Robert Kiyosaki’s book, Cashflow Quadrant: Rich Dad’s Guide to Financial Freedom, is an inspirational and compelling guide to breaking free from the earnings “rat race”, by moving from the “left side of the quadrant” where most people work to the “right side” and ultimately financial freedom. Kiyosaki outlines how those of us locked into jobs or self-employment can get ahead by becoming financially literate and consistently building financial assets that generate income; freeing ourselves to spend time doing the things we truly enjoy.
In Part 1 of this article, we looked at how to use the Morningstar Premium Fund Screener, and I showed you two screens I use to select top funds for my portfolio. This article will move on from the screening phase of the stock screening process to the analysis phase, where we actually choose the candidates for possible investment. The key to successful analysis is understanding how to read the results views provided by the screener. In addition to the basic views provided by Morningstar, the premium screener also allows you to create up to two additional views. By creating custom views that package your most important statistics together, decision making can be more rapid and accurate.
Pro forma earnings (sometimes spelled “proforma” or “pro-forma”) are included by some companies in their quarterly or annual reports as a way to discount “unusual and non-recurring transactions” to more accurately reflect their true financial health. But while actual earnings are calculated using Generally Accepted Accounting Principles (“GAAP”), the US standard for corporate accounting, pro forma earnings are used as guidance for investors to demonstrate how much money a company would have earned had unusual and one-time charges not occurred. As one would expect, pro forma reporting has had a history of abuse and therefore should be approached with great care.
There’s a very important topic that I’d like to discuss briefly here, and it’s in regards to starting your own business. Fundamentally, a business is an investment. Any company’s goal is to generate profits for its owners, and in the case of a small business, a salary as well. The problem with businesses is that they’re a job. And not only are they a job, they also cause a lot of stress and a generally poor social life during the initial years.
Real estate has always been a passion of mine. Many people have made fortunes off real estate and growing up with a father in the business, I understand how the model works. However, getting started is a big effort, which involves management, construction, marketing, and all the other jobs associated with starting a business. This is not coincidence — buying investment property is a business.
Frank bought me The Only Investment Guide You’ll Ever Need by Andrew Tobias for Christmas, which finally arrived at my doorstep on Saturday. With the assistance of Tobias’ great sense of humor, it’s a quick and enjoyable read. The book provides sound advice on when it’s appropriate for people to begin considering their investment options, and what those options are.
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I’ve spent a lot of time in the past week working with the Morningstar Premium Fund Screener, a tool used to search for mutual funds based on filtering criteria. Think of a screener as both a search engine and a pair of blinders. Not only will it help you discover new funds but it will also keep you away from funds that may post high short-term results but have a lot of inherent risks.
This screener is the best I’ve seen for mutual funds and in addition to access to Morningstar analyst reports, makes the Morningstar Premium subscription worth every penny of the $135/yr fee. If you can get a friend or two to split it with you, all the better! Think of it this way, if you have $15,000 invested in mutual funds and this subscription lets you pick up an extra 1% annually, it has more than paid for itself.
In my last article, I discussed starting my portfolio, and a strategy for allocating assets efficiently while keeping the number of accounts and fees manageable. As I stated in that article I think it’s very important for those of us who want to eventually become more involved with individual stock investing to have only a small portion of our funds in a brokerage account. Because we’re very inexperienced, risking too much of our portfolio with individual stocks can leave us open to a lot of unnecessary risk. That’s why I advocate starting simply by learning the basics then building a foundation of a few stock and bond mutual funds, before allocating more to individual stocks.
This strategy may not be exciting, but to paraphrase Ben Graham, author of The Intelligent Investor, true investing should be boring. By learning the basics we can understand the full range of investments available and how to maximize their returns. We can then invest in relatively safe but consistently well-performing mutual funds. Not only do mutual funds provide instant diversification, but they also give us focus as we continue to learn about more advanced investing topics. As I will mention again, we have a lot to worry about when we’re just starting out. There’s no need to add risky investments to that list before we’re ready.
As part of my forthcoming portfolio strategy, I was trying to find information on the best S&P 500 Index funds. As you may or may not be aware, Vanguard created the first S&P 500 index fund in the 1970’s. An S&P 500 index fund aims at tracking the performance of the S&P 500, regarded as one of the best (if not the best) total market indexes out there.
If you have less than $50,000 to invest in securities you kinda get screwed. All of us here at InvestorGeeks are just starting out, in our Mid-20s and have less than $50k in investments. Now I love to learn about investing, but I’m nobody’s fool, and so I want to build a foundation of safe diversified funds until I master selecting value stocks. However, because of my low account balances, I get whacked with maintenance fees that can be pretty stiff. This is a problem because I’d like to diversify my portfolio, but lose more and more of my returns because of these fees. So I’ve come up with an action plan, and I’m hoping you’ll provide feedback before I go ahead an implement it in the next couple weeks.