Ken Himmler.com

In reviewing the presidents tax proposal and then the Republicans version I 

am convinced that absolutely nothing will get changed for two more years. I understand it cannot be an easy job doing what they do but it sure seems easier to spend than to cut spending. In the end the only way our economy is going to grow is to first have more jobs available. Once this accomplished then it allows more spending which increases money flow. My proposal is to have each politician tie their districts fiscal policy to their own personal income and net worth. What if each politician’s feet were held to the fire. If they overspend their budget then reduce their pay and their net worth by the same percentage. If they come in under budget then give them a bonus on their income by the profitable percentage. Right now if they are in office for four years there is no motivation to do well during that time, unless they want to get reelected. Even so they can just blame the other guy. Just an idea!

Keeping your cool can be hard to do when the market goes on one of its periodic roller-coaster rides. It’s useful to have strategies in place that prepare you both financially and psychologically to handle market volatility. Here are 11 ways to help keep yourself from making hasty decisions that could have a long-term impact on your ability to achieve your financial goals.

1. Have a game plan
Having predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, you might take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. You also can use diversification to try to offset the risks of certain holdings with those of others. Diversification may not ensure a profit or guarantee against a loss, but it can help you understand and balance your risk in advance. If you’re an active investor, a trading discipline can help you stick to a long-term strategy. For example, you might determine in advance that you will take profits when a security or index rises by a certain percentage, and buy when it has fallen by a set percentage.

2. Know what you own and why you own it
When the market goes off the tracks, knowing why you originally made a specific investment can help you evaluate whether your reasons still hold, regardless of what the overall market is doing. Understanding how a specific holding fits in your portfolio also can help you consider whether a lower price might actually represent a buying opportunity. And if you don’t understand why a security is in your portfolio, find out. That knowledge can be important, especially if you’re considering replacing your current holding with another investment.

3. Remember that everything’s relative
Most of the variance in the returns of different portfolios can generally be attributed to their asset allocations. If you’ve got a well-diversified portfolio that includes multiple asset classes, it could be useful to compare its overall performance to relevant benchmarks. If you find that your investments are performing in line with those benchmarks, that realization might help you feel better about your overall strategy.
Even a diversified portfolio is no guarantee that you won’t suffer losses, of course. But diversification means that just because the S&P 500 might have dropped 10% or 20% doesn’t necessarily mean your overall portfolio is down by the same amount.

4. Tell yourself that this too shall pass
The financial markets are historically cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Even if you’re considering changes, a volatile market can be an inopportune time to turn your portfolio inside out. A well-thought-out asset allocation is still the basis of good investment planning.

5. Be willing to learn from your mistakes
Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. Even the best aren’t right all the time. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions. Expert help can prepare you and your portfolio to both weather and take advantage of the market’s ups and downs.

6. Consider playing defense
During volatile periods in the stock market, many investors reexamine their allocation to such defensive sectors as consumer staples or utilities (though like all stocks, those sectors involve their own risks, and are not necessarily immune from overall market movements). Dividends also can help cushion the impact of price swings. According to Standard and Poor’s, dividend income has represented roughly one-third of the monthly total return on the S&P 500 since 1926, ranging from a high of 53% during the 1940s to a low of 14% in the 1990s, when investors focused on growth.

7. Stay on course by continuing to save
Even if the value of your holdings fluctuates, regularly adding to an account designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, your bottom-line number might not be quite so discouraging.
If you’re using dollar-cost averaging–investing a specific amount regularly regardless of fluctuating price levels–you may be getting a bargain by buying when prices are down. However, dollar-cost averaging can’t guarantee a profit or protect against a loss. Also, consider your ability to continue purchases through market slumps; systematic investing doesn’t work if you stop when prices are down.

8. Use cash to help manage your mindset
Cash can be the financial equivalent of taking deep breaths to relax. It can enhance your ability to make thoughtful decisions instead of impulsive ones. If you’ve established an appropriate asset allocation, you should have resources on hand to prevent having to sell stocks to meet ordinary expenses or, if you’ve used leverage, a margin call. Having a cash cushion coupled with a disciplined investing strategy can change your perspective on market volatility. Knowing that you’re positioned to take advantage of a downturn by picking up bargains may increase your ability to be patient.

9. Remember your road map
Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that strong performance of some investments may help offset poor performance by others. Even with an appropriate asset allocation, some parts of a portfolio may struggle at any given time. Timing the market can be challenging under the best of circumstances; wildly volatile markets can magnify the impact of making a wrong decision just as the market is about to move in an unexpected direction, either up or down. Make sure your asset allocation is appropriate before making drastic changes.

10. Look in the rear-view mirror
If you’re investing long-term, sometimes it helps to take a look back and see how far you’ve come. If your portfolio is down this year, it can be easy to forget any progress you may already have made over the years. Though past performance is no guarantee of future returns, of course, the stock market’s long-term direction has historically been up. With stocks, it’s important to remember that having an investing strategy is only half the battle; the other half is being able to stick to it. Even if you’re able to avoid losses by being out of the market, will you know when to get back in? If patience has helped you build a nest egg, it just might be useful now, too.

11. Take it easy
If you feel you need to make changes in your portfolio, there are ways to do so short of a total makeover. You could test the waters by redirecting a small percentage of one asset class into another. You could put any new money into investments you feel are well-positioned for the future but leave the rest as is. You could set a stop-loss order to prevent an investment from falling below a certain level, or have an informal threshold below which you will not allow an investment to fall before selling. Even if you need or want to adjust your portfolio during a period of turmoil, those changes can–and probably should–happen in gradual steps. Taking gradual steps is one way to spread your risk over time as well as over a variety of asset classes.
 

Expanded rollovers from 401(k) and other employer plans to Roth IRAs now permitted.
With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a daunting task.  Many investors feel it’s useful to have a system for finding stocks that are worth buying, deciding what price to pay, and realizing when a stock should be sold.   Bull markets–periods in which prices as a group tend to rise–and bear markets–periods of declining prices–can lead investors to make irrational choices.  Having objective criteria for buying and selling can help you avoid emotional decision-making.

Even if you don’t want to select stocks yourself–and many people would much prefer to have a professional do the work of researching specific investments–it can be helpful to understand the concepts that professionals use in evaluating and buying stocks.

There are generally two schools of thought about how to choose stocks that are worth investing in.  Value investors focus on buying stocks that appear to be bargains relative to the company’s intrinsic worth.  Growth investors prefer companies that are growing quickly, and are less concerned with undervalued companies than with finding companies and industries that have the greatest potential for appreciation in share price.  Either approach can help you better understand just what you’re buying–and why–when you choose a stock for your portfolio.

Value investing
Value investors look for stocks with share prices that don’t fully reflect the value of the companies, and that are effectively trading at a discount to their true worth.  A stock can have a low valuation for many reasons.  The company may be struggling with business challenges such as legal problems, management difficulties, or tough competition. It may be in an industry that is currently out of favor with investors.  It may be having difficulty expanding. It may have fallen on hard times.  Or it may simply have been overlooked by other investors.

A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock’s fair value.  Value investing takes into account a company’s prospects, but is equally focused on whether it’s a good buy.  A stock’s price-earnings (P/E) ratio–its share price divided by its earnings per share–is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth.

Value-oriented data
Here are some of the questions a value investor might ask about a company:
• What would the company be worth if all its assets were sold?
• Does the company have hidden assets the market is ignoring?
• What would the business be worth if another company acquired it?
• Does the company have intangible assets, such as a high level of brand-name recognition, strong new management, or dominance in its industry?
• Is the company on the verge of a turnaround?

Contrarians: marching to a different drummer
A contrarian investor is perhaps the ultimate example of a value investor.  Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.
The challenge for any value investor, of course, is figuring out how to tell the difference between a company that is undervalued and one whose stock price is low for good reason.  Value investors who do their own stock research comb the company’s financial reports, looking for clues about the company’s management, operations, products, and services.

Growth investing
A growth-oriented investor looks for companies that are expanding rapidly.  Stocks of newer companies in emerging industries are often especially attractive to growth investors because of their greater potential for expansion and price appreciation despite the higher risks involved.  A growth investor would give more weight to increases in a stock’s sales per share or earnings per share (EPS) than to its P/E ratio, which may be irrelevant for a company that has yet to produce any meaningful profits.  However, some growth investors are more sensitive to a stock’s valuation and look for what’s called "Growth At a Reasonable Price" (GARP).  A growth investor’s challenge is to avoid overpaying for a stock in anticipation of earnings that eventually prove disappointing.

Growth-oriented data
A growth investor might ask some of these questions about a stock:
• Has the stock’s price been rising recently?
• Is the stock reaching new highs?
• Are sales and earnings per share accelerating from quarter to quarter and year to year?
• Is the volume of trading in the stock rising or falling?
• Is there a recent or impending announcement from or about the company that might generate investor interest?
• Is the industry going up as a whole?

Momentum investing: growth to the max
A momentum investor looks not just for growth but for accelerating growth that is attracting a lot of investors and causing the share price to rise.  Momentum investors believe you should buy a stock only when earnings growth is accelerating and the price is moving up.  They often buy even when a stock is richly valued, assuming that the stock’s price will go even higher.  If a stock falls, momentum theory suggests that you sell it quickly to prevent further losses, and then buy more of what’s working.

The most extreme momentum investors are day traders, who may hold a stock for only a few minutes or hours then sell before the market closes that day.  Momentum investing obviously requires frequent monitoring of the fluctuations in each of your stock holdings, however.  A momentum strategy is best suited to investors who are prepared to invest the time necessary to be aware of those price changes.

Why understand investing styles?
Growth stocks and value stocks often alternate in popularity. One style may be favored for a while but then give way to the other.  Also, a company can be a growth stock at one point and later become a value stock.  Some investors buy both types, so their portfolio has the potential to benefit regardless of which is doing better at any given time. Investing based on data rather than stock tips or guesswork can not only assist you as you evaluate a possible purchase; it also can help you know when to sell because your reasons for buying are no longer valid.
 

One of the longest-standing debates in investing is over the relative merits of active portfolio management versus passive management. With an actively managed portfolio, a manager tries to beat the performance of a given benchmark index by using his or her judgment in selecting individual securities and deciding when to buy and sell them. A passively managed portfolio attempts to match that benchmark performance, and in the process, minimize expenses that can reduce an investor’s net return. Each camp has strong advocates who argue that the advantages of its approach outweigh those for the opposite side.

It’s easy to see how inflation affects your daily life. Gas prices are higher. Electric bills are steeper. Wallets are thinner. But what inflation does to your investments isn’t always as obvious. Let’s say your money is earning 4% and inflation is running between 3% and 4% (its historical average). That means your so-called "real return"–the stated return minus inflation–is only 1% at best. After you subtract any account fees, taxes, and other expenses, you could actually end up with a negative number.

What can you do to keep from losing the race against inflation? One of the easiest ways is to buy investments that are designed to keep pace automatically.

Take stock of TIPS

Since the U.S. Treasury introduced them in 1997, Treasury Inflation-Protected Securities (TIPS) have become the most widely known example of what are generally referred to as "inflation-protected securities." TIPS are especially popular with long-term investors who want to preserve the purchasing power of their money over time. Many investors also like the security of knowing their investment is backed by the U.S. government.

Like other Treasury bonds or notes, TIPS are basically loans to the U.S. government. You receive interest payments every six months based on a fixed interest rate specified in advance. With most bonds, it’s easy to know the exact amount of money you’ll receive each year. You simply multiply the principal–the amount of your initial investment–by the interest rate.

TIPS work a little differently. Instead of guaranteeing how much you’ll be paid in interest, an inflation-protected security guarantees that your real return will keep up with inflation. The interest rate stays fixed; what you won’t know is the exact dollar amount of the payments you’ll receive. If inflation goes up, your return will increase to match it. With TIPS, you’re trading off the certainty of knowing exactly how much you’ll receive for the knowledge that, as long as you hold the bond until it matures, your investment will maintain its buying power.

How do TIPS work?

TIPS pay slightly lower interest rates than equivalent Treasury securities that don’t adjust for inflation. The reason for that reduced rate? Your TIPS principal is automatically adjusted twice a year to match any increases or decreases in the Consumer Price Index (CPI), a widely used measure of inflation. If the CPI increases, the Treasury recalculates your principal to reflect the increase.

For example, let’s say you buy $20,000 worth of TIPS that pay a fixed interest rate of 2.5%. Over the next six months, the CPI rises at an annual rate of 3%. Your $20,000 principal would go up by 1.5% (half of the 3% annual inflation rate) to $20,300.

This adjustment will affect the amount of your semiannual interest payments. Even though the interest rate stays the same, it’s applied to the recalculated amount of your principal. In this example, the 2.5% interest rate would be applied to the new $20,300 figure. The actual dollar amount paid in interest goes up because it’s based on a higher principal; instead of $250, your next semiannual payment would be $253.75. If inflation goes up again, your next payment will be higher still. (The return on a specific bond may be different, of course, since this is only a hypothetical illustration designed to show how the return on a TIPS is calculated.)

If the CPI figure is lower in six months, your principal will be adjusted accordingly when it’s recalculated; that in turn will affect the amount of your next interest payment. If there’s a period of deflation and the CPI is actually a negative number, your principal and interest payment would both drop.

The inflation adjustment feature means that if you hold a TIPS until it matures, your repaid principal will likely be higher than when you bought the bond. Even if the CPI turns negative and the economy experiences deflation, the amount you’ll receive when the bond matures will be the greater of the inflation-adjusted figure or the amount of your original investment.

Things to think about
You can still lose money with a TIPS if you don’t hold it until it matures. Inflation rates rise and fall, and as with any bond, the returns offered by other investments can affect the market value of your TIPS. Also, if inflation turns out to be less over time than you had anticipated when you invested, the total return on a TIPS could actually be less than that of a comparable Treasury security without the inflation-adjustment feature.

Calculating the TIPS Advantage
How do you know whether owning a TIPS makes sense? Subtract the TIPS interest rate from the rate for an equivalent bond without the inflation protection feature. If the inflation rate is higher than the difference between the two rates, the TIPS may have an advantage.

If a TIPS pays… And equivalent non-TIPS yield is… Inflation rate needed for a TIPS advantage is…

• 2.5% 4.5% More than 2%
• 3% 6% More than 3%

If the inflation rate over time isn’t high enough to make up for the difference between the lower interest rate of a TIPS and that of an investment without inflation protection, the TIPS has no advantage. That’s why TIPS may only be appropriate for part of your bond holdings.

There’s another catch. You’ll also need to think about the federal taxes that will be due each year on the interest and any increases in your principal. Even though the Treasury records the changes in your principal every six months, you don’t actually receive that money until the TIPS matures. However, the government still taxes that increase each year as if you’ve received the cash. Many investors prefer to postpone that tax bill by holding TIPS in a tax-deferred account such as an IRA.

How can I buy TIPS?

You can buy TIPS individually, in $100 increments and with maturities of 5, 10, or 20 years (although individual brokers may have higher minimum purchase requirements). You could choose a selection of TIPS that mature at different times. When the shorter-term bonds mature, you could reinvest that principal into either another TIPS or some other type of bond. Known as "laddering," this strategy gives you flexibility as interest rates change. If interest rates are higher than the bond that’s maturing, you can invest at a higher rate; if rates are lower, you might prefer an investment that offers a higher return. Also, if you will need some of your principal for a specific goal, such as college tuition, you can select maturity dates that return your principal at the right time.

Another possibility is a mutual fund, which may invest in TIPS only or mix them with inflation-protected securities from other entities, such as foreign governments. Typically, a fund invests in a variety of debt instruments to balance the higher interest rates usually offered by longer-term bonds with the flexibility of shorter maturities. A TIPS mutual fund pays out not only the interest but also any annual inflation adjustments, which are taxed as short-term capital gains. Some exchange traded funds (ETFs) also invest in an index composed of TIPS with various maturities.

Before investing in a mutual fund, carefully consider its investment objective, risks, fees, and expenses, which are contained in the prospectus available from the fund. Review it carefully before investing. Your financial professional can help you decide which choices may be appropriate as you race to keep up with rising costs.
 

It generally goes without saying that when setting aside money for retirement you want to get the most out of your investments.  Every type of investment carries with it a certain amount of risk.  This has a tendency to scare people into sticking with the safest investments possible because they are afraid of losing all of their money.  Unfortunately, the risks involved with investments are not always clear at the outset.

While it may sound like a good idea, the fact is letting your money sit in a standard savings account could cause you to effectively lose more money than you would be risking in other forms of investment.  It is very true that a little bit goes a long way, and over time a small investment could grow exponentially.  Unfortunately, there are a lot of other factors that are figured into the growth of your money.  One of these factors that is often overlooked is the ratio of interest to inflation.  If the level of interest is lower than the level of inflation, you will effectively lose money in your investment.

With any investment option the goal is always to get the highest interest rate possible.  This is especially important when we take the rate of inflation into account.  The value of the US Dollar changes over time.  Placing $1 in the bank now might result in $100 in 20 years but the value of that $100 will be different than it is today.  To avoid losing value in your investment it is important that your interest rate is the same as or (preferably) higher than the inflation rate.  For this reason the safest investment options for you may not be the best options for you.  Talk with your retirement planner if you are having trouble finding investment options that will give you the most return.

In the light of the present recession, everyone is looking for ways to make safe investments.  Unlike in previous generations, today’s primary resource for conducting the much needed investment research is none other than the Internet.  Unfortunately, there are a lot of dishonest people who have caught on to the fact that everyone is looking for a way to make a easy, safe investments.  These dishonest individuals have set up several elaborate scams to swindle honest, hardworking individuals like you out of their hard earned money.  You will need to equip yourself with the information you need to avoid such scams when doing your own investment research.

One of the most common scams comes in the form of unqualified individuals who claim to be reputable investment advisors.  These are sometimes easy to spot because they make unrealistic claims about your money.  Unfortunately there are also many well thought out scams that are hard to spot.  Sometimes scammers assume the identities of actual, licensed investment planners with outstanding credentials.  If you are not careful you can lose a lot of money in a short amount of time.

The best way to avoid these types of scams is to double-check all of your references.  Never send anybody money for investment services until you are absolutely sure they are who they claim to be.  Most reputable investment planners have only a select few websites that they operate with, and these websites are usually well documented by services that specialize in this kind of research.  When in doubt, do a google search with the name of the individual or service in question followed by the word ‘scam’ to find complaints other people have had.  When in doubt, follow this golden rule of Internet investing:  If it sounds to good to be true it probably is.  There are many legitimate investment services out there just waiting for you to find them.
 

When an individual starts down the path toward financial independence, it is understood that he or she will have to make adjustments along the way.  Even the most well thought out plan cannot take into account every unforeseen situation that can interfere with your future plans.  For this reason, it is extremely important to stay on top of your financial situation so that you can make the appropriate adjustments to your savings and investments as necessary.

There is no substitute for being well informed about the laws that govern things such as taxes, investments, or anything that could affect your personal financial status.  State and tax laws have a tendency to change seemingly overnight, and adjustments to your financial retirement plan may have to be made so that you continue to get the most out of your hard earned money.  Failure to stay on top of your financial situation in this way could even have some potentially dire legal consequences.  Always check with your retirement planner when you hear about new laws that could concern your savings and investments.

Besides legal changes, there are many other situations that you should stay well informed about.  New financial opportunities become available every day for those who are actively looking for them.  Whether it is a new investment opportunity or a special holiday savings account with a particularly high interest rate, adapting your plan as necessary can make you a lot more money in the long run. 

If you get in the habit of doing investment research, watching the economic forecasts, and playing an active role in the investment process, you will be better equipped to deal with life’s uncertainties.  All it takes is a little bit of time, effort, and energy and you will be well on your way to true financial independence.