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Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1. Warren Buffett Investments One great way I have found to make money is to learn to do something well. Find something that you like to do. Something you can then duplicate over and over. This idea works well in a business as well as in investing in stocks or real estate. The term for this concept is a cookie cutter. after you prepare the dough you can stamp out replicas again and again without reinventing the wheel each time. If you want to master our financial security, you must learn to make money work for you rather than continuing to work for money. The most common types of investments for individuals are: stocks, bonds, mutual funds, real estate and small business. There are many good investment courses on the internet let me recommend one for your review. This outline is called Smart Monet University and is sponsored by NASDAQ.
Asset Allocation means how are assets allocated in a portfolio. The vast majority of a portfolio's performance is determined by the type of investment and industry the stock is in . For example semiconductor stocks tend to move as a group and in a big move which stock you hold does not matter as much as being in or out the right industry class at the right time. Contrary to popular thinking only a small portion of the markets gain by timing the market and individual stock selection. This is not to say that timing and stock selection is not important but over the long hall this may add only ten percent to the portfolio while asset allocation may account for up to ninety percent of a portfolios actual return. According to Nobel Prize winning economist Harry Markowitz, "The risk of a portfolio is not the average risk of its component investments. To the extent that investments move in concert with each other there is no effective diversification. The risk of a portfolio can be less than the average risk of the component investments. To the extent that assets do not move in concert with each other, their specific risks can be diversified away. If two portfolios have the same average return, the one with the lower volatility will have the greater compounded rate of return." In other words investing among various industries will help reduce the average risk of a portfolio. Diversifying too broadly drives the portfolio toward the market return, and you might be better off buying index funds that track various markets, NASDAQ, S&P 500, Dow 30 etc. Where is the adventure in that? Factors to consider when selecting an investment:
The most important investment principal is get started now. Learn what you want, do not wait to be sold something, and get started. Market Timing vs. Compounding Imagine you have a neighbor Mr. Market High who started investing in 1963 and makes one investment of two thousand dollars in the stock market (say a fund that comprises the Standard & Poors 500 index) each day at the worst day of the year, the exact market top, and repeated this unlucky timing scenario each year for ten years, and then made no further investments but let their investments ride. As of July 2000, his total investment of $20,000 would have grown to $168,113. Now imagine that another neighbor Mr. Market Low started investing $2,000 a year starting in 1973, right after Mr. High quit. Mr. High was the worlds luckiest investor. Every year he picked the exact market bottom each year when he invested his money. This gave him a lot of pride and bragging rights among his friends. Especially to Mr. High. He continued with his lucky streak for twenty years as opposed to your Mr. High's ten years. Mr. Low invested twice as much for twice as long. One day your neighbors, by mistake, each get the others brokerage statement for July 1, 2000 and guess what, Mr. Low's total portfolio value would be worth $29,936 less than Mr. High's ($938,177 vs. $968,113). Consider this, Mr. Low had all of the advantages. He invested twice as much money, his annual return was higher because of his great market timing, but he started later, and that made all of the difference. It is hard to beat the value of savings and compounding over time. The Moral is: market timing, is not very important over long periods of time. It is hard to make money trading because you need to have both the buy and the sell timing right on this investment and the next and so on. The investor who buys good investments and holds them for the long run is usually the winner. Timing and luck are always welcome, but you the most important timing decision you can make is to get started now. - Story courtesy of Louis Rukeyser If both Investors would have invested for the same ten years 1988 to 1997 (an extraordinarily good market) Mr. High would have made a 13.25 percent annual return and Mr. Market Low would have enjoyed a 18.95 APR. The difference between buying at the absolute market high each year for ten years vs. the absolute market bottom was 5.7 percent. Not a difference to be ignored but considering that none of us are good enough market timers to catch the absolute market bottoms or unfortunate enough to always buy at the absolute market top each year, the power of market timing fades and is over taken by the power of compounding over time. The market is usually very efficient over time. There are extremes that you should take note of, but in general, an investor takes a larger risk being out of the market when it goes up than not being in the market when it goes down The Investors Business Daily published a study that shows that If you had invested in the S&P 500 at the end of 1981, and reinvested your earnings and dividends until the end of 1998 (a seventeen year period), you would have earned a 21 percent average annual return. If you timed the market and missed the ten best trading days during that period your return would have dropped to a 16 percent annual return. If you missed the thirty best market days, over the seventeen year period, your return drops to just a 9 percent annual return. So much for aggressive market timing. We can take an even longer view. One dollar invested in the market over the last thirty years grows to twenty four dollars. Miss the best ten days of the past thirty years your dollar grows to fifteen. Miss the best ninety days, over a thirty year period, your dollar grows to only two dollars and ten cents. No one likes to ride out a major market decline. There are worst things in the world, and market declines do offer excellent opportunities to purchase good stocks on sale. In general markets recover quickly from market declines. During major market declines in the past forty years the stock market regained its previous peak in an average of thirteen months and then went onto new highs. A general rule of thumb is that markets have three up years followed by one down or flat year. Tax Tax rates for various capital gains:
Remember that the long term holding period is anything more than 12 months, a year and a day. Short-term holding periods is one year or less. Tax consequences are behind every investment decision. Tax issues should not automatically be the most important consideration in your financial decisions, but at the same time its importance should not be minimized. |