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This is a guest post written by David Lewis

I’m going to go out on a limb and say that managed mutual funds should not be long-term investment vehicles. Very few people are experiencing stellar results. DALBAR Inc. has gone on record to say that the average mutual fund return is less than the index it is made up of.

There is one reason that products are sold in the financial world, and that is to make money. It doesn’t matter what you buy: insurance, annuities, mutual funds, stocks, bonds, ETFs, or anything else. The only question is,

How efficiently can you buy these products?Read More →

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The financial papers are filled with discussions of Goldman Sachs and their alleged misconduct in the trading of certificates linked to the housing crisis. Executives at Goldman Sachs  [stckqut]GS[/stckqut] have had to testify in front of congressional committees and it appears that at least one Attorney General is investigating them for crimes committed.

The result will likely be fines for the company.  But is the company evil? Should the company be punished?  The company is officially only a filed document in some state. The reality is the company is a group of shareholders that employ some managers to run a company to make a profit. Therefore, the company itself is not evil, even if there is a chance that some of those managers or employees are criminally negligent. Read More →

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If you sit on Twitter long enough (especially Stocktwits) you will see a message like this: “I think XXXX company is great because their new widget is awesome and it is going to shake up the industry.” So the question is out there, should you invest in the company based on this amazing new product?

Probably not!

  1. One cool product does not make a great company. It takes many products over a series of years to make a company that you can be confident will be a long-term hold. Great companies consistently offer good products to their customers and create ways to keep and attract customers over a long cycle.
  2. While there is some bounce on new good news, typically this is just a bounce. It doesn’t last. If you are a day-trader then you may want to take advantage of these “news bounces” but if you want to hold a security for some time, you need more than just a single new cool product.
  3. You are probably late.  Most companies have the majority of their stock held by institutional investors. If this new product was that significant then they have already factored this news into their holdings. Major investment firms do not wake up in the morning, read Engadget, and then decide to buy a company. If this new product was that significant then they were slowly accumulating the stock in advance of the introduction and they were doing it by listening to the company’s statements of direction in their annual meetings, quarterly calls, and analyst updates.
  4. You are swimming against the tide. As I pointed out in 3, most of the stock of many companies is with institutional investors. They aren’t going to buy the inflated price from a product bubble, they will wait until the excitement is over to continue to accumulate. That means the only people you are going to sell your stock to are the fools that also listened to the new product fervor and are late to the game (so they have made a 2nd mistake by being late).
  5. You may be wrong! How many great products have been introduced that simply didn’t live up to the hype? Even great companies will sometimes release a dud product.

Let me give you a great example.  Arguably, the iPhone from Apple is the most significant cell phone ever released to the market. It only operates on the AT&T [stckqut]ATT[/stckqut] network so a few weeks before the introduction of the iPhone in June of 2007, you could have surmised that AT&T stock was going to boom.  Didn’t happen, on May 31, 2007 the stock closed at $24.82. Yesterday, the stock closed at $26.26 – not even 10% growth. Yes, I know that AT&T put out some dividends in that time but those didn’t increase in size either – on April 27, 2007 AT&T gave out a dividend of $.412 and on April 28, 2010 they did a dividend of $.398 (all prices per Yahoo Finance).

On the flip side, Apple [stckqut]AAPL[/stckqut] had a significant rise in stock price but Apple makes a lot of great products and their customers love the company. Apple is a Good Company on my ranking scale, AT&T is not.

Market timing is fine for buying stocks but you should limit yourself to momentum indicators and overbought indicators on Good Companies (see the Watch List on the right side of this site). Don’t try to market time based on product introduction hype.

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The absolute best investment that you can make is to pay off your higher interest loans!

If you are carrying any credit card debt, you are probably paying double digit interest rates. This is short term money so you have to put yourself on a budget and pay these debts off. Whatever your current interest rate on your credit card, that is exactly the interest rate you will effectively earn by paying off that short-term debt. In today’s economy, I don’t know of any other legal investment that will GUARANTEE your return at double digit percentage rates.

If you have a car payment that is over 6% interest rate, that is also a likely target for accelerated payments. Once again, a 6.9% loan on your car means that you are guaranteed to get 6.9% return by paying the loan off more quickly (minus inflation). Since car loans rarely go longer than 60 months, this is medium term money (as opposed to short-term for credit cards). If you don’t need the extra $100 in the next month, spend that money on your car loan.

However, you may have bought your car with a subsidized loan from the manufacturer and therefore paying a very low rate that is approaching 0%. In that case, you may want to slow down this payment and only pay the minimum amount that you can. Essentially, inflation will grow faster than your interest rate so your cash equivalent spending will go down over the course of time. In this case, you are earning whatever the inflation rate is in interest!

Your home loan is probably different. Chances are you have been able to drive your interest rate down below 8 or 9%. Your home loan may still be 10, 20 or more years left so any money that you put into it is very long-term. You may need this money before the 10 years are up and if that is the case then it will be quite expensive to get it back out. It is reasonable to pay a bit extra on your home loan but be careful that it doesn’t impact your regular cash flow – and pay off your credit cards first!

In order to do all this, you need to start budgeting your money. Check out these sites for some advice on how to successfully budget your money.

[save] Budgeting for Dummies

How to budget your money for debt relief

The Fluid Budget