Investing For Dummies

Eric Tyson is a nationally recognized personal finance counselor, writer, and lecturer. He has been featured and quoted in hundreds of local and national news outlets. He has appeared on NBC's Today Show, ABC, CNBC, FOX News, PBS Nightly Business Report, and CNN. He has also been heard on CBS national radio, NPR Sound Money, Bloomberg Business Radio, and Business Radio Network.

Introduction 1


About This Book 1


Foolish Assumptions 3


Icons Used in This Book 3


Beyond the Book 4


Where to Go from Here 4


Part 1: Getting Started with Investing 5


Chapter 1: Exploring Your Investment Choices 7


Getting Started with Investing 8


Building Wealth with Ownership Investments 9


Entering the stock market 10


Owning real estate 10


Running a small business 12


Generating Income from Lending Investments 13


Considering Cash Equivalents 14


Steering Clear of Futures and Options 15


Passing Up Precious Metals 17


Counting Out Collectibles 18


Chapter 2: Weighing Risks and Returns 21


Evaluating Risks 22


Market-value risk 23


Individual-investment risk 28


Purchasing-power risk (aka inflation risk) 30


Career risk 32


Analyzing Returns 33


The components of total return 33


Savings and money market account returns 35


Bond returns 36


Stock returns 36


Real estate returns 39


Small-business returns 40


Considering Your Goals 41


Chapter 3: Getting Your Financial House in Order 43


Establishing an Emergency Reserve 44


Evaluating Your Debts 45


Conquering consumer debt 46


Mitigating your mortgage 46


Establishing Your Financial Goals 49


Tracking your savings rate 49


Determining your investment tastes 50


Funding Your Retirement Accounts 52


Gaining tax benefits 52


Starting your savings sooner 53


Checking out retirement account options 53


Choosing retirement account investments 55


Taming Your Taxes in Non-Retirement Accounts 56


Figuring out your tax bracket 56


Knowing what’s taxed and when to worry 57


Choosing the Right Investment Mix 58


Considering your age 59


Making the most of your investment options 59


Easing into risk: Dollar cost averaging 61


Treading Carefully When Investing for College 63


Education Savings Accounts 64


Section 529 plans 64


Allocating college investments 65


Protecting Your Assets 66


Part 2: Stocks, Bonds, and Wall Street 69


Chapter 4: The Workings of Stock and Bond Markets 71


How Companies Raise Money through the Financial Markets 71


Deciding whether to issue stocks or bonds 72


Taking a company public: Understanding IPOs 73


Understanding Financial Markets and Economics 74


Driving stock prices through earnings 74


Weighing whether markets are efficient 75


Moving the market: Interest rates, inflation, and the Federal Reserve 77


Chapter 5: Building Wealth with Stocks 83


Taking Stock of How You Make Money 84


Defining “The Market” 84


Looking at major stock market indexes 85


Counting reasons to use indexes 86


Stock-Buying Methods 88


Buying stocks via mutual funds and exchange-traded funds 88


Using hedge funds 90


Selecting individual stocks yourself 90


Spotting the Right Times to Buy and Sell 91


Calculating price-earnings ratios 92


Citing times of speculative excess 93


Buying more when stocks are “on sale” 101


Avoiding Problematic Stock-Buying Practices 104


Beware of broker conflicts of interest 104


Don’t short-term trade or try to time the market 105


Be wary of gurus 108


Shun penny stocks 109


The Keys to Stock Market Success 109


Chapter 6: Investigating and Purchasing Individual Stocks 111


Building on Others’ Research 111


Discovering the Value Line Investment Survey 112


Considering independent brokerage research 117


Examining successful money managers’ stock picks 117


Reviewing financial publications and websites 119


Understanding Annual Reports 119


Financial and business highlights 120


Balance sheet 121


Income statement 124


Exploring Other Useful Corporate Reports 126


10-Ks 127


10-Qs 127


Proxies 127


Getting Ready to Invest in Stocks 128


Understanding stock prices 129


Purchasing stock “direct” from companies 131


Placing your trade through a broker 131


Chapter 7: Exploring Bonds and Other Lending Investments 133


Banks: Considering the Cost of Feeling Secure 134


Facing the realities of bank insurance 135


Online banking: More for you? 135


Being wary of the certificate of deposit (CD) 137


Swapping your savings account for a money market fund 138


Why Bother with Bonds? 140


Assessing the Different Types of Bonds 142


Determining when you get your money back: Maturity matters 143


Weighing the likelihood of default 144


Examining the issuers (and tax implications) 144


Buying Bonds 148


Deciding between individual bonds and bond funds 148


Understanding bond prices 149


Purchasing Treasuries 149


Shopping for other individual bonds 151


Considering Other Lending Investments 152


Guaranteed-investment contracts 152


Private mortgages 153


Chapter 8: Mastering Mutual Funds and Exchange-Traded Funds 157


Distinguishing between Mutual Funds and Exchange-Traded Funds 158


Discovering the Benefits of the Best Funds 158


Professional management 159


Cost efficiency 159


Diversification 159


Reasonable investment minimums 160


Different funds for different folks 160


High financial safety 161


Accessibility 161


Reviewing the Keys to Successful Fund Investing 162


Minimize costs 162


Reflect on performance and risk 165


Stick with experience 166


Consider index funds 166


Steer clear of leveraged and inverse exchange-traded funds 167


Creating Your Fund Portfolio with Asset Allocation 169


Allocating for the long term 169


Diversifying your stock fund investments 171


The Best Stock Funds 172


Making money with stock funds 172


Exploring different types of stock funds 173


The Best Bond Funds 178


Avoiding yield-related missteps 179


Treading carefully with actively managed bond funds 181


Stabilizing your portfolio by investing in short-term bond funds 182


Earning higher returns with intermediate-term bond funds 183


Using long-term bond funds to invest aggressively 184


Balanced and Asset Allocation Funds: The Best Hybrid Funds 185


The Best Money Market Funds 186


Taxable money market funds 188


US Treasury money market funds 188


Municipal money market funds 189


Chapter 9: Choosing a Brokerage Firm 191


Getting Your Money’s Worth: Discount Brokers 191


Assessing the high-commission salespeople’s arguments 192


Selecting a discount broker 193


Considering Online Brokers 195


Examining your online trading motives 196


Taking other costs into account 196


Looking at service quality 197


Listing the best online brokers 198


Part 3: Growing Wealth with Real Estate 201


Chapter 10: Investing in a Home 203


Considering How Home Ownership Can Help You Achieve Your Financial Goals 204


The Buying Decision 204


Weighing the pros and cons of ownership 205


Recouping transaction costs 208


Deciding How Much to Spend 209


Looking through lenders’ eyes 210


Determining your down payment 211


Selecting Your Property Type 212


Finding the Right Property and Location 214


Keeping an open mind 214


Research, research, research 215


Understanding market value 216


Pounding the pavement 216


Chapter 11: Investing in Real Estate 217


Discussing Real Estate Investment Attractions 218


Limited land 218


Leverage 218


Appreciation and income 219


Ability to add value 220


Ego gratification 221


Longer-term focus 221


Figuring Out Who Should Avoid Real Estate Investing 223


Examining Simple, Profitable Real Estate Investments 223


Finding a place to call home 224


Trying out real estate investment trusts 225


Evaluating Direct Property Investments 226


Residential housing 226


Land 228


Commercial real estate 229


Deciding Where and What to Buy 230


Considering economic issues 230


Taking a look at the real estate market 231


Examining property valuation and financial projections 233


Discovering the information you need 238


Digging for a Good Deal 238


Recognizing Inferior Real Estate “Investments” 240


Avoiding ticking time shares 240


Staying away from limited partnerships 242


Ignoring hucksters and scams 242


Chapter 12: Real Estate Financing and Deal Making 247


Financing Your Real Estate Investments 247


Getting your loan approved 248


Comparing fixed-rate with adjustable-rate mortgages 251


Choosing between fixed and adjustable mortgages 252


Landing a great fixed-rate mortgage 254


Finding a suitable adjustable-rate mortgage 255


Examining other mortgage fees 258


Finding the best lenders 259


Refinancing for a better deal 261


Working with Real Estate Agents 263


Recognizing agent conflicts of interest 263


Selecting a good agent 264


Closing the Deal 266


Negotiating 101 266


Inspecting the property 267


Shopping for title insurance and escrow services 268


Selling Real Estate 269


Negotiating real estate agents’ contracts 270


Forgoing a real estate agent 271


Part 4: Savoring Small Business 273


Chapter 13: Assessing Your Appetite for Small Business 275


Testing Your Entrepreneurial IQ 276


Considering Alternative Routes to Owning a Small Business 279


Being an entrepreneur inside a company 279


Investing in your career 280


Exploring Small-Business Investment Options 280


Starting your own business 281


Buying an existing business 281


Investing in someone else’s business 283


Drawing Up Your Business Plan 285


Identifying your business concept 285


Outlining your objectives 287


Analyzing the marketplace 288


Delivering your service or product 291


Marketing your service or product 291


Organizing and staffing your business 292


Projecting finances 293


Writing an executive summary 295


Chapter 14: Starting and Running a Small Business 297


Starting Up: Your Preflight Checklist 297


Preparing to leave your job 298


Valuing and replacing your benefits 299


Financing Your Business 302


Going it alone by bootstrapping 302


Taking loans from banks and other outside sources 303


Borrowing from family and friends 305


Courting investors and selling equity 306


Deciding Whether to Incorporate 307


Looking for liability protection 308


Taking advantage of tax-deductible insurance and other benefits 309


Cashing in on corporate taxes 309


Making the decision to incorporate 311


Finding and Keeping Customers 311


Obtaining a following 311


Providing solid customer service 312


Setting Up Shop 313


Finding business space and negotiating a lease 313


Equipping your business space 315


Accounting for the Money 316


Maintaining tax records and payments 317


Paying lower taxes (legally) 319


Keeping a Life and Perspective 320


Chapter 15: Purchasing a Small Business 321


Examining the Advantages of Buying 321


Understanding the Drawbacks of Buying 323


Prerequisites to Buying a Business 324


Business experience 324


Financial resources 325


Focusing Your Search for a Business to Buy 325


Perusing publications 327


Networking with advisors 327


Knocking on some doors 327


Working with business brokers 328


Considering a Franchise or Multilevel Marketing Company 330


Finding a franchise 330


Considering a multilevel marketing company 332


Evaluating a Small Business 334


Doing due diligence 335


Determining a business’s value 337


Part 5: Investing Resources 339


Chapter 16: Selecting Investing Resources Wisely 341


Dealing with Information Overload 342


Separating Financial Fact from Fiction 343


Understanding how advertising corrupts the quality of investment advice 343


Recognizing quality resources 345


Chapter 17: Perusing Periodicals, Radio, and Television 349


In Print: Magazines and Newspapers 349


Judging the journalists 349


Making the most of periodicals 351


Broadcasting Hype: Radio and Television Programs 352


You often get what you pay for 352


Information and hype overload 353


Poor method of guest selection 353


Fillers and Fluff: Being Wary of Investment Newsletters 354


Chapter 18: Selecting the Best Investment Books 357


Being Wary of Infomercial Books 358


Understanding how authors may take advantage of you 358


Learning by example 358


Ignoring Unaudited Performance Claims 361


Investing Books Worth Reading 363


A Random Walk Down Wall Street 363


Stocks for the Long Run 364


Built to Last and Good to Great 364


Mutual Funds For Dummies 365


Chapter 19: Investigating Internet and Software Resources 367


Evaluating Investment Software 368


Taking a look at investment tracking software 368


Considering investment research software 370


Investigating Internet Resources 373


Assessing online resources 373


Picking the best investment websites 375


Part 6: The Part of Tens 379


Chapter 20: Ten Investing Obstacles to Conquer 381


Trusting Authority 381


Getting Swept Up by Euphoria 382


Being Overconfident 383


Giving Up When Things Look Bleak 383


Refusing to Accept a Loss 384


Over-monitoring Your Investments 385


Being Unclear about Your Goals 386


Ignoring Your Real Financial Problems 386


Overemphasizing Certain Risks 386


Believing in Gurus 387


Chapter 21: Ten Things to Weigh When Considering an Investment Sale 389


Remembering Preferences and Goals 389


Maintaining Balance in Your Portfolio 390


Deciding Which Ones Are Keepers 390


Tuning In to the Tax Consequences 391


Figuring Out What Shares Cost 391


Selling Investments with Hefty Profits 393


Cutting Your (Securities) Losses 393


Dealing with Unknown Costs 394


Recognizing Broker Differences 394


Finding a Trustworthy Financial Advisor 395


Chapter 22: Ten Tips for Investing in a Down Market 397


Don’t Panic 397


Keep Your Portfolio’s Perspective in Mind 398


View Major Declines as Sales 399


Identify Your Portfolio’s Problems 399


Avoid Growth Stocks If You Get Queasy Easily 400


Tune Out Negative, Hyped Media 400


Ignore Large Point Declines but Consider the Percentages 401


Don’t Believe You Need a Rich Dad to Be a Successful Investor 401


Understand the Financial Markets 402


Talk to People Who Care about You 402


Index 403