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Personal Investing: The Missing Manual PDF

250 Pages·2010·4.05 MB·English
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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. Published by O’Reilly Media, Inc., 1005 Gravenstein Highway North, Sebastopol, CA 95472. O’Reilly books may be purchased for educational, business, or sales promotional use. Online editions are also available for most titles (http://my.safaribooksonline.com). For more information, contact our corporate/institutional sales department: 800.998.9938 or [email protected]. 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. The O’Reilly logo is a registered trademark of O’Reilly Media, Inc. Personal Investing: The Missing Manual and related trade dress are trademarks of O’Reilly Media, Inc. Many of the designations used by manufacturers and sellers to distinguish their products are claimed as trademarks. Where those designations appear in this book, and O’Reilly Media, Inc. was aware of a trademark claim, the designations have been printed in caps or initial caps. While every precaution has been taken in the preparation of this book, the publisher and authors assume no responsibility for errors or omissions, or for damages resulting from the use of the information contained herein. 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

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Did your investments take a hit in the recession? You're not alone. Between 2007 and mid-year 2009, the average 401K lost 31% of its value. Ouch. It's time to take control of your investments with Personal Investing: The Missing Manual. Financial experts agree that with the right guidance, consumers
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