Why should I invest now?
Consider two twin sisters Sally and Mary born roughly 60 years ago.
Both managed to save the same amount of money each month. The only difference being that they started
saving at different times.
Sally started saving and investing from the age of 20 to the age of 30 and then did not save or invest a
dime more. Mary saved and invested continuously from the age of 30 to 60. When
both of them are 60 years old, who would have more money in her retirement account?
Shockingly the answer is Sally. Based on a historical rate of return of 10% a year for the S&P 500 and
the power of compounding, Sally would have more money when they turn 60 than Mary even though Sally only
saved for 10 years while
Mary saved for 30 years. This is a simple example that obviously does not take many other factors
into account but does show how important it is to invest early.
Isn't investing in individual stocks like gambling?
When have you seen a gambling bet pay a dividend or split into two bets? How often have you seen
someone hold on to a gambling bet for over 30 years and hand it over to his or her heirs? Yes, it is entirely
possible to trade stocks frequently without any fundamental or technical analysis and that could be
comparable to gambling. But investing for the long term after doing due diligence is essential for both
wealth preservation (against the forces of inflation) and to grow your net worth towards the goals of
financial freedom or retirement.
Lets suppose you wanted to start your own business. Since only one in 5 new businesses survive
or in other words 80% of new businesses fail, wouldn't it be better to invest your money in a business
that has already proven that it can survive and can generate free cash flow. Allowing your money to grow
with a growing company can be a much safer strategy than attempting to start your own business.
Understandably, if your business were to succeed, it will be personally and financially more satisfying
than investing in a public company.
Why is SINLetter free?
SINLetter is free because I originally created it to disseminate information about
stocks I was researching for my personal portfolios, to friends and family. This is reflected by the fact that
as of January 1st, 2006, 10 out of the 11 stocks featured in the SINLetter model portfolio are also in my
personal portfolios. As I am personally a Software Engineer, my IT and infrastructure costs are very low
and SINLetter will continue to remain free.
What is your approach to investing?
I am a value investor at heart and look for stocks that are undervalued, out of favor
or just not on Wall Street's radar. Value investing requires a great deal of patience and committment but the payoffs
can be huge. I also follow the "Dogs of the Dow" theory as discussed in the January 2006 SINLetter but
with a few modifications of my own. Having said that, it does not mean that I do not consider growth companies and
have featured them in previous editions of SINLetter.
How do I get started?
Financial advisors usually suggest that before you start investing,
you should have at least 3 to 6 months of living expenses in cash. This is excellent advice and depending
upon your situation, the number of months may vary. This amount of money will hopefully help you weather
events such as the loss of a job or an unforeseen emergency without having to liquidate your investments
at short notice. To make this emergency fund grow, parking it in an online bank such as
ING Direct that pays a high rate of interest
(currently around 4%) is a good idea.
Once you have this emergency fund in place, start by learning about investing
from books and online websites (there are many links in the SINLetter resources page).
The best website that covers the basics of investing and helps you understand the concepts is
SmartMoney Investing 101.
After you are done with the SmartMoney Investing 101 website, check out the book
One Up on Wall Street
by Peter Lynch. Finally identify stocks that you think you would like to purchase and put them in a
"simulated online portfolio" to see how they perform over the next few months. SmartMoney.com has a good tool
to do this. Yahoo and a bunch of other websites will let you maintain an online portfolio as well.
Which broker should I use?
Most people start out by using an online "discount" broker such as
Ameritrade or Scottrade.
If you have a minimum of $5,000 to start with, then Ameritrade Izone with its $5
commissions cannot be beat. The only caveats with IZone are that the value of your portfolio should be a minimum of $5,000
and you can only reach customer support through their website. Ideally starting out with investments in stocks and
Exchange Traded Funds (ETFs) would be a good idea.
If the Federal Reserve (often called "the fed") is no longer raising interest rates (interest rates are flat) or
if interest rates are falling, diversifying into bonds is also a great idea.
Is there a minimum amount I should start with?
Various brokers have various minimum requirements. I would suggest starting with a minimum of at
least $1,000 or $2,000 so that trading fees do not have a very big impact on your returns. Many brokers provide free trades to
clients who open new accounts and that could help keep your trading costs low. If possible, try to invest money periodically
(every month or quarter). If the amount you can save every month or quarter is very small then you can wait until the end of
the year to invest your savings for the entire year. Please make sure that you have an emergency fund setup and retain some part
of your overall savings in cash or other liquid investments.
What should I know before I start investing?
It is very important to identify your goals and objectives. It is also important to
make an honest assessment about the amount of risk you can afford to take. To figure that out, try to answer the following two questions.
- How long of an investment horizon do you have? 10 years, 20 years, 30 years?
- Will you have any big expenses in the near future such as buying a house, getting married or having a child?
Risk and reward go hand in hand and if you have a long investment horizon, then you could
afford to take greater risk, as you will have more time to recover in case something goes wrong.
DOs & DON'Ts
These dos and don'ts are meant for long-term investors and some of them may not apply to all investors.
- Try to be patient and avoid trading very often.
- Low dollar value stocks are not necessarily cheap. Sometimes a $100 stock could be much cheaper than a $1 stock. Valuation is
determined not by price, but by earnings, underlying assets and the number of outstanding shares. Investors who are just starting
out often find it very hard to grasp this concept.
- Keep taxation issues in mind when you buy or sell stocks. Short-term and long-term
capital gains and losses are taxed differently.
Specifically watch out for the wash sale rule.
- Establish a goal and lay out a strategy to help you reach this goal. Then stick by your strategy.
- Do not use margin to purchase stocks. Margin
could do wonders for your portfolio in a bull market (a market where stock prices are rising) but can be totally disastrous
during a bear market (a market where stock prices are heading lower). It is extremely hard to time the market and liquidate
margin positions before a bear market starts. I have seen too many individual investors get wiped out completely because they used margin.
- Unless you are a professional trader, try to filter out the "daily noise". According to me "daily noise" refers
to the coverage about the financial markets by various media outlets. Watching the Nightly Business Report every night
on PBS (or other public TV stations) will give you an unbiased and comprehensive yet concise overview of the financial markets.