2018 is upon us. We’re older. Hopefully wiser. Definitely closer to our retirement age. So now is as good a time as ever to reevaluate our investment portfolio.
Don’t want to think about it? Most people don’t like to. My girlfriends and I can talk about most things but investment. “My husband does it.” “I use an advisor.” “I just put it in a savings account.” Maybe it’s because the terminologies are so confusing and the topic seemingly incomprehensible. But I’m hoping to change that. Our investment portfolio has a significant effect on our quality of life after we can no longer work (or want to work). Shouldn’t it warrant a more hands-on approach or at least a better understanding?
Why is it important?
To know why it is important women take reins of our investment, consider a few statistics:
- Of the 62 million wage and salaried women (age 21-64) working in the United States, only 45% participate in a retirement plan.
- Social Security is based on earnings made in one’s lifetime. Women not only earn less than men (76% of what men earn, on average), but we also leave the workforce for an average of 12 years to care for family, making our overall earnings less.
So how do we close the gap? Make our money grow.
How?
To begin wrapping our heads around the mechanics of investing, let’s compare it to something we are familiar with: Relationships. Why not? We all have relationships. Some of us are great at it. And what is the stock market but a web of relationships between companies, people, and governments. Sometimes it is emotional and manic-depressive. Other times it is optimistic and exuberant. So why not apply some of the skills we have gained in relationships to our investments?
Get into a relationship with your investment account
Like any relationship, it begins with a hello.
There are several brokerage accounts out there. Choose one that works for you. Click here for a list of the best ones . Each has its own fees and minimum investment required to start.
I use Fidelity mainly because that’s where my 401k was held. But I stay because of their $4.95 trading fee, easy to use website, an abundance of funds and stocks to choose from, and lots of statistical information for my geeky research.
The process is simpler than you think:
- Choose a type of account
- Open an account (online, over the phone, or in person by walking into a branch)
- Fund it
- Choose investment options
A few types of accounts that you can open
- Roll-over IRA – this allows you to move your retirement savings from your retirement plan at work (401(k) or profit-sharing plan to your Individual Retirement Account (IRA) tax-deferred.
- Traditional IRA – a tax-deferred retirement savings account. You pay taxes on your money only when you make withdrawals in retirement.
- Roth IRA – this is where you invest the money you already paid tax on. The best thing is because you already paid your tax before you contribute, your gains will be tax-free when you withdraw. The more you can build this, the less tax you’d have to pay when it comes time to retire.
- Individual/Joint brokerage account – this is not a retirement account nor is subjected to its rules. But any gains is taxable.
To open an account
All you need is an identifying information (social security number, driver’s license, passport, etc.) and contact information.
To fund an account
You just need an account number and routing number if you are moving money from a bank, check or cash if in person, or your brokerage account number and account type if moving assets. Then start picking.
Investment Strategies
Women are nurturers. We grow relationships. We see it through. So, it’s no surprise that on average more women than men like to ‘buy-and-hold’. This is not a bad thing. It just means we need to do more due diligence so we feel confident about the quality of what we’re getting.
Think of investment choices as the different people you have relationships with: some long-term, some a short-term affair. While in real life you should not be dating someone else while married, you can do this guilt-free in your investment portfolio. I follow investment philosophies of two different men. And they seem to be opposites. On one end is Warren Buffett and on the other is Mark Cuban. Two billionaires. Two different styles. But they coexist peacefully and play harmonious roles in building my retirement income.
Both Buffett and Cuban agree on one thing: invest in what you know. And if you don’t know, learn. How do we learn? We stalk, we watch, we google. If you’ve googled an ex, you already know the drill.
Strategy 1: The marrying kind
Warren Buffet just won the $1 million bet he made in 2007 against Protégé Partners that hedge funds wouldn’t outperform an S&P index fund over a 10-year period. His philosophy is simple: invest 10% cash in short-term government bonds and 90% in a low-cost S&P 500 index fund.
- U.S. government bond is a debt security issued by the government to support its spending. It’s essentially risk-free. It’s a rich guy borrowing your money. You know he’s good for it. You know where he lives.
- S&P 500 index fund is an index of 505 stocks issued by 500 large companies. This guy is well established. Old money. Steady. He may not be into grand gestures, but he’s going to be home for dinner.
Even with these Steady Eddies, you still want to make sure you look closely at their pedigree. You’re going to be married to them long-term. Make sure these guys aren’t going to cost you a lot of money or have a hidden gambling habit. Google the best low-cost S&P 500 index fund and government bonds, and you’ll get endless links to advice blogs. Look for the same stock ticker symbols that come up over and over in various blogs and research them.
To spot quality, look for:
- The companies they’re investing in and sectors – who do they hang out with
- Expense ratio – what are they costing you
- Ratings – their reputation
- Dividend rate – the little quarterly or yearly gifts
Strategy 2: The hottie you hook up with in a bar
Mark Cuban, on the other hand, believes that you should be a little bit of a risk taker and buy-and-hold is a sucker’s game. He thinks you must take emotions out of the game or you’re going to end up buying at the same time as everyone (translate: highest price) and selling at the same time as everyone (translate: lowest price).
What makes a stock rise and fall? Supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price increases. If more people wanted to sell a stock than buy it, there would be greater supply than demand, and the price would decrease. It’s all human-driven. Greed buying and panic selling will not do you any good.
So, what do you look for?
Solid companies.
Look at the everyday things that surround you. Look at where you shop, what you buy, why you buy them, and think of whether you would buy them again. Ask yourself if you believe in the companies that produce the product or provide the service. If you do, put them on a watch list (stalk and watch). The idea here to buy at the best price you can. Read up on them. Everyone is on the Internet. Look for a pattern – 1 year, 5 years, 10 years. If it’s a retailer, seasonality could cause a surge and fall within a year.
Even big companies can fall out of favor sometimes. Think of when Brad Pitt grew a beard. Less handsome. But underneath it’s still Brad Pitt. An example: Costco. I shop there. I like their business philosophy. When I looked at them last year, I saw that they were experiencing a dip. I couldn’t really see a valid reason. They were beating quarterly goals. They have money. I didn’t consider them a big risk. So, I bought some. Since then they have gained 25%.
Emerging companies.
Before you discount these guys, Amazon was once a small company. So was Apple. Emerging companies are like the 20-something you meet in a bar in Silicon Valley. He’s handsome. He’s sexy. And boy, he’s charming. Especially when you’re drunk.
He talks about watching sunrise from a temple in Bagan. He’s not worried about how he’s going to finance it. It will come. He believes that if he thinks positively, things will happen. It’s fate.
Breath. Take one step back from his dream and look at your own vision of the future. Are you interested in this guy? What do you believe in? Energy, artificial intelligence, virtual reality, medication, self-driving cars? Look for new trends within those sectors and pick a few companies to keep your eye on. This is where you must do your due diligence and research. What is this company doing? Do other companies like their technology? Do they have other income streams? Are they buying other companies? Are they being bought?
You’re buying potentials here. There will be losers and there will be winners. Over time and with experience, you will be able to spot the losers and winners easier. Like dating. The trick is to only pick a few. You’re going to be nurturing this relationship. You’re going to learn what you can about it. With luck, fate, and understanding, you may just win yourself a Steve Jobs.
To spot quality, look for:
- Earnings vs. Estimates – have they been beating their estimates in their quarterly reports? Does the guy talk the talk and walk the walk or is he just full of air?
- P/E ratio – market value per share divided by earnings per share. This is how much people think the company is worth. If P/E is 20, it means investors are willing to pay $20 for every $1 the company earned. If 100, then people are willing to pay $100 for each $1 he earned. As with all things, some are ‘over-rated’ and some ‘under-rated’. There are stocks like Amazon that has P/E of 300 (expensive compared to earning). But high does not always mean bad if the company is reinvesting in its growth and has a lot to offer.
- Stock price history – this will give you a gauge on whether you’re buying a stock at its height. All stocks will go through a cycle of dip and climb. There are undervalued stocks out there.
Strategy 3: The man your age
He knows all the bands you listened to in High School. He’s on the same timetable. He tells you he wants the same things in life. He’s low maintenance. He seems to be everything you want in a partner. But dang, he’s expensive to keep. He’s a target-date fund.
Target-date funds are based on your age. You pick a fund with a target year that is closest to the year you anticipate retiring (ex. 2050). Then the fund does the rest.
The good: It holds the promise of accurate allocation of your portfolio as you age. More aggressive when you’re young. Less aggressive as you get closer to retirement.
The bad: 1) Not everyone retiring in a given year has the same risk tolerance, cash flow needs, and time horizon, 2) Cost is generally high when compared to index funds.
There is also a false sense of security. You are in the back seat. You’ll have no idea why a fund is high or low. Or what the managers are doing to change anything. This is the strategy for those who like to ‘set it and forget it’. But beware – like any stocks, there is risk involved.
Google ‘best target-date funds’ and you will be given a myriad of options. Do the same due diligence here. Understand fees, allocation, and quality related to the fund.