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Why Invest in Stocks?

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“Resist the human biased to act. Compound interest is the eighth wonder of the world and never interrupt it unnecessarily.”

It’s a wonderful feeling once you discover the value of financial freedom which is closely related to saving for the future and to the rationale for growing your money and accumulating wealth through long-term stock investing. Historically, stocks have shown the best return over the long term dating back almost a full century and becoming a long term investor is key to financial freedom.

From the Forbes Advisor chart, you can observe that stocks have averaged 9.59% annual returns since the 1929 Great Depression. That’s more than 40% more than bonds’ average annual returns, and over 10% higher than a balanced portfolio of both stocks and bonds. This demonstrates that remaining invested in stocks and not panicking during market dips is the best way to position yourself for long term growth.

Invest in your future

Whatever you financial plan to achieve financial freedom, it’s essential that you spend less than you earn, that you build an emergency fund, that you pay yourself first, and that you invest for the long term in order to benefit from the power of compounding.

The best way to learn investing is by doing it, explained Vitaliy Katsenelson, CFA. in a letter in which he shares investing advice to new investors. Take as much money as you are can afford to lose (because you may lose it), and invest it. Look at this sum of money as real-world tuition and leaning, and start investing one stock at a time. The most difficult part of investing is staying rational when you get blindsided by the volatility of the markets. Paper trading portfolios and practice investing won’t blindside you. Understanding your emotions that real losses and gains evoke in you and dealing with these emotions is incredibly valuable.

https://youtu.be/hAhju2ANgj

Invest, don’t gamble or speculate.

Do the research and analysis of a company with rigor and document your research. You’ll learn a lot from documenting and writing up your research. And, by documenting your research will keep you rational. And, don’t forget the wisdom of Charlie Munger that “All investments should begin by measuring risks”.

Avoid acting irrationally when investing 

Investors are prone to two opposing but equally debilitating fears, says Katsenelson: the fear of missing out when times are good in the stock market, and the fear of loss when markets are volatile. These two fears have absolutely no relationship with rational investing decisions. As a result, the more you are dominated by these fears, the less rational you are.

Patience to wait for the right investment opportunity to deploy your money (your capital) and then focus on it with single minded dedication can lead to lasting success. Thus, patience and a single-minded focus are key to investing success and financial freedom

Finally, mindset is everything. Without the belief in yourself that financial freedom is achievable, then little else matters. Your past doesn’t define your future, but if you truly focus on and work towards what you deserve, you can change your future to what you like.

“Spend each day trying to get a little wiser than you were when you woke up…Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve” Charlie Munger

References:

  1. https://www.betterinvesting.org/learn-about-investing/free-videos
  2. https://www.betterinvesting.org/learn-about-investing/investor-education/investing/letter-to-a-young-investor
  3. https://www.forbes.com/advisor/investing/stock-and-bond-returns/
  4. https://www.vrdnation.com/poor-charlies-almanack-by-charlie-munger
  5. https://fortuneclub.co/poor-charlies-almanack/

Sequence of Returns Risk in Retirement

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A stock market pullback can pose a risk early in retirement.

Retirees face many risks when investing for retirement. Markets crash, inflation can eat into your returns, you might even worry about outliving your savings. And, there’s another big retirement risk: Sequence of returns risk.

Down markets can pose significant “sequence of returns” risk in the early years of retirement. Sequence risk is the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor, according to Investopedia.

A “sequence of returns” risk is basically about how the order, or sequence, of stock returns over time — combined with your portfolio withdrawals — can impact your balance down the road.

Once you start withdrawing income, you’re affected by the change in the sequence in which the returns occurred. During your retirement years, if a high proportion of negative returns occur in the beginning years of your retirement, it will have a lasting negative effect and reduce the amount of income you can withdraw over your lifetime.

Timing is everything. Sequence risk is the danger that the timing of withdrawals from a retirement account will damage the investor’s overall return. Account withdrawals during a bear market are more costly than the same withdrawals in a bull market.

“If there’s a big loss in the market and you’re taking withdrawals, you could be taking more from your portfolio than what it can make up for,” said certified financial planner Avani Ramnani, managing director at Francis Financial in New York. “If that happens early in retirement … the recovery may be very weak and put you in danger of not recovering at all or being lower than where you would have been and therefore jeopardizing your retirement lifestyle.”

One of the basic rules of investing is that a long-term strategy is self-correcting. And, for long-term investors — those whose retirement is many years or decades away — such market drops matter less because there’s time for their portfolios to recover from this risk before they need to start relying on that money for cash flow in retirement.

Retirement is a long game.

Since running out of money in retirement is the primary concern for most retirees, fortunately, there are options for mitigating the risk:

  • Plan to spend more conservatively since the less you spend consistently, the less you have to withdraw overall.
  • Withdraw and spend less when your portfolio performance is suffering. 
  • Reduce the risk in your portfolio by creating a low stock allocation early in retirement but increase it over time, or use bonds for short-term expenses and stocks for long-term ones.
  • Set aside assets outside your investment portfolio that can support your spending needs when stocks are underperforming.

You may simply be able to meet your goals without taking on the risk that comes with stocks.

Key Takeaways

Sequence of return risk is basically the risk that market declines in the early years of retirement, paired with ongoing withdrawals, could significantly reduce the longevity of your portfolio. Thus, timing is everything, and in retirement early market declines, particularly if they are paired with rising inflation, can have a huge effect on how long a nest egg can sustain you in retirement.

The recommended way to mitigate sequence of returns risk when you can’t predict future market performance or future rates of inflation is by managing spending and/or keeping a portion of your portfolio in liquid assets, such as cash or bonds, to ride out the market downturn.

When market returns are high and inflation is low, retirees can distribute more from their portfolios, according to Forbes Advisor Staff Editors Rob Berger and Benjamin Curry. When market returns are negative and inflation is higher than expected, retirees reduce the amount of their annual distributions.

Remember, no one can forecast market performance or economic inflation. Yet, by managing your spending, you can adjust annual withdrawal amounts to reflect inflation and market returns.

References:

  1. https://www.investopedia.com/terms/s/sequence-risk.asp
  2. https://www.thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672
  3. https://www.cnbc.com/2021/09/21/stock-market-pullback-is-a-big-risk-early-in-retirement-what-to-know.html
  4. https://www.forbes.com/advisor/retirement/sequence-of-returns-risk/

Avoiding Investment Fraud

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Financially savvy and experienced investors, along with inexperienced investors, fall prey to investment fraud frequently.

Researchers have found that investment fraudsters hit their targets with an array of persuasion social engineering techniques that are tailored to the victim’s psychological profile.

Here are several “red flags” to look for:

  • If it sounds too good to be true, it is. Any investment opportunity that claims you’ll receive substantially more could be highly risky – and that means you might lose money. Be careful of claims that an investment will make “incredible gains,” is a “breakout stock pick” or has “huge upside and almost no risk!” Claims like these are hallmarks of extreme risk or outright fraud.
  • “Guaranteed returns” aren’t. Every investment carries some degree of risk, which is reflected in the rate of return you can expect to receive. If your money is perfectly safe, you’ll most likely get a low return. High returns entail high risks, possibly including a total loss on the investments. Most fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or “can’t miss.” They try to plant an image in your head of what your life will be like when you are rich. Don’t believe it.
  • Beware the “halo” effect. Investors can be blinded by a “halo” effect when a con artist comes across as likeable or trustworthy. Credibility can be faked. Check out actual qualifications.
  • “Everyone is buying it.” Watch out for pitches that stress how “everyone is investing in this, so you should, too.” Think about whether you are interested in the product. If a sales presentation focuses on how many others have bought the product, this could be a red flag.
  • Pressure to send money RIGHT NOW. Scam artists often tell their victims that this is a once-in-a-lifetime offer and it will be gone tomorrow. But resist the pressure to invest quickly and take the time you need to investigate before sending money.
  • Reciprocity. Fraudsters often try to lure investors through free investment seminars, figuring if they do a small favor for you, such as supplying a free lunch, you will do a big favor for them and invest in their product. There is never a reason to make a quick decision on an investment. If you attend a free lunch, take the material home and research both the investment and the individual selling it before you invest. Always make sure the product is right for you and that you understand what you are buying and all the associated fees.

What You Can Do to Avoid Investment Fraud

  • Ask questions. Fraudsters are counting on you not to investigate before you invest. Fend them off by doing your own digging. It’s not enough to ask for more information or for references – fraudsters have no incentive to set you straight. Take the time to do your own independent research.
  • Research before you invest. Unsolicited emails, message board postings, and company news releases should never be used as the sole basis for your investment decisions. Understand a company’s business and its products or services before investing. Look for the company’s financial statements by searching SEC’s EDGAR filing system.
  • Know the salesperson. Spend some time checking out the person touting the investment before you invest – even if you already know the person socially. Always find out whether the securities salespeople who contact you are licensed to sell securities in your state and whether they or their firms have had run-ins with regulators or other investors. You can check out the disciplinary history of brokers and advisers for free using the SEC’s and FINRA’s online databases.
  • Be wary of unsolicited offers.Be especially careful if you receive an unsolicited pitch to invest in a company, or see it praised online, but can’t find current financial information about it from independent sources. It could be a “pump and dump” scheme. Be wary if someone recommends foreign or “off-shore” investments. If something goes wrong, it’s harder to find out what happened and to locate money sent abroad.
  • Protect yourself online. Online and social marketing sites offer a wealth of opportunity for fraudsters. For tips on how to protect yourself online see Protect Your Social Media Accounts.

You should strive to become an educated investor and to know what to look for. Make yourself knowledgeable about different types of scams and red flags that may signal investment fraud.

References:

  1. https://www.investor.gov/protect-your-investments/fraud/how-avoid-fraud/what-you-can-do-avoid-investment-fraud
  2. https://www.investor.gov/protect-your-investments/fraud/how-avoid-fraud/protect-your-social-media-accounts

September is Healthy Aging Month

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Let’s encourage ourselves and others to:

  • Stay Fit!
  • Stay Adventurous!
  • Stay Healthy!
  • Stay Connected!

September celebrates Healthy Aging Month. It is a terrific time to get started on a healthy lifestyle which should include getting and staying in shape, the challenging the mind and spirit, and making a commitment and keeping up social connections.

The observance is designed to encourage people to get going on positive measures and activities that can impact your physical health, emotional well-being, financial security and purpose.

Here are some ideas from the editors of Healthy Aging® Magazine to get you thinking and moving in the right direction.

10 Tips for Rein­vent­ing Your­self dur­ing Sep­tem­ber Is Healthy Aging Month: 

  1. Do not act your age or at least what you think your cur­rent age should act like. What was your best year so far? 28? 40? Now? Pic­ture your­self at that age and be it. Some peo­ple may say this is denial, but we say it’s pos­i­tive think­ing and goes a long way toward feel­ing bet­ter about your­self. (Tip:  Don’t keep look­ing in the mir­ror, just FEEL IT!)
  2. Be pos­i­tive in your con­ver­sa­tions and your actions every day. When you catch your­self com­plain­ing, check your­self right there and change the con­ver­sa­tion to some­thing pos­i­tive. (Tip: Stop watch­ing the police reports on the local news).
  3. Have neg­a­tive friends who com­plain all of the time and con­stantly talk about how awful every­thing is? Drop them. As cruel as that may sound, dis­tance your­self from peo­ple who do not have a pos­i­tive out­look on life. They will only depress you and stop you from mov­ing for­ward. Sur­round your­self with ener­getic, happy, pos­i­tive peo­ple of all ages and you will be hap­pier too. (Tip: Smile often. It’s con­ta­gious and wards off naysayers.)
  4. Walk like a vibrant, healthy per­son. Come on. You can prob­a­bly do it. Ana­lyze your gait. Do you walk slowly because you have just become lazy or, per­haps, have a fear of falling? (Tip: Make a con­scious effort to take big strides, walk with your heel first, and wear com­fort­able shoes.)
  5. Stand up straight! You can knock off the appear­ance of a few extra years with this trick your mother kept try­ing to tell you. Look at your­self in the mir­ror. Are you hold­ing your stom­ach in, have your shoul­ders back, chin up? Check out how much bet­ter your neck looks! Fix your stance and prac­tice it every day, all day until it is nat­ural. You will look great and feel bet­ter. (Tip: Your waist­line will look trim­mer if you fol­low this advice.)
  6. How’s your smile? Research shows peo­ple who smile more often are hap­pier. Your teeth are just as impor­tant to your good health as the rest of your body. Not only is it the first thing peo­ple notice, but good oral health is a gate­way to your over­all well-being. (Tip: Go to the den­tist reg­u­larly and look into teeth whiten­ing. Noth­ing says old more than yel­low­ing teeth!)
  7. Lonely? Stop brood­ing and com­plain­ing about hav­ing no friends or fam­ily. Do some­thing about it now. Right this minute. Pick up the phone, land­line, or cell and make a call to do one or more of the fol­low­ing: Vol­un­teer your time, Take a class,  Invite some­one to meet for lunch, brunch, din­ner, or cof­fee. (Tip: Vol­un­teer at the local pub­lic school to stay in touch with younger peo­ple and to keep cur­rent on trends, take a com­puter class or a tuto­r­ial ses­sion at your cell phone store to keep up with tech­nol­ogy, choose a new per­son every week for your din­ing out.)
  8. Start walk­ing not only for your health but to see the neigh­bors. Have a dog? You’ll be amazed how the dog can be a con­ver­sa­tion starter. (Tip: If you don’t have time for a dog, go to your local ani­mal shel­ter and vol­un­teer. You will be thrilled by the puppy love!)
  9. Make this month the time to set up your annual phys­i­cal and other health screen­ings. Go to the appoint­ments and then, hope­fully, you can stop wor­ry­ing about ail­ments for a while.
  10. Find your inner artist. Who says tak­ing music lessons is for young school chil­dren? You may have an artist lurk­ing inside you just wait­ing to be tapped.  Have you always wanted to play the piano, vio­lin, or tuba? Have you ever won­dered if you could paint a por­trait or scenic in oil? What about work­ing in wood? (Tip: Sign up now for fall art or music classes and dis­cover your inner artist!)

Just embrace the fact that it’s never too late to find a new career, a new sport, passion or hobby, and travel more than ever, according to Carolyn Worthington, editor-in-chief of Healthy Aging® Magazine and executive director of Healthy Aging®.

References:

  1. https://healthyaging.net/healthy-month/september-is-healthy-

Ransomware Attacks and Cyber Scams Surge in 2020

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Ransomware attacks surged 300% in calendar year 2020, according to Chainalysis. And in 2020, $406.3 million was paid out in cryptocurrency ransoms, 337% more than the previous year. This calendar year’s ransom payments are on pace to pass seven figures.

The attacks have crippled supply chains and critical infrastructure by holding digital information hostage.

  • Colonial Pipeline, one of the largest fuel pipelines in the US, was forced offline for six days in May.
  • An Iowa grain co-op was hit by a cyberattack, and hackers demanded $5.9 million to unlock the organization’s data.

Ransomware is something that government agencies are extremely focused on these days. They’re viewing it on par with terrorist financing attacks. The victims of ransomware attacks are mostly big businesses, where more sophisticated attack appear to be sanctioned by foreign governments such as Russia, China, North Korea or Iran.

However, big business are not the only victims of cybercriminals. Nearly 7,000 individual investors lost a collective $80 million to cryptocurrency scams from October 2020 to March 2021, according to the Federal Trade Commission.

Currently, the biggest type of cybercriminal activity in terms of volume is scamming: your investment scam, your Ponzi scheme, or just a phishing attack. Retail investors are oftentimes more vulnerable to being taken advantage of by scammers. But these scams impact the government as well, because the SEC is chartered to make sure they’re protecting consumers.

The bottomline is that “illicit activity on the blockchain is heating up, from minor scams to elaborate ransomware attacks”, explained Kimberly Grauer, director of research at Chainalysis.

The majority of cryptocurrency activity is legal according to the U.S. Treasury Department. But, cryptocurrency can be exploited by cybercriminals and leveraged for ransomware attacks. Crypto’s decentralized nature can make it more difficult to track down hackers.

The SEC’s Office of Investor Education and Advocacy issues periodic Investor Alerts to help investors identify signs that what is offered as an investment may actually be a scam or fraud. They urge investors to be on high alert in order to protect themselves and others from becoming victims of investment cyber fraud.

The key to avoiding investment fraud and scams is to be an educated investor. Below are five tips from the SEC website investor.gov to help you avoid investment fraud:

  1. Be Wary of Unsolicited Offers to Invest – Cybercriminals look for victims on social media sites, chat rooms, and bulletin boards. If you see a new post on your wall, a tweet mentioning you, a direct message, an e-mail, or any other unsolicited – meaning you didn’t ask for it and don’t know the sender – communication regarding a so-called investment opportunity, you should exercise extreme caution.
  2. Look out for Common “Red Flags” – Wherever you come across a recommendation for an investment – be it on the Internet or from a personal friend (or both), “red flags” such as (a) It sounds too good to be true since any investment that sounds too good to be true probably is; (b) The promise of “guaranteed” returns since every investment entails some level of risk, which is reflected in the rate of return you can expect to receive; and (c) Pressure to buy RIGHT NOW because should not be pressured or rushed into buying an investment before you have a chance to research the “opportunity.”
  3. Look out for “Affinity Fraud” – Never make an investment based solely on the recommendation of a member of an organization or group to which you belong, especially if the pitch is made online. An investment pitch made through an online group of which you are a member, or on a chat room or bulletin board catered to an interest you have, may be an affinity fraud. Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. Even if you do know the person making the investment offer, be sure to check out everything – no matter how trustworthy the person seems who brings the investment opportunity to your attention (think Bernie Madoff). Be aware that the person telling you about the investment may have been fooled into believing that the investment is legitimate when it is not.
  4. Be Thoughtful About Privacy and Security Settings – Investors who use social media websites as a tool for investing should be mindful of the various features on these websites in order to protect their privacy and help avoid fraud. Understand that unless you guard personal information, it may become available for anyone with access to the Internet – including cybercriminals.
  5. Ask Questions and Check Out Everything – Be skeptical and research every aspect of an offer before making a decision. Investigate the investment thoroughly and check the truth of every statement you are told about the investment. Never rely on a testimonial or take a promoter’s word at face value. You can check out many investments using the SEC’s EDGAR filing system or your state’s securities regulator.

Investors on the Internet and social media should always be on the lookout for cyber scams and fraud. If you have a question or concern about an investment, or you think you have encountered fraud, you should contact the SEC or FINRA,

References:

  1. https://www.morningbrew.com/daily/stories/2021/08/23/blockchain-expert-fights-crypto-crime
  2. https://www.sec.gov/oiea/investor-alerts-bulletins/ia_5redflags.html
  3. https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-alerts/updated-11
  4. https://www.sec.gov/oiea/investor-alerts-and-bulletins/investment-scam-complaints-rise-investor-alert

Best Investment Advice – Mark Cuban

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“You can’t buy health and you can’t buy love.” Warren Buffett

“The best investment you can make is paying off your credit cards, paying off whatever debt you have.” Mark Cuban

Cuban lived for years on the budget of what he referred to as “a broke college student”, driving lousy cars, eating lousy food and saving, saving, saving. He believed that overspending can be an unnecessary cause of stress, and he advocates for living like a student if that’s all you can truly afford. “Your biggest enemies are your bills,” Cuban wrote. “The more you owe, the more you stress. The more you stress over bills, the more difficult it is to focus on your goals. The cheaper you can live, the greater your options.”

A forward-thinking investor and notorious taker of calculated risks, he built his wealth slowly over time and he derived as much pleasure out of saving as he did spending.

Here is top investing advice from Mark Cuban to builde wealth and achieve financial freedom:

  • Pay Off Debt, Then Invest – Paying off debt before you invest delivers the best returns for your money (capital). “The best investment you can make is paying off your credit cards, paying off whatever debt you have. If you have a student loan with a 7% interest rate, if you pay off that loan, you’re making 7%, that’s your immediate return, which is a lot safer than picking a stock, or trying to pick real estate, or whatever it may be,” Cuban said.
  • Never Invest To Get Out of Trouble – Just like you should never gamble if you absolutely have to win, the same rules apply to investing as a remedy for financial trouble. “If you are buying because you need the price to go up and solve a financial hole you are in, that is the EXACT WRONG time to trade,” Cuban commented. “And we all have to respect people who choose to sell because they need to. Bills don’t care what the market does. Get right and come back later.”
  • Don’t Invest In the Stock Market – Cuban disagrees with investors who think capitalism’s greatest wealth-generation machine is the stock market. “Put it in the bank. The idiots that tell you to put your money in the market because eventually it will go up need to tell you that because they are trying to sell you something. The stock market is probably the worst investment vehicle out there. If you won’t put your money in the bank, NEVER put your money in something where you don’t have an information advantage. Why invest your money in something because a broker told you to? If the broker had a clue, he/she wouldn’t be a broker, they would be on a beach somewhere.”
  • But If You Invest in the Stock Market, Buy an Index Fund – Avoid picking your own stocks or buying into expensive mutual funds — buy an index fund. “For those investors not too knowledgeable about markets, the best bet is a cheap S&P 500 fund,” according to Cuban.
  • Buy a Stock You Believe In and Hold on for Dear Life – Ignore short term volatility and market gyrations. “When I buy a stock, I make sure I know why I[‘m] buying it. Then I HODL until … I learn that something has changed,” using text-slang acronym for “hold on for dear life.”
  • Take Risks — But Play It Safe 90% of the Time – Without risk, there can be no reward, and the bigger the risk, the bigger the potential payout. Cuban suggests that investors to go for broke and swing for the fences — but only with a sliver of their investments. “If you’re a true adventurer and you really want to throw the hail Mary, you might take 10% and put it in Bitcoin or Ethereum, but if you do that, you’ve got to pretend you’ve already lost your money,” Cuban commented. “It’s like collecting art, it’s like collecting baseball cards, it’s like collecting shoes. It’s a flyer, but I’d limit it to 10%.”
  • If One of Those Risks Is Crypto, Stick With the Big Boys – If you’re considering jumping on the cryptocurrency bandwagon, you’d be wise to place your bets on the biggest names in the game because Cuban sees way too many similarities to 1999 for comfort. “Watching the cryptos trade, it’s exactly like the internet stock bubble. exactly. I think Bitcoin, Ethereum, a few others will be analogous to those that were built during the dot-com era, survived the bubble bursting and thrived, like AMZN, EBay, and Priceline. Many won’t,” commented Cuban
  • If You Don’t Understand an Investment, Walk Away –  Investing fundamentals dictates against investing in things you don’t understand. “If you don’t fully understand the risks of an investment you are contemplating, it’s okay to do nothing,” Cuban wrote. “No. 1 rule of investing: When you don’t know what to do, do nothing.” Always invest in what you know.
  • Knowledge Is the Best Investment – The best way to avoid investing in something you don’t understand is to understand whatever you’re invested in. “At MicroSolutions it, “knowledge advantage”. gave me a huge advantage. A guy with little computer background could compete with far more experienced guys just because I put in the time to learn all I could. I read every book and magazine I could. Heck, three bucks for a magazine, 20 bucks for a book. One good idea that led to a customer or solution paid for itself many times over.”

You must be able to earn, save, and manage your spending, then you can start investing and building wealth.

Cuban was influenced by a book called “Cashing in on the American Dream: How to Retire by the Age of 35.”“The whole premise of the book [Cashing in on the American Dream] was if you could save up to $1 million and live like a student, you could retire” Cuban said. “But you would have to have the discipline of saving and how you spent your money once you got there. I did things like have five roommates and live off of macaroni and cheese and really was very, very frugal. I had the worst possible car.”

  1. https://www.gobankingrates.com/money/wealth/millionaire-money-rules/
  2. https://www.gobankingrates.com/investing/strategy/mark-cubans-top-investing-advice

Patience is the Key to 10X Investing

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

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

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

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

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

Its difficult to be patient

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

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

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

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

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

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

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

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

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

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

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

References:

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

Believe in the Power of Compounding

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

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

Believe in the power of compounding

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

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

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

Four important factors that determine how your money will compound:

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

Rule of 72

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

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

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

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

References:

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

Taper Trantrum

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The Federal Reserve is discussing tapering, or slowing down the loose monetary policiy of bond purchases (quantitative easing).

The Federal Reserve has started dropping hints it’s going to begin tapering the quantitative easing that has been going on since March 2020 in response to the COVID-19 pandemic and subsequent economic shutdown.

Tapering is the process when the Federal Reserve reduces Quantitative Easing (QE) and begins scaling back their asset purchase program.  By gradually backing off or ending their asset purcase program by the middle of 2021, they would avoid disrupting financial markets.

The taper tantrum refers to the reaction of financial markets to the Fed’s announcement in 2013 that it might begin to scale back the pace of its asset purchases. The taper tantrum was an indicator that markets had become far too dependent on the Fed’s stimulus for their financial well-being and were addicted to its easy money / loose monetary policy.

Reducing bond purchases could provide more flexibility for the Fed to raise interest reates if inflation stays high within the economy and unemployment continues to fall.

No one know for sure how the market will response when the Fed slows Quantatative Easing. The fear of Wall Street is that the Fed could begin tapering much faster than had previously been expected.

References:

  1. https://seekingalpha.com/article/4435971-welcome-to-the-taper-tantrum-of-2021-and-buckle-up

Greater Financial Transparency of Chinese Stocks

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“The problem is, there’s all sorts of incentives to raise money on public markets in China, and there’s no penalty for fraud. So why should you not commit fraud in order to raise more money?” Anne Stevenson-Yang, Research Director at J Capital Research

Gary Gensler, Chairman of the U.S. Security and Exchange Commission (SEC), wants greater transparency of Chinese stocks listed on U.S. exchanges. He wants the risks of investing in Chinese companies that list on U.S. exchanges and that cook their books and commit rampant fraud to be made more clear and apparent.  Gensler, like many American investors, consider investing in Chinese stocks extremely risky because they don’t completely trust Chinese companies’ financial reporting.

For example, the Chinese company, Luckin Coffee, was found to be a fraud after an internal investigation revealed the fabrication of approximately $300 million in revenue. The investigation found that the fabrication of sales began in April 2019, and involved inflating costs and expenses by almost $200 million, as well as booking $300 million in false revenue.

Recently, the Senate passed a bill that could essentially ban many Chinese companies from listing their shares on U.S. exchanges, or raising money from American investors. The companies would be subject to audits by U.S. regulators for three consecutive years. If they do not comply, they would be banned from trading on the exchanges.

Anne Stevenson-Yang believes that the SEC should not wait for three consecutive years of non-compliance. Instead, she believes that this three year look will not happen expeditiously enougn to save U.S. investors from Chinese fraud and scams. She suggested that U.S. auditors should get “immediate and thorough access” to audit papers. “If they’re not given access, then the companies should immediately be delisted. Why wait three years?”

Delisting Chinese stocks on US exchanges that do not comply with US accounting and listing standards would be justify because of financial fraud or lack of transparency.

Delisting means that a Chinese company traded on an exchange like the Nasdaq would lose access to a broad pool of buyers, sellers and intermediaries. The centralization of these different market participants helps create what’s called liquidity, which in turn allows investors to quickly turn their holdings into cash.

“Chinese financial authorities have gone out of their way to reassure foreign investors and markets have responded with a powerful rally,” said billionaire investor George Soros. “But that is a deception. Xi [Jinping] regards all Chinese companies as instruments of a one-party state. Investors buying into the rally are facing a rude awakening. Xi’s China is not the China [foreign investors] know. He is putting in place an updated version of Mao Zedong’s party.”

References:

  1. https://www.cnbc.com/2020/07/06/investing-fraud-at-china-luckin-coffee-fraud-case-warning-for-investors.html
  2. https://www.fool.com/investing/2021/09/05/should-you-worry-about-fraud-with-chinese-tech-gia/
  3. https://www.fool.com/investing/2020/07/01/luckin-coffee-reveals-findings-of-internal-fraud-i.aspx
  4. https://www.cnbc.com/2021/01/05/heres-what-happens-if-you-own-a-share-of-a-chinese-company-that-gets-delisted.html
  5. https://www.msn.com/en-us/money/markets/investors-who-buy-into-chinas-stock-market-rebound-are-set-for-a-rude-awakening-says-george-soros/ar-AANUgci