The Difference Between Value and Growth Stocks (Part 2)

Regardless of the previous behavior of the market, one can see with its recent performance that it is still a great investment tool.  According to Google, the Dow Jones Index was actually down to its low of 6547 on March 6,2009.  Now, it is currently at 8500.  That is over 30% up in just one 3 months.  However, as mentioned before, there are very few out there that can time the stock market that well in order to get those returns.

To continue from the previously written article, Value stocks are great choices for those who believe in holding a stock for the long term.  Below is the definition cited from Investopedia:

A stock that tends to trade at a lower price relative to it's fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio.  (Citation)

These particular stocks are viewed as being "undervalued" and typically do not have quick growth rates.  More characteristics of these stocks are the following:

1. Dividends 
2. Equity equals the amount of debt held by the company.
3. 2x Assets to liabilities.
4. Very low Price-to-Earnings 

Examples of these companies are well-established blue-chip companies that typically have a very long history of successful operation.  Some examples of these companies are the following:

1. IBM
2. General Electric
3. Wal-mart

As you can tell from these companies, they typically provide a service or product that is always in demand no matter the economic climate.  In addition to that, they have pretty high stock prices which do not fluctuate often.  Of course there is an exception to the rule (as seen over the past year) due to internal and external factors that can cause a company to reduce its market share and even fail.  However, most well established/well ran companies can usually weather any storm.

As hard and as nerve wrecking it may be, it is always a good idea to have some portion of your investment portfolio into stocks.  Whether your investment style is risky or stable, there are some stocks from each class that will fit your requirements to help provide the results you desire.

What are some stocks that you are invested in?

Stay Disciplined!

Hedging Against Everyday Expenses Using Stocks

During a visit home, while passing a gas station my father remarked "Wow, these gas prices are really going up".  After giving it some more thought, I realized that he was right.  After all, just back in December, the average price per gallon in the United States was $1.65/gallon.  (Citation)  Now consulting the same source, I see that gas on average is $2.30/gallon and rising!  Well, there is a silver lining in every cloud and this blog article will provide you with information on how to see it.

Definition of Hedge (Hedging)

In finance, a hedge is a position established in one market in an attempt to offset exposure to the price risk of an equal but opposite obligation or position in another market. (Citation)

In plain English, all it basically means is to have an equal but opposite position to offset the risk taken with an investment.  This procedure was used massively by many investment groups to short sell many stocks.  Many critics point the finger at these funds as a key contributor to the recession that is currently being experienced.  Although "hedging" takes a negative aspect in this situation, it can be used on a smaller scale to benefit the average consumer.  Let's take hedging against an everyday expense for example.  

It is a requirement that you have gas for your car.  In order to hedge against the rising gas prices, one would invest in a index or mutual fund that invests in gas and oil.  The way that the hedging process works is that as the gas prices continue to rise, the oil/gas stock would rise also allowing the owner to offset the added expense of paying more at the pump.

It is good to know, just as hedging can work for you in a positive way, the opposite can happen also.  In the case that the gas prices go down, the stock that invests in oil/gas can go down also.  Although you are paying less at the pump, there is a higher chance that the oil/gas stock will decrease in value.

Although this one particular example uses gas as a means to hedge, one can also use many different industries such as housing, groceries, technology to perform the same type of strategy.  What are some industries that you think will be good to hedge against?  Stay Disciplined!

The Rule of 72

“The keys to patience are acceptance and faith. Accept things as they are, and look realistically at the world around you. Have faith in yourself and in the direction you have chosen.” ~Ralph Marston

Earlier this week, I was asked the question, "Do you know what the rule of 72 is?"  I thought about it and promptly responded back with "of course", followed by my rendition of the answer to that question.  However, the person I discussed this with stated that over 90% of the people, he asked that question, did not know the answer.  This is quite staggering to me due to the fact that this is a very simple idea and it is very valuable to know in terms of investing.  

The definition for the rule of 72 is listed below:

The rule of 72, is a method for estimating an investment's doubling time. The number, 72, is divided by the interest percentage per period to obtain the approximate number of periods (usually years) required for doubling.  (Source)

For those who understand formulas, it looks like the following:

(Years to Double) = 72 / Interest Rate

View the following example for further clarification:

HSBCDirect offers you an unlimited length Certificate of Deposit (CD) for 4% Annual Percentage Yield (APY).  If you just deposited $10,000 and wanted to know how long it would take to double into $20,000, you could use the following formula below to calculate it:

72 / 4 = Approximately 18 years to double.

To get a more exact amount of time to use for doubling, you can use the "Future Value" (FV) formula.  

FV = Present Value x ((1 + Interest Rate)^N)

(Where N is the Number of Years)

To calculate the number of years, you can use the following formula (just solving for # of years):

ln(FV/PV) / ln(1+I) = N

(Where PV is Present Value)

Using the numbers from the previous example, you get the following:

ln(20000/10000) / ln(1+.04) = N

17.673 = N

As listed above, the interest rate is represented in terms of the actual decimal number rather than the whole integer value.

As you can see from the two formulas, there is a lot more complexity to get a more exact estimate of time.  However, using the "rule of 72" can give you a quick estimate when weighing your investment options and correctly balance the amount of risk you take with an expected return.

If you have anymore comments or any other shortcuts or rules you know about in regards to investing, please leave them in the comments below.

Stay Disciplined!

Steps to Prepare for Home Ownership

This is a very sensitive topic to talk about given the current situation that our economy is in.  I am in no way ignorant to the fact that many good people are losing their home due to the downturn in our economy.  The only hopes of this article is to educate my audience on the steps (as determined from my experience) to purchase a home if it is a good investment option for the particular person.

Over a year or two ago, the terms foreclosures, auctions, short sales, etc would have seemed like a foreign language to most Americans.  I mean after all, I have never heard my parents talk about any of the terms previously listed the whole time that they have owned their home.  Now, it is common place to see advertisements for foreclosure auctions, or even receive emails to your inbox announcing a fire sale of condos at "below builder price".

With the abundance of vacant properties in America, in my opinion, it is a great time for the first time home buyer, second time home buyer or even the investment buyer to look at purchasing a home.  It is definitely a buyer's market and with patience and the preparation, home ownership is just around the corner for many Americans.  I did some research on the topic and found the following link that was interesting to try to explain the previous downturns of the housing market in America:

Housing Data Shows Downturn Could Be Prolonged

Although this particular article claims that this housing downturn could persist eight years, I am optimistic that we are at a point where houses are beginning to be a good value again.  I am currently in the process of pursuing an investment property and wanted to share some of the preparation that was needed in order to begin this process:

1. Ask yourself the following questions and be honest
• What is your price point for your house that you can afford?
  
• As a personal rule of thumb, I have always believed that the primary mortgage should not be anymore than 33% of your take home (after taxes) pay.
• What location do you want your house to be in?
• What type of house do you want?  (Townhome, Single Family, Condo)?
  
• How big do you want your house to be?
  
• What special features you want in your home?
2. Write down a description of your home
• This step is important so you do not compromise on getting the house that you want.  Throughout this process of searching for a home, I got discouraged when others beat me to the punch when placing a contract on homes that had 60 - 70% of what I wanted.  However, I eventually found the house that had 90%+ of what I wanted and I currently have it under contract.
3. Research your Credit Score
• There are a multitude of ways to research your credit score on the Internet.  Below are the free alternatives that I use:
1. https://www.annualcreditreport.com/cra/index.jsp
   
2. http://www.creditkarma.com/
   
• Realistically, many of the loan officers I spoke with stated that they are looking for 700+ credit scores.  However, do not get discouraged if your credit score is not that high, I recommend to at least try, the worst thing they can say is "no".
4. Find a Real Estate agent
• A real estate agent can determine how your home buying process will be.  They generally handle all of the paper work and discussions with the seller (or the seller's real estate agent).
• In addition to that, they will be the ones to make the necessary arrangements to view the property.  
• Usually they also have easy access to people you may need during the home buying process (inspectors, general contractors, loan mortgage officers, etc).
5. Research homes
• There are many things to take in consideration when purchasing a home.  Below is a short list with somethings worth considering:
1. Utilities
2. Taxes
3. Repair on the home
4. Maintenance
5. Location
• For more things to consider, look at the article at the following link.
6. Find a Mortgage Broker
• Talk to the mortgage broker to find out what packages they have and make an educated decision on which offered package is best for you.
• Get financial records in order for loan qualification process, what you will need:
1. Last two paycheck stubs
2. 60 days worth of bank and investment account statements.
3. W-2s from the last two years
• A few important notes:
• The loan company should be able to provide you with a loan pre-qualification letter and Good Faith Estimate without any type of commitment to obtain the loan with the company.  You should use these documents to compare offers and get the best deal possible.
• One concern that many people have when it comes to obtaining loans is the credit-check process.  From this article, credit scorers look at all credit inquiries made within a 14-day interval as being the same as one inquiry.  This will allow you to shop around for mortgages for a two week period without substantial negative impact on your credit score.

As I am in the stage of just getting my home under contract, I am currently waiting to proceed with purchasing this home.  However, I find that educating yourself about the home buying process is the best thing that you can do in order to successfully proceed with purchasing a house.  There is a lot that goes into the process of purchasing a home but the information in this article can at least help the novice to get started in the process.  It may seem overwhelming at times, but if you get the right people on your team (real estate agent and mortgage broker), you will find that it will progress and you will be owning your new home before you know it.

Please let us know if you have any comments or questions below.  Stay Disciplined!

Previous articles that relate to this topic:

http://getmoneyandmore.blogspot.com/2008/10/are-foreclosures-good-investment.html

http://getmoneyandmore.blogspot.com/2008/11/more-information-for-foreclosure.html

Disclaimer:  The ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment adviser.

Reading the Prospectus...A tutorial about knowing what you are invested in.

You can know the name of a bird in all the languages of the world, but when you're finished, you'll know absolutely nothing whatever about the bird... So let's look at the bird and see what it's doing -- that's what counts. I learned very early the difference between knowing the name of something and knowing something. -Richard Feynman

With the current downturn of the economy, many people are uncertain about their future with the current financial situation that the country is facing. If you were fully invested in stocks since October 2007, your portfolio is probably down somewhere in the neighborhood of 30% - 40% of its value on that date. It is amazing the difference a year can make.

I must admit, I have fell victim to the downturn of the stock market just as many of my colleagues have. As of today, I am currently down 38.8% in my 401(k) alone not to mention the many other investments that I currently own. While I am in no position to make a recommendation on what to invest in next, what I can do explain the tools provided for the investor that can help you make an informed decision about where to place your hard earned money.

Some of the fundamental steps that is incorporated in "It's Easy as P.I.E" is the planning and evaluation phases. Both of these require that you do the necessary research to make sure that your current allocation is the best applicable to your current financial situation. It also requires that you periodically review your current allocation to make sure that your portfolio is best suited for the amount of risk you are willing to take on. One of the most important tools for doing this research for a stock or mutual fund investment is given in the form of a prospectus.

Prospectus: A formal legal document, which is required by and filed with the Securities and Exchange Commission, that provides details about an investment offering for sale to the public. (Link to Investopedia)

Prospectuses are usually broken down in the following structure:

1. Overview
• Typically provides a high level overview of what the stock or fund is comprised of.
• May provide a small summary of the objectives of the company and how they plan to make their revenue.
  
• Provides some general information about the investment and provides in general a snapshot of the investment Year to Date (YTD) performance and price.
  
2. Expense and Fees
• In the case of mutual funds, there is usually a management fee that the mutual fund charges you in order to maintain the fund purchased. This fee is usually referred to as the Expense Ratio.
• Expense Ratio: A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual calculation, where a fund's operating expenses are divided by the average dollar value of its assets under management. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors. (Link to Investopedia)
• Some funds also contains a load fee that is charged for maintaining the fund.
• Load: A sales charge or commission charged to an investor when buying or redeeming shares in a mutual fund. (Link to Investopedia )
  
• May also contain a minimum amount required to purchase the fund initially. From my own experience, it does not look like this minimum price needs to be maintained, but just done on the date of the initial purchase of the fund.
  
3. Performance
• This section may be the most important part of the prospectus as it will generally give you an idea of what kind of return you will be able to get on your investment.
• Contains average annual returns for 1, 3, 5 and 10 years. May contain the funds performance since the fund's inception.
• Return: The gain or loss of a security in a particular period. The return consists of the income and the capital gains relative on an investment. It is usually quoted as a percentage.(Link to Investopedia)
  
• The use of the return helps gauge future performance of the fund or stock. Depending on the market conditions, it can allude to whether or not the investment is going to continue to provide a good return on your investment or whether you should look elsewhere as it might have hit its peak.
• Usually represented in a percentage form that displays your overall return in the case that the investment was made at whatever previous time period without further contributions.
  
• This section may also contain a graph of the prices of this investment over time for a predetermined time period allowing for an example of what a certain amount of money would have returned over the past.
  
4. Portfolio Composition
• Another very important section to the prospectus is the portfolio composition.
• Contains information about the specific stocks or other mutual funds and the amount of them that the investment is comprised of.
• In a mutual fund, usually contains a list of the Stock Style
• Stock Style: The investment approach or objective that a fund manager uses to make choices in the selection of securities for the fund's portfolio. (Link to Investopedia)
• Flash Movie of Stock Styles
• Displays the sectors of the market that the fund is exposed to.
5. Prices and Distributions
• This section contains a historical reference of the prices that the stock or mutual fund closes at on a daily basis.
• Can be useful for determining whether a stock is over-valued based on the price over a given period of time.
  
• Can also help to identify the best time to purchase the stock during the month.
• Contains the rolling 52 week high and low which allows you to gauge the high price and low price for the year of the investment.
  

Although I am unsure about how much lower the Dow Jones will go, I am still hopeful that the stock market will rebound and pull itself out of this funk. In my opinion, I think that there will be a lot of bad days down the road, however, if I am able to make an informed decision by investing in the sectors that I believe will bring America back to the forefront of the global economy, I may be able to reap some great rewards.

Feel like I missed something in this article about prospectus? Please share your knowledge about this topic in the comments below.

Stay Disciplined!

P.S. - For some real world examples of prospectuses, look at the links below:

Fund listing for Vanguard
Fund listing for TRowePrice

More Information for Foreclosure Investments

I realize that the previous post about the foreclosures was a bit incomplete because I did not really leave you with too many links that you can use to actively research the foreclosure market. Having these tools listed in this article can help you decide whether an investment in the foreclosure market is a sound decision.

Finding Foreclosures

As mentioned in the previous articles, foreclosure listings can be bought in three different phases. Those three phases are:

1. Pre-Foreclosure (Short Sale)
   
2. Foreclosure by the Bank (Courthouse Steps)
3. Sold/Auctioned as a Foreclosure

Below are some of the links that you can use for researching these properties. Please hover over the links for a description of each link.

Atlanta Journal Constitution Foreclosure Listing

US Home Auctions

Hudson and Marshall Auctions

Georgia MLS

Trulia

Due Diligence

Part of the due diligence for determining whether or not any property is a good investment is find out key pieces of information. Some of the things to research are:

1. Crime in the Area
2. Schools in the Area
3. Property Taxes to pay
4. Previous value of the home
   

Below are some of the links that you can use for researching this information. Please hover over the links for a description of each link.

Atlanta Police Google Map Showing Crimes in the City of Atlanta

Listing of the current and previous value of a home

Georgia MLS

County Tax Records for Homes in Georgia

Getting the Finances in Order

The last and in my opinion, the most important step is getting your finances in order to purchase any kind of investment. In addition to the information listed in my previous post below is a website that contains great information to help calculate whether or not you are in a good position to finance an investment.

Great Place to learn about Financing an Investment

I hope that these links assist in your decision of whether or not to pursue an investment in real estate. Please share with us any other links that you find useful to assist you in your decision of whether or not to invest.

Stay Disciplined!

Index Funds...The Investor's Training Wheels

The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think. -Jesse Livermore

On my birthday during one my wonder years (where I did not have to worry about things like bills, stocks, recession, etc), my father bought me a bike. After the initial excitement of realizing that I got a bike had passed, I realized that I was going to have to learn how to ride the thing. I was a bit timid of the thought of having to get on the bike, maintain balance and pedal all at the same time. After all, I could fall off the bike, get hit by a car in the street or many other bad things.

However, my friend Zack would come by my house on his bike. His house was a mile away from mine and while it took me about 15 minutes to walk to his house, he could get to my house in 5 minutes. Well, now it was my turn, now that I have my bike, I was capable of getting to his house within 5 minutes or less, I just had to learn how to ride it.

So when I tried to ride my new bike for the first time, I hopped on and tried to pedal. Unfortunately I did not understand the concept of balancing on the bike and got approximately 1 foot forward before having to put my feet down to prevent me from falling. After a week after these failed attempts, my father came out and showed me a couple of tricks. He taught me how to coast down a heel to learn how to maintain my balance. Once I learned how to maintain my balance, I learned how to pedal and eventually was able to put the two together and ride my bike.

At the end of the whole learning process my dad told me, "Man, maybe I should have gotten you some training wheels, that would have made this a lot easier and you would have been riding in no time." What, training wheels? Are you serious!? Are you telling me that I could have gotten back at least a few days of failures if I just had training wheels!?

Well, it seems like history repeats itself, because I made the same mistake on my initial entry into the stock market. The simple rule to succeeding in the stock market is to "Buy low, Sell High". Sounded simple enough to do so back in October 2007, Washington Mutual was on its way down and I thought that they looked like a good buy. They were down to $20 from their high of $47 and I just knew when they rebounded, I was going to be able to recover all of my money as well as make a hefty profit.

Well, if you have not followed Washington Mutual's fate, currently they are bankrupt meaning that their stock is worth $0 and no longer exists. Fortunately, I was able to recover some of my money before losing it all, however, the fact of the matter is whether I lost $1000 or $10, I still lost which is the exact opposite of my motivation for investing in the stock market.

Once I realized that my individual stock picking skills were not up to par, I realized that I need to get some "training wheels" so that I do not let history repeat itself. While researching one day, I came across Index Funds.

Index Fund: A type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.

(Index Fund Definition taken from Investopedia)

*For a list of other common stock indexes, view the Wikipedia page*

An Index Fund is the novice's best investment tool as it offers the following benefits:

1. Allows you to easily diversify your portfolio without having to choose individual funds
   
• Diversification: A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. (Cited from Investopedia)
  
2. Low Management Costs
• Since Index funds are managed by computer models that try to purchase the exact funds listed by an index rather than relying on stock analysts, the fee to manage index funds are typically lower than those of other mutual funds.
  
3. Low Turnover
   
• Turnover: The number of shares traded for a period as a percentage of the total shares in a portfolio or of an exchange. (Cited from Investopedia)
• Lower turnover allows you to pay less transactional costs as well as reduce the capital gains tax that you will incur for trading funds held less than a year.
4. No commissions to pay when bought directly from some mutual fund companies.
• Unlike many online stock brokers, when you buy more shares of an index fund directly from the mutual fund company, you do not have a to pay a commission for each purchase. In addition to that, you typically do not have to pay a commission to redeem the fund at a later date.
5. Easier to do Automatic Investing for dollar cost averaging
   
• Dollar Cost Averaging: The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. (Cited from Investopeida)
  

Although there are many advantages to investing in Index Funds, there are some disadvantages as well.

1. Index funds are designed to perform at the index rate of return
• If you are trying to get a higher return than the rate that is given by the market, you will typically not achieve it by having an index fund.
  
2. As with all investments, there is a risk that the overall index can go down meaning you would get a negative rate of return. (i.e. our current market situation)
3. Investing through a brokerage typically requires a hefty minimum if you are investing in a general account.(i.e. Vanguard requires $3000 for a minimum investment into their funds for a general investment account)
   

Index funds give you the chance to invest in the stock market without a lot of experience or knowledge. I highly recommend that you if you wish to start investing in the market, that you do so using an index fund especially with the market at historic lows. For those who are interested in getting their feet wet with index funds, you can do some research at Vanguard for the different funds they offer.

Do you have any recommendations for Index Funds or any other beginner investments, please share them in the comments below.

Stay Disciplined!

Prioritizing Finances and Investments

"A wise man should have money in his head, but not in his heart."
Jonathan Swift (1667 - 1745)

One of the key points to success in your personal finance is learning to prioritize what exactly to do with your money. This is one of the harder things to do because it requires patience and self discipline to stick to a plan that you have created. In this article, I will be sharing with you my list of priorities in relation to my personal finances and goals as well as explain why I chose this particular ranking.

Below is the ranking of importance in my personal finances:

1. Checking AccountSavings Account (directly linked to checking account to prevent overdraft)
2. Emergency Fund (In high-yield savings account [e.g. HSBCDirect, INGDirect])
3. 401(k) (through my employer)
4. Roth IRA (Reputable Mutual Fund company [e.g. Vanguard, TRowePrice])
5. Mutual/Index Funds (Reputable Mutual Fund company [e.g. Vanguard, TRowePrice])
6. Individual Stocks (Through an online broker, refer to post "I have money, now who do I invest it through" for more information)
   

Checking Account

The checking account is the first priority because typically this is what most people use to pay their expenses and bills such as utilities, rent/mortgage, car payment, etc. It is important to have this account funded properly at all times so that bills are paid on time and bills can be paid in full without having to overdraft this account. This is also typically the account that most people choose to have their paychecks deposited to. I personally allocate funds from this account to fund my other accounts.

Savings Account

The whole purpose of my savings account is to prevent any type of overcharge fees from my checking account. This account is insurance for my checking account so I do not incur any unnecessary fees, further depleting my usable income. I typically keep this account a little above the minimum balance as specified by my bank so I do not incur any fees for it.

As mentioned earlier, since this account is only used as "insurance" it should not be constantly withdrawn from to cover back-to-back overdrafts. Since most savings accounts are covered by Federal Regulation D, you are limited to 6 overdraft transfers a month. For more information and details about this regulation, please click on the following links:

Regulation D FAQ
Regulation D
Regulation D Offerings
Regulation D -- Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities Act of 1933

Emergency Fund

The Emergency fund is the most important account I own. It contains approximately 5 months of my take-home salary that will hold me over in the event that I lose my job, become disable or encounter a major unplanned expense. The Emergency Fund is an account that I do not have easy access to. Since I have it all online with HSBCDirect, it takes approximately 3 days for me to receive money from this account once I have requested it. This is perfect for this type of account because that typically discourages me from using this account for anything else besides an emergency.

The reason I suggest keeping an account like this directly with an online bank is due to the fact that there is a stable interest rate that usually pays more than standard bank account. In addition to that, you do not have to worry about your money invested dipping below your original amount deposited. This refutes the idea of using a personal Individual Retirement Account (IRA) as your emergency fund due to the fact that IRAs are volatile and run the risk of being "down" at the time that you need to withdraw from it.

401(k)

The employee sponsored 401(k) is typically the "nest egg" that most people use to retire. Since this money is taken out pre-tax, it adjusts your taxable income and has potentially tax benefits that can make the difference in the amount of taxes you owe the government at the end of the year. In addition to that, most employers contribute some form of matching up to 6% of the employee's contribution (which translates into FREE MONEY). There is a 15,500 limit by law (reference) that you can contribute annually to this fund. However, I have set my own personal limit to 15% of my annual salary. This was done so that I can continue to invest my money through other investment vehicles.

Roth IRA

The Roth IRA is probably the best investment vehicle possible besides the 401(k). Typically, the 401(k)'s benefits exceeds the Roth IRA only due to the fact that most employers offer some type of "matching" plan for employee contributions and because the 401(k) can lower the overall taxable income. However, if the employer does not contribute to the employee's 401(k) at all through matching, then the benefits of the Roth IRA mostly outweigh that of the 401(k). The biggest benefit of the Roth IRA is that it is not taxed at all when it is withdrawn (pending that you meet your eligibility to withdraw requirements) For more information on some of the benefits of the Roth IRA, refer to the following links below:

Roth IRA by Wikipedia
401(k)/IRA Matrix

Mutual/Index Funds

For beginning investors, mutual and index funds are the best introduction into the stock market. The reason why these are the best way to enter into the market is because it offers the two key requirements in successful portfolios: Diversification and Low-maintenance. Typically index funds are better than mutual funds because they usually have a lower Expense Ratio ,with a comparable amount of diversification. Also, these are great for the buy and hold strategy where one can contribute a set amount of money each money to a steady investment to allow it to grow over time.

Individual Stocks

The last financial priority should be investing in individual stocks, however this is commonly one of the higher priorities on most people's list. I, too, am guilty of mis-prioritizing this particular vehicle and was severely burned by this strategy. Individual stock picking requires a lot of research and time that most people are not able to invest. It is very rare that novice stock investors will be able to beat the S&P Index fund's average return rate approximately 15% in their first year of trading. My recommendation is to fund the higher priority vehicles first and then use any left over money (that you do not mind losing) to play individual stocks.

Overall, my priorities may not fit your financial situation. Different people have different needs and goals that they have set as to what they want to accomplish. This particular methodology works well for me and has so far allowed me to stay on top of my finances as well as plan for my future. Please let me know your thoughts below and any other strategies that you have in the comments section. Remember...stay disciplined!