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									                          Investing for the Beginner
                                     Jim Porter


Chapter 1                                                                   3
Risk Tolerance

Chapter 2                                                                   5
Understanding Our Friend Inflation

Chapter 3                                                                   7
Short vs. Long-Term Objectives and Goals

Chapter 4                                                                   9
Stock Market Investment Vehicles

Chapter 5                                                                   12
Asset Allocation

Chapter 6                                                                   14
Setting up an Account
Advice and Commissions

Chapter 7                                                                   17
Planning for the Future

Terminology                                                                 19


                                                       Investing for the Beginner   1
Preface: The time is NOW!

A new person to the stock and bond market is usually hesitant to Take the Plunge. This is
a normal reaction and if this describes you, then you are just like millions of others. The
key to success is knowledge, and we believe that it is attained one step at a time. In this
publication, we will attempt to increase your knowledge in order to expand your Comfort

As an ex-stock broker, I will attempt to ease your fears and share with you things that
many people in the industry hold near and dear to their hearts.

When I was a teenager, my father told me to “Save money out of every paycheck, even if
it is only a dollar. (In today’s dollars that would be closer to $10). You will learn to live
on what is left, and be glad that you did”. I took his advice, always maximized my
company savings plan, invested without leveraged programs and earned money the slow
and painless way. As a result, I had my house paid for and was totally out of debt at 35
years old.

Maybe you missed the opportunity to start as young as I did. Fear not, given enough time
and determination, you too can retire early in comfort. The time to start is NOW. Not
next week, next month or next year. Read this material twice and make a plan, review the
plan at least once a year and remain flexible enough to adjust it as necessary.

                                                                  Investing for the Beginner   2
                                                                             Chapter 1

                                                                     Risk Tolerance

We all face risks everyday. We get in the car, and either drive or ride in a vehicle down
the road almost without thought. And yet, it is one of the most dangerous things in life to
do. The reason we will probably continue doing it? The rewards outweigh the risks. We
recognize both the Need and the Want to do it. We Need to go get groceries, and we Want
to go out to eat.

Investing in the stock and bond market is very much the same. No one in their right mind
invests to lose money, but every once in a while, this happens even to the best of us. One
of the best methods of limiting your losses is to both diversify your holdings and to
choose the kinds of investments that you feel most comfortable with.

As one experiences the ups and downs of the market (and they will occur), they become
more comfortable with the unexpected. Investing is NOT a gamble as some negative
soothsayers try to imply. Owning Stocks for example is a way for an individual to
become a small partner in a large corporation. As part owner, you get to participate in the
gains and losses of that company. It becomes a gamble if a person does not do the
research or ask enough questions of qualified professionals.

Sometimes the first time investor wants to make a killing in the stock market by listening
to past history. As I was taught in Stock Broker school…. “That is like trying to drive a
car only using the rear view mirror”. In April of one year, I bought a copy of a very
popular magazine on money management and stocks. I kept it and one year later, I
bought a copy of an issue of the same magazine. I looked at the first copy and noted the
“Top 10 Investments” which was a look backwards over the past twelve months, and then
I looked at the second issue to see how it compared over the previous year. Those “Top
Ten Investments” didn’t even make the list after a year. The second issues “Top Ten
Investments” over the past twelve months didn’t even earn honorable mention the
previous year. I would have been better off investing the magazine money in something
more productive. I must admit that the ads were pretty though.

Then there was the true story of a woman that came into my office one day almost in
tears. She had worked for an old time company all her life and was within 6 months of
retirement. She was to receive $1200 per month in company pension benefits at
retirement. The company was bought out by a group of large investors. Now her pension
was only going to be $400 per month. This has happened to entirely too many people.

                                                                Investing for the Beginner   3
She had not invested in anything else other than savings accounts, which would not make
up the difference in income. Her risk was in believing that nothing would ever happen to
the company that she invested her life in, and she lost. She wound up with the money that
she put in the plan, but the company’s portion now belonged to the new owners.

                            Should I Roll Over or Transfer?

There is also a certain risk involved in transferring your retirement benefits from a
previous employer to a new employer’s plan. If you choose to make a transfer to a new
company’s plan, you are bound by that plan’s rules and stiff government regulations.
Your choices of investment vehicles are usually limited to a handful, and there are
usually only certain times that you can make changes. If, on the other hand, you decide to
take your previous retirement plan and transfer or roll it over into your own brokerage
account, you gain automatic benefits. You can, by paying taxes and sometimes a small
penalty, take out small or large amounts for emergencies. Those emergencies can be
anything that you deem an emergency like new tires for the car or a new TV set to
replace the one that was hit by lightning. You, not your new employer, decide what kind
of investment vehicle(s) to use, gaining you flexibility for diversification.

Owners of companies usually make more than the employees of the same company. If
that company is a well-chosen blue chip company, over the long term, it will historically
have rewarded its owners quite well. You too can be a part owner, and this is an area that
your serious money should be invested. This is money that you know that someday, you
want to use to increase your well being, and not the money that you want to speculate
with. You can minimize your risk even further by asking a quality Investment Broker
about a blue chip mutual fund.

Either an individual money manager or a team of managers administers mutual funds.
The team approach is less risky than the individual manager approach, but yet sometimes
has more conservative returns. Again, for serious money, the team approach seems to
make sense. We will go over this again in Chapter 4 “Stock Market Investment

You need to decide what your risk tolerance is. Many first time people choose the wrong
path and flame out quickly. When they have a bad experience due to a bad decision, they
are usually the ones trying to blame the market rather than themselves. Ford Motor
Company is not a racehorse, but it has taken people millions of miles. Don’t take this as a
stock recommendation… just an analogy.

                                                                Investing for the Beginner   4
                                                                             Chapter 2

                                       Understanding Our Friend Inflation

How many times have you heard “We are concerned about inflation”? When the Federal
Reserve Board smells inflation fears, they start raising interest rates to curtail spending.
At that point, two things usually happen short term. The stock market becomes soft,
worried about higher interest rates cutting into corporate earnings. You hear the
newscasters talk in doom and gloom terms (bad news sells lots of press). But at the same
time, retired people who have money coming due get renewed at higher rates, which help
their own personal monthly budget.

Of course, the Real Estate market also gets soft due to higher mortgage rates, but that
sometimes means better cash prices for home buyers. Wow, what a merry go round.

Lets look back into history a few years. When I was a teen, a brand new 4-door family
sedan cost $1,650.00. Today, a 4-door family sedan can typically cost $16,500 (or more).
That is ten times more in let’s say 40 years. Now IF inflation repeats its ugly 40-year
history, you can expect a 4-door family sedan to cost $165,000 around the year 2040.
Maybe it will, and maybe it won’t. But if it does, you need to be ready?

How about Needs such as groceries? Yep, bread has also followed the 10 times rule over
the past 40 years. If groceries in general do the same over the next 40 years, we are
looking at a loaf of bread costing well over $10, a gallon of milk between $20 and $30. A
gallon of gas you say? Try $15 to $20 per gallon!!!

One thing for sure, is that inflation has been around since recorded time, and is not
expected to disappear anytime soon. So why in the world would anyone call inflation his
or her Friend? A friend is someone you can count on right? Well, you can just remove
those shoes and start counting on inflation as a friend. All we have to do is figure out how
to take advantage of it.

What about your mortgage payment? Lets say it represents 20% of your income at this
point in time. If you have a fixed rate, then the payment only goes up by the insurance
and taxes that are escrowed. So when your salary doubles due to inflation, the mortgage
payment is only around 10%. Then when your salary doubles again, the mortgage is only
5% and so on. Hmmm, no wonder the older folks can afford to do things like save more,
take vacations, etc. They are using part of the percentage that used to go toward mortgage
payments!!! So, you can see the power of borrowing for long term on shelter. Inflation

                                                                 Investing for the Beginner   5
can indeed be our friend!!! If we pay off our home early, we will certainly save money on
interest, but we will lose our tax credits and the advantages of inflation. We would also
be tying our money up in a virtually non-liquid investment.

What about borrowing money to invest? Now here is a slightly different scenario.
Borrowing for investments, even though it has proven effective in some cases, is not
guaranteed, and the margin loan requirements on investments can force the sale of a good
stock at a depressed price. A margin loan is a loan that the brokerage firm will give you
based on them holding the security or stock for collateral. Margin loans are charged
healthy interest rates, and there is no guarantee that the investment will make more than
the interest charged.

Non leveraged investing in an inflating economy can indeed be our friend. When those
prices go up, the corporate world is making sure they keep their margins profitable in
order to stay in business (and more selfishly, get raises). Owning stocks are a great
inflation hedge, and have a history of being safe, but not at the risk of borrowing.

One should also avoid borrowing on consumables and fun stuff that aren’t necessary. If
things ever get tight, you’ll want to be free of the extra burden. Housing and cars are one
thing, but department store credit cards are another. If you use them, pay them off at the
end of the month, or else just pay cash. It can become a spiral downward, and has been
the demise of many otherwise well intending people.

Guaranteed accounts like U.S. Treasury Bills, short term FDIC Insured CD’s
(Certificates of Deposit), savings accounts, Money Market accounts, and that sort of
thing have a hard time being anything but a good emergency fund. Think about the
$1,000 account that is paying you, say, 4% and maybe you are in the effective tax bracket
of 20% (Federal + State):

       Principal: 1,000.00

       4% Interest:                    + 40.00
       20% Taxes on Interest:            - 8.00
       Effects of 3 1/2% Inflation:    - 35.00
                                         - 3.00

Looks like a guaranteed loss to me!

Let inflation be someone else’s enemy…choose to make it your friend.

                                                                Investing for the Beginner   6
                                                                             Chapter 3

                             Short vs. Long-Term Objectives and Goals

As an astute home financier, you have probably developed a plan for emergencies. What
if you needed new tires, or lightning hit the TV again? How about needing new jeans
because you just tore a hole in your favorite pair? More serious emergencies can be
things like losing a job, a death in the family, etc. The list can go on and on. Emergencies
know no age, race or creed. They attack the poor and the wealthy, never ceasing to set us
back a bit; not only financially, but emotionally as well.

Before you start investing with serious money, you must have a plan for emergencies by
having some money available at a moment’s notice. Many times, the salaried or hourly
employees will have a three-month emergency stash, and commissioned employees a six-
month stash. But whatever you decide is the right level for your family; you need a safe,
convenient place to get at it.

Having an interest bearing checking account may be the first place you look. This is an
area where you can shop for the best deal. Look at the interest rate, and then factor in the
accounts fees and make a decision on the best one for some of your money. Some people
keep a month or so of emergency funds in a checking account. Then you can look at
savings accounts at your local bank or credit union, as they will usually pay higher
interest than the checking accounts. Savings accounts can sometimes be linked with a
checking account, so a transfer is either just a phone call away, or in some cases

Next, Money Market Accounts can be used. They are typically available at local banks
and Investment Brokerage firms. If you use a brokerage firm, make sure that they are
members of the SIPC (Securities Investor Protection Corporation). The SIPC insures
against the firm taking off with your money. It DOES NOT mean that your principle is
insured against market loses. However, I don’t know of anyone who has ever lost a dime
in a Money Market account. Money Market accounts will many times have a minimum
check writing privilege of $100 or $500 minimum checks.

Then for some of the money, you may want to consider 3-month CD’s. Some people
even stagger these so you have money coming due every month. If you don’t take the
money out within a few days of maturity, it automatically renews at a new rate. The
problem is that you need to take it out during the renewal time or forfeit a penalty for
early withdrawal. If you buy CD’s at your local brokerage house, you can sell them at
any time usually in $1,000 increments. Brokerage houses buy these from FDIC insured
banks in large blocks, then turn around and sell them as a service to their customers. So
they are indeed as safe as a bank CD, with the extra benefit of better liquidity.

                                                                 Investing for the Beginner   7
After you satisfy your emergency fund needs, it’s time to think longer term. If you indeed
know that you will need a certain amount of cash at a particular time (like a down
payment on a house), and want to make sure that the principal and interest are intact, then
you can look at longer term CD’s, Treasury Notes or short term government backed or
corporate bonds. Your investment broker can give you exact details on what is available
at the time.

For even longer-term needs, it is time to think bonds, stocks, mutual funds, etc. There
will be more detailed information given on these in Chapter 4 “Stock and Bond Market
Investment Vehicles”.

The time horizon usually recommended for corporate stocks and bonds is 5 years or
longer. This is due to the fact that these investment vehicles change in value hourly, but
have proven over a five-year period to generally make money. So much money in fact,
that they are the chosen investments for the sophisticated investor and most company
retirement accounts. Did you know that those sophisticated investors were in your shoes
at one point and had to learn themselves? Yep, they put their pants on one leg at a time

I remember being a new broker back in the mid 1980’s and we were taught to not judge
anyone, and treat everyone the same. One day, a soiled little old man (about 80 years old)
with quite an odor came in the front door of my office. After greeting him, my secretary
ushered him into our conference room. I met with him for about 20 minutes (wishing I
had an exhaust fan). Then he asked me what I had available in 30 year bonds. I gave him
the rate, and he said what about $100,000 worth, and I told him I had plenty of bonds to
fill a $100,000 order. Then he said what about $200,000 and I had to give him an average
rate of less than the $100,000 level because rates were dropping and I couldn’t fill the
entire $200,000. He said he’d better get the entire $200,000 before we ran out and wrote
a check on the spot. Of course we called the bank to make sure it was good.

Now, the interesting part: Why would an 80 year old man ask for 30 year bonds? Because
he knew he’d get the highest income. He said, “You see, with CD’s, you only have a one
week period to take out money without penalty. I can’t time my emergencies that well.
Neither can I take it with me when I die, so what the ____ is the use of a maturity date?”

How many times have you heard “I can’t invest in something that far out, I might not live
that long”? This little guy turned out to be the retired vice president of a well-known
national blue chip company. He grew up on a poor farm in the country, but taught himself
the basics that lead to success. It turns out that he was worth millions. Millions, not from
salary, but from using simple investment techniques.

                                                                 Investing for the Beginner   8
                                                                             Chapter 4

                          Stock and Bond Market Investment Vehicles

You may have asked yourself “How does the Market work?” This is a good question that
I have addressed with hundreds of people. Think of your local Farmers Market where the
farmers come to sell their crops. This is a one-way trade mechanism, whereas the stock
and bond markets are a two-way trade mechanism. There, you can both buy and sell with
many other investors.

Whether it is the stock market, or bond market, the principle is the same. The Market is a
gathering place where people can trade or buy and sell the investment that they want. The
investments traded on the floor of the market have to meet certain criteria in order to be
listed and traded legally. The SEC (Securities and Exchange Commission) an arm of the
U.S. Government oversees the trading that is done in the United States. Most other
countries have similar agencies.

The people that you see on television waving their hands in the air on the floor are traders
who do the actual buying and selling on behalf of customers for a commission. The
broker that the order is entered through is the local contact for the traders and they too
make a commission on every buy and sell that is transacted.

So every time you buy a stock or bond you pay a commission. Likewise, every time you
sell a stock or bond you pay a commission. It doesn’t matter if you have made money or
not, the brokers and traders always make money unless they make some kind of mistake
which is at their expense. A typical mistake might be that you told them to Buy 100
shares of Hootchie Cootchie Motors, and instead they Sold 100 shares of Hootchie
Cootchie Motors. They are then obligated to buy back the sold shares and then buy the
100 shares that you wanted. This action is called a Buy Back.

The Bond Market trades such instruments as Government Bonds and Corporate Bonds.
When you own a bond, you are Loaning money to whoever issued the bond. A bank CD
is a type of bond. In return for you loaning money, you get paid interest and eventually
the principal (as long as the agency doesn’t go belly up). The agency or company issuing
the bond like the U.S. Government, or Ford Motor Company backs the bond. The quality
of the bond is only as good as the agency or company. United States Treasury Issues are a
direct obligation of the Federal Government and are guaranteed by them. Treasury issues
are available in three categories: Treasury Bills (three to six month

                                                                 Investing for the Beginner   9
maturities), Treasury Notes (one to five year maturities) and Treasury Bonds (ten to thirty
year maturities). Corporate bonds generally pay a bit higher interest than the Treasury
issues, and are rated by services such as Moody’s and Standard & Poor’s. The highest
rating is AAA, which is generally insured by a third party, then AA, A, BBB, BB, B,
CCC, CC, and C. The most speculative of these is the C rated bond. Investment grade
bonds are AAA, AA, A and BBB. Investment grade is where the beginning investor, as
well as the elderly generally invests. Economic conditions with the issuer can change,
resulting in a re-rating of the issuer and therefore the bonds. It’s important to keep a
handle on how your issuers are doing in order to know if it is time to dump them for
something better. There are also Zero Coupon Bonds, which sell at less than face value
and grow to full face value at maturity. Remember the War Bonds or Savings Bonds, etc?
They were, or are, zero-coupon bonds.

Since bonds can be traded at any time, (when the market is open), at the market price.
The price or value will fluctuate according to what interest rates are doing. If you could
by a Treasury Bond paying 12% today, would it not be worth more to you than a bond
paying 6%? It indeed would be, and there are people paying a Premium for this type of
bond every day. Likewise, people would only want to buy a 5% bond when rates are at
6%, if they can get it at a Discount (pay less than face value). A good way to remember
the relationship of a bond price in relation to interest rates is to think of the old
playground seesaw. Interest rates are on one-end and bond values on the other. If interest
rates go up, bond values go down, and visa versa.

Finally, we get to stocks. The Big Board refers to the New York Stock Exchange. Blue
Chip refers to long established profitable companies. The New York Stock Exchange is
just one of many places that there is a market. There is the Pacific Stock Exchange, the
Nasdaq Exchange, over the counter, etc. The beginning investor need only concern
himself or herself with either Blue Chip (Growth and Income) or Growth stocks. Where
they actually trade will become more relevant as you become more familiar with the

When you own a stock, you are part Owner in the company and get to vote along with the
other shareholders. You get to share in the company’s profits or losses as long as you
own the stock. Blue Ship stocks usually pay dividends in quarterly checks, and is a good
way for a retired person to gain income while waiting on the company to increase in
value due to great management performance, or just a normal factor of our friend
inflation. Utility companies are historically ones that retired investors like due to their
history of increased dividend growth which means rising income to help keep up with

Start-up companies; usually do not pay out a dividend as they are struggling to get every
dollar to strengthen the company’s fundamentals for future growth. The Nasdaq is a
popular place where these are traded and of course they are more speculative. They often
trade on speculation or emotion rather than on fundamentals.
                                                              Investing for the Beginner 10
Most brokers like to see a person Trade rather than Buy and Hold stocks because they get
a commission every time they make a move for you. Trading is done when you think all
of the blood is out of the turnip, and you want to switch turnips. Sometimes brokers will
even call to tell you it is time to trade even though it may have some blood left in it. That
does not mean that every time you hear from your broker, that he is trying to Churn your
account, but it does mean that you need to be aware that this could happen. In the
industry this practice is called Churning and Burning. If the broker is caught doing this
without good reason on the customers behalf, he can get fined or lose his or her job.

Titanic Investing
Options, selling short, margin loans and commodities are a totally different type of risky
investments that we will not try to discuss here other than a recommendation to avoid
them like the plague. This type of investing can sink you faster than the Titanic.

Mutual Funds
Mutual Fund is a term that describes a lot of investors that mutually own a basket of
stocks managed by professionals. You can get stock mutual funds and bond mutual
funds. They can focus on a specific area like blue chips, technology, overseas, etc. They
provide a great deal of automatic diversification since they will typically own in the
neighborhood of 100 companies in the overall portfolio. Then professionals decide when
to buy and sell within the portfolio. They get paid a percentage of the overall value, so
they are interested in how well it does. You can buy and sell large or small numbers of
shares in the funds any time the market is open at the closing price on that day.

I just said that the managers get paid a percentage of the overall value of the fund. But
you may say “I don’t want to pay a fee…I’m going to invest in NO-Load Funds” Do you
think that those money managers driving those fancy cars give away their services? Not
by a long shot!! In fact, No-Load funds can pay the local broker up to twice as much as a
Front-End Loaded Fund. I have written software where we can enter the data from the
Prospectus of any two funds and see which one would have won out over the past ten

A Prospectus is a legal document that EVERY broker is required by law to give you
whenever they pitch a fund. It not only tells you what the fees are right in the front, but
also tells you about the funds objectives, etc. Before investing, take the prospectus home
and look at it. If you see Total Fees of over 1%, just keep looking for other funds.

One nice advantage of Mutual funds is the ease of compounding. They can reinvest the
dividends and capital gains for you automatically. Even though you don’t take the
reinvested portion out to spend it, you WILL owe taxes on it just like a CD that rolls

Mutual Funds give peace of mind and are affordable. There are some good quality blue
chip fiduciary funds that start at $250 with subsequent deposits of as little as $50. They
should be a component of everyone’s portfolio.
                                                              Investing for the Beginner 11
                                                                                   Chapter 5

                                                                         Asset Allocation

Asset Allocation, when spoken of in investment terms, is not how much your father or
mother gave you as an allowance when you were a child as compared with your siblings.

What it is however, is how well you have your portfolio divided in relation to your age
and investment objectives. A retired person has a need for mostly income with a certain
percentage going into growth to combat inflation. A younger person may need little or no
income from their investments and have an objective of growth in order to retire early.

Model portfolio allocation will also change with the economy for the short term, but over
the last 50 years there seems to be some general guidelines that one might consider.

The best way to describe this concept is in table form. Here is an example of a Model
Portfolio based on age groups:

                                   "After Reserve" Model Portfolio *

           Money Market
                           Treasury Notes & High Quality   Growth &             Growth
          Savings Accounts                                            Blue Chip                         Growth
Age Group                  Bonds, Certificate Corporate Income Mutual           Mutual
              Checking                                                 Stocks                           Stocks
                              of Deposit       Bonds        Funds               Funds

   < 40            5%                  0%              0%             25%           20%           30%    20%

  40 - 59          5%                  0%              5%             25%           20%           25%    20%

  60 - 75          5%                 30%              15%            25%         15% **          5%     5%

 75 - Old          5%                 50%              20%            15%         10% **          0%     0%

* 3 month reserve is typical for salaried and hourly employees, 6 month reserve for commissioned
** Some quality Utility Stocks should be considered for their historical rising income through dividend growth
…. Conservative investors should avoid Leveraged Programs of any kind….

                                                                     Investing for the Beginner    12
In the above table, age can be overruled by investment objectives. For example: A 37
year old person that has just become disabled may fit into the 60-75 category because
they are now on a fixed income and can no longer work. They have a need for current
income, but also need grow
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