New Year's Resolution #2: Analyze Some Good Companies

One company we all use regularly is United Parcel Service or UPS. Whether we're shipping products for our business, sending gifts, or doing a little online shopping, UPS is part of our lives. Is it a good company? Let's see what the sales/revenue was for the most recent period. Hmm: a little over $53 billion for the year. How much of that did they keep as a net profit? $3.8 billion. As you can see, package delivery/logistics is not a high-margin business, which is why it's intriguing that UPS has a net profit margin (the percentage of each dollar of sales the company  keeps) that is 35% higher than their rival, FedEx. Okay, but maybe they just had a good year--a lot of sports teams win the World Series and then disappear. Is that what's going on here? Actually, no. UPS has made profits over the last several years of $496 million, $655 million, $1.968 billion, $3.338 billion, and $3.8 billion. Notice a pattern there? Will that pattern continue? Nobody knows, but it is encouraging. This is not an industry subject to outsourcing or foreign competition--if you need a package delivered in Ottumwa, Iowa, no one in China can take it there for you, right? There are only a couple of players in this industry, and UPS has the biggest fleet, and makes the best profit margins.
Is there anything that would prevent you from owning a little piece of this company's profits? Only if you feel that package delivery will decline as an industry over the next 10 years, which seems unlikely to the point of absurd. As internet commerce becomes more and more acceptable, UPS will deliver more and more packages. It's really that simple. Or, if you feel the stock is trading at too rich a price, you should always hesitate to buy. In this case, UPS trades at 22 times the earnings-per-share. That is not cheap. Then again, we saw how the earnings/profits have grown steadily over the past five years--if they continue to grow at that rate, imagine how high the stock price could be at that point!
Or not. It's always a risk to buy a share of a public company. That's why you should never buy any stock without knowing what the company does, who it competes with, what the industry is like, and what the sales and profits look like. Doesn't take a finance degree to do that--just takes a little time, and a little gumption.Learn to Invest in Your Future

New Year's Resolution #1: Pick Some Good Companies

Okay, nobody's saying you have to do something crazy like purchase shares of stock.
Yet.
Our New Year's Resolution #1 is simply to start identifying up to 5 great COMPANIES. What kind of companies? The kind you already use on a regular basis. What are five great brand names in your opinion? Starbucks? Krispy Kreme? Apple? Microsoft? Ford? McDonald's? What about a couple of drug companies--do you think Pfizer, Merck, Abbot Labs, or Johnson and Johnson are companies whose sales and profits are likely to grow over the next 10 or 20 years?
We'll wait on introducing you to the 10K/annual report. For now, just start looking around and noticing the great companies that you use--which ones would you like to own a piece of? Write them down, and after the company name, list the stock symbol, and two or three reasons why this company impresses you more than the competition. Get the E-book now

End of the Year

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So, did you maximize your Traditional IRA or Roth IRA for 2012 yet? While you COULD wait as long as next April 15th to do so, at that point most of us will still be paying off the ridiculous overspend on "the holidays." Instead, why not maximize your $5,000 or $6,000 contribution now before you run up a similar amount on your cornucopia of credit cards? If you're 50 or older, make it $6,000. If you can't do the $5,000 or $6,000, contribute what you can. If your spouse doesn't work, you can even maximize his or her IRA contribution for 2012.

Not sure about you, but I don't remember who gave me what last year--I can afford all the sweaters, ties, and books my heart desires at this point. On the other hand, watching my IRA accounts grow over time . . . now that is a gift that keeps on giving.

Fixed and Indexed Annuities

A fixed annuity is a product sold by an insurance company that takes an investor's purchase payments and promises a minimum rate of return on the money. Many individuals opt for monthly payouts that last for the rest of their life, no matter how long they end up living. So, if you like the idea of receiving a promised monthly check backed up by a strong insurance company, you might like a fixed annuity. The rate of return is not high, but if you end up living 10 years longer than you ever dreamed, these guaranteed payments will sure come in handy.
Some people want to experience some of the upside of the stock market and, therefore, they buy equity indexed annuities. These products are a little complicated. First, the individual is credited with some of the upside on the S&P 500--if there is a 70% participation rate, he only sees a 7% increase if the S&P 500 moves up 10%. And, there is usually a cap placed on the how much the contract can go up in any given year, period. So, if the S&P 500 goes up 30% one year, the contract would not go up 21% but would , instead, be capped at maybe 10% no matter what happens. The indexed annuity looks better after a bear market for stocks--here's an insurance company promising to give the investor a return on his money and a return of his money. For a safe-money investment that will protect you against outliving your retirement savings, investigate fixed and indexed annuities. LearnHowToInvest

Should I Use a Traditional IRA or Roth IRA?

IRA? Golf clubs?

So, do you want a tax break now or a tax break when you retire? With a Traditional IRA you can often deduct what you put in each year. If your income was going to be $50,000, you could put $5,000 into the Traditional IRA account, and then your taxable income would drop to $45,000. The $5,000 would grow (we hope) over time without being taxed until you withdraw funds in retirement. As your investments earn interest, dividends, and capital gains, you can reinvest that money into more mutual funds, stocks, or bonds to earn compounded returns. On the other hand, if you make around $50,000, you might want to put $5,000 into your Roth IRA. This way, your taxable income is still going to be $50,000 now, but in retirement all the money coming out of your Roth IRA is tax-free. Big difference, right? If you withdraw $60,000 in retirement from your Traditional IRA, you might only keep $45,000 or less of that after taxes are figured in. In the Roth, on the other hand, if you withdraw $60,000, you keep $60,000. Remember, for the Traditional IRA you must begin withdrawals at age 70 1/2, while in the Roth, there is no such rule. Also, no more contributions are allowed into a Traditional IRA after age 70 1/2, while contributions can continue into a Roth IRA indefinitely, as long as you have earned income.Earned income is what it sounds like--you have to earn it by working, not by collecting bond interest, dividends, capital gains, or rental payments on your investment properties. If you want to keep funding your Roth IRA at, say, age 77, you'll probably need a part-time job. If the maximum contribution is $7,000 at that point, you'll need to make $7,000 or more if you want to max out your contribution. Then again, how much tax-deferral do you need at age 77? Remember, you will have to make withdrawals from your Traditional IRA at age 70 1/2. And, even if it is a Roth IRA, that money is there to pay your living expenses in retirement. Caveat: if your income is too high, you can't fund a Roth IRA. If you participate in an employer-sponsored plan, say a 401K, and you start making around $70,000 or more, you won't be able to deduct your contributions to a Traditional IRA. At that point, you'd probably be advised by your CPA to put money into your Roth IRA. But, I just try to teach the basics to help the average investor make sense of all the terminology involved with retirement savings. Always check out tax issues with your CPA. And, if you're a professional, you know that many, many details have been omitted from this overview. Any time we drill down into all the details of these accounts, we end up with hundreds of pages no one wants to read other than CPAs, CFPs, and tax attorneys. Get the E-Book Now

Broker Check

Are you working with a "stock broker"? Maybe he calls himself a "financial advisor" or a "registered representative." Whatever the case, have you checked to see if he has any disciplinary problems or has had to pay out awards to clients who convinced the arbitrators that he mishandled their accounts?

FINRA is the securities industry regulator, and they are quite happy to provide you with such information at www.FINRA.org . . . look for "BrokerCheck" and then type in the name of your broker and/or his particular firm. You'll see his employment history, which exams he has passed, and you'll see if there are any disciplinary events to disclose. If so, read them. If not, chances are you're working with someone who--at least so far--has kept himself out of hot water. Get the E-Book Now

Protect Your Income

Individuals and families face many financial risks. Obviously, our homes and automobiles are insured both in terms of damage to our property and liability for any damage we might cause to property or other people. Many consumers are so caught up in consuming that beyond home and auto insurance, the rest is considered a luxury, but with so many Americans living paycheck to paycheck, the question each of us really has to face is this: how long could I go if I got sick/injured and could no longer work? One month? Three months? A year? For most people, one month would put them on the edge of disaster, and within three months the house would be in foreclosure, with bankruptcy right up ahead. One in four of us will get sick/injured and be unable to work for an extended period, yet almost none of us has insured against this loss of income. Disability insurance--if you don't have it, google it. See what it's about. That crazy duck in the commercials isn't quacking about nothing, people. Frankly, I couldn't sleep (let alone ride a bicycle in traffic) without knowing how much monthly income I would receive should the unthinkable happen to me. I would have to cut back a bit on spending, but I could get by to age 65 on the disability insurance policy. Let's just hope I never have to find out for sure. Insurance is for peace of mind. You gotta have it; you never actually want to use the protection, obviously.
Many Americans are convinced they will never get sick or injured--even though we aren't looking as svelt as we used to as a nation, are we--and even more, apparently, are convinced they won't die earlier than expected. Really--you didn't lose any classmates in high school, college, in your 30's, in the past few months if you're over 50? Let's get real. If most Americans are already living paycheck to paycheck, what happens if the breadwinner dies at age 42? Does he have life insurance? If not . . . how long before the widow loses the house, struggles to find a job, and declares bankruptcy? Life insurance--if you don't have it, google it. Just type in the question, "why do I need life insurance?" or "what types of life insurance policies are available?" Insurance isn't exciting. It isn't anywhere near as fun as watching a stock double in value over time, but you really can't invest your money until you've first protected against a loss of income due to disability or death. Get the E-book Now