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5 Simple Rules for Investing Success

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“Definiteness of purpose or single-mindedness combined with PMA (positive mental attitude) is the starting point of all worthwhile achievement. It means that you should have one high, desirable, outstanding goal and keep it ever before you.” W. Clement Stone

Investing is a mental game.  And to be successful at the mental game, you must adjust your mindset and retrain your thinking that as a long-term investor, you need to be able to buy stocks and open new positions when the market is crashing or correcting.  You’re genetically programmed to be a lousy investor.  You must set up systems and rules to fight our normal urges and invest at what appears to be the absolute worst time and when everyone else is fearful and selling.

It is important to accept the fact that you will absolutely enter a position at the wrong time and make a bad buy in the short term.  It happens to every investor at sometime in their life.

Investing doesn’t have to be intimidating or challenging. To get started investing in stocks and bonds, you should follow with deliberate purpose and action five simple rules for building a long-term portfolio, according to TD Ameritrade:

  1. Contribute early and often – The single most important thing you can do in investing is to invest early and save often. Thanks to the magic of compounding, money invested early has more time to grow. Delaying investing can have a significant effect on your portfolio. In fact, for every 10 years you wait before starting to investing, you’ll need to save roughly three times as much every month in order to catch up.
  2. Minimize fees and taxes – Charges and taxes will have an impact on your overall returns, so it’s important to take these into consideration when choosing your investments.
  3. Diversify your portfolio – We all know the saying ‘don’t put all your eggs in one basket’, but it’s particularly important to apply this rule when investing. Spreading your money across a range of different types of assets and geographical areas means you won’t be depending too heavily on one kind of investment or region. That means if one of them performs badly, some of your other investments might make up for these losses, although there are no guarantees.
  4. Consider how much time you have – Investing should never be considered a ‘get rich quick’ scheme. You need to remain invested for at least ten years, but preferably much longer to give your investments the best chance of providing the returns you’re hoping for. Even then you must be comfortable accepting the risk that you could get less than you put in. If your investment goals are short-term, for example, two or three years away, investing won’t be right for you, as you’ll need to keep your money readily accessible, usually in a savings account.
  5. Have a financial plan and focus on long-term goals – A financial plan creates a roadmap for your money and helps you achieve your goals. It is a comprehensive picture of your current finances, your financial goals and any strategies you’ve set to achieve those goals. Good financial planning should include details about your cash flow, savings, debt, investments, insurance and any other elements of your financial life. Knowing what your financial goals are and what sort of timeframe you are investing over may help you stick to your plan and strategy. For example, if you have long-terms goals, perhaps saving for retirement which may be several decades away, you may be less tempted to dip into your investments before you stop work.

https://youtu.be/NxEcO7ITtMo

And, never forget the top two and oldest rules for investors, according to Warren Buffet:

  • Rule #1 of investing is “Don’t Lose Money.”
  • Rule #2 is “Don’t forget rule #1.”

What Buffett is referring to is a state of mind and philosophy for investing. Simply, it means that there’s no such thing as “play money.” You don’t go out and speculate on a stock. You remain patient and disciplined, whether your tax deferred or brokerage accounts are up or down for the month or year.

Investing is not gambling and the stock market is not a casino. There’s no such thing as the house’s money in investing. It’s all your money, and it has to be protected.

So, don’t become anchored to the price of stocks, instead focus on buying good businesses at fair prices.  Only thing that truly matters in investing is the long-term future prospects (innovation, moat, management acumen) and growth opportunities of businesses. Don’t let the loss in the price of a stock get in your head and don’t let a short-term paper loss sway your emotions, behaviors or actions.

Better to be a regular investor rather than be perfect or optimize to price of the stock.  And remember, celebrate good stock buys, and recognize and learn from bad buys.

References:

  1. https://www.barclays.co.uk/smart-investor/news-and-research/investing-for-beginners/10-golden-rules-for-investors
  2. https://www.fool.com/retirement/2007/08/06/invest-early-and-often.aspx
  3. https://www.investopedia.com/articles/financial-theory/11/6-lessons-top-6-investors.asp
  4. https://www.investopedia.com/articles/fundamental-analysis/09/market-investor-axioms.asp
  5. https://cabotwealth.com/daily/how-to-invest/10-basic-rules-of-investing-according-to-the-legends

Manage Your Debt

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You must protect your wealth from destructive forces, such as debt, taxes and inflation, which all can erode wealth. Add to these another wealth destroyer: overspending.

Americans are drowning in debt. Before COVID-19, Americans were merely treading water in dangerous seas. But once the economy turned ugly, jobs went away and nest eggs cracked, those with the most debt, sunk, according to the Bill “No Pay” Fay the founder of Debt.org. Many people were forced into insolvency or foreclosure, unable to pay their obligations or provide for their families.

Today, debt is almost a fact of life for most Americans. When you owe money to someone, you are in debt. Owing money is not always bad. Debt allows you to buy homes and cars, send our kids to college, and have things in the present that we can pay for in the future and nearly everyone has at least one credit card. Indeed, capitalism essentially was built on the extension of credit and the ensuing debt it creates. But credit’s convenience can easily lead to spending more than you earn or budget. And, debt becomes bad and financial bondage when you owe money you cannot pay back.

Debt is rampant

“Most American’s spending habits are based on the amount of available credit they have, not on their cash flow (income) or checking account balance”

According to the New York Federal Reserve, consumer debt was approaching $14-trillion in the second quarter of 2019. This includes mortgages ($9.14-trillion), auto loans ($1.65-trillion), student loans ($1.44-trillion), and credit card loans ($829-billion).  It was the 24th consecutive quarter for an increase.

Living without debt these days is next to impossible. Debt falls into two categories: good debt and bad debt. It’s good to know that all debt (or money owed) isn’t created equal, and it’s even better to know the difference, according to Navy Federal Credit Union. Before buying anything on credit, it’s a good idea to determine whether you’re accruing good debt or bad debt.

Good Debt:

  • Good debts are those that create value and can be seen as an investment. Think mortgages, loans for college education or business loans. School loans and mortgages often have lower interest rates than other kinds of debt. Student loans can increase your ability to command a larger income. An ideal situation in a home loan is that the property increases in value over the course of the loan term, an increase that could offset the interest paid on your loan.

Bad Debt:

  • Bad debt comes into play when you purchase items that quickly decrease in value and don’t generate income. Bad debt often carries a high interest rate—think store credit cards and payday loans or cash advance loans. The rule of thumb for avoiding bad debt is: If you can’t afford it, don’t buy it. Every month that you make a partial payment on a high-interest loan, that item loses value while the price you paid for it increases.

When it comes to your credit history, well-managed debt can actually help improve your credit score. When purchasing on credit, know what you’re getting into and take on only as much debt as you can afford to pay off.

https://twitter.com/cbcfamily1889/status/1354852205451501569?s=21

For many, using credit is a normal part of handling their finances. For others, using credit can lead to uncontrolled spending, anxiety, and even bankruptcy. It’s important to recognize your own spending and savings habits so you remain in control.

Knowing when and where not to use credit –and what type of credit to use –can help you avoid getting in over your head. Borrowing for higher education is probably a good idea as it should result in a higher earned income later. Charging extravagant vacations, and for expensive dinners and gifts that you really can’t afford is not a good idea.

Installment credit and credit cards

“Your biggest enemies are your bills. The more you owe, the more you stress. The more you stress over bills, the more difficult it is to focus on your goals. More importantly, if you set your monthly income requirements too high, you eliminate a significant number of opportunities.” Mark Cuban

There are two major types of household debt: installment and revolving credit.

  • Installment debt is paid off in a specified period of time with predetermined periodic payments. Conventional mortgages are the best example.
  • Revolving credit is a line of credit that is instantly available, usually through credit cards. As you pay down your debt in a revolving line of credit, the minimum payment is also reduced, which can extend your payoff period and the interest you pay.

Installment debt is excellent for big-ticket purchases like a home mortgage and should be accounted for in your monthly budget. Compared with credit cards, interest rates for installment debt are usually relatively low.

According to statistics collected by the Federal Reserve and other government data, credit card debt is the third highest source of household debt behind mortgages and student loans, with an average owed of $15,863.

The modern-day credit card — which entered the culture in the late 1950s — has meant far greater buying power for U.S. consumers, but also financial disaster for many individuals and families.

Consider these statistics about credit cards in America :

  • More than 189 million Americans have credit cards.
  • The average credit card holder has at least four cards.

Credit cards are a convenient way to buy virtually anything at any time, but you need to use them intelligently and be aware of the interest costs. And, you might not realize it, but every time you use your credit card, you’re essentially taking out a loan. The purchases you put on your card are bought with your line of credit, and you’re responsible for paying your credit card company back for whatever you buy. When used responsibly, a credit card can be a great tool for building credit history; used incorrectly, it can lead to debt.

Credit cards can offer the temptation to overspend, but you can curb that urge by using these tips to be smart about your spending:

  • Budget. Budget. Budget. Keep track of your finances with an up-to-date budget that accurately reflects your income and output. Knowing your finances is a huge step in knowing how much you can afford.
  • Borrow only as much as you repay. A good rule of thumb is to not tie up more than one-third of your income in debt, including mortgage, credit cards and installment loans. Borrow only as much as you can pay back in a reasonable time, while staying on top of the daily necessities.
  • Pay bills in full and on time. Don’t overextend your funds. Be mindful of when your credit card bills are due and make a concerted effort to pay them off in full each month.
  • Check your credit report regularly. By keeping an eye on your credit report, you can monitor your status and whether there are mistakes that could negatively affect your score. You can check your credit report for free on an annual basis at

Remember that you have to pay back every charge you make. In a nutshell – don’t charge things you can’t afford. Try to pay your entire balance each month to avoid finance charges and be sure to make the payments on time to avoid late payment fees.

Assessing your financial situation helps you to manage your debt efficiently. And with respect to wealth destroyers — taxes, inflation debt and overspending — the last two can have the most destructive effect on your wealth if not kept in check. They are the forces over which you can manage and have the most control.

Keeping Debt Manageable

Compounding interest can be a powerful tool to have in your arsenal. It can be very beneficial in accumulating wealth and in creating large sums of money over time if wielded correctly. But unfortunately, debt has a best friend forever (BFF) and it is the darker side to compounding interest – compounding debt.

When you get into debt, it’s you that incurs interest on what you owe. And if you don’t have a solid repayment plan, that can easily spiral out of control. If you’re stuck in the vicious circle of compounding debt, it’s important to quickly get out as fast as you can. The less you owe the less interest you incur so pay as much as you can as often as you can.

The simplest way to maintain a manageable amount of debt is to ensure you never owe more than you can pay, but simple isn’t always easy. Follow these tips from Navy Federal Credit Union to better manage your debt:

  • Know how much you owe. Make a list of all of your debts. Include the debt total, monthly payment, interest rate and due date. Track your progress by updating the list regularly as you make payments. As the old adage goes, you can’t manage what you don’t measure.
  • Pay your bills on time each month. Set up automatic payments so you don’t miss payments and incur late fees. Determine which bills are due first and pay them in order. Pay more than the minimum on each bill if you’re able. Paying the minimum on high-interest debt usually doesn’t help you make real progress, but if that is all you can pay, it does keep debt from growing.
  • Pay off the high-interest debts first. High-interest debt costs you the most, so you’ll want to immediately wipe it out. The faster you pay these debts off, the less interest you’ll pay. The thinking behind this solution is that if you let the debt with the highest interest rate sit for a long time, it will cost you a bundle in interest payments so attack it immediately. Waiting to pay off high-interest debt likely will cost you thousands of dollars and increase the amount of time you spend in debt.
  • Start an emergency fund. That way, should an unexpected expense come up, you won’t have to add to your debt to pay it.

Eliminate Your Debt Before You Invest

“If you’ve got $25,000, $50,000, $100,000, you’re better off paying off any debt you have because that’s a guaranteed return.” Mark Cuban

Bottomline about paying off debt is that you must be committed to the process. It’s likely you didn’t incur the debt overnight and it’s even more likely you won’t get out of debt overnight. A study published in the Journal of Marketing Research says that the act of closing accounts after they’re paid off, regardless of size, is a better predictor of whether you’ll get out of debt in the long run.

“Credit is a financial tool, debt is a financial problem.”

References:

  1. https://www.debt.org/faqs/americans-in-debt
  2. https://equitable.com/goals/financial-security/basics/manage-your-debt
  3. https://diversyfund.com/blog/compounding-debt-the-dark-side-of-compounding-interest
  4. https://www.navyfederal.org/makingcents/knowledge-center/financial-literacy/understanding-debt/about-debt.html
  5. https://www.bankrate.com/finance/savings/wealth-destroyers.aspx
  6. https://www.thinkbank.com/managing-debt

3 Ways to Start Investing in the Stock Market With $100 or Less | Motely Fool

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“One of the best ways to build wealth over time is to invest!”  The Motley Fool

The stock market is a fantastic tool to build wealth.  If you don’t have much money to spare, The Motley Fool video below explains how to start investing with just $100 or less.

Investing is a marathon

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

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

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

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

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

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

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

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

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

Invest in stocks.

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

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

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

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

The power of compounding

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

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

Purchasing power protection

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

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

Invest for the long term.

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

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

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

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

References:

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

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

Omega-3 EPA and DHA

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When it comes to the benefits of omega-3 fish oil supplementation, the evidence shows that it benefits both the mind and heart.  Our brains, hearts, and bodies appear to suffer when we don’t get enough of these healthy and essential fats. In terms of brain and heart health, omega-3s derived from wild cold water fish oil (or grass-fed animal fat and other kinds of seafood) are best because they are loaded with two particular brain- and heart-healthy essential fatty acids (EFAs) called eicosapentaenoic acid (EPA) and docosahexaenoic acid (DHA).

A Harvard School of Public Health study published in 2011 found that omega-3 deficiency is likely the sixth biggest killer of Americans, and maybe the underlying factor of roughly 96,000 premature deaths each year!

What Are the Benefits of Omega-3 Supplements?

Scientific Benefits of Omega-3 Supplements | BrainMD

First, the most important fact to remember about omega-3 essential fatty acids (EFAs) is that they are indeed essential, meaning that your body needs to get them from your diet. Unfortunately, with today’s modern diet, which is light on omega-3-rich foods (fish, grass-fed meats, nuts, seed and dark leafy greens) and heavy on foods with saturated fats and oils (corn, safflower, soybean, sunflower, cottonseed, peanut, etc.) that are rich in omega-6 EFAs.

The American Heart Association recommend at least two oily fish meals per week (which equates to roughly 500 mg per day of EPA and DHA), a full gram per day for those with coronary heart disease—and even more for those with high triglyceride levels—there’s good reason.

  • Inflammation. Studies indicate that DHA and EPA from fish oil may support healthy inflammation levels in the body.10 Keeping inflammation levels in check supports a healthy vascular system.
  • Blood pressure and heart function. Research has also correlated adequate amounts of DHA and EPA with healthy blood pressure levels.11 And while still inconclusive, some studies have shown that EPA and DHA may play a role in healthy heart rhythm.12
  • Triglycerides. Having a high level of triglycerides, a type of fat (lipid) in your blood, can increase your risk of heart disease. A very strong body of research suggests that DHA and EPA help to maintain healthy triglyceride levels.13

Our brains, hearts, and bodies appear to suffer when we don’t get enough of these healthy fats. In terms of brain and heart health, omega-3s derived from wild cold water fish oil are best because they are loaded with two particular brain- and heart-healthy EFAs called eicosapentaenoic acid (EPA) and docosahexaenoic acid (DHA). Literally, thousands of scientific studies have been conducted using fish oil rich in these two nutritional dynamos—with mostly promising results.

Major Benefits of EPA and DHA For Your Health

It has been scientifically demonstrated that your brain needs the omega-3 fatty acids EPA and DHA to function optimally. Though not technically classed as essential, these fatty acids are called essential for a reason – our bodies need them, and the only sure way to get enough of them is through foods or supplements. Let’s take a closer look at these two most important omega-3 fatty acids.

Power Team: EPA + DHA

Humans need a variety of fatty acids for our cell membranes to function. EPA (eicosapentaenoic acid) and DHA (docosahexaenoic acid) are essential to the functioning of all our 30 trillion cells. They’re building blocks for the membrane systems that do most of the heavy lifting for our cells.

We require premade EPA+DHA from our diet. Unfortunately, the modern diet has an unhealthy balance of fatty acids: we get an abundance of saturated and omega-6 fatty acids and not nearly enough omega-3s. Also, most of the omega-3s we do get must be converted to EPA+DHA, which the body doesn’t do effectively.

Numerous surveys indicate populations that don’t consume a lot of seafood (such as the U.S.) don’t get sufficient supplies of EPA and DHA from their diet. Since plant foods don’t supply them, the main dietary sources of EPA and DHA are cold-water fish and dietary supplements. Considering the widespread contamination of seafood by mercury and other toxins, many experts advise that taking a purified fish oil supplement could be a smart choice.

 1. Promotes Healthy Mood

EPA+DHA have been tested on adults with mood problems in at least 26 randomized, controlled clinical trials. Two meta-analyses, which analyze the data pooled from all the best trials, have concluded that these omega-3s are consistently beneficial for mood. These meta-analyses also suggest that fish oils with more EPA than DHA work better, with the best ratio being around 1.5 to 1 EPA to DHA.

Children and adolescents with mood difficulties commonly have problems with academic performance, self-esteem, and socialization. In two clinical trials with youth aged 7-14 years, EPA+DHA 1600 mg per day (1400 mg EPA, 200 mg DHA) for 12 weeks substantially improved coping with distraction and stress – as well as mood, irritability, and self-esteem – compared with placebo.

 2. Improves Attention and Behavior

Children and adolescents with attention and learning challenges often have low Omega-3 Index values (about 3% on average, compared to a healthy 8% or higher). A 2018 meta-analysis concluded that supplementation with EPA+DHA improved parental reports of attention and behavior, as well as mental focus on cognitive tests. The researchers concluded that to ensure the most benefit, the EPA dose should be at least 500 mg per day.

 3. Essential for the Heart and Circulation

Numerous health agencies worldwide recommend EPA and DHA for promoting and enhancing cardiovascular health. Meta-analyses clearly indicate that supplementation with EPA+DHA at doses of 2-3 grams per day can promote healthy triglyceride status and blood pressure regulation. Additionally, EPA+DHA supplementation can improve blood vessel function, especially their capacities for relaxation and flexibility.

 4. Supports Healthy Immunity

The immune system is the body’s security force. When the body is invaded, it goes on full alert to eliminate the threat. EPA and DHA support healthy immune responsiveness.

Having sufficient EPA+DHA in our tissues gives the immune system the option to generate messengers from them to coordinate its activities. Healthy immunity is held in delicate balance by EPA and DHA. No other omega-3s can substitute for EPA and DHA in this crucial role.

 5. Vital for Healthy Pregnancy

Babies of mothers who have good EPA+DHA status through pregnancy have a lower risk for problems with mood, cognition, and behavior in their early childhood. DHA, the predominant omega-3 in our cell membranes, is essential to the developing fetal heart, brain, and retina.

A meta-analysis of 38 trials concluded that children born to mothers with higher prenatal EPA+DHA intakes show better motor, vision, and cognitive development in their first two years of life. Yet U.S. women on average have considerably lower EPA+DHA intakes than recommended by the U.S. National Institute of Medicine.

 6. Total Brain and Body Protection

EPA and DHA have been shown to protect brain circulatory function and preserve memory and other cognitive capacities. EPA and DHA support many other organs and body systems including the liver (by preventing triglyceride buildup), the joints (promoting joint comfort), eyes (essential for retinal function), and muscles (protecting against mobility loss as we age).

With strong evidence supporting the positive effects of omega-3s EPA and DHA on the brain, heart, and entire body, taking a fish oil supplement daily can have a significant impact on individual wellness. BrainMD is proud to recommend its new, high EPA and DHA premium liquid fish oil…

https://twitter.com/yourwellbeing88/status/1278666518390165505?s=20

References:

  1. https://brainmd.com/blog/omega-3s-the-supplement-your-mind-and-heart-can-get-behind/
  2. https://brainmd.com/blog/benefits-of-epa-and-dha-fish-oil-supplements/

Tax on the Sale of a House (Primary Residence)

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If you sell your home for a profit, some of the capital gain could be taxable. Capital gains are the profits from the sale of an asset — shares of stock, a piece of land, a business — and generally are considered taxable income.

The IRS and many states assess capital gains taxes on the difference (profit) between what you pay for an asset — your cost basis — and what you sell it for. Capital gains taxes can apply to investments, such as stocks or bonds, and tangible assets like cars, boats and real estate.

To minimize your tax burden, the IRS typically allows you to exclude up to:

  • $250,000 of capital gains on your primary residence if you’re single.
  • $500,000 of capital gains on real estate if you’re married and filing jointly.

You will have to meet certain criteria in order to qualify for this exclusion, so be sure to review them before you sell. You might qualify for an exception, and adding the value of home improvements you’ve made could help.

For example, if you bought a home 10 years ago for $200,000 and sold it today for $800,000, you’d make $600,000. If you’re married and filing jointly, $500,000 of that gain might not be subject to the capital gains tax (but $100,000 of the gain could be), according to NerdWallet.com. What rate you pay on the other $100,000 would depend in part on your income and your tax-filing status.

The bad news about capital gains on real estate is that your $250,000 or $500,000 exclusion typically goes out the window, which means you pay tax on the whole gain, if any of these factors are true:

  • The house wasn’t your principal residence.
  • You owned the property for less than two years in the five-year period before you sold it.
  • You didn’t live in the house for at least two years in the five-year period before you sold it. (People who are disabled, and people in the military, Foreign Service or intelligence community can get a break on this part, though; see IRS Publication 523 for details.)
  • You already claimed the $250,000 or $500,000 exclusion on another home in the two-year period before the sale of this home.
  • You bought the house through a like-kind exchange (basically swapping one investment property for another, also known as a 1031 exchange) in the past five years.
  • You are subject to expatriate tax.

If it turns out that all or part of the money you made on the sale of your house is taxable, you need to figure out what capital gains tax rate applies.

  • Short-term capital gains tax rates typically apply if you owned the asset for less than a year. The rate is equal to your ordinary income tax rate, also known as your tax bracket.
  • Long-term capital gains tax rates typically apply if you owned the asset for more than a year. The rates are much less onerous; many people qualify for a 0% tax rate. Everybody else pays either 15% or 20%. It depends on your filing status and income.

References:

  1. https://www.nerdwallet.com/article/taxes/selling-home-capital-gains-tax

Personal Debt in America

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“Debt means enslavement to the past, no matter how much you want to plan well for the future and live according to your own standards today. Unless you’re free from the bondage of paying for your past, you can’t responsibly live in the present and plan for the future.” Tsh Oxenreider, Organized Simplicity: The Clutter-Free Approach to Intentional Living

Debt stands stubbornly in the way of Americans’ financial goals and life dreams.  Moreover, debt is the biggest barrier to wealth creation and is the great destroyer of wealth. Debt and financial freedom are polar opposites – they never meet. Where there is debt, there cannot be wealth and financial freedom.

In the U.S., adults aged 18+ report having an average of $29,800 in personal debt, exclusive of mortgages, according to the latest findings from Northwestern Mutual’s 2019 Planning & Progress Study. The research also revealed that 15% of Americans believe they’ll be in debt for the rest of their lives.

While those numbers are staggering, they represent an improvement over last year when U.S. adults reported an average of $38,000 in personal debt. Still, the debt problem in America continues to run deep with wide-spread implications. The study found:

  • On average, over one-third (34%) of people’s monthly income goes toward paying off debt
  • 45% of Americans say debt makes them feel anxiety on at least a monthly basis
  • 35% report feeling guilt at least monthly as a result of the debt they’re carrying
  • One in five (20%) report that debt makes them feel physically ill at least once a month
  • One-fifth (20%) of U.S. adults are not sure how much debt they have
  • Over one in three Americans (34%) are unsure how much of their monthly income goes toward paying off their debt

Among the generations, Gen X reported the highest levels of personal debt with $36,000 on average. They’re followed by Baby Boomers at $28,600; Millennials at $27,900; and Gen Z at $14,700.

This is the latest round of findings from the 2019 Planning & Progress Study, an annual research project commissioned by Northwestern Mutual that explores Americans’ attitudes and behaviors towards money, financial decision-making, and factors impacting long-term financial security. This year marks the 10-year anniversary of the study.

The Credit Card Crisis

The leading sources of debt for most Americans is a tie between mortgages and credit cards, according to the study. An equal 22% of U.S. adults listed each as their main source of debt, more than double the next two highest sources — car loans (9%) and personal education loans (8%).

Millennials cite credit card bills as their main source of debt (25%), while Gen Z notes personal education loans as theirs (20%). Both Gen Xers (30%) and Baby Boomers (28%) note mortgages as their leading source of debt, followed by credit card bills (at 24% and 18% respectively).

Digging deeper into the numbers around credit card debt, the study found:

  • Nearly one-third of Americans (31%) are paying interest rates on their credit cards greater than 15%
  • Over 1 in 10 (12%) say they “always” pay only the minimum required payment, just covering the interest without paying down any principal
  • Close to one-fifth (19%) don’t know what their interest rate is, with Millennials being the most likely to report not knowing (22%)
  • 18% report having four or more credit cards, with Baby Boomers being more likely than other generations to have four or more (23%)

According to the Federal Reserve Bank of New York, credit card debt has reached $868 billion in the United States, and delinquencies are on the rise.

“Before you spend, earn. Before you invest, investigate. … Before you retire, save.” William A. Ward

When you are in debt the clock works against you. Every morning when you wake—weekends, holidays, sick days, birthdays and work days—you are already behind. The mortgage, credit card, car loan, et cetera, all tacked on interest the second after midnight. Long before you rolled out of bed and poured your first cup of coffee you need to work to pay the interest before you have money for food, clothing, shelter or entertainment.

In debt you are a slave; without debt you’re free.  Every day in debt you owe your master. Every day! He is a cruel, heartless master. When the clock ticks past midnight the interest for the day ahead is due.  Only those without debt and in possession of investment assets are free to live each day as they choose.

Without debt you are free; without debt and with possessing of assets and wealth, each day is yours to use as you chose.

References:

  1. https://news.northwesternmutual.com/planning-and-progress-2019
  2. https://wealthyaccountant.com/2018/04/12/the-greatest-secret-between-debt-and-wealth/

Investing for the Long Term

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

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

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

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

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

Patience

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

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

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

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

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

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

Missing the best days

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

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

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

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

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

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

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

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

The power of compounding

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

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

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

Tax control advantages

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

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

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

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

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

References:

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

Investing Involves Managing Your Behavior and Emotions

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“90% of investing involves managing yourself, not your money.” Nick Murray

Investing in stocks won’t make you wealthy. Your behavior around investing in stocks makes you wealthy, according to Nick Murray, a behavioral financial services professional and author of eight books for financial services professionals. Stocks need your help. The only thing you control – your behavior – is the biggest factor in your investing success.

This is a recurring theme repeated by all great investors – 90% of investing involves managing your emotions and yourself, not your money. A simple investment plan helps manage that 90% so the other 10% can be left alone to grow your money. As Nick Murray said about investors not following a plan, “human nature is a failed investor”.

“Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.” Morgan Housel, author of The Psychology of Money

In other words, behavior trumps other considerations in the pursuit of financial success. “Doing well with money has a little to do with how smart you are and a lot to do with how you behave”, Morgan Housel explains in his book The Psychology of Money. “Engage in the right behaviors and you are likely to succeed. Similarly, no amount of intelligence, savvy, or inside information will save you from the wrong set of behaviors.”

Margin of Safety

Warren Buffett said, “The three most important words in investing are ‘margin of safety’.” That means that you buy stuff like stocks while they’re on sale. That also means paying less than what it’s worth. That means to buy $10 dollar bills for $5 dollars. In a nutshell, that’s the secret to great investing.

“If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger the margin of safety you’d need. If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay; but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety.” Warren Buffett

The Margin of Safety is a measure of how “on sale” a company’s stock price is compared to the true intrinsic value of the company. You need to be able to determine the intrinsic value of a company and from that value determine a “buy price”. The difference between the intrinsic value and the buy price is the margin of safety.

Margin of Safety is a value investing principle strategy. If the total value of all shares of a company is 30% less than the intrinsic value of that company, then the margin of safety would be 30%. In other words, if the stock price of a company is below the actual value of the cash flow and assets of a company, the percentage difference is the Margin of Safety.  This is the discounted price at which you are buying a share in the company.

The Margin of Safety is the percentage difference between a company’s Fair Value per share and its actual stock price. If a company has profits and assets that outweigh a company’s stock market valuation, this represents a Margin of Safety for the investor. The higher the margin of safety, the better.

Margin of safety is only an estimate of a stock’s risk and profit potential. Most value investors believe that the higher the margin of safety, the better.  And, the larger the margin of safety, the more irrational the market has become. 

One of the keys to getting a great margin of safety is to understand that price and value is not the same thing. Price is what you pay for something, but the value is what you get.

The stock market rises about four out of every five years or about 80% of the time, according to Murray. Said another way, the market only falls 20% of the time. You can fear that 20% or cheer for it.

No one ever got wealthy paying full price or top dollar for assets. Most successful investors got that way buying assets that were distressed, out of favor, and therefore on sale. Unfortunately, few people see it that way. You need to take advantage of the sale during market selloffs and corrections when it occurs. Your money literally goes further because you can buy more share at lower prices that lead to market-beating returns later on.

Managing your emotions and financial planning

It’s paramount to insulate yourself against uncertainty, greed and fear – so that you can prosper by continuously implementing your financial plan, and managing your behavior by not reacting to random circumstances and volatility of the markets.

Failing to financially plan is planning to fail financially. For people in the accumulation phase of life, that means a written, date-specific, dollar-specific retirement accumulation plan, premised on long-term historical returns, according to Murray. Once in retirement, it has to become a retirement income plan which, at historic returns, defends and even accretes purchasing power.

Financial planning is essential to managing your behavior and ensuring your financial success.

References:

  1. https://novelinvestor.com/10-lessons-learned-nick-murray/
  2. https://mentalpivot.com/book-notes-the-psychology-of-money-by-morgan-housel/
  3. https://www.ruleoneinvesting.com/blog/how-to-invest/how-to-invest-margin-of-safety-the-growth-rate/
  4. https://www.liberatedstocktrader.com/margin-of-safety/
  5. https://www.fa-mag.com/news/a-talk-with-nick-murray-20921.html

Wealth Mindset

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“Developing the right frame of mind is critical to successfully investing for the long term and achieving your financial goals.”

Many people do not obtain financial freedom because they do not have the one thing that matters most: the Right Mindset. Everything about attaining financial freedom starts with how you think about managing your money (budgeting), saving for the future, investing for the long term, and accumulating wealth.

Your mindset is a big part of what’s gotten you to where you are right now financially. It’s largely responsible for the financial success (or lack of it) that you already have. So, if you want your financial life to change, your mindset will also need to change or adjust.

Altering your perspective and mindset can help you overcome the majority of financial, health or emotional challenges you may face. An individual’s perspective, how we face challenges, and how we choose to live is a choice. That mindset shapes how we deal with life’s hardships, whatever storms come our way.

What is Wealth Mindset?

“Before you can become a millionaire, you must learn to think like one. You must learn how to motivate yourself to counter fear with courage. Making critical decisions about your career, business, investments and other resources conjures up fear, fear that is part of the process of becoming a financial success.” Thomas J. Stanley

Your mindset is the sum of the attitudes and ideas you bring to a situation related to your personal finances. It’s the mental habits you have for thinking about and responding to any financial circumstance; they’re usually created by your previous financial experiences.

A mindset, according to psychologist Carol Dweck, Ph.D, and popularized in her book, Mindset: The New Psychology of Success, “is a self-perception or “self-theory” that people hold about themselves. Believing that you are either “intelligent” or “unintelligent” is a simple example of a mindset”, according to Dweck. “People may also have a mindset related their personal or professional lives—“I’m a good teacher” or “I’m a bad parent,” for example. People can be aware or unaware of their mindsets”, Dweck wrote, “but they [mindset] can have profound effect on learning achievement, skill acquisition, personal relationships, professional success, and many other dimensions of life” including financial.

Mindset is one of the primary reasons more Americans don’t become wealthy and don’t reach their financial goals. They’re afraid – not of being wealthy and financially free, but of the changes in their lives they’ll have to make to get there.

There’s a saying: “We don’t see the world as it is. We only see the world as we are.” The money results you’re experiencing are a reflection of your internal framework or mindset. When you change your mental blueprint and financial self-image (a.k.a. your mindset), you transform external results. As John Maxwell says “You’ll never change your life until you change something you do daily. The secret of our success is found in your daily routine.”

If you keep telling yourself that you aren’t smart enough or good enough, or that you don’t know enough, it’s not going to be easy to turn on the steady stream of cash flow. And with a fixed, low-earning mindset and constant negative self-talk, you won’t be likely to achieve financial freedom.

So instead of all that unproductive thinking, implement a “wealth mindset” and put a high value on yourself. When you value yourself first and foremost, you increase your deserving level through a self-worth vibration and resonance.

Change Your Mindset

“Decide You Want It More than You Are Afraid Of It” Bill Cosby

The first thing we must do is change our beliefs. When we drop the mindset that says that in order to make money, we have to trade our time for it, our minds open up to the possibilities. There’s no rule that says that to make X dollars, we have to work X hours. In fact, it’s more important to spend time “un-learning” the old limiting or “fixed” mindset than “learning” the new positive mindset.

So, think about trading value for money, not time. 

  • Think about what value you can create for other people, and how you can deliver that value. 
  • Think about what assets, skills, knowledge, connections or ideas do you have that people value.
  • Recognize your strengths and competency, then go all-in. Bet on and invest in yourself.

Additionally, those who have accumulated wealth tend to develop the habit of “accumulating wealth slow” rather than “getting rich quick.” To assure this, they follow two of billionaire investor Warren Buffett’s rules with regard to their capital and assets. “Rule number one: Don’t lose money. Rule number two: If ever you feel tempted, refer back to rule number one, “don’t lose money.””

Climbing the economic ladder, even when the odds seem stacked against you is doable. But in order to become financially free, you have to have a serious heart-to-heart talk with yourself, according to Forbes. You want to get a few things clear in your head, including:

  • A definition of exactly what financial freedom means to you – following someone else’s definition won’t get you there
  • A realistic and accurate picture of your current financial situation
  • A realistic idea as to what you’ll have to give up to get where you want to go A realistic assessment of the obstacles in your path
  • A series of goals that will help you to become financially independent
  • The path to wealth and financial freedom depends on your financial mindset, what you learned about money management early in life, and what your willingness to delay gratification and exercise discipline to get to realize your goals.

    • Living life on your terms means being free to do the things that are most important to you.

    Make small changes over time

    No matter what changes you want to make, it’s better to make small ones over time than to try to make a huge one right away, according to leading personal finance author Laura D. Adams. Those who succeed the most make small incremental changes and build on that foundation.

    You might start with a financial goal to automatically save a certain amount of your monthly pay or to invest a few dollars in a low cost index fund. Small changes that become habits create momentum for additional improvements. Decide to implement one small change this month, like tracking spending each week, setting up a retirement or brokerage account, or figuring your net worth.

    Once you have success accomplishing a small financial change or goal then add more, such as creating a spending plan, cutting unnecessary expenses, and building credit.

    And, it is imperative to get started now since it’s human nature to procrastinate—especially when the deadline for getting something done like saving for retirement is decades away. But procrastination never works in the case of saving money for retirement, because building wealth is inherently a long-term process.

    In other words, accumulating wealth is difficult or virtually impossible without upfront thought, planning and discipline. The earlier you get started, the more time your investments have to exponentially grow and benefit from the magic of compounding. The key to building wealth for the future is to start early and to slowly but surely increase your net worth over the long term.

    You cannot realize your wildest dreams or reach your most audacious goals with a negative mindset.

    References:

    1. https://www.edglossary.org/growth-mindset
    2. https://lauradadams.com/money-mindset-tips-tools-for-financial-success
    3. https://www.forbes.com/sites/jrose/2016/03/25/financial-independence/?sh=1e589742984b
    4. https://www.entrepreneur.com/article/244745
    5. https://www.ruleoneinvesting.com/blog/personal-development/4-valuable-tips-for-a-healthy-money-mindset/
    6. https://www.amazon.com/Wealth-Choice-Success-Secrets-Millionaires/dp/1137279141/ref=nodl_
    7. https://www.federalreserve.gov/econres/notes/feds-notes/disparities-in-wealth-by-race-and-ethnicity-in-the-2019-survey-of-consumer-finances-20200928.htm