Book Review: The Motley Fool Investment Guide

The Motley Fool Investment Guide

About the Book:

A completely revised and updated edition of an investing classic to help readers make sense of investing today, full of “solid information and advice for individual investors” (The Washington Post).

Today, anyone can be an informed investor, and once you learn to tune out the hype and focus on meaningful factors, you can beat the Street. The Motley Fool Investment Guide, completely revised and updated with clear and witty explanations, deciphers all the current information—from evaluating individual stocks to creating a diverse investment portfolio.

David and Tom Gardner have investing ideas for you, no matter how much time or money you have. This new edition of The Motley Fool Investment Guide is designed for today’s investor, sophisticate and novice alike, with the latest information on:

—Finding high-growth stocks that will beat the market over the long term

—Identifying volatile young companies that traditional valuation measures may miss

—Using online sources to locate untapped wellsprings of vital information

The Motley Fool rose to fame in the 1990s, based on its early recommendations of stocks such as Amazon.com, PayPal, eBay, and Starbucks. Now this revised edition is tailored to help investors tackle today’s market. “If you’ve been looking for a basic book on investing in the stock market, this is it...The Gardners help empower the amateur investor with tools and strategies to beat the pros” (Chicago Tribune).

My Comments:

Conventional wisdom right now is that the best investment strategy for the average person is to invest in a diversified portfolio of  low cost index mutual funds or ETFs.  Studies show that few professional money managers are able to consistently beat the averages so just buying those averages puts you ahead of them.  

Rather than espousing conventional wisdom, The Motley Fool Investment Guide says that you can be better than average by investing in individual stocks as opposed to mutual funds/ETFs.  Their basic thesis is that fund managers are playing with too much money so that when they buy into a company it affects the price of the stock; and the same when they sell.  It is the opinion of the authors that individual investors, even if they do not possess the expertise that some of the professionals do, are able to achieve better than average results if they gather the proper information, analyze it and purchase stocks that are likely to produce better than average gains.

The book is easy to read and it describes where to get information on public companies, how to interpret it and what qualities to seek.  

While The Motley Fool Investment Guide gives a lot of good information, it is also a not-so-subtle sales pitch for the premium services offered via Motley Fool's website.  Those services start at $99 per year.  Still unlike some other books that seeks subscribers for websites, The Motley Fool Investment Guide tells you how to do it yourself--if you have the time, knowledge and resources.  It makes outsourcing the job sound very attractive. 

Still if you want to learn how to pick stocks, The Motley Fool Investment Guide is a good start. 

I'd like to that the publisher for making a review copy available via NetGalley. Grade:  B+

Third Quarter Update

As the calendar flips yet another page, I realize that the race to retirment is more than just a blog title.  Time is passing, people are dying, and I'm getting older.  All the more reason to save for the future and to think about the time in my life when I won't get up in the morning and head for the office.

As anyone who has any amount of money in the stock market knows, this has been a very good year.  It makes up for a few stinkers we've had lately.  Let's take a look at how things are going financially at my house.

We are still paying down a substantial medical bill in incurred this spring/summer.  The hosptial doesn't charge interest and the reminder notes it sends aren't mean.  They get a few hundred a month, and if not happy, at least they are not bugging me for more.

My college graduate is still looking for a fulltime job but her mean mom has started to make her pay rent and for her phone and Netflix, so its a little less outgo here.  At this point we own her car and it is on our insurance, which is due this month.  I showed her the bill, explained what it meant and told her that we were paying it, this time.  Next time it is hers.  She can decide whether to transfer the car to her name (and pay the sales tax) and get her own policy or she can keep it on our policy.  She can raise the deductibles, but the car is hers to fix if wrecked.  As long as it is in our name, she has to carry our high liability limits; if she transfers it, she can lower them.  On the other hand, there are discounts on our policy that she wouldn't be able to get on her own.  Oh well, as a recent college student she ought to have research skills.  She can decide what to do and I'll be glad to be rid of that bill.  

Let's take a look at some numbers.

Vanguard:

My husband and I have Roth IRAs and regular IRAs, and a taxable account.  We deposited $1100 in each Roth IRA this quarter.  The combined dividends from these accounts totalled $1751.93.  These accounts consist of a variety of mutual funds purchased for us by our ex-financial advisor, along with Vanguard's International Bond Index Fund, Total Stock Market Index Fund, 500 Index Fund, Total Bond Market Index Fund and REIT Index Fund. In the last year, our rate of return has been 11.5%.

MFS:

My 401k has a year to date return of 16.46 %, and the account paid dividends of $531.60 this quarter.  It is invested in Janus Triton,  Oppenheimer Int'L Small Mid Co A, MFS Government Securities Fund-A , Pioneer Fundamental Growth Fd-A,  and Delaware US Growth Fund-A.  My firm contributes 5% of my salary, and I contribute 6%.  

AXA:

My husband's 401K is with AXA and it has increased in value, though not a lot.  He puts in the minimum necessary for employer match.

Motif:

The initial investment in this account was $7,000.  It began the quarter at $8355.99 and ended the quarter at $8,850.43,  This quarter  the account has paid $33.46 in dividends.  I have invested in "Motifs" or baskets of stock with a variety of themes including dividend payers, things I like and online gaming.

I had been withdrawing my dividend payments and investing them via a no-commission broker, but Motif has changed their fee policy such that if you have less than $10,000 and do not have any commissions in a given six month period, they charge you a $10 fee.  To avoid that, I have started accumulating my dividend payments and last week I purchased another Motif--this one contains shares of a variety of REITs.  My plan is to contribute to the account until it reaches $10,000.  The market is helping. 

Lending Club:

My returns have been steadily dropping.  Accounting for expected defaults, Lending Club estimates my return since I began the account at about 4.53% whereas three months ago I wrote that it was
"5.05% annually, whereas three months ago it was  5.68% annually".  As my notes mature I'm moving the money elsewhere. The economy on the whole is fine now; if I can't make money with Lending Club under this economy, I'm going to lose it big time if things go downhill.  The profits today do not justify the risk.  

Prosper:

My returns here have dropped as well.  Three months ago my annualized net returns were 6.9%, and my "seasoned" returns--the returns on notes that are more than ten months old were 6.23%. Those figures have dropped to 5.41% and 4.82%.  Time to shut off the auto reinvest here as well.  

Robinhood:

At the beginning of the quarter I owned shares of AT&T, Visa, CVS, Lending Club and Hanesbrands.  During the quarter I bought Hormel.   Robinhood is an online broker that uses phone apps only, no webpage.  They charge no commission and allow you to place limit or market orders.  They also allow you to initiate bank transfers and then invest the money immediately--you do not have to wait for the tranfer to complete.  You do have to buy whole shares.  I've added money to this account that I've withdrawn from Kickfurther and right now the value is $442.96.  So far this year, dividends from this account total $2.24.

Stockpile:

This is an online broker for whom I wrote a sponsored post.  I invested $100 in Johnson & Johnson through them.  They charge $0.99 per trade, so even though they sell fractional shares, I don't recommend investing less than $100.00 per trade.  I plan to keep the account and use it when I want to buy shares of stock that are substantially over $100, since my investments in individual stocks are as much toys as investments and I don't plan to put too many dollars in any one stock.  Stockpile had a promotion this quarter where they were giving away $5.00 worth of Apple stock so I got mine.  At the end of September this account was worth $104.06.   

Kickfurther:

I'm in the process of withdrawing my money not only because I'm in the red (an expected risk of investing) but because I've become convinced that Kickfurther is going to fail.  They have too little business at this time and while they have tightened their contracts and changed their business model somewhat, I've just seen too much incompetence to believe that the investment risk is the only risk I'm bearing and the returns have not justified the risk.

All in all, the third quarter of 2017 was a good one investment wise. 

The Bottom Line

As compared to the beginning of the year, we are about almost a year's pay richer, but most of that is stock market gains, not savings.  We did not have to pull any money out of our savings this quarter, but we haven't been able to replace any we withdrew earlier this year.  However, the big bills for the year have been paid; the next big irregular bill will be the car insurance six months from now and we are saving for it and the other big irregular bills. 

How did the third quarter go for you? 

Which Type of IRA Should I Choose?

While many people have a work-based retirement plan of one sort or another, that plan may not be all you need to prepare for retirement.  Today we are going to take a look at Individual Retirement Accounts--accounts that you fund but which the government helps you with by deferring or foregoing taxes.

Rollover IRAs:

When you leave an employer that has a 401(k) or similar plan, you are offered the opportunity to roll the money from the employer plan into an IRA.  The transfer has to take place between the custodians (companies holding the money) but a rollover puts you in charge of the investments and often allows less expensive options that what the employer may offer.  

Money is a rollover IRA remains there until withdrawn.  If you withdraw it before age 59.5, you have to pay penalties as well as taxes. 

Individual Retirement Account

IRAs are accounts individuals open with banks or brokerage houses and to which pre-tax dollars are contributed.  When you do your taxes, the amount you contribute to your IRA is deducted from the amount of money on which you owe taxes.  As of 2017, individuals under 50 are allowed to contribute $5,500 to an IRA yearly; those over 50 are allowed to contribute $6,500 annually.  

In order to contribute to an IRA, you must have at least as much earned (as opposed to investment) income as you contribute, or be the spouse of an earner.  

IRAs may be invested in mutual funds, stock, bonds, or just about any other type of investment except individually-owned real estate.  You get to decide where to open the account and in what to invest.  You may choose to have one IRA or multiple ones (but the contribution limit is per person, not per account).  

Once money is put in an IRA, withdrawing it before age 59.5 means penalties on top of the taxes owed.  There are a few exceptions, such as the purchase of a home, payments of medical expenses and payments for college, but in general you should consider money in your IRA to be for retirement, not for the new car or other pre-retirement expenses.

Like the 401(k), earnings within the IRA accrue tax-deferred.  If money is withdrawn after age 59.5, that money will be taxed at your then current tax rate.  Also like the 401(k), you are required to take a minimum distribution each year after you are 70.5.  

If there is still money in your IRA when you die, it is distributed to the named beneficiaries (not through your will), and as is true with distributions from a 401(k) they will owe taxes on the money unless steps are taken to defer them. 

Roth IRA

The Roth IRA is a relatively new type of account. 

In order to contribute to a Roth IRA, single people must have a modified adjusted gross income below $133,000, but contributions are reduced starting at $118,000. If you are married, your MAGI must be less than $196,000, with reductions beginning at $186,000.   You must also have earned income (as opposed to investment income) of at least the amount of your contribution.   

While regular IRAs allow you to defer the taxes you pay on both the money you place in the account and the money earned via the account, contributions to the Roth IRA are taxed before they are deposited.  However, the money earned on the account is NEVER subject to income tax.  

Another advantage of the Roth IRA is that you can withdraw your contributions penalty-free at any time, and since you have already paid taxes on them, they will not add to your income that year.  This makes the Roth IRA a good place for young people who aren't sure what the future will bring to save money.  While you don't want to have to take money out of your Roth IRA, the money is accessible if you are laid off, or even if you need a new car.

While regular IRAs require that those 70.5 and older take minimum required distributions, Roth IRAs do not.  If you do not need the money that is in your Roth IRA, you can leave it there to continue to grow.  When you die, any money left in a Roth IRA passes to the beneficiary(ies), and those beneficiaries do not have to pay taxes on that money.  

"Back-Door" or "Conversion" Roth IRAs

As noted above, the main advantages of the Roth IRA are that you never pay taxes on earnings and you are able to leave the account to beneficiaries without subjecting them to income taxes on the money.  However, as also noted above, if you make too much money you cannot contribute directly to a Roth IRA.  But, there is a "back door".  The law allows owners of regular IRAs to convert those IRAs to Roth IRAs.  If you choose to do so, taxes become due that year on the converted portion.  So, if you convert a $10,000 IRA to a Roth IRA,  your taxable income that year increases by $10,000, giving you an additional tax bill of $2,100 if you are in the 21% tax bracket. 

There are quite a few calculators online that will tell you whether it is likely to be advantageous to you to convert your current regular IRA to a Roth IRA (and it can be done a little at a time, you don't have to move the whole account in one year).  Basically you have to consider how long you have until you are likely to need the money, what  your tax bracket is now, and what it will likely be in the future and whether you have cash available with which to pay the taxes. 

Those who do not qualify to put money into a Roth IRA directly are allowed to convert a regular IRA into a Roth IRA.

Which IRA Is Best for Me?

The advantage of a regular IRA is immediate tax relief.  Tax brackets this year for those with taxable income over $91,000 range from 28% to 39.6%.  In those cases, a regular IRA allows you to invest 1/3 more money than a Roth IRA does.  If you are in peak earning years and expect your tax bracket to decrease significantly after retirement, the regular IRA may be your best bet, particularly if you plan to withdraw (and spend) the money.

While the Roth IRA does not give you immediate tax relief, you never owe taxes on the money from the account and you never have to take money out of it.  If you expect your tax bracket later in life to be similar to or higher than your current bracket, the Roth becomes more attractive.  

The main thing to remember about either IRA is that it doesn't make money unless you put money in it, there won't be any money to take out.  

How to Get the Most From Your Work-Based Retirement Program

Work-based Defined Benefit Program:

Unless you work for the governement or a non-profit, you are unlikely to have this available to you.  These are traditional pensions where employers contribute on behalf of employees and guarantee to pay a specific benefit for the life of the employee, based on a number of factors, including the number of years employed, the average salary and the final salary.  

The main advantage of these pensions is that the employer takes the risk.  Contributions from employees may be required, and if so, the amount is not optional.  However, at the end of the day, you will know what you will receive and some of these pensions, particularly for school teachers or military personnel, can be very generous compared to the size of the paycheck.

The main disadvantage of these pensions is that they are not portable.  If you swich employers, voluntarily or not,  you may lose benefits.  They may give you some money upon leaving a job, but it it is probably not worth as much as the pension would be.  For example, I taught in Louisiana public schools for two years, and money for teacher's retirement was deducted from my check.  When I left, they refunded my contributions, but not those of the school system, and I received no interest.  

If you participate in such a plan, you need to know  the vesting schedule.  At what point will you be eligible for payments, and how much will you get?  The last thing you want to do is to leave a job a year or two before you would become eligible for a pension.  

Most pensions have some provision for continuing benefits to a spouse after your death in return for smaller payments during your life.  However, once you (and your spouse if that option is chosen) die, the pension is no longer an asset and cannot be left to your heirs.

Some pensions will allow a lump-sum distribution when you retire, which give you the ability to leave left-over money to heirs, but it comes at the cost of a guaranteed check for the rest of your life.

Generally speaking pension income is taxable income in the year it is received.

Some places that offer defined benefit plans also offer defined contribution plans which are a boon to those who do not plan long-term employment with that employer.

To get the most from a defined contribution plan, consider the vesting schedule carefully in making decisions about continued employment, so that you do not leave right before additonal benefits would be due to you.  In picking  your pension payout, consider other assets available and the age of your spouse to pick the type of payout that will likely be worth the most in your situation.

Work-based Defined Contribution Program

These are the 401(k), 403(b) and similar accounts.  Instead of guaranteeing how much money you will receive when you retire, employers who use these plans define how much they will contribute on your behalf (and sometimes that contributioin is $0).  Employers often "encourage" employees to contribute by making employer contributions "matches" rather than outright grants.  

Employee contributions to these plans are made on a tax-deferred basis, which means you pay income taxes on the money when you take it out of the account, rather than when you put it in.  If you are in the 15% tax bracket that means that $100 contributed to the plan reduces your paycheck by $85.  As long as money stays inside the plan, no taxes are assessed on earnings.  

Employers usually contract with an investment company to run the plan.  Usually employees are offered a variety of investment choices--usually mutual funds or similar--and the employee has to decide how to invest his or her account.

If an employer offers to match employee contributions, employees should do their best to contribute enough to get the maximum match--after all a guaranteed doubling of your money the first year is impossible to find in any other investment.  

As far as how much an employee should contribute to an employer plan once a maximum match has been achieved, that depends on the quality of the offered choices and the expenses related to the plan.  My husband's plan has only high-expense funds with mediocre returns.  We get his match and don't add more to that account.  My office plan is pretty good so we make substantial contributions.

Some companies allow you to borrow from your 401(k), others (like mine) do not.  The only way we could access the considerable money in that account (I've been there over twenty years) is for me to quit.  If I quit and wanted to spend that money before I was 59.5 years old, not only would I have to pay taxes on that money at my then-current rate, I would have to pay a penalty.

When employees leave a job with a defined contribution plan, they can always take their contributions with them.  Federal law requires that employees who have been at a job at least three years be allowed to take some of the employer contributions with them (partial vesting) and that those who have been there at least five years be allowed to take all of the employer contributions with them (full vesting).  Often employees who leave are offered to option of maintaining their accounts in the employer program or of moving them to an IRA.  While employer programs are a little more protected from creditors than IRAs, IRAs give you a wider range of investment options, and often lower fees. Having all  your accounts in one place can also simplifiy monitoring and bookkeeping.

Employees who leave a company are also offered the opportunity to "cash out" their retirement accounts.  For employees who are under 59.5, this means paying a penalty on top of taxes, and if your distribution is substantial, it could push you into a higher tax bracket, thereby costing you even more in taxes.  Unless there is an urgent need for the money, this option is not recommended for anyone.   

When you retire and withdraw money from your plan, it is taxed as ordinary income, since no taxes were paid when the money went in.  It makes no difference whether the money you withdraw was money you contributed, money your employer contributed or money that has been earned inside the account.  Generally speaking, once you reach 70.5 you are required to take a minimum required distribution from your 401k, and that amount is based on what actuarial tables say is necessary to deplete the account by the time of your expected death.

If you die with money in a 401(k), it is distributed to the beneficiary (ies) you named, and is generally taxable at that time unless steps are taken to defer the taxes.  The steps aren't difficult, and hopefully the custodian will inform you about them, but they would require another whole blog post, so maybe next week.

To get the most out of your 401(k), contribute enough to get the maximum match.  Pay attention to vesting schedules so you do not leave shortly before you would be entitled to more money.  Keep an eye on the investment options and fees to determine whether the plan is a good place for discretionary contributions.

Work-based programs form the backbone of most people's retirement.  Know how to get the most from yours. 

*Part of Financially Savvy Saturdays on brokeGIRLrich.*