Category Archives: Compounding

Successful Investors are Patient

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“The stock market is a device to transfer money from the impatient to the patient.” — Warren Buffett

Patience is ofter referred to as the most underused investing skill and virute. And, learning patience could help you reach your financial goals of wealth building and finacial freedom.

Be extremely patient when investing in assets and wait until you can buy an investment at an entry price when everybody else hates the investment or are extremely pessimistic about the prospects of the investment.

In other words, wait until you can buy the asset at a extremely discounted price.  Keep in mind that every investment is affected by what you pay for it.  The less you pay, the better your rate of return on that investment.  Never, Never, Never…overpay for an investment.

People feel losses twice as much as they feel gains.

Successful investors develop a number of valuable skills over their lifetimes. And many report that patience is the most important skill to learn and master, but often it goes underused.

We’re not born patient. But, patience can be learned and, if you’re an investor, learning it could help you reach your financial goals.

Patience often involves staying calm in situations where you lack control. Even if we’re patient in some parts of life, we have to practice and adapt to be patient in new situations. Just because you’re a patient person while waiting in line at the DMV doesn’t mean you’re a patient investor.

Alway keep in mind and retain the mantra that…if there is a good opportunity now, a better one will come in the future.

Yet, patience can be difficult for investors to master, why it’s an important investing skill and how to apply patience to investing.

Why Is it so Hard to Be Patient?
Simply put, your brain makes it hard to be patient. Human beings were designed to react to threats, either real or perceived. Stressful situations trigger a physiological response in people. You’ve likely heard this called the “fight-or-flight” response — either attack or run away, whatever helps alleviate the threat.

The problem is, your body doesn’t recognize the difference between true physical danger (during which fighting or fleeing would actually be helpful) and psychological triggers, like scary movies. Being patient is difficult because it means overcoming these natural instincts. Turbulent financial markets can trigger the response too but, unlike scary movies, there can be real-world impacts you’ll need patience to overcome.

When markets are seesawing and you’re overwhelmed with negative financial media, as we experienced this year during the pandemic-driven bear market, your brain perceives a threat to your financial well-being. Even though stock market volatility isn’t a physical threat, the fight-or-flight response kicks in, emotion takes over, and your brain starts telling you to do something. Your investment portfolio is being harmed! Take action! Now! With investing, action too often translates into selling something because selling feels like you’re shielding your portfolio from further harm. But selling at the wrong time — like in the middle of a major downturn — is one of the biggest investment mistakes you can make.

Impatient investors let anxiety and emotion rule their decision-making. Their tendency towards “doing something” can lead to detrimental investing behaviors: checking account balances too often, focusing on short-term volatility, selling or buying at the wrong time or abandoning a long-term strategic investment plan. And those bad behaviors could damage investors’ long-term returns.

Selling out of the market during a correction might feel like you’re taking prudent action. And you may even derive some pleasure in seeing the market continue to fall after you’ve sold your equities. But that pleasure could soon be replaced by regret, because consistently and correctly timing the market by selling and buying back in at the right time requires an incredible amount of luck — and we don’t know any investors who have that much luck.

Investment entry point and investor patience are super-important too.

Benjamin Graham, known as the “father of value investing,” knew the importance of patience in investing. Patience and investing are actually natural partners. Investing is a long-term prospect, the benefits of which typically come after many years. Patience, too, is a behavior where the benefits are mostly long-term. To be patient is to endure some short-term hardship for a future reward.

The importance of being patient when investing can be best summed in this quote by Benjamin Graham…“In the end, how your investments behave is much less important than how you behave.”

“We agree with Warren Buffet’s observation that the stock market is designed to transfer money from the active to the patient. By only swinging at fat pitches and avoiding curveballs thrown far outside the strike zone, we attempt to compound your capital at an above average rate while incurring a below average level risk. In investing, patience often means the accumulation of large cash balances as we wait to purchase ‘compounding machines’ at valuations that provide a margin of safety.” Chuck Akre

Compounding works exponentially for the patient investor. The power of compounding is one of the most important concepts that investors need to learn and embrace. Since, patient and time are better friends to the investor than experience, expertise, and even research.

“A lot of people historically have done fairly well investing in companies they just genuinely like, whether it’s been Starbucks or Nike.” Gary Vaynerchuk, CEO, VAYNERMEDIA

References:

  1. https://www.thestreet.com/thestreet-fisher-investments-investor-opportunity/patience-the-most-underused-investing-skill
  2. https://www.nasdaq.com/articles/why-patience-is-crucial-in-long-term-investing
  3. http://mastersinvest.com/patiencequotes

Billionaire’s Income Tax

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“Some liberal lawmakers hope the “billionaire tax” will eventually be extended to millionaires.”

A ‘Billionaires Income Tax’ would be a fundamental change in how the tax system operates in the United States, and open up a new revenue stream for the Treasury. The wealth tax plan would “get at the wealth of the richest Americans that currently goes untaxed until assets are sold”, according to Roll Call.

The Senate has proposed a special new tax on the uber wealthy, think billionaires, that Democrats will use to help pay for their next big multi-trillion dollar ‘Build Back Better’ fiscal spending package. The proposed tax on the net worth of billionaires’ stock holdings, real estate and other assets could help Democrats accomplish goals of raising taxes on the wealthy and funding their pet social safety net and climate programs.

The Senate Finance Committee Chair wants to “begin requiring people with more than $1 billion in assets, or who earn more than $100 million in three consecutive years, to begin paying capital gains taxes each year on the appreciation in value of their assets, regardless of whether they are sold”, Politico reported.

The ‘billionaire tax’ plan would reportedly hit around 700 Americans and generate several hundred billion dollars in tax receipts. “We have a historic opportunity with the Billionaires Income Tax to restore fairness in our tax code, and fund critical investments in American families,” said Senate Finance Chair Ron Wyden (D-Ore.). “The Billionaires Income Tax would ensure billionaires pay tax each year, just like working Americans.”

The proposal, should it pass Congress and be signed into law by the President, would almost certainly be challenged in federal court on its constitutionality. The Constitution restricts so-called direct taxes, ‘a term referring to levies imposed directly on someone that can’t be shifted onto someone else’. There’s a big exception for income taxes, as a result of the 16th Amendment, which allows Congress to tax income and earnings. (All current taxes are either forms of income tax or levies on transactions).

The proposed plan would tax people on the appreciation of their publicly traded marketable securities. Effectively, the plan would tax billionaires’ assets on any gains or appreciation in value of those assets. For example, if that asset became worth $110, they’d only owe on the $10 gain. And, the proposal would begin by imposing a one-time tax on all the gains that had accrued before the tax had been created.

Stocks, bonds and other publicly traded assets, marketable securities, would be assessed the levy each year. Harder-to-value assets like real estate or ownership stakes in privately held businesses would not be taxed until they are sold, but would then face an interest charge designed to approximate the tax people would have faced if they had been publicly traded assets.

Capital losses

Under the proposal, a billionaire subject to the tax whose asset values take a dive during the year would have two options. They could choose to:

  • Carry those losses forward to offset potential future mark-to-market gains, or
  • Carry them back to a year within the previous three to generate refunds for taxes paid on unrealized gains.
  • Carrybacks could only offset prior mark-to-market tax, not taxes paid on other income.

    • Nevertheless, the plan would incentivize the wealthy to move into non-publicly traded assets in order to avoid having to pay the IRS. And if the billionaire wealth tax survives the certain court challenges under the current conservative Supreme Court, you can safely bet that many liberal leaning states will follow suit and implement their own version of a billionaire or millionaire wealth tax.

    This new billionaire tax on wealth, instead on income, is a tax that some liberals lawmakers hope will eventually be extended to include every millionaire in assets, regardless of actual net worth. However, Congress always seem able to devise work arounds to exclude their own financial assets and the assets of their big re-election campaign donors from these extremely regressive tax policies.

    Additionally, this proposal, if enacted into law, would dramatically impact compound growth of assets and, would have the unintended consequences of slowing job creation and capital investments in the U.S.

    Senator Mitt Romney (R-Utah) said that the billionaire tax will leave the rich thinking: “I don’t want to invest in the stock market, because as that goes up, I gotta get taxed. So maybe I will instead invest in a ranch or in paintings or things that don’t build jobs and create a stronger economy.”

    References:

    1. https://www.rollcall.com/2021/10/27/wyden-details-proposed-tax-on-billionaires-unrealized-gains/
    2. https://www.politico.com/news/2021/10/27/billionaires-income-tax-details-wyden-517318
    3. https://www.marketwatch.com/story/mitt-romney-says-a-billionaire-tax-will-push-the-rich-to-buy-paintings-or-ranches-instead-of-stocks-11635269305

    Patience is the Key to 10X Investing

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    “The stock market is a device to transfer money from the impatient to the patient.”  Warren Buffett

    Patience and successful investing are necessary natural partners. Investing is a long-term prospect, the benefits of which typically come after many years. Patience, too, is a behavior where the benefits are mostly long-term. To be patient is to endure some short-term sacrifice or difficulty for a future reward. Patience is an important investment skill which we need to develop more fully and learning it could help you reach your financial goals.

    Patience involves staying calm in situations where you lack control. Being a patient investor might not be easy, but there are tools to help you overcome impatience. Here are a few strategies you can use to cultivate patience and clarity of thought in your investing decisions.

    • Have a plan and think long term. Set long-term financial goals and keep them front of mind during volatile times. A written financial plan is a great idea. Long-term thinking helps you mentally separate your investing journey from your long-term financial destination. Keeping a long-term perspective will give you the psychological fortitude you need to grow your portfolio over the long term.
    • Understand that market volatility is normal. Market volatility is a normal part of life. It might still be unpleasant in the moment, but recognizing that you’ll encounter volatile markets will help you mentally prepare for corrections or other downturns.
    • Look for fear or fundamentals. Consider whether a recent stock decline reflects investor fear or actual negative fundamentals. If markets are driven more by fear, you may not need to worry too much about it: Fear-based corrections often turn around quickly. Even if fundamentals have declined, markets may be pricing in a future far worse than reality. In either situation, be patient and stick to your investment strategy.
    • Remember, time is on your side. Take solace in the long history of capital markets. Corrections are temporary and usually brief, and even bear markets eventually end. Historically, markets go up far more often and by a much greater margin than they go down. Owning stocks for the long term is one of the best ways to profit from economic progress, innovation and compound growth.

    Time and patience are two of the most potent factors in investing because it brings the magic of something Albert Einstein once called the 8th wonder of the world- Compounding. It’s not easy, but hopefully these practices can help you focus on the long term and take comfort in stocks’ exceptional performance history.

    Its difficult to be patient

    Your brain makes it hard to be patient. Human beings were designed to react to threats, either real or perceived. Stressful situations trigger a physiological response in people. This is called the “fight-or-flight” response — either attack or run away, whatever helps alleviate the threat.

    The problem is, your mind doesn’t recognize the difference between true physical danger and psychological triggers, like a market crash. Being patient is difficult because it means overcoming these natural instincts. Turbulent financial markets can trigger the response causing real-world impacts you’ll need patience to overcome.

    During pandemic-driven bear market, your brain perceives a threat to your financial well-being. Even though stock market volatility isn’t a physical threat, the fight-or-flight response kicks in, emotion takes over, and your brain starts telling you to do something. Your investment portfolio is perceived as being harmed and your metabolically influenced to take action.

    With investing, action too often translates into selling something because selling feels like you’re shielding your portfolio from further harm. But selling at the wrong time — like in the middle of a major downturn — is one of the biggest investment mistakes you can make.

    If you can find a way to invest inexpensively in the market and stay in the market, you can start to build your net worth. Success in investing requires patience.

    “In the end, how your investments behave is much less important than how you behave.” Benjamin Graham

    You need patience when what you are invested in is performing poorly—and you need it when what you don’t own is performing well.

    one of the most valuable traits an investor can have is patience. If you are a patient investor and decide on great businesses, there is virtually no scenario where you will not make money.

    Investing your money in great companies over time will grow into a fortune. Switching in and out of investments cost investors significant returns over time.

    “Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.”  Charlie Munger

    When it comes to investing, staying invested is quite often the most prudent and smartest approach for long-term investors. While there will always be market volatility and corrections, the key to successful investing is to stay focused on your goals.

    References:

    1. https://www.entrepreneur.com/video/342261
    2. https://www.etmoney.com/blog/time-and-patience-two-key-virtues-to-become-successful-in-investing/
    3. https://www.thestreet.com/thestreet-fisher-investments-investor-opportunity/patience-the-most-underused-investing-skill

    Believe in the Power of Compounding

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    “Compounding is the eighth wonder of the world.” Albert Einstein

    It is said that Albert Einstein once noted that the most powerful force in the universe is the principle of compounding. In simple terms, compound interest means that you begin to earn interest on the interest you receive, which multiplies your money at an accelerating rate. This is one significant reason for the success of many top investors.

    Believe in the power of compounding

    The key to successful investing is patience to search and wait for great companies that are selling for half or less than what they were worth (intrinsic value), and to hold the investment for the forever. The task is to try to buy a dollar of value for a fifty cents price, and to hold the investment for the long term.

    • Compound interest is the interest you earn on interest.
    • Compounding allows exponential growth for your principal.
    • Compounding interest can be good or bad depending on whether you are a saver or a borrower.
    • Think of stocks as a small piece of a business
    • Think of Investment fluctuations, volatility, are a benefit to a patient investor, rather than a curse.
    • Focus your attention on businesses where you think you understand the competitive advantages
    • The more people respond to short term events allow patient and value investors to make a lot of money.
    • Buy stocks when things are cheap. It’s important to control your emotions.

    The key is that if you spend less than you earn, you put something away, and that little something can become more and more and eventually what you want to do is you want to be your own boss.” Mohnish Prbrai

    Four important factors that determine how your money will compound:

    1. The profit you earn on your investment.
    2. The length of time you can leave your money to compound. The longer your money remains uninterrupted, the bigger your fortune can grow.
    3. The tax rate and the timing of the tax you have to pay to the government. You will earn far more money if you do not have to pay taxes at all or if the taxes are deferred.
    4. The risk you are willing to take with your money. Risk will determine the return potential, and ultimately determine whether compounding is a realistic expectation.

    Rule of 72

    The Rule of 72 is a great way to estimate how your investment will grow over time. If you know the interest rate, the Rule of 72 can tell you approximately how long it will take for your investment to double in value. Simply divide the number 72 by your investment’s expected rate of return (interest rate).

    “The first rule of compounding: Never interrupt it unnecessarily. The elementary mathematics of compound interest is one of the most important models there is on earth.” Warren Buffett

    The power of compounding is truly visible with billionaire investor Warren Buffett, the Oracle of Omaha. He first became a billionaire at the age of 56 in 1986. Today, his net worth is over $100 billion at the age of 90-plus. And that’s after he donated tens of billions of stock to charity. His wealth is due to compounding, over 99% of the billionaire’s net worth was built after the age of 56.

    When you understand the time value of money, you’ll see that compounding and patience are the ingredients for wealth. Compounding is the first step towards long-term wealth creation.

    References:

    1. https://www.thebalance.com/the-power-of-compound-interest-358054
    2. https://www.valuewalk.com/2020/07/power-compounding-getting-rich/

    Power of Compound Interest

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    It is said that Albert Einstein once commented that “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

    The Power of Compound Interest shows that you can put your money to work and watch it grow. The power of compounding works by growing your wealth exponentially. It adds the profit earned back to the principal amount and then reinvests the entire sum to accelerate the profit earning process.

    When you earn interest on savings and returns on investments, that interest (or returns) then earns interest (or returns) on itself and this amount is compounded monthly. The higher the interest rates, the faster and the more your money grows!

    The sooner you start to save, the greater the benefit of compound interest. This is one reason for the success of many investors. Anyone can take advantage of the benefits of compounding through starting a disciplined savings and investing program.

    Yet, compounding interest can be good or bad depending on whether you are a saver or a borrower, respectively.

    Three factors will influence the rate at which your money compounds. These factors are:

    1. The interest rate or rate of return that you make on your investment.
    2. Time left to grow or the age you start investing. The more time you give your money to build upon itself, the more it compounds.
    3. The tax rate and when you pay taxes on your interest. You will end up with more accumulated wealth if you don’t have to pay taxes, or defer paying taxes until the end of the compounding period rather than at the end of each tax year. This is why tax-deferred accounts are so important.

    Finally, it’s important to resist the temptation of seeking higher interest rates or returns, because higher interest rates and returns always bring higher risk. Unless you know what you’re doing, no matter how successful you are along the way, you always want to avoid the possibility of losing money.

    Benjamin Graham, known as the father of value investing, was aware of the risk of ‘chasing yield or return’ when he said that “more money has been lost reaching for a little extra return or yield than has been lost to speculating.”

    References:

    1. https://www.primerica.com/public/power-compound-interest.html
    2. https://www.thebalance.com/the-power-of-compound-interest-358054

    Best Ten Investment Rules

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    “Bad decisions and poor behavior are the primary reasons why many fail to meet their financial goals.” Bloomberg

    The greatest value of money is its ability to allow you to control your time. That is “being able to do what you want, when you want, where you want, with who you want and for as long as you want provides a lasting level of happiness and emotional well-being that no amount of “fancy stuff or things” can ever offer.”

    Furthermore, thinking about money – earning it, saving it, spending it, and most of all, how to invest it – has several basic rules that every novice and seasoned investor should know and follow.

    And, it’s never too late to start building your fortune in the stock market.

    What follows are ten basic investing rules that can guide every investor:

    1. Start early, pay yourself first, invest for the long term, be diversified, watch your costs, and let compounding work its magic. Investing is simple, but following through can be challenging. Humans are plagued by an inability to just “sit there and do nothing.” Failing to do nothing leads to costly errors and loss of capital that erode returns. Understanding what is required is very different than being able to perform,
    2. Behavior and Mindset are Everything: Rationally and positive mental attitude are essential. The inability to manage emotions, thoughts and behavior is the financial undoing of many. “Behave!” Avoid ill-advised decision-making and poor behavior which are the biggest reasons why many investors fail to meet their financial goals.
    3. Spend Less Than You Earn: Budgeting is simple: Income goes on one side of your household balance sheet, expenditures on the other side and make sure the latter is less than the former. Don’t buy a boat, don’t get a new car, and avoid buying lattes if you cannot afford them.
    4. Wealth comes from owning assets and compounding over the long term. You can accumulate wealth via the stock market and owning appreciable assets. Since, it’s not the buying and selling that makes you money. It’s the waiting. When you buy a quality stock, plan on holding it forever. In buying an asset, buy it below its intrinsic value (margin of safety or growth at a reasonable price). Always remember…Price is what you pay; value is what you get.
    5. Cut your losers short and let your winners run: Letting your winners run generates all sorts of desirable outcomes: It allows compounding to occur, gives you the benefit of time and keeps your transaction costs, fees and taxes low. Similarly, cutting your losers short forces you to be humble and intelligent. It rotates you away from the sectors and stocks that are not working. Best of all, you are forced to admit your own fallibility.
    6. Asset allocation is crucial: What is your relative weighting of stocks, bonds, real estate and commodities? Studies show that asset allocation is the most important decision an investor makes. “Stock picking is for fun. Asset allocation is for making money over the long haul.” The weighting you select for various asset classes [stocks, bonds, real estate, cash, commodities, etc] is a function of such factors as your age, income, risk tolerance and retirement needs. It is what serious investors focus on.  For example, cash is an inefficient drag during bull markets and as valuable as oxygen during bear markets, either because you need it to survive a recession or because it’s the raw material of opportunity, says Morgan Housel. Leverage is the most efficient way to maximize your balance sheet, and the easiest way to lose everything. Concentration is the best way to maximize returns, but diversification is the best way to increase the odds of owning a company capable of delivering returns.
    7. Hope for the best, but expect the worst: Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in. Brace for disaster via diversification and learning market history. Expect good investments to do poorly from time to time. Don’t allow temporary under-performance or disaster to cause you to panic. A corollary rule is: Save like a pessimist; Invest like an optimist.
    8. Fear and greed are stronger than long-term resolve: Warren Buffett likes to say:  “Be fearful when others are greedy and be greedy when others are fearful.” Investors can often be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and promote optimism. Studies of investor behavior show that losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
    9. If the business does well; the stock will follow: A stock is part of a business. If a company is growing its revenues, has a moat around its business, and is well managed, you can expect the stocks price to increase. Only listen to those you know and trust; and only buy stocks of companies you know and understand. Only buy companies you know and understand. Risk comes from not knowing what you’re doing.
    10. Invest In Yourself: This is the most important investment you can make. Educate yourself, develop an expertise and add to your professional knowledge and skills. Ignore the noise (forecast and predictions) of the crowd and financial pundits.

    Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated, according to Morgan Housel, behavioral finance expert and the author of The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when the magic of compounding runs wild.

    Investors need to understand the challenges that face them when investing their money: “Capital markets are about making the best probabilistic decisions using imperfect information about an unknowable future. You will never have perfect information that allows you to bet on a sure thing.”

    References:

    1. https://www.cnbc.com/2020/06/19/fathers-day-letter-to-kid-money-life-lessons-people-learn-too-late-in-life.html
    2. https://ritholtz.com/2021/07/top-10-rules-for-money/
    3. https://ritholtz.com/2012/10/ritholtzs-rules-of-investing/
    4. https://ritholtz.com/2015/09/jason-zweigs-rules-for-investing/
    5. https://www.cnbc.com/2020/09/08/billionaire-warren-buffett-most-overlooked-fact-about-how-he-got-so-rich.html

    7 Investing Principles

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    The fundamentals you need for investing success.  Charles Schwab & Co., Inc

    1. Establish a financial plan based on your goals

    • Be realistic about your goals
    • Review your plan at least annually
    • Make changes as your life circumstances change

    Successful planning can help propel your net worth. Committing to a plan can put you on the path to building wealth. Investors who make the effort to plan for the future are more likely to take the steps necessary to achieve their financial goals.

    A financial plan can help you navigate major life events, like buying a new house.

    2. Start saving and investing today

    • Maximize what you can afford to invest
    • Time in the market is key
    • Don’t try to time the markets—it’s nearly impossible.

    It pays to invest early.  Maria and Ana each invested $3,000 every year on January 1 for 10 years—regardless of whether the market was up or down. But Maria started 20 years ago, whereas Ana started only 10 years ago. So although they each invested a total of $30,000, by 2020 Maria had about $66,000 more because she was in the market longer.

    Don’t try to predict market highs and lows. 2020 was a very volatile year for investing, so many investors were tempted to get out of the market—but investors withdrew at their peril. For example, if you had invested $100,000 on January 1, 2020 but missed the top 10 trading days, you would have had $51,256 less by the end of the year than if you’d stayed invested the whole time.

    3. Build a diversified portfolio based on your tolerance for risk

    • Know your comfort level with temporary losses
    • Understand that asset classes behave differently
    • Don’t chase past performance

    Colorful quilt chart showing why diversification makes long-term sense. The chart shows that it’s nearly impossible to predict which asset classes will perform best in any given year.

    Asset classes perform differently. $100,000 invested at the beginning of 2000 would have had a volatile journey to nearly $425,000 by the end of 2020 if invested in U.S. stocks. If invested in cash investments or bonds, the ending amount would be lower, but the path would have been smoother. Investing in a moderate allocation portfolio would have captured some of the growth of stocks with lower volatility over the long term.

    4. Minimize fees and taxes; eliminate debt

    • Markets are uncertain; fees are certain
    • Pay attention to net returns
    • Minimize taxes to maximize returns
    • Manage  and reduce debt

    Fees can eat away at your returns. $3,000 is invested in a hypothetical portfolio that tracks the S&P 500 Index every year for 10 years, then nothing is invested for the next 10 years. Over 20 years, lowering fees by three-quarters of a percentage point would save roughly $13,000.

    5. Build in protection against significant losses

    • Modest temporary losses are okay, but recovery from significant losses can take years
    • Use cash investments and bonds for diversification
    • Consider options as a hedge against market declines—certain options strategies can be designed to help you offset losses

    Diversify to manage risk. Investing too much in any single sector or asset class can result in major losses when markets are volatile.

    6. Rebalance your portfolio regularly

    • Be disciplined about your tolerance for risk
    • Stay engaged with your investments
    • Understand that asset classes behave differently

    Regular rebalancing helps keep your portfolio aligned with your risk tolerance. A portfolio began with a 50/50 allocation to stocks and bonds and was never rebalanced. Over the next 10 years, the portfolio drifted to an allocation that was 71% stocks and only 29% bonds—leaving it positioned for larger losses when the COVID-19 crash hit in early 2020 than it would have experienced if it had been rebalanced regularly.

    7. Ignore the noise

    • Press makes noise to sell advertising
    • Markets fluctuate
    • Stay focused on your plan

    Progress toward your goal is more important than short-term performance. Over 20 years, markets went up and down—but a long-term investor who stuck to her plan would have been rewarded.

    References:

    1. https://www.schwab.com/investing-principles

    Bobby Bonilla Day: The perfect example of the power of compounding

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    Bobby Bonilla’s contract with the Mets is a brilliant example of the power of compound interest

    For former baseball player Bobby Bonilla, July 1 and every July 1, from 2011 through 2035, marks his annual payday, when the New York Mets send him a a check for $1,193,248.20 as part of a deal set up 20 years ago.

    In 2000, the Mets cut Bonilla from the team and terminated his contract early. The ball club owed him $5.9 million for that season. Bonilla and his agent chose to defer collecting what was owed and instead agreed to spread the payments out over 24 years, starting in 2011, with an 8% annual interest rate.

    When all is said and done, the total payout will be $29.8 million on a $5.9 million initial investment.

    Bonilla’s contract with the Mets is a brilliant example of the power of compounding. Compounding is when you earn interest on your earned interest and it can have a powerful impact on growing your money over time.

    You and anyone can defer spending your cash by saving and investing it now, giving it ample time to grow. “When you are young, time is your best friend,” says Certified Financial Planner Vid Ponnapalli. “And the magic of compounding is your best resource.”

    Putting away money now and combined with the power of compound interest helps you bank some flexibility for later.

    Reference:

    1. https://www.marketwatch.com/story/this-retired-baseball-players-contract-is-the-perfect-example-of-the-power-of-compounding-2018-07-16
    2. https://www.marketwatch.com/story/what-is-bobby-bonilla-day-it-is-the-beauty-of-compound-interest-11625145948

    The Five Simple Rules to Investing | TD Ameritrade

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    Investing does not have to be complicated and can be a hedge to expected strong inflation.


     

    “Global investment managers are more worried about the risk of inflation on markets than they are about the risk of Covid-19.” Bank of America survey

    72% of global fund managers expect strong inflation to be transitory, despite US prices surging 5% year-on-year in May, according to Bank of America’s latest survey. The Bank of America survey polled 224 managers with $630 billion in assets under management between March 5 and 11, 2021.

    In their collective opinions, trillions of dollars in federal stimulus spending in the United States helped set the economy on the path to recovery, but it’s also fueled concerns about ballooning levels of debt and the rapid inflation that could accompany the injection of so much money into the fragile economic system, according to an article in Forbes. 

    Despite the risks, investor sentiment overall is still “unambiguously bullish,” the survey found, with 91% of fund managers expecting a stronger economy in the future and nearly half of fund managers are now expecting a v-shaped recovery in global markets. 

    “Investors (are) bullishly positioned for permanent growth, transitory inflation and a peaceful Fed taper,” said Michael Hartnett, chief investment strategist at BofA, adding that 63% of the investors believe Fed will signal a taper by September.

    References:

    1. https://www.forbes.com/sites/sarahhansen/2021/03/16/inflation-not-covid-19-is-now-the-biggest-risk-to-markets-bank-of-america-survey-shows/?sh=6f5fd2db3b1f
    2. https://www.reuters.com/article/us-markets-survey-bofa/investors-see-transitory-inflation-and-peaceful-fed-taper-bofa-survey-idUSKCN2DR0Z9

    Saving and Investing

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    “The easiest way to wealth are saving and investing in your mind and in appreciating assets.”

    Save and invest today for the life and financial freedom you want later. Investing for the long-term is the only way to truly build wealth and achieve financial freedom.

    Retirement doesn’t mean what it used to for a lot of Americans. It used to be something you could count on — and when it came, you were going to pursue the goals and lifestyle you dreamed about and love.

    Today, many Americans don’t believe that they will retire, while others are not waiting until retirement and are doing what they love now.

    Regardless of your unique circumstances or life’s priorities, it important to save and invest now so later the resulting financial freedom will allow you – in a tax advantaged way – to enjoy a better and happier life later.

    A smart investor:

    • Plans for life’s unexpected challenges and investing in uncertain times
    • Conducts research on a product before investing
    • Assesses the impact of fees when choosing an investment
    • Understands that risk exists in all investments
    • Avoids “get rich quick” and “can’t lose” schemes
    • Recognizes the power of compound interest
    • Recognizes the importance of diversification
    • Plans for and invests according to his/her future needs and goals
    • Recognizes the benefit of long-term, regular and diversified investment
    • Verifies that an investment professional is licensed

    Establish Emergency Savings

    Unexpected emergencies often sabotage our financial goals, so getting in a savings mindset and building an emergency fund is crucial. Start small and think big by setting a goal of a $500 rainy day fund. Once you’ve reached that goal, it will be easy to continue!

    Open Your Savings Account

    If you don’t have a savings account, now’s the time! Ensure your savings account is federally insured with a reputable financial institution with no fees (or low fees).

    Set up Automatic Savings

    The easiest way to save is to save automatically!

    Choose the amount you would like to automatically save each period. Even $10-50 of your paycheck, weekly or bi-weekly, can provide substantial savings over time.

    Contact your employer to set up a direct deposit into your savings account each pay period or set up an automatic transfer from your checking account to your savings account at your financial institution.

    Even small amounts, saved automatically each pay period, make a big difference.

    Get Serious About Reducing Your Debt

    Paying down debt is saving!

    When you pay down debt, you save on interest, fees, late payments, etc. Not only that, by having savings you’re less likely to need credit for emergencies – allowing you to keep a lower credit usage percentage.

    When you reduce your debt, you save on interest and fees while maintaining or improving your credit score! Create a debt reduction plan that works best for you. Utilize America Saves resources to see the different options to pay down debt.

    Get Clear On Your Finances

    Create a Spending and Savings Plan that allows you to easily see your income, expenses, and anything leftover. Once you have a clear view of your finances, you can determine where to make changes and what else you should be saving for based on your financial goals.

    It’s always the right time to create a saving and spending plan (aka a budget). It’s also a good idea to revisit that plan annually or when a major shift occurs in your income or expenses.

    Here are several tips to help ensure that your money is working smarter and harder for you.

    Step 1. Determine your income.

    To create an effective budget, you need to know exactly how much money you’re bringing in each month. Calculate your monthly income by adding your paychecks and any other source of income that you receive regularly. Be sure to use your net pay rather than your gross pay. Your net pay is the amount you receive after taxes and other allocations, like retirement savings, are deducted.

    Step 2. Determine your net worth which is your assets minus your liabilities

    Net worth is assets minus liabilities. Or, you can think of net worth as everything you own less all that you owe.

    Calculating your net worth requires you to take an inventory of what you own, as well as your outstanding debt. And when we say own, we include assets that you may still be paying for, such as a car or a house.

    For example, if you have a mortgage on a house with a market value of $200,000 and the balance on your loan is $150,000, you can add $50,000 to your net worth.

    Basically, the formula is:

    • ASSETS – LIABILITIES = NET WORTH

    And by the way, your income is not included in a net worth calculation. A person can bring home a big paycheck but have a low net worth if they spend most of their money. On the other hand, even people with modest incomes can accumulate significant wealth and a high net worth if they buy appreciating assets and are prudent savers.

    Step 3. Track your cash flow which is both your expenses and your spending.

    This step is essential. It’s not enough to write out your actual expenses, like rent or mortgage, food, and auto insurance, you must also track what you are spending.

    If you’ve ever felt like your money “just disappears,” you’re not the only one. Tracking your spending is a great way to find out exactly where your money goes. Spending $10 a day on parking or $5 every morning for coffee doesn’t sound like much until you calculate the total cost per month.

    Tracking your spending will help you pinpoint the areas you may be overspending and help you quickly identify where you can make cost-efficient cuts.  Once you’ve written out your expenses and tracked your spending habits, you’re ready for the next step.

    Step 4. Set your financial goals.

    Now you get to look at your present financial situation and habits and decide what you want your future to look like. Ask yourself what’s most important to you right now? What financial goals do you want to achieve?

    Some common goals include building an emergency fund, paying down debt, purchasing a home or car, saving for education, and retirement.

    Step 5. Decrease your spending or increase your income.

    What if you set your financial goals and realize there’s not enough money left at the end of the month to save for the things you want?

    You essentially have two choices. You can either change the way you manage your current income or add a new source of income. In today’s gig economy, it’s easier than ever to add a stream of income, but we know that everyone’s situation is different, and that’s not always an option.

    Even if you can add income, you may have identified some spending habits you’d like to change by decreasing how much you spend.

    Take a look back at your expense tracking. For the nonessential items, consider reducing your spending. For example, if you find that you are spending quite a bit on entertainment, like movies or dining out, reduce the number of times you go per month.

    Then apply the money that’s been freed up to your savings goals.

    For more ideas on how to increase your savings, read 54 Ways to Save.

    Step 6. Stick to your plan.

    Make sure you stick to your spending and savings plan. To make saving more efficient, set up automatic savings so that you can set it and forget it! Saving automatically is the easiest way to save.

    Reassess and adjust your plan whenever you have life changes such as marriage, a new baby, a move, or a promotion.

    Following your plan ensures that you’re financially stable, are ‘thinking like a saver,’ and better prepared for those unexpected emergencies.

    References:

    1. http://www.worldinvestorweek.org/key-messages.html
    2. https://americasaves.org/media/yordmpza/7steps.pdf
    3. https://old.americasaves.org/blog/1754-creating-a-budget-for-your-family