Tag Archives: Investing

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

    Investing in Edge Computing: Cloudflare

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    Cloudflare’s platform helps clients secure and accelerate the performance of websites and applications. Motley Fool

    Cloudflare (NYSE:NET), which completed its IPO in 2019, is a software-based content delivery network (CDN) internet security company that uses edge computing to protect against cybersecurity breaches. The whole premise of edge computing is to bring the access points closer to the end users. Cloudflare has access points at over 200 cities throughout the world, and they claim that 99% of Internet users are close enough that they can access the network within 0.1 seconds or less.

    This internet infrastructure company manages the flow of information online and therefore plays an important role in migrating data from the cloud to the edge. Its platform helps clients secure and accelerate the performance of websites and applications. And, it offers myriad security products and development tools for software engineers and web developers.

    The public internet is becoming the new corporate network.

    Cloudflare is a leading provider of the network-as-a-service for a work-from-anywhere world. Effectively, the public internet is becoming the new corporate network, and that shift calls for a radical reimagining of network security and connectivity. Cloudflare is focused on making it easier and intuitive to connect users, build branch office on-ramps, and delegate application access — often in a matter of minutes.

    No matter where applications are hosted, or employees reside, enterprise connectivity needs to be secure and fast. Cloudflare’s massive global network uses real-time Internet intelligence to protect against the latest threats and route traffic around bad Internet weather and outages.

    Edge computing

    While cloud computing houses data and software services in a centralized data center and delivers to end users via the internet, edge computing moves data and software out of the cloud to be located closer to the end user.

    Edge computing reduces the time it takes to receive information (the latency) and decreases the amount of traffic traveling across the internet’s not-unlimited infrastructure. Businesses that want to increase the performances of their networks for employees, customers, and smart devices can take advantage of edge computing to bring their apps out of the cloud and host them on-site either by owning and using networking hardware or paying for hosting at localized data centers.

    The company recently launched Cloudflare One, a network-as-a-service solution designed to replace outdated corporate networks. Cloudflare One acts as a secure access service edge (SASE). Rather than sending traffic through a central hub, SASE is a distributed network architecture. This means employees connect to Cloudflare’s network, where traffic is filtered and security policies are enforced, then traffic is routed to the internet or the corporate network.

    This creates a fast, secure experience for employees, allowing them to access corporate resources and applications from any location, on any device.

    Enterprise accelerating growth

    Cloudflare has gained hundreds of thousands of users with a unique go-to-market strategy, according to Motley Fool. It launches a new product for free (with paid premium features) to acquire lots of individual and small business customers and then markets its new product to paying enterprise customers.

    Cloudflare has created a massive ecosystem that it can leverage to land new deals and later expand on those relationships. It’s what makes this company a top edge computing pick since businesses and developers continue to flock to the next-gen edge network platform.

    There is increased risk associated with a small-cap, pure-play edge computing company like Cloudflare.

    References:

    1. https://www.fool.com/investing/stock-market/market-sectors/information-technology/edge-computing-stocks/
    2. https://www.cloudflare.com
    3. https://www.fool.com/investing/2021/06/17/forget-amc-this-growth-stock-could-make-you-rich/

    The Five Simple Rules to Investing | TD Ameritrade

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    Investing does not have to be complicated and can be a hedge to expected strong inflation.

    https://youtu.be/NxEcO7ITtMo
     

    “Global investment managers are more worried about the risk of inflation on markets than they are about the risk of Covid-19.” Bank of America survey

    72% of global fund managers expect strong inflation to be transitory, despite US prices surging 5% year-on-year in May, according to Bank of America’s latest survey. The Bank of America survey polled 224 managers with $630 billion in assets under management between March 5 and 11, 2021.

    In their collective opinions, trillions of dollars in federal stimulus spending in the United States helped set the economy on the path to recovery, but it’s also fueled concerns about ballooning levels of debt and the rapid inflation that could accompany the injection of so much money into the fragile economic system, according to an article in Forbes. 

    Despite the risks, investor sentiment overall is still “unambiguously bullish,” the survey found, with 91% of fund managers expecting a stronger economy in the future and nearly half of fund managers are now expecting a v-shaped recovery in global markets. 

    “Investors (are) bullishly positioned for permanent growth, transitory inflation and a peaceful Fed taper,” said Michael Hartnett, chief investment strategist at BofA, adding that 63% of the investors believe Fed will signal a taper by September.

    References:

    1. https://www.forbes.com/sites/sarahhansen/2021/03/16/inflation-not-covid-19-is-now-the-biggest-risk-to-markets-bank-of-america-survey-shows/?sh=6f5fd2db3b1f
    2. https://www.reuters.com/article/us-markets-survey-bofa/investors-see-transitory-inflation-and-peaceful-fed-taper-bofa-survey-idUSKCN2DR0Z9

    Investing Goals

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    “The goal of investing is to maximize your returns and to put your money to work for you.” 

    Emergency funds
    Being prepared for life’s surprises can take a burden off your mind—and someday, your wallet. An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly.

    Here are some of the top emergencies people face:

    • Job loss.
    • Medical or dental emergency.
    • Unexpected home repairs.
    • Car troubles.
    • Unplanned travel expenses.

    3 benefits of having emergency money

    Aside from financial stability, there are pros to having an emergency reserve of cash.

    — It helps keep your stress level down.

    It’s no surprise that when life presents an emergency, it threatens your financial well-being and causes stress. If you’re living without a safety net, you’re living on the “financial” edge—hoping to get by without running into a crisis.

    Being prepared with an emergency fund gives you confidence that you can tackle any of life’s unexpected events without adding money worries to your list.

    — It keeps you from spending on a whim.

    You’ve heard the saying “out of sight, out of mind.” That’s the best way to store your emergency money. If the cash is only as far away as your closest debit card, you may be tempted to use it for something frivolous like a designer cocktail dress or big-screen TV—not exactly an emergency.

    Keeping the money out of your immediate reach means you can’t spend it on a whim, no matter how much you’d like to.

    And by putting it in a separate account, you’ll know exactly how much you have—and how much you may still need to save.

    — It keeps you from making bad financial decisions.

    There may be other ways you can quickly access cash, like borrowing, but at what cost? Interest, fees, and penalties are just some of the drawbacks

    Retirement

    Saving for retirement might be the most important thing you ever do with your money. And the earlier you begin, the less money it will take.

    When it comes to preparing for retirement, there are a lot of things you can’t control—the future of Social Security, tax rates, and inflation, for example. But one big thing that you can control is the amount you save.

    Social Security shouldn’t be your only retirement plan since Social Security was never meant to be anyone’s sole source of retirement income.

    In fact, a 30-year-old making $50,000 per year today—and who might realistically expect to make substantially more by the time he or she retires—can expect less than $22,000 per year from Social Security at age 67 (in today’s dollars).

    In the past, pensions often offered an additional source of income for retirees. But pension plans are becoming rare in today’s world, and it’s more important than ever to take advantage of the opportunity to save for your future.

    Keep in mind that on average, Social Security payments make up only about 33% of Americans’ retirement income, according to Social Security Administration.

    Spending now could mean you’ll pay for it later

    Perhaps you’d rather spend your money on other things that are more fun than saving for retirement.

    But because compounding can enhance the value of your savings, the “pain” of each dollar you save now can be greatly outweighed by the flexibility you gain later.

    Of course, we’re not suggesting you’d be better off squeezing the last drop of enjoyment from your life.

    But we think that knowing you’ll be all set to meet your basic needs later—with enough left over to let you comfortably do the things you look forward to in retirement—is worth going without a few treats now and then.

    Choosing to spend less on certain expenses now could make a huge impact in the long run! For example, you could spend $3,600 a year on payments for a new car during the next 5 years … or you could watch that money grow to $80,000 over the next 40 years!*

    Control what you can

    In the end, the future of Social Security isn’t the only thing that’s out of your hands. Tax rates will almost certainly change between now and your retirement date, and inflation will continue to increase prices over time. Other government programs, like Medicare, might also change.

    But there’s one thing that only you can completely control: how much you save. Start now and you might be surprised at how little you notice the sacrifice.

    1. https://investor.vanguard.com/emergency-fund/
    2. https://investor.vanguard.com/retirement/savings/why-save

    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

    Greater Fool Theory | Motley Fool

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    “Greater fool theory states that investors can achieve positive returns by buying an asset without concern for valuation fundamentals and other important factors because someone else will buy it at a higher price.”

    Simply stated, investors expect to make a profit on the stocks they purchase because another investor (the “greater fool”) will be willing to pay even more for the stock, regardless if the stock’s price is overvalued based on fundamentals analysis or long-term performance outlooks.

    According to The Motley Fool, this philosophy relies on the expectation that someone else will get caught up in market momentum (frenzy) or have their own reasons for why the asset is worth more than the price you paid. 

    In the short term, popular sentiment plays the biggest role in shaping stock market pricing action, but fundamental factors including revenue, earnings, cash flow, and debt determine how a company’s stock performs over longer periods.

    In short, it is possible to achieve strong returns by using the greater fool theory, but it’s risky and far from the best path to achieving strong long-term performance. 

    Specifically with regard to the stock market, the Greater Fool Theory becomes relevant when the price of a stock goes up so much that it is being driven by the expectation that buyers for the stock can always be found, not by the intrinsic value (cash flows) of the company.

    The Greater Fool Theory is a very risky, speculative strategy that is not recommended especially for long-term investors.

    References:

    1. https://www.fool.com/investing/how-to-invest/greater-fool-theory/
    2. https://www.hartfordfunds.com/investor-insight/the-greater-fool-theory-what-is-it.html

    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

    Volatility and Market of Stocks

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    If you pay any attention to the stock market, you probably know that volatility is actually a normal part of investing.

    Stock market volatility is a measure of how much the stock market’s overall value fluctuates up and down. A stock with a price that fluctuates wildly—hits new highs and lows or moves erratically—is considered highly volatile. A stock that maintains a relatively stable price has low volatility. according to Investopedia.

    Stock market volatility is most commonly measured by standard deviation, which is a measure of the amount of variability around an average. The larger the standard deviation, the higher the volatility will be.

    Volatility is often associated with fear, which tends to rise during bear markets, stock market crashes, and other big downward moves. However, volatility doesn’t measure direction. It’s simply a measure of how big the price swings are. You can think of volatility as a measure of short-term uncertainty.

    “Keep it simple and avoid complications in the markets.”

    • Sooner or later, most investors realize that the stock market is actually a ‘market of stocks’ that is chaotic, dictated by investors’ emotions of fear and greed, and influenced by interest rates and macro economic conditions. Good stocks don’t always advance. Bad stocks don’t always fall. Reality is rarely ever as bullish, or as bearish, as forecasted by financial analysts and strategists.

    What is certain is that a quasi-invisible force known as volatility is always always present, threatening to disrupt the market’s delicate equilibrium and sanity.

    “One of the hardest parts about being a long-term investor is the fact that sometimes your money is going to get incinerated and there’s nothing you can do about it.” Barry Ritholtz

    Investors have a few primary ways to respond.

    • They can sit tight and act like long-term investors. Time tends to reward such behavior, though research has shown that it is as difficult to practice as it is uncommon.
    • Most investors never hold stocks long enough to benefit from the fact that the market rises over time. Investors typically buy too late and sell too early. They routinely “greed in” and “panic out” of stocks. They hold stocks for just a few years — or worse, a few months — rather than carefully curating a portfolio over decades, which means most investors behave like salmon swimming upstream. They struggle against the stock market’s natural rhythms.
    • Rotations is when smart and retail money runs after gains in certain sectors until a rally there becomes exhausted, and then their money runs to other sectors.
    • Investors can use options to more effectively navigate the stock market. A well-placed put or call can make all the difference in an uncertain market. A well-placed options contract can turn the unpredictably of investing into a defined outcome.
    • There are two types of options. A call option gives investors the right to buy a stock at a certain price and time. A put option gives investors the right to sell a stock at a certain price and time. An easy way to remember the difference between puts and calls is that a call gives you the right to “call in” a winning stock, while a put gives you the right to “put off” a bad stock on someone else.
    • Investors buy puts when they want to protect stock that they own from losing value.
    • Investors buy calls when they want to own a stock they believe will increase in value.
    • Many investors sell puts and calls to generate income.
    • Many people pick options that expire in three months or less. When you buy an options contract that expires in a year or more, you spend more money because time equals risk.
    • Simplicity is everything. It’s important to keep your trading strategy simple and avoid complications in the markets. Since everything could change tomorrow, or not, and thus we fall back on something we learned during the dark days of the 2008-09 financial crisis: Focus on the facts that have held up over time

    Consider keeping a list of stocks or exchange-traded funds you would like to buy during market sell offs or crashes.

    When in doubt, always remember: “Bad investors think of ways to make money. Good investors think of ways to not lose money.”

    To keep from panicking when stock market volatility ticks up, it’s important to realize that volatility comes with the territory when you decide to invest. The stock market will always have its ups and downs, and there’s no use trying to predict what’s going to happen. So if you’re investing for the long term, consider basing your decisions on your goals. timeline and tolerance for risk, rather than on what’s happening in the markets from one day to the next.

    Also, remember that being diversified is one way to help manage your exposure to volatility. By spreading your money out over various asset classes you’re also spreading out your market risk, and ensuring your portfolio’s results aren’t based on the performance of one type of investment.

    References:

    1. https://www.fool.com/investing/how-to-invest/stocks/stock-market-volatility/
    2. https://www.barrons.com/articles/how-to-buy-and-sell-options-without-making-a-fool-of-yourself-51600336811
    3. http://www.barrons.com/articles/how-to-use-options-to-beat-the-market-1477415121
    4. https://awealthofcommonsense.com/2021/05/sometimes-you-just-have-to-eat-your-losses-in-the-markets/

    Financial Mindset

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    “It’s difficult to master the psychology and emotions behind earning, spending, debt, saving, investing, and building wealth.”

    Personal finance is simple. Fundamentally, you only need to know one thing: To build wealth and achieve financial freedom, you must spend less than you earn. Yet, it seems challenging for most people to get ahead financially.

    Financial success is more about mindset and behavior than it is about math, according to J.D. Roth, author of Get Rich Slowly. Financial success isn’t determined by how smart you are with numbers, but how well you’re able to control your emotions and behaviors regarding savings and spending.

    Financial Mindset

    “Change your mindset and attitude, and you can change your life.”

    You sometimes have to make sacrifices in order to improve your financial situation. For instance, if you are in debt, you need to sacrifice some expenses so you can pay more towards managing and eliminating your debt. It is these financial sacrifices that will require you to have the right financial mindsets so you can overcome the obstacles that derail people from managing and eliminating their debt.

    According to an article published in USAToday.com, Americans do not have a financial literacy problem. Instead, Americans simply make the wrong financial decisions and have bad final habits which does not necessarily translate that they are unaware of the best practices of financial management. We know how to make the right choices about our personal finances. The problem, according to the article’s author Peter Dunn, is that Americans have a financial behavioral problem. It is bad financial behavior, decisions and habits that usually get them into money trouble. It is what put them in a financially untenable position.

    A perfect example is that you should never spend more than what you are earning. It is logical after all. But does that mean you follow it. Some people still end up in debt because they spend more than what they are earning.

    Other examples of beliefs about money and personal finance include:

    • Taking personal responsibility regarding your finances is everything.
    • You shouldn’t buy things you can’t afford.
    • You don’t have to make a ton of money to be financially successful.
    • You can give yourself and your family an amazing life, if you’re able to remain disciplined and think long term.
    • Borrowing money from or lending money to your family isn’t recommended.
    • Education can get you a better job, if you get the right education.
    • You should buy life insurance.
    • You have much more to do with being a financial success than you think.

    Financial literacy gems such as “spend less than you make,” “you need to budget” and “save for the future” are impotent attempts to help. However, lacking the correct financial mindset can make following the simple financial gems quite challenging.

    There are 5 destructive financial mindsets that are the norm in our society today but you should actually get rid of starting today, according to NationalDebtRelief.com.

    1. Using debt to reach your dreams.

    This can actually be quite confusing. A lot of people say that it is okay to be in debt as long as it will help you reach your dreams. There is some truth to that but you should probably put everything into the right perspective. Buying your own home and getting a higher education are some of the supposedly “good debts.” It is okay to borrow for these if you can reach your dreams because of that debt. Not so fast. It may be logical to use debt to reach these but here’s the key to really make it work – you should not abuse it. If you get a home loan, buy a house that will help pay for itself. That way, the debt will not be a burden for you. When it comes to student loans, make sure that you work while studying to help pay for your loans while in school. Do what you can to keep debt from being a burden so it will not hinder you from reaching your dreams.

    2. Thinking you do not need an emergency fund.

    The phrase, “you only live once (YOLO)”, should no longer be your mindset – especially when it comes to your finances. You always have to think about the immediate future. If you really want to enjoy this life, you need to be smart about it. Do not splurge everything on present things that you think will make you happy. It is okay to postpone your enjoyment so you can build up your emergency fund. You are not as invincible as you think even if you are still young.

    3. Settling for a stressful job to pay off debt.

    “The most important thing when paying off your debts is to pay off your debts.”

    Among the financial mindsets that you need to erase is forcing yourself to stay in a stressful job just so you can pay off your debt. You are justifying the miserable experience that you are going through in your job because you need it to meet your financial obligations. This is the wrong mindset. You need to put yourself in a financial position where you will never be forced to stay in a job that you do not like. Live a more frugal life that does not require you to spend a lot so you can pursue a low paying job and still afford to pay your debts.

    4. Delaying your retirement savings.

    Some young adults think that their retirement savings can wait. Some of them think that they need to pay off their debts first before they can start thinking about the future. This is not the right mindset if you want to improve your finances. You have to save for retirement even when you are drowning in debt.

    5. Failing to have a backup plan.

    The last of the financial mindsets that you need to forget is not having a backup plan. Do not leave things to chance if it involves your finances. You have to make a plan and not just that, you need to have a backup plan. If you have an emergency savings fund, do not rely on that alone. What if one emergency happens after another? Where will you get the funds to pay for everything? Think about that before you act.

    Takeaway

    Remember, personal finance is simple…it’s your emotion, behavior and habits that are challenging. Bottom-line, it comes down to your financial mindset.  Smart money management is more about your mindset than it is about personal financial math of net worth, cash flow, saving and investing. The math of personal finance is simple and easy. It’s the psychology that’s tough and challenging. Essentially, the concepts to improving your finances and achieving financial freedom are simple but it is not easy to follow through with them.

    References:

    1. https://business.time.com/2013/03/11/why-financial-literacy-fails/
    2. https://www.usatoday.com/story/money/personalfinance/2015/09/27/americans-financial-literacy-behavior/72260844/
    3. https://business.time.com/2011/09/22/debt-tsunamis-debt-snowballs-and-why-the-conventional-wisdom-about-defeating-debt-is-wrong/
    4. https://www.nationaldebtrelief.com/5-financial-mindsets-you-need-to-get-rid-of/
    5. https://www.getrichslowly.org
    6. https://obliviousinvestor.com
    7. https://petetheplanner.com/yes-you-are-an-investor-think-like-one/

    Road to Wealth | American Association of Individual Investors (AAII)

    Posted on by

    You can build wealth by saving for the future and investing over a long term. The earlier you start, the easier it is for your money to work for you through compounding. 

    Building wealth is essential to accomplish a variety of goals, from sending your kids to college to retiring in style. Wealth is what you accumulate; not what you spend. Most Americans are not wealthy. and few have accumulated significant assets and wealth.

    How long could the average household survive without a steady income.

    Every successful saving and investing journey starts with a set of clear and concise goals, whether they’re as big as retirement or as small as wanting to save for new tires for your vehicle. It’s important to determine and write down what are your savings, investing and wealth building goals.

    Rather than trying to guess what’s going to happen, focus on what you can control. Each financial goal calls for a positive step you can take no matter what the market or the economy is doing.

    The Wealth-Building Process can help you keep many of these financial goals and investing process on track. It is designed to give you clarity on what you are investing for and what steps you need to take to reach and fulfill those goals.

    The key is to stick to your financial plan and recalibrate the investing process throughout the year. One way to do so is to set up reminders that prompt you to go back and review your goals. Positive change often requires a willingness to put yourself back on track whenever you drift away from the plan.

    With that in mind, here are financial and investing tactics for investors:

    1. Only follow strategies you can stick with no matter how good or bad market conditions are.  All too often, investors misperceive the optimal strategy as being the one with the highest return (and often the one with the highest recent returns). This is a big mistake; if you can’t stick to the strategy, then it’s not optimal for you. Better long-term results come to those investors who can stick with a good long-term strategy in all market environments rather than chasing the hot strategy only to abandon it when market conditions change.

    One way to tell if your strategy is optimal is to look at the portfolio actions you took this past year. Make sure that you are not taking on more risk than you can actually tolerate. Alternatively, you may need to develop more clearly defined rules about when you will make changes to your portfolio.

    2. Focus on your process, not on your goals. Mr. Market couldn’t care less about how much you need to fund retirement, pay for a child’s college education or fulfill a different financial goal you may have. He does as he pleases. The only thing you can control is your process for allocating your portfolio, choosing investments to buy and determining when it’s time to sell. Focus on getting the process right for these three things and you will get the best possible return relative to the returns of the financial markets and your personal tolerance for risk.

    3. Write down the reasons you are buying an investment. One of the most fundamental rules of investing is to sell a security when the reasons you bought it no longer apply. Review your current holdings and ask yourself the exact reasons you bought them. Recommend you maintain notes, so you don’t have to rely on your memory to cite the exact characteristics of a stock or a fund that attracted you to the investment.

    4. Write down the reasons you would sell the investments you own. Just as you should write down the reasons you bought an investment, jot down the reasons you would sell an investment, ideally before you buy it. Economic conditions and business attributes change over time, so even long-term holdings may overstay their welcome. A preset list of criteria for selling a stock, bond or fund can be particularly helpful in identifying when a negative trend has emerged.

    5. Have a set schedule for reviewing your portfolio holdings.  If you own individual securities, consider reviewing the headlines and other relevant criteria weekly. (Daily can work, if doing so won’t cause you to trade too frequently.) If you own mutual funds, exchange-traded funds (ETFs) or bonds, monitor them quarterly or monthly.

    6. Rebalance your portfolio back to your allocation targets. Check your portfolio allocations and adjust them if they are off target. For example, if your strategy calls for holding 40% large-cap stocks, 30% small-cap stocks and 30% bonds, but your portfolio is now composed of 45% large-cap stocks, 35% small-cap stocks and 20% bonds, adjust it. Move 5% of your portfolio out of large-cap stocks, move 5% out of small-cap stocks and put the money into bonds to bring your allocation back to 40%/30%/30%. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by five percentage points or more.

    7. Review your investment expenses. Every dollar you spend on fees is an extra dollar you need to earn in investment performance just to break even. Higher expenses can be justified if you receive enough value for them. An example would be a financial adviser who keeps you on track to reach your financial goals. Review your expenses annually.

    8. Automate when possible. A good way to avoid unintentional and behavioral errors is to automate certain investment actions. Contributions to savings, retirement and brokerage accounts can be directly taken from your paycheck or from your checking account. (If the latter, have the money pulled on the same day you get paid or the following business day.) Most mutual funds will automatically invest the contributions for you. Required minimum distributions (RMDs) can be automated to avoid missing deadlines and provide a monthly stream of income. You can also have bills set up to be paid automatically to avoid incurring late fees.

    9. Create and use a checklist. An easy way to ensure you are following all of your investing rules is to have a checklist. It will both take the emotions out of your decisions and ensure you’re not overlooking something important.

    10. Write and maintain emergency instructions on how to manage your portfolio. Typically, one person in a household pays the bills and manages the portfolio. If that person is you and something suddenly happened to you, how easy would it be for your spouse or one of your children to step in and take care of your financial affairs? For many families, the answer is ‘not easily’ given the probable level of stress in addition to their lack of familiarity with your accounts. A written plan better equips them to manage your finances in the manner you would like them to. It’s also a good idea to contact all of your financial institutions and give them a trusted contact they can reach out to, if needed.

    Even Warren Buffett sees the value of this resolution. In his 2013 Berkshire Hathaway shareholder letter, he wrote, “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Considering the probability of Mrs. Buffett having learned a thing or two about investing over the years, it speaks volumes that Warren Buffett still sees the importance of including simple and easy-to-follow instructions in his estate documents.

    11. Share your insights about investing with your family.  If you’re reading this, you likely have some passion for, or at least interest in, investing. Share it with your family members by having a conversation with them. Talk about how you invest, what you’ve learned and even the mistakes you’ve made. It’s a great way to pass along a legacy to those younger than you and to maintain a strong bond with those older than you. You might even learn something new by doing so. Our Wealth-Building Process can provide a great framework for facilitating these types of conversations.

    If a family member isn’t ready to talk, don’t push them. Rather, write down what you want to say, give the letter to them and tell them you’ll be ready to talk when they are. For those of you who are older and are seeking topics that your younger relatives (e.g., millennials) might be interested in, consider our discount broker guide, which includes a comparison of the traditional online brokers versus the newer micro-investing apps.

    12. Check your beneficiary designations. It is critical that all of your beneficiary designations are current and correctly listed. Even if nothing has changed over the past year, ensure that the designations on all of your accounts are correct. Also, make sure your beneficiaries know the accounts and policies they are listed on. Finally, be certain that those you would depend on to take over your financial affairs have access to the documents they need in the event of an emergency. We think this step is so important that we included a checklist for it in our Wealth-Building Process toolkit.

    While you are in the process of checking your beneficiaries, contact all of the financial institutions you have an account or policy with to ensure your contact information is correct.

    13. Be disciplined, not dogmatic. When you come across information that contradicts your views, do not automatically assume it is wrong. The information may highlight risks you have not previously considered or that you have downplayed in the past. At the same time, don’t be quick to change your investing style just because you hear of a strategy or an approach that is different than yours. Part of investing success comes from being open to new ideas while maintaining the ability to stick with a rational strategy based on historical facts. When in doubt, remember resolution #1, only follow strategies you can stick with no matter how good or bad market conditions are.

    14. Never panic. Whenever stocks incur a correction (a decline of 10%–20%) or fall into bear market territory (a drop of 20% or more), the temptation to sell becomes more intense. Our brains are programmed to disdain losses as well as to react first and think later.

    This focus on the short term causes us to ignore the lessons of history. Market history shows a pattern of rewards for those who endure the bouts of short-term volatility. We saw this last year. The coronavirus bear market was sharp, and the drop was quick. Those who were steadfast—or used it as an opportunity to add to their equity positions—were rewarded with new record highs being set late in the year and so far this year.

    Drops happen regularly and so do recoveries. If you sell in the midst of a correction or a bear market, you will lock in your losses. If you don’t immediately buy when the market rebounds—and people who panic during bad market conditions wait too long to get back in—you will also miss out on big gains, compounding the damage to your portfolio. Bluntly put, panicking results in a large and lasting forfeiture of wealth.

    15. Don’t make a big mistake.  Things are going to go haywire. A stock you bought will suddenly plunge in value. A mutual fund strategy will hit the skids. A bond issuer will receive a big credit downgrade. The market will drop at the most inopportune time.

    If you are properly diversified, don’t make big bets on uncertain outcomes (including how President-elect Biden’s administration and the Democrats’ control of Congress will impact the financial markets), avoid constantly chasing the hot investment or hot strategy and set up obstacles to prevent your emotions from driving your investment decisions, you will have better long-term results than a large number of investors.

    16. Take advantage of being an individual investor. Perhaps the greatest benefit of being an individual investor is the flexibility you are afforded. As AAII founder James Cloonan wrote: “The individual investor has a distinct advantage over the institution in terms of flexibility. They can move more quickly, have a wider range of opportunities and can tailor their program more effectively. They have only themselves to answer to.”

    Not only are we as individual investors not restricted by market capitalization or investment style, but we also never have to report quarterly or annual performance. This means we can invest in a completely different manner than institutional investors can. Take advantage of this flexibility, because doing so gives you more opportunity to achieve your financial goals.

    17. Treat investing as a business. The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation 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.

    18. Alter your passwords and use anti-virus software. There continues to be news stories about hacks. The best way you can protect yourself is to vary your passwords and use security software. A password manager is helpful for this. Anti-virus software and firewalls can keep viruses off of your computer and help thwart hackers.

    19. Protect your identity. Identity theft can cause significant problems. Freezing your credit, monitoring your credit reports (Consumer Reports recommends AnnualCreditReport) and paying your taxes as early as possible can help prevent you from becoming a victim. Promptly challenge any suspicious charges on your credit card or telephone bills. If you get an unsolicited call asking for personal information, such as your Social Security number, or from someone claiming to be an IRS agent, hang up. (Better yet, don’t answer the phone unless you are certain you know who is calling.) It’s also a good idea to cover the keypad when typing your passcode into an ATM. Never click on a link in an email purporting to be from a financial institution (a bank, a brokerage firm, an insurance company, etc.). Instead, type the company’s website address directly into your browser.

    The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 required credit bureaus to allow consumers to freeze their credit reports at no cost. The following links will go directly to the relevant pages on each credit bureau’s website:

    • Equifax: www.equifax.com/personal/credit-report-services
    • Experian: www.experian.com/freeze/center.html
    • TransUnion: www.transunion.com/credit-freeze

    20. To help others, invest in yourself first. Investing based on your values, donating to charity, devoting your time to causes you are passionate about and giving to family and friends are all noble actions and goals. To do so now and in the future requires taking care of yourself. Keep yourself on a path to being financially sound through regular saving and controlled spending. Good sleep habits, exercise and following a healthy diet (eat your vegetables!) are also important—as are continuing to wear a face mask and practicing social distancing. The better shape you keep yourself in from a physical, mental and financial standpoint, the more you’ll be able to give back to society.

    For those of you seeking to follow an ESG strategy, be it due to environmental, social or governance issues, make sure you stay on a path to achieve financial freedom. The same applies to other values-based investing, such as following religious beliefs. While it is possible to do well by doing good, every restriction you place on what you’ll invest in reduces the universe of potential investments you will have to choose from.

    21. Be a mindful investor. Slow down and carefully consider each investment choice before making a decision. Ensure that the transaction you are about to enter makes sense given your investing time horizon, which may be 30 years or longer, and that it makes sense given your buy and sell rules. A common trap that investors fall into is to let short-term events impact decisions that should be long-term in nature. If you think through your decision process, you may well find yourself making fewer, but smarter, investment decisions.

    22. Take a deep breath. Often, the best investing action is to simply take a deep breath and gather your composure. Short-term volatility can fray anyone’s nerves, but successful investors don’t let emotions drive their trading decisions. It’s okay to be scared; it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves. If you find yourself becoming nervous, tune out the investment media until you get back into a calm state of mind and then focus on resolutions #1, #2, #3 and #4 (found in last week’s Investor Update). Success comes from being disciplined enough to focus on your strategy and goals and not on what others think you should do.

    “I found the road to wealth when I decided that part of all I earned was mine to keep. And so will you.”  The Richest Man in Babylon

    Finally, remember that you have a life outside of the financial markets. Investing is merely a means to an end. Put the majority of your energy into activities you truly enjoy, including spending time with family and friends.

    References:

    1. https://www.aaii.com/learnandplan/aboutiiwbp
    2. https://www.forbes.com/sites/jrose/2019/09/26/ways-to-build-wealth-fast-that-your-financial-advisor-wont-tell-you