Living Below Your Means
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Advice on Financial Advisor, Please

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By leighsah
October 8, 2003

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Dear batdoe,

Before you give any financial advisor any money, I would suggest parking your available funds in the bank until one and preferably both of you get yourselves educated in investing. It is not rocket science.

This is going to be long so you may want to make sure nothing is in the oven, your dog has been walked and your husband fed.

This will serve as the syllabus to the Leighsah school of high finance.


Good, now take a breath and know this isn't nearly as difficult as the financial world makes it out to be.

1. NO ONE, and I mean NO ONE cares as much about your money as you do. Not your sister, your weird uncle Fred, the grocery clerk nor the guys and gals on MSNBC.

2. Note I didn't make mention of the financial advisor. They also don't care about your money no matter what they say in their ads. If you just HAVE to have a financial advisor, choose one that is fee-based rather than commission based. Those who are fee based don't make a commission off of their recommendations. HINT: AMEX is commission-based. The "advisor" will most likely recommend actions/purchases that will line his pocket and while may not hurt you, will probably NOT be in your best interest. Maybe good interest, but not BEST interest. TMF Money Advisor is a fee-based advisor. (I haven't used them and frankly don't know anyone who has, but if you feel you MUST use someone, that's an option.)

3. You are obviously intelligent enough to realize the value of The Motley Fool, affectionately known in these parts as TMF. Now make use of it.

4. I would suggest reading the following sites/boards:

This is TMF investing basics 101. It has a basic description of investment vehicles inclusing stocks, bonds, mutual funds, etc. Also strategies, picks, etc.

Now that you have the very basics under your belt, I would make a detour to this site:

It is a glossary of financial terms you will find in the annual report, prospectus or financials of any company or fund.

The last place I would visit is this board:
How to read the financials. It is fairly slow, but when you post, others answer.

Now for a little Leighsah philosophy. Remember Rule number 1? I never forget it. I alone am responsible for my money. I make the decisions as to how it gets spent, invested, saved and held. I have much more faith in my motives and intelligence than any financial advisor, relative or ad pitchman.

Because of that responsibility, I make the time to invest my money in stocks rather than index funds. After reading about managed mutual funds, I assume you will skip that option. Now Index funds are a type of mutual fund and are explained in that first link above, but basically they are a group of stocks held that mimic a particular index. You can have an S&P index or a Spider or any of a bazillion (yes, I made that word up, but I like the way it sounds) other index funds. The big difference is that these are much cheaper to own (MUCH lower management fees) because they aren't managed. These are good investment vehicles if you don't have or make the time to research potential investments.

If you are interested in index funds, then here is the board for that.

Now, myself, I like individual stocks. I buy them and hold them. I do this using DRiPs. DRiP is an acronym for Dividend Reinvestment Plan. Basically you buy a lone or several or however many shares of stock and then reinvest the dividends in the same stock.

For instance, say you buy a lone share of Coke stock (KO) for the going rate of $47. Now each month you send Coke another $50 for part of a share. Say at the end of month one KO is selling for $44 a share. At the end of month two it is selling for $48 a share and the third month for $46 a share. At the end of three months you will have about 4 shares of Coke. You ask about 4 shares? Huh? How can you own part of a share of stock. HA!!! That is just part of the greatness of DRiPs.

Now look back at your shares of stock. The first one you bought at $47, the second at $44, the third at $48 and the forth at $46. This is called dollar cost averaging. You didn't buy all your stocks at the highest price and you didn't buy everything at the lowest price. You did average out to about $46 per share. GREAT STUFF!!!

Now, look back at those numbers. With your first $50, the stock was selling for $44. So what happens to the other $6 you ask? Well, the really neat thing with DRiPs is that you can own PART of a share of stock. So the first month you bought 1.12 shares of stock. The next month you bought 1.04 shares of stock, etc. At the end of the quarter, you own 4.24 shares of stock. Coke announces a yield of .22 per share. Well, would you look at that. You just made .93. Nifty huh? Didn't do a dang thing, but Coke likes you so much that they paid you .93 for owning their stock. (Well not really, but they like their shareholders and you are now one of them.)

Now the other really nifty thing about DRiPs is that MOST do not charge you to buy those shares. Now if you'll look to the top of this page you will see an ad for TD Waterhouse or e-Trade or some other such place that for the low, low price of $16 you can buy a share of stock. Sharebuilder allows you to do it for $4. Generally, once you own the first share, you can buy the other shares in your DRiP for free or almost nothing.

Now each company does NOT have a DRiP. The VAST majority of the biggies do though. Each has differing limits and rules, but for my money, I think DRiPs are the best thing going.

For more info on DRiPs, I would go to this board:
DRiP Investing - The Basics
Really look through the FAQ section as there is a wealth of info.

After you have educated yourself, try this one.
DriP Investing - Companies

Now you have outline for the Leighsah school of high finance. It may not be worth much, but I really HATE that folks are so intimidated by finances that they feel they have to go to someone calling themselves and advisor to figure out how to invest your money.

For some other education off of TMF, I would recommend venturing to the library for some books. TMFSelena posted a list of recommended investing books a while back here. Well, actually these aren't all investing, but more financial education.

I particularly liked in no particular order

The Wealthy Barber
One Up on Wall Street
The Millionaire Next Door
Common Stocks and Uncommon Profits
The Richest Man in Babylon

I'm sure others have their favorites, but these are mine.

Now, I know this sounds like a lot. It is. But you have the most to lose and even better, the most to gain by learning about finances. It really isn't anywhere near as hard as Wall Street makes it out to be. After all, as long as folks continue to believe stockbrokers, fund managers and financials advisors have some magic decoder ring, the longer folks will continue to depend on their advice.



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