Investing 102

[Tony_SS]

Originally Posted by toy71camaro

Did you gamble on some?

I didnt. I dont have the extra coin to be gambler, yet.

I bought some when they were less than $100... I cashed alot out in silver but I kept a little for when they will be worth one million dollars each. lol

[gearheads78]

OK now I want to go back to the begining and read some of the links.

I have a question about this one

http://money.cnn.com/magazines/money...nds/index.html

It lists those funds YTD and 5 year. Does the 5yr mean average per year or total 5 year return? Some of those funds say 5years around 12-15% which seems like a lot but if thats total does that mean they are only averaging 2-3% at year?

[ErikLS2]

Every time you see a time period like 5 or 10 year return it's the average per year over that time frame, unless it's identified as a cumulative return. Usually, but not always, the bulk of the positive return was in one or two years during that time period. You could earn much higher than that if you were in for a shorter time period but the RIGHT time period. But, there is no way to know or predict that time period. With the exception of getting dividends it only matters when you buy and when you sell, what happens in between doesn't matter.

Another thing to be careful of with these mutual fund annual averages is that you would have had to be in the fund the entire year to actually realize that return since the bulk of the return comes on just several of the best days that year. I read a study one time that the average investor is far below these average returns because they get in once they hear it's doing good which is generally AFTER it's done doing good. Somewhere in this thread I posted a chart showing just how quickly your return dwindles as you miss more and more of the best days in the market in any given year. I go back to my first post in this entire thread, the key is buy low, sell high, with much more focus on buy low which psychologically is the hardest thing to do.

Go back and look how well you would have done if you had the balls to put everything you could muster in at the bottom in March 2009 when everyone was saying the stock market is doomed never to return.

[GregWeld]

Originally Posted by gearheads78

OK now I want to go back to the begining and read some of the links.

I have a question about this one

http://money.cnn.com/magazines/money...nds/index.html

It lists those funds YTD and 5 year. Does the 5yr mean average per year or total 5 year return? Some of those funds say 5years around 12-15% which seems like a lot but if thats total does that mean they are only averaging 2-3% at year?

Since 1962 the average return on big cap stock market is 9.62%…. thus the saying that you average 10% annual average returns in the stock market. But there's a CAVEAT! You can be UP 30% one year and down 40% the next year. This is why you can't put money in the market that you're planning on needing in the "short term". Because for certain - the market will be down when you absolutely must have the money. Long term - it's the best place in the world to be invested. But short term - you can get creamed.

If you're saving to buy a house… I would split my investments and savings putting perhaps 60% in the market -- and keeping 40% in liquid CD's or some other "certain" capital return. That way you could take advantage of POSSIBLY getting some growth in your capital - but you wouldn't have to depend on perfect returns when the time comes that you want to make your downpayment. You could end up with 100% of what you need just from the 60% you invested in the market -- but you could also come up short and either be forced to wait or forced to sell in a down market. Or you could use the 40% cash you saved and just figure out some other combination to make your down.

[GregWeld]

Now let's discuss the mutual fund list you referred to.


#1 --- all 3 and 5 year "returns" are going to be skewed heavily on the up side because we're coming off near depression like lows! It's easy to show big 3 and 5 year returns IF -- you were in at the bottom and that's your comp.


#2 --- If you've read this thread -- you'd understand that you can build your own mini mutual fund (if you have 25K or more to invest) and skip the fees etc which affect your return.


#3 --- People are naturally drawn towards large numbers and tend to invest in Mutual Funds with the largest returns "lately". History is not a guarantee of future performance. In other words the funds that show the largest returns today may be under performers going forward. For example. They might be heavily invested in Financials -- which went way south in '08 and '09 and have made huge comebacks… or they may be invested in home builders and ditto - they've made big comebacks. SO ----- You need to really look behind the curtain of any mutual fund to see what they're invested in and then think about whether or not that set of investments has seen their best days -- or is there room to expand going forward.

[GregWeld]

Originally Posted by Tony_SS

Anyone looked at Bitcoin lately? $762 each!

The boom came after the US govt officially gave it its blessing and said they would not be regulating it. Crazy.

Unless there is some sort of massive conspiracy going on, I think it has proven itself in the market. $100 was a bargain not long ago!

Do you remember when GOLD was "going to $2,000 an ounce?? I do… was just a few months ago…


The problem is not things going UP -- the problem is when the chi t hits the fan and things go DOWN and they go down far faster than they go up!


I have no problems with someone that wants to buy BitCoins -- or buy FaceBook - or whatever else they want to buy. But for INVESTING 102 -- there are appropriate investments or not appropriate investments… Lots of people made great money flipping houses -- lots of my friends got very rich during the "dot com" era… I personally got rich in "tech" -- a couple of times. But like I always say --- better lucky than smart. You (anyone) are lucky if they can catch a wave - ride it - and get off and ride into the sunset. MOST DO NOT… they catch the wave and it slams their ass on the beach.

If someone has plenty of extra money (whatever level that is for each person) and wants to play with this kind of stuff -- GREAT! But for MOST it's not appropriate and once burned they're twice shy and then they get to retirement age and have zippola. This thread is about how to lift people off their asses and have them actually have a nice retirement.

[SSLance]

Hello, my name is "Disillusioned Investor",

I'm part of what I have heard referred to as an investor of the lost decade, only my lost decade lasted 15 years. I started investing in the stock market in 1997, and finally pulled the plug and went to 100% cash in the fall of 2011. I'm 47, my wife is 52, we don't have any kids, are debt free except for our mortgage (12 years left on a 2.9% 15 year fixed note) , and have a decent amount in our IRA and Roth IRA accounts and a nice nest egg in a taxable investment account. We were in mostly conservative asset classes for the early part and the late part of that period and got aggressive with equities during other periods. We gained most of our investment funds from additions, not growth, but we had times where we made a lot of money in the market, and we've had times (at least three) where we've lost our arse in the market. For a while my adviser was trying to build my wife and I a "dividend paying" asset base much like what Greg talks about in this thread. We also had a fairly large chunk in High Yield muni bond funds in late 2008...which while they kept their dividends in check, lost 35-40% of their net asset value.

We didn't bail then...like so many people did. We doubled down and got very aggressive and early 2009 treated us very well. By the end of 2009 we were on the plus side again and went back to the dividend paying plan that was directed by my adviser (A Merrill Lynch guy that I really like and trust).

My problem with that plan was the hunk just wasn't big enough to create the kind of income needed in retirement and the changes made chasing dividends often resulted in asset value losses. I can see the merit in that sort of a plan, I'm just not sure it fits our needs at this time.

Here's the deal, I'm in asset preservation mode. I'm winding down my working career, I don't want to have to go back and make what I have again if I loose it. Between our retirement accounts, real estate holdings, cash value life insurance, and cash in our investment accounts...we are pretty sure we can make do and retire (or slow way down anyway) very soon and spend the next 10-15 years really enjoying ourselves without going crazy. The hardest part will be accessing what's in the retirement accounts before we reach 59.5 years of age...and keeping what is in all of the investment accounts keeping up with inflation.

My partner is in his 70s and we've discussed this many times. I tell him how much I've enjoyed being out of the market and not having to worry about the next big drop. He's the polar opposite...when he's been out of the market for timing purposes, he can't sleep worrying that he's missing the next big bull market.

Being disillusioned like I am, I really have a hard time trusting the market anymore. I firmly believe that the institutional investors build opportunities into the market for themselves...and the rest of us are along for the ride. There have been WAY too many times the market has had a run like crazy for no reason...and just as many times where things have tanked when the fundamentals were there and even though one was doing everything they were supposed to, they lost their arse anyway. I don't like that feeling of no control anymore.

The reason I've been following this thread, and reading Greg's (and others) investment advise...is to try to find some sort of happy medium out there. I like Greg's theory of buying what you know...that makes a LOT of sense, especially since buying on fundamentals has been such a bust over my investing career. Don't get me wrong, I've made a LOT of money in the market...I've just lost a ton of money in the market more times than I feel I should have as well. I guess I'm a recovering investor...the time off has been very healing for me. Maybe I'll get back in some how, some way...maybe I won't.

I have enjoyed reading this thread though...and will continue to do so.

\Disillusioned investor...out...

[GregWeld]

Lance ----


You only loose money when you SELL… So what I'm saying is -- you're either into the wrong investments -- or you tend to pull the plug at the wrong time.

The reason I'm saying this - #1 - MANY people read these threads… so when I write - I write for "others" not just a single response…

The reason I preach investing the way I do - is that this is INVESTING 102 -- a beginners thread… it's not a "I have millions and do all manor of investing" thread. So buying what you know - understand - and TRUST to be there long term is to keep people from freaking out and selling at a loss when things aren't going so well. Rather - what they should be doing is putting steady money to work on a constant basis… which will have them adding more shares when prices are lower…

There's no way for anyone to respond to your post… because the details just aren't there - and they don't need to be and I'm not asking for them. Rather - what I'm seeing is a "boom and bust" investor (face value - without the details). Happy as a clam when the market is up -- poo faced when the market is normal or down. THAT is a sure fired way to loose your ass. My guess is that if you looked back at your actual stock investments - when you bought them - and did some quick calculations had you HELD them and reinvested the dividends - rather than going to cash or moving in and out… that you'd be far richer now.

Now --- another thing is in my humble (not really) opinion is that you're very near sighted. You're not ready for retirement -- or can't retire like you'd like to - and you've stopped investing because you're "nearing" retirement. REALLY? You going to die shortly? Or do you plan to live until what age? If you add the time until you can access your funds - 59.5 years old - and when you plan to be 6 feet under -- say another 30 years (89.5 ain't that old anymore!) seems to me you'll have a very very long horizon for the market to work for you and keep working for you.

See that's the problem -- INFLATION -- I've already been retired for 22 years (or 23 - I forget) -- and I'm just 60 -- and I plan to live a very good long time - and I plan to spend more as I age because there's a whole lot of stuff I've yet to do. Therefore my investments are paying me to play now - and growing over time - with rising dividend payouts - and capital growth… I DO NOT PLAN to suck. I PLAN to live well and keep it that way. Will my net worth go up and down over the next 30 years? Hell yes! Will my dividend payouts keep coming and keep me in the lifestyle to which I'm accustom? Yes - unless there's something like the zombie apocalypse which I can't control.

So --- I think your SALESMAN (called a broker) is making more money than you are moving you in and out of the market - and selling you inappropriate investments - and then calling you up and selling (churning) your accounts when it's easy to play on your fears.

Bonds are terrible investments and are only used as a small portion of your funds and should be used as TAX FREE MUNI'S when you already have a very high taxable income. Not sure why a guy would put a retirement account in bonds - except they don't really know much about investments… If you owned the bonds as TAX FREE MUNI'S to get current income without the additional income tax - then that is a different story… but we don't know your actual situation. IF you'd held the bonds until maturity - you would not have lost a single dime.. and you'd have been collecting the interest. Bonds shouldn't be bought for capital appreciation - they should only be bought for INCOME and "safety" IF == BIG IF == You plan to hold until maturity. BONDS SUCK OTHERWISE.

So here's my advice - and I'm not being critical nor am I making fun of you or anything of the kind….

I think you need to rethink your investment approach - and take charge of your own investments WHEN you think you can approach investing as what it is - INVESTING. When you understand that capital appreciation happens over time - and that at times you may be going backwards - but that over time you'll have gains. And when you understand that a balanced investment portfolio isn't a get rich quick scheme… and that the market doesn't go straight up day after day… and most importantly - that you understand your personal investing weaknesses. If you are the type that tends to panic at the least amount of "capital loss" (even if they're not realized) - then maybe no investment is suitable for you. But I believe that people can LEARN to change their ways and conquer their fears If they can learn to buy great companies and trust that over time they will be fine.

Learn that (let's just pick a company and make some sh t up) CHEVRON will go up and will go down - but that they pay you 3% every 3 months… and that even when the stock you bought at $120 is now at $100 - it's still paying you 3%…. and that you really don't have a loss unless you're stupid enough to sell… and that if you owned 100 shares at $120 and bought 100 more at $100 you'd now have 200 shares at $110… and you'd be making 4% because the dividend is being paid in dollars not percentages… and then 5 years go by and Chevron is trading at $130 and now paying 4% (on the current $130 price!) which raises your actual dividend to about 6% because your 3% calculation was based on the rate paid at the time you bought it. Period. When they raise the dividend - it's a raise and if you want to know what you're making in real terms you'd just have to do a bit of simple math.


In other words --- Chevron (CVX)in 2004 was paying 36.5 cent per share per quarter --- and today they are paying $1.00 per share per quarter. So if you'd bought and held back in 2004 -- and paid a whopping $47.70 per share -- and now you're 10 years later and they're paying you $4.00 a year to own their stock - that's almost 10% on your cost basis… and that's if you'd never re-invested the dividends (which everyone should be doing unless they're already retired!). Oh yeah -- and let's not forget that capital appreciation you're worried about --- it's (Chevron) only 237% over the last 10 years.

I don't know -- it all seems so boring to me…. but then again -- I'm just retired and running my race cars and building new hot rods and traveling all over the place in my Semi…

Yes - now I'm being a smart ass…. but it's also factual. Just saying'. Maybe you're broker ain't so smart after all.

[SSLance]

Oh trust me Greg, you aren't telling me anything I haven't already heard before. I know that you started this thread to help newbies understand and get acquainted with investing in the market, but I can't help wonder if it can't help disillusioned investors as well.

I've tracked all of my investments in Quicken and I haven't put Quicken back on my home laptop since it's hard drive crashed last summer. When I get to work tomorrow I can give you some examples of equities that worked out well for us over the years and some that didn't even though I held them much longer than I should have. The tax free munis were not in my retirement accounts, they were in the taxable accounts and yes, they were used more to keep taxable income low than capital appreciation. They were supposed to be the "safe" investment for my more liquid assets. Dollar cost averaging, keeping on buying even during the 3 different bust periods we've been through, was really what saved us. I understand that theory very well, just as much as dividend reinvestment which we've also always done. Problem comes when there's no more income coming in to keep on pouring into the market during the down years.

My FA is not a pump and dump type of guy and if we moved in and out of certain stocks or asset classes at the wrong times, it was more likely at my doing than his. I'd say over all we were about 50/50 on moves working out, half real good, half bad timing, but there were other factors involved as well in those moves, not just trying to market time.

About 1 year after I cashed out, I plugged into a spreadsheet all of the investments I held at the time and updated the share prices. This would have been approximately August 2011 - August 2012. The total appreciation was about $10,000 and about half of that was in Apple, which I would have probably sold before then as it had had a huge run up during that period. I realize that dividends wouldn't have been included in that calculation but the dividends were pretty small scale on the grand scheme. I just used this exercise to try to see what I missed. I came away from the exercise thinking that the extra sleep I gained during the same time period more than made up for the gains I missed out on.

I think mentally, if I'm going to get back into the market, I'm going to have to ease back in and only with a set percentage of the overall. When I was in before, I had 90% or so of my liquid assets invested. It's very unnerving when your business is taking a dive and at the same time your net worth is taking a dive as the market crashes. Tie into that some untimely deaths of friends and family members at near the same time and it makes one step back and reevaluate exactly what is most important.

My wife and I have spent the last 20 some years working our tails off and saving and scrimping and making smart financial decisions at the cost of personal enjoyment. Everyone has to decide for themselves when enough is enough, and I don't know that anyone will ever really know. I know this though, I'm going to stop chasing every last dollar I can and start taking the time to spend with those I love and enjoying day to day. If I have to adjust my life style in order to accomplish that, I'm okay with that. I spent a lot of years with nothing, so I know how to live on very little if necessary.

I do realize that I need to do something to keep up with inflation though, and that's what I'm trying to figure out how to do while preserving capital at the same time.

Please don't take my posts here as an anti-Greg investment theory stance, I don't mean that in anyway whatsoever. I'm intrigued by the way you describe your investing and am thankful that you are so willing to share it with others. Much like Ron has helped me dial in the tuning on my car, I think it is very cool that you give back your knowledge free of charge to anyone that will listen. I'm just trying to figure out if there is a way to make it apply to my personal situation comfortably.

[GregWeld]

Lance --

I never took your post as anti anything… only that you were relating your personal investing experience and that you were gun shy by your own admission.

My response was to put into perspective what I SPECULATED may have brought you to your disillusionment with investing. I've heard 'em all before… I have many friends that have lost everything they got lucky (Microsoft millionaires as well as other "self made" friends) and made… only to plow into markets and investments they never understood.

#1 rule of investing -- Never buy into anything you don't really really understand. That means the tax implications for your particular situation. That means the losses. It means the economic conditions that might affect your investment over time, etc.

SO HERE'S THE TAKEAWAY FOR YOU PERSONALLY….


Go back and look at the names we've discussed here… and do a bit of research on when you might have purchased them (in other words - when you were putting money to work - not that you actually purchased these names) and get the charts working for you…. and see what you could have had in income from dividends -- and how much capital growth you'd have had with a buy and hold strategy.

I don't think there's a single looser - over time - in the names we've tossed out in the last 300 some odd posts. There are INAPPROPRIATE names for many people -- and I've always put in that caveat! High yield bonds - JNK - HYG - and Annaly Capital Management (NLY) are not buy and hold investments!! I've said this 100 times… and these are the types of investments that I mean when I say - you must UNDERSTAND your investments. They get killed in a rising interest rate environment!

With a well blended portfolio of dividend paying investments -- a guy should be able to get about 5% dividend (using current rates/investment costs)… which means it takes ONE MILLION DOLLARS -- to make $50,000 (Fifty thousand dollars) per year in "income". That will be taxed at 20% -- so a NET spendable income of $40,000….. not much is it! But here's the kicker -- you should also be almost debt free at retirement - and you should also be collecting Social Security (maybe 2K a month?) AND your capital should appreciate "on average" over time around 8 or 9%. That means about every 3rd year or so - you should be able to pull out 100K and use that to take the family to Hawaii -- or pay cash for a new car -- or "toy" -- or just to raise your standard of living - or do a small remodel. By the time a guy hits mid 70's -- he should just be kicking back and playing golf and shouldn't have any worries what-so-ever.

I don't care what people invest in… but they need to invest… they need to do realistic math… they need to understand that it's their debt that's killing them financially…and that TIME is the great multiplier of money… and that they can't afford to gamble. They need to INVEST, not gamble, in order to make up for lost time. Buying a lottery ticket isn't the answer to a comfortable retirement. Being a forward looking thinker and making a plan, and sticking to it. and understanding TIME - including time spent in retirement is the key. It's never too late to start…

By the way -- I'm not a guy that thinks "diversification" is the key to any of this. In all my investing life - I've never seen that work the way it's supposed to. In other words -- when the market sucks - so does real estate - so does your business you were counting on… when it's good - they're all good… when it's bad… they're all bad. THAT IS WHY WE NEED INCOME -- so you don't have to sell to get money to live on when things SUCK! If you're counting on the rental income each and every month to survive - the renter will stiff you and move in the middle of the night and steal all the appliances… or the roof needs repair - or the place needs paint… or the neighborhood goes to hell and the rental is half what you expected. Stocks will always be down IF you MUST sell to get some money. Your business will be in a depression when it's time to retire… But if you own the building - there's rental income… if you're invested in stocks that pay you to own them - then you have income - If you're paying attention to your investments - then you would have sold the house in the ****ty neighborhood and would have bought a duplex in a better neighborhood… and you wouldn't have spent every last nickel it created - because you'd KNOW that it's going to need paint - and a roof - and remodeling once in awhile. So what I'm saying is -- INVESTING is about a way of life -- of paying attention -- understanding -- planning -- not boxing yourself into a corner. It's not about getting lucky… it's about being smart, and diligent, and desire.