Investing Essentials to Last You a Lifetime
Aug 15th 2012 12:07PM
Updated Aug 15th 2012 12:08PM
The best time to start saving for retirement is as soon as possible. So if you've secured your emergency savings account, thumbed through your employer's benefits package, and know you're interested in stocks, where do you go from there?
Good news: People are saving more
According to the Bureau of Economic Analysis, the personal savings rate -- how much we save as a percentage of our disposable income -- was 4.4% in June 2012, compared with negative 1% in 2006. Individuals are saving more, but the secret lies in what you do with the money. Some savings strategies are smarter than others.
That's great and all, but where do I start?
Start by contributing to your 401(k) to the point where you fully take advantage of any match offered by your employer. Many employers grant a match up to a certain percent of your salary. So in a 3% match situation, when you contribute any amount up to 3% of your salary, your employer matches this dollar-for-dollar. Check out what a difference ratcheting up your contribution just a percentage point or two can make over the long haul.
1% Contribution and 1% Match
2% Contribution and 2% Match
3% Contribution and 3% Match
|Total Out-of-Pocket Contribution From Employee Over 40 Years||$16,000||$32,000||$48,000|
|Value at Retirement (65 years old)||$234,297||$468,559||$702,856|
Source: American Funds Tax-Deferred Investment Calculator. Assumes a $40,000 annual salary with no raises, tax-deferred contributions beginning at age 25, and an 8% investment rate of return.
If you do nothing else to save for retirement, do this. Don't leave free money on the table.
Strongly consider a Roth IRA for your extra cash. Like a 401(k), a Roth IRA is a retirement account in which you can own investments like mutual funds and stocks. Although you don't get the same immediate tax break with a Roth that you do with a 401(k), the Roth lets you withdraw money down the road without paying a cent in income taxes as long as you meet requirements for tax-free withdrawals. Contributing to a Roth IRA now sets you up for tax diversification for your retirement income streams.
Start with what you know
A good place to start investing in your Roth is to consider what you know. While familiarity with a company alone doesn't make it a good investment, it provides a starting point. Evaluate whether the company is a great business with solid growth prospects, and whether it trades at a good value.
Walk down any city street and take note of the people proudly toting Coach (NYS: COH) bags pecking away on their Apple (NAS: AAPL) iDevices while sipping a Frappuccino at Starbucks (NYS: SBUX) . These companies' products are stylish, trendy, and tasty -- not to mention pricey. But instead of forking over your paycheck on their products, consider buying pieces of the entire companies. All three boast solid businesses and have the numbers to back them up.
When researching companies, a good place to start is the SEC's EDGAR system database. There you can find company filings that contain information to help you evaluate a company. Yahoo! Finance is another great resource. Here's what I found.
Last quarter, Coach sales in China grew spectacularly as the company took advantage of the exploding luxury goods market in Asia, while North American same-store sales grew 6.7%. Gross margins for the company expanded to 73%. Coach's PEG ratio of 1, compared to 2.69 for the industry, signals the stock appears very attractively valued now.
Net sales per square foot in Apple retail stores grew nearly 20% in 2011. Even with Apple trading close to its 52-week high and the Dow in 13,000-plus territory, the stock still appears undervalued with a PEG of 0.64 compared to 0.93 for the tech sector. Apple has a ton of cash on the balance sheet and now rewards shareholders with a 1.7% dividend.
Expect future sales growth for Starbucks as a result of its recent acquisition of bakery retailer La Boulange, a deal with Coinstar to set up coffee kiosks across the country, and explosive growth slated for Asia. Starbucks recently announced a deal with mobile payments player Square that will allow the behemoth brewer to embed technology into its stores.
Don't fall into this trap
While it might be tempting to invest in what's familiar, don't blindly let your approval of a company's products drive investing decisions. While you may love your Keurig coffee brewer and think Skin So Soft lotion is the best thing since sliced bread, Green Mountain Coffee Roasters (NAS: GMCR) and Avon (NYS: AVP) are two companies right now that exemplify this deceptive attractiveness.
Green Mountain is facing patent expirations, and doubts are surfacing about its sales channel. Its increasing opacity in financial reporting and negative free cash flow demonstrate major red flags. At first glance the company appears undervalued, but a bevy of problems are brewing. Avon is losing sales representatives in nearly every market and experiencing shrinking margins. It has tons of debt on the balance sheet and pays an unsustainable dividend.
Foolish bottom line
Of these stocks, I think Apple appears most enticing. It exemplifies a well-run business with amazing growth prospects and an innovative culture that's bar none. But don't take my word for it -- do some research of your own.
If you're feeling a bit overwhelmed at the prospect of digging through company SEC filings, don't fret. We've combed through research and made it easy for you with a brand-new premium research report. In the report, you'll find everything you need to know about Apple, including key opportunities and risks facing the company. You'll even score a year's worth of analyst updates. Check out the details here. You can also find a similar report on Green Mountain here.
The article Investing Essentials to Last You a Lifetime originally appeared on Fool.com.Fool contributor Nicole Seghetti owns shares of Apple. You can follow her on Twitter @NicoleSeghetti. The Motley Fool owns shares of Apple, Starbucks, Coach, and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended buying shares of Apple, Green Mountain Coffee Roasters, Coach, and Starbucks; creating a lurking gator position in Green Mountain Coffee Roasters; creating a bull call spread position in Apple; and writing covered calls on Starbucks. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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