Category Archives: Stock Market

Investing Truths by Peter Lynch

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“Wisdom acquisition is a moral duty. It’s not something you do just to advance in life. Wisdom acquisition is a moral duty. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you are not going to do very well.”  Charlie Munger

Peter Lynch stressed the importance of looking at the underlying business enterprise strength, which he believed eventually shows up in the company’s long-term stock price performance. Also, pay a reasonable price relative to the company’s market value.

Here are important investing truths from Peter Lynch:

  1. Know what you own and be able to explain why you own it.  Only buy what you understand. ” Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion, and so forth.”
  2. Compounding of capital and principal takes time. Be patient, because most great wealth from the stock market is built over decades. “Often, there is no correlation between success of a company’s operations and the success of its stock over a few months or even years. In the long term, there is 100% correlation between the success of the company and the success of the stock. This disparity is the key to making money; it pays to be patient and to own successful companies.”
  3. Simple is usually better than complex and smart. “If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.”
  4. Volatility of the stock market is guaranteed. “You’ve got to look in the mirror every day and say: What am I going to do if the market goes down 10%? What do I do if it goes down 20%? Am I going to sell? Am I going to get out? If that’s your answer, you should consider reducing your stock holdings today.”
  5. Finding undervalued companies selling below their intrinsic value is a lot harder today. “A stock-market decline is as routine as a January blizzard in Colorado. If you’re prepared, it can’t hurt you. A decline is a great opportunity to pick up the bargains left behind by investors who are fleeing the storm in panic.”
  6. Start early and at a very eary age. Invest for the long term…stocks are relatively predictable over 10-20 years. “Time is on your side when you own shares of superior companies. You can afford to be patient – even if you missed Walmart (WMT, Financial) in the first five years, it was a great stock to own in the next five years. Time is against you when you own options.”
  7. Focus on the company behind the stock. Do not become overly attached to a stock. “Although it’s easy to forget sometimes, a share is not a lottery ticket…it’s part-ownership of a business.”
  8. Don’t try to predict the market. “Nobody can predict the interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what‘s actually happening to the companies in which you’ve invested.”
  9. Study history. Market crashes are great opportunities. “During the Gold Rush, most would-be miners lost money, but people who sold them picks, shovels, tents, and blue-jeans (Levi Strauss) made a nice profit. Today, you can look for non-internet companies that indirectly benefit from internet traffic (package delivery is an obvious example); or you can invest in manufacturers of switches and related gizmos that keep the traffic moving.”
  10. It’s very tough for a company to go bankrupt if a company has more cash than debt or if they do not have debt. “The real key to making money in stocks is not to get scared out of them.”
  11. When you own stocks, it will alwalys be scary due to volatility and there is always something to worry about.  Everyone is a long term investor until stocks go down. “There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.”
  12. When yields on long-term government bonds exceed the dividend yields of the S&P 500 by 6% or more, sell stocks and buy bonds. ““In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.”

Emotions can be a real performance killer according to Lynch, if market drops get you selling out in a panic, or market surges have you greedily snapping up overvalued shares. The best investors will do the opposite.

“The single greatest edge an investor can have is a long-term orientation.” Seth Klarman

References:

  1. https://www.investopedia.com/articles/stocks/06/peterlynch.asp
  2. https://www.fool.com/retirement/2020/04/07/9-investing-tips-from-peter-lynch-that-you-shouldn.aspx
  3. https://www.gurufocus.com/news/341584/peter-lynch-golden-rules-for-investing-
  4. https://www.valuewalk.com/2015/07/peter-lynchs-investing-principles-and-25-golden-rules/
  5. https://www.suredividend.com/peter-lynch-investing-lessons/

Closing the Black Wealth Gap

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Black families have one-eighth the wealth of white families as a result of economic discrimination and institutionalized racism.

This year marks the 100th anniversary of the Tulsa Race Massacres. Over two days, a white mob in the city’s Black district of Greenwood killed an estimated 300 Black Americans and left nearly 10,000 destitute and homeless. The Greenwood area was known as Black Wall Street, an epicenter of Black business and culture.

The Tulsa Race Massacres is just one many thousands of violent and economic incidents throughout American history that created the wealth gap. As such, the Black wealth gap was created through centuries of institutional racism and economic discrimination that limited opportunities for African-Americans.

Wealth was taken from these communities before it had the opportunity to grow. This history matters for contemporary inequality in part because its legacy is passed down generation-to-generation through unequal monetary inheritances which make up a great deal of current wealth.

The racial wealth gap is a chasm with Black families owning one-eighth the wealth of white families. According to the Survey of Consumer Finances, in 2019, the median net worth of Black households was $24,000 as opposed to $189,000 for white households. This shortfall in financial wealth creates a cascade of inequalities in education, homeownership, and simply saving for emergencies.

Historically, Blacks were limited to certain neighborhoods and had more trouble borrowing to buy a home than white home buyers. Additionally, Black workers don’t advance to the top positions in companies at a proportional rate as other groups.

Moreover, African American families have had fewer opportunities to build generational wealth through home ownership, investments and inheritance. In this century, many Black families were stripped of their wealth and financial security by by both public and private institutionalized racism whether called Jim Crow or redline policies.

There are other factors: Many African-Americans, particularly older ones, are too conservative as investors. Only 34% of Black families own stocks, while more than half of white families do, according to a Federal Reserve. It is important to help African American investors get more comfortable with owning risk assets such as equity stocks, ETF and mutual funds that build wealth over the long term.

Do not seek shortcuts to build wealth

You must build wealth over time. If you’re saving 15% or 20% of your income over 30 years, there’s a good chance you will be wealthy. These methods truly work whether you’re making $50,000 or making $500,000 a year.

‘We just had an 11-year bull market. If you didn’t take the appropriate amount of risk, you’re significantly behind,” says Malik Lee, an Atlanta financial advisor whose clientele is more than 90% African-American.

American Dream for Black families

The heart of the American Dream for Black families is financial wellness, independence and freedom. There are many ways to express the American Dream, including owning their home, not living paycheck to paycheck, and being able to travel. Today, 69% of African American families are confident the American Dream is still attainable, according to MassMutual’s ‘State of the American Family’ survey.

Financial wellness for most families is the heart of the American Dream. American families tend to view financial wellness in terms of five common financial priorities:

  • Having an emergency fund
  • Feeling confident in both short-term and long-term financial decision making
  • Not carrying a lot of debt
  • Being financially prepared for the unexpected
  • Not living paycheck to paycheck

Black families are taking steps to secure their financial future and dreams, but more needs to be done to keep the American Dream alive. The top financial regret across all consumer groups surveyed is “not starting early enough.”

References:

  1. https://www.barrons.com/articles/this-advisor-wants-to-close-the-black-wealth-gap-accepting-risk-is-key-51625077456
  2. https://www.federalreserve.gov/econres/scf/dataviz/scf/chart/#series:Net_Worth;demographic:racecl4;population:1,2,3,4;units:median;range:1989,2019
  3. https://www.brookings.edu/blog/up-front/2020/02/27/examining-the-black-white-wealth-gap/
  4. https://www.massmutual.com/static/path/media/files/mc1133aa_09248mr-final.pdf
  5. https://www.forbes.com/sites/brianthompson1/2021/06/17/the-key-to-closing-the-racial-wealth-gap-black-entrepreneurship/

Successful Investing Requires Mastering the Inner Game

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“When you learn how to control your emotions, you can derive more positive, productive meanings, even from seemingly negative events.” Tony Robbins

Inner game helps you improve yourself as you learn from your past life experiences. Learning to work on your inner game helps you develop a better outlook in life and this helps you develop your confidence as well. This new sense of self worth allows you be more successful personally and professionally, and with your over all interaction with other people.

To find your inner game, you have to know who you truly are, what you really want and how you want things to be done. This step is not easy. It takes a lot of self-reflection and looking back to your past mistakes and learning from them. It requires you to open your eyes and see yourself for who you really are now. Then try to look to the future and visualize how you want to see yourself after a couple of years.

It may take a lot of self-reflection, emotional intelligence and psychological understanding of your personal issues and how to deal with them. But the bottom line to becoming confident being the real you, is that you will have to overcome your insecurities, angsts, worries, and fears. If you fail to do so, these negative factors will reveal themselves in your personal and professional life and can cause problems.

When you get the real picture of who you truly are, you also have to learn to appreciate the traits that you have. Don’t focus on the things that you dislike about yourself. Real attractiveness come from within. Before anyone else appreciates your looks, you should be the one to appreciate it first. Know your strongest feature and use it to your advantage. If you believe that you look good then you will feel good about yourself too. Your self confidence will improve and this makes you more.

Inner Personal Scorecard

Warren Buffett frequently relates an interesting way to frame this topic:

Would you rather be the world’s greatest lover, but have everyone think you’re the world’s worst lover? Or would you rather be the world’s worst lover but have everyone think you’re the world’s greatest lover? 

Or. If the world couldn’t see your results, would you rather be thought of as the world’s greatest investor but in reality have the world’s worst record? Or be thought of as the world’s worst investor when you were actually the best?

Buffett’s getting at a rather fundamental model he’s used most of his life: The Inner Scorecard. When you have an internal scorecard, no one can define success for you but you.

What Buffett and a lot of other people who have been successful in life — true success, not measured by money — have in common is that they’re able to remember what we all set out to do: live a fulfilling life! Not get rich. Not get famous. Not even get admiration, necessarily. But to live a satisfying existence and help others around them do the same.

It’s not that getting rich or famous or admired can’t be deeply satisfying. It can be! I’m positive Buffett deeply enjoys his wealth and status. He’s got more “admiration tokens” than almost anyone in the world.

But all of that can be ruined very, very easily along the way by making too many compromises, by living according to an external scorecard rather than an internal one.

Controlling your emotions

According to James J. Gross, a psychologist and professor at Stanford University and best known for his research in emotion and emotion regulation, the inability to control, or regulate, your emotions is at the root of some psychological disorders including depression, social anxiety and borderline personality. And, no matter how psychologically healthy you think you are, you can benefit from learning how to better manage your emotions in investing and everyday life.

References:

  1. https://www.tonyrobbins.com/ask-tony/cycle-of-meaning/
  2. https://www.essentiallifeskills.net/5-effective-ways-to-control-your-emotions.html

Roth IRA Conversion

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A Roth individual retirement account (IRA) is off-limits for people with high annual incomes.

If your earnings put Roth IRA contributions out of reach, a backdoor Roth IRA conversion is an option that lets you enjoy the tax benefits of a Roth IRA. A backdoor Roth IRA is a strategy that helps you save retirement funds in a Roth IRA even though your annual income would otherwise disqualify you from accessing this type of individual retirement account.

Backdoor Roth IRA conversions are mainly useful for high earners whose annual income (plus access to workplace retirement plans) already make them ineligible for tax deductions for traditional IRA contributions.

Who Benefits from a Backdoor Roth?

  • High earners who don’t qualify to contribute under current Roth IRA rules.
  • Those who can afford the taxes for a Roth conversion and want to take advantage of future tax-free growth.
  • Investors who hope to avoid required minimum distributions (RMDs) when they reach age 72.

A general rule of thumb with Roth IRA conversions is that you will owe taxes on any money that has never been taxed before.

Roth IRA Conversion makes little Tax difference f

A Roth conversion will not make a significant difference to your retirement standard of living, according to an exhaustive new study.

The study findings reveal that “…only if you’re in the top 1% of retirement savers will a Roth conversion move the needle more than a little bit in your retirement.” The study, “When and for Whom Are Roth Conversions Most Beneficial?,” was conducted by Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University.

Unlike many previous analyses of Roth conversions, McQuarrie adjusted all his calculations by inflation and the time value of money, likely changes in tax rates, and a myriad other obvious and not-so-obvious factors.

McQuarrie finds that only if you have millions in your IRA or 401(k)—at least $2 million for an individual and $4 million for a couple—will your required minimum distributions in retirement be so large as to put you into even the middle tax brackets.

Only for those select few will the potential tax savings of a Roth conversion be significant. For most of the rest of us, we’ll likely be in lower tax brackets in retirement years, with an effective rate of 12% or less. That almost certainly will be lower than the tax we would pay for a Roth conversion during our peak earning years prior to retirement.

Even if tax rates themselves go up, furthermore, it’s still likely that your tax rate in retirement will be lower than preretirement. That’s because you’ll likely be at your peak earning years prior to retirement, when you might be undertaking a Roth conversion, and therefore in a relatively high tax bracket.

Once you stop working and retire, and are living on Social Security and the withdrawals from your retirement portfolio, your tax rate will most likely be lower—even if the statutory tax rates themselves have been increased in the interim.

Backdoor Roth IRA conversions lets you circumvent the prescribed AGI limits if your annual earnings put direct Roth IRA contributions out of reach.

References:

  1. https://www.forbes.com/advisor/retirement/backdoor-roth-ira/
  2. https://www.marketwatch.com/story/to-roth-or-not-to-roth-11623431970
  3. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3860359

Investing Goals

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“If you avoid the losers, the winners will take care of themselves.”

If you’re new to the world of investing, figuring out how and where to start can be daunting. Investing involves putting your money into an asset with the hope that the asset will grow in value or generate profit over time.

Deciding on which goals, on different kinds of accounts and investments are critical first steps to get you moving in the right direction.

The world of investing can seem vast and overwhelming if you haven’t been a part of it before. But if you take things one step at a time, you can make a plan that’ll get you started on the right path toward your financial goals.

Put your goals first. It’s important to decide what those goals are. Maybe you want to save for retirement.

  • The Joneses are in debt…Make your lifestyle and purchasing decisions based on what you can afford, not what your peers are buying, and instead of coveting thy neighbor’s car, try to feel smug about your fat retirement account, your zero credit card balances, and the car you own free and clear.
  • If it’s good for the planet, it’s usually good for your wallet. Think: small cars, programmable thermostats, compact fluorescent lightbulbs, a garden, refilling your water bottle…the list goes on.

“The biggest mistake you can make is to stop laying the foundation of a generational wealth developing portfolio because it feels temporarily monotonous.”

The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation — saving for the future, investing for the long term, and accumulating wealth — than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

Consistency is a key characteristic of successful investors. But as many longtime investors know, it’s hard to stay consistent when volatility whipsaws one’s portfolio, or when losses pile up, or even when one’s portfolio is perceived to trail those of one’s peers. All those factors can drive an investor to abandon their plan and make trades they might one day regret.

  • The secret to successful investing isn’t talent or timing…it’s temperament, according to Jean Chatzky, New York Times Bestselling Author and financial editor at the TODAY Show.. Sad but true–human psychology works against the behaviors that have historically led to good long-term returns.

    • Your goal should be excellence in investing. This means achieving attractive total returns without the commensurate higher risk. Your objective must be to strive for superior investment returns. Your first investment priority is to produce consistency, protect capital, and produce superior performance in bad times.

    It takes superior performance in bad times to prove that those good-time gains were earned through skill, not simply the acceptance of above average risk, according to Howard Marks of Oaktree Capital. Thus, you should place the highest priority on preventing losses. Since, it is should be your overriding belief that, “if you avoid the big losers, the winners will take care of themselves.”

    You can have too much of a good thing

    The power of asset allocation is all about building an intelligent portfolio of stocks, bonds, and other asset classes also means you’ll have less to worry about and more to gain. Asset allocation and asset class mix are a few of the most important factors in determining performance. Look at the size of a company (or its market capitalization) and its geographical market – U.S., developed international or emerging market.

    Financial advisory firm Edward Jones recommends that, when owning individual securities, you consider a diversified portfolio of domestic large-cap and mid-cap stocks. For the more volatile international, emerging-market and small-cap stocks, they favor a mutual fund to help manage risk. Remember, while diversification cannot guarantee a profit or prevent a loss, it can help smooth out performance over time since stocks, bonds, real estate, gold, and other investments move in different directions and are influenced by different economic factors. By holding multiple asset classes, you reduce your risk and increase the return you get per “unit” of risk you take on.

    References:

    1. https://www.forbes.com/sites/bobcarlson/2018/05/01/investing-as-a-business-what-the-tax-code-says/?sh=7b1c9f967bc6
    2. https://www.oaktreecapital.com/about/investment-philosophy
    3. https://investornews.vanguard/getting-started-with-investing/?cmpgn==RIG:OSM:OSMTW:SM_OUT:011921:TXL:VID:2MIN$$:PAQ:INVT:GAD:CSD:PRS:POST:GS:sf241078738&sf241078738=1
    4. https://www.edwardjones.com/market-news-guidance/guidance/stock-investing-benefits.html

    Apple’s Stock Price Underperforms Market 2021 YTD

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    “‘Most important, have the courage to follow your heart and intuition.’ Remembering Steve and the many ways he changed our world.”  Tim Cook

    On June 8, 2021, Apple Inc. (ticker: AAPL) closed $18.35 below its 52-week high ($145.09), which the company achieved on January 25th, and the stock is down slightly more than 4% year-to-date (YTD).

    No photo description available.

    Despite the recent stock price underperformance, Apple remains the most valued U.S.-traded company, at $2.1 trillion market capitalization. On April 28, 2021, Apple announced financial results for its fiscal 2021 second quarter ended March 27, 2021. The Company posted a second quarter record revenue of $89.6 billion, up 54 percent year over year, and quarterly earnings per diluted share of $1.40. International sales accounted for 67 percent of the quarter’s revenue. While hardware like the iPhone and iPad will continue being a significant part of Apple’s revenue, look for services to play an increasingly important role over the next decade in the company’s growth and success.

    Yet, investors remain concerned regarding the big questions facing Apple and its ecosystem, according to an article reported in the Wall Street Journal. The company has been sued for alleged anticompetitive behavior by “Fortnite” maker Epic Games over the rules and fees for its App Store. A bench trial on the matter wrapped up last week.

    That trial ended with Apple Chief Executive Tim Cook facing sharp questions from U.S. District Judge Yvonne Gonzalez Rogers, who seemed skeptical about some of the company’s explanations for its business practices on the App Store. A ruling in the case is not expected for months.

    Apple’s share price has fallen 3% since the start of the trial and is now off nearly 7% for the year—the worst performance among its mega-cap tech peers. Part of that can be chalked up to worries about a peak iPhone cycle following the strong sales performance of last year’s models.

    From a capital allocation perspective, Apple’s board hiked its dividend by 7% and announced a new $90B share repurchase program. Despite well-known industry chip supply constraints, Apple appears to be executing extremely well and is seeing robust demand across all business line.

    References:

    1. https://www.marketwatch.com/story/apple-inc-stock-rises-monday-still-underperforms-market-01623097911-d343febf425e
    2. https://www.wsj.com/articles/apples-big-show-may-not-be-enough-11622804401
    3. https://www.apple.com/newsroom/2021/04/apple-reports-second-quarter-results/

    Index Fund Investing

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    Successful investing always starts with a goal!

    Source: Napkin Finance

    Investing is for everyone and it can help you reach your financial goals. And, you don’t have to try to pick the winners in the stock market to achieve long-term investing success.

    When investing, you don’t have to have tons of money, trade a lot, or employ sophisticated strategies. A proven strategy is just doing the “boring” thing of determining an appropriate asset mix (of stocks, bonds, cash and real estate), owning well-diversified, passively managed index funds, avoiding the herd following tendency to “buy high / sell low,” and sticking with that asset mix over time can help you reach your financial goals.

    Even billionaire investor Warren Buffett, the chairman and CEO of Berkshire Hathaway, has repeatedly recommended index funds. Buffett said at a shareholders’ conference, “In my view, for most people, the best thing to do is to own the S&P 500 index fund,”

    An index fund is a professionally managed collection of stocks, bonds, or other investments that tries to match the returns of a specific index. They tend to:

    • Pool money from a group of investors and then buy the individual stocks or other securities that make up a particular index. That model helps to reduce the associated costs that fund managers charge, compared to those funds where someone is actively strategizing which investments to include.
    • Track the performance of a particular market benchmark, like the S&P 500 or the Dow Jones Industrial Average. They’re a form of passive investing, because they allow investors to buy a lot of assets at once and hold them for the long term.
    • Offer instant diversification for a portfolio, which helps reduce risk. They also tend to be low-cost investment options, which is a big reason why they’re popular with investors.

    While individual stock prices can fluctuate wildly, the broader index tends to go up over time — and with index funds, you don’t have to pick the winning stocks to benefit from the market’s overall gains.

    Although all index funds track an index, according to Napkin Finance, what they invest in can vary widely:

    • U.S. stocks—some index funds track a well-known U.S. index, like the S&P or the Dow.
    • Global stocks—some try to essentially track the entire global stock market.
    • A specific industry—some index funds focus only on tech or healthcare stocks or those of another industry.
    • A particular region or country—there are index funds that track only investments in Japan, South America, or other regions.
    • Bonds—some index funds try to track the whole bond market, while others focus on a specific slice.
    • Alternatives—there are index funds that track oil, gold, real estate, and more.

    Putting your money to work

    There are some inherent risks that come with investing in the stock market, but investing also offers a higher rate of return than the interest rates you’ll earn on a savings account. The S&P 500, an index representing the 500 largest U.S. companies, has delivered average annual returns of almost 10% going back 90-plus years.

    You don’t have to be an expert or professional investor to be successful. Index funds are a low cost and easy way to beef up the diversification of your portfolio. Additionally, they are relatively low cost and you don’t need a lot of index funds to achieve diversification.

    References:

    1. https://napkinfinance.com/napkin/index-fund/
    2. https://grow.acorns.com/warren-buffett-index-funds/
    3. https://rajn.co/warren-buffett-quotes-investing-business-stocks-risk-debt/
    4. https://grow.acorns.com/why-index-funds-are-often-the-best-way-to-invest/

    Stop Orders

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    A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price.  Stop orders are orders that are triggered when a stock moves past a specific price point. Beyond that price point, stop orders are converted into market orders that are executed at the best available price.

    When the stop price is reached, a stop order becomes a market order.  

    A buy stop order is entered at a stop price above the current market price.  Investors generally use a buy stop order to limit a loss or to protect a profit on a stock that they have sold short.  

    A sell stop order is entered at a stop price below the current market price. Investors generally use a sell stop order to limit a loss or to protect a profit on a stock that they own.

    https://youtu.be/wb3hpmu49OA

    Stop orders are used to limit losses with a stop-loss or lock in profits using a bullish stop.

    References:

    1. https://www.sec.gov/fast-answers/answersstopordhtm.html
    2. https://www.investopedia.com/terms/s/stoporder.asp

    Five Money Goals to Financial Wellness | TIAA

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    According to TIAA, there are five big financial goals anyone seeking financial well-being should include on their list:

    1. Max out your 401(k) / 403(b). One rule of thumb says that by the time you turn 30, you should have the equivalent of your annual salary saved (that’s all savings, not just retirement assets); double your salary saved by age 35; three times the amount by age 40. And, it’s essential to take full advantage of your employer match, if you have one: With a $50,000 salary from an employer matching up to 6% of your contributions, you’d be turning down $3,000 (free money) each year! Letting your employer match go to waste would be like you accepting a $3,000 pay cut without a fight. In the absence of an employer plan, contribute to an IRA instead, even though the target is much lower (the annual contribution rate for 2021 is $7,000.
    2. Build an emergency fund. Each year brings economic uncertainty to many and, even for the financially secure, life happens in the form of medical bills, domestic catastrophes and other unplanned expenses. As a general rule, it’s good to maintain an emergency fund that would cover three to six months of living expenses in case you find yourself unemployed. Once you’ve calculated how much you should save, set aside a certain amount from each paycheck to set you on your way.
    3. Get your financial affairs in order. Estate planning is something you can’t afford to ignore. Getting your financial affairs in order, and designating the right people to manage them in the event of your incapacity or death, takes a huge weight off your shoulders. Necessary documents include durable powers of attorney, which designate someone to manage your day-to-day affairs, and a living will or healthcare directive to instruct your doctor what to do if you’re unable to make medical decisions for yourself. Don’t forget to inform those assigned with the task of handling your estate, who need to know the location of your will and other estate planning documents.
    4. Give yourself a debt deadline. Bad debts. You know which ones they are: the loan you took out to pay for a wedding; the credit card with the sky-high interest rate whose balance keeps rolling like a New York subway car. Convincing yourself that minimum monthly payments are okay? How about setting a deadline for repayment and getting rid of this exponentially growing interest?
    5. Create a budget (and stick to it). If you find that your spending is a bit out of control, you may want to press the reset button on your out-of-control spending behavior with a budget.

    Setting these five money goals is enough to start you well on your way toward financial well-being.

    References:

    1. https://www.tiaa.org/public/learn/personal-finance-101/5-must-have-financial-goals

    Investing – How to Get Started

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    “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:

    1. Stocks – which are a share in a company. These tend to be riskier investments, but also typically offer more potential for profit over time.
    2. 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.
    3. 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:

    1. https://www.investopedia.com/financial-edge/0511/the-top-17-investing-quotes-of-all-time.aspx
    2. https://www.northwesternmutual.com/life-and-money/how-to-invest-a-beginners-guide/
    3. https://www.northwesternmutual.com/life-and-money/4-investment-terms-you-should-know/
    4. https://www.investopedia.com/terms/c/capitalgain.asp