The 5 Reasons Why I am Gradually Moving More of My Money to Exchange Traded Funds

In the recent months I have begun moving more and more of my money to index funds/exchange traded funds. Below I list the 5 main reasons why I have chosen to do this.

1. Picking Stocks Takes Time

I love researching and picking my own stocks, especially when they turn out to be big winners. However, in order to pick the right stocks it takes time and patience.

When I pick stocks I am very meticulous in my research. I only pick stocks that appear to be a great companies at a good value.

Finding these stocks takes time.

In order to free up time for my other ventures, I have begun investing more and more into exchange traded funds, also known as ETF’s.

2. My Chances of Beating the Market are Slim

I know that the chance of me beating the market as a whole is slim. While I love researching and picking stocks, it is highly likely that my returns will be subpar, or right at the market at best.

Instead of hoping to match the market and maybe beat it, I have instead chosen to invest my money into the very funds I am trying to beat.

This goes hand in hand with #1 listed above. Why spend so much time matching the market when I can buy an ETF in the market?

3. Diversification is Simpler

Trying to diversify a portfolio with many stocks can prove to be a difficult challenge. This is another reason I have chosen to invest more in ETF’s.

Consider this: I have one Total Stock Market ETF and on Total Bond Market ETF. It is much easier for me to balance this portfolio than if I am juggling with 20 different stocks and bonds in my portfolio all at one time.

4. Keeping Track of Stocks Takes Time

I noted above that picking stocks takes time, but tracking your own stocks takes even more time.

In order to maintain your portfolio, you need to have some idea of how your stock positions are performing.

So you need to stay updated on the stock’s news and know when a good exit point for you will be.

I have lost out in some instances where I waited too long to sell a stock. As a result, I am still holding some stocks that have proven to be losers which brings me to #5.

5. It’s Hard to Cut Losses

With individual stocks it is hard to cut losses and move on. This is something that I have struggled with.

I currently own some stock in 3D Technology (DDD) which has dropped 39% since I bought in about a year ago.

What is holding me back?

If I had to guess, it would be the loss aversion theory in action. I wrote a post about loss aversion which you can check out here.

Do you pick your own stocks or do you opt to invest in an exchange traded fund instead? Why did you choose one over the other? 

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What is Financial Freedom?

As you know this blog has been inspired by financial freedom. While there are differing opinions about what financial freedom, this article will present financial freedom from my personal perspective.

What is financial freedom to me?

Financial freedom to me is having enough money to live without ever really having to work again. Now this does not mean you never have to work again. Instead it means that you work on your own terms.

You never have to worry about the stress of losing your job. You don’t have to worry about whether you have clients or not. When you are financially free, work no longer becomes a requirement in life but rather a choice.

How would you get there?

There are a number of ways to achieve financial freedom. The most effective way is by building passive income streams. This is done in a few ways shown below.

Have Your Money Make You Money

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Build up enough cash so that it will generate money-almost like planting your very own money tree.

The first way to build a passive income stream is to build up enough cash so that it will generate money. Use your cash to purchase dividend paying stocks or bonds which pay you interest. You could also purchase annuities which would pay you over the life time of the annuity.

For example, if you have $5 million in cash right now you could invest in bonds which pay out 5% a year. Just by having those bonds alone, you will generate $250,000 a year in interest income!

Imagine, $250,000 in your pocket and you don’t have to do anything at all! You can accomplish this with dividend paying stocks as well.

Stocks pay a wide range of dividends, and are not quite as reliable as bonds for paying you out every month.

But stocks do have the advantage of appreciating in value over time, so that when you sell the stock you have a chance to make more money.

I don’t have $5 million to put away, what should I do?

Fair enough. Most of us do not have $5 million in liquid cash at our disposal at any time. So what should you do instead?

Create a Business which Produces Cash with Minimal Effort

While I was writing that subheading, it sounded a tad bit scammy. Just like one of those spam emails which tell you how some guy makes $5,000 a day just by clicking a few buttons.

There are people out there with legitimate businesses that do not require much effort on their part.

They do this by doing one of two things

1)      They automate their business so they don’t have to do most of the work or,

2)      The create a product which they can sell to the masses

In order to accomplish number one listed above you would do a few things. First you would have to build a business up from scratch (if you can’t buy one initially).

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Automating your business by hiring employees is one method you can use to become financially free.

Then you would look to hire employees to help do the menial tasks that you don’t want to do. Then finally you would hire a manager to help oversee the employees and take care of the higher level duties that you don’t want to do.

This leaves you to plan for the future and grow, and takes you away from the day-to-day tasks that you would be doing at any typical 9 t
o 5 job.

For the second item, you would create a product that you only need to create once or can be created by others, and sell it to the masses.

Key Point: Learn How to Separate Time From Money

The key to building a passive income business is separating your time from money. Most jobs will pay you for every hour you work.

It has been engrained in us that we get paid when we work and don’t get paid when we don’t.

What if you did get paid when you didn’t work? How would you like to get paid when you didn’t work? When you are sleeping? When you are on vacation?

If you have an automated business, you will no longer trade your valuable time for money.

There are a ton of ideas to help you build up passive income streams. One of the best books to help you understand the different types of business systems is “The Millionaire Fastlane” by MJ Demarco.

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Check out The Millionaire Fastlane, one of my favorite business books that I’ve read recently

In that book he lays out the “Five Fastlane Business Seedlings” which are business systems which produce passive income for the owner. Those five systems are

  1. Rental Systems
  2. Computer Systems
  3. Content Systems
  4. Distribution Systems and,
  5. Human-resource Systems

If you want to find out more, check out the book on Amazon. It really is a great resource and I would recommend it to any entrepreneur or wantreprenuer looking to get started.

My Top Three Reasons for Wanting to Achieve Financial Freedom

I have told you what financially freedom is to me. Know I want to elaborate on why it is my goal to achieve financial freedom.

Reason #1: I want to have the freedom to do what I want when I want

If I want to sleep in until 12 I can.

If I want to meet friends for lunch on the other side of town at the last second I can.

If I want to go on vacation at the drop of a hat I can.

I would also have freedom to pursue hobbies that you enjoy but would never really make you money.

For example, I enjoy playing basketball and golf. I am not really good at either one of those. I could play those whenever I want.

Reason #2: I want to explore the world

Many folks don’t have to be financially free to explore the world, but I think it would be pretty amazing being able to travel all over without a timeline to get home like you would when you work.

I have never traveled much, and I think it would be great to be able to see the world.

Being financially free would allow me to travel on my own time, and have the money to do so.

Reason #3: Spend more time with those I love

I am personally not a workaholic. I’ll admit it.

I will work really hard doing the job the needs to be done. Once it is complete I go home and do the things that I want to do.

It’s not even that I am lazy, but I just like to enjoy life and do those things that I want to do.

I don’t want to feel obligated to go into some place five days a week for the next 35 years of my life.

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You now know my reasons for wanting to achieve financial freedom. What are yours?

I enjoy spending time with family and friends, and financial freedom will allow me to do this.

Down the road when I have kids, I want have the ability to spend time with them. I want to be a part of their life.

I don’t want to be at work all of the time and come home and be too tired to spend time with my family.

This is what financial freedom is to me. This is why I want to achieve it. What is financial freedom to you? Why do you want to achieve financial freedom?

Photo Credits (in order)

Flickr/Shari’s Berries, Flickr/Phil Whitehouse, Flickr/Kalyan Chakravarthy

My Positions

Hello there!

If you don’t already know, this is my personal finance and investing blog! I periodically post my thoughts about finance and investing to try and help you out to create a better future for yourself. I also post some suggested stock picks every once in a while. Some people have actually asked me if I invested in the stocks I suggest. To which I say “Of course!” (when I have the money to do so). So that inspired me. Today, I have decided to post my portfolio for you to see. I believe that it is important to be as transparent as possible and I know this is a great way for all of you to see what I love to do.

Before I post my stock positions, I just want to give you some background information. I just recently started investing (real money) at the very beginning of August. During the months of August and part of September I tried my hand at buying and selling on a short time horizon. This didn’t work out quite as well as I hoped and I ended up breaking even. Since about mid September I have been investing and going long on many of my positions. For someone like me, this is the best thing that I can do given that I don’t have unlimited time and resources.

Also keep in mind that I started out with about $5,000 and have added a little bit every month. I currently have about $11,500 in principal invested which has a current fair market value of $12,000. Without further ado, here is my portfolio:

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Hope you enjoy and Happy Investing!!

Why you should invest today!

Do you want to make money while you sleep? Of course you do! By investing today, you will take the money you have now and put it to work for you. Just think of your investments as your own little employees working hard for you while you sleep. The beauty of investments is that your money will gradually increase over time due to a little concept known as compounding interest, which I will talk about more in a minute.

Retirement plans are going by the wayside. Gone are the days of having a fat check waiting for you when you retire. Times are tough for everyone which means your retirement check isn’t going to be your grandparent’s retirement check. Even if you pension seems like its guaranteed, would it really hurt to put away a few more dollars a month towards your future? You also must consider that social security is shrinking, and analysts predict it will completely run out by 2033.

Compounding Interest

I mentioned compounding interest in the above paragraph. Compounding interest is when you earn interest on your interest. In other words it’s when you make money on the money you made which made money on the money you invested, hence the compounding part.

It’s okay if you are confused. The best way to illustrate compounding interest is to use an example. Let’s take John for example. John just graduated and just started working his first real world job. John also loves Starbucks. He loves Starbucks so much that he goes in every morning before work. He spends $4.85 for a Grande latte at least three times a week, sometimes more. Let’s say John decides to forgo one latte this week and invests the $4.85 in the stock market instead. With the an average return on investments of 10% a year, how would that interest compound over time?

Value Today

In a year

In 5 years

In 10 years

In 25 years

In 40 years

$4.85

$5.36

$7.98

$13.13

$58.48

$260.45

 

By forgoing just one latte today, John can put away that money he saves and build it up to be worth over $58 dollars in 25 years or $260 in 40 years! I know what you’re thinking, $260 isn’t really all that much in the grand scheme of things. So let’s crank it up a notch.

Let’s say John forgoes one latte a month, or 12 lattes a year at $4.85. At the end of every month he puts that $4.85 into the stock market. This is what is known as an annuity.

Value Today

In a year

In 5 years

In 10 years

In 25 years

In 40 years

$4.85

$61.45

$378.70

$1001.78

$6,488.77

$30,927.38

 

John can make over $30,000 by the time he’s 80 by just skipping out on Starbucks once a month! This is the power of a compounding annuity! The point of this example is to illustrate how just a small amount of money put away to day can pay off big time in the long run and how putting away a little bit each month can make your gains multiply even more quickly!