Tag Archives: personal finance

Financial Independence 101: How to Manage your Portfolio

This is a continuation of my Financial Independence blog posts related to financial education. I’m creating the blogs so that our two sons that will be graduating college soon will have a better understanding of personal finance and portfolio management.

Should you Manage your Own Portfolio?

As you begin saving and investing, your total investments will begin to accumulate and compound. This is great, that’s going to build your wealth. When you reach a certain status (maybe it’s after you have $100k invested or maybe even $1m), you will probably begin getting calls from Certified Financial Planners wanting to manage your portfolio.

Is it wise to have them manage it? First, I would like to say that Certified Financial Planners have an incredible amount of knowledge and can be very helpful if you are struggling with specific strategies. Same goes for CPAs. If you can hire them when you need them (for an hourly fee), I would agree that it’s a good idea.

However, most will want to manage your portfolio on a monthly basis and will charge about 1% of your portfolio value for doing this. If your portfolio is worth $1m, it may cost you about $10,000 per year for this service. If you had invested that $10,000 per year for 30 years, you would have given up over $1.2m in gain:

Portfolio - $10,000 per year invested for 30 years

That could be a million dollar mistake. Think about it, who’s got your best financial interests in mind? You or someone else? My guess is you. You work so hard to accumulate the wealth, you should want to know everything you can about personal finance so that you can protect your nest egg.

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How to Manage your Portfolio

Managing your own portfolio is not difficult if you keep it simple. Here are 3 steps that may help.

Step 1 – Invest only in Low-Cost Index Funds

Index funds will diversify your investments with great risk protection. The returns will follow the S&P 500 and it normally produces about 7.5% – 8% per year on average. Open up a Fidelity account and begin contributing money to a few mutual funds. For diversification, I suggest these 4 mutual funds to invest equal amounts in:

  • FUSVX – Invests in S&P 500 stocks (invest 34% here)
  • FSEVX – invests in smaller yet stable companies (invest 33% here)
  • FSIVX – Invests in international stocks, like those in Europe (invest 33% here)

** Note: I have no affiliation with Fidelity nor do I get any compensation, I am just more familiar with their services than other investment companies so that is why I recommend them in this article. You can find similar Vanguard investments.

Step 2 – Add a Bond Fund when you are 5 Years from Retirement

Once you approach retirement age, it will be good to have a bond fund because it will protect your portfolio in years when stocks are not performing well.  Generally, when the economy is booming, stocks do well and bonds produce almost nothing. However, when the economy is in the tank, stock prices fall and bonds do well.

Once you retire, you will need to cash in money to live on, so by having a bond fund, you draw your retirement money from there if the economy is not doing well. When the economy is doing well, you can draw from your stock funds.

So once you are 5 years from retiring, rebalance your portfolio with these allocations:

  • FUSVX – Invests in S&P 500 stocks (invest 25% here)
  • FSEVX – invests in smaller yet stable companies (invest 25% here)
  • FSIVX – Invests in international stocks, like those in Europe (invest 25% here)
  • FSITX – Invests in bonds (invest 25% here)

Step 3 – Rebalance Yearly

As the earnings in your portfolio grow, some of the funds will outperform others. Since you will be reinvesting dividends, you may find at the end of the year that you have more money in one of the funds than others. So it’s a good idea to rebalance your portfolio yearly.

Let’s imagine that at the end of the year you find that FUSVX makes up 30% of your portfolio, FSEVS makes up 20% of your portfolio and FSIVX and FSITX each makes up 25%. In this case, you would simply sell 5% of FUSVX and purchase 5% more of FSEVS, then your portfolio will be balanced once again.

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Read this Financial Book

If you are serious about managing your own finances, I suggest you read a book called “How to Retire Early“. It is written by a friend (Bob Charlton) and in the book he discusses how he and his wife retired at 43 years old. Neither had incredible salaries, they just saved and invested.

The book gives a transparent look into how much they invested each year, what they invested in (they used Vanguard funds similar to the Fidelity funds I suggested above), and how they now manage their portfolio.

More info on the book: http://www.amazon.com/How-To-Retire-Early-Retiring/dp/1482653729

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

What do you think of these financial independence training articles? Leave me a comment to let me know your thoughts!

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** DISCLAIMER ** Financial Information presented on this blog is intended for informational purposes only and is not meant to be taken as financial advice. While all attempts are made to present accurate information, it may not be appropriate for your specific circumstances and information may become outdated over time. Before investing, do your research and seek professional advice.

Financial Independence 101: What are Stock Dividends and Stock Splits?

This is a continuation of my Financial Independence blog posts related to financial education. I’m creating the blogs so that our two sons that will be graduating college soon will have a better understanding of personal finance.

What are Stock Dividends?

Profit is the amount of money a business has left over after paying all its expenses (revenue – expenses). The goal of most businesses is to make a profit because it adds value to the business and allows it to grow.

Stock dividends and stock splits

So what happens if a business makes a profit? They can take that profit and reinvest some of it back into the business to allow them to build better products and services. But many times, there is still money left over after that. When this happens, the business will normally give part of that money back to those who invested in their stock. This is done with a dividend.

Not all companies pay dividends, especially startups. They normally want to keep all of the profits to reinvest into growth. But well-established companies will often pay dividends.

When looking at your investments, you must look at stock appreciation and dividends to calculate the total return on investment.  For example, if you purchase stock A for $100 per share and stock B for $100 per share and both grow to $125 per share after the first year, your return on investment is 25% on each. However, if stock A also paid a 5% dividend, your return on stock A is actually 30%, so it is a better performing stock for you.

Dividend paying stocks (or mutual funds) can be great investments once you retire because they normally pay those dividends quarterly. When they pay the dividends, you can spend that money on retirement expenses.

What are Stock Splits?

When companies grow and are more profitable, the price of their stock tends to rise. Once the stock price rises over a certain price (normally around $150 per share), companies look for ways to reduce the stock price so that smaller investors can purchase shares. This is accomplished with a stock split.

Stock splits

With a stock split, the company will cut the price of their stock but will give their stockholders more shares. For example, if a company’s stock is $200 per share, they may cut the price to $100 per share but give all their existing shareholders twice the number of shares that they had before. This is called a 2 for 1 stock split. They can also split it by any denomination. In the previous example, they could have done a 4 for 1 split, reducing the cost to $50 per share but giving each stockholder 4 times the number of shares than they had before the stock split.

Conclusion

Now that you have an understanding of stock dividends and stock splits, let’s get to the bottom line. Once you start your career, set aside money for savings and have that money automatically deducted from your paycheck. Start with 15% of your paycheck, more if you can swing it.

Open up a Fidelity account and begin contributing money to a few mutual funds. If you want to really diversify, I suggest these 4 funds to invest equal amounts in:

  • FUSVX – A mutual fund that invests in S&P 500 stocks
  • FSEVX – A mutual fund that invests in small and mid cap stocks
  • FSITX – A bond fund that invests in credit-worthy bonds (note: if you are young and have 30 or more years before you retire, you may consider delaying the purchase of bonds for a while since you will not care as much about market fluctuations).
  • FSIVX – A mutual fund that invests in international stocks (like those in Europe).

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Finally, track your budget and investments with an online tool. Personal Capital is an excellent tool for this and best of all, it’s free**. This is a great start to financial independence!

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence, and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

What do you think of these financial independence training articles? Leave me a comment to let me know your thoughts!

Follow me: Twitter  |  Facebook  |  LinkedIn  |  Subscribe to this Blog

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What are bonds

Financial Independence 101: What are Bonds?

This is a continuation of my Financial Independence blog posts related to financial education. I’m creating the blogs so that our two sons that will be graduating college soon will have a better understanding of personal finance.

Financial Independence 101: What are Bonds?

Investors tend to talk about buying and selling stocks and bonds. But what is a bond?

Bonds are simply a loan or an IOU, but you serve as the bank. 

Stocks and bonds are the primary ways companies raise money to grow their business. As discussed in our last blog post, when you purchase stock, you are purchasing ownership in the company. When you purchase bonds, you are lending money to the company and receive interest payments on that investment.

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Bonds have a fixed term (called a maturity date), normally 5 to 20 years but companies that issue bonds may “call them” (purchase them back) prior to maturity.

Related Post: Financial Independence 101: What are Stocks?

Who Issues Bonds?

Both companies and the government issue bonds to finance projects. Municipal bonds are issued by city and state governments. The US government issues Savings Bonds, Treasury securities, T-Bills and Treasury Bonds.

Why buy Bonds?

Buying bonds is a defensive play when you are building a balanced portfolio. Generally, the value of a bond rises when interest rates fall and fall when interest rates rise. So normally if the stock market starts to tank, your bond values will rise, protecting you from the ups and downs of the stock market.

When the stock market tanked in August of 2015, the value of my stock index mutual funds tanked but my bond index funds did well. This was my protection. Because we are retired, I draw money from our retirement portfolio every so often to pay for our living expenses. Since our stock funds were down, I could cash in some of our bond funds if I needed cash, and we would not lose money from the stocks that were in decline at the moment.

How do you purchase bonds?

Bonds are sold through brokerage accounts (Fidelity, Vanguard or some other financial institution).  You can also purchase government bonds directly from the US Treasury at TreasuryDirect, but I recommend having an investment account (like Fidelity). Once you have an account, you can buy and sell stock and bonds online. This account will become your portal to financial independence.

Is it risky to purchase bonds?

Bonds are much less risky than stocks but do not normally produce as high of a return. Again, it is your defensive play for when the stock market is in decline. One of the drawbacks of investing in bonds is that they have a set maturity date, so you cannot sell them at will.

Bond mutual funds solve this issue. A bond mutual fund is a collection of bonds (normally hundreds of bonds) that allow you to buy or sell at any time. The mutual fund is managed by a company and you pay a small fee to the mutual fund management company for having them manage it. The amount you pay is called the expense ratio, so look for mutual funds with low expense ratios (I look for those with an expense ratio of .15% or less).

Conclusion

Now that you have an understanding of bonds and financial freedom, let’s get to the bottom line. Once you start your career, set aside money for savings and have that money automatically deducted from your paycheck. Start with 15% of your paycheck, more if you can swing it.

Open up a Fidelity account and begin contributing money to a few mutual funds. If you want to really diversify, I suggest these 4 mutual funds to invest equal amounts in:

  • FUSVX – Invests in S&P 500 stocks
  • FSEVX – invests in smaller yet stable companies
  • FSITX – Invests in bonds (note: if you are young and have 30 or more years before you retire, you may consider delaying the purchase of bonds for a while since you will not care as much about market fluctuations).
  • FSIVX – Invests in international stocks (like those in Europe).

Finally, track your budget and investments with an online tool. Personal Capital is an excellent tool for this and best of all, it’s free**. This is a great start to financial independence!

** Note: I have no affiliation with Fidelity nor do I get any compensation, I am just more familiar with their services than other investment companies so that is why I recommend them in this article. I am an affiliate for Personal Capital, it is a totally free and superior way to keep watch over your investments. I would never recommend anything that I don’t personally use and completely believe in, so give it a try.

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about lifestyle freedom, financial independence and technology. If you like this blog, subscribe here to get an email each time he posts.

If you like this post, you might also like these prior posts:

What do you think of these financial independence training articles? Leave me a comment to let me know your thoughts!

Follow me: Twitter  |  Facebook  |  LinkedIn  |  Subscribe to this Blog