Why you should start a ROTH IRA

With tax season in full swing, I think it’s a good time for me to share why I love Roth IRAs and why I think everyone, particularly young people, should set one up today and let the tax-free earnings grow.

If your employer offers it, hopefully you’re taking advantage of a traditional 401k, which allows you to contribute up to 15% of your salary, and that amount is deducted from your taxable wages.  For example, if you make $50,000 per year, you can contribute up to $7,500 and your taxable wages will be reduced to $42,500.  At that income level, your federal tax bracket is 25%, so instead of paying $12,500 in federal taxes, you’ll only owe $10,625.  That’s an extra $1,875 in your pocket each year, plus any match that your employer offers.  Unfortunately, you’ll eventually have to pay taxes on the principal as well as any returns when you begin withdrawing during retirement.

Unlike a traditional 401k, a Roth IRA is funded with post-tax dollars, but ALL withdrawals during retirement are tax free.  So, in other words, you pay taxes on the principal up front, but all growth is tax free.  So lets say you contribute $5,000 per year, beginning at age 30.  When you retire at 65, you’ll have contributed $175,000 of post-tax dollars, and if we assume a modest 6% average annual return, you’ll have about $600,000 and all withdrawals will be tax free.  You already paid tax on the principal of $175,000 but the $425,000 in returns is absolutely tax free when you withdraw at retirement.

Compare this scenario to a traditional 401k.  The $5,000 in contributions each year would be tax deferred, so that saves you $43,750 over the course of 35 years.  However, unlike a ROTH, you will owe taxes on ALL withdrawals of both the principal, as well as the estimated $425,000 in appreciation.

Traditional ROTH
Annual Wages $50,000 $50,000
Annual Taxes Paid $11,250 $12,500
Annual Contributions $5,000 $5,000
Returns at 6% Annual $425,000 $425,000
IRA Balance at Age 65 $600,000 $600,000
Taxes Paid on Withdrawals $150,000 $0

So there you have it …  You would make over $1,000 more per year in net pay by contributing to a traditional 401k because all contributions are tax-deferred, plus you may be eligible for an employer match, but you eventually have to pay taxes on both the principal and any returns at retirement.  The ROTH IRA does nothing to reduce your tax liability today because it is funded by post-tax dollars, but all withdrawals are tax free at retirement, so you’ll end up with a lot more money in the long run by investing in a Roth vs. a traditional 401k.

So, how do you setup a ROTH IRA?  You can setup an account with most major banks.  I set mine up with Capital One (Share Builder) because that’s where I also have my checking account so it’s easy to transfer money.  Once you set it up, you can choose to invest your money however you would like.  Unlike an employer-managed 401k, which only gives you a few options for investments, you have total control over your ROTH account.  Pick individual stocks, mutual funds, ETFs, bonds, etc.  You can buy and sell assets inside of your account at any time.  However, you can only contribute a maximum of $5,000 per year into the account and there are also income limitations so high earners may not be eligible.  Finally, another benefit is that if you need take the money out, you can remove the principal without any penalties.  So, for example, after 2 years of contributing the maximum of $5,000 per year, lets say that you have $12,000, ($10,000 principal + $2,000 in returns).  If you absolutely need to, you could withdraw up to $10,000 without penalty.  However, this is strongly discouraged.  Leave that money in and watch it grow!

My advice?  Take advantage of both!  At the very least, contribute enough into your employer’s 401k to maximize their match (usually 3% to 5%) but contribute the full 15% if you think you can swing it.  On top of that, you can contribute up to $5,000 per year into a ROTH IRA.  Do this for 30 years and you will be living the good life when you retire.  Good luck!

“Google Now” – Creepy or Awesome?

If you have a newer Android phone, you may have noticed a new application called “Google Now” that came with the latest Jelly Bean update.  It definitely pushes the creepy envelope but it’s also incredibly useful.  Google Now combines information it collects from you, like where you are based on your phone’s GPS, reservation confirmations that were sent to your gMail account, searches for your favorite sports team on Google, events on your calendar, etc.

google-now-cards

Access Google Now by holding down the menu button and you’ll be surprised by what you see.  First, current traffic conditions on your route to work or to home, depending where you are.  But how does it know this when you never told Google where you live or work?  Google has learned where you live based on your GPS signal at night and where you work based on your GPS signal during the day.  Once you get over the creepiness, you’ll appreciate how convenient this is.  Google Now will also show you a weather forecast of wherever you are, local events and attractions, nearby movie theatres and show times, nearby restaurants and reviews, and nearby train/subway routes and schedules.

The beauty is that you don’t need to search for any of this, it’s already there.  Search for the Red Sox a lot on Google?  You’ll automatically see scores or upcoming games.  Book a flight and have the confirmation sent to your gMail account?  Google Now will show you your flight status, gate, and boarding pass.  Order a package and have the confirmation sent to your gMail account?  See the shipping status and tracking information.

Some people might find this so creepy that they’ll want to ditch their smartphone for a flip phone, go private when web surfing and go back to using AOL e-mail.  I personally love this stuff.  If technology can make my life easier, I’m all for it.  But this is yet another reminder to be careful of how much information you give companies like Google or Facebook.  It’s scary how much they know about us!

Top 20 Favorite Apps for Android

Your Android phone is only as good as the apps you download so here are the top 20 apps, in my opinion.  Most of these are available on the iPhone as well.  Let me know if I missed any good ones!

#1. Facebook  facebook
Facebook’s Android app used to be so slow that I was forced to use other apps like Friendcaster to access FB instead of the official app.  However, last month the app was upgraded and it’s now quicker and easier to view photos, get messages and navigate around the app.  Finally!
#2. Pulse News pulse
If you like reading the news or magazines, this app is a must!  Pulse takes your favorite websites and transforms them into an interactive mosaic. Tap on an article to see a clean view of the news story within the app. Save stories for reading later across all platforms or sync them with Pocket and Evernote.  You can also easily share articles on Facebook or Twitter.
#3. Pocket  (Read It Later) pocket
A lot of times I find articles that I want to read but I don’t have the time to read them at that moment.  With Pocket, you can save anything on the web and view it later, even offline.  It also syncs between your phone, tablet & computer. 
#4. Evernote evernote
Evernote is a notepad on steroids.  Take notes, capture photos, create to-do lists, record voice reminders–and all of these will sync so you can access them on any device, anywhere. 
#5. Barcode Scanner barcode scanner
Scan barcodes on products in stores and then look up prices and reviews on Google, Amazon, etc.  You can also scan QR Codes containing URLs, contact info, etc.
#6. Go SMS Pro go sms pro
Replaces original SMS app.  Features include custom backgrounds and layouts and pop-up notifications.
#7. Mint.com mint
I know this might sound scary, but you can setup Mint to access all of your checking accounts, credit cards, even student loans, car loans and your 401k, so you can see all of your balances and recent transactions in one place.  It automatically categories your transactions so you can go to mint.com on your browser and access charts to analyze your spending. 
#8. iHeart Radio iheartradio
I prefer iHeartRadio over Pandora because there’s much less apps doesn’t keep asking me if I’m still listening.  Create custom stations just like you do on Pandora, or just listen to the radio (but why would you?). 
#9. Sound Horn soundhorn
◦ Amazing, fast music recognition
◦ See lyrics move in time with the music
◦ Facebook and Twitter sharing, 
◦ Buy links, YouTube videos, artist biographies, and much more
#10. Into Now intonow
It’s crazy what apps can do …  While you’re watching ANYTHING on TV, even if it’s live, hit the green button in this app, let it listen for about 10 seconds, and it will identify what you’re watching and give you links to look up more information.  Also allows you to share on Facebook & Twitter.  If Yahoo could make more apps like this, maybe their stock would finally rebound. 
#11. Stumble Upon stumble
This app lets you “stumble upon” interesting websites …  Just tap the “Stumble!” button, or swipe your device’s screen to discover photos, videos, web pages and more, recommended by people sharing your Interests.  You never know where the next Stumble might take you… 
#12. Linked In linkedin
The social network for professionals.  This app does everything you need it to do.  Get updates on people in your network, view industry news, edit your profile, keep up to date with your groups, or view recommended jobs. 
#13. Cam Scanner cam scanner
Turn your phone into a scanner.  Just take a picture of any paper documents such as receipts, whiteboards, notes, agreement and so forth, and CamScanner can auto-crop image, enhance image quality and create an industry standard PDF file.
#14. Redbox redbox
Find the nearest Redbox kiosk, see what movies or games are available, and easily reserve the discs for pickup so that you don’t annoy the people waiting behind you at the kiosk when you can’t make up your mind.   
#15. Yelp yelp
 Find and read reviews about local businesses near you.  Use Yelp to search for places to eat, shop, drink, relax and play then read reviews from the locals.
#16. Microsoft Skydrive sky drive
SkyDrive is the place to store your files so you can access them from virtually any device. You can also upload photos or videos from your phone to SkyDrive.  Access all of your SkyDrive content including files shared with you.
#17. Kindle kindle
Read books on your phone, including thousands of free Kindle books.  The Kindle app puts over a million books at your fingertips. It’s the app for every reader, whether you’re a book reader, magazine reader, or newspaper reader—and you don’t need to own a Kindle to use it.
#18. Vevo vevo
Access VEVO’s entire catalog of 50,000 music videos from more than 11,000 artists.
#19. Zillow zillow
Find homes and apartments for sale, or for rent. Or, get home values on nearly every home (100+ million) in the U.S.
#20. Bookmarks bookmark
Bookmark Home is a website launcher, a bookmark manager, that looks and feels like a home application for bookmarks.

My Review of Windows 8 with the Lenovo Yoga

I’ve been using Windows 8 for about a month with the Lenovo Yoga, an ultrabook/tablet convertible, and I must say that I’m a big fan of the new Windows 8 operating system, as well as Lenovo’s hardware.

lenovo_yoga_windows_8_ultrabookIn my last post, I wrote about my first impression of Windows 8 and I said that touch screen is a must.  I’m now more convinced of that than ever.  Windows 8 was built for touch screens, and people with non-touch screens will see little benefit in the new modern start screen.  The good news is that the traditional Windows 7 desktop can still be accessed by clicking on the “Desktop” app.  The only thing missing from the traditional Windows 7 desktop is the start button in the bottom-left of the screen, but you can easily bring it back my downloading a program such as Start8.  In fact, if you download that program, you can set the traditional desktop to be the default and completely ignore the modern start screen.

I personally love the modern start screen.  I use the “People” app a lot for viewing Facebook and Twitter and the Mail app is nice because it brings all of your accounts together into one place.  I like the new “charms” bar, accessed by swiping the right side of the screen, which lets you quickly search the web, search your apps, share things to social media, print, send to Bluetooth, send videos to your xbox-connected TV, adjust settings, etc.  If you swipe the left of the screen, you can either pull up your most recent app, view all open apps, or pin another app to the left or ride of the screen.  I wouldn’t call these new controls intuitive because there’s definitely a learning curve, but now that I’ve got the hang of it, I love how easy it is to navigate between apps.

The new touchscreen functionality in Windows 8 is fantastic.  The touchscreen on the Lenovo Yoga is extremely responsive and the on-screen keyboard is easy to use in tablet mode.  I love being able to browse the web by scrolling through pages and zooming in & out with my fingers.  In fact, when I’m using my non-touchscreen Windows 7 work laptop, I often find myself reaching up to the screen and trying to scroll or zoom.  The Lenovo Yoga is optimal for me because I use applications like Microsoft Excel and Adobe Photoshop, which really need a keyboard and trackpad/mouse.  Switching between laptop and tablet couldn’t be any easier, just flip over the screen.  Yes, the keyboard is exposed in tablet mode, but it automatically disables and really doesn’t bug me.  More than any other mode, I use the pictured “stand mode”, in which the keyboard is on my lap and the screen is closer to me, ideal for using the touch screen or watching videos.

The Lenovo Yoga is priced at $999, which is far from cheap, but matches the price of the MacBook Air with similar specs, minus a touch screen.  Apple doesn’t believe in touch screens on traditional computers because there may be undesired trade-offs.  In CEO Tim Cook’s words, “You can converge a toaster and a refrigerator, but those aren’t going to be pleasing to the user.”  However, Windows 8 works for me.  It’s a fully-functional laptop with the added bonus of a touch screen, which makes browsing e-mails or the web more convenient.  Plus, if you get a convertible model like the Lenovo Yoga or Dell XPS Duo which flips  or swivels into a tablet, you have the option to get the keyboard out of the way.  Sure, it’s twice the weight as a traditional tablet, but I’m not one to walk around holding it in my hand, so more weight is OK if it means better performance (Fast Intel CPU, 4 GB RAM) and the convenience of having one device do it all.

 

First Impression of Windows 8

Not wanting to get stuck in Apple's ecosystem, I've held off on buying an iPad and have been waiting for the new Windows 8 tablets instead.  They're definitely late to the party, but I like what I'm seeing.  Not only are a lot of these tablets/netbooks/convertibles just as sexy as anything Apple has out there, but more importantely, many of them a lot more functional than any other tablet on the market because they can do everything that a laptop can do and more.   

I've played around with some of the new Windows 8 devices at Best Buy and this much I know – if you're going to get a Windows 8 device, touch screen is the only way to go.  They're quite a bit more expensive but I see no purpose in buying a traditional non-touchscreen laptop with Windows 8 since the operating system revolves around touch.  I think that the "convertibles" are the best of both worlds – a fully functional laptop that can easily convert into a lightweight standalone tablet.  Windows 8 will take some getting used to and may not be as intuitive as it should be, but the live tiles are really cool.  Plus, unlike traditional tablets, you can actually use real computer software on most Windows tablets, like Microsoft Office and Photoshop, in addition to many of the same apps available through Apple or Google.  (The exception here is the Surface, which runs a scaled down version of Windows 8.) 

Here are the devices that I'm considering for my next toy …

Lenovo has unveiled a new hybrid tablet/Ultrabook named YOGA which can also be positioned ...Lenovo IdeaPad Yoga
 
This is one of the few convertibles that is already on the market.  The Lenovo Yoga's screen can be flipped 360 degrees in order to be used as tablet.  It feels a little strange to have a keyboard on the bottom in tablet mode, but the keyboard automaticaly disables when flipped so you don't need to worry about pushing any buttons.  The advantage of a screen that flips, rather than a screen that detaches, is that you can prop the device like a tent, as pictured.
 

   Sony VAIO Duo 11
This device switches from a laptop into a tablet by simply sliding the screen down its tracks on the perimeter of the keyboard.  It's as easy as flipping open a QWERTY phone but that adds some bulk because the screen covers an area that would otherwise be used for a bigger keyboard. 

 

Dell XPS Duo 12  Dell XPS 12 Convertible
Forget flipping or sliding, the screen on the Dell XPS Duo 12 swivels.  To switch from laptop to tablet, you just push a button and swivel the screen around 180 degrees, then close the lid.  Looks awesome!  

 

 HP ENVY x2 
The screen of the HP Envy deatches from the keyboard for use as a standalone tablet.  The benefit here is that it's probably lighter than any of the other devices that have screens that flip, slide, or swivel. 

 

 

Sorry for the lack of updates!

Well, it's been almost 6 months since my last update so my plan of frequently updating this blog went out the window.  However, I do have a few excuses …  In these last 6 months, I finished my MBA, got a promotion at work that has required me to travel back and forth a lot between Connecticut and Virginia, and most importantly, I got married in September!  Now that things have calmed down a bit, I'm going to try to do a better job with updating this website.  

Stay tuned …  More updates on the way

Weighing in on the Facebook IPO

 The 'historic' Facebook IPO has been all over the news.  Based on the hype, I expected the stock to jump from $38 and go into the $40s or $50s before crashing down to somewhere around $20, where I think it belongs and where I may actually be a buyer.  

But I was actually surprised to see the stock drop so quickly.  On day 2 FB dropped below the IPO price of $38, meaning that all of those institutional investors who were priveledged with getting thousands of shares didn't make anything on the IPO, not yet anyway.  Here's my two cents on the whole thing:

I'm weary of investing in Facebook at any price because a) it's trendy, b) most of its heavy users are young, c) a growing number of users access facebook on their smartphone, and d) the company solely relies on advertising revenues.  

Trendy websites come and go …  One obvious example is My Space.  Also think about the giant web portal AOL and its instant messenger service that me and my friends were signed onto for about 10 years straight.  (I kind of miss it)  You never know, a few years from from now, we may be saying, "hey, remember when everyone went on facebook?  that was crazy!".  

As for my point about most of its users being young, this is undesirable to most Internet advertisers because they measure success by how many users clicked on their ads and actually purchased something on their website.  Well, the first problem is that the younger generation ignores advertisements and feels entitled to getting everything on the Internet for free. Secondly, even if users did click the ads, a lot of them are too young to have credit cards.

Then there's the whole mobile problem that has been getting a lot of attention lately.  Facebook currently makes zero profit from users that access it on mobile phones.  I'm sure they'll figure out how but I think its going to be hard for Facebook to convince companies of the value of putting their ad on someone's phone while they're playing 'words with friends'.

Finally, there's the important issue of valuation.  A company sets its IPO price in a way that it can make as much money as possible and I think Facebook did a great job in doing that.  For example, if the price was set much lower and the price then sky rocketed 30% like it does with many other IPOs, then that would be money left on the table because it's the shareholders, not Facebook as a company, that make money off share gains after the initial public offering.  

However, the downside now is that Facebook is probably too expensive for shareholders to realize any significant gains in the near future.  If you're new to investing, you may be thinking, "Huh?  $38 isn't expensive!  Google is $600.  That's expensive".  But actually, Google is much much CHEAPER than Facebook.  That's because the price alone is meaningless.  

It's the price per earnings that actually matters and Facebook's current P/E of $74 is ridiculous!  Why pay $74 for each dollar in Facebook earnings when you get more bang for your buck from similar companies like these:

Google       $18
Yahoo         $17
Microsoft    $11
Apple          $14

(If the whole price/earning thing sounds confusing, read my previous article on the basics of evaluating stocks for beginner investors.) 

Don't get me wrong, Facebook has a lot going for it and can offer companies a terrifying amount of information about its users that allows them to target their ads in a way that has never been possible.  (EX: Show my ad only to guys who are ages 18 to 24, single, college-educated, live in CT, have at least this many facebook friends, have been to any of these places recently and "like" this brand or this celebrity)  Crazy!  At the right valuation, I would be a buyer of FB, but let's not get carried away.  This stock isn't going to skyrocket any time soon and could definitely lose more ground over the next few months.  Intsead of buying FB, you're better off with GOOG.  An $18 P/E is a steal for a growing technology company that is diviersified in everything from web search to android phones to driver-less cars, even if Google+ is a complete ghost town!

Evaluating Stocks: The Basics

I hear a lot of beginner investors say that they want to buy a company's stock because it's "cheap" or that they won't buy a company's stock because it's "expensive".  Unfortunately a lot of beginners are evaluating a stock based on its market price.  Don't!

The market price alone is useless in determing value because it depends on the number of shares out there.  A company can manipulate its stock price just by doing a split or reverse split.  When determing if a stock is cheap or expensive, ignore the stock's market price and instead look at these two things: earnings per share (EPS) and price-to-earnings (P/E Ratio).  

Earnings Per Share

As the name implies, EPS is simply the company's earnings divided by the number of shares outstanding.  This tells you how much of the company's earnings are represented by each share.  The more, the merrier.  However, EPS by itself does not tell you if the stock is cheap or expensive, but it's used in the P/E ratio, which does just that!

Price-to-Earnings

The P/E ratio is calculated by dividing the current market price by the EPS.  I think that it's the singe most important number to look at when evaluating if a stock is cheap or expensive.  This is basicaly how much you're paying for the company's earnings.  The lower the number, the better bang for your buck!  However, don't buy a company that looks like a sinking ship just because it has a low P/E ratio.  (Only the future earnings count!)  Similarly, many technology companies have really high P/E ratios because the street believes that these companies are really onto something and that their earnings will continue to increase.  Unfortunately, this is also how bubbles occur.  When there's a lot of hype, like there was around technology stocks in 2000, a crash can occur when the street finally realizes that their expectations are way too high and the company's will never be able to generate the expected earnings.    

A couple examples ...

Lets start with Apple (AAPL).  The market price is currently $633.68, which is just about its all-time high.  I know that price is tough to swallow but in my opinion, this stock is actually cheap!  The high market price just means that you won't be able to buy a lot of shares but that's OK.  All that matters is the return you get on your investment.  

In the case of Apple, I bought the stock at $200 because I believed that iPhone sales would go through the roof and the iPad would sell like crazy (eventhough it's just a big iPhone that can't make phone calls).  So, is it still a good buy today?  Lets look at the fundamentals.  The EPS is 35 and the P/E is $18.  When you compare that to the P/E of the S&P 500, which is currently $13, you see that it's priced at a premium.  But there's a good reason.  Apple is on fire!  Every device they make, even if it's only slightly different from the previous model, it sells like crazy, so the street believes that earnings will keep increasing.  Most importantly, a P/E of $18 is not high when you look at Apple's historic P/E.  How do you see the historic P/E?  Big Charts by Market Watch.  When you do an advanced chart, click on "Lower Indicator" and then click "P/E Ratio".  Set the time to 5 years.  Here's what you get:

As you can see, despite tremendous appreciation in the stock's price, the P/E ratio has remained stable, between $15 and $20, because Apple's earnings keep increasing each quarter, which justifies the appreciation.  So, based on Apple's historic P/E ratio, one could argue that Apple is actually still "cheap", despite costing almost $700/share. Plus, Apple recently announced that it will begin paying a dividend which yields about 1.5% at the current price, which adds to the value.  Need I say more?  Apple is the real deal!

Amazon (AMZN) is currently trading at $194.39 with EPS of $1.37 and a P/E ratio of $142.  Amazon is 21% below its high of $246.71.  The P/E ratio of Amazon.com and other online retailers has always been high because the street believes that online purchases will continue to increase.  

But how does the current P/E ratio compare to Amazon's historic P/E?   

As you can see, Amazon's P/E ratio is higher than ever, which may explain the recent pull-back in its market price.  However, Amazon is currently shifting its business model to revolve around its e-readers and tablets which it basicaly sells at cost (or below) because the company hopes for recurring profits to come from the digital purchases made on its devices.  (Think about razors …  The razors are always cheap because the company makes its money from its over-priced high-margin razors!)  If you think this strategy will work, buying Amazon at such a high price may not be so crazy.  A couple good earning releases and this stock is over $300.  Then again, Amazon is under pressure from the traditional competitors companies like Wal-Mart and the not-so-traditional competitors like Google, which just introduced its "Play" store and plans to release new devices that will compete with Amazon's "Fire" tablet.

I hope you now have a better understanding of how to evaluate a company's stock.  I can't say enough about how important a company's P/E ratio is but remember that it isn't everything.  I'm just scratching the surface when it comes to evaluating stocks.  There's several other very important ratios to consider as well as the company's financial reports.  

Disclosure: I am long AAPL and AMZN.