I read an article in this week's TIME which stated that while the S&P 500 has returned 11.8% over the 20 years ending in 2006, the average investor earned only a 4.3% return. Let's take a look at how badly the average investor was beaten by the market.
If you invested $10,000 in 1986:
Average Investor: $23,000
Mr. Market: $93,000
Ouch. The average investor barely doubled their money in 20 years. And this was a great 20 year period for the market in general. If the average investor earns only 4.3% in such a great bull market period, then imagine how well the average investor does over a time frame when things don't go as well.
Why such a big difference - market timing. Bad market timing. The lesson here is clear, if you are going to try to time the market, you better be sure you know what you're doing, most people don't.
Saturday, April 19, 2008
Friday, April 18, 2008
Saving and Spending
If you want to have a successful savings plan, I think that the first thing that you have to figure out is what type of spender and what type of saver you are. That is, what do you have to spend money on to make you happy and what can you save money on, because you can be happy without it.
In my mind, what you should save and splurge on depends a lot upon the person. I think that there are a lot of articles on saving out there that tell everyone to save $4 on a morning latte at Starbucks. Maybe that's not a bad idea for a lot of people. But for some, maybe that latte is what get's them out of bed and going to work in the morning. Another idea I hear is to limit eating out. Again this might be good for some people, but I'm not sure it's for me. Eating out is really a great socializing time and a lot more important to me than buying stuff or gadgets. But, if you decide to keep the latte and the dinners out, you have to find somewhere else to save. Maybe a new car isn't that important to you or maybe you can get by on a smaller apartment. Of course, some people may be the exact opposite. They can get by without the latte and the dinners out, but derive a lot of happiness from a new car or nice house or apartment.
The point is, decide what are the most important splurges to you. Once you identify what is the most important, you can start finding ways to save on the rest.
In my mind, what you should save and splurge on depends a lot upon the person. I think that there are a lot of articles on saving out there that tell everyone to save $4 on a morning latte at Starbucks. Maybe that's not a bad idea for a lot of people. But for some, maybe that latte is what get's them out of bed and going to work in the morning. Another idea I hear is to limit eating out. Again this might be good for some people, but I'm not sure it's for me. Eating out is really a great socializing time and a lot more important to me than buying stuff or gadgets. But, if you decide to keep the latte and the dinners out, you have to find somewhere else to save. Maybe a new car isn't that important to you or maybe you can get by on a smaller apartment. Of course, some people may be the exact opposite. They can get by without the latte and the dinners out, but derive a lot of happiness from a new car or nice house or apartment.
The point is, decide what are the most important splurges to you. Once you identify what is the most important, you can start finding ways to save on the rest.
Saturday, April 12, 2008
Stockpicking: Investing or Gambling
I earlier said that I think that young savers should be invested in 100% stocks. Should that include picking individual stocks, or just having mutual funds that own stocks? Well, I think that picking individual stocks can make sense. But, you want to decide whether you want to pick stocks like a gambler or pick stocks like an investor.
Gambling
A gambler picks stocks they know little about, in risky industries, possibly because they heard or read something about the stock. Buying a stock without doing research to really get to know the stock is gambling. Buying stocks of businesses you don't understand is gambling. Buying stocks of businesses that you don't know will be around in 1, 5 or 10 years, is gambling.
I remember hearing something about a stock for First Marblehead Corporation (FMD). This company makes money with student loans for college students and the stock has been decimated. It has gone from a 52-week high of $45.70 to a low of under $4. The stock may be cheap. I would think that student loans will be a big business for years to come. If the company can stay alive, its stock could double or triple. But I have no idea about the details of their business. I have no idea if they will go bankrupt. And, some investors thought the stock looked cheap at $15, $10, etc., and have lost big money. For me to buy this stock, I would be simply gambling. Maybe it would work out, maybe not. But it wouldn't be investing.
Investing
Investing in individual stocks means researching the company. Researching the companies earnings and other fundementals. Understanding the company. What they do. How they will make money in the upcoming years. You can draw on your personal experience here. Is the company one whose products you would buy? Is it a product/service you like, understand and think will be around in 10 years.
There are a number of books and theories on investing that can help you here. And I think that it is ok to look at expert recommendations, as long as you confirm those recommendations before investing your money.
I think there is a temptation to buy stocks like a gambler. Buy a story without doing the work of researching a company yourself. I just don't think that you can be successful as a stock gambler over 30 years.
Gambling
A gambler picks stocks they know little about, in risky industries, possibly because they heard or read something about the stock. Buying a stock without doing research to really get to know the stock is gambling. Buying stocks of businesses you don't understand is gambling. Buying stocks of businesses that you don't know will be around in 1, 5 or 10 years, is gambling.
I remember hearing something about a stock for First Marblehead Corporation (FMD). This company makes money with student loans for college students and the stock has been decimated. It has gone from a 52-week high of $45.70 to a low of under $4. The stock may be cheap. I would think that student loans will be a big business for years to come. If the company can stay alive, its stock could double or triple. But I have no idea about the details of their business. I have no idea if they will go bankrupt. And, some investors thought the stock looked cheap at $15, $10, etc., and have lost big money. For me to buy this stock, I would be simply gambling. Maybe it would work out, maybe not. But it wouldn't be investing.
Investing
Investing in individual stocks means researching the company. Researching the companies earnings and other fundementals. Understanding the company. What they do. How they will make money in the upcoming years. You can draw on your personal experience here. Is the company one whose products you would buy? Is it a product/service you like, understand and think will be around in 10 years.
There are a number of books and theories on investing that can help you here. And I think that it is ok to look at expert recommendations, as long as you confirm those recommendations before investing your money.
I think there is a temptation to buy stocks like a gambler. Buy a story without doing the work of researching a company yourself. I just don't think that you can be successful as a stock gambler over 30 years.
Sunday, April 6, 2008
Enemies of Investing Returns - FEES
This is the first in what will be a series of posts about enemies of investing returns. While the effects of compounding interest on savings was discussed in earlier posts (and the amazing difference that beginning to save early can have on accumulation of wealth), these effects can be greatly reduced by getting lower investment returns. In fact, most investors get significantly lower returns than the stock market in general. In these series of posts, we will discuss the "enemies" of investing returns that can give away your returns to big investment companies.
ACCOUNT INACTIVITY FEE
Let's talk about account inactivity fees. I held a small account at E-Trade (about $3K-$4K). When I started with E-Trade, there was no account inactivity fee. However, while I held the account there, they started charging me $40 per quarter if I did not make sufficient trades. I was using a buy and hold strategy, so I rarely had any trades. So, if I left my money there I would have been paying $160/year to E-Trade. $160 that should stay in my pocket. 5% of my annual returns. The first 5% of any money I made was slated to go to E-Trade and I would have to earn a 15% return to realize a market 10% return. In some earlier posts the differences between 10%, 8% and 6% were shown to be huge. Imagine the difference in returns if you are paying 5% in fees.
So, make sure you don't lose your returns to fees. By the way, I moved my account to Scottrade, which has no account inactivity fees. There are a number of other online brokerages with also have no inactivity fees.
ACCOUNT INACTIVITY FEE
Let's talk about account inactivity fees. I held a small account at E-Trade (about $3K-$4K). When I started with E-Trade, there was no account inactivity fee. However, while I held the account there, they started charging me $40 per quarter if I did not make sufficient trades. I was using a buy and hold strategy, so I rarely had any trades. So, if I left my money there I would have been paying $160/year to E-Trade. $160 that should stay in my pocket. 5% of my annual returns. The first 5% of any money I made was slated to go to E-Trade and I would have to earn a 15% return to realize a market 10% return. In some earlier posts the differences between 10%, 8% and 6% were shown to be huge. Imagine the difference in returns if you are paying 5% in fees.
So, make sure you don't lose your returns to fees. By the way, I moved my account to Scottrade, which has no account inactivity fees. There are a number of other online brokerages with also have no inactivity fees.
Saturday, April 5, 2008
Saving and Investing
Why is this blog about saving and investing? Well, they really go hand in hand. If you can't save any money, investing doesn't matter much. Conversely, even if you save a lot of money, it is difficult to accumulate significant wealth without at least reasonable investing returns. For example, if you can only save $100/year, it doesn't matter what return you get on your money, you aren't going to be wealthy. On the other hand, if you can't beat inflation with your investment returns, you are not going to accumulate wealth at any type of pace. I will give a little caveat to that. I have an uncle who is a ferocious saver. There aren't too many things harder to do than separate him and his money. Although not privy to the details of his finances, I am of the impression that he has made very mediocre investment returns. But by saving 60%, 70% or more of his income he has become wealthy even with bad investment returns. But who wants to save 60% of their income? Not me, and I have to imagine not you. If you don't mind saving most of your paycheck, then I guess you can get rich without worrying about investment returns. For the rest of us, it is important to both figure a way to save a reasonable amount and also find a way to maximize our investment returns.
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