Investment Tips – Know Your Risk Tolerance  (image credit)

A recent copy of Forbes magazine has a list of 365 tips on investing to get rich.  I thought I’d go through some of the ones I found the best and expand on them to provide a more detailed discussion.

Today’s investment tip is: “know your risk tolerance.  Pick an asset allocation that lets you sleep at night, so you won’t panic and sell stocks at the bottom.”

Know Your Risk Tolerance – Background

What is an asset allocation?  Well, this is simply the investment breakdown you select between different assets such as: stocks, bonds, real estate, cash, precious metals, etc.  Some asset allocations are risky (such as 80%+ stocks) and some are pretty conservative (such as mostly cash and 60%+ bonds).  The amount of of long term reward investors can expect depends on the amount of risk they are willing to take.  Folks looking for high long-term returns will have to take on considerable risk.  The point of this tip is to not bite off more than you can chew by taking on more risk than you’re comfortable with.

Know Your Risk Tolerance – My Take?

I think this investment tip is spot on!  When I was younger (and stupider),back in 2008 when the market crashed I really did bite off way more risk than I could take.  By investing in individual companies, using leverage, and trading in futures, I was definitely way in over my head (if you are a high risk taker, click here for the best way to learn futures trading).  I was taking on WAY too much risk for what I was mentally able to handle.  I was very inexperienced with investing at the time.

What was the result of this?  You can probably guess – I lost a ton of money by selling close to the bottom of the market!  Just like what this tip is trying to help us avoid.  If I would have invested in more “boring” index funds and had a healthy amount of bond investments, I probably would have fared much more favorably.

You may be asking: “how do I know my risk tolerance if I’ve never invested before?”  I’d answer that great question by saying: “you don’t – so assume your risk tolerance is low!”  It’s better to get a slightly lower return for a few years while you learn the ropes of investing by taking a more conservative investing approach than to go hog wild and get really aggressive.  If the market corrects and you sell your investments for a huge loss because you aren’t ready to handle the pressure of a short term loss, you really won’t feel all that good about things   For beginning investors, I really think the old adage “better safe than sorry” aptly applies here.

Know Your Risk Tolerance – Final Thoughts

This tip is excellent advice for folks that are “newish” to investing.  It can help keep us out of the hot water by tempering the huge swings in our portfolio’s value if we’re not ready for that type of emotion yet.  Many books write on the topic of new investors who routinely overestimate their risk tolerance.  If you are a new investor, then I’d take this advice to heart and err on the side of caution when selecting your asset allocation.

The post Investment Tips – Know Your Risk Tolerance appeared first on MoneyAhoy.

For more saving money, making money, and investment ideas go to www.MoneyAhoy.com

Why Invest In The Stock Market? Inflation!

There are two main reasons people seeking to improve their financial health invest in the stock market.  The first is inflation and the second is compounding interest.  This article will focus on inflation – I’ll leave compounding interest for another day

Why Invest in the Stock Market? What is Inflation?

So, what is inflation exactly?  Well, Wikipedia defines inflation as: “the persistent increase in the general price level of goods and services in an economy over a period of time.”  What the heck does this mean?  Well, remember the story of how granddad used to head down to the corner store as a kid and buy a soda-pop for 10 cents?  Now that same soda will run you $1.50!

For those that don’t save for the future, and get regular cost of living adjustments from their job, normal and steady inflation doesn’t really matter all that much.  For the savers among us (hopefully that’s you!), inflation really is the “hidden thief” that takes a little bit from our pockets each and every day.  In recent years, inflation has been kept around the 2% – 4% range, but you’ll see if you take a look at the figure below that annual inflation rates have been as high as 15%!

Historic Rate of Inflation in the US

Bureau of Labor and Statistics – CPI data

Why Invest in the Stock Market? Why is Inflation Important to You?

Why is understanding inflation so important for savers?  Let’s say you’ve just graduated college at the age of 22, and you’re going to be very smart and save a little bit for retirement.  You take a crisp new $100 bill from your first paycheck, take a long, sweet whiff of it, stick it in an old mason jar, crank down on the lid, and bury it in a location known only to you.  You then dig it up 40 years later at the age of 62 on your first day of retirement.  You’re ready for the good life after all those sucky fun days at the office.  Well, you’re in for a bit of a surprise!

If inflation averaged 3% over these 40 years, that $100 bill would be able to only buy about $31 of stuff.  How can that be?  It’s still a $100 bill right?  Yes, but for the same reason your granddad only had to pay 10 cents for a soda-pop, you’ll have to pay more than triple for just about everything 40 years from now!

Why Invest in the Stock Market? Predicting Inflation

“Aha,” you might say.  “Just because inflation has been around 2% in the recent past doesn’t mean it will stay that way in the future!”  I would then proceed to tell you about the Federal Reserve and the Federal Open Market Committee and how they have a mandate to maintain price stability.  The FED maintains this price stability by targeting a 2% inflation rate!  “So you see,” I’d say, “inflation is basically pre-programmed into our way of life by our US central bank.”  There’s really isn’t a practical way to avoid it.  Savers need to find a way to at least break even, or every dollar they save for the future will lose value over time.

To beat the silent thief that is inflation, savers need to find some type of income producing asset that will grow in value over time.  There are a million and one things that a person could invest in that have the potential to increase in value over time.  Just a couple examples include: old sports cars, violins, paintings, real estate, comic books and other rare collectibles.  One of the best methods to obtain appreciation on your investments is with the stock market.

Why Invest in the Stock Market? Final Thoughts

My first answer to the question “why invest in the stock market?’ is always inflation!  Ignore inflation at your own peril!  One of the best ways to beat inflation and ensure that your saved money won’t lose value over time is to invest in the stock market.

The post Why Invest in the Stock Market? Inflation! appeared first on MoneyAhoy.

For more saving money, making money, and investment ideas go to www.MoneyAhoy.com

Asset Allocation Basics

If you are thinking about the allocation of your assets then you must look at the whole picture and this must be reassessed on a regular basis, at least once a year. It will mean that you are able to check that your investments are heading in the right direction; it also means that if something is not going well you have time to re-think the area of investment.

Asset Allocation Basics- Asset split

If you are considering your options you must consider the amount of risk that you are prepared to take and the proportion of your capital that you are willing to risk at a higher rate. It is important that you don’t put all of your capital into high risk ventures and you keep a proportion for less risky options.

Asset Allocation Basics – Areas of investment

You need to consider all areas of investment.

• Savings
• Stock market
• Housing market
• Investments

It is only when you make a plan for all your money that you will understand the true value of the correct asset allocation, you need to have covered the savings aspect and have an emergency fund so that any investments that you do have are allowed to mature and the capital that you have invested is not withdrawn prematurely.

Asset Allocation Basics – Stock market

If you are looking to invest in the stock market then you will need to look at the different aspects. You need to add your age into the equation as to the amount of capital that you put into the more risky options.
The closer that you are to the retirement age then you should risk less of your capital than if you are in your twenty’s. This is because the younger that you are you have more time, in theory, to make up your capital if you lost it on an investment. This is possible on the stock market because there are no guarantees that any of the investments are going to make you money. This is due to the risk that every investment on the stock market takes; there are options that are less risky.
The options that have less risk have the lower rate of return for the money invested the more risk that the option has the higher the return that you will get. This means that you are able to make a quicker rate of return and potentially increasing the capital you invested. The safe investments can also lose money, but they are considered the safest option and they can mean that you can protect a proportion of your capital.
The best proportion of your capital to hold in safe investments depends on your age, a twenty year old should invest a maximum 8o% of their capital in more risky investments and they must protect at least 20%. A forty year old would have to invest 40% of the capital that they have available into the less risky options. This is because there are fewer years that they have left before they need to start investing.

Asset Allocation Basics – About the author

Sharon Rowe is the Senior Editor at Growing Money, a financial blog that helps readers learn to invest and make money.

The post Asset Allocation Basics appeared first on MoneyAhoy.

For more saving money, making money, and investment ideas go to www.MoneyAhoy.com

Book Review – A Random Walk Down Wall Street

There are hundreds of investment and stock trading books out there.  I’ve purchased and read a few of them over the years (mainly in the stock trading and day trading arena).  These were OK books that explained the details of how the market works on a VERY microscopic level, but following their advice actually lost me handfuls of money

Recently, I set a monthly goal to read the book A Random Walk Down Wall Streetby Burton Malkiel.  I could tell before I was even halfway through the book that it would change my life forever in an extremely positive way!

Contents and the Basic Premise of “A Random Walk Down Wall Street”

Malkiel has written a number of investing books over the past 50 years, but A Random Walk Down Wall Street  is the book he is most famous for.  The basic premise of A Random Walk Down Wall Street is that the markets are perfectly efficient in the long run.  This efficient market hypothesis (EMH) means that all bubbles will eventually self correct, and that all stocks will eventually revert back to their true value after some period of time.

Investors often disagree on what the “true value” of stocks are, and from time to time market bubbles form.  There are many different methods to estimate what the “true value” of a stock it, but in the end the EMH always holds true and stocks revert back to their true value.  Malkiel covers several examples of bubbles and their eventual bursting going all the way back to the dutch tulip mania of the 1600’s.

The book dissects several different types of investing/trading systems that are used and basically proves that none of these can beat buy and hold investing in market index funds over the long term because of the EMH.

A Random Walk Down Wall Street is broken down into four main sections:

1. Stocks and their value – This section discusses fundamental analysis and technical analysis.  This describes different methods for how investors attempt to assess a stock’s true market value.
2. How the pros play the stock market – This section covers actively managed funds and their performance relative to market index funds.  It also addresses active trading and market timing.
3. Modern portfolio theory – Here Malkiel discusses the newer theory that investors are rewarded with higher returns only on the additional amount of non-diversifiable risk they are willing to undertake.
4. Practical guide section for getting started – Here several example portfolios are presented with specific mutual fund ticker symbols if you’re ready to jump in and get started.

What I Didn’t Like About “A Random Walk Down Wall Street”

Overall, A Random Walk Down Wall Street was a good read, but I do have just a few criticisms of the book.  Most of these are pretty nitpicky.  Here they are in no particular order.

• The book is really long (450+ pages!).  In many areas Malkiel takes a very long time to get to the point.  This is OK for someone like me that likes some of the details, but it got a bit much at times.
• The fourth section where he lays out the practical guide could have been a bit more organized.  It feels kinda like a data dump at the last minute.
• The book does a good job of getting across investing concepts, but isn’t great at giving the reader actionable steps to help get them jump started.  It assumes you already have an investment or retirement account.
• Parts of the book are pretty complicated, and I had to re-read a couple sections to fully understand the concepts.  You may find some of the concepts presented a little complicated if you’re new to investing, but this shouldn’t put you off from reading the book IMHO.

What I Loved About “A Random Walk Down Wall Street”

Overall, I really loved A Random Walk Down Wall Street.  If someone had beat me over the head and forced me to read this book 15 years ago, I’d be so far ahead of where I am today that it’s almost depressing!

There are so many gems of useful information in this book, I can’t really do it justice here in this review.  While it is a long read, I think just about reader would benefit from it unless you are truly an investing expert.  Here are some of the reasons I loved this book:

• Malkiel gives great descriptions of many of the historical bubbles throughout human history.  From the 1600’s tulip mania all the way to the most recent credit crisis in 2008, he covers each formation and pop in great detail.  I found this fascinating.
• Malkiel compares buying and holding market index funds to many other types of investing strategies that have been developed over the past 70 years.  Malkiel expertly cuts through all the investing crap and explicitly shows why each method is worse than buy and hold.  He proves all of this academically and with historical market data.
• The author gives discussion as to why market timing is a complete waste of time and will ALWAYS leave you worse off over the long run.  If I had read this book 15 years ago, this point alone could literally have saved/made me hundreds of thousands of dollars by now.  At least I know going forward that I would be doing myself more harm than good by trying to time the market.
• He gives a perfect description of the random walk theory and why this can help to explain nearly all of the stock market variation and those “hot shot” fund managers that seem to come out of nowhere, take the world by storm, and fizzle out back into the shadows.
• I really love the humorous examples he uses throughout the book.  One that sticks in my mind is an illustration of the efficient market hypothesis and attempts to beat the market averages:
  • It takes place with a conversation between and economist and a student.  As they are walking down the sidewalk, the student notices what he thinks is a $100 bill on the sidewalk.  “Did you see that?  It’s a $100 bill,” the student exclaims.  “Don’t bother picking it up,” the economist says.  “If it really were a $100 bill, someone else would have picked it up by now.  So, don’t waste your time.  We know that it can’t be a $100 bill.”  For me, this perfectly illustrated the debate between being able to beat the market averages and the efficient market hypothesis!  Good deals are around, buy you’ve literally got millions of people looking around for those loose $100 bills, so they won’t last but for a second before they’re corrected.  This means it is nearly impossible to beat the market average in the long run!!!

Book Review – A Random Walk Down Wall Street – Rating

4/5 Stars – A little on the long and complicated side, but worth it if you can get past that.

Who Should Read “A Random Walk Down Wall Street“

Unless you’re a recognized investing master, I highly recommend picking up a copy of A Random Walk Down Wall Street from the library or Amazon.  There really is something here for everyone who is interested in increasing their wealth.  I learned so much from this book around I can improve at investing that it isn’t even funny.  I can honestly say to you that this book will change the rest of my life in a hugely positive way!  How many times do we get to say that?!?  Please do your future self a favor make the commitment to read it today!

The post Book Review – A Random Walk Down Wall Street appeared first on MoneyAhoy.

For more saving money, making money, and investment ideas go to www.MoneyAhoy.com