Money Hacks

There are a couple solid approaches to rational stock-market investing. The easiest, of course, is to stick your money into mutual funds. Another approach, however, is to pursue value investing, a method practiced by big names like Benjamin Graham and Warren Buffet.

Value investing is the technique advocated by Phil Town in his recent book Rule #1 (my review at GRS). In plain English, value investing involves buying good companies at a discount price. Obviously there’s a lot of meaning in that one sentence — what’s a “good company”? what’s a “discount price”? — but this isn’t the place to explain the concept fully.

This is the place to share a fine source for beginning your quest for undervalued stocks. Every month in Money magazine, Michael Sivy shares his list of “blue-chip growth stocks for the long run”. This list is also available online. Sivy writes:

If there is any way to beat the market over the long run, it consists of following the strongest, most secure stocks and trying to scoop them up when they are measurably undervalued. There are surprisingly few such stocks that you need to follow on an on-going basis — we’ve come up with 70, which you can track in the table below.

What are the defining characteristics of these great growth stocks? Size is certainly part of it, and almost all of the stocks on the core list have market capitalizations and total revenues that top $5 billion a year. We also looked for companies with diverse product lines and dominant positions in their industries. As for growth, we sought companies that are capable of returning a steady 11 percent to 12 percent a year through a combination of earnings gains and yield.

I’m a big fan of index funds. But I also allocate a little money with which to invest in individual stocks. When I’m looking to find a new one, I start with the Sivy 70.

How much should you have invested in the stock market? According to Money magazine, the rule-of-thumb has changed.

One hundred minus your age used to be the rule, and in fact the basic concept still makes sense: As you get closer to retirement (and go beyond it), you want to increase the percentage of stable fixed-income investments in your portfolio and cut back on higher-returning yet riskier stocks. But the old formula now appears to be overly conservative.

Today’s longer life spans mean you have to keep your money growing to last through a far longer retirement than previous generations enjoyed. Plus, it’s less likely than it would have been in the past that you will have a pension making a big contribution to your retirement income. What would be a better guide? Subtract your age from 120. That more aggressive formula should help you maintain your living standard through your retirement years.

I am nearly 38 years old. According to this formula, I should be 82% invested in stocks. (According to the old formula, I should be 62% invested in stocks. I agree — that seems conservative.) My concern is that while this formula seems to work fine for younger people, it’s rather aggressive for people in retirement. Even a person at age 70 would have 50% of her portfolio in stocks using the new rule-of-thumb. I think 30% seems much more reasonable.

[Money: Five rules of thumb]

The best-known money hack of all time is simply to pay yourself first. Every time you receive money, set aside a portion (many people set aside 10%) for personal investment. Put this money into a savings account, a certificate of deposit, or some other form of investment. Never touch it. Do this on a regular basis and you will accumulate wealth.

The key to this hack is to actually set the money aside before you can spend it. In order for this to work, you must make it a priority to literally pay yourself first.

In The Automatic Millionaire, David Bach details how to remove all temptation by making this saving forced. Chapter three is entitled “Learn to Pay Yourself First”. Chapter four is “Now Make It Automatic”. The entire book offers advice to make this happen.

One of the easiest ways to begin to pay yourself first is to take advantage of a salary increase. The next time you get a raise, don’t give in to lifestyle inflation. Instead, take that pay increase and sock all of it into savings. Think of this as a gift, a free chance to implement this money hack.

Many of us know this hack. Many of us preach it. But how many actually put it into practice?

[Read more at Get Rich Slowly — Pep talk: Pay yourself first]

One of the trickier parts of investing is keeping track of all the stocks that interest you. When I was young, my friends did this with pen and paper. (Not that they actually invested, mind you, but they followed the market.) Then they graduated to spreadsheets. Now there are all sorts of applications that let you watch stocks on your computer. Stocktickr is a web-based stock-tracking tool.

StockTickr is a free portfolio tracker with an important twist: all watchlists are shared among all users! There are hundreds of users sharing their watchlists right now via StockTickr. StockTickr is a great way to generate trading ideas by browsing the stocks on the site. Because all watchlists are shared, you can view reports on the most popular stocks added recently or see which stocks have been the most profitable for StockTickr users.

The site lists the following features:

• Categorize your watchlist using tags (kind of like categories)
• Track picks from other users that trade like you do
• See how the stocks in your watchlist have performed since you added them
• Set up email alerts for stocks in your watchlist
• View the alerts in other users’ watchlists
• Identify trends by viewing your performance by tag
• View aggregate reports generated from all stocktickr users
• Add other users to your friends list and track trades from all your friends
• Subscribe to RSS feeds of most any view in stocktickr - there are feeds for each user, each tag, and more!
• Coming Soon! For a small monthly fee, you’ll have access to lots of tools that will help you become a better trader!

I’m satisfied with the OS X stock-tracking widget. But stocktickr tempts me.