What scares you?

Doubts. Worries. Fears. At the end of the day, everyone has them. When it comes to finances, many people are in the same boat. If you are reading these, you are probably share similar feelings. We all have a similar goal, and that is to be financially independent. We want to break loose from the live to work mentality. That’s why we I created this blog. I want to help you while also helping myself. By providing insight into personal finance, I hope to make a little bit of a difference in your life. In return, I have had the pleasure of reading many of your insights on personal finance.  

What am I afraid of?

I am afraid that I won’t save up enough money. I have concerns about my investments. Although I feel pretty confident they will continue to go up in value, there are no guarantees. I worry that I won’t be able to buy a house until I’m too old due to my student loans. I worry that I won’t be able to live a fulfilling life because I will always be concerned about money. I think about these fears a lot. My biggest fear at the end of the day is that I will be stuck working a job I don’t enjoy the rest of my life just so I can make enough money to get by. If I don’t achieve financial independence, these fears can become a reality. Some of these fears are irrational, but they still stick in the back of my mind.

What are your fears? Is there anything you do to help overcome those fears? Please leave a comment below. I look forward to your response.

Quote of the Day

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, no more. Thus the investor who permits himself to be stampeded or undly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared mental anguish cause him by other persons’ mistake of judgment.

 

– Benjaman Graham in The Intelligent Investor

What grocery shopping can teach you about picking stocks

Imagine your average trip to the grocery store. You go through the ads and various coupons and figure out what items are on sale. If there are products that you have a preference for, you will go ahead and buy them for a bargain. It makes sense. When you like a product and see it selling at a lower price than usual, you will buy it. That begs this question: why should the approach the stock market any different?

When buying stocks, the first thing you want to do is identify companies that you like. Good companies can be defined in any ways. This depends on personal preference, but for me, a good company is one with good management in place. In addition, it is a company that has had steady growth over the years. Companies that have historically paid dividends are also another plus in my book. Finally, invest in what you know. Peter Lynch advises this in his book “One Up on Wall Street” which provides great insight on how he made 29% a year over the span of 20 years.

I suggest that you make a list of good companies that you like based on the criteria above. It doesn’t have to be a long list, be it should be long enough so that it gives you options in investing. Track of these companies over time. When these companies become “cheap” buy as much stock as you are comfortable buying. Cheap can be defined in any number of ways. I personally view cheap companies as one that have a low PE ratio. A low PE ratio has historically been one that is under 15. I use this as a base for deciding the value of a company. I also compare their PE ratio to the historical PE ratio of the company as well as the average PE ratio for other companies in their industry. You can also use price-to-book ratio and price-to-sales ratio when valuing a company.

When you combine you knowledge of great companies with the valuation metrics, you will greatly increase your chance of succeeding in the stock market. As Warren Buffett once said: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” 

Lesson from a young Warren Buffett

At the tender age of 11, Warren Buffet invested in his first ever stock. Buffett bought six shares of Cities Service preferred stock for $38 per share. The stock fell to $27 a share shortly thereafter. The shares eventually bounced back to $40 a share. Buffett sold the stock at that point for a nice $3 per share profit. Not too shabby…right?

Not long after Buffet sold his shares in Cities Service, their stock price jumped to $200 per share! Buffet could have made 426% on his initial investment if he had stuck with it. This experience taught Buffett a valuable lesson which he would carry with him the rest of his life.

What lesson is to be learned here? Teach your children about personal finance and investing at a young age. What they learn about money when they are young will help set them up for great success for the future. It will be the best investment you ever make.

Build Your Own Million Dollar Portfolio

Imagine if I were to give you one million dollars to invest with right now. What would you invest in? As a beginning investor, it’s easy to believe that you have the ability to find the right stocks at the right price. One problem that people incur during their early investing lives is that they believe that they can beat the stock market. By utilizing stock market simulation games, you can track your investment performance over time before you decide to jump into the stock market.

Young investors can benefit the most from utilizing stock market simulation tools. One particular website that I used when I was still learning about stocks was smartstocks.com. They give you one million dollars in imaginary money to invest in whatever stock you want. This gives you the opportunity to learn about investing.

It is important to utilize stock market simulators like smartstocks.com because they allow you to track your true performance over time. Many people believe that they knew the winners in the stock market before they made it big. They fail to remember the companies that failed that they also believed would be big winners. By utilizing a simulator, you can buy and sell stocks virtually and keep track of your performance over time. This will allow you to learn how good you truly are at picking winners and losers.

Keep in mind that if you do well in the short term, it does not always mean you will perform well over the long run. If you only utilize a stock market simulator for a few weeks and do well, you will not get the full effect than if you were to do it over a longer period of time.

Personally, I utilized a smartstocks for a few years off and on while I was in college. Utilizing a simulator allowed me to get my feet wet in the stock market. I learned that predicting the markets are not quite as easy as I imagined. Despite picking many winners through the simulator, I picked a few losers as well. These losers essentially wiped out any gains (and then some) I made from my winners, making me realize how important it is to diversify.

If you want to begin learn about the stock market, but don’t want to risk any of your own money quite yet, find a stock market simulator game online and try your hand at it for at least three months. Track how you perform compared to the market as a whole and build confidence in your investing abilities. If you still enjoy picking individual stocks by the end those three months, then you are well on your way to picking your own stocks for your portfolio. Sign up today at smartstocks.com and get started today!

Note: I am not affiliated with smartstocks.com in any way

Invest Young: A Few Simple Tips Will Make You a Millionaire

In my last article I made the argument that fear was the leading cause of young people investing. I illustrated how not doing anything with you extra cash will make you lose money. In this article I will go more into detail about how implementing an investing plan at a young age will make a giant impact on your life. I will also present a few simple steps that will help you become a millionaire.

Long-Term Impact of Investing When You are Young

Compounding and time value of money is a powerful thing. In a prior article, I showed how small changes coupled with time value of money can add up to giant sums of money. Time value of money also plays a huge role for your retirement and is the reason you need to start saving today. To illustrate my point I will discuss two different people. These people are Sally the Saver and Sam the Spender.

Sam and Sally are very similar. They had the same major in college, graduated at the age of 22, and got a job at the same time. Both make pretty good money working. They don’t have too much student debt.

Sam the Spender likes to spend money. As soon as he makes money he spends it. He continues this way until he hits his 30s. It is then that he realizes he has nothing put away, and he needs to start taking his investments seriously. Sam saves $500 dollars a month from his paycheck. He puts this into a stock market fund that returns an average of 8% a year. He continues on this path for 35 years, until the age of 65 when he retires. By the time Sam is 65 he will have put away $1,033,900! He is a millionaire!

Sally the Saver likes to save money. As soon as she makes money she saves it. She “pays herself first” if you will. At the age of 22, Sally begins to save $500 a month. She also puts this into a stock market fund that returns an average of 8% a year. She continues on this path for 43 years, until the age of 65 when she retires. By the time Sally is 65 she will have put away $1,977,500! This is almost twice as much as Sam and all she did was start saving eight years sooner!

Investing at a young age is the best decision you could ever make. When you put away cash when you are young, you open yourself up to so many more options as you age. You could continue to save up as you work. Or, you could have enough money to give you financial independence which would allow for you to start your own business. You won’t be on the constant treadmill where you work for a paycheck only for it to be gone two weeks later. The key here is financial independence. Being free from the shackles of work will make you happy. It will enable you to take chances in life that you wouldn’t otherwise take.

How to Become a Millionaire?

Becoming a millionaire isn’t as difficult as it may seem as displayed above by Sally and Sam. To become a millionaire you must be willing to save money. It doesn’t necessarily have to be a lot, but it has to be enough that will accumulate over time.

Don’t spend money on things you don’t need. You need to create a budget for yourself and stick to it. How can you force yourself to stick to a budget? Pay your investment plan first. Whether it is a 401(k) or just a plain old brokerage account, force yourself to make a payment to that investment plan first. Whatever money you have left over will be used for all of your other expenses you budgeted out.

Big financial decisions can lead to big savings

When you are buying a home or a new car, keep the long-term financial impact in mind. Make sure you can get the best deal you can on a new home or car. Don’t buy something that is unnecessarily big. Live below your means and you will achieve financial freedom. It’s these big decisions that either make or break people financially.

Don’t make dumb investments

If you are new to investing, don’t try your hand at picking stocks. Chances are that you are not going to beat the market. It is hard enough for people who do it for a living to beat the market. My recommendation is to put your money into a total stock market exchange traded fund (ETF). One good ETF for this situation is the Vanguard Total Stock Market ETF (VTI). This ETF tracks the market as a whole, has extremely low expenses, and will help reduce your risk. As you begin to learn more and more about investing, then you can start picking individual stocks.

A call to young people.

Start investing as soon as you can. If you have money leftover at the end of the month, open a brokerage account and begin putting it into a total stock market ETF. The longer you wait, the more you have to lose.