Save Smart, Earn More Book Review

Save Smart Earn More Book Review

Here’s some great tips for investing in stocks, options, real estate and more. Save Smart, Earn More – The New Rules for Retirement Investing by Dennis Blitz is a great read to help you get started in investing or help you improve your investing skills. In my book review, I’ve pulled out some helpful investing tips, but, of course, there’s more financial insight in the book, so I’d recommend checking it out. On to the investing advice.

5 Obstacles to Investing

  1. Believing the half-truth of mutual fund diversification. Put some in mutual funds, but still invest in other things.
  2. Ask what is the best way to invest.
  3. Beware of the investment salesperson who says I specialize in all investments.
  4. Risk is real. Every guarantee has a cost. Ask yourself whether you really need each guarantee being offered. Sometimes the simplest products offer the greatest return. Only work with the salesperson who provides the positives and the drawbacks.
  5. Knowing all the fees all the time.

The First Rules of Successful Investing

  1. Invest in what you know. Successful investors know what they don’t know. Successful investors only place their funds in a few areas. Stick to your area of expertise.
  2. Identify an action that is possible – Invest, succeed, repeat. The method you use to invest is much more important than what you invest.
  3. Embrace the learning curve. Develop your knowledge and skill in your subcategory of investing.
  4. Avoid losing money. Ask yourself, ‘How much risk am I taking?’
    1. Determine your personal risk tolerance. Take the amount that you’re investing, multiply it by 5%, 10%,…100% and determine the amount you’re willing to lose. Choose your aggressiveness based on that. You can still invest in the low risk investments. It doesn’t mean you never take a risk, it means you only accept calculated risks. See the chart below.
Percentage of Risk Amount Invested $5,000 Aggressiveness
5% $250 Low Risk
10% $500 Low Risk
20%
30%
40%
50% $2,500 Moderate
60% Moderate
70%
80%
90% Aggressive Risk
100% $5,000 Aggressive Risk

Calculate risk based on T-bills rate of return because they have zero risk.

Keep things level and balanced.

  1. Create a complementary combination of investments
    1. Choose investments that when one will goes up, the other goes down. Like stocks and bonds.
    2. The more even the average rate of return, the higher the compounded return.
    3. Investors who follow these rules can safely accept greater risk.
  2. Take charge of one investment.
  3. Which do you choose? Ask: which category of investing interests you the most? And which category are you most willing to invest your time as well as money? If your holdings grew large enough, which area could you see becoming your occupation? It’s likely that this category will be your largest investment.
  4. Keep it simple.
    1. Complex investments tend to have higher fees.
  5. Trust your method and stick with it.
    1. If another option outperforms yours, stick with yours. Most investments return to their traditional rate of risk and reward. You switch, you pay.
  6. Rebalance your portfolio.
    1. Rebalance every three months.
    2. Bring your investments back to their original percentage levels. Historically, investment results regress to their traditional mean.

Get Started – The greatest obstacle to progress is the delay we cause by waiting for perfection.

  1. List your current investments.
  2. Make notes defining your investment goals and needs. For example, are you most interested in growth with less need for current income?
  3. Decide if you have the time or desire to self manage one of your investment categories. If so, choose it.
  4. Select one or two investment categories that complement your core category. Equities, real estate, fixed investments, business investment, commodities, foreign investments.
  5. Look at the assets you wrote down in step one. Is the balance where you need it to be? If not, start aligning your portfolio with your goals.
  6. Work your plan. Manage one investment and regularly monitor the balance of your portfolio.
  7. Rebalance your portfolio as needed. Perhaps when it’s off by 5%.

Investment Options

  1. Stocks, options, fixed investments.
  2. Have an investment philosophy. Not a technique.

Long-term investment results are more dependent on the actions of the investor than on the actions of the market.

STOCKS

Philosophy 1: The efficient market. Most investors fail to outperform the market. You might save by investing in the S&P 500 or the Russell 3000. Buy stocks and keep them.

Philosophy 2: Value investing. Value stocks are the stocks of companies with the net asset value per share greater than the market price of the stock. Market price is lower than the net assets per share. The idea is to identify stocks that appear inexpensive based on a measurable metric, like the price to sales ratio.

Philosophy 3: Growth stocks. Seek growth companies, not growing stocks. You want companies where the sales are growing faster than others in their industry.

  1. Pinpointing stock market winners.
  2. Choose a market sector(s) for investment.
    1. Two factors can influence this, our own observations and hard data. Never underestimate the power of your own personal observations. Watching social trends is one investment selection indicator. The other is sector rotation data (you can subscribe to one of these online services). Net sellers, lighten up on those stocks. Net buyers, increase those stocks.
  3. Exchange traded funds (ETFs): if you don’t want to buy individual stocks then invest in an ETF in your sector. ETF management fees are less than a mutual fund. Examples: S&P 500, Russell 1000, Brazil, real estate.
  4. Select individual stocks within the sector(s).

 Use the most relevant selection filters. You may use 3, 4, or 5 of the below:

  1. Sales growth: set criteria, for example 15% or greater for three consecutive years.
  2. Growth rate: look at the growing rate in that sector and don’t go below the average.
  3. Sustainability: good for a long-term trader.
  4. Earnings health and direction: consistent growth and will it continue?
  5. New product pipeline: changes in product lines can produce growth.
  6. Institutional investor activity: are banks and mutual funds moving funds to this stock?
  7. Profit margins: growing sales with growing margins can be rich.
  8. New share offerings or stock buybacks: fewer shares outstanding mean greater earnings-per-share.
  9. Activity spikes: stocks that go up or go down larger than usual. Info available on ‘Investors’ Business Daily.’
  10. Volatility: increased volatility to the upside can be an increase of investor interest.
  11. Insider trading activity: must be announced the day after the trade. This information is available online. Buying stock with insider buying and shorting companies with insider selling has produced better-than-average returns.
  12. Short selling opportunities
  13. Price to earnings and price to dividend ratios: P/E is dividing a stock’s price by its earnings per share (really high or really low could be good but you have to compare against other companies). Investors’ Business Daily (IBD), is in line with a growth stock investor.  Price to dividends will show what they are willing to pay you in dividends.

-Choose filters that fit your philosophy. Select stocks that meet your first criteria then your second and then your third. You can use an online site that helps you progressively filter company data. Your broker may give you a good filtering site at no charge.

-Warren Buffett is a value investor.

-Free helpful sites: www.123jump.com, ipo & www.bigcharts.com &www.MarketWatch.com & money Central.MSN.com & www.valuepro.net (play the what if game, you can edit fields on this site) & finance.yahoo.com

-Fee helpful site: www.SmartMoney.com

INVESTING IN EQUITY OPTIONS

Could have seven or eight stocks in solid companies. Each month make a few simple option trades. Goal is to have more gains than losses and higher gains.

Buying and selling call options (buy equals call, sell equals write).

1.Buying options as a speculative investment: if you lose, you’re only out the money of the premium. An option is 100 shares of stock.

2.Writing options to produce regular income:

  1. You already own or you buy an underlying security (100 shares of the stock).
  2. You sell to open. You receive the premium. There are commission costs.

3.After you’ve written the covered call, the option expires or the stock rises above the amount. You win either way.

Tips for selecting underlying securities.

1.Select underlying stocks that are solid and will remain stable in price or will appreciate.

2.Be disciplined.

3.Be a steady player.

4.Be consistent to make the process work in the long term. No single trade will make you rich.

-Treat options as a conservative investment tool:

-Buying protective ‘puts,’ have a high premium.

-The collar spread: having a put and a call is a safer way to play. You will lose if the stock remains flat.

-Writing an iron butterfly spread: use when you think the stock is going nowhere. It’s best if you own the underlying stock. Write both the put and the call. You receive both premiums. If the stock does not remain flat then you have to sell.

-Understanding your endless options: check the CBOE website.

FIXED INCOME INVESTMENTS

  1. T-bills: hi safety, very liquid and active. Almost no minimum or maximum investment limits, very low or even no-cost entry (commission free) and no management costs.
    1. You can instruct your bank to buy these on your behalf. Best way is through: www.ustreas.gov. Treasury direct – just open an account. Click buy direct. Good idea to activate rollover provision. Choose t-bills over money market funds or CDs.
  1. Corporate bonds and bond funds: look at the bonds debt rating. The higher the rating the more secure the Bonds’ safety. AAA is the highest rating; if it’s below BBB, don’t buy. There will be a commission fee. To achieve a greater return, you need to accept greater risk.
  1. Extra earnings, extra risk.

Buy non-investment grade bonds, commonly called junk bonds. Choose them carefully and you can earn a premium interest return.

Annuities

  1. Peace of mind at a price: investing in insurance. You can switch your annuity over to a different company, but there will be a fee. You are taxed when you take the money out.
  2. Fixed annuities: fixed rate of return. The minimum rate of return is set at the inception of the contract. Decide based on the state of the economy. If interest rates go up buy an annuity with the short-term locked in interest rate. If the interest rates will go down, select longer-term guarantees.
  3. Variable annuities: a mutual fund wrapped inside an insurance policy.
    1. Funded with a large payment or individual payments over a period of time. Selecting a variable annuity is more difficult than the fixed.
  4. Equity indexed annuities: complicated.
  5. Do it yourself by buying term life insurance and investing in high-grade corporate or government bonds that may offer a higher return than the annuity contract.
  6. Withdrawing money from your annuity: for fixed annuities you pay a percentage of your earnings for taxes. You decide how often you get paid. You can set it up for a beneficiary.

Investing Time and Money

  1. Franchises: The value is in the plan. Greater success than starting a new business. These plans have already been proven. What are you interested in? Visit the franchise before buying. Go to your franchise show. Ask for a UFOC. There’s a lot more information provided in the book.
  2. Buying a business: already in place, but it has risks.

Investing in Real Estate

  1. Buy it and hold it.
  2. Buy it, fix it up and sell it.
  3. Many options: Buy and sell foreclosures, lend money, make home-improvement loans, etc.
  4. If it becomes necessary, can I afford to hold the investment until the market comes back?

Investing in real estate from your armchair.

  1. Should you invest in a partnership?
    1. General partnership: you all have unlimited liability.
    2. Limited liability partnerships: only one partner has unlimited liability.
  2. Real estate investment trusts (REIT): at least 100 investors invest their money and a manager makes the real estate decisions.
    1. Selecting an REIT: rate of yield will drive your decision.
  3. First, decide what type of real estate you want to invest in.
  4. Second, select an REIT that offers a good return, but is supported by its earnings. A dividend that exceeds the earnings may signal a disaster.
  5. Invest in very conservative REITs that use little leverage.
  6. Watch out for: interest-rate spikes AND the large inflow to this investment class AND economic downturn AND Industry scandal. Avoid non-traded REITs.

Becoming a hands-on real estate investor:

Always have your exit plan.

  1. Direct investment in real estate.
  2. Know the most you should ever pay: get the NOI (net operating income), projected annual debt service ratio and your desired return on investment.
  3. Start small.

Managing your real estate investment

  1. Manage your property or it will manage you.
  2. Decide on your rate of return goal, 10% for example. $10,000 in improvements * 10% / 12 months, extra $xx per month you’ll need to charge. There’s also intangible benefits to consider, like better tenants.

Hopefully this investing advice from, Save Smart, Earn More was helpful. What else have you tried that could be helpful to someone newer to investing?

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