Fortune Watch

The initial exchange gave way to a group of merchants who banned together to form the New York Stock Exchange. This initial assembly of men met every day on Wall Street to trade their stocks and bonds – an outdoor ritual that lasted through to the early 1900s, when commerce moved indoors. Today, investment on this scale has come full circle – operating outside the bricks and mortar of traditional trading. Today’s investors operate en masse through the Internet, buying and selling stocks online with the click of a mouse.

Buying and selling stocks online has become the new way of investing. In this chaotic world of long work hours combined with the juggling of frenzied family schedules, the computer has taken an ever-increasing role – giving us a place to work, communicate, and be entertained any time of day from the comfort of our homes. The computer has also taken an ever-increasing role in investing, offering consumers the opportunity to trade online. Several reputable companies have pioneered the online investment arena where they have kept pace with the changing needs of today’s modern investors.

In accessing stocks online, investors have been given access to a bevy of services previously only obtained through visiting brokers in the brick and mortar world of finance. Online investment through reputable brokerage companies requires investors to set up an account through the website. They can then access their financial portfolio at the touch of a mouse. Additionally, these companies will offer up-to-the-minute stock quotes, historical performance and forecasts for each stock, as well as in-depth information about each of the companies.

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The world of stocks is a highly dynamic one. One has to constantly be on his/her toes in order to keep abreast of the latest developments taking place. To a layperson, it can be intimidating, with stock prices constantly changing every second.

Of course, we have seen during the (in) famous market crashes that can happen when things do not go according to what the markets expect. When unexpected events and their sudden impact on stock prices make even the most experienced among us quiver, imagine what the common investor must be thinking!

However, I am of the belief that certain simple investing habits, if inculcated well into one’s behavior can make one’s investing experience more comfortable and rewarding..

In this write-up I shall restrict myself with stock market investing. As such, the term ‘investing’ used in this article will simply imply investing in the stock markets. Let us now take a look at some characteristics effective investors possess.

Begin with the end in mind: Investing, in its broadest sense, is one of the most basic and important processes of preparing oneself for meeting future financial needs like child education and marriage and retirement. And stock market investing is no different. It has to be followed like a process with an aim of achieving your future financial needs. Started early, and done in a systematic manner, investing in good quality companies can help an investor generate good returns over a long-term.

Think ‘risk-risk’: In making an investment decision, apart from returns, there is one more very important factor that should weigh heavy on your minds — risk.

Simply defined, it is the uncertainty of happening/non-happening of a certain event(s) that is likely to affect future returns. A risk is generally attributed to external factors that create disturbance in the existing scheme of things. Some of these external factors are geo-political uncertainties (elections, terrorist attacks and wars), financial crisis and economic downturn.

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Perfection is achieved not when there is nothing more to add, but when there is nothing left to take away.

What, you may ask, is the connection between minimalism and investments? A very close connection, I think. When I look at the market for investment products today, and see the kind of investment portfolios that people are collecting, I think there’s a strong need for a self-conscious and aggressive minimalism in investment planning. What is happening now is the very opposite. The loudest messages about investments and savings that reach people are advertising about the launch of new mutual funds. This collective impact of these messages is to fabricate the idea that your investment needs are best met by portioning out little bits of your savings into a large number of exotic and specialized mutual funds.

Here’s a sampling of just the last few months. There are funds specializing in different sizes of companies-large, medium, small and micro. There’s a fund for companies that are facing ‘unique’ situations, which are apparently different from ‘special’ situations. There’s a fund for investing in companies that will benefit from increased infrastructure spending and one for only companies that will benefit from increased consumer spending. There’s a fund for investing in companies that are growing fast and another one only for companies that will grow fast in the long-term. There are even some funds that specialize in companies of all sizes although that’s clearly a meaning of the word ‘specialize’ that’s not there in any dictionary that I have seen.

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Most working people dream of this thing called financial freedom. It certainly sounds like something we’d all want. But have you ever stopped to really think about what it means? It can mean different things to different people, so before you spend time looking for it, maybe it’s worthwhile to examine what the concept really means to you. After all, it’s hard to find something if you don’t know exactly what it is!

Time and money are inversely related. This means that in most cases, one can be traded for the other. And if you think of how that applies both to your everyday life and to the way business is conducted, it’s true. For example, you can spend your own time cleaning your house or mowing your lawn, or pay someone to do it for you, and free up the time for yourself. You can spend time researching on your own, or you can pay some money for someone else’s specialized knowledge in that same field.

With that idea in mind, financial freedom may be defined broadly as reaching the point where you no longer have to trade your time for money in order to provide for what you want in life. There are two key phrases in that idea – “no longer have to trade” and “what you want”. These are what you have to define for yourself, in order to determine what financial freedom means to you.

To many, financial freedom means just not having to work for a living. They dream of stepping off the treadmill of going to work everyday to pay the bills. Some may want to escape the stresses of the job itself, unpleasant working conditions, commuting, boredom, and so on. Others may just value more time to be with their families and pursue their own interests. For most people, it’s some combination of those.

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A young couple came to me several years ago. At the time, they had a good combined annual income of over $100,000 yet owed $20,000 to credit cards, and they were adding debt at the rate of almost $2,000 per month. Despite their high income, they were spending considerably more than they were earning.

When we reviewed their situation, I discovered that a lawn service visited their home four times a month, at $85 per visit. I told them to cancel the service, and he replied, “But our lawn will look terrible if we do that! We must keep this expense.”

I also noticed that they subscribed to cable TV, including every premium channel — a monthly cost of $97! I told them to cancel cable. Monica gasped. “There will be nothing for us to watch! We can’t cancel cable!”

I’m sure you’ll agree with me that a lawn service and cable TV are optional, yet neither understood this. Both these expenses are optional, just as — pardon me for shocking you — almost your expenses are optional.

Health club membership? Optional. Entertainment? Optional. Telephone? Optional. Clothes? Most of it — or more accurately, the total money you spend on it — is optional.
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It is time to sell a stock when the points in your buy case have turned negative, but beware of false signals that can trick you into selling at the wrong time.

This written case is your reason for owning the stock. The only reason for selling the stock is if something changes the buy case. Here are some events that can fool you into selling, but may not mean your buy case has been compromised:

Falling stock price – A drop in stock price is not necessarily a reason to sell (it may, in fact be a signal to buy). Remember that you are investing in a company and its stock may not always reflect its true value.

Re-check the company’s fundamentals and if they haven’t changed, the stock is probably reacting to market conditions that are affecting all stocks or all stocks in the same sector.

If the company remains a strong buy, it may be time to add more to your portfolio.

Stock price rises – Oddly enough, investors sometimes can’t stand a good thing and sell after the stock has gone up. Stocks prices don’t necessarily operate by the laws of gravity. Just because they have gone up doesn’t mean they are doomed to come down. Some stocks keep going up for long periods, which is the idea.

Bad news and rumors – Bad news about a stock/company can send a stock down. It might be a story about the company missing earnings or something more serious like a government investigation.

Before an emotional “Oh my gosh” reaction, get facts, not rumors to assess the full impact of the news. Is this a bump in the road or a major wreck? Unless it is a serious problem, most bad news goes away quickly unless it involves criminal proceedings or a fundamental change in the company’s core business. Hang over bumps. If it’s truly a wreck, it is probably time to cut your losses as quickly as possible.

Knowing when not to sell is as important as knowing when to sell.

Don’t Abandon your Buy Case without a Good Reason.

Obviously the answer lies somewhere in the middle– but where? We take pride in making responsible choices for the future instead of thinking only of today, but do you ever feel like you’re going too far? Not appreciating the present enough?

I hear that suggestion a lot regarding how much money frugalites and penny-pinchers spend: that we’re not enjoying life enough because we’re not willing to spend much money. The thing is, I don’t think that spending more money would make me noticeably more happy! I mean, certainly there are some things that I could spend more on and enjoy– probably more expensive vacations, maybe going out to eat more and/or at fancier places– but in general I’m very comfortable with the way things are. I find ways to enjoy myself that are just good values for the money… and if there’s something that comes up that’s expensive but would be really wonderful, I weigh it carefully but am pretty good about letting myself go for it if it’s worth it.

However, it’s the flip side that concerns me. The amount you save is a combination of how much you make and how much you spend, so it follows that to save the most for tomorrow you need to make as much money as you can today. A lot of personal finance bloggers like to stress the importance of increasing your income as much as possible.

For me personally, while I’m not earning as much as I could if income was my only priority but I’m still doing a job I like and one I feel is good for society. The thing is, I’ve never really envisioned myself following a standard “career path”. Yet most of the other options will likely pay substantially less, in some cases perhaps as little as half as much. So the question is, how long should I stay at a good-paying job that I’m fairly but not completely happy with? I definitely want to try other work, but don’t I have plenty of time for that later on?

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One of the unique things about the state of mind of investors in stocks or mutual funds nowadays is that there is a huge diversity in their happiness levels. Of course, those who chase short term opportunities over days or weeks are always in some part of a manic-depressive cycle but nowadays, even long-term investors’ moods have an impressive diversity.

On the face of it, happy days are here again. Stocks have clearly shaken off the decline the suffered in the middle of last year. The markets are at or near all time highs and so are equity mutual funds. Currently, almost 95 per cent of equity mutual funds are either at an all time high or within five per cent of such a high.

In fact except for a handful of perpetual dullards (whom no one any longer invests in any way), there are no equity funds that haven’t recovered the losses that the markets suffered a year ago. In fact, many funds have done substantially better. In the period from June 14, 2006, which was the lowest point that the major indices touched in recent times, the markets have gained considerably. During this period many equity mutual funds gained more than the markets did.

Of course, a larger number, performed worse than the markets. Still, as I pointed out earlier, the fact remains that even these have earned substantial returns over this period and as I said earlier, there aren’t too many funds which aren’t at all time highs.

All in all, there are hardly any investors who are today sitting on losses, no matter when they’ve invested. So that’s that isn’t it? Happy times are here again and everyone should be smiling and congratulating each other?

Not quite. The fact remains that people invest in equity mutual funds to make money, not just to avoid losses. A great deal of money flowed into equity funds in the first half of 2006. Based on the heady atmosphere of those days, I think much of this money was not level-headed long-term investment. Instead, it flowed in expecting quick and substantial returns.

However I think this has been a good experience everyone. This is the way equity investment is. Stocks are volatile and need time to give returns. Most investors who come in at the peak of a bull run actually end up having to make losses in exchange for receiving this valuable educational experience. Those who have learnt it for free should actually consider themselves pretty lucky.

A huge debate arises when it comes to marriage and money about whether or not spouses should have a joint checking account or separate checking accounts. One popular thing that people do nowadays is they keep one joint account to pay the bills from and then they keep a separate account for each of them to spend money on “personal” things. This is a total cop-out when it comes to managing money with your spouse. A marriage is not a joint venture. You cannot pick and choose which things that you want to share as a couple and which things not to share. You must be handling money as a team.

My opinion is that there is only one way to handle your bank accounts. You keep one joint checking account and one joint savings account. You write a budget together, stick to that budget together, and talk to each about making purchases over $50 dollars, unless you are going to make 10 different $50 purchases in one day, then you talk it over with your spouse!

Common Arguments: “My spouse is worse at handling money than I am”. This is why you got married, to help each other, not avoid each others weaknesses. It is okay for one of you to be more financially savvy, but you both need to create a budget together, and not sharing your incomes will only bring more division. If your spouse had a problem with drinking, would you totally abandon them or try to help them? In the same way, why would you totally abandon your spouse if they had a problem with handling money?

“It is easier to keep track of the money”. No it’s not harder, it should be simpler because you are dealing with less bank accounts. What account do you use when you go out to dinner? I can hear it now “No, you pay this time; I have to pay for the dentist tomorrow”. If you are communicating about your purchases, and balancing your check book together each week, it should be easier to keep one joint account.

“I make more money than her, and I don’t want her spending all of it”. You make more money than her? Well, does she cook for you? Does she wash your dirty underwear? Yeah, exactly. You cannot put tabs on your salaries, or else resentment, jealousy, and division will destroy your marriage.

Handling money is extremely important in a marriage. And just like everything else important in a marriage, communication is key to keeping your money handling healthy. If one of you wants to spend all the time and the other wants to save all the time, come to an agreement. Set aside some “Blow” money to use for having fun and blowing it without any worries about what it gets spent on. Set aside money that will be saved for long term and short term. Also, remember to set aside money to pay off debts. Never settle for just paying the minimum payments on credit cards or paying off a car or house in 20 years.

Stocks not Best Investment for Quick Returns

Did you buy a stock to turn $20,000 into the $60,000 you need for Junior’s next year in college? If so, you’re not investing, you’re gambling, and, unless you are incredibly lucky, you will not meet your goal. The expectation of a high return in a short time frame is not realistic. Do stocks ever shoot up like rockets?

Yes, some do. However, you must understand that the market works on a rigid risk-reward basis. If there is little risk to the investor, there will be a lower potential reward. Investments that offer an extremely high potential reward invariably come with a high level of risk.

For the investor, this means if you are after the big returns, you must be prepared to suffer more losses than rewards. As an investment choice, stocks have historically returned 11 to 14 percent.

This does that mean that every stock should return in that range? Not at all – that is simply an average. You need to assess the risk of investing in a particular stock before deciding what an acceptable return is.

An investment in a young high tech company should have a higher potential payout than putting your money in a “blue chip” company that posts modest growth and pays a regular dividend.

What would be the risk factor for a stock that could potentially triple in price over a short period? The answer is very high – in fact, so high that the odds of it succeeding would be very slim. There is no safe (or legal) way to earn a very high return on your money over a short period.

Investing in stocks is best done as a long-term effort, which allows your money to grow and permits time for course corrections and adjustments.