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Investing For Dummies, 6th Edition

ISBN: 978-0-470-90545-6
432 pages
August 2011
Investing For Dummies, 6th Edition (047090545X) cover image
Proven investing advice from Eric Tyson

Investing For Dummies arms novice investors with Eric Tyson's time-tested advice along with updates to his investing recommendations and strategies that reflect changing market conditions. You'll get coverage of all aspects of investing, including how to develop and manage a portfolio; invest in stocks, bonds, mutual funds, and real estate; open a small business; and understand the critical tax implications of your investing decisions.

This new and updated edition of Investing For Dummies provides a slow-and-steady-wins-the-race message and helps you overcome the fear and anxiety associated with recent economic events, no matter where you are in life — from men and women who are beginning to develop an investing plan or want to strengthen their existing investment portfolios, employees making decisions regarding investing in their company's 401(k) plans or who need to roll them over when changing jobs, young adults who want to begin saving and investing as they land their first jobs, and baby-boomers seeking to shore up their nest eggs prior to retirement.

  • Covers all aspects of investing, including how to develop and manage a portfolio
  • Expanded and updated coverage on investing resources, retirement planning, tax laws, investment options, and real estate
  • Time-tested advice and strategies from Eric Tyson, a nationally recognized personal finance counselor and bestselling author

If you're looking to get sound guidance and trusted investment strategies, Investing For Dummies sets you up to take control of your investment options.

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Introduction 1

Part I: Investing Fundamentals 7

Chapter 1: Exploring Your Investment Choices 9

Chapter 2: Weighing Risks and Returns 23

Chapter 3: Getting Your Financial House in Order before You Invest 45

Part II: Stocks, Bonds, and Wall Street 69

Chapter 4: The Workings of Stock and Bond Markets 71

Chapter 5: Building Wealth with Stocks 81

Chapter 6: Investigating and Purchasing Individual Stocks 109

Chapter 7: Exploring Bonds and Other Lending Investments 131

Chapter 8: Mastering Mutual Funds 153

Chapter 9: Choosing a Brokerage Firm 187

Part III: Growing Wealth with Real Estate 195

Chapter 10: Investing in a Home 197

Chapter 11: Investing in Real Estate 213

Chapter 12: Real Estate Financing and Deal Making 241

Part IV: Savoring Small Business 265

Chapter 13: Assessing Your Appetite for Small Business 267

Chapter 14: Starting and Running a Small Business 289

Chapter 15: Purchasing a Small Business 313

Part V: Investing Resources 331

Chapter 16: Selecting Investing Resources Wisely 333

Chapter 17: Perusing Periodicals, Radio, and Television 341

Chapter 18: Selecting the Best Investment Books 349

Chapter 19: Investigating Internet and Software Resources 359

Part VI: The Part of Tens 371

Chapter 20: Ten Investing Obstacles to Conquer 373

Chapter 21: Ten Things to Consider When Weighing an Investment Sale 381

Chapter 22: Ten Tips for Investing in a Down Market 387

Index 393

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Eric Tyson, MBA, is an internationally acclaimed and bestselling personal finance author, lecturer, and adviser. He is dedicated to teaching people to manage their money better and to successfully direct their own investments.
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September 29, 2011
Make Sense of the Talking Heads

Between the political infighting and the many pundits providing their own, often misguided, input on what’s best for the nation’s finances, it can be difficult for Americans to know what to believe when it comes to the economy. That’s why level-headed personal finance author Eric Tyson offers his reasoned and practical insight on what the nation’s big issues really mean for the economy and your personal finances.

If you spend any time listening to talk show pundits and many of today’s politicians or reading opinion columns or political blogs, it doesn’t take long to pick up on a sense of impending doom for the nation’s economy. While many Americans struggle to find employment and to make the family budget’s ends meet, the “experts” are at each others’ throats. They spend more time arguing about why stock prices are so volatile, and whether or not to raise the debt-ceiling, overturn healthcare reform, or curtail entitlement programs, than they do actually finding solutions or making compromises on these issues.

Author and financial expert Eric Tyson says it’s time to clear the air. Known for his reasoned and objective advice, he says what the American people really need is someone to help cut through all the misinformation and fear-mongering that is so prevalent among today’s politicians, pundits and “experts.” 

“I don’t think people need to be told anymore that the economy isn’t doing well,” says Tyson, author of the bestselling Personal Finance For Dummies® 6th Edition (Wiley, 2009, ISBN: 978-0-470-50693-6, $21.99) and several other financial books including Investing For Dummies® 6th Edition (Wiley, 2011, ISBN: 978-0-470-90545-6, $21.99). “Trust me, they get it. They know that companies are making huge layoffs because they live it every day. They understand what it’s like to be constantly worried that they won’t have a job next week or that they won’t be able to find a job in the near future.

“They know what it’s like to see a smaller investment portfolio and 401(k). They see that their paychecks don’t quite cover as much of their expenses as they did a couple of years ago. They don’t need anymore doomsday predictions. They need and deserve clear-headed insight into what is going on with the government’s finances and how that affects them at home.”

Below Tyson offers an overview of what’s being said about today’s biggest issues and provides his insight on what it all really means for individual Americans and the nation’s economy.

The Issue: Sagging (and Volatile) Stock Prices and Americans Supposedly Shunning Stocks. Bill O'Reilly, host of The O'Reilly Factor, the most popular cable news program on television, said recently that he has just 20 percent of his own money in the stock market. He also proclaimed that "most Americans are out of the stock market" due to their having lost confidence because they think it's a con game with all the day traders.

Tyson Says: These statements are wrong. Regular investors hold diversified portfolios with the majority of their retirement money in stocks and have held fairly steady allocations in recent years despite market volatility. I've seen no evidence that folks are shunning stocks due to day traders. (Successful day traders engage in rapid buys and sells of stocks to make small profit, low risk trades. Day traders don't affect the market's long-term direction and aren't capable of market manipulation).

This recent stock market correction has been sharp and quick. The major catalysts have been concerns about European government debt, an economic slowdown and the U.S. government credit downgrade. Given the current level of corporate profits and reasonable expectations for profits over the next couple of years, stock prices appear to be undervalued now. Global stock markets seem to now be pricing in not just an economic slowdown but a new recession. If that doesn't happen, stock prices should rebound nicely in the months ahead.

Investors who are piling into longer-term Treasury bonds could end up being disappointed but not for the reason that you might expect (default risk) from S&P's downgrade. The bigger risk is that economies will do reasonably well and inflation may pick up which would cause investors to demand higher yields from government bonds.

The Issue: The Debt-Ceiling and the Deficit. Democrats and Republicans both used it as a bargaining chip in their fight over whether cutting spending or increasing revenue (i.e., raising taxes) is the best way to get the economy back on track. Pundits and economic experts couldn’t emphasize enough that lagging on the debt-ceiling decision would lead to an implosion of the global financial system and would result in a parade of financial horrors for Americans.  

Tyson Says: We’ve been here before—in 1995 to be exact. Late in that year, the debt ceiling wasn’t increased in time and portions of the U.S. government were shutdown and workers furloughed. Guess what happened? The government prioritized its bills and shutdown some non-essential agencies. There was never any talk of or risk of default. Interest rates on government bonds didn’t jump higher.

So, any of the knuckleheads who warned of default and economic Armageddon recently should have known better. Not surprisingly, word is that during the debt-ceiling debates private calls were made to major U.S. banks by the administration assuring bankers that no default would happen and encouraging the banks to continue lending and conducting business as usual. This stands in contrast to dire warning by some officials to the public that if Congress didn’t get its act together, an economic calamity was around the corner.

Interestingly, some of the most sensible and honest perspectives on the debt-ceiling debates came from Secretary of State Hillary Clinton: “This is how an open and democratic society ultimately comes together to reach the right solution. So, I’m confident that Congress will do the right thing and secure a deal on the debt ceiling and work with President Obama to take the steps necessary to improve our long-term fiscal outlook.”

The Issue: Taxes. The saying goes that the only things certain in life are death and taxes. Well, today you could add another certainty to the list—heated debates about taxes. The question of whether or not to raise taxes was a huge point of contention in the debt-ceiling discussions. With the rise of the Tea Party, the idea of raising taxes to increase revenue has become even less popular with Republicans. While, on the other side of the aisle, some Democrats are pushing to increase taxes for the nation’s top earners. 

Tyson Says: Recently I was surprised to hear a statistic on a news network show that federal income tax payments were at a 60-year low. After doing some digging, I found that it’s not that personal income tax payments are at a 60-year low...it’s that personal income taxes paid as a percentage of the nation’s GDP are at a 60-year low. In fact, one-third of all filed federal income tax returns now have no tax liability or actually get money back from the government without having paid any federal income tax during the year.

For individuals and families, lots of tax breaks are directed to the non-wealthy and phase out at higher income levels. The federal income tax burden of the top one percent of taxpayers now exceeds that of the bottom 95 percent. Unfortunately, I don’t think we’ll make any real headway in addressing tax reform until after the November 2012 elections. This is bad news because U.S. economic progress and hiring depend in part upon this happening.

The Issue: Unemployment and Job Creation. Recently, President Obama gave a much anticipated and promoted speech to a joint session of Congress. He urged Congress to pass his American Jobs Act immediately. Naturally, though, his enthusiasm was met with opposition from Republicans and even from some in his own party. And they aren’t the only ones. A recently released Bloomberg poll shows high levels of disapproval among Americans for this newly proposed jobs bill and for the President's overall handling of the economy.

Tyson Says: I have reviewed the American Jobs Act, and overall, I have to say that the President's jobs bill disappoints me. Among many other elements, the President's new plan calls for a cut in the payroll tax from 4.2 percent to 3.1 percent for 2012. President Obama’s plan lowers the effective cost of carrying each employee by a few percent for companies but it's just for the year. Employers aren't going to commit simply to hiring more workers for the long-term just because of short-term savings. The plan also calls for putting money towards upgrading schools, roads and bridges in order to create jobs. The stimulus passed in 2009 included a lot of this and most folks who have reviewed it found the jobs created were costly on a per job basis and there was too much waste. If the money could be spent more efficiently, this could be a worthwhile part of the bill.

The total price tag of the American Jobs Act is $447 billion price. That is a huge cost that will require significant tax hikes. When the so-called Bush tax cuts were set to expire at the end of 2010, Congress and the President agreed to extend them for two more years as a compromise and with the thinking that it didn't make sense to raise taxes in such a weak economic environment. The President now wants to raise taxes on folks making more than $200,000 per year by phasing out various deductions and exemptions. How about some broader tax reform rather than these types of incremental changes which make the tax code more complex?

What is needed is a tax reform bill that would lower the corporate income tax rate to a more internationally competitive level. And in fact, the Wyden-Gregg bill, named for Senators Ron Wyden (D-OR) and Judd Gregg (R-NH), addresses the high U.S. corporate income tax rate, which increasingly is putting U.S. companies at a disadvantage. There is a huge need to lower the U.S. corporate income tax rate and make the U.S. globally competitive again. The Wyden-Gregg bill could do just that while also creating jobs. In fact, a 2010 Heritage Foundation study projected that the bill could create more than two million jobs a year over the next decade. Unfortunately, too many politicians oppose this either because they are economically clueless and/or they are being political and attempting to demonize those who support this move as being in the pocket of big corporations.

The Issue: Inflation. Plenty of pundits and prognosticators warn that rising inflation is around the corner due to current “easy-money” Federal Reserve policies.

Tyson Says: Over the past year, U.S. inflation as measured by the Consumer Price Index (CPI), has increased about 2 percent. (This is about where the Federal Reserve would like it to be.) Excluding food and energy costs—the so-called core inflation rate—is running at about 1 percent annually. Inflation worriers and alarmists tend to cherry pick items whose prices are rising at higher rates (e.g., motor fuel, education costs, medical care services and food costs). Meanwhile, other components are showing quite low inflation rates and some components have actually decreased in cost over the past year. 

The Issue: Energy Costs. The triple digit price per barrel and rising gasoline prices nearing $4 per gallon are getting lots of traction in the news media. For example, Bill O’Reilly blames oil companies for the current high prices. He has accused oil companies of price gouging and says that there’s a lack of price competition. O’Reilly recently said, “There are only five major oil companies and they can sell their product for almost any price because consumers have to have it.”

Tyson Says: No one likes paying high energy prices and for sure, oil company profit margins generally expand when market prices are surging for the simple reason that market prices are rising faster than costs. Market prices are set by market forces, not by a single company or group of companies.

The good news is that the rapid rise in oil prices in 2007 and early 2008 finally woke up enough folks to the amount of money we’re sending overseas, including to nations that don’t have our best interests at heart. I recommend Americans start doing the following in order to reduce their spending on energy and not always be on the losing side when energy costs rise:

  • Conserve.
  • Replace old cars with more fuel efficient versions.
  • Invest in diversified stock funds—Many energy companies, such as major oil companies, have been excellent long-term investments. If you’re profiting with these companies, that won’t make you bitter about higher energy costs!

The Issue: The Federal Reserve. One of the Federal Reserve’s biggest opponents is Republican Presidential Ron Paul. In a CNBC interview, Paul said that essentially there’s no need for the Federal Reserve to exist and that the Federal Reserve should butt out of getting involved with the economy since they are the source of so much of our economic problems (bubbles, recession, etc.). Recently, many pundits interviewed on financial cable television programs and website pontificators have used the Federal Reserve as a punching bag, blaming them for various economic problems including the 2008 financial crisis.

Tyson Says: While I support Paul’s idea of doing a thorough review of the Federal Reserve, abolishing the Fed and believing in Paul’s other nutty assertions won’t help economically. Unfortunately, it’s becoming more popular and fashionable among politicians and pundits to bash the Fed. The reality is that if the Fed had been wrong about everything for the past 20 years and had never been right, our economy would be in a shambles and our stock market would not have appreciated more than 500 percent over that period.

“There’s no denying that the past few years have been economically challenging both for the nation as a whole and for Americans individually,” says Tyson.

“Unfortunately, too often the loudest, more extreme voices are the ones that have received the spotlight,” he concludes. “It’s time for the misinformation to stop and to put politics aside so that we can start moving toward a strong economy from which we’ll all benefit. The economy will recover, and it’s better to focus on what can be done to move the recovery along than to conjure up every possible worst-case scenario.”

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