Personal Investing: The Missing Manual

250 Pages·2010·4.05 MB·English

by  Bonnie Biafore

Personal
Investing
The Missing Manual®
Personal Investing: The Missing Manual 
BY Bonnie Biafore, amY e. Buttell, and Carol faBBri
Copyright © 2010 Bonnie Biafore. All rights reserved.
Printed in the United States of America.

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Editor: Peter McKie
Production Editor: Nellie McKesson
Copy Editor: Jan Jue
Indexer: Angela Howard
Cover Designer: Karen Montgomery
Interior Designer: Ron Bilodeau
Print History:
May 2010: First Edition.
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ISBN: 9781449381783
[SB]
Contents
The Missing Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Part One: Prepare to Invest
Chapter 1
Why Should You Invest? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
How Inflation Hurts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Why Scary Numbers Aren’t That Scary . . . . . . . . . . . . . . . . . . . . . . . . . 16
Chapter 2
Set Your Investment Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Building Your Bucket List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Retirement, College, or Other Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
The Big Kahuna: Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Other Long-Term Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Putting It All Together . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Chapter 3
Invest with Open Eyes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Clean Up Your Finances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Spend Money Wisely . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Expect Base Hits, Not Home Runs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Sidestepping Pitfalls in Investor Psychology . . . . . . . . . . . . . . . . . . . . . . 45

Part Two: Choose and Buy Your Investments
Chapter 4
How Investments Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
The Big Four: Typical Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Taxing Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Contents iii
Chapter 5
Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
The Vanilla, Chocolate, and Strawberry of Funds . . . . . . . . . . . . . . . . . . . 72
What a Fund Invests In . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Evaluating Fund Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Keeping a Lid on Fund Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
How to Pick Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Finding Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Deciding When to Sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Managing Your Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
Chapter 6
Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Buying into a Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Investing in Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Investing in Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Investing in Good Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Watching for Trends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
Chapter 7
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
Why Invest in Bonds? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
How Bonds Work and How You Use Them . . . . . . . . . . . . . . . . . . . . . . 129
Buying Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Chapter 8
REITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
Is REIT Investing Right for Me? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
Types of REITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Picking Individual REITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Finding the Right REITs and REIT Funds . . . . . . . . . . . . . . . . . . . . . . . . 149
Chapter 9
Manage Your Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
What’s Investment Portfolio Management? . . . . . . . . . . . . . . . . . . . . . 154
Return vs. Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Asset Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Choosing an Asset Allocation Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
Asset Allocation Made Ridiculously Easy . . . . . . . . . . . . . . . . . . . . . . . 166
Reviewing Your Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
Rebalancing Your Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Getting Back On Track . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
iv Contents
Part Three: Manage Your Investments
Chapter 10
Investing for Retirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
The Key Retirement Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Making the Most of Retirement Accounts . . . . . . . . . . . . . . . . . . . . . . 177
Managing a Retirement Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
Making the Most of Social Security . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Withdrawing Money During Retirement . . . . . . . . . . . . . . . . . . . . . . . 194
Chapter 11
Investing for College . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
College Costs How Much? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
Tax-Savvy Ways to Save for Education . . . . . . . . . . . . . . . . . . . . . . . . . 199
How to Pick a 529 Savings Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
Saving for More Than One Child . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
The Best Way to Spend College Savings . . . . . . . . . . . . . . . . . . . . . . . 209
Chapter 12
Investing for Health Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
Types of Health Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
Choosing an Employer-Sponsored Plan . . . . . . . . . . . . . . . . . . . . . . . 215
Choosing an Individual Health Insurance Plan . . . . . . . . . . . . . . . . . . . 216
High-Deductible Health Insurance Plans . . . . . . . . . . . . . . . . . . . . . . . 218
Negotiating with Health-Care Providers . . . . . . . . . . . . . . . . . . . . . . . 224
Paying for Long-Term Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
Contents v

The Missing Credits
About the Author
Bonnie Biafore has always been a zealous planner, wheth-
er setting up software demos, cooking gourmet meals, or 
scheduling a vacation to test the waters of spontaneity. ironi-
cally, fate, not planning, turned this obsession into a career as 
a project manager. When she isn’t managing projects for cli-
ents, Bonnie writes about personal finance, investing, project 
management, small business accounting, and technology. 
She’s also branching out into other “dry” topics with a recent article for Wine
Enthusiast. as an engineer, she’s fascinated by how things work and how 
to make things work better. She has a knack for mincing dry subjects like 
accounting and project management into easy-to-understand morsels and 
then spices them to perfection with her warped sense of humor.
Bonnie is the award-wining author of more than a dozen books including 
QuickBooks 2010: The Missing Manual, Project 2010: The Missing Manual, 
Quicken 2009: The Missing Manual, the Better Investing Stock Selection
Handbook (which won an aPeX award of distinction), Online Investing
Hacks, and On Time! On Track! On Target!. She also writes regularly about 
financial topics for Better Investing, bankrate.com, and interest.com. When 
unshackled from her computer, she hikes in the mountains, cycles, cooks 
gourmet food, and tries, mostly unsuccessfully, to say no to additional 
work assignments. email: [email protected].
the missing Credits vii
Amy E. Buttell is a journalist who writes about personal 
finance, investing, healthcare and accounting. She is the 
author of The Better Investing Mutual Fund Handbook and 
contributed to the book Online Investing Hacks. She lives 
in erie, Pa, with her two sons and two cats in a house near 
lake erie.
Carol Fabbri helps people achieve their financial goals. to 
accomplish this mission, she writes, speaks, and presents 
on personal finance to her clients and other audiences.  She 
uses a decade in management consulting and the finance 
education she got at mit to teach people how to shed emo-
tional baggage so they make smart investment decisions. 
She is the managing partner of fair advisors (http://fair
advisors.com), an independent financial advisory firm, and is the President 
of fair advisors institute (http://fairadvisors.org), a nonprofit dedicated to 
improving financial literacy in the uS. She is frequently quoted in national 
publications like the Wall Street Journal, Forbes, and Smart Money. Carol’s 
other passions are her husband and her son. Before becoming a mom, she 
had hobbies. email: [email protected].
About the Creative Team
Peter McKie (editor) is an editor at missing manuals. He has wanted to 
commission a practical, clear, insightful consumer book on personal in-
vesting since he read Peter lynch’s Beating the Street a decade ago. thanks 
to its authors and their unwavering diligence, this book is everything he 
envisioned and more. Peter graduated with a master’s degree from Boston 
university’s School of Journalism and lives in new York City, where he re-
searches the history of old houses and, every once in a while, sneaks into 
abandoned buildings. email: [email protected].
Nellie McKesson (production editor) is a graduate of St. John’s College in 
Santa fe, new mexico. She lives in Brockton, mass., and spends her spare 
time studying graphic design and making t-shirts (www.endplasticdesigns.
com). email: [email protected].
Jan Jue (copy editor) enjoys freelance copyediting with care and preci-
sion, reading a good mystery, and searching for the perfect potsticker. 
email: [email protected].
Angela Howard (indexer) has been indexing for more than 10 years, most-
ly for computer books, but occasionally for books on other topics, such 
as travel, alternative medicine, and leopard geckos.  She lives in California 
with her husband, daughter, and two cats. 
viii the missing Credits