Is it possible to save more money than you earn? Depending on how you want to look at the math, it is. The key to the math is to look at your earnings the same way your company does: total cost of payroll.
It should come as no surprise that the cost of an employee is more than the money you earn. The company likely has to pay for benefits such as medical insurance, workers compensation, disability costs, retirement costs and many other expenses.
Before you even start saving on your own, consider fully what your company can offer you in benefits for savings. The most advantageous kind of savings a company can offer you is what is called deferred compensation. This is money that you or the employer can set aside for future consumption.
We are currently seeing a correction in U.S. stocks of about 5% from the high reached by the major indexes a few weeks ago. What makes this correction noteworthy is that there were analysts pounding the table about ‘sell in May and go away’ as well as the need for a correction. These things usually occur when people don’t expect them, this correction has been the worst kept secret.
A 5% move doesn’t sound like much, but keep in mind that many quality stocks have underperformed on top of the correction. So a move by the market has exacerbated their under performance. A good example of this is McDonalds (MCD) which has underperformed the market by over 16% YTD and can be called as being in a correction.
The adage of “buy low, sell high” works especially well when the market itself forces stocks down for reasons not having much to do with the fundamentals of a company. If you are invested in Fossil (FOSL) or Chipotle (CMG), we did see significant news about their earnings that will force you to assess your position. The market showed no mercy on these high growth stocks gone wrong since the market had previously priced them for perfection.
If you are starting to invest, the easiest place to start is with your employer. The company you work for has setup retirement investing accounts for you, perhaps a defined contribution plan, such as a 401(k) retirement account and maybe even a pension account. Some companies even enroll you automatically in their defined contribution retirement plan (if you don’t want to contribute, you will need to tell them you don’t want to). The combination of automatic account creation plus easy funding through payroll deductions make investing at your job really easy.
If you want to achieve any kind of financial security or freedom, though, you are going to need to setup taxable accounts, outside of retirement investing.
Can your employer help, here? In many cases, your employer can help you here, too.
The markets have done well for the first quarter of 2012. We have new milestones for all three of the major indexes. I’d say the NASDAQ breaching 3,000 is the most significant because we haven’t seen that number for over 10 years!
S&P500 1,402.21 (+12.0% YTD)
DOW 13,102 (+8.1% YTD)
NASDAQ 3,044 (+18.7% YTD)
The DOW is underperforming relatively because its big hitters, MCD, IBM and CVX have underperformed (remember that the DOW is a price weighted index not market cap weighted!). Apple single handily has really improved the returns of both the S&P500 and NASDAQ. Apple is now 12% of the entire NASDAQ and 17% of the NASDAQ 100. Apple is the reason why the NASDAQ breached 3,000, with an over 50% gain in the shares so far this year.
Investing is all about finding good companies or ETFs and buying them when you think they are attractively priced. And then holding them. This is the part that makes investing boring, because I know from experience that holding the quality companies will make you money over time, you don’t need to trade them.
It can happen quickly, you lose upside before you even have the chance to make successful trades. For example, Philip Morris (PM) is trading at a 52 week high and all time high. If you simply waited for everything to be “all clear” in the economy, you missed out on this move. A company like Philip Morris is a so called secular stock, which means that it makes money and grows its earnings consistently in spite of economic cycles. Therefore, trading it can be tricky.