Successful Long Term Investing

Posted on May 23, 2021 by admin

“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.” Warren Buffett

You need courage, a long term focus, and the discipline to adhere to a long term plan to buy stocks when the markets are turbulent, stock prices are melting down, and the economy is in a deep slump, and the outlook for corporate earnings over the subsequent quarters is unfavorable. In Warren Buffett’s view, “Widespread fear is your friend as an investor because it serves up bargain purchases.” Thus, smart long-term investors love when the prices of their favorite stocks fall, as it produces some of the most favorable buying opportunities. According to Buffett, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.” Warren Buffett

Warren Buffett

Additionally, investors must focus on the long term — a minimum of seven to ten years — and look for high-quality, blue-chip companies that have fortress like balance sheets and can generate extraordinary free cash flow. In the short term, equity markets tend to swing wildly from day to day on the smallest of news, trend and sentiment, and celebrate or vilify the most inane data points. It’s important not to get caught up in the madness but stick to your homework. Warren Buffett quipped that, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

Invest in well-managed, financially strong businesses that sell goods and services for which demand is consistently strong (think food, consumer goods, and medicines), since it’s essential to keep capital preservation and margin of safety at the top of your priority list when deciding how to invest your money. As Buffett says, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

Businesses that are well managed and that have strong balance sheets typically display certain characteristics:

They carry little or no debt.
They generate enough free cash flow (earnings plus depreciation and other noncash charges, minus the capital outlays needed to maintain the business) that they don’t have to raise equity or sell debt.
They have a proven history of management excellence.
They have abundant opportunities for reinvesting capital (or clear policies for returning excess capital to shareholders), and their leaders boast an outstanding record of allocating capital.
They have a durable competitive advantage which could mean cost advantages, a strong brand name, or something else.
In addition, they are global in scope. After all, 95% of the world’s population lives outside the U.S., and economic growth is likely to be greater abroad than at home.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Warren Buffett

To be a successful long term investor, it’s essential to filter out the short-term noise. Most of the chatter from Wall Street and in the financial entertainment media headlines is just that: chatter you can and should ignore. “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. According to Buffett, “Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” Warren Buffet

If You’re Not Investing You’re Doing it Wrong

“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” Warren Buffett

Investing in equities delivers higher returns than bond or cash investments over the long term but is accompanied by a higher exposure to market risk. Investing in fixed income investments offers more modest return potential and risk exposure. Investors can invest in cash as a low- risk, low-return strategy, which is ideal for short-term savings goals or to balance out the risks of stock and bond investments. Ideally, investors’ asset allocations should reflect their goals, risk tolerance, time horizon, income and wealth, and other personal factors.

“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” Warren Buffett

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Long-Term Investing

Posted on May 18, 2021 by admin

“Finding success as a long-term investor requires navigating a psychological minefield.”. Ben Carson, Director of Institutional Asset Management at Ritholtz Wealth Management.

Everyone would agree that the stock market has been highly volatile since the turn of the 21st century, experiencing crashes of 50%, 57% and 34% since 2000. It’s possible this level of heightened volatility is going to remain for the foreseeable future with an assist from the internet, rising sovereign debt and inflation.

Investing for the long-term implies that you set aside money today so you can have more money in the future. But getting to whatever the “long-term” means to you requires seeing the present value of your holdings fall, sometimes in soul-crushing fashion.

In the coming 40-50 years, you should expect to experience at least 10 or more bear markets, including 5 or 6 that constitute a market crash in stocks. There will also probably be at least 7-8 recessions in that time as well, maybe more.

However, you can never be sure of anything when it comes to the equity markets or the U.S. economy, but let’s use history as a rough guide on this. Over the 50 years from 1970-2019, there were 7 recessions, 10 bear markets and 4 legitimate market crashes with losses in excess of 30% for the U.S. stock market. Over the previous 50 years from 1920-1969, there were 11 recessions, 15 bear markets, and 8 legitimate market crashes with losses in excess of 30% for the U.S. stock market.

Bear markets, brutal market crashes and recessions are a fact of life as an investor. They are a common and expected feature of the financial system.

If you’re investing in the stock market that means you should plan on losing at least 10% of your money once every 1-2 years, on average. You should also plan on losing 20% of your capital once every 3 or 4 years, 30% once every 6 or 7 years and 40% or worse every 10-12 years.

These time frames aren’t set in stone since actual stock market returns are anything but average but you get the point. If your money is invested in the stock market for the long-term, expect it to grow over time but also evaporate without warning on occasion.

The same applies to pretty much any risk asset.

References:

Investing – How to Get Started

Posted on May 15, 2021 by admin

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.” Robert Kiyosaki, Rich Dad Poor Dad

Investing, which involves putting your money to work, is a great first step toward building wealth for yourself and your family. If you think investing is gambling, you’re doing it wrong. The world of investing requires discipline, planning and patience. And, the gains you see over decades can be exciting. The three most common categories of investments, referred to as asset classes, include:

Stocks – which are a share in a company. These tend to be riskier investments, but also typically offer more potential for profit over time.
Bonds – which are a share of debt issued by a business or the government. These are safer investments, typically returning a lower profit than stocks over time.
Cash and cash equivalents – which are readily available cash and short-term investments like certificates of deposit (CDs). These are the safest investments, but typically return little profit over time.

Before you start investing, it is important for you to understand a few basic concepts and definitions, such as:

Risk Tolerance

Risk tolerance is basically your emotional ability to deal with losing money. If you invested $1,000 today, could you deal with it being worth $500 for a period of time? That’s possible if you invest heavily in stocks, which tend to increase in value over time but can be volatile from one day to the next. If you answered yes to being okay losing a great deal of money for a period of time, then you have a high risk tolerance.

Time Horizon

Time horizon is the amount of time before you want to use your money. If you’re planning to use the money to make a down payment on a home within the next three years, you have a short time horizon and would likely have less risk tolerance. If you’re not planning to use the money until you retire in 30 years, then you have a long time horizon and can afford to take on more risk.

Asset Allocation

Asset allocation is the percentage of stocks, bonds or cash you own. If you have a high risk tolerance and long time horizon, you’re likely to want a larger percentage of stocks because you’ll be able to weather ups and downs and make more money over the long term. On the other hand, if you have a low risk tolerance and short time horizon, you probably want more cash and bonds so that you don’t lose money right before you need it.

Stocks, bonds and cash tend to respond differently to market conditions (one may go up when the others go down). Asset allocation helps you spread your money so that when one asset class unexpectedly zigs, your whole portfolio doesn’t zig along with it. In this way, asset allocation can help ensure your portfolio is correctly positioned to help you reach your financial goals, no matter what is happening in the market.

Diversification

Diversification splits your investments among different groupings or sectors in order to reduce risk. That includes your asset allocation. But it also includes where you invest within asset classes. For instance, you might diversify between stocks in companies located within the United States and stocks in companies located in Asia.

Different sectors of the economy do better at different times. It’s tough to predict which one will do well in any given year. So when you diversify and own stocks across different sectors, you are positioned to make money on whatever sector is performing well at the time. A well-diversified portfolio can help lessen the impact of market ups and downs on your portfolio.

Rebalancing

If you’ve done a good job with asset allocation and diversifying, then the balance of your portfolio is likely going to get out of whack over time as one sector does better than another. For instance, let’s say you wanted 10 percent of your stocks to be companies in Asia. If companies in Asia have a great year, those companies may now make up 15 percent of your stocks. In that case you’ll want to sell some of those stocks and use that money to buy more stocks (or even bonds) in parts of your portfolio that didn’t do as well.

Rebalancing on a regular basis (once or twice a year, for example) can help ensure your portfolio remains aligned with your goals. And because it provides a disciplined approach to investing, portfolio rebalancing also may prevent you from buying or selling investments based on emotion.

Dollar Cost Averaging

Dollar cost averaging (DCA) involves putting your investment plan on autopilot. With DCA, you invest a set amount at set intervals (for example, $200 every month) in the market. By investing systematically, you’ll buy more shares of an investment when the market is lower, fewer when the market is higher, and some when the market is in between. Over time, this may help you to pay a lower average price for the total shares you purchase.

DCA takes the emotion out of investing, helping you to start on your investment plan sooner, rather than later. And once you begin, DCA can also help you remain focused on your goals, no matter what’s happening in the market. It helps make investing a habit.

Capital Gains

Capital gains is an increase in the value of an asset or investment over time. Capital gains is measured by the difference between the current value, or market value, of an asset or investment and its purchase price, or the value of the asset or investment at the time it was acquired {cost basis}.

Realized capital gains and losses occur when an asset is sold, which triggers a taxable event. Unrealized gains and losses, sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment’s value but are not considered a capital gain that should be treated as a taxable event.

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Fiscal Fact: The average white household had $402,000 in unrealized capital gains in 2019, compared with $94,000 for Black households and $130,000 for Hispanic or Latino households. These disparities have generally widened over time. Source: Tax Policy Center https://www.taxpolicycenter.org/fiscal-fact/unrealized-capital-gains-ff-05102021

Capital gains are classified as either short-term or long-term. Short-term capital gains, defined as gains realized in securities held for one year or less, are taxed as ordinary income based on the individual’s tax filing status and adjusted gross income. Long-term capital gains, defined as gains realized in securities held for more than one year, are usually taxed at a lower rate than regular income.

“If you want to become really wealthy, you must have your money work for you. The amount you get paid for your personal effort is relatively small compared with the amount you can earn by having your money make money.” John D. Rockefeller

Before you start investing or putting your money to work for your, do your homework and research. Once you’ve made a decision, make sure to re-evaluate the assets in your portfolio on a regular basis. A good asset today may not necessarily be a good asset in the future.

And, don’t panic during the inevitable setbacks and don’t be fearful during the inevitable stock market corrections that all long-term investors face. If the reasoning behind the investment decision was sound when purchased, stick with the assets, and they should eventually recover and grow.

References:

Goals

Posted on May 12, 2021 by admin

“Most people don’t know what they want.” Jim Rohn

You can’t ask for what you want unless you know what it is you want, according to Mark Victor Hansen, co-author for the Chicken Soup for the Soul. And, the first step to creating a goal is to figure out what you want. If you don’t know what you want, you don’t know what you need to achieve to get there.

Creating a list of financial goals is necessary for managing money and financial success. When you have a clear picture of what you’re aiming for, working towards your target is easy. That means that your goals should be measurable, specific and time oriented.

There are several types and timeframes of financial goals:

Short term financial goals – These are smaller financial targets that can be reached within a year. This includes things like a new television, computer, or family vacation.
Mid-term financial goals – Typically take about five years to achieve. A little more expensive than an everyday goal, they are still achievable with discipline and hard work. Paying off a credit card balance, a loan or saving for a down payment on a car are all mid-term goals.
Long-term financial goals – This type of goal usually takes much more than 5 years to achieve. Some examples of long term goals are saving for a college education or a new home.

The concept of setting “goals” can be intimidating to many individuals. It can feel so overbearing that it keeps people from even beginning the process settling goals.

Instead, a better way is to think of goals as a to-do list with deadlines and for the rest of your life. Goals can be added, subtracted and, most important, scratched off the list as you move through your life.

The major reason for setting a goal is for what it makes you do to accomplish the goal. This will always be a far greater value than what you get. That is why goals are so powerful—they are part of the fabric that makes up our lives.

“Research says that merely writing your goals down makes you 42% more likely to achieve them.”

Goal setting provides focus, provides a deadline and measurement for your dreams, and gives you the ability to hone in on the exact actions you need to take in order to get everything in life you desire.

Goals are exciting because they provide focus and aim for your life. Goals cause you to stretch and grow in ways you never have before. In order to reach your goals, you must most do thing differently, you must become better; you must change and grow.

A powerful goal has components:

It must be inspiring.
It must be believable.
It must have written targets and you must measure progress against those targets.
It must be one you can act on.

When your goals inspire you, when you believe and act on them, you will accomplish them.

Achieving financial goals takes a little more than just luck.

It requires extreme discipline, dedication, and repeated sacrifice. It means setting short- and long-term financial goals and then following through on them. Unfortunately, these are things with which the majority of Americans seem to struggle.

Research, however, suggests that simply writing out a list of financial goals makes a person 42% more likely to achieve them, according to a study done by Gail Matthews at Dominican University.

#goals #dreams #success #mindset #mondaymotivation pic.twitter.com/VDIPqBmyGN

— Mark Victor Hansen (@MarkVHansen) May 10, 2021

It is widely known and accepted that if you want to achieve something, you had better set a goal.

However, very few Americans actually do or even know how to set financial goals. According to Schwab’s Modern Wealth Index, only 25% of people have some sort of written plan or goals. What’s worse, the Financial Health Network finds that only 29% of Americans are financially healthy.

Don’t wait for financial success to come knocking. Achieving your goal like affording a house, paying college tuition, or ultimately funding retirement, will most likely be on you.

References:

Avoiding Investing Mistakes

Posted on April 30, 2021 by admin

“You have to learn how to value businesses and know the ones that are within your circle of competence and the ones that are outside.” Warren Buffett

Research shows that most active investors underperform the market over the long-term, according to CNBC. In reality, profitable day traders make up a very small proportion of all traders. Only 1.6% of all day traders are profitable in an average year, according to an Haas School of Business University of California, Berkeley, study. This means that’s roughly ninety-nine out of every one-hundred day traders fail and lose money. And, “overconfidence can explain high trading levels and the resulting poor performance of individual investors,” Brad M. Barber and Terrance Odean of the University of California, Berkeley concluded.

These facts makes it clear that the odds are stacked against the ordinary retail trader or investor. Thus, you have to tread carefully if you want to achieve success over the long term.

Building an investment framework

Multitudes of successful investors, including both Berkshire-Hathaway’s billionaires Warren Buffett and Charlie Munger, believe it is essential to avoid high-risk equity investments at all costs. This means avoiding investments and businesses that have a high chance of failure. It also means avoiding any companies that are difficult to understand or fall outside of your circle of competence.

Following a few basic guidelines can help any investor avoid significant losses from struggling and failing companies.

Another piece of investing advice is not to overpay for companies. If you don’t understand the value or how to value a business, then that is a pretty clear indication that it does not fall inside your circle of confidence, and thus, it might be better to avoid the investment. Buffett believes that the market will eventually favor quality stocks that were undervalued (margin of safety) for a certain time.

Finally, investors shouldn’t rush to get rich quick and they should follow an investment plan and rules. Investors who rush to get rich tend to take unnecessary risks such as borrowing money to purchase stocks, buying stocks they don’t understand or allocating capital to opportunities that seem too good to be true. Moreover, research continues to show that investors who stick with a comprehensive long-term investing plan tend to outperform those who collect stocks and constantly jump in and out of the market. All of these actions can lead to significant losses.

The key investment principle of not being in a rush helps ensure you’re not rushing into anything you don’t understand or taking on too much risk. In short, being patient and not rushing into investments is a very low-tech and straightforward way of trying to eliminate mistakes.

By following this advice, an investor may be able to improve their process and outcome.

In the words of arguably the world’s most successful long-term investor, Buffett states, “We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

References:

Saving and Investing

Posted on April 24, 2021 by admin

“The easiest way to wealth are saving and investing in your mind and in appreciating assets.”

Save and invest today for the life and financial freedom you want later. Investing for the long-term is the only way to truly build wealth and achieve financial freedom.

Retirement doesn’t mean what it used to for a lot of Americans. It used to be something you could count on — and when it came, you were going to pursue the goals and lifestyle you dreamed about and love.

Today, many Americans don’t believe that they will retire, while others are not waiting until retirement and are doing what they love now.

Regardless of your unique circumstances or life’s priorities, it important to save and invest now so later the resulting financial freedom will allow you – in a tax advantaged way – to enjoy a better and happier life later.

The easiest and most effective way to save is automatically.

Start small, think BIG: Even a little savings can go a long way! You can start with a small amount, and you can save daily, weekly, or monthly for ANY savings goal you have.

Set your goal and start saving today! 👏 pic.twitter.com/fE5Lxel2iB

— America Saves (@AmericaSaves) April 1, 2021

A smart investor:

Plans for life’s unexpected challenges and investing in uncertain times
Conducts research on a product before investing
Assesses the impact of fees when choosing an investment
Understands that risk exists in all investments
Avoids “get rich quick” and “can’t lose” schemes
Recognizes the power of compound interest
Recognizes the importance of diversification
Plans for and invests according to his/her future needs and goals
Recognizes the benefit of long-term, regular and diversified investment
Verifies that an investment professional is licensed

Establish Emergency Savings

Unexpected emergencies often sabotage our financial goals, so getting in a savings mindset and building an emergency fund is crucial. Start small and think big by setting a goal of a $500 rainy day fund. Once you’ve reached that goal, it will be easy to continue!

Open Your Savings Account

If you don’t have a savings account, now’s the time! Ensure your savings account is federally insured with a reputable financial institution with no fees (or low fees).

Set up Automatic Savings

The easiest way to save is to save automatically!

Choose the amount you would like to automatically save each period. Even $10-50 of your paycheck, weekly or bi-weekly, can provide substantial savings over time.

Contact your employer to set up a direct deposit into your savings account each pay period or set up an automatic transfer from your checking account to your savings account at your financial institution.

Even small amounts, saved automatically each pay period, make a big difference.

Q8. How do good saving habits affect your creditworthiness? #CreditChat #ASW2021 pic.twitter.com/Ve9vKkRr1o

— Experian (@Experian) February 24, 2021

Get Serious About Reducing Your Debt

Paying down debt is saving!

When you pay down debt, you save on interest, fees, late payments, etc. Not only that, by having savings you’re less likely to need credit for emergencies – allowing you to keep a lower credit usage percentage.

When you reduce your debt, you save on interest and fees while maintaining or improving your credit score! Create a debt reduction plan that works best for you. Utilize America Saves resources to see the different options to pay down debt.

Get Clear On Your Finances

Create a Spending and Savings Plan that allows you to easily see your income, expenses, and anything leftover. Once you have a clear view of your finances, you can determine where to make changes and what else you should be saving for based on your financial goals.

It’s always the right time to create a saving and spending plan (aka a budget). It’s also a good idea to revisit that plan annually or when a major shift occurs in your income or expenses.

Here are several tips to help ensure that your money is working smarter and harder for you.

Step 1. Determine your income.

To create an effective budget, you need to know exactly how much money you’re bringing in each month. Calculate your monthly income by adding your paychecks and any other source of income that you receive regularly. Be sure to use your net pay rather than your gross pay. Your net pay is the amount you receive after taxes and other allocations, like retirement savings, are deducted.

Step 2. Determine your net worth which is your assets minus your liabilities

Net worth is assets minus liabilities. Or, you can think of net worth as everything you own less all that you owe.

Calculating your net worth requires you to take an inventory of what you own, as well as your outstanding debt. And when we say own, we include assets that you may still be paying for, such as a car or a house.

For example, if you have a mortgage on a house with a market value of $200,000 and the balance on your loan is $150,000, you can add $50,000 to your net worth.

Basically, the formula is:

ASSETS – LIABILITIES = NET WORTH

And by the way, your income is not included in a net worth calculation. A person can bring home a big paycheck but have a low net worth if they spend most of their money. On the other hand, even people with modest incomes can accumulate significant wealth and a high net worth if they buy appreciating assets and are prudent savers.

Step 3. Track your cash flow which is both your expenses and your spending.

This step is essential. It’s not enough to write out your actual expenses, like rent or mortgage, food, and auto insurance, you must also track what you are spending.

If you’ve ever felt like your money “just disappears,” you’re not the only one. Tracking your spending is a great way to find out exactly where your money goes. Spending $10 a day on parking or $5 every morning for coffee doesn’t sound like much until you calculate the total cost per month.

Tracking your spending will help you pinpoint the areas you may be overspending and help you quickly identify where you can make cost-efficient cuts. Once you’ve written out your expenses and tracked your spending habits, you’re ready for the next step.

Step 4. Set your financial goals.

Now you get to look at your present financial situation and habits and decide what you want your future to look like. Ask yourself what’s most important to you right now? What financial goals do you want to achieve?

Some common goals include building an emergency fund, paying down debt, purchasing a home or car, saving for education, and retirement.

Step 5. Decrease your spending or increase your income.

What if you set your financial goals and realize there’s not enough money left at the end of the month to save for the things you want?

You essentially have two choices. You can either change the way you manage your current income or add a new source of income. In today’s gig economy, it’s easier than ever to add a stream of income, but we know that everyone’s situation is different, and that’s not always an option.

Even if you can add income, you may have identified some spending habits you’d like to change by decreasing how much you spend.

Take a look back at your expense tracking. For the nonessential items, consider reducing your spending. For example, if you find that you are spending quite a bit on entertainment, like movies or dining out, reduce the number of times you go per month.

Then apply the money that’s been freed up to your savings goals.

For more ideas on how to increase your savings, read 54 Ways to Save.

Step 6. Stick to your plan.

Make sure you stick to your spending and savings plan. To make saving more efficient, set up automatic savings so that you can set it and forget it! Saving automatically is the easiest way to save.

Reassess and adjust your plan whenever you have life changes such as marriage, a new baby, a move, or a promotion.

Following your plan ensures that you’re financially stable, are ‘thinking like a saver,’ and better prepared for those unexpected emergencies.

The top 10 investing terms people Google the most https://t.co/15SdaKrH8h

— ELB (@ebrownl33) March 17, 2021

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Investing is a marathon

Posted on March 20, 2021 by admin

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.

Take a closer look at why we recommend staying invested long-term, with a strategy that aligns with your financial goals. https://t.co/HT8CZyTGxk pic.twitter.com/FgV4FaBS94

— Edward Jones (@EdwardJones) December 21, 2020

References:

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.

Investing for the Long Term

Posted on March 15, 2021 by admin

“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.

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.

“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.

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Long-Term Investors Have Almost Always Experienced Positive Returns

Posted on January 12, 2021 by admin

S&P 500 rolling returns have been almost always positive over the long-term.

One of the best ways to invest is over the long term and it’s more important than ever to focus on long-term investing. It’s long-term investing strategy where investors can accumulate wealth. By investing long term, you can meet your financial goals and increase your financial security.

94% of 10-year rolling returns have been positive since 2000.

Rolling returns are measured over consecutive periods starting with the earliest period and finishing with the most recent. For example, the period of measure for a 10-year rolling return for an investment as of the end of February, would be 03/01/2010 through 02/29/2020.

Source: Bloomberg Finance L.P. as of 02/28/2020. Past performance does not guarantee future results. The referenced index is shown for informational purposes only and is not meant to represent the Fund. Investors cannot directly invest in an index.

Investing and learning to think long-term

While many investors of all ages think of investing as trying to time the market to make a short-term return on their investment, investing for the long-term investing is one of the best ways and a proven strategy for investor to accumulate wealth over time and achieve financial security. But the first step is learning to think long term, and avoiding obsessively following the markets daily ups and downs.

Do you hold long term investments in your portfolio? Over most 20 year periods, the S&P 500 has had positive returns for investors. Long term holding limits emotional trading and almost always outperforms the market compared to trying to time the market. pic.twitter.com/0E950P80n3

— OptionsSwing (@OptionsSwing) January 7, 2021

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Financial Planning and Market Volatility

Posted on January 8, 2021 by admin

“The first rule of investment is ‘buy low and sell high’, but many people fear to buy low because of the fear of the stock dropping even lower. Then you may ask: ‘When is the time to buy low?’ The answer is: When there is maximum pessimism.” Sir John Templeton

Market volatility is a fundamental part of trading and investing. When market volatility strikes, it’s common for investors to succumb to temptation and follow the herd to panic sell stocks.

Financial Planning is About Long-Term Goals

“All financial success comes from acting on a plan. A lot of financial failures come from reacting to the market.” Nick Murray

Setting financial goals—and sticking with your plan—is key to potential long-term success. Rather than letting market volatility change your long-term financial plans, it is important to stay focused on your long term goals and disciplined in your investment philosophy.

“People thought that just because the vaccine started, we suddenly had this magic bullet,” @TDAmeritrade's @TDAJJKinahan says. “I do expect… more volatility in these first few months as the logistics around getting this to the average person becomes a bit more of a challenge.” pic.twitter.com/Hcg24AwyFJ

— Yahoo Finance (@YahooFinance) January 4, 2021

“Your financial goals aren’t set in stone,” according to Mark Gleason, senior manager of investment products and guidance at TD Ameritrade. “Circumstances change, and what you want might change. When that happens, it does make sense to change your approach.”

“Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.” Peter Lynch

Just remember, the time to make adjustments to your long term financial plan are due to changes in life circumstances and should not be in response to market volatility. Here are four reasons to adjust your financial plan:

Change in risk tolerance. If something has happened to change your risk tolerance, making tweaks to your financial plan can make sense. When a recent shakeup forces you to confront where you stand, it might be time to adjust your approach.
New life events. Perhaps there’s been a death in the family. Or you’ve added a new baby to the mix. Maybe you’re getting married or going through a divorce. All of these life events can indicate a change in your financial planning approach.
Shifting to a new life phase. Sometimes your approach needs to change as you actually start approaching your long-term financial goals. When you move from preretirement to actual retirement, your strategy is likely to change. Likewise, if you’ve been growing your child’s 529 and you’re worried about potential market volatility, you might make a few tweaks to the portfolio.
Setting new financial goals. Most people set different financial goals as they move through life. Maybe you decide that buying a home isn’t the goal now; you’d rather get an RV and travel. Perhaps your target retirement age has changed. Whatever the new goal, you might need different financial planning in order to meet it.

Stay disciplined when investing.

Market volatility can cause discomfort, but it is important to realize that market volatility is short term and should not impact your long term goals and financial planning. You’ve set long-term financial goals designed to help you reach certain life milestones—and you don’t want to undo all your progress just to feel better during a market downturn.

Highlight: "If there was a drastic difference between what the market was expecting and the numbers we were seeing in general, I think you'd have a lot more overall volatility and probably a little bit of pullback," TD Ameritrade's @ShawnCruz_TDA says. pic.twitter.com/w8z2qf3i4k

— Yahoo Finance (@YahooFinance) October 21, 2020

“Why is staying the course so important? As an extreme example, consider the investor who lost faith in the markets and cashed out on March 23, the low point in the U.S. stock market. Stocks subsequently rebounded more than 39% over the next three months; the unfortunate individual who moved to a money market fund earned a meager 0.14%. Vanguard’s analysis found that about 85% of investors who fled to cash would have been better off if they had just held their own portfolio.” (Source: Vanguard, https://investornews.vanguard/a-snapshot-of-investor-behavior-during-a-downturn/)

Reference:

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Category Archives: Long-Term

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