10 Insider Secrets™ How to Buy Real Estate In Your IRA

Retire Rich Using Your IRA to Buy Foreclosures, Short Sales, Tax Liens & More!


10 Insider Secrets™ How to Buy Real Estate In Your IRA


I created this site to provide you with a new perspective into the potential opportunities that exist for your IRA investments. Sure, you can maintain your current direction. Or, as Emeril Lagasse, the famous TV chef and restaurant owner says, you can “take it up a notch.” When I learned what I am about to share with you, I couldn’t help but get excited. Now, I want to share that knowledge and excitement with you.

Yes you can invest in Real Estate using your IRA funds!  

Ultimately, it is up to you whether or not the secrets on this site will suit you, your personality and your current situation. But, whether you choose to act or not, at least after you explore this site, you will have a new perspective on investing in your IRA that can help you in your odyssey to retire rich.

Without further adieu, let’s begin. Once again, welcome and thank you for visiting. I am confident you will be thrilled you did.

Table of Contents


Would you like to retire faster, wealthier and live more comfortably? If so, congratulations! You have visited the right site. I created this site to share with you a new way you can take control of your future and and perhaps even retire rich. By learning the information in this site you will no longer be dependent on the so called “experts” (financial planners) who are only making themselves wealthy at your expense. You will have the tools you need to succeed in building a massive amount of wealth for your retirement.

Welcome, my name is Todd Bermont and I would like to thank you for visiting. You may be wondering why I created this site. Well, first of all, let me tell you, I am not a Real Estate Agent. Nor, am I an Accountant. In fact, until recently, I never even owned an investment property outside of the home I am living in. Like many of you, I am a typical American looking to become wealthier and live the “American Dream.”

So, why should you explore this site? To learn the truth about investing.

You can retire rich by taking control of your investments and not risking your whole nest egg in the Stock Market to do so. In this site, I will share with you secrets that hardly anyone knows about. When I learned that I could buy Real Estate in an IRA, I couldn’t believe it.

I asked my cousin-in-law who is a Real Estate lawyer if I could do this… and he had never heard of it. I asked my financial planner if she could help me. She had no idea you could do this. As it turned out, even my accountant had to research this.

I was shocked that not one person I knew was aware of the fact that you could buy Real Estate in an IRA.

This is ridiculous! Everyone should know that you can retire rich by investing your IRA funds in Real Estate.

The time has come to build your wealth!

Up until now, a precious few people have been getting all of the wealth in this country. It is about time that people like you and I share in the American Dream… to create wealth and live a happy and comfortable life! The secrets I am about to share with you could change your life.

But, why would I share these secrets with you? How about an honest answer… to make money! After all, I have to have a vested interest in educating you. My vested interest is if you make money by taking action on what you learn with this site, hopefully you will recommend my books, online classes and seminars to others. Ultimately, if this site generates a million visits, I guarantee you I will be more than delighted that I chose to share these secrets with you. Any author that tells you otherwise is most likely a blatant liar, like some of the financial planners I have run into over the years.

But, of equal, if not greater importance, I am tired of people being misled by certain unscrupulous bankers, insurance agents and financial advisors who typically only have their best interest at heart when it comes to investing your hard earned money.

One of my greatest frustrations is that our educational institutions often don’t teach us the valuable skills we need to succeed in life. I graduated with honors from a Big Ten University and received a degree in Business Administration/Marketing.

You’re probably thinking “Wonderful Todd, I’m happy for you.” I share this with you because I don’t know about you, but when I was in college, I was not offered one course on how to invest my money. The only course that came close was a class I took on insurance. I was not offered one course on how to job hunt. I was not offered one course on how to be a great parent and raise wonderful children. I was not offered one course on how to be a great husband.

I have had to learn all of these things on my own. And, I will be the first to tell you, it has often been a painful process. My dear wife Paula will be more than happy to tell you that I am not perfect by any means. My goal with this book is to help you circumvent the many years it took me to learn this material.

The secrets in this site are revolutionary!

My hope is to give you a shortcut to success so you don’t have to go through the same learning curves and schools of hard knocks that many of us have had to go through. 

I wrote created this site to share with you knowledge that can not only make you money but make you rich. You see, very few people have a vested interest in sharing the information you are about to learn. Most “experts” don’t want you to know this information.

Your bankers and financial advisors don’t want you to know these secrets!

Your banker doesn’t want you to know these secrets because he or she can’t make a commission off of selling you a property in an IRA.

Also, if you follow my recommendations, he or she can’t loan you any money for the purchase of property either. Your financial planner certainly doesn’t have a vested interest. Whether he or she is independent, or represents Merrill Lynch, Wachovia, Fidelity, Principal or any of the other majors, he or she most likely can’t offer you a Self-Directed IRA account that can buy Real Estate. They can only sell you Stocks, Bonds, CDs and Mutual Funds.

Oh… they will tell you, you can invest in a REIT. But you don’t have any control in an REIT. If the REIT management makes a bad investment, you lose. Yet, they still make their fat salaries. If they make a mistake, you lose… not them! 

Financial planners will tell you they don’t recommend buying investment property because it is too risky. Can Real Estate be any more risky than Intel going from $75 a share down to $18? More risky than Walgreens stock dropping 25% in one week because they missed the expectations on a quarterly earnings report? Even after the huge run-up in stocks from the bottoms of 2008/2009 to 2012, the NASDAQ was still valued at less than 50% of its highs over a decade earlier.

A while back, I was reading an article online on CNN Money titled “Money 70: The best Mutual Funds you can buy.” The article was quoting 1-year returns of mutual funds. Believe it or not, of the “Top 70” Mutual Funds they listed on that day, 41 of the 70 had negative 1-year returns. And that was during a time where the market went up. And this is supposedly the best of the best? Over 58% of their “best of the best” had a negative return. What about all the Mutual Funds that were not the best of the best?

Do you really want to trust your hard earned money with people representing firms that have lost Tens of Billions of Dollars?

How about getting $159 million for getting fired?

I can’t believe how the CEO of Merrill Lynch presided over that company losing Billions and Billions of dollars investing in bad mortgages and other leveraged investments. He walked away with a $159 Million settlement package. I don’t know about you, but, I sure haven’t gotten a going away gift of $159 Million for getting fired.

When stuff like that happens it really makes me question whether or not investing the “traditional” way makes sense. Do these firms really have our best interest at heart or do they have their own best interest? I think you know the answer to that.

Perhaps, I have just had some really bad financial planners, but my wife and I have yet to find one that has consistently given good advice.

Years ago, my wife was a passenger in a car accident where she and her entire family were driving home from a shopping trip to an outlet mall on a Sunday afternoon. They were broadsided by a drunk driver blowing through a red light. My wife’s mother was killed instantly.

I can’t think of anything more tragic. And to make matters worse, the person who hit them was not only drunk, but uninsured. As a result, each family member received just a small settlement from their insurance company. Certainly no amount of money could ever bring my wife’s mother back. Nor, could it ever repair the permanent loss inflicted on the family. But, the amount of the settlement was ridiculous. Never the less, I share this with you because the story only gets worse.

My wife didn't know what to with the money she did receive. After all, she too never had any courses in high school or college on how to invest money. So, she did what many of us would have and went to a so called “expert” a “trusted” financial advisor. She solicited the help of a financial planner that the family had known for years. 

This expert proceeded to sell her a couple of different annuities, all which were tied to the performance of the stock market.

Well, the stock market tanked from 2000 to 2003 and on paper she lost the majority of her investment. Ah… but in 2007 the market in general rebounded and hit new all time highs. Yes, that was true, but even though the market was at an all time high, my wife’s annuities were still worth 50% less than what she invested in 1998. How was that possible?

Fees & commissions diminish investment returns in traditional IRA investments!

The returns on my wife’s annuities were pathetic because of fees, commissions and bad investments. That’s how she lost all that money. We finally got so frustrated we sold all of her annuities at a loss almost 50%. So not only did my wife lose her mother. But after 9 years, she also lost a good portion of the money she received as compensation for losing her mother. What a disgrace. That financial planner should be ashamed of himself.

And, my own experience hasn’t been much better. In the fall of 2007, I had no less than three financial planners all tell me to “Buy… Buy… Buy” in the stock market. I will never forget about three weeks before the market tanked, one of my financial planners left me a voicemail.

“Buy… Buy… Buy!”

On the message, you could hear him ringing a bell as he was saying: “Now’s the time to buy. Buy… buy… buy” Fortunately, I didn't listen to him. I told him “No… No… No… keep me in cash earning a paltry 4% because I think the stock market is going down and I don’t want to lose my money.” I turned out to be the one who was right. The stock market proceeded to tank over 20% from the point he was telling me to buy.

Sure, the stock market almost always recovers, but at the time of the printing of this book, the NASDAQ was still 50% lower than its peak of 2000, almost eight years later. I don’t have the patience to wait for it to come back to 5,000.

Are you happy with your investments?

Prior to learning the secrets I am going to share with you, I was getting really frustrated. I was sitting in cash, earning less than 4%. Plus, with rates going down, it was only going to get worse.

My thoughts were that the country was going into a recession, even if the government statistics showed the contrary. If that was to be the case, the stock market most likely would not go up any time soon.

At the time, I didn’t want to lose my hard earned retirement money in the stock market. But, without a pension and who knows whether or not Social Security will be around for my wife and me to collect, I wondered how my wife and I would ever be able to retire comfortably earning less interest than the rate of inflation?

Stock Markets don’t always go up!

Prior to learning the secrets I am about to share with you, I can’t tell you how frustrated I was. Every financial advisor I have met based retirement projections off of earning 8% to 12% a year. Yet, there have been many prolonged periods of time where the stock market has not delivered those kinds of returns. Sure, financial planners will point to the fact that in 1987 the Dow Jones stock market index was at 1739 and now it is much higher. But, what about the other markets that they don’t talk about?

From 1966 thru 1982 the Dow Jones had Zero gain! From 2000 to 2008, the NASDAQ Index, after eight years, was still trading at less than half of what it was at in 2000.

Unfortunately, it can take years for stock markets to recover from bear (down) markets. It can also take years for stock markets to show gains.

The bottom line is when I learned that I could buy Real Estate in my IRA I thought it was too good to be true. But, after thorough research I learned that yes, it is true! The IRS fully blesses the ability to purchase Real Estate for IRA investments. 

Secret #1 - There are 5 Traditional Ways to Invest IRA Funds

In today's complex times there are thousands of ways you can invest your hard earned money. The main objective of this website is to share with you the knowledge that you can buy Real Estate in your IRA and how to do it. However, before diving into why you should consider buying Real Estate in your IRA, let's take time to discuss the different traditional options that are available to IRA investors. Real Estate may not be the optimal solution for everyone. So it is important to objectively first explore some of the most prevalent alternatives available to investors today.

Traditionally people have invested in conventional investment vehicles such as Certificate of Deposits (CDs), Bonds and Mutual Funds. In this chapter we will discuss the good, the bad and the ugly of each type of investment. To be fair, we will also point out the good, the bad and the ugly of investing in Real Estate as well. However, we will first look at Traditional IRA investment options.

To be fair, there are certainly many viable investments available to investors like you and me. The key is to be fully educated and decide which ones are right for our personalities and situations.

No one investment is "fool proof"

All investments carry both risk and reward. Typically, the more risky investments provide the greatest reward. However, that is not always the case.

When making IRA investments it is important to be as fully informed as possible. As many have said before me, knowledge is power.

With so many different kinds of investments, it is hard to do any one a justice. However, in the pages ahead, I will attempt to share with you enough information to provide a solid foundation for success. Let's now explore the first of many options, Certificate of Deposits (CDs).

1. Certificate of Deposits (CDs)

A Certificate of Deposits (CD) is basically a loan that you make to a financial institution for a given rate of return and a fixed period of time. When you "buy" a CD you agree to give your money to the bank or brokerage for somewhere in the range of 3 months to 5 years. You typically can not withdraw the money ahead of time otherwise there is a steep penalty involved.

CDs are everywhere. All you need to do is drive down a major street or open up a newspaper and you will see scores of CDs advertised. Just about every kind of financial institution offers these investments. Traditionally, you were just able to buy them from banks, savings & loans and credit unions. But now stock brokers and even insurance agents sell them.

Just like a home loan, financial institutions offer both variable rate CDs as well as fixed rate CDs. Unlike loans, the rate of interest will increase based on the amount of time you agree to keep your CD. With a home loan, the interest rate for a 15-year loan will almost always be less than the rate for a 30-year loan. However, with CDs it is the opposite. A 3-month CD may pay a full percentage point less interest than a 2-year CD.

To open up a CD, all you need to do is to bring your checkbook, cash or details of the account you want to wire funds from to any given financial institution of your choice. Typically, the institution will want to see a couple of forms of identification and will ask you to fill out a myriad of forms.

You then choose which CD you want. After that, they take your money and give you a receipt. That's it.

Most financial institutions will allow you to monitor your deposits online so that you can track, in real time, the value of your investment.

CD interest can be calculated differently.

One question to ask when purchasing a CD is "How do you calculate the interest?" Some banks calculate interest on a daily compounded basis. In other words, each day, interest is credited so over time you are earning interest on interest. Others pay on a quarterly basis while the worst ones pay interest on an annual basis. That is why you might see an advertised CD that says annual rate of 5% with an APY of 5.25%. APY stands for annual percentage yield versus the rate. The yield is what you actually get. A CD that compounds daily will have a higher APY than a CD that compounds monthly or quarterly.

The shorter the duration of interest posting the better your money will work for you. Ideally you want daily compounding of interest. Always compare the APY of one CD versus another, not just the rate. By the way, the same holds true when taking out a mortgage or another type of loan. Make sure you look at the APY. Some unscrupulous lenders will advertise a low Annual Rate for a loan only to have an APY that is much higher.

THE GOOD: Certificate of Deposits (CDs)

Like any investment, CDs have a good, a bad and an ugly side to them. Let's first take a look at the good aspects of owning a CD in your investment portfolio. As you will see, perhaps one of the best aspects of CDs is the fact that they are safe and stable. Very few people have ever lost money purchasing a CD. Granted, many have lost "purchasing power" due to inflation, but few, in real dollars, have ever lost money investing in a CD. But let's look at the advantages in more detail.

1) Guaranteed rate of return

Unlike Stocks, commodities, Mutual Funds or variable rate annuities, CDs offer investors a fixed and guaranteed rate of return. If the bank says they will pay you 6.5%, they will pay that to you, guaranteed... as long as you follow the rules like not breaking the CD ahead of time.

Most investment vehicles carry risk and do not guarantee a set rate of return. CDs are risk-free up to $250,000 as they are insured by the FDIC. So, basically you are guaranteed the return that is promised to you.

2) Insured against losses

One of the main benefits of CD investments is the fact that CDs are insured by the FDIC for up to $250,000. So if the bank defaults, you can still get your money back, up to that amount.

Finally, also note that FDIC insurance covers $250,000 in total at a given institution. FDIC insurance covers principal and accrued interest combined, per depositor, per institution, for all deposits held in the same insurable capacity.

What that means is that if you already have $200,000 deposited in your name at a given bank, then you may only be covered for purchasing a CD of $50,000. Anything above that may put you at risk.

Even though this isn't the 1920's... banks can fail

Now, I know it may sound alarmist to think that a bank could go under. After all, hardly any banks have since the great depression. However, recently some have. A couple of large internet banks have failed, most notably NetBank, IndyMac Bank and Washington Mutual failed. Some people have lost a lot of money in bank failures. If you go to the FDIC website, www.fdic.gov, you will find the most recent list of bank failures. Believe it or not, in the last five years, according to this list over 50 banks have failed. Many experts expect that number to grow. Some of these banks like NetBank, IndyMac and Washington Mutual were quite large.

Plus, with the recent sub-prime lending mess, many banks and other financial institutions have experienced a weaker balance sheet. So, if you are purchasing CDs you want to make sure you don't give any institution more than the insured amount. I know this might require more work on your part. But, you worked hard for your money. The last thing you want to do is lose it because some clown presiding over your bank decided to make a bunch of bad loans.

3) Wide Selection

Institutions offering CDs usually have a wide selection of CD investments. These differ in terms of size of investment and the time allotted to the investment. Also, as we discussed, some CD investments may have their interest calculated in different ways. Let's look at some of the flexibility offered by CDs.

a) Can start with a minimal investment

There are CDs that you can buy with as little as $500 or you can buy them for tens or hundreds of thousands of dollars.

b) Different timeframes

There are many different timeframes to choose from when investing in a CD. You can get them for as little as 3-months or for many years.

c) Different structures

Standard CD

This is the most prevalent CD and this structure offers a fixed rate of return on a fixed amount of money that is invested. This is a good investment if you think interest rates may go down in the future.

Rising Rate CD

This type of CD can offer an increase in the interest rate the financial institution pays you if overall rates go higher. If, after you purchase a rising rate CD, interest rates rise, your rate of return will increase accordingly. This can be a good investment if you anticipate that inflation and rates will increase in the future.

Step Rate CD

This form of CD guarantees certain increases in the percentage of return throughout the term and at specified intervals. This can be a good investment vehicle if you think rates may go up.

Expandable CD

Expandable CDs allow you to increase the amount of money you invested in the CD. Let's say you started out with a $10,000 CD. Over time you might be able to invest another $5,000 to make it a $15,000 CD at the same rate. This can be beneficial if, after your purchase, the Federal Reserve Bank decides to lower interest rates and CD interest rates fall. With an expandable CD, you can add money to it. If it was purchased at a rate higher than today's market, you would benefit from the higher rate that you were given at the initial time of purchase. This type of CD is beneficial if you think rates will go down.

Market Index CD

These very unique CDs may generate additional return to the holder based on the changes in a given stock market index such as the S&P 500 Index. This is good during periods of time when the stock market goes up, but bad when it goes down. I don't like this investment because if you think the market will go up, it is better to invest your money in the stock market as you will capture a greater return.

4) Ease of principal reinvestment

The fourth benefit of CDs is that, in most cases, financial institutions will allow you to have interest and dividends paid by your CD automatically reinvested into other funds and accounts you keep at their institution.

This makes it very easy for you to reinvest your profits if you don't want to have to cash checks or go to the bank a lot.

THE BAD: Certificate of Deposits (CDs)

As with any investment, there is a downside to investing in CDs. By nature, CDs are about the most conservative vehicle you can put your money in. Let's take a look at some of the drawbacks.

1) CDs pay little more than the rate of inflation

First of all, the rates that a bank or financial institution will pay you are typically not much more than the rate of inflation. At the time of writing this book, banks were paying less than 5% in interest. But the inflation rate was about 4.6% according to the U.S. Department of Labor Bureau of Labor Statistics for January 2008 as quoted on their website. That means in real dollars you are barely staying ahead of the game.

2) Most CDs are only insured up to $250,000

While it is unlikely that the financial institution you will be investing with will go under, if you want to invest more than $250,000 in a CD, you could lose the entire amount over $2,000 if that institution ever went belly up. That means you may have to open up CDs at multiple institutions to protect yourself. What a hassle.

THE UGLY: Certificate of Deposits (CDs)

Lack of Liquidity

CDs often have large penalties associated with them if you want to take your money before the term expires.

One of the knocks of buying Real Estate is that the investment is not a liquid investment. Well, CDs are not very liquid either. What does it mean to be a liquid investment? It means that you are able to sell it at any time you want for market rates. CDs are not a liquid investment because banks invoke stiff penalties if you take your money out before the term of the CD expires. This is ridiculous.

I can tell you from personal experience that CDs are not liquid investments. Over a year ago, I purchased an 18-month CD from a local bank. At the time, I did not think I needed the money. But, a great investment opportunity arose that I wanted to use the money for that I had not anticipated when I opened the CD. When I asked the bank how much the penalty would be for breaking the CD, they told me that not only would I lose the 13 months of interest I accumulated on the CD, I would also lose some of the principal.

Pardon my language, but that is crazy! Here the bank got to use my money for 13 months and they want me to pay them for using my money! That just is not right. In fact, that is a rip-off! CDs while secure are not at all liquid and that is my biggest complaint about investing in them.

Certificate of Deposits (CDs)

The Good, the Bad & the Ugly

Good Points

☼ Guaranteed rate of return

☼ Insured by the FDIC

☼ Wide selection

☼ Easy to re-invest profits

Bad Points

↓ Only pays slightly above the rate of inflation

↓ Only insured up to $250,000

Ugly Points

↓ Not liquid

↓ Big penalties to sell/break the CD before the term is up

2. Stocks and the Stock Market

Arguably the most popular investment for IRA investors is investing in individual corporate Stocks and Mutual Funds that invest in those Stocks and stock markets. When purchasing a stock, you actually become a part owner in the company. You get voting rights. You get to share in the profits and losses of the company. Typically the more profitable a company becomes, the greater the increase in the value of the shares owned. Conversely as a company becomes less profitable or loses money, often the value of the stock will usually diminish as well.

Stocks can be a wonderful investment

Throughout my life, I have had the good fortune of making some extremely good stock investments. One of my best trades was buying a Biotech stock called Geron back in 2000. I paid around $23 per share and sold it for over $70 per share just a few months later. I made over triple my money in a very short period of time. It is very hard to beat that with any investment vehicle.

Another great trade I made was buying JDSU for $1.65 a share in 2005 and selling it a few months later for over $4.50 per share. Here again, I almost tripled my investment in a very short period of time.

I have also more than doubled my money over the years in a very short period of time investing in companies such as Starbucks (SBUX), Qualcomm (QCOM), Protein Development Labs (PDLI), Incyte Pharmaceuticals (INCY), Human Genome (HGSI), Global (GLBL), Horizon Offshore (HOFF), Petroleum Development (PETD) and many others.

Past success does not guarantee future wealth!

As I mentioned, Stocks can be a great investment. This can be especially true if you invest in solid companies with great future earnings potential. However, if the future looks bleak, Stocks can go down based on the bleak outlook.

With Stocks it's all about the outlook for the future

The value of a stock today is based on the anticipation on what it will do in the future. Past history typically doesn't factor into a price of a stock.

Why is that? Well think about it. A century ago, you could have invested in a very profitable company that made horse buggies. They could have been the best horse buggies in the world. But, this invention called the automobile was coming and would soon render most horse buggy companies obsolete. So it wouldn't have mattered how profitable that buggy manufacturer was. Most likely, they ended up going out of business once cars came out. That is why the future outlook is far more important than present and past earnings.

You can look at almost any company and see that its stock had its heyday. But, once competition comes into being... and once growth slows down, the price often flattens out or decreases. Once a stock drops from its peak, often it can take years if not decades for the price of the stock to recoup.

Sometimes a stock never recovers from a drop in price

I can give you a few examples of Stocks I purchased over the years that became worthless. Years ago, I bought MiniScribe, a promising disk drive manufacturer. They did well for a while but then the disk drive industry changed.

Companies like Seagate, Iomega, EMC and others began to eat their lunch. I bought the stock well off of its peak thinking I was getting a bargain. I paid a whopping $4 per share.

You see, I thought I was getting a bargain. After all, the stock once sold for over $30 per share, so I was getting a deal right? So I thought. Everyone loves a deal. I was getting the stock at a 75% discount. Awesome... right! Wrong!

The stock continued to go down. Now it was selling for $2 per share. Well, as the pundits often say... if the stock market goes down or a stock goes down, dollar cost average. Just keep buying more. Great, I could buy twice as many shares at $2 for the same stock I paid $4 for and that will lower my cost per share to $2.67 (1000*$4/share + 2000*$2/share = $8,000 total investment/3,000 total shares = $2.67).

I was a genius right. Now, I had 3,000 shares of a stock that once sold for $30 and I got it for 85% off of list (top price). All I had to do was wait for the stock to bounce back and collect my money! This was too easy. NOT!

You see while many experts tell people in their 401Ks and IRAs to keep buying even when the stock market goes down that advice didn't work here. Instead, the stock kept going down and the company went bankrupt. My stock became worthless! That is right. My entire investment was wiped out. Thus, dollar cost averaging is not necessarily the best game plan.

Don't just buy a stock because it is "On Sale"

Unfortunately, it took me several times to realize the folly of my ways. Back in the early 1990's, I bought a stock called American Track Systems. They were designing rail switches for high speed transit. They were the only company in America that was going to do this. They came public at $2.50 per share and being a railroad buff I bought in.

I thought to myself what a great idea. Amtrak was going to develop a high speed rail corridor between Washington and Boston. Why of course they would buy from an American company right?

Well the stock after going up to $3 or so began to decline. It went down to 50 cents. I once again thought, wow... great deal. I know better than the market. In fact, I even took the time out to visit the company headquarters in Altoona, Pennsylvania. I spent several hours with the Vice President of Sales. I bought his story hook, line, and stinker, I mean sinker and purchased another 10,000 shares at 50 cents. Brilliant!

Well, I should have known if a vice president of sales had that much time to spend with me that the company wasn't selling anything nor were they ever going to. But, hindsight is always 20/20. Needless to say, that company went bankrupt and out of business. In this case the President of the Company embezzled millions from the company and drove it out of business. The stockholders like me, the suckers, were the ones left holding the bag.

Hmmm, you might be thinking... "Todd, these are just a couple of bad examples. Maybe you are just a bad investor."

Well, the jury is still out on that. While I would like to think I am a better than average investor, the final tally won't be known until my final trade has been made... which hopefully won't be for many years to come.

While I can't argue that my investments in MiniScribe and American Track Systems were boneheaded, there are many other great companies out there that have seen their stock prices suffer over the years. Perhaps they did not go out of business, but the value of their stock sank significantly.

Stocks don’t always go up

For years Microsoft was one of the best Stocks ever. In 1986 it came out at $21 per share. However, the stock has split nine times in its history. A split is when a company increases the number of shares outstanding to make the stock more affordable. A common split is a 2 for 1 split. But I have seen a split "3 for 2" and "3 for 1" as well.

Let's look at how a "2 for 1" stock split works. Say a stock sells for $100 and the company splits the stock 2 for 1. That means that for every share you own, the company will issue you another share. Thus, if you bought 100 shares and the company splits its stock 2 for 1 that means you will now own 200 shares. But, when that happens, the initial price of the stock is adjusted to compensate for the split.

So let's assume that the "2 for 1" stock split is effective on March 15. On March 14 you own 100 shares and the stock is trading at $100 per share. On March 15 you will own 200 shares and the price will now be $50 ($100/2). If instead it was a "3 for 2" stock split, you would now own 150 shares ((100x3)/2) and the price would be adjusted to $66.67 ($100/1.5).

Conventional wisdom always states that stock splits are a good thing. In reality it has no impact on the long term value of your stock. 100 shares of a $100 stock are worth exactly the same amount as 200 shares of a $50 stock. However, the masses believe that when a stock splits and becomes more affordable that more people will want to buy it, effectively increasing the price and value of the stock.

While this may be true and happens quite often in the short term, in the long term each split dilutes the value of a company's stock and makes it that much more difficult to hit earnings projections and raise additional capital down the road.

Let's go back to our Microsoft example. Back in 1986, Microsoft went public at $21 per share.

Since Microsoft has had nine splits, its split adjusted offering price was just over 9 cents per share. So if you bought the stock in 1986, you made a fortune.

However, look at what has happened to Microsoft since its peak in 2000. For over eight years since its peak the stock has been worth far less. In fact, the stock dropped as much as 60% from its peak price. As you can see by the chart below which depicts the closing price on the 6th of each month, the stock after peaking around $60 per share has basically traded sideways and generated little to no profit for over ten years from July 1, 1998 through Jul 6, 2008.

microsoft chart

Now certainly if any time from 1986 through 1999 you purchased Microsoft stock and sold when it was at is peak, you would have made a great return. But, for all those who have since purchased Microsoft, unless they bought at the bottom of the dip after 9/11, odds are those investors are losing money.

The key to success in investing in Stocks is timing!

While this can be said about any investment timing is extremely crucial when investing in Stocks or Mutual Funds.

And, don't think the professionals are any better at this. In fact according to many studies I have seen over the years, over 80% of all Mutual Funds under-perform the stock market. And the market itself is not fool proof.

The overall Stock Market doesn't always go up either!

Several times in history, major stock market indices have either declined in value or remained stagnant for many years. Yes, in the 1990's and 2000's we had a couple of great bull markets. But, let's take a look at some other time periods.

1965 – 1982 Dow Jones Industrial Average (-7% Return)

On October 1, 1965 the Dow Jones Industrial Average closed at a value of approximately 960. On September 1, 1982, the Dow Jones Industrial Average closed at approximately 896. That means almost 17 years later, the value of the Dow Jones was still approximately 64 points or almost 7% lower than it was in 1965. It was not until the following month that the market finally began to go up. So basically, if you invested $100,000 on October 1, 1965 on September 1, 1982 your investment was now worth only $93,333. That is terrible. You waited almost 17 years so you could lose 7% on your money? How pathetic is that?

Dow Jones Chart 1965 - 1982

You know what is amazing? Every financial advisor I have ever met has said just keep investing your money in the stock market.

Yes, eventually the market always goes up. However, while this may be true, some of us might not live an additional 17 years to see it if history wants to repeat itself.

Don't be fooled into thinking the market always goes up. It doesn't. Don't believe me? Let's take another look at another popular US index, NASDAQ.

"Every worthwhile accomplishment, big or little, has its stages of drudgery and triumph; a beginning, a struggle and a victory." – Ghandi

2000 – 2008 NASDQ Index (Eight Years Later 50% Less)

In March of 2000, the NASDAQ got as high as 5048. By October of 2002, the NASDAQ went as low as 1108. Go online to a financial website and take a look at where the NASDAQ is trading at today. At the time of writing this book the NASDAQ was hovering around 2300. That means that if you were unfortunate enough to invest $100,000 in the NASDAQ towards its peak your investment eight years later would be worth about whopping $45,500.

NASDAQ Chart 1999 - 2008

As you can see by the chart above, even if you had invested before the peak in the NASDAQ, if you had bought and held through the peaks and valleys, nearly ten years later your investment still would have been worth less than it was in July of 1999. This is further proof that stock markets can go very long periods of time with little to no return if you are not actively trading it on a daily basis.

1985 - ??? Japan's Nikkei 225 Index

Think stagnant markets are limited to the United States? Think again. Let's look at what once was one of the world's most successful markets; Japan's Nikkei Index. From 1985 to 1990, the Nikkei index almost quadrupled in value from around 11,000 to almost 40,000. Then, look at what happened. At the time of the writing of this book, over 18 years later, the index is still only trading around 13,500. Even if you bought at the bottom in 1993, your investment would still have not been worth what you paid. That is over 15 years of ZERO appreciation! Certainly, if you look at the chart there have been points where you could have bought and sold for a profit. But, the tired old strategy of buy and hold just does not work like the financial advisors would like you to believe.

Markets don't always go up! In fact, as we can see they often trade sideways or go down.

Nikkei Chart 1999 - 2008

The bottom line is if you bought the Nikkei Index any time between 1986 and 2000 and held your position until February, 2008, it would have generated ZERO profit! That is pathetic! That means if you invested in Japan Nikkei Index in 1986 and held all the way through to 2008 after 22 years your investment would still be worth the same. Now, tell me that 22 years of zero return is good. No way! It has been a terrible investment.

Granted, I am demonstrating some extremes here and there may have been some dividend income. But, the point is there is no such thing as a fool-proof investment. For those investors who bought a bunch of NASDAQ Stocks during the peak of 2000, they may unfortunately not live long enough to see them bounce back to profitability past where they were purchased.

Some stocks never recover their initial value

Some Stocks never recover from a long downtrend or at least take years to recover. Some stocks never recover because the underlying company went bankrupt. Other stocks never recover because of a variety of reasons.

Look at Intel. It used to trade for over $70 a share. Where is it now? What about JDSU? In 1999 this stock was a high flyer, a darling in the industry. Its stock kept soaring. Then something radical happened. Their market opportunity dried up and their market share was diminished by several tough competitors. Add to that the fact that the added competition put tremendous pressure on operating margins and the stock tanked!

It used to trade over $1,200 per share after you adjust for the reverse split it had in 2006. Its real high was around $153 per share but it had a reverse-split of 1 for 8. That meant for every eight (8) shares you used to own of JDSU, you now owned just one (1). Remember earlier we talked about a regular stock split and the potentially dilutive effects of that. Well JDSU split five times and had so many shares outstanding that the price of its stock dropped to less than $2.

Most Mutual Funds will not buy a stock under $5 and many won't buy anything less than $15 per share. So, to get its stock price back to a level that Mutual Funds would be interested in buying it, JDSU did a big taboo. It did a reverse split. So taking that into account, the stock used to truly trade for a value of over $1,200 per share. I guarantee you it is not even close to that point now. At the time of print, it was around $11 per share.

One thing I can tell you is that if you own a company that wants to do a reverse split... sell... sell... sell. If you live near hills... run for them. Whether it was JDSU, ADCT, Ciena or a host of other Stocks, rarely does a stock go up after a reverse split. It almost always continues to go downward because the negative thing about a more expensive stock is that it can be sold short.

Short sellers love pounding a weak stock

For those of you who are not familiar with the term short selling or selling short, what it means is that a trader is expecting the price of the stock to go down. So what the trader does is borrow shares of stock he or she does not own and sells them at a given price. He or she then waits for the stock to go down and then repays the loan of stock. The way a trader repays the stock loan is to buy back stock on the open market. By buying back the stock, the trader closes out the transaction. The difference between what the trader sold the stock for and what the trader bought the stock back for is the profit (or loss) for that transaction. There are also some costs associated with the interest on the "loan."

So let's look at JDSU. It had a 1-for-8 reverse split. That meant that for every 8 shares of the old JDSU you used to own, you now only had 1 share. After it reversed split the stock was re-priced around $16.30 per share. This occurred on 10/16/2006. While the stock initially went up after the reverse split, it started to pick up its old habits and the stock proceeded to trade as low as $10 per share for quite some time.

If a trader sold short at $16.30 a share and closed out the position at $10 a share he or she would have made $6 per share profit or 60% on their money. Not bad.

Now perhaps at this moment in time JDSU is trading above its reverse split price but the point is that almost always at some point, Stocks that have to reverse split continue to see their stock price erode. After all a reverse split does not change the value of the company. A dog is still a dog. And short sellers love to pound beaten up Stocks causing them to go down further.

Even "bell-weather" stocks can see prices erode

Now you might be thinking, come on Todd, JDSU? That is an anomaly. Well, think I am just giving a few really bad examples. Let's look at some other "bell-weather" Stocks and see how well they have fared as of late. Certainly if you bought these Stocks years ago, you would still be doing ok, but if you bought them in the last several years, likely you would be down significantly.

Citigroup (C) used to trade around $560 per share (Adjusted price for reverse 1 for 10 split). Where is it now?

Ford (F) used to trade around $40 per share. Where is it now?

GE used to trade around $60 per share. Where is it now?

Bank of Amercia used to trade over $50 per share. Where is it now?

At the time of creating this, each one of these Stocks was down significantly. And these were at one time industry leaders. Now certainly at some point they may go back higher... maybe by the time you have read this book, they have regained their swagger. However, the point I am trying to make here is to not blindly follow what the "experts" say and not to assume that Stocks always go up.

GM hit 65 year lows in 2009 and wiped out investors!

Perhaps one of the saddest stories at the time back in 2009 was General Motors. In June of 2009, the stock hit a 65 year low and the company went officially bankrupt. That is right. If you had bought the stock 65 years prior and held it through the time of bankruptcy liquidation, you would have seen no appreciation in the price of the stock. In fact you would have seen your investment wiped out! Now to be fair GM had paid nice dividends over the years but the stock price, after 65 years, was trading at just pennies.

Perhaps now it is trading higher. But the problem is when the company re-emerged from bankruptcy, it did not issue new shares to the previous shareholders. The previous shareholders saw their investments wiped out. This is a crime. There should be laws that state if a company goes bankrupt and re-emerges as a new publically traded company that the previous shareholders are given some sort of percentage of ownership in the new company. For many shareholders, investing in GM stock became a disaster.

In Stocks, fortunes are made & lost

Sure, fortunes are made every day in the stock market. But many more fortunes are also lost.

However, Stocks should be a part of your portfolio

I certainly do not want to discourage anyone from buying Stocks. Stocks should absolutely be a part in everyone's portfolio. The key though is to not just sit back and be a passive investor. Instead, you should be an active investor. Make sure you take profits. And for goodness sakes, don't turn profits into a loss.

I am still an avid investor in the stock market. Why? Because, quite frankly if invested properly, Stocks can be one of the best investments available. If you purchased Google when it went public in 2004 around $100 per share you could have made an almost 750% return if you sold it in the fall of 2006 at $750. If you had bought $100,000 worth of Google stock in 2004 you could have sold it for $750,000 just three years later. Now, that is an incredible return on your investment.

You could have retired off of Starbucks stock

If you bought Starbucks stock when it went public in 1992 you could have become very wealthy. I actually did buy it in 1992 because I loved their coffee. But, I must admit I sold it way too soon. Ah the challenge of investing in Stocks. I was so happy I doubled my money I sold it.

I had no idea what would ultimately happen to the stock price of Starbucks. The stock had five 2 for 1 stock splits. If you bought 1,000 shares at the IPO price of $17 back in 1992, by 2006 your investment would have been 32,000 shares at around $38 per share which would have meant your $17,000 investment would have grown to over $1.2 Million.

If you bought Dell during its infancy, you could have become a millionaire on a $2,000 investment if you sold it near the peak in 2000. There are thousands of success stories of Stocks that have gone up over 1,000%. That is right, 1,000%.

Let's look back at Microsoft. Say you bought it back in 1986 for, if my math is correct, the equivalent of 9 cents a share. Even at the time of print at $28 per share, your investment is still up over 31,000%. Not too shabby. A $2,100 investment in Microsoft back in 1986 would be worth over $653,000, even at the price at the time of print of around $28 per share in 2008. Where else can you see a return like that?

With Stocks timing is critical

We just discussed how if you bought Microsoft at the right time you could have made a fortune. However, if you purchased 100 shares of Microsoft at its peak in 2000 around $60 per share, your $6,000 investment would have been worth only $2,800 at the time this book went to print. That equates to a loss of 53%. So timing is everything when it comes to Stocks. If your timing is right, you can be a hero. If your timing is wrong you will be a goat.

The good, the bad and the ugly of investing in stocks

When considering an investment in stocks there are some good, bad and ugly things to consider. Let's take a look at each.

The "good" about investing in stocks

1) Opportunity for a huge return on investment (ROI)

As we discussed during our overview of Stocks, one of the greatest aspects of investing in the stock market is the ROI you can get from Stocks. It is not unheard of to see the price of a stock double, triple or even quadruple. Over time, the market has also shown a nice rate of appreciation.

If you have the talent to invest in the right investments at the right time, you can make a fortune in the stock market and fully fund your retirement.

2) Liquidity

Unlike almost any other investment available to IRA investors, Stocks provide a tremendous amount of liquidity. If you want to buy or sell a stock, you can do so in seconds. Unlike a CD where you have to keep your money tied up for a period of time, with Stocks, you can buy and sell on any day the market is open for business.

Unlike Real Estate, the stock market is always full of buyers and sellers at any given time. While you may not be happy with the current price, you can still choose to buy or sell at any time if you wish. All you need is to have the proper amount of capital and an account with a broker.

3) Some stocks pay dividends

Many Stocks, especially those that trade on the American and New York Stock Exchanges, pay a dividend to holders of the stock (shareholders). Depending on the price of the stock and the declared dividend, the yields can vary tremendously.

A dividend is a cash and/or stock payment that a company pays out of retained earnings. It's a way of companies sharing the wealth so to speak. Getting a dividend is almost like getting paid interest on a stock. In fact, the yield is quoted as a percentage rate like interest.

Just like with Bonds, the better quality Stocks don't typically have to pay as high of a yield on their dividends as those of lesser quality. However, that is not always the case. The yield literally changes on a daily basis. The way a stock dividend yield is calculated is by taking the current price of the stock and dividing it by the declared dividend and then extrapolating that out on an annual basis.

For instance a $20 stock that pays a 25 cent quarterly dividend has a dividend yield of 5%. The way that is calculated is by extrapolating the quarterly dividend to its full-year value then dividing by the stock price. So in this example 25 cents times 4 quarterly payments equals an annual dividend of $1. If you divide $1 by the $20 that you paid for the stock, you are receiving a dividend yield of 5% (1/20=.05=5%).

Dividends are like a salary

The beauty of a dividend is that you can generate a quarterly income by holding the stock. When you are a shareholder of a company that pays out dividends, usually they electronically deposit funds into your broker account every quarter. This can be especially helpful for those who are on a fixed income.

Take my Great Uncle Harold as an example. At the time of going to print, my Uncle was 92 years old and living in an assisted care facility. At 92 years old, he is no longer able to work. Over the years, he inherited Stocks from deceased relatives. These happened to be great dividend paying Stocks.

While his entire portfolio was worth maybe $110,000, he was earning almost $7,000 per year in dividends.

Considering he was on a fixed income where he was relying on Social Security and his paltry VA pension to pay for his monthly expenses, without his dividends, it would have been difficult for him to have enough money to pay his bills.

Sure, he could sell his Stocks to raise funds. But, then Uncle Sam would want a good piece of the profit so that really wasn't an option. So the dividends really helped my uncle and can help you in retirement as well.

4) Tiny commissions

Unlike Real Estate or Annuities, you can buy and sell Stocks and pay almost no commission. In fact some online brokers now offer $0 commission trading. How long that will last, I don't know. But, many other stock brokers charge as little as $5 per trade to buy and sell stock.

When you think about that, it is amazing. You could sell 1,000 shares of Google for over $400,000 and pay $5 in commission to sell it. Contrast that with selling a house. If you pay a Real Estate agent a standard commission of 5% to 6% to sell a $400,000 house, you would pay between $20,000 and $24,000 in commissions. So selling a stock is far less costly than selling a house.



The "bad" about investing in stocks

1) Timing is crucial

Stocks are perhaps the most volatile of all investments. Having the right timing is crucial to success. If your timing is off by as little as a day or two you can see extremely adverse results. Consider one recent example, Walgreens (WAG). For years, Walgreens was a stellar stock. As of September of 2007, it was trading around $47 a share. Then, the unthinkable happened. Walgreens had a bad earnings report. One bad report! It wasn't even all that bad. They still made money for the quarter but Wall Street punished the stock. In a matter of a few days it went from the $40's to the $30's. Investors in a matter of days lost almost 25% of their investment, almost overnight.

Walgreens is typically not a volatile stock. However, with Stocks anything can happen and now people may have to wait a long time, just to break even.

Months later, the stock got as low as $32 per share but then recouped a bit to $36. So if you were fortunate enough to buy at $32 and sell at $36 you made a nice return on your investment.

The key though is timing. You see with CDs or Real Estate, it is almost impossible for you to lose 25% or more on your investment in just a few days time unless you really goof up. But, with Stocks, it's a different story.

2) Once a stock tanks it can take years to recover

Earlier in this section we talked about the fact that once a stock falls out of favor, it can sometimes take years to recover, if it ever does. Many don't ever recover and go into bankruptcy leaving the shareholders with nothing.

Enron, HealthSouth, United Airlines, and Northwest Airlines are just a few large companies that cost investors billions of dollars.

What really upsets me is what happened with both United Airlines and Northwest. Both airlines were allowed to go bankrupt, leaving the original shareholders with nothing. Then, they were allowed to re-emerge from bankruptcy, once again issue stock, but leave the original shareholders holding the bag. On top of that the executives that ran these companies into the ground were rewarded with millions of dollars in salary and bonus. Executives were rewarded while employees and original shareholders got the shaft. Something is really wrong with our system when that is allowed to happen.

When you invest in Stocks is to follow the action on a daily basis and place protective stops to prevent yourself from losing all of your money. Brokers will allow you to place an order called a "stop loss" order. This means that if the stock ever decreases to the point of your order, it is automatically sold and you are out.

The problem with stop losses is that they almost always get hit. I have never met one market professional who will admit to this, but I swear that the market makers that determine the price of Stocks know where the stops are at and often knock the stock down to take out the stops only to then move the stock back up.

No one will ever admit that this happens, but almost every single time I have ever entered a stop loss, I have gotten taken out.

So what I do now is mentally keep track of my stops. When I see a stock go below my mental stop, I then issue the order to sell. But that requires watching it on a daily basis which you may not want to do. So just know that you do have the option of placing stop losses on the Stocks that you own.

3) One piece of news can crater your investment

I can't tell you how many thousands of times I have seen a stock tank or even the stock market as a whole tank because of one piece of news. And the worst part of this is the fact that companies rarely release important news while the market is open. Instead, they release the news when it is closed thus limiting the ability to have an orderly reaction to the news. That is why Stocks can violently gap up or down. If a stock closed at $40 one day and opened at $30 the next, that gap down was most likely created by a negative news event. It's too bad companies are not forced to announce this during market hours so people can have an opportunity to exit in an orderly fashion if they don't like the news.

4) You are at the mercy of the market & management

With Stocks you are at the mercy of the market and corporate management. A company can issue a great earnings report, but if it fell short of inflated expectations, the stock can still tank.

Additionally, you can have great performing company, but the overall market can be going down and that can drag down even the best of Stocks.

Then, too, you are also at the mercy of corporate management. All too often we have seen situations where executives have raided corporate coffers for their own gains and ultimately cost value in the company.

CEOs sometimes live lavishly at shareholder expense

The CEO of Tyco, Dennis Kozlowski lived an extravagant lifestyle while running Tyco into the ground. According to an SEC filing from Tyco, he spent $15,000 of company money on an umbrella stand, $6,300 for a sewing basket and $17,000 for a traveling toilette box. That's what I call a crappy investment... no pun intended.

Ultimately Dennis Kozlowski, in June 2005, was convicted of misappropriating more than $400 million of Tyco's corporate funds. What did the shareholders get? As they say in New York, bubkis. Tyco shares at the time of print are still worth a fraction of what they used to be prior to the conviction of Kozlowski.

The CEO of Hollinger International, Conrad Black allegedly spent $62,000 of shareholder money to throw his wife a birthday party. He was also indicted for allegedly playing a major role in misappropriating over $52 million in corporate funds.

What is amazing to me about this is that my sister used to work for the Pioneer Press which was owned at the time by Hollinger. They treated their employees so poorly and were so cheap that they permanently turned the escalators off leading to the second floor where my sister worked so they could save on electricity costs.

So here, under Black and other Hollinger management, millions of dollars were misappropriated yet my poor sister, who at one point was pregnant, had to walk up a non-functioning elevator every day to work so they could save a couple of bucks on electricity. Wow... what a way to maximize employee productivity and shareholder value.

The CEO of WorldCom, Bernard Ebbers originally received a severance package of $1.5 Million per year for the rest of his life as a reward for leading the company into bankruptcy which left shareholders with a worthless investment.

Other CEOs just mismanage situations

We have also seen corporate management perform very poorly and that performance has often cost shareholders dearly. When Carly Fiorina took over HP, its stock traded at almost $80 per split adjusted share. When she was dismissed, it traded at less than $20. John Ackers presided over IBM which went from being an industry leader to seeing its stock hit multi-year lows.

Richard Scrushy presided over HealthSouth and saw its stock go from around $200 per split adjusted share to almost zero. Even today the stock only trades at a fraction of where it once did.

In all three of these situations, CEOs failed to acknowledge the market pressures and adjust their strategy. In the case of IBM and HP, their stock performance greatly improved once management was changed. For HealthSouth, unfortunately shareholders were left with a huge loss on their hands years after the CEO was sacked.

Perhaps the most frustrating thing is how difficult it is to remove a poor performing CEO. Certainly, it has happened over the years, but it is extremely difficult to piece together enough shareholder votes to overthrow poor management. This is because corporate insiders and boards of directors typically hold a large portion of shares and are reluctant to toss the very people that brought them to their positions of power.



The "Ugly" about investing in stocks

1) Some Stocks can become virtually worthless!

Perhaps one of the worst examples of a fortune gone bust was Bear Stearns. This was a company that had been around for over 85 years. It had survived the Depression, two world wars and several recessions. Yet, in March of 2008, it virtually collapsed. Within a period of just over a year, the stock price of Bear Stearns went from selling as high as $170 per share to virtually nothing.

Because of the Credit Crunch that occurred in 2007 and 2008, Bear Stearns all of a sudden couldn't cover their leveraged bets that they had made in the mortgage market and had to sell out to JP Morgan for a mere $10 per share. In the period of one year, Bear Stearns Stock lost 94% of its value!

2) Big news almost always happens when the market is closed preventing an orderly reaction to the news

Typically companies always wait until after the market is closed to release important information such as earnings, a drug approval or denial, or something else major that can have an impact on the price of a stock. Additionally, the government typically releases the most critical information such as unemployment figures, inflation figures, etc. before the market opens.

What this means is that reaction to the news is almost always overdone one way or another because everyone is in a panic to react to the news, either to buy or sell. The impact of this is that both stock markets and individual Stocks can loose a huge percentage of their value in a very short period of time due to a panic.

I have always thought that it is ridiculous that this information is released during off hours.

What it does is prevent investors from reacting to news in an orderly fashion and it causes stop losses to often become worthless.

The reason I say this is if you put in a stop-loss order at for $50 per share for a stock you paid $60 for initially, and the company releases bad news before the market opens or after it closes, you could get stopped out for much less than your stop loss.

Let's say that a stock closes at $55 and releases an earnings report after the market closes where the company missed the analyst expectation by a few cents per share and lowered their guidance for the following quarter.

That stock could open the following day at $40 per share. So even though your stop loss was placed at $50, you could get filled at less than $40 the following day, thus compounding your loss. What a bummer.

I have always felt that companies should have to release big news during the market so there is an orderly response to the news and stop losses could play the role for which they were intended.

3) Potential for huge losses

Speaking from experience and in reviewing the information we have already discussed, I can tell you that there is a very high probability of incurring huge losses when investing in the stock market.

While I have doubled and tripled my money on some investments, I can also tell you I have lost thousands of dollars on investments as well.

On companies that I invested in such as MiniScribe and American Track Systems, I lost all of my investment. That's right 100%! But I also lost over 20% on Stocks like Intel and Dell by thinking I was buying at the bottom only to see them go lower.

The key with investing in Stocks is to make sure you either keep a mental or a physical stop-loss in place. Many experts such as William J. O'Neil recommend that you not risk more than 8% on any given trade. The problem with that is in today's volatile markets a stock can go up or down 8% in a day, so there is a likelihood that if you place your stop too tight you will get taken out of your investment with a loss.


"Don't let the opinions of the average man sway you. Dream and he thinks you're crazy. Succeed, and he thinks you're lucky. Acquire wealth, and he thinks you're greedy. Pay no attention. He simply doesn't understand." - Robert Allen

3. Mutual Funds

In the previous section, we discussed the purchase of individual Stocks and market indexes. In many IRAs and 401Ks you have the opportunity to diversify your holdings by buying baskets of Stocks called Mutual Funds.

Mutual Funds are perhaps the most popular method that people use to invest in the stock market. Mutual Funds solicit money from multiple investors and pool that money together to invest it in some sort basket or combination of financial instruments. Typically, they invest in Stocks and Bonds. But, some funds invest in Real Estate, gold, and other investments.

When the market goes up, Mutual Funds can be a great place to have money invested. The problem is, as we have already discussed, the market doesn't always go up. Mutual Funds available to the public and trade like a stock. They are managed by professional fund managers. Each manager makes the buying and selling decisions. So, ultimately, your returns are often determined by the quality of the fund manager.

As mentioned, Mutual Funds can offer a multitude of baskets of investment vehicles. Some are index funds that try to mimic the performance of a given index such as the Dow Jones Industrials, the S&P 500 (Standard and Poor's) and the Russell 2000. Other funds focus on industries such as health care, telecommunications and biotechnology. Others yet allow you to own foreign Stocks in multiple countries or foreign Stocks from a single country like China.

Most Mutual Funds charge a fee of some sort. There are some who call themselves "no load" (free of fees) funds, but believe me people don't manage funds for free. There is always a cost of doing business hidden somewhere. So, one would think since you are paying a fee for a professional to manage the fund, that their performance would be stellar... right? Wrong! I have seen studies and articles that show that as many as 80% of all Mutual Funds under-perform the indexes.



Fidelity Magellan Fund (Case Study)

Let's look at perhaps one of the most popular Mutual Funds ever, the Fidelity Magellan fund (FMAGX). If you had bought into this fund in 1999 or 2000, some eight to nine years later, your investment would not be worth much more than what you paid.

Just look at the chart below depicted as of July 1, 2008. Now granted prior to 1999, the fund went up very nicely. But if you were unfortunate enough to have invested during 1999 or 2000 it took several years just for you to break even and at times you would have had a substantial loss on paper.


Fidelity Magellan 2008 Chart


If you notice on the previous chart we explored on Fidelity Magellan, there were peaks and valleys. At the end of the day if you did not get in at the right time on these Mutual Funds and just played by the tired old strategy of buy and hold, your money would not only have not accumulated in value, it is very possible you could have lost money over that time.

The point of this illustration is that the stock market does not always go up and neither do Mutual Funds. I know this is counter to what the so called "experts" will tell you. Sure, in the history of time, markets typically go higher. But, a lot of us may not live long enough to see higher returns if we are one of the unfortunate investors who did not time our investments properly.



Mutual Funds often have high fees and commissions

Compounding often poor returns, is perhaps the one thing that many investors are not aware of and that is the fact that Mutual Funds pay hefty commissions to the stock brokers that represent them. You may be thinking, "Wait a minute Todd, you are wrong. I just purchased a Mutual Fund and my broker did not charge me a dime of commission."

That may be true, but funds bake in the commissions into the NAV or Net Asset Value price that the broker charges you for the purchase. So, while the commission is not charged separately like it is when you invest in Stocks, believe me it is baked into the cost of the fund.

It is only human nature for brokers to want to push those funds that pay the highest commissions. So, before investing in any Mutual Fund, you should conduct your own research on the performance history of that fund. There are many free finance portals that you can find on the Internet where you can pull up charts to see how funds have performed.

At the time of this writing my favorite financial portal is Yahoo! Finance. You can find out a tremendous amount of information on almost any financial vehicle using Yahoo! Finance (http://finance.yahoo.com). Other financial sites include Google.com, MarketWatch.com and CNNMoney.com.

The good, the bad and the ugly of investing in mutual funds

When investing in mutual funds, there are good, bad and ugly things to consider. After all, no investment is perfect or fool proof. Let's take a look at the good, the bad and the ugly of investing in mutual funds.

The GOOD: Mutual Funds

I know thus far, based I what I have written, one could get the impression that Mutual Funds aren't worthwhile investments. However, that would not be a completely accurate depiction. Mutual Funds do have their place in an investment portfolio. When used properly, Mutual Funds can indeed be a wonderful investment.

The key with Mutual Funds is to trade them similar to Stocks and not buy and hold them forever. The bottom line is if the stock market is going to go down, most likely your Mutual Fund will too. So, don't become emotionally attached to your Mutual Funds. As they are performing well, hold on to them. But, if you see them not performing as well as the overall market, or if you think the economy is going to tank, don't be a hero. Unload the fund and either go to cash or invest in a fund that has a better track record.

Now, let's look at some of the positive attributes of Mutual Funds.

1) Diversification:

A single Mutual Fund can hold Stocks, Bonds and cash issued by from hundreds or even thousands of companies and governmental entities. Some funds may invest 80% in a basket of Stocks, 15% in a group of Bonds and 5% in cash. Other funds may have different ratios. By being diversified, Mutual Funds considerably reduce the risk of a serious monetary loss due to problems in one particular company or industry.

Picking out a winning stock can be very difficult to do. And, sometimes one will really tank. Where as a Mutual Fund invests in numerous Stocks, Bonds and other vehicles. In March of 2008, when the stock of Bear Stearns went from over $60 to under $10 in just a couple of days, investors that had a large interest in that stock took a beating.

However, investors who were in Mutual Funds that may have had just a small percentage of their portfolio in that stock were spared a potentially tremendous financial trauma because of being diversified.

Diversification can be a wonderful thing because you typically go along with the upward trend without as much risk as you might have in an individual stock.

2) Low cost of entry

Many Mutual Funds let you invest with as little as $500 to start. Most then let you invest smaller amounts after that. In some cases, once you have begun investing in a fund, you can invest as little as $50 to buy more units or shares in the future.

This is nice because to buy some Stocks like Berkshire Hathaway or Google you need a nice sized nest egg just to afford a couple of shares. However, with Mutual Funds, it allows you to participate in the stock market with a very low cost of entry.

3) Managed by professionals

If you are like most investors, you may not have the time or feel you have the expertise to manage your personal investments on a daily basis. With Mutual Funds, a fund manager oversees the daily balance of investments, determines where to reinvest interest and dividend income and researches where to make the next investments. Fund managers literally scour thousands of potential Stocks on a regular basis, both domestically and internationally to try to find the best values.

Unlike most of us, Mutual Fund Managers spend the entire day researching the best investment vehicles because that is their job. As a result, in theory, they should have a better chance at finding that next great investment.

4) Decent liquidity

Units or shares in a Mutual Fund can be bought and sold on any day that the stock market is open and trading. Unlike trying to sell Real Estate or coins or some other hard asset, selling a Mutual Fund can be done the same day you want to get rid of it. That provides you with relatively easy access to your money.

To buy or sell a Mutual Fund, you don't need to hire a lawyer, negotiate back and forth on price or run ads in the newspaper. All you need to do to buy or sell a fund is to go to your online broker and click a few buttons to purchase the fund. Or, you can just call your financial advisor or broker with your order.

Outside of individual Stocks themselves, Mutual Funds provide the greatest liquidity of most any IRA investment.

5) Flexibility

Many Mutual Fund companies manage multiple funds. They might offer everything from stock funds, to Bond funds, to money market funds. Often, if you move your money from one fund to another within the same family of funds there are minimal sales charges to switch. This allows you the ability and flexibility to change your portfolio as you see fit and as market conditions warrant.

6) Opportunity for stellar performance

I have saved the best advantage for last. Perhaps the most exciting aspect about Mutual Funds is that, like the overall market, in up markets your investment can see double digit and some times triple digit returns. It is not unusual for a Mutual Fund to provide a return of 15% to 25% in a given year, especially if the market is up.

It is very difficult to achieve this kind of return with almost any other investment. The key however, is long term performance. But, even in the long term, there are some Mutual Funds that have provided tremendous year-over-year returns to their investors.


The BAD: Mutual Funds

1) Your success is at the mercy of the fund manager

When you invest in a Mutual Fund you place your money in the hands of a professional manager. The return on your investment depends heavily on that manager's skill and judgment. Research has shown that few portfolio managers are able to out-perform the market. Make sure you check the fund manager's track record over a period of time when selecting a fund you want to purchase.

2) Fees eat into performance & returns

Fees for fund management services and various administrative and sales costs can reduce the return on your investment. These are charged, in almost all cases, whether the fund performs well or not.

Redeeming your Mutual Fund investment in the short-term could significantly impact your return due to sales commissions and redemption fees.

But, the most diluting of returns is the fact that management fees are charged that come right out of the performance that your fund achieves.

Fees on Mutual Funds can range anywhere from 1% to well over 6%. So if the market goes down or just trades sideways it is possible the value of your investment will still go down because of the fees involved.

3) Tough to know what your fund is really holding

By law, Mutual Funds must issue a prospectus at the end of each year and quarter. In this report, the Mutual Fund outlines its performance and discusses its key holdings. The problem is that often funds will use "window dressing" to disguise bad decisions.

Window dressing is when a fund either buys or sells a stock right at the end of the quarter. Fund managers do this so that in their quarterly report they can either look like they own a bunch of winners or they can disguise the fact that they owned some real dogs.

In this day and age of the Internet and real time information, it is ridiculous that Mutual Fund holders can not see in real time the holdings of their funds.

Imagine owning a store and not knowing with certainty what inventory you have in the store. That is not exactly a recipe for success. But that is exactly what happens with Mutual Funds. On any given day, you really have no idea what you are buying when you purchase a fund.




The Ugly: Mutual Funds

1) Mutual Funds trade only once a day

Unlike a stock, with Mutual Funds you can only buy and sell with the closing price of the day. This can significantly impact your profit or loss. Let's say the Federal Reserve just lowered interest rates by ½% and the market goes up 350 points after the Federal Reserve announced the move. Well if you now decided you wanted to get back into the stock market and buy a Mutual Fund, the price you would pay would be based off of the close. So you would have missed the entire 350 point move and had to pay up for the privilege of owning the fund.

Shortly, we will talk about another way to buy baskets of Stocks called Spiders and Qs that would have allowed you to capture a good part of this move. But, as far as Mutual Funds go, you only get one entry point a day.

Now let's look at how that can really hurt you in a down market. Let's say that the Core Inflation (CPI) number just came out and inflation unexpectedly shoots up and Stocks tank. Let's say the market goes down over 500 points and you want out because you think it is going to go lower. Well when you go to sell the Mutual Fund that day, you once again get the closing price of the day so you take the full hit. If you owned individual Stocks or Spiders you could have sold first thing in the morning on the news and only taken a couple of hundred point hit instead of a 500 point hit. But, that is not so with Mutual Funds.

2) Commissions often dictate broker recommendations

In this era of "me first" it is not at all unusual for Financial Advisors and Investment Brokers to recommend what is best for them, not you. What I mean by this is that these people are really salespeople. The way they are compensated is by selling you something.

Often, like any good salesperson, Financial Advisors and Stock Brokers will recommend funds that pay the highest commissions to them. After all, they need to put food on their tables and pay for their "McMansions." Sure, at times they will recommend good funds for you to invest in. But, you should know that often they will recommend the ones that pay them the highest commissions.

That is why research is so important. It is critical that you use tools such as Yahoo! Finance and others to look at prior performance as well as you should read the prospectus to at least get an idea of the types of investments the funds you are considering make.

3) Most funds under perform the overall market

According to some studies, the return on investment from as many as 80% of all funds is worse than overall stock market.

Monarch Capital Management states, "Many recent studies have shown that Mutual Funds, as a group, perform worse than the market over the long-term. A landmark 2003 Dalbar/Lipper study of all U.S. equity Mutual Funds, between 1984 and 2002, found that the average equity Mutual Fund returned 9.3% annually, underperforming the 12.2% annual return of the S&P 500 by a whopping 2.9%. But the really bad news is that the average Mutual Fund investor realized an annual return of only 2.7%."

4. Exchange Traded Funds (ETFs)

There is a hybrid way of buying baskets of Stocks that I personally like far better than Mutual Funds and that is a relatively new vehicle called Exchange Traded Funds or ETF(s). These are baskets of Stocks that trade like a stock. They have a symbol and contain all of the components of a given index. Often, many of these funds have catchy names associated with them like "The Qs," "The Diamonds" and "The Spiders." These names are often derived by the underlying symbol.

The Qs are called that because of the symbol QQQQ. This basket of Stocks is based off of the NASDAQ 100 index. When you buy a share of QQQQ you are getting a fractional share of the 100 companies listed in the index. The QQQQ is great because if you want to invest in technology Stocks and you think the market is going higher, you can buy the QQQQ and its performance will track the NASDAQ performance. If you want to broaden your horizons and invest in the overall market, not just technology, you can buy the symbol SPY affectionately called "The Spiders" because of its symbol SPY. That tracks the performance of the S&P 500. If you like following the Dow Jones Industrial Index, perhaps the most widely watched index, you can buy the symbol DIA affectionately called "Diamonds" because of its symbol DIA.

The beauty of investing in these baskets of Stocks is that they very accurately track the underlying indexes, they charge much smaller fees and they are much more liquid.

Yes, diamonds are liquid

They are much more liquid because you can buy and sell them during the day just like a stock. You don't have to wait until the end of the day. Let's go back to our earlier example in our discussion of Mutual Funds of the market going up 350 points due to a rate reduction.

Let's say at the time of the announcement the Dow was trading at 13,500. The DIA correspondingly was at $135. The DIA is 1/100 of the value of the index. If you bought the DIA at the time of the announcement at $135 and the market went up 350 points to 13,850, your DIA shares would now be worth $138.50 at the close of the day. That is a 2.6% return in one day.

Now if the Mutual Fund you wanted to buy, say RALCX, traded at $12 (the closing price the day before) if you wanted to buy it the day the market went up 350 points, it might have cost you $12.40. You would have to pay up for the fund and you would have missed the entire move that day. As so often happens, much of a market's move in a given year is dependent on just a few days trading. The rest of the time the market gets chopped around. So if you missed one of the biggest moves of the year, your performance will be significantly less than if you captured a good part of the move.

That is why I am a much bigger advocate of buying QQQQ, DIA and SPY rather than Mutual Funds. Because they are much more liquid and you have more control of your own destiny. It is a total scam that most 401K plans do not allow you to buy these. The reason for this scam is that Mutual Funds pay huge commissions to the plan providers so they are motivated to push Mutual Funds.

The Good, The Bad and The Ugly of Investing in ETFs

As with any IRA Investment, there is a good, bad and ugly side of investing in ETFs. Let's take a look at each.

The "good" of investing in Exchange Traded Funds (ETFs)

Now that I have provided you with an overview of Exchange Traded Funds, let's drill down and learn a bit more about their strengths and weaknesses. First, we will look to the several positives.

1) Opportunity for stellar performance

Since ETF(s) follow baskets of Stocks, when the market or sector goes up there is a great opportunity to earn a nice return on your investment. It is not unusual for an ETF to have months or years where they increase in price by 25% to 50%. Now that is what I call a sweet return.

Just like with Stocks, the key to being successful in ETF(s) is to, just like the song says, "know when to hold them and know when to fold them." ETF(s) will not go up indefinitely. When you think they have gone for a nice run, take your profits and look for another investment.

2) Great liquidity

One of my favorite attributes of ETF(s) is that they trade like individual Stocks. Unlike Mutual Funds where you can only buy and sell them on the closing price of the day, ETF(s) allow you to buy and sell them any time the market is open. That is a huge advantage.

When it comes to investing, in my mind liquidity is important and ETF(s) certainly provide a high level of liquidity.

3) Diversification

Like Mutual Funds, ETF(s) allow you to invest your money into a basket of Stocks. This is very beneficial because you don't have to be an individual stock picker. Plus, if any one stock tanks, it won't totally crater the value of an ETF investment as it would if you were holding the tanking stock yourself.

4) Can target specific sectors

Another great attribute of ETF(s) is that you can target specific sectors or even specific strategies for that matter. There are ETF(s) for commodities, for financials, for biotech and for the overall market itself. In fact, there are even some ETF(s) that specifically cater to short strategies where you are betting that the stock market is going to go lower and stand to profit nicely if it does.

For instance, if you think the Stocks in the technology are overpriced, you can purchase a ProShares Short ETF with a symbol of SID. This trades just like a stock only it performs inverse to the market. If the market goes down, this ETF goes up. However, if the market goes up this ETF goes down.

The nice thing about the short ETF(s) is that unlike shorting a stock, your risk is limited to what you purchased the ETF for and assuming you have enough money in your account you don't have to worry about going on margin if the market goes against your strategy.

The "bad" about investing in Exchange Traded Funds (ETFs)

ETFs are still a risky investment

At the end of the day, investing in the stock market through ETF(s) can still be a risky venture. For instance, in 2000, the QQQQ which was one of the first ETF(s) was selling around $90 per share. The QQQQ tracks the NASDAQ 100 Index. Over eight years later that same ETF was still worth only $45 or less than half of its original investment.

Other ETF(s) have suffered at times too. For instance both the SPY and DIA dropped over 20% from the fall of 2007 to the summer of 2008. A 20% decline in value in less than a year can be a tough pill to swallow.

The "ugly" about investing in Exchange Traded Funds ETF(s)

ETFs have a potential for years of negative returns

In my opinion the only real ugly point about ETF(s) is the fact that your investment can have negative returns for many years. As pointed out with the QQQQ, a significant drop can be very difficult to recover from. But, the beauty of ETF(s) is that since they trade like Stocks you can place protective stop losses to minimize your negative return.

There are no guarantees an ETF will always go up. In fact some have traded sideways to down for almost as much as a decade. There have been very few times in history where Real Estate property values have stagnated or gone down for over a decade. Sure there have been some speculative pockets or areas with significant economic decline. However, for the most part Real Estate has almost always appreciated. However, with ETF investments, just like Stocks and Mutual Funds, they can go many years without an increase in value.