Investing for dummies, 5th ed

Investing
FOR

DUMmIES

‰

5TH

EDITION

by Eric Tyson, MBA
Financial counselor, syndicated columnist, and author of six
national bestsellers, including Personal Finance For Dummies®,
Real Estate Investing For Dummies®, and Mutual Funds For Dummies®



Praise for Eric Tyson’s Bestselling
For Dummies Titles
“Eric Tyson For President!!! Thanks for such a wonderful guide. With a clear,
no-nonsense approach to . . . investing for the long haul, Tyson’s book says it
all without being the least bit long-winded. Pick up a copy today. It’ll be your
wisest investment ever!!!”
— Jim Beggs, VA
“Eric Tyson is doing something important — namely, helping people at all
income levels to take control of their financial futures. This book is a natural outgrowth of Tyson’s vision that he has nurtured for years. Like Henry
Ford, he wants to make something that was previously accessible only to the
wealthy accessible to middle-income Americans.”
— James C. Collins, coauthor of the national bestsellers
Built to Last and Good to Great

“The organization of this book is superb! I could go right to the topics of immediate interest and find clearly written and informative material.”
— Lorraine Verboort, Beaverton, OR
“Among my favorite financial guides are . . . Eric Tyson’s Personal Finance For
Dummies.”
— Jonathan Clements, The Wall Street Journal
“In Investing for Dummies, Tyson handily dispatches both the basics . . . and the
more complicated.”
— Lisa M. Sodders, The Capital-Journal
“Smart advice for dummies . . . skip the tomes . . . and buy Personal Finance For
Dummies, which rewards your candor with advice and comfort.”
— Temma Ehrenfeld, Newsweek
“You don’t have to be a novice to like Mutual Funds For Dummies. Despite the
book’s chatty, informal style, author Eric Tyson clearly has a mastery of his
subject. He knows mutual funds, and he knows how to explain them in simple
English.”
— Steven T. Goldberg, Kiplinger’s Personal Finance Magazine


“Eric Tyson . . . seems the perfect writer for a …For Dummies book. He doesn’t
tell you what to do or consider doing without explaining the why’s and
how’s — and the booby traps to avoid — in plain English. . . . It will lead you
through the thickets of your own finances as painlessly as I can imagine.”
— Clarence Peterson, Chicago Tribune
“Personal Finance For Dummies is the perfect book for people who feel guilty
about inadequately managing their money but are intimidated by all of the
publications out there. It’s a painless way to learn how to take control.”
— Karen Tofte, producer, National Public Radio’s Sound Money


More Best-Selling For Dummies

Titles by Eric Tyson
Personal Finance For Dummies®
Discover the best ways to establish and achieve your financial
goals, reduce your spending and taxes, and make wise personal
finance decisions. Wall Street Journal bestseller with more than
1 million copies sold in all editions and winner of the Benjamin
Franklin best business book award.

Mutual Funds For Dummies®
This best-selling guide is now updated to include current fund and
portfolio recommendations. Using practical tips and techniques,
you’ll design a mutual fund investment plan suited for your income,
lifestyle, and risk preferences.

Taxes For Dummies®
The best-selling reference for completing your tax return and
making tax-wise financial decisions year-round.

Home Buying For Dummies®
America’s #1 real estate book includes coverage of online
resources in addition to sound financial advice from Eric Tyson
and frontline real estate insights from industry veteran Ray Brown.
Also available from America’s best-selling real estate team of
Tyson and Brown — House Selling For Dummies and Mortgages For
Dummies.

Real Estate Investing For Dummies®
Real estate is a proven wealth-building investment, but many
people don’t know how to go about making and managing rental
property investments. Real estate and property management

expert Robert Griswold and Eric Tyson cover the gamut of property investment options, strategies, and techniques.

Small Business For Dummies®
Take control of your future and make the leap from employee to
entrepreneur with this enterprising guide. From drafting a business
plan to managing costs, you’ll profit from expert advice and real-world
examples that cover every aspect of building your own business.



Investing
FOR

DUMmIES

‰

5TH

EDITION

by Eric Tyson, MBA
Financial counselor, syndicated columnist, and author of six
national bestsellers, including Personal Finance For Dummies®,
Real Estate Investing For Dummies®, and Mutual Funds For Dummies®


Investing For Dummies®, 5th Edition
Published by
Wiley Publishing, Inc.

111 River St.
Hoboken, NJ 07030-5774
www.wiley.com
Copyright © 2008 by Eric Tyson
Published by Wiley Publishing, Inc., Indianapolis, Indiana
Published simultaneously in Canada
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form
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Manufactured in the United States of America
10 9 8 7 6 5 4 3 2 1


About the Author
Eric Tyson is an internationally acclaimed and best-selling personal finance
author, lecturer, and advisor. Through his work, he is dedicated to teaching
people to manage their money better and to successfully direct their own
investments.
Eric is a former management consultant to businesses for which he helped
improve operations and profitability. Before, during, and after this time of
working crazy hours and traveling too much, he had the good sense to focus
on financial matters.
He has been involved in the investing markets in many capacities for more
than three decades. Eric first invested in mutual funds back in the mid-1970s,
when he opened a mutual fund account at Fidelity. With the assistance of Dr.
Martin Zweig, a now-famous investment market analyst, Eric won his high
school’s science fair in 1976 for a project on what influences the stock market. In addition to investing in securities over the decades, Eric has also successfully invested in real estate and started and managed his own business.
He has counseled thousands of clients on a variety of investment quandaries

and questions.
He earned a bachelor’s degree in economics at Yale and an MBA at the
Stanford Graduate School of Business. Despite these impediments to lucid
reasoning, he came to his senses and decided that life was too short to spend
it working long hours and waiting in airports for the benefit of larger
companies.
An accomplished freelance personal finance writer, Eric is the author of
numerous best-selling books including For Dummies books on personal
finance, mutual funds, taxes (coauthor), and home buying (coauthor) and is a
syndicated columnist. His work has been featured and quoted in hundreds of
national and local publications, including Newsweek, Kiplinger’s Personal
Finance Magazine, Los Angeles Times, Chicago Tribune, The Wall Street
Journal, and Bottom Line/Personal, and on NBC’s Today Show, ABC, CNBC,
PBS’s Nightly Business Report, CNN, CBS national radio, Bloomberg Business
Radio, National Public Radio, and Business Radio Network. He’s also been a
featured speaker at a White House conference on retirement planning.
To stay in tune with what real people care about and struggle with, Eric still
maintains a financial counseling practice.
You can visit him on the Web at www.erictyson.com.



Dedication
Actually, before I get to the thank yous, please allow me a really major thank
you and dedication.
This book is hereby and irrevocably dedicated to my family and friends, as
well as to my counseling clients and customers, who ultimately have taught
me everything I know about how to explain financial terms and strategies so
that all of us may benefit.

Author’s Acknowledgments
First, I’d like to thank Georgette Beatty. Thanks also to Vicki Adang for all of
her fine editing and to all of the fine folks in Composition and Graphics for
making this book and all of my charts and graphs look great! Thanks also to
everyone else who contributed to getting this book done well and on time.
And last but not least, a tip of my cap to the fine lot of technical reviewers
who helped to ensure that I didn’t write something that wasn’t quite right.
For the 5th edition, this important job was well handled by Don Luskin of
TrendMacro.


Publisher’s Acknowledgments
We’re proud of this book; please send us your comments through our Dummies online registration
form located at www.dummies.com/register/.
Some of the people who helped bring this book to market include the following:
Acquisitions, Editorial, and
Media Development
Senior Project Editor: Georgette Beatty
(Previous Edition: Mike Baker)
Acquisitions Editor: Mike Baker
Senior Copy Editor: Victoria M. Adang
(Previous Edition: Jennifer Bingham)

Composition Services
Project Coordinator: Katie Key
Layout and Graphics: Reuben W. Davis,
Melissa K. Jester, Christin Swinford
Proofreaders: John Greenough, Toni Settle,
Amanda Steiner
Indexer: Potomac Indexing, LLC

Assistant Editor: Erin Calligan Mooney
Technical Editor: Donald L. Luskin
Editorial Manager: Michelle Hacker
Editorial Assistants: Joe Niesen,
Jennette ElNaggar
Cover Photo: Index Stock Imagery
Cartoons: Rich Tennant
(www.the5thwave.com)

Publishing and Editorial for Consumer Dummies
Diane Graves Steele, Vice President and Publisher, Consumer Dummies
Joyce Pepple, Acquisitions Director, Consumer Dummies
Kristin A. Cocks, Product Development Director, Consumer Dummies
Michael Spring, Vice President and Publisher, Travel
Kelly Regan, Editorial Director, Travel
Publishing for Technology Dummies
Andy Cummings, Vice President and Publisher, Dummies Technology/General User
Composition Services
Gerry Fahey, Vice President of Production Services
Debbie Stailey, Director of Composition Services


Contents at a Glance
Introduction ................................................................ 1
Par t I: Investing Fundamentals ..................................... 7
Chapter 1: Exploring Your Investment Choices ............................................................. 9
Chapter 2: Weighing Risks and Returns ........................................................................ 23
Chapter 3: Getting Your House in Order before You Invest ...................................... 45

Par t II: Stocks, Bonds, and Wall Street ....................... 69
Chapter 4: The Workings of Stock and Bond Markets ................................................ 71
Chapter 5: Building Wealth with Stocks........................................................................ 81
Chapter 6: Investigating and Purchasing Individual Stocks ..................................... 109
Chapter 7: Exploring Bonds and Other Lending Investments.................................. 131
Chapter 8: Mastering Mutual Funds ............................................................................ 151
Chapter 9: Choosing a Brokerage Firm ....................................................................... 181

Par t III: Get ting Rich with Real Estate...................... 189
Chapter 10: Investing in a Home .................................................................................. 191
Chapter 11: Investing in Real Estate ............................................................................ 205
Chapter 12: Real Estate Financing and Deal Making ................................................. 231

Par t IV: Savoring Small Business .............................. 255
Chapter 13: Assessing Your Appetite for Small Business ......................................... 257
Chapter 14: Starting and Running a Small Business.................................................. 279
Chapter 15: Purchasing a Small Business ................................................................... 303

Par t V: Investing Resources ...................................... 321
Chapter 16: Selecting Investing Resources................................................................. 323
Chapter 17: Perusing Periodicals, Radio, and Television ......................................... 331
Chapter 18: Selecting the Best Investment Books ..................................................... 339
Chapter 19: Investigating Internet and Software Resources .................................... 349

Par t VI: The Par t of Tens .......................................... 361
Chapter 20: Ten Investing Obstacles to Conquer ...................................................... 363
Chapter 21: Ten Things to Consider When You’re Selling an Investment.............. 371
Chapter 22: Ten T ips for Investing in a Down Market .............................................. 379

Index ...................................................................... 385

Table of Contents
Introduction ................................................................. 1
How Savvy Investors Build Wealth................................................................ 2
Conventions Used in This Book ..................................................................... 2
Foolish Assumptions ....................................................................................... 2
How This Book Is Organized .......................................................................... 3
Part I: Investing Fundamentals ............................................................. 3
Part II: Stocks, Bonds, and Wall Street ................................................ 3
Part III: Getting Rich with Real Estate.................................................. 3
Part IV: Savoring Small Business.......................................................... 4
Part V: Investing Resources .................................................................. 4
Part VI: The Part of Tens ....................................................................... 4
Icons Used in This Book ................................................................................. 4
Where to Go from Here ................................................................................... 5

Par t I: Investing Fundamentals ..................................... 7
Chapter 1: Exploring Your Investment Choices . . . . . . . . . . . . . . . . . . . .9
Getting Started with Investing ....................................................................... 9
Building Wealth with Ownership Investments .......................................... 10
The stock market ................................................................................. 11
Real estate............................................................................................. 12
Small business ...................................................................................... 13
Generating Income from Lending Investments .......................................... 14
Considering Cash Equivalents ..................................................................... 15
Steering Clear of Futures and Options ........................................................ 16
Passing Up Precious Metals ......................................................................... 18
Counting Out Collectibles............................................................................. 19

Chapter 2: Weighing Risks and Returns. . . . . . . . . . . . . . . . . . . . . . . . . .23
Evaluating Risks ............................................................................................. 24
Market-value risk ................................................................................. 25
Individual-investment risk .................................................................. 30
Purchasing-power risk ........................................................................ 32
Career risk ............................................................................................ 33
Analyzing Returns.......................................................................................... 34
The components of total return......................................................... 35
Savings and money market account returns .................................... 37
Bond returns......................................................................................... 38
Stock returns ........................................................................................ 39


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Investing For Dummies, 5th Edition
Real estate returns............................................................................... 41
Small-business returns ........................................................................ 41
Considering Your Goals ................................................................................ 42

Chapter 3: Getting Your House in Order before You Invest . . . . . . . . .45
Establishing an Emergency Reserve ........................................................... 45
Evaluating Your Debts .................................................................................. 47
Conquering consumer debt ................................................................ 47
Mitigating your mortgage ................................................................... 48
Establishing Your Financial Goals ............................................................... 50
Tracking your savings rate ................................................................. 50
Determining your investment tastes ................................................. 51
Funding Your Retirement Accounts ............................................................ 52

Gaining tax benefits ............................................................................. 52
Delaying increases your pain ............................................................. 54
Checking out retirement account options ........................................ 54
Choosing retirement account investments ...................................... 57
Taming Your Taxes ....................................................................................... 57
Determining your tax bracket ............................................................ 57
Knowing what’s taxed and when to worry ....................................... 58
Choosing the Right Investment Mix ............................................................ 59
Considering your age .......................................................................... 60
Making the most of your investment options .................................. 60
Easing into risk: Dollar cost averaging .............................................. 61
Treading Carefully When Investing for College ......................................... 63
Education Savings Accounts .............................................................. 64
Section 529 plans ................................................................................. 65
Allocating college investments .......................................................... 65
Protecting Your Assets ................................................................................. 65

Par t II: Stocks, Bonds, and Wall Street ........................ 69
Chapter 4: The Workings of Stock and Bond Markets . . . . . . . . . . . . .71
How Companies Raise Money through the Financial Markets ................ 71
Deciding whether to issue stocks or bonds ..................................... 72
Taking a company public: Understanding IPOs ............................... 73
Understanding Financial Markets and Economics .................................... 74
Uncovering the roots: Capitalism ...................................................... 74
Driving stock prices through earnings.............................................. 75
Weighing whether markets are efficient ........................................... 76
Moving the market: Interest rates, inflation,
and the Federal Reserve .................................................................. 77

Chapter 5: Building Wealth with Stocks . . . . . . . . . . . . . . . . . . . . . . . . .81

Taking Stock of How You Make Money....................................................... 82


Table of Contents
Defining “The Market” ................................................................................... 83
Looking at major stock market indexes ............................................ 83
Counting reasons to use indexes ....................................................... 85
Stock-Buying Methods .................................................................................. 86
Buying stocks via mutual funds ......................................................... 86
Using exchange-traded funds and hedge funds ............................... 88
Selecting individual stocks ................................................................. 88
Spotting the Best Times to Buy and Sell..................................................... 89
Calculating price/earnings ratios....................................................... 90
Citing times of speculative excess ..................................................... 91
Buy more when stocks are “on sale” ................................................. 99
Avoiding Problematic Stock Buying Practices......................................... 102
Beware brokers’ conflicts of interest .............................................. 102
Don’t day trade or short-term trade ................................................ 103
Don’t buy penny stocks .................................................................... 104
The Keys to Stock Market Success ............................................................ 106

Chapter 6: Investigating and Purchasing Individual Stocks . . . . . . .109
Building on Others’ Research .................................................................... 109
Discovering the Value Line Investment Survey ............................. 110
Considering independent brokerage research .............................. 115
Examining successful money managers’ stock picks .................... 116
Reviewing financial publications and Web sites ............................ 116
Understanding Annual Reports ................................................................. 117
Financial and business highlights .................................................... 118
Balance sheet ..................................................................................... 118

Income statement .............................................................................. 122
Exploring Other Useful Corporate Reports .............................................. 124
10-Ks .................................................................................................... 124
10-Qs .................................................................................................... 125
Proxies................................................................................................. 125
Getting Ready to Invest in Stocks .............................................................. 126
Understanding stock prices.............................................................. 127
Purchasing stock “direct” from companies .................................... 128
Placing your trade through a broker ............................................... 129

Chapter 7: Exploring Bonds and Other Lending Investments. . . . . . .131
Banks: The Cost of Feeling Secure............................................................. 132
The realities of bank insurance ........................................................ 132
The overused certificate of deposit (CD) ....................................... 133
The money market fund alternative to savings accounts ............ 134
Why Bother with Bonds? ............................................................................ 136
Assessing the Different Types of Bonds ................................................... 138
Determining when you get your money back:
Maturity matters ............................................................................ 138
Weighing the likelihood of default ................................................... 139
Examining the issuers (and tax implications) ................................ 140

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Investing For Dummies, 5th Edition
Buying Bonds ............................................................................................... 143
Deciding between individual bonds and bond mutual funds....... 143

Understanding bond prices .............................................................. 144
Buying Treasuries .............................................................................. 145
Buying other individual bonds ......................................................... 146
Considering Other Lending Investments .................................................. 147
Guaranteed-investment contracts ................................................... 148
Private mortgages .............................................................................. 148

Chapter 8: Mastering Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . .151
Discovering the Benefits of the Best Funds ............................................. 152
Professional management................................................................. 152
Cost efficiency .................................................................................... 152
Diversification .................................................................................... 153
Reasonable investment minimums.................................................. 153
Different funds for different folks .................................................... 154
High financial safety .......................................................................... 154
Accessibility ....................................................................................... 155
The Keys to Successful Fund Investing .................................................... 155
Minimize costs ................................................................................... 155
Consider performance and risk ....................................................... 158
Stick with experience ........................................................................ 159
Buy index funds.................................................................................. 159
Consider exchange-traded funds ..................................................... 160
Creating Your Fund Portfolio ..................................................................... 161
Allocating for the long term.............................................................. 162
Diversifying your stock fund investments ...................................... 163
The Best Stock Mutual Funds .................................................................... 164
Making money with stock funds ...................................................... 165
Exploring different types of stock funds ......................................... 165
The Best Bond Funds .................................................................................. 170
Avoiding yield-related missteps....................................................... 171

Treading carefully with actively managed bond funds ................. 172
Short-term bond funds ...................................................................... 173
Intermediate-term bond funds ......................................................... 174
Long-term bond funds ....................................................................... 175
The Best Hybrid Funds ............................................................................... 176
The Best Money Market Funds .................................................................. 177
Taxable money market funds ........................................................... 179
U.S. Treasury money market funds ................................................. 179
Municipal money market funds ....................................................... 179

Chapter 9: Choosing a Brokerage Firm. . . . . . . . . . . . . . . . . . . . . . . . . .181
Getting Your Money’s Worth: Discount Brokers ..................................... 181
Ignoring the salespeople’s arguments ............................................ 182
Selecting a discount broker .............................................................. 183


Table of Contents
Considering Online Brokers ....................................................................... 184
Examining your online trading motives .......................................... 185
Considering other costs .................................................................... 185
Examining service quality ................................................................. 186
The best online brokers .................................................................... 188

Par t III: Get ting Rich with Real Estate ...................... 189
Chapter 10: Investing in a Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .191
The Buying Decision ................................................................................... 192
Weighing the pros and cons of ownership ..................................... 192
Recouping transaction costs ............................................................ 194
Deciding How Much to Spend .................................................................... 195
Looking through lenders’ eyes ......................................................... 197

Determining your down payment .................................................... 197
Selecting Your Property Type.................................................................... 199
Finding the Right Property and Location ................................................. 201
Keeping an open mind....................................................................... 201
Research, research, research ........................................................... 202
Understanding market value ............................................................ 203
Pounding the pavement .................................................................... 203

Chapter 11: Investing in Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . .205
Outlining Real Estate Investment Attractions.......................................... 205
Limited land ........................................................................................ 206
Leverage .............................................................................................. 206
Appreciation and income.................................................................. 207
Ability to “add value” ........................................................................ 207
Ego gratification ................................................................................. 208
Longer-term focus .............................................................................. 208
Figuring Out Who Should Avoid Real Estate Investing ........................... 209
Examining Simple, Profitable Real Estate Investments........................... 210
A place to call home .......................................................................... 211
Real estate investment trusts ........................................................... 211
Evaluating Direct Property Investments .................................................. 212
Residential housing ........................................................................... 213
Land ..................................................................................................... 215
Commercial real estate ..................................................................... 216
Deciding Where and What to Buy ............................................................. 217
Considering economic issues ........................................................... 217
Evaluating the real estate market .................................................... 218
Examining property valuation and financial projections ............. 219
Finding the information you need ................................................... 225
Digging for a Good Deal .............................................................................. 225

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Investing For Dummies, 5th Edition
Recognizing Inferior Real Estate “Investments” ...................................... 227
Time shares ........................................................................................ 228
Limited partnerships ......................................................................... 229
Scams................................................................................................... 229

Chapter 12: Real Estate Financing and Deal Making . . . . . . . . . . . . .231
Financing Your Real Estate Investments .................................................. 231
Getting your loan approved ............................................................. 232
Comparing fixed-rate to adjustable-rate mortgages ...................... 235
Choosing between fixed and adjustable mortgages ...................... 237
Getting a great fixed-rate mortgage ................................................. 238
Finding a great adjustable-rate mortgage ....................................... 239
Understanding other mortgage fees ................................................ 242
Finding the best lenders ................................................................... 243
Refinancing for a better deal ............................................................ 245
Working with Real Estate Agents............................................................... 246
Recognizing agent conflicts of interest ........................................... 246
Finding a good agent ......................................................................... 247
Closing the Deal ........................................................................................... 249
Negotiating 101................................................................................... 249
Inspecting the property .................................................................... 250
Shopping for title insurance and escrow services ........................ 251
Selling Real Estate........................................................................................ 252

Negotiating real estate agents’ contracts ....................................... 253
Selling without a real estate agent ................................................... 254

Par t IV: Savoring Small Business ............................... 255
Chapter 13: Assessing Your Appetite for Small Business . . . . . . . . .257
Testing Your Entrepreneurial IQ ............................................................... 258
Considering Alternative Routes ................................................................. 261
Being an entrepreneur inside a company ....................................... 262
Investing in your career .................................................................... 262
Exploring Small-Business Investment Options ........................................ 263
Starting your own business .............................................................. 263
Buying an existing business ............................................................. 265
Investing in someone else’s business ............................................. 266
Drawing Up Your Business Plan ................................................................ 267
Identifying your business concept .................................................. 268
Outlining your objectives ................................................................. 270
Analyzing the marketplace ............................................................... 271
Delivering your service or product ................................................. 273
Marketing your service or product ................................................. 274
Organizing and staffing your business ............................................ 275
Projecting finances ............................................................................ 275
Writing an executive summary ........................................................ 278


Table of Contents
Chapter 14: Starting and Running a Small Business . . . . . . . . . . . . . .279
Starting Up: Your Preflight Check List ...................................................... 279
Preparing to leave your job .............................................................. 280
Valuing and replacing your benefits................................................ 281
Financing Your Business ............................................................................ 284

Bootstrapping..................................................................................... 284
Borrowing from banks....................................................................... 285
Borrowing from family and friends.................................................. 287
Courting investors and selling equity ............................................. 287
Deciding Whether to Incorporate.............................................................. 288
Liability protection ............................................................................ 289
Tax-deductible insurance and other benefits ................................ 290
Corporate taxes.................................................................................. 290
Making the decision........................................................................... 291
Finding and Keeping Customers ................................................................ 292
Setting Up Shop............................................................................................ 293
Finding business space and negotiating a lease ............................ 293
Equipping your business space ....................................................... 296
Accounting for the Money .......................................................................... 297
Tax record keeping and payments .................................................. 297
How to (legally) pay lower taxes ..................................................... 299
Keeping a Life and Perspective .................................................................. 300

Chapter 15: Purchasing a Small Business. . . . . . . . . . . . . . . . . . . . . . .303
Examining the Advantages of Buying ........................................................ 303
Understanding the Drawbacks of Buying ................................................. 304
Prerequisites to Buying a Business ........................................................... 306
Business experience .......................................................................... 306
Financial resources............................................................................ 306
Focusing Your Search for a Business to Buy ........................................... 307
Perusing publications........................................................................ 308
Networking with advisors ................................................................. 309
Knocking on some doors .................................................................. 309
Working with business brokers ....................................................... 309
Considering a Franchise or Multilevel Marketing Company .................. 311

Finding a franchise............................................................................. 311
Considering a multilevel marketing company................................ 314
Evaluating a Small Business ....................................................................... 315
Doing due diligence ........................................................................... 315
Determining a business’s value........................................................ 318

Par t V: Investing Resources ....................................... 321
Chapter 16: Selecting Investing Resources. . . . . . . . . . . . . . . . . . . . . .323
Dealing with Information Overload ........................................................... 323

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Investing For Dummies, 5th Edition
Separating Financial Fact from Fiction ..................................................... 325
Understanding how advertising corrupts....................................... 325
Recognizing quality resources ......................................................... 327

Chapter 17: Perusing Periodicals, Radio, and Television. . . . . . . . . .331
In Print: Magazines and Newspapers ........................................................ 331
Taking the scribes to task ................................................................. 331
Making the most of periodicals ........................................................ 333
Radio and Television Programs ................................................................. 334
Looking at problems with radio and television programs ........... 334
Picking the best investing programs ............................................... 336
Investment Newsletters .............................................................................. 337

Chapter 18: Selecting the Best Investment Books . . . . . . . . . . . . . . . .339

Beware of Infomercial Books ..................................................................... 339
Ignore Unaudited Performance Claims ..................................................... 343
Investing Books Worth Reading................................................................. 344
A Random Walk Down Wall Street ................................................... 345
Stocks for the Long Run .................................................................... 345
Built to Last and Good to Great ....................................................... 346
Mutual Funds For Dummies.............................................................. 347

Chapter 19: Investigating Internet and Software Resources . . . . . . .349
Evaluating Investment Software ................................................................ 349
Investment tracking software ........................................................... 350
Investment research software.......................................................... 353
Investigating Internet Resources ............................................................... 354
Evaluating online resources ............................................................. 355
The best investment Web sites ........................................................ 356

Par t VI: The Par t of Tens ........................................... 361
Chapter 20: Ten Investing Obstacles to Conquer . . . . . . . . . . . . . . . . .363
Trusting Authority ....................................................................................... 363
Get ting Swept Up by Euphoria................................................................... 364
Being Overconfident ................................................................................... 365
Giving Up When Things Look Bleak .......................................................... 365
Refusing to Accept a Loss .......................................................................... 366
Overmonitoring Your Investments ........................................................... 367
Being Unclear about Your Goals................................................................ 367
Ignoring Your Real Financial Problems .................................................... 368
Overemphasizing Certain Risks ................................................................. 368
Believing in Gurus........................................................................................ 369

Table of Contents
Chapter 21: Ten Things to Consider When You’re
Selling an Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .371
Remembering Your Preferences and Goals ............................................. 371
Maintaining Balance in Your Portfolio ...................................................... 372
Deciding Which Investments Are Keepers ............................................... 372
Tuning In to the Tax Consequences .......................................................... 373
Figuring Out What Shares Cost .................................................................. 373
Selling Investments with Hefty Profits ...................................................... 374
Cut ting Your (Securities) Losses............................................................... 375
Selling Investments with Unknown Costs................................................. 376
Recognizing Broker Differences................................................................. 376
Finding a Trustworthy Financial Advisor ................................................. 376

Chapter 22: Ten T ips for Investing in a Down Market . . . . . . . . . . . . .379
Don’t Panic ................................................................................................... 379
Keep Your Portfolio’s Perspective in Mind .............................................. 380
View Major Declines as Sales ..................................................................... 380
Identify Your Portfolio’s Problems............................................................ 381
Avoid Growth Stocks If You Get Queasy Easily ....................................... 381
Tune Out Negative, Hyped Media .............................................................. 382
Ignore Large Point Declines — Consider the Percentages ..................... 382
Don’t Believe You Need a Rich Dad to Be a Successful Investor........... 383
(Re-)Read Chapters 4 and 5........................................................................ 384
Talk to People Who Care about You ......................................................... 384

Index ....................................................................... 385

xxi

xxii

Investing For Dummies, 5th Edition


Introduction

T

he dozen years since the first edition of this book was published have
witnessed increased interest in and media coverage of the investment
world. The Internet has established itself as a fixture within the home and
office, along with all the investment-related stories, facts, figures, applications, and scams that reside there. You can’t flip through the channels on
your television without running into a stock ticker at the bottom of your
screen or a pitchman claiming that folks are just waiting to pay you to buy
their property. And new books are published daily that claim to possess
the secret to investing success. With all this attention, you may think that
investing times have changed. But to a large degree, things haven’t changed
all that much. Investments that were considered lousy years ago — products
with high fees and commission — generally are still lousy today.
The best investment vehicles for building wealth — stocks, real estate, and
small business — haven’t changed either. And you still need money to play
in the investment world. Like the first edition of Investing For Dummies, the
fifth edition of this national best-seller includes complete coverage of these
wealth-building investments as well as other common investments, such as
bonds. Here are the biggest changes in this edition:
ߜ Completely revised and updated: I’ve freshened up the data and
examples in this book to provide you the latest insights and analyses.
Wondering what all the fuss is about with gold, oil, and other commodities? Seeking a way to invest in stocks without exposing yourself to

tremendous risk? Curious about what an exchange-traded fund or hedge
fund is and whether you should invest? Weighing whether it’s too risky
or difficult to invest in real estate? Wondering what the best ways are
to invest globally? Having trouble making sense of various economic
indicators and what they mean to your investment strategy? Confused
about how tax law changes should affect your investment strategies?
Wanting to invest in a Health Savings Account (HSA) but don’t know
why, where, or how? You can find the answers to these questions and
many more in this edition.
ߜ Investing resources: With the continued growth in Web sites, software,
publications, media outlets, and many other information sources offering investing advice and information, you’re probably overwhelmed
about how to choose among the numerous investing research tools and
resources. Equally problematic is knowing whom you can trust and
listen to — and whom you need to ignore. I explain how to evaluate the
quality of current investment tools and resources, and I provide tips for
whom to listen to and whom to tune out.