Your million-dollar portfolio: Why Now Is Not the Time to Sell

Why Now Is Not the Time to Sell
By Tom Gardner December 30, 2008 Comments (40)

Two weeks ago, Vanguard founder Jack Bogle -- who Fortune magazine named one of the four investing giants of the 20th century -- visited Fool Global Headquarters to talk about the collapse of the stock market.
Bear markets, he believes, separate the speculators from the true investors. Your average speculator is three times more interested in the price of a stock than the merits of underlying businesses -- and bear markets can shake these speculators out of stocks, sometimes forever.
The real investor, by contrast, obsesses over the long-term potential of a business and tries to create true wealth over rolling 10-year periods.

Are you an investor, or are you a speculator?

According to Mr. Bogle, that single distinction makes all the difference in investment returns over a lifetime. True investors -- those who do not try to time the market -- take home most of the rewards of the market.
That's tough to accept after the second-worst year for stocks in the last century -- because we're all hurting, speculators and investors alike. But Bogle's right. When you factor in frictional costs and short-term tax rates, it's extremely difficult for speculators to make long-term money by trying to time their way into and out of bull and bear markets.
Just look at the decline from annual highs of these five truly great American companies:

Berkshire Hathaway (NYSE: BRK-B), down 38%
IBM (NYSE: IBM), down 38%
FedEx (NYSE: FDX), down 38%
Disney (NYSE: DIS), down 37%
Microsoft (Nasdaq: MSFT), down 47%

These are companies with multidecade histories of success. They're five of the greatest businesses in American history. Yet in a matter of just months, their value has been nearly cut in half. And you don't have to dig to find greater calamities. Gannett (NYSE: GCI), the publisher of USA Today, is down 80% from its highs. Bank of America (NYSE: BAC) is down more than 70%.

The world's stock markets right now are a graveyard of broken dreams.

And yet, on average, had you attempted to sell these stocks near their highs, to pay the commission costs, to pay the tax penalties, and then to try to time your way back into them, you'd almost certainly have failed. Jack Bogle has proven this over his 60 years of investment scholarship and application.
Investors, on the other hand, suffer along with everyone else when the bear market hits, but let time and compounding work their magic. Just look back on history -- master investors like Charlie Munger and Shelby Davis suffered big losses during the 1973-74 bear market en route to growing portfolios valued in the millions (or, rather, the hundreds of millions).

Your million-dollar portfolio

We think you can do the same -- no matter how much you've lost. And we've returned to the world of publishing in the belief that now is not the time to sell your stocks. If anything, it's the time to scrabble together cash to buy more.

In our first book in more than five years, The Motley Fool Million Dollar Portfolio: How to Build and Grow a Panic-Proof Investment Portfolio, we present the investing playbook we believe will help you amass that million-dollar portfolio. The book (on sale today) presents the strategies -- value, growth, small, large, domestic, international -- we preach and practice every day here at The Motley Fool. But it goes one step further: It shows you how to put them all together.

Tom Gardner is co-founder and CEO of The Motley Fool. Tom owns shares of Microsoft, but no other companies mentioned in this article. Disney, FedEx, and Berkshire Hathaway are Motley Fool Stock Advisor recommendations. Disney, Berkshire, and Microsoft are Inside Value selections. Bank of America is an Income Investor recommendation. The Motley Fool owns shares of Berkshire Hathaway and is investors writing for investors.
Read/Post Comments (40)

http://www.fool.com/investing/general/2008/12/30/why-now-is-not-the-time-to-sell.aspx?source=iomsitcag0000001#125610

The Best Way to Prepare for the Coming Market

The Best Way to Prepare for the Coming Market
By Todd Wenning December 26, 2008 Comments (18)

http://www.fool.com/investing/general/2008/12/26/the-best-way-to-prepare-for-the-coming-market.aspx?source=iomsitcag0000001#125605

In fact, the very same thing happened in the 1920s.
The parallels are clearer and clearer.

... are doomed to repeat it?

When Noyes was writing, the full scope of the Great Depression was yet to befall the country -- but many of the elements in play then look very familiar: rising unemployment, a government struggling to respond, and a financial system in shambles.
He was encouraged, however, that Americans in 1930 had already begun to discard "completely the dangerous illusions of the past two years and making ready to meet and turn to the American community's advantage whatever realities may be ahead of us."

Something similar seems to be happening today.

In fact, in the three months ending in September, American household debt decreased for the first time in more than 50 years. That trend is likely to continue, regardless of the government's many efforts to pump more credit into the hands of consumers. While massive de-leveraging is bad for the economy in the near term, it's what we desperately need if we're to return to healthy economic growth over the long run.

Writing a different future

In the 10 years following Noyes' observations, the stock market remained a roller coaster and, despite some hopeful rallies, never even came close to the highs of October 1929. Indeed, the market's total return from 1931 to 1940 was essentially zero, despite the significant volatility it endured in the meantime.
While I'm not going to try to predict the near-term market, it would serve us well to consider the possibility that the market will provide lackluster returns in the coming years. That makes learning about all of the tools at our disposal -- tools that can help you generate more income, reduce your portfolio's volatility, and increase the benefits of diversification -- even more important.

3 Bubbles That Will Shape 2009

3 Bubbles That Will Shape 2009
By Morgan Housel December 16, 2008 Comments (25)

It’s as reliable as the sun rising in the east: Financial bubbles burst. All of them do. Always. Usually in grand fashion. Over the years, there have been dozens and dozens of them, and every single one has ended badly. Shall we reminisce? Here are a few big ones:
Tulip mania
The South Sea bubble
The railroad bubble
The Roaring '20s
The 1980s buyout bubble
The dot-com bubble
The housing bubble
The American Idol bubble (Fun fact: More people vote for American Idol than typically vote for the winning President)
There are probably more, but you get the idea: As long as there has been an economy, there have been bubbles.
So what bubbles might underline 2009? Here are three distinct ones I can think of.

Bubble No. 1: Treasuries

As I write this, a three-month Treasury bill yields 0.005%, a 10-year note will fetch you 2.5%, and a 30-year bond will score you a spectacular 3.007%. For comparison's sake, inflation has averaged 3.42% since 1913.
If the expectation is that every other asset class will be eroded by deflation, skimpy returns on government bonds might not be a bad idea. I bet most investors would have loved to achieve "only" a 0.005% return over the past year, compared to the destruction of nearly every other asset class.
Still, the stampede into Treasuries will eventually burst. It has to. One of two factors practically guarantees this:
Things will get better; investors will regain an appetite for risk, and move away from Treasuries.
Things will get worse, prompting more bailouts and more stimulus packages, eroding faith in the dollar.
Either way, the Treasury bubble won't be fun when it bursts. Having sent the government's borrowing costs higher, Uncle Sam might have a tough time funding its trillion-dollar endeavors, and this could leave companies like Citigroup (NYSE: C), General Motors (NYSE: GM) and Ford (NYSE: F) up in the air should they come back, hats in hand, asking for more ... which, come to think of it, probably isn't a bad thing.


Bubble No. 2: Fear

Have a look at these fear indicators:
In January of 2007, the spread between corporate junk bonds and U.S. Treasuries was just 2.65%. Yesterday, it was more than 20%.
Annaly Capital (NYSE: NLY) -- which invests solely in Fannie Mae and Freddie Mac securities -- saw the spread on its investments surge from 0.67% to more than 2% over the past year, even though those investments technically became less risky after the government nationalized and guaranteed Fred and Fan.
Credit default swaps on Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) surged to 440 basis points last month (higher than Citigroup's at the time), meaning some assumed a Berkshire bankruptcy was a very real possibility within the next five years.
What started years ago as a bubble of optimism has morphed into a bubble of fear today. Sure, reckless speculation needs to be purged out of the system, but an economy that's unwilling to take any risk is just as bad as one that's oblivious to it.
One worry is that even financially healthy consumers will become gripped by fear, slamming their wallets shut and exacerbating an already beleaguered economy. Another is that investors' hesitation to take any risk could stifle the venture capital investments that produce the Googles (Nasdaq: GOOG) of the world, hurting our chances of staying globally competitive when we need it the most.
Let's not forget that when Franklin D. Roosevelt warned, "The only thing we have to fear is fear itself," it was in the context of factors he thought could prolong the Great Depression. And he was right.


Bubble No. 3: Distrust

In just the past week, we've been blindsided by two (really, three) big stories that could lead to a bubble of distrust:
Illinois Governor Rod "do I hear $500,000" Blagojevich undermining the credibility of politicians.
Money manager Bernard Madoff, whose self-described Ponzi scheme may have blown through $50 billion.
The Securities and Exchange Commission being asleep at the wheel while Madoff committed perhaps the largest financial fraud in history.

All three are pretty appalling. What's scary is that the few bad apples who make all the headlines ruin it for the honest politicians (I'm sure they exist) and credible money managers that are vital to the economy. The old saying that "capitalism is based on trust" is getting tested, and that's a scary, scary proposition. If these shady headlines keep up at this pace, one fear is that we could become a culture that dismisses even sound financial advice and refuses to accept almost everything politicians do, which certainly isn't a recipe for anything economically healthy.
This could just be a partial list, of course. Any other potential bubbles you can think of? Feel free to share your thoughts in the comment section below.

http://www.fool.com/investing/general/2008/12/16/3-bubbles-that-will-shape-2009.aspx

Value? Growth? Both!

Value? Growth? Both!
By Julie Clarenbach January 2, 2009 Comments (0)
http://www.fool.com/investing/general/2009/01/02/value-growth-both.aspx?source=ihptclhpa0000001

The same company can be both a growth and a value stock. Value investing, after all, wants to buy companies selling at a discount to their intrinsic value. Growth investing wants to buy companies that will grow their bottom lines -- and presumably your investment -- many times over. But there's nothing excluding fast-growing stocks from being undervalued. That's why Warren Buffett himself said that "growth and value investing are joined at the hip."

Putting the puzzle together The other piece that gets lost in the "value vs. growth" debate is this: You shouldn't be buying only one stock anyway. You should be building a portfolio. And that portfolio should be -- say it with me now -- diversified.

One premise of diversification is that different kinds of stocks do better in different market environments. Putting together assets that don't move in the same direction at the same time will create the best chance for high returns with lower overall volatility. Notice how each of these different investment classes go into and out of fashion at different times:

Large Caps
Small Caps
International
REITs

So when you're picking stocks, make sure you choose from a variety of categories:

• Large-cap stocks, being more established, typically endure less volatility; small-cap stocks, on the other hand, are more risky but also have the potential to be more rewarding.
  
• Value stocks provide downside protection and a reasonable assumption of an upside, while growth stocks take advantage of room to double, triple, and quadruple in value.
  
• Domestic stocks take advantage of the unparalleled power of American industry -- but emerging economies, which don't always move in lockstep with developed economies, have room to grow much faster than ours.
  
• While they have may have a reputation for being slow growers, dividend payers have historically boosted performance for investors: From 1960 to 2005, about 80% of the market's returns came from reinvested dividends.
  
• Diversifying across industries ensures that your portfolio isn't wiped out from unforeseen economic, political, or natural disasters. While the credit crisis bankrupted numerous financials and pushed department store stocks down an average of 64% in 2008, discount stores, biotech, and waste management have held their own.

Your portfolio should have all of these: large caps and small, value stocks and growth, domestic stocks and international, as well as some dividend payers -- all from a variety of industries.

Whoa -- how many stocks are we talking here? It won't necessarily take dozens of stocks to diversify in all of these ways, because, as I mentioned earlier, the same stock can fit into multiple categories.

Take "technology, media, and financial services company" General Electric (NYSE: GE) as an example. Where would it fit on this list? It has a market cap of $170 billion, Morningstar considers it a value stock, it currently yields 7.9%, and while it's based in Connecticut, half of its revenue comes from outside the United States.
Or what about tiny China Fire & Security (Nasdaq: CFSG)? It's a $190 million growth company selling fire-protection products to Chinese corporations.
Every single stock you consider is going to fit many different categories, and thus will diversify your portfolio in multiple ways. The key is to fit your holdings together to achieve meaningful diversification, so that you can enjoy strong returns with minimal risk.

The Foolish bottom line

As important as diversification is, it's secondary to buying stocks worth holding for the long run.

But as you consider the world of stocks worth holding, you want to make sure you're blending them together for a portfolio that can earn you great returns while weathering all kinds of markets.

The Worst Is Yet to Come

The market has separated out those businesses that are undervalued and those businesses that are of concern going forward. The smart investor shall take this opportunity to seek out undervalued good quality companies in this severe bear market.

-----

The Worst Is Yet to Come
http://www.fool.com/investing/high-growth/2008/12/24/the-worst-is-yet-to-come.aspx
By John Rosevear December 24, 2008

Great rally we're having, isn't it? In the past month, the S&P 500 has risen from around 750 to right around 900 before falling back slightly. Right now, you've got a nice neat 15% gain. Think we're through the worst of it?
Think again.
My magic crystal ball doesn't work any better than anyone else's, but if I had to guess, I'd say we'll be back down near the lows before winter ends. Consider:

• Reality -- and more pessimism about the economy -- may set in after the Obama administration takes office and optimism gives way to the sober understanding that the new team's economic solutions will take time to work, and will be expensive.
  
• Along the same lines, the recession has hit Wall Street and the upper echelons of corporate America very hard, but the serious pain is just starting to filter down to Main Street. That process will intensify over the next few months.
  
• Past bear markets have been marked by sharp rallies off the lows -- followed by sharp declines right back down. The true end of a bear market is typically marked by a point of maximum fear. That's when it seems like everyone's throwing in the towel, and when there's little talk of bargain-hunting.
  

That last point is the one that's most convincing for me. Do you think we're at the point of maximum fear? If you've been investing for a while, root around in your memory and think back to late 2002.

What I want right now are the stocks that we'll be citing as examples during the next bear market, seven or 10 years down the road, the ones that will be 20-baggers or 40-baggers, the growth leaders of the coming decade.


Some comments:
On December 25, 2008, at 3:58 PM, dibble905 wrote:
If November 20 wasn't 'retesting the lows' set on October 27, in terms of the dow... I don't know what to tell you. The drop was quick and enormous, with that week in October registering the worst week by absolute and percentage terms in history.
We are now back to the early 2003 levels for the S&P and Dow, erasing pretty much all of the recovery and expansion that has occurred in the past 5 years. And worse yet, that places us back to 1998 before even the dot come bubble.
We are at the cheapest valuation in history in terms of companies with tangible, real assets (Dow & S&P). If this is not an opportunity, I don't know what to tell you. If there is more to fall, so be it. But it will be driven by emotions rather than logic.
All of this 'the worst has yet to come' is out there, everyone is reading about it, everyone knows about it. The collective expectations of the world are priced into these stock price right now, and unless something overly catastrophic beyond even the worst expectations become true, the markets will rebound in the next year. Fear is in these markets, fear will continue to be in these markets. It will limit upward movements, but I really cannot see large scale drops like we have seen in October/November without what I suggested above.
And to provide some support for my argument, hedge funds and mutual funds have enormous cash positions waiting on redemptions or to protect their positions. Either way, even if things do get worse, what's left to sell to drive markets down so much more? As well, when these large funds sell, someone's buying it -- who's buying these assets? It looks like the companies themselves are installing share buyback programs and insiders are actively purchasing. These may be a publicity stunt to stop the blood shed, but you know what, it'll probably work because it shows some confidence -- something that's been lacking lately. We also no longer see all stocks following the same broad market declines -- strong companies are rebounding 100-200% from their lows. The Dow and S&P aren't producing the same results, but that just separates the ones that were oversold and the ones that do have material concerns going forward.
Be diligent and prudent, and you'll live through this. But don't hold off on an investment because you 'fear' a bigger drop coming. Unless you have some basis surrounding that, it's all emotion -- and no one rewards you for emotions.

Report this Comment On December 25, 2008, at 6:43 PM, dgmennie wrote:
The latest stock market tumbles serve to underscore the fact that putting money into equities is essentially a GAMBLE (as opposed to an investment). How many blue-chip big-name companies and "sure things" of just 10-20 years ago still qualify as such today? Far too many have gone belly-up or merged themselves out of existence. Too often common stock owners are left holding worthless paper (hello ENRON). And this trend will continue, as the timeline for getting in and (more importantly) GETTING OUT becomes ever shorter and more unpredictable (DO YOU HAVE INSIDE INFORMATION?). Unless you are a very skilled and lucky stock trader who is emerged in the markets full-time, you will eventually LOOSE BIG. Depending on others to watch out for your best interests in this game is nonsense (I give you the 50-billion Ponzi scheme all over today's headlines).
Instead, look carefully at the bond market. Certain corporate issues may be acceptable. Many municipals offer reasonable returns backed by the fact that states and local governments cannot simply disappear someday, leaving their debts unpaid. Fortunately, the yuppie go-go crowd finds the plodding predicrtability of these investments a turn-off. All the more reason why those who value protection of principle over "the next big thing" should get on board. IMPORTANT: Own the bonds themselves, not a "bond fund" whose assets will be churned with the profits sucked off by incompetent and overpaid managers.

Times Money's top 10 investment gurus

October 29, 2008
Times Money's top 10 investment gurus

Genuine stock market experts are a rare breed, and their investment thinking is never more valuable than when the financial world is in turmoil, as it is today.
So here at Times Money we have come up with a list of our top ten stock market gurus of all time.
1. Benjamin Graham
He is generally regarded as one of the most influential thinkers on investment management. His book, the Intelligent Investor, is still selling more than 50 years after he wrote it.
Mr Graham’s basic idea was that you should be looking to buy companies worth ten dollars a share for five dollars a share. The way you determined which companies were selling at way below their book value was to make a detailed study of their balance sheets. He believed in cautious investment following thorough analysis and abhorred ill-informed speculation.
2. Warren Buffett.
The ‘sage of Omaha’ has put his investment skills to good use and is now the world’s richest man. In the process he has made millionaires out of many of the shareholders in Berkshire Hathaway, his main investment vehicle.
Mr Buffett’s basic idea is that there are a handful of truly outstanding businesses around - and a lot of mediocre ones. The investor’s skill comes in identifying the rare great businesses and then in waiting for the moment when a great business is selling at a really attractive price. He is down to earth - he won’t invest in a business he doesn’t understand - and very patient. He is prepared to wait a long time for the right sort of company to turn up. As he would put it, he is like a baseball player who is ready to stand at the plate for ball after ball until he finds one he can hit into the stands.
3. Philip Fisher
Mr Fisher, the father of Ken Fisher, was a renowned growth investor who was a passionate exemplar of the "buy and hold" approach.
His main idea was that the best way to invest is to buy a limited number of outstanding stocks and simply hold them for years and years. If you have chosen the right stocks in the first place - and that’s obviously a big if - then their real quality will shine through over the long term.He was very definitely not an in and out trader. As he put it: “If the job has been done correctly when a common stock is purchased, the time to sell it is - almost never.”
4. T Rowe Price
Mr Price shared the long-term perspective of investors such as Philip Fisher. He, too, believed in the virtues of "buy and hold" and practised them with a vengeance. In 1972, looking back at a portfolio he had started in the 1930s, he found that he had held a number of stocks, such as Merck, the pharmaceutical company, and Black & Decker, the household tool company, for more than 30 years. Over that time they had made him a lot of money.
5. John Templeton
Sir John, who died earlier this year, was a classic contrarian investor. He embodied the dictum : "Buy when others are frantically selling and sell when others are greedily buying". While others were looking for gems in a jewel shop, he would be looking for diamonds in a dustbin. He was quite happy to buy what others were throwing away and believed that the stocks offering the best value would be those that other investors had completely neglected.
His most celebrated coup came in 1939, just after war had broken out in Europe. He reasoned, correctly, that although the immediate outlook was bleak, the war would provide a massive boost to US industry. He instructed his broker to buy 100 dollars’ worth of every single Wall Street stock that was priced at a dollar or less. Within four years he had sold his unusual portfolio of stocks for four times its original value.
6. Mark Mobius
Dr Mobius is from the Templeton stable of investment managers and has become a specialist in emerging markets. He shares something of Mr Templeton’s contrarian style. As he puts it: “We seek out shares that other investors have rejected. We go where others fear to tread.”
But above all he is a value-based stockpicker. He focuses on putting together a portfolio of good quality stocks, irrespective of which country they are from. One of his great strengths is that he immerses himself in his subject, travelling tens of thousands of miles each year to visit companies and meet their managements. He says:, “At Templeton we like to get out from behind our desks. We are also active investors, ready to get alongside management and take a seat on the board.”
7. Anthony Bolton
Mr Bolton is perhaps the best known UK fund manager of recent years, though he has now stepped back from the hands on running of funds. Like Mark Mobius he is a contrarian investor, as he demonstrated recently by indicating that he was putting some of his own money into bank shares just when everyone else was seeking to make a rapid exit from the sector.
One of his great skills is correctly anticipating market trends. He foresaw the end of the most recent bull run some months before the market peaked in the summer of 2007 and had already battened down the hatches before the market storms set in.
8. Neil Woodford.
Mr Woodford has taken over Mr Bolton’s mantle of best known UK fund manager and one of his great skills is being able to achieve very good performance with enormous sums of money that would weigh down a lesser investor. His two principal funds contain more than £13 billion of investors’ money.
Mr Woodford, like Mr Bolton, is something of a contrarian investor, and he shows considerable skill in keeping ahead of the investment pack. He had been warning about the excessive levels of debt in the UK and US long before the credit crunch struck and had sold all his bank and property shares before those two sectors collapsed.
He takes a top-down view of the economy and is not afraid to make big sector bets. In the past few years he has invested heavily in tobacco and utilities at a time when they were distinctly unfashionable areas to put your money.
9. Nils Taube.
Mr Taube, who died earlier this year, was Britain’s longest-serving fund manager. Like John Templeton he was fond of buying stocks that had been overlooked by other investors. He made a name for himself by keeping a cool head during the stock market slump of 1973-74 and was investing when most other people had despaired of shares ever recovering.
He called the market right again in 1987, when he anticipated the October crash of that year and was selling stocks short in the months running up to the dramatic drop in share prices.
10. Robin Geffen.
Mr Geffen might be viewed as something of a "new boy" because his company, Neptune Investment Management, was launched only in 2002. But Mr Geffen has nearly 30 years of investment management experience under his belt and it is now showing in the outstanding performance of his Neptune stable of funds.
Mr Geffen takes a thematic approach to investment and, like Mr Woodford, is prepared to take big sector bets. He is not constrained by index weightings and will seek out value wherever he finds it. He is quite prepared to go against the trend where he thinks this makes sense. For example while energy companies make up 60 per cent of the Russian stock market Mr Geffen’s Russian fund has just 22 per cent of its portfolio in energy.

More from Money Central:
Ten people who predicted the financial meltdown
The 20 golden rules of investment
The 10 best stock market investments ever
The 10 shares that went from hero to zero
The world's 10 wealthiest politicians
The 10 biggest stock market crashes of all time
Ten ways to profit from gold
The 10 most decadent dictators
The 10 worst property investments ever
The 10 stupidest taxes ever
The six safest places for your savings
The 10 craziest parking tickets ever
The 10 most ridiculous fines of all time
50 tips to beat a recession
25 reasons to avoid the new iPhone

Posted by MAtherton on October 29, 2008 at 10:30 AM in Invest Permalink

How share ownership has gone out of fashion

From The Times
January 2, 2009
How share ownership has gone out of fashion
Patrick Hosking, Business and Finance Editor

For decades the proportion by value of shares directly owned by private individuals has been shrinking as they come to rely more on occupational pension schemes or pooled investment vehicles such as unit trusts.
Michael Kempe, operations director for Capita, said: “Never in modern times has share owning been less fashionable. The combination of falling share prices and the long-term trend by private investors to reduce their holdings has seen 2008 end with a whimper.”
He said that the booming residential property market had till recently diverted money that might otherwise have gone into the share market: “The lure of getting rich quick in the property market has mopped up a lot of money. Since 2000, at least £150 billion has been piled into the buy-to-let market alone.”
However, Mr Kempe predicted the trend could be reversed in 2009, citing evidence that small shareholders were starting to dip their toes into the stock market again in October and November after being net sellers for most of 2008. In the year just gone, they traded £7.2 billion in shares, compared with more than £14 billion in 2007.
“Normally private investors shun volatile markets and they have been sitting on the sidelines for much of the past year. But it seems the lows of October and November proved irresistible to many.” They bought a net £645 million of shares in those two months, he said.
Mr Kempe expects market conditions to improve in 2009. “But it seems too early to call a bottom just yet,” he said. “The recent upswings have all the characteristics of bear market rallies and have soon petered out.”

http://www.timesonline.co.uk/tol/money/investment/article5430122.ece

Teach Your Children the Value of Money

Teach Your Children the Value of Money

There are a number of ways you can teach your children to form healthy savings habits. This article offers some age-specific teaching tools.


Your Child Could Become a Millionaire

This chart shows the growth, compounded at 8% monthly, of an investment of $100 per month beginning at age 4 and ending at age 18, assuming that the investment remains untouched until age 62. This example is hypothetical and does not represent the performance of any actual investment.

Summary

• The benefits of teaching your children about money can be both short and long term. Let your children help you determine how to teach them. Use their questions to develop lessons.


• Explain to children that money is earned. Consider paying them for helping with certain chores.


• Use a piggy bank to help teach about savings and interest. Set a savings goal to encourage your children to save some of their allowance. Calculate how much is saved each month and chip in a certain percentage as interest.


• Take your children to the bank to open a savings account requiring a lower minimum deposit.


• If you extend credit, issue an IOU, set a repayment schedule, and charge interest.


• Review compounding, or the ability of interest to build upon itself.


• Once your children begin earning their own money through part-time jobs, introduce them to investments such as stocks and mutual funds.

Checklist

• If they're old enough, help your children set up a plan to save for their own goals (such as a new video game) and other accounts for family goals (such as paying for college).


• Agree on an amount of their savings that you'll "match."


• Schedule time to talk about how investing works and how it may enable people to reach their financial goals faster.


• Talk to your children about good shopping habits. Perhaps you can ask them to clip coupons and let them keep some of the savings.

Source: Teaching Your Children the Value of Money

Topics
Teach Your Children the Value of Money
Earlier Is Better
Where Does Money Come From?
Children and Allowances
Make Saving Interesting
Banking and Investing
Compounding
A Little Learning Can Pay Off

The Year 2008 of the Great Financial Meltdown

Small house versus big house strategy

Homes: Why Buying Bigger Is No Guarantee of a Rich Retirement
by Jonathan ClementsWednesday, December 20, 2006

This is one tab the house won't pick up. It's among today's most popular retirement-savings strategies: Buy the big house, hope the real-estate boom continues and then trade down at retirement, thus freeing up home equity that will pay for years of early-bird specials. Sound appealing? Trouble is, you will fork over a heap of dollars -- and you'll end up with a surprisingly small nest egg.

To understand why, imagine you are age 35, have a $400,000 home with a $300,000 mortgage and are looking to retire at age 65. What's the best way to build yourself a nest egg?

You might stick with your current home, pay down that mortgage over the next 30 years and stash your spare cash in stock and bond mutual funds. Call this the "small-house strategy" (though, in many parts of the country, a $400,000 home wouldn't be exactly small).

Alternatively, you could opt for the "big-house strategy" -- trading up to a $1 million home and aiming to pay down the resulting $900,000 mortgage between now and retirement. At age 65, you would then cash in a big chunk of your home equity by swapping back to the equivalent of a $400,000 home.

Which strategy would leave you richer?

Read here:

Forget the Mansion: Why Buying Bigger Doesn't Guarantee a Rich Retirement

Result:

The small-house strategy would give you not double the spending money, but triple.

"The killer is the expenses on the big house," Mr. Farrell says. "It's costing you a lot to carry this $1 million investment. That money is just going out the window, while the small-house guy is investing the money."

There is, however, an upside to buying the bigger home. For the next 30 years, you would live in a grander place. But that just highlights what this is all about. Buying a bigger house isn't an investment. Rather, it is a lifestyle choice -- and it comes with a brutally large price tag.

-----

MONEY PIT
Buying, selling and owning real estate isn't cheap.

• Baby-boomer homeowners spent an average of $2,200 on home improvements in 2003.
• On a $200,000 mortgage, closing costs will typically cost you around $3,000.
• In 2004, home sellers paid real-estate brokers an average of 5.1% in commissions.

Sources: Bankrate.com; Harvard's Joint Center for Housing Studies; REAL Trends

Buy Instead of Renting When You Have the Down Payment

Buy Instead of Renting When You Have the Down Payment
Friday, September 30, 2005

After looking at all the costs involved in buying house, you may have begun to have second thoughts: Perhaps, it is better to rent a home.
Real estate in most areas today is not a top investment compared with investment securities. "You're not going to get a 30 percent return on your house," said Steve O'Connor, senior director of residential finance at the Mortgage Bankers Association of America. In the past decade, people have been advised to think of a home "as shelter not investment" O'Connor said. "Wealth accumulation is secondary."
Still, as shelter, most experts say if you can afford the down payment, it makes sense to buy your home rather than rent it. That's because you can deduct mortgage interest on income tax and build equity in your property. This is especially true when mortgage interest rates are low. Mortgage interest rates are deductible up to a $100,000 annual limit.

Example
A homeowner has a gross annual income of $40,000. The monthly mortgage payment is $1,000 on a 30-year mortgage. In the first few years, 80 percent of that payment goes to interest and is therefore tax deductible. In the 15 percent tax bracket, the homeowner saved about $375 more in taxes with the home provision versus with only a standard deduction.

-----

Lease-Purchase Agreements

Some people take a middle road. They ease into homeownership by renting a house or condominium with an option to buy.

• Lease-purchase gives a buyer time to save for a down payment or to clean up a credit history.
• It can work in a buyer's favor in areas where real estate values are rising quickly at a rate of 10 percent a year. A buyer benefits from this appreciation because the purchase price of the home is locked in on the day the buyer signed the rent-to-own contract with the seller.
• In most agreements, the seller allows a portion of the rent to be applied towards the purchase price, which some lenders consider to be part of the down payment. The amount of rent credited could be 10 percent to 100 percent, based on your contract.
• Most rent-to-own options require some down payment to secure the agreement, which is not refundable in case the renter decides not to buy.

Homeowners who would agree to a lease-purchase option include people who have had property on the market longer than they wish or owners who had to move and want the house to be lived in. The owner benefits with rental income to help pay the carrying costs of the home, and the strong possibility of selling the house when the contract expires.

Copyrighted, Bankrate.com. All rights reserved.

http://finance.yahoo.com/real-estate/articleindex
http://finance.yahoo.com/real-estate/article/101345/Buy_Don't_Rent_When_You_Can_Afford_the_Down_Payment

Exit Strategies for Entrepreneurs

Summary

• The sale of a business is only one small transaction at the center of a larger plan often referred to as an exit strategy.
• The most successful exit strategies are those that give the business owners the greatest probability of comfort with the results as seen in their financial security, family dynamics and long-range goals.
• There are many options for structuring the sale of the business, and each had different implications for other elements of the broader strategy. Buy-sell agreements can help maintain continuity for remaining owners in a wide range of circumstances. Pure cash transactions typically yield the greatest immediate liquidity. Leveraged transactions may enable managers, partners or family to take over and maintain continuity for the business. ESOPs can provide tax benefits and empower employees.
• Trusts can be valuable tools for managing the income tax and estate planning implications of the wealth derived from a business sale.

Checklist

• Record all exit policies and sales agreements in writing.
• Hire an expert to identify the fair market value of your business before settling on a selling price.
• Work with a business broker who can help simplify the job of selling your business by screening potential buyers before referring qualified candidates to you for more information.
• Consider allowing employees to make the first offer to purchase your company.
• Draft confidentiality agreements to be signed by anyone who takes a close look at your company's operations and records.

Source: http://finance.yahoo.com/how-to-guide/career-work/12818

Topics
Exit Strategies for Entrepreneurs
Laying the Groundwork
Potential Deal Forms to Consider
Managing the Proceeds
Professional Guidance a Must

Small-Business Financing: Debt vs. Equity

Summary

• Since debt and equity are accounted for differently, each has a different impact on earnings, cash flow and taxes, and each also has a different effect on leverage, dilution and a host of other metrics.
  
• Debt can be a loan, line of credit, bond or even an IOU -- any promise to repay borrowed amounts over a certain time with a specified interest rate and other terms.
  
• When you finance with equity, you are giving up a portion of your ownership interest in -- and control of -- the company in exchange for cash.
  
• While equity financing can be used for many different purposes, it is usually used for long-term general funding and not tied to specific projects or time frames.
  
• The mix of debt and equity that best suits your company will depend on the type of business, its age, and a number of other factors.

DEBT-TO-CAPITAL RATIOS FOR SELECTED INDUSTRIES
Publishing 34%
Homebuilding 37%
Advertising & Marketing 37%
Lodging & Gaming 56%
General Retailing 24%
Supermarkets & Drugstores 33%
Commercial Transportation 18%
Packaged Foods 27%
Restaurants 23%
Health Care: Managed Care 20%
Movies & Home Entertainment 17%
(Source: Standard & Poor's.)

Source:
http://finance.yahoo.com/how-to-guide/career-work/12825
Topics
Small-Business Financing: Debt vs. Equity
Debt
Equity
Striking a Balance

Additional comments:

Yahoo! Finance User - Wednesday, May 28, 2008, 11:37AM ET Report Abuse
Overall: 4/5
Nice overall article. Loan terms depend on what is being pruchased. Real estate (10 to 20 yrs), equipment (3 to 7 yrs), inventory (2 to 3 yrs), etc. An SBA backed loan can help lengthen these terms which will help decrease monthly payments.

How-to Guides

How-to Guides
Most Popular
Mortgage Basics
Buying a New or Used Car
Get Out of Debt and Save
Make the Most of Your IRA
Home Refinancing Basics
Traditional vs. Roth 401(k)s
Retiring? Take Control of Your Assets
Shortcuts
Banking & Budgeting
Career & Work
College & Education
Family & Home
Insurance
Loans
Real Estate
Retirement
Taxes

Banking & Budgeting
Starting Out: Begin Funding for Your Financial Security
Why Avoid Bankruptcy?
Stop Singing Those Holiday Spending Blues
Yes, You CAN Get Out of Debt
Managing Debt and Credit
Put Savings (and Yourself) First With a Budget
How to Dig Yourself Out of Debt and Save at the Same Time
Career & Work
Managing Retirement Assets in the Event of a Layoff
An Introduction to Stock Options
Small Business Financing: Debt vs. Equity
Exit Strategies for Entrepreneurs
Changing Jobs? Don't Forget Your Retirement Savings
College & Education
Getting Your Children Involved in Saving for College
Using 529 Plans to Invest for College and Manage Wealth
Transferring Assets to a 529 Plan
Consider Prepaid Tuition Plans for College Savings
Series E and EE U.S. Savings Bonds
Federal and State College Financial Aid Programs
Section 529 Plans: Saving for College
Coverdell, Custodial, or 529: How to Choose
Planning for the Cost of Higher Education
Family & Home
Divorce and Your Finances
How to Finance Your Wedding
Vacation Value
Saving Strategies: Buying vs. Leasing a Car
Helping to Care for Aging Parents
Teaching Your Children the Value of Money
Buying a New or Used Car
Budgeting for Baby
Insurance
Health Care Options in Retirement
Why Disability Income Insurance?
Long-Term Care Insurance: Understand Your Options
The Role of Insurance in Your Financial Plan
Buying Life Insurance: What Kind and How Much
Loans
Financing a New Car
Retirement Plan Loans: Do They Make Sense for You?
Mortgage Basics: Financing the American Dream
Home Refinancing Basics
Real Estate
Your Home and Your Retirement
Remodeling Your Home
Buying Your First Home
Retirement
Use Annuities to Plan for Your Future
Frequently Asked Retirement Income Questions
Strategies for Building a Laddered Retirement Portfolio
Will Your Money Last? Risks to Retirement Income
The Phases of Retirement: Updating Your Finances for Your Changing Lifestyle
Frequently Asked Roth 401(k) Questions
Understanding 403(b) Plans
Financial Considerations for Americans Retiring Abroad
Your Retirement Checklist
Asset Allocation in the Golden Years
Your Social Security Statement Explained
Redefining Retirement in the 21st Century
Social Security and You: What Does the Future Hold?
The Roth Individual Retirement Account
Using a Rollover IRA to Consolidate Multiple Retirement Assets
Naming Beneficiaries of Insurance Policies and Retirement Plans
Retirement Account Distributions After Age 70 1/2
Choosing Your Annual Withdrawal Rate
Retirees and Financial Scams: How to Protect Yourself
Variable Annuities: Choices Abound for Today's Retiree
Choosing a Retirement Location
How Much Do You Need to Retire?
Bring Charitable Giving Into Your Estate Plan
Choosing Between Traditional and Roth 401(k)s
Retiring? Take Control of Your Assets
Maximizing Your Retirement Income
Making the Most of Your IRA
Taxes
Tax Strategies for Retirees
Withholding Income
2007 Tax Brackets
Who Must File a Return?
Itemizing Deductions
Standard Deductions
Personal Exemptions
Alternative Minimum Tax (AMT) - Part Two
Alternative Minimum Tax (AMT) - Part One
How to File an Extension
Common Tax Credits
Capital Gains
Audits and Penalties - Part Two
Tax Changes: What They Mean to You
The Alternative Minimum Tax -- Not Just for the Wealthy

Source: http://finance.yahoo.com/how-to-guide/index

Real Estate Education

Real Estate
Buy
A Home-Buying Primer
How to Find the Perfect Home
Buy, Don't Rent, When You Can Afford the Down Payment
Online Sleuthing Resources for Home Buyers
Web Can Help With Questions Your Realtor Can't Answer
Finding Your Ideal Neighborhood
Is a Bigger Lot Better When Buying a Home?
Five Ways to Beat Buyer's Remorse
A Web-Surfing Guide to Finding Discounts on Brand-New Homes
New Homes: Beware of Shoddy Construction
Forget the Mansion: Why Buying Bigger Doesn't Guarantee a Rich Retirement
Should You Buy That Home?
Seven Questions You Must Ask Before Buying a Condo
How to Avoid a Bad Co-op or Condo
The Lure of Living South of the Border
Recreational Land: Own Your Piece of Paradise
Can't Afford the Down Payment? Share the Wealth
Tips for Purchasing a House With a Pal
Best Places to Live 2007: America's Top Ten Towns
Best Places to Live 2007: Most Affordable Towns
Best Places to Live 2007: Where We'll Live Tomorrow
Best Places to Live 2007: A Look at Past Winners
Sell
Four Steps to Selling Your Home for Top Dollar
Ten Things Your Real Estate Broker Won't Tell You
Boosting Your Home's Value in a Down Market
How to Make the Most of Your Curb Appeal
Top Tips: Moving Your Home in a Bad Market
The Incentives Game: Know Your Competition
Five Reasons to Sell Your Home Yourself
Sellers Should Run From These Home Buyers
How to Overcome the Neighborhood Eyesore
Your Home Not Selling? Swap It
The Home-Sale Tax Exclusion
Selling a House Quick and Cheap
Ten Things Your Mover Won't Tell You
Let Uncle Sam Help Pay for Your Move
Rent
Renters, Fight for Your Rights!
Rent or Buy?
New Realities of the Rent vs. Buy Conundrum
Renters Insurance Can Offer a Safety Net
Got Pets, Eviction Record? Make Landlords Love You
Best and Worst Cities for Renters
How to Live Rent-Free
The Pros and Cons of Renting in Retirement
Why Homeowners Get Rich and Renters Stay Poor
Home Improvement
Which Home Improvements Pay Off -- and Which Don't?
Small Projects That Appeal to Buyers
Age-Appropriate Makeover Tips That Can Sell Your Home
Twenty Things That Can Alter Your Home's Value
How Much Is Too Much on Home Improvements?
Fixer-Uppers Can Be Dreams or Money Pits
Don't Let Repair Costs Drain Your Savings
How to Avoid Contractor Disputes, and What to Do If They Arise
How to Cope With Zoning Boards
Your Household Energy Crisis Solved
Which Backyard Features Add Value?
Medical Needs Can Help Pay for Remodeling
Tapping Friends and Family for Home Projects

Source: http://finance.yahoo.com/real-estate/articleindex

Options Education

Options Education

Basic Options Concepts
· How Options Work
· Exiting an Option Position
· Call Options
· Put Options
· Intrinsic Value and Time Value
· How to Use Options

Advanced Options Concepts
· LEAPs
· What Affects Equity Options Prices?
· Volatility
· Liquidity

Options Strategies: Bullish
· Buying Calls
· Covered Calls
· Vertical Spread
· Bull Call Spread
· Bull Put Spread

Options Strategies: Bearish
· Buying Puts
· Covered Puts
· Bear Put Spread
· Bear Call Spread


Source: http://biz.yahoo.com/opt/education.html

Learn the Basics about Investment Clubs

Learn the Basics about Investment Clubs

Overview
What is an Investment Club?Investorama.com
An Investment Club is a Great Learning ExperienceInvestorama.com Back to Top
Starting and Running a Successful Club
So You Want to Start an Investment Club?Investorama.com
Pitfalls for Your Investment Club to AvoidInvestorama.com
Running an Organized Investment Club MeetingInvestorama.com
Five Tips for Starting a Successful Investment ClubInvestorama.com
Adding New Members to Your Investment ClubInvestorama.com Back to Top
Additional Topics
Investment Clubs and the SECInvestorama.com
Investment Clubs and TaxesInvestorama.com

Source:
http://finance.yahoo.com/education/investment_clubs

Advice or a Novice Investor

Advice for a Novice Investor

Main Points:

• Educate through reading
• Learn through experience
• Learn from mistakes
• Keep mistakes small
• Join investment clubs
• Hire investment manager or advisor
• Befriend a successful and experienced investor as Mentor
• Remember always you are the boss

-----

Question: I am completely new to investing and want to know how to get started. I recently inherited quite a large sum of money and I would like to be able to live comfortably for the rest of my life. All I know about investing is that you can lose your shirt.


Answer: Well, I would say the one thing you know about investing is very accurate, so you are off to a good start! I think there are two parts to your question.

1. First, how do you educate yourself?
2. Second, how you set yourself up to live comfortably ever after?

To become informed, you can talk to savvy investors, you can read books and articles and watch video and live presentations. To really learn (which is not the same as merely being informed), you need experience. Try some things, and along the way you will undoubtedly make mistakes from which you can learn. The secret is to keep those mistakes small.
You can learn a lesson just as well from losing $500 as from losing $50,000. But you would be surprised how many people plunge ahead as if they couldn�t possibly make a mistake. They might spend weeks researching a new car purchase yet make an investing decision involving ten times as much money after only a few minutes.
To educate yourself, start by doing some reading. An excellent place to start is Investing for Dummies by Eric Tyson. This covers a wide range of alternatives and teaches you how to protect yourself from many of the biggest mistakes investors make. I would also call your attention to two good books by John C. Bogle: Bogle on Mutual Funds: New Perspectives for the Intelligent Investor, and Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor.
Quite soon you will find that there�s an overwhelming amount of investment information available free on the Internet. Some of it is valuable and some of it is essentially uninformed opinion. Some of it is simply incorrect and masquerades as the truth. It can be hard to sort all this out.
Take a class at a local community college, but be aware that the teacher may be a broker or financial planner who is looking for clients to whom to sell commissioned products. The whole class may be subtly arranged with that objective in mind.
Consider joining the American Association of Individual Investors (http://www.aaii.org/), a non-profit organization that offers lots of educational materials. Local chapters in most large cities hold seminars on various investment topics.
Now, the second part of your question: How to live comfortably ever after. I don�t know your age or your objectives, or the amount of money you have inherited. So I can speak only in general terms.
Your question suggests to me that you are at relatively high risk to be taken advantage of: a novice investor with a lot of money. Therefore I would urge you to proceed with great caution.
At the moment you are at a fork in the road and you have to make a basic decision: Will you do this yourself? Or will you hire an investment manager or advisor? Perhaps you will want to hire a manager while you learn, then gradually take more and more control over the management of your money as you gain confidence.
If you take the do-it-yourself route, go slowly and cautiously. Start by making sure your legal affairs are in order, that is, you have a will and you have protected yourself from liability through appropriate insurance. Next make sure you set aside money for an emergency fund, money you can access quickly without fouling up an investment plan.
Then invest half or more of your money in bond funds. Start with a short-term bond fund like those offered at Janus, Fidelity, Vanguard or T. Rowe Price. Invest the rest in a couple of conservative no-load equity funds. Four that come to mind are T. Rowe Price Spectrum Growth (PRSGX), the Fidelity Fund (FFIDX), Vanguard Total Stock Market Index (VTSMX), and Vanguard Tax-Managed Capital Appreciation (VMCAX).
As you learn more, you will probably want to diversify. Do this gradually and cautiously, and be patient. Expect to make mistakes along the way, and do your best to learn from them.
If you find a successful and experienced investor who is willing to be your mentor, consider entering that sort of relationship. But always use your common sense and remember that you, not anybody else, are the boss.
If you want to hire an investment manager or advisor, choose carefully. Seek references from friends and relatives. Ask for references from lawyers and accountants.
Here�s a parting thought, an excellent rule of thumb: Never invest in anything that you don�t understand.
If you do all these things, you will be well on your way to living comfortably ever after.
Paul Merriman is founder and president of Merriman Capital Management, a Registered Investment Advisory firm, and co-portfolio manager of the Merriman Mutual Funds. He manages over $280 million for his clients, has a weekly radio show which can be seen and heard at soundinvesting.com, and is the publisher and editor of FundAdvice.com.

http://finance.yahoo.com/education/begin_investing/article/101181/Advice_for_a_Novice

Random Walks Down Wall Street

Random Walks Down Wall Street

In the 1960s, Eugene Fama developed a new theory about the market called the Efficient Market Hypothesis. Fama determined that, at any given time, the prices of all securities fully reflect all available information about those securities.
While that doesn't sound so radical, most people who buy and sell stocks do so with the assumption that the stocks they are buying are undervalued and therefore worth more than the purchase price. When you haggle with a car dealer over the price of a new car, you're aiming for a price that's less than retail. When you buy a stock, you're also hoping that other investors have overlooked that stock for some reason, in effect giving you the opportunity to buy for "less than retail."
However, under the Efficient Market Hypothesis, any time you buy and sell securities, you're engaging in a game of chance, not skill. If markets are efficient and current prices always reflect all information, there's no way you'll ever be able to buy a stock at a bargain price.
Fama also asserted that the price movements of a particular stock will not follow any patterns or trends at all. Past price movements cannot be used to predict future price movements. He called this the Random Walk Theory -- stock prices move in an entirely random fashion, and there's no way to ever profit from "inefficiencies" in the price of a stock.
The end results of the Efficient Market Hypothesis and Random Walk Theory are controversial. If you can't predict stock prices, and picking stocks is really a matter of luck, how are we supposed to invest? And what are all those people on Wall Street doing, anyway?
Once you've resigned yourself to never beating the market, the Random Walkers say, you can be satisfied with matching the returns of the overall market. Instead of picking stocks or individual mutual funds, you should invest in the entire stock market. You can do this by investing in index funds, special mutual funds that are designed to allow you to match the returns of the overall market.

http://finance.yahoo.com/education/begin_investing/article/101173/Random_Walks_Down_Wall_Street

Modern Portfolio Theory Made Easy

Modern Portfolio Theory Made Easy

You can divide the history of investing in the United States into two periods: before and after 1952. That was the year that an economics student at the University of Chicago named Harry Markowitz published his doctoral thesis. His work was the beginning of what is now known as Modern Portfolio Theory. How important was Markowitz's paper? He received a Nobel Prize in economics in 1990 because of his research and its long-lasting effect on how investors approach investing today.
Markowitz starts out with the assumption that all investors would like to avoid risk whenever possible. He defines risk as a standard deviation of expected returns.
Rather than look at risk on an individual security level, Markowitz proposes that you measure the risk of an entire portfolio. When considering a security for your portfolio, don't base your decision on the amount of risk that carries with it. Instead, consider how that security contributes to the overall risk of your portfolio.
Markowitz then considers how all the investments in a portfolio can be expected to move together in price under the same circumstances. This is called "correlation," and it measures how much you can expect different securities or asset classes to change in price relative to each other.
For instance, high fuel prices might be good for oil companies, but bad for airlines who need to buy the fuel. As a result, you might expect that the stocks of companies in these two industries would often move in opposite directions. These two industries have a negative (or low) correlation. You'll get better diversification in your portfolio if you own one airline and one oil company, rather than two oil companies.
When you put all this together, it's entirely possible to build a portfolio that has much higher average return than the level of risk it contains. So when you build a diversified portfolio and spread out your investments by asset class, you're really just managing risk and return.

http://finance.yahoo.com/education/begin_investing/article/101172/Modern_Portfolio_Theory_Made_Easy

Risk may be unavoidable, it is manageable.

Risk and Return

Sure, you'd like to make a fortune in the markets -- who wouldn't? The first thing you need to understand, before you commit even a dollar to a portfolio or begin surfing investing Websites, is that it's impossible to realize a return on any investment without facing a certain degree of risk.
According to Webster's, risk is the "possibility of loss or injury." In investing, risk is the chance you take that the returns on a particular investment may vary. That's another way of saying that there are no sure things when you're investing.
No matter what you decide to do with your savings and investments, your money will always face some risk. You could stash your dollars under your mattress or in a cookie jar, but then you'd face the risk of losing it all if your house burned possibly less dollars in real terms than when you started. Investing in stocks, bonds, or mutual funds carries risks of varying degrees.
The second fact you need to face is that in order to receive an increased return from your investment portfolio, you need to accept an increased amount of risk. Keeping your money in a savings account reduces your risk, but it also reduces your potential reward.
While risk in your portfolio may be unavoidable, it is manageable. The riddle of controlling risk and return is that you need to maximize the returns and minimize the risk. When you do this, you ensure that you'll make enough on your investments, with an acceptable amount of risk.

So, what constitutes acceptable risk?
It's different for every person. A good rule of thumb followed by many investors is that you shouldn't wake up in the middle of the night worrying about your portfolio. If your investments are causing you too much anxiety, it's time to reconsider how you're investing, and bail out of those securities that are giving you insomnia in favor of investments that are a little less painful. When you find your own comfort zone, you'll know your personal risk tolerance -- the amount of risk you are willing to tolerate in order to achieve your financial goals.
When it comes to your long-term financial future though, the biggest risk of all may simply be to do nothing. If you don't invest for retirement, or for the college education of your children, or to help meet your personal financial goals, then you're most likely guaranteed a future of just scraping by.

http://finance.yahoo.com/education/begin_investing/article/101171/Risk_and_Return

Learn the Basics of Investing

Learn the Basics of Investing
Overview
Types of Investments
Basic Investment Concepts & Strategies
Investment Tips
Overview
Getting Started in InvestingWorldlyinvestor.com
Advice for a NoviceWorldlyinvestor.com Back to Top
Types of Investments
Saving with Savings AccountsInvestorama.com
CDs: Low Risk, Low ReturnSmartMoney.com
What is a Stock Anyway?Investorama.com
What is a Mutual Fund?Investorama.com
Money Market Funds: Stash Your CashInvestorama.com
What is a Bond?SmartMoney.com
Savings Bonds: The Old ReliablesInvestorama.com Back to Top
Basic Investment Concepts & Strategies
Risk and ReturnInvestorama.com
Defense is the Best Offense: Basic Investing StrategiesSmartMoney.com
The Importance of DiversificationInvestorama.com
Understanding Asset AllocationInvestorama.com
Dollar Cost Averaging: Put Your Investing on Auto-PilotInvestorama.com
Modern Portfolio Theory Made EasyInvestorama.com
Random Walks Down Wall StreetInvestorama.com Back to Top
Investment Tips
Investment Record Keeping: Don't Drown in PaperInvestorama.com
Choosing a Financial AdvisorInvestorama.com
Beware the TelemarketerInvestorama.com
Don't Be a Victim of Fraud


Source: http://finance.yahoo.com/education/begin_investing