Financial Freedom
Lesson 6: Investment
1. The Basics of Investing
2. Begin Where You Are
3. Cycles
4. The Stock Market
5. Four Pillars of Investing
6. Invest in What You Know
7. Think for Your Self Financially
8. Timing
9. All the Talking Heads
10. Moving Forward
1. The Basics of Investing
Investing is not just for the rich. We all need to learn to invest, to get ahead.
The main difference between saving and investing is that savings tend to remain fairly static, usually with little risk of loss and a corresponding low return, while investments are chosen for their higher rate of return, with an acceptance of the consequent higher possibility of loss.
Investing usually includes both acquiring assets and selling them. You have to know when to buy them (at a lower price) and when to sell them (at a higher price), to make a profit. Some assets don't have to be sold to realize a profit, as they may already produce cash flow (such as real estate rentals). Others, such as precious metals or gems, generate no profit unless you sell them.
Investing is having your money work for you — over a given period of time — to produce more money, with an assumption of risk and potential reward (or loss). If you were to interview a variety of financial advisors, you would get a variety of recommendations as to what to do with your money. Everyone has a different approach, different opinions, different perspective, different knowledge and information, different motives, and a different relationship with you. No two will be the same. You will find that investing ultimately comes down to you, what you are comfortable with, what you understand, what you see as your own goals, and the extent to which you feel you can trust a financial advisor (or your self). You have to make the final decisions as to what to do with your own money.
To most people, investing means stocks. A general guideline in securities investing is to ride a winner, sell a loser, and not throw good money after bad. The tendency may be to sell a winner (to cash in on your profits), but that is often the opposite of what works to build wealth in the long term. Selling a stock that has gone down in value is not always a good idea either, especially if it is a solid company with a good future.
There is "dollar cost averaging" in stock investments, where you buy more of a stock you already own when the price goes down; it keeps you in the market at a lower average share price, and may improve your long-term gains. Of course, this only works if the stock goes up again, not during a long downward slide from which the stock does not recover. Another form of dollar cost averaging is to keep purchasing a stock as it rises, to protect yourself from a future decline.
It takes awareness, insight, and understanding to make decisions that are right for you. Of course, we usually expect things to turn out for the better in our decisions — that's why we make the decision in the first place. But, that is not always the case. Always be sure that you have sufficient resources to start again, to recover, to move forward, even if things go bad. Spread the risk among savings, investments, property, and so on. Expect the best, but be prepared for the worst. That isn't negative thinking; it is being realistic and facing reality.
If you questions about investing, speak with a professional financial planner, one you trust. But, be wary of any financial advisor who sells you investment products through some affiliation, because they may steer you towards investments on which they receive a high commission but which are not necessarily the most suitable for you. You have to ask a lot of questions, and find what you feel is best for you, in your own situation.
No two investors and no two investment options are the same. Your situation is unique, but you may find there are certain guidelines you can follow that help to build wealth:
- Know your goals in investing.
- Know your tolerance for risk.
- Know how much money you wish to have, at what time.
- And, never invest more than you can afford to lose.
You have to use your own best judgment. Prior decisions that are costing you, on which you are unexpectedly losing a lot of money, may need to be curtailed. But if you seek personal financial advice for your specific situation you might be advised to hold on to your investments (especially stocks) for the long term, and ride out any periods of loss of value with the historical (and expected) increases in value.
It is easy to invest online, but beware of the potential downside. A stock purchased with a low fee, because it comes with absolutely no advice, is not always the best choice of how to place your money in investments, especially if you are not financially savvy. Historically, people who pick stocks do not do as well as the market does as a whole (in terms of key indicators such as the Dow Jones average). Realize, this includes thousands of people with advanced business and finance degrees who use all sorts of technical tools to analyze stocks — and who, historically, do worse than the market average.
Of course, stockbrokers make money whenever they buy or sell stock for their customers; it doesn't matter if the market is moving up or down, they profit either way. Beware the tendency of some brokers to "churn" your stock, that is, to buy and sell small blocks often; it maximizes their profits, but does not serve your own best interests.
Last of all, do not lose sight of the larger picture by having too narrow a financial vision. Watch out for major market corrections, downturns, and crashes. They happen. The nature of growth is that it is cyclical, it moves in spurts, or it declines. Things do not just keep getting better. Pay attention to what is happening in the world around you, including things outside the financial world which may impact it — and do not be tempted to merely hope for the best. Positive thinking does not protect your wealth or produce success.
2. Begin Where You Are
Everyone comes to investing differently, and makes different choices through their lives. People have different amounts that they wish to put into savings, investments, stocks, bonds, funds, precious metals, deals, and so on; and people are at different points in their lives, with different incomes, different family situations, with different costs of living, and so on. No two people are the same.
This is about the nature of investing, rather than providing any kind of investment advice, stock picks, mutual fund recommendations, "sure things," and so on. You will not find any specific investments recommended here. Instead, you may come to a better understanding of what investment is all about, how it can work for you, and what constitutes a "good" investment.
There are no guarantees in investing, and no approaches work the same for everyone. One person may decide to never go into debt, and invest what comes to them seeking the maximum return. Another person may decide to never use their own money for business and investment deals, preferring to use other people's money. And, still another person may find that the only thing that works for them in their business is to borrow money, which is often necessary when a business is doing well, rather than when it is doing poorly. Money is needed for growth and expansion, to take advantage of opportunities, and to gather the working assets and materials to produce products and services. Of course, there is risk inherent in all of these approaches.
Realize, what may be appropriate or workable at one point in time, may be unworkable or wrong at another. There are many rich people who have gone through cycles of wealth and lack, who have made and lost fortunes — especially the "self-made" wealthy. Having money at one point in time is not a guarantee that you will continue to have it in the future. So, you have to learn to make the best use of it now — and for the long term — to increase the likelihood that you will have what you need in the future.
It really is a learning experience. Most of us do not have the luxury of being born into, and being bestowed with, wealth. We have to earn what we can, and find ways to build it over time. Time is the underlying factor in all investments. Investments are for the purpose of growing money over time. And, we can only begin from where we are.
Begin where you are, but begin with the end in sight.
The only good investment for you, is one that takes your individual circumstances into consideration, including your willingness — and appropriate rationale — to take risks. It isn't enough to merely choose to risk the money you have with the hope of making more in your investments; you have to understand your investments, your approach, your expected outcome, the time span of the investment, and how reasonable the risk is in your situation.
It is generally observed that a young person may have more leeway to risk in investing, that is, to seek higher risk investments which may have a higher rate of return. And an older person may wish to be more conservative in their investment strategy, especially when they are moving closer to retirement. But, there is no absolute rule about this. A young person may be risk averse, and simply put money into their retirement plan each month throughout their working career, and have the money compound to a point that allows them a comfortable retirement — without taking on any big risks. And an older person may have a lot of financial savvy accumulated over the years, and be able to pick higher risk investments with much less chance of losing money. So, it is all relative. There are few absolutes in investing.
This is one of the reasons why we encourage anyone who is serious about their financial situation to learn to find a place within them where they more clearly feel or know what is right, good, and true for them. We are all different, and yet we have that place within us which tells us if we are being wise or foolish, insightful or impulsive, rational or caught up in popular emotion and expectations. That place, where we choose what we feel is right for us — with greater awareness, self-reflection, self-directedness, and inner wisdom — is, ultimately, the one thing we need to learn to depend upon, in all areas of life, including our financial future.
We need to check within us for what we feel is right, in a rather intuitive way, but we also need to be aware of what is happening in the world around us — especially as it may impact our financial well-being and future. There are external cycles, patterns, and trends — and unexpected changes — that can dramatically change the value or return on our investments.
3. Cycles
Everything goes in cycles. There are economic upturns and downturns, periods of growth and decline, bull markets and bear markets. There simply is no such thing as everything getting better, all the time — not in the "real world." What goes up does come down. The illusion that everything is getting better, that everyone has more money over time, is largely a result of inflation.
Many investments, and markets in general, go up and down, gain value and lose value, daily. However, change is rarely periodic, or repetitive over the same amount of time; in the financial world, things change unexpectedly. All we know is that they will change, often and repeatedly.
Life is full of ups and downs. Financially, it might seem that we can only make money when things are getting better in the economy (or some sector we have invested in), but, in reality, we can also make money when things are getting worse in the economy or market.
Stockbrokers make a commission on sales, when a stock is purchased or sold. It doesn't matter to them all that much if the market is up or down on a given day; the more activity there is, the more buying and selling, the more they make, one way or the other. Some investors bet on stocks going up or down in the short term; this is referred to as "playing the market."
The more often or quickly you trade your stocks, the more likely you are to diminish your returns due to the cost of trading plus the higher taxes you must pay on stocks which are not held for a longer period of time. At any given time, it is just as likely for a given stock to go up or down, when the stockbroker executes your buy or sell order.
Investing is the art of putting money in income-producing assets (or assets which appreciate in value) at the right time, at the right price, and in the right place. An investment is only worth what someone else will pay for it when you sell it. Investments have a certain value, and a certain liquidity — or ease with which they may be converted into money. So, for example, there may a time when owning a house is a worthwhile investment, when it is appreciating in value each year; but the ease with which that property may be converted into money can be anything from nearly impossible to fairly easy.
An investment is really only worth something to you, when you can get your money out of it. As we have observed, the amount people will pay for something often has nothing whatsoever to do with its inherent worth, but rather its desirability. The stock market, too, is generally driven by factors such as desirability, excitement, and emotion, more than technical analysis.
In hard financial times, the most desirable investments are often the most conservative, the ones with the least amount of risk. But, even that isn't an absolute rule. There are people who make a fortune in hard times, speculating on things that they believe will soar in value once there are better times; this is referred to as buying for "pennies on the dollar."
In prosperous times, people are usually willing to risk more on speculative investments. When everything seems to be going well, it is hard to put your money into something that won't do okay. When things are going badly in the economy, most people find it hard to keep from losing money. In bad times, savvy investors usually move money out of stocks into bonds; government bonds, in particular, tend to be less risky, and more reliable in hard times. Of course, any investment that is expected to rise, which is purchased at its low value, might be a worthwhile investment. Stocks, of course, are the investor's favorite when the market is reaching new highs.
There are cycles in stocks, bonds, real estate, commodities, precious metals, gems, and so on. When one goes up, often, another goes down. Seldom do they all go up or down. The best hedge against inflation is usually real estate; the best hedge against deflation is usually bonds; and the best investment when times are good, and business is booming, is usually stocks.
Most people are very conservative in their investing. They leave their money in the same holdings for a long time, often decades.
Investing is, for most people, not about speculating on whether the market is going up or down on a given day, or even in a given year. It is about the long-term gains that they expect. Any given market can look good or bad on any given day, or in any given year. Over the long term, the best investments gain value; they may have periods during which they lose value, but over the long term, they gain value. People who buy stocks, for example, at a high price, watch their stocks lose value and then sell them, are doing the opposite of what a wise investor does: buy low and sell high.
In the stock market, rather than selling off a stock or mutual fund that is decreasing in value, an investor may buy more, on the downturn. And, if it keeps going down, they will buy each month, regardless. This process, known as cost averaging, may tend to minimize the loss, and maximize the return on an investment — or not. It is up to the individual investor to understand what is really happening in the market, and do what they feel is right for them (or listen to their financial advisor).
Some people try to play the daily increases in stock prices, in a very risky process known as "day trading." Day traders often lose a lot of money. They seldom make more money by buying and selling stocks, daily, than they would if they simply left the same amount of money in a long-term stock investment. Even professional traders are generally only right half the time. That makes sense; since most equities are traded by professionals who manage huge funds, they buy and sell to each other, continuously, so half the time money is being made by the one making the right decision, money is being lost by one who is making a wrong decision.
There are cycles in the financial market that occur daily, weekly, monthly, quarterly, annually, and over even longer time periods — but they tend to not be regular. Some people claim to be able to predict stock market crashes, or a depression, over a period of many decades. Others apply esoteric mathematical models to stocks, or look at the shape of the graph of a stock's price over a period of time, and guess which way the stock is headed, up or down, or how much.
Realize, this is all mostly guesswork. It is simply not possible for people to see the future of investments via such analysis, at least not in any reliable, predictable, or guaranteed way. One thing you can count on, is: things change; nothing stays the same forever; and bad times follow good times, as surely as night follows day.
4. The Stock Market
When you buy stock, it is often said that you are buying ownership in a company. The stock you buy, however, isn't really purchased from the company. You are really buying stock from another person or entity that already owns that stock, rather than purchasing it from the company. Which means, one of you — it takes two to make a stock trade — might make money on the stock trade. One of you is counting on the stock price going up, and the other is counting on it going down. And, it most likely will go up or down in any given time period, though, which way it will go, is basically anyone's guess.
Today, there is so much information available daily that people have the temptation to trade stocks in the short term, rather than merely holding on to them for a period of many years or decades.
But, stocks tend to make money in the long term. This the historical perspective. Stock in a given company, or a given mutual fund which consists of stock in many companies, may gain or lose value in the short term or the long term. In fact, many do lose value for significant periods of time. The traditional way of making money in stocks is to keep a portfolio of stocks in solid companies that are expected to continue to make profits, or grow, over the long term.
It is ironic, but even in the US, there have been times when the average person was having a hard time financially, when bankruptcies were at an all-time high, when unemployment was high, or when there was a major disaster, and the stock market reached a high. The same principle applies: investments return money based upon their expected return. And, those who have a lot of money, or who make a lot of money — especially large multinational corporations — can make a lot of money even in bad times. The stock price reflects the belief investors have in their ability to make money with that investment, not the actual profitability of the company, or how well the country may be doing as a whole.
The market reflects people's confidence in their ability to make money. Notice how this is quite different from reflecting the real value or worth of a company or its stock. If lots of people believe they can make money on a given stock, they basically bet on it. And, that kind of enthusiasm is often enough to drive the price of the stock up, and make their expectations a reality. Again, you need to realize that such speculation is vastly different from understanding the true valuation of a company and its stock. Just as emotion can drive up the price, it can cause it to drop just as quickly.
Different segments of the market may act out of any perceivable relation to each other. For example, utilities stocks, technology stocks, financial stocks, transportation stocks, and so on, may change in value without much relation to how the others are doing. In order to minimize risk, most investors choose to spread their money among different industries, different market segments, and different "time" investments, which they expect to hold for varying lengths of time, some for the short term, some for the long term.
There are ever more complex financial instruments that deal with various aspects of the market in different ways, including hedge funds. Thousands of hedge funds have made billions of dollars for their founders and managers, and the temptation may be to imagine they are all good investments. As with any investment, you need to discriminate and do your homework.
Because investments are bought and sold, daily, on a global scale, investors look for opportunities and expanding markets wherever they may find them: Eastern Europe, India, Asia, Brazil, Russia, and so on. It doesn't always mean that people are doing well in these countries, but rather that there are particular companies that are expected to make money — which are drawing investment money, and producing a good return. This is an example of what are called "emerging markets."
Today, it may be increasingly important to diversify stock holdings across international borders as well.
Perhaps the simplest approach to investing in the stock market, is to find good companies whose stocks represent good value, and who are expected to maintain their market position and profitability over the long term. You may have to rely upon the information and advice you can get from appropriate financial advisers, but even more, on what you feel is right for you. There are countless investment professionals and experts who lose money all the time. You ultimately have to accept responsibility for your own decisions, and be aware of changes that might negatively impact you.
5. Four Pillars of Investing
Capital is money that is working for you, which can produce more money. You have to choose the investment vehicle for your capital, to get the return you need. The four main pillars of investing are: stocks (equities), bonds, real estate, and precious metals such as gold, silver, and platinum.
Traditionally, only the first three are considered to be necessary investments in a diversified portfolio. But, increasingly, with the devaluation of the US dollar, the increasing demand for precious metals worldwide, and the lack of tangible assets in many of our lives, it is becoming important to have precious metals as an asset that has inherent value (unlike "paper" assets).
Even a home is a paper asset, in a sense. You have a mortgage payment to make until the house is paid in full, and until then all you really have is a piece of paper. Sure, you get to live there if you choose to, as long as you are making that monthly payment and paying your property taxes, but fail to pay either of those — including your property taxes when your home is fully paid for — and you can still lose your home. It happens.
Precious metals are different in the sense that what you have is yours, especially if you retain possession. Other countries, especially India (the largest consumer of gold in the world) and China, have cultures which value gold as tangible wealth. So, the price of gold per ounce will probably continue to rise in the future, as demand increases, as more wealth is generated in those rapidly growing economies. Today, the rich invest in art, which often appreciates in value astronomically. But, the value of artwork can vary greatly; the price is not based upon any inherent material worth, and, as they say, beauty is in the eye of the beholder.
Back to the more traditional investments: stocks, bonds, and real estate. With the caveat that real estate isn't necessary really yours until it is fully paid for, a home generally remains a good investment in inflationary times. It tends to increase in value in relation to the rate of inflation. Another way of thinking of this is, the Federal Reserve feeds the increase in home prices with a lot of easy money and credit (debt), to create inflation without it appearing to actually be inflation.
It may seem that a house that is worth five times what it was worth thirty years ago is an excellent investment, but money is worth five times less than it was thirty years ago, many people earn five times what they did thirty years ago, gasoline costs five times what it did, and so on. The net result is, a house may be "worth" more numerically, but not in real dollars adjusted for inflation. Of course, there are local markets, such as in California, where real estate has gone up in value out of all proportion to inflation, the cost of materials, or anything else other than speculation. With so many millions of people competing for homes, real estate prices have been driven up by demand, not by the value of the home.
A home that is worth five hundred thousand dollars in some area of California may be worth no more than half that in another part of the country. The same house, the same size, the same materials, the same size lot, but the price is not inflated by speculative demand. This is why real estate may or may not be a good investment in a given area: demand is one thing, but the inherent value of a property is another. Demand — or speculation — is a bubble that can burst at any time, with the result being a large drop in property values.
So, a home is not always the best or safest investment. This is why, traditionally, stocks and bonds are recommended as part of a person's portfolio, too.
Stocks will go up in value in times of prosperity, not necessarily all stocks, or even a given stock rising continuously, but in general. There are pitfalls here, too. Many stocks do not do well. And, if your timing isn't right, you can lose all the value you might have gained on paper, if you wait too long to sell, and the price drops again.
This is why most people leave their stocks (especially mutual funds) to grow over the long term, and try to ignore the short-term market fluctuations, whether they go up or down. It is too hard for the average person to decipher all the information about the economy, including global markets, which impact the movement of share values on the exchange. So, the let their investments ride.
Bonds tend to have the most useful return in times of deflation, when stocks are not making a lot of money, and home prices are not rising much. The slow but steady (lower) return on bonds (especially those issued by the Treasury) is seen as being more safe, reliable, and buffered from dramatic stock market swings.
Perhaps you can see the role that each of these might play in an investment portfolio. In combination, they tend to shield investments from the drastic changes that may occur in just one sector. And, they allow the investor to ride out changes that might ruin those who have "all of their eggs in one basket." Of course, speak with your own financial planner, who will help you to determine your investing objectives, the risks that are appropriate or acceptable in your unique situation, and the proper mix of investments in these different areas — which can vary greatly at different times in your life.
6. Invest in What You Know
What we mean by "invest in what you know" is, invest in what you can understand. There are so many different non-banking investment vehicles these days, that it is no longer a matter of having cash, common stocks, bonds, and real estate. Today, there are "derivatives," and "hedge funds," and new investment instruments being created all of the time. The fact that they are new and often very complex means that few people understand how they work.
You can choose to trust others, believing they know what they are doing, or you can trust yourself more, and only choose to invest in the things you can understand. Some things may require a bit of self-education or information gathering; others may be incomprehensible no matter how much information is available. Futures are a form of derivative, which is highly leveraged. A small change in price and a lot of money may be gained or lost. And much of the time it is little more than speculation. How many people can determine what price a given commodity such as cotton will be selling for on a given day in the future?
You can't really say for sure whether an investment will go up or down in value. The more "risk" you take out of the investment, the more of a sure thing it is, but the less money it makes. The higher the risk, the more money there is to be made. But, in either case, the future simply is not commonly known, so no matter how much you "invest in what you know," you may never really know how things will be.
People generally do better investing in something they can understand, something that has at least some small meaning to them, personally. This is why "investing" in a home makes sense for a lot of people. It is tangible, and it is something they get value out of each and every day. Contrast this with stocks and mutual funds, which are complex to understand, and which largely exist as numbers on paper. People understand the value in owning a home, and so are willing to put their money into it.
There is of course a limit to investing in what you know. Consider "high technology." One person may know computers and invest in computer companies, another may be expert at optical imaging cameras. One may be riding a wave in the computer business, the other following trends in the health care industry. One technology may be advancing while the other is declining. So, merely investing in "high tech" is not the basis for a sound investment. You need relevant information about a particular industry or company, and how it is performing within its market segment and in relation to the market as a whole.
Even if you believe you know how a given market segment, industry, or company really works, it is hard to tell how it will perform in the future. There is a field know as "futurism," which attempts to predict the future in all areas of society. Futurism has grown out of favor in our rapidly changing times, because more often than not, the predictions turn out to be erroneous. If you need an example of how wrong predictions of the future can be, just look at the early science fiction movies, which showed people traveling around with jet engines strapped to their backs, flying through the skies. Reality tends to greatly depart from predictions and expectations.
Some people invest entirely on the basis of financials, price to earnings ratios, company valuations, stock highs and lows, and so on. Others seek an understanding of what the company actually does, and who is managing it. Some seek information from historical data; others focus on present performance; and others seek information on what new avenues a company is exploring for the future. Clearly, what you do with information is entirely up to you; you provide the context for evaluating the information; and so, what you think and perceive — based upon informed decision making — matters most.
It is common these days to not risk thinking differently from the herd. So, mutual funds that are "indexed," or related to things such as the Dow Jones average, are considered safe bets. The thinking is, at least you won't do worse than average. And, you almost don't have to think at all.
Which brings us back to our basic advice: learn to think for your self. It's what the most successful investors do.
7. Think For Your Self Financially
Are you aware of the ways in which your thinking may be supporting or inhibiting you, or your greater success? Are you willing to think differently from the herd?
The one thing that separates self-made millionaires from the ordinary person is a willingness to think for themselves. They do not go along with the herd. They think differently and see things differently. What people do when they invest or start a business is to put their money into something that they see as an opportunity, which others may not.
In fact, the fewer people who recognize the opportunity, the greater the possible return on investment or business success. An investor is counting on people to catch up to their way of thinking and seeing things, sooner or later, so that what they value comes to be more greatly valued by others. That is how they make a lot of money. They know something that others do not, or that others are not acting on, and take advantage of that.
It is possible to make money being mindless. People do it all the time, especially those who already have money. They just let their money sit in long-term investments, and may not touch a stock they own for many decades. They may even forget that they have it. Yet, it can keep making money. Tax-free municipal bonds are a way to be mindless and yet make money in investing.
But, this is about learning how to think in a way that improves your ability to make money and experience greater success. If you are content where you are, fine; if you are content doing what everyone else does, fine. You don't have to change what you are doing. But, consider the possibility that you could do better in life by relying upon your own thinking and initiative. There is always a risk in thinking for your self; you lose the (real or imagined) security of going along with the herd. Your financial position may rise or fall based upon your own individual choices, and you have to accept that responsibility.
Opportunity exists not only in a "sure thing" but in uncertainty as well. In fact, there is often a lot more opportunity in what is not certain, and what other people do not yet realize.
Some examples of things that people invest in, because they are "sure" of where they are headed in the future, include oil and other energy stocks including uranium. And precious metals such as gold, platinum, and silver. The idea is that there is a limited supply of these resources, they are in great demand and demand will only increase in the future, hence the price can be expected to go up. Yet, commodities, natural resources, and precious metals can be very risky investments.
Other things that people invest in are a function of the society in which we live, for example Coca Cola. Coca Cola, the beverage, has no essential function in human life on this planet. But, the demand for it, all over the world, has kept rising at a rapid rate for decades. People bank on this, and make money as the stock price keeps rising over the years. Now there are new drinks that are appealing to the younger generation, so-called "energy drinks" that have large amounts of caffeine and other substances that make a person feel charged up.
The questions you need to ask yourself are: what "opportunity" do I see, and what do I believe ? It isn't just a matter of whether a product will do well in the marketplace, and the stock price will go up, but what do you wish to promote and support in your society. Sure, there is a lot of money to be made in things that are ultimately not all that good for people. But, is that something you wish to do?
Society has its own trends and movement, fashions and addictions. The person who truly thinks for his or her self, does so in their personal life — in their own choices and behavior — and in their financial life as well. Why make a distinction between what you feel is right, good, and true for you as a person, and what you promote by in your world?
Always come back to the question: what are you spending your life on?
8. Timing
Most things — especially investments — have a given value at a given point in time. Investing is all about timing. Timing requires knowledge and intuitive responsiveness in the present moment.
Analytical knowledge is not enough. Things change in ways that do not follow expected trend lines determined analytically. You need to have an inner sense of how things are changing, or what lies ahead. This is not something that most people develop in a short time; it takes practice.
Your sense of timing — your perception of what is going on — may be shaped by your thinking (especially your programming and indoctrination), your feelings (especially emotion), and your sense of anticipation (especially your desires and expectations). These may cloud your judgment and throw off your sense of timing.
Here is a simple example of how we practice ignoring our true sense of timing: have you ever bought something, and regretted buying it at that time? How many things do you buy, which you probably wouldn't buy — because you would realize you didn't really need them — if you just waited a few days, or perhaps a month. It is very common.
In the moment, if we give in to impulse or programming or desire, we fool ourselves into believing that it is always right to have whatever we want right now. That is often a lie, and if we follow it blindly, it will be to our disadvantage.
Learning the proper timing of things requires you to stand back and observe — as if from a more distant place in space in time — and see objectively. Not via the ego, emotions, desires or expectations, but via true awareness, clarity of perception, and insight.
Ask yourself what you are reacting to — what is it that is moving you to act — in investing, and in acquiring or selling investment assets. What is the factor that is controlling how you are acting in relation to time?
Is it what you truly know?
Is it what you believe?
Is it a rumor, popular belief, or programming?
Is it a reaction to what others are doing?
Is it based in fear?
Is it based in greed?
Is there a desire to get over others, or to prove your superiority?
Is it based in ego?
Or is it based in what you know within you to be right, good, and true for you?
Ultimately, the only thing that will serve you in investing and handling your assets in the most progressive way, is to learn to think for your self, gain understanding and awareness, and make your decisions confidently when you feel the timing is right.
Confidence in decision making — and that is what investing really is — develops over time by learning to make good decisions, first on a smaller scale and then on a larger one. If you wish to practice, it doesn't cost you much of anything. You can assemble a portfolio of investments and see how they do over time, by simply investing in an imaginary fund. You create the portfolio, and track how it does. See if and when you feel to acquire or divest yourself of various investments.
Keep in mind that it is possible to be overconfident, too. People who practice so-called day trading, who buy and sell stocks that they expect to go up over a matter of hours, to make a quick buck, often lose their money. The vast majority lose everything they have. And, they wouldn't be studying the diagrams and plots and trend lines — and making the decisions they are making — if they didn't believe they knew something that was really working for them. They simply do not.
The value of an investment is what others will pay for it. There are times when you might invest in an asset that is undervalued, with the belief that it will rise in value. Sometimes it does. There may be times when you invest in an asset that is overpriced, believing it will continue to rise in value. Sometimes it does. What matters is how others expect the value of the investment to move, up or down. Even if a stock is very overpriced, as a function of price to earning ratio, for example, if the vast majority of people expect it to go up in price, they will drive the price up.
Remember, investments are worth what other people will pay for them at any given time. No matter how you determine the value of an investment or asset, if there isn't someone else who believes it is worth that much (or more) you will not got your profit from it. Be aware of the factors that are driving other people's determination of the value of the investment, as well.
9. All the Talking Heads
The more you follow investment news, and commentaries, the more you realize you are just seeing a bunch of talking heads — who do not necessarily know any more about what is happening than you do. When the market is up, they all point to stocks that are climbing, and act as if it will go on forever; when the market is down, they point to stocks dropping in value, and declare that to be the trend. In other words, they go with the trends — even on a daily basis — and it shifts their entire perspective.
When the sun is shining, they are all proclaiming the day will never end; when dark clouds appear, they say the sky is falling. Even in your own life, when you see the sun shining brightly, it is hard to think of nighttime; when times are good, it is hard to think of bad times. But, if you wish to succeed financially, you need to have a greater awareness. You have to realize the way things are, the way they can change (sometimes very quickly and unexpectedly), and which way they are going. Too narrow a vision can severely limit perspective on the real value of investments.
If you wish to have more perspective, you can listen to what all the talking heads are saying, but make up your own mind. Learn to recognize the self-promotion of those in the investment business — including those who do investment shows. They, like stockbrokers, always have good business as long as they get people to change their positions: sell up or sell down, the brokers make their profit either way. And people in the media make money by getting viewership, or by entertaining you.
Analysts portray the market on any given day, or in any other time frame, as just moving in cycles, whether they are predictable or not. There are ups, and there are downs, but they all ultimately work out. Or do they? Do all stocks or funds work out, and make a profit? No.
There are decades during which the average stock market holdings do not earn a penny. And there are "singularities," events which companies, industries, or the market as a whole may have a very hard time coping with.
Yet, brokers and analysts are generally optimistic; they cannot foresee an end to the big game. For many years, analysts and investment firms recommended stocks in order to prop up the price of the stock. They could see no wrong — ninety five percent of their stock analyses were positive. It was as if the stock market — or the stocks they recommended to their clients — could do no wrong.
Of course, the true reality is a lot different from this.
Analysts and brokers and all the talking heads recommend stocks every day that drop in price. If they really knew which ones were going up, then it is true that they would also know the ones that were not (or were going down). The fact is, they do not know. They guess. And they are right perhaps fifty percent of the time.
Some analysts really do their homework, and make very informed recommendations. But, even then, they invariably pick stocks to do well which turn out to be big losers.
What it comes down to, is your learning to trust what you know. Get the information that supports an informed decision, consider different opinions, and learn to rely upon your own judgment.
What analysts will never say, is that intuition plays a large role in all decision making — whether it leads to the initial item of interest, a little voice that says something is interesting or holds possibilities, or whether there is a feeling that a given stock or investment is "right." That feeling is not quantifiable. The best fund managers do their homework, but they also have gut feelings about what investments will pay off; they don't just do what everyone else does, and follow the herd. They follow their own guidance.
You need to learn to do that same process of self-referral.
10. Moving Forward
This is a process of self-referral, to see where you are and what you need to do to get going, now. Everyone is different. Don't try to compare yourself to anyone else, or judge yourself for being where you are. You can only begin where you are.
Step 1
- Do you have money put aside for emergencies, for example, enough to cover two months of your expenses if you had no income or there was a natural disaster? If not, you need to decide whether it makes sense to you, in your situation, to begin to invest for the long term when you have not provided for the short term.
- Do you have resources that you can fall back on, for example parents, if you had no income, lost your job, had investments that did poorly, and so on? If not, be aware of that. Credit cards — and debt — are not really a resource or asset; and despite the fact that people treat them as such, they only worsen your financial situation.
- Do you have sufficient and appropriate insurance for health and life, especially to provide for necessary expenses of your loved ones in the event you are incapacitated or die? Life insurance does not benefit you, individually, but is a basic necessity to provide for your family.
Step 2
- Do you understand the language of money and investing? If not, spend some time on the Internet at popular money sites, and become familiar with the terms that are used, and their importance (or not) to you. Consider that a part of your ongoing financial education and financial awareness.
- Do you have money to invest? If not, then you need to get to a point where you do have money that can make more money for you.
- Are you free from consumer debt? If not, then you need to reduce or eliminate your consumer debt before allocating money for investing.
- Do you have a positive cash flow, more money coming in each month than you spend? If not, then you need to reduce your expenses and begin to save money for investing.
- Are you willing to cut back on unnecessary expenses, or a false lifestyle fed by debt, and take real steps to achieving financial freedom now? If not now, then when?
- Is there any one issue that is holding you back? Is there any one propelling you forward?
- Collectively, do you have more force moving in a forward direction, than is holding you back?
- Deal with what you need to, to free yourself to move forward now.
Step 3
- Are you aware of the risks of investing, and the risks of choosing not to invest? There are few guarantees in life. You can choose from the least apparent risks, such as an investment in US Treasury bonds, or higher risks such as stocks, or even greater risks such as flipping a house. If you do not understand the risks of all different levels of investment, and your own needs, any investment you choose may be riskier for you.
- Do you understand that almost anything can be a liability in a changing economy? Houses that once appreciated in value annually may no longer do so, and may even lose value. The stock market can "correct" or go from bullish to bearish, with or without any notice. Keep your eye on your investments — wherever you have your money invested — and do not be complacent, unaware, or uninformed.
- Have you spoken with a trusted financial advisor? This means a professional, not a coworker or neighbor with a hot tip or someone who does not understand the changing economy and market, today. You will generally receive back far more in value than you pay for good professional advice.
- Do you know which investments that may be sold by professionals affiliated with different companies (including insurance annuities and mutual funds) are too expensive, because they have an inbuilt commission or "load"?
- Do you understand the need for diversification of an investment portfolio, the need to have your investments in different markets, different industries, and, perhaps, different countries in the global market? If you have money to invest (or already have investments), and you wish to minimize your risks, you need to be sure that your holdings are diversified to minimize risk and maximize return.
- Understand the nature of long-term investments, such as equities. Do you think you can "beat" the stock market, by picking individual stocks? Even professional funds pickers seldom beat the market, and often earn less for their fund investors than the market average (the Dow). Choose your investments wisely, usually for the longer term rather than for a quick profit, and you will tend to do better in the long term. If you buy regularly, you can take advantage of "dollar cost averaging" in stock investments.