Investing -- Looking At The Schwab Cartoon, Part 1

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I'm starting a new series on investing that I can share with my extended family members, most of whom have Schwab accounts but little understanding about investing.

Anything I write here is meant only for my extended family members and no other readers. It is a starting point for discussion among the family members. Nothing is written in stone. These posts will be updated as conditions change. They will eventually be collected and linked under the "Personal Investing" tab at the top of the blog.

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Lessons in Investing

When I started investing back in 1984, there were no discount brokers, no tax-free retirement programs, no commission-free trades. I was pretty much limited to high-commission brokers who really weren't interested in small investors, and load / no-load mutual funds. Tax preparation was confusing and itemized deductions were in vogue. There was little information with regard to personal investing. The worst thing uneducated folks could do was invest in individual stocks; the second worst things, load funds. No-load funds were a crap shoot: some did well, some not so well. Because there weren't a lot of options and there weren't many resources, a lot of folks tried investing in individual stocks on their own.

Flash forward thirty years, and everything has changed. Except one: folks like me should not be investing in individual stocks. We should leave that up to professionals. 

With discount brokers, commission-free trading, several types of retirement programs, investing has changed immensely. For most folks with earned income less than, let's say, $250,000 per year, one's investment plan should focus on tax-free retirement accounts.

Let's use an example. 

One of my extended family members has just transferred "all" their investments into their existing Schwab account and wanted me to discuss my thoughts on investing using their Schwab account as an example.

I would assume many Schwab accounts look like this cartoon:

Section A: IRAs, 401(k)s

Section B: an individual stock portfolio.

Section C: 529s.

Section D: ETFs.

Section E: cash.

I assume folks can customize this Schwab cartoon front page any way they want. 

The first discussion with one of my extended family members was interesting. 

The first thing we did was focus on section B, the individual's individual stock portfolio.

These were individual stocks the extended family member had inherited from parents and grandparents over many years that had been transferred into their Schwab account. Three immediate problems:

• the individual family member knew "almost" nothing about investing in individual stocks;
• the individual family member had no plan / strategy for investing in individual stocks; and,
• the cost basis was pretty much unknown for 90% of the individual stocks in section B.
  

There is not enough in the account to justify paying a financial advisor the standard fee, at least not at this point.  I can help them get started, and once they get the feel for what they are doing, they can hire a financial advisor if they want. I strongly advise against that if they have a solid investment plan that can run on auto-pilot.

The first problem: risk of losing everything or much of what they already have in their individual stock portfolio. They are likely to compound their error(s) by adding new money to section B.

This is what they need to be doing right now.

With all new money:
    __ budget their monthly income and expenses (at this, they are incredibly good; welcome relief)
    __ ensure they have emergency funds available
    __ insure the breadwinner is adequately insured
    __ maximize their IRAs; if married, establish a spousal IRA for the spouse without earned income
    __ maximize their 401(k)s or equivalent, such as a TSP
    __ maximize their 529s -- even if they have don't have children, but especially if they have children

Going back to the Schwab cartoon, I stressed again:
    __ focus on sections A and C
    __ do not spend "any" time on section B
    __ do not put any new money into section B until sections A and C are maxed out
    __ when "investing" in section B, only use what currently exists;
        __ if there is a "hot"stock that needs to be bought, go ahead and buy it but use the proceeds from sales of existing stock in section B; again, add no new money to section B until section A and C are maxed out      

Section B:
    __ buy and sell "small" until you understand what you are doing
    __ don't sell shares of stock in "good" companies (or any company, for that matter) without a good reason
    __ use Schwab tools to help determine what I mean by "good" companies

Dividends in section B:
    __ stop all automatic reinvesting, for several reasons which we can discuss later
        __ option: keep the section B dividend cash in section B to make additional investments in section B; that's   the only exception to "no new money" in section B -- however, see next line
    __ my recommendation: move dividend cash from section B into sections A or C; there is a good reason for that. Actually, at least three.

I'll confirm the numbers later, but roughly:
    __ IRA contributions this year: $7,000 per individual = $14,000 per couple
        __ Roth IRA and not traditional IRA, we can discuss reasons later
    __ 401(k) contribution: $23,000
    __ 529 contributions; two children; no max; set a goal for each year; as a starting point, I'll recommend $5,000 per child = $10,000
    __ total so far: $47,000 for sections A and C

So, first steps:
__ all new money into sections A and C
__ check your cash status once monthly
__ don't let cash exceed $1,000
    __ monthly living expenses, life insurance, emergency funds are not part of the Schwab portfolio

Reminder: I am inappropriately exuberant about the US economy and the US market, I am also inappropriately exuberant about all things Apple.

See disclaimer. This is not an investment site.

Disclaimer: this is not an investment site. Do not make any investment, financial, job, career, travel, or relationship decisions based on what you read here or think you may have read here. 

All my posts are done quickly: there will be content and typographical errors. If anything on any of my posts is important to you, go to the source. If/when I find typographical / content errors, I will correct them.

Reminder: I am inappropriately exuberant about the US economy and the US market, I am also inappropriately exuberant about all things Apple.