Category Archives: Investing Advice

What Should You Do With Your Tax Refund 2013

First of all, congratulations on getting a tax refund. This means last year’s tax planning protected you.

For this article, I am assuming the tax refund is net of payments applied to the first quarter estimates and the tax planning for next year is complete. For most people, this will not be an issue, but if you are starting to pay Uncle Sam when filing your taxes, consult a tax professional, they can help you with tax planning.

The next assumption is the tax refund is net of spiritual obligations. All the major religions in the world have some form of tithe or obligation that is paid. Each person’s situation is unique, so the tax refund amounts are assumed to be after the spiritual obligations are addressed.

Another assumption is your retirement account has been taken care of. For most wage earners, the contribution made from your paycheck into your 401K or pension plan will take care of this. If you are self employed, you should be taking care of this as part of managing your business. If you do not have or have not funded your retirement account, the refund should be used for that purpose first.

What you should do with your tax refund will depend on the size of the refund, what your current economic situation is and if you have already made plans for the refund.

The following are just guidelines and should be modified to fit your situation.

The Small Refund

If your refund is small, say $100 or less, then spend it on something fun. You have worked hard all year, treat yourself and your loved ones to dinner out, go bowling, buy a computer game for the kids. Sometimes having an unexpected treat can be therapy for the whole family.

The Medium Refund

The size of this refund is probably the most difficult to deal with. It is not big enough to have a major impact on a bill or purchase, but still big enough to make a difference.

The size will vary depending on your income level. For a single mom, $300 would be a lot of money, while someone who is making $80,000 a year, $300 would be on the smaller side. What is important is that it can make a difference even if it is small.

I suggest you split the refund into thirds and do the following:

The first third should be set aside for “fun”. (You can see a theme developing here.) You should use this to treat yourself and family. This should be done guilt free as you used Uncle Sam’s Bank as your savings account. Celebrate having saved some money!

The next third should go into savings. Unless you have six months of cash available to you, saving some of the refund in an “emergency” fund will help give you some peace of mind. This should be in a place that you can quickly get to.

You should not feel guilty about using it in an emergency or when an unexpected expense arises. A good example would be getting a flat tire. Instead of putting the cost of the tire on a charge card, you could use the emergency savings to pay for it. Having cash available for unexpected expenses can be liberating.

The final third of the tax refund needs to do one of two things. Service debt or add to investing assets.

Depending on your situation, servicing debt could be the most prudent course of action. Reducing credit card debt should be the first priority for everyone. The current interest rates on credit cards is horrendous. Paying an extra 10% to 23% on a purchase every month eats away at your cash flow and limits options. By far, the first priority should be to eliminate any credit card debt.

If you are meeting your monthly obligations out of normal cash flow and credit card debt is gone or at a minimal level, the other option is to start or add to your investing account.

What is an investing account? It is an account you start with the idea of building capital to purchase or invest in income producing assets. This is where you eventually purchase assets that pay you instead of the asset losing value. This is the key to financial wealth.

The Big Refund

The big refund can be a game changer for some and can be a signal tax planning is needed for others. What you don’t want is to have a large refund every year. That means you are overpaying your taxes. By reducing your payments to Uncle Sam, you can use the extra cash flow to reduce debt or increase your investing account.

The first thing you do with the big refund is to have some “fun”. As before, spend some of it on you and your family. Depending on the size of the refund, you may even want to use it for a vacation. For some families, that is what the tax refund is for. It funds some or all of the summer vacation.

The next item to spend at least half of the big refund on is to reduce debt. Target credit cards first then look to see if an auto, boat or personal loan can be reduced or eliminated. Having one less bill to pay every month can be liberating.

Next look to see if you need to fund an emergency savings account. You may only need to have $500 or $1000 set aside.

Finally, with the rest of the monies, start or continue to fund your investment account. After a few years your investment account may be ready to purchase an income producing asset. With a big refund, it may push you over the top an you can start investing in mutual funds or have enough cash to start a stock portfolio.

To summarize, there are many ways to use your tax refund. First, treat yourself and family. Then reduce debt and start funding your investment account. Only you can make the right decision.

Best Vanguard Mutual Funds For Beginners 2013

Good choice! Investing in Vanguard Funds is a good place to start your investing career. To start, you need to understand what your investing objectives are. For this article, I am going to make several profiles with various assumptions:

Young Professional:

  • You are a young person 25 to 29 years old.
  • You have job and can invest $100 per month after all bills and living expenses are taken care of.
  • Your job has a 401K and you are contributing for retirement
  • You have saved $3000 to invest in a mutual fund.
  • Your goal is to build additional capital for investing
  • Your risk tolerance is high

For this type of investor, an aggressive stock fund would be the way to go. They have all their bases covered and are trying to build wealth. The $3000 is the minimum needed to get into various stock funds that will provide a higher rate of return.

I would suggest the following five funds to pick from. Depending on what the individual preference is, any one of the five will meet the objectives of starting with an aggressive fund.

  • Vanguard Capital Opportunity Fund – Mid growth stock fund with high risk (5 on a scale of 5). Currently has 120 stocks with 36.95% in Healthcare.
  • Vanguard Dividend Growth Fund– Large Blend stock fund with moderately high risk (4 on a scale of 5). Currently has 50 stocks, 19.14% in Industrials, 18.21% in Healthcare and 15.27% in Consumer defensive.
  • Vanguard MidCap Growth Fund – Mid-growth stock fund with high risk (5 on a scale of 5). Currently has 121 stocks, 23.62% in Industrials, 20.24% in consumer cyclical and 18.30% in Technology.
  • Vanguard Small-Cap Value Index – Small value stock fund with high risk (5 on a scale of 5). Currently has 1004 stocks, 22.67% in financial services, 16.41% in Real Estate and 16.05% in Industrials.
  • Vanguard Strategic Equity Fund – Mid blend stock fund with high risk (5 on a scale of 5). Currently has 420 stocks, 18.19% in Industrials, 15.12% Consumer cyclical and 12.17% in Financial services.

Putting $100 a month into one of the above funds, after two years of investing, contact Vanguard to see about diversifying into another fund. They will be on their way to building a substantial wealth base.

Late Bloomer:

  • In your 40’s.
  • Have saved some money – $5000
  • Monthly bills and mortgage leaves you with $100 a month to add to savings.
  • Starting to wonder about retirement and how to save for it.
  • Risk tolerance is moderate.

For this type of investor, a balanced fund would be ideal as you have some growth and risk, but there is a stable income from bonds. Here are the five funds I would suggest picking from. Note: all suggested funds have moderate risk (3 on a scale of 5).

  • Vanguard Wellesley Income Fund – Balanced fund with an expense ratio of 0.25%. Currently has 64 stocks (13.30% of assets invested in the top ten stocks), 16.47% in Industrials, 16.37% in Consumer defensive and 14.56% in Healthcare. Current number of bonds – 696 with an average maturity of 9.4 years and average coupon of 3.9%.
  • Vanguard Wellington Fund – Balance fund with and expense ratio of 0.25%. Currently has 102 stocks (16.40% of assets invested in the top ten stocks), 18.24% in Financial services, 16.11% in Healthcare and 13.45% in Industrials. Current number of bonds – 599 with an average maturity of 9.2 years and average coupon of 3.9%.
  • Vanguard Star Fund – Balanced fund with expense ratio of 0.34%. Currently has 8 investments. Note, this fund currently has 62.80% of monies invested in the following Vanguard Funds:
    • Vanguard Windsor II
    • Vanguard International Growth Fund
    • Vanguard International Value Fund
    • Vanguard Windsor Fund
    • Vanguard PRIMECAP Fund
    • Vanguard Morgan Growth Fund
    • Vanguard U.S. Growth Fund
    • Vanguard Explorer Fund
  • Vanguard Balanced Index Fund – Balanced fund with an expense ratio 0.24%. Currently has 3141 stocks (8.80% of assets invested in the top ten stocks), 16.71% in Technology, 13.59% in Financial services, and 12.17% in Industrials. Current number of bonds – 4521 with an average maturity of 7.2 years and average coupon of 3.4%
  • Vanguard Life Strategy Mod Growth – Balanced fund with an expense ratio of 0.16%. This fund has 60% of its assets invested in the Vanguard Total Stock Market Index Fund and the Vanguard Total International Stock Index Fund. This fund is an “index fund” of index funds. 40% of the fund is invested in bonds.

As you can see, the above funds will allow you to gain growth with some steady income from bonds. I would recommend the STAR Fund as a first investment. They will open it with $1000. You can then choose to pick another fund – I would suggest the Wellington Fund as is weighted more in stocks (66.72%). With purchasing two funds, you can add to each and still get a good diversified portfolio.

Going into Retirement:

You are about to go into retirement. You need to save and invest your capital so you can have a steady income for the rest of your life. Often this comes from the sale of your home or other assets. Purchasing an annuity or annuities is a way to take the burden of managing your assets long term and have a guaranteed income.

Vanguard offers annuities that can give you guaranteed payments, guaranteed payments with growth potential and ones that provide steady income, growth potential and market protection.

For every beginning investor, the most important thing is to get started. The sooner you start your money working for you, the better.

Best Mutual Funds For Beginners 2013

What are the best mutual funds for beginners? That is a very complex and daunting question. To come up with the right answer for you, certain questions need to be answered first. Then, basic criteria should be used in making a decision.

The first question for you to answer is what type of investing do you want to use the mutual fund for? I will eliminate those who are participating in a company sponsored investment program. If you are fortunate to have a 401K offered where you work, be sure to participate. Your company should also provide information and advice to help you make the appropriate selections for you. Take advantage of the services that are offered.

Most beginners want to invest in mutual funds to get their feet wet in the investment arena and minimize the risk of losing capital. This is a wise move, as educating yourself about how mutual funds are set up and how they do their investing will provide knowledge that can transfer to stock investing.

One of the drawbacks to mutual funds is the expense load they charge. This is to cover the management of the fund and bookkeeping. This charge can range from 0.19% to 2.00% or more. This will eat into your return. I will address this later.

The motivating factor should be to save money and have it grow with small risk. Some funds allow you to start investing with as little as $500. However, your investing timeline will drive some of your choices. Each mutual fund has certain characteristics and objectives they strive for. They usually fall under the following categories:

  • Index – matches shareholding of a specific index like the S&P 500 or the Dow Jones. These funds match the overall market performance
  • Sector – concentrates stocks from companies in a specific sector of the economy. Examples include transportation, health, energy, and consumer goods. Results from these types of funds can vary widely and is dependent on the overall conditions of the economy.
  • Global/International – these funds focus on international companies, although they may include some US based companies. These tend to be more volatile than funds with only US stocks.
  • Bond – these funds are made up of bonds and are usually called fixed-income funds. They target interest income.
  • Balanced – these type of funds have a mix of stocks and bonds. They strive for a more stable return.

Now that we know the various categories of funds, we now need a way to narrow down your selection. The following

Criteria are key to helping you make the selection.

  • Consistency with your investment goals – do you have issues with investing in oil companies? What about tobacco producers or casinos? Do you have issues with major agribusiness. If you do, investing in mutual funds will be difficult. The whole purpose of mutual funds is to diversify the risk. This is done by investing in a lot of different companies. It is up to you to make sure you know what companies/industries your fund is investing in and you are comfortable owning part of those companies.
  • Fund strategy – is the fund strategy of colleting interest and preserving capital at all costs what you want? This will limit your return, but minimize the risk of losing your initial capital. Are you a risk taker? Then a Global or International Fund may be what you are looking for. They can have a higher rate of return, but there is a greater risk of losing some of your capital.
  • Volatility – slow and steady or peaks and valleys? My recommendation for beginners is to have low volatility in the fund you choose. Until you have some investment experience, and get comfortable with volatility, stay away from it.
  • Tax efficiency – for most beginners, this will not be an issue.
  • Manager tenure/turnover – look for funds that have management that has been with the fund over 5 years, better yet, over 10 years. This is an indicator the fund will continue the same investment patterns and should achieve similar results as in the past.
  • Fund Fees – this is the biggie. The lower the expense load, the more money you get to keep. As a rule of thumb, look for a fund that has an expense load of 1.50% or less. If it is going to cost you more, then make sure you understand why the fees are higher and are you going to get additional returns. Also, look for funds that are no-load. No-load funds do not have a sales charge.

One of the best places to do your research is at the Morningstar website. Sign up and you can use their free screener to help you find the mutual fund that is right for you.

If you are overwhelmed with information, then I have a recommendation. Go to the Vanguard site or Fidelity site. Both have friendly websites and are used to dealing with new investors. Both have low fees and a variety of funds to choose from.

Depending on the amount of money I had to invest, going with one or two Vanguard or Fidelity funds would be the way to go. The Vanguard STAR Fund has a $1000 minimum to invest, 0.34% expense ratio and good performance. Fidelity has about 10 funds that are candidates for investing. Most start with a $2500 minimum and the expense ratios are closer to 1.0%. My preference would be to start with Vanguard. They have the lowest fees and have been around a long time.

Key to successful investing is to make sure you understand what risks you are taking and how much you are paying for the services being provided. Starting with Vanguard or another large fund that deals with new investors is the best place to start. They will help you with your education.