Investing 102

[Sieg]

OK youngsters don't let us down. Pay close attention to the fundamentals and take the ball and run wisely!

Oh how I wish this opportunity would have been put in front of me in this manner 25 years ago. I'd be focused on track day schedules for this season with Mr. Weld vs. real work.

[CRCRFT78]

You mentioned having to be able to move these stocks (NLY JNK HYG) fast if there was a change with the interst rates. Would you park these in a specific account due to the possible tax hit you might take if you can't hold them for the long term?

I posted what I have in my Rollover IRA, I also have a brokerage account with Schwab and a Roth IRA. When selecting stocks should you watch where you park them for tax purposes?

[ErikLS2]

Personally, I think the only real advantage to a 401k anymore is if the company matches any portion of your contribution. You should of course put enough in every month so you get the maximum match the company is offering. Beyond that, I believe a Roth IRA is a much better choice for people with a long way to retirement. Now, if you have or make enough that you can max out your Roth every year and have some left over, then put the left over amount into the 401k.

Most 401k's have very limited investment options and most of those usually suck. A Roth that you open at a discount brokerage gives you the option to invest in just about anything you want. Also, if you want to take a small portion and gamble or trade with it a little bit any gain you realize is not a taxable event when it's done inside a Roth. It's not even taxed when you withdraw it, you pay the transaction fee for the trade and that's it.

If you have some money in a 401k account in a plan from an employer THAT YOU NO LONGER WORK FOR, you can convert that into a Roth IRA provided you can pay the income tax on the money (at your current tax rate) with money outside the plan. This is because the 401k contributions are pre-tax and the Roth IRA contributions are post-tax. You can't use money from inside the plan to pay the income tax either, you have to pay it with "outside" money and the whole thing goes on your tax return for the year in which you make the conversion. The money does not go through you personally or you'll pay the early 401k withdrawl penalty. What you have to do is a trustee to trustee transfer where the money goes from the old 401k plan directly to an already setup Roth IRA plan. If you don't have a Roth yet setup yet you should anyway and it should be established before you initiate the conversion.

There is some math involved to see if the conversion is worthwhile but I believe for just about anyone probably 45 or younger it makes sense to do it provided you can pay the income tax on the balance from the 401k without suffering a financial hardship. The 401k pre-tax contribution premise is based on the assumption that you will be in a lower tax bracket at retirement age but I bet if you are following an investing 102 philosophy there's a good chance you'll be in a higher bracket in which case the Roth is a much better plan because all withdrawls from it are tax free.

I'm not sure I'm aware of all the current rules so you should investigate the details further if this interests you. I just wanted to contribute a little to the overall thought process here. Any corrections or add-ons are of course welcome.

[GregWeld]

Originally Posted by CRCRFT78

You mentioned having to be able to move these stocks (NLY JNK HYG) fast if there was a change with the interst rates. Would you park these in a specific account due to the possible tax hit you might take if you can't hold them for the long term?

I posted what I have in my Rollover IRA, I also have a brokerage account with Schwab and a Roth IRA. When selecting stocks should you watch where you park them for tax purposes?

Man we're getting great questions in this thread!! Amazing how people are thinking now! I love it!!

Jose.... #1 thing about investing when thinking about taxes. BE HAPPY if you have to pay a tax! It's only a small percentage of what you MADE! My accountant used to get so angry with me when I complained about my tax bill! He'd say - GREG! You made a million bucks and you're only paying 350,000 in taxes -- that means you still got to KEEP 650 GRAND! Don't be an idiot! I'd smile and say -- Okay I see what you mean.

Now -- First off -- folks -- do not be confused as to WHICH ACCOUNT you have money in! If it's a TAX DEFERRED ACCOUNT (401/ROTH etc) then there is no tax due until you withdraw.... and in the case of a ROTH there's NEVER any tax due! So fugedidabout taxes.... they're not important here.

IF however, you're talking about a taxable account... then still forget about the taxes --- LTCG are one year and a day - 15%..... STCG are anything less than that and are taxed at your ordinary rate.... so Jose -- what you're really talking about is the DIFFERENCE between 15% -- and your ordinary rate... and while we can sit here and discuss this all day... paying that "difference" on your taxes is FAR FAR better than LOSING CAPITAL! So let's say you made 1,000 in gains -- short term (STCG) -- and you're at the 35% bracket (god bless you!) DUDE! You're only paying taxes because you MADE MONEY!

The alternative is to LOSE your gain --- and pay no taxes.... which would you rather do??

SO the key here is to MAKE MONEY - furgit da tax man - we don't want no stink in' loses! And if that means you have to sell to keep your gain - then DO IT!

Oh == and maybe at the end of the year -- you might want to scoop some gains - redeploy those workers.... then look at your account and take a loss on something else to MINIMIZE your tax gain.... and retrain those losers! Maybe not the whole team but maybe some of them -- just a haircut here and there so as to offset some of your gain...

So the real difference is between being a TRADER and an INVESTOR.... a Trader is just trying to make quick trades to make gains... and he's going to have (hopefully) a tax at the end of the year... but we're not talking about being that guy. We're talking about MANAGING our money to minimize losses - maximize our gains and protect our assets. HUGE difference!

Parking money is still about MAKING MONEY.... Obviously we will try to minimize the tax bill in the process. I have a couple MM in JNK - HYG - NLY.... it's parked there because I don't LOVE these plays for anything other than the cash they spit out... they don't make anything - there's no brand - so I only want them for their bodies! The minute they get long in the tooth they're outta here! Or if I can find something else that is safer and gives me near the return. In the meantime... I'm loving 'em TODAY.

Remember that we use these kinds of "stocks" to offset our far better INVESTMENTS that pay a smaller dividend. They can really boost your returns.... but if interest rates change or look like they're going UP - RUN! These will get clobbered first! So ya gotta be on the lookout all the time.

[GregWeld]

Originally Posted by hifi875

One good thing about this thread is that it has legs. I don't think it will just end, because its something like cars that we all have in common. Its just another part of the car hobby(funding it to a lesser degree sorta). It might even pass vegas69 build thread one of these days! I know I check it daily. thanks for getting it going and keeping it going.

mike

Mike --

I have various buckets of money - old money - new money - stocks - bonds - real estate etc. I like to keep 'em separate so I can track what they're doing. Recent "new money" (an asset that converted to cash) was just gravy for me (thank you thank you thank you... better lucky than smart!!).... and was stuck into several different accounts. One of those was UP $35 grand today and the market wasn't up much.... so buying that $275 replacement module for my trucks Banks Power system was no biggie (in my mind). It's like a total "ho hum"....

This is where ya want to be... making money in your sleep so parts are no biggie.

[JKnight]

Originally Posted by GregWeld

...but if interest rates change or look like they're going UP - RUN! These will get clobbered first! So ya gotta be on the lookout all the time.

Hey Greg, you're doing a great job of passing along quality information in a way that can be digested by the masses. While this may be an investing 101 topic, I would think the quote above could be a great reason to integrate a discussion on the use of, and strategy behind, limit orders, stops and trailing stops. Particularly as it fits in with your overall investing strategy...

[GregWeld]

Originally Posted by JKnight

Hey Greg, you're doing a great job of passing along quality information in a way that can be digested by the masses. While this may be an investing 101 topic, I would think the quote above could be a great reason to integrate a discussion on the use of, and strategy behind, limit orders, stops and trailing stops. Particularly as it fits in with your overall investing strategy...

Thank you... I'm trying to keep it simple enough that no one is left behind.

Limit orders - stops and trailing stops are something I never use.... so while I certainly understand them and will explain them here I don't think they're a good strategy for Investors 102...

Limit orders is a price you pick when placing a purchase order. And there are several factors you can choose when placing a buy order - limiting the price you are willing to pay - vs "market order" - and also the time frame you're willing to place on an order - good til filled - fill or kill etc. You can even specify fill all or none etc. These are fine "limits" but for our purposes - we just want to own the stock - and a few pennies one way or the other isn't going to make much of a difference.... thus I've left this out of the discussion.

If I don't use this to buy 10,000 or 20,000 shares at a time.... I don't see how it's particularly useful buying 50 / 100 / 500 shares. While setting a limit order price could save you .50 or even maybe a 1.00 per share (on a stock that moves like that) many times you can set a limit and not buy the stock because it never traded that day at your limit price.

Stop orders are a price you choose in advance - telling your brokerage that if it gets to this point sell it... It's kind of a short for "stop loss"... which is just picking a price at which you'd rather sell the stock than hold it should it fall below your chosen price.

Again - for our purposes - the last thing we'd want to do is to get "stopped out" (the stock hits your stop price and is sold out) - and then loose our dividend in the process.... just because for one day or one week - or even for 3 months - the price is lower and meets some pre picked price. Remember -- that for our purposes - we actually want to BUY more stock at lower prices! We want that dividend to buy more shares... And I just don't think that stop loss orders have a place in "Investing 102". These are sophisticated strategies for people that are gambling rather than investing.

If someone is interested in learning these strategies - and there is no doubt that they can be used and in certain instances maybe should be used - there's a ton of information about them on the discount brokerages websites.

If you're really fearful of the stock market -- and wanted to put in stop losses on your stocks - you could just set some price on each stock that when they got to 10% below your cost you'd get sold out...

Guaranteed --- at some point you'll be sold out... and a week later or a month later the stock is higher and you're left shaking your head holding a 10% loss on a stock you wanted to own for 2 /3 /5 years... and now you have to go back and re-buy it... and then maybe miss the "ex" date for the dividend in the process....

If you're a real sophisticated guy - and you're watching your account minute by minute - and have all day every day to fuss around with this kind of stuff... it's fine. Me? I buy good stuff - year after year it goes a little higher - and those checks just keep buying me more car crap....

[Bucketlist2012]

Originally Posted by GregWeld

Thank you... I'm trying to keep it simple enough that no one is left behind.

Limit orders - stops and trailing stops are something I never use.... so while I certainly understand them and will explain them here I don't think they're a good strategy for Investors 102...

Limit orders is a price you pick when placing a purchase order. And there are several factors you can choose when placing a buy order - limiting the price you are willing to pay - vs "market order" - and also the time frame you're willing to place on an order - good til filled - fill or kill etc. You can even specify fill all or none etc. These are fine "limits" but for our purposes - we just want to own the stock - and a few pennies one way or the other isn't going to make much of a difference.... thus I've left this out of the discussion.

If I don't use this to buy 10,000 or 20,000 shares at a time.... I don't see how it's particularly useful buying 50 / 100 / 500 shares. While setting a limit order price could save you .50 or even maybe a 1.00 per share (on a stock that moves like that) many times you can set a limit and not buy the stock because it never traded that day at your limit price.

Stop orders are a price you choose in advance - telling your brokerage that if it gets to this point sell it... It's kind of a short for "stop loss"... which is just picking a price at which you'd rather sell the stock than hold it should it fall below your chosen price.

Again - for our purposes - the last thing we'd want to do is to get "stopped out" (the stock hits your stop price and is sold out) - and then loose our dividend in the process.... just because for one day or one week - or even for 3 months - the price is lower and meets some pre picked price. Remember -- that for our purposes - we actually want to BUY more stock at lower prices! We want that dividend to buy more shares... And I just don't think that stop loss orders have a place in "Investing 102". These are sophisticated strategies for people that are gambling rather than investing.

If someone is interested in learning these strategies - and there is no doubt that they can be used and in certain instances maybe should be used - there's a ton of information about them on the discount brokerages websites.

If you're really fearful of the stock market -- and wanted to put in stop losses on your stocks - you could just set some price on each stock that when they got to 10% below your cost you'd get sold out...

Guaranteed --- at some point you'll be sold out... and a week later or a month later the stock is higher and you're left shaking your head holding a 10% loss on a stock you wanted to own for 2 /3 /5 years... and now you have to go back and re-buy it... and then maybe miss the "ex" date for the dividend in the process....

If you're a real sophisticated guy - and you're watching your account minute by minute - and have all day every day to fuss around with this kind of stuff... it's fine. Me? I buy good stuff - year after year it goes a little higher - and those checks just keep buying me more car crap....

Greg,

Good to know..

I may not be investing in quite the same stuff as Investing 102 does, but my strategy is similar.. i buy what i think is the best of a certain asset class, i do the long term research, and i am not into a quick trade, but a longer term strategy.

I may not keep it as simple as you say(KISS), but i sure leave out a lot of the movement and hands on trading that some of the above terms , seem to be.

If i see a longer trend in the asset, and maybe i should fire them, that is one thing, but to sell at a given temporary low price, just seems strange to this newbie..

to me the total value of the asset at a given time does not matter..Dividends are being paid, and in just about ALL cases, it goes back to and above where i would have stop lossed or whatever you call it.

[GregWeld]

Originally Posted by solarguy09

to me the total value of the asset at a given time does not matter..Dividends are being paid, and in just about ALL cases, it goes back to and above where i would have stop lossed or whatever you call it.

And there in lies the truth.... regardless of what the price is "today" -- the dividend gets paid quarterly.... and lord knows I've tried to show enough times the power in that.

Which is why I always keep some powder dry (parked as I call it) to buy on the "dips" in stocks I want to own... because the lower I can buy them - the higher that dividend percentage is! I love it when I can buy a stock down $5 or more... than my original purchase cost. That's why -- if at all possible you want to scale into a position. Obviously you've got to be buying 250 or 500 shares (total position) in order to make that work... Ya can't be scaling in to 100 shares... the commissions would eat your savings.

Here's a classic example in real life...

on May 27, 2011 I bought 5,000 Annaly (NLY) at 18.00

on June 21, 2011 I bought 5,000 more at 18.56

on Nov 22, 2011 I bought 10,000 more at 15.91

If I liked it at 18.56 I gotta really love it at 15.91 so I bought TWICE as much!

It's paying the same .57 per share dividend... so at 18.56 I'm making 12.28%

but at 15.91 I'm getting paid 14.33% !!

So on my holdings in this stock --- I've got a pretty healthy blended return. I'm holding 35,000 shares of this right now - but it goes up and down all the time -- I just use this to park some dough while I'm sitting on my brains doing some thinking.


BTW -- you math whizzes... to figure your PERCENTAGE of any given dividend -- add up the ANNUAL dividend - and divide it by the per share price you paid...

[GregWeld]

Originally Posted by hifi875

im thinking of dropping 10 in annaly. bought some other stocks the other day.

at&t
bank of america
starbucks
altria

the dividend stream alone on annaly can really add up!!

Ya know -- I don't like to be recommending stocks -- just not my thing... I'm more about how to think about investing - the old - catch a fish or teach a guy how to fish thing...

But if it was me - I'd be investing in BANCO SANTANDER (STD) which is a "world bank" and is paying 10% dividend while you wait for the banking industry to "recover"... Poor beleaguered Bank of America (BAC) is only paying .51%

Just thinking out loud here -- both charts are nasty -- but sometimes it "pays" to be early if you're willing to suck up some lumps along the way. I just like being paid to suck up the lumps...