Entries from May 2010 ↓

When the markets take a nose dive, it makes the financial “advisors” look like they don’t know what they’re doing, because they have been telling people to “stay invested no matter what” – and yet, average investors find themselves treading water, as the increases erode with just a few days massive declines. The problem is that this advice is intended to help everyone except the individual investor. The financial advisors are selling product. They make money when you first invest, and after that, they don’t care much. Except for when they can tell you to invest in something else, and they make money again. Their fortunes are not tied up in whether you make money in the stock market or not. True, you may decide to move your account as a result of bad advice, but the advisors at the next firm you go to have the same motives, the same results, and the same product as the advisor you are seeking to leave.

The only way to really protect your finances is to invest yourself using a self-directed account. Whether you have a self directed individual account, a self directed rollover 401k account, a self directed custodial account, only you have your own best investing interests at heart. Many people who put money into mutual funds and other products – who are not truly “investors” as will be explained below – don’t want to hear that they have to learn how to invest. But the sobering fact is, even if you choose not to invest your own money in a self directed account, and prefer to give your money to someone else to invest it, you need to understand the markets and know how to invest so that you can make sure your broker is doing the right thing. You won’t know that if you don’t understand investing.

I’ve heard people say “I don’t want to know all the details of how to invest in stocks, so I hire a professional.” Well if you have less than a$250,000 to invest, real professsoinals, who operate on a fee only basis, are not going to want to work with you. There is no profit in it for them to have dozens of investors who only have $5,000, $10,000 or even $50,000 to invest. The reason is, they get fees that are high enough that it eats into your returns, and they can’t show you a decent return on your investment after you deduct the costs of using their services. And small investors are more likely not to want to pay fees in the hundreds of dollars to get advice anyway. So if you are rich, you can afford to hire a professional. The rich are not in the position of being concerned about saving what’s left of a very small nest egg.

So where then do you invest if you want to have a self directed account? The idea is, you invest then in vehicles you understand, and that you learn how to trade. In the beginning, this may mean just a money market fund, or a government bond fund, something conservative which is easy to grasp and where you can park your money relatively safely while you learn more. From there you can graduate to investing in index funds, but using ETFs instead of mutual funds, as they are cheaper to trade, have no minimum balance requirements (like the $3,000 minimums you’ll find as some fund companies) and they don’t have the same fees and taxes.

At some point, you may even learn to buy stocks, and there is nothing wrong with doing that, if you learn how to do the research, follow the market, and are ready willing and able to make trades that aren’t just based on emotions, but a solid financial plan. There are plenty of good sources of information about how to invest in stocks, from broker resources, to books, to entire publishing companies that put out nothing but investor information.

The point is you are going to take it slow, at your own pace, to learn about what works for you, and understand how your money is working for you. You are not then at the whim of some advisor and their desire to make money for themselves. You don’t have to be anxious about not knowing what is going to happen to your hard earned money, and what exactly it is invested in. You can relax, and plan your future around a financially stable plan, and know that you have the skill to take care of yourself financially.

With all the talk about derivatives on Wall Street and Washington, the average investor might think that derivatives are confusing and complex and not available to them. The fact is that derivatives have been around for awhile and actually come in a variety of types. For example options, where you pay money up front for the option to buy or sell a stock, have been around for decades. Learning to invest with options adds a layer of protection for any investor with a significant portfolio, helps to diversify your risk, or even opens up a world of speculative investment for investors who don’t mind taking chances. Learning to use options is critical to the success of any portfolio today. We don’t think that that’s exaggeration. Hedge funds, pension funds, large institutional investors of all types are using options as a way to guarantee that whichever way the stock market goes they will have some protection. Given the way the stock market has been volatile in the past, it’s important to learn how to use these tools as just that-another tool in your toolbox.

Understanding options  is not that difficult. There are a huge variety of online tools available to help teach investors how to take advantage of this valuable investment vehicle. For example the options institute has an entire website devoted to nothing but educating investors on how to use options. The Options Industry Council(OIC) provides many top online educational tools including free webinars, recorded seminars, and virtual training platforms to help any investor try their hand at buying and *selling options* while taking zero risk with real money. In addition, you can find multiple books and magazines available for additional education. There are all kinds of books on the market on the subject getting started with options. Reading these, in conjunction with the virtual training tools available online, can help you get your feet wet and feel more confident in your ability to train options.

How do options work? The simple answer is that an option is simply giving you a right to buy or sell a stock but not the obligation to do so at a specific price that you select. Options are available for individual stocks and ETF’s on the market. There are also options available for commodities and futures trading. When you research options online, you select an individual stock for example for which you would like to see the option chain. An option chain lists all of the outstanding options for the next several expiration periods. When you purchase an option, you are purchasing the right to buy stock at a particular price point before an expiration date. So if you select a stock that you expect to go up in the next several months, you would buy a call option.

When you are buying or selling options based on stock you have in your portfolio that is called a “covered” option. When you don’t hold the stock itself in your portfolio, these are called “naked” options. Selling options based on stock you have in your portfolio lets you take care of market downturns where you may lose money on your stock price but earn money on your option purchase. Unlike covered options, buying or selling naked options is an outright gamble on whether the price of the underlying stock will go up or down.

Some of the best brokerages where you can trade options are the discount brokerages. Brokerage companies like Trade King, Options Express, or Interactive Brokers are brokerage houses that allow you to trade options for very low cost. With options, you normally pay a commission plus a price per contract. If you are buying and selling options frequently, these costs can add up so it makes sense to use a brokerage with low fees. In addition, many brokerages offer extensive training tools as well, because as an investor gets more educated about how to invest in options, they are more likely to purchase these investments for their portfolio. Look for features like how to materials including publications and webinars, forums where investors both beginner and expert alike that exchange information, and other trading blogs that can show you hands on information about actual trades being made in the field. Some brokerages even allow investors to publish their trades, so that you can follow along with some of the top traders who are training with the same firm.

*Getting started with options* is fairly simple. It might take some time to learn the ins and outs and go through some of the training materials, but afterward you will have a knowledge base that will help you profit and build your portfolio exponentially. Most brokerage accounts allow options trading for certain investors, and certain minimum balances may apply. Check with your broker, or investigate some of the other top brokerages for trading options. Here at Saving Cash Tips, we recommend Trade King, which is the brokerage we use ourselves. They offer an extensive variety of educational tools, forums and discussion groups, and research tools that are hard to find at other brokers. In addition the fees are rock bottom. Whether you decide to use options as a hedge mechanism or as a speculative vehicle to boost your returns, if you expect top returns you will definitely need to learn how to invest with options.