Category Archives: Investing

Investing is a marathon

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Investing is a marathon and learning how investing in stocks can help you accumulate wealth is important to your financial

Long-term investing is a marathon and is the best way, by far, to build wealth that stands the test of time. It’s how you plan for financial freedom, retirement and build a legacy to pass on to your children and grandchildren. Long-term investments require patience and time measured in decades, but have the potential to pay off with high returns.

Investing is the act of purchasing assets – such as stocks or bonds or real estate – in order to move money from the present to the future. However, the conversion of present cash into future cash is burdened by the following problems:

  • Individuals prefer current consumption over future consumption: delayed gratification is hard for most people and, all things being equal, we would rather have things now than wait for them.
  • Inflation: When the money supply increases, prices also often increase. Consequently, the purchasing power of fiat currency decreases over time.
  • Risk: The future is uncertain, and there is always a chance that future cash delivery may not occur.

To overcome these problems, investors must be compensated appropriately. This compensation comes in the form of an interest rate, which is determined by a combination of the asset’s risk and liquidity and the expected inflation rate.

The steps to investing and building wealth involve a series of small decisions that move you along a financial path, one building block at a time over a long period of time. The steps begin with believing that attaining wealth is possible, and a clear intention to start investing and attaining wealth. After all, making your money work for you and accumulating wealth is not a haphazard occurrence, but a deliberate process, journey and destination.

Once you determine that investing and attaining wealth is a priority, focus your energies on maximizing your income, and saving a portion of it. Investing and building wealth also requires you to make decisions on avoiding potentially destructive forces that erode wealth, such as inflation, taxes and overspending.

Learning to be mindful of where your money has been going and spending wisely by evaluating whether something is a need or just a want will keep more money in your pocket. The bonus from being mindful will help you stop accumulating more stuff and may teach you to repurpose already owned items.

“Successful investing and building wealth are about discipline, understanding of your tolerance for risk and, most importantly, about setting realistic financial goals and expectations about market returns,” says Certified Financial Planner Melissa Einberg, a wealth adviser at Forteris Wealth Management.

Invest in stocks.

Your first thought regarding investing in stocks and bonds may be that you don’t want to take the risk. Market downturns definitely happen, but being too cautious can also put you at a disadvantage.

Stocks are an important part of any portfolio because of their long term potential for growth and higher potential returns versus other investments like cash or bonds. For example, from 1926 to 2019, a dollar kept in cash investments would only be worth $22 today; that same dollar invested in small-cap stocks would be worth $25,688 today.

Stocks can serve as a cornerstone for most portfolios because of their potential for growth. But remember – you need to balance reward with risk. Generally, stocks with higher potential return come with a higher level of risk. Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.

Investing a portion of your savings in stocks may help you reach financial goals with the caveat that money you think you’ll need in three to five years should be in less risky investments. Stock investing should be long-term, understanding your risk tolerance, and how much risk you can afford to take.

The power of compounding

Compound interest is what can help you make it to the finish line. Compounding can work to your advantage as a long-term investor. When you reinvest dividends or capital gains, you can earn future returns on that money in addition to the original amount invested.

Let’s say you purchase $10,000 worth of stock. In the first year, your investment appreciates by 5%, or a gain of $500. If you simply collected the $500 in profit each year for 20 years, you would have accumulated an additional $10,000. However, by allowing your profits to stay invested, a 5% annualized return would grow to $26,533 after 20 years due to the power of compounding.

Purchasing power protection

Inflation reduces how much you can buy because the cost of goods and services rises over time. Stocks offer two key weapons in the battle against inflation: growth of principal and rising income. Stocks that increase their dividends on a regular basis give you a pay raise to help balance the higher costs of living over time.

In addition, stocks that provide growing dividends have historically provided a much greater total return to shareholders, as shown below.

Invest for the long term.

Long-term investing is the practice of buying and holding assets for a period of five to ten years or longer. While investing with a long-term view sounds simple enough, sticking to this principle requires discipline. You should buy investments with the intention of owning them through good and bad markets. You should base your investment guidance on a long-term view. For your stock picks, you should typically use a five – to ten-year outlook or longer.

Long-term investments require patience on your part which is a trade-off for potentially lower risk and/or a higher possible return.

Market declines can be unnerving. But bull markets historically have lasted much longer and have provided positive returns that offset the declines. Also, market declines often represent a good opportunity to invest. Strategies such as dollar cost averaging and dividend reinvestment can help take the emotion out of your investing decisions.

No one can or has accurately “time” the market. An investor who missed the 10 best days of the market experienced significantly lower returns than someone who stayed invested during the entire period, including periods of market volatility and corrections. Staying invested with a strategy that aligns with your financial goals is a proven course of action.

References:

  1. https://www.edwardjones.com/market-news-guidance/guidance/stock-investing-benefits.html
  2. https://smartasset.com/investing/long-term-investment
  3. https://www.bankrate.com/investing/steps-to-building-wealth/
  4. https://www.cnbc.com/2021/02/04/how-we-increased-our-net-worth-by-1-million-in-6-years-and-retired-early.html

Source: Schwab Center for Financial Research. The data points above illustrate the growth in value of $1.00 invested in various financial instruments on 12/31/1925 through 12/31/2019. Results assume reinvestment of dividends and capital gains; and no taxes or transaction costs. Source for return information: Morningstar, Inc. 

Stay Invested – Time in the Markets

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“Time in the markets, not timing the markets.”

A common mantra in investing circles is ‘it’s about time in the markets, not timing the markets’. In other words, the best way to make money is to stay invested for the long term, rather than worrying about short term volatility or whether now is the best time to invest.

Value investing guru Benjamin Graham once quipped that “in the short term the stock market is a voting machine” that measures the popularity of companies and the sentiment of investors, whereas in “the long term it is a weighing machine” that measures each company’s fundamentals and intrinsic value.

Time in the market works because it takes this ‘guess the market bottom’ element out of the equation. By focusing on the long term, it’s easier to ignore the volatility of markets. Sure, it’s still scary watching the value of your share portfolio fall from time to time.

Time in the market is really about harnessing the power of compound interest. Compounding is the best thing about investing. Albert Einstein once said “Compound interest is the most powerful force in the universe. Compound interest is the 8th wonder of the world. He who understands it, earns it, he who doesn’t, pays it.”

With compounding, your money accumulates a lot faster because the interest is calculated in regular intervals and you earn interest on top of interest. Compounding is usually what makes investors like billionaire investor Warren Buffett wealthy. If you are able to achieve a consistently high annual rate of return over the long term, building wealth is almost inevitable. And Buffett has never tried to time a market in his life.

But pushing and pulling your money in and out of the market stymies the compounding process. And all it takes is one massive mistime to end up back at square one given the fact that market can never be timed. Investor Peter Lynch said it best: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”

Compounding plays a pivotal role in growing your wealth. When using compounding, the results will be small at the start but over time, your wealth will accumulate fast. Warren Buffet is known to make the majority of his wealth later in his adult life and this is due to the compounding interest effect on his assets and invested capital.

Missing the best days

Timing the markets involves trying to second-guess the ups and downs, with the hope that you will buy when prices are low and sell when they are high. This can be lucrative if you get it right consistently, but this is very difficult to do and getting it wrong means locking in losses and missing out on gains.

Not only is timing the market difficult to get right, it also poses the risk of missing the ‘good’ days when share prices increase significantly. Historically, many of the best days for the stock markets have occurred during periods of extreme volatility.

Instead of trying to time the market, spending time in the market is more likely to give you better returns over the long term. It is best to base your investment decisions on the long-term fundamentals rather than short-term market noise and volatility.

Value of $10,000 investment in the S&P 500 in 1980

Source: Ned Davis Research, 12/31/1979-7/1/2020.

This chart uses a series of bars to show that from the end of 1979 until July 1, 2020, a $10,000 investment would have been worth $860,900 if invested the entire period. Missing just the 10 best days during that period would reduce the value by more than half, to $383,400.

Anybody who pulls money out in the early stages of a volatile period could miss these good days, as well as potentially locking in some losses. For instance, between May 2008 and February 2009 in the depths of the global financial crisis the MSCI World index dropped by -30.4%. By the end of 2009 it had bounced back +40.8%.

References:

  1. https://www.edwardjones.com/us-en/market-news-insights/guidance-perspective/benefits-investing-stock
  2. https://www.fa-mag.com/news/retirees-are-leading-precarious-financial-lives-42426.html
  3. https://www.tilney.co.uk/news/it-s-about-time-in-the-markets-not-timing-the-markets
  4. https://www.fool.com.au/2020/10/06/does-time-in-the-market-really-beat-timing-the-market/
  5. https://www.fool.com.au/definitions/compounding/

Investing for the Long Term

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“For investment success and above average returns, investors should invest and grow their money over the long term.”

Long-term investing is the best way to build wealth and is a strategy that has for decades withstood the test of time. It’s instrumental in planning for retirement and building wealth and a legacy. Long-term investing require patience and has the potential to pay off with a much higher returns.

Long-term investing is the practice of buying and holding investments like stocks for many years and decades. The exact definition of how many years or decades you must hold an investment for it to qualify as a long-term investment varies. Generally, it is between ten and twenty years, though it can be much longer.

“Investors would be better off…to just keep their investments long-term and not worry about what happens in the short-term. It’s the hardest thing to do, but sitting on your hands and staying long-term focused pays the highest dividends.”  Mark Matson

Common sense says that long-term investing is more conservative. Sometimes that’s true, but not always. You can invest in the stock market, generally considered one of the riskier investment assets, with the intention of holding the stocks for the long term. There is still a good amount of risk involved even though it’s technically a long-term investment if you hold the stocks for a longer period of time.

Patience

Long-term investments require patience. That patience is a trade-off for potentially lower risk and/or a higher possible return. You aren’t going to see the quick increases in portfolio value and it isn’t always going to be the most exciting type of investing.

It’s important to keep your eyes on long-term goals (or prize) like retiring, paying for your education and passing on some of your wealth to your family.  “Investors need to stay focused on the next 10 to 20 years, not the next 10 to 20 minutes,” says Mark Matson, veteran market strategist of Matson Money.

Investors hold long-term investments for a period of several decades. Long-term investing is about buying and holding securities rather than selling at the first sign of profit.

Long-term investing is about patience and waiting out volatility, corrections and bear cycles. You have to focus on how an investment will appreciate down the road. There are a number of possible long-term investments you can make. Just think about your own financial situation before deciding which of them is right for you.

Market declines can be unnerving. But bull markets historically have lasted much longer and have provided positive returns that offset the declines. Also, market declines often represent a good opportunity to invest. Strategies such as dollar cost averaging and dividend reinvestment can help take the emotion out of your investing decisions.

As the chart below illustrates, no one can accurately “time” the market. An investor who missed the 10 best days of the market experienced significantly lower returns than someone who stayed invested during the entire period, including periods of market volatility. Staying invested with a strategy that aligns with your financial goals is essential.

Missing the best days

Value of $10,000 investment in the S&P 500 in 1980

Source: Ned Davis Research, 12/31/1979-7/1/2020.

Successful long term investing equates to decades and is extremely boring.

The path to build wealth required you to take the laziest, simplest approach to stock investing imaginable, and have a little patience. Ever since Vanguard introduced its S&P 500 index fund 45 years ago, ordinary investors have been able to invest in broad stock indexes in a tax-efficient manner, with extremely low fees.

Investors who committed to large-cap stocks of the S&P 500 index for 35 years saw returns equal to or higher than the long-term return (94 years) of 10.2% in 87% of the rolling 35-year periods between 1926 to 2019 (there were 60 of them), according to Barron’s.

If only investing for 30 years, returns were 10.2% or higher in only 74% of the rolling 30-year periods. It falls to 60% when the time frame is 25 years.

The historical success rate of achieving the long-term return also increased for investors willing to stay in the saddle for at least 35 years. In general, if an investment portfolio has at least a 60% equity allocation, the needed investment period is at least 25 years to have a 70% or higher chance of achieving the long-term return.

Long-term investing means holding stock in a portfolio for a period of at least 10 to 35 years.  Long term investing represents some of the best investing advice investor should heed.  Investors need to stay focused and base their investment decisions on the next 10 to 30 years, not the next 10 to 30 days.

The power of compounding

Compounding can work to your advantage as a long-term investor. When you reinvest dividends or capital gains, you can earn future returns on that money in addition to the original amount invested.

Let’s say you purchase $10,000 worth of stock. In the first year, your investment appreciates by 5%, or a gain of $500. If you simply collected the $500 in profit each year for 20 years, you would have accumulated an additional $10,000. However, by allowing your profits to stay invested, a 5% annualized return would grow to $26,533 after 20 years due to the power of compounding.

“Good investing isn’t necessarily about earning the highest returns…It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time”, according to Warren Buffett. “That’s when compounding runs wild.”

Tax control advantages

Investing is a terrific way to build wealth and financial security, but it’s also a way to create a hefty tax bill if you don’t understand how and when the IRS and state tax departments impose taxes on investments.

  • Tax on capital gains – Capital gains are the profits from the sale of an asset — shares of stock, a piece of land, a business — and generally are considered taxable income. Essentially, the money you make on the sale of any of these items is your capital gain.
  • Tax on dividends – Dividends usually are taxable income in the year they’re received. Even if you didn’t receive a dividend in cash — if you automatically reinvested your dividend to buy more shares of the underlying stock, such as in a dividend reinvestment plan (DRIP) — you still need to report it. And, there are generally two kinds of dividends: nonqualified and qualified. The tax rate on – nonqualified dividends is the same as your regular income tax bracket. The tax rate on qualified dividends usually is lower.
  • Taxes on investments in a 401(k) – Generally, you don’t pay taxes on money you put into a traditional 401(k), and while the money is in the account you pay no taxes on investment gains, interest or dividends. Taxes hit only when you make a withdrawal. With a Roth 401(k), you pay the taxes upfront, but then your qualified distributions in retirement are not taxable. For traditional 401(k)s, the money you withdraw is taxable as regular income — like income from a job — in the year you take the distribution.
  • Tax on mutual funds – Mutual fund taxes typically include taxes on dividends and capital gains while you own the fund shares, as well as capital gains taxes when you sell the fund shares. Your mutual fund may generate and distribute dividends, interest or capital gains from the investments inside the fund. Accordingly, you may owe taxes on these investments — even if you haven’t sold any of the shares or received any cash from them. The tax rate you pay depends on the type of distribution you get from the mutual fund, as well as other factors. If you sell your mutual fund shares for a profit, you might incur capital gains tax.

With stocks, you control when to buy and sell, and can reduce your tax burden and are very cost efficient.

You can reduce capital gains taxes on investments by using losses to offset gains. Tax-Loss Harvesting is a tool that can significantly lessen the tax burden and the pain of corrections or down markets. The primary benefit of tax-loss harvesting is you can capture current losses in your portfolio without changing the risk and return characteristics of your portfolio. These recognized losses can be used to reduce your taxes. They can be applied to up to $3,000 of ordinary income and an unlimited amount of capital gains each year. Unused losses may even be carried forward indefinitely.

Very few investors realize their true account value is the aggregate value of their securities plus the aggregate tax savings from their harvested losses (i.e. their harvested losses * their marginal federal + state ordinary tax rate). For example, if you invested $10,000 and harvested losses of $2,000, and your marginal tax rate is 40% and your account has traded down to $9,500 then you are actually above water despite appearing to have lost 5%. That’s because you should add the $800 of tax savings ($2,000 * 40%) to your securities value of $9,500 to get a total tax adjusted value of $10,300 – greater than the $10,000 you invested. This is why tax-loss harvesting provides an opportunity for an offsetting economic benefit.

References:

  1. https://smartasset.com/investing/long-term-investment
  2. https://www.barrons.com/articles/financial-advisors-tell-clients-to-invest-for-the-long-term-but-how-many-years-is-that-51604003385?mod=article_signInButton
  3. https://finance.yahoo.com/news/a-president-trump-or-biden-doesnt-matter-to-the-stock-market-just-invest-for-the-next-20-years-strategist-161541443.html
  4. https://www.edwardjones.com/us-en/market-news-insights/guidance-perspective/benefits-investing-stock
  5. https://mentalpivot.com/book-notes-the-psychology-of-money-by-morgan-housel/
  6. https://www.nerdwallet.com/article/taxes/investment-taxes-basics-investors
  7. https://www.nytimes.com/2021/02/04/upshot/stock-market-winning-strategy.html

Beginner’s Guide to Investing

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“Successful investors had to start somewhere, and it’s never too early or too late to start planning for your financial future and learning how to invest wisely.” Phil Town

Getting started investing can be intimidating. The learning curve combined with the fact that you are putting your own money at risk is often enough to scare many people away from one of the safest ways to put ‘your money to work for you’ and financial freedom.

However, the most successful investors like Peter Lynch and Warren Buffett had to start somewhere, and it’s never too early or too late to start planning for your financial future and learning how to invest wisely.

This beginner’s guide to investing, according to investment advisor and NY Times Best-Selling author Phil Town, covers everything you need to know to start investing on your own and make smart investing decisions.

Step 1: Pay Off Bad Debt and Avoid Money Traps

Don’t even think about making any major investments before you have paid off unnecessary debt.

These things shouldn’t hold you back from starting to invest, but if you have “bad” debt from credit cards and high interest personal loans that will get you in trouble with interest payments, pay that off before you put money in the stock market.

Additionally, don’t fall into the common money traps. People of all ages trying to keep up with the Joneses: buying the latest phone, shiniest car, biggest house.

“Money traps are things that will take all your money so you have nothing left to invest.” Phil Town

These are money traps because they are things that will take all your money so you have nothing left to invest. Spending money wisely is one of the most important steps you can take to put yourself in the best possible financial situation before you begin investing.

Step 2: Create an Emergency Fund

If you have figured out how to spend your money wisely, you have probably figured out how to save it. An emergency fund is part of your savings that you set aside in case of an emergency.

It’s a good idea to put 3-6 months of your living expenses into your emergency fund (it can just be in a savings account) should something crazy happen a pandemic!

If your car breaks down, you get laid off, or you have unforeseen medical expenses, you will have the funds you need. An emergency fund will also come in handy in case of a recession.

Even if you don’t have to tap it, you will have peace of mind knowing there is a cushion available if you need it.

Step 3: Learn the Investing Basics

You wouldn’t start driving a truck without knowing the basics driving, so you shouldn’t jump in the stock market without knowing the basics of investing.

Before you begin building wealth, it’s important to understand the basic goal of investing as well as the basic process that you will use to reach that goal.

Step 4: Embrace a Positive Investing Mindset

Your investing psychology (mindset and behavior) and how it affects your investing are important aspects to understand and appreciate. It will dictate how you as an investor will actually behave, the reasons and causes of that behavior, why the behavior can hurt your wealth and what you can do about it.

Understanding the psychological aspects and how psychology affects investing are an important and critical aspect of investing. Knowing that you belong in the market and that your capable of investing in the market are important first steps.

Successful investing has much to do with you needing to be a pretty good amateur psychologist of both your own biases and the market’s, according to Nick Murray. Virtually all market tops and bottoms occur at emotional extremes:

  • Bottoms coincide with widespread panic while
  • Tops tend to be associated with some unjustified level of overconfidence or greed.

The theory behind sentiment analysis is quite simple. Market peaks occur when buying power has become exhausted. This happens because those buyers have become either complacent, overconfident or just plain greedy. Once they’ve all bought in, who’s left to buy?

Step 5: Create an Investment Plan

Once you have a positive investing mindset and know you know how investing works, you can move on to the next steps, but don’t get your wallet ready just yet.

Before you put your money in the market, you need to have a clear plan of what you want to accomplish and how you are going to do it. This is where creating an investment plan comes in.

The best investment plan is one that is customized to your lifestyle, so it’s necessary to create an individualized strategy that will set you on the path to success.

  • Evaluate your current financial standing to understand how much risk you can take.
  • Determine your goals and how long it will take you to realistically achieve them.
  • Figure out which types of investments and strategies are the best way to get you to where you want to be.

Having a clear investment plan will give you a ton of clarity as you begin investing.

Step 6: Decide What Type of Investment to Make

Next, you need to decide what type of investments will help you accomplish what you have set out to accomplish. There are several different types of investments that you should be aware of before you start investing your money.

Step 7: Establish Your Investing Strategy

Investing is more than picking a few stocks and hoping for the best. If you’re doing it right, there’s a real strategy involved. Now, you can choose from a plethora of investment strategies for investing beginners. These investment strategies include:

  • Impact Investing: Investing in companies with a measurable environmental or charitable impact
  • Growth Investing: Investing in companies that exhibit signs of above-average growth
  • Income Investing: Investing in securities that pay dividends
  • Small-Cap Investing: Investing in small companies that are new and potentially grow faster
  • Value Investing: Investing in great companies when they are on sale for prices lower than they are worth

There is one investment strategy that is recommended which follows the principles of value investing.  When you value invest, you buy growth companies, small-cap companies, and impactful companies, but you buy them when they are on sale.

This investing strategy will give you the highest rates of return with the lowest amount of risk.  When you buy wonderful high-value companies for half or even a quarter of their value, you can ensure big returns.

Step 8: Determine Where To Invest

Once you decide that you are ready to start buying and selling stocks, you need to choose what platform or service you will use to make your investments.

For most investors, an online broker will be the best option because online brokers allow you to place trades for a relatively small fee while still offering all of the resources and information you need to make wise investments.

There are many online brokers available to choose from and most are fairly competitive in regards to the fees they charge and the services that they offer. And, you really can’t go wrong with any of the major online brokers.

Step 9: Build a Stock Watchlist

It’s time to start investing. If you decided stocks are the right type of investment, you can start picking stocks…carefully. A stock watchlist is your own personal list of companies that you have researched and found to be worthy of your investment. Once you build your watchlist, you watch and wait for the companies on it to go on sale.

To build a watchlist, you need to do your research

The best companies to invest in for beginners are companies that have been around for at least ten years, companies that you understand, companies that exhibit past growth and the potential for future growth, companies that are run by trustworthy management, and companies that have been placed on-sale relative to their value.

You can break down these qualifications into what we call the Four Ms of Investing. It will take a bit of research to discover the Four Ms for each company, but the payoff will be worth it.

If you find a company that meets these qualifications, you will have found an ideal investment for any investor, beginners included.

If you find a company that meets all of these qualifications, you will likely have found an ideal investment opportunity.

Practice Patience and Wait

Once you have found a company that meets your qualifications, it still may not be prudent to invest in it right away. Instead, you’ll want to put the company on your watchlist and wait until the stock market places it on sale.

The good news is that the market puts wonderful companies on sale all the time. If you’re patient, the companies on your watchlist will eventually dip to a price that allows you to buy them up for a bargain rate and profit once the price of those companies goes back up to their true value.

Investing Tip: Check Your Emotions

By far, the most important investing tip for beginners to follow is this: keep your emotions in check.

If you invest in wonderful companies at a point when the market has placed them on sale relative to their value, it’s hard not to make money; that is, if you don’t let your emotions get the better of you.

Even great companies can experience dips in price over the short-term, and these dips often cause inexperienced investors to become afraid and sell off their shares.

By the same token, greed causes many investors to buy into a company at times when the company is overpriced. This leads to lower returns or even losses.

If you want to succeed as an investor, you have to avoid letting fear or greed drive your decision-making process.

Remain patient and logical as you invest and you’ll be able to avoid many of the pitfalls that beginner investors often fall prey to.

Step 10: Know When to Buy Your Stocks

Succeeding at investing in stocks is all about choosing the right companies as well as the right time to invest, but the right time won’t last forever. Once a company on your watchlist goes on sale, it’s time to buy.

Making money requires some degree of timing. Investment legends like Warren Buffett may condemn market timing, however, they would not disagree that there are far better times to enter a stock position and exit a stock position than others.

Entering a new position when there is panic is a far better bet than when the stock price has increase to levels far above its intrinsic value due to fear of missing out.

At this point, all you need to do is place your money in the company and keep it there for the long-term. If you made a wise investment, your money will grow in value for many years after you invest it in the company.

References:

  1. https://www.ruleoneinvesting.com/blog/how-to-invest/get-started-investing-with-these-10-steps/
  2. https://www.markonomics101.com/2018/10/08/the-psychology-of-investing/

Investing Rules of the Road

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“Invest for the long term, seek quality investments and manage risk through diversification.”

The market changes every day, but what you want for your future probably doesn’t. The same goes for your investment / financial mindset, strategy and goals.

Your investment / financial mindset, strategy and goals are as unique as the route you take to reach them. But regardless of your course, the following 10 investing “rules of the road”, according to financial-services firm Edward Jones, can help you get where you want to be.

1. Develop your long-term goals and strategy

Determine your long-term goals, investment time frame and comfort level with risk – before deciding on a strategy. The more you can outline and clearly define what you are trying to achieve, the more you can tailor your strategy.

It’s tempting to chase the market, but most successful investors make their money over time, not overnight. Long-term investing with an emphasis on quality and diversification is a proven and time tested course of action.

The best way to build and preserve your financial future is with a long-term approach to investing. That’s why you don’t follow investment fads. But “buy and hold” doesn’t mean “buy and ignore.” You should still review your portfolio at least once a year to make sure you’re on track for the long haul.

Before you put your money in the market, you need to have a clear plan of what you want to accomplish and how you are going to do it. This is where creating an investment plan comes in.

The best investment plan is one that is customized to your lifestyle, so it’s necessary to create an individualized strategy that will set you on the path to success.

  1. Evaluate your current financial standing to understand how much risk you can take.
  2. Determine your goals and how long it will take you to realistically achieve them.
  3. Figure out which types of investments and strategies are the best way to get you to where you want to be.

Having a clear investment plan will give you a ton of clarity as you begin investing. By creating a specific plan, you will be ready to make your retirement goals a reality when that day comes.

2. Understand the risk and your risk tolerance

As a rule, the higher the return potential, the more risk you’ll have to accept. To determine what makes sense for you, you will want to know:

  • What is your comfort level with risk? Understanding this can help you determine how you may react to market ups and downs over time.
  • How much risk are you able to take? The amount of time you have to invest plays an important role in determining how much risk you’re able to take.
  • How much risk do you need to take? Your financial advisor will want to determine the return, and therefore the risk, that may be necessary to reach your long-term goals.

3. Diversify for a solid foundation

Your portfolio’s foundation is your asset allocation, or how your investments are diversified among stocks, bonds, cash, international and other investments. Your mix should align with your goals and comfort with risk.

While diversification can’t protect you against a loss, it can help reduce your risk. If your money is invested in just one or a few investments, and one of them struggles, your entire financial strategy could be in trouble. So most financial advisors recommend building a portfolio that includes different types of investments that perform differently over time.

4. Stick with quality

Believe in long-term investing with an emphasis on quality and diversification. Of all the factors to consider when investing, quality is one of the most important factor. It’s also one of the most overlooked. Although it may be tempting to buy a popular investment, it may not fit with the rest of your portfolio, and it may be riskier than you expect. If it sounds too good to be true, it probably is.

5. Save and Invest for the long term

It’s tempting to chase the market, but despite stories of fortunes made on one or two trades, most successful individual investors make their money over time, not overnight. One of the biggest mistakes you can make is trying to “time” the markets.

Timing the market is difficult or simply impossible for even the most seasoned professional investors and smart money. Rather than waiting for the best time to invest, it can often be a better idea to just take the plunge into the market and get invested. Waiting for the best time will lead to a lot of missed opportunities.

6. Establish realistic expectations

You’ll need to determine the return you’re trying to achieve – which should be the return you need to reach your long-term goals. Then you can base your expectations on your asset allocation, the market environment and your investment time frame.

The average stock market total return (e.g. S&P 500 historical returns), from 1950 to 2020 was 8.9%.

7. Maintain your balance portfolio and asset mix

Your portfolio’s mix could drift from its initial objectives from time to time. You can rebalance to reduce areas where your investments are overweight or add to areas where they are underweight. By rebalancing on a regular basis, you can help ensure your portfolio remains aligned with your objectives and on track to reach your long-term goals.

8. Prepare for the unexpected

When things are going well, emergency savings can seem unimportant. But in addition to your regularly occurring expenses, like rent/mortgage and utility bills, you’ll often deal with unforeseen events and unexpected costs.

Unforeseen events can derail what you’re working so hard to achieve financially. By preparing for the unexpected and building a strategy to address it, you’ll be better positioned to handle the inevitable bumps along the way.

No one wants to think about car breakdowns or job loss. But as much as we’d like to avoid thinking about them, emergencies do happen. Building an emergency savings account that is dedicated to handling unexpected costs is important.

9. Focus on what you can control

You can’t control market fluctuations, the economy or the political environment. Instead, you should base your decisions on time-tested investment principles, which include:

  • Diversifying your portfolio
  • Owning quality investments
  • Maintaining a long-term perspective

Additionally, taking control of your spending habits and weighing them against your dreams for the future can determine how to align your spending goals. Perhaps you might decide that it’s more important for your family that you retire by a certain age, and you could drive one car for a longer time or cut back in other areas. That way, more money would be available to make that bigger dream a reality.

If you have “bad” debt from credit cards and high interest personal loans that will get you in trouble with interest payments, pay that off before you put money in the stock market. 

Don’t fall into the common money traps of trying to keep up with the Joneses: buying the latest phone, shiniest car, biggest house. These are money traps because they are things that will take all your money so you have nothing left to invest. Spending money wisely is one of the most important steps you can take to put yourself in the best possible financial situation before you begin investing.

10. Review your strategy regularly

The one constant you can expect is change. That’s why it’s so important that you review your strategy on a regular basis. You should still review your portfolio at least once a year to make sure you’re on track for the long haul.

Realizing your dreams starts with smart investing. By regularly reviewing your strategy and make the adjustments you need, you can have a clearer picture of where you stand and what you need to do to help reach your goals.

No matter what your path forward looks like, tailor your strategies – so you can see the road ahead and move forward with confidence.

References:

  1. https://www.edwardjones.com/us-en/market-news-insights/personal-finance/investing-strategies/investing-rules
  2. https://www.edwardjones.com/us-en/why-edward-jones/investing-approach/investment-philosophy
  3. https://www.ruleoneinvesting.com/blog/how-to-invest/get-started-investing-with-these-10-steps/

Financial Literacy: Six Principles of Personal Finance | TD Ameritrade

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Imagine operating a boat without the basic understanding of nautical rules of the road or even how to operate a boat. Scary thought.

Here’s another scary circumstance – one that is all too real. Many Americans are making financial decisions with minimal financial knowledge of investing, budgeting, and credit. The TIAA Institute conducted a survey on U.S. financial literacy, asking 28 basic questions about retirement saving, debt management, budgeting, and other financial matters. The average respondent answered only about half of the questions correctly.

Another study, conducted by Pew Research, found that one in four Americans say that they won’t be able to pay their bills on time this month.

It has been said that knowledge is power, and if that’s true, then too many Americans lack the power to control their financial futures. Financial success rarely happens by accident; it is typically the outcome of a journey that starts with education.

Talking about money is one of the most important skills to being a fiscally responsible and a financially literate person. However, 44% of Americans surveyed would rather discuss death, religion or politics than talk about personal finance with a loved one, according to CNBC.

Why? Two major reasons are embarrassment and fear of conflict, even though the consequences can be grave: 50% of first marriages end in divorce, and financial conflict is often a key contributor. Additionally, it is considered rude to discuss money and wealth.

The missing component is financial literacy education and training.

Mastering personal finance requires you to look at your financial situation holistically and come up with a plan for how to manage your money. In this TD Ameritrade video, we’ll look at helpful principles for six personal finance topics:

  1. Budgeting – focus on the big ticket items by cutting cost on the expensive costs such as cars and homes
  2. Saving and investing – be specific about your destination and your plan on achieving your goal and reaching your destination
  3. Debt and Credit – avoid high interest debt and loans on items that will quickly lose value
  4. Reduce taxes – find ways to legally pay less taxes on the income you earn,
  5. Avoid insurance for expenses you can pay out of pocket – purpose of insurance is to protect you in unfortunate scenarios.  60% of all bankruptcy is related to medical expenses
  6. Investing for retirement. – don’t just save for retirement, invest for retirement.

Make high impact adjustments to your finances to improve your financial future.

References:

  1. https://www.cnbc.com/2019/04/30/the-us-is-in-a-financial-literacy-crisis-advisors-can-fix-the-problem.html
  2. https://www.tiaainstitute.org/publication/financial-well-being-and-literacy-midst-pandemic
  3. https://www.pewtrusts.org/en/research-and-analysis/articles/2017/04/06/can-economically-vulnerable-americans-benefit-from-financial-capability-services

Option Investing 101 | Fidelity

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From Fidelity Investments

Learn the fundamentals of options trading. This introduction to trading option contracts is all about getting to know the basics of options investing and trading; learning the key terms and concepts essential for a new or novice options trader.

Put/Call Ratio

High put/call (P/C) levels are a sign of fear (bullish from a contrarian view), while low P/C levels are a sign of complacency (bearish from a contrarian view). The trend of P/Cs is more important than absolute levels. When the intermediate- to longer-term trend of P/Cs is lower, it is bullish for stocks. When the trend is higher, it is bearish for stocks from an intermediate-/longer-term basis.

Annual Black Investor Survey by Ariel Investments Charles Schwab

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“Black Americans are already behind the eight ball, and it is disheartening to see that at current savings and investing rates, the wealth gap will continue to expand, endangering our futures and leaving our families exposed.” Mellody Hobson, co-CEO & President of Ariel Investments

The annual Black investor survey by Ariel Investments and Charles Schwab was recently released.

This year, the survey revealed that Black Americans continue to have less opportunity to benefit from stock market growth than white Americans at similar income levels, according to Ariel Investments. The data also showed signs of hope, including increased young investor engagement.

For more than 20 years, the Ariel-Schwab Black Investor Survey has compared attitudes and behaviors on saving and investing among Black and white Americans.

This year’s results show the deep-rooted gap in participation between the groups persists. The survey conveyed several important trends:

  • Growing engagement in the stock market by younger Black Americans, with 63% under the age of 40 now participating in the stock market, equal to their white counterparts
  • The closing of this gap among younger investors is being driven by new investors: 3 times as many Black investors as white investors (15% vs. 5%)
  • A wide investing gap exists overall – 55% of Black Americans and 71% of White Americans reporting stock-market investments

It is encouraging to view that younger African Americans are investing in greater numbers. Yet, a significant gap persist in the overall number of who invests by race and ethnicity.

More Black Americans became first-time investors in 2020 than in any other year, according to the results of a new survey by Ariel Investments and Charles Schwab. The rise has primarily been driven by younger investors: 63% of Black Americans under 40 now report participating in the stock market, equal to their white counterparts.

On the whole, however, wide gaps remain, with 55% of Black Americans and 71% of white Americans reporting stock-market investments. “This disparity, compounded over time, means that middle-class Black Americans will have less money saved for retirement and less wealth to pass onto the next generation,” the report’s authors write.

The ongoing pandemic has only exacerbated the imbalance, according to the report. In 2020:

  • More than twice as many Black 401(k) participants (12% vs. 5%) borrowed money from their retirement accounts.
  • Almost twice as many Black Americans (18% vs. 10%) dipped into an emergency fund.
  • Nine percent of Black Americans (vs. 4% of white Americans) say they asked family or friends for financial support.

“Financial literacy is a great equalizer, and a life skill that everyone needs.” Carrie Schwab-Pomerantz, President of Charles Schwab Foundation

Financial literacy and education are desperately needed in the African American community. And, it needs to start at a very early age before the vestiges of debt and negative spending behaviors becomes a difficult to break habit.

Trust Remains an Issue

Trust in the financial services industry continues to affect stock market participation among Black Americans. While similar proportions of Black and white investors believe that financial services institutions are not trustworthy, only 35 percent of African American investors feel they are treated with respect by financial institutions versus 62 percent for white investors. As a result, Black Americans are less likely to work with financial advisors.

Additionally, what works against new African Americans investors is that most wealth and financial advisors will not work with you if you don’t already have large amounts of money you either earned or inherited. This leaves the vast majority of American (Black, White, etc) out of the financial advisory equation.

There will be a conversation among leading financial services experts from Ariel Investments, Charles Schwab, and CNBC discussing the challenges driving the racial wealth opportunity gap. This group will discuss the research findings, broader trends, and how the financial services industry can challenge the status quo.

The The Racial Wealth Opportunity Gap Widened in 2020 conversation will occur on Tuesday, March 2, 2021, 3:00 – 4:00 p.m. EST.

References:

  1. https://www.aboutschwab.com/ariel-schwab-black-investor-survey-2021
  2. https://blackinvestorsurvey.swoogo.com/ariel-schwab/979446?ref=swbh?SM=URO&sf243370044=1

When Markets Dip, Don’t Drop Out

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“Just stay the course. Don’t do something, just stand there. This is speculation that we’re seeing out there, and you can’t respond to it.” Jack Bogle, Vanguard Investment

When the market gets jumpy, so do many investors.

In periods of volatility, anxious stock market investors can be tempted to take money off the table, fearing a potentially major slide in their portfolio. Selling off stocks when the market dips and returning only when things calm down is emotional, not rational or successful investing strategy. Data has proven that over the long term investors are always able to overcome dips and recessions successfully.

Markets tend to overshoot in both directions,” the late financier Leon Levy wrote in his memoir, The Mind of Wall Street. “Just as we saw stock prices rise far above the value of the companies, we are likely to see the reverse. Stocks will then be undervalued, and there will be new opportunities for investors.”

“During the last 20 years alone, there have been 25 months (i.e. more than every tenth month) where the S&P 500 index dropped by more than 5% in a month, with the decline averaging -7.9% among those 25 months. Despite this, over this time period the annualized compound growth rate on the index has been +6.3% per year. “ Jakub Jurek, Wealthfront Advisers’ VP of Research explains.

The Charles Schwab infographic explains how staying the course during market dips can be healthier for an investor’s portfolio.

It considers three types of investors over the course of 40 years:

  • The Stalwart – a discipline investor who sits tight and continues to invest, no matter how the market is performing.
  • The Reactor – an investor who reacts and pulls his money out of a bear market. He continues to save 10 – 15 percent of his income in hopes recouping some of his losses, but didn’t invest it.
  • The Waffler – during a year with negative returns, a waffling investor will move all his money out of the market and will sit on the sideline in cash. And, if the market rises up after a few years, he would finally get back into the market.

“If you take money out of your accounts in anticipation over a market downturn, it’s hard to know when you should put your money back in,” says Celine Sun, Wealthfront’s Director of Research. “This means that most likely, you’ll miss the upside returns more than you’ll avoid the downside.” Exiting stocks amid a turbulent market may help assuage your anxiety, but you’re likely to miss out on substantial gains while you sit on the sidelines.

Stay the course

“Stay the course” is a phrase that means to continue with your current investment plan. Investing should be for the long term. The stock market will always have turbulence, so it’s important that you ride out market cycles. If you are invested in high quality equities and your investments are based on a solid financial plan, don’t sell anything that you wouldn’t sell when there isn’t crashing. The only exception is when it’s clear that a company or niche industry isn’t going to recover, and then it may be time to cut your losses.

“In the short run, listen to the economy; don’t listen to the stock market,” Vanguard Group founder Jack Bogle said during an interview in the midst of a rather severe market turmoil. “These moves in the market are like a tale told by an idiot: full of sound and fury, signalling nothing.”

Whether the market recovers quickly or years from now, the most important thing to remember is, it will recover. And so will you. According to Carlos Slim Helu, “Courage taught me no matter how bad a crisis gets … any sound investment will eventually pay off.”

References:

  1. https://www.schwab.com/resource-center/insights/sites/g/files/eyrktu156/files/Q120_When_Markets_Dip_fina%401x_72dpi_0.jpg
  2. https://blog.wealthfront.com/what-should-you-do-when-markets-dip-hint-nothing/
  3. https://www.marketplace.org/2009/01/05/history-rewards-stalwart-investor/
  4. https://www.forbes.com/sites/lizfrazierpeck/2020/03/12/three-things-to-do-during-a-stock-market-crash/?sh=185db9a54c78

Note: Investors simply don’t experience FOMO (Fear of Missing Out) as much as they experience FOLO (fear of losing out). Consequently, the fear of losing lingers far beyond the crisis period and investors are left worse off than if they had done nothing at all. For those investors who sold during a market crash, it is important that they get back into the market and not engage in the destructive speculation.

Never invest in something you don’t understand.

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Many successful investors follow one extremely important rule of thumb: Never invest in something you don’t understand.

Selecting the right companies to invest is very difficult and the decision shouldn’t be taken lightly. When you invest in the stock market, you will be tempted often to buy companies or products that you don’t truly understand.

Consequently, if you can’t understand the investment and understand how it will help you save for the future, build wealth over the long term or achieve your financial goals, do not buy the asset. You need to resist temptation, and focus on the only question that counts:

“Do I understand the business of this company well enough so that I am reasonably confident that it is going to be a good investment?”.

Warren Buffett famously said he has three boxes for investment ideas: in, out and too hard. If a company’s business or product is too difficult to understand, it’s better to just file it in the “too hard” category and move on to another opportunity.

Investors should always remember that a share of stock represents partial ownership of a company. “Just as you would never purchase a private business from someone else without at least looking at its sales, profits, debt and trends of all three of those things at a bare minimum, you need to do the same thing before purchasing stock in a company,” Cornerstone Wealth chief investment officer Chris Zaccarelli says. “If you are doing anything else, you are just hoping what you bought will go higher – and hope is never a good strategy.”

Be sure to always read an investment asset’s prospectus or disclosure statement carefully. And, if you are still confused, you should think twice about investing.

The bottom line for investors is simple: If you don’t completely understand how an investment works, or creates revenue, earnings and cash flow, then don’t buy it.

References:

  1. http://www.mymoneyworks.de/back-to-basics/dont-buy-what-you-dont-understand/
  2. https://money.usnews.com/investing/articles/2017-05-11/never-invest-in-something-you-dont-understand