Starting Investing

Read Die Broke. It`ll help you put things into perspective, impossible dreams included. And give you out-of-the-box thinking. One of the rare financial books I keep.

I manage investment portfolios for a living. Here’s my advice:

Go to www.investors.com (Investors Business Daily) and sign up for the free 2 week subscription for the paper and online access. Once you have access to the site, go through all the educational sections. Follow the rules espoused therein to a “T”, and you will do well. After your 2-week free trial is up, you’ll definitely want to subscribe. It’s a tad expensive, but I’ve easliy made up the cost several times over (gross understatement!).

After you have a handle how to invest using the IBD methods,start a brokerage account online. I recommend Ameritrade or E-Trade. E-trade is nice because you can set up checking, savings, investment, and credit card accounts all on one site (comprehesive banking). You can thank me later…

Take it slowly. You have plenty of time, so don?t worry about jumping in immediately. In fact do not do anything until you understand what you are doing.

Socco was right, (did I say that?) about going to fool.com. It is a great site. Be sure to go to their fools school, and read their 13 steps to investing.

Leverage. Very dangerous, very risky. If you want to go that route, you need to become an expert.

A good basic book is Dave Ramsey?s total money makeover. It doesn?t really tell you how to invest, but it puts things in an intelligent systematic order that works. This is by a religious guy, but any preaching is really minor if it bothers you.

Also go down to the library and read all the financial magazines, and catch some of the financial talk shows on the radio.

[quote]PCH wrote:
I manage investment portfolios for a living. Here’s my advice:

Go to www.investors.com (Investors Business Daily) and sign up for the free 2 week subscription for the paper and online access. Once you have access to the site, go through all the educational sections. Follow the rules espoused therein to a “T”, and you will do well. After your 2-week free trial is up, you’ll definitely want to subscribe. It’s a tad expensive, but I’ve easliy made up the cost several times over (gross understatement!).

After you have a handle how to invest using the IBD methods,start a brokerage account online. I recommend Ameritrade or E-Trade. E-trade is nice because you can set up checking, savings, investment, and credit card accounts all on one site (comprehesive banking). You can thank me later…[/quote]

Will do. Except the etrade part, I’m probably going set up all my banking needs with a major canadian bank (CIBC). Their fees are quite good, and I get nice student bonuses. Oh, and I won’t be subscribing after the free trial, because my net worth is so low that even small charges will really hurt at this point. Thanks for the info.

[quote]The Mage wrote:
Take it slowly. You have plenty of time, so don?t worry about jumping in immediately. In fact do not do anything until you understand what you are doing.
[/quote]

This really is the problem, I think I know as much as I can without getting in an practicing. I can read all day, but without the real life experience to associate it with, it all becomes jumbled after a certain point.

When I woke up this morning, I remembered my HS basketball coach telling us off one day. We were behind by a few points early in the 4th, and someone tried to close the gap with a 3-pointer. He made the shot, but we got told off anyway. He said “you don’t win ball games with 3-point shots”, and he was right. You win with strong defense and sharp offensive plays. I guess this isn’t much different, and I think I will be better off playing it more conservatively for now. Randman, I don’t know why you think I wasn’t listening, but I was, and am.

recommended readings so far (just to stay organized):

www.fool.com (already had a look, and learned a fair bit in just a couple of hours)

Die Broke

Total Money Makeover

www.investors.com

I got a new job this week so I haven’t been able to keep up with this thread.

Don’t take what I said the wrong way. There are way too many people out there who are very intelligent but invest stupidly. I assumed by what you said, that you were planning on taking out loans to invest in the stock market. If that was the case, then that would be an excellent recipe for disaster.

Consider my post tough love. I don’t want you to repeat other people’s mistakes. You have to admit I got the point across.

soco

Alek,

This part here is crucial to your problem:

“I have $1000, maybe up to $1500 that I don’t need for life sustaining essentials for the next 3.5 months, and after that I don’t know what will happen.”

From this part here, I would be recommending that you put your money in some sort of “at call” interest bearing account. I don’t know of any off the top of my head in Canada, but here in Oz, you can get one that has no fees, online access only, and pays a nice interest rate.

The last thinkg you want to do is put your money in stocks if you may need it in 3-4 months. Until your future income becomes a little more concrete, I would be keeping that money safe and available.

In the mean time, buy a few investing books and have a read. “Bull’s eye Investing” by John Maudlin is excellent. Randman’s suggestions are also solid.

What are your goals (i.e. are you investing to make a particular purchase, like for the downpayment on a house), and what is your investment horizon?

I’ve posted this before and it’s a little dated, but it’s a good article, especially when you get down to the five main points of investing basics:

This Time It’s Different?
No way. Don’t let the fear-mongerers fool you.

By James K. Glassman

“I am in a PANIC over this article, telling people to get out of stocks,” said an impassioned e-mail I received last week from a nice, intelligentprofessional woman who is a friend of a friend. “Is he right??? I am 52 years old, and I really hope to retire SOME day.” What upset her can be gleaned from this excerpt from the CBS MarketWatch website on March 24: “Listen closely: The next crash is coming. . . . It is coming! . . . Read my lips: The next crash is coming, and it could kill your retirement if you don’t start planning ahead now.” The main point of the author, Paul B. Farrell, is that there will be another big terrorist attack, which will not only kill lots of people but also have an adverse effect on stock prices. “The likely timing will coincide with a significant political event this year: the Fourth of July, a political convention, the 9/11 anniversary or the November presidential election.”

Farrell has other reasons for predicting a market collapse. He approvingly cites Richard Russell, a newsletter editor, who recently predicted, “We are coming into one of the worst bear markets in history,” plus Robert Prechter, who expounds a weird theory about Fibonacci cycles and says bluntly: “Get out of stocks and funds and park all your money in Treasurys and money markets. Cash out insurance policies.”

I do not know Farrell, but I do not like him. He scared this nice woman - and probably many others. Farrell claims to have predicted the market peak in March 2000. Let’s accept that. Maybe he is a genius or is psychic.

Still, he should be ignored.

Fear-mongers abound, as do stock touts and charlatans of all varieties. What investors need is a context in which to judge their proclamations, which are always made with the extreme confidence that the rest of us mortals lack. Context requires investor education, a buzz-phrase that was the subject of a Senate hearing last week. My view is that investor education doesn’t need to be complicated. It should be simple - and brief. If I were designing a curriculum, the course would last for five days, with each session running three hours. It would look like this:

Day 1. Lesson to learn: Your goals determine your investments.

To decide what to include in your portfolio (a process known as asset allocation), you need to decide why you are investing. A strategy for retirement is different from a strategy to save enough to buy a house in two years. Far-off goals (five years or more) require stocks. Medium-term goals (one to five years) are more appropriate for bonds, which are loans you make to businesses and government agencies. And for short-term needs, stick to cash, meaning money-market funds, savings accounts, or certificates of deposit.

History shows that stocks return far more than bonds: an annual average of about 10 percent, compared with a little over 5 percent for long-term Treasury bonds. But stocks are more volatile. They lose money in one out of every three or four years. Over the long term, however, that volatility evens out. U.S. stocks have lost money in only one out of every 10 five-year periods, and they have been profitable in every fifteen-year stretch in history.

Day 2. Lesson to learn: Markets are (mostly) efficient.

The price of a stock reflects the considered judgment of millions of investors who have their own hard-earned money at stake. These investors use all available knowledge about a company, the economy, the political situation, the weather - you name it - to reach their conclusions about the “right” price for a stock today. From today’s perspective, a stock price moves in what economists call a “random walk,” that is, a completely unpredictable pattern. Of course, as Warren Buffett points out, to say that markets are efficient
most of the time is not to say that markets are efficient all of the time. Sometimes stocks become expensive or cheap, and occasionally small investors can capitalize on such anomalies.

But it is a gigantic error of hubris to believe that you are smarter than the market as a whole. This is the error that Paul B. Farrell commits.

He says, first, that an attack is coming. Well, so do most Americans. They’ve believed, for the past 2 ? years, that a terrorist attack was imminent inthe United States. The most recent survey I could find on the subject, taken by the Harris Poll on Feb. 6, well before the Madrid bombing, found that 62 percent of respondents believe “a major terrorist attack [is] likely” in thenext 12 months.

When that many people expect a calamity, their expectations tend to be reflected in the price of stocks - just as, for example, the price of Johnson & Johnson (JNJ) stock reflects the expectation that the company’s dividend will rise in 2004, as it has for the previous 42 years in a row. In fact, you might argue that the belief that terrorists will strike here has depressed stock prices severely since Sept. 11, 2001. At any rate, it’shard to credit Farrell with a profitable insight if his view on terrorism is shared by nearly two-thirds of the public. It is likely that such an attack is already “discounted” in stock prices. In other words, an attack may come, but that doesn’t mean that a stock market crash - or, more important toinvestors, a prolonged downturn - will result.

There are other conclusions to draw from the lesson of efficient markets. One is that, as a long-term investor, you shouldn’t worry too much about whether the stocks you pick are cheap or expensive. The market has determined that their prices are “right” at any given moment. The market may be wrong, but the default position is that it is correct.

Had a big winner lately? Don’t flatter yourself. It was probably just luck. Searching for undervalued stocks is great sport, and you should never deprive yourself of the pleasure, but it’s a mistake to believe you can make brilliant selections with any consistency.

Day 3. Lesson to learn: Diversify for protection.

Own one stock, and you are vulnerable to disaster. Own 40 stocks in different sectors, and your portfolio is more likely to perform about the same as the market as a whole. It’s the same with bonds. Own a single corporate or municipal bond, and you could lose everything you have in a default. U.S. Treasurys won’t default, but owning just one, with a single maturity date, is also risky. A sharp rise in interest rates could leave you with a bond you will have to sell at a loss.

The easiest way to diversify with stocks is through mutual funds or exchange-traded funds (ETFs, like mutual funds, are portfolios of stocks, but ETFs are pegged to indexes and trade as though they were individual companies). Because stocks are efficient, smart investors are not outsmarters, but partakers; instead of trying to beat the market, they join it. How? By owning index funds like Vanguard Index 500 (VFINX), which reflects the Standard & Poor’s 500-stock index, the largest listed U.S. companies, which together account for more than four-fifths of the value of the entire stock market.

But managed (or human-run) mutual funds can be an even better choice. On Thursday, I used a screening tool on the Morningstar website http://www.morningstar.com/ and specified that I wanted to find all U.S. domestic-stock large-cap growth funds that had a manager with at least a five-year tenure; required a minimum investment of no more than $2,000; had turnover of 100 percent or less (that is, the average stock was held for one year or more); had a rating of five stars (tops); and had beaten the S&Pover the past one-, three- and ten-year periods.

The computer spat out only two funds, and they are both terrific: SmithBarney Aggressive Growth (SHRAX), managed by Richie Freeman since its inception in 1983, and American Funds Growth Fund (AGTHX), run by a six-person team with an average of twenty-eight years of experience.

Day 4. Lesson to learn: The little things count.

The little things, in this case, mount up, thanks to the power of compounding over long periods. But the little things also include taxes, inflation, and expenses. Gross returns mean nothing. The question is how much you can put in your pocket at the end of the day.

Here are the high points:

Taxes: The recent cut in taxes on dividends to 15 percent means that income-producing stocks can be much more profitable than bonds, whose interest is still taxed at ordinary-income rates of as high as 35 percent. Also, remember that holding stocks for a year or more qualifies the gains for a much lower tax rate.

Inflation: The rate today is below 2 percent, but the average for the past thirty years has been 5 percent. At that pace, during a human lifetime, the purchasing power of a dollar will diminish to about 3 cents. Inflation is bad for nearly all investments. An exception is a new type of bond - Treasury Inflation-Protection Securities, or TIPS, introduced in 1997. The value of these bonds rises with the consumer price index. Stocks do better in inflationary times than conventional bonds, since companies can raise their prices while bond yields (interest payments) are fixed.

Expenses: The average expenses that investors pay to mutual funds amount to about 1.25 percent annually (not including the fund’s costs of buying and selling stocks, which can be another 0.3 percent or so). This may not sound like much, but, as the value of your holdings rises, the amount of dollars you pay in expenses soars. Assume an initial investment of $10,000 and an annual rate of return averaging 11 percent for thirty years. According to a calculator I used on the Securities and Exchange Commission website http://www.sec.gov/ , total expenses over that time for a fund that charges 1.5 percent annually would come to $83,000; for a fund that charges 0.8 percent, $34,000. Among the 8,000 mutual funds on offer, expenses varywidely, so pay attention.

Day 5. Lesson to learn: Know what you don’t know.

It’s your money, so it’s understandable that you worry about the many
things that can affect it. The lesson here is: Don’t.

The economy, for example, has its ups and downs, but over long periods - and, if you are a stock investor you should be investing only for long periods - the trajectory has been up. After each bear market, for instance, stocks move to a new, higher level.

“In the last 50 years,” writes Peter Lynch, the former manager of the Fidelity Magellan fund and one of the greatest investors of all time, “we have had many periods of economic prosperity and many periods of uncertainty. Despite nine recessions, three wars, two Presidents shot (one died and one survived), one President resigned, one impeached, and the Cuban Missile crisis [I would add a period of runaway inflation, a one-day crash that depleted the market by 22 percent and an attack that killed nearly 3,000 Americans], . . . stocks have been a great place to be.”

Indeed, stocks have doubled in purchasing power roughly every 10 years.

Farrell, after quoting Lynch, writes, “This time it is different.”

Those are the five most dangerous words for investors. We could be hit by a meteor tomorrow. But the final lesson is that intelligent investors don’t jeopardize their nest eggs by making such guesses.

Again, Peter Lynch: “Betting against America was a bad bet in the past. It’ll be a bad bet in the future.”

Investing is hard, but it is not hard in the way that most people think.

Benjamin Graham, who was Buffett’s mentor, wrote more than sixty years ago, “The investor’s chief problem - even his worst enemy - is likely to be himself.”

In addition, of course, there are a lot of people encouraging the investor to be his own worst enemy by making him panic.

In the end, the best qualities for investors are the same ones Aristotle admired: moderation, common sense, restraint, modesty, and integrity.

Maybe, instead of five days of investor education, we should all sit down and read five days’ worth of the ancient Greeks.

Aleksandr,

If you have extra money it is a good idea to look at investing it, however I would recommend starting off slow and conservative. Everyone picks winners when their money’s not really on the line, we also pick losers…but we forget about them.

The more conservative approach would be to skip the brokerages altogether and visit some mutual fund reps. You could get a fund set up with no/minimal upfront costs plus you can withdraw the money any time without penalty (funds vary so confirm these points). This will allow you to remove the funds without continuing to pay the account charge.

Will you do this…likely not.

You seem to have you head set on investing in stocks. That’s fine.

First the brokerage, check around but most have similar fees, but also check the minimum balances as to when the fees stop.

Investments: I would recommend the conservative approach first, invest in index funds (“i” funds on the TSX) and/or energy/unit trust funds. The returns aren’t going to be as high a riskier investments but they are more reliable. Do your research!

DON’T LEVERAGE!

I’m not against it, but first learn through executing. Line of credits never require principal repayments, you can do this later.

Only invest in 1 or 2 investments, the trading commissions in Canada are ~$30 per trade (in and out =$60). Two investments in and out plus the account fee = $120+$60=$180 (or 18% upfront cost on $1000). My piont here is pick something you can leave the money in and learn more about the market, that will save you 6% right off the bat.

Experience and education will pay off in the long run so learn as much practical knowledge.

PS- For your reading list, pick up one or two of the biographies on Warren Buffet, they will held you mold your investment philosophy.