Cry Me a River...

An interesting business development transpired this week.  You may (or may not) have heard that pharmaceutical giant Pfizer, known for tons of prescription drugs including Viagra, Lyrica, Lipitor and Chantix as well as over-the-counter drugs such as Advil and Robitussin, had planned to leave the USA-- well...at least on the books.

The plan had been for Pfizer to merge with Irish-based Allergan-- known for making many generic drugs as well as name brands like Botox and Restasis--  in order to save on their corporate tax bills. On Wednesday news that the deal fell through hit the presses.

So what's going on? And why should you care? Pfizer's plan had been to acquire smaller "Irish-based" company Allergan, then change its bookkeeping address to Ireland too. The actual business would have remained here in the good old USA though, because Pfizer planned to continue usage of American infrastructure, technology, research, workers and patent laws. Since Ireland's corporate taxes are lower than ours, this would have been a big money saver for Pfizer.

Both these companies are part of the S&P 500 I mentioned in my previous blog post. If you click on the link and look for Allergan, there's the stock! And look where it's headquarters address is: Dublin, Ireland. US headquarters, however, are in Parsippany NJ, and distribution headquarters are in Weston, FL. Their website lists its primary contact phone numbers to area code 862, which is in NJ. Why the headquarters is in Ireland becomes blatantly obvious when you really examine the situation.

On Tuesday, President Obama said new Treasury Department and IRS rules would help prevent companies from taking advantage of “one of the most insidious tax loopholes out there, fleeing the country just to get out of paying their taxes.” " And it seems it's working, if this Pfizer/Allergan deal's failure to launch is any indication. Rachel McCleery, a Treasury Department spokesperson stated, "We tailored our earnings stripping rules to focus on abusive practices, not genuine investment in our country. Businesses that are investing in American workers and infrastructure will not be penalized by these regulations." 

 President Obama further stated, "That lost revenue (money saved by the wealthy and large corporations not paying their share of taxes) has to be made up somewhere" in order to run our nation. That "somewhere" includes middle class families. Like mine. And small business owners, who employ a huge number of American workers.

The kind of sleazy move Pfizer and Allergan were attempting is what is known as a corporate inversion. It's one of many business tactics that I view in essence as the old dine-and-dash. A dine-and- dash is when people get up and quietly exit a restaurant without paying their tab. It leaves business owners and honest customers to cover the costs of this behavior. Someone else has to pick up the tab, one way or another.

Big dog, little dog: the rules are the same! (Lightning with Rupert, 2006)

Corrupt as it sounds though, often business tactics like this are perfectly legal due to poorly written laws. So it's not really analogous to a dine-and-dash. It's more like certain customers are deemed more special than others, and are allowed to dine-and-dash while paying customers and small business cover everyone's bills. Big businesses and wealthy people have tons of accountants and lawyers to figure out the best way to avoid paying taxes. These privileges are not exactly something available to 'regular' people-- or small business owners. 

Issues like this should matter to average American workers who pays taxes on hard-earned income. Forcing large wealthy companies to play by the same rules as individuals is reasonable.  I'd go so far to say it's obvious!

Pfizer backing out of the deal with Allergan did not go over well with Brent Saunders, CEO of Allergan.  He has gone so far to say the Treasury Department was acting in an "un-American" way, and that the Pfizer/Allergan deal was targeted by the Treasury Department. Mr. Saunders said in an interview, "the rules are focused on the wrong thing: Our government should be focused on making America competitive on a global stage, not building a wall locking companies into an uncompetitive tax situation." 

Scare tactics such as these abound, as in a declaration from president of the Organization for International Investment (A non-profit! Believe it or not!) Nancy McLernon, who according to Fox Business said that the new rules would "put at risk the jobs of 12 million American workers." That sounds more like a thinly veiled threat and blatant fear-mongering than anything else. 

I guess what I personally view as American vs. un-American is a little different from Allergan's CEO.  I believe that American corporations should stay in America and operate by the same rules as the average citizen. But overall, the ones who ship their business overseas have been reaping higher rewards instead.  I'm all for big business doing well (really well even!)- but NOT at the expense of those of us who don't have special loopholes created just for them.

These 2 big dogs (Hermione & Digory) knew how to play fair, even with their much smaller brother Howie the cat. It wasn't even an issue-- it was simply the way it was and they always lived up to my expectations.

Interestingly, according to FoxBusiness.com, "The Obama administration and congressional Republicans actually agree -- and have for years now -- that the U.S. should cut its corporate-tax rate, make it harder to push profits out of the U.S. and remove the incentives to stockpile profits abroad."  In fact President Obama wants to decrease the corporate tax rate from 35% to 28% (lower even than Republican hero Ronald Reagan's corporate tax rate). Wait-- what? So what's going on?

It gets confusing. Senator David Perdue of Georgia (R) actually said large corporations "aren't companies that are led by mean, greedy CEOs. These are people making good decisions based on our current tax law." Hmm...something just doesn't add up. It would seem the top 1% in this country is somehow being favored. Again. Let's look at corporate salaries, shall we? CEO Ian Read is doing fine, thanks for asking.  According to the Wall Street Journal, Read's 2014 pay package was $23.3 million.  In 2014 Mr. Saunders of Allergan was compensated with a little over $21 million. Somehow there's all kind of money to pay the top dogs in these companies, yet the average American worker is at risk of losing his/her job? Wow-- this is really insane.

While speaking to the press earlier this week, the President said that only Congress can close tax loopholes enjoyed by large corporations, but there is limited interest in changing the laws to protect the super wealthy.  Gee, I wonder why? Perhaps it's because big business can funnel  money to campaigns for the politicians who'll protect their interests. Corporations are people now, remember? The Supreme Court ruled that with Citizens United. It's all legal!  It boggles the mind.

This blog is about investing for the future. You may be wondering-- do we, as in this household, own any stock in Pfizer? You bet. It's tucked away in mutual funds in our 401Ks and IRAs: it's in a few Vanguard, TIAA-CREF, T. Rowe Price funds we own, and pretty much any index large cap fund you can mention. And Allergan? Yep. Got that too. It's in similar mutual funds, and-- you guessed it-- many index funds. We own neither as individual stocks.

If you've got IRAs and/or a 401K, I've got news for you: odds are really high you own these companies too, and probably don't know it. And undoubtedly like you, I do in fact want these stocks to do well and make money for our retirement. Just not at the expense of the average American taxpayer. Which ironically is me, and probably you.

Before I go, and before you cry a river for these 2 misunderstood corporations, Pfizer's stock price went up Wednesday, April 6th by a whopping 5% to nearly $33.00 per share. The past year has been a rocky road, with a high in August 2015 of $36.15 per share, to a low of $28.56 in February this year.  Allergan has had rockier road over the past year (again, highest in August 2015, with a big drop just  days ago when the deal with Pfizer fell through). But it's stock also went up nearly 3.5% just April 6th. 

Let's see what tomorrow and the next few months bring, shall we? 

Mutual Funds: Indexing

What are index funds? Are they as glamorous as they sound? Can it be possible?

These 2 stylish dressers know something about glamour as anyone can clearly see

Yes, they're pretty much as glamorous as they sound. I've got my work cut out for me to make this interesting, but I will try. Index funds are a type of mutual fund that track an index, like say the S&P 500. But what does that mean, you may ask? And while we're at it, what exactly IS the Standard & Poor 500?

The S&P 500 is a group of 500 large stock companies that are tracked as a group. Together they are an indicator of how well the US economy is doing-- in terms of large business in all kinds of industries, that is. These companies were specifically selected to be in this special group because together they offer a decent representation of the US market. In fact they represent about three quarters of it! That's a pretty sizable chunk.

You have heard of many of these 500 companies: Apple, Bank of America, the Walt Disney Company, Under Armour, Starbucks, PayPal, Coca Cola, Mattel, and General Motors are just a handful in this group. As an investor in an S&P 500 index  fund, you can own shares in all 500 companies without having to buy each individual stock. That would be a hefty amount of stock trades for one individual (or at least for me). Even at $7 a trade, the bill would be insane!

Not to mention that some stock prices start at hundreds of dollars per share, meaning you'd need a whole big stash of cash to do anything like that. People starting out usually just aren't overflowing with cash. For example, Chipotle Mexican Grill Inc closed today at $470.97 per share. So if you only have a small amount of money to invest, that's quite a bit of money. If that seems a bit steep for you, consider Berkshire Hathaway A. It closed at $215,450.00 a share today.  Yes, you read that right. That's for 1 share. It's not part of the S&P 500, but Berkshire Hathaway B is. It's a LOT less pricey! It's closing price was $141.88 today.

Index funds offer a huge amount of diversification for you as an investor. The great thing about this is that if one stock is having a bad day, it is offset (hopefully) by those doing well. Historically the S&P 500 has had returns averaging 10% or more. Keep in mind that is of course over decades. Make no mistake-- that kind of return is not a sure thing in any given year. In 2015 the S&P 500 index had a -0.73% return. Yuck. That's not exactly awe-inspiring. But in 2013 it was nearly 30%!! Nice!

What are the total 500 companies that comprise this index? They can be viewed here:

So that's an example of one index that gets tracked. There are also mid-sized companies that get tracked as well as small companies, and so on. Accordingly, you can invest in mutual funds that will follow these. There are even total stock market index funds, which offer investors exposure to the entire US stock market.

There are multiple reasons index funds are of interest to investors. First, following an existing index like the S&P 500 makes an easy job for the manager of the fund. He/she just trades stocks within the index, and offers a pre-defined package of stocks for sale in one convenient package with no fuss or muss. By fuss or muss, I mean the research is done for the manager, as the fund is comprised of a set group of stocks that varies only under certain circumstances.

What are reasons the S&P 500 companies themselves could vary? From time to time each individual company may be going through some sort of change. For example, companies themselves may be bought or sold (often to one another), some may decrease in value, while others change their name, and so on. But for the most part it's pretty stable in terms of the 500 companies.

The manager of an index fund doesn't have to study each company and make selections based on personal research. This is why index funds are inexpensive-- they aren't labor intensive on the part of the manager. Their time & effort savings gets passed on to you.

There are no free rides with any mutual fund, but index funds will save you money!

Second, index funds often outperform many actively managed funds. The work, research and additional fees of experts hasn't historically always translated into more money for investors. So index funds are hard to beat in returns as well as fees.

Third, index funds are relatively tax efficient. The companies within them aren't sold like they might be in actively managed funds. This keeps turnover (mentioned in my previous blog post) low.

For you history buffs, index funds were created by Vanguard founder John Bogle in 1975. Bogle had 8 guidelines for mutual fund investors, which I will condense here:

Eight Simple Rules for Mutual Fund Investors

1.      Consider the cost of advisors and decide if they're worth the expense.

2.      Don't put too much faith in past fund performance...

3.      ...but DO use that information to determine risk and consistency over time.

4.      Don't get caught up believing that superstar fund managers can do the impossible.

5.      Buy and hold (don't be a frequent trader).

6.      Be careful when an actively managed fund gets too big (this is why many funds close to new investors at a certain point). The more people who buy into an actively managed fund, the more likely it can stray from its original goals AND become less cost-efficient. 

7.      Don't buy too many funds, however alluring that idea may be.

8.      Buy index funds to keep fees low, diversify and stay tax efficient.

Mutual Funds: Where Most of Us Start in the Investing World

Chances are if you own investments, some are in mutual funds. Mutual funds are investment opportunities that are made from a group of selected stocks, bonds and/or cash. They offer investors a way of owning diversified securities. If you buy a single stock, that's a share or group of shares in one company. A mutual fund is collection of many different stocks, bonds and/or cash all packaged together in a bundle. 

If you are lucky enough to be employed by a company or organization that offers you a 401K savings plan, chances are you'll get to choose from a group of investments offered in the form of mutual funds. Knowing which ones will work best for you? That largely comes down to your time frame (how many years to retirement) and your risk tolerance. But before we even look at that, we need to consider cost. Cost matters and needs your full  consideration no matter what kind of investor you are. 

Risk tolerance: The teeth on this big blue metal dog look pretty fierce, but we can see Marley has a high tolerance for risk. Plus she knows full well that this dog's just not real.

Over the years I've made my share of mistakes picking mutual funds, without always fully understanding the cost of my choices. As I have learned from my many mistakes, I'd like to share some considerations for anyone starting out.

Fees: they can eat into your investment!

First off, all mutual funds cost YOU, the investor, money. They incur fees. The people who create and manage these funds expect to be paid, and they cleverly build their fees right into the fund. They get paid whether or not you make any money.  So it's your job to hunt down funds with low fees that have performed well over time!

As I said, fees are built into your purchase. There's no separate bill. These fees range between 0.1% to over 2.0% yearly. The rate you are charged is completely irrelevant to the quality of management. Yes, you read that right. So when you are presented with a list of funds to choose from by your employer or you're hunting around for yourself, you need to do a little research on what your choices are. And remember--expensive does not always necessarily imply better. It only implies expensive.  

So here's the deal: you're looking for a fund that has historically performed well with good managers for the best price you can get. 

Step 1: Do NOT fall for a LOAD of-- well, you fill in the blank!!

Now pay attention to this next bit of friendly advice carefully, because I know of what I speak. I learned this the hard and painful way: Do not EVER buy loaded mutual funds. Ever. What is a loaded mutual fund? It's a fund with an extra fee tagged on, usually right up front. It's the sales commission for the alleged professional who's luring you in by offering a cup of coffee in a pretty office. Or maybe they're just so darn nice they come to your home! 

These people may have some insight that is valuable, BUT you also need to know some basic facts or you can get sold something that just outright costs too much. Learn what to ask and look for when someone says they have an investment plan for you. 

So say you have $1,000 to invest and the front-end load is 5% on the fund you picked. That means you really only have $950 to invest, because that nice cup of coffee in the professional's office just cost you $50. That's the load. That 5% is taken out of your initial investment right at the start. Ouch.

And that's a very expensive cup of coffee. If you even get offered that. Remember-- it doesn't matter how nice the person is who's selling you a loaded fund! These people are NOT always looking out for your best interests, no matter how charming or insistent they are. And loaded funds are only good for the person who's selling them. But loaded funds aren't just offered in fancy offices, you can buy them online too! No coffee for you, unless you make it or buy it yourself. Yes, you can have the honor of paying extra and getting less, right at your fingertips, without ever leaving the comfort of home! 

 So-- what have we learned? DO. NOT. BUY. LOADED. FUNDS. Ever, ever, EVER!!!

There are also back-end loads on some mutual funds, which in case you're wondering, is comparable to what it sounds like. Not to be crass, but you are going to get screwed in the end buying one of these. I am less familiar with these, but anytime your money is locked up tight and can't be sold until a given amount of time passes without incurring a sales fee, (and we're talking YEARS here) you are getting a bad deal. Don't fall for any sales ploys. 

So you are going to buy no load funds only. It's your money, and yours to grow efficiently. But now what?

Step 2: Consider other fees that may eat into your investment

Okay, so it's time to go shopping!! Your new best friend in this adventure is Morningstar. Yep, you can click on that word, it's a link that will take you to this incredible mountain of information. I know I've mentioned this before, but you can find a ton of free info on the Morningstar website which can help you figure out just what might fit into your portfolio.

Your employer may have a relatively small selection of funds for you to choose from for your 401K. You can look these choices up individually on Morningstar. What should you look at first? Fees, of course. Just how much are you going to be forking over to fund managers? You need to know.

We can look at a specific example.  A well-known fund that might be offered in a 401K is Vanguard's Wellington Fund (click on the ticker VWELX to open a quote on this fund). This stock and bond fund has been around since 1929, so it's weathered its share of storms. In fact if you had invested $10,000 in 1929 and held all this time, you'd have a bit over $8.7 million in this fund now. And you'd probably be over 100 years old. 

As you can see if you opened the Morningstar site, this fund is rated 5 stars and has a gold medal status. The page shows the NAV (net asset value), or price per share. It shows if the price went up or down that day. Now scan to the right of the price, and you will see a lot of data. One of several we are looking for here is "Load." And it says "None."  Excellent!  That's just what we want to see. 

Next scan over to "expenses." Wellington's expenses are 0.26%. Then look at "fee level." It says low. Yep, that's low. But what exactly does this mean? Remember, the expense here is an annual fee that is deducted each year to pay the management.  Again--this is not a transaction fee (a buy or sell fee), it's just a fee to run the fund. You will not get a bill for this. 

Step 3: Consider How Often the Fund Manager Buys & Sells

There's a lot of other information on this Morningstar page featuring Vanguard's Wellington fund.  Another one to consider is turnover.  On the Wellington fund, the turnover is 39%. Turnover is important, especially if you are buying a fund that is in a taxable account. According to Morningstar, turnover is "how often a fund manager sells all the stocks in the mutual fund in a given year." That's not the full story, so if you want a more detailed explanation, click on the blue link above. In short, the lower the turnover, the most cost efficient your fund will be.

Who cares about that? Well you might, if you own this fund in a taxable account.  The reason the manager traded some stock was his/her attempt to maximize returns. In other words, to make you more money! The whole buy low, sell high! Which is great! Except sometimes you can get a little surprise around tax time on all this manager selling. You may end up paying taxes on your fabulous fund's profits & dividends. 

Here we are meeting Herbert the Snowman: he looks & feels great! Healthy, robust and ready for anything! Like a great mutual fund, Herbert looks great until the heat is on...

The after-tax return is something you want to consider when choosing a mutual fund. If you hold a fund with a high turnover in a tax deferred account, like a traditional IRA or 401K, this is not as critical. But high turnover rates even in tax-deferred funds can still cost you money, because the manager of your account pays fees every time a stock is bought or sold. And those fees gets passed on to YOU. Over time they can cost you money. So you want to know the after-tax and after-sale profit a fund has made in previous years to get a better feel for what you can really expect.

Holy heat wave, Batman! Taxes & fees can melt away even the robust investment, so you end up like poor Herbert the Snowman. Yes, that's him behind Rupert. You want to stay cool and hang onto your money!

Step 4: To be continued...

So what are you to do? Look for funds with low turnover. But where are they? Do they even exist? Well as a matter of fact, they do. Index funds have the lowest turnover rates. Index funds are also generally less expensive than actively managed funds. Why is that?  And what exactly are index funds? I'll get to that in my next post, in 2 weeks or so! 

Do We Subsidize the Wealthy? 100 Years of Federal Taxes

Now that may seem an unlikely title for someone writing about investments, but to be clear, this blog is called Money Matters. And money does matter! As you know if you're reading this, I follow the stock market, and find it fascinating. I have educated myself relative to investing for maximum returns in our retirement funds, so maybe my husband won't have to work forever.

What piqued my interest to look at personal income taxes over the past century taxes was a YouTube video made by author Robert Reich (Saving Capitalism: For the Many, Not the Few,  2015. I know nothing about this book whatsoever and am not here to sell it. Click on Kirkus review and/or Amazon for more info). Reich served under Presidents Ford (R), Carter (D) and was Bill Clinton's (D) Secretary of Labor from 1993-1997.

Recently a Facebook friend posted the video, and it showed a cartoon illustrating the top tax rates on individuals under various presidents. I could not believe my eyes. I looked into this more fully to satisfy my own curiosity, and found info going back to 1913.  Then I looked into it in more depth. It was like opening a can of worms. How our nation has looked at wealth and taxes over the past 100+ years is quite revealing.

Here's the political cartoon by M. Wuerker that caught my eye: 

Before I begin, I should make a few things very clear: First, This article is not intended to comment on the 2016 candidates for president. You have to draw your own conclusions relative to that circus.  I hope Republicans and Democrats alike will read this and perhaps reflect on the implications of what the history of tax rates says say. Numbers, you ask?

Second, I like numbers. That's not a secret if you know me. Numbers are clean, honest and not subject to opinion. Since I am highly opinionated, I like using them to make my points. Try not to glaze over in advance thinking about that. 

Third: I like money. In fact, I'm a huge fan. If you don't believe me, take a look at the rest of this website. Anyone who says money doesn't matter is frankly only fooling themselves with idealized, romanticized notions. I've been on the border of poor and now I'm comfortable. Comfortable is a lot better. I would guess that being wealthy would be better still. I'd love to give it a try.

Fourth: to be perfectly blunt, I do what I can to reduce our tax exposure; we take all the deductions we're allowed to by law.

Fifth: As with so much in life, issues surrounding tax rates are far more complex than what I am presenting here. Many variables contribute to the economy as a whole. I don't get into deductions of any kind. I realize this is a simplified, highly condensed look at a long span of time. So with that, here's some all-American tax history from last 100 or so years. With my not always subtle interpretations thrown in for good measure.

American Income Taxes: A History

Norris Brown, a Republican from senator from Nebraska, first proposed an income tax amendment to the Constitution in 1909 while serving under Republican President Howard Taft. The country was still very young, and had little infrastructure. American sentiment at this time was that the wealthy should pay an income tax. Taxes had been part of American life before this time, but a new more formally structured format was seen as necessary by this time.

In 1912, Democrat Woodrow Wilson was elected president. Set in motion by the Taft administration, the 16th Amendment to the Constitution was created and adopted on February 3, 1913 shortly after Wilson's inauguration. The 16th Amendment allowed Congress to levy a federal income tax without apportioning any to the states.

In 1913 there were 7 tax brackets. At the top was an incredibly low rate of 7% on individuals making half a million dollars & up. If you made under $20,000 a year (which obviously most people did), you paid 1%. Capital gains taxes on profits from investments were taxed at a higher rate than income taxes. Government was very small and the approach was very basic. World War I changed everything. By the end of Wilson's 2nd term in 1920, personal income taxes had jumped to 73% on those making a million dollars and up. Capital gains taxes had also jumped and matched the personal income tax level. Corporate taxes were ten times higher than in`1913. Wars are expensive.

My grandfather John Wright was in the artillery in World War I. Our family believes he was 'shell-shocked' from what he witnessed in the war, a condition now called post-traumatic stress disorder. The expense of war goes well beyond the monetary.

That million dollar line drawn in the sand is the highest income tax tier. For future reference, the highest income tax tier is defined as the minimum income being taxed at the year's highest rate. So in the above 1920 example, people making $1 million made the smallest amount of money in the group paying the highest rate of 73%. The top tier tax rate was on $1 million incomes and up.

All presidential administrations have had multiple tax bracket ranges. Taxes are not set as all or nothing, but the rate is calculated on a curve depending on the family's income. I often refer to the top tier throughout this article, but bear in mind that tax ranges varied between 0-94% over this 100-year span, often with many brackets.

So you know: the USA has a marginal tax system (click on the link)  What is that, you ask? It's a method of taxing income that adjusts within each bracket for fairness.  The link shows how you're taxed on income increases (like that cost of living raise I hope you'll get!)  within your bracket. When you hit the top of one bracket, you get nudged into the next tax bracket. 

Republican Warren Harding became president in 1920, and lowered the individual tax rate gradually to a high of just around 43%. By the time he died in 1923 he lowered the tax tier to $200,000 a year. The lower the top tier is, the more people are taxed at the top rate. This is because far more people make lower incomes than do high ones. In this particular case it means that in 1923, multi-millionaires and people making $200K were seen as the same in terms of tax rates. 

Harding's VP Calvin Coolidge became president in 1923. He lowered the top tax rate to 25% for people making $100K and up. So even more 'regular' people were paying the same tax rate as millionaires than under Harding. (I say 'regular', because in the 1920s $100K per year was a whole lot more money than it is today. According to the inflation calculator from the US Dept of Labor, $100K in 1926 equals a buying power of $1,340,000 in 2015. That was and is a huge annual salary by most people's definition!)

To Coolidge's credit, he kept taxes low for everyone-- including the poor. For example, if you made $4,000 or less as a married couple filing jointly in 1927 (which most people did at that time), the tax rate was 1.5%.  This was considerably less than his predecessor, Harding. But make no mistake-- the Harding and Coolidge administrations offered huge tax relief to the wealthy, believing that this would help the overall economy. Interestingly, the 20s were a time when the USA became much more anti-immigration. The 2os were a time of great technological advances-- the automobile, movie and radio industries all took off during the roaring twenties. Upgrades were made to roads and electricity, as well as phone lines & things we take for granted like modern plumbing.

A few Life magazine covers from the roaring twenties!

We're setting up for the Great Depression now. Republican Herbert Hoover followed Coolidge's tax rates, and in 1929 when the stock market crashed, taxes were low a 24% on anyone making over $100K a year. That changed by 1932 when Hoover asked people earning over a $1 million a year to fork over 63% of their income to taxes. The country was in big trouble, and times were changing. The rich were asked to chip in-- big time. 

Democrat 4-term-elected Franklin Delano Roosevelt had a different tax approach during the Great Depression. He kept Hoover's highest tax rate of 63% for his first few years, gradually raising the highest tax tier to 5 million dollars in 1936. These people-- the super rich-- were asked to chip in 79%. Recovery from the Great Depression was costly. But Roosevelt believed everyone had an obligation to pay taxes. Even the very poor had a tax rate of 4% from 1932-1940.

Click on the photo below for a slideshow of photos from the Great Depression-

This went on for years, with the tax rate on the wealthy gradually creeping up to 81% in 1941. That year even the least wealthy paid 10% as the nation recovered-- but then the war started. World War II created an explosive change in tax rates.

From 1942-1944, the top tax tier was lowered to $200,000, so a lot more people were taxed at the highest rate. Not only was the top tier lowered, but the tax rate for these people went up drastically: If you made over $200K in 1944, you were taxed at a staggering 94%. That's the highest rate levied in the past 100+ years. Again, war is expensive on many levels, both in casualties and in cash. FDR & Congress understood that.

To be clear, the average person in the 1940s did not pay anywhere near this amount in taxes. In both 1944 and 1945, the average family made just over $2,000 annually. These people were taxed at a 25% rate. In 1945 even those in the lowest income bracket were taxed at 23%. Taxes were very high. It was a time of great sacrifice, and everyone paid their share.

According to teachinghistory.org, only 7% of the US population was paying income tax in 1940. That number jumped to 64% in 4 short years, when more Americans paid for running and defending the nation. The people in what is now referred to as the "Greatest Generation" were asked to take ownership of investing in America. This was a defining time in history when the people of our nation came together.

View fullsize

Rosie the Riveter was and still is an American icon. She symbolized all the women during World War II who took jobs in factories and shipyards, replacing the men who had been sent to war.

Taxes stayed high under Democrat Harry Truman (who became president when FDR died) after the end of World War II. Taxes stayed relatively high throughout his presidency.

According to web.standford.edu, the median salary in 1950 was around $4,000 a year. What was the federal tax rate for the middle class? In 1950, a married couple filing jointly making between $4,000-6,000 a year was taxed at 26%. That's a comparable salary income to a couple making between $39,000-72,000 now. As of 2013, the tax rate on people making the same inflation-adjusted salary paid considerably lower marginal tax rate of 15%.

Here's where this all gets even more interesting, especially for people like me who love numbers. In 1952, Republican Dwight D Eisenhower was elected president, and from 1952 to 1960 he was our commander-in-chief. Throughout that time taxes remained stable, with the top tier paying a whopping 91% of their income to taxes. This was the exact same tax rate as during the latter part of Democrat Harry Truman's presidency.

In 1960, at the end of Eisenhower's 2nd term, the same 'average' couple was now making around $6,000 a year. Their federal tax rate was 22%. Taxes for the middle class had dropped somewhat over 10 years. But they were still relatively high-- even those in the very lowest tax bracket paid a tax rate of 20%.

That's what caught my eye. Here we had a Republican president-- but one who was not afraid to ask everyone, especially the wealthiest among us-- to help build the nation's infrastructure and preserve our nation. This is the president you may all thank whenever you use the interstate highway system. I personally remember traveling through rural Vermont to see my cousins before I-89 was built in the 1960s. The interstates transformed our nation, saving time and money for everyone.

Of course we had yet another war to pay for in the early 50s, the Korean War. Have I mentioned war is expensive?

Democrat JFK also kept this tax rate. The most famous catch-phrase of Kennedy's short presidency? "Ask not what your country can do for you, ask what you can do for your country." What a concept! It seemed to be the way of our presidents from FDR to Truman to Eisenhower, and now the youngest elected individual to claim the highest office of the land. Kennedy's taxes were undeniably high for everyone. The poorest of our nation had a tax rate of 20% through 1963.

Some faces from the 1960s, when I was a child-

Vice president Lyndon Johnson became president after the assassination of President Kennedy in 1963. In 1964 the rate dropped from a crushing 91% to 77% for those in the highest tax tier. The poorest people saw their first tax break in a long time, with the lowest bracket dropping to 16%. That rate gradually dropped for the poor throughout the mid-60s.

From 1965 (LBJ) to 1976 (Carter), the highest income tier remained at $200,000 a year.  Sandwiched between these 2 Democrats were 2 Republican presidents, Nixon & Ford. The top tax rate remained close to a constant of 70% for nearly 2 decades under Democrats and Republicans alike, from 1965 until 1982. And remember-- before 1965 that tax rate on the wealthiest Americans had been even higher than that for decades!

Top Rate of Taxation of Regular Income (%)

taxes under 6 presidents: 3 Republican, 3 Democrat from 1959 to 1980

Republican Richard Nixon became president in 1969. The top tax tier was still $200,000, and as I mentioned above these people were taxed still at a 70% rate. A year later, the average income was about $8,200 a year. The average married couple filing jointly was taxed 22% in 1970. These Republican presidents, like Eisenhower before them, were pretty consistent about taxes, and not shy asking the wealthiest among us to pay more.

And of course let's not forget the Vietnam War was a huge expense throughout the 1960s and early-to-mid 70s. I'm starting to see a pattern. Have I mentioned war is expensive? Oh yes-- I think I did.

Democrat Jimmy Carter's administration raised the income tax tier slightly so by 1980 it was $215,400. Under Carter, a married couple filing jointly who made under $3,200 a year paid zero taxes. Carter was the first president in the past 100 years to have a zero tax rate for the very poor. The 70s were a dark time in our history. Not only was there horrendous inflation, but simply awful disco music, hair styles and clothing (including the foul and horrific "leisure suit" for men). I shudder to remember.

An actual catalog advertisement from a JCPenney catalog from the 1970s. Terrifying.

Here's where this whole tax rate thing gets really interesting, at least to a middle class person such as myself. I will warn all Reagan fans right now that I have a huge problem with the changes that the 1980s brought to the tax structure of our nation. 

Under the Reagan administration, the top tier taxable income goes haywire. Since a picture is worth a thousand words, let's take a look:

The Reagan Years: Highest Income Tax Tier in Thousands of Dollar$

1981-1988

This chart shows jumps all over the place. It's where it lands that captured my attention. Percentage-wise in 1988, people who were making $29,750 annually were viewed has having the same tax responsibilities as someone making $10 million. Or more. WAKE UP!! That should really open your eyes, if you've been dozing off!!

Then there's the tax rate itself, for those in the top tier:

Top Tax Rate on Regular Income under Reagan (percentage)

1981- 988

What do  these graphs show together? As stated above, a married couple making $29,750 was suddenly in the top tax tier along with millionaires & billionaires. And they both were taxed at a rate of 28% a year. If you made less than $29,750, the tax rate you paid was 15%. There were 2 brackets-- that's it.  Simplicity. Fairness.

But in reality? This was the first time a US president had reduced taxes on the wealthy while simultaneously increasing taxes on the poor. No wonder the rich fall all over themselves for Reagan! A 28% marginal income tax rate must have seemed like a dream come true! I get it now!

The problem here to me is fairly obvious. If you were making $29,751 in 1988, your bills were predominantly about paying your rent/mortgage, feeding your family, making car payments, clothing the kids, heating/cooling your home, etc. The basics. The average price of a new home had skyrocketed to $91,600. A new Ford Taurus cost $9,996. Interest rates on loans (like mortgages) were over 10%. Life was expensive. I remember it well.

The 1980s!

The wealthy on the other hand, had all these ordinary needs squared away.  The Reagan tax break allowed for an even more luxurious lifestyle. Believing someone making under $30K a year should have the same tax rate as someone making $100K, $1 million and billionaires is beyond comprehension. It's absurd.

Prior to 1988, the Reagan tax structure was friendlier to the poor. Keeping with the Carter policy at first, the very poor paid zero federal taxes. There were still 15 tax brackets in 1986. By 1987 there were only 5 brackets. Then 2 brackets in 1988. 

In all fairness to Reagan, if you were a middle class tax payer in the 1980s making over $30K a year, the new tax code was helpful. The inflation of the 1970s made the tax burden very difficult for the middle class. Salaries went up for this group in the 70s, but with these increases came new, higher tax brackets. The expense of everyday living was difficult with sky-high prices on goods and services. The considerable Carter-era tax burden was very tough on people who were getting no bang for their purchasing buck. But Reagan gave the largest tax breaks by far to the well-to-do. The struggling middle class was thrown a little bone, though. 

I should also mention that Reagan increased the capital gains tax in 1987 to the same rate as the personal income tax rate, 28%, from the previous rate of 20% in the early 80s. What does that mean? It means people who were fortunate enough to have profits from the stock market were taxed at the same rate as their income. Capital gains profits traditionally had been taxed at a much lower rate than regular income. 

This looked fair and equitable in many ways. But if you look back-- and it's all a matter of public record-- from 1970 to 1978 the top capital gains taxes had been well over 30%. It's just that the personal income tax was considerably higher during those times on most people as well. Reagan lowered the personal income tax rate, then matched the capital gains tax giving the illusion that all was fair. Again, the rich love Reagan for a reason. In comparison to previous rates, both were beyond great for them! And the middle class had their little break to lull them into a sense of fairness.

Democrats argue that Reagan did raise taxes some ways: he attempted to close loopholes for tax-evaders and removed some tax breaks. He signed a law relative to taxing social security benefits on those with high incomes. He raised taxes on cigarettes. He got rid of the real estate deduction loophole. But I agree with the starry-eyed Republicans relative to Reagan's taxes-- they went down.  Without question. I'm just not quite as wowed as they are with that fact, or maybe I am, but for an entirely different reason. According to Politifact.com from a 2012 report, "it’s accurate to say Reagan increased levies during five years of his administration, but there’s a caveat: The overall tax burden on businesses and individuals went down during his presidency."

This income tax structure set a precedent that is not sustainable for a nation that has a penchant for going to war. It was created by a president who believed that giving huge tax breaks to the rich would ultimately benefit everyone. Including the middle class and poor, when the money would-- in theory-- eventually 'trickle down' to them. It never did. All it did was make the rich even more rich, and left the middle class and working poor with the same tax burden percentage-wise as the wealthy.

Interestingly, Reagan's VP George H. W. Bush described Reaganomics as "voodoo economics" while trying to win the 1980 presidential nomination.  Reagan is associated with small government & spending, but that was not the reality. He expanded the military enormously, spending money hand-over-fist on it to outdo Russian leader Gorbachev. In 1980, the public debt was $712 billion. In 8 years it had nearly tripled to over $2 trillion. For a president associated with reining in government, ironically the number of federal employees increased by 324,000 people from 1980 to 1988. That's over 6%.

It's my opinion that this precedent-- the one of giving huge tax breaks to our nation's wealthiest-- haunts us as a nation to this day.

George H. W. Bush did raise taxes slightly in 1991 to 31% for the top rate on regular income. Under his administration the highest tax tier rose to a slightly more realistic $82-86K range. Effects of Reaganomics were felt during the Bush administration when the poverty level increased.

When Democrat Bill Clinton won the presidency in 1992, the top tax rate on regular income climbed to 39.6% for those making $250,000 and more. Under Clinton, the top tier climbed to just under $300K per year. By 1993, 5 tax brackets were back in place. People making under $37K/year had the lowest tax rate of 15%, which offered relief to many. People making between $37K-89K a year, a substantial portion of the middle class, kept the Reagan tax rate of 28%. 

Compared to the 40 years before Reagan, taxes during the Clinton Administration were very, very low. Clinton even lowered the top tax rate on capital gains to a low 21.2%, a really nice little gift for those doing well in the stock market. This once again benefited those with the most money. But it also helped retirees living off of their savings investments though, keeping their taxes low. 

Taxes overall have remained very low ever since the late 80s and early 90s, especially for the wealthiest among us. Even Reagan's early 80s administration taxed regular income at a 50% rate until 1986. Thirty years ago, everything changed. The wealthy have adjusted to paying a lot less over this span of time. And because of this they have kept a lot more money than ever before, under Democrats and Republicans alike.

Clinton left the White House with the deficit erased, and the nation had a surplus of money. Not getting into war really seems to make a difference, doesn't it? Clinton also left the White House with the smallest federal workforce in decades, according to records from the Office of Personnel Management, OPM.gov . Don't believe me? Click on the link and look it up!

Under Republican George W. Bush, we went to war. We have seen how every single previous president paid for wars-- by raising taxes on everyone.  Especially the wealthiest of our citizens. Not this time. While military spending sky-rocketed, taxes stayed low and capital gains taxes took a nosedive. People with investments in the stock market made & kept more money since Herbert Hoover's presidency. George W. Bush's lowest rate of 15.4% on capital gains even outdid Clinton's lowest with a 29% reduction on an already low rate.  Incredible.

To Bush's credit, the poorest among us were given a real tax break in 2002, when the marginal tax rate for couples filing jointly making $12,000 or less saw their tax rate drop to 10%, a break compared to the Clinton & Reagan eras. When you're in that income bracket, every cent matters. By 2008, anyone making under $16,000 a year was in the 10% tax bracket.

During the Bush years, our country spent a ton of money. The financial cost of the Iraq war's first 7 years alone totaled just over $1.1 trillion (according to the Watson Institute of International Studies at Brown University). As of March of 2013, that the cost has been more accurately estimated at $2.2 trillion. I'd put in all the zeros & commas, but it's frankly easier to write the word "trillion' than to keep track of them all. This is just the price for the war itself. It does not include any medical bills for our hundreds of thousands wounded and traumatized vets.

Did President Bush raise taxes even the tiniest bit to help pay for the wars (note the plural; I've only been highlighting the Iraq War) during his administration? No, he did not. President Bush kept taxes down at an even 35% top tax rate from 2003 to 2008 for anyone making over a salary in the $300K+ range.

Social Security had a surplus of cash that was 'borrowed' from to pay for part of this war. Many Democrats think this cash was in essence stolen, but that's not accurate. We just went into debt.  But unlike previous generations, the wealthiest in our land were asked to sacrifice absolutely nothing during this time period. My husband & I are not wealthy, but we were asked to sacrifice absolutely nothing during this time period. The poorest among us were the ones who were predominantly sent to war. Great and life-altering sacrifices were made in the battlefield.

My family & I visited the gorgeous Caribbean island of St. John in 2006. Not exactly a sacrifice. Here we are snorkeling, sacrificing absolutely nothing.

In terms of human loss, the war in Iraq has cost the lives of approximately 4,500 members of our military. Hundreds of thousands of our vets have sustained life-altering injuries. As of 2013, this war alone has killed at least 190,000 people-- the majority being Iraqi civilians-- according to the Watson Institute of International Studies at Brown University. That should be jarring to anyone reading this.

And I haven't even touched the costs of the Afghanistan War, in either dollars or human life. Or the lost opportunity for those who sacrificed so much. Or the financial bailouts in terms of money. By President Bush's last day in office we were over $10 trillion in debt. But at least our taxes didn't go up. Mission accomplished, at least in that department.

What does that reveal about us as a society? For me it reveals that we want the wealthy to be protected at all costs. Part of the reason that The Hunger Games series by Suzanne Collins resonated for me was that it isn't as outlandish at it seems at first. The wealthy are getting wealthier, and gaining more and more control of our politicians in the process. It's about what money buys: ultimate power. And that makes the Hunger Games books/movies all the more terrifying.

You can read more about how the wealthy are protected in an article from a June 4, 2015 article from the The Washington Post. For more, click on its title: "As the Rich Become Super-rich, They Pay Lower Taxes. For Real."

Democrat Barack Obama became president in 2009, and inherited a hot mess. Since the day he walked into the White House, I have heard Republicans moaning about the deficit, and all the reckless spending Obama has done. I am constantly stunned by this. It's like if someone owned a house, trashed it, got a double mortgage on it at a really high rate, and then dumped it all-- mortgage, mess, lock, stock and barrel-- on a new owner. And then all the friends of the original owner said, fix this up right now.  Do it quickly, but don't spend any money trying to improve anything. Just do it. Incredible.

Since Obama became president some disturbing tax-related issues have arisen. The tax interests of big business took an historic turn in 2010 when Democracy was in effect sold. Under the 2010 Citizens United Supreme Court ruling, now corporations and unions can make unlimited political donations to the candidates that best represent their interests. Corporations legally became 'people' under the guise that their monetary donations to political campaigns are the equivalent of free speech.

Justice Ruth Bader Ginsburg has actually called this the Supreme Court's "worst ruling," stating, "I think the notion that we have all the democracy that money can buy strays so far from what our democracy is supposed to be."  The voice of the average American is increasingly being drowned out by the wealthy and big business, who can wildly outspend the average person relative to political campaign contributions and advertising.

Here's one place President Reagan & I agree on something:

“Politics is supposed to be the 2nd oldest profession. I have come to realize that it bears a very close resemblance to the first.”

— Ronald Reagan

As for income tax on individuals, President Obama offered more tax relief than Presidents Bush, Clinton, Bush or Reagan for the poorest among us. By 2013, couples filing jointly making $17,850 or less were asked to pay the lowest rate, 10%. He increased the top rate on regular income from 35% to 39.6% for people making more than $450,000 a year in 2013, with a lot of opposition from Congress. For Obama's first 4 years as president, capital gains taxes dropped to a record low, even beating George W. Bush's insanely low rate. Then in 2013 the rate jumped up to 25%. Taxes are still very low, however, when held up against the rates previous to 1987. The deficit, however, is not exactly low.

It's like pre-Reagan tax history doesn't exist, or few remember it. I certainly didn't know about taxes in the last century until very recently. It's time for people to know how past presidents--both Democrat & Republican-- handled expenses and taxes. In the past, the wealthy were much less idolized. To be sure they've always been admired, envied and seen as celebrities. But they weren't government subsidized like royalty.

But is it fair to ask more of the wealthy? Yes. Historically we have asked more of the wealthy. That is very evident from the chart above. If that's not enough, here's one more reason among many: According to the Economic Policy Institute, the average CEO compensation in 2013 was $15.2 million, up 21.7% in a mere 3 years. From 1978 to 2013, CEO inflation-adjusted compensation a staggering increased 937%!! The average CEO now makes over 200 times what the average worker makes (click on glassdoor.com for more information on literally hundreds of large companies). It's good to be super wealthy!

The illusion is that these "job creators" deserve this. The average worker's inflation-adjusted compensation increased 10.2% over the same time period. Chances are that if you're reading this, that's more your situation than that of the super wealthy.

According to theHill.com in 2014, 2.4 million American jobs have been shipped overseas over the past 10 years. Why? So corporations can get cheap labor. And to add insult to injury, did you know that American companies can deduct the costs of moving operations overseas from their taxes? That's a money saver. When American company Burger King merged with Canadian company Tim Horton's, its "official" address became Canadian for the express purpose of saving tax dollars. The rich get richer. And the beat goes on.

Ross Perot, 1992 & 1996 independent presidential candidate for the Reform Party & billionaire, favored increasing taxes on the wealthy. He once said, "Makes no sense for me to pay less of a percentage of my income than other people." He knew he was rich, he knew he had enough. How refreshing! I personally wouldn't know, but I imagine there comes a time when having $1 billion is no different than having a quarter of that. 

Some argue that if the rich are taxed like they once were, they'll lose their motivation. What nonsense. At the same time, these very same people often say the working poor should just pull themselves up by their bootstraps, even if they're working 2 full time jobs at minimum wage. They just can't figure out why someone doing that should lose heart. America is the land of opportunity! The poor just need to try harder!

America IS the land of opportunity, I still believe that. But it's undeniable that over the past 30 years the wealthy are the most favored class in our nation. Forgive me if I'm not weeping for the wealthy at the thought of them contributing more money through taxation. What motivates the rich isn't merely more money.  If that were true, they would retire earlier than they do. At some point monetary excess becomes meaningless when you already have everything you ever dreamed of and more.  As the late co-founder of Apple & billionaire Steve Jobs said, " If you do something and it turns out pretty good, then ....go do something else wonderful, don't dwell on it too long. Just figure out what's next."  

Life isn't going to change all that much, one way or another give or take a few million or billion dollars if you're already filthy rich. But imagine whose lives could be changed by the wealthy contributing more to our nation than they do now. Just imagine.

It is fair to ask the wealthy to pay more. This can still be a nation where people strive for greater financial success. But wealth for a select few must never come at the expense of the people who are the majority of America. With great privilege comes great responsibility. Or at least in the movies, anyway.

2016 starts with a bang!

Or not! Or at least not a good bang!

What's important to remember as the first month of 2016 comes to a close is that EVERYTHING IS ON SALE. What's also important to remember is that you are a buy low sell high investor! This is not the time to sell, let me reiterate: everything is on sale!  

A good article to reference relative to the upcoming year is from the NY Times, so click on this link to read an article from January 7th: 6 Tips for Investors When the Stock Market Tumbles

Don't freak out, just ride this through! I'll be back to more regular writing soon, I've missed this. In the meantime, hang in there!

A Question from a Reader

The blog post from 3 days ago prompted this question: At what point in investing would you branch from a mutual fund to individual stocks?

Right off the bat I personally see individual stocks as more risky than mutual funds. There's no diversification when you buy one stock, very little even if you buy several stocks in different sectors.

But then there's no return in any mutual fund like the kind you get when you pick a single winning stock and it just skyrockets.  When can you afford to take that risk??  In my opinion? When you have enough money to potentially lose.

To be more specific, I think before any young person buys individual stocks they should have the basics covered: 

•  a stable job
• 3-6 months savings in case of a job-layoff
•  a car that is safe & reliable
• a home, whether an apartment, condo or house and basic furniture/kitchen utensils/linens, etc.
• a working budget that covers food, clothes, home heating/cooling, medical care, electricity & water, etc.
• investments being made for retirement

Investing in individual stocks takes a certain amount of homework, as you may have guessing based on 4 articles on that very topic since since June.  And I'm not done yet!  

The Story of Ben and the Golden Apple

When our son Ben was in high school, we gave him $1,000 to invest on his own.  The agreement was if he lost it, then it would be gone, no questions asked.  If he made money, then eventually he would need to pay back the initial $1,000 when he could afford to do so, but then the investment would become his 100%. He did some research, then invested all the money in one stock-- Apple. Nine years later, we can clearly see he made a great choice. He still owns his shares, free and clear.

That being said, I would not advise anyone to put all their eggs in one basket. 

It is clear that this individual does not want all her eggs in the same basket, and is working on diversifying her assets throughout the living room

If Ben had picked a stock that tanked, the money would be gone (but only if he sold low!!  Sometimes these stocks can come back-- which is why we buy and hold!!!). Our 16-year-old son did this as an experiment, but he was not using his own money. It was money given to him with the understanding that he could potentially lose it all.  He had a built in safety-net called mom & dad providing the initial investment. You may not have that luxury.  

Cindy and the Terrible, Horrible, No Good, Very Sad Investment

In July of 2006, I bought some stock in British Petroleum (BP).  I had done some research that said that  BP was the only large energy company that was investing in renewable energy, such as solar and wind power. I liked that idea, and decided to buy a few shares.  It seemed a solid value company with OK dividends, and that along with BP's corporate interest in environmental energy alternatives inspired me to buy.

Then disaster struck, but not for me. In April of 2010, a BP oil drilling rig in the Gulf of Mexico exploded, killing 11 workers. The explosion also caused a stunning 210,000 gallons of crude oil to be pumped in the sea every day for nearly 3 months. The impact on the sea, its creatures and the shore's wetlands was devastating. This was not the green energy idea I had in mind.  It was not what anyone had in mind.

Big surprise-- the stock tanked after this disaster, and I quite honestly was so disgusted that I ever bought BP that I sold it for a little less than half of what I paid for it.  To this day, the stock has not recovered.  This is a horrible story of an accident of monumental proportion that cost human & animal lives.  The horror of this accident is still evident for the animals, wetlands, and people of the Gulf states. The even longer-term environmental consequences of this awful situation are still not known.  

Nothing is worth making money at such an expense, even if the stock had returned to its previous value. The moral of this story is to really understand what the company does that you are buying, and realize you could lose some or all of your money when buying any single stock.  

Safer Ground

That was  intense to write. The loss of a small amount of money was a very minor thing when considering the big picture. Talking about stocks vs mutual funds is a lot lighter topic.

When it comes to money, you should have a feel for what you can truly afford to lose. It's harder to lose your investment in a solid mutual fund for the simple reason that if one stock isn't progressing within a mutual fund, usually there are plenty of others doing well to offset the loss.

This illustrates members of a diverse grouping, where one individual is going in a different direction than the rest. Overall, however, the majority of the group is aiming in the right direction to offset this individual's decision

 It would be nice to have a crystal ball to know single stocks to pick.  That's where all the stock picking guidelines come into play.

Choosing mutual funds has its own homework involved, and money can be lost or gained investing in these as well.  Anyway, the reader's question assumes that mutual funds are an investor's first type of investment. And they probably should be. With that in mind--

Start early and take advantage of your employer's 401K plan!

First and foremost: Any young person starting out should be investing through their employer's 401K program. Actually, anyone with a job that offers a 401K-- regardless of age--  should be doing this.  The choices in 401Ks are usually mutual funds, money market accounts (a money parking lot),  and annuities. 

This money will be invested before you see your paycheck, so you can't spend it. (You may miss it, but that's another story entirely.) It has the built-in benefit of lowering the taxable income on your tax return. This saves you even MORE money. The money invested in a 401K will grow over decades, and  is also tax-free until accessed in retirement. 

Many employers will match your investment amount or make a smaller contribution. That's an added bonus for your future. At the point of retirement when you start making withdrawals of this money, these investments will be taxed at a lower rate because you'll have no salary. 

No 401k at your job?? Invest in IRAs (individual retirement accounts).  This involves a whole other topic, and while not irrelevant, it deserves its own special blog entry. So I'll continue on.

Mutual Funds

Mutual funds are a wonderful choice for anyone saving over a span of years for retirement, a home, a wedding, college funds, the trip of a lifetime, a car-- well, you get the picture.  They are comprised of a specially selected group of stocks and/or bonds.  Some even offer the simple no-thought-required beauty of built-in diversification (like 'all-in-one' funds).

Mutual funds comprised of stocks come in all varieties-- large company, small company, and mid-sized companies. They may be growth or value based, and have a wide range of risk levels to choose from. So if you are adventurous, conservative or somewhere in-between, there are choices out there for you. 

Mutual funds are managed by the people who put them together. These people are paid a certain percentage to manage the mutual fund. There is usually not an upfront fee for buying a mutual fund unless it is a loaded fund. Loaded means that you pay before the investment is ever made, and you still pay the percentage over time. It's like double billing the customer.  I do not ever recommend buying loaded mutual funds. 

If you sell some mutual funds before a given time frame (such as 6 months, often), there may be a service charge.  The people who manage these funds want them to remain as stable as possible.  

Individual Stocks vs Mutual Funds

With individual stocks, the fees are different. The fees associated with stocks involve buying and selling (usually around $7-$10 per trade).  Buying individual stocks offers more flexibility of how much money you can to invest.  If you have $500, you can open an eTrade brokerage account.  But good luck trying to find a mutual fund without at least a $1,000 minimum.* People with less cash on hand need to save up in a money market or savings account before investing in mutual funds.

You can hire a financial managers to assist you in picking stocks and mutual funds.  Some are wonderful and worth every cent; others not so much. The point of my blog is to help people make their own decisions without involving a middle-man. But this approach is not for everybody.

*But!!  The  401k Saves the Day!

These rules change when you are investing in a 401K. Because you're investing with a group of people at your workplace,  minimum investment amounts don't apply when buying mutual funds. So you can start off even with a small amount of money. 

I believe mutual funds are where anyone starting out should invest. And when your employer offers you a 401K, sign up as fast as you can. 

Taxes associated with both mutual funds (unless invested in a 401k or IRA) and individual stocks are a given. Sorry. I could go off on that tangent, but it's probably best to say good bye for now!

Picking Individual Stocks Part 4: Earnings-Per-Share and Growth Rate

I'm back from a brief break, and today the stock market is taking yet again another negative hit. Last week was uninspired as well.  But do we panic??  Do we rush to sell? Do we run in circles screaming??  No-- even in times like this it's best to sit tight and ride out the storm.  This too shall pass.

So far we have looked at the following criteria to consider whether (or not) deciding to buy a stock:

• Return on Equity (ROE)
• Price-to-Earnings Ratio (P/E)
• Price Earnings-to-Growth Ratio (PEG)

Now we're going to look at EPS, also known as Earnings Per Share. Yes, this is a throw back to the July 3rd post, because EPS is needed to calculated the price-to-earnings ratio (AKA the P/E).  Give yourself a gold star if you remembered that!

The Basics of EPS and Trends

Here we're going to look at the EPS of an individual stock over time, rather than making a comparison between 2 stocks at a single point in time (like we did for Rupert's Rawhides and Marley's meaty treats).  We are looking at the trend a stock is setting, and a positive trend is a beautiful thing!

View fullsize

Although it's summer, you can see the value of trend-setting from this fashionable photo taken last winter

EPS boils down to one simple concept. It looks at whether or not a company is  profitable. This is how it is calculated:

net income over the past 4 quarters (minus any dividends)/outstanding shares

Remember, outstanding shares means the shares that have been sold.

If we look up Apple's EPS on Morningstar (and remember, this is FREE!!!), you can see the EPS over the past 10 years. To review how to get to that point on your computer, 

1. Open the Morningstar webpage.
2. Find the little quote box in the heading just to the right of the red Morningstar name, and type in 'apple.' The first choice in the dropdown menu of choices should read AAPL Inc NASDAQ. Click on this option.
3. On this page, it's all about Apple.  You can see the last price, the day change (up or down; today it's down -1.39%), the opening price for the day, the day range, etc. Scroll down the page until you reach Key Stats. Click on the little link titled "more..." just to the left.
4. On the new page under the heading Financials, look about 1/3 of the way down and you will see Earning Per Share in USD (US dollars).
5. Here's the link to Morningstar. This will open a new window.  

Growth Rate

In the case of Apple, we can see a steady growth pattern, as illustrated here (because a visual is more exciting than a chart full of numbers on Morningstar):

EPS Growth of Apple stock over the past 10 years

You can see here is that Apple's EPS was $0.22 in 2005 and rose to $6.45 over ten years. That's all well and good, but the percentage increase from year-to-year is significant as well. Even though it looks like a small increase on the graph, just between 2005 and 2006 Apple's EPS increased an astounding 45%!!

Remember, EPS changes from year to year.  As of the 2nd quarter of 2015, Apple's EPS is $8.66. That's roughly 34% higher than the 2014 3rd quarter value of $6.45. But it is actually not the final value, because we are not comparing the same quarter of this year to last year. We have to wait a few more months for that.

Fun Links For People Who Want to Learn More!!!

Are you interested in finding out Apple's overall growth rate over the past 10 years??  Of course you are!! It involves lots of math, which I KNOW everyone loves!!  But in the interest of saving time, guess what-- there's yet another free place to get this information!!  Yes, at a free website you can have your stock's growth rate calculated for you!!  Now how cool is that? You simply plug in the beginning year's EPS (meaning the 1st year you want to measure from) in the 1st box, and then the ending year's EPS in the next box. Then you tell the calculator how many years you are measuring. Press the magic button and get your answer!

So for our Apple example, in 2005 the EPS was $0.22.  That's the beginning EPS.  The ending EPS in 2014 was $6.45. The span of years we are looking at is 10 years, so plug that number in.  Now here's the fun part: press 'calculate growth rate.' And voila! The growth rate for Apple from 2005-2014 was 40.189%* on average per year.  Amazing! Check out other stocks by clicking this link,  Free-Online-Calculator (this opens a new window).

The growth rate allows you to compare stocks side by side over the same span of time.  This can be helpful in your decision-making process.

You can find the EPS of any stock (and a lot of up-to-the moment info that's also free) from Google's business reports. This site gives you the day's big headlines, plus a quotes box where you can type in the name or ticker of the stock you are interested in examining.  Check it out by checking this link, Google Financial (this also opens a new window).

A Few Final Words for Today's Entry...

You may have noticed a slight negative slip from 2012 to 2013.  Even Apple's EPS can dip some years, but what we're looking at here is the overall trend of the curve, and it is safe to say it has been historically positive.

Most stocks' EPS ratios are not going to increase this rapidly. A solid growth stock can be expected to have its EPS increase 18% from the same point in time from the previous year, and hopefully more!  But keeping up this rate involves selling  a LOT of whatever a company makes or does, so that may not be completely realistic all the time. That's why we look at trends over a span of time. It doesn't have to be 10 years, but whatever time frame you decide to use.  

Now here's the twist: a company's accountants can kinda, sorta, maybe tweak the numbers a bit in their favor to make the stock look more desirable. Many analysts suggest only using what is called the diluted EPS because it includes adjustments to the outstanding shares (such as shares that will be issued in the future and stock options offered to employees of the company). That will lower the earnings-per-share.  t's more realistic than the basic EPS, and because of that is more noteworthy. 

Where to find diluted EPS??  Once again, this information is posted on Morningstar. First find the stock you want to look up. Under the corporation's name is a bar with quote, chart, stock analysis, etc. Click on Financials. Here you'll see revenue, profit, operating income, and so on. About 3/4 down the page you can find earnings-per-share, both the basics and the diluted for the past 5 years.  

That's why we always consider several concepts before purchasing any stock.  Growth rates are not the be-all, end-all of picking stocks-- there are plenty of slow & steady stocks that are also a very important part of any investor's portfolio.  Not everyone is a rock star, but just reliable workers who get the job done over the long haul. It never boils down to just one thing!

Picking Individual Stocks Part 3: The PEG Ratio

Meet PEG!

So far while considering how to pick a stock we have looked at: 

• Return on Equity (ROE)
• price-to-Earnings Ratio (P/E)

The price earnings to growth ratio (PEG) is the next factor to consider. Here it is as a math equation you will probably never use:

PEG = P/E  divided by  earnings-per-share growth

Just when you thought the math part was over.  But fear not, when you go to investigate whether or not to buy a stock, you will not have to calculate anything. This will be done for you. In other words, you can look up what you need to know! Once again, Morningstar can show you the PEG ratio for the stock you are investigating on any given day. In the gray bar under your stock selection's name, just click on 'valuation.'

The PEG can be used to figure out a stock's value in a more complete way than P/E alone. Here's what you need to consider:

• A PEG of less than 1.0 may be a good value and therefore considered a 'buy.' Stocks with a PEG less than 1.0 have been undervalued and may be ready to grow. This is a signal you are looking at a growth stock.
• Greater than 1.0 PEG may not be as strong of a stock pick and is possibly overvalued.  These are sometimes 'hold' or 'sell' stocks. (Note: just to make life confusing, some of these are 'buys.'  There  is no all-or-nothing when considering a stock; there are many, many variables to consider!! It's just that a stock with a PEG greater than 1.0 is not growing as rapidly as one with a lower PEG ratio.)

A few words of caution!

Even with the information above in mind, a stock's PEG ratio should not be the be-all and end-all in your decision making process. There's a lot more to 'buy', 'hold' and 'sell' than the PEG ratio.  

Calculating the PEG Ratio

So let's look at Rupert's Rawhides vs Marley's Meaty Treats again!  Don't remember these entrepreneurs?? They're from the July 3rd post.

We know the P/E for Rupert's Rawhides is 13.88. Let's say his annual earnings-per-share (EPS) growth over the next 5 years is projected to be 10%. Plugging our information into the above formula, this is what we find:

PEG = 13.88 (P/E) / 10% (EPS growth) = 1.39 

Because the PEG is over 1.0, Rupert's stock may be overpriced and considered over-valued. It may not perform as well in the future as stocks with a PEG ratio less than 1.0. But you can still think about purchasing Rupert's Rawhides: Some analysts feel that any stock with a projected earnings-per-share (EPS) growth of over 8% for the next 5 years is a stock worth considering. Also Rupert offers a solid product and some nice dividends. And besides, we haven't even seen the analysts' reports or much else on this stock! 

In this 2007 photo, we can clearly see Marley's growth potential is greater than Rupert's at this particular point in time. 

Now for Marley's company. The P/E for Marley's Meaty Treats is 20.0. Her company's annual earnings-per-share (EPS) growth over the next 5 years is projected to be 28%.

PEG = 20.0 (P/E) /28% (EPS growth) = 0.71

What can we conclude from this? Marley's Meaty Treats stock is comparatively priced lower than Rupert's Rawhides, and due to its growth potential may be a better buy. Because of its relatively low PEG ratio, we can expect Marley's Meaty Treats to out-perform companies with a higher PEG ratio. Remember though, even though there is potential for the stock price to increase more with Marley's stock, it also has more risk than Rupert's.

PEG Payback

But wait, there's more! Listed on Morningstar's valuation page for any given stock is an interesting number called the 'PEG payback.'  What's this, you may ask?  PEG payback is a ratio used to determine how many years it will take an investor to double their money.

Yes, double it. For example, if you buy $10,000 of a particular stock, this is the number of years it is projected to take to grow to $20,000.  It's no doubt intuitive, but this means the smaller the time frame, the better.  Also a shorter time frame implies less risk because the longer we peer into the future, the more hazy and distant it becomes. It's hard to predict too much about the future. 

Check for yourself:

To see this is real time, click on the link to Morningstar to see Apple's PEG payback.  You can enter any stock in the quote box on Morningstar, go to the valuations page and see this forward valuation.

Examples in today's market-- or more accurately, yesterday's: July 6, 2015-- are interesting to compare. Here are a few forward valuation estimates of PEG payback on a few real well-known companies (and perhaps one you haven't heard of):

1. Proctor & Gamble: 11.6 years  
2. Disney: 10.1 years
3. GE: 10.0  years
4. Microsoft: 9.6 years 
5. Union Pacific Railroad: 8.4 years
6. Apple: 6.8 years
7. Hawaiian Holdings: 5.7 years

PEG Payback (years to doubling initial investment)

7 stocks to consider when looking at PEG Payback

Now before you start assuming that Proctor & Gamble is the big risky stock of this group, think again. PG (it's ticker) is considered to be a stock with low volatility. According to Reuters (as of today), "over the past 90 days PG shares have been less volatile than the overall market, as the stock's daily price has fluctuated less than 99% of the S & P 500 index firms." Analysts do not, however, rate PG as a 'buy' at this time. It is considered a 'hold.' This doesn't make it risky, it just means it's not necessarily the time to buy it. And it also means it's not growing right now. PG is a solid value stock that generates money for its investors in the form of dividends.

Remember, all sorts of considerations need to be made before you decide to buy anything.  PEG (and its partner PEG Payback) are just a small piece of the decision-making puzzle.  Besides--

There is no real crystal ball--BUT!!

This all sounds great and very precise, but actually, it isn't. The truth is, no one truly knows what the future holds. We can examine these numbers all we want, but predicting what a company's growth potential actually is gets a little fuzzy. There is no absolutely sure magical formula or crystal ball for 'potential.'

So what's the point? How do the analysts arrive at their predictions of growth potential??  Before you throw up your hands and give up, they arrive at their conclusions using real numbers and facts from the past & present:  

1. Return on Equity (ROE): yes, back to that! This shows how efficiently the company is being run. Is the ROE for the stock greater or less than the 5-year average?  Greater than is good! 
2. Sales: Has the company been making money over the past 5 years? If the yearly earnings-per-share has been 5% or better, this is a good sign.
3. Cost control: What are the company's profit margins?  Even if a company has had great sales, if their expenses have increased at a greater rate, they may actually be not have done as well as it appears.
4. Growth rate: This is calculated from looking at how a company has grown historically over the past 5-10 years. It involves more math to explain, from which I will spare you-- today!! But it isn't just some arbitrary number assigned because a company has a cool website.

Anyway, that's PEG!!  Have a good evening!

Teaching Old Dogs New Tricks

Yes, I am here to tell you it CAN be done!  Yesterday's blog got a comment to which I answered, but would like to be sure anyone reading today sees this as well.

I started educating myself about investing for our future just 9 years ago.  I was 46 years old, and it had to be done. The so-called experts we had hired to help us actually lost us a significant amount of money. Part of this was because they were terrible at their jobs, but a large amount of responsibility falls on us (my husband Lewis & me).  We were clueless about investing because we could not clearly articulate what we wanted to invest in, or even what our options were. I literally knew nothing, other than having money is good, and losing it is bad.

That being said, not all financial experts are disasters, and I am sure there are plenty of good ones with insight. But for your own sake, learn on your own too, if you decide to hire one!  Informed investors can make choices that fit their needs.

So as I replied to my reader of yesterday's blog, YES, you can teach old dogs new tricks. Rupert at the age of 8 has proven to me that it is possible!  He is slowly but surely learning what the word 'quiet' means (yes, Rupert is a YLD: "yappy little dog"-- and it can get pretty annoying at times). Rewards are used for desirable results (no commentary upon meeting other dogs, for example). Being squirted with water from a harmless pump bottle is a consequence of poor decision making on his part (yappying to demand his daily dental chew, for example). A few droplets of water have the mysterious power to help him refocus, for whatever reason.

                                                                                                          Rupert at 2 weeks old, 2006

Rupert has come a long way since the above photo was taken, and we are all a work in progress!  And we can all keep learning, as long as we live.

Happy 4th of July!!

Did you find yesterday's blog overwhelming?  Did you glaze over and just give up? I think it might have had too much information, so I am going to pare it down a bit here with this:

Spoiler alert:  You do not have to calculate the P/E on any stock yourself. The P/E and industry average for any stock you care to check is clearly posted on a site like Morningstar (and undoubtedly Vanguard, Fidelity and T. Rowe Price, if you have accounts with them). It's in the 'Key Stats' of a stock's quote page is posted right on the quotes page.

 

                                                                                                                                                                   WHAT DID YOU SAY?????

So why the long explanation in the July 3rd post?  Because I like seeing how formulas are calculated. Yes, it is a sickness, but seeing the components of calculations like P/E's just makes me happy. But like Dorothy in the movie version of The Wizard of Oz, you could have gotten home without all the shenanigans. 

Here's the condensed gist of what to remember:

1. The P/E of a stock helps us understand the real value of a company's stock. It can be helpful in seeing whether a stock is over-priced or under-valued. 

2. The P/E is calculated using the company's past earnings over the past 12 years (trailing P/E). Because of this, P/E alone does not show a company's growth potential.

3. A rising stock price results in a higher P/E.  A decreased stock price means a lower P/E.

4. A stock's P/E should only be compared with other stocks in its industry. So its industry average should be looked at to see whether the stock is a possible bargain (lower than industry average P/E) or possibly overpriced (higher than industry average). Think apples to apples comparisons!

5. A stock with a higher than average P/E is usually considered a growth stock.  Growth stocks often reinvest their profits directly into the company so they can grow even more. In some cases, they are simply overpriced-- but they can really pay off as well if they do grow as expected. Because of this, growth stocks have more risk associated with them, but also more potential reward. They are usually more expensive to buy than value stocks. 

6. A stock with a lower than average P/E is usually considered a value stock. These stocks are often less expensive to buy that than others in their industry.  They often pay dividends and are slower to grow than growth stocks. So the risk is lower, but so is the reward. 

Enjoy your day!!

Picking Individual Stocks: Price-to-Earnings Ratio (P/E)

Last week we looked at  Return on Equity (ROE) as one of the many criteria for picking an individual stock. Today we will look at another area to consider before buying any single stock. And brace yourself for more to come after this! This is but one of many articles to come about picking stocks.

Today we'll examine the price-to-earnings (P/E) ratio. Yes, it's another math formula to consider when looking whether or not to buy stock, but no need to panic!  It isn't too complicated. Here it is:

P/E = market value of your stock per share/earnings-per-share over a 12 month period.

(Again, the / means 'divided by.'  I wish I could type an old-fashioned division sign. I am showing my age.)

So what is this?? And why do we care? We care because knowing what this number means helps us understand the real value of a company's stock. It can be helpful in seeing whether a stock is over-priced or under-valued. 

Continuing on, let's look at the equation above and define what it means.

• Market value is the price your stock is trading for each day.
• Earnings-per-share (EPS) is the profit that stock has made over the course of the last year (minus dividends paid) divided by the number of shares held by all its shareholders (AKA 'outstanding stock'). 

There are 3 kinds of P/E ratios:

1. trailing P/E: this is calculated based on data from the past 4 quarters (also typically known as a year). This is calculated from actual data. 
2. rolling P/E: a blend of the past 2 quarters and what the projected estimate of the next 2 quarters will be. Half of this actually happened in real life, the other half is what is projected to happen.
3. forward P/E: this is based on what the next 4 quarters are expected to be. But it hasn't happened yet.

Are you still with me?  

Since I like concrete examples, concrete is what I will illustrate this with for your reading enjoyment. Let's say Rupert has an exchange-traded company that sells raw hides (called Rupert's Rawhides) , and Marley has one that sells treats (called Marley's Meaty Treats). You want to buy one or both of these stocks. Which one do you pick? Knowing the P/E of each stock can help you decide.

First, let's calculate the EPS, or earnings-per-share. Remember, this is expressed like this:

EPS = profit - dividends/outstanding stock

So now let's look at the 2 companies:

Rupert's Rawhides!

                                                                                             This CEO stands behind his tried and true product

Over the past year, my entrepreneurial dog Rupert has made a profit of $100 selling his raw hides. He has paid out $10 in dividends to his stock holders. In all, he has sold 25 shares of stock. Plugging in values for the above equation, we have-- 

1. $100 (profit) - $10 (paid dividends) = $90
2.  $90/25 shares of sold stock=  $3.60 earnings-per-share (EPS) for Rupert's Rawhides

Next, let's look at ---

Marley's Meaty Treats!

                                                         While camera-shy, this CEO knows she has a winning product

Over 12 months, Marley has made a profit of $150 selling her meat treats. She doesn't paid stockholders; rather she takes any profits and reinvests them into her company so it can expand.  In all, Marley has sold  50 shares of stock. So...

1. $150 (profit) - $0.00 (paid dividends) = $150
2. $150/50 shares of sold stock = $3.00 earnings per share (EPS) for Marley's meaty Treats

So although Marley has made more profits and sold more stock, Rupert's earnings-per-share is higher, as $3.60 > $3.00.  But this alone is not enough information for anyone looking to buy stock in either company. You need more information!

Calculating the Price-to-Earnings ratio

So now we can calculate the P/E. Both Rupert and Marley own companies within the same industry, so they can be fairly compared. You wouldn't compare their companies' P/E with that of Microsoft, for example, which is in the software industry. So when shopping for stocks, you compare apples to apples when it comes to P/E, not apples to oranges. Otherwise the information is meaningless.

Let's say Rupert's stock is trading at $50 per share. That is the market value of his stock. So now we need the formula for the P/E:

 P/E = market value per share/earnings per share, 

P/E ratio for Rupert's Rawhides = $50(market value) / $3.60 (earnings per share) =  13.88

Marley's stock is selling at a slightly higher price of $60 per share. So the

P/E on Marley's Meaty Treats = $60 (market value) / $3.00 (earnings per share) = 20.00

So what does the P/E show?  It shows that if you buy Rupert's company, you will be investing $13.88 for every dollar of earnings Rupert's company makes.  Likewise, it shows that you you will be investing $20.00 for every dollar that Marley's company makes. To justify the higher price of Marley's stock, Marley's company is expecting to grow more quickly than Rupert's. There is potentially more money to be made with Marley's stock. And that there is more at stake for you as an investor.

A rising stock price results in a higher P/E. We can expect Marley's stock price to increase more rapidly than Rupert's based on its P/E, but it may simply be over-priced.  With the higher P/E, the hope is that something worth the risk will come along down the road. 

If the price of a stock goes down, the P/E will also lower. Stocks with lower than average P/Es are often value stocks. Stocks with higher P/Es are often growth stocks. 

This means very little without a reference. That reference is relative to the stocks' industry average. Let's say the dog treat industry average's P/E  is 16. Rupert's company's P/E is less than that, so it may be a bargain with a P/E lower than the industry average. It may be a safer stock with less risk on than Marley's.  

Marley's may be the better stock in terms of growth potential, though. If Marley's company starts earning as expected, the investment may pay off in a bigger way than Rupert's over time.  But if her company doesn't grow as she expected, the stock price will most likely fall.  If you bought Marley's Meaty Treats at a higher price, that would be pretty disappointing. (Which is why we buy and hold for the long term.  And don't flip out every time the market fluctuates.)

Whether a P/E is considered high or low boils down to is this:

1. What the industry average is overall.   That means Marley's company maybe looking to more profits with increased efficiency in the future to justify the higher than average price and corresponding P/E. So the reward may be greater, but so is the risk.
2. A company's projected growth rate for the future should be in line with its P/E. This is where we come to part 2, which will be in the the next article: earnings growth comes into play.   Earnings growth is the increase in a company's earnings per share over the course of several years.  

See you next time!

 

New Format

The past few days I have been re-formatting this website. My hope is to make it a bit easier to navigate. That being said, at this point it's a work in progress! 

Please feel free to ask questions using the mail icon on the welcome page or comment below!  

A New Facebook Page for Money Matters!

I am not a huge Facebook fan, but since I am ready to expand my horizons a little, here goes! As of today, Money Matters has its own page.  

You can click on it here:

https://www.facebook.com/investingmadefriendlier

So check it out, and pass it along to any friends you think might be interested.

Picking individual stocks: Return on Equity

There is no perfect stock. I wish there were.  That being said, a few basic concepts need to be suggested for picking a company you like, can live with, and will potentially make money for your future. I will get to picking mutual funds, but decided to go with stocks first.

Today we will look at a couple of ideas in particular, but there are many. So do not assume these are the only criteria on which to base your stock selections.

One aspect to look for right away is, does the company make money? It sounds pretty obvious, but some just don't. The long and the short of that is to find one that does.

The next thing to look at is Return on Equity (ROE).  This looks at how efficient a company is at generating profits.  

What is equity?  Equity is the value of an asset (in this case, your shares of stock) after all its debts have been paid. This is the stock's net worth or book value.

Here's the scary math part (stay with me now!!):   

ROE = net income - dividends/shareholder's equity

Everyone still with me?? The slash means divided by (I am not trying to be condescending, I just am trying to be clear).  So ROE is what the company makes divided by the shareholders' investment. This indicates a corporation's profitability.

Are we all OK?  Take a deep breath, and let's move on. No need to get fussed up over this. You want to look for stocks whose ROE has increased over time. (In general terms; a decreasing ROE may have other factors associated with it, but that's for another day.) That's it. 

How do you do this? You look it up. You can go to Morningstar and find out all sorts of information.  Go to www.morningstar.com/ and let's get started! So please log on!

After arriving on their welcome page, look for their logo in red at the top left. See the little box that says "quote" to the right of their welcome greeting?  Type in AAPL.  That's the ticker for Apple Inc, which we are going to take a closer look at as an example.

After you type in the ticker, click on the stock in the bluish gray drop down box, and let's check it out.

You should land right on the 'quote' page. This will show you the last price the stock sold for, its day range, and other useful information. Now scroll down the page to Key Stats. Second from the bottom is ROE-- that's return on equity! It will show Apple's ROE, plus the industry average (the industry in this case is Consumer Electronics; Apple's sector is Technology) . The 'relative to industry' is shown here.

Now you can either click the tiny word "more" in the Key Stats area, or you can go back up to  "Key Ratios" in the gray bar.  A new page will pop up. Scroll down util you see the heading 'Profitability.' In that listing you should see Return on Equity.  It gives a list for the ratio over the past 10 years.

Apple, like anything else, has had its ups and downs. But overall the numbers have increased substantially over the past 10 years.

Play around with this site. On the main quote page, check out not just the overview, but the company profile and Apple's industry peers.  Look at the dividends, the yield, the projected yield, Apple's grade in growth and profitability.  If you go to 'Chart' in the gray bar, you can see Apple's price change over the past day, month, 3 months, year-to-date (ytd), year, and on up to 10 years. 

Some features on the Morningstar site are free, like this one.  Others will require you to upgrade to their premium analysis.  My hope is to show you the tools that are free and can be of help to you.

So today, return on equity. Next time we'll look at other areas to consider when selecting a stock. 

New today-- want to subscribe? I will send email reminders when I have posted new articles. If you are an original "guinea pig," you will see I had a few technical difficulties in my emailing.  Please delete the first one! (And maybe the 2nd one as well!)

Also if you are an "original," you do NOT need to subscribe below. 

I will eventually figure all this out. As always, I look forward to your questions and comments.

What's in YOUR Investment Portfolio?

When I began to make investment choices for our future in 2006, I must admit I started with mutual funds. Mutual funds are a made up of a group of stocks, bonds, and/or real estate that has been selected by financial managers. These managers get a cut of your return. The hope is that their expertise in choosing what to buy will make paying them worthwhile.

The beauty of a stock mutual fund is that if one stock tanks, hopefully it will be offset by others that are doing well. Mutual funds offer built-in diversification. So do ETFs (exchange traded funds).

When you buy an individual stock, all your money goes to one place. It's the equivalent to having all your eggs in one basket. If you bought Apple 20 years ago, you would be delighted to have all your eggs in that basket! Sadly, however, Apple is not your typical stock.  If only!

(An aside: My unprofessional advice to anyone starting out is this: before you invest in ANYTHING, make sure you have accessible money put away for the unexpected. Having at least 2 months worth of your take home pay set aside in a money market account is a good cushion.  

Can you do that realistically?  Many young people live paycheck to paycheck, not because they want to, but because they have to.  I remember what that is like! If you are in that situation it is especially important that you take advantage of any 401K/retirement savings plans your employer offers. These savings plan offerings are usually an array of mutual funds.)

Back to the topic at hand: what to invest in!  I have done a lot of talking about Disney recently, and as you know we own a very small amount of this as an individual stock. But we also own Disney in our mutual funds. Many people own companies in their portfolios and have no idea what those companies are. 

So who owns Disney?  Probably YOU do, if you have any savings set aside in IRAs, 401Ks, or any other investments. Do you have any funds in Vanguard, Fidelity, T. Rowe Price, Alliance Bernstein, Columbia, ING or Blackrock (just to name a few)?  Chances are you own some shares of Disney. 

This brings me to the idea of social responsibility. Disney repeatedly makes the cut as being a 'socially responsible' company. Other publicly traded businesses deemed socially responsible by several investment firms-- and there are many-- include companies such as Apple, Whole Foods Market, CVS, Starbucks, Cigna, Nordstrom,  Microsoft, Ford, Hershey, Expedia, Google, McDonald's and Loews. 

So what makes a company pass the socially responsible test?? According to WBCSD (World Business Council for Sustainable Development),  

"Corporate Social Responsibility is the continuing commitment by business to contribute to economic development while improving the quality of life of the workforce and their families as well as of the community and society at large."

Hmm...well, there are many definitions out there in addition to this one. For me, a company is socially responsible if they treat their employees and customers well. It is responsible if it obeys the law, including ones that protect the environment. I also view animal welfare as important.

A lot comes down to what you feel comfortable owning.  Perhaps this is a non-issue for you altogether, and that is for you to decide.

Economist Milton Friedman professed that businesses do not have social responsibilities and that "only people can have responsibilities." That being said, in his book Capitalism and Freedom (first published in 1962), he states,

"There is one and only one social responsibility of business-- to use its resources and engage in activities designed to increase profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

I disagree with Mr. Friedman's philosophy that a corporation cannot take responsibility. I do not believe that business's only goal should be to make a profit at any expense. 'The rules of the game' is pretty vague-- what exactly does that mean? The explanation of those rules is also blurry.

It's because of those blurs that rules and regulations have been imposed so that corporations cannot (in theory) hire children to work in sweat shops; they cannot dump pollutants into our streams, rivers, lakes and oceans; they cannot expose employees to hazardous materials without protection; they cannot falsely advertise their products. It's why there's a federal minimum wage law and it's why there are fire regulations. Yes, it is probably easier to run a business without all these pesky rules, but they were set in place to protect people from being exploited.

Because I would like my cake and be able to eat it, too, I believe businesses can make profits ethically. I agree with Kenneth Mason, president of Quaker Oats in the seventies, who said this:

"Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life's purpose, one would hope, is somewhat broader and more challenging. Likewise with business and profit."

If you have been reading this blog, you clearly know I feel that Disney recently made some corporate decisions that are not within the rules of my game.  And I let them know my opinion about that. I'm all for profits, but not at any expense. 

The 'Who Do You Love?' question from a few articles ago should come into play when you make your investment choices. Whatever you choose, you should be able to live with that choice. Personally I do not feel comfortable owning stock in tobacco companies.  Tyson Foods Inc is another company I just can't fall in love with; their past record of animal abuse and cruelty is just not worth the fact that they have a 5 star S&P rating and are considered a strong buy by several analysts.

Yet I am aware that buried deep within at least one or two mutual funds we own, companies such as these may lurk. 

So getting back to choosing between mutual funds and stocks--  begin with looking at mutual funds and/or ETFs before diving into picking individual stocks.  Make a list of individual stock possibilities you like, and screen them carefully.  I will try to get some screening process ideas in upcoming blog entries.   

And take a few minutes to see what companies you have selected within mutual funds, so you have a better sense of what you actually own. This can be done easily online by following the links to a fund's portfolio holdings. I think I will refresh my memory and do the same!

I do swear to God that I am really and truly doing research about making investments. I promise I am investigating ways to pick stocks and mutual funds, and I promise to pass any and all of what I find onto you.  But I must admit the ethical aspects of investing and business do fascinate me. So yes, I am digressing again!

This morning while perusing a few online business articles, I came across this gem from Fortune magazine: "Top CEOs Make More Than 300 Times the Average Worker." This article was written in response to a report from the Economic Policy Institute released on Father's Day.

So of course me being me, I had to check this out. The gist? Adjusted for inflation, over the past 36 years CEOs have seen an increase of almost 1000% in pay, while most of us in the USA saw a pay raise of 11% over the same period of time.

According to this article, back in 1965 the ratio was considerably different than it is today: for every dollar a worker made, the CEOs made $20.

So what's happened over the past half century?

Read more about it at http://fortune.com/2015/06/22/ceo-vs-worker-pay/

Feel free to comment! 

What's Love Got To Do With It?

Well, maybe love-- or at least hope-- has EVERYTHING to do with it. Continuing where I left off yesterday, I have composed a letter to various executives at the Walt Disney Company.  This letter will be sent, and while I don't expect an enthusiastic reply, I do hope it makes a difference.  It certainly will NOT make a difference if I keep it to myself!

Anyway, without further ado, here is my letter:

Dear _______,

 I could not start this letter without first stating that I am a Disney fan of epic proportion. I've lost count of the number of times our family has been to Disney World. It is truly one of my very favorite places on the planet. We went to Disney World after the horror of nearly losing one of our children, and I can honestly say that experience helped in my healing process. My family has always stayed at Disney hotels, eaten in Disney restaurants, and shopped in Disney stores.  I love to be literally immersed in the magic, wonder and charm that is Disney.

While we're not huge investors who may make executives at Disney stand up and take notice, my husband and I do own Disney stock. I was appalled  as a stock holder to hear of the recent firing of 250 data systems workers at Disney World so they could be replaced by immigrants on H-1B visas.  A company that makes movies where villains are portrayed as greedy, boastful, callous, cruel, selfish and arrogant made a decision to 'reorganize' in this way?  This is unethical and hypocritical.

I believe if Disney sells idealism as a hot commodity, its business practices should reflect the same values. Disney asks us to dream, to imagine. All too well I can imagine the horror these tech workers felt upon hearing that not only were they fired, but they had to train their replacements.

The U.S. Department of Labor rules state that, "the hiring of a foreign worker will not adversely affect wages and working conditions of U.S. workers comparably employed." (8 U.S. Code 1182)  Yet business tactics such Disney's have done just that: harmed the wages and working conditions of those 250 workers.  It seems quite obvious that the Indian immigrants were hired to replace existing Disney World workers at a much lower rate of pay. Not only is this unethical as I stated before, but also appears to be illegal.

This is unacceptable for me as a stock holder. It is unacceptable to me that the Disney board of directors granted CEO Robert Iger a 35% increase for his compensation this year to a whopping $46,500,000 while simultaneously firing a group of people who make a drop in the bucket in comparison. This is the kind of business practice that increases the divide between the rich and poor of our nation, and shrinks the middle class even more.

This is the kind of business that crushes the American dream. So much for America spreading her "golden wings" to "sail on freedom's wind," as so movingly sung in EPCOT's American Showcase. When that attraction gets 'refurbished for my future enjoyment', will there be a new segment on how Disney outsources jobs of cast members so the company can exploit foreign workers to save a few bucks? Somehow I doubt it.

Walt Disney himself once said, "You can design and create the most wonderful place in the world. But it takes people to make the dream a reality." For me, this translates into the very people who create the magic-- the people who run the rides, sell the tickets, drive the buses, wear the costumes, program the computers,  and clean the messes in the self-proclaimed 'happiest place on Earth.'  These are the cast members of Disney World. They are the foundation of the parks, they are what makes Disney World run like clockwork and feel like no other place on Earth.

One of Sir Richard Branson's 5 rules for good business is this: "Your employees are your best asset. Happy employees make for happy customers." It would seem Richard Branson knows a thing or two about running a business, as evidenced by his enormous success.  Job security should not be a serious worry for people who do their jobs diligently and well. 

Yet the story of the Disney tech people who suddenly lost their jobs must have caused nothing short of a tremor throughout the entire company.  I don't see it as a morale builder for Disney cast members. I don't see this as a tactic to increase loyalty or productivity. And relative to my own self-interest, I don't see this as a boon to me as a stockholder or future customer planning to spend hard-earned money at Disney World. It's bad for business.

Again-- I am an investor in the Walt Disney Company. I carefully chose the stock and company because I believed it would make money for me. It has lived up to my expectations so far.  But I also picked the stock because I love all that Disney represents. About the Disney Company, Walt himself once said, "Virtue triumphs over wickedness in our fables. Tyrannical bullies are routed or conquered by our good little people, human or animal. Basic morality is always deeply implicit in our screen legends."

Basic morality is in essence the trademark of Mr. Disney's name and the Walt Disney Company: that good overcomes evil, hard work and honesty matter, and daring to dream can really change the world. Yes, it's idealistic. But I am a customer, and this is what I expect from Disney as a company.

I am not at all pleased, and would like to see that the 250 people who were terminated have their jobs offered back to them. 

Sincerely,

Cindy Crowell-Doom

So anyway, there it is. As always, your comments are important! And yes, I will eventually get back to the main point of this blog, which is investing. 

Who Do You Love??

While I am cautious about making single stock recommendations to anyone, I will share what drove me to pick  the select few my husband and I own.  It comes down to the title of a classic rock song by Bo Diddley, entitled "Who Do You Love?"

The "Who Do You Love?" reference was going to be relative to buying stocks: if you understand what a company does and like it, you know what you're buying. An educated consumer is better off. Right? This is nothing more than opinion, but enthusiasm goes a long way. I was going to use an example of a purchase I have done pretty well with overall. Certainly liking what we own encourages me to 'hold' for the long term, which is one of my objectives.

Which brings me one of my favorite picks-- Walt Disney (DIS). If you know me, you know I LOVE Disney World. Some might even say I am somewhat obsessed! And let me clarify: those people would be right! I have a Disney-themed powder room in my home,  "Under the Sea" plays on my iPod, and we have a so-called 'Mickey Jar' that all our spare change gets poured into to go toward future Disney World trips. No joke. I've lost count of the number of times we have been to WDW. We always stay at Disney hotels, eat in Disney restaurants, and shop in Disney stores.  I love to be literally immersed in the magic, wonder and charm that is Disney.

And the stock?? Bear in mind I am not here to sell it, and it is at a record high so tread lightly and do your homework before buying ANYTHING!! That's not what this is about, but read on:  Disney is one of the 30 stocks that make up the Dow Jones Industrial Average Index. Its stock pays about a 1% yield, not huge but not too shabby, either. Cash dividends are at $1.15 per share. Stock analysts consider Disney a 'buy.'  In the 2015 2nd-yearly-quarter estimates of earnings-per-share, Disney beat its projected goal by close to 10%. The Thomson-Reuters Detailed Stock Report gives Disney a score of 9 out of 10, placing it within the top 15% of stocks they have scored. Their S&P star rating is 4 out of 5 stars. The stock has a fairly low price-to-earnings (P/E) ratio, making it a halfway decent deal. It's a well run company-- it makes money and that is, after all, the goal of pretty much every corporation. And every investor.

All this points to a solid company with potential to make even more money! As a shareholder I have been delighted!  Zip-a-dee-doo-dah!!

To clarify, we own a very small quantity of Disney as an individual stock (and undoubtedly have more hidden away in various mutual funds in IRAs and 401Ks; if you have mutual funds you own it too, most likely). But my enchantment with Disney as a company took a big hit last week. While we're not investors who exactly make CEOs stand up and take notice, I still have a few opinions to share about some of Disney's business practices. The ones I am appalled by as an American.

Those business practices come down to one very important element: the people who work for Disney, and in this particular case, those who work for Disney World (the self-proclaimed happiest place on Earth!).  Disney World is run exceptionally well-- everything is pretty much perfect from gardens to rest rooms. The employees of Disney World are the very people who create magic for people like me-- visitors who want to escape the real world for a few days.

These 'cast members' run the show: they're the people who hear the theme of "It's a Small World" over and over and OVER again for hours while loading boatloads of sweaty tourists for a mini-cruise, who swelter in heavy full-body and head covering costumes on 90 degree days, who scrape gobs of spit-out bubble gum from the parks' pavement continuously, who answer inane questions all day about how Fast Passes work, who scoop the rhino poop at Animal Kingdom, and who-- oh yes-- manage the data systems for the whole shebang.

On June 3rd, 2015 the NY Times printed an article highlighting what I view as an ethical scandal. They reported that in October 2014, around 250 employees of WDW who managed the data systems were handed pink slips and told their jobs were going to be given to Indian immigrants holding temporary H-1B visas. To add to this, these same employees losing their jobs were asked to train their replacements until their final day of work in January 2015. Talk about going from depressing to just plain humiliating. I also cannot fathom what it must have been like for the Indian immigrants, knowing what their presence meant to their 'mentors'.

Seriously??  A company that makes movies where villains are often portrayed as greedy, boastful, callous, cruel, selfish and arrogant actually made a decision to 'reorganize' in this way?  Isn't that kind of--  well, hypocritical?? I may be naive, but if you sell idealism as a hot commodity, maybe you should be ready to conduct business by the same standard.

To clarify, this isn't a only Disney issue. If you look at the companies who most hire H-1B workers, Disney is not even remotely a contender for this type of practice. They just happen to be a company I love, so I feel like I've been smacked in the face. Companies Tata Consultancy Services and Infosys Technologies led the way hiring H-1B recipients in 2013. This has become the acceptable way business is conducted in America. If we just all turn and look the other way, maybe it won't really matter. Until our own job is eliminated.

Associate Professor of Public Policy Ronil Hira of Howard University testified before the Judiciary Committee of the U.S. Senate in March 2015 about bringing workers with temporary visas into the US from other countries. How this practice affects  American workers isn't pretty. These workers are mostly brought in for one reason and one reason only: to cut corporate costs.

So in the situations where a company can cut costs to increase profits, not only do many qualified American get displaced from their jobs, but the people coming here to work are not getting full compensation. They're exploited. The employers of these workers holds the visa, not the employee. Overall, only 2% of these immigrant workers are granted green cards. These workers are used simply to outsource jobs rather than help them become US citizens. A typical tech worker in India makes $6,000 a year, which makes even a substantially cut American salary look really good. There are all kinds of loop-holes for getting around the law that requires people with H-1B visas to be paid the 'prevailing wage' for their jobs. In his testimony Dr. Hira states, "Simply put, the H-1B program has become a cheap labor program."

This is a big deal for American workers. To quote Professor Hira's report, "The scale of this damage is large and its effects long lasting, adversely impacting: the careers of hundreds of thousands of American workers; future generations of students; and, America's future capacity to innovate." It increases the divide between the rich and poor in our nation, and shrinks the middle class even more. So much for America spreading her "golden wings" to "sail on freedom's wind," as so movingly sung in EPCOT's American Showcase.

Again, Disney is a mere drop in the bucket in the number of American companies who do this kind of business. According to Professor Hira, often times the only way anyone finds out about these wide-spread business practices is through whistle-blowers. But most of the time the whistle-blowers are retaliated against by their employers, so they are reluctant to come forward.

In the case of the Disney workers who were fired, they agreed to be interviewed by the NY Times only if they could remain anonymous. The fear of not being able to find a job in their field is so intense that they will not directly say anything unflattering about Disney.

We all shudder when we hear movie characters like 1987's Wall Street's Gordon Gekko make statements like, "Greed, for lack of a better word, is good."  It sounds so smarmy when uttered by fictional evil villains who will do anything to accomplish their goals. Yet reality is, often times greed does drive businesses to make money. Greed builds the equity in our retirement portfolios, even if we are unaware of some unethical practices being used by the companies that comprise our investments.  We want our savings to make us money, we want businesses to succeed. So where do we as capitalist society draw the line?

We draw the line by following the letter of the law which already exists!! In Dr. Hira's testimony to the Senate, he reports that the law for hiring foreign workers is perfectly clear: that it will not harm American workers.  The U.S. Department of Labor rules state that, "the hiring of a foreign worker will not adversely affect wages and working conditions of U.S. workers comparably employed." (8 U.S. Code 1182)  Dr. Hira goes on to state that approximately 120,000 new foreign workers are admitted annually, but not for their "unique or specialized skills" (meaning there are no Americans to do their job here in the USA) as the law clearly states. They are hired to replace American workers at a much lower rate of pay.

In response to the NY Times article and the subsequent negative publicity, a Disney spokesperson argued that Disney has "created almost 30,000 new jobs in the U.S.  over the past decade."  My response to that is, so what?  While that's truly wonderful, it doesn't erase the fact that 250 workers were fired for the simple reason that the company could get the same job done for a whole lot less money.  Kind of like how the evil step-mother could get Cinderella to do all the cleaning and grunt work for nothing, while she and her daughters lived high on the hog. Yuck. It also doesn't erase the fact that those 30,000 people can be replaced at any time by some desperate souls willing to travel halfway around the globe if Disney decides to save a few bucks.

Ironically, Good Morning America featured a story about the business practices of billionaire Sir Richard Branson, founder of Virgin Group on the morning of June 11, 2015. I say ironically because ABC-- the network from which GMA is broadcast, is owned by the Walt Disney Company. The report explained Branson's business approach with his employees, which is to create a work atmosphere where people know they are a valued part of a business team. One example of this is that he offers generous maternity and paternity leave for new parents. The gist of the news article was that happy employees are productive employees. Loyalty to the company they work for has been shown to increase productivity. This seemed to be of great interest of the GMA reporters.

And why shouldn't it be-- they know the very company they work for recently fired loyal employees for no other reason than to save a relatively small amount of money. The story of the Disney tech people who suddenly lost their jobs must have caused nothing short of a tremor throughout the entire company.  Job security must be a serious worry for these people.  I don't see this business model as a morale builder for Disney cast members. I don't see this as a tactic to increase loyalty or productivity. And in perfectly selfish terms, I don't see this as a boon to me as a stockholder or future customer planning to spend hard-earned money at Disney World. It's bad for business.

The question still remains: who do I love??  Do I still love Disney? The short answer is yes. Without a doubt. I am not in love with some of their business practices. While I don't want to throw out the baby with the bath water, I do want the magic-creating cast members to matter to the company I love. I want the whole idealized Disney dream to be true and not just an illusion, sappy as it sounds. One of Richard Branson's 5 rules for good business is this: "Your employees are your best asset. Happy employees make for happy customers." Executives of Disney, take note. We all know what happens to Disney villains. And at the moment, you have a grumpy customer here.

Spring 2015

Well, it's been forever since I've written anything on this blog, and it's time to start up again.  It's now April and I'm more than a little behind.  I am not behind, however, in following how my investments are doing. They seem to be on a bit of a roller coaster.

So far 2015 has had many ups and downs in the stock market.  As I am writing today, the market is way, WAY down.  Like around 1% on the S&P 500 in just one day. Why?  Greece is having continuing financial problems. The Chinese regulatory commission is frowning on borrowing to bet on the stock market.  (Imagine that!) Here in the USA, there is a growing concern about inflation.  And maybe Kim Kardashian dyed her hair another color.  

Personally sometimes it seems to me that just the wind blowing the right ( or the wrong) way can influence the way the market moves. Overall the S&P is up 1.12% for 2015.  Not  exactly an awe-inspiring amount 3 and half months into the year, but as I have written before, I'm in it for the long haul.

Recently Uncle Bob and I were discussing how to pick stocks.  It isn't easy and there are many schools of thought.  I think knowing a few basic concepts is the best way to make a decision for the long haul.  But there are A LOT of concepts involved, and as much as I wish anyone held a crystal ball for selections,  well that just isn't the case.

So my next article will have one of these classic song titles:

• A : Take the Money and Run
• B:  Let It Be
• C:  Who Do You Love
• D:  You Can't Always Get What You Want

Silly, I know.  I hope to get this next article done before Lewis and I go on vacation, but if I don't , I WILL be back!!

Reader Question: Part 2 →

So here's the final part of the question from my reader (see yesterday's blog post):

The money (in a stock) is not really yours and you can’t treat it as a constant because the market can change at any time, so what can you use your invested money for?

Pretty much everything we own can fluctuate in value.  Owning stock in Microsoft (and all our investments in general) has certainly done that over time, to be sure.  But the shares in the company ARE in fact ours.  No, we can't physically touch the shares, they have not been converted to cash, and I don't carry them around with me (no Microsoft earrings, for example).  And yes, the market does change on a daily basis, depending what in the World is going on!! 

Change is pretty much the nature of the universe, I'd say. But before this gets too deep, let's look at a few basic concepts.

How do I look?

Money in investments-- stocks, bonds, mutual funds and ETFs-- are part of your net worth.  Your net worth can be estimated to show how you are doing financially. Stocks, bonds, mutual funds and ETFs are all assets that are part of your net worth.

Assets are what you own outright. Other assets are things such as a home you may own, other real estate properties or rentals that you may own, your 'stuff' in general, like cars, jewelry & furniture, and art & collectibles.

The things I'll wear for treats...

Net worth is calculated by subtracting your liabilities (what you owe other people: money on loans for things like college, cars, home mortgages, & credit cards) from your assets.

Positive net worth means you own more than you owe.  Negative net worth means you owe more than you own.

So why do these ideas matter if you are not selling your assets?  It matters for the long haul, in that you have a nest egg for some future use of your investment assets. Having money for a rainy day, a big life event like a wedding, furthering  your own or your kids' education, or putting down a deposit on a home is a beautiful thing!  If you buy a stock and its price goes up, you do not pay taxes on that stock until you sell it. 

It also matters because you can use your assets (investments) as collateral for borrowing money.

Collateral is essentially an asset that you can promise to a lender (such as a bank) as a form of insurance for repayment on a loan.  Banks lend to people they feel are a safe bet for repayment. The agreement would be that you would give up your collateral to the lender (in this case, we're talking about your stocks) if you don't pay back the loan. 

Banks can make what are called security-based loans to people with eligible securities as collateral (those stocks, bonds, mutual funds and ETFs we've talked about).  This may be useful for  people with solid assets so that they can borrow money without having to sell their stocks, bonds, mutual funds or ETFs.

Circumstances where you may want to borrow money would include buying a car, a home, or borrowing for education.

As long as we don't have to wear these on our walk, it's fine.

Of course you may choose to sell your stock rather than get a loan.  But if your stock is doing nicely,  you may do better getting a loan if you need one than dipping into your investment portfolio.  Your investment returns may be higher than the interest rate you get charged by a bank for your loan.  Also, you will pay taxes on any capital gains (the money you make on your investment when you sell) where the interest on many loans is actually tax-deductible.

I hope these 2 articles answer my reader's questions!!  As always, the topics I write about lead to more questions about investing.  Have a good remainder of the weekend, everyone!