Tips on How Investors Could Build a Large Portfolio
Saturday, January 23, 2010
Owing to the global economic downturn, some investors may have to put aside their aim of wealth accumulation lately.
For now, wealth accumulation seems to be far away given their current low salary level, worsened by lower bonuses received or no salary increment.
As a result of the uncertainty arising from salary reduction or getting retrenched, some may even need to tap into their savings to survive through this period of difficulty.
We can fully understand this situation. However, we believe that we should consider building a portfolio at this time.
We may not want to rush in to buy stocks now in view of the current high prices. However, we need to prepare ourselves to “fish” good quality stocks at reasonable price levels if the market turns down again.
We will regret if we are not investing during this period because usually the best opportunities are discovered during a downturn.
Nevertheless, some investors think that it may not be realistic for them to invest now given that they are already having difficulties making ends meet.
However, we believe that we need to start somewhere. Every big portfolio always starts from a small one. If we never sit down and start thinking about building a portfolio, we will never get a big portfolio. Hence, we should start now and start small.
When our portfolio is about RM10,000 in size, a 10% return means a return of only RM1,000. However, when our portfolio grows to RM1mil, a 10% return means RM100,000!
Some investors may have the intention of building a portfolio but they do not know how to do so. In fact, some may depend on wealth advisers on this issue.
However, even if we get a very good, knowledgeable and responsible wealth adviser, we also need to equip ourselves with some knowledge in this area to make sure we make sound investment decisions; after all, we need to be responsible for our future.
We can gain this knowledge by reading books related to this topic or attending some training courses.
Know what we want to achieve
T. Harv Eker says in his book, Secrets of the Millionaire Mind, that “the number one reason for most people who do not get what they want is that they don’t know what they want.”
For example, if we want to have a good retirement, we will have to know how much we need for our retirement and plan ahead for it. To give you some ideas, there are quite a few websites that can provide free advice on how to determine your retirement needs.
Once we know how much we need for retirement and set it as an objective, we need to focus on growing our net wealth to achieve it.
Sometimes investors are too focused on their current income level and short-term gain that they end up neglecting the long-term growth of their net wealth.
High income does not mean high net wealth if your expenses are higher than your income level. Hence, we need to control and monitor our expenses in order to have a net positive cash inflow instead of outflow.
If possible, we should have a cash budget that will guide us on the expected income to be received as well as the expenses to be incurred in the coming periods. We should try our best to stick to the plan and be committed to build our wealth.
Lately, some investors have been affected by high credit-card debts, which may be due to high expenses that cannot be supported by their current income.
During hard times, we need to plan carefully for big expenses and, if possible, we should delay expenditures which are not critical.
Given that nobody will know when our economy will recover, it is safer to spend less and try to reduce our debts.
In fact, if we have cultivated good spending habits from the start, regardless of economic situation, we will not have the problem of having to trim down unnecessary expenses during bad times. We have seen a lot of successful people living below their means and being very careful in spending money on luxury items. We should learn from these examples.
Don’t look down on low returns
Sometimes, a guarantee of low returns is better than the uncertainties of high returns, depending on the risk tolerance level of individuals. Always remember that risk and return go hand-in-hand. Not every investment product suits our return objective and risk tolerance level.
Therefore, we need to understand the characteristics and nature of investment products that we intend to invest in before we make any investment decisions.
We cannot always think of big returns without considering the potential risks that we need to encounter.
For those who like to play it safe, it will be wiser to go for defensive ways of investing, which means looking for stocks that pay good dividends and have solid businesses.
Remember, we need to be patient, go slow and steady. If we can avoid making losses during this period, we should be able to achieve our financial goals when the economy recovers again.
Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
Source : The Star
Sunday, 24 January 2010
Market Timing Strategies
- First, enter a breakout or breakdown after it's under way.
- Second, wait for a pullback and enter near support/resistance.
- Third, buy or sell within a narrow range before the move begins.
- current market environment,
- reward-to-risk ratio and
- chosen holding period.
http://alltradingideas.blogspot.com/2009/12/market-timing-strategies.html
Comments:
Useful for those hoping to profit from short-term trades. However, it is still not a foolproof method that can be consistently employed profitably each time.
For those investing in good quality companies for the long term, price is the most important issue. Buy these at fair price or bargain prices, never buy them at high prices.
Your main reason for buying stocks in the first place.
To own shares in good companies.
People are always looking around for the secret formula for winning on Wall Street, when all along, it's staring them in the face: Buy shares in solid companies with earning power and don't let go of them without a good reason. The stock price going down is not a good reason.
People are always looking around for the secret formula for winning on Wall Street, when all along, it's staring them in the face: Buy shares in solid companies with earning power and don't let go of them without a good reason. The stock price going down is not a good reason.
Crashes, corrections and bear markets cannot be predicted exactly
Nobody can predict exactly when a bear market will arrive (although there's no shortage of Wall Stree types who claim to be skilled fortune tellers in this regard). But when one does arrive, and the prices of 9 out of 10 stocks drop in unison, many investors naturally get scared.
They hear the TV newscasters using words like "disaster" and "calamity" to describe the situation, and they begin to worry that stock prices will hurtle toward zero and their investment will be wiped out. They decide to rescue what's left of their money by putting their stocks up for sale, even at a loss. They tell themselves that getting something back is better than getting nothing back.
It is at this point that large crowds of people suddenly become short-term investors, in spite of their claims about being long-term investors.
Without realising it, they've fallen into the trap of trying to time the market. If you told them they were "market timers" they'd deny it, but anybody who sells stocks because the market is up or down is a market timer for sure.
A market timer tries to predict the short-term zigs and zags in stock prices, hoping to get out with a quick profit. Few people can make money at this, and nobody has come up with a foolproof method.
They hear the TV newscasters using words like "disaster" and "calamity" to describe the situation, and they begin to worry that stock prices will hurtle toward zero and their investment will be wiped out. They decide to rescue what's left of their money by putting their stocks up for sale, even at a loss. They tell themselves that getting something back is better than getting nothing back.
It is at this point that large crowds of people suddenly become short-term investors, in spite of their claims about being long-term investors.
- They let their emotions get the better of them, and they forget the reason they bought stocks in the first place - to own shares in good companies.
- They go into a panic because stock prices are low, and instead of waiting for the prices to come back, they sell at these low prices.
- Nobody forces them to do this, but they volunteer to lose money.
Without realising it, they've fallen into the trap of trying to time the market. If you told them they were "market timers" they'd deny it, but anybody who sells stocks because the market is up or down is a market timer for sure.
A market timer tries to predict the short-term zigs and zags in stock prices, hoping to get out with a quick profit. Few people can make money at this, and nobody has come up with a foolproof method.
Anybody who sells stocks because the market is up or down is a market timer for sure.
Anybody who sells stocks because the market is up or down is a market timer for sure.
A market timer tries to predict the short-term zigs and zags in stock prices, hoping to get out with a quick profit.
Few people can make money at this, and nobody has come up with a foolproof method.
In fact, if anybody had figured out how to consistently predict the market, his name (or her name) would already appear at the top of the list of riches peole in the world, ahead of Warren Buffett and Bill Gates.
Try to time the market and you invariably find yourself getting out of stocks at the moment they've hit bottom and are turning back up, and into stocks when they've gone up and are turning back down.
People think this happens to them because they're unlucky. In fact, it happens to them because they're attempting the impossible. Nobody can outsmart the market.
People also think it's dangerous to be invested in stocks during crashes and corrections, but it's only dangerous if they sell.
They forget the other kind of danger - not being invested in stocks on those few magical days when prices take a flying leap.
It is amazing how a few key days can make or break your entire investment plan.
Here is a typical example: During a prosperous five-year stretch in teh 1980s, stock prices gained 26.3% a year. Disciplined investors who stuck to the plan doubled their money and then some. But most of these gains occurred on 40 days out of the 1,276 days the stock markets were open for business during those 5 years. If you were out of stocks on those 40 key days, attempting to avoid the next correction, your 26.3% annual gain was reduced to 4.3%. A CD in a bank would have returned more than 4.3%, and at less risk.
So to get the most out of stocks, especially if you're young and time is on your side, your best bet is to invest money you can afford to set aside forever, then leave that money in stocks through thick and thin.
A market timer tries to predict the short-term zigs and zags in stock prices, hoping to get out with a quick profit.
Few people can make money at this, and nobody has come up with a foolproof method.
In fact, if anybody had figured out how to consistently predict the market, his name (or her name) would already appear at the top of the list of riches peole in the world, ahead of Warren Buffett and Bill Gates.
Try to time the market and you invariably find yourself getting out of stocks at the moment they've hit bottom and are turning back up, and into stocks when they've gone up and are turning back down.
People think this happens to them because they're unlucky. In fact, it happens to them because they're attempting the impossible. Nobody can outsmart the market.
People also think it's dangerous to be invested in stocks during crashes and corrections, but it's only dangerous if they sell.
They forget the other kind of danger - not being invested in stocks on those few magical days when prices take a flying leap.
It is amazing how a few key days can make or break your entire investment plan.
Here is a typical example: During a prosperous five-year stretch in teh 1980s, stock prices gained 26.3% a year. Disciplined investors who stuck to the plan doubled their money and then some. But most of these gains occurred on 40 days out of the 1,276 days the stock markets were open for business during those 5 years. If you were out of stocks on those 40 key days, attempting to avoid the next correction, your 26.3% annual gain was reduced to 4.3%. A CD in a bank would have returned more than 4.3%, and at less risk.
So to get the most out of stocks, especially if you're young and time is on your side, your best bet is to invest money you can afford to set aside forever, then leave that money in stocks through thick and thin.
- You'll suffer through the bad times, but if you don't sell any shares, you'll never take a real loss.
- By being fully invested, you'll get the full benefit of those magical and unpredictable stretches when stocks make most of their gains.
Secret formula for winning was always staring in your face
People are always looking around for the secret formula for winning on Wall Street, when all along, it's staring them in the face: Buy shares in solid companies with earning power and don't let go of them without a good reason. The stock price going down is not a good reason.
To get that 11%, you have to pledge your loyalty to stocks for better or for the worse - this is a marriage we're talking about, a marriage between your money and your investments. You can be a genius at analysing which companies to buy, but unless you have the patience and the courage to hold on to the shares, you're an odds-on favorite to become a mediocre investor.
It is not always brainpower that separates good investors from bad; often, it's discipline.
To get that 11%, you have to pledge your loyalty to stocks for better or for the worse - this is a marriage we're talking about, a marriage between your money and your investments. You can be a genius at analysing which companies to buy, but unless you have the patience and the courage to hold on to the shares, you're an odds-on favorite to become a mediocre investor.
It is not always brainpower that separates good investors from bad; often, it's discipline.
Invest for the Long Term - Twenty years or longer is the right time frame.
If you can read and do fifth-grade arithmetic, you have the basic skills to be a successful investor in stocks. The next thing you need is a plan.
The stock market is one place where being young gives you a big advantage over the old folks. You've got the most valuable asset of all - time.
The old expression "Time is money" ought to be revised to "Time makes money." It is a winning combination. Let time and money do the work, while you sit back and await the results.
If you have decided to invest in stocks above all else, avoiding bonds, you have eliminated a major source of confusion, plus you've made the intelligent choice. This assumes, you are a long-term investor who is determined to stick with stocks no matter what.
People who need to pull their money out in one year, two year, or five years shouldn't invest in stocks in the first place. There's simply no telling what stock prices will do from one year to the next. When the stock market has one of its "corrections" and stocks lose money, the people who have to get their money out may be going home with a lot less than they put in.
Twenty years or longer is the right time frame. That's long enough for stocks to rebound from the nastiest corrections on record, and it's long enought for the profits to pile up. 11% a year in total return is what stocks have produced in the past. Nobody can predict the future, but after 20 years at 11%, an investment of $10,000 is magically transformed into $80,623.
To get that 11%, you have to pledge your loyalty to stocks for better or for the worse - this is a marriage we're talking about, a marriage between your money and your investments. You can be a genius at analysing which companies to buy, but unless you have the patience and the courage to hold on to the shares, you're an odds-on favorite to become a mediocre investor. It is not always brainpower that separates good investors from bad; often, it's discipline.
Stick with your stocks no matter what, ignore all the "smart advice" that tells you to do otherwise, and "act like a dumb mule." That was the advice given 50 years ago by a former stockbroker, Fred Schwed, in his classic book Where are the Customers' Yachts? and it still applies today.
People are always looking around for the secret formula for winning on Wall Street, when all along, it's staring them in the face: Buy shares in solid companies with earning power and don't let go of them without a good reason. The stock price going down is not a good reason.
It's easy enough to stand in front of a mirror and swear that you[re a long-term investor who will have no trouble staying true to your stocks. The real test comes when stocks take a dive. Nobody can predict exactly when a bear market will arrive (although there's no shortage of Wall Street types who claim to be skilled fortune tellers in this regard). But when one does arrive, and the prices of 9 out of 10 stocks drop in unison, many investors naturally get scared.
The stock market is one place where being young gives you a big advantage over the old folks. You've got the most valuable asset of all - time.
The old expression "Time is money" ought to be revised to "Time makes money." It is a winning combination. Let time and money do the work, while you sit back and await the results.
If you have decided to invest in stocks above all else, avoiding bonds, you have eliminated a major source of confusion, plus you've made the intelligent choice. This assumes, you are a long-term investor who is determined to stick with stocks no matter what.
People who need to pull their money out in one year, two year, or five years shouldn't invest in stocks in the first place. There's simply no telling what stock prices will do from one year to the next. When the stock market has one of its "corrections" and stocks lose money, the people who have to get their money out may be going home with a lot less than they put in.
Twenty years or longer is the right time frame. That's long enough for stocks to rebound from the nastiest corrections on record, and it's long enought for the profits to pile up. 11% a year in total return is what stocks have produced in the past. Nobody can predict the future, but after 20 years at 11%, an investment of $10,000 is magically transformed into $80,623.
To get that 11%, you have to pledge your loyalty to stocks for better or for the worse - this is a marriage we're talking about, a marriage between your money and your investments. You can be a genius at analysing which companies to buy, but unless you have the patience and the courage to hold on to the shares, you're an odds-on favorite to become a mediocre investor. It is not always brainpower that separates good investors from bad; often, it's discipline.
Stick with your stocks no matter what, ignore all the "smart advice" that tells you to do otherwise, and "act like a dumb mule." That was the advice given 50 years ago by a former stockbroker, Fred Schwed, in his classic book Where are the Customers' Yachts? and it still applies today.
People are always looking around for the secret formula for winning on Wall Street, when all along, it's staring them in the face: Buy shares in solid companies with earning power and don't let go of them without a good reason. The stock price going down is not a good reason.
It's easy enough to stand in front of a mirror and swear that you[re a long-term investor who will have no trouble staying true to your stocks. The real test comes when stocks take a dive. Nobody can predict exactly when a bear market will arrive (although there's no shortage of Wall Street types who claim to be skilled fortune tellers in this regard). But when one does arrive, and the prices of 9 out of 10 stocks drop in unison, many investors naturally get scared.
Consistently losing money in stocks - don't blame the stocks, it is not the fault of the stocks. You need a plan.
When people consistently lose money in stocks, it's not the fault of the stocks.
Stocks in general go up in value over time.
In 99 out of 100 cases where investors are chronic losers, it's because they don't have a plan.
They buy at a high price, then they get impatient or they panic, and they sell at a lower price during one of those inevitable periods when stocks are taking a dive.
Their motto is "Buy high and sell low," but you don't have to follow it.
Instead, you need a plan.
Stocks in general go up in value over time.
In 99 out of 100 cases where investors are chronic losers, it's because they don't have a plan.
They buy at a high price, then they get impatient or they panic, and they sell at a lower price during one of those inevitable periods when stocks are taking a dive.
Their motto is "Buy high and sell low," but you don't have to follow it.
Instead, you need a plan.
Groundwork for a lifetime of investing in Stocks
The Pros and Cons of some basic investments.
Stocks
Stocks are likely to be the best investment you will ever make, outside of a house.
When you buy a bond, you're only making a loan, but when you invest in a stock, you're buying a piece of a company. If the company prospers, you share in the prosperity. If it pays a dividend, you'll receive it, and if it raises the dividend, you'll reap the benefit. Hundreds of successful companies have a habit of raising their dividends year after year. This is a bonus for owning stocks that makes them all the more valuable. They never raise the interest rate on a bond!
Stocks have outdone other investments going back as far as anybody can remember. Maybe they won't prove themselves in a week or a year, but they've always come through for the people who own them.
More than 50 million American have discovered the fun and profit in owning stocks. That's one in five.
These aren't all whizbangs who drive Rolls-Royces. Most of these shareholders are regular folks with regular jobs: teachers, bus drivers, doctors, carpenters, students, your friends and relatives, the neighbours in the next apartment or down the block.
You don't have to be a millionaire, or even a thousandaire, to get started investing in stocks. Even if you have no money to invest, because you're out of a job or you're too young to have a job, or there's nothing left over after you pay the bills, you can make a game out of picking stocks. This can be excellent training at no risk.
People who train to be pilots are put into flight simulators, where they can learn from their mistakes without crashing a real plane. You can create your own investment simulator and learn from your mistakes without losing real money. A lot of investors who might have benefited from this sort of training had to learn the hard way, instead.
Friends or relatives may have warned you to stay away from stocks. They may have told you that if you buy a stock you're throwing your money away, because the stock market is no more reliable than a casino. They may even have the losses to prove it. Looking at the annual rates of returns of selected investments, stocks been the best performers, averaging 11% annualy over decades. If stocks are such a gamble, why have they paid off so handsomely over so many decades?
When people consistently lose money in stocks, it's not the fault of the stocks. Stocks in general go up in value over time. In 99 out of 100 cases where investors are chronic losers, it's because they don't have a plan. They buy at a high price, then they get impatient or they panic, and they sell at a lower price during one of those inevitable periods when stocks are taking a dive. Their motto is "Buy high and sell low," but you don't have to follow it. Instead, you need a plan.
This introductory material hopefully will lay the groundwork for a lifetime of investing.
Stocks
Stocks are likely to be the best investment you will ever make, outside of a house.
When you buy a bond, you're only making a loan, but when you invest in a stock, you're buying a piece of a company. If the company prospers, you share in the prosperity. If it pays a dividend, you'll receive it, and if it raises the dividend, you'll reap the benefit. Hundreds of successful companies have a habit of raising their dividends year after year. This is a bonus for owning stocks that makes them all the more valuable. They never raise the interest rate on a bond!
Stocks have outdone other investments going back as far as anybody can remember. Maybe they won't prove themselves in a week or a year, but they've always come through for the people who own them.
More than 50 million American have discovered the fun and profit in owning stocks. That's one in five.
These aren't all whizbangs who drive Rolls-Royces. Most of these shareholders are regular folks with regular jobs: teachers, bus drivers, doctors, carpenters, students, your friends and relatives, the neighbours in the next apartment or down the block.
You don't have to be a millionaire, or even a thousandaire, to get started investing in stocks. Even if you have no money to invest, because you're out of a job or you're too young to have a job, or there's nothing left over after you pay the bills, you can make a game out of picking stocks. This can be excellent training at no risk.
People who train to be pilots are put into flight simulators, where they can learn from their mistakes without crashing a real plane. You can create your own investment simulator and learn from your mistakes without losing real money. A lot of investors who might have benefited from this sort of training had to learn the hard way, instead.
Friends or relatives may have warned you to stay away from stocks. They may have told you that if you buy a stock you're throwing your money away, because the stock market is no more reliable than a casino. They may even have the losses to prove it. Looking at the annual rates of returns of selected investments, stocks been the best performers, averaging 11% annualy over decades. If stocks are such a gamble, why have they paid off so handsomely over so many decades?
When people consistently lose money in stocks, it's not the fault of the stocks. Stocks in general go up in value over time. In 99 out of 100 cases where investors are chronic losers, it's because they don't have a plan. They buy at a high price, then they get impatient or they panic, and they sell at a lower price during one of those inevitable periods when stocks are taking a dive. Their motto is "Buy high and sell low," but you don't have to follow it. Instead, you need a plan.
This introductory material hopefully will lay the groundwork for a lifetime of investing.
Saturday, 23 January 2010
Bonds
The Pros and Cons of some Basic Investments
Bonds
A bond is a glorified IOU.
When you buy a bond, you're simply making a loan.
The seller of the bond, also called the issuer, is borrowing your money, and the bond itself is proof that the issuer, is borrowing.
The biggest seller of bonds in the world is Uncle Sam. Whenever the US government needs extra cash (which these days is all the time), it prints up a new batch.
The government owes so much to so many that more than 15% of all the federal taxes goes to paying the interest.
The type of bond that young people are most likely to get involved in is the US Savings Bond. Grandparents are famous for giving savings bonds as gifts to their grandchildren. Over the years, the government pays back the money, plus interest - not to the grandparents, but to the grandchildren.
State and local governments also sell bonds to raise cash. So do hospitals, and airports, school districts and sports stadiums, public agencies of all kinds, and thousands of companies. Bonds are in abundant supply.
The main difference between bonds and CDs or Treasury bills is that with CDs and Treasuries, you get paid back sooner (the period varies from a few months to a couple of years), and with bonds you get paid back later (you might have to wait five years, ten years, or as long as thirty years).
The longer it takes for bonds to pay off, the greater the risk that inflation will eat up the value of your money before you get it back. That's why bonds pay a higher rate of interest than the short-term alternatives, such as CDs, savings accounts, or the money market. Investors demand to be rewarded for taking the greater risk.
All else being equal, a 30-year bond pays more interest than a 10-year bond, which in turn pays more interest than a 5-year bond, and so on. The buyers of bonds have to decide how far out they want to go, and whether the extra money they make in interest, on say, a 30-year bond is worth the risk of having their money tied up for that long. These are difficult decisons.
Stocks are riskier than bonds, and potentially far more rewarding.
The good thing about a bond is that even though you miss the gain when the stock goes up, you also miss the loss when the stock goes down.
That's why a bond is less risky than a stock. There's a guarantee attached to it. When you buy a bond, you know in advance exactly how much you will be getting in interest payments, and you won't lie awake nights worrying where the stock price is headed. Your investment is protected, at least more protected than when you buy a stock.
Still, there are 3 ways you can get hurt by a bond.
1. The first danger occurs if you sell the bond before the due date, when the issuer of the bond must repay you in full. By selling early, you take your chances in the bond market, where the prices of bonds go up and down daily, the same as stocks. So, if you get out of a bond prematurely, you might get less than you paid for it.
2. The second danger occurs when the issuer of the bond goes bankrupt and can't pay you back. The chances of this happening depend on who is doing the issuing. The US government, for example, will never go bankrupt - it can print more money whenever it wants. Other issuers can't always offer such a guarantee. If they go bankrupt, the owners of the bonds can lose a lot of money. Usually, they get something back, but not the entire investment. And sometimes, they lose the whole amount.
When an issuer of a bond fails to make the required payments, it's called a default. To avoid getting caught in one, smart bond buyers review the financial condition of the issuer fo a bond before they consider buying it. Some bonds are insured, which is another way the payments can be guaranteed. Also, there are agencies that give safety ratings to bonds, so potential buyers know in advance which ones are risky and which aren't. A strong company gets a high safety rating - the chance of defauting on a bond are close to zero. A weaker company that has trouble paying its bills will get a low rating. You've heard of junk bonds? These are the bonds that get the lowest ratings of all.
When you buy a junk bond, you're taking a bigger risk that you won't get your money back. That's why junk bonds pay a higher rate of interest than other bonds - the investors are rewarded for taking the extra risk.
Except with the junkiest of junk bonds, defaults are few and far between.
3. The third and biggest risk in owning a bond is: INFLATION. With stocks, over the very long term, you can keep up with inflation and make a decent profit to boot. With bonds, you can't.
Bonds
A bond is a glorified IOU.
When you buy a bond, you're simply making a loan.
The seller of the bond, also called the issuer, is borrowing your money, and the bond itself is proof that the issuer, is borrowing.
The biggest seller of bonds in the world is Uncle Sam. Whenever the US government needs extra cash (which these days is all the time), it prints up a new batch.
The government owes so much to so many that more than 15% of all the federal taxes goes to paying the interest.
The type of bond that young people are most likely to get involved in is the US Savings Bond. Grandparents are famous for giving savings bonds as gifts to their grandchildren. Over the years, the government pays back the money, plus interest - not to the grandparents, but to the grandchildren.
State and local governments also sell bonds to raise cash. So do hospitals, and airports, school districts and sports stadiums, public agencies of all kinds, and thousands of companies. Bonds are in abundant supply.
The main difference between bonds and CDs or Treasury bills is that with CDs and Treasuries, you get paid back sooner (the period varies from a few months to a couple of years), and with bonds you get paid back later (you might have to wait five years, ten years, or as long as thirty years).
The longer it takes for bonds to pay off, the greater the risk that inflation will eat up the value of your money before you get it back. That's why bonds pay a higher rate of interest than the short-term alternatives, such as CDs, savings accounts, or the money market. Investors demand to be rewarded for taking the greater risk.
All else being equal, a 30-year bond pays more interest than a 10-year bond, which in turn pays more interest than a 5-year bond, and so on. The buyers of bonds have to decide how far out they want to go, and whether the extra money they make in interest, on say, a 30-year bond is worth the risk of having their money tied up for that long. These are difficult decisons.
Stocks are riskier than bonds, and potentially far more rewarding.
The good thing about a bond is that even though you miss the gain when the stock goes up, you also miss the loss when the stock goes down.
That's why a bond is less risky than a stock. There's a guarantee attached to it. When you buy a bond, you know in advance exactly how much you will be getting in interest payments, and you won't lie awake nights worrying where the stock price is headed. Your investment is protected, at least more protected than when you buy a stock.
Still, there are 3 ways you can get hurt by a bond.
1. The first danger occurs if you sell the bond before the due date, when the issuer of the bond must repay you in full. By selling early, you take your chances in the bond market, where the prices of bonds go up and down daily, the same as stocks. So, if you get out of a bond prematurely, you might get less than you paid for it.
2. The second danger occurs when the issuer of the bond goes bankrupt and can't pay you back. The chances of this happening depend on who is doing the issuing. The US government, for example, will never go bankrupt - it can print more money whenever it wants. Other issuers can't always offer such a guarantee. If they go bankrupt, the owners of the bonds can lose a lot of money. Usually, they get something back, but not the entire investment. And sometimes, they lose the whole amount.
When an issuer of a bond fails to make the required payments, it's called a default. To avoid getting caught in one, smart bond buyers review the financial condition of the issuer fo a bond before they consider buying it. Some bonds are insured, which is another way the payments can be guaranteed. Also, there are agencies that give safety ratings to bonds, so potential buyers know in advance which ones are risky and which aren't. A strong company gets a high safety rating - the chance of defauting on a bond are close to zero. A weaker company that has trouble paying its bills will get a low rating. You've heard of junk bonds? These are the bonds that get the lowest ratings of all.
When you buy a junk bond, you're taking a bigger risk that you won't get your money back. That's why junk bonds pay a higher rate of interest than other bonds - the investors are rewarded for taking the extra risk.
Except with the junkiest of junk bonds, defaults are few and far between.
3. The third and biggest risk in owning a bond is: INFLATION. With stocks, over the very long term, you can keep up with inflation and make a decent profit to boot. With bonds, you can't.
Houses or Apartments
The Pros and Cons of some Basic Investments
Houses or Apartments
Buying a house or an apartment is the most profitable purchase most people ever made.
A house has 2 big advantages over other types of investments:
But you don't pay for the house all at once. Typically, you pay 20% up front (the down payment), and a bank lends you the other 80% (the mortgage). You pay interest on this mortgage for as long as it takes you to pay back the loan. That could be as long as 15 or 30 years, depending on the deal you make with the bank.
Meanwhile, you're living in a house, and you won't get scared out of it by a bad housing market, the way you might get scared out of stocks when the stock market has a crash or a correction.
As long as you stay there, the house increses in value, but you aren't paying any taxes on the gains. And once in your lifetime, the government gives you a tax break when you do sell the house.
Some mathematics
If you buy a $100,000 house that increases in value by 3% a year, after the first year it will be worth $3,000 more than what you paid for it.
At first glance, you'd say that's a 3% return, the same as you might get from a savings account.
But here is the secret, that makes the house such a great investment. Of the $100,000 it takes to buy the house, only $20,000 comes out of your pocket. So, at the end of year one, you've got a $3,000 profit on an investment of $20,000. Instead, of a 3% return, the house is giving you a 15% return.
Along the way, of course, you have to pay the interest on the mortgage, but you get a tax break for that, and as you pay off the mortgage, you're increasing your investment in the house. This is a form of savings that people often don't think about.
Fifteen years up the road, if you've got a fifteen-year mortgage and you stay in the house that long, the mortgage is paid off, and the house you bought for $100,000 is worth $155,797, thanks to the annual 3% increase in price.
Houses or Apartments
Buying a house or an apartment is the most profitable purchase most people ever made.
A house has 2 big advantages over other types of investments:
- You can live in it while you wait for the price to go up, and
- You buy it on borrowed money.
But you don't pay for the house all at once. Typically, you pay 20% up front (the down payment), and a bank lends you the other 80% (the mortgage). You pay interest on this mortgage for as long as it takes you to pay back the loan. That could be as long as 15 or 30 years, depending on the deal you make with the bank.
Meanwhile, you're living in a house, and you won't get scared out of it by a bad housing market, the way you might get scared out of stocks when the stock market has a crash or a correction.
As long as you stay there, the house increses in value, but you aren't paying any taxes on the gains. And once in your lifetime, the government gives you a tax break when you do sell the house.
Some mathematics
If you buy a $100,000 house that increases in value by 3% a year, after the first year it will be worth $3,000 more than what you paid for it.
At first glance, you'd say that's a 3% return, the same as you might get from a savings account.
But here is the secret, that makes the house such a great investment. Of the $100,000 it takes to buy the house, only $20,000 comes out of your pocket. So, at the end of year one, you've got a $3,000 profit on an investment of $20,000. Instead, of a 3% return, the house is giving you a 15% return.
Along the way, of course, you have to pay the interest on the mortgage, but you get a tax break for that, and as you pay off the mortgage, you're increasing your investment in the house. This is a form of savings that people often don't think about.
Fifteen years up the road, if you've got a fifteen-year mortgage and you stay in the house that long, the mortgage is paid off, and the house you bought for $100,000 is worth $155,797, thanks to the annual 3% increase in price.
Short-term investments: Savings Accounts, Money-Market Funds, Treasury Bills and Certificate of Deposits
The Pros and Cons of some Basic Investments
Savings Accounts, Money-Market Funds, Treasury Bills and Certificate of Deposits
All of the above are known as short-term investments.
They pay you interest. You get your money back in a relatively short time.
In savings accounts, Treasury bills, and CDs, your money is insured against losses, so you're guaranteed to get it back.
Money markets lack the guarantee, bu the chances of losing money in a money market are remote.
One big disadvantage: They pay you a low rate of interest.
Sometimes, the interest rate you get in a money-market account or a savings account can't even keep up with inflation. Looking at it that way, a savings account may be a losing proposition.
Inflation is a fancy way of saying that prices of things are going up. Another way to look at inflation is that the buying power of the dollar is going down.
The first goal of saving and investing is to keep ahead of inflation. Your money's on a threadmill that's constantly going backward. In recent years, you had to make 3 % on your investments just to stay even.
That's the problem with leaving money in a bank or a savings and loan. The money is safe in the short run, because it's insured against loss, but in the long run, it is likely to lose ground against taxes and inflation.
Here's a tip - when the inflation rate is higher than the interest rate you're getting from a CD, Treasury bill, money-market account, or savings account, you're investing in a lost cause.
Savings Accounts, Money-Market Funds, Treasury Bills and Certificate of Deposits
All of the above are known as short-term investments.
They pay you interest. You get your money back in a relatively short time.
In savings accounts, Treasury bills, and CDs, your money is insured against losses, so you're guaranteed to get it back.
Money markets lack the guarantee, bu the chances of losing money in a money market are remote.
One big disadvantage: They pay you a low rate of interest.
Sometimes, the interest rate you get in a money-market account or a savings account can't even keep up with inflation. Looking at it that way, a savings account may be a losing proposition.
Inflation is a fancy way of saying that prices of things are going up. Another way to look at inflation is that the buying power of the dollar is going down.
The first goal of saving and investing is to keep ahead of inflation. Your money's on a threadmill that's constantly going backward. In recent years, you had to make 3 % on your investments just to stay even.
That's the problem with leaving money in a bank or a savings and loan. The money is safe in the short run, because it's insured against loss, but in the long run, it is likely to lose ground against taxes and inflation.
Here's a tip - when the inflation rate is higher than the interest rate you're getting from a CD, Treasury bill, money-market account, or savings account, you're investing in a lost cause.
- Savings accounts are great places to park money so you can get at it quickly, whenever you need to pay bills.
- They are great places to store cash until you've got a big enough pile to invest elsewhere.
- But over long periods of time, they won't do you much good.
Invest Now! What are you waiting for?
Many people wait until they are in their thirties, fourties, and fifties to start saving money.
The trouble is, by the time they realize they ought to be investing, they've lost valuable years when stocks could have been working in their favour.
One of the best way to avoid this fate is to begin saving money as early as possible, while you're living at home. When else are your expenses going to be this low? You have no children to feed - your parents are probably feeding you.
Money is a great friend, once you send it off to work. It puts extra cash in your pocket without your having to lift a finger.
If you invest $500 a year in stocks instead of putting it in the bank, the money gets a chance to do you an even bigger favour, while you're off someplace living your life. On average, you will double your money every 7 or 8 years if you leave it in stocks.
A lot of smart investors have learned to take advantage of this. They realise that capital (money) is as important to their future as their own jobs (labour).
Warren Buffett, America's second richest man, got there by saving money and later putting it into stocks. To him, a $400 TV set he saw in the store wasn't really a $400 purchase. He always thought about how much that $400 would be worth twenty years later, if he invested it instead of spending it. This sort of thinking kept him from wasting his money on items he didn't need.
If you start saving and investing early enough, you'll get to the point where your money is supporting you. This is what most people hope for, a chance to have financial independence where they're free to go places and do what they want, while their money stays home and goes to work. But it will never happen unless you get in the habit of saving and investing and putting aside a certain amount every month, at a young age.
In the past people felt great pride when they worked hard and made certain sacrifices in order to pay for something all at once. It made them nervous to owe money to the banks, and when they paid off their home mortgages, they had parties and invited all the neighbours to help them celebrate.
It wasn't until the 1960s that Americans got into the habit of using credit cards, and it wasn't until the 1980s that average families were hocked to the limit on mortgages, car loans, home equity loans, and the unpaid balances on their cards.
It is OK to pay interest on a house or an apartment, which will increase in value, but not on cars, appliances, clothes, or TV sets, which are worth less and less as you use them.
Debt is saving in reverse. The more it builds up, the worse off you are. We see this in households across America, people struggling to make the payments, and in the government itself, which at the moment is hopelessly in debt.
America was once a nation of savers.
People of all income levels put aside as much money as they could, mostly in savings accounts at the local bank. They made money on this money as it grew with interest, so eventually they could use it for a down payment on a house, or to buy things, or to draw on in family emergencies. In the meantime, the bank could take people's savings and lend them out to home buyers, or home builders, or businesses of all kinds.
Save as much as you can! YOU'll be helping yourself and helping the country.
The trouble is, by the time they realize they ought to be investing, they've lost valuable years when stocks could have been working in their favour.
One of the best way to avoid this fate is to begin saving money as early as possible, while you're living at home. When else are your expenses going to be this low? You have no children to feed - your parents are probably feeding you.
Money is a great friend, once you send it off to work. It puts extra cash in your pocket without your having to lift a finger.
If you invest $500 a year in stocks instead of putting it in the bank, the money gets a chance to do you an even bigger favour, while you're off someplace living your life. On average, you will double your money every 7 or 8 years if you leave it in stocks.
A lot of smart investors have learned to take advantage of this. They realise that capital (money) is as important to their future as their own jobs (labour).
Warren Buffett, America's second richest man, got there by saving money and later putting it into stocks. To him, a $400 TV set he saw in the store wasn't really a $400 purchase. He always thought about how much that $400 would be worth twenty years later, if he invested it instead of spending it. This sort of thinking kept him from wasting his money on items he didn't need.
If you start saving and investing early enough, you'll get to the point where your money is supporting you. This is what most people hope for, a chance to have financial independence where they're free to go places and do what they want, while their money stays home and goes to work. But it will never happen unless you get in the habit of saving and investing and putting aside a certain amount every month, at a young age.
In the past people felt great pride when they worked hard and made certain sacrifices in order to pay for something all at once. It made them nervous to owe money to the banks, and when they paid off their home mortgages, they had parties and invited all the neighbours to help them celebrate.
It wasn't until the 1960s that Americans got into the habit of using credit cards, and it wasn't until the 1980s that average families were hocked to the limit on mortgages, car loans, home equity loans, and the unpaid balances on their cards.
It is OK to pay interest on a house or an apartment, which will increase in value, but not on cars, appliances, clothes, or TV sets, which are worth less and less as you use them.
Debt is saving in reverse. The more it builds up, the worse off you are. We see this in households across America, people struggling to make the payments, and in the government itself, which at the moment is hopelessly in debt.
America was once a nation of savers.
People of all income levels put aside as much money as they could, mostly in savings accounts at the local bank. They made money on this money as it grew with interest, so eventually they could use it for a down payment on a house, or to buy things, or to draw on in family emergencies. In the meantime, the bank could take people's savings and lend them out to home buyers, or home builders, or businesses of all kinds.
Save as much as you can! YOU'll be helping yourself and helping the country.
The Typical Shareholder of US stockmarket (historical data)
Since the 1950s, there has been a gradual increase in the number of people buying shares. This is a positive trend, because the more shoreholders there are, the more the wealth gets spread around.
Twenty years after the Great Depression, the vast majority of Americans were afraid of stocks and kept their money in the bank, where they thought it was safe. You've heard the expression, "I'd rather be safe than sorry"?
1962
17 million Americans owned stocks. 10% of US population.
The more stock prices rose, the more people jumped on the bandwagon.
1970
By 1970, there were 30 million shareholders in America, 15% of the population.
The eager buyers had pushed prices to dangerously high levels.
Most stocks were fatally overpriced.
Market corrected.
So many brutal sellers during the brutal stock-market correction of the early 1970s.
5 million former shareholders, 3% of the US population exited the market en masse.
1975
It took 5 years for enough people to come back to stocks so that once again, the US had 30 million shareholders.
mid 1980s
47 million shareholders in US
1 out of 5 Americans owned stocks
33% of these invested through mutual funds.
Market value of all stocks on NYSE > $1 trillion
1990
51.4 million shareholders
A larger number of people invested through mutual funds.
The average investor was no longer interested in picking his or her own stocks.
The job was turned over to the professional fund managers at the nearly 4000 funds in existence at the time.
3.7 million shareholders or 7% of total, under the age of 21.
1995
Market value of all the stocks of NYSE > $5 trillion mark (In 1980, these same stocks were worth $1.2 trillion)
The money invested away in stocks had made the investors at least $4 trillion richer in a decade and a half.
That is letting your money do the work!
The typical shareholder in 1900
45 year old man
Annual income: $46,400
Owned: $13,500 worth of stocks
44 year old woman
Annual income: $39,000
Owned: $7,200 worth of stocks
Twenty years after the Great Depression, the vast majority of Americans were afraid of stocks and kept their money in the bank, where they thought it was safe. You've heard the expression, "I'd rather be safe than sorry"?
- In this case, the money was safe and the people were sorry, because they missed the fabulous bull market in stocks during the 1950s.
- There were only 6.5 million shareholders in 1952, only 4.2% of the population, and 80% of those shares were in the hands of 1.6% of the population.
- All the gains went to a small group of people who weren't afraid of stocks and understood the benefits far outweighed the risks.
1962
17 million Americans owned stocks. 10% of US population.
The more stock prices rose, the more people jumped on the bandwagon.
1970
By 1970, there were 30 million shareholders in America, 15% of the population.
The eager buyers had pushed prices to dangerously high levels.
Most stocks were fatally overpriced.
Market corrected.
So many brutal sellers during the brutal stock-market correction of the early 1970s.
5 million former shareholders, 3% of the US population exited the market en masse.
1975
It took 5 years for enough people to come back to stocks so that once again, the US had 30 million shareholders.
mid 1980s
47 million shareholders in US
1 out of 5 Americans owned stocks
33% of these invested through mutual funds.
Market value of all stocks on NYSE > $1 trillion
1990
51.4 million shareholders
A larger number of people invested through mutual funds.
The average investor was no longer interested in picking his or her own stocks.
The job was turned over to the professional fund managers at the nearly 4000 funds in existence at the time.
3.7 million shareholders or 7% of total, under the age of 21.
1995
Market value of all the stocks of NYSE > $5 trillion mark (In 1980, these same stocks were worth $1.2 trillion)
The money invested away in stocks had made the investors at least $4 trillion richer in a decade and a half.
That is letting your money do the work!
The typical shareholder in 1900
45 year old man
Annual income: $46,400
Owned: $13,500 worth of stocks
44 year old woman
Annual income: $39,000
Owned: $7,200 worth of stocks
Neither Buying at High Price nor Selling at Low Price.
The eager buyers of shares pushed prices to dangerously high levels, so by 1970, most stocks were fatally overpriced. By almost any measure, people were paying far too much for the companies they were buying.
This sort of craziness happens a few times in a century, and whenever it does, the market "correct," the prices drop to more sensible levels, and the people who bought at the top are stunned and depressed. They can't believe they've lost so much money so quickly.
Of course, they haven't really lost anything unless they sell their shares, but many investors do just that. They dump their entire portfolio in a panic. A stock they acquired for $100 when it was overpriced, they unload a few weeks later for $70 or $60, at a bargain price.
Their loss is the new buyers' gain, because the new buyers will make the money the sellers woulod have made if they'd held on to their investments and waited out the correction.
This sort of craziness happens a few times in a century, and whenever it does, the market "correct," the prices drop to more sensible levels, and the people who bought at the top are stunned and depressed. They can't believe they've lost so much money so quickly.
Of course, they haven't really lost anything unless they sell their shares, but many investors do just that. They dump their entire portfolio in a panic. A stock they acquired for $100 when it was overpriced, they unload a few weeks later for $70 or $60, at a bargain price.
Their loss is the new buyers' gain, because the new buyers will make the money the sellers woulod have made if they'd held on to their investments and waited out the correction.
Subscribe to:
Posts (Atom)