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Nine Tips for Creating a Smart Investment Strategy from Scratch

Whether you are saving for a retirement that is still decades away or building a college fund for your high school student, developing a smart, diversified investment strategy to also include real estate will not happen by accident. If you want the finances of your future to be better than the finances of today, you need to work hard to make it happen.

You do not have to be a savings savant or a real estate expert to develop a smart, effective and safe investment strategy. All you need is the dedication and desire to get it done, and here are a few tips you can use to make your plan more successful.

  1. Lay out your goals.Before you start on this road, you need to know where you are going. Lay out your short-term and long-term goals and determine your investment personality. Do you prefer to flip real estate for profit or are you the type of investor that enjoys cash flow from single-family rentals?

  2. Explore your options.Know what your options are, from the retirement plan at work to an individual retirement account, IRA, or 529 plans for education. Laying out all the available pieces will make it easier to develop a comprehensive investment strategy.

  3. Pay yourself first.Instead of waiting until the end of the month and seeing how much is left to invest, put your investments first. Whether that means investing automatically in a 401(k) or 403(b) or transferring money from your checking account to ensure you have capital ready to invest in a real estate deal, paying yourself first is a winning strategy. Remember, your income is the greatest wealth generator.

  4. Be smart about diversification.Diversifying your investments should be part of your investment strategy. If you are investing for retirement and have decades to go, you can probably afford to take more risk. If you need the funds in just a few years, reducing or eliminating that risk can keep your money working without the danger of loss. Given where the real estate market is right now, I would consider a 40/40/20 strategy. My colleague Rick Melero from HIS Capital Group and I discuss this at length because it truly is a smart strategy to deploy. Forty percent of your activity should be in real estate flips, 40% of your activity should be in buying cash-flowing assets (e.g. single-family rentals) and 20% of your activity should be in high-risk, high-rewards opportunities.

  5. Keep your costs low.Investment costs can eat into your investment portfolio, so look for the lowest cost products that meet your needs. If you want to play it safe, index funds are low cost and provide exposure to a wide universe of stocks and bonds both domestically and internationally, making them excellent choices for most investors. In the real estate game, consider flipping one home and with the profit, buying two rental properties.

  6. Invest consistently.It can be scary to keep investing when the real estate market is falling, but the down years are actually the best times to buy. When the market falls, every dollar you invest buys more property, and that can make a huge difference when the market eventually recovers. Remember, this is a long-term game; don't be swayed by short-term fluctuations.

  7. Do not be a micromanager.Micromanaging your real estate investments will do nothing but increase your stress level, so avoid daily checks of your account balance. It is important to review your passive investments once or twice a year, but micromanaging your accounts will get you nowhere.

  8. Be smart about taxes.When you make money on your investments, Uncle Sam will want a cut, but there are things you can do to reduce the pain. Keeping your real estate investments in self-directed retirement accounts, which are taxed when you take the money out, is one smart way to reduce your tax bill and keep your investments growing.

  9. Ramp up your savings.Getting started is often the hardest part of investing, but once you are started, it is just as important to ramp things up. If you are currently investing 6% of your earnings into your real estate investing strategy, make it 7% next year and 8% the year after that. This escalation can give you the discipline you need to ramp up the savings over time, and that will be good news for your portfolio.

Developing a smart investment strategy will not happen by accident, but if you work hard and consistently, it will happen over time. The tips listed above can help you get started, and as your comfort level rises, you can up the ante and invest even more.

Dividend Stock Investing Strategy – How to Choose the Best Dividend Stocks

Many investors find themselves experiencing extreme emotional shifts in concert with the unpredictable rises and falls that come with stock market investing. Anxiety may hit like a ton of bricks when prices fall, while excitement sets hearts racing with exhilaration when they rise.

Those who choose to invest in long-term dividends, however, will not feel this same angst as stock prices shift. These investors know that the financial success of their investment is not based on the vagaries of the market itself, but rather on the long-term success of the company. They believe that the stock price and dividend will eventually rise over the long haul, resulting in huge gains over a long period of time.

So, what type of investor should you be? Should you ride the rollercoaster of short term investing, or settle in for the long haul? Really, it’s all about your personality and financial goals. Read on for some of the how’s and why’s of long-term dividend investing.

What Is a Dividend?

When a publicly traded company earns a profit, the management generally has three choices:

  1. Reinvest the money in the company.

  2. Offer a share buyback.

  3. Offer a dividend to investors.

Frequently, fast growth companies will keep the proceeds and either reinvests their income in the long-term growth of the company or offer a share buyback. Share buybacks increase each investor’s proceeds in the future by decreasing the outstanding shares of stock.

Other companies will issue a dividend, or a share of the company’s profits, which is paid out to investors on a quarterly basis.

Long-Term Dividend Investing

Dividend stock investing does not often provide the short-term capital appreciation of hot penny stocks. Nor does it match the excitement of day trading, which during rapidly rising markets can make these investments seem like stodgy, slow money stocks. Moreover, dividend-paying securities often fall out of favor in rapidly rising bull markets, subsequently regaining a fervent following during turbulent and unpredictable markets. This is due to the relatively moderate growth nature of these securities as well as the slow compounding nature of dividends that can be achieved through a long-term, buy and hold philosophy of dividend stock investing.

However, during slow growth bear markets, more and more investors seek shelter in dividend growth stocks such as blue chip stocks. In addition, the stability that these stocks can offer makes them an attractive class of security to include as a component in any portfolio during both harsh and thriving economic times.

Now that you know what dividends are, and how they work in the market, is it the right investing route for you? Here are a few things to consider:

  1. The Power of Dividends

When choosing whether or not to begin this type of investing, it is important to understand the hidden power of dividends. Take these dividend facts into account:

  • You can’t fake a dividend. Unfortunately, recent history has proven that “creative accounting” methods can be used to falsely inflate a company’s earnings per share and other valuation tools in order to falsely increase share price. Dividends offer protection from these shenanigans. Companies cannot pay out money that they do not have.

  • Dividends protect you from the downside. During a bear market, when prices of many securities fall, dividend-paying stocks actually become more attractive, as their dividend yields effectively increase. This can result in an artificial stock price floor, preventing the huge capital losses that can provoke panic selling.

  • Dividends result in more shares. Using a dividend reinvestment strategy or dividend reinvestment plan (DRIP) will result in each of those incremental payouts building commission free equity in your position, which in turn results in bigger dividend payouts the following quarter.

  1. A Strategy for Investors, Not Traders

When choosing a dividend investing strategy, it is important to develop a long-term investor’s mindset. To the dividend investor, a share of stock is a living, breathing piece of a company, not solely a vehicle for capital appreciation. By looking at the investment as such, you will not be disappointed by what will likely be a slower growth rate than non-dividend-paying stocks. The most important factors in their overall investing strategies are:

  1. The long-term growth and financial prospects of the company.

  2. The current and long-term financial health of the company.

  3. The health of the company’s dividend and the ability for its payout to increase over time.

  4. Management’s treatment of investors. 

  1. Successful, Long-Term Investors Choose Dividends

Warren Buffett has been called a value investor. Indeed, he has historically purchased shares of companies when they are being sold at a discount to their inherent worth. But, if you review the top 10 holdings of Berkshire Hathaway, you will also find each position constitutes a dividend paying security. If dividend stocks are the investment of choice for the most successful investor in history, shouldn’t they be good enough for your personal investment portfolio? Buffet loves dividend-paying stocks because they add another, more stable form of capital appreciation above and beyond share price increases.

How to Choose the Best Dividend Stocks

As with any investment, it is imperative to do your research when choosing a dividend stock. The most important things to consider when determining the correct dividend stock for your portfolio are:

  1. Long-Term Prospects

Dividend investing is a long-term investing strategy. When asked what his favorite holding period for stocks is, Warren Buffett is reputed to have replied, “Forever.” This is a dividend investor’s mindset.

As a dividend investor, you never want to sell because this ruins your long-term investing strategy. So you must carefully choose companies with the long-term staying power and ability to thrive despite economic conditions. Seek corporations that grow, regardless of external economic conditions. Even dividend investors have to sell from time to time, when the underlying business or strategy changes.

  1. Financials

If you can’t read a balance sheet, research the company’s bond ratings. You want to invest in the companies with the best credit ratings (investment grade or above). If you are familiar with reading financial statements, you will want to look at all of the traditional valuation tools, including the P/E ratio, price/sales ratio, Enterprise Value/EBITDA, and book value.

The company’s outstanding debt structure will also be important to understand, as a corporation’s creditors will get paid before the shareholders in any financial downturn.

  1. Management and Dividend History

Look for companies with management teams that have a reputation for being investor-friendly. Consider the management’s historical treatment of dividends and share buybacks, as well as the ability to navigate difficult financial times. Has management ever suspended or lowered its dividends? Has the company ever missed a dividend payout? Or has the company consistently grown its cash reserves and increased its dividend yield over the years?

  1. Competition

If someone will be putting this company out of business in a few short years, there’s no point in owning the shares as a dividend investor. Remember, fads come and go, but excellent companies with long-term staying power have the ability to navigate difficult financial waters while emerging as a leader in their industry. Look for industry leaders with staying power.

Final Word

Long-term dividend investing can be an excellent choice if you are looking to gain big over time. While it doesn’t necessarily provide the instant gratification (or complete devastation) of short-term investing, it does promise a more stable investment strategy. Take a page out of the playbooks of big investors like Warren Buffett, think long-term, research the companies you’re investing in, and your portfolio will significantly benefit.

Investing in Individual Stocks – 5 Survival Techniques in a Changing Market

Investing in Individual Stocks – 5 Survival Techniques in a Changing Market

There are no flashing lights, no clatter of coins hitting the metal bins of slot machines, no raucous shouts of victory or envious looks when a winner hits it big. But some believe that Wall Street is no different than the Las Vegas Strip – less glamor, less glitz, but still a place for gamblers to risk all where the house has the edge.

Dr. Leon Cooperman, the noted hedge fund founder and president of Omega Advisers, Inc., warned President Obama on CNBC television that “the best capital markets in the world were turning into a casino.” And The Motley Fool, a popular newsletter for individual investors, said in November 2011 that “market volatility had become so erratic this summer that it often felt like a rigged game.”

But what does this mean to the individual investor? Is the age of analyzing and picking your own investments passé? Should you be working with a new investment strategy? Knowing how to invest today requires, at minimum, two things: an understanding of how the market has changed, and strategies for survival in the new environment.

Fundamental Changes in the Equity Markets

Beginning in the 1970s, the composition of Wall Street participants – those who worked in the industry and those who invested in corporate securities – began to change. According to the Conference Board, an internationally known independent research association, institutions (pension/profit-sharing, banks, and mutual funds) owned 19.7% of the total U.S. equity value ($166.4 billion) in 1970. But by 2009, the institutional share had grown to 50.6% ($10.2 trillion) of the total value. According to Stat Spotting, a website that tracks the identification of stock buyers and sellers, professional or institutional funds accounted for more than 88% of the volume in 2011, with retail investors being only 11%.

Investors who purchase stock in individual companies – once the source of the majority of trading volume – have become increasingly rare due to the disadvantages resulting from the transition to institutional investor dominance. In fact, top performing stocks are likely to be sold by individuals and bought by institutions. What this means is that individuals are liquidating too soon, while institutions are picking up these stocks en masse, increasing their positions, and capitalizing on the subsequent appreciation and rise in profit.

Predominance of the Institutional Investor

The decline of investors buying individual stocks is due to a number of factors, including:

  • The Attrition of Publicly Available Quality Research. The consolidation of Wall Street brokerage firms, the effect of the negotiated commissions on security trades, and the willingness and ability of large investors to purchase private equity research has resulted in a significant loss in the quality (depth) and quantity (companies covered by analysts) of free equity research available to small investors. As a result, individuals are more likely to retreat from individual stocks and invest in managed security funds than spend the personal time and energy and gain the expertise necessary to be successful as an individual investor.

  • The Rapid Adjustment of the Market to News. Theoretically, profit opportunities exist where information voids are present. These anomalies allow a knowledgable investor through independent research to have an advantage that other investors lack. However, the expansion of technology combined with worldwide communications and a sophisticated retrospective review of unusual market activity has minimized the likelihood of an information advantage.

  • The Increased Volatility of the Market. Institutions, due to their size, are generally limited to companies with large “floats” in which they can take major positions. In other words, a large number of investment companies seek to invest in the same small group of large-cap companies. This concentration creates wide variations in prices as they adjust their positions by buys and sales, often in the same periods. In addition, high frequency traders (HFTs) using technically adroit software programs constantly move in and out of the market, amplifying price movement for a series of small profits. These funds, which account for more than one-half of the daily volume, are not mutual funds buying and holding securities for investment, but short-term trading entities which capitalize on short-term price movements.

  • The Popular Acceptance of the Efficient Market Hypothesis. Market theorists have posited for years that it is extremely difficult, if not impossible, to out-perform the market on a risk-adjusted basis. This view is commonly known as the efficient market hypothesis. In other words, your expected return generally will be that of the market unless you are taking inordinate risks. That is to say, you might make $1 million by investing your retirement savingsin the shares of a new technology company, but you’re just as likely – if not more likely – to go broke. As a consequence, most investors have elected to leave investing to the professionals.

Despite the changes in the fundamental nature of the equity market, many people continue to believe in a market of stocks, rather than the stock market. They believe that good research and a fundamental, long-term approach to investing enables them to pick stocks that appreciate even if market averages go down. Others are content with the returns of the market as a whole, buying a fund that owns stocks of the same identity and proportion as in a popular benchmark index, such as DJIA or the S&P 500.

It is true that not all stocks go down or up on a single day or in any single period. There are always winners and losers. If you feel that you have the stomach, the brains, and the fortitude to thrive in this market, there are strategies that might keep you on the winning side.

Stock Investing Survival Techniques

One of the most successful investors of the modern era is Warren Buffett. Buffett recently told people at the Berkshire Hathaway annual meeting, “The beauty of stocks is that they sell at silly prices from time to time. That’s how Charlie [Munger, an early partner] and I got rich.” He has always taken a long-term perspective, sought companies that were overlooked and undervalued by the market, and exercised patience, believing that good management would deliver results that would be ultimately reflected in the stock price. There is no better example to follow if you elect to purchase stock in individual companies, rather than mutual funds.

Warren Buffett’s rules of investing include:

1. Invest in Yourself

Learn the rudiments of stock market analysis by reading and studying “Security Analysis,” a classic book written by Benjamin Graham and David Dodd in 1934 and still considered the bible for investors. Study annual reports of companies to become familiar with accounting and financial reporting, and subscribe to “The Wall Street Journal” to get a financial perspective on the nation.

2. Focus on the Long-Term and the Value of Good Management

On any given day, some industries and companies attract the attention of the public with the promise of untold riches and worldwide dominance. While the popular picks rarely deliver hoped-for profits, they often explode in price on the upside following by an equally spectacular implosion. When selecting long-term investments, consider the following:

Concentrate on industries that are stable and will remain vital to the economy into the future. Buffett’s current investment portfolio includes insurance, entertainment, railroads, and his much publicized investment into the automobile industry.

Look for companies with a long-term future in products that people use today and will continue to use tomorrow. For example, Buffett’s biggest winner has been Coca-Cola, which he purchased in 1988 and still holds. As part of his analysis, he seeks to understand the industry in which the company operates, its competitors, and the events that are likely to affect it over the next decade. The management team is important with a track record of long-term growth in profits.

Buy companies that are undervalued relative to their competition. Plenty of companies with a history of improving earnings year after year and have lower price-to-earnings or price-to-sales ratios than their competitors are being overlooked in the market. Since this condition tends to correct itself, identifying these companies can represent an opportunity for profit.

3. Diversify Your Holdings

Even an investor with the prowess of Buffett can be wrong with regards to a company or its stock price. In 2009, he admitted taking a loss of several billion dollars on ConocoPhillips when he failed to anticipate the dramatic fall in energy prices.

Spreading your risks is always a prudent course to follow. Most professionals recommend a minimum of six positions or companies, but no more than 10 due to the work necessary to remain informed. It is also wise to vary investments across industries with the expectation that a general recession will not affect all of the companies and industries in the same manner or amplitude.

4. Act like an Owner

Be sure you’re on the company’s mailing list for announcements of new products and financial results. Buy the company’s products and services, and recommend them to your friends. Attend company board meetings and other public events where the company will be present. Learn the name of the security analysts following the company, and read their analyses. Treat the investment as your company and not just as numbers on a brokerage account statement.

5. Be Patient

The market is full of examples where companies rise, fall, and rise again, demonstrating the underlying fundamentals and the value of a competent, if not outstanding, management team. Apple Inc., the company with the highest stock capitalization in the world, sold on March 1, 2002 for $21.93 per share. On March 1, 2007, the stock sold for $122.17, but fell to $78.20 by February of 2009. An investor selling at that time would have missed the stock at $621.45 during March 2012.

If the reasons you purchased a company initially remain in place, keep the investment no matter how long or how short you’ve held it. The fact that the stock price goes up and down is not justification by itself to sell or buy.

Final Word

While the stock market attracts more than its fair share of gamblers, investing doesn’t require taking extraordinary risks. Fundamental investing is based primarily on safety of principal with the knowledge that good management in an undervalued company will pay better than average returns to investors over time.

Do you use any of these principles? What has your experience been with them?

How to Find Prime Investments with Dividend-Growth Potentials

It is a common belief among most investment experts that the fastest way to financial growth is to invest in long-term ventures or to set a gestation period of at least 10 years for enhancing one’s prospects for bigger revenues instead of building a portfolio of short-term assets (for example, bonds and mutual funds). Hence, experienced leaders recommend diversifying investment portfolios with top-quality stocks that pay high dividends. This strategy has proven to be an efficient approach for investors to gain high long-term revenues that can sustain a stable retirement future for them.

Remember that this investment option is suitable only for investors who can have the patience and endurance to go for the long haul and choose to invest back dividends into the firms that offer payouts. For novice dividend investors, these primary advantages of investing in dividend-paying stocks on a long-term basis:

  1. Highly rewarding with a potential return of a maximum of 45% when you re-invest.

  2. You stand to gain a large number of shares, resulting to greater returns when you finally retire.

  3. Dividends provide a lower volatility than earning over time.

  4. Companies offering dividend stocks are most often well-managed, stable businesses in their particular areas and can, therefore, sustain their operations through unpredictable market conditions.

Nevertheless, be ready to apply many approaches of investing in dividend stocks in order to maximize your opportunities to gain big returns. Visit websites or consult experts to find out other essential investing tips any dividend-growth investor should implement to enhance your portfolio’s long-term viability.

Aim for the overall return

Investing in stocks that produce high revenues does not readily bring in your expected overall returns; the process all hinges on the results of capital growth and the actual dividend outcome. However, do not give up on dividend returns. The top dividend-producing stocks have the highest payout ratios, although it also means having less money to invest back with below-average dividend growth in the future. Hence, the best strategy would be to aim for the overall return rather than aiming for high yields; this is due to the fact that dividend growth depends heavily on the future outcome and not on the present performance.


Dividend growth has nothing to do with time; therefore, persevere as you implement your long-term strategies. Wait patiently as you hold on to your stocks over a long period of time, not panicking even when market values dip. Buying and selling on impulse could cost you more than you have to because of the burdensome expenses, such as brokerage fees and taxes; and, moreover, you lose the compounding benefits of potential returns from high-yielding dividends. Nevertheless, when stock prices decrease in times of recession, stocks offering high-quality dividends can sustain large payouts to investors. Remember that firms that consistently provide sizeable returns yearly will help you accumulate stable revenue on the long-term basis.

Well-known investment guru Jeremy Grantham was quoted by Reuters as saying this: “Be patient and keep your eyes on the light ahead…. Endure the pain in the meantime since an excellent investment will grow eventually. More often than not, individual stocks will recover; and all markets eventually do.”

Measure the risks involved

Besides persevering over the long-term, investors must also know when they have to invest and when to reduce any losses, the common qualities possessed by well-seasoned industry traders. FXCM recommends that traders must fully understand their trading personality, or, as in your situation, your investing personality. Ask yourself this: “Am I a risk-taker?” for it will show the type of investor personality you have to maintain and the best strategy to build wealth. As in all investment ventures, investing in dividend growth stocks likewise demands measuring risks and using your instincts often. All investors must learn to cut their losses and to let profits roll. Avoid the common human weakness to cling on to one’s losses and calculate early both the degree of risk and the potential returns to diminish or eliminate the effects of human emotions on your investment decisions.

Finally, it is important to stick to a well-designed strategy (meaning, the dividend income need you have set as your goal, investment approach to apply), as a dividend growth venture lends well to a systematic investment approach. From here on, you are all set to raise your investment portfolio to a higher level of performance by using these recommendations. All the best in your investment journey!

Tax-savvy Tips for Retirement Savings

With the New Year with us, it is appropriate to consider your retirement savings and find out if you are benefitting at all from any applicable tax law with regard to your retirement future.

Melissa Sotudeh, a certified financial planner in Washington, D.C., offers tax-savvy advice on retirement savings.

What is the most vital aspect in retirement accounts tax-planning?

To a certain degree, you can control your income tax bracket by maximizing salary deferrals — for instance, by maxing your retirement accounts, such as 401(k) and IRA plans; hence, reducing your taxable salary. On the other hand, you can become tax-efficient when you invest money for college education, retirement or other objectives.

If you are in a lower tax bracket, take advantage of specific deductions, such as those for seeking a job or relocating for work, and tax credits, such as the education credit or the child-tax credit. Contribute to a Roth 401(k) as well, allowing you to pay lower-rate taxes today and then take out your Roth funds free of tax when you retire.

When you reach a higher tax bracket, salary deferral could be the best choice for a lower taxable income. Maximize your contributions to 401(k) or Health Savings Accounts.

Approach your investment planning as tax-efficiently as you can. This has nothing to do with tax brackets, rather, with the tax treatment of your portfolio investments. Strategies involve keeping the right investments in the right account (e.g., keeping tax-advantaged investments such as municipal bonds in a taxable account), annual tax loss harvesting and selecting funds with tax-effective features, such as low turnover ratios.

What is the most common pitfall in terms of income and tax brackets?

People do not leverage tax-advantaged savings instruments before they are phased out -- which is a common error with Roth IRAs. Although a great savings tool, your capacity to contribute starts to get phased out beyond specific earning levels. For 2017, the Roth IRA salary limits start once you begin receiving more than $118,000 ($186,000 for married, filing jointly). At the $133,000 income level ($196,000 for married, filing jointly), you are not qualified to contribute.

Likewise, not using the catch-up allowance for tax-deferred retirement accounts and HSAs, which allows you to contribute way above your retirement account when you are 50, is a big mistake. If you can, take full advantage of this chance to rev up your saving and limit your taxable salary. The catch-up contribution for retirement accounts, for instance, 401(k)s, is presently $6,000, aside from the regular $18,000 limit. It should give you a total maximum contribution of $24,000 every year for 50-above individuals.

$1,000 catch-up contributions for HSAs are permitted beginning at age 55, aside from the maximum yearly contribution of $3,400 for individuals or $6,750 for families.

What else can people do about optimizing their tax status?

Giving to charity through Donor Advised Funds is an efficient way to optimize tax management in any particular tax year. Using these funds, you will be able to give money or appreciated assets and avail of the tax deduction for your donation during the year that you contributed the amount. Nevertheless, you need not choose a recipient beneficiary for your donation within that year. You may let assets in the fund to increase in time and contribute to any 501(c)(3) charitable group any time you desire.

No matter what investment method you choose, choose the appropriate tax strategy needed to optimize investment taxes.


Arisa Horikawa

Author:Arisa Horikawa
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