Mellody Hobson, the president of Ariel Investments, recently shared her favorite piece of advice to Money Magazine.

When I was 22, a friend who is very successful explained to me that no one ever got rich through earned income. “Look at all the great wealthy families,” he said. “From Carnegie to Rockefeller, it was never how much they made at work that made them wealthy – it was their investments.”

And that made me shift from thinking about a paycheck to thinking about building equity and long-term wealth. And it has helped me a lot. Instead of a raise, I ask for more stock.

This may be good advice for a senior level executive at a large corporation. Those who make the compensation decisions may have the authority to grant stock. The concept suggested by Mellody’s advice may also be helpful for those working at a small company at the onset. Then again, perhaps there is no cash available and the promise of stock is all that can be offered.

I have the feeling that most people are like me, however. They work at a large company and don’t have the option of bargaining for alternative compensation. My boss, for example, would not have the ability to simply grant me stock. I suppose that the vice president of my division could put a request through our human resources department, but in the end, it would still come from the same budget. So practically, I see no difference for the company between offering stock or cash as a raise other the simplicity of cash. I cannot see my large financial corporation seeing a stock grant as a preferable alternative to a typical raise.

Another issue I have with accepting company stock in lieu of cash is related to diversification and risk. An employee is deeply vested in the success of the company and the company’s desire to keep you. Look no further than Enron to see what happened to employees who relied too much on their own company. While the senior management at Enron lied to its employees about the company’s health, many employees suffered more during the company’s collapse. They suffered because they relied on the company for much more than just their income. In addition to salary, the employees most affected held too much company stock, particularly in 401(k)s. Enron actively encouraged its employees to buy company stock outside of retirement, as well. If your company’s stock started nosediving with imminent failure and the management decided to freeze stock so you could not sell it, how would your finances be affected?

So would you take Mellody’s advice? I think she’s right about shifting from an income-from-paycheck mentality to income-from-investments mentality, but is company stock the best path? Would you ask for more company stock in lieu of a raise?

The smartest advice I ever got, Money Magazine

I don’t think “market timing” is a good investment strategy—in fact, it’s not a strategy at all—but it can be a worthwhile experiment if played with money you don’t mind losing.

One way to time the market is to buy low-cost exchange-traded funds (ETFs). These investments act as mutual funds—a portfolio of a number of stocks—that can be purchased through the stock market like any other stock. Using ETFs rather than individual stocks for market timing allows the investor to mitigate the risk of investing in just one company. Powershares Dynamic Banking (PJB) is one such ETF, designed to track the retail banking industry.

Are banks ready for a rebound? PJB is down 23% over the past 12 months. If it’s the right time, banking stocks might be able to provide not only a short-term gain, but a long-term gain if the market believes that this sector is deeply discounted due to all the various market conditions that have affected banks over the past year.

Some experts are saying that now is a good time to buy into the banking sector, but others believe that there will be more bad news ahead, trending stock prices further downward.

I’m investing for the long-term, but I wouldn’t mind finding bargains that might provide a significant increase over the next few years. Is banking the right industry for a fast recovery, and is now the right time?

Despite contributions totaling thousands of dollars so far this year, since January 1, the value of my investment portfolio is down 10%. That’s enough of a decline to make anyone consider giving up on the stock market. It’s an understandable point of view.

My 401(k) offers an automated interview to help you choose your asset allocation. Several questions resolve around the comfortability during losses. When the stock market has been in an upward trend, it’s a lot easier to say you’d be willing to experience a 20% decline over one year. However, during a bear market, those who believe they are suited for aggressive and risky investing are put to the test.

Do you cut your losses? Is it time to reconsider your long-term strategy?

I don’t think so. I’ll be sticking with my plan. If you have several decades to retirement, the stock market should continue its upward trend. In fact, staying the course and buying smartly during a bear market provides the opportunity for bargain-hunting.

The idea of “getting rich slowly” may well be a fallacy. While slow and steady is a great method of accumulating wealth over long periods of time thanks to compounding interest and returns, the power of inflation—real inflation, not government-reported inflation, eats away at the value of your funds almost ensuring you will never “get rich” from steady investment in a diversified portfolio of stocks. You may retire with a few million dollars thirty years from now, but by the time you’re contemplating your southern migration, time has eroded the value of a dollar to a fraction of today’s purchasing power.

So what is one to do?

Annie Logue from MSN Money has the answers, offering seven ways to get rich a little faster than “slowly.” There is a small problem with her advice though; the seven pieces of advice that can help you get rich are the same seven causes of total financial ruin. The difference between using any of these ideas to get rich and allowing these ideas to lead to financial ruin is not necessarily level of skill, perseverance, or positive thinking.

Here are Annie’s seven ways to get rich, which I argue could just as easily—more easily—have the opposite of the desired effect.

1. Concentrate. Annie says: “Diversification is great because it reduces risk. But at some point, you might want to build on your nicely diversified core with a big chunk of risk concentrated in one sector.” Her source adds: “The investments that have the smallest volatility also have the smallest end returns.”

It shouldn’t be hard, especially recently, to realize that the total stock market index is quite volatile in itself. A concentration in one segment adds volatility and risk, which means both the financial rewards and the financial suffering will be amplified. Concentration is great for a small portion of your portfolio that you can afford to lose. That portion will probably be too small to make you rich in the event of a sector’s success.

Let’s not forget about those who were heavily concentrated in the technology sector which crashed at the beginning of this century. There were lost fortunes all around because those invested in these particular stocks valued their concentration and faith.

2. Leverage up. Annie says: “One quick way to increase your risk and your potential return (as well as your downside) is to borrow money for your investment, usually through a margin account at a brokerage firm… It’s true that leverage can generate a return on money you don’t have, but it generates an outsized risk as well.”

Leverage is one of the main reasons our economy not well right now. Highly leveraged real estate allowed more people to enter the marketplace as buyers and more buyers led to higher, unsustainable prices in many markets. Businesses use leverage to a great advantage most of the time, but businesses who do not manage this risk are in danger.

Buying stocks on margin is one of the riskiest endeavors available to a typical individual investor. If the stock performs well, you have nothing to worry about, unless your success leads you to continue the cycle of investing on margin. You’re almost guaranteed to fail at some point, and the failure can easily wipe out all your gains. The risk is much greater on the downside because a drop in the stock price can quickly result in a margin call, in which case all your debt will be due to the broker immediately.

3. Hunt for bargains. Annie says: “Phillips recommends that investors consider distressed securities, such as bonds issued by companies near bankruptcy or, right now, stocks in banks that have heavy real-estate exposure.” Are you interested in junk bonds? When the economy is in the trough of a cycle, like now, you often hear about looking for bargain-priced investments.

This technique is stacked against the individual amateur investor. One can find a bargain with information about a company not known by the market at large, but if the information is out there to be known, you’re better bet is that the people who move significant sums around the market already have that information. Maybe you can ride the wave.

4. Be above brands. Annie says: “Many investors feel safest with something they know. But just because you have never heard of something doesn’t make it a bad investment.” I agree wholeheartedly. Once you’ve heard about a new brand, unless you are an industry insider or specialist, chances are the brand has already experienced the kind of growth that would make someone rich in a short amount of time.

So how do you become an industry insider or specialist? Well, it’s not going to come from reading the junk email you receive touting this or that penny stock. “Invest in what you know” is Peter Lynch’s mantra. He’s the investment star from Fidelity. “The more you know…” is the motto for NBC’s public service announcements. A combination of the two may be the only way to make this suggestion work.

5. Explore emerging markets. Annie says: “It’s a big world out there, and much of it is growing faster than the United States. There will be risk in all these markets as their citizens feel their way into modern economies…” I think it’s a good idea for the modern investor to start thinking about investing around the world rather than domestic vs. international. Like it or not, the world is getting metaphorically smaller, and nations’ economies are increasingly affected by other nations outside their borders.

Emerging markets is great for diversification, but it’s not a way for the individual investor to get rich. There is more of a likelihood for getting rich through direct investment in a country that has the potential for growth by moving to the country, building land, and directly assisting their economy through local businesses. Investing in emerging markets from the comfort of your recliner is safer but ultimately less effective.

Once you move to the country in the emerging market you like, you run the risk of government seizure, rebellious uprisings, xenophobia, embargoes, stiff regulations, invasion or war, or political unrest. This is a dangerous move if you’re investing your life savings.

6. Consider commodities. Annie says: “In a world economy that is growing rapidly, demand for commodities—such as oil, cotton and corn—is bound to grow. As demand grows, prices of commodities are likely to rise. Individual investors can get exposure to growing global demand for commodities through commodity-based exchange-traded funds.”

Anytime someone claims that any particular type of investment will continue to rise, you should be skeptical. I agree that consumption across the world will continue to grow, but that’s a long term view that doesn’t match the article’s purpose of “getting rich quickly.”

7. Do your research. Annie says: “The more risk you want to take, the more work you’ll have to do… The advice of steel tycoon Andrew Carnegie was that it’s OK to put all your eggs in one basket, as long as you watch the basket pretty carefully.”

I still find it very unlikely that any research you uncover isn’t already known by people with much more money to move in the market. Are there are particular niches in the market that are not being researched right now by those who make research their living? I would find that very hard to believe. Unless you have non-public, insider knowledge—and if you had, it would be against SEC regulations for you to invest—someone has already made money on the findings of your research.

While it is certainly possible to get rich in quick fashion using some or all of the suggestions provided above, it seems unlikely and not worth the risk, particularly if you can’t hedge against your bets.

7 ways to get rich faster, Annie Logue, MSN Money, June 23, 2008

About the author: The following is a guest article written by Kevin from No Debt Plan. He writes to help readers eliminate debt, learn how to budget and save, and move themselves towards financial freedom.

The first investment we made in one of our Roth IRAs was in a Vanguard Target Retirement fund. Generally target date retirement funds make good investments; if you are just starting to save for retirement it’s a great investment. Flexo recently shared his reservations about these investments, but today I’ll give you four reasons why we like them.

1. It’s an easy start.
2. Low investment needed to start.
3. You get instant diversification.
4. The fund automatically rebalances based on your age.

Let’s look at these individually.

An easy start. You need only one account (Roth IRA, Traditional IRA, taxable investment account, etc.). You invest in one fund. That’s pretty easy to get going and removes a bunch of hurdles.

Low investment needed to start. With any target retirement fund, the only start up cost you have is your minimum investment and then associated expense fees. We opened our Roth IRA with Vanguard because they are known for having low expense fees, and the minimum investments are only $3,000. Once you invest your first $3,000, you can add as little as $100 to your account after that. The kicker is you only need the one fund to get started, which leads us to…

Instant Diversification. The reason you only need one fund starting out, is a target retirement fund gives you a great deal of diversification right off the bat. Let’s take a look at Vanguard’s Target Retirement 2050 Fund (VFIFX) that we are currently invested in:

• 71.61% Vanguard Total Stock Market
• 10.09% Vanguard Total Bond Market
• 9.97% Vanguard European Stock Index
• 4.39% Vanguard Pacific Stock Index
• 3.62% Vanguard Emerging Markets Index
• 0.16% Vanguard Total Stock Market ETF

With one fund, you’re invested in 5 other major investments. Starting out you probably want a large amount of US and International stock exposure. Even if you just wanted these two things you would need two funds to get that diversification. Two funds means two minimum investments. Add additional funds and you add additional minimum investments. Not so with the target retirement fund. One minimum investment and you suddenly have instant diversification.

Automatic Rebalancing. Rebalancing is the act of sitting down once per year and adjusting your portfolio toward your target asset allocation. Let’s say you hold two funds because you want a 50% US stock exposure and 50% International stock exposure. During the last year, it is unlikely the funds have gained and lost exactly the same. So you end the year and US stocks have been up more than International stocks. Your current portfolio weight is 53% US and 47% International.

Doesn’t sound like a big deal, right? Just 3%. Well, over time that gap can get larger and larger until one day you find yourself with a 75/25 allocation—way out of whack.

With a target retirement fund, you don’t have to worry about rebalancing. If 100% of your portfolio was in the fund (not a recommendation, just an example), the fund will rebalance for you every year. As time marches on you will get closer and closer to the target date for the fund. As you get closer, the fund adjusts the portfolio for you to be more conservative.

Let’s compare two of Vanguard’s funds, the Target Retirement 2010 (VTENX) and Target Retirement 2050, to make the point clear. We expect the 2010 fund to have fewer stocks and more bonds/income generating investments than the 2050 portfolio listed above. The 2010 investments include:

• 44.08% Vanguard Total Stock Market Index
• 40.28% Vanguard Total Bond Market Index
• 6.18% Vanguard European Stock Index
• 4.43% Vanguard Inflation-Protected Securities
• 2.69% Vanguard Pacific Stock Index
• 2.27% Vanguard Emerging Markets Stock Index
• 0.05% Vanguard Total Stock Market ETF

The 2010 fund is 55.27% stocks and 44.73% non-stock investments. The 2050 fund is 89.91% stocks and 10.09% bonds. An obviously difference. Over time, the 2050 fund will start to look more and more like the 2010 fund.

What are you waiting for? For all of you new investors out there, I honestly think a Vanguard Target Retirement Fund is one of the best initial investments you could make.

If you enjoyed this article, please visit No Debt Plan for more thoughts about saving money and avoiding debt at all costs. We would appreciate your comments and reactions, so if you would like to contribute to the discussion, add your comment below.

Target retirement funds are increasing in popularity. The funds, and they may be called “lifecycle funds” or “target date funds” or “age-based funds” or a variety of other terms are mutual funds comprising other mutual funds. The allocation percentages of the constituent mutual funds change as time progresses, theoretically becoming more conservative as you approach your target.

For example, the Vanguard Target Retirement 2050 Fund (VFIFX) is a mutual fund of funds designed for people who expect to retire in the year 2050. You would expect an investment—one that is designed to mirror your investing strategy based on your time horizon—to be quite aggressive in order to make the most of the decades between now and the time you need to access its value.

This reveals the first problem I have with target retirement funds: they are often too conservative. VFIFX contains five other Vanguard mutual funds: Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, Vanguard European Stock Market Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund. As of today, 72% of the fund is invested in the Total Stock Market, 10% is invested in the Total Bond Market, and the remaining 18% is split between the others in amounts hardly meaningful.

I don’t see this as aggressive enough for someone who has such a long time horizon. I would suggest eliminating the bond component entirely and distributing the rest towards the international funds.

My second issue with target retirement funds is how it could lull an investor into a false sense of safety and security. While creating a hands-off approach to investing, it encourages buying and holding which is great for long-term success, but it opens the door to complacency. Your reallocations are on auto-pilot, so if you decide to change your time horizon, you may find yourself under or over-exposed to risk. Also, Vanguard, or which ever management company you choose for your target retirement fund, may decide to change strategies in the future, to the point where their guidelines no longer match your expectations.

Target retirement funds to encompass your entire portfolio. If you’ve chosen the Vanguard Target Retirement 2050 Fund for your entire 401(k) election, but you have a Roth IRA where this fund is not available, then you’re modifying your asset allocation away from that prescribed by Vanguard. If you are comfortable with Vanguard’s exposure to equities in their fund but you decide to invest in VTSMX separately in your Roth IRA, you’ve disturbed your overall asset allocation and opened yourself up to risk you may not have intended for your retirement funds.

Fund managing companies can’t seem to agree on the most appropriate asset allocation for a certain target. I mentioned Vanguard’s current allocation rule for its “2050” fund. Fidelity has a different strategy for those retiring the same year. The Fidelity Freedom 2050 Fund (FFFHX) invests in 68.5% domestic stock funds, 20.9% international stock funds, and 10.5% bond funds. Overall, this is similar to to Vanguard fund of funds, but the specific composition of the international portion provides a strong enough contrast that could have profound effects over 40 years of investment.

The fees for target retirement funds are usually a combination of the fees of the underlying investments. Rarely, a target retirement fund will add a management fee in addition to the feeds already charged by the funds held. Pay attention to these fees, because they will eat into the value of your investment. With a distant target like 2050, the fees eat into your returns even more.

Active stock trading has more in common with gambling than it does with investing. On top of that, it’s expensive gambling. When you step up to a quarter slot machine, you know each bet will cost a quarter. You don’t lose a nickel on each spin as a “transaction fee.” In order to play the stock market, with “play” being the operative word, you lose money right off the bat in the form of commissions.

So if you’re going to invest in stocks, it makes sense to find the least expensive option. Here are some of the more popular choices. What are your experiences with these brokerages?

ShareBuilder. ShareBuilder’s lowest commission fee on an account without a monthly fee is $4. Last year, ShareBuilder was incorporated into ING Direct. Out of all the discount brokerages listed here, ShareBuilder is the only one with which I’ve had direct experience, and I haven’t had any problems. I currently have three investment accounts, each initiated with free money from account opening bonuses. I invested in one exchange-traded fund and two stocks, MSFT and AKAM. The accounts haven’t fared well, but since I’m playing with small amounts of free money, I am not shouldering much overall risk to my portfolio.

If you trade more often, ShareBuilder is willing to give you a discount on your commissions and some free trades, but you’ll have to fork over $12 or $20 each month. Keep in mind that the low commission will only qualify you for a bulk purchase. That is, if I place a $4 order today, it won’t be executed until next Tuesday with all this week’s orders. If I wanted to purchase a stock in real time, I’d have to spend $9.95 for a real-time purchase.

No matter which monthly plan you join, you’ll have to pay a $9.95 fee for selling.

Zecco. Zecco offers up to ten free trades every month if you maintain a minimum of $2,500 with the brokerage. Otherwise, each trade costs $4.50. These are all real-time transactions, not bulk, like ShareBuilder. Zecco charges $10 if you want to buy a no-load mutual fund, however. That’s an unappealing fee, and it’s a reminder than one should keep holdings in an appropriate account. Zecco might be a good low-cost option for stock trading, but Vanguard and Fidelity might be more appropriate for mutual funds.

Both Zecco and ShareBuilder will not charge you for inactivity. It doesn’t hurt to let your account sit if you decide to stop trading, at least until they change their terms and decide to begin charging an inactivity fee.

E*TRADE. If you have less than $12,000 at E*trade, this brokerage will charge a $12.99 commission fee for each trade. Additionally, E*TRADE will charge a quarterly fee unless you meet one of the many conditions described here.

My comapny stock purchase plan is maintained by E*trade, and due to the market’s poor performance, I’m waiting until the stock is higher before selling my shares acquired over the past two quarters. By combining more share sales in one transaction in the future, I’m also saving on transaction fees. It costs $19.95 every time I sell ESPP shares, so I can save money by not selling four times a year (and also, I hope, waiting for the stock to rise).

Scottrade. Three years ago, Wachovia announced they were adding a $50 annual fee to my discount brokerage account. I tried to get the fee waived, but my protests fell on deaf ears. Rather than paying the $50 fee once and continuing to do so every year, I opted to pay the $75 account termination fee to move my funds to Scottrade. Scottrade offers no account fees other than the $7 commission for online trading. As I was holding only one mutual fund and I didn’t plan to do any trading, the account was free for me.

When I opened up my new Scottrade account, I was referred to a “local” branch. The closest branch was an hour away. I didn’t have to visit the branch to open my account and transfer the mutual fund shares, but they did call me quite often until they realized I wasn’t planning on buying any more products.

TD Ameritrade. TD Ameritrade is “that broker with the actor spokesperson,” formerly TD Waterhouse. To trade stocks online, TD Ameritrade charges a $9.95 commission.

These are the low-cost stock trading brokerages I am familiar with, though I’ve had personal experience with only a few. If there are any others I should know about, please leave a comment with some information. Also, please share your experiences and reviews.

Money Magazine is recommending that those wishing to build their net worth over a long period of time simplify matters by putting all their eggs into seven baskets in the form of mutual funds.

1. Fidelity Spartan 500 Index (FSMKX). This fund’s total expense ratio is a minuscule 0.10%. It tracks the S&P 500 index.

2. Vanguard Total International Stock Index (VGTSX). “Nearly 60% of the world’s stock market value resides in companies outside our borders,” so you’ll want a piece of that action.

3. T. Rowe Price New Horizons (PRNHX). New Horizons is a small company stock fund. There are periods of time in which small company stocks have outperformed the market at large. This isn’t an index fund, though, so expect to pay an expense ratio of 0.79%, still low for managed funds.

4. Vanguard Value Index (VIVAX) . If you pay attention to value funds, your investments will return dividends. Literally. This fund currently offers a dividend yield of 2.94%.

5. Vanguard Total Bond Market Index (VBMFX). Got bonds? I don’t. But if your asset allocation calls for bonds, this fund beat the industry average by 14% over the past 10 years and its expense ratio is 0.20%.

6. Vanguard Inflation-Protected Securities Fund (VIPSX). First of all, official government inflation statistics underestimate the real increase in prices we see every year, partly because those who calculate the statistics assume Americans “trade down” to lower quality products when prices get high. Thus, inflation-protected securities are likely misguided. Money Magazine has nevertheless included them among the other suggestions.

7. Fidelity Cash Reserves (FDRXX). Cash reserves are good for when you spot a buying opportunity in the market and need flexibility and liquidity to jump. A money market fund like this is decent for at least part of your emergency fund. Personally, since I have some of my retirement accounts at Vanguard, I chose Money Magazine’s alternate, VMMXX. This Vanguard fund features an expense ratio of 0.24% compared to Fidelity’s 0.40%.

Probably more important than the specific funds is the overall asset allocation strategy. Investors spend a lot of time talking about investments, analyzing and choosing the best funds that will help us reach our goals, but asset allocation is just as important. If an investor ignores his allocations, her investments might not provide the results.

Photo credit: epicharmus
The Only 7 Investments You Need [Money Magazine]