By Walter Updegrave, Money Magazine senior editor
Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).
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NEW YORK (Money) -- Question: I'm planning to invest some money in the stock market, but I'm wondering whether I should buy mutual funds or individual stocks. Which do you think is better? And in the event I decide to go with stocks, which ones to you think are really good buys now? --Monique Thompson
Answer: The stocks vs. funds issue has always been a biggie for individual investors. But the question of whether you should go it alone or turn over your money to a mutual fund manager who'll invest it for you is even more critical today, if only because this uncertain economy and volatile market make the rewards for success and the cost of failure that much higher.
Clearly, the answer will vary from person to person, depending on such factors as how much money you have to invest, how well versed you are in the ways of the financial markets and how much time and effort you want to put into your finances.
It's also clear that each approach has advantages and drawbacks. With mutual funds, you get convenience, a diversified portfolio and the security of knowing that you have an experienced stock picker working full time on your behalf.
On the other hand, you have less control over your investments - not just which ones you choose, but when you recognize gains. That can be an issue when it comes to taxes. If the fund manager sells enough shares at a profit so that the fund has realized capital gains in a given year, you'll have to pay tax on a share of those gains even if you haven't sold shares of the fund (assuming you hold the fund in a taxable account).
If you decide to buy stocks on your own, you definitely have more control over what you own and when you sell. But you've also got to be willing to devote more time and attention to your investments.
So as I see it, the decision to go with stocks or funds comes down to a realistic assessment of how much you want to make your own investing decisions and your ability to handle that responsibility. Here are three questions you might ask yourself to help you with that assessment.
Am I willing (and able) to analyze companies' prospects? You don't have to be a rocket scientist to identify promising stocks. But you should be able to evaluate a company's finances. What sort of earnings growth is it likely to achieve? What's the value of its assets? Is it vulnerable because of a heavy debt load or a weakness in its product lineup?
But even that's not enough. You've also got to be able to assess whether it's selling at an attractive price. If a company has solid earnings and an impeccable balance sheet but is so popular that it's trading at a bloated share price, buying it may be an invitation to subpar returns.
There are many ways you can develop stock-picking skills. CNNMoney's Money 101section has easy-to-read lessons on everything from assessing stocks to putting together a portfolio. The American Association of Individual Investors also offers lots of information about stock investing [www.aaii.com/basics/] that's geared toward beginners, as does the Learn [www.weseed.com/learn/learn.html] section of relatively new site called WeSeed.
But until you at least familiarize yourself with the basics of stock investing, stick with funds (or at least keep all but a tiny portion of your money in funds).
Am I ready to devote the time and effort to monitor my holdings? As we know from recent experience, the investing world can change dramatically. I certainly don't want to suggest you need to be buying or selling stocks every time the market or the economy reverses course or the fortunes change for a company whose stock you own. But there may be times when you should react.
If a company's potential has dimmed, you may want to sell some or all of your shares and plow the proceeds into a firm that has a rosier future. Conversely, if one of your stocks has racked up such huge gains that it now represents an outsize percentage of your portfolio, you may consider selling some shares to avoid having too much riding on one stock.
There may also be times when you can turn the tax system to your advantage, say, by selling shares that are trading for less than you paid for them and then using the loss to trim your tax bill.
Keeping an eye on your portfolio and making occasional adjustments isn't a 24/7 job. But you should be prepared to spend at least a few hours a week tending to your holdings. If you're not disposed to put in that amount of time - and possibly more during periods of upheaval - then you're better off in funds, which generally require less attention.
Do I have enough money to make it worthwhile to choose stocks on my own? Here, mutual funds offer a clear advantage for most investors. By using a tool such as Morningstar's Fund Screener, you can easily find funds that allow you in for a minimum initial investment of as little as $500, even less in some cases. Many of the funds on our Money 70 list of recommended funds also require a minimum of $1,000 or less. And once you're in, you can typically add to your account in increments of $50 to $250.
If you want a reasonably diversified portfolio of stocks, on the other hand, you're talking about a much larger investment. You don't have to buy in round lots of 100 shares as was the case back in the day. But at the same tie you don't want brokerage commissions to eat up your returns. So even if you figure on paying a modest $10-per-transaction brokerage fee, you'd probably want to invest a minimum of $1,000 per stock in order to prevent your costs from exceeding 1% of the amount you invest. (Remember, you'll also have to pay a fee when you sell.) Assuming you'll need at least 20 stocks to create a balanced portfolio, you're talking about investing in the neighborhood of $20,000 to $25,000, if not more.
You can always invest smaller amounts, either initially or when adding shares. But the less you invest, the higher the percentage of your return that gets eaten up by brokerage fees.
One final tip: If you're relying on personal finance columnists or cable TV pundits for stock picks, then my feeling is that you probably shouldn't be in stocks at all.
The point to buying individual shares is that you think you bring something to the table that adds value and can boost your return - in-depth research, expertise at valuing securities, a sense of discipline that prevents you from buying or selling on emotion.
But if all you're going to do is buy on someone else's say so - in other words, substitute their judgment for yours - you'll save yourself a lot of time, energy and money by acknowledging that upfront and sticking to funds.
Thursday, May 28, 2009
Major GM bondholders OK revised deal
By Chris Isidore, CNNMoney.com senior writer
Detroit Three's survival report card
GM, Ford, and Chrysler, the former Big 3 now dwindled to the Detroit 3, have gone in such different directions they don't seem to be on the same planet - let alone the same city. Will they make it? Fortune grades each on its performance and prospects.
View photos
Quick Vote
Do you think the changes being made at Chrysler and General Motors will save the companies?
Yes, both of themOnly GMOnly ChryslerNeither or View resultsDETROIT'S DOWNFALL
Chrysler fate in judge's hands
Major GM bondholders OK revised deal
Visteon files for Chapter 11
Fiat was Chrysler's only option
Germany to shield Opel from GM bankruptcy
NEW YORK (CNNMoney.com) -- The Treasury Department and a committee of major bondholders at General Motors have reached a deal that could give creditors a larger stake in GM than previously offered as long as they agree not to fight the government's plans for a quick bankruptcy at GM.
The agreement, revealed in a Securities and Exchange Commission filing by GM (GM, Fortune 500) early Thursday, would essentially give the bondholders 10% of the company but also give them the rights to buy an additional 15% of the company's stock at a low price.
The deal is unlikely to allow GM to avoid bankruptcy, however. If anything, it might clear away potential obstacles to the government's plans to use bankruptcy as a way to turn around the nation's largest automaker.
As part of such a filing, GM would emerge with only its more profitable plants, brands, dealerships and contracts. GM's unprofitable plants, contracts and other liabilities that the company can no longer afford would be left behind in bankruptcy court.
According to Thursday's filing, the new offer is structured so that the assets of GM that would remain in bankruptcy would receive a 10% stake in a "new GM" that would be used to pay bondholders. The old GM would also technically receive the right to buy the 15% stake in the new company that emerges from bankruptcy.
In the original offer to bondholders, which was soundly rejected earlier this week, creditors would only receive a 10% stake in a new GM.
The filing also disclosed that GM will not repay the loans it has already received from the government or much of the additional federal aid it will get as part of the bankruptcy.
The government has already given GM $19.4 billion to fund operations and cover losses this year, and total help is expected to exceed $50 billion.
GM will pay back $8 billion of that sum. The government will also receive $2.5 billion in preferred shares of GM that pay a dividend and are more similar to a loan than stock.
But more than $40 billion of federal help to GM will be converted into a 72.5% stake in the new company. This means that for taxpayers to make back any of the money loaned to GM, it will have to be because shares of the new GM increase dramatically in value following an exit from bankruptcy.
A trust fund run by the United Auto Workers union would also have a 17.5% stake in the new GM, as well as the right to buy an additional 2.5% stake.
Detroit Three's survival report card
GM, Ford, and Chrysler, the former Big 3 now dwindled to the Detroit 3, have gone in such different directions they don't seem to be on the same planet - let alone the same city. Will they make it? Fortune grades each on its performance and prospects.
View photos
Quick Vote
Do you think the changes being made at Chrysler and General Motors will save the companies?
Yes, both of themOnly GMOnly ChryslerNeither or View resultsDETROIT'S DOWNFALL
Chrysler fate in judge's hands
Major GM bondholders OK revised deal
Visteon files for Chapter 11
Fiat was Chrysler's only option
Germany to shield Opel from GM bankruptcy
NEW YORK (CNNMoney.com) -- The Treasury Department and a committee of major bondholders at General Motors have reached a deal that could give creditors a larger stake in GM than previously offered as long as they agree not to fight the government's plans for a quick bankruptcy at GM.
The agreement, revealed in a Securities and Exchange Commission filing by GM (GM, Fortune 500) early Thursday, would essentially give the bondholders 10% of the company but also give them the rights to buy an additional 15% of the company's stock at a low price.
The deal is unlikely to allow GM to avoid bankruptcy, however. If anything, it might clear away potential obstacles to the government's plans to use bankruptcy as a way to turn around the nation's largest automaker.
As part of such a filing, GM would emerge with only its more profitable plants, brands, dealerships and contracts. GM's unprofitable plants, contracts and other liabilities that the company can no longer afford would be left behind in bankruptcy court.
According to Thursday's filing, the new offer is structured so that the assets of GM that would remain in bankruptcy would receive a 10% stake in a "new GM" that would be used to pay bondholders. The old GM would also technically receive the right to buy the 15% stake in the new company that emerges from bankruptcy.
In the original offer to bondholders, which was soundly rejected earlier this week, creditors would only receive a 10% stake in a new GM.
The filing also disclosed that GM will not repay the loans it has already received from the government or much of the additional federal aid it will get as part of the bankruptcy.
The government has already given GM $19.4 billion to fund operations and cover losses this year, and total help is expected to exceed $50 billion.
GM will pay back $8 billion of that sum. The government will also receive $2.5 billion in preferred shares of GM that pay a dividend and are more similar to a loan than stock.
But more than $40 billion of federal help to GM will be converted into a 72.5% stake in the new company. This means that for taxpayers to make back any of the money loaned to GM, it will have to be because shares of the new GM increase dramatically in value following an exit from bankruptcy.
A trust fund run by the United Auto Workers union would also have a 17.5% stake in the new GM, as well as the right to buy an additional 2.5% stake.
Sunday, May 24, 2009
So far, investors aren't fighting back to change CEO pay levels
By Rachel Beck, Associated Press
NEW YORK — This was the year corporate governance experts predicted that investors, stung by plunging stock prices as the recession intensified, would finally demand big changes in CEO pay levels and ineffective boards.
But so far during this spring's annual meeting season, there have been few examples of investors fighting back. Shareholders have yet to vote down a single executive pay plan at U.S. companies and only a handful of corporate directors have lost investor backing. Support for corporate management is still the status quo.
"It turns out (U.S.) shareholders may be more accepting of how things work than the perception really is," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
In contrast, five companies in England already have lost shareholder votes on executive pay this year. The latest came Tuesday when oil company Royal Dutch Shell Group's pay plan was rejected. There was also significant dissent, though not by a majority, at three other British companies, according to RiskMetrics, a financial risk management company.
That kind of activism comes six years after what is known as "say on pay" was first used by British shareholders. While those votes don't require boards to take any action, they still allow investors to make themselves heard.
NEW YORK — This was the year corporate governance experts predicted that investors, stung by plunging stock prices as the recession intensified, would finally demand big changes in CEO pay levels and ineffective boards.
But so far during this spring's annual meeting season, there have been few examples of investors fighting back. Shareholders have yet to vote down a single executive pay plan at U.S. companies and only a handful of corporate directors have lost investor backing. Support for corporate management is still the status quo.
"It turns out (U.S.) shareholders may be more accepting of how things work than the perception really is," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware.
In contrast, five companies in England already have lost shareholder votes on executive pay this year. The latest came Tuesday when oil company Royal Dutch Shell Group's pay plan was rejected. There was also significant dissent, though not by a majority, at three other British companies, according to RiskMetrics, a financial risk management company.
That kind of activism comes six years after what is known as "say on pay" was first used by British shareholders. While those votes don't require boards to take any action, they still allow investors to make themselves heard.
Friday, May 22, 2009
Largest bank failure of '09: Equity firms get BankUnited
WASHINGTON) (Reuters) — U.S. bank regulators Thursday closed troubled lender BankUnited Financial, Florida's largest bank, and sold its banking operations to a private equity consortium that includes WL Ross & Co.
BankUnited, which had $12.8 billion in assets and $8.6 billion in retail deposits, is the biggest of 34 U.S. banks to fail so far this year.
The Federal Deposit Insurance Corp. said it estimates BankUnited's failure will cost its insurance fund $4.9 billion.
The private equity group buying BankUnited is headed by John Kanas, a veteran of the banking industry and former head of North Fork Bank. Other members of the group, besides WL Ross & Co, include Carlyle Investment Management, Blackstone Capital Partners, and Centerbridge Capital Partners.
BankUnited's 86 offices will open on Friday during normal business hours, the FDIC said.
BankUnited is the largest failure since California-based Downey Savings & Loan was closed in November with $12.8 billion in assets.
The private equity group will recapitalize BankUnited with $900 million in new capital, the FDIC said.
The FDIC said selling the bank to the consortium was the least costly option and noted that "in the near future" it will provide general guidelines for how private equity investors can make investments in banks.
"Due to the interest of private equity firms in the purchase of depository institutions in receivership, the FDIC has been evaluating the appropriate terms for such investments," the FDIC said in a statement.
Copyright 2009 Reuters Limited.
BankUnited, which had $12.8 billion in assets and $8.6 billion in retail deposits, is the biggest of 34 U.S. banks to fail so far this year.
The Federal Deposit Insurance Corp. said it estimates BankUnited's failure will cost its insurance fund $4.9 billion.
The private equity group buying BankUnited is headed by John Kanas, a veteran of the banking industry and former head of North Fork Bank. Other members of the group, besides WL Ross & Co, include Carlyle Investment Management, Blackstone Capital Partners, and Centerbridge Capital Partners.
BankUnited's 86 offices will open on Friday during normal business hours, the FDIC said.
BankUnited is the largest failure since California-based Downey Savings & Loan was closed in November with $12.8 billion in assets.
The private equity group will recapitalize BankUnited with $900 million in new capital, the FDIC said.
The FDIC said selling the bank to the consortium was the least costly option and noted that "in the near future" it will provide general guidelines for how private equity investors can make investments in banks.
"Due to the interest of private equity firms in the purchase of depository institutions in receivership, the FDIC has been evaluating the appropriate terms for such investments," the FDIC said in a statement.
Copyright 2009 Reuters Limited.
Wednesday, May 20, 2009
Bank of America raises $13.5 billion selling stock
CHARLOTTE (AP) — Bank of America (BAC) said Tuesday that in less than two weeks it has raised $13.47 billion through the sale of 1.25 billion shares at an average price of $10.77 each.
"We're pleased to have this portion of our capital plan completed," said Chief Financial Officer Joe Price, in a statement Tuesday. "This strengthens and diversifies our capital structure."
The government recently released the results of "stress tests" it ran on the nation's 19 largest banks to determine if they would need additional capital to protect against losses should the economy worsen. It found that Bank of America would need an additional $33.9 billion, more than any other bank reviewed.
Bank of America launched a plan to raise the capital through asset sales and stock offers. It recently sold part of its stake in China Construction Bank to Asian investors for about $7.3 billion, which together with the stock sales, put the bank well past the halfway mark in its capital raising goals.
BofA executives have said they are mulling sales of the bank's Columbia asset management unit, as well as several other businesses. The bank previously said it planned to sell its First Republic Bank unit, which it inherited when it bought Merrill Lynch & Co. in January. Those sales could help raise $10 billion.
"We're pleased to have this portion of our capital plan completed," said Chief Financial Officer Joe Price, in a statement Tuesday. "This strengthens and diversifies our capital structure."
The government recently released the results of "stress tests" it ran on the nation's 19 largest banks to determine if they would need additional capital to protect against losses should the economy worsen. It found that Bank of America would need an additional $33.9 billion, more than any other bank reviewed.
Bank of America launched a plan to raise the capital through asset sales and stock offers. It recently sold part of its stake in China Construction Bank to Asian investors for about $7.3 billion, which together with the stock sales, put the bank well past the halfway mark in its capital raising goals.
BofA executives have said they are mulling sales of the bank's Columbia asset management unit, as well as several other businesses. The bank previously said it planned to sell its First Republic Bank unit, which it inherited when it bought Merrill Lynch & Co. in January. Those sales could help raise $10 billion.
Geithner expects banks to pay back $25 billion
By Jim Kuhnhenn, Associated Press Writer
WASHINGTON — Treasury SecretaryTimothy Geithner expects financial institutions to repay $25 billion of their government rescue loans in the coming year.
He also told the Senate Banking Committee Wednesday that a public-private partnership to help banks shed their bad assets will begin operating in the next six weeks.
The program would combine up to $100 billion in government money with private investments in hopes of building a purchasing pool of up to $1 trillion.
Bank lending has in part been hindered by the amount of real estate-related loans and securities on banks' balance sheets. Treasury has received applications from more than 100 potential fund managers to help run the program. Geithner says Treasury will inform applicants of their preliminary approval in the "next several weeks."
The program was announced March 23 and some lawmakers have questioned why the program is not yet up and running.
WASHINGTON — Treasury SecretaryTimothy Geithner expects financial institutions to repay $25 billion of their government rescue loans in the coming year.
He also told the Senate Banking Committee Wednesday that a public-private partnership to help banks shed their bad assets will begin operating in the next six weeks.
The program would combine up to $100 billion in government money with private investments in hopes of building a purchasing pool of up to $1 trillion.
Bank lending has in part been hindered by the amount of real estate-related loans and securities on banks' balance sheets. Treasury has received applications from more than 100 potential fund managers to help run the program. Geithner says Treasury will inform applicants of their preliminary approval in the "next several weeks."
The program was announced March 23 and some lawmakers have questioned why the program is not yet up and running.
Stocks inch higher as oil jumps
By Tim Paradis, AP Business Writer
NEW YORK — Investors' optimism about the nation's banks wavered Wednesday, erasing most of a big early advance, but energy stocks showed some of the biggest gains after oil topped $62 a barrel for the first time since November.
Financials turned mixed after enthusiasm about Bank of America's ability to raise billions of dollars by selling stock couldn't erase fears that banks are still a long way from scrubbing all the stains off their balance sheets.
Bank of America's stock sale puts it more than halfway toward raising the $33.9 billion in capital the government is requiring as a result of its stress test of 19 big banks. The company already raised $7.3 billion from the sale of a business in Asia since the government issued its report cards for banks on May 7.
NEW YORK — Investors' optimism about the nation's banks wavered Wednesday, erasing most of a big early advance, but energy stocks showed some of the biggest gains after oil topped $62 a barrel for the first time since November.
Financials turned mixed after enthusiasm about Bank of America's ability to raise billions of dollars by selling stock couldn't erase fears that banks are still a long way from scrubbing all the stains off their balance sheets.
Bank of America's stock sale puts it more than halfway toward raising the $33.9 billion in capital the government is requiring as a result of its stress test of 19 big banks. The company already raised $7.3 billion from the sale of a business in Asia since the government issued its report cards for banks on May 7.
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