2015 New Year's Resolution Breakdown

2015 was not a great year for my personal finance goals.  Here’s a quick rundown of my 2015 financial resolutions and how I plan to meet them in 2016.

1.       Max out my IRA.

a.      Accomplished.  It’s the first thing I do every year so I have money to invest with.

b.      2016:  This is always my first goal, so I’ll definitely accomplish this.

2.      Save $X in my savings account.

a.      Accomplished.  This is the second thing I do every year now that I have a house, to cover large maintenance expenses.

b.      2016:  This will come second after my IRA, and I have no doubt I’ll accomplish this.  I plan to buy a car in cash this year too, so this near-term goal will be a primary objective.

3.      Save at least $X every paycheck.

a.      Not accomplished.  We had some large expenses this year, and we basically took 3 vacations.  We went back home for two weeks, Vegas in December for two weddings, and my in-laws came to my house for the holidays.  I came close though; just needed one more paycheck in the year.

b.      2016:  I’ve already implemented some routine deductions in expenses throughout the year.  This should help balance some of the larger expenses like car and housing maintenance.  I’m also going to try and publish blog posts more frequently and build some side income.

4.      Increase 2015 passive income (dividend/interest/mutual fund distributions) by 50%.

a.      Not accomplished.  I waited too long in my investing career to focus on passive income from investments—which explains the goal of trying to reach a 50% increase.  There were several factors contributing to me not reaching my goal in 2015.  The first was a reduction in end-of-year mutual fund distributions.  There weren’t a lot of short- and long-term gains with the market dropping this year.  Additionally, some of my dividend stocks gained quickly and I sold the profit.  For example, WWE offered a 5% dividend when I bought it a low of $9, but then it skyrocketed to $18—doubling my money, and I sold it.

b.      2016:  I’m going to put more money into mutual funds during large market drops.  I will also put more money into large dividend payers whose industry isn’t doing well like oil companies and Real Estate Investment Trusts (REITs).  I have a solid chunk of money in bonds, so I’ll need to keep a close eye on the bond market and make sure that I don’t take a huge capital loss by keeping my money in those bond mutual funds just to get a passive income.

5.      Net assets of $X on 31 Dec.

a.      Not accomplished.  I rarely reach my net asset goal, mainly because the percentage increase is always higher than the market average.  I’ve also never measured my progress monthly or quarterly.  I guess I just hoped I would land on the arbitrary amount at the end of year.  The main reason for not meeting my goals this year was the massive loss I took trying to get quick money.  I invested in some speculative, risky, short-term investments and underestimated how quickly I could lose money. 

b.      2016:  I’ll need to split the goal into monthly and quarterly goals and work harder if I’m not meeting those goals.  I won’t make those same risky investments I tried in 2015 either.

I have a feeling that 2016 will be a great year for those prepared and ready to take advantage of it.  What are your 2016 New Year’s goals?

USAA Index Funds (USSPX & USPRX)

This March, LeBron James asked Warren Buffett for investing advice. Mr. Buffett simply told him to keep 10% in cash and 90% of his money in an S&P 500 Index Fund (http://www.cnbc.com/id/102467435). This is becoming the common advice from most professional money managers now. As a whole, individual investors are unable to beat the market and often pay more fees to brokerages trying. Hedge and Private Equity Funds, which are sometimes able to beat the market, are often outside the reach of individual investors. To make the most of your money, Index Funds offer the greatest exposure to American (domestic) stocks; diversify for the lowest overall risk; and often have the least amount of fees.

Military members often choose to bank with USAA because of its exceptional customer service and understanding of the military lifestyle. Personally, I use Fidelity for my brokerage for my IRA and taxable accounts but there have been times when some of the uniqueness of my military career has made transactions difficult. Thanks to fully online services, my military service hasn’t interfered with much of my banking needs. But if you do like to bank with USAA, then USAA offers two S&P 500 Index Funds.

1. USSPX – S&P 500 Index Fund Member Shares with a minimum investment of $3K. The expense ratio is ~.26% which is really low (a good thing) compared to the category’s average of .59%. The Fund has a 4-star Overall Morningstar Rating which is good and has a 7.78% 10-year average return.
2. USPRX – S&P 500 Index Fun Reward Shares with a minimum investment of $100K. The expense ratio is ~.16% which is lower than the Member Shares Index Fund because it’s a larger amount of money being spread across the mutual funds and reduces overall transactions for the fund manager. The fund also has a 4-star Overall Morningstar Rating and has a 7.9% 10-year average return which is only slighter higher than the Member Shares fund probably because of the lower expense ratio. If you have $100K to put into one investment then you probably don’t need the advice of this blog (joking).

Index funds are a great way to invest in the stock market without having to make individual stock and mutual fund selections. An S&P 500 Index Fund is still exposed to stock market risk so if the stock market sinks so will the Index Fund. If the market does sink, regular monthly investments, you will be buying more of the fund at lower stock prices. Another risk is the S&P 500 invests in the Top 500 American companies so you may not be exposed to international growth from emerging markets. The Index Fund is ~98% in stocks so as you get older you may be exposed too much stock. LifeCycle Funds often provide better protection as you get older so having a LifeCycle Fund and an Index Fund is the ideal investment strategy.

 

Big Thrift Savings Plan (TSP) Returns

In my previous blog post titled, Active TSP participation, I recommended taking advantage of the recent market dip by changing your portfolio allocation or by doing an Interfund Transfer (IFT). In less than two weeks, you could have earned over .5% in most of the funds besides the “G” and “F Funds”. Considering that the national average for the ANNUAL return of savings accounts is less than .5% (http://www.bankrate.com/checking.aspx), then you could have made more in two weeks than all year in a typical savings account while keeping your money in your TSP accounts.

Date	L Income	L 2020	L 2030	L 2040	L 2050	G Fund	F Fund	C Fund	S Fund	I Fund
14-Oct-14	17.11	21.98	23.55	24.84	14.00	14.55	16.71	24.66	32.31	23.94
22-Oct-14	17.24	22.38	24.11	25.53	14.44	14.56	16.68	25.63	34.15	24.35
Gain/(Loss)	0.74%	1.79%	2.32%	2.72%	3.04%	0.06%	-0.20%	3.78%	5.38%	1.67%

*Data as of 23 Oct 14

You don’t have to be passive when it comes to major market swings and the Thrift Savings Plan (TSP). I understand most people want to invest and forget when they participate in the TSP. “Dollar cost averaging” or investing at regular intervals can earn you average results compared to the market; but by taking a passive approach to investing, you can achieve above average results.

Why I'm Not a Billionaire Yet...

To date, I’ve been unsuccessful at “beating the market” and becoming a self-made millionaire/billionaire through investing. In some years, I’ve beaten the market and professional investors; however, over 12 years of investing myself, I’ve managed to barely get a decent return compared to inflation. If I had put all my money into an Exchange Traded Funded (ETF) and have done no research or any active managing, I would have a significant higher rate of return. Here are some lessons and some recommendations I’ve learned which I’m hoping could help other self-managing investors.

·         Investing takes time. To be successful at investing, you must do a significant amount of research, all the time. You have to read books, stay current on events and research all types of market patterns, ranging from coffee prices, labor disputes, droughts in Russia to major political changes. The more you know about an investment’s “circle of influence” the better you’ll be at making a decision on when to buy. Personally, I do not spend the appropriate amount of time it takes to be extremely successful. Those who are successful make it a priority in their lives.

o   Recommendation: I recommend going to SeekingAlpha.com, Fool.com and Morningstar.com and Marketwatch.com to keep you updated.

·         Investing takes patience. One of the causes of losses in my portfolio has been a lack of patience. I jump into investments without sufficient data because I was impatient and was hoping to “get rich quick.” Or conversely, I’ve sold out of stocks because I was impatient with the slow rate of return. You have to be able to shut down your emotions while making investment choices. My obsession with becoming a millionaire has stopped me from being able to shut down my emotions. I recently joined some young people doing quick options and penny stocks and my emotions got the best of me and I jumped in without controlling my emotions. I’ve lost quite a bit of money doing the same thing with other investments.

o   Recommendation: Don’t jump into any investment unless you are fully prepared. Know where your entry and exit points are. Know how much you expect to profit from each investment.

·         Investing takes persistence. Gone are the days when individual investors can invest and forget. If you are going to manage your own investments then you must be active. This doesn’t mean day trading but it does mean spending a lot of time each day evaluating your investment objectives. I don’t have persistence and if I do, it’s inconsistent. If I pick some good investments, I start to become complacent. If I lose too much money, I’ll become disheartened and turn away from investing. My lack of persistence has left me on the sidelines during bull market runs and left me holding on while all my stocks dropped during bear markets.

o   Recommendation: I recommend checking your news sources daily and then focus on your strategy’s results on the weekends. Utilize trackers to measure your performance and compare to the market or similar investments. You may have earned a profit but was it less than a passively-managed strategy? This persistent evaluation will keep you on track with your goals and help make minor corrections at the correct time.

·         The power of dividends. For almost a decade, I had ignored the power of dividends. I spent most of my time trying to find the next Apple (AAPL). Many investors who focus primarily on dividends may never see their portfolio totals skyrocket in a couple of days or months, but over time they will consistently match or exceed the market because the dividends are reinvested during bear markets and then the stock rebounds giving you more capital gains and more dividend income. Many “boring” companies also increase their dividends throughout the years. So your $1,000 investment earning a 4% dividend 10 years ago but would now be getting an 8% dividend because the company kept increasing its dividend yield.

o   Recommendation: When using stock filters always consider dividend yield and dividend growth. If you are investing in mutual funds, consider high-yield or income based funds.

 If you are looking at becoming a self-made millionaire/billionaire in the stock market, then I hope this has helped you. But even for those just starting out, I hope this information has helped.

Military Financial Report Video #2 - USAA Mutual Funds

Check out the second video in my YouTube series.  In this short YouTube clip, I take you through a quick tour of USAA's mutual funds and how to find which one is right for you.  Please let me know if you would like a YouTube video on a specific topic.  Also, if you like the videos, please remember to Subscribe, Comment and Like the videos.

Everything You Need to Know About Dividends

If you’re not fluent in finance, then hearing two people talk about it can sound like two people speaking a foreign language. I met another military blogger, Starting from Zero, and his site focuses on investing with an emphasis on DIVIDENDS. Here’s some information about Dividends so you can increase your finance fluency and how to invest with them.

What are dividends? Dividends are paid out to shareholders by companies. When a company goes “public” it offers up shares in exchange for money. The company can use this influx of money to make the company bigger. The shares represent a portion of the company. If the company offers up a large portion of shares, then it most likely will offer a Dividend too. A dividend is a portion of a company’s sales returned to the shareholder. In industries where companies are mainly owned by shareholders, like utility and phone service companies, you will find larger dividend amounts. In industries where companies have few shareholders, like technology stocks, you will find smaller dividend amounts.  Some companies are legally required to pay out a dividend, like Real Estate Investment Trusts (aka REITs) and carry very large dividend yields; though their stock price remains stable.

How do you invest with dividends? Dividends are an essential element for anyone investing. Some people create portfolios, or collection of investments, solely on maximizing dividends. There are several mutual funds dedicated to find the safest and highest dividend amounts through Fidelity or Vanguard. You can measure dividend amounts by a stock or mutual funds’ dividend yield. A dividend yield is the amount of dividend divided by the stock price. Large dividend yields don’t always mean a good investment.  If a stock is about to go bankrupt or is failing horribly, its stock price will go down and its yield will look huge. For the riskiest investors, this may present a short-term gamble, but for most of us, this is to be avoided.

The best idea is to look for large companies that pay out large dividends and increase them regularly. Look around your house and determine what you purchase every week and see if it’s the same brand. Coca-Cola (KO), currently offering a 3.2% yield, and Johnson & Johnson (JNJ), at 2.9%, are favorites among dividend investors. Over the long history of the companies, they also raise their dividends. AT&T (T) and Verizon (VZ) are also favorites because telephone-service companies pay out large dividends; 5.7% and 4.5% respectively.

These dividends should be reinvested immediately back into the stock or mutual fund it came from or to your cash balance to purchase different stock. You can set the automatic re-investment through your bank. If you are under 55, you SHOULD NOT be spending your dividends. Reinvesting dividends is one of the top strategies of rich people.

You must also think about taxes. If you’re receiving dividends through your IRAs, then they are tax-free.  If you are receiving them through a taxable account, then the dividends may increase your tax rate. As of now, dividends are only taxed as high as 15%.  They can be taxed at 20% for the ultra-rich, but I don’t imagine they would be reading this blog if they were.  You can read more about dividend taxes here: http://www.irs.gov/publications/p550/ch01.html#en_US_2013_publink100010066

Current News on dividends. Some companies retain a large amount of cash on hand. In times of low-interest rates, like we are currently seeing, investors become angry when companies “sit” on large hoards of cash. If there are enough shareholders becoming angry and there are enough shares to have a controlling interest, then the company will be pressured to offer a dividend or increase its dividend. Most recently, this has happened to Apple (AAPL). Its size and success has made it to difficult to invest the money into Research and Development or future projects and the cash is just building. Investors got together and forced the company to pay out a dividend.  AAPL currently offers a 2.3% dividend while Google (GOOG) does not. Microsoft (MSFT) was forced into a similar position and offers a 3% dividend.

BL: For the average investor, we rely on our IRAs, TSP and/or 401(k)s, so dividends aren’t such a big deal. But for those of us investing ourselves, dividends should be a big deal. Your total portfolio of investment should have a yield equal to or higher than the interest rate on a 10-year bond. Unless you are extremely confident with your stock picking abilities, then there should be no reason you are taking on the risk of stock market losses AND earning less than a 10-year bond. You can find the dividend yield on any stock or mutual fund by using Google or Yahoo! Finance.

I'm Ready to Start Making Money!

Many people have asked me, “My finances are in order, so now what?” I’m very pleased to get this question. When I get asked this, I ensure, and/or assume, they have: accounted for all their expenses (as suggested in my 30-day challenge post), eliminated or reduced their debt levels and, most importantly, established an emergency savings account. If this describes you and you’re ready to start investing and making money, then read on.

·         The first step is to take advantage of tax-sheltered investments. I typically recommend everyone have an Individual Retirement Account (IRA). To determine if you should open a ROTH or Traditional IRA, then read this previous blog post: You can invest up to $5,500 annually in an IRA. Once you have the money in an IRA, you can invest it in pretty much any investment possible—mutual funds, stocks, gold, bonds, etc.

·         If you have more than $5,500 annually to invest, then you should fund your Thrift Savings Plan (TSP). Again, you can choose the ROTH or Traditional accounts, but you are limited to the funds offered by TSP.  For military members, the TSP does not match and for civil service employees, the TSP does match (up to 5% in a complicated matter). You can invest $17,500 (does not include your employer’s contributions) annually to your TSP.  With an IRA and the TSP, you can contribute to $23,000 a year in tax-sheltered investments.

·         On a lateral financial decision, if it makes sense for your particular financial situation, then purchasing a house while in the military is a great investment. When living in the dorms, base housing or renting, you are theoretically “losing” the BAH we receive. If you were a civilian, it would be factored into your base pay, but it is separated in the military. This is a basic discussion and gets more complicated on how to make the decision to buy or rent, but buying a house allows military members to “earn” that BAH.

·         Back to normal investing, if you have more than $23,000 a year to invest, then you can open up a normal taxable, brokerage account with any large bank and purchase stocks, mutual funds, bonds, art, oil, etc up to however much you want to invest.

Mathematically, the earlier you invest the better potential you have for earning a large return on your money. If you do it right, by using tax-sheltered accounts, avoiding fees and saving as much as possible, you could retire early and live a long, financially independent, life.  

Does USAA Have Good Mutual Funds?

USAA has done a great job in improving it's mutual fund choices and performance.  On 30 Jun and according to their site, USAA has seven 5-star rated mutual funds and eighteen 4-star rated mutual funds.  From a quick glance, it looks like most of their highest-rated funds are from their bond family of mutual funds and might be doing well because bonds have been doing well, but there are some non-bond mutual funds on the list too worth checking out.  If you like USAA's solid customer service and appreciation for the military and want to invest with them, I would start looking at these mutual funds first.

https://www.usaa.com/inet/imco_mutualfund/ImMorningstarFunds

Morningstar 5 Star USAA Mutual Funds

A list of five star Morningstar rated USAA mutual funds.

https://www.usaa.com/inet/imco_mutualfund/ImMorningstarFunds?ACTION=INIT