Tag Archives: Investing

Difficult Financial Conversations

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The financial realities of being a woman — 4 out of 10 people—men and women alike—do not realize that women need to save more for retirement. Life expectancy, the pay gap, health care costs, and career interruptions due to caregiving are all contributing factors, according to Fidelity Investments Women Talk Money.

Video: 5 Investing Conversations to Have Now with guest: Anna Sale, host of the podcast “Death, Sex and Money” and author of “How to Talk About Hard Things”
Hosted by Lorna Kapusta, Head of Women Investors at Fidelity Investments

“Money is like oxygen. It’s all around us. We can pretend it’s not but we need it to breathe. When you don’t have enough you really feel it.” Anna Sale, host of the podcast “Death, Sex and Money” and author of the book “How to Talk About Hard Things”

“Money is at once a tool which is the choices we make around money, what we spend it on, how we save it”‘ says Anna Sale. “And money is also a symbol which brings up all these questions about am I enough, am I worthy enough, am I living up to all these expectations for myself. When we talk about money as a tool, sometimes the symbolic ways that money kind of makes us feel lots of big feelings can distort those conversations about money being a tool.”

References:

  1. https://www.fidelity.com/learning-center/personal-finance/women-talk-money/investing

Things to Consider When Saving, Investing and Building Wealth

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Saving for the future, investing to grow your money and building wealth has little to do with the economic cycle, the stock market valuation or even how much money you earn.

It’s your mindset that can hinder your financial outcome and keep you trapped at an unsatisfying level of financial success. And, unless you can embrace a positive financial mindset, your ability to save, invest and build wealth will be hindered for the rest of your financial life.

The process of investing and wealth-building can be improved by a adhering to the following tips to set yourself up for potential financial success and freedom:

1. Start Early

It’s important to invest a percentage of your salary each month. And, starting early could be a way to dramatically increase your savings over time. The good thing about starting early is you can get the benefits of compound interest!

2. Set Investment Goals

Are you saving up to buy a house? Or putting money away for retirement? Investing with a purpose will help you determine the right strategy and keep you on track to pursue your financial goals. Determine your financial freedom number.

3. Know Your Time Horizon

If you think you’ll need the money within the next five years, you might consider less volatile investments, like fixed income securities. Investing for the long-term (think: 15 or more years)?  You might think about adopting a less conservative strategy.

4. Assess Your Risk Level

Knowing how much risk you’re willing to take on will help you narrow down your investment choices and keep you from letting your emotions guide your investing during periods of high market volatility.

5. Analyze Your Budget

Take your monthly income and take a list of your monthly expenses and create a budget (for instance, the popular 50/30/20 budget). By looking at your spending, you may discover extra money to invest each month.

6. Know Your Investment Choices

Familiarize yourself with different investment types to see what makes sense for you. Are you interested in international stocks and ETFs (exchange-traded funds)? Maybe bonds and mutual funds?

7. Go It Alone or Use an Advisor

If you’re the independent type, you may be drawn to Self-Directed Trading. Or if you prefer an advisor or to automate your investments with a Robo Portfolio.

8. Consider Avoiding Individual Stocks and Bonds; Invest in Market Index Funds

If you’re still learning the ropes, you might be more comfortable sticking to broader based investments like index funds and ETFs. These types of investments require less of your time and are less risky since they invest in numerous companies. As an alternative, an market index fund is an investment that tracks a market index, typically made up of stocks, like the S&P 500, or bonds. Index funds typically invest in all the components that are included in the index they track,

9. Diversify Your Portfolio

If all your investments are your company’s stock, and they go out of business, you’ll wish you had a diversified portfolio. You may reduce your risk by holding a variety of securities that react differently to market changes.

10. Think Long-term

History shows whenever the market takes a dip due to volatility, it eventually bounces back. Be patient and disciplined: Give your money time, make consistent contributions and wait out inevitable market downturns.

11. Don’t Forget High Interest Debt

School loans or credit card debt can make allocating money to investments a tough choice. It’s possible to reduce your debt and invest, and we can help you accomplish both.

12. Get Your Match

Many employers offer a 401(k) match, which can be a great incentive to invest for retirement, helping you to potentially build tax deferred savings.

13. Save and Invest for Retirement

When you’re young, retirement seems like eons away — but for many, regardless of age, now is the best time to start saving for your golden years. You may consider looking into Traditional and Roth IRAs to get started. The typical retirement strategy is built on the pillars of your pension, 401(k) plan, your Traditional IRA, and taxable savings.

14. Automate Your Contributions and Pay Yourself First

Pay yourself first instead of saving what remains after monthly expenses. Set up recurring investments to take advantage of dollar cost averaging. With this strategy, instead of trying to time the market, you invest the same amount each month — sometimes you might buy high, but other times, you’ll purchase low.

15. Beware of Fads

Just because everyone is jumping on the latest meme stock or investing app doesn’t mean you should. Fad stocks are often unpredictable, so if this doesn’t align with your investment strategy, feel confident to sit them out.

16. Be Informed

A prospectus sheet details the performance of a company to help you understand its stock performance. And digital tools can help you track your investments, too. If you cannot dedicate time to read and research, invest in a market index fund which is one of the easiest and most effective ways for investors to build wealth.

17. Don’t Neglect Your Emergency (or Peace of Mind) Fund

Investing grows your money and helps build long-term financial freedom, but you need to be prepared for short-term unexpected expenses. So when setting out on your own, don’t forget to start setting aside funds in an emergency (or peace of mind) fund. This money should be liquid (not invested in securities), so you can access it for unexpected expenses.

18. Watch Out for Fees

Some brokers will charge a commission fee whenever you buy or sell stocks, which add up and make a dent in your overall returns. Trade U.S. stocks and ETFs commission-free with our Self-Directed Trading.

19. Ask for Help

Investing can get complicated. Don’t be afraid to reach out to a financial advisor for advice and support.

20. Adjust as You Go

As life circumstances change, it might make sense to move your money into different types of investment accounts or change up how much you contribute. Any time your financial circumstances change, remember to reassess your financial goals, plan and investments.

21. Create and Follow a Financial Plan

Every living adult needs to financially plan. A financial plan is a comprehensive overview of your financial goals, net worth, cash flow, debt, taxes, risk tolerance, time horizon and it provides the steps you need to take to achieve and manage them.

22. Investing has risks.

No one knows exactly what will happen in the future and investments could lose money, so be aware of how much you are able to invest and be comfortable leaving it there for a period of time since it may have ups and downs.

23. A Wealthy (or Positive Financial) Mindset

It’s imperative that you refocus your mindset and change how you think about yourself, your finances, and the world around you. If you keep thinking about things the same way, you’re going to get the same results. Change in the world around you doesn’t happen until you change yourself. Embrace and grow your positive financial mindset about money, wealth and financial freedom.

Getting Started

Getting started is often the hardest step for most new investor to take, but starting to invest today is advice worth implementing! “The best time to plant a tree is twenty years ago; the second best time is today.” And, what’s true for a tree is also true for growing your money.

References:

  1. https://www.ally.com/do-it-right/investing/things-to-know-when-investing-in-your-20s/
  2. https://www.harveker.com/blog/11-principles-infographic-financial-freedom/

Own Your Net Worth and Cash Flow

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8 out of 10 women will be solely responsible for their financial well-being. Some women will be ready. Many won’t. UBS Wealth Management Report

As women’s life expectancies increase and the rate of divorce for individuals over age 50 continues to climb, more women will find themselves solely responsible for their own current and long term financial well-being.

UBS Wealth Management embarked on research–Own Your Worth–to explore women’s thoughts and feelings, the challenges they faced, lessons they learned and advice they would impart to other women.

With the wisdom of hindsight, nearly 60% of widows and divorcees regrettably wish they had been more involved in long-term financial decisions while they were married, according to UBS’ findings. A full 98% of them urge other women to become more involved early on.

Unfortunately, too many women ignore the advice of widows and divorcees. In direct contrast to the advice, many married women are taking a lesser role in managing the household finances. In a counterintuitive twist, Millennials are the most willing to leave investing and financial planning decisions to their husbands.

Fifty-six percent of married women still leave investment decisions to their husbands, according to UBS. Surprisingly, 61% of Millennial women do so, more than any other generation. What’s more, most women are quite content with their backseat role when it comes to investing and financial planning.

UBS’ research reveals many reasons for women’s abdication, from historical and social precedents to family, gender roles and confidence levels.

So. why do women minimize their role in major financial decisions? According to USB’ research, the reasons vary:

  • Gender roles run deep – Gender roles are ingrained from early in life and often prove hard to shake. In many cases, married couples are simply imitating the gender roles they witnessed growing up.
  • Men are still the breadwinners – Within families, 70% of men are the main breadwinners, in part because of the gender pay gap and the career breaks women take to raise children.
  • Time constraints are challenging – Whether married or not, women have many demands on their time. They take on the majority of household duties, including childcare and chores, as well as paying bills and tracking spending.
  • Competence vs. confidence – Together, history and society have conspired to affect women’s financial confidence. Both women and men think men know more about investing, and women are less confident than men in making major financial decisions. Women consistently underestimate their own abilities while overestimating what is required to be financially involved.

Yet, most study respondents participated in some financial decisions while married, from handling cash flow and bills to saving and investing. Regardless of their level of engagement, however, most agree it wasn’t enough. The research shows:

  • 59% of widows and divorcees wish they had been more involved in long-term financial decisions
  • 74% don’t consider themselves very knowledgeable about investing
  • 64% of widows blame themselves for not being more financially involved (53% of divorcees)
  • 56% of widows and divorcees discover financial surprises
  • 53% would have done fewer household chores to find more time for finances
  • 79% of women who remarry take a more active role

USB recommends three actions to take today

The advice from women who have been there is clear: The time to become involved in your family’s present and future financial well-being is today, not when some unforeseen events happen in the future.

Women are encouraged to get involved in their financial well-being as a form of self care, much in the same way you would take care of your health by:

  1. Owning your worth – Know where you stand and what you want for the future. Take the time to add up your assets and liabilities, like loans, credit and other debts, and ask for full transparency from your partner.
  2. Finding your voice – Start the conversation with your partner. Talking about money is considered taboo to some couples, particularly before they are married. But if you found yourself alone tomorrow, do you know what you’d do to make sure you’re financially secure? There is a tremendous benefit to having open communication about money with a trusted confidante.
  3. Setting an example – Model financial partnership for your family and loved ones. According to our survey, women are repeating the gender roles they saw growing up. As you begin taking a more active role in your finances, you can set an example of financial partnership for the younger generation.

Though women are aware of their increasing longevity and the financial needs associated with it, most tend to focus their efforts on short-term financial responsibilities such as managing the household’s day-to-day expenses and paying the bills.

In contrast, taking charge of long-term financial decisions, such as investing, financial planning and insurance, can have far more impact on their future than balancing a checkbook.

By sharing decisions jointly, both women and men can face the future with optimism—and set an example of financial partnership for generations to come.

Almost 60% of women do not engage in the most important aspects of their financial well-being: investing, insurance, retirement and other long-term planning. USB Wealth Management Report

References:

  1. https://www.ubs.com/content/dam/WealthManagementAmericas/documents/2018-37666-UBS-Own-Your-Worth-report-R32.pdf
  2. https://www.ubs.com/us/en/investor-watch/own-your-worth/_jcr_content/mainpar/toplevelgrid_1797264592/col2/teaser/linklist/link_2127544961.2019551086.file/PS9jb250ZW50L2RhbS9XZWFsdGhNYW5hZ2VtZW50QW1lcmljYXMvZG9jdW1lbnRzL293bi15b3VyLXdvcnRoLXJlcG9ydC5wZGY=/own-your-worth-report.pdf

Growing Your Money

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When investing your money in the stock market, doing your research and investing in what you know are crucial elements of successful investing. You don’t have to be a financial expert to start buying stocks, but the more you know going in, the more likely your investing journey will be successful.

It’s critical to understand that stocks represent legal ownership in a company; you become a part-owner of the company when you purchase shares.

People ultimately invest in stocks with one end-goal in mind: to grow their money and build wealth.

But it’s important to note that growing your money and building wealth are not guaranteed. Investing in individual stocks carries much more risk than buying bonds or putting your money in index funds.

As you begin to research stocks, first know how much risk you can take, or your risk tolerance, and your time horizon.

Financial experts typically recommend that you only invest money that you can afford to lose and, since investment returns are typically maximized over the long term, only invest money that you won’t need in the short term (less than three to five years).

Stock’s Value vs. Price

Buying stocks equates to owning companies which lets you be a part of something that’s normally very exclusive. It allows you to invest in pieces of well-known companies, such as Amazon, Google or Apple.

A company’s stock price has nothing to do with its value, because the share price means nothing on its own.

The price of a stock will go down when there are more sellers than buyers. The price will go up when there are more buyers than sellers.

A company’s performance doesn’t directly influence its stock price. Investors’ reactions to the performance decide how a stock price fluctuates.

The relationship of price-to-earnings and return on equity is what determines if a stock is overvalued or undervalued. Essentially, You should make no assumptions based on price alone.

Knowing when to sell is just as important as buying stocks. Most retail investors buy when the stock market is rising and sell when it’s falling, but smart investors follow a strategy based on their financial plan and requirements.

Benjamin Graham is known as the father of value investing, and he’s preached that the real money in investing will have to be made not by buying and selling, but from owning and holding securities, receiving interest and dividends, and benefiting from the stock’s long-term increase in intrinsic value through compounding.

Learning how to invest in stocks might take time, but you’ll be on your way to growing your money and building your wealth when you do so. But, keep your risk tolerance, time horizon and financial goals in mind,

References:

  1. https://www.thebalance.com/the-complete-beginner-s-guide-to-investing-in-stock-358114

Ransomware Attacks and Cyber Scams Surge in 2020

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

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

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

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

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

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

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

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

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

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

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

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

References:

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

Best Investment Advice – Mark Cuban

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

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

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

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

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

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

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

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

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

Peter Lynch’s Investing Maxims

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Here are several investing maxims that every investor should memorize and insight repeatably to pick winning stocks, according to Peter Lynch:

  1. A good company usually increases its dividend every year.
  2. You can lose money in a very short time; it takes a long time to make money.
  3. The stock market really is not a gamble; as long as you pick good companies that you think will do well and not because of the stock’s price.
  4. You can make a lot of money in the stock market; but then again, you can lose a lot of money.
  5. You have to research the company before you put your money into it.
  6. When you invest in the stock market, you should always diversify.
  7. You should invest in several stocks becasue for every five you pick, one will do very great, one will be very bad, and three will be okay.
  8. You should never fall in love with a stock…you should always have an open mind.
  9. You shouldn’t just pick a stock: you should do your homework.
  10. Buying stocks of utility companies is good because it gives you higher dividends, but you will make more money in growth stocks.
  11. Just because a stocks goes down doesn’t mean it can’t go lower.
  12. Over the long term, it is better to buy stocks in small companies.
  13. You should not buy a stock because it is cheap, but because you know a lot about it.

Look for shares that offer “growth at a reasonable price” which helps you to avoid two common investment mistakes:

  1. Either paying too much for fast-growing companies;
  2. Or buying seemingly cheap firms without realizing that they have stopped growing.

https://youtu.be/hKdtS_0vQ48

References:

  1. https://www.safalniveshak.com/value-investing-course-peter-lynch-way
  2. https://sites.google.com/site/changechina2050/investment/learn/peter-lynch-s-investment-rules

Financial Metrics for Evaluating a Stock

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“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” Peter Lynch

Anyone can be successful investing in the stock market. But, it does take thorough research, patience, discipline and resilience. And, it’s important to appreciate that “Behind every stock, there is a company. Find out what it’s doing”, says Peter Lynch, who managed the Fidelity Magellan Fund from 1977 to 1990 and achieved an impressive return which reportedly averaged over 20% per year.

With a long-term view to investing, Lynch would patiently wait for the company to become recognized by Wall Street for its growth, which subsequently unleashed an explosive rise in its stock price as smart money and institutional investors rush to buy stock.

In his book “One Up On Wall Street”, he reveals his principles and metrics for successful investing. Here are 11 financial metrics investors can utilize to evaluate a company’s value:

  1. Market Cap – Shows the current size and scale of the company. “If a picture is worth a thousand words, in business, so is a number.” Peter Lynch
  2. Strong Balance Sheet (Cash on Hand / Long Term Debt to Equity) – Shows how financially sound a business has become and its capacity to withstand an economic downturn. Determine if the company’s cash has been increasing and long term debt has been decreasing?
  3. Sales and Earnings Growth Rates – Shows if the business model works & current growth rate
  4. Free Cash Flow – Shows if company generating or burning through cash
  5. Returns on Capital (ROE / ROIC / ROA)- shows capital efficiency of business
  6. Margins (Gross Profit Margin / Operating Margin / Profit Margin / Net Income) – Shows current profit profile of products, spending rates, & potential for operating leverage
  7. Total Addressable Market – What is market size and long term growth potential for the company.
  8. Long Term (5+ years) Stock Performance vs. market – has the stock created or destroyed value for shareholders. “In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.” Petere Lynch
  9. Current Valuation (Price to Sales / Price to Earnings / Price to Book / Price to FCF) – How expensive or inexpensive is the stock price.or is the company reasonably priced. “If you can follow only one bit of data, follow the earnings (assuming the company in question has earnings). I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction.” Peter Lynch
  10. Mission and Vision Statement – Understand why the company exist.  What is it doing. “Behind every stock is a company. Find out what it’s doing.” Peter Lynch
  11. Insider Ownership – Do insiders have skin in the game. SEC Filings. Information available on proxy statement.

Additionally, it is important to figure out:

  1. What is changing
  2. What is not changing
  3. Is there an underappreciation for either. “Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.” Peter Lynch

Do that well, move on #3, you’re the best investor in the world.

As an investor, unless you understand the underlying business of a company, you will not be able to hold its stock when the price is falling. You could end up selling a great company out of fear – even though its price will recover in the future and give you great returns in the years to come. The ability to hold a good company even when its stock price is falling or undergoing a time correction – will play a crucial role in you becoming a successful investor.

In the long run, the stock price will go up only if the business of the company does well.

In Peter Lynch’s own words “I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies”

If you like a stock, buy small quantity of shares. Study the company in more detail. Buy more shares if you like its business. As your understanding of the business increases, your conviction (confidence) will also increase, this will allow you to give higher allocation in your portfolio.

Categories of Stocks in the Stock Market

Peter Lynch divided different stocks into six categories

Slow Growers – Slow growers are those stocks that have a slow growth rate i.e. a low upward slope of earnings and revenue growth.These slow growers can be characterized by the size and generosity of their dividend. According to Peter Lynch, the only reason to buy these stocks are dividends.

The Stalwarts – The Stalwarts have an average growth rate as that of industry and are usually mid to large companies. They have an earnings growth between the 8-12 percent CAGR range. According to Peter Lynch, investors can get an adequate return from these stocks if they hold these stocks for a long time.

The Fast Growers – The fast growers are generally aggressive companies and they grow at an impressive rate of 15-25% per year. They are fast-growth stocks and grow at a comparatively faster rate compared to the industry average and competitors. However, Peter Lynch advises that one should be open-eyed when they own a fast grower. There is a great likelihood for the fast growers to get hammered if they run out of steam or if their growth is not sustainable.

The Cyclicals – Cyclical are stocks that grow at a very fast pace during their favorable economic cycle. The cyclical companies tend to flourish when coming out of a recession into a vigorous economy. Peter Lynch advises investors to own the cyclical only on the right part of the cycle i.e. when they are expanding. If bought at the wrong phase, it may even take them years before they perform. Timing is everything while investing in cyclical stocks.

The Turnarounds – The turnarounds are characterized as potential fatalities that have been badly hammered by the market for one or more of a variety of reasons but can make up the lost ground under the correct circumstances. Holding turnarounds can be very profitable if the management is able to turn the company as these stocks can be bought at a very low valuation by the investors. However, if the management fails to bring back the company on track, it can be very troublesome for the investors.

Asset Plays – Asset Plays are those stocks whose assets are overlooked by the market and are undervalued. These assets may be properties, equipment, or other real assets that the company is holding but which is not valued by the investors when there has been a general market downturn. The real value may be worth more than the market capitalization of the company. Peter Lynch suggests owning a few of these stocks in your portfolio as they are most likely to add a lot of value to your portfolio. However, the biggest significant factor while picking these stocks is to carefully estimate the right worth of the assets. If you are able to do it, you can pick valuable gems.

“Average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research.” Peter Lynch

Infinity income – When your income from investments is higher than your expenses, you might be able to live off those returns for 10 years, 30 years, 50 years… or forever!

References:

  1. https://stockinvestingtoday.blog/the-investing-style-of-peter-lynch?
  2. https://www.thebalance.com/peter-lynch-s-secret-formula-for-valuing-a-stock-s-growth-3973486
  3. https://goldenfs.org/wp-content/uploads/2020/12/summary-One-Up-On-Wall-Street-Peter-Lynch-2-scaled.jpg

Four Secret to Investing Outperformance – Motley Foolo

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“The average investor’s portfolio lags the performance of the S&P 500 by nearly 4 percentage points.”

The average retail investor’s portfolio lags the performance of the S&P 500 by nearly 4 percentage points, a DALBAR study shows. The lag is a result of bad behaviors by investors because investors jumped into funds when they were already at a high mark—with lower returns in their future—and dumped funds when they were on the way down, without waiting for a rebound.

The returns received by investors vs. returns earned by funds based on Morningstar data

There are four secrets to outperformance, according to Motley Fool, and the secrets are simpler than you might expect.

  • You take market returns – According to a 2020 study by financial research company Dalbar, average investors earned about 5% annual growth in their accounts over the last 30 years. That’s roughly half the average growth rate of the S&P 500 in the same time frame. You can avoid lagging the S&P 500 index by 4% to 5%. If you invest in S&P 500 index funds, you should see performance that’s only a fraction below the index.
  • You stay calm – The Dalbar report finds that 70% of the average investors’ underperformance occurred in volatile markets. Specifically, most of the investors who performed the worst sold their securities when the market was in crisis. Had they held on to those investments, they would have ultimately fared better. The takeaway here is it’s usually best to stay calm and stay invested.
  • Selectively, you do the opposite of the crowd – When everyone else is selling, it’s often a good time to buy. By following best practices such as not investing in a downturn unless your finances are in order; not expecting a quick return; and investing in a “quality” stock of an established company with low or manageable debt, experienced leadership, and consistent cash flows and profits.
  • You buy and hold  – The Dalbar report also concludes that a buy-and-hold strategy with the S&P 500 would have returned more than the average investor’s portfolio. Buy-and-hold investing is the practice of investing in stocks and funds that you intend to keep for years or decades. To implement this approach, pick quality stocks or funds and hold them indefinitely. You might sell if the company changes in some fundamental way, but you won’t sell because the market’s having a temporary crisis.

Hopefully, these four secrets to beating the average investor sound easy. They are, as long as you can resist making emotional decisions.

The average investor can get anxious about market volatility, and that’s often when shortsighted decisions are made. Even investors who can tune out market noise sometimes find it hard to avoid tinkering with a portfolio that doesn’t seem to be growing as anticipated.

When it comes to investing, patience is a virtue.

References:

  1. https://investor.vanguard.com/investing/portfolio-management/performance-overview
  2. https://www.fool.com/investing/2021/07/22/4-secrets-to-beating-the-average-investor/

Loss of Purchasing Power: Is $1 million enough for retirement?

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“One million dollars doesn’t buy as many Cadillac Escalades as it used to.”

Today, $1 million no longer buys as many McDonald’s Big Mac sandwiches or Rolex Submariner watches or Ford F150 trucks as it once did thirty years ago.  There’s a good reason for that called ‘loss of purchasing power’ which is a byproduct of inflation. That’s because $1 million of purchasing power in 1970 was the equivalent of nearly seven million dollars today, according to Motley Fool. And as recently as 1990, a million dollars has lost half its buying power since then, meaning you’d need two million today to have the same buying power as you did in 1990.

As a result of normal inflation and loss of purchasing power, $1 million retirement nest egg today definitely will not offer you as comfortable a retirement lifestyle as it did a few years ago or a few decades ago.

Retirement is not an age, but a number

Financial preparedness is more important than reaching a certain retirement age. And, to answer the question of whether $1 million or any amount of money is enough for retirement, the answer depends on what you want your retirement to look like.

It’s important to ensure you have enough savings and income to sustain your spending and lifestyle in retirement. If you don’t have enough money set aside to pay for your retirement, then you may have to delay retiring. And no matter where you are on your retirement journey, you can make your financial number. No matter how little you have or how much time you have left until you want to retire, you can always improve your financial situation. Getting started and creating a retirement plan can carry you a long way.

A 2018 Northwestern Mutual study found that one in three Americans has less than $5,000 saved up for retirement, and 21% of Americans have no retirement savings at all. Overall, Americans are feeling underprepared and less confident regarding the financial realities of retirement, according to the data.

Despite these findings regarding the woeful retirement savings rate by Americans, it’s still not too late to enjoy the kind of life you’ve worked so hard for… and the retirement you deserve.

One of the most important goals for Ameriocans facing retirement is knowing that they can sustain their desired level of spending and lifestyle throughout their lives, with a sense of financial peace of mind and without the fear of running out of money.  For our purposes, financial peace of mind is the knowledge that, no matter your level of savings or degree of market volatility, you are confident that you are unlikely to run out of money during retirement to support your level of spending and  lifestyle.

Taking the financial road less traveled

Conventional wisdom recommend that older Americans should reduce their stock allocation in retirement and move into more safe investments such as bonds and cash.  Although this may seem the less risky road to take in your retirement years, a few experts do not agree.  If you expect to maintain your purchasing power into future, you must stay invested in stocks.

“The idea that a 60-year-old retiree should be investing primarily in conservative investments is an antiquated way of approaching personal finance”, says Jake Loescher, financial advisor, at Savant Capital Management in a 2017 U.S. News article. “Historically, the rule of thumb stated that an individual should take the number 100, subtract their age, which will define the amount of stocks someone should have in their portfolio. For a 60-year-old, this obviously would mean 40 percent stocks is an appropriate amount of risk.”

“A better approach would be to perform a risk assessment and consider first how much risk an individual needs to take based on their personal circumstances,” Loescher says.

According to the article, there are five circumstances when retirees should eskew conventionl wisdom:

  1. The likelihood you’ll live into your 90s or beyond. Since life expectancy is much longer these days and in today’s low-interest environment, you face an increase risk of your nest egg not keeping up with inflation over the long haul.
  2. If you don’t have enough cash for retirement. If you didn’t accumulate enough retirement assets to sustain an expected lifestyle, it becomes essential to decide how much capital in a retirement portfolio you’re willing to risk for the potential upside appreciation.
  3. When interest rates are low. Low interest rates makes the capital risk seem greater than the value bonds might provide due to a loss of purchasing power.  Taking a total-return approach, using low volatility, dividend-paying stocks to replace part of our typical bond component seems the best approach.
  4. If you have estate planning needs. If you don’t depend totally on your investments for income, then your money may be providing a bequest for charity or an inheritance for children.
  5. For historical purposes. The stock market has outperformed all other asset classes over the last century.

In retrospect, retirees will need to allocate a certain portion of their assets to higher-return equity investments to achieve long-term retirement objectives – be it longevity of assets, a desired level of sustainable income, the ability to leave a legacy, etc.

Essentially, the stock market has outperformed all other asset classes over the last century. And studies continue to show that unless you are within three years of retirement, the average variability of stocks relative to their returns is superior to that of Treasurys, municipal and corporate bonds.  Thus, the right course of action is for older Americans to stay invested in the stock market past age 60 which will provide you at least 20 years, on average, to ride out the long-term volatility inherent in equities.

References:

  1. https://www.fool.com/ext-content/is-1-million-enough-for-retirement/
  2. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/worried-about-retirement-pimcos-plan-to-help-retirement-savings-last-a-lifetime
  3. https://money.usnews.com/investing/articles/2017-07-24/5-reasons-to-stay-in-the-stock-market-in-your-60s
  4. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/income-to-outcome-pimcos-retirement-framework
  5. https://money.usnews.com/money/blogs/on-retirement/2011/03/22/why-retirement-is-not-an-age