Extension Educator, Consumer Economics
Extension Specialist, Consumer Economics
Extension Educator, Consumer Economics
January 29, 2010
Don't put all your eggs in one basket. While this might make sense if you're a farmer, why would you care? The mental image of losing all your eggs when you trip over a running chicken can help you remember the importance of diversification with your investment portfolio.
Diversification is an important investment strategy; it helps us manage business and market risk. Let's suppose that Susie Q wants to invest in technology. Clearly choosing to invest in only one tech company would not be a diversified portfolio. If something bad happens to this company (for example, poor management leads to the company failing), then Susie Q would lose all of her investments. To help manage business risk, people choose to invest in more than one company.
What if Susie Q invests in several tech companies such as Dell, Apple and Sony. Does she now have a diversified investment portfolio? No – if something happens to this market sector, and tech stocks as a group lose value, her portfolio will suffer significantly.
To have a diversified stock portfolio, Susie Q will invest in a variety of businesses types such as stocks in pharmaceticul, agribusiness, aerospace, automanufacturing and technology. (Caveat: this is a hypothetical situation; this does not mean you should run out and buy stock in any of these sectors today.) Mutual funds can help people diversify their investments by investing in many companies in different market sectors.
To summarize, diversification in your investment portfolio can help you manage the risk of one company failing (business risk) and the risk of a particular industry doing badly (market risk). To learn more about diversification, visit the "Choosing Investments" section of the Plan Well, Retire Well website.
Bonus Question: If you own a significant amount of your company's stock in your investment portfolio, are you diversified? Think of it this way, if your company fails (which you likely think won't happen, but imagine that it does) and you lose your job AND your investment portfolio's value goes down, were you diversified?
January 23, 2010
In the wake of natural disasters such as the earthquake that hit Haiti last week, charitable giving is up. With so many organizations claiming to collect for relief efforts, how do you know whom to give your monies to? Through research, I found that there are a few key factors that might help you choose which efforts to support and which to stay away from. Here are a few points to consider when choosing a charity:
1. Find out the percentage of your donation that actually goes towards supporting victims. As a rule of thumb, reputable organizations will use most of your donation to aid victims or provide programs. If most of your donation goes toward administrative costs, the organization is probably one you would want to shy away from.
2. Steer clear of organizations that seem to appear overnight. Organizations which have been around for years and have recognizable names and reputations for helping are probably safer alternatives.
3. Look at the organization's Form 990. This IRS form is filed by organizations exempt from taxation. In addition, it provides financial information on how much the organization spent on administrative, program and fundraising costs.
4. Make sure the charity is legitimate. Don't be fooled by a charity having a similar name to one that you may have heard before. There are watchdog groups that track charitable organizations. Visit their websites to look up the charity you are considering. See the list below.
5. Give your time in lieu of money. If you want to learn more about a charity, volunteer some of your time. Firsthand experience with an organization allows you to get a better feel for who they are and what they do.
6. Avoid identity theft. Never give your credit card or personal information in response to phone, email or door-to-door solicitation. If you would like to give to an organization, visit their website for online giving or write a check. Never give cash.
For those that itemize, the IRS has made your charitable donations to support Haiti relief efforts immediately deductible on your tax return. For more information on this deduction, visit the IRS website.
If you would like to check out a charitable organization, visit one or more of these websites:
Until we talk again, have a happy new year.
January 11, 2010
It comes around every year, but it still catches many of us off guard: tax season. So it's time to pull together all the info that you or your tax preparer will need to complete your 1040, 1040A or 1040EZ.
If you find yourself scurrying each year to find records of your donations, business expenses, IRA contributions, or child care payments, this would be a great time to get prepared for NEXT year.
How big is the stack of documents that you use to compute your deductions and prepare your taxes? If your stack is just a few sheets of paper, all you need is a single file folder or envelope. Label it "Current Year Taxes" and put it somewhere handy, preferably close to where you open the mail
Also set up a file folder on your computer labeled the same, Current Year Taxes. Rather than printing documents that you might misplace, you can drag and drop them into their own place on your hard drive.
Throughout the year, whenever you receive a document you MIGHT need when you file your taxes, drop it into the Current Year Taxes folder.
If your situation is more complicated - maybe you have a home-based business or your have numerous investments that generate taxable income - you may need an accordian file or a directory on your computer. Look for natural groups of information to determine the labels for the divisions in your accordion file or your directory. Some might be:
Once this year's taxes are done, move the electronic and paper files to a new folder labeled "Taxes 2010." Now, you're ready to put this year's documents into the Current Year Taxes folders. Next year, it will be a piece of cake.
January 3, 2010
Did you set any goals for the New Year? I find setting goals to be relatively easy -- it's reaching the goals that is difficult. Especially those goals that require repeating behaviors week after week like losing weight or saving money. Based upon the number of articles I've recently read, it seems I'm not the only one that has trouble staying focused on my goals!
Well, leave it to an economist to come up with a new way to motivate you. Dean Karlan, Economics Professor at Yale University, decided to apply behavioral economics research and help people reach their goals. With others, he formed a company, StickK.com -- a place where you can "put a contract on yourself."
According to the Stickk.com website, "We all need help to reach our goals - whether it's incentives, or support from others. Years of economic and behavioral research show that people who put stakes - either their money or their reputation - on the table are far more likely to actually achieve a goal they set for themselves."
Basically the idea is that you use a stick to motivate yourself to meet your goal. For example, at the website, I could set a financial goal to save 10% of my income in a retirement savings plan each paycheck. If I fail to meet my goal, a stick (of my choosing) would be applied: a donation to a charity would be made at my expense or, even worse, a donation to an anti-charity! An anti-charity is defined as "any organization whose views you strongly oppose, or one which promotes values that are most contrary to your own." The possibility of donating to an anti-charity would motivate me!
Previously I've used the carrot approach to my New Year's Resolutions -- visualizing myself slim in the summer or enjoying a vacation using money saved. But this year, I think I'll try the stick approach and see how that works for me. Of course, you don't have to use a website like StickK.com or one of the many other similar websites that are springing up. Publically declaring your intentions (to a friend or family member) may work as well for you. The embarrassment of not reaching your goals is a stick too.
Here's one other tip for reaching your goals. Be sure you set SMART goals. SMART goals are goals which are:
S -- specific (for example, how much money saved?)
M -- measurable (a way to tell if you are succeeding)
A -- agreed upon (by family members or others affected by the goal)
R -- reasonable (reach high but don't set a goal that you can't achieve)
T -- timed (set a date to achieve your goal or steps to your goal)
The calculators at the Plan Well, Retire Well website may help you set your SMART financial goals.
And, let me know -- does a stick or a carrot help you achieve your financial goals? Click on my name below to send me a note.