Are Stocks Hopeless?

Question of the week:I've never before bought an individual stock, but with prices as low as they are right now, I'm starting to consider it. What do you think--is this the right time to buy? -Janice F.

Dear Janice,

Congratulations on not automatically following the crowd in your investing decisions. Despite their recent dismal performance on Wall Street, I believe that stocks (or stock mutual funds) remain the place to be for long-term investors.

If you look back at the time period from 1926 to 2000--years that included a major depression, many recessions, and a fair number of bear markets--stocks as measured by the S&P 500 had an average annual return of 11.2 percent. That beats the pants off the performance of long-term government bonds (5.2 percent) or U.S. Treasury bills (3.8 percent).

We recently asked stock investors in the Armchair Millionaire community how they are feeling about their portfolios in light of the recent market turmoil. Here are a couple of the responses we received.

"My stock portfolio has fallen just like the rest of the market, but I remain very confident with my strategy and always stick to it. Tell yourself to look at investments as long term and always buy good, solid companies with excellent track records." --J. Gaston

"'Buy low, sell high' is a well-known rule. Well, it's pretty low right now and could be a gold mine for those who do their homework, make a plan and jump in. When share prices are down, I remind myself that I haven't lost a thing unless I sell." --Nina

If you choose to start building your own stock portfolio, use time-tested strategies and good old common sense. My checklist will get you going.

The Armchair Millionaire Checklist for Building a Stock Portfolio

Start small. In the beginning, make individual stocks a small part of your overall portfolio. I suggest that they make up no more than 10 percent of your total investments. In addition, no single stock should take up more than five percent of your entire portfolio. This means that if you only have a couple of thousand dollars to invest in stocks, you're probably not ready. Stick with a stock index fund instead for now.

Do the digging. Be committed to doing the research required to make sound decisions. Read (and be sure to understand) earnings reports and estimates, annual reports, and analysts' reports, for starters. Never-and I mean never-invest in a stock just because you receive a "hot tip."

Mix it up. Even after you've done your homework and picked the best stocks you could, you'll still see them fluctuate in price. There's not much worse than watching your entire portfolio drop in value, so protect yourself from this as much as you can with diversification. You can diversify your portfolio in two major ways:

• Buy stocks from different sectors. A sector is a major segment of the economy, such as consumer goods, financial services, transportation and utilities.
• Buy stocks of different-sized companies. The stock prices of large companies and of small companies tend to go up and down at different times.

Resist the impulse to sell. It's disheartening to see the value of your stocks drop, and your reaction may be to sell to protect them from further losses. But doing so will guarantee that you'll miss out on the inevitable market recovery. If you did your homework and bought stocks that remain fundamentally sound, then just hang on tight.

THE BOTTOM LINE: Today's market can make even the most die-hard stock investors question their approach. But by looking beyond the short-term upheavals to the long-term rewards of investing in stocks, you'll be much better prepared to weather the storm.

Navigating the Financial Advice Maze

Question of the week:With all the upheaval in the markets lately, I'm ready to get some professional advice about where to go from here. It seems like there's so many kinds of financial advisors these days-how do I find the right kind?
--Mike in Milwaukee

Dear Mike,

Lots of people are feeling the way you do these days. According to a survey of upper-income households done by the Certified Financial Planners, 22 percent of respondents use financial planners. We asked folks in the Armchair Millionaire community about their experiences with financial advisors, and here are some of the responses we got:

"An independent advisor can insist on discipline and really help fill in your financial education gaps. It allows you to rest assured that someone else is looking at your financial well being." --Peter

"Combining my knowledge of money with the expertise of someone who works to achieve my financial goals has been a great experience for me. I think it would be necessary for most people." --Michael R.

"I use my CPA as my advisor. She gives me a lot of advice--not about stocks or funds--but about ways to define my financial life that have lots of advantages that I wouldn't know about otherwise." --Paulie

With everyone from attorneys to accountants and insurance agents offering investment advice and services these days, it's not easy to sort through your choices and make a decision. My guide will help.

The Armchair Millionaire Guide to Financial Advisors

Referrals from friends or coworkers are a good place to start, but be sure to get them from people who have they same kinds of financial goals and challenges as you. These people will be much more likely to refer you to advisors who are best suited to working with you. Also, if you already work regularly with a CPA, attorney, or insurance provider, they may be a good source of referrals.

• Where do I find an advisor?
• What kind should I get? Lots of different professionals offer financial advice now, and the major types can overlap a bit, so it can be confusing. Anyone can call him or her self a financial advisor, so work with someone who has been credentialed, ensuring that he or she has a certain level of knowledge and experience. Here are the major types of advisors:
  • Financial planners provide overall planning assistance, though many may specialize in one area such as retirement or education planning, tax guidance, or insurance. Many planners have earned the Certified Financial Planner (CFP), Chartered Financial Consultant (CFC) or, for CPAs, the Personal Financial Specialist (PFS) designations.
  • Investment advisors give advice about securities, and must be registered with the Securities and Exchange Commission or their state securities commission, depending on how much money they manage. Their credential is usually either an Investment Advisor (IA) or Registered Investment Advisor (RIA).
  • Insurance agents can sell and give you advice about insurance, and must be licensed in their state to do so. Many agents hold the Chartered Life Underwriter (CLU) credential.
  • Accountants can offer tax planning help and hold the Certified Public Accountant (CPA) designation.

  There are three ways advisors can get paid:

  • Fee-only advisors are paid only for their advice, not for selling products (such as mutual funds, stocks and annuities to name a few). Depending on the advisors, they may charge a percentage of your portfolio (typically one to two percent), by the hour, or a flat annual fee.
  • Fee-based advisors are paid by a combination of fees for their advice and commissions from selling products but derive their income primarily from fees.
  • Commission-based advisors earn their money strictly from the commissions on the products they sell.

• What will it cost?

THE BOTTOM LINE: In my experience, fee-only or fee-based works best for most people. Paying your advisor primarily based on fees gives you a greater assurance that your advisor has fewer conflicts of interest and is most likely to work with your best interest in mind. However, any advisor should spell out exactly what you'll be paying and what you'll receive in return.

Dealing With the High Cost of Long-Term Care

Question of the week:My financial advisor suggested that I get long-term care insurance, but it seems like this might be just another expense I don't need right now. What's your take on it? --Jesse T.

Dear Jesse,

Consider that the cost of a long-term care policy can be downright cheap compared to the cost of long-term care. According to the United Seniors Health Cooperative, the national average cost in 2000 for a nursing home was $153 a day, or over $55,000 per year. In some areas, the cost can be much, much higher.

But will you end up in a nursing home? A study by the U.S. Department of Health and Human Services found that people at age 65 have at least a 40 percent lifetime chance of entering a nursing home, with about 10 percent staying there at least five years. So while you might never need long-term care, the longer you live, the greater your chances are that you will.

We asked members of the Armchair Millionaire community about the reasons they have purchased long-term care insurance and got some great, common sense responses:

For peace of mind. "We bought our policies in our early 40s so that we would know that we are prepared for whatever happens. We wish that we had taken policies for our parents years ago!" --B. in Alabama

For financial security. "As part of my overall financial plan, I purchased a long-term care insurance policy when I was 34. At that age, the premiums are dirt cheap." --Bob S.

For asset protection. "My mother-in-law has been in a nursing home for two years and the cost is $5,000 to $6,000 a month, so slowly but surely her assets are being spent down. I do not want that to happen to everything I worked for my entire life." --Tom from Buffalo Grove

To make a wise decision about buying this all-important insurance, use my quick overview of long-term care coverage.

The Armchair Millionaire Guide to Understanding Long-Term Care Insurance

Policies provide for care in a nursing home, and often also pay for at-home nursing care, physical therapy, and home health aids. And many policies cover the cost of assisted living and adult daycare.

Any policy you consider should include an "outline of coverage" that describes the policy in detail and helps you compare it to others. There are three major things to understand about any policy:

• The benefit amount and period. This is the amount that the policy will pay each day you require care and the total number of days the policy will pay for covered services.
• The elimination period. Like a deductible, this is the number of days you require care before the policy begins to pay benefits. Elimination periods of zero days are available.
• Inflation adjustment. This is an increase in the benefit to offset inflation. Five percent inflation protection is common.

It all depends on the level of benefits you choose and your age when you buy the policy. A typical policy costing $900 a year at age 50 could easily be double that at age 65. And premiums do vary quite a bit between insurance companies. A nice thing about long-term care insurance, though, is that your premium does not increase as you age (unless your provider chooses to raise its rates for all its policy holders).

You want a reputable, financially strong company without a history of major rate hikes. Your insurance agent should be able to give you company ratings and rate histories. Your state insurance department can also be a valuable resource, providing the names and ratings of companies licensed to sell insurance in your state and maintaining public records of complaints against companies.

• What does it cover?
• How do I choose a policy?
• How much does it cost?
• How do I find a good insurance company?

THE BOTTOM LINE: For protecting your assets and offering peace of mind, there may be no better deal than long-term care insurance. But policies and options are complex, so research carefully before you buy and consider consulting a financial advisor specializing in long-term care policies.

Making Your Plastic Pay

Question of the week:I get a half dozen credit card offers in the mail every week. I'm tempted to go with one that offers frequent flyer miles, but the annual fee is $60. How do I figure out which is really the best deal? --B. Gonzalez

Given the Americans are up to their necks in credit card debt, people are smart to get as much as possible in return for all the interest they're paying. According to the Federal Reserve, revolving debt (which mainly includes credit cards) is at an all-time high--we owe a cool $725 billion, at an average interest rate of 12.9 percent.

What to do? When we asked Armchair Millionaire community members for their tricks on getting the most from their plastic, we heard some interesting stories. Here are three:

Go on vacation. "I travel regularly for business and have put over $300,000 in company-paid expenses on my Amex in the last four years. At one point for every dollar spent, the points add up! My wife and I recently spent a week at a Hilton in Hawaii. The entire vacation, including our airfare from our home, cost us nothing more than cashing in some of the points." --David

Pay for college. "I have two credit cards that give me cash back for my child's education that go into her 529 account and her Upromise account." --Shelly

Get bucks back. "I pay for all my work expenses (meals, hotels, materials, etc.) with the Discover Platinum Card, which rewards me 1 percent cash back on all my purchases. If I charge $50,000 a year for company- reimbursed expenses, I get a check for $500 every year. There's no annual fee, and I pay the balance each month so I don't pay any interest." --Josh

To understand if those frequent flyer miles are really worth the 60 bucks a year, you really have to run your own numbers. If you charge enough to get a free ticket every year or so, it could certainly be worth it. If you only earn a free ticket every ten years, however, than clearly the $600 in annual fees that you would have paid over that time would more than cancel out the value of that ticket.

But the gimmicks are not all that you should consider when looking at credit card offers. My checklist provides a complete rundown on everything you should look at to make sure you get the best deal.

The Armchair Millionaire Checklist of Credit Card Features

• The rates. This is the first thing most people look at, but remember to consider more than just the annual interest rate. Does the card offer a lower introductory rate? Or a lower rate for balance transfers? If so, how long do these rates last? And what about the interest rate for cash advances? Also, is the annual rate fixed, or will it go up and down with prevailing interest rates? Finally, what is the interest-free grace period?
• The fees. Of course, you'll want as low an annual fee as possible (or better, none at all), but consider other less obvious fees. These include late fees and fees for charging more than your credit limit.
• The extras. Cash back, frequent flyer miles, and merchant discounts are all well-known, but many cards offer a range of other benefits that may be useful to you. To name but a few, these include travel accident insurance, travel and emergency assistance, auto rental insurance, lost luggage insurance, extended warranty protection, free additional cards, annual account summaries and online account management. Remember that frills rarely come free, however.
• The hidden "gotchas." Some cards charge a fee whenever you transfer a balance to it. Most charge a fee for cash advances (up to 4 percent of the amount). And some will cancel your nice low introductory interest rate if you make a single late payment. Read the fine print carefully.

THE BOTTOM LINE: Regardless of the gimmicks you go for, you should always follow a single rule: Pay off your cards every month. Otherwise the interest you pay will outweigh all those goodies.

For Sale By Owner?

Question of the week:We're planning to sell our house soon and are debating whether to list it with an agent or sell it ourselves. We're very tempted to go "For Sale By Owner" because we'd save over $35,000 in commissions. What's your advice about this? --Moving On in LA

Dear Moving On,

The "For Sale By Owner" route ("FSBO" in advertising lingo) is taken by plenty of home sellers these days. According to a survey by the National Association of Realtors, 13 percent of all homes were sold directly by their owners in 2001. The survey doesn't tell us, however, if those sellers were glad they did it.

For some insight into that, we asked Armchair Millionaire community members about their experiences in selling their homes themselves, and if they'd do it again. Here's a bit of what we heard:

Absolutely. "I sold my home myself and would do it again in a heartbeat! I spent $3 on two "For Sale" signs and because I set the asking price in the same range as similar houses being sold, I got to keep the equivalent of the real estate agent fees (4 to 6 percent of sale price) for myself." --Tony in CT

It depends. "I know from lots of personal experience that a slow housing market almost 100 percent requires a real estate agent, and even in some very strong markets it is very helpful to have one." --Will

No way. "We tried selling our home ourselves a year ago in order to save money. We experienced three months of people never showing up for an appointment, showing up early and showing up late. For us it was a pain-missed meals, changed plans, etc. We finally listed with an agent and it sold in 10 days." --Dave

Is FSBO right for you? It depends. What's the market like in your area? How quickly do you have to sell? Do you have the time and temperament to deal with hordes of perspective buyers tramping through your house? Balance all this out against the amount you would save by not paying a commission to an agent and you should have your answer.

Whether or not you choose go it alone, use my checklist of the key things you can do to make selling your home as profitable (and painless) as possible.

The Armchair Millionaire Checklist for Selling Your Home

Make it shine. Look at your house through the eyes of prospective buyers. Toss the junk, clear the clutter and make it sparkling clean. Make minor repairs so that your buyer's home inspection comes clean, but stay away from capital investments at this time, which you are unlikely to fully recoup when you sell. Your money is much better spent making cosmetic improvements.

Get real about the price. What you paid for the house or what need to make on the sale isn't relevant. The only thing that really matters is what buyers are willing to pay. To get a realistic idea of how you should price your house, look at what similar homes in your area are actually selling for, not the price they are listed for. You should also consider getting it appraised. If you do use an agent, he or she will be able to provide a fair price range.

Pick the best offer. If you receive multiple offers (and hopefully, you will), evaluate each on price, how prepared they are to finance the purchase, the terms offered and the type and number of contingencies placed on the offer. Remember that the offer with the highest price is not necessarily the best one.

Get legal help. Real estate transactions are complex affairs. A few hundred dollars spent on having a lawyer review your listing agreement, contract and closing documents can be money extremely well spent, ensuring that there are no surprises and you're getting a square deal. Choose one who specializes in real estate sales.

THE BOTTOM LINE: For most of us, our homes are the biggest investment of our lives. So when it comes to selling, be sure to either get professional help or to put a great deal of your own time and effort into ensuring that you get the best possible price and terms.

Stockpiling for the Short Term

Question of the week:I just got my first real job and I'm starting to save big time. I want to buy a new car within the next year, have enough for a down payment on a house in five years and save for retirement! Right now this money is just sitting in a savings account earning dismal interest. Are there better choices? --Blaine

Dear Blaine,

Congratulations on your ambitious savings goals. Now you just need to get that money in the right places, and you do have options beyond the very popular savings account.

The main thing that will help you decide where to put your money is how much time you have before needing that money. Split your goals into either short term--everything you will need (or might need, like for an emergency), in the next five years--or long term, everything more than five years out.

I believe that most money set aside for long-term goals, like retirement, should be in vehicles that will significantly grow your capital over time, like stocks or stock funds. (For me, this five-year line is what distinguishes "savings" from "investments.")

As for short-term savings, we recently asked Armchair Millionaire community members where they're keeping their money. Here's a sampling of what we heard:

"My main short-term goal is to have six months worth of living expenses in a very liquid account. I use a money market account since the interest rate is a little higher." --Bryan J.

"My short-term goal is to have enough money for a car. I keep this cash in an Internet savings account that pays 3 percent interest." --Miller

"We're saving for the short-term for travel and house renovation and medium-term for a replacement car and rainy day fund. These savings are in CDs and savings accounts." --Simplicity

For your short-term goals, you want your money safe and liquid so you can easily access it when you need it. My checklist has your major choices, with the pros and cons for each.

The Armchair Millionaire's Checklist for Stockpiling Your Savings

• Certificates of deposit. CDs are issued by banks, savings and loans and credit unions and are federally guaranteed. When you buy a CD, you commit to leaving the money untouched for a fixed amount of time (anywhere from 30 days to five years or more). The longer the term, the higher interest rate, but if you withdraw your money early, you'll pay a penalty.

• Money market deposit accounts. Federally guaranteed and available from banks, credit unions and S&Ls, these accounts are much like regular checking accounts, but pay a bit of interest. They typically limit the number of checks you can write each month, so a money market account probably can't take the place of your checking account. Accounts paying higher interest may require a high minimum balance.

• Money market funds. These are a type of mutual fund and are available from fund companies and brokerages. They invest in high-quality, short-term debt instruments, so while they're not federally guaranteed, they are very safe. They offer check writing, usually with fewer restrictions than money market deposit accounts.

• I bonds. These are a nifty kind of savings bond offered by the U.S. Treasury with an interest rate adjusted periodically to keep up with inflation. Interest is exempt from state and local taxes, but you'll pay a small penalty if you redeem one before owning it for five years. I bonds are available from banks or directly from Uncle Sam at www.treasurydirect.gov.

• Bond mutual funds. These funds purchase government bonds, municipal bonds, corporate bonds or some combination of the three. They're convenient and give you instant diversification with a lot of different bonds, but they carry no guarantees. Different funds carry different levels of risk, and not all are appropriate for short-term savings, so look closely before buying.

THE BOTTOM LINE: The more security and liquidity you need for your savings, the lower the interest rate you'll have to accept. But when you balance this out with the rewards of long-term investing, you'll have the best of all worlds.