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Directionless Investing

October 28th, 2013 at 05:47 pm

My income has been steady over the past few months, so I have concentrated my efforts on funding my Roth IRA account. My goal is to fully fund the account for the 2013 tax year. I've been working toward that goal to the detriment of paying off my credit cards and building an emergency fund. I have no emergency fund. I feel that I will never get this year back to build up a Roth IRA, so I have to start using my retirement building years productively. In this case, I have to start using them because I have neglected to do so for so long.

So far, I have contributed $1170 in my Roth. I calculated that I can contribute $170 a week minimum to make it to April 15, 2014 for the 2013 tax year. I've actually been contributing more than that $170 threshold in the event that I have a period of unemployment.

I really don't have specific plans for investing. At first, I started putting my money in a S&P 500 Index fund with low fees. In addition to this IRA, I have $8,000 from an old pension and 401K in a rollover account. These investments are in mutual funds. Since the bulk of my small estate is in mutual funds, I decided to dabble in stocks.

I feel that I have a good grasp of financial analysis. I did a lot of work in securities litigation so I'm familiar with the concept of securitization. However buying stock as a small potato investor is difficult. For one thing, I don't really have a lot of money to invest up front, so I buy a few stocks at a time. Plus I am with E-Trade and the commission is $9.99 a transaction for stocks. At the time I created my Roth IRA, I did not think that I would want to buy and sell stocks. At this point, I really don't want to change accounts because I already have my money with them and it's easier to keep track of contributions if you have one account.

I'm not even sure if I should buy stock since I buy stock a little at a time and right now, with the commission costs and market "losses", my stocks are worth "less" than my contribution. My thought is that perhaps mutual funds and stocks are really not great investments for retirement. They can gain a lot of traction, but they also can "lose" as well. I even wonder if my "losses" are really losses. The stock market is so speculative and stock prices increase/decrease on the whims of the buyers and sellers. I guess if a lot of people want to buy a stock, it may say something about a company's value. But is that really the case?

I purchased shared in three companies: Nokia, Ford and Coty. I needed a new cell phone and got so excited when I saw the Lumia at Verizon. I did not buy the Lumia because Verizon wants to phase out the unlimited data plans so I had to buy a phone full price on the market and have them hook it up. I went with an LG Intuition that cost significantly less from an Ebay seller (plus I got it brand new) than the Lumia would have cost from Verizon. However I was sufficiently impressed that I thought that maybe I should get stock in that company because the phone was so sharp. The price was affordable and I bought a few shares. With my next contribution, I wanted to buy more shares of Nokia. I really like the phone that much. It seemed that either a lot of investors really liked the Nokia phones or were just gambling with the stock because the price increased very quickly. I got scared and decided not to acquire more shares.

My next purchase was Coty stock. I was shopping at TJ Maxx and picked up Meow from Katy Perry and JLo's Glo. I knew that Coty made those perfumes and then I decided to see if they had stock. Amazingly enough, Coty was listed and had just had an IPO. Furthermore, the stock was priced a little more than $16 a share. That's less than a bottle of those perfumes I had picked up and only a fifth of what I spent for JLo's Glo back when it came out on the market. Then I looked at Coty's 10K filing and got even more excited. They own Sally Hanson as well! My thought was that I probably had spent at least a few thousand dollars on Coty products in my lifetime and that investing $200 would not be the worse decision in the world. It was confusing, because analyst reports said that Coty’s IPO was "not beautiful" and that it was not for the stockholders but for the current shareholders. They also said that Coty wanted to issue stock so it can make more acquisitions. Now how do I interpret this analyst report? I know what I spend on Coty. The analysts are saying that the shares are not that great and the price is only $16 a share, yet I have a few hundred dollars of its products sitting on my shelf. I went with my gut and bought the stock because my rationale was that the money I spent on Coty products is dead, however at least there was a chance that the stock may pay a dividend or increase a value. It certainly is doing more than just sitting on my shelf.

My most recent purchase is Ford. My family has a lot of experience with Ford cars. I have owned two Ford Tauruses that were acquired used and two Lincolns that were passed down from my father. I gave the Taurus cars away when I got my Lincoln and one Lincoln went to 350,000 miles and the other was over 400,000 miles before Sandy destroyed it. My father routinely gets 300K+ on his Lincolns and he takes very good care of the cars. So Ford is priced well now and I guess everyone is buying it because it posted good earnings. With the government bailout of GM, Ford’s stock took a beating. This is the issue I have with stocks and stock prices because they fluctuate so much even if the company is good and makes a great product. So is Ford intrinsically better now than it was 4 years ago? Or does opinion play too much of a factor in stock pricing?
The hardest part about a Roth IRA is that unless the contributions are in a bond or CD, or just sit in the account, the money fluctuates. A $5,500 contribution may be worth more, or it could be worth much less depending on the market. Even mutual funds are not immune from these fluctuations. They always recommend that people have to take risk and buy stocks or stock based investments however there are no real guarantees that the stocks will be valued at what you paid for them. It just seems that timing plays so much of a role in whether your investment will make money or not.

I'm not really sure what is really the best investment strategy is. I guess all I can do is take a chance and hope it all works out.

18 Responses to “Directionless Investing”

  1. Kiki Says:

    I don't do individual stocks in my IRA, just mutual funds that while they fluctuate I feel better and more comfortable. I have a few stocks in an account from past employers that I transferred to my IRA company to hold.

    And why are you so stuck with Etrade? It's your future. Keep that account if you wish but open an IRA with less fees and more options. It's your future!!

  2. Petunia 100 Says:

    I used to dabble in individual stocks. While I did find it fun, I quickly learned that I did not have any special stock-picking abilities. Now I stick to broad market index funds. These are available both as mutual funds and as ETFs.

    I think $9.99 per trade is very steep and is going to significantly eat into your returns. (Remember, you will pay again when you sell). There are several places where you can trade ETFs for free. Vanguard is one, Schwab is another. Perhaps E*Trade has some as well?

    If you want to stick with individual stocks, I suggest you save up money (in the cash account inside your IRA), and make fewer purchases with larger amounts.

  3. soogar Says:

    I've been looking for other alternatives. I know there are cheaper online brokers but they either are targeted for people who keep a lot of money in the account or they charge fees for IRAs. If you can recommend an online broker who is cheap and does not have a minimum balance and does not charge a fee for an IRA I would appreciate the information.

    As for ETFs, to me they are very similar to CDOs and CDO squared. At least that's what I get when I read about them because they are based on underlying stocks/commodities/whatever that comprise some sort of index. We all know what happened with CDOs when they became very popular. A CDO and a CDO square in itself is not a bad investment vehicle, and ETFs are probably okay as well. However I feel that they are being oversold as this easy low fee investment and a lot of little people are buying them and bigger institutions that know what they are doing are shorting them.

    It seems to me that the liquidity of an ETF makes it as volatile as a stock. Etrade has no fee ETFs and I think they waive their commissions for ETFs. I might try an ETF but I think that it is odd how it is being pushed ahead of a mutual fund. The concept of a mutual fund is a lot easier to understand and is less attenuated than an ETF.

    I would be happy to hear from someone who has a different take on ETFs.

  4. Petunia 100 Says:

    Some investments are available as either a mutual fund or an ETF. For example, Vanguard's Total Stock Market Index has mutual fund shares VTSMX and ETF shares VTI. The holdings are identical. The only differences are that VTI has a lower expense ratio and VTI trades like a stock, being re-priced constantly throughout the trading day. Either one is a fine choice, IMO.

    I believe that Charles Schwab has a $100 minimum to open an IRA and charges no fees. Additionally, they offer a dozen or so ETFs which may be traded with no commission. A complete portfolio can be made using only the no fee ETFs.

    If you prefer to stay away from ETFs, you can open an IRA at Vanguard with $1,000 if you choose either the STAR fund or a Target Retirement fund. There is no annual fee if you elect to have all correspondence delivered electronically. The expense ratios of both funds are quite low. STAR invests in actively managed VG funds, the TR funds invest in VG index funds.

  5. baselle Says:

    I love my stocks - I'm close to a 100% return - but the main reason I love them is that they pay a dividend. While many people consider a dividend play stodgy, how could you not like a stock that pays you for holding it? Getting & reinvesting the dividend would "smooth" out the ups and downs a bit, plus in a Roth, the dividend would not be taxed. Ford I think has a dividend, the others I'm not sure about. My stocks are all in Drps (dividend reinvestment program), which while its futzy, it can be a very low cost way to invest. Matter of fact, I consider $3/trade stock in a Drp to be "rich" so $9.99 is plenty rich. Not sure how (or if) you can put a Drp in a Roth.

    Personally, since dividend stocks treat me right, I've put some of my Vanguard money into their high Dividend mutual fund.

  6. soogar Says:

    Thanks Petunia and baselle.
    The fees are a few more dollars per trade at Etrade but I like the interface and and my goal is somewhat similar to baselle's strategy- buy stocks that produce dividends that I can hold. I'm trying to pick stocks that are undervalued. It's really difficult because sentiment drives up the value. I don't know why Coty's IPO did not take off yet everyone is excited about Twitter and Facebook. All those ads have to have something behind them to sell. Who's going to make the stuff that is advertised on these virtual mediums.

    I've been researching those ETFs some more. One thing that seems odd is that in comparison to S&P 500 Index funds, they don't produce as much dividend income. Why is that if the ETF is following the same index? Is it because there aren't nearly as many underlying stocks in an ETF as there is in a huge mutual fund?

  7. baselle Says:

    With Coty - I would prefer that NOT everybody is interested. Much better value play that way. As long as you avoid the value traps by tapping into what a person who would "short" the stock is thinking, I think value plays + time are the way for a small investor to go.

    Check out Seeking Alpha for stock gossip ... I like them much better than the Motley Fool.

    I've heard that ETFs still have administrative fees compared to completely passive trading, plus I think each shop has their own proprietary recipe so none perfectly match the S&P. Check and see if Vanguard's EFT compares with Fidelity's or T Rowe Price's and see.

  8. Petunia 100 Says:

    Soogar, I'm not certain why you are seeing differences in the yield.

    Vanguard's S&P 500 Index mutual fund, investor shares, has a yield of 1.98%.

    Vanguard's S&P 500 Index mutual fund, admiral shares, has a yield of 2.10%.

    Vanguard's S&P 500 Index ETF has a yield of 2.10%.

    The yield is lowest on the investor shares because it has the highest expense ratio. Admiral shares, available with 10k or more, have the same expense ratio and yield as the ETF version.

  9. soogar Says:

    Hi Petunia, I just checked again. I compared my S&P 500 fund (SVSPX) to SPY. and SVSPX broke down its yield for 10K over a 10 year period into income and dividends. Their yields are similar, maybe SPY a little better but SVSPX had $100 more in dividends and surprisingly less fees and expenses compared to SPY. THough these are different funds and may have different stock combinations to comprise their indices.

  10. soogar Says:

    Ultimately my goal is to be like those little old ladies who just live off dividends. How do I achieve this? I'm trying to figure out how many shares of stock and at what yield would I need to acquire in order to achieve $25K+ a year in income without selling off my investments?

  11. baselle Says:

    There are two different types of little old ladies living off of dividends. Type 1 are the ones who basically treat investing like a part-time job or a very intense hobby; Type 2 are the ones whose husbands treated investing like a PT job or a very intense hobby.

    "How do I achieve this?" Well if anyone really knows, they are extremely good at keeping a secret.

    Take a look at the dividend yield of your stocks. For example, Coca Cola (KO). It pays a dividend of $1.12/yr/share. You would need about 22,321 shares of KO to generate $25K; at $40/share means you need to put in about $892K in KO. Now all is not totally lost; the power of reinvesting dividends means that with time you buy a good chunk of those shares with the dividend the company is paying you. It will take many, many years to do this, and you need to invest in companies that will last for many many years.

  12. soogar Says:

    Baselle- I took your advice and enrolled my stocks in a dividend reinvestment program. The program is free and does not have trading fees at Etrade and it was really easy. I'm trying to buy stocks that are cheap now that I think are good companies or will grow so I can pick up a lot of shares.

    Health permitting, I have a 30 year plan for accomplishing this and I hope that I have 30 years of earning years ahead of me.

  13. Petunia 100 Says:

    There are a lot of blogs out there devoted to dividend investing. One blog I like to read is http://www.deathtothefulltimejob.blogspot.com/
    If you visit his site, look at his blogroll. There are quite a few which will likely interest you.

    I think if you want to go this route, you should start reading and learning as much as possible. Good luck! Smile

  14. baselle Says:

    I'd also search on "Dividend Aristocrats" on Google, Motley Fool, Seeking Alpha to get ideas on other dividend generating companies to invest. These are companies whose dividend meets certain criteria, the main one being that they have increased their dividend steadily for decades.

  15. soogar Says:

    Petunia- thanks for the blog. I definitely want the luxury of not having to work!

    Baselle- Thanks for all of your advice-

    One question- do you have to pay taxes on the dividends that go into purchasing new shares or is this all in a roth account. Because I was thinking that I may want to invest in a personal brokerage account but am not sure about the tax implications of that - especially on gains on stock that I choose to hold and not sell.

  16. baselle Says:

    If its outside a Roth, then reinvested dividends are taxed.

    Inside a Roth, I would consult a CPA.

    Taxes on stock gains only are realized when you sell. If you hold the stock for at least a year before selling, you incur long term capital gains tax which is less than short-term (shorter than a year).

  17. soogar Says:

    Thanks Baselle!

  18. Petunia 100 Says:

    There are no taxes due on growth inside your Roth. Ever, if you follow the rules. Smile

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