grocery shopping.  When we became deep in financial crisis, I made an amazing discovery:  couponing was a way to get items for free.  Granted, a few free items here and there wasn’t going to net me a $2000/month income to get out of the red.  But, it was something at least.

Day 6/366 Couponing

The very first coupon blog I found was www.moneysavingmom.com (and it’s still one that I visit at least once a day).  I followed it daily and used my new-found information to score my family a variety of free items:  shampoo, deodorant, toothpaste, cereal.  It wasn’t all perfect though, and I made mistakes along the way as I tried to get my traction as a serious couponer.  However, even after we finally sold those investment houses and paid off our $50,000 in credit card debt, I continue to coupon.  Maybe not so much out of necessity now, but here are 5 reasons why I still do:

It allows me to get products for free.  Couponing is a completely legal way to get items for free (provided that you abide by the rules of the coupon and the store’s policy on coupons).  In this economy, free is good!

It allows some wiggle room or extra money in my monthly budget.  By getting some of my monthly necessities for free or pennies, it frees up that money to be used for other areas.  For example, I buy a case of diapers from Amazon.com for about $35 every 2 months.  Diapers are in a category that is allotted $40/month.  So every other month, most of my money in this category goes to diapers.  But if I can get some other items free, such as toothpaste or shampoo, it helps.

I don’t have to be brand-specific.  With couponing, most of the time you can’t be brand-specific.  Whatever toothpaste I can get for free is the toothpaste that my family uses.  The beauty is, not being tied to a specific brand actually allows you to buy brands that are important to you.  For example, my husband prefers Listerine mouthwash; but he could care less about the brand of his deodorant, toothpaste, and shampoo.  If I can get these 3 items for free, the money that I would have spent on them can be used for the special Listerine product.  I’ve learned not to be dependent on brands, except for a few special cases.

CVS Trip 6/8Build a stockpile for when life happens.  By stockpile, I don’t mean having a basement that looks like a grocery store.  Stockpiles don’t normally look like they are straight out of TLC’s Extreme Couponing show.  I stockpile mostly toiletries – deodorant, hair care, feminine care products, and toothpaste.  One of the wonderful things about having a stockpile is that it allows you to take a break from couponing when life happens.  After my second daughter was born, I didn’t set foot in a store for 3 months.  I had a comfortable stockpile of basic toiletries that got us through the first few months.  Because I homeschool my oldest daughter and simultaneously try to keep the toddler from destroying the home, I choose not to coupon very much during the school year.  During the summer, though, I take extra time to build a stockpile of some of our most frequently used items so that during the school year, I can keep life as relaxed and low-key as possible.

Bless others.  When you have an abundance, it makes it easy to share with others.  Blessing others can come in many forms:  donating items to a local homeless shelter, creating food baskets for a neighbor in need, or giving to a canned food drive.  The possibilities are endless!  We create “college survival kits” for family graduation gifts that are stocked with toiletries and food items for those hectic first few months of college.

 

I spend less than an hour each week clipping coupons and browsing various blogs to see where I can use them.  I love that by couponing, I am able to stretch my family’s money and also help others in my community.