Investing


deeptrancenow_create_money2.jpgIf you ask children to choose between eating one ice cream immediately or two ice creams a day later, they’ll invariably choose to have just one right away. But if you give the child a choice between one ice cream the next day or two ice creams the day after that, almost all children will choose to wait the extra day and get two ice creams instead of one. I think all parents know this. I too figured this out almost as soon as my daughter was old enough to ask for things. Of course, children are pretty clever and often manage to outmaneuver parents. But whether it works or not, parents know that the trick is to try and avoid situations where a choice has to make between immediate gratification and some future pleasure.

Unlike parents, economists took a long time to figure this out and when they finally did, it was thought to be a great discovery. But then, applied to economic behavior, it probably is. What is true about the way our children make ice cream decisions is also true about the way we make decisions about savings, investments, and expenditures and probably about many non-financial matters like health and work too. Most of us, children or adults, are not good at making decisions that involve comparing the seductive present (and the immediate short-term) with the distant future.

Of course, this is not equally true of everyone. Some people, especially at a young age, have a severe form of this problem of not being able to think past the immediate gratification. These are the people who supply much of the profits of credit card issuers. At the other extreme are the kind of people who spend their lives accused of being misers- the ones who are unable to live the present without obsessively planning for the future. For a long time, the difference between the two kinds was considered to be a sort of moral gap with the former being the thrifty and careless no-goods and the latter being sensible and prudent.

But perhaps this is not the right way of looking at things. Over the last three decades or so, there has been a lot of research that suggests that some of these behavior patterns are fundamental to the way the human brain has evolved. For most of the period during which human beings were evolving, the immediate present really was very important – much more so than the distant future.

The problem is that this instinctive preference produces financial behavior that is detrimental to our economic well being. Conventionally, the solution to this would be education and self-awareness. If more people learn about patterns of risky economic actions then they wouldn’t take those actions, right? Well, actually, it doesn’t look like it. Only a small proportion of people will have the self-awareness to modify their economic behavior and pay more attention to the long-term than the immediate short-term. The only way that people can change their behavior is if they somehow get committed into a good choice.

I’ve always said that it was important for investments to be liquid so that one could withdraw from them when the need arises. However, it is a fact that for a large mass of people, the main investments tend to be the ones like long term retirement funds where they are forced to make and stick to for a long period of time. Perhaps there’s a lesson there.

3958-0med1.jpgDon’t fall behind. Finance charges, interest payments, getting discouraged about your finances… all problems that can occur if you let yourself fall behind. Whether it’s bills, credit cards, or student loan payments, falling behind can be a very difficult problem to come back from. The more you have to pay out in charges, the less you will have to invest in your future.

Set goals. If you don’t know where you are headed, how do you get there? In order to accumulate wealth you need a plan. Write out your goals, a way to achieve them, and you’ll be on your way to an early retirement.

Invest early. The greatest thing you can do to build wealth is start early. Even if you can’t invest much, start with what you can and let your money grow over time. As Albert Einstein said, “compound interest is the greatest mathematical discovery of all time.”

Invest in what you know. Whether you are looking to invest in real estate, stocks, or anything else, make sure you know how the investment works. The great Warren Buffett was often criticized for not investing in technology during the dot-com boom. His answer was simple. If you don’t know the business model, what the company does on a day to day basis, or how it generates revenue now, and in the future, then stay away from it. This principle can be applied to all types of investing.

Don’t do what the crowd is doing. When everyone is starting to get into an investment, that is generally when the smart investors are getting out. If everybody knows a stock is hot, or that their real estate market is booming, it generally indicates a bubble and that it’s time to cash out. Investors make money buying low and selling high. If an investment is hot and lots of money is flowing into it, you can’t buy low.

Don’t try get rich quick schemes. Don’t get greedy. This is easier said then done, but don’t try to gain too much too fast. Building wealth takes time and hard work… there is no easy way to get rich.

Save more. This is another one that sounds pretty basic, but can be difficult to achieve. Often times people want the instant gratification and go out and treat themselves. If you have some money burning a hole in your pocket at the end of the month, save it. Think about how nice it will be when that money is working for you rather than heading out shopping.

One of my friends writes some interesting stuff that is being written nowadays about investing, is fond of using the word fool. But he doesn’t do it the normal way – the way, say, a school teacher does. For example, I remember him once saying that banks were the default suppliers of foolishness in the markets. This idea of foolishness in this special sense makes it easier to understand why markets behave the way they do. What exactly is this foolishness? I think it’s best defined as what is not.

barros-money-man.jpgWe’ve all heard of the Efficient Market Hypothesis, which says that financial markets are ‘efficient’, meaning that the prices of stocks (or other securities) reflect all known information and therefore incorporate the collective beliefs of all investors about the future. For the hypothesis to be correct, people must have equal access to all information and have rational expectations.

I think the kind of foolishness we are talking about is everything that is the opposite of all those factors that make the market efficient. It’s a bit like heat and cold in physics. You could say that the flow of knowledge and rational expectations keep the markets efficient or you could say that it’s the flow of foolishness that keeps the markets inefficient. Isn’t that a problem? No, it isn’t, most certainly not. Inefficiency is what keeps the stock market interesting and profitable. If the markets were as efficient as the hypothesis says, then those who can identify and mark out foolishness would make less money.

Therefore, a steady and limitless supply of foolishness is the greatest of assets. Foolishness is the life blood of the stock market. Without foolishness, we would be nowhere. Instead of worrying about how well companies are doing and how much the economy is growing, smart stock investors should instead worry about whether an adequate supply of foolishness will be maintained. I’m happy to inform readers that if present trends continue, they have nothing to fear.

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user.jpgIn years of answering people’s questions about investing, I’ve come to classify two major sources of problems: One, investing without thinking enough, and two, thinking too much about investments. We all know at least a few hypochondriacs who continuously suspect themselves to be suffering from dangerous illnesses and require frequent visits to specialists and get exotic medical tests done to allay their fears.

Similarly, there are a vast number of investment hypochondriacs who suspect their asset portfolios to be suffering from some dangerous disease. Generally, they believe that this disease can only be diagnosed by having a specialist examine the portfolio and test it by applying exotic formulae that will perform some magical analysis. Somewhat like its medical version, investment hypochondria, too, is encouraged by these specialists who claim to detect and cure exotic diseases suffered by investment portfolios.

One of the most popular type of diseases in this field is a faulty asset allocation. Many people are worried sick about whether their investment portfolios have the correct amount of money allocated to debt and equity. Periodically, I get asked about what the formula for calculating asset allocation is and sometimes I’m actually asked this not by a patient but by a budding specialist.

The problem, of course, is that there is no formula, nor can there ever be. Asset allocation is just a fancy term for investing according to your needs. Try to get anyone like this to plan your investments and they’ll start by putting up a charade whose purpose is to convince you that finding out correct asset allocation is a complex process that requires proprietary formulae being churned up in complex looking spreadsheets invented by teams of MBAs.

By this process, deciding on an asset allocation starts by figuring out how risk-averse you are and how much risk you are willing to take to get the returns you want. This sounds so logical and systematic but is actually completely useless. Professional investors who are investing other people’s money may be able to find out their location on a risk-vs-return continuum, but at the back of their mind, everyone else wants zero risk. And guess what, zero risk is effectively possible if you do asset allocation the right way.

The key to really figuring out asset allocation is simply to make a rough time table of the future, one where you try and lay down when you will need how much money. Now, what you need to understand is that over some time horizon, most asset types turn zero risk, or as least as close to it as humanly possible. What you need to do is to match your investment time horizon (and not some theoretical risk level) to the asset type. Assets like bank Fixed Deposits and cash mutual funds are always zero risk, short-term income funds are zero risk after six months, and a good stock portfolio like a well-chosen set of diversified equity funds are close to zero risk after maybe seven years.

I‘ll admit this is a slightly simplified view but what I’m trying to do here is to demonstrate the principal on which individuals should base their asset allocation. There is no formula for asset allocation. The right way to do this is to figure out what you plan to do with your money in the future.

money-invest.jpgIn simple economics, there is little distinction between savings and investments. One saves by reducing present consumption, while he invests in the hope of increasing future consumption.Therefore, a fisherman who spares a fish for the next catch reduces his present consumption in the hope of increasing it in the future.

Most of the people probably have savings accounts with ATMs to access their hard-earned cash and be able to store away any extra cash in a place a little safer than a mattress. A few of you may even have some stocks or bonds.

Let me explain why while a savings account in the bank may seem like a safer place than the mattress to store your money, in the long-term it is a losing proposition! If you open a savings account at the bank, they will pay you interest on your savings. So you think that your savings are guaranteed to grow and that makes you feel extremely good! But wait until you see what inflation will do to your investment in the long-term!

The bank may pay you 5 percent interest a year on your money, if inflation is at 4 percent though; your investment is only growing at a mere 1 percent annually.

Saving and investing are often used interchangeably, but they are quite different! Saving is storing money safely, such as in a bank or money market account, for short-term needs such as upcoming expenses or emergencies.

Typically, you earn a low, fixed rate of return and can withdraw your money easily.
Investing is taking a risk with a portion of your savings such as by buying stocks or bonds, in hopes of realizing higher long-term returns.

Unlike bank savings, stocks and bonds over the long term have returned enough to outpace inflation, but they also decline in value from time to time.The rate of returns and risk for savings are often lower than for other forms of investment.

Return is the income from an investment. Risk is the uncertainty that you will receive an expected return and preservation of capital. Savings are also usually more liquid. That is, you may quickly and easily convert your investment to cash.

The decision about which investment to choose is influenced by factors such as yield, risk, and liquidity. Investments may produce current income while you own the investment through the payment of interest, dividends or rent payments.

When you sell an investment for more than its purchase price, the profit is known as a capital gain, also called growth or capital appreciation.

ist2_2665797_stairs.jpgToo much money in the Stock Market.

When there is too much money in the stock market, it can be a warning sign that things are about to change.

New money coming into the market could means investors who have been holding cash investments (CDs, bonds, and so on) are jumping into equities.

Individually, this may be a good decision, depending on where investors place their money.
Better Stock Return Unfortunately, what often happens is inexperienced investors watch a bull market run and want to get in on the better returns the stock market offers.

They may not choose their investments wisely and push the prices of hot stocks even higher. Because they are inexperienced, they buy stocks they hear about on television or from friends.

Rather than do their own research, money pours into the market and pushes up certain stocks beyond reasonable expectations.

If you have been a stock investor for at least 10 years, this scenario may sound like the tech bubble of the late 1990s.Stock Market Bubble. Huge amounts of cash poured into the market creating a demand for something to buy. During that period, it was any stock that had to do with the Internet.

Like any market where there are more buyers than sellers, prices shot up until professional investors began pulling their money out of the market and values crashed.

This doesn’t mean you should stay out of a market where there is lots of enthusiasm. However, be careful about what stocks you buy and even more careful about what you pay for them.

Don’t rely on the market to keep its enthusiasm forever.

stress1.jpgOn Tuesday, February 27 this year, the Dow Jones Industrial Average dropped 416 points—the markets sharpest drop in three years. Two emotions—fear and greed—can lead to bad investment decisions.

Investing can be dangerous yet profitable endeavor. Many people have been burnt and decide not to ever invest again. This is the primary fear for investing in anything. They may give you excuse such as ‘I don’t have enough money’ or ‘I don’t know where to invest’. But the number one fear is always the fear of losing money. If a novice investor knows that he won’t lose money, he must have used all means necessary (such as loan) to buy as much investment opportunity possible.

Investing here can mean a lot of things from buying gold coin to real estate. There are several ways of how to reduce your fear of investing in common stock.

Get Educated. When you know more about something, you are more certain of your outcome. When you know how to calculate the fair value of a common stock, you will know your expected return of investment. Remember that the less uncertainty you have, the less risk you undertake. You will also know more about the downside risk of your investment. If a common stock has $ 3 per share of positive net cash, is profitable and is currently trading at $ 5 per share, then you know that it won’t trade at below $ 3 per share for a long period of time. Your maximum possible risk here is 40% of your original investment.

Start Small. When you begin your investing journey, you have a lot of unknowns. Less education means more unknown which means greater risk. How small should you start? As much money that you can afford to lose. If you still have no idea, then how about $ 1 a day? One dollar a day will give you $ 500,000 after fifty years of investing with 10.5 % return. Even if you have $ 500,000 right now, it is better for you to start small if you are a novice investor.

Pay Yourself First: means that you find investment that can pay you first as investors. What investment can pay you first? One thing that comes to mind is buying a common stock that historically has steady or increasing dividends. There is one more way to pay yourself first by selling covered call options. For novice investors, however, I suggest we put this subject of selling covered call options off until you get really really comfortable with investing in common stock.

Learn From Your Mistake. Once you begin investing, the fear of losing money is always there. The best ways to learn is from your own mistake, but do not to hasten your learning curve.

Will you be fear-free after reading this column? The answer is no. Fear is always there because of uncertainty. Successful investing is about predicting the future which is uncertain. Even investing in your money-market account is uncertain. It involves some small risk. The risk might be inflation being higher than the interest rate offered. There is also uncertainty regarding the direction of interest rate. Interest rate used to be in the high single digits during the 1980s. Look where it is now.

We live in uncertain world. Instead of hiding behind the wall, we need to embrace it and educate ourselves to reduce the uncertainty. Doing this will in effect increase our investment return beyond the rate of inflation.

100130497_30b44feff9_m.jpgInvesting in the stock market sometimes boils down to one essential element, namely good choices.

No matter how well we do our research, how often we buy and sell, or how much we pay experts for their tips and advice, without choosing stocks that represent value, we won’t succeed.

Although some are good at predicting the direction of the market and timing the ups and downs, if they don’t purchase the right stocks, they will still meet with difficulties when trying to reap profits.

For that reason, some of the best paid people on Wall Street are known primarily for their talent at picking stocks. Financial advisors give talks and write books and newsletters about how to choose stocks that will outperform the market, and most experts echo the same sentiment and agree that one of the best ways to judge a stock is from the point of view of a consumer. By using instincts we have already honed as ordinary shoppers, we can often ferret out information that even the most skilled and software-savvy market watchers miss. While they study analytical charts, earnings reports, and the stock exchange ticker tape, folks just like you actually do business with the companies they invest in, because their experience as a customer speaks volumes about the value of the company and its products and services.

Here are the kinds of things to look for as indicators of a company’s worth.

How popular is their product or service? If everyone you know uses it, and is satisfied with such things as price, customer service, and reliability, the company is probably well situated among the competition. Are the employees satisfied? One of the best ways to judge a company is by talking to employees. Many companies put on a good façade, but underneath the fancy marketing is plenty of discontent. But if employees like a company – especially if they like it enough to buy stock in it – that’s a very good sign.

How well known are they? You may find a great startup company with all the trappings of success, but discover that it is lesser known. Many small or regional companies are popular in their own back yards, but the rest of the world may not yet know about them. Buying such unknowns can be a great way to invest in the next hot stock. If the fundamentals look good, sometimes being lesser known is a good thing for investors getting in on the ground floor.

If they went out of business, where would you go for similar products and services? If you can’t think of a convenient alternative, the company is probably in a niche market that enjoys customer loyalty and repeat business.

Shop around, and notice what you see and how each business makes you feel. Then trust your intuition. Make a list of companies that get your attention, and then call their shareholder relations department and ask for more details. By starting your list with companies you already have a first hand experience of, you raise the chances considerably that you will make smart choices.

admarkettrends.jpgMost, but not all, stocks move with the overall trend of the market. I’m not talking necessarily about one-day bumps, but general upward and downward trends – bull markets and bear markets. For this reason, it’s important to have an idea what the general trend of the market seems to be and what the market is telling us about future trends.

For this reason, it’s important to have an idea what the general trend of the market seems to be and what the market is telling us about future trends.

You can get a good idea of where the market is headed with just two pieces of information: Price and volume. When you put these two together, you get a picture that tells whether there are more sellers in the market or buyers. Volume tells you whether there is movement in the market and price tells you which direction.

The volume indicator comes from the daily sales volume. Both of these indicators are available online from many different sites. If the market has a high-volume day and prices (of the indexes) are up, you are probably looking at mutual funds and institutional investors buying, which is a sign of an up market trend.

On the other hand, a high-volume day with lower prices could mean a downward trend with the big players backing out of the market. You need to use some common sense when watching these indicators. For example, if you have three or four days of high volume and rising prices, it is not unusual to hit a high-volume day where the prices fall off.

You’ll usually hear the talking heads on television refer to this as “profit taking.” If you begin to see the down days too frequently in a market that has been moving up, it may be a sign that it is about to reverse course or stall.

Mutual funds and institutional investors are the volume buyers and sellers that move the market. When they began moving in a direction, that’s where the market goes and you can see it in the price and volume numbers. A market that shows sharp price movements in either direction without corresponding volume increases is sending false messages that should be watched carefully.

What does this mean to you? Don’t swim upstream. The obvious forces of supply and demand (except when something extraordinary occurs) drive the market. When there are more buyers (higher prices on higher volume) than sellers, the market is trending up.

When there are more sellers (lower prices on higher volume) than buyers, the market is trending down.

Watch for signs that the market is changing course (different price and volume than the prevailing trend), if you see more than a few of these, prepare for a change.

money_men.jpgCreating an investment plan can be a tricky but rewarding experience. The key to having a solid and fully customized plan is to know what your financial goals are and make sure your plan fit your needs. Investment plans are extremely popular because many people, due to the unstable job market and insufficient social security, are trying to save for their retirement.

Investment plans help investors buy a set number of stocks, bonds, and funds at regular intervals. This occurs automatically and does not require the investor’s constant attention. If you are interested in an investment plan below are some basic information and helpful tips about investment plans and how to choose the one that best fits your needs.

How does it work? Investment plans automate the investment process. Initially the investor picks out stocks which they want to regularly invest in. Then money is automatically removed from one of your financial accounts (checking, savings, or money market) and stocks are purchase for you by the investment plan coordinator.

As the investor you can make adjustments to how much money, how often, and what type of stocks will be purchased. Most brokerages, which offer investment plans, allow you to make changes at a small fee. However, one of the benefits of online investment firms is that many of the traditional fee based options, like adjusting your financial plan, are free of charge.

How much? Deciding how much you should invest is never an easy question. Only you know your financial situation and how much you can afford to put toward an investment plan. It is important to not over invest only to leave yourself short in paying your monthly obligations. You need to make sure the money you choose to invest will be available at the same time each month in the same amount. Think about the future. Perhaps this month you have more disposable income available however, most months you do not. It is better to invest less and not run short at the end of the month.

Becoming wealthy is not a matter of how much you earn, who your parents are, or what you do, it is a matter of managing your money properly.

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