Category Archives: Investing

Quote of the Week

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“So smile when you read a headline that says ‘Investors lose as market falls.’ Edit it in your mind to ‘Disinvestors lose as market falls—but investors gain.’ Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other.” Warren Buffett, billionaire investor, and Chairman and Chief Executive Officer Berkshire-Hathaway

“The most common cause of low prices is pessimism—some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.” Warren Buffett

Additionally, Buffett said, “We don’t have to be smarter than the rest, we have to be more disciplined than the rest.”

More from Warren Buffett:

Financial Planning 12 Step Process

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A financial plan creates a roadmap for your money and helps you achieve your financial goals.

The purpose of financial planning is to help you achieve short- and long-term financial goals like creating an emergency fund and achieving financial freedom, respectively. A financial plan is a customized roadmap to maximize your existing financial resources and ensures that adequate insurance and legal documents are in place to protect you and your family in case of a crisis. For example, you collect financial information and create short- and long-term priorities and goals in order to choose the most suitable investment solutions for those goals.

Although financial planning generally targets higher-net-worth clients, options also are available for economically vulnerable families. For example, the Foundation for Financial Planning connects over 15,000 volunteer planners with underserved clients to help struggling families take control of their financial lives free of charge.

Research has shown that a strong correlation exist between financial planning and wealth aggregation. People who plan their financial futures are more likely to accumulate wealth and invest in stocks or other high-return financial assets.

When you start financial planning, you usually begin with your life or financial priorities, goals or the problems you are trying to solve. Financial planning allows you to take a deep look at your financial wellbeing. It’s a bit like getting a comprehensive physical for your finances.

You will review some financial vital signs—key indicators of your financial health—and then take a careful look at key planning areas to make sure some common mistakes don’t trip you up.

Structure is the key to growth. Without a solid foundation — and a road map for the future — it’s easy to spin your wheels and float through life without making any headway. Good planning allows you to prioritize your time and measure the progress you’ve made.

That’s especially true for your finances. A financial plan is a document that helps you get a snapshot of your current financial position, helps you get a sense of where you are heading, and helps you track your monetary goals to measure your progress towards financial freedom. A good financial plan allows you to grow and improve your standing to focus on achieving your goals. As long as your plan is solid, your money can do the work for you.

A financial plan is a comprehensive roadmap of your current finances, your financial goals and the strategies you’ve established to achieve those goals. It is an ongoing process to help you make sensible decisions about money, and it starts with helping you articulate the things that are important to you. These can sometimes be aspirations or material things, but often they are about you achieving financial freedom and peace of mind.

Good financial planning should include details about your cash flow, net worth, debt, investments, insurance and any other elements of your financial life.

Financial planning is about three key things:

  • Determining where you stand financially,
  • Articulating your personal financial goals, and
  • Creating a comprehensive plan to reach those goals.
  • It’s that easy!

Creating a roadmap for your financial future is for everyone. Before you make any investing decision, sit down and take an honest look at your entire financial situation — especially if you’ve never made a financial plan before.

The first step to successful investing is figuring out your goals and risk tolerance – either on your own or with the help of a financial professional.

There is no guarantee that you’ll make money from your investments. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money.

12 Steps to a DIY Financial Plan

It’s not the just the race car that wins the race; it also the driver. An individual must get one’s financial mindset correct before they can succeed and win the race. You are the root of your success. It requires:

  • Right vehicle at the right time
  • Right (general and specific) knowledge, skills and experience
  • Right you…the mindset, character and habit

Never give up…correct and continue.

Effectively, the first step to financial planning and the most important aspect of your financial life, beyond your level of income, budget and investment strategy, begins with your financial mindset and behavior. Without the right mindset around your financial well-being, no amount of planning or execution can improve your current financial situation. Whether you’re having financial difficulty, just setting goals or only mapping out a plan, getting yourself mindset right is your first crucial step.

Knowing your impulsive vices and creating a plan to reduce them in a healthy way while still rewarding yourself occasionally is a crucial part of a positive financial mindset. While you can’t control certain things like when the market takes a downward turn, you can control your mindset, behavior and the strategies you trust to make the best decisions for your future. It’s especially important to stay the course and maintain your focus on the positive outcomes of your goals in the beginning of your financial journey.

Remember that financial freedom is achieved through your own mindset and your commitment to accountability with your progress and goals.

“The first step is to know exactly what your problem, goal or desire is. If you’re not clear about this, then write it down, and then rewrite it until the words express precisely what you are after.” W. Clement Stone

1. Write down your goals—In order to find success, you first have to define what that looks like for you. Many great achievements begin as far-off goals, that seem impossible until it’s done. Though you may not absolutely need a goal to succeed, research still shows that those who set goals are 10 times more successful than those without goals. By setting SMART financial goals (specific, measurable, achievable, relevant, and time-bound), you can put your money to work towards your future. Think about what you ultimately want to do with your money — do you want to pay off loans? What about buying a rental property? Or are you aiming to retire before 50? So that’s the first thing you should ask yourself. What are your short-term needs? What do you want to accomplish in the next 5 to 10 years? What are you saving for long term? It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying and prioritizing your values and goals will act as a motivator as you dig into your financial details. Setting concrete goals may keep you motivated and accountable, so you spend less money and stick to your budget. Reminding yourself of your monetary goals may help you make smarter short-term decisions about spending and help to invest in your long-term goals. When you understand how your goal relates to what you truly value, you can use these values to strengthen your motivation. Standford Psychologist Kelly McGonigal recommends these questions to get connected with your ideal self:

  • What do you want to experience more of in your life, and what could you do to invite that/create that?
  • How do you want to be in the most important relationships or roles in your life? What would that look like, in practice?
  • What do you want to offer the world? Where can you begin?
  • How do you want to grow in the next year?
  • Where would you like to be in ten years?

Writing your goals out means you’ll be anywhere from 1.2 to 1.4 times more likely to fulfill them. Experts theorize this is because writing your goals down helps you to choose more specific goals, imagine and anticipate hurdles, and helps cement them in your mind.

2. Create a net worth statement—To create a successful plan, you first need to understand where you’re starting so you can candidly address any weak points and create specific goals. First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property. Now make a list of all your debts: mortgage, credit cards, student loans—everything. Subtract your liabilities from your assets and you have your net worth. Your ratio of assets to liabilities may change over time — especially if you pay off debt and put money into savings accounts. Generally, a positive net worth (your assets being greater than your liabilities) is a monetary health signal. If you’re in the plus, great. If you’re in the minus, that’s not at all uncommon for those just starting out, but it does point out that you have some work to do. But whatever it is, you can use this number as a benchmark against which you can measure your progress.

3. Review your cash flow—Cash flow simply means money in (your income) and money out (your expenses). How much money do you earn each month? Be sure to include all sources of income. Now look at what you spend each month, including any expenses that may only come up once or twice a year. Do you consistently overspend? How much are you saving? Do you often have extra cash you could direct toward your goals?

4. Zero in on your budget—Your cash-flow analysis will let you know what you’re spending. Zeroing in on your budget will let you know how you’re spending. Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes. Then write down nonessentials—restaurants, entertainment, even clothes. Does your income easily cover all of this? Are savings a part of your monthly budget? Examining your expenses and spending helps you plan and budget when you’re building an emergency fund. It will also help you determine if what you’re spending money on aligns with your values and what is most important to you.  An excellent method of budgeting is the 50/30/20 rule. To use this rule, you divide your after-tax income into three categories:

  • Essentials (50 percent)
  • Wants (30 percent)
  • Savings (20 percent)

The 50/30/20 rule is a great and simple way to achieve your financial goals. With this rule, you can incorporate your goals into your budget to stay on track for monetary success.

5. Create an Emergency Fund–Did you know that four in 10 adults wouldn’t be able to cover an unexpected $400 expense, according to U.S. Federal Reserve? With so many people living paycheck to paycheck without any savings, unexpected expenses might seriously throw off someone’s life if they aren’t prepared for the emergency. It’s important to save money during the good times to account for the bad ones. This rings especially true these days, where so many people are facing unexpected monetary challenges. Keep 12 months of essential expenses as Emergency Fund or a rainy day fund.  If you or your family members have a medical history, you may add 5%-10% extra for medical emergencies (taking cognizance of the health insurance cover) to the amount calculated using the above formula. An Emergency Fund is a must for any household. Park the amount set aside for contingencies in a separate saving bank account, term deposit, and/or a Liquid Fund.

6. Focus on debt management—Debt can derail you, but not all debt is bad. Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Don’t go overboard when taking out a home loan. It can be frustrating to allocate your hard-earned money towards savings and paying off debt, but prioritizing these payments can set you up for success in the long run. But, as a rule of thumb, the value of the house should not exceed 2 or 3 times your family’s annual income when buying on a home loan and the price of your car should not exceed 50% of annual income. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. This is called the debt-to-income ratio. If you stick to this ratio, it will be easier to service your loans/debt. Borrow only as much as you can comfortably repay. If you have multiple loans, it is advisable to consolidate all loans into a single loan, that has the lowest interest rate and repay it regularly.

“Before you pay the government, before you pay taxes, before you pay your bills, before you pay anyone, the first person that gets paid is you.” David Bach

7. Get your retirement savings on track—Whatever your age, retirement planning is an essential financial goal and retirement saving needs to be part of your financial plan. Although retirement may feel a world away, planning for it now is the difference between a prosperous retirement income and just scraping by. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. To build a retirement nest egg, aim to create at least 20 times your Gross Total Income at the time of your retirement. This is necessary to keep up with inflation. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference thanks to the power of compounding interest. Do not ignore ‘Rule of 72’ – As per this rule, the number 72 is divided by the annual rate of return on investment to determine the time it may take to double the money invested. There are several types of retirement savings, the most common being an IRA, a Roth IRA, and a 401(k):

  • IRA: An IRA is an individual retirement account that you personally open and fund with no tie to an employer. The money you put into this type of retirement account is tax-deductible. It’s important to note that this is tax-deferred, meaning you will be taxed at the time of withdrawal.
  • Roth IRA: A Roth IRA is also an individual retirement account opened and funded by you. However, with a Roth IRA, you are taxed on the money you put in now — meaning that you won’t be taxed at the time of withdrawal.
  • 401(k): A 401(k) is a retirement account offered by a company to its employees. Depending on your employer, with a 401(k), you can choose to make pre-tax or post-tax (Roth 401(k)) contributions. Calculate how much you will need and contribute to a 401(k) or other employer-sponsored plan (at least enough to capture an employer match) or an IRA.

Ideally, you should save 15% to 30% from your net take-home pay each month, before you pay for your expenses. This money should be invested in assets such as stocks, bonds and real estate to fulfil your envisioned financial goals. If you cannot save 15% to 30%, save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.

After retiring, follow the ‘80% of the income rule’. As per this rule, from your investments and/or any other income-generating activity, you need to generate at least 80% of the income you had while working. This will ensure that you can take care of your post-retirement expenses and maintain a comfortable standard of living. So make sure to invest in productive assets.

8. Check in with your portfolio—If you’re an investor, when was the last time you took a close look at your portfolio? If you’re not an investor, To start investing, you should first figure out the initial amount you want to deposit. No matter if you invest $50 or $5,000, putting your money into investments now is a great way to plan for financial success later on. Market ups and downs can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis. As a rule of thumb, your equity allocation should be 100 minus your current age – Many factors determine asset allocation, such as age, income, risk profile, nature and time horizon for your goals, etc. But you could broadly follow the formula: 100 minus your current age as the ratio to invest in equity, with the rest going to debt. And, never invest in assets you do not understand well.

  • Good health is your greatest need. Without good health, you can’t enjoy anything else in life.

9. Make sure you have the right insurance—As your wealth grows over time, you should start thinking about ways to protect it in case of an emergency. Although insurance may not be as exciting as investing, it’s just as important. Insuring your assets is more of a defensive financial move than an offensive one. Having adequate insurance is an important part of protecting your finances. We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Have 10 to 15 times of annual income as life insurance – If you are the bread earner of your family, you should have a tem life insurance coverage of around 10 to 15 times your annual income and outstanding liabilities. No compromise should be made in this regard. Review your policies to make sure you have the right type and amount of coverage. Here are some of the most important ones to get when planning for your financial future.

  • Life insurance: Life insurance goes hand in hand with estate planning to provide your beneficiaries with the necessary funds after your passing.
  • Homeowners insurance: As a homeowner, it’s crucial to protect your home against disasters or crime. Many people’s homes are the most valuable asset they own, so it makes sense to pay a premium to ensure it is protected.
  • Health insurance: Health insurance is protection for your most important asset: Your health and life. Health insurance covers your medical expenses for you to get the care you need.
  • Auto insurance: Auto insurance protects you from costs incurred due to theft or damage to your car.
  • Disability insurance: Disability insurance is a reimbursement of lost income due to an injury or illness that prevented you from working.

10. Know your income tax situation—Taxes can be a drag, but understanding how they work can make all the difference for your long-term financial goals. While taxes are a given, you might be able to reduce the burden by being efficient with your tax planning. Tax legislation tend to change a number of deductions, credits and tax rates. Don’t be caught by surprise when you file your last year’s taxes. To make sure you’re prepared for the tax season, review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information at https://www.irs.gov/tax-reform. Taking advantage of tax sheltered accounts like IRAs and 401(k)s can help you save money on taxes. You may also want to check in with your tax accountant for specific tax advice.

11. Create or update your estate plan—Thinking about estate planning is important to outline what happens to your assets when you’re gone. To create an estate plan, you should list your assets, write your will, and determine who will have access to the information. At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare. Medical directive forms are sometimes available online or from your doctor or hospital. Working with an estate planning attorney is recommended to help you plan for complex situations and if you need more help.

12. Review Your Plans Regularly–Figuring out how to create a financial plan isn’t a one-time thing. Your goals (and your financial standing) aren’t stagnant, so your plan shouldn’t be either. It’s essential to reevaluate your plan periodically and adjust your goals to continue setting yourself up for success. As you progress in your career, you may want to take a more aggressive approach to your retirement plan or insurance. For example, a young 20-something in their first few years of work likely has less money to put into their retirement and savings accounts than a person in their mid-30s who has an established career. Staying updated with your financial plan also ensures that you hold yourself accountable to your goals. Over time, it may become easy to skip one payment here or there, but having concrete metrics might give you the push you need for achieving a future of financial literacy. After you figure out how to create a monetary plan, it’s good practice to review it around once a year.

Additionally, take into account factors such as the following:

  • The number of years left before you retire
  • Your life expectancy (an estimate, based on your family’s medical history)
  • Your current basic monthly expenditure
  • Your existing assets and liabilities
  • Contingency reserve, if any
  • Your risk appetite
  • Whether you have adequate health insurance
  • Whether you have provided for other life goals
  • Inflation growth rate

A financial plan isn’t a static document to sit on — it’s a tool to manage your money, track your progress, and one you should adjust as your life evolves. It’s helpful to reevaluate your financial plan after major life milestones, like getting m arried, starting a new job or retiring, having a child or losing a loved one.

Financial planning is a great strategy for everyone — whether you’re a budding millionaire or still in college, creating a plan now can help you get ahead in the long run, especially if you want to make a roadmap to a successful future.

For additional financial planning resources to create your own financial plan, go to the MoneySense complete financial plan kit.

References:

  1. https://www.pewtrusts.org/en/research-and-analysis/articles/2017/04/06/can-economically-vulnerable-americans-benefit-from-financial-capability-services
  2. https://www.forbes.com/sites/forbesfinancecouncil/2020/05/26/your-mindset-is-everything-when-it-comes-to-your-finances/?sh=22f5cb394818
  3. https://www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan
  4. https://www.principal.com/individuals/build-your-knowledge/build-your-own-financial-plan-step-step-Guide
  5. https://mint.intuit.com/blog/planning/how-to-make-a-financial-plan/
  6. https://www.federalreserve.gov/publications/files/2017-report-economic-well-being-us-households-201805.pdf
  7. https://news.stanford.edu/news/2015/january/resolutions-succeed-mcgonigal-010615.html
  8. https://www.investec.com/content/dam/united-kingdom/downloads-and-documents/wealth-investment/for-myself/brochures/financial-planning-explained-investec-wealth-investment.pdf
  9. https://www.sec.gov/investor/pubs/tenthingstoconsider.html
  10. https://www.nerdwallet.com/article/investing/what-is-a-financial-plan
  11. https://www.axisbank.com/progress-with-us/money-matters/save-invest/10-rules-of-thumb-for-financial-planning-and-wellbeing
  12. https://twocents.lifehacker.com/10-good-financial-rules-of-thumb-1668183707

 

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

Investing Intelligently

Aside

As an investor, your general investing objectives are to grow your money and invest for the long-term.

Investing can seem challenging since there’s an overwhelming amount of investing information, choice of investment accounts, and strategies out there. Plus, the markets fluctuate and are volatile, and the idea of potentially losing money can create stress, fear and uncertainty.

The lesson for the investor: The fears you feel when you think about starting investing or during periods of market volatility are very similar to those many seasoned feel after decades of investing. The doubts. Negative thoughts. The fear and uncertainty that lead us to think about giving up. The encouragement you get from focusing on the future and your long-term goals. And the satisfaction of crossing goals of financial freedom that you thought were all but impossible.

Investing in stocks is an excellent way to grow wealth. For long-term investors, stocks are a good investment even during periods of market volatility — a stock market downturn simply means that many stocks are on sale. And for long-term investors, time tends to reward their behavior, though research has shown that it is as difficult to practice as it is uncommon.

Most investors never hold stocks long enough to benefit from the fact that the market rises over the long-term. Investors typically buy too late and sell too early. They routinely “greed in” and “panic out” of stocks. They hold stocks for just a few years — or worse, a few months — rather than carefully curating and diversifying a portfolio of stocks for the long-term, typically over decades.

https://youtu.be/hE2NsJGpEq4

By learning more about the process of investing in stocks, understanding the financial markets, and knowing what securities you are investing in— you can gain more confidence and understanding that you are on the right path, according to SoFi.

Investing your hard earned money

Historically, the return on stock investments has outpaced other asset classes like bonds and real estate, making them a powerful tool for those looking to grow their wealth over the long-term.

The average interest rate on a savings account at the top five U.S. banks this year was 0.08%, while the average return on the S&P 500 from 1950 through 2009 was 7%. So, what does this mean for your money? If you had $10,000 today and put it in a savings account with an interest rate of 1% (some banks have rates this high), you would have $11,046 in 10 years. If instead you took that money and invested it, earning an average annual return of 7% and compounding annually, you would have $19,672 in that same time period!

Everyone should have these two, what SoFi calls “bookend goals”, as their primary short-term and primary long-term goals:

  • Create an emergency fund and
  • Save for retirement

Getting started investing is simple.

Investing in stocks will allow your money to grow and outpace inflation over the long-term.

Investing is not just for the wealthy; it’s for anyone who wants to achieve their financial goals and achieve financial security. And your focus should be on the opportunities and rewards of achieving financial goals.

It’s important to understand your goals. Selecting an investment strategy depends on your goal amount (how much you want to save) and the time horizon (when you’d like to use that money).

Before you invest, you should make a list of all of your accounts (bank, investments, retirement, credit cards, other debt) and their interest rates. Know and calculate your personal net worth. And, know your cash flow. How much do you make after taxes? How much do you spend?

First goal: Emergency Fund

Your emergency fund is a cash account that you can easily access should an emergency arise—for example, if you face an unexpected health cost. This fund should be 6 -12 times the amount you spend monthly, depending on how risk-averse you are.

For example, if you’re unable to work, you may be comfortable with having three months saved. You want to keep your emergency fund money “liquid,” or available to access as soon as you need it. With that said, many savings accounts only pay you 0.01% interest on cash balances. This doesn’t keep pace with inflation, so you’re essentially losing money. Instead, you might consider opting for a high-yield savings account that earns 1% interest or more.

Ultimate goal: Retirement

Retirement should be your highest priority and your largest financial goal. Even if it feels very far away, it’s important to start saving early, diligently and purposely. You may share the same priority and retirement goals as many retirees, such as:

  • Essential Living Expenses
  • Reserves in an emergency fund to cover unexpected expenses
  • The stuff that brings joy, emotional well-being, and provides purpose like vacations and spending time with others
  • Leaving a legacy for your family, a charity, or something else

Remaining financially independent and understanding ways to ensure there is enough money to last a lifetime is of great importance to retirees.

https://twitter.com/tdameritrade/status/1362095933387927562

Let’s say you and your partner will need $6,000 per month in retirement income (in today’s dollars). If you start saving at 40, you would need to save $46,000 per year to be on track for retirement at 67. However, if you start saving at 30, you need to save $32,000 per year. (Note: This assumes you’ll both receive Social Security.) This illustrates the importance of starting early and giving your money time to work for you.

Need to catch up? It’s never too late! You may need to save more or be more aggressive, but the most important step is to start saving (and investing) as soon as possible.

Investing should be for long-term goals

If you’re investing for a far-off goal, like retirement, you should be invested primarily in stocks or stock mutual funds and ETFs.

This is an important lesson for the investor: When you think about investing, you usually feel that you know exactly what you are looking for. In your mind, you have defined the plan that will lead to success and you begin to execute it hoping to be able to fulfill it to the letter. The truth is, it rarely happens. The path of the investor is full of surprises, of unintended consequences that you did not appreciate, of outcomes that you did not expect to face. Let yourself be surprised by them, live them and just like the best investors do, dare to take the first step that could take you to achieve financial freedom in retirement.

To start investing for retirement, most financial experts and institutions advise you to invest in an employer-sponsored tax deferred retirement plans. There are several investing options for longer-term goals like retirement and college, according to Navy Federal Credit Union. Here are a few you may consider:

  • As part of your employee benefits package, you may be offered a retirement plan such as a 401(k), 403(b), or 457 plan, Thrift Savings Plan (TSP), or pension. Your contributions to an employee-sponsored plan aren’t taxed until they’re withdrawn in retirement, and your contributions may even be partially matched by your employer.
  • Individual retirement accounts (IRAs): IRAs can operate standalone or in addition to an employer-sponsored plan. Depending on the type of IRA you have, you’ll either pay taxes when you contribute (as with a Roth IRA) or when you withdraw (as with a traditional IRA). A Roth retirement account that allows individuals to pay taxes on contributions to the plan at the time they are made, but when funds are withdrawn during retirement, they are tax-free.
  • 529 college savings plans: 529 plans allow you to make large contributions, some with limits beyond $300,000, with withdrawals used for qualified K-12 and college expenses free from federal income taxes. These plans are a great way to save no matter your level of income or timeline for your or your child’s academic career.
  • Coverdell education savings accountA trust account designed to help fund educational expenses for individuals under age 18. The maximum yearly contribution is $2,000.
  • (ESA): ESAs let you save for school with a greater variety of investment options than 529 plans. If your gross income is under $110,000 (or $220,000 on a joint return), you can set aside up to $2,000 a year for college or K-12 expenses.
  • Brokerage accounts: Brokerage accounts allow you to purchase and sell investments, including stocks, bonds and mutual funds, through a brokerage firm. These investments aren’t insured and are subject to taxation, but you may be able to earn more in returns than with other savings vehicles, and you can use the money for any purpose, such as for retirement.

And, do not be too conservative or risk adverse with your investments. The most successful investors have done little more than stick with stock market basics. That generally means using a low cost S&P 500 index fund for the majority of your portfolio and choosing individual stocks only if you believe in the company’s potential for long-term growth.

Your Tolerance for Risk

“Practice patience in stock investing and give your investments a chance to grow into mighty oaks.”

Learning to invest means learning to weigh potential returns against risk, according to TD Ameritrade. Basically, no investment is absolutely safe, and there’s also no guarantee that an investment will work out in your favor.

Furthermore, the risk of losing money can be daunting and upsetting to typical retail investors. This is why it’s important for you to know your risk tolerance level.  When it comes to your choice of assets, it’s important to understand that some securities are riskier than others. This holds true for both equity and debt securities (i.e., “stocks and bonds”).

Consequently, the best thing to do after you start investing in stocks, ETFs or mutual funds may be the hardest: Don’t look at them. It’s good to avoid the habit of compulsively checking how your stocks are doing several times a day, every day. Instead, stay focused on your values and long-term goals. and periodically check your investments.

Additionally, the toughest thing in stock investing is to do nothing. That’s right, nothing! Once you buy a stock and watch it move up, down and all around for a few weeks, there is an urge to take action.

Most investors lack patience, which is a shame, because almost every successful investor you’ll ever meet or read about has an abundance of patience. You should wait for the right time to buy. And, being patient means you are the best prepared when opportunities emerge.

Many times, the stocks you purchase don’t move much in price for many weeks after your initial purchase. But if you have the patience to stick with those stocks, a few can turn out to be huge winners. And in the end, those big winners are what make all the difference.

References:

  1. https://d32ijn7u0aqfv4.cloudfront.net/wp/wp-content/uploads/20170718165706/Guide-to-Investing-Intelligently_V5-1.pdf
  2. https://www.navyfederal.org/makingcents/knowledge-center/financial-literacy/actively-saving/saving-for-longer-term-goals.html
  3. https://www.nerdwallet.com/article/investing/how-to-invest-in-stocks
  4. https://www.debt.org/advice/debt-snowball-method-how-it-works/
  5. https://tickertape.tdameritrade.com/investing/learn-to-invest-money-17155
  6. https://cabotwealth.com/lessons/practicing-patience-stock-investing/

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

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.

Stimulus, Inflation, Unsustainable Debt and America | Fidelity Investments and Peterson Foundation

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“America has been on an unsustainable fiscal path for many years, since long before this pandemic.” The Peter G. Peterson Foundation

  • The new $1.9 trillion stimulus spending package, on top of trillions already spent to revive the economy, is driving the national debt to unprecedented levels.
  • History shows that high government debt often leads to inflation, and an uptick in inflation is expected this year as the economy recovers.

The $1.9 trillion federal stimulus package will help many families, businesses, and state and local governments hard hit by the pandemic. But it is also fueling concerns about the ballooning federal debt, inflation, and how investors can protect themselves.

The Congressional Budget Office projected that the federal budget deficit will rise during the second half of the decade and climb steadily over the following 20 years.  By 2051, the federal debt is expected to double as a share of the economy.

The projections by the nonpartisan office forecast a more challenging long-term outlook, as interest costs on the national debt rise and federal spending on health programs swells along with an aging population.  “A growing debt burden could increase the risk of a fiscal crisis and higher inflation as well as undermine confidence in the U.S. dollar, making it more costly to finance public and private activity in international markets,” the CBO report said.

Our federal fiscal budget has structural problems, driven by well-known and predictable factors that include an aging population, rising healthcare costs and compounding interest—along with insufficient revenues to meet our commitments, according to The Peter G. Peterson Foundation.

Over the last 20 years, the federal government’s debt has grown faster than at any time since the end of World War II, running well ahead of economic growth. In addition to COVID-related spending, rising federal debt has been driven by longer-term trends including increasing Social Security and Medicare spending for an aging population. Today, according to the Congressional Budget Office, the federal debt is $22.5 trillion, more than 100% of gross domestic product (GDP).

Why debt matters

New Fidelity research suggests that higher debt can slow economic growth, and ultimately lead to higher inflation and more volatile financial markets. Warns Dirk Hofschire, senior vice president of asset allocation research at Fidelity Investments: “Debt in the world’s largest economies is fast becoming the most substantial risk in investing today.”

In the short term, Fidelity’s director of global macro Jurrien Timmer says a market consensus has emerged that inflation will rise in the second half of 2021: “An inflationary boom could result from the combination of COVID infections falling, vaccinations rising, ongoing massive fiscal stimulus, pent-up consumer demand, and low interest rates.”

FEDERAL DEBT IS ON AN UNSUSTAINABLE PATH

Longer term, Hofschire says, “The rise in debt is unsustainable. Historically, no country has perpetually increased its debt/GDP ratio. The highest levels of debt all topped out around 250% of GDP. Since 1900, 18 countries have hit a debt/GDP level of 100%, generally due to the need to pay for fighting world wars or extreme economic downturns such as the Great Depression. After hitting the 100% threshold, 10 countries reduced their debt, 7 increased it, and one kept its level of debt roughly the same.”

Only time will tell which way the US goes and when. But Hofschire thinks “government policies are likely to drift toward more inflationary options.” Among them:

  • Federal spending aimed at lower- and middle-income consumers
  • Increased public works spending not offset by higher taxes
  • Protectionist measures with a “made in America” rationale
  • Infrastructure upgrades targeting sectors such as renewable energy, 5G telecom, and health care
  • Higher inflation targeting by the Federal Reserve
  • Mandatory pay increases for workers benefiting from government assistance

In the longer term, if further free-spending fiscal policies are adopted while interest rates stay low and credit remains abundant, the likelihood of inflation could increase. But history suggests the magnitude and timing is uncertain. Many predicted an inflation surge the last time the federal government embarked on major fiscal and monetary stimulus after the global financial crisis, but inflation mostly failed to appear.

THE GROWING DEBT IS CAUSED BY A STRUCTURAL MISMATCH BETWEEN SPENDING AND REVENUES according to The Peterson Foundation

Why the national debt matters, according the The Peter G. Peterson Foundation:

  • High and rising federal debt matters because it reduces the county’s flexibility to plan for and respond to urgent crises.
  • Debt matters because growing interest costs make it harder to invest in our future — to build and sustain infrastructure, enhance education and support an economy that creates job growth and rising wages.
  • Debt matters because it threatens the safety net — critical programs like Social Security, Medicaid, Medicare, SNAP and Unemployment Compensation are essential lifelines for the most vulnerable populations.
  • Debt matters because America faces emerging and ongoing challenges that will require fiscal resources to keep the country safe, secure and strong — challenges like socioeconomic injustice, climate change, affordable health care, wealth and income inequality, international conflicts and an increasingly complex and competitive global economy.
  • Debt matters because the nation should care about its children and grandchildren. Borrowing more and more today reduces the opportunities and prosperity of the next generation.

The U.S. faces a range of complex, unprecedented health, economic and societal challenges, set against the backdrop of a poor fiscal outlook that was irresponsible and unsustainable before the crisis.

Building a brighter future for the next generation must become an essential priority for America, and the high cost of this health and economic crisis only makes that challenge more urgent. Once America has emerged from the pandemic, it will be more important than ever for its elected leaders to address the unsustainable fiscal outlook and manage the burgeoning national debt, to ensure that America is more prepared, better positioned for growth, and able to meet its moral obligation to future generations.

References:

  1. https://www.cbo.gov/publication/57038
  2. https://www.fidelity.com/learning-center/personal-finance/government-spending-2021?ccsource=email_weekly
  3. https://www.pgpf.org/what-does-the-national-debt-mean-for-americas-future

* The Peter G. Peterson Foundation is a non-profit, non-partisan organization that is dedicated to increasing public awareness of the nature and urgency of key fiscal challenges threatening America’s future, and to accelerating action on them. To address these challenges successfully, we work to bring Americans together to find and implement sensible, long-term solutions that transcend age, party lines and ideological divides in order to achieve real results.

Investing is a marathon

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

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

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

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

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

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

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

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

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

Invest in stocks.

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

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

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

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

The power of compounding

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

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

Purchasing power protection

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

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

Invest for the long term.

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

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

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

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

References:

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

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

Stay Invested – Time in the Markets

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

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

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

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

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

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

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

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

Missing the best days

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

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

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

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

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

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

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

References:

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

Investing for the Long Term

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

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

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

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

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

Patience

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

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

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

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

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

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

Missing the best days

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

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

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

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

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

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

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

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

The power of compounding

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

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

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

Tax control advantages

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

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

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

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

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

References:

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

Beginner’s Guide to Investing

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

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

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

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

Step 1: Pay Off Bad Debt and Avoid Money Traps

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

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

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

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

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

Step 2: Create an Emergency Fund

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

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

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

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

Step 3: Learn the Investing Basics

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

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

Step 4: Embrace a Positive Investing Mindset

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

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

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

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

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

Step 5: Create an Investment Plan

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

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

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

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

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

Step 6: Decide What Type of Investment to Make

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

Step 7: Establish Your Investing Strategy

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

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

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

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

Step 8: Determine Where To Invest

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

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

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

Step 9: Build a Stock Watchlist

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

To build a watchlist, you need to do your research

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

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

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

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

Practice Patience and Wait

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

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

Investing Tip: Check Your Emotions

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

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

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

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

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

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

Step 10: Know When to Buy Your Stocks

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

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

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

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

References:

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