Keep INVESTING Simple and Safe (KISS) ****Investment Philosophy, Strategy and various Valuation Methods**** The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Wednesday 4 March 2020
What To Avoid Investing In When You’re 20-40
If you are investing, or have invested while you were in your twenties or even earlier, that is an excellent first step. However, if you have invested in the wrong things, you have missed out on excellent opportunities for your money to grow. In this post I will explain what to avoid investing in when you are just starting out your adult life.
My Investment
Regretfully, I am giving you this information from personal experience, not from “book-smarts.” In other words, I made this investment mistake and I am telling you this so you don’t have to make the same mistake. I invested money into these types of investments over ten years ago. I had purchased thousands of dollars of these investments. Eventually, I had cashed in many of them but have kept $200 to try to accrue higher interest.
Altogether the investments have accrued around $80 over more than 10 years. This may sound like a decent investment. Keep in mind that I have brought up that a 7% interest rate would double your investments over ten years. I commonly use this number because the lifetime return of investment of the S&P 500 is just less than 10%, and the inflation rate is just less than 3%. With only about 40% return over 10 years, that would mean I have an interest rate of around than 2.6%. Keep in mind, with an inflation rate of less than 3% my investment was not beating inflation. It was not even breaking even. This investment was a set of series I US savings bond.
Savings Bonds Are Overrated
Savings bonds are a form of investment where the government issues these bonds for a set amount that investors loan to them. The savings bonds can receive interest for up to 30 years, but can be redeemed before maturation. They usually make great gifts and savings, but not great investments.
Many people see savings bonds as safe investments. They are, but they are what you should avoid investing in when you are young. They have too small of a return to invest in the long term, although you can cash out your savings bonds before 30 years, the interest they accrue is too small to make up for the lack of risk.
Where Bonds Are Acceptable
Just because individual savings bonds do not make very good investments does not mean they cannot find a place in finance. Savings bonds still make great gifts, especially to young children. Children could see the value of saving and investing from these alone. Savings bonds are safe and have some return so a child would be excited to see money grow, and would want to learn how to make it grow more. Sure, the investment may not beat inflation, but what ten year old knows or cares about inflation? They will just see it as money growing. Furthermore, bond funds are useful in balanced funds to control risk, and to diversify investments. More importantly, bonds should be utilized when you are close to retirement.
Where To Invest Instead
If you are in your 20s – 40s, you should at least be considering investing in funds that are mostly invested in equities (at least 60% equities). You should avoid investing in bonds too much. Your portfolio will lean more towards growth so your money can work harder for you than the other way around. Your investments may be more prone to losses. However, unless you are planning on retiring early, you could expect your portfolio to recover within 10 years and grow further.
If you need money saved within the short term, it may be better to save your money. Savings are almost completely liquid and at least your money will be collecting a little interest instead of dust. Furthermore, there are high interest savings accounts with comparable interest to savings bonds.
Final Thoughts
Investing in bonds may not be the best financial strategy when you are young. But they make better investments than most things. Most people could spend their money as it comes or “invest” in black jack. However, if you want to forge your wealth, you need to give your wealth a little more heat. Investing in equities, real estate, or other high return of investment assets will do more for you in the long run than bonds. Besides, if you are just starting to invest in your 20s – 40s, you will be surprised at how quickly you will have to change gears to preserve your wealth.
BYPAPA FOXTROT
Author:Papa Foxtrot
Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.
View all posts by Papa Foxtrot
https://forgeyourwealth.com/2020/03/03/what-to-avoid-investing-in-when-youre-20-40/?utm_source=rss&utm_medium=rss&utm_campaign=what-to-avoid-investing-in-when-youre-20-40&utm_source=rss&utm_medium=rss&utm_campaign=what-to-avoid-investing-in-when-youre-20-40
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My Investment
Regretfully, I am giving you this information from personal experience, not from “book-smarts.” In other words, I made this investment mistake and I am telling you this so you don’t have to make the same mistake. I invested money into these types of investments over ten years ago. I had purchased thousands of dollars of these investments. Eventually, I had cashed in many of them but have kept $200 to try to accrue higher interest.
Altogether the investments have accrued around $80 over more than 10 years. This may sound like a decent investment. Keep in mind that I have brought up that a 7% interest rate would double your investments over ten years. I commonly use this number because the lifetime return of investment of the S&P 500 is just less than 10%, and the inflation rate is just less than 3%. With only about 40% return over 10 years, that would mean I have an interest rate of around than 2.6%. Keep in mind, with an inflation rate of less than 3% my investment was not beating inflation. It was not even breaking even. This investment was a set of series I US savings bond.
Savings Bonds Are Overrated
Savings bonds are a form of investment where the government issues these bonds for a set amount that investors loan to them. The savings bonds can receive interest for up to 30 years, but can be redeemed before maturation. They usually make great gifts and savings, but not great investments.
Many people see savings bonds as safe investments. They are, but they are what you should avoid investing in when you are young. They have too small of a return to invest in the long term, although you can cash out your savings bonds before 30 years, the interest they accrue is too small to make up for the lack of risk.
Where Bonds Are Acceptable
Just because individual savings bonds do not make very good investments does not mean they cannot find a place in finance. Savings bonds still make great gifts, especially to young children. Children could see the value of saving and investing from these alone. Savings bonds are safe and have some return so a child would be excited to see money grow, and would want to learn how to make it grow more. Sure, the investment may not beat inflation, but what ten year old knows or cares about inflation? They will just see it as money growing. Furthermore, bond funds are useful in balanced funds to control risk, and to diversify investments. More importantly, bonds should be utilized when you are close to retirement.
Where To Invest Instead
If you are in your 20s – 40s, you should at least be considering investing in funds that are mostly invested in equities (at least 60% equities). You should avoid investing in bonds too much. Your portfolio will lean more towards growth so your money can work harder for you than the other way around. Your investments may be more prone to losses. However, unless you are planning on retiring early, you could expect your portfolio to recover within 10 years and grow further.
If you need money saved within the short term, it may be better to save your money. Savings are almost completely liquid and at least your money will be collecting a little interest instead of dust. Furthermore, there are high interest savings accounts with comparable interest to savings bonds.
Final Thoughts
Investing in bonds may not be the best financial strategy when you are young. But they make better investments than most things. Most people could spend their money as it comes or “invest” in black jack. However, if you want to forge your wealth, you need to give your wealth a little more heat. Investing in equities, real estate, or other high return of investment assets will do more for you in the long run than bonds. Besides, if you are just starting to invest in your 20s – 40s, you will be surprised at how quickly you will have to change gears to preserve your wealth.
BYPAPA FOXTROT
Author:Papa Foxtrot
Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.
View all posts by Papa Foxtrot
https://forgeyourwealth.com/2020/03/03/what-to-avoid-investing-in-when-youre-20-40/?utm_source=rss&utm_medium=rss&utm_campaign=what-to-avoid-investing-in-when-youre-20-40&utm_source=rss&utm_medium=rss&utm_campaign=what-to-avoid-investing-in-when-youre-20-40
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Top 25 Malaysia Investment Blogs And Websites For Malaysian Investors in 2020
Top 25 Malaysia Investment Blogs And Websites For Malaysian Investors in 2020
Last Updated Mar 1, 2020
About Blog Keep INVESTING Simple and Safe (KISS)Investment Philosophy, Strategy and various Valuation Methods. The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It's true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!
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Warren Buffett Explains Why Book Value Is No Longer Relevant
The Oracle of Omaha on why cash flows are more important than book value
March 03, 2020
For decades, value investors have used book value per share as a tool to assess a stock's value potential.
This approach began with Benjamin Graham. Widely considered to be the father of value investing, Graham taught his students that any stocks trading below book value were attractive investments because the companies offered a wide margin of safety and low level of risk. To this day, many value investors rely on book value as a shortcut for calculating value.
Buffett on book value
Warren Buffett (Trades, Portfolio) is perhaps Graham's best-known student. For years, Buffett used book value, among other measures, to asses a business's net worth. He also used book value growth as a yardstick for calculating Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) value creation.
However, as far back as 2000, the Oracle of Omaha started to move away from book value. He explained why at the 2000 annual meeting of Berkshire shareholders. Responding to a shareholder who asked him for his thoughts on using book value to track changes in intrinsic value, Buffett replied:
"The very best businesses, the really wonderful businesses, require no book value. They — and we are — we want to buy businesses, really, that will deliver more and more cash and not need to retain cash, which is what builds up book value over time...
In our case, when we started with Berkshire, intrinsic value was below book value. Our company was not worth book value in early 1965. You could not have sold the assets for that price that they were carried on the books, you could not have — no one could make a calculation, in terms of future cash flows that would indicate that those assets were worth their carrying value. Now it is true that our businesses are worth a great deal more than book value. And that's occurred gradually over time. So obviously, there are a number of years when our intrinsic value grew greater than our book value to get where we are today...
Whether it's The Washington Post or Coca-Cola or Gillette. It's a factor we ignore. We do look at what a company is able to earn on invested assets and what it can earn on incremental invested assets. But the book value, we do not give a thought to."
It is no secret that value as an investing style has underperformed growth over the past decade. There's no obvious explanation as to why this is the case, but one of the explanations could be that the definition of value is out of date. Buffett's comments from the 2000 annual meeting seem to support this conclusion.
No longer a good measure
Book value was an excellent proxy for value when companies relied on large asset bases to produce profits. As the economy has shifted away from asset-intensive businesses and more towards knowledge-intensive companies, book value has become less and less relevant.
What's more, as Buffett explained in 2000, book value does not necessarily represent intrinsic value. Just because a stock is trading below its book value does not necessarily mean it is worth said book value.
The same is true of companies trading at a premium to book. The intrinsic value of that business could be significantly higher than book value as book value does not tend to reflect intangible assets.
Investing is an art, not a science, and valuing businesses is not a straightforward process. Investors cannot rely on a simple metric or shortcut to assess value. Many factors contribute to intrinsic value and intrinsic value growth, and using book value as a proxy for intrinsic value is an outdated method. Even in Graham's time, it wasn't always correct.
https://www.gurufocus.com/news/1063604/warren-buffett-explains-why-book-value-is-no-longer-relevant
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