Here’s how to become a millionaire overnight: win the lottery. But before you start playing, know that rich people have their own set of problems. You may have heard about how some of them harbor millionaire secrets, but they’re not the kind you’d want to have.

Image from guardian.co.uk

A study I read several years ago revealed the fate of sudden millionaires through lottery tickets or unexpected inheritance. The panorama was devastating. Very few people are able to survive the fame, the incessant supplications for help, the recent accumulation of “friends”, the hounding from salesmen and, especially, the advice and recommendations for “good” investments.

Sudden Wealth: Too Much, Too Soon

One case in particular caught my attention, since I knew the man personally. One of eight grandchildren, he lived most of his adult life struggling to make ends meet, although he knew that eventually he would inherit a sizable sum from his grandparents. When the time came to receive his share, he was 39 years old and unemployed. I had the opportunity to visit him a couple of months later at his luxury home where he had stashed 8 very expensive automobiles (maybe he figured he was Jay Leno).

Since we were not close friends, I did not see him again for 2 years, until a casual encounter in a local restaurant. When I asked how he was doing, he confessed that he had lost everything and was looking for a job. Here’s what had happened to him: perhaps you remember a craze in Russian bonds several years ago. He had invested over a million dollars (his liquid assets) in these bonds, believing the broker who claimed that returns would be “fantastic”. The Russian government defaulted, and billions of dollars disappeared in smoke.

Lottery Winners And The Curse of Sudden Wealth

Another case involves “William “Bud” Post, who won $16.2 million in the Pennsylvania lottery in 1988 but now lives on Social Security. He says: “I wish it never happened. It was totally a nightmare.” There are many horror stories out there of riches to rags, even of attempted murder by relatives hoping to get their hands on the pie.

So why do so many lottery winners go broke over such a short amount of time? In truth, there are many factors as to why the suddenly wealthy end up going broke as quickly as they got rich. I’d like to explore one factor in particular that may contribute to their downfall.

Wall Street Casino

In the investment world, a very interesting theory called “Prospect Theory” analyzes the behavior of investors, and uncovers the fact that emotions are more powerful than reason. Prospect theory also explains why investors hold onto losing stocks: people often take more risks to avoid losses than to realize gains. For this reason, investors willingly remain in a risky stock position, hoping the price will bounce back. Gamblers on a losing streak will behave in a similar fashion, doubling up bets in a bid to recoup what’s already been lost. Here’s a bit more about this theory:

Individuals are much more distressed by prospective losses than they are happy by equivalent gains. Some economists have concluded that investors typically consider the loss of $1 dollar twice as painful as the pleasure received from a $1 gain. Researchers have also found that people are willing to take more risks to avoid losses than to realize gains. Faced with sure gain, most investors are risk-averse, but faced with sure loss, investors become risk-takers.

Have you checked your stock brokerage accounts lately? As we have seen with the stock market during the financial crisis of 2008-2009, investors — especially the small ones like you and me — tend to panic when they see their (paper) investments dwindling rapidly. On a whim, they decide to engage in stock market timing and sell at a loss, or hold onto bad stocks because Uncle Rick (or a co-worker) gave them a “winning” tip. Let’s face it: Wall Street is a huge casino that attracts the gambler inside of all us. Who can resist making a lot of money without really working? Well, the smart ones, for example; those who refuse to let their emotions get the better of them: Warren Buffett anyone?

Greed Is Not Good

The Russian scheme peddled by unscrupulous brokers and the record-breaking Ponzi pyramid for $50 billion attracted very smart and powerful people who let greed dictate their decisions. Once greed takes hold, people may find themselves behaving irrationally. Over time, greed can prove to be the downfall of many fortunes.

So, dear friends, apply your own personal Prospect Theory in these challenging economic times. If you are holding stock in solid companies, keep them; if your investment is too risky, get rid of the shares, even if you lose money in the process. Now that the market seems to have begun some kind of recovery, it’s a good time to take stock (pun intended) of your financial position and to make the right decisions.

Why Lottery Winners Go Broke: Prospect Theory At Work

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When did you start saving for retirement? Think you’ve missed the boat because you didn’t get a chance to invest early?

Reality Check For Those Nearing or Approaching Retirement Age

Awesome image by Mark Stivers

For many of us who are 65 years or older, we live by our social security checks. In fact, this is literally the situation for a third of seniors who’ve reached retirement age, according to government reports. A good number of people rely completely on social security and wouldn’t survive without this help. We can thank the New Deal of Franklin D. Roosevelt for its creation in 1935: this was really a huge step after the catastrophic crash of the stock market in 1929.

Whenever Wall Street goes through some volatility, we wonder about what happens to those who’ve invested most of their savings into stocks, mutual funds or any other risky financial instrument. The most appropriate answer I can think of? They are going through hell, and if they are over the age of 50, they may well panic and sell for a significant loss. This is all the more reason why many seniors rely so much on their fixed income stipend from the government.

Our social security payments depend on how much we’ve earned before retiring. It ranges from 28.9% for the high salaries all the way to 55.9% for those making an average of $16,739 a year. A wife who has not worked outside the house will receive about 50% of her husband’s entitlement. Social security income doesn’t really seem like much, given the conventional wisdom that we would typically require between 80% to 90% of our pre-retirement income to live on once we do retire. Therefore, it would certainly help if we had a secondary source of income, such as a pension plan and /or personal investments.

Retirement Investing Advice For Late Start Investors

But what if you are one of those investors who is worried about not having enough when you finally hit your retirement years, say because you started investing later in life? AARP’s site offers some valuable advice to those between 50 and 65 who have to scramble to find other sources of income:

1. Look Into A Reverse Mortgage. If you have equity or if you have finished paying for your house, you can obtain a reverse mortgage, a financial instrument advertised by a well known actor, Robert Wagner. You get money for your home and you don’t have to pay it back for as long as you live there. Please check the AARP site for details, and weigh all the pros and cons before reaching a decision.

2. Go Back To Work (or Never Quit Working). “Working past retirement” doesn’t necessarily mean that you are going to say hello to incoming customers at Wal-Mart, although any job is an option. If you have accumulated skills and knowledge that many companies value highly and if your health permits it, don’t be afraid to apply for a job you know you can do well. Or see if you can find an income-generating activity that you’ll be able to enjoy no matter what age you are. For instance, you can consider checking out the online universe for opportunities: you may not realize it, but there are a lot of online work options that abound. I’m actually a freelancer, and I’m a grandfather of 4, still hitting the keyboard (and having fun)!

3. Be Frugal. By learning to cut unnecessary costs from your budget, you may find that you can get by with less of your pre-retirement income than you normally thought. By learning to conserve and by developing frugal habits, you may realize that instead of 80% to 90% of your previous annual salary (or income) to live on, you’ll only require 60% to 70% (or less!) of this income for your living expenses.

4. Avoid Risky Investments. For people over 50, risky investments are an absolute NO-NO. Take a good look at what happened to the stock market this year. Millions of people have lost a lot of money. Even mutual funds, with their diversification, have taken a hit. Ask your financial adviser or do your own extensive research to seek out safe and productive investments.

5. Believe That It’s Never Too Late. Maybe you’re a fifty-something, and you still have another 10 to 15 years of hard work and saving opportunities ahead of you. But you need to find out how much you’ll need (and how long you’ll live) during your later years: well you can check out this page (from CNN Money) for some helpful resources and to see if you are saving and investing enough for your retirement. There are calculators there that will let you know how much you’ll need to save and how much your assets will need to grow to support your lifestyle.

It’s never too early or too late to develop a retirement plan. Unless you are on Bill Gates’ last will and testament, you should do what you can to prepare for the future, no matter where you are in life right now. Something is always better than nothing.

Retirement Investing Advice For Late Start Investors

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For those of you shopping around for a new stock broker, there’s some good news I’d like to share. Not only are the investment markets performing better lately, but there have also been some attractive promotions that a handful of our favorite online stock brokers have decided to offer to new account holders. Here’s a quick list of ongoing offers and promotions I’m familiar with. Some of them are only available for a limited time, so you may want to check them out before they expire.

Online Stock Trading Promotions From Top Brokers

1. TradeKing is offering a $50 cash bonus for anyone who opens an account between now and November 30. This ongoing promo will only be good till the end of this month. To be eligible for the bonus, you’ll have to fund your account with $2,500 and make your first trade. After meeting these requirements, you’ll get the money deposited into your account.

Other benefits of using TradeKing include:

• Flat, very low cost stock trading fees of $4.95 a trade.
• Transfer fees are reimbursed up to $150.
• Referral program that gives you $50 for each new customer you refer (to TradeKing).
• Award winning broker for top customer service, trading tools and social media features.

2. OptionsHouse is giving away 100 commission free trades for all new accounts that are opened between now and December 31. Ordinarily, this broker’s stock trades are at $2.95 a transaction, one of the cheapest rates you’ll find in the industry. Also, you can receive a reimbursement that’s worth up to a $100 if you switch your broker account to OptionsHouse (although you may have to inquire whether this rebate can be used in conjunction with their ongoing free trades promotion).

Aside from the very low trading commissions, OptionsHouse has also been acknowledged as a top broker by Barron’s, in their 2009 Online Broker Survey. The recognition that this brokerage house received was for “Trading Experience”. They’ve also got a virtual trading environment for those who are interested in learning how to trade and invest in the stock market without having to risk any money in the process.

3. E*Trade also offers up to 100 commission-free trades for new investors who open new Power E*Trade or IRA accounts. You’re required to deposit at least $1,000 to be eligible for the free trades. It works as follows: for each trade you make within 30 days of account open, you’ll initially be charged a $9.99 commission fee. But within 8 weeks of qualifying for the free trades, you’ll be credited back the charges you’ve paid, minus options contract fees.

Pricing for E*Trade is on the higher side, ranging from $7.99 to $12.99 per trade based on the number of trades you make per quarter. But you’ll get what you pay for since ETrade has been recognized as the best discount broker by Smart Money for three years in a row, and has also scored very well in other broker surveys. Their tools, mobile trading platform, trading environment and investment resources give them the extra edge over their competition.

What’s great about Zecco is that they give you free stock trades on an ongoing basis. As a permanent feature of being a Zecco customer, you can qualify for 10 free stock trades each month if you keep at least $25,000 in your investment account OR if you trade frequently (and make at least 25 trades per month). If you don’t qualify for the free trades, the regular cost at Zecco is a cheap $4.50 per trade.

Zecco also has a few features you are not likely to find in many other online stock brokers. Here are a few extras they offer beyond the standard trading tools and features:

• An online community of investors and traders who readily share information.
• A virtual trading environment called Zecco Zimulator where you can trade without risking your funds.
• A Forex trading platform.

There are some other notable online brokers out there, but if you’re looking for some good reasons to sway your decision about joining a particular brokerage, then hopefully some of these broker promotions and features may provide you with just the motivation you need.

Online Stock Trading Promotions From Top Brokers

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Investing simply means putting your money to good use with the expectation that you’ll receive a return or reward for doing so.

A lot of us don’t have much money to spare. Sometimes you may find yourself with an extra $100; maybe someone finally paid you back for a long-forgotten debt (it’s happened to me!) or your mom sent you over a cash gift for your birthday. Or chances are, it’s just an extra $100 rattling around in your bank account that could find better use somewhere else.

A few days ago, I published a guest post on where to invest extra cash and savings. Well that post inspired me to reflect on how I’d personally make use of a little extra money.

Got $100? Best Ways To Invest Small Amounts of Money

1. Set up an automatic investment program.
I started an automatic investment program at a discount broker around a couple of decades ago. If my memory serves me right, I committed to placing $50 a month in a few mutual funds that represented diversified asset classes. I figured that I could afford to spare at least $50 a month on building a portfolio, and I found the process of choosing funds, deciding my allocation and finally starting an investment program pretty fulfilling.

While I’m not totally sure how much I’ve put into my investments through the years, I do know that my net worth has grown over a hundred times since I started investing. A lot of this I’d attribute to just “automated investing and saving”. This is something you can definitely do yourself by contacting online brokers, mutual fund companies and banks, and then setting up such programs at these institutions.

2. Invest in yourself.
Here’s one more way I’d gladly spend $100: on myself. Of course, our opinions of “how to spend on oneself” can all vary greatly. You may think of investing in yourself as spending to improve your health, your looks or your well being, which are all quite important to maintain your happiness and health. But what I mean here is that I would use $100 to invest in my “money generating” potential. For instance, investing in one’s education or in trying to improve your finances through personal finance classes or seminars would be money well spent.

3. Invest in a small business.
While I started an online business pretty much by accident, I realize now that if I had actually planned to become an entrepreneur, I would have looked into which businesses had the smallest outlay while promising to yield some reasonable returns down the road. Interestingly, there are still great ideas out there that you can pursue for a mere $100. Here’s a tip: online business ideas are notoriously cheap to start.

For instance, you can try to make money blogging. The stories of many bloggers (including my own) are testaments to how this can be done. I actually spent $0 when I first started blogging. It’s been several years now and my hobby has evolved into an online business: I got a few domains, hunted for the best web host and invested in a web design. The rest is sweat equity. The good news is that it took me 1.5 years to take the leap and quit my day job, and I’ve been blogging full time now for another 1.5 years. That’s 3 years as an accidental online entrepreneur and it’s been a fun and rewarding ride.

In addition, this change also spurred a lifestyle change for me which improved my health tremendously. All these results for less than $100!

4. Pay down your bad debt.
If you are carrying any amount of bad debt — whether it be credit card debt or other installment loans, you should funnel any extra money you have towards these obligations. Paying down debt which charges you X% in interest is like “earning” X% interest on that money you apply to the debt. If you carry a credit card balance, tossing $100 at it is always a fantastic idea.

These are some of my favorite $100 investment ideas. I’d love to find out how you’d spend, use or invest $100. If you’ve got some great ideas on where you’d invest small amounts of money, please feel free to share!

Best Ways To Invest Small Amounts of Money

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Have you got some extra cash you’ve squirreled away, waiting to be put to good use? If you’ve got your debt paid down and your emergency fund taken care of, and you’re fortunate enough to have additional disposable income or a windfall to work with, then here are a few ideas about where to put that cash.

Savings account rates are not exactly where we want them right now. Even the best online savings accounts these days are yielding relatively lower returns; Bankrate surveys show that the best cd rates aren’t too exciting, with the average yield for a three-month CD lingering at 0.86 percent. There is an understandable fear to invest in stocks and the mattress is no longer an acceptable option (has it ever been?). How can one obtain some decent returns in this close to zero prime rate environment?

Image from ColoradoEnergyNews.com

Where To Invest Extra Cash and Savings Today

1. Invest In A Checking Account

Recently, I discovered quite by accident, a regional high yield checking account (also known as a rewards checking account) that was returning up to 4.25% APY if certain qualifications are met. For example, the bank asks that you:

• Have no more than $25,000 in the account to earn that interest rate (.95% will be paid on any amount above that limit).
• Make a minimum of 10 debit card purchases per month. ATM withdrawals do not count.
• Sign in to your online account at least once a month.
• Manage your account electronically. The bank won’t be sending out paper statements with everything done electronically.

The great aspects of this offer are that it requires no minimum balance, and offers a free ATM and debit card, FDIC insurance, $500 overdraft privilege and free online banking. If you don’t comply with the requirements, your APY drops precipitously to 0.10 %. For more details, check out CheckingFinder.com.

2. Consider The Stock Market Carefully

If you don’t feel comfortable about opening a free high yield checking account in a distant bank, there are still other options. You could look into investing in the stock market in a prudent fashion. If you haven’t done so already, consider index funds.

For instance, popular personal finance guru, Suze Orman, recommends a couple of great index funds: the Vanguard Total Stock Market ETF (VTI) or its mutual fund cousin, Vanguard Total Stock Market Index Fund (VTSMX). These highly diversified funds can represent the core of any long term investor’s portfolio. Of course, invest only what you don’t need for an emergency and be prepared to wait (patiently) for solid returns on your investments.

3. Increase Your 401K Contributions

How to become a millionaire? You can become one over time, by increasing the savings in your 401K. If you increase your savings rate by just a couple more percentage points, you may achieve your savings goals and grow your nest egg much more quickly. Check out the lessons from this CNN Money article:

Say you’re 30, make $70,000 a year and contribute 10% of your pay, which grows 3% annually. If your 401(k) investments earn 7% a year, you’d have about $1.4 million by 65. Not bad. But if you increased your savings rate by just two percentage points, to 12%, you could have a nest egg of $1.7 million. Boost it to 15% and you’d have more than $2.1 million.

4. Cash In On The Wind

Image from TreeHugger

If you’re willing to “gamble” just a little, and you’re comfortable about putting your money into a more concentrated stock play, then consider investing in the future based on the trends. In particular, you may have heard President Obama placing great emphasis and federal money on three areas: health, education and energy. So what about betting on “Obama” stocks? As this article suggests: His plan to spend $150 billion over 10 years on alternative energy bodes well for funds like PowerShares WilderHill Clean Energy Portfolio (symbol PBW) and Market Vectors Global Alternative Energy (GEX). Again, this money must be set aside for a minimum of 5 years, unless these companies tank all of a sudden due to mismanagement. Just don’t forget about them completely; make sure you keep track of how your investments are doing. Also, if you go this route, don’t rely on these funds to pay for your short or near term financial goals, though if luck is on your side, these investments may very well pay for your kids’ college education.

Break (Out) the Piggy Bank

Having money sitting in a very low yielding account in your local bank is a total waste. If you are under 40, it’s downright “criminal”, since you can afford to take some risks. If you are over 50, some of these options are still very attractive and very safe. So smash your piggy banks and start making some much needed capital!

Where To Invest Extra Cash and Savings Today

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If you’re a borrower who’s looking to get a personal loan that’s potentially cheaper than at banks or loan companies, or if you’re an investor who’s interested in a new way to invest in short term instruments, you may be interested to know that there’s a particular service that allows both borrowers and investors to help each other out via a special network, called a peer to peer lending network.

The idea is to match borrowers and lenders/investors without the need for a “middleman”. We’ve covered this type of service in a lot of past articles, such as in this Lending Club review. But I’d like to mention another well known company in this space that is offering some cash bonuses for its members: Prosper has a few ongoing promotions right now.

There are three ways to earn cash bonuses with Prosper:

1. Prosper.com: $50 Cash Bonus To Open A New Account

While you can open an account with Prosper as a borrower or lender, only lenders (or investors) qualify for the $50 sign up bonus. All it takes is that you sign up for a Prosper lending account and fulfill two bids on Prosper loans, after which they’ll deposit $50 in your account. Here’s are some basic requirements to get you going:

• Provide your driver’s license.
• Provide your bank account information.
• You have to reside in one of these states: California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Minnesota, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Virginia, Washington, Wisconsin and Wyoming

At this time, investing in peer to peer lending is only available in certain states as it is a regulated investment activity and requires scrutiny by the state government before it’s permitted. In due time, it is expected that residents from all the states will eventually be able to participate in this form of investing.

Historically, returns through Prosper have been attractive, where you may earn from 7% (for lower risk loans) to 13% (for higher risk portfolios) annually. Note of course that there are risks associated with all investments, including this one, so do your due diligence before participating in the network.

2. Earn a Cash Rebate Based On Your Investment Amount

As a lender you can also earn a cash rebate between October 12, 2009 and November 15, 2009. You’ll need to successfully bid on loan listings that result in funded loans. Once you’ve made your investments in these loans, you’ll receive the following rebates based on the amount you invest:

• Investing $1,000 to $4,999 will get you a 1% cash rebate deposited into your account.
• Investing $5,000 or more will get you a 2% cash rebate deposited into your account.

These deposits will take place by December 4, 2009.

3. Earn a $100 Referral Fee

There’s also a “refer a friend” program wherein you can receive a cash bonus of $100 for any new borrower you refer to Prosper. Any Prosper member, whether you’re a borrower or lender, can participate in this program.

For more information on the topic of peer to peer lending and other companies involved in this space, here are a few articles for your perusal:

• $25 Lending Club Sign Up Bonus
• Lending Club Return On Investment
• Personal Loan Interest Rates from Lending Club

Prosper.com: $50 Bonus For A New Account

YNAB Pro Giveaway Code: fibonacci

Musings on stock market investing.

I was indulging my regular surfing habit and came upon yet another insightful observation by Monevator, this time, on the (de)merits of technical analysis. I’ve found that many bloggers and investors of my persuasion are usually critical of technical analysis, especially as we’ve embraced index investing, asset allocation and passive or long term investing as the prudent ways to invest. But since I’ve begun blogging about personal finance, and have the opportunity to read countless financial and investment articles and posts on a daily basis, I’ve come to relax many of my opinions and views about finance. In the case of investing, as with many other topics, I’ve begun keeping a more open mind.

Image from Free Forex Signals

Monevator is of the camp (along with one of my all time favorite bloggers, Golbguru, who’s been sadly quiet of late) who thinks that technical analysis is a bunch of mumbo jumbo, or as one of them says, “a load of bull and bear crap”. I suppose it’s because it seems much like reading tea leaves: check out a bunch of charts and wield a ruler and voila, you’ve got some answers! Seems a bit far-fetched maybe?

Thoughts On Technical Analysis of the Investment Markets

For me, the jury for this kind of investing analysis is still out. I may want to expound on this another day, but for now, I’ll say that I like to “dabble” in it and haven’t particularly discounted this form of analysis completely. In fact, I’ve been studying it for the sake of seeing a different perspective on investing, and have picked it up to try to understand current and past market behavior. As far as trying to predict the future based on the past? It’s all guesswork of course, but both stock market technical analysis and fundamental analysis attempt to provide perspective about what may potentially happen down the road with a given market or security.

I actually lean on both approaches (with varying degrees of confidence) along with a whole lot more (intuition included) in order to determine my next moves for my investments. And while I don’t rely on technical analysis exclusively as a way to make money off the markets, I believe I’ve become a better investor and have learned a lot more about how any market works, thanks to getting a little bit more educated in the concepts used by short term traders and active investors.

The point here for me is whether technical analysis can “help me with my game”. I think it has, but not in the way you’d think, since I don’t trade that much. I’ll just have to say “it works for me” in so far as providing me additional knowledge about how the various investment markets work and how investors and traders “play” in this universe. I pretty much use it for the educational value. I just view it as a way to get a big picture read on investments and a nice way to try to gauge market sentiment.

Anyway, enough ramble. Here were some of the bloggers I caught up with this week. There’s more food for thought here!

Personal Finance Articles

• Free Money Finance: How to Be Financially Comfortable
• Lazy Man and Money: What if You were Required to Share your Finances?
• Gen X Finance: How to Save Money for Christmas in a Short Amount of Time
• Credit Karma: The Ups and Downs of the Housing Market
• Money Smart Life: Outsourcing Your Investing Decisions
• Frugal Dad: The End of Universal Default
• One Mint: Tap tap tap

Recent Carnivals

• Carnival of Pecuniary Delights
• Festival of Frugality
• Carnival of Personal Finance

Thoughts On Technical Analysis of the Investment Markets

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The word “leverage” gets some people excited, while it makes others nervous. No surprise since it’s just a word that represents “higher risk, higher reward”. Our contributing writer, Tim Parker from Elementary Finance, talks about leveraged ETFs and how you can use them to spice up your investment portfolio.

What Is Leverage?

I’d like to bring up a word that you may not use much: Leverage. Here’s a fairly simple definition: leverage refers to multiplying something you already have. I have legs that allow me to move — but I can “leverage” the speed of my movement by traveling in some sort of vehicle. For instance, I can get somewhere faster by riding an airplane. I can get to where I’m going in a fraction of the time this way.

But if I want to fly faster using a device (on my own) that can leverage my speed, I’m going to have to learn how to use that device. Trying to fly a plane without the sufficient knowledge to operate it can certainly be a huge risk and a dangerous endeavor; doing so would just be plain foolish.

Fun ICanHasCheezburger photo.

The same thing is true when you try to use leverage in the field of finance. We all have heard that it takes money to make money, and on the surface, it’s true. Let’s take for example the case of a typical part time retail investor who would probably invest, at the most, $2,000 into one stock position. Given historical long term stock market returns, it would be realistic to think that he could make 10% or so with his investment on an annual basis. A 10% return on his stock position yields around $200. That is certainly nothing to sneeze at but it isn’t going to change anyone’s standard of living, at least not until that 10% return multiplies itself many times over.

Now here’s the thing, there are many ways to multiply that return many times over — you can go on margin with your investments, but it’s something that takes a tremendous amount of risk, which to me, boils down to making a gamble. There’s also the “wait and see” (or buy and hold) approach: over time, investments go up in value in a market uptrend, their returns multiplied as a consequence of the power of compounding. But if you aren’t necessarily interested in borrowing from your broker in order to purchase securities (via margin) but you feel that you can afford to take on some risk to give your portfolio that extra nudge, then there’s a way to leverage by simply relying on the right stock picks you make.

By using a little money to make a lot of money, you’ll be able to “leverage” what you already have. This is possible with a type of exchange traded fund called a leveraged ETF. Let’s look at one of my favorites:

Leveraged ETF Investing: More Risk With More Reward

The ProShares Ultra Dow (DDM) is a leveraged exchange traded fund that moves at twice the rate of the Dow Jones Industrial Average. If the Dow moves up 1%, this ETF moves up 2%. If the Dow has a great day and moves up 3%, you’ll make 6% in one day! Quite a nice way to invest, isn’t it? Here is a tidy list of Ultra ProShares Leveraged ETFs that tracks the whole spectrum of indexes (and more):

But wait — let’s not forget the risks! In the world of investing, investment rewards are directly proportional to the risks that you take. Let’s not forget the dark side to this. If the Dow moves down 3%, you’ll lose 6% of your investment. While these leveraged ETFs have the ability to make you a lot of money, they also have the ability to double or even triple your bad decisions, and will magnify your risk. You should only use these ETFs if you have a proven history of good stock picks or if you can afford to lose the money that you put into these funds.

One other aspect about these ETFs that isn’t publicized is this: leveraged ETFs are best for day trading. If you are not a day trader, you probably should steer clear. The reason for this is something that we aren’t going to talk about in great detail, but here’s the gist: ETFs are rebalanced at regular intervals, with most of them being rebalanced each night. You would expect that if the Dow goes up 10% over 3 weeks, your investment in DDM would make you 20%. But that’s not the case due to rebalancing. For that reason, you should aim to sell these ETFs at the end of the day.

Here’s the bottom line: leveraged ETFs are a great tool for using a little bit of money to make a nice profit, but they can also sharply magnify a bad decision that can lead to great financial loss. Don’t let greed lead you to experience big losses. Be careful, dear investors!

We’d love to hear from those of you who’ve invested in and traded leveraged ETFs. Being new-ish financial products, these ETFs may not be widely traded, so it would be interesting to hear about anyone’s experiences with such funds.

Leveraged ETF Investing: More Risk With More Reward

YNAB Pro Giveaway Code: fibonacci

I still remember those times during the roaring bull market when I would trade stock picks with friends and colleagues. We’d then buy stocks after a pitch and compare notes as we watched ourselves mint money. Those were the days when even a dart-throwing monkey could make you money.

These days, you’ll have to be much more particular about which stocks, ETFs and mutual funds to buy. Today, I doubt I’d be as enthusiastic about anyone’s word-of-mouth recommendations as I used to be. I would do a lot more due diligence before I decide to add something new to my portfolio.

Resources To Help You Manage Your Portfolio

The good news is that there’s a rich set of resources out there for equity investors. Nowadays, it’s much easier to build your portfolio from scratch and much easier to tweak it to achieve the optimal asset allocation. Here’s where you can find the resources to help you manage your investments:

1. Stock Brokerages
There are a ton of free tools that you’ll find at various online stock brokerages, which also have extensive libraries on investment and trading topics. Check out our reviews on popular brokerages such as Scottrade, ETrade and TradeKing, for more information. Other good stops are at Fidelity and T.Rowe Price.

2. Independent Investment Research Sites
There are also independent investment research sites that I find extremely helpful for investors and traders. Some places that come to mind (and that I’ve used): Morningstar.com and INO.com.

These are places where you can pick stocks, screen for mutual funds and track your portfolio in a convenient fashion.

How To Use a Stock Screener To Find Stocks To Buy

As a demonstration, I wanted to show you a little of what you’ll get out of using screening tools that are offered by a site like Morningstar.com. Here’s how to build your own portfolio quickly:

1. Use the stock or mutual fund screener.
Morningstar’s tools allow you to create your own screening criteria, or you can choose predefined Morningstar criteria that narrow down your list of choices with one click. In this example, I chose a preset screening criteria for mutual funds called “Long Term Winners” which filter out funds with a star rating of 4 or 5 stars and a 10 year return that are at least as good as that of the S & P 500 index.

2. Get details on the stocks or funds in your select list.
Once you’ve got your list results, you can then drill down for more information on the stocks and funds in the list. You can view the details of a mutual fund by clicking on the links provided in the results page. There are a lot of details here, including charts, analyst reports and performance numbers.

3. Score your stock or fund results.
Among the many features the tool has, is the capability to “score your stock or fund selections” according to a variety of criteria such as performance returns, expense ratios, star ratings, P/E ratio and growth rate. It’s a nice, preliminary way to get a quick read on your picks.

4. Test and analyze your choices against your portfolio.
The screener allows you to see how your new picks will fit together and complement the existing portfolio you already have. If you’re building a new portfolio, only the new picks will be gauged. All this is achieved by using the popular Morningstar Portfolio X-Ray tool, which gives you an in-depth view of your asset allocation.

From Morningstar: Portfolio X-Ray is a sophisticated analytical tool that allows you to dissect your portfolio and gain a clear view of your holdings. You can evaluate your overall asset allocation and sector weightings as well as uncover concentrated positions, view the stock holdings behind your mutual funds, measure performance against benchmarks and industry indexes, and stay up-to-date on the latest news and corporate actions relating to your holdings.

5. Add your choices to your portfolio.
Once you’re satisfied with your picks, you can introduce them into your portfolio by entering them into Morningstar’s portfolio manager. This tool allows you to track the performance of your portfolio in real time.

Check Out Morningstar.com For Investment Tools

I would suggest signing up to a site like Morningstar.com to get access to their investment tools. Morningstar offers two kinds of membership accounts:

1. Free Membership
You can get a free account to get a hold of mutual fund and stock financial data, basic fund and stock screeners, articles and community boards, a basic portfolio manager tool, and educational material.

2. Premium Membership With Free Trial
If you’d like the works and are interested in exploring more resources, you can sign up for a free 14 day trial to Morningstar as a premium member.

By signing up, you’ll receive Morningstar Fund Analyst Reports which covers full research on thousands of stocks, a much more advanced Portfolio Manager with advanced x-ray analysis of your portfolio, ratings, analyst newsletters, advanced screeners, as well as discounts to even more material. For a comprehensive overview of what’s available with a premium membership, check out this pdf report (note: the pdf may require a little time to load).

Use A Stock Screener To Find Stocks To Buy (Morningstar Demo)

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If it costs less, it’s a bargain, right? But not all bargains are worth the money. Some time ago, I wrote about why I thought that buying penny stocks is a big mistake. Now I’m joined by fellow PF blogger Tim Parker from Elementary Finance who gives his own thoughts on the subject.

Image from smart-kit.com

One particular Saturday not long ago, I was doing my weekly grocery shopping. The local store that I go to has a bargain bin. You should see some of the items that are in there: some of the products in the bin are products that I’ve never heard of nor would I buy them, no matter how cheap. I don’t think I’m alone either. The same products can be found on this rack every week.

Inevitably, though, we both know that somebody will come around and see value in these items. I’ve fallen into this trap myself. More often than not, I’m wrong. These items are cheap because they hold little value. We’ve all figured this out at least once.

You wouldn’t think that something as sophisticated at the stock market would have a bargain bin, would you? The stock market attracts many of the brightest minds in the business world. Surely, every stock is valuable!

But not only does the market have a bargain bin, you will be surprised to hear that it’s huge. It’s as easy to spot as it is at the supermarket, where people are attracted to it en masse. This particular discount bin carries penny stocks.

No Penny Stock Trading For Me, Here’s Why

I don’t have any direct evidence on this, so take this view as my own theory. The reason that the stock market can be dangerous (or perceived dangerous) for the average investor is because we’re not really dealing with tangible assets here. To look at our supermarket analogy again, if you went to the bread isle and there was a loaf of bread for one dollar and a moldy loaf of bread for 50 cents, which would you buy? Surely, you would pay a little extra money to buy the good loaf!

Everyday, though, amateur investors go shopping for the moldy loaf. They find stocks that are literally on sale for pennies and they buy up because they see the cheap price tag. But here are two reasons why penny stocks just don’t make sense.

1. You’ll need to make high volume trades to make money.
First, in order to make any money, you are going to have to invest a sizable amount of money regardless of the stock that you buy. A penny stock may move 1 or 2 cents on average. In order to make money off of a move like that, you are going to need 1,000 shares just to make $20. That barely covers the broker’s commission. The nature of the beast here is that penny stocks are only suitable for very short term trades. Because of their high risk and volatility, it’s not a good idea to own them for long. Penny stocks will force you to become a trader.

If you have $1,000 to spend, why not buy 20 shares of Walmart for the same price? It’s a better company and you stand to make money over time. You don’t save any money by purchasing shares in a bad company. In this case, the moldy bread will cost you the same amount of money as the good loaf. Yet I know too many people who buy the lower priced stocks because they equate the low price for good value, when in fact, they should be valuing a stock based on parameters like its P/E ratio….which leads me to my next point.

2. Penny stocks are hard to value.
You don’t know a penny stock’s true value. High quality companies trade millions and over tens of millions of shares of stock per day. Well followed, high quality stocks are easier to value. Penny stocks often trade very few shares (they’re thinly traded), which means that there are a wide variety of offers circulating. Often the sellers and buyers are far apart (large bid-offer spread). Because of this, it’s hard to find out the true value of such a stock.

So take away this lesson: We know how to find true value in our everyday life. We can tell the difference between the good stuff vs the bad when we walk into most stores. We should use the same rules when buying stocks. If it’s a penny stock, that means nobody wants it. If nobody wants it, it’s not valuable. If it’s not valuable, you need to stay away. Just my .02.

No Penny Stock Trading For Me

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