Investing can be very simple indeed. It is very possible to spend little time to monitor them. A more passive strategy and well picked portfolio might do better than simple stock picking.
How to Double Your Money Every Seven Years – The Parable of Jill and Average Joe. Compound interest is amazing and allows you to accumulate wealth. It is good to start young. It is best to start the moment you enter the workforce. Most people are satisfied with returns that are too low. They need to aim higher and get what they deserve. One saves so that in the future, the money will grow and you will have more of it. Compound growth is actually exponential growth. Use the rule of 72 to know when your money will double. Let the money work for you. Why does the average investor not enjoy good returns? One is because of fees to an investment manager or financial advisor. He might also make poor investment decisions. This has a lot to do with timing. Never underestimate the value of compound interest.
Laying a Solid Foundation – How to Make Sense of the Investment World. Bonds are a type of debt that represents an IOU from a user of money such as a company or government, to a provider of money such as an investor. The debtor has to make periodic interest payments and return the principal at the end of the term. Stock is about buying a stake in a company and sharing the risks. Stocks have unlimited upside but are more risky. Companies can return some of its earnings to shareholders as dividends. A stock market is a place where an individual invested in a stock or bond can sell it to someone else. Mutual fund pool funds together so that they can invest in a larger pool of portfolio of stocks. The value of the stock today is the present value of its future dividends. A dollar is more valuable than one tomorrow. Many of us prefer instant gratification. However, to get the present value, you need to apply a discount rate. A good rate to use is the US Treasury bonds etc, or a zero coupon bond. However, markets do not simply reflect the intrinsic value of a stock. It is very difficult to predict actual dividends. Factors like the economy will affect it. Humans are also full of fear and greed. As a result, holding period of stocks have shortened. There is also a concept of reflexivity, where movements in stock prices do not just reflect estimates of the future, but they can, in fact, directly impact the future. It can be a cyclical in nature.
How to Get Off to the Right Start: A Practical Guide to Choosing an Investment Account. Look for discount brokerages and do not pay excessive commission. In general, there are 4 choices: full-service brokerages, mutual fund companies, discount brokerages and banks. Discount brokerages allow you to DIY and buy whatever you want. This is the low cost way to invest. You can also buy into mutual funds. Full service brokerages are offered by banks and they are like an investment adviser. Returns from a deposit pale in comparison with the stock market potential returns of course. There are no maintenance fees for discount brokerage accounts. You can link your stock account with your bank account.
How to Save Tens of Thousands of Dollars in Taxes, Without Opening an Offshore Bank Account. Taxes are a large investment expense. Tax advantaged accounts like IRA and 401(K) can be used. Use a tax sheltered retirement account. Interest income from bonds are taxable. There is also a capital gain tax. Dividends received are also taxed. Tax has a huge impact on compound interest. Therefore, it is important to use a tax-advantaged account. 401(k) is a retirement account that is provided by your employer. The employer may match your contribution into 401(k). You can also deduct your contribution from income before computing taxes. Any investment in 401(k) is tax free until it is taken out. However, there are penalties for early withdrawal on 401(k) and IRA, before age 60. Withdrawals made after 60 are subject to tax. Your investment options might be limited somewhat. IRA is not managed by your employer, but has similar benefits. There are also Roth and traditional ones. Understand the differences between Traditional and Roth IRAs and 401(k). You might need a taxable account if you need a short term funding for buying a car etc. Everyone should have all 3 accounts.
Getting Organized: How to form your own personal investing plan. Planning for a retirement is definitely important. Goal setting is really important. There needs to be a clear signpost. How much money do you need? Ask yourself about your spending habits and expenses. 2/3 of your current income is extremely comfortable. What are your stretch goals? How much money will you need to meet them? Your portfolio should last 25 years after retirement. You need to set aside a sum of money for investments every year. You can split your savings into different accounts, like IRA, 401(k) etc. The first step should be to contribute enough to a 401(k) to maximize the employer match. You should a bank account that can cover at least 3 month of living expenses in the event of emergencies. Learn to maximize tax-deductible contributions to an IRA. Do the same for 401(k).
Why You Need to Know Your Investing Alphas and Betas: A Guide to Investment Returns. Beta refers to your exposure to the market. Alpha returns shows your skill and whether you can beat the market. Alpha returns are difficult to achieve and people should focus on beta. Exchange traded funds will give you beta returns. You need to compare your returns with an index. Beta measures how risky a portfolio is. Investors need to be compensated for the risk inherent in the stock. There is no economic reason for positive alpha returns. Beta drives returns more than alpha. They are also easier to achieve. There are both active and passive mutual funds. Actively managed funds will pick stocks that do better than the market. ETFs are really convenient and very liquid.
Moving Beyond the Stock Market: An Introduction to Asset Classes. There are many other investment opportunities available. Stocks are the most common. One can make from the dividends and capital gains. You can also buy foreign stocks like those in emerging markets. For bonds, they are less risky and relatively more stable. Bondholders have a higher claim than shareholders during liquidation. T bonds are the safest. One can also consider mortgage backed securities or even municipal bonds. There are also inflation protected bonds. There is also an asset class known as REITs. REITs are legal entities that own properties like apartment buildings, malls, and office buildings. They have to pass dividends to shareholders. They are required by law to distribute most of its profits. REITs usually perform well when stock markets are down. There are also commodities, venture capital, hedge funds, private equity etc.
Why the S&P 500 is not good enough: How to Use the Principles of Diversification to Choose an Intelligent Asset Allocation. Diversification is important. Asset allocation is more important than stock picking. Diversification can increase returns while keeping risk the same. Sometimes, people combine unrelated asset classes in order to smooth returns. An S&P Index Fund is not a diversified portfolio. This is because diversification occurs between different asset classes. Observe the endowment funds and what they are investing in. You can be like 50% stocks, 30% bonds etc. There is an argument that corporate stocks are as risky as their stock counterparts. Stick to a plan that works well for you. As you get older, it is advisable not to have so much money tied up in stocks.
Putting It into Practice: How to Painlessly Implement Your Target Asset Allocation Using ETFs. Cost and liquidity are important for good ETFs. The fees should be less 0.5% of assets. There are good investment opportunities in the 401(K) too. You can buy an equity index fund for US or international stocks. In addition, you can also get a good actively managed equity fund. The expense ratio of mutual funds should be less than 1% of assets. Find those mutual funds with less than 60% of turnover. Look for those with 5 star ratings. Look for portfolio managers with long tenures. Buy a bond fund. REITs should be kept in retirement accounts.
Making it Bulletproof: How to Manager for the Long-Term with a Lockbox (and a Sandbox). Keep your savings in a lockbox. This is your buy and hold portfolio which should not vary over time. Keep a lockbox so that you will be immune to the above. Most fund managers are not good enough to outsmart the market. Set aside 5% for playing. You can bet into a 10-bagger. Avoid day trading as people tend to lose money. Your sandbox should not be more than 20% of your assets.
A major reason for poor performance is the human tendency to look around at the crowd and buy what everyone else is buying and sell what everyone else is getting rid of. In other words, we buy assets that have recently appreciated and sell those that have recently depreciated. – Ivybytes
Book & Quote Monster 