One of my goals for 2013 was to become more financially savvy. Yeah, the eternal goal to retire at 40 and sip cocktails on a beach, while getting a shoulder massage. With that definitely achievable goal in mind, I set out out to become financially literate first and maybe savvy later. I had simple goals to begin with. One, don’t lose money. Two, stay ahead of inflation. Three, maybe actually make money.
One of the reasons investing right away is important is because of the power of compounding. Your money will double every 10 years if you get a 7% annual return. Or for the dreamers, it will double every 7 years if you get a 10% annual return. Now those are some sweet numbers. But numbers can work against you too. Yeah, no finance without numbers. Don’t lose money. If you had $100 and you lost $25. Now you have $75, a loss of 25%. But to get back to $100, you need a gain of 33% on the $75. The difference between loss and gain percentages gets worse for higher losses. Hence, stick to conservative sensible investments to reduce the risk of major initial losses which can seriously set you back.
Getting started. Yes, the internet has all the answers, including how to make dogs chase their tails. But when it comes to investing, there is a lot of BS out there and frankly it is not worth the effort sifting through BS, unless it is your thing. Investopedia is a good site to explain the meaning of terms and is a handy reference guide. But only books could give an orderly instruction to a blank slate like me. The following are the books I have read so far, in the order I read them.
1) Start Late, Finish Rich - This is a good and easy read for the uninitiated. It will introduce you to some investment ideas, whet your appetite for the subject and I think, most importantly, inspire you to begin.
2) The Intelligent Investor - It is the most well known investment book. Warren Buffett himself recommends it. It is well written, textbook style but tinder dry. Sometimes I had to force myself to read and get through a chapter. For completeness sake I read everything, even though I was not interested in some topics. The commentary on each chapter is an easier read. If you really must, you could skip the main chapter and read the commentary instead. This book definitely has all the instructions on how to become an investor and not a speculator.
3) Rich Dad Poor Dad - An epic waste of time. It is not even a feel good book. Those four hours of my life spent on reading it are never coming back. Well, none of my life is ever coming back, but you get the point.
I plan to read One Up On Wall Street next. But for now, let’s delve into what I have learned. First, close your mind to the mindless bragging by your friends who always seem to make money. One of my friends has sold all his stock three times in the last month or so. Every time the stock market goes up, he says he sells ALL his shares and he is waiting for the next crash. How can you sell all your shares every month? Buy low and sell high is a great idea, in theory or rather in your dreams. The question is, who has the crystal ball that will tell me when is low and when is high? Remember hindsight is 20/20, sometimes 20/10. And there are folks who go, I had told you to buy Tesla when it was $30, now it is $130. So Mr. Smartpants, did you put your money where your mouth was? Nope. Don’t listen to people who don’t bet on their own instincts.
The million dollar question, literally, is how to make money then? I concluded that I don’t have the time or the motivation to spend my leisure time on researching companies, reading earnings reports, calculating P/E ratios, etc. I am not making excuses. I know that if I don’t invest the time in researching, I cannot expect stupendous returns on my financial investments. So I settled for the conservative, semi-lazy person approach. I diversify between bonds and stocks. And diversify by industry in each of those categories. The easiest way to diversify is by buying mutual funds and ETF’s. And don’t forget that blue chip companies pay dividends. Some folk get excited only by looking at the increase of stock price over time. Dividends can and will bolster the ROI too. Also, read up on the concept of ‘dollar cost averaging’ if you are worried about market swings. The market has more mood swings, for the most obscure reasons, than women.
I could talk about gold, real estate, foreign currency, etc. as investment vehicles. But I think I will stick to level 1 for now, and that is stocks and bonds. Roll the dice, let’s partake in the great game of capitalism.