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Beware of Stingrays

Issue: September 6, 2006

Dear NOW Reader,

As you've probably heard, Steve Irwin -- better known as the Crocodile Hunter -- passed away over the weekend. If you followed Irwin's work, you might have assumed he would die young given the volume of life-threatening encounters with dangerous animals that he welcomed.

Still, the exact circumstances of his death came as a surprise. It was a freak stingray accident -- not a run-in with the world's most venomous snake or some such "dangerous" animal -- that ended Irwin's life way too soon. So why am I bringing up Irwin's passing this week?

His demise should be a reminder to us all that we never know when something important might be taken away. In your personal life, that may mean making peace with loved ones before it's too late. In your investing life, it means planning now instead of procrastinating and paying later. We're going to tackle the latter theme this week.  

In This Issue
We kick things off this week with Dayana Yochim dishing out some "tough love" in a call for everyone to take the time to go through a financial makeover. Shannon Zimmerman follows up with a call to take advantage of the market's volatility to build a portfolio around blue-chip stocks that are currently on sale. This will be the first in a three-part series in which Shannon also shares his advice on portfolio construction and on investing internationally.

Finally, we have the final installment of the investing seminar with Motley Fool founders David and Tom Gardner that we have been presenting here over the past few weeks. This time we tackle the emotional aspects of owning stocks.

And speaking of emotional aspects, it was a pity to lose you so young, Steve Irwin. G'day mate.

NOW you know,

Rick Munarriz

Rick Munarriz

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Get Naked

By Dayana Yochim, Advisor, Motley Fool GreenLight

Your friends will tell you that you look great in those jeans. Your family will celebrate your bang-up year in the annual holiday letter, even if your life was a train wreck for the past 12 months. I, however, have the luxury of a gazillion miles of Internet cable and a running head start. I can tell it like it is.

Take a good long look in the full-length mirror. Shine an unflattering fluorescent light on the details and begin to account for your assets (what you own, such as equity in your home and your savings) and your liabilities (what you owe to lenders, such as student loan companies and credit issuers).

This is what the average American's undressed finances look like:

  • Three-fourths of workers age 55 to 64 have less than $56,000 saved for retirement.
  • 20% of credit cards are maxed out.
  • 42% of workers cash out their 401(k)s rather than transfer (or "roll over") the assets to an IRA or a new employer's retirement plan.
  • One-third of "millennials" (those born after 1979) do not contribute a single dollar to their work-sponsored retirement savings plan.
  • Last year, the average household paid $1,000 in interest on the money it borrowed.
  • One out of every 73 U.S. households files for bankruptcy.

Not pretty, is it? Once you look at the black-and-white truth of your personal balance, you might be inspired to make a few improvements.

Save More. Period.
Let's start with your savings. Or what little there is of it. One-quarter of you who have access to an employer-sponsored retirement plan evidently can't be bothered with such mundane details like actually putting money into it. And those of you who do participate in a retirement program can stop smirking -- we're on to you.

In fact, a study by Hewitt Associates found that 22% of workers failed to contribute enough to even get the company match. And get this, one quarter of workers have an outstanding loan against their balance.

Grab a pen. Go ahead and fill out a 401(k) contribution change form. Just suck it up -- you'll never even miss those pre-tax dollars taken out of your paycheck. And while you're at it, please remember to keep your mitts off the money when you leave your job. There's no reason to cash out your 401(k)s. Please show a little restraint and roll it over into a self-directed IRA.

Save Smarter. Got it?
Oh, and another thing. We need to talk about how you're allocating your assets. In short, you're not.

More than half of you have your entire 401(k) in all stocks, or all fixed-income investments. And when the ERBI and the Investment Company Institute took a closer look at your portfolios, they found that nearly one-quarter of employees over the age of 60 had more than half of their 401(k) assets in their employer's stock, and 16% of them entrusted 80% of their retirement savings to the performance of their company.

Do I need to spell it out for you?


Even employees of tried-and-true firms like General Electric (NYSE: GE), Microsoft (Nasdaq: MSFT), and Intel (Nasdaq: INTC) have been devastated by diversification nightmares. Those who put their financial security in the hands of one of these companies in 2000 are now looking at severely diminished 401(k) balances.

Then there are companies like Alcoa (NYSE: AA), IBM (NYSE: IBM), Verizon (NYSE: VZ), and Sprint (NYSE: S), all of which have frozen their employee pensions (or announced the intention to do so). In fact, the Pension Benefit Guaranty Corporation (PBGC) projects that 75% of all the pension plans that it guarantees are underfunded by a total of $95 billion.

Spend Less. Finis.
While we're on the subject of your financial shortcomings, there's something else I need to get off my chest. It's that little matter about the plastic in your purse. Would it kill you to leave it at home once in a while?

We've had this talk before, but I suppose it doesn't hurt to repeat it: Carrie Bradshaw is a fictional character. The pals portrayed on Friends wouldn't really be able to afford that abode. The price of "wowing" your buddies is way too high. And those who are impressed by excess aren't likely to stick by you when you're hauled off to debtor's prison.

The Naked Truth
Look, you've got a lot going for you (very few cavities, for example, and decent taste in movies). But I want so much more for you and your future. Trust me, as hard as this has been for you to hear, it has been equally difficult for me to bring it up. I'm only having this conversation because I care.

When you do decide to tiptoe up to the financial looking glass, you won't be alone. Check out The Motley Fool's new personal finance service, GreenLight, for hands-on help getting your finances back in fighting shape. The service includes "Get It Done" guides, articles, and advice organized by life stage and money topic, advisor blogs, and an amazing group of Fools on call on the dedicated discussion boards. To try out the service free for 30 days, just click here.

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Smart Ways to Get Started

By Shannon Zimmerman, Advisor, Motley Fool GreenLight

This is the first in a three-part series. This week, Shannon drops by to provide some advice on anchoring a portfolio with large-cap stocks, which just so happen to be relatively cheap these days. 

A volatile market can provide choice investment opportunities. It's when stocks are on sale, after all, that savvy types go shopping. What's more -- counterintuitive though it may seem -- turbulence is good news for new investors, too. It means they have a chance to begin building their nest eggs on the relative cheap.

With that in mind, this commentary begins a three-part series on smart moves that brand-spanking-new investors ought to consider as they test the market's waters.

First up: Building your portfolio around solid large-cap stocks.

Anchors Aweigh
In my view, just about every investor should anchor their portfolio to a well-diversified basket of large-cap stocks, and one terrific no-muss, no-fuss way of doing that is to invest in rock-solid mutual funds.

Specifically, you may want to consider an index pick such as the Vanguard 500 (FUND: VFINX), an S&P tracker that provides ample exposure to such big boys as ExxonMobil (NYSE: XOM), General Electric (NYSE: GE), and Citigroup (NYSE: C). This fund has been tough as nails to beat over the years, and best of all, its expense ratio is a mere 0.18%.

Lump-sum investors, meanwhile, can go an even cheaper route by plunking down their moola in the popular S&P-tracking SPDRs (AMEX: SPY) exchange-traded fund (ETF). Since ETFs trade like stocks, you'll have to pay a commission each time you buy and sell them, but the expense ratio is a dirt cheap 0.10%.

Get Active
That said, investing exclusively in index funds means that you're pretty much destined to lose to the market each year by about the amount of the fund's annual expenses. Fools can and should do better than that, which is why I'm a fan of active management -- and, in particular, of pairing passive picks like Vanguard 500 with the cream of the fund industry's actively managed crop.

One fund worth considering is Neuberger Berman Socially Responsive (NBSRX). It targets the market's big boys, too, but the fund's strategy diverges from the Vanguard fund's in several significant ways. For starters, the management team here presides over a portfolio of just 35 names, a compact collection that recently included behemoths like Novartis (NYSE: NVS) and Texas Instruments (NYSE: TXN). What's more, the companies the fund holds have made it through an obstacle course of social criteria that includes rigorous screens against, among other things, tobacco and firearms.

The results? This fund has bested the S&P over one-, three-, five-, and 10-year trailing periods. Not too shabby, eh?

That's a Wrap
I'll be back next week with another Foolish tip for folks who are just getting going, but in the meantime, I encourage you to get the inside scoop on new GreenLight service. In the newsletter and on our information-packed companion website, we have tips aplenty for folks who are trying to a grip on their financial future -- smart ways to begin your investing career most definitely included.

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Emotions and Investing

By David and Tom Gardner

Two months ago, The Motley Fool hosted its first teleseminar, an event in which Fool co-founders David and Tom Gardner, along with GreenLight masters Shannon Zimmerman and Dayana Yochim, spoke to 1,000 Fools nationwide and shared their Foolish wisdom on the art and science of buying and selling. Today we present the final installment in this four-part series in which David and Tom discuss the emotional aspects of buying and selling stocks. You are welcome to check out the NOW archives to dig up the other three parts.

Dayana: It's time for the group therapy portion of our show tonight.

David: I have been waiting for this.

Dayana: Yeah, thank you for sharing, David. Tom, we would like you to open up. No, but seriously, there is a lot of emotion when it comes to money and investing and especially when you are talking about a volatile market and making these buy and sell decisions. People get emotionally attached to their investments. I think that is where a lot of mistakes can be made, so when it comes to either buying or selling, can you two talk about what you do to keep the emotion out of the investment process?

Tom: I think it is critical to remove emotion completely when you are investing. If you can get it down to zero, you are going to do better as an investor, so the lower you can get it, the better off you are.

The first guidance I would give on that is to diversify to the point where no position has you worried. Think about it this way: Imagine that you had $20,000 to invest, and you invested 20,000 one-dollar bills into 20,000 different entities. You would not care whether one of them did poorly or well. At that point, you would be walking around going, "I wasn't really paying attention. Was that stock down or up?"

However, if you put all that $20,000 in one company and you needed that $20,000 as a portion of a down payment you were making on a house in six months, you would be following it very closely. When it was up three-quarters or down 1-7/8, the entire mood of your life can be taken over by that. And you will be apt to buy too high because the emotion is great. Everyone is talking about this stock. It is so exciting. It is going up. I am going to buy now. When it is going down, that is when you are going to be inclined to sell, and that is exactly what you don't want to do: buy high and sell low. So the first step is to diversify. You have to spread it out in a way that no single position is going to keep you up at night.

The second thing is to only be invested in the stock market if you have five years or more. That is what we have been teaching people in Hidden Gems and we have got now thousands of people who are diversifying broadly into a number of companies and holding long term.

To close, I want to share the classic story of Shelby Davis Sr. He started investing in his late 30s. After about 40 to 45 years of investing, he owned more than 1,200 different stocks in his portfolio. Obviously he couldn't follow them all, but he had trained himself to spend a lot of time finding only companies he felt would do well over long periods of time. He ended up turning $50,000 into $900 million over his 40 years as an investor.

David: The guy made a lot of money, you are saying.

Tom: The guy made a lot of money. He spent a lot of time trying to find great companies, but his philosophy was that the best time to invest is when you have the cash. Just buy. Buy more shares of another company, spread it out, and don't be worried when the market goes down. Be excited so you can buy more stocks. I think that removes emotion from the game.

David: Do you think he knew every stock he owned by name? Or not? What do you think?

Tom: That is a good question.

David: I don't know if I want to know.

Tom: There is a man who runs the Fidelity Low-Priced Stock (FUND: FLPSX) fund that has done unbelievably well. I think he manages an extraordinary amount of money and that he is trying to buy mostly small-cap stocks.

Shannon: He had 900 stocks or more in his portfolio, and he can tell you details about the one that is like 901.

Tom: Yeah, Joel Tillinghast. Apparently he has got a paragraph on every stock in his head.

Shannon: That is right.

Dayana: Total stock market index fund there.

Tom: Well no, his returns have been incredible because remember, there is a way to invest, which is almost purely quantitative, which is you are just waiting for company stock prices to fall and then you buy them. You don't have to necessarily be following the product very closely, competitively. You are just waiting for a good company to see its price dip. Then you buy it and you hold it for a fairly long period of time, and then you can beat the index that way.

David and Tom Gardner launched The Motley Fool a dozen years ago. They share stock-picking duties every month in the Stock Advisor newsletter service. Shannon Zimmerman and Dayana Yochim are co-conspirators in the new GreenLight personal finance service.

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Three Great Links

Members of our editorial staff recommended three of their favorite stories of the past week.

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