The world’s investment markets are notorious for their wild swings up and down, but savvy investors know the underlying fundamentals of each business (stock) they buy and they analyze them before purchasing (fundamental analysis). Great investors know WHY they bought and what made the company appealing to them. They know the conditions of the industries they invest in, the management team running the show, and the company’s long-term prospects for the future. They know the numbers, they know at what share price they’ll buy more … and at what has to change for them to sell their shares.

Fundamental Analysis

Analyzing a stock’s fundamentals simply means examining a company’s financial numbers to uncover any prospects for the company’s future and to size up its stock value. Your goal when conducting fundamental analysis is to find stocks whose share prices are below where the market should be pricing them. Since markets aren’t always as “efficient” as many experts would have you believe, using fundamental analysis to uncover these undervalued gems can result in superior returns. Another strong benefit of fundamental analysis is that it removes much of the emotion associated with valuing a business and allows investors to make a rational buying or selling decision.

Rarely will you ever find a business with perfect numbers in every category you examine … I know I haven’t! But by actually taking the time to learn about a company’s financial numbers and then determining the market value of it’s stock, I can then decide to buy only when I have a large margin of safety. That is, I buy only when the stock is priced at less than half of what I determine it’s value should be.

Generally, when investors speak of a company’s fundamentals, they’re referring to the company’s financial well-being, as determined by three principle factors:

• Profits (earnings): The total amount of money the company actually earns after expenses
• Debt: The company’s outstanding financial obligations to suppliers, banks, and so on
• Assets: The company’s valuable property, including cash, inventory, real estate, etc.

Data about a company’s fundamentals is easy to find, as every publicly traded company is required to report it quarterly to the SEC. One good place to start is online. I like to use Yahoo! Finance (finance.yahoo.com).

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Once you’ve gathered this data, you can use a variety of simple statistics and ratios to assess a company’s fundamentals and determine whether the company’s stock is worth buying. The most commonly used ratios and statistics are:

• Earnings per share (EPS)
• Price-to-earnings (P/E) ratio
• Price-to-earnings-growth (PEG) ratio
• Debt-to-asset ratio
• Price-to-book (P/B) ratio
• Beta

Fundamental Analysis Example

The best way to understand how to calculate and use these ratios and statistics is through an example. The fictitious company in the example below, Big Red Bullfighting Capes, Inc. (stock symbol “TORO”), has financial numbers as follows:

• Assets: $120,000
• Debts: $20,000
• Publicly traded shares: 1,000
• Share price: $100 per share
• Profits (prior year): $10,000
• Stock dividend payments (prior year): $4 per share
• Projected earnings growth rate (next ten years): 10%
• Beta (explained below): 0.8

Let’s analyze TORO’s fundamentals and the value of its stock:

Earnings Per Share (EPS)

• Definition: The portion of a company’s earnings (profits) that each share of the company’s stock contains.
• How to calculate: Divide earnings by the number of publicly traded shares.
• TORO example: $10,000 in earnings / 1,000 publicly traded shares = $10.
• How to evaluate: If all other factors are equal and two stocks have the same profits, investors generally favor the stock with fewer publicly traded shares and therefore higher EPS.

Price-to-Earnings (P/E) Ratio

• Definition: A way to determine the value of a company’s shares compared to its peers by comparing its current share price to its current EPS.
• How to calculate: Divide the company’s share price by the company’s EPS over a specified period of time.
• TORO example: $100 (share price) / $10 (EPS) = 10 (P/E)
• How to evaluate: Investors generally favor stocks with low P/E ratios relative to other stocks in the same industry. Given two companies in the same industry with the same profits, investors tend to buy the shares of the company with the lower priced stock—in effect, paying a lower price for the same amount of profits. If too many investors flock to the lower stock, however, the price will naturally rise!

Price-to-Earnings-Growth (PEG) Ratio

• Definition: A comparison of a company’s share price to its earnings growth rate. Some investors consider this ratio more useful than the P/E ratio because it factors in futureearnings, not just past earnings.
• How to calculate: Divide a company’s P/E ratio by its projected earnings growth rate (in percentage form).
• TORO example: 10 (P/E) / 10% (earnings growth) = 1
• How to evaluate: If all other factors are equal, given two stocks with the same P/E ratio, investors tend to favor the stock with the lower PEG ratio, since it predicts higher future earnings growth. Investors generally consider stocks with a PEG below 1 to present a good value, though this can vary from industry to industry.

Debt-to-Asset Ratio

• Definition: A ratio of a company’s assets that have been secured through debt as opposed to equity (assets minus debts).
• How to calculate: Divide the company’s debts by the company’s assets.
• TORO example: $20,000 (debts) / $120,000 (assets) = 0.16
• How to evaluate: A debt-to-asset ratio greater than 1 means that the company’s assets have been financed primarily by debt. Investors favor stocks with debt to asset ratios less than 1, since these companies have fewer liabilities and therefore present less risk.

Price-to-Book (P/B) Ratio

• Definition: A stock’s book value (equal to its equity) gives an indication of what the company is actually worth “on the books” after all debts have been subtracted from assets. A company’s book value is equal to its assets minus its debts. The price-to-book ratio helps investors get a sense of the discrepancy between how the market values a stock and what the stock is actually worth.
• How to calculate: Divide current share price by book value per share (book value divided by number of shares).
• TORO example: TORO’s book value per share = ($120,000 in assets – $20,000 in debts) / 1,000 shares = $100. TORO’s Price to book ratio = $100 (current share price) / $100 (book value per share) = 1.
• How to evaluate: Stocks with P/B ratios equal to 1, such as TORO, show a strong correlation between the company’s underlying value and the value that the market currently places on the stock. A P/B ratio of less than 1 suggests that the market has either overlooked some value in the stock or doubts the value of the company’s underlying assets. Stocks with P/B ratios greater than 1 command a premium from the market. Investors tend to buy these stocks only if they believe that the premium is justified based on actual earnings expectations, as opposed to speculation.

Beta

• Definition: A measure of a stock’s historical volatility relative to the broader market’s volatility, which is represented by a beta of 1.
• How to calculate: Calculating a stock’s beta requires advanced math and considerable amounts of data, so consult websites such as Yahoo! Finance to find the latest beta information for stocks you’re researching.
• TORO example: Beta = 0.8
• How to evaluate: Stocks with betas greater than 1 are more volatile than the broader market—they tend to move up and down in price more often and in greater extremes than the market. Stocks with betas of less than 1, such as TORO, tend to be less volatile than the general market. If the market drops by 1%, TORO should drop by 0.8%; however, if the market rises by 1%, TORO should rise by just 0.8%. High beta stocks offer more potential profits to investors but also more risk.You can calculate the average beta of your portfolio stocks to try to keep your holdings in line with your risk tolerance and financial goals. For instance, a portfolio designed to beat the market should have an average beta of greater than 1.

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Determining the stock price

You’ll need a few more pieces of data to determine the stock’s value:

• The analyst’s estimated ten year growth rate
• The rate of return you want to achieve

You’ll also need to be able to use and understand Future Value and Present Value calculations. These are both pretty easy to use with a spreadsheet.

I take the analyst’s ten year growth rate and the current EPS and calculate what the EPS should be in ten years. When I calculate that number and then compare it to the P/E ratio for the industry, I’m able to get a rough idea what the stock price should be.

TORO example: The future value of a $10 EPS over the next ten years at a 10% growth rate = $25.94. Many investors conducting fundamental analysis use a P/E ratio of double the growth rate so in our case it would be 20. With that P/E ratio, the stock should be valued at $518.80 in ten years. Now we switch to present value calculations and since I want to achieve a rate of return of 15%, the present value of $518.80 is $128.24. That’s what I value this stock to be today based on the numbers I have available.

To buy or not to buy? I wouldn’t buy this stock unless it’s price dropped to $64.12. Why do I use a 50% margin of safety? I may have made a mistake in my calculations somewhere or I may just have a streak of bad luck! Also, because valuation is an imprecise art, the future is unpredictable, and humans do make mistakes, a large margin of safety insures that I don’t lose money.

In the end, fundamental analysis is much more reliable that other measures in determining whether a business is worthy of my hard earned dollars as an investment. What method or methods do YOU use to make your investing decisions?

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With workers changing jobs an average of 12 times during their career, chances are you’ll set up multiple types and varieties of retirement accounts over the course of your lifetime (please don’t cash them out!). But instead of maintaining a lot of separate accounts at different employers, you can in many cases consolidate, or merge, your various retirement plan accounts into just one easier-to-manage account.

Why Consolidate Your Retirement Plans?

Consolidating your retirement plans can be a benefit with:

1. Paperwork: Keeping up with one account with one firm means you’ll get only one statement every month and one annual statement at the end of each year.
2. Convenience: Maintaining just one account means you’ll deal with only one firm for customer service issues.
3. Investment management: It’s much easier to maintain your preferred asset allocation.
4. Annual fees: Consolidating your various accounts into one account can reduce or eliminate annual maintenance fees. Many brokerages charge an annual fee for accounts with less than $5,000. If you have two accounts with $4,000 in each, you’re possibly paying fees that you don’t have to pay!

Which Retirement Plans Can Be Consolidated?

The table below indicates which types of retirement plans can be consolidated into which other types. Note that not all types can be consolidated: for instance, you can consolidate a Roth IRA into another Roth IRA, or into a Roth 401(k), Roth 457(b), or Roth 403(b), but not into a Traditional IRA. Regardless of which type of consolidation you’d like to do, it’s a good idea to consult a tax advisor and/or a financial planner for guidance.

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Traditional IRAs can be consolidated into:

• Another traditional IRA
• Roth IRA *
• SEP IRA
• 401(k), 457(b), or 403(b)
• Roth 401(k), 457(b), or 403(b) *

Roth IRAs can be consolidated into:

• Another (different) Roth IRA *
• Roth 401(k), 457(b), or 403(b) *

SIMPLE IRAs can be consolidated (after you’ve participated for a minimum of two years) into:

• Rollover IRA
• SIMPLE IRA
• Roth IRA *
• SEP IRA
• Roth 401(k), 457(b), or 403(b) *
• 401(k), 457(b), or 403(b)

SEP IRAs can be consolidated into:

• Rollover IRA
• Roth IRA *
• Another SEP IRA
• 401(k), 457(b), or 403(b)
• Roth 401(k), 457(b), or 403(b) *

401(k), 403(b), or 457(b)s can be consolidated into:

• Rollover IRA
• Roth IRA *
• SEP IRA
• Another 401(k), 457(b), or 403(b)
• Roth 401(k), 457(b), or 403(b) *

Roth 401(k), 403(b), or 457(b)s can be consolidated into:

• Roth IRA
• A different Roth 401(k), 457(b), or 403(b)

* Only if your adjusted gross income for the tax year does not exceed the maximum limits set by the IRS.

How to Consolidate Retirement Plans

If you’d like the simplicity of having just one retirement account, consider consolidating. The best way to get this done is to simply contact the firm you intend to consolidate into. Most companies and online brokerages have “consolidation specialists” on hand to guide you each step of the way and chances are you’ll simply have to fill out a few forms and answer a couple of questions. From there, the specialist can handle things.

Where Can You Consolidate?

For MAXIMUM flexibility and control, I would consolidate into an online brokerage such as:

• Scottrade
• E*trade
• TradeKing
• tradeMONSTER
• Zecco
• optionsXpress
• optionshouse

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Far too many people, 45 percent in 2008, choose to cash out their 401(k) account when they leave a job. Given the economic conditions, I’d be willing to bet that number has risen. What generally happens next involves shopping sprees, vacations, and drinks on the house … and a huge amount of taxes.

Changing jobs is a fact of life – you will probably change jobs at least a few times over your career. As a matter of fact, the average number of job changes for today’s college graduates is twelve! Almost half of all people who change jobs and have a 401(k) will take their retirement money in the form of a check made out to them personally and will then spend the money earmarked for their retirement on consumable items … after paying 20% to 30% in taxes and another 10% penalty if they’re under 59 1/2. All in all, they lose approximately 40 to 50 percent of their balance.

The numbers

Assume Ashley is a 35 year old in the 28% tax bracket and plans to retire at age 65. Her 401(k) balance is $50,000.

• If she cashes out, she will net only $31,000.
• If she rolls her money into a Scottrade IRA, and achieves an 8% return, at retirement she will have $546,786 (compounded monthly).
• The difference – with no other contributions – is an astounding $515,786.

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That difference is due to the incredible and powerful effect of compounded interest. It may be an urban legend, but when asked to name the greatest invention in human history, Albert Einstein is said to have simply replied “compound interest.”

Better options than cashing out your 401(k)

You don’t have to take the money and run! It’s probably better for you in the long run that you DON’T!

1. You can leave your money in your former employer’s plan.

Some companies will allow you to leave your money in their 401(k) plan despite no longer working there. Usually there are balance minimums ($1,000 to $5,000). If you like your investment options under your former employer’s plan and the fee structure isn’t out of line, this is an okay choice.

2. You can move your money to your new employer’s plan.

The kicker is: do you like the investment options offered under this new plan as opposed to the old plan? If the answer is YES, then your life probably got a whole lot easier from an administrative point of view, plus you’ll be able to continue making contributions to your retirement plan.

3. You can roll your 401(k) into an IRA.

I’m partial to Scottrade because that’s where my personal IRA is located, but you can also roll your money into an E*Trade, optionsXpress, or Zecco IRA as well. If you plan on actively trading stocks, be sure to examine your trading costs. Both Zecco and optionsXpress have very low trading costs at only $4.95. Each of these brokerage houses has rollover experts to help you handle the details and rolling over all your other retirement accounts into one at one of these brokerages will help you maintain your proper asset allocation. Whether a Roth or a Traditional IRA is right will depend on your income level and your personal retirement plans.

With optionsXpress you can trade stocks, ETFs, mutual funds, or options in an IRA.
Click HERE to get started today!

Rolling over your IRA is simple

You have two options for getting the ball rolling:

1. Sit down with the human resources or plan administrator at each of your former jobs and fill out the appropriate paperwork, then have the company write a check for the amount of your account balance.
2. Utilize the rollover experts at one of the brokerage houses.

Guess which one is easier?

One 401(k) rollover caveat

DO NOT have the check made out to you personally. If this happens, the money will be treated for tax purposes as income, just as if you cashed out. Instead have the money wired to the brokerage house you’ve chosen. It’s really easy if you choose Scottrade since they have hundreds of local offices all over the country.

If you DO take possession of a check (made out to the brokerage house), you’ll have only 60 days to deposit it into your IRA. Miss that deadline and you’ll incur the 10 percent early withdrawal penalty. Ouch!

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If you’re interested in depositing much, much more into an IRA than the traditional $5,000 annual limit, an SEP IRA may be just the ticket. The catch? You’ll have to start your own business (read 26 Ways to Make Extra Money Wile Keeping Your Day Job).

Simplified Employee Pension Individual Retirement Accounts, known as SEP IRAs, are IRAs that business owners can set up and fund on behalf of employees and/or themselves, even if there’s only one employee … YOU! And the annual contribution limit for 2011? Almost ten times the regular IRA contribution limit! One key difference is that instead of the employees, it’s the employers that make contributions to the plan. In 2011, corporations were able to make a contribution of the lower of $49,000 or 25% of an employee’s compensation, so if you want to get started making much larger contributions to YOUR retirement account, get your corporation started with LegalZoom ASAP and get your business off the ground.

SEP IRAs

SEP IRAs are most often used by:

• Self-employed sole proprietors who don’t otherwise have access to employer-sponsored plans, such as 401(k)s, for their own retirement investing purposes
• Small-business owners who want to offer a basic retirement plan to employees and/or themselves without the complexity and expense of setting up a 401(k) plan

The Advantages of SEP IRAs

SEP IRAs have four main advantages:

1. Higher contributions: If you’re an employer, SEP IRAs let you contribute up to 25% of your eligible annual income (and that of your employees), up to $49,000 per year for 2011, whichever number is lower. Future limits will be inflation adjusted. These limits vastly exceed those of IRAs and allow self-employed people to contribute as much as the maximum annual 401(k) contribution. SEPs don’t allow catch-up contributions, however.
2. Higher deductions: SEP IRA contributions are usually 100% tax deductible (check with a tax advisor first), which means you can take up to a $49,000 tax deduction annually—much more than the $5,000 deduction for Traditional IRAs.
3. Tax deferred growth: SEP IRA contributions grow tax deferred until withdrawal.
4. Multiple plans: You can create SEP IRAs even if you also have another IRA. Likewise, you can set up a SEP even if you already have an employer-sponsored plan, such as a 401(k), as long as the income you use to contribute to the SEP IRA comes from a separate source (hence the need to start another business). SEP IRAs are a great option if you have an employer-sponsored plan but also earn income on the side by running your own business.

Start your Scottrade SEP IRA today and begin making some meaningful contributions!

How SEP IRAs Work

SEP IRAs for self-employed sole proprietors work a bit differently from SEP IRAs for employers.

• If you’re a self-employed sole proprietor: You set up an account with a financial services firm such as Scottrade and make contributions up to certain annual limits, just as you would with a Roth or Traditional IRA.
• If you’re an employer: You set up SEP IRA accounts with a financial services firm for yourself and your employees. Employees do not set up or administer their own accounts. By law, as an employer you’re required to contribute the same percentage of income into your employees’ accounts as they contribute into their own accounts each year (up to the stated limits). Employees cannot make contributions on their own but can roll over their accounts into Rollover IRAs if or when they leave the company.

Regardless of whether you’re a sole proprietor or an employer, there are a lot of rules surrounding the use of SEP IRAs so be sure and check out the IRS web page on SEP IRAs and consult with a qualified financial advisor to ensure you’ve dotted your i’s and crossed your t’s.

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That’s the $64,000 question. The real question is: will your savings last as long as you do?

How can you make your retirement funds last as long as you do?

This is probably the number one question in the back of anyone’s mind when they start planning their retirement or selecting a life insurance policy. People ARE living longer and since the beginning of the 20th Century, life expectancy rates have increased dramatically. As a result, more and more people are finding themselves cruising right on past their 70′s and 80′s only to discover that their retirement monies didn’t. What can you do to avoid this nightmare?

1. Know your own life expectancy

There are over 1.1 million sites that pop up on Google when you search life expectance calculator but all these sites can tell you is how long the average person with your demographic profile will live. Are you average? I didn’t think so.

What happens if you don’t figure out how long you’ll live?

• You may live like a frugal miser your entire life only to die with millions in the bank
• You could outlive your cash and be forced to depend on charity, family or the federal government

The Census Bureau tables found in those 1.1 million sites are a decent place to start but there are several other factors that could determine if you’ll outlive your funds (other than not saving enough!):

– Improper investing

Chasing returns, aggressive investing, trying to time the market, failing to set up the correct retirement accounts, and investing in things you don’t understand can cause your portfolio to dry up far too soon.

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– Skipping the budget

Probably no budget is more important than the retirement budget. You HAVE to know what you can spend and what you can’t.

– Too much debt

Interest charges can cut through a portfolio like a hot knife through butter. Having to repay a mortgage or excessive credit cards when living on the proceeds of your retirement accounts is a sure way to run out of cash far too soon.

– Your health

If you keep yourself in shape, exercise moderately, stay within a healthy weight range, don’t smoke, don’t have high blood pressure, and generally practice healthy habits, you probably should add a few years to those tables. Chances are pretty good you’ll do better than average.

– Your genetics

Genes may play a bigger role than many people, even experts, realize. We all know people who drink like fish and smoke like chimneys but are in their 80′s or 90′s, still living large. But if your family medical history is rife with cancer, or heart attacks, or short lives (well under average), you should take that into consideration. Family history IS NOT a guaranteed short lifespan but taken with poor health habits, it could be cause for concern.

If you don’t like thinking about these things, I don’t blame you. Just estimate that you’ll live to 95 … and if you plan for your retirement money to last that long, you’ll probably be okay one way or the other and if you live to 97 — GREAT! If you live to 75, you just left a great inheritance to your heirs. Make sure your will is in place and up to date.

2. Withdraw your funds wisely

Most financial advisors (click HERE to get matched with a financial advisor) advise their clients to withdraw no more than four percent of their retirement savings each year. The Four Percent Theory however, is a moving target and should be adjusted depending on the economy. If the market takes a tumble and your accounts are suffering, four percent next year will be substantially less than four percent this year.

3. Don’t be afraid to make adjustments

Even if you do use the Four Percent Rule, every two or three years you should sit down with your financial advisor to look at where your retirement portfolio stands and whether you’re on the right track.

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