Saturday, June 22, 2013

An Investment Primer

What do you need to know before you start investing on your own? Here are some basics for the newcomer.

I’m frequently asked for resources for beginning investors. In my column I usually assume a certain familiarity with investing concepts and use of the Internet. But for my next two columns, I’ll walk through the basics of what you should know to get started as an independent, self-directed investor.

Your success as an investor, whether off-line or online, depends on your attitude. “Money is a singular thing. It ranks with love as man’s greatest source of joy. And with death as his greatest source of anxiety,” said economist John Kenneth Galbraith. So are you a person who looks for opportunities and ideas? Or do you engage your mental brakes out of the fear you’ll make a mistake? You should try to find a happy medium that accounts for your stage in life and is based on a realistic assessment of your finances and goals. The summertime lull in trading is a great time to do your homework.

Though you can use programs such as Intuit’s Quicken ( or Mint ( to keep tabs on your expenses and set up a basic plan, you might want to check out Financial Fate (, a free program that walks you through goal-setting scenarios. This is a small download that runs on PCs, and helps you come up with annualized estimates of where you are and where you’d like to go. Another planning tool is Personal Capital (, which can import data from your existing financial accounts and create a picture for you.

You’ll need to consider three buckets for your investing: Cash savings for immediate needs and emergencies, short-term investing for goals such as a down payment on a house or a vacation, and long-term investing for items such as retirement or your newborn baby’s college education. Take a hard look at how deep you are in debt, as well––your car loan, your credit-card bills, and your mortgage. Get rid of the credit-card debt as quickly as you can; it’s a rare investor who is able to generate the 18% (or more) interest that your unpaid credit-card balances rack up.

The key to investing is to plan how much you’ll put away rather than having it happen haphazardly. The younger you are, and the longer your investment time frame, the more risk you can handle in your portfolio. To assess the level of risk you’re willing to handle, check out the investment risk-tolerance quiz from, of all places, Rutgers University’s agricultural extension program ( This quiz will give you an idea of the type of risk you feel you can handle with your finances.

How much financial savvy will you need? Since you’re reading Barron’s, I’m going to assume you are at least ¬interested in the markets and in the ¬underlying pressures that influence their movements. You need to be comfortable doing some arithmetic and know the basics of how a business is run, so you can figure out the components of a company’s financial statements and how changes in the economy might ¬affect an individual firm. The ability to evaluate a graph that plots a stock’s price over time is a necessary skill. has an education module called Chart School that walks you from basic charts all the way through the intricacies of technical analysis (though you don’t have to go that far).

At some point, you have to ask yourself whether you want to go it alone, or work with an advisor. I’m a dedicated self-directed investor. There was a time when I had some help, but I’m an independent sort, knowing that nobody out there is as interested in my financial future as I am. Perhaps you are more trusting or just need some help to get started; Barron’s regularly lists financial advisors who can offer lots of ideas.

But if you’re thinking of striking off across the wilderness and opening an online brokerage account, make sure you’re comfortable. I’ve spent a lot of time testing my investment ideas using virtual trading sites, such as the Virtual Stock Exchange Games at MarketWatch (

What are the best online brokers for the trading newcomer? I’ll tell you next time.

Posted by twcarey on 06/22 at 03:44 AM
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Saturday, June 08, 2013

Income Generators

Amid the uncertainty about rates, investors should think about closed-end funds to produce payouts. Where to research them.

With the fixed-income markets last week scrambling to adjust to the prospect—however distant—of tighter Federal Reserve policy, investors might want to think about income-generating alternatives. Some closed-end funds fit the bill.

Unlike standard mutual funds, closed-ends issue a set number of shares and trade like stocks and exchange-traded funds. CEFs, however, can and do change hands at prices above (at a premium to) or below (at a discount to) their net asset value. ETFs, in contrast, rarely stray from their NAVs, and open-end mutual funds continually issue and redeem shares at their net asset value. Most closed-end vehicles are created to generate steady cash flows for investors, which is what makes them attractive right now.

As critics point out, they do have shortcomings: CEFs can be illiquid, and it isn’t possible to write options on them. Many ETFs do have options available, which can be used to leverage a position.

CEFS ARE ACTIVELY managed, while ETFs are usually based on a broad market index or specific sector. CEF expense ratios, on average, are higher than the 1% or so that most open-ended mutual funds charge. One advantage that CEF managers have over their open-end counterparts is that they don’t have to worry about shareholder redemptions when the market goes south because there are only a finite number of shares available. That makes them more suitable for relatively illiquid asset classes, such as foreign securities and certain fixed-income strategies. However, you might want to be cautious about funds with long-term bonds at the moment.

I’ve been using a half dozen or so CEFs to generate income for two relatives who’ve handed me their portfolios. (I am not a certified financial planner, but three decades tracking financial technology has helped me develop certain skills.) My introduction to CEFs came at Barron’s. I would sort through our lists searching for those trading at a discount (because I like a bargain). The Barron’s list these days also can be found online under Market Data by clicking on the Stock and Fund Tables menu choice. You can choose the weekly Closed End Fund report, or the quarterly table. Unfortunately, these tables are not sortable—I used to go through the printed versions with a highlighter and a notepad. But searching for suitable CEFs online is much easier.

One site that I always visit when re-evaluating the list of CEFs that I track and trade is run by the Closed-End Fund Association ( Under the Learn tab, you’ll find an overview of CEF basics, which is a short read but well worth perusing. Down the left-hand side of the page you’ll find Managed Distributions, which is a unique tool comparing different types of CEF payouts, allowing you to determine whether a fund is making promised payouts from income or from return of capital. Most tables show the distribution yield of a fund, which some investors may assume is from the income generated. But it actually include a return of capital, which means the fund is giving investors their own money back.

The H&Q Life Sciences Investors (ticker: HQL), for instance, shows a yield of 6.68%, but its income-only yield is now zero. The NAV of the fund, which invests in health-care, agriculture, and environmental-management companies, has been rising at a 33%-35% clip over the past year, so it can afford its 30 cents-a-share quarterly payout to investors from capital. If the NAV isn’t growing, that may not be such a great idea. There are many other good tools on

Another site I like is CEF Connect (, which bills itself as “the authority on closed-end funds.” Its screener lets you search for tax-free income by state, among other criteria. It can also sort by discount, premium, yield, and return. CEF Connect provides a link to a fund’s Website, which usually provides even more detail. It also lists fund expenses. A closed-end fund has little incentive to minimize expenses, since it’s not looking to market more shares, like a regular mutual fund. A high expense ratio may account for a closed-end fund’s discount, in which case it’s no bargain.

You can use the site without registering, but there are more tools for registered users, including fund alerts and a portfolio tracker. There is no fee for registering. The site is sponsored by Nuveen Closed-End Funds, but the sponsorship is not terribly intrusive.

Published in Barron’s, June 3, 2013. 

Posted by twcarey on 06/08 at 03:11 AM
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