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| Investing 101 - again? | ||
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| NoSkill |
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Sir
Registered Member #457
Joined: Tue Oct 10 2006, 01:13PMPosts: 2628 |
I think I did this thread once or twice already before. Can anyone find it?
Ok before I begin, is anyone actively investing? If so please share with us how long you've been investing, what your portfolio consists of, what has and hasn't worked, etc.
There's a Money Management thread by Omega. -[link]- There's definitely some good advice in there, especially by yourdroid and myself.
There's this one also Investing Advice? by .4ngryToasters. -[link]- He was looking for a pretty impossible investment vehicle (32% annual return over 5 years) but this thread has some of the formula's needed for figuring out present values, future values, interest rates & time.
As for myself, I've been investing since around 2000, but didn't get over $1000 in the market until around '03-'04. I was working as a bartender part time, a engineering draftsman full time and going to school full time. I had alot of money ($1k a weekend) and no time to spend it. I knew savings accounts were bad places to keep money as you'll never keep up with inflation.
So I asked the owner of the restaraunt I worked at. He was an avid investor and claimed he made over $450k in the market in the past 25 years. I knew nothing about investing, other than that I wanted to do it. So I entrusted my investment decisions into this guy.
WORST MOVE EVER. ("trust then verify" is going through my mind right now)
The stocks he recommended were OTCBB (Over the counter bulletin board) stocks. These are stocks that aren't listed on any major board like the NYSE or the NASDAQ. Mostly because they aren't "legitimate", usually very small companies, potentially unprofitable and theres thousands of them. 1 out of a thousand will meet the requirements to get listed on a "big board" (here's the NYSE's requirements -[link]-
So I ended up putting in about $5,000 into 4 OTCBB stocks over the course of 2 years. (CYGX, BGII, HEGP, and I forgot the 4th one...) I lost everything... all of it. I lost 95% of my money... that sucked. But it forced me to learn what the "right way" was to invest.
I did some research & read the following books. I strongly recommend anyone who wants to create financial independence and eventually wealth for themselves, read these books. At least the first two.
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| NoSkill |
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Sir
Registered Member #457
Joined: Tue Oct 10 2006, 01:13PM Posts: 2628 |
So since then I've re-invested another $5,000 into the market, I had to pull about $1,500 out due to needing the cash and lost about another $1,000 on some bad stock picks (well 2008 was a bad year for most stocks). So right now I have about $3,000 currently invested in my mutual fund. Which I add $100 to every month. (ITHAX) But let me tell you what YOU should do if you could take my $10,000 worth of experience and turn it into something useful for you. How much should I invest? You should invest no more than 20% of your net worth. This will presumably give you plenty of room to "live within your means" on whatever amount of money you make. If you have $5,000 in the bank and make $1,000 a month. Then you should take $1000 (20%) of that money in the bank and invest it. Then take $200 (20%) of each paycheck and invest it monthly into the same investment. Most people can do this. However if you've been living at your means or above your means (spending just as much as you make or spending more than you make) then you're going to have trouble with this. You need to learn to budget your income and not only stick to your budget but live within it. If you cannot do this well then no advice anyone ever gives you will help you. It's called discipline and without it you will fail at life. Where should I invest my money? This is simple. First, read those books, that will help you determine where to invest your money. BUT if you don't want to read, I'll tell you the best place to invest your money for the "defensive" (read: Lazy) investor. Index Funds. Index funds are what they sound like, a basket of funds designed to match an index (overall average) of an entire sector, market segment or even an entire market of stocks. The Willshire 5000, S&P 500, Russell 2000, Total Market, etc. These are benchmarks that the funds will use to invest their money. In other words an S&P 500 index fund will allocate all of it's money into all 500 stocks on the S&P 500 in roughly the same exact percentage as the market caps of the individual stocks. What does this do? It removes any thought whatsoever from the process. It reduces the fees to run the fund to next to nothing (A HUGE ADVANTAGE OVER MUTUAL FUNDS) and it will track the performance of an index almost exactly. You will officially be buying every single stock of importance, which stock is good or bad? WHo cares? I own them all. Over the long term, 20+ years, this is a damn near fool proof way to invest. There is no thought involved, you can Dollar Cost Average (Invest the same amount every month) and reinvest the dividends. You can do all this through an online broker such as Scottrade & make the deposits automatic so you never even notice the $$$. The disadvantages to index funds? 1) It's boring. You'll never be able to brag at a BBQ about how you own the top performing fund in the country, you'll never be able to say I made 1000% return on my investment. This is a slow & steady approach, but has little to no risk involved. 2) Since you're tracking the entire market (or portion of the market) should we experience down turns in the economy (like 2000-2001 or 2008) then you're going to suffer some losses. However the loss of the index is usually not nearly as bad as some of the losses for mutual funds during these times (after fees and taxes a 12% loss for the market can easily be a 17%-20% loss for a mutual fund) How can I hedge my risk during a market downturn? Great question, well since as we can see Index Funds are the best investment vehicle invented in the last 50 years how can you protect yourself from losing on these vehicles as well? Easily. Diversification. Diversification is everything, naturally you'll be well diversified over stocks just by having the fund itself. But there are other investments out there besides stocks. Many actually go up when stocks go down. Like bonds for example or foreign stocks. So how does an intelligent investor take advantage of these potential investments as well? Easily... it's called index funds. They have index funds for everything. So here's what I (& Benjamin Graham - you know the guy who taught Warren Buffet how to invest) would recommend. The Gist Of It Invest 20% of your income & net worth. Of that 20% put 80% into a total stock market index fund. Of that 20% put 10% into a bond index fund. T-Bill Bond Funds are good because they're backed by Uncle Sam and have 0% chance of defaulting... unless America goes broke in which case you'll have bigger problems to worry about than getting a 7% return on your bond fund. Of that 20% take 10% and invest it into a Foreign Stocks Index Fund. Here you have some freedom of choice as most funds will specifiy in geographic regions, you can invest in Chinese Markets, Indian Markets, European Markets, Latin American Markets, there's index funds for them all. You'll likely have to pick one. That's it, that's all you have to do. I personally will be investing another $10,000 into the market before the year is over. I'm going to move into the fund arrangement listed above. For reference here's a list of 30 No-Load Index Funds, pay attention to account minimums and expense ratios. Choose one that can work for you. -[link]- Edited Sun Aug 31 2008, 06:30PM |
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| yourdroid |
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Registered Member #36
Joined: Thu Dec 01 2005, 06:12PMPosts: 214 |
I had to take my money out of the market and go with CDs because i don't have the time to do the research i should before i buy a stock. And that is my first bit of advice, never put your money in the stock of a company (or any investment vehicle for that matter) that you don't understand. This is a pretty basic concept, similar to going to a casino and not sitting at a table for a game you don't know the rules for. As for good investment books. Benjamin Graham had another book that he wrote 60+ years ago with David Dodd that still works "Security Analysis". I like his method. It seems so intuitive and simple and it works so well. A few other books I liked would be: "The only three questions that count" by Ken Fisher who is the CEO of Fisher investments which is one of the largest investment firms out there. I like it because he takes a more philosophical approach to explaining investing that is a refreshing break from regurgitating numbers and textbook theory that so many people throw out there. He knows what he is talking about when it comes to investing and he is also a decent writer so you can make it through the book. anything written by warren buffet. He doesn't have much, but if you search hard enough you find stuff. Some is just a small piece he would write for a college newspaper (sorry don't have the link at the moment) but worth the effort to find. |
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| NoSkill |
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Sir
Registered Member #457
Joined: Tue Oct 10 2006, 01:13PM Posts: 2628 |
Thanks droid, but you'll find as I said in my second post than an Index Fund is the best place for the money of an investor who doesn't have the time to do research. Index funds will follow the entire market, or portion of the market, without you doing anything, they will automatically adjust their allocation to the bigger companies in the exact same percentages as the index itself. It's like buying the whole market (and as history has demonstrated, the whole market will go up) Here's a smaller list of index funds and which segments they invest in. -[link]- |
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| yourdroid |
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Registered Member #36
Joined: Thu Dec 01 2005, 06:12PM Posts: 214 |
One more thing, If your young, learn all you can about options and start investing in them. Learn now, then when you have enough to invest in them start. Options are theoretically one of the riskiest investments you can have because you get all or nothing, there is no inbetween. I don't view them that way at all though, for me, if i put 500 into an option then that is all i can loose but the reward is far greater if you do your homework. Brokers require that you have a certain level of funds to invest in options though. the best place to learn about options IMHO is -[link]- investopedia.com also has alot of good information about all forms of investing and on key terms you need to be familiar with to understand some things. |
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| yourdroid |
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Registered Member #36
Joined: Thu Dec 01 2005, 06:12PM Posts: 214 |
You only had one post up when i started writing that lol. I've never had much to do with index funds, but i guess my current situation is as good a time as any to start. I'll look into those, thanks. | ||
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| NoSkill |
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Sir
Registered Member #457
Joined: Tue Oct 10 2006, 01:13PM Posts: 2628 |
A Case Against ETF'S ETF's are funds that trade like stocks. They have all the advantages of index funds, low costs to run, accurate tracking of an index, low maintenence. But have one very big disadvantage. Since they trade like stocks and not like funds, you will be subject to trading fee's EVERY TIME you purchase more stock. For Scottrade that's $7 per trade, if you invest $100 a month, YOU'RE AUTOMATICALLY LOSING 7% ON EVERY PURCHASE. Also since you need to buy a whole stock (unlike funds where you can own fractions of stock) it's more difficult to dollar cost average a certain amount. However, for investors playing with $10,000 or more, ETF'S can be a great asset as they have all of the advantages of stocks: - buy and sell at any time during the trading day - instantly get exposure to a portfolio of stocks or bonds - buy on margin - sell short - no sales loads, although brokerage commissions will apply - lower fees - tax efficiencies But again due to trading commissions, unless you're moving alot of money in and out (to negate the $7 fee) then it's not advisable and a fund would be a better vehicle for you. |
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| b4ndito |
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b4ndito
Registered Member #958
Joined: Fri Jan 04 2008, 06:59AMPosts: 3385 |
This whole thread is a personal conversation. | ||
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| .4ngryToasters |
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you would
Registered Member #149
Joined: Sun Feb 12 2006, 01:08AMPosts: 2039 |
I think there's some good advice here. And, I'm no professional, but now seems like as good a time as ever to get into the market. Buy low and sell high. I'm definitely going to research this now that I have a decent and steady income. |
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| NoSkill |
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Sir
Registered Member #457
Joined: Tue Oct 10 2006, 01:13PM Posts: 2628 |
Feel free to ask me any questions. But the one thing you should take away from this thread is that Index Funds are better than Mutual Funds. They do a better job of diversifying and have lower costs/fees. This won't gaurantee you a higher return, but it will gaurantee you a lower loss (in a losing year like this one). And the preservation of capital (during losing years) is more important than the appreciation of capital. (a 50% loss requires a 100% gain to offset the loss) So ya unless you're going to pick stocks yourself (definitely buy and read those books) the Index Fund is your best bet. |
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