Beginning Investors Guide and Considerations

Investing can be intimidating and confusing. For people who’s wholely unfamiliar, the slight thought could be scary and give a headache. It’s like stepping in a foreign land where people speak a different tongue, and one would be in deep trouble if nature happens and bathroom is nowhere to be found.

I was like that. But I was not ready to run away. So I “paid” the market to learn.

After 3 years, I am still no expert. I learned a few things from experience and much magazines reading, news studying, and internet browsing. I put together today’s post as a stepping stone for you who are beginning to invest or still thinking about it. Hopefully it will give you a sense of direction.

Why invest? And getting ready

Investing is for people looking to grow their money beyond the rate of high yield saving account and certificate of deposit. If you feel saving is not enough and too slow to lead you to financial freedom, it will do you well to learn to invest your money. As the saying goes, “Make your money work for you.”

Before you start investing, it will be good to pay off debt with high interest rate, especially ones with doublt digit rate and/or are not tax-deductible. Doing so basically means you make a rate of return equivalent to as if you invest the amount of the debt. Additionally, how can you invest with a clear mind when debt is nagging you constantly.

Once the debt is paid off, saving up a comfortable amount of money is the second line of duty. By “comfortable” I mean an amount of money that will allow you to stay cool in case of emergency (ie. loss of job, doctor visits, urgent car fix…). More on this later under risk tolerance.

Investing is not…

… a get-rich-quick scheme. If that’s what you are looking for, you are looking at the wrong place. It’s important that we get this clear.

Know your time horizon

You must know the amount of time you can keep your money invested in the market. Anything less than 5 years is not enough to ride out the turbulance of the market. It is the general concensus to assume your money to grow 11% on average in stock market, but remember that 11% is an average taken over couple decades. Correct me if I’m wrong.

I would suggest to only consider investing when you have at least a 5 years horizon. Time is your best friend and greatest asset in investing. The more time you have, the more time the money can grow. The more time you have, the better hedge you have against the turbulance in the market.

What about short-term trading? Day trading?

If you can only invest in less time than that, I suggest to choose either cash account or short-term bonds. If you plan to buy a house in a year or two, keep the downpayment money in cash saving. Obviously, you don’t want to lose that money. But I can’t stop you if you want to do otherwise. It is your choice.

If you want to trade short-term or even day trade anyways, first assure that you have the time and effort available to do homeworks:

  • study and understand the balance sheet, income statement, cash flow, and other stats
  • read news about the market sector and undertand its flow and future
  • learn the structure and behaviors of the management of the company
  • learn as much else about the company as possible (if you cannot make sense of the business, forget it)

Again, I don’t suggest doing this because it’s not easy, and it’s more dangerous than it is fun.. But I am not here to stop you, nor can I. I did it at the beginning myself to learn NOT to do it anymore. I paid to learn a lesson that I think is worth every penny. Short-term/day trading is more like gambling. Sure you can hit a jackpot, but you can lose it all just as easily. Plus, you will have “a lot of fun” entering your transactions at tax time.

Know your risk tolerance

Can you stand to see your money fluctuate a lot? Will you sell everything out of panic when you see your portfolio down 20%? You should select investment relative to your risk tolerance.

If you are not very risk tolerant, your portfolio should contain more stable investments that fluctuate less (ie. blue-chip companies and bonds). If you don’t give a darn about the money you are investing, you can bet on riskier investment vehicles. With greater risk, comes possibility for greater gain, and loss.

Your risk tolerance is closely related to how emotionally you are attached to the money you are investing. If you invest money that is of great importance like the fund for an engagement ring, consider yourself divorced. Go create your online dating account before dropping the money.

What I’m saying is that your chance of losing money is much higher due to panic caused by your emotion. This is why it is important to have saving for emergency before you plunge into the market. You don’t want to be forced to sell at a loss because you need to feed your dog.

Basically, the more you can emotionally detach yourself from your money, the better.

Allocation and Diversification

To lower the risk in investing, you diversify. Simply put, don’t bet it all on ONE thing.

Spread your money into different piles. That’s diversification.
Deciding how big each pile is. That’s allocation.

Once you know where to diversify, you decide an allocation that fits your risk tolerance. Your allocation should also change over time. For example, if you observe instability in domestic stocks for the near future, you will want to re-allocate bigger amount to bonds or foreign market. As you approach retirement when you cannot afford to lose your money, you will want to allocate to bonds or even cash.

Watch the expense

If you trade stocks, most brokerage account costs you each transaction, though I know that Zecco offers free trade (I use TDAmeritrade). Assuming otherwise, transaction cost can greatly lower your rate of return, especially if you day trade. If it costs you $10 to buy $1000 of stocks, you automatically lost 1% up front. Another reason to invest long-term.

This is also true for funds. You need to pay attention to its expense ratio. Don’t just look at the rate of return. Your true gain is the rate of return minus the expense ratio minus tax rate. Remember that.

The Simplest Way – Index Fund

Since I talked about cost, it would be blasphemous if I don’t mention index fund. An index fund simply traces a specific index in the market. If you bought an index fund that traces the S&P500, you would have made 11% annually for past few decades. If I further explain, it will becomes insulting to your intelligence.

The greatest benefit of index funds is their low expense ratio, versus traditional mutual funds or privately managed funds. You can have an entire portfolio of index fund, which keeps the cost low. And because they are already diversified, it saves you the tedious job of picking individual stocks and at the same time, provides you with safer and more stable growth than individual stocks.

If you go with index fund, all that needs to be done is to contribute regularly and control your portfolio’s allocation on intervals (quarterly or yearly). Doing so is enough to maintain a steady growth. It’s as simple and easy as it gets! Oh, and Vanguard has been wonderful.

Special accounts for retirement and college fund

Just a reminder… If you are investing for your retirement, you can open an IRA or Roth IRA account that provides tax benefits. Same goes for college fund, whether for you children or yourself, there are 529 plans available that differ by state, each with its own pluses and minues.

Some words of wisdom

Don’t be greedy because it can only be harmful. Don’t try to time the market because it’s a fool’s job. You can never catch the top nor can you catch the bottom.

Understand that a huge part of the market is based on speculation, and speculation is based on human emotion. Human emotion is never a predictable thing in itself and most fickle in nature. Conversely, how can you accurately predict the market? Especially when experts with advanced analysis tools have failed to do so.

Three key points

  • pick solid investment
  • diversify and allocate
  • invest long-term

With that, I’m done. But don’t just take my words and because this is only a quick guide for beginner.
Go study, read, try, and learn from your own experience.
Go build your own intuition of the market.

Let me know how you are doing later.

Originally posted 2008-02-28 23:32:37. Republished by Blog Post Promoter

A Generation Gone Awry

In the latest issue of BusinessWeek, there is an article about students taking the extra effort to be competitive by participating in financial/investing clubs AFTER getting into prestigious school, Meet Your New Recruits, They Want to Eat Your Lunch. Here is an excerpt:

Once, merely graduating from an Ivy League college or similarly prestigious rival like Stanford or Swarthmore qualified students for a choice entry-level perch on Wall Stree. No longer. “The whole idea of smart people just falling into banking is becoming rarer,” says Lance LaVergne, a vice-president and global head of diversity recruiting at Goldman Sachs. “Clubs are essential to preparation, especially for students who are not majoring in traditional discipline like finance or accounting.”

Also in the article, a girl is described to gain admission to three prestigious clubs at Stanford, and it is AMAZING.

I understand the world is getting tougher out there. Therefore, it is great to be driven. It is great to prepare for the future. It is great to kick-start learning about investing because that’s what I am doing now. But despite all that, I can’t help but contemplate if these students are getting too mixed up in the money-means-success culture at a very young age. I can’t help but worry that these students would grow up with the only ability to handle money, finance, and investing and narrow vision due to being a money-purist. Is that what life is all about?

I am not saying one should not focus on academic work because I did that and graduated with a 3.8+ GPA majoring in Computer Science and Japanse, and here I am working in the computer industry. One must need pragmatism to survive in this society.

However, from when I was an undergraduate, a huge part of what makes me the person today is being a part of the fencing team for 4 years, where focus, discipline, hard-work, comradeship, travelling, and fun happened, and then other things like social dancing, Japanese cultural events, a few music classes, misc. physical exercise, or just having some plain(dumb) fun with my friends. Perhaps that is why I am not rich, in today’s commen sense at least, but I am perfectly content with how I am and what I have, which are not just things and money.

On top of that, these investment clubs may have an unintended consequence of promoting short-term trading because the students are driven for immediate results to show recruiters and they have an investment time horizon of at most 4 years.

I only wish the students can still take their sweet time, in spite of those clubs, and participate in other cultural, character cultivating, or simply fun events. Because I would hate to see a bunch of physically-dwarfed, money-mongering, rich, yet utterly unhappy people to be grown out of this generation.

Your thoughts?

Originally posted 2008-05-18 11:01:41. Republished by Blog Post Promoter

Introvert living in a world of extroverts

I maybe quiet, but I may also have great ideas.

I maybe quiet, but I may also have great ideas.

We live in a very loud society. At least, it feels that way.

We either scream at the top of our lung or risk being unheard, unnoticed, unappreciated in today’s world. With the ever more stimulating media and everyone’s craving for attention, we all, in turn, need to continuously speak up, and FIGHT for attention.

More and more talking.
Less and less listening, paying attention.

No wonder people are feeling lonelier than ever.
No wonder we seem to understand so little of each other.

When do we have time for contemplation and introspection? Without which we leave little room for substance to grow, new idea to form, and creative vision to arise. Without such, the words that we keep spewing out lack what was mentioned, and they are just verbal diarrhea. That is, what we excrete out of our mouths are malformed, malnutritioned, perverted ideas that will lead us to a world that we… ultimately don’t want. All because we have to be constantly talking and constantly entertained… so it seems.

This is not to say introverts are better than extroverts. This is all about how unbalanced we have become.

We now deem extroversion as “normal.” Our world is not accepting of personalities that are of an introvert. We usually end up calling those people as boring, or inadequate, or even weird.

We are a society that suffocates those who are more introverted. We demand continuous communication even when it’s unnecessary. We ask for non-stopping display of excitement which is obnoxious to introverts.

I am an introvert. I enjoy being alone. I like having time to read at home. I love playing the piano. I find listening to music with headphones which is relaxing. I can sit somewhere and simply people watch.

I had been in management for almost a year now. It is surprising how criticism would arise mostly from a more mild demeanor that is natural for an introvert. If you don’t try to be visible, shouting words at every chance, you lack leadership and are not acting with a sense of urgency.

IntrovertImage02_2

I am analytical, I like to take in a lot of information, process, and then arrive at a conclusion. But the environment does not favor that. If I don’t immediately respond, it does not mean I do not care. Being able to be quiet and listen is also where understanding can happen, where appreciation comes from. With inadequate traits of introversion, we become mostly egomaniacs. And that’s how more than the average people would act these days (especially people in management).

That’s why I feel a sense of relief when I came across Susan Cain’s TED talk – The power of introverts:

Finally, the talk of the idea to take the time to stop, to enjoy solitude and to introspect.

Introversion is important. That is how we can understand each other. And understanding is the basis of compassion where we begin to truly care for each other.

I believe in action with grace and humility.

And someone like that can still be exciting, can still have style. Our world should not require people to call attention to ourselves in a sort of self-aggrandizing way exhibitionistic way.

From way back, my quiet and introverted style of being has always left me feeling “out of place” in this society, and it’s still does sometimes.

In conclusion, two obvious idea stand out from these discussion:

1) Our society still benefit from learning and adapting more traits of introversion, and as a result be more tolerant and able to work with introverts who may have some great ideas.

the_hulk

2) Meanwhile, introverts need to compensate, especialy if one wants to be influential, by being more studious and knowledgeable, thus more confident and assertive when the occassion arises that we need to speak up.

In other words, to all you introverts, don’t be afraid to go into hulk-mode if you feel strongly that you need to speak up or you know that you are right!

Originally posted 2013-06-03 04:12:01. Republished by Blog Post Promoter

Mortgage Bailout and Rate Freeze, Government Comes to the Rescue?

Based on current news, the federal policy will help a selective group of subprime homeowners by freezing the rate for a period of 5 years applicable to those who are still on time with their payment but could not afford a rate reset. In a sense, the selectiveness of this plan is good news because the less government intervention the better, and it means limited government involvement with a free market that badly needs to correct on its own. Nonetheless, the concept of a government supported bailout is still scary, no matter in what scale. Notice I said concept.

Let’s walk through some implications that I had learned.

Promoting Irresponsible Spending, Investing Behavior

Let’s be honest. People who are truly responsible are not those who cannot afford their mortgage. People who are responsible would learn and understand what they are getting themselves into and buy a place they can afford down the road. These people who took an ARM made a bet, whether they think of it this way. Any betting involves risk, just like investing in stocks, starting a business, or gambling in casino. Now that they lost the bet, are they supposed to be able to kick, scream, whine, and complain to get away with it? People who lost in casino don’t get saved. People who bankrupted on their own business don’t get saved. Why this case? Sorry to sound cold-blooded but tough love is sometimes best to teach a lesson. Without consequences, it is difficult for people to learn responsibility, like how we teach kids. If they provide a bail out in this scenario, they may as well bail out people who lost money on stocks, lost money in business. Heck, they should even bail out those who are defaulting on their car loans. After all, we need to “protect the American dream”, and last I heard, that includes owning a McMansion and luxurious vehicles. And what lesson? Who needs to learn anyways?

Repurcusion for Future Home Buyers

Banks are not the owner of the money they lend out. They receive those money from lenders who are looking to receive return base on interest rate. If the government freeze the rate, that takes away the potential return that they invested their money for. They will be intimidated by what else they government can possibly do in the future and therefore, will become much more conservative about investing in the bank loans. To secure a certain income level and to entice lenders for their money, banks will start charging higher rate for all mortgage loans. For this, let me laugh at those who will take out mortgage in the near future. You just got screwed. Oh wait, I’m one of those people… crap!

Punishment for Taxpayers

This is speculation, but the government may end up paying some lenders, not the banks, who actually own the loans to compensate for their loss. Additionally, the government or the banks will need an agency to identify qualified homeowners and process their applications. Someone has gotta foot the bill. This means taxpayers are paying, including many of us who are too responsible to take out an ARM to buy a giganto house. Banks will try to come up with ways to pay for the cost of this plan. They will do things such as increase various financial charges, invent new types of financial charges, lower saving account’s rate… So why save? All you dummies should be taking out ARM you cannot afford. Wait, I don’t have an ARM either… Argh!!!

Prolonging the Housing Bubble

We can all agree on how bloated the housing prices have gotten, especially in major cities. A correction is needed and is a healthy process for the cycle. Responsible people who have been saving diligently to afford a home will benefit from the correction that will lead to more reasonable pricing. Looks like they will have to wait longer now.

Renters will also suffer

Based on the last point, less people will be able to afford their own place due to the lack of, or a delayed correction. Consequently, they will have to rent. The demand for rentals together with sustained high housing price will lead to high and increasing rental prices, which also means less saving to contribute to a down payment. Ouch, a double whammy. I’d like to point out renters in the bay area is definitely feeling the pain of the ever-raising rent. On a side note, I guess when the government says “they will protect the American Dream”, they apparently mean they will protect the American Dream just for those who already own a house, and not those who rent. Renters don’t deserve to dream. I guess I’m stuck in reality then.

Delaying the Inevitable

Last but not least, people who need to be bailed out cannot afford a rate reset on their ARM payment now, how likely are they able to do that 5 years down the road? Their possibility for this is not high, unless the interest rate drops to something like 1% again, which very very unlikely. These people stand a good chance to lose their home to foreclosures 5 years from now still. Will the government bail them out again? I guess we will have to see.

Unpredictable Outcome and Behavior

We don’t know the specifics on who and how ones qualify for a rate freeze. Once we find out, some may take drastic measures in order to qualify. The possibility for abuse simply exists.

I’m not saying that all of these things WILL happen. They are all possible ripples that may result from the government dropping this stone in the pond. However, in the grand scheme of things, this plan which supposedly “protect people from losing their homes” will hurt everyone in more ways than one and at the same time, will “save” just a small group of homeowners only within a 5 years period. You can decide if this is worth it. I personally see more political agenda for this action than the government genuinly want to do something for the people. Now they can claim they have done something. I feel the situation is dire because our economy, and therefore our life, is dictated by a bunch of halfwits who seem to be irresponsible, lacking foresight, and high on we… I mean, greed.

Thank you for reading my commentary.

Originally posted 2007-12-08 23:06:19. Republished by Blog Post Promoter

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