Frugal Investing

How To Invest - Stock Market, Mutual Funds And Other Investment Vehicles

Frugal Investing

When it comes to how to invest, my money investment tips are time tested. We've used these techniques for several years and have been very pleased with our results.

We're excited to pass this knowledge on to you because like us, you work hard for your money and deserve to get the best return on your investments.

Avoid These Investment Mistakes

• Vacant Land

  Please keep your investment money out of vacant land. We made this mistake over 20 years ago. We bought a vacant parcel on a golf course subdivision of Florida for an investment. At that time we paid $15,000 thinking the land would appreciate so we could use it as a down payment to build and investment home.

  Ouch, what a mistake. The land actually decreased in value for the first few years. About 7 years into this investment, we finally we're able to sell the land for $15,000. Although we recovered the $15,000, we actually lost a good deal of money because during those 7 years the vacant land produced no income.

  In fact, it created negative cash flow through property taxes. We also took a hit on realtor commissions for selling the land. So, we basically blew it because we could have had that $15,000 invested in an income producing investment.

  If you're considering investing in vacant land, please do your homework looking for land in an appreciating area. Believe us, this is easier said than done and highly risky.

• Time-Shares

  Fortunately, we didn't step into this trap and you shouldn't either. Time-sharing is co-ownership of a real estate investment, usually a condo with several other investors. Each investor can use the time-share during certain weeks out of the year.

  Even in today's depressed real estate market, a time share on say a Florida beach, can run at minimum $1,500 bucks for 1 week, plus you have to pay huge annual maintenance fees to boot.

  If that's not bad enough, you don't want to get caught holding the bag if the developer who built the time-share goes bankrupt. This has happened many many times. You can be left losing your down payment, plus any monthly payments you already made, plus the maintenance fees. If you paid cash, you could lose the entire amount.

• Avoid Individual Stocks And Bonds

  Buying individually is much riskier than putting your money into mutual funds. You will also pay commissions when buying individual stocks and bonds whereas you can avoid this by investing in no-load mutual funds (please see below).

• Commissioned Financial Salesman

  With frugal investing, please do as we do and avoid working with commissioned brokers. The commissions and fees will eat away at your investment returns. You'll fare much better with your investing by cutting out the broker and working directly with the financial institution such as no-load mutual fund family.

  The brokers usually don't have your best interests at heart. They're under pressure to produce a certain amount in commissions to keep their jobs so they will push the high commission investments on you regardless of how they perform.

Frugal Investing

Conservative Investing - The 10% Rule

Instead, beginning with your next paycheck, take 10% of your net pay right off the top and invest it. You'll want to do this with every paycheck you receive.

Using the frugal investing 10% rule, you'll be paying yourself first by writing your first check to your investment vehicle (please see below) before you pay your mortgage, rent, groceries, etc.

If funds are tight you may be thinking, oh come on, I'm already spending more than I earn, or barely breaking even. Believe us when we say, you will be able to build your wealth using the 10% rule and still get your expenses paid. By budgeting money properly, you'll find you can eliminate unnecessary expenses providing you with that 10% investment money.

Frugal Investing - How To Invest Your Money

Below, you'll find our investment strategies.

• CD's

  Basically, a CD is a time deposit, which means the money you put into a CD should remain there for a specific amount of time before you can withdraw it. A CD's maturity can range from days to 3 months, 6 months, 1 year, or even up to 5 years.

  We believe CD's are an excellent frugal investing vehicle because you can earn a decent interest rate, they're usually FDIC insured (verify FDIC insurance with your bank) and you can choose how long to park your money in the CD whether it be 3 months, 6 months, 1 year, etc.

  We prefer the shorter terms CD's because it enables us access to our funds quicker than a longer term CD. Also, you'll find that in many cases, the interest rate earned is not substantially higher on a long versus short term CD.

  Another GREAT benefit of the CD is it's a liquid investment. If you ran into a situation where you had to withdraw your money prior to the CD's maturity, you would lose some or all the interest you would have earned on it had you held onto it until maturity. The "good news" is, you'll recover the money (the principal) you invested into the CD.

  You usually can find the best CD rates on-line. We use bankrate.com which is an excellent resource. While on this site, you'll want to make sure that the CD is FDIC insured and that the bank has a good reputation.

  On Bankrate.com you can actually sort by the financial condition of the institution providing the CD's - a great tool. The site also has other excellent features that you can sort by to meet your needs. This includes the CD minimum deposit and rate of return (APY).

How To Invest - Mutual Funds

• No Load Mutual Funds

  Another great frugal investing vehicle are no load mutual funds. A mutual fund is basically a collection of stocks and/or bonds grouped together in a portfolio. The fund brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund.

  Mutual funds also carry a lower amount of risk than investing in individual stocks or bonds because each mutual fund invests in a portfolio of several hundred stocks, bonds or money markets; so you're automatically diversified.

  To avoid high expenses, you'll want to invest in a no load instead of a loaded mutual fund. Both high and low load funds charge you huge expenses in the form of commissions to the broker or financial planner for investing and withdrawing money out of the fund. You will save big bucks going with no load funds that don't charge these expenses.

  Since we're talking about frugal investing, we have to tell you that the best of the best of no load mutual funds are without a doubt index funds. Since we're long-term investors, we primarily invest in stock index funds which match the rate of return generated by the market.

  You'll find that stock index funds are far superior investments to the non-index mutual funds for several reasons.

  Low Costs

  Index stock fund expenses are much lower because they don't require highly paid fund managers to analyze different stock investments. The index fund just needs to mirror the performance of a specific market index, such as the S&P 500, which involves minimal analysis.

  Bottom line, an index fund will provide you with returns that (average 11% historically) mimic the market for very low fees.

  Low Turnover

  Turnover is the buying and selling of securities by the fund manager. Many managed mutual funds (non index funds) have very high turnover rates, averaging about 85% a year.

  This means that this fund is selling most of their holdings every year. This is not good for you because buying and selling stocks costs money through commissions and spreads. So, a high turnover means higher costs, which will reduce your rate of return.

  Again, it's index funds to your rescue. Index funds have much lower turnover rates meaning you'll have lower expenses and you'll receive higher returns as a result. So, if you own mutual funds, or are shopping for them, look to own funds with low turnovers like index stock funds that have a 5% or lower turnover rate.

  Performance

  You're gonna love this. The market "outperforms over 85% of all mutual funds." So, if you ask what type of mutual fund should I invest in, it's definitely a stock index mutual fund.

  We like the Vanguard S&P 500 Index fund, which by the way, was the very first index fund. Since this fund started up years ago, several other stock index funds have popped up. Because of this, you need to be careful when choosing an index fund because you'll find there are several fund companies that charge higher fees than is necessary.

  Fidelity and Vanguard are good fund families. Vanguard in particular is known for its low expense ratios. Expense ratios are VERY important because they are the fees the fund charges you which reduces your rate of return. So, you'll want to make sure you compare the expense ratios of similar index funds.

• Dollar Cost Averaging (DCA)

  We DCA and you should give serious consideration to this to. You are DCA when you buy a fixed dollar amount of a stock or fund on a consistent schedule. For example, we invest a set dollar amount monthly into our mutual funds regardless of the funds price, rate of return or the state of the economy.

  Using dollar cost averaging, you'll find that more shares are purchased when prices are low, and fewer shares are bought when prices are high. The end result is that over time the average cost per share of the security will become smaller and smaller.

  Right now the economy is in a recession and we're still investing monthly into our stock index funds. Why? Because we're bottom feeding and able to buy more fund shares because they're priced lower.

  When the market goes back up, which it will as it has done historically, we will have accumulated a great many more shares valued at higher dollar amounts.

  As Warren Buffett states "Be fearful when others are greedy, and be greedy when others are fearful." He's also a big believer, as are we, that the market has upswings and downswings.

  As Warren believes, right now, we're in a recession. But the market will recover as it has proven in the past. So, you really don't want to run with the herd; run away from it using DCA.

• Stock versus Bond Funds

  Going with a stock versus a bond fund is your choice based on how risk adverse you are and taking into account your investment horizon. Generally, if you can allow for your investments to grow for 5 years or more, and have at least 15 years until you need the money, you'll want to weight your investment portfolio more towards the stocks.

  Historically, you'll find that stocks have significantly outperformed bonds. Stocks are more volatile than bonds, but if you use a longer term buy and hold strategy along with DCA, you'll do well as we have with stocks.

Frugal Investing - Online Mutual Fund Research

We recommend two excellent sites to visit to research your investments. You can extract a wealth of information including performance returns, expense ratios, and fund ratings to name a few features.

The sites are Yahoo Finance and Morningstar

Frugal Investing - Wrapping It Up

We appreciate your visiting our site. We're confident that these frugal investing techniques will prove valuable when it comes to your family money management.

Happy Investing!





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