Investopedia has given simple forex trading rules which a neophyte like me can follow. As they always say, practice makes perfect and the site offers practice trading to get me started until I can learn the ropes so to speak and choose my broker.
Trading Is An Art, Not A Science
The systems and ideas presented here stem from years of observation of price action in this market and provide high probability approaches to trading both trend and countertrend setups, but they are by no means a surefire guarantee of success. No trade setup is ever 100% accurate. Therefore, no rule in trading is ever absolute (except the one about always using stops!). Nevertheless, these 10 rules work well across a variety of market environments, and will help to keep you out of harm's way.
Never Let A Winner Turn Into A Loser
The FX markets can move fast, with gains turning into losses in a matter of minutes, making it critical to properly manage your capital. There is nothing worse than watching your trade be up 30 points one minute, only to see it completely reverse a short while later and take out your stop 40 points lower. You can protect your profits by using trailing stops and trading more than one lot.
Logic Wins; Impulse Kills
It can be a huge rush when a trader is on a winning streak, but just one bad loss can make the same trader give all of the profits and trading capital back to the market. Reason always trumps impulse because logically focused traders will know how to limit their losses, while impulsive traders are never more than one trade away from total bankruptcy.
Never Risk More Than 2% Per Trade
This is the most common and most violated rule in trading. Trading books are littered with stories of traders losing one, two, even five years' worth of profits in a single trade gone terribly wrong. By setting a 2% stop-loss for each trade, you would have to sustain 10 consecutive losing trades in a row to lose 20% of your account.
Use Both Technical And Fundamental Analysis
Both methods are important and have a hand in impacting price action. Fundamentals are good at dictating the broad themes in the market that can last for weeks months or even years. Technicals can change quickly and are useful for identifying specific entry and exit levels. A rule of thumb is to trigger fundamentally and enter and exit technically. For example, if the market is fundamentally a dollar-positive environment, we'd technically look for opportunties to buy on dips rather than sell on rallies.
Always Pair Strong With Weak
When a strong army is positioned against a weak army, the odds are heavily skewed toward the strong army winning. This is the way you should approach trading. When we trade currencies, we are always dealing in pairs - every trade involves buying one currency and shorting another. Because strength and weakness can last for some time as economic trends evolve, pairing the strong with the weak currency is one of the best ways for traders to gain an edge in the currency market.
Being Right And Early Means You Are Wrong
In FX, successful directional trades not only need to be right in analysis, but they also need to be right in timing as well. If the price action moves against you, even if the reasons for your trade remain valid, trust your eyes, respect the market and take a modest stop. In the currency market, being right and being early is the same as being wrong. Consider a scenario where a trader takes a short position during a rally in anticipation of a turnaround. The rally continues for longer than anticipated, so the trader exits early and takes a loss - only to find that the rally eventually did turn around and their original position could have been profitable.
Differentiate Between Scaling In And Adding To A Loser
The difference between adding to a loser and scaling in is your initial intent before you place the trade. Adding to a losing position that has gone beyond the point of your original risk is the wrong way to trade. There are, however, times when adding to a losing position is the right way to trade. For example, if your ultimate goal is to buy a 100,000 lot, and you establish a position in clips of 10,000 lots to get a better average price, this type of strategy is known as scaling in.
What Is Mathematically Optimal Is Psychologically Impossible
Novice traders who first approach the markets will often design very elegant, very profitable strategies that appear to generate millions of dollars on a computer backtest. Armed with such stellar research, these newbies fund their FX trading accounts and promptly proceed to lose all of their money. Why? Because trading is not logical but psychological in nature, and emotion will always overwhelm the intellect in the end. Conventional wisdom in the markets is that traders should always trade with a 2:1 reward-to-risk ratio, the trader can be wrong 6.5 times out of 10 and still make money. In practice this is quite difficult to achieve.
Risk Can Be Predetermined; Reward Is Unpredictable
Before entering every trade, you must know your pain threshold. You need to figure out what the worst-case scenario is and place your stop based on a monetary or technical level. Every trade, no matter how certain you are of its outcome, is an educated guess. Nothing is certain in trading. Reward, on the other hand, is unknown. When a currency moves, the move can be huge or small.
No Excuses, Ever
The "no excuses" rule is applicable to those times when the trader does not understand the price action of the markets. For example, if you are short a currency because you anticipate negative fundamental news and that news occurs, but the currency rallies instead, you must get out right away. If you do not understand what is going on in the market, it is always better to step aside and not trade. That way, you will not have to come up with excuses for why you blew up your account. It's acceptable to sustain a drawdown of 10% if it was the result of five consecutive losing trades that were stopped out at a 2% loss each. However, it is inexcusable to lose 10% on one trade because the trader refused to cut his losses.
Sunday, January 24, 2010
Saturday, January 23, 2010
Top 6 Most Tradable Currency Pairs
In the previous article, we have been introduced to the different tradable currencies in the market. Investopedia has given a bird's eyeview of the top 6 tradable currency pairs in the world.
The forex market is the fastest growing marketplace around. Forex trading allows traders to trade a wide range of currencies online, 24 hours a day, five days a week.
Traders also have the luxury of highly leveraged trading with lower margin requirements than equity markets. But before you jump in head first to the fast-paced world of forex trading, you'll need to know the currency pairs that traders trade most often.
Here's a look at six of the most tradable currency pairs in forex.
EUR/USD
The euro and U.S. dollar cross is far and away the most actively traded currency pair for forex traders. Known as "trading the euro", forex traders love this currency pair for the liquidity it offers.
The EUR/USD currency pair tends to have a negative correlation with USD/CHF and a positive correlation with the GBP/USD. This is due to the positive correlation of the euro, the British pound and the Swiss franc.
USD/JPY
The next most actively traded pair has traditionally been the Japanese yen - U.S. dollar pair. Known as "trading the gopher", this pair has been sensitive to political sentiment between the United States and the Far East.
The USD/JPY currency pair tends to be positively correlated to the USD/CHF and USD/CAD currency pairs due to the U.S. dollar being the base currency in all three pairs.
GBP/USD
One of the original forex currency pairs was the Great British pound - U.S. dollar pair. This currency pair is known as "trading the cable", a saying that originates from the days when the markets in New York and London were synchronized by a cable which spanned the Atlantic Ocean.
The GBP/USD pair tends to have a negative correlation with the USD/CHF and a positive correlation to the EUR/USD. This is due to the positive correlation between the pound, euro and the Swiss franc.
USD/CAD
With Canada being the United States' largest trading partner, one can easily see why the Canadian - U.S. dollar currency pair is so heavily traded. It is often referred to as "trading the loonie", a reference to the nickname of the Canadian dollar coin.
The USD/CAD currency pair tends to be negatively correlated with the AUD/USD, GBP/USD and EUR/USD pairs due to the U.S. dollar being the quote currency in these other pairs.
USD/CHF
Another major currency pair in the world of forex is the Swiss franc - U.S. dollar currency pair. Known as "trading the swissie", the franc has long been thought of as a safehaven for forex traders in times of political unrest.
The USD/CHF currency pair tends to have a negative correlation with the EUR/USD and GBP/USD pairs. This is due to the strong positive correlation between the Swiss franc, pound and euro.
AUD/USD
Forex traders love the "down-under" cross of the Australian - U.S. dollar currency pair. Referred to as "trading the Aussie", forex traders trade this pair in large amounts.
The AUD/USD curency pair tends to have a negative correlation with the USD/CAD, USD/CHF and USD/JPY pairs due to the U.S. dollar being the quote currency. As well, the correlation with the USD/CAD is also due to the the fact that both the Canadian and Australian dollars share a positive correlation with each another as both currencies are considered commodity block currencies.
There is a need to read further like A Primer on the Forex Matter as well as Commodity Prices and Currency Movements in order to understand how the different currency pairs work and not the other way around.
The forex market is the fastest growing marketplace around. Forex trading allows traders to trade a wide range of currencies online, 24 hours a day, five days a week.
Traders also have the luxury of highly leveraged trading with lower margin requirements than equity markets. But before you jump in head first to the fast-paced world of forex trading, you'll need to know the currency pairs that traders trade most often.
Here's a look at six of the most tradable currency pairs in forex.
EUR/USD
The euro and U.S. dollar cross is far and away the most actively traded currency pair for forex traders. Known as "trading the euro", forex traders love this currency pair for the liquidity it offers.
The EUR/USD currency pair tends to have a negative correlation with USD/CHF and a positive correlation with the GBP/USD. This is due to the positive correlation of the euro, the British pound and the Swiss franc.
USD/JPY
The next most actively traded pair has traditionally been the Japanese yen - U.S. dollar pair. Known as "trading the gopher", this pair has been sensitive to political sentiment between the United States and the Far East.
The USD/JPY currency pair tends to be positively correlated to the USD/CHF and USD/CAD currency pairs due to the U.S. dollar being the base currency in all three pairs.
GBP/USD
One of the original forex currency pairs was the Great British pound - U.S. dollar pair. This currency pair is known as "trading the cable", a saying that originates from the days when the markets in New York and London were synchronized by a cable which spanned the Atlantic Ocean.
The GBP/USD pair tends to have a negative correlation with the USD/CHF and a positive correlation to the EUR/USD. This is due to the positive correlation between the pound, euro and the Swiss franc.
USD/CAD
With Canada being the United States' largest trading partner, one can easily see why the Canadian - U.S. dollar currency pair is so heavily traded. It is often referred to as "trading the loonie", a reference to the nickname of the Canadian dollar coin.
The USD/CAD currency pair tends to be negatively correlated with the AUD/USD, GBP/USD and EUR/USD pairs due to the U.S. dollar being the quote currency in these other pairs.
USD/CHF
Another major currency pair in the world of forex is the Swiss franc - U.S. dollar currency pair. Known as "trading the swissie", the franc has long been thought of as a safehaven for forex traders in times of political unrest.
The USD/CHF currency pair tends to have a negative correlation with the EUR/USD and GBP/USD pairs. This is due to the strong positive correlation between the Swiss franc, pound and euro.
AUD/USD
Forex traders love the "down-under" cross of the Australian - U.S. dollar currency pair. Referred to as "trading the Aussie", forex traders trade this pair in large amounts.
The AUD/USD curency pair tends to have a negative correlation with the USD/CAD, USD/CHF and USD/JPY pairs due to the U.S. dollar being the quote currency. As well, the correlation with the USD/CAD is also due to the the fact that both the Canadian and Australian dollars share a positive correlation with each another as both currencies are considered commodity block currencies.
There is a need to read further like A Primer on the Forex Matter as well as Commodity Prices and Currency Movements in order to understand how the different currency pairs work and not the other way around.
Friday, January 22, 2010
Break Into Forex In 12 Steps
I am a beginning investor. I am looking at the market where I can practice and learn to get started. One promising portfolio I want to venture in is the forex market. Being able to read this article on Investopedia on how to break into Forex in 12 steps make it easy to try. Let's read on.
Getting Started
Learning to trade in the Forex market can seem like a daunting task when you’re first starting out, but it is not impossible. Here we will cover the preliminary steps you need to take to find your footing in the FX market.
The Eight Majors
In no specific order, the eight currencies every currency trader should know are the U.S. Dollar (USD) or "greenback", British Pound (GBP) or "cable", Japanese Yen (JPY), European Euro (EUR), Swiss Franc (CHF), Canadian Dollar (CAD) or "loonie", and the Australian/New Zealand Dollar (AUD/NZD). Currencies must be traded in pairs, and there are 18 different currency pairs that are conventionally quoted by forex market makers, including USD/CAD, EUR/USD, USD/CHF, AUD/USD, GBP/USD, NZD/USD, and USD/JPY.
Yield Drives Return
In every fx transaction, you are simultaneously buying one currency and selling another. Since every currency in the world is attached with an interest rate set by the central bank of that currency’s country, you are obligated to pay the interest on the currency that you have sold, but you also have the privilege of earning interest on the currency that you have bought. For example, assume that New Zealand has an interest rate of 8% (800 basis points) and that Japan has an interest rate of 0.5% (50 basis points). If you decide to go long NZD/JPY, you will earn 800 basis points in annualized interest, but have to pay 50 basis points for a net return of 7.5% or 750 basis points.
Low Spreads Save Money
The difference between the price at which a currency can be purchased and the price at which it can be sold is called the spread. It is calculated in “pips”, and this difference is how Forex brokers make their money, since they don’t charge commission. In comparing brokers, you will find that the time spent shopping around is worth it, as the difference in spreads can by very large.
Look For A Reliable Institution
Forex brokers are usually tied to large banks or lending institutions because of the large amount of leverage they need to provide. Also, forex brokers should be registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). You can find this and other financial information and statistics about a forex brokerage on its website or on the website of its parent company.
Proper Tools = Success
Forex brokers offer many different trading platforms for their clients - just like brokers in other markets. These trading platforms often feature real-time charts, technical analysis tools, real-time news and data, and even support for trading systems. Before committing to any broker, be sure to request free trials to test different trading platforms. Brokers usually also provide technical and fundamental commentaries, economic calendars and other research.
Keep Leverage Options Open
Leverage is necessary in forex because the price deviations (the sources of profit) are merely fractions of a cent. Leverage, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means your broker would lend you $100 for every $1 of actual capital. Many brokerages offer as much as 250:1. Remember, lower leverage means lower risk of a margin call, but also lower bang for your buck (and vice-versa).
Avoid Shady Brokers
Sniping and hunting – or prematurely buying and selling near preset points - is used by shady brokers to increase profits. Of course, no broker will admit to committing these acts, and there is no blacklist or organization that reports such activity. Secondly, when you are trading with borrowed money, your broker can buy or sell at its discretion, even if you had enough cash to cover. If your position takes a dive before rebounding to all-time highs, some brokers will liquidate your position on a margin call at that low. The only way to determine which brokers do this and which brokers don’t is to talk to fellow traders.
Fundamental Analysis Vs. Technical Analysis
Every Trader is different, but the best trading style is probably a combination of both technical and fundamental analysis. Smart traders will always be aware of the broader fundamental picture while using their technicals to pinpoint good entry and exit levels. Fundamental indicators include the consumer price index (CPI), retail sales, and durable goods. In addition, meetings held by the Federal Open Market Committee can cause market volatility. Technical analysis is most popular among forex traders, common forms include the Elliot Waves, Fibonacci studies and pivot points.
Define A Forex Strategy
The FX market offers multiple avenues to trading success, but in order to take advantage of these opportunities, you must first understand your strengths and weaknesses. Are you more comfortable with short-term or long-term time frames? How will you use fundamental and technical analysis? For more on devising a forex strategy, read Trade To Your Taste.
Practice Makes Perfect
Forex is a decentralized market in which dealers distribute their own price feeds through proprietary trading platforms. As such, it’s important to learn the features of each type of trading software before committing real funds to an account. Open a demo account and paper trade until you can make a consistent profit. Many people jump into the forex market and quickly lose a lot of money (because of leverage). It is important to take your time and learn to trade properly before committing capital. The best way to learn is by doing.
Trade Without Emotion
Don't keep "mental" stop-loss points if you don't have the ability to execute them on time. Always set your stop-loss and take-profit points to execute automatically, and don't change them unless absolutely necessary. Make your decisions and stick to them.
The Trend Is Your Friend
If you go against the trend, you had better have a good reason. Because the forex market tends to trend more than move sideways, you have a higher chance of success in trading with the trend.
Getting Started
Learning to trade in the Forex market can seem like a daunting task when you’re first starting out, but it is not impossible. Here we will cover the preliminary steps you need to take to find your footing in the FX market.
The Eight Majors
In no specific order, the eight currencies every currency trader should know are the U.S. Dollar (USD) or "greenback", British Pound (GBP) or "cable", Japanese Yen (JPY), European Euro (EUR), Swiss Franc (CHF), Canadian Dollar (CAD) or "loonie", and the Australian/New Zealand Dollar (AUD/NZD). Currencies must be traded in pairs, and there are 18 different currency pairs that are conventionally quoted by forex market makers, including USD/CAD, EUR/USD, USD/CHF, AUD/USD, GBP/USD, NZD/USD, and USD/JPY.
Yield Drives Return
In every fx transaction, you are simultaneously buying one currency and selling another. Since every currency in the world is attached with an interest rate set by the central bank of that currency’s country, you are obligated to pay the interest on the currency that you have sold, but you also have the privilege of earning interest on the currency that you have bought. For example, assume that New Zealand has an interest rate of 8% (800 basis points) and that Japan has an interest rate of 0.5% (50 basis points). If you decide to go long NZD/JPY, you will earn 800 basis points in annualized interest, but have to pay 50 basis points for a net return of 7.5% or 750 basis points.
Low Spreads Save Money
The difference between the price at which a currency can be purchased and the price at which it can be sold is called the spread. It is calculated in “pips”, and this difference is how Forex brokers make their money, since they don’t charge commission. In comparing brokers, you will find that the time spent shopping around is worth it, as the difference in spreads can by very large.
Look For A Reliable Institution
Forex brokers are usually tied to large banks or lending institutions because of the large amount of leverage they need to provide. Also, forex brokers should be registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Trading Commission (CFTC). You can find this and other financial information and statistics about a forex brokerage on its website or on the website of its parent company.
Proper Tools = Success
Forex brokers offer many different trading platforms for their clients - just like brokers in other markets. These trading platforms often feature real-time charts, technical analysis tools, real-time news and data, and even support for trading systems. Before committing to any broker, be sure to request free trials to test different trading platforms. Brokers usually also provide technical and fundamental commentaries, economic calendars and other research.
Keep Leverage Options Open
Leverage is necessary in forex because the price deviations (the sources of profit) are merely fractions of a cent. Leverage, expressed as a ratio between total capital available to actual capital, is the amount of money a broker will lend you for trading. For example, a ratio of 100:1 means your broker would lend you $100 for every $1 of actual capital. Many brokerages offer as much as 250:1. Remember, lower leverage means lower risk of a margin call, but also lower bang for your buck (and vice-versa).
Avoid Shady Brokers
Sniping and hunting – or prematurely buying and selling near preset points - is used by shady brokers to increase profits. Of course, no broker will admit to committing these acts, and there is no blacklist or organization that reports such activity. Secondly, when you are trading with borrowed money, your broker can buy or sell at its discretion, even if you had enough cash to cover. If your position takes a dive before rebounding to all-time highs, some brokers will liquidate your position on a margin call at that low. The only way to determine which brokers do this and which brokers don’t is to talk to fellow traders.
Fundamental Analysis Vs. Technical Analysis
Every Trader is different, but the best trading style is probably a combination of both technical and fundamental analysis. Smart traders will always be aware of the broader fundamental picture while using their technicals to pinpoint good entry and exit levels. Fundamental indicators include the consumer price index (CPI), retail sales, and durable goods. In addition, meetings held by the Federal Open Market Committee can cause market volatility. Technical analysis is most popular among forex traders, common forms include the Elliot Waves, Fibonacci studies and pivot points.
Define A Forex Strategy
The FX market offers multiple avenues to trading success, but in order to take advantage of these opportunities, you must first understand your strengths and weaknesses. Are you more comfortable with short-term or long-term time frames? How will you use fundamental and technical analysis? For more on devising a forex strategy, read Trade To Your Taste.
Practice Makes Perfect
Forex is a decentralized market in which dealers distribute their own price feeds through proprietary trading platforms. As such, it’s important to learn the features of each type of trading software before committing real funds to an account. Open a demo account and paper trade until you can make a consistent profit. Many people jump into the forex market and quickly lose a lot of money (because of leverage). It is important to take your time and learn to trade properly before committing capital. The best way to learn is by doing.
Trade Without Emotion
Don't keep "mental" stop-loss points if you don't have the ability to execute them on time. Always set your stop-loss and take-profit points to execute automatically, and don't change them unless absolutely necessary. Make your decisions and stick to them.
The Trend Is Your Friend
If you go against the trend, you had better have a good reason. Because the forex market tends to trend more than move sideways, you have a higher chance of success in trading with the trend.
Thursday, January 21, 2010
10 Books Worth Investing In
Here is a list of 10 books as recommended by Lisa Smith as worth investing in to increase one's knowledge of investment and how to increase your value in the marketplace.
"The Battle For The Soul Of Capitalism" (2005) by John C. Bogle
John Bogle, a mutual fund giant and long-time advocate for the little guy, takes a hard-hitting look at everything that ails the financial system in the United States. From overcompensated CEOs and overpriced mutual funds to Wall Street research scandals and the focus on short-term results over long-term gains, Bogle lays bare the truth behind what went wrong with capitalism. He also highlights the impact that mutual funds and their boards of directors have on the corporate policies of the companies that they run, and he provides a prescription for how stockholders can exercise their will, reclaim the companies they own and put the financial system back on track.
"Conspiracy Of Fools: A True Story" (2005) by Kurt Eichenwald
Written by a senior investigative reporter at The New York Times, this entertaining look at the Enron meltdown introduces readers to the rogues' gallery behind the biggest failure in corporate history. From influencing the nation's energy policy to misleading investors and analysts, the audacity, arrogance and greed of these characters is presented in a novelistic style that will keep you reading from the first page to the last. (For further reading, see What Enron Taught Us About Retirement Plans, Cooking The Books 101 and The Biggest Stock Scams Of All Time.)
"Freakonomics" (2005) by Steven D. Levitt and Stephen J. Dubner
Popular, thought provoking and controversial are all good words to describe this look at how a self-proclaimed "rogue economist explores the hidden side of everything". This is an economics text written for the average reader, not for Rhodes scholars, and it explores a host of real-world topics ranging from violent crime and the hierarchy of drug dealers' networks to backyard swimming pools and baby-naming patterns. It is an interesting departure from the financial services genre's usual fare.
"Fooled by Randomness" (2004) Nassim Nicholas Taleb
Taleb draws on his experiences as a professional trader and math professor to provide an intellectual look at the role of luck in achieving financial success. He provides food for thought to anyone curious about the role of skill in stock picking and the value of psychology in decision making. Whether you believe that great fortunes are made through hard work and persistence or merely via the fickle hand of fate, this book will bring a new perspective to your ruminations. Fortune declared it one of "the smartest books of all time".
"Bull's Eye Investing" (2004) by John Mauldin
When John Mauldin took a look at the future, he didn't see the traditional buy-and-hold methodology as a viable stock market strategy. Mauldin highlights the virtues of absolute return investment vehicles such as hedge funds, and old standbys like gold, as ways to make money in a decade which he predicts will be marked by stagnant markets. Citing factors such as new accounting standards and rising pension costs, he paints a bleak vision of the future and uses a variety of studies to make a compelling argument for his outlook and investment approach.
"A Mathematician Plays The Stock Market" (2003) John Allen Paulos
Most people know that numbers play a huge role in stock market analysis, and they assume that mathematical genius provides some hidden insight that mere mortals cannot hope to match. Using personal insight from his own efforts to beat the Street, Paulos provides a humorous and entertaining look at the mathematical theories and technical analysis methods that all too often fail. If you like math, you will love this book!
"Value Investing Today" (2003) by Charles H. Brandes
Benjamin Graham, Warren Buffett and Charles Brandes are all giants in the field of value investing. Their stock screening, portfolio construction and insight into the markets made them all famous - and rich. Brandes provides a solid introduction to the strategies behind the success of the value approach. The third edition of this book, originally published in 1989, updates supporting data and adds several new chapters, including strategies to capitalize on international markets.
"The Millionaire Mind" (2000) by Thomas J. Stanley
In his earlier book, "The Millionaire Next Door", Thomas J. Stanley collaborated with William D. Danko to provide a profile of the "average" millionaire. In "The Millionaire Mind", Stanley provides a detailed look at the type of thinking that helped these millionaires amass their wealth. Everyone who aspires to millionaire status shouldn't just read this book, they should study it.
"John Neff On Investing" (1999) by John Neff
The legendary manager of Vanguard's Windsor Fund built his reputation as a bargain hunter extraordinaire. With a contrarian approach to picking stocks, Neff bought low and sold high. For investors that count themselves among Neff's many fans, this account of how he got the job done is well worth the read. That said, anyone reading this book in hopes of finding a shortcut to making a few bucks will likely be disappointed - there are no quick fixes offered here.
"The Millionaire Next Door" (1996) Thomas J. Stanley and William D. Danko
If you have ever had a burning desire to know "how the other half lives", this is the book for you. When looking for the rich, "The Millionaire Next Door" advises us to forget the Lamborghinis, yachts and personal helicopters and focus instead on the people who live across the street, because the average millionaire isn't who you might expect it to be. Many of the folks with seven-figure bankbooks live in average suburban neighborhoods, drive average cars and live just like the rest of us!
So many books, so little time! This list of books is sure to give you new food for thought and may even make you question what you already know. Regardless of which you choose to read, when it comes to finance and investing, a little knowledge can go a long way.
"The Battle For The Soul Of Capitalism" (2005) by John C. Bogle
John Bogle, a mutual fund giant and long-time advocate for the little guy, takes a hard-hitting look at everything that ails the financial system in the United States. From overcompensated CEOs and overpriced mutual funds to Wall Street research scandals and the focus on short-term results over long-term gains, Bogle lays bare the truth behind what went wrong with capitalism. He also highlights the impact that mutual funds and their boards of directors have on the corporate policies of the companies that they run, and he provides a prescription for how stockholders can exercise their will, reclaim the companies they own and put the financial system back on track.
"Conspiracy Of Fools: A True Story" (2005) by Kurt Eichenwald
Written by a senior investigative reporter at The New York Times, this entertaining look at the Enron meltdown introduces readers to the rogues' gallery behind the biggest failure in corporate history. From influencing the nation's energy policy to misleading investors and analysts, the audacity, arrogance and greed of these characters is presented in a novelistic style that will keep you reading from the first page to the last. (For further reading, see What Enron Taught Us About Retirement Plans, Cooking The Books 101 and The Biggest Stock Scams Of All Time.)
"Freakonomics" (2005) by Steven D. Levitt and Stephen J. Dubner
Popular, thought provoking and controversial are all good words to describe this look at how a self-proclaimed "rogue economist explores the hidden side of everything". This is an economics text written for the average reader, not for Rhodes scholars, and it explores a host of real-world topics ranging from violent crime and the hierarchy of drug dealers' networks to backyard swimming pools and baby-naming patterns. It is an interesting departure from the financial services genre's usual fare.
"Fooled by Randomness" (2004) Nassim Nicholas Taleb
Taleb draws on his experiences as a professional trader and math professor to provide an intellectual look at the role of luck in achieving financial success. He provides food for thought to anyone curious about the role of skill in stock picking and the value of psychology in decision making. Whether you believe that great fortunes are made through hard work and persistence or merely via the fickle hand of fate, this book will bring a new perspective to your ruminations. Fortune declared it one of "the smartest books of all time".
"Bull's Eye Investing" (2004) by John Mauldin
When John Mauldin took a look at the future, he didn't see the traditional buy-and-hold methodology as a viable stock market strategy. Mauldin highlights the virtues of absolute return investment vehicles such as hedge funds, and old standbys like gold, as ways to make money in a decade which he predicts will be marked by stagnant markets. Citing factors such as new accounting standards and rising pension costs, he paints a bleak vision of the future and uses a variety of studies to make a compelling argument for his outlook and investment approach.
"A Mathematician Plays The Stock Market" (2003) John Allen Paulos
Most people know that numbers play a huge role in stock market analysis, and they assume that mathematical genius provides some hidden insight that mere mortals cannot hope to match. Using personal insight from his own efforts to beat the Street, Paulos provides a humorous and entertaining look at the mathematical theories and technical analysis methods that all too often fail. If you like math, you will love this book!
"Value Investing Today" (2003) by Charles H. Brandes
Benjamin Graham, Warren Buffett and Charles Brandes are all giants in the field of value investing. Their stock screening, portfolio construction and insight into the markets made them all famous - and rich. Brandes provides a solid introduction to the strategies behind the success of the value approach. The third edition of this book, originally published in 1989, updates supporting data and adds several new chapters, including strategies to capitalize on international markets.
"The Millionaire Mind" (2000) by Thomas J. Stanley
In his earlier book, "The Millionaire Next Door", Thomas J. Stanley collaborated with William D. Danko to provide a profile of the "average" millionaire. In "The Millionaire Mind", Stanley provides a detailed look at the type of thinking that helped these millionaires amass their wealth. Everyone who aspires to millionaire status shouldn't just read this book, they should study it.
"John Neff On Investing" (1999) by John Neff
The legendary manager of Vanguard's Windsor Fund built his reputation as a bargain hunter extraordinaire. With a contrarian approach to picking stocks, Neff bought low and sold high. For investors that count themselves among Neff's many fans, this account of how he got the job done is well worth the read. That said, anyone reading this book in hopes of finding a shortcut to making a few bucks will likely be disappointed - there are no quick fixes offered here.
"The Millionaire Next Door" (1996) Thomas J. Stanley and William D. Danko
If you have ever had a burning desire to know "how the other half lives", this is the book for you. When looking for the rich, "The Millionaire Next Door" advises us to forget the Lamborghinis, yachts and personal helicopters and focus instead on the people who live across the street, because the average millionaire isn't who you might expect it to be. Many of the folks with seven-figure bankbooks live in average suburban neighborhoods, drive average cars and live just like the rest of us!
So many books, so little time! This list of books is sure to give you new food for thought and may even make you question what you already know. Regardless of which you choose to read, when it comes to finance and investing, a little knowledge can go a long way.
Wednesday, January 20, 2010
8 Tips For Starting Your Own Business
Aside from becoming an investor, one way to increase your value and become a millionaire is to be your own boss or start your own business. Here are 8 basic tips on how to be one as outlined in another article published in investopedia.
Wouldn't it be great to be able to quit your job, be your own boss and earn a paycheck from the comfort of your own home? The good news is that with a little planning and some startup money, it is possible! Here we'll examine some important steps to follow when starting your own business.
Do You Have What It Takes?
Not everyone is cut out for the challenge of starting their own business. There are several personality traits that are common among successful entrepreneurs, including discipline, frugality, self-confidence, good communication skills, humility, honesty and integrity, superb record-keeping skills, motivation, good health, optimism and more.
Creating The Concept
Before you quit your job to become an entrepreneur, you must first think of a concept, product or service that will generate a steady stream of income. This may sound easy, but for most people, this is actually the hardest part. You should conceive a plan that puts your knowledge, experience and expertise to use in the most profitable way possible. Once you settle on an idea, research the marketplace to see how similar businesses have fared.
Start with areas you already have a great deal of interest in, and equipment and materials for. This will help cut down startup costs.
Make Sure You Have Support
If you're married and/or have kids, you should also be asking your family how they feel about your working from home, as your decision will affect them both financially and psychologically. If the response is negative, spend time addressing any concerns and decide whether your goal is worth continuing against their wishes if you are unable to change their minds.
Develop A Work Space
If you are considering a home-based business, remember that your home's primary function is to serve as a dwelling for you and your family - not as a warehouse or meeting place for your business and its clients. If you're considering a computer-based business, make sure you have the technology necessary to give your idea a fighting chance.
Make sure you have a dedicated, private area to work. This area should be free of noise and distraction.
Create A Business Plan
Numerous studies have shown that one of the major reasons new businesses fail is poor planning. If you are planning on starting up a business, you must have a business plan. This will serve as a road map to guide you, and communicate with your bank and/or investors what you're doing and why they should invest in you. It should include a mission statement, executive summary, product or service offerings, target market, marketing plan, industry and competitive analysis, pro-forma financials, resumes for the company's principals, your offering, and an appendix with any other pertinent information.
Find The Right Funding
Most businesses require startup income. Ideally, this investment will help you break even after a year, but keep in mind that even successful businesses can remain in debt for the first few years. Potential sources of funding include a small-business loan from your local bank, tapping into your savings, money from other investments, borrowing from family/friends and, as a last resort, credit cards.
Try to avoid racking up costly credit card debt that could cost 20% or more in yearly interest fees. You should also avoid borrowing against your 401(k) or other similar plans as this could adversely affect your retirement.
Plan Your Company Budget
Without a budget, a business runs the risk of spending more money than it is taking in, or not spending enough money to grow the business and compete. There are a number of ways you can plan your budget. These include researching industry standards, giving yourself a cushion, reviewing the budget periodically, and shopping around for services and suppliers.
While many firms draft a budget yearly, small business owners should do so more often. In fact, many find themselves planning just a month or two ahead when unexpected expenses throw off revenue assumptions.
Get All The Help You Can Find
A number of resources are available to help entrepreneurial hopefuls get off to a great start. Free information and assistance is available from your local Small Business Development Center (SBDC) and SCORE offices. Both are associated with the U.S. Small Business Administration (SBA). The IRS can even provide free assistance, including accounting and record-keeping, through the Small Business Tax Education Program.
Look To The Future
Nearly three out of four businesses are no longer in operation after two years, so you'll have to find ways to adapt as the business expands and to conquer new challenges. Prepare yourself for the event that growth requires you to move the business out of your home and into an office space. In addition, after the rush of a small-business launch and the initial influx of curious customers, many small businesses reach a plateau. Any business must constantly adapt to changing market conditions, new business tools and new sales opportunities in order to continue to grow and prosper.
Wouldn't it be great to be able to quit your job, be your own boss and earn a paycheck from the comfort of your own home? The good news is that with a little planning and some startup money, it is possible! Here we'll examine some important steps to follow when starting your own business.
Do You Have What It Takes?
Not everyone is cut out for the challenge of starting their own business. There are several personality traits that are common among successful entrepreneurs, including discipline, frugality, self-confidence, good communication skills, humility, honesty and integrity, superb record-keeping skills, motivation, good health, optimism and more.
Creating The Concept
Before you quit your job to become an entrepreneur, you must first think of a concept, product or service that will generate a steady stream of income. This may sound easy, but for most people, this is actually the hardest part. You should conceive a plan that puts your knowledge, experience and expertise to use in the most profitable way possible. Once you settle on an idea, research the marketplace to see how similar businesses have fared.
Start with areas you already have a great deal of interest in, and equipment and materials for. This will help cut down startup costs.
Make Sure You Have Support
If you're married and/or have kids, you should also be asking your family how they feel about your working from home, as your decision will affect them both financially and psychologically. If the response is negative, spend time addressing any concerns and decide whether your goal is worth continuing against their wishes if you are unable to change their minds.
Develop A Work Space
If you are considering a home-based business, remember that your home's primary function is to serve as a dwelling for you and your family - not as a warehouse or meeting place for your business and its clients. If you're considering a computer-based business, make sure you have the technology necessary to give your idea a fighting chance.
Make sure you have a dedicated, private area to work. This area should be free of noise and distraction.
Create A Business Plan
Numerous studies have shown that one of the major reasons new businesses fail is poor planning. If you are planning on starting up a business, you must have a business plan. This will serve as a road map to guide you, and communicate with your bank and/or investors what you're doing and why they should invest in you. It should include a mission statement, executive summary, product or service offerings, target market, marketing plan, industry and competitive analysis, pro-forma financials, resumes for the company's principals, your offering, and an appendix with any other pertinent information.
Find The Right Funding
Most businesses require startup income. Ideally, this investment will help you break even after a year, but keep in mind that even successful businesses can remain in debt for the first few years. Potential sources of funding include a small-business loan from your local bank, tapping into your savings, money from other investments, borrowing from family/friends and, as a last resort, credit cards.
Try to avoid racking up costly credit card debt that could cost 20% or more in yearly interest fees. You should also avoid borrowing against your 401(k) or other similar plans as this could adversely affect your retirement.
Plan Your Company Budget
Without a budget, a business runs the risk of spending more money than it is taking in, or not spending enough money to grow the business and compete. There are a number of ways you can plan your budget. These include researching industry standards, giving yourself a cushion, reviewing the budget periodically, and shopping around for services and suppliers.
While many firms draft a budget yearly, small business owners should do so more often. In fact, many find themselves planning just a month or two ahead when unexpected expenses throw off revenue assumptions.
Get All The Help You Can Find
A number of resources are available to help entrepreneurial hopefuls get off to a great start. Free information and assistance is available from your local Small Business Development Center (SBDC) and SCORE offices. Both are associated with the U.S. Small Business Administration (SBA). The IRS can even provide free assistance, including accounting and record-keeping, through the Small Business Tax Education Program.
Look To The Future
Nearly three out of four businesses are no longer in operation after two years, so you'll have to find ways to adapt as the business expands and to conquer new challenges. Prepare yourself for the event that growth requires you to move the business out of your home and into an office space. In addition, after the rush of a small-business launch and the initial influx of curious customers, many small businesses reach a plateau. Any business must constantly adapt to changing market conditions, new business tools and new sales opportunities in order to continue to grow and prosper.
Tuesday, January 19, 2010
World's Greatest Investors
Investopedia enumerated a list of the world's greatest investors. Some may be familiar to the business world while others who are just starting out their investment portpolio may benefit from knowing who they want to emulate as an investor.
Great money managers are like the rock stars of the financial world. The greatest investors have all made a fortune off their success and in many cases, they've helped millions of others achieve similar returns.
These investors differ widely in the strategies and philosophies they applied to their trading; some came up with new and innovative ways to analyze their investments, while others picked securites almost entirely by instinct. Where these investors don't differ is in their ability to consistently beat the market.
(1) Benjamin Graham
Ben Graham excelled as an investment manager and financial educator. He authored, among others, two investment classics of unparalleled importance. He is also universally recognized as the father of two fundamental investment disciplines – security analysis and value investing.
The essence of Graham's value investing is that any investment should be worth substantially more than an investor has to pay for it. He believed in fundamental analysis and sought out companies with strong balance sheets, or, those with little debt, above-average profit margins, and ample cash flow.
(2)John Templeton
One of the past century's top contrarians, it is said about John Templeton that "he bought low during the Depression, sold high during the internet boom and made more than a few good calls in between." Templeton created some of the world's largest and most successful international investment funds. He sold his Templeton funds in 1992 to the Franklin Group. In 1999, Money Magazine called him "arguably the greatest global stock picker of the century." As a naturalized British citizen living in the Bahamas, Templeton was knighted by Queen Elizabeth II for his many accomplishments.
(3)Thomas Rowe Price, Jr.
Thomas Rowe Price, Jr. is considered to be "the father of growth investing." He spent his formative years struggling with the Depression, and the lesson he learned was not to stay out of stocks but to embrace them. Price viewed financial markets as cyclical. As a "crowd opposer," he took to investing in good companies for the long term, which was virtually unheard of at this time. His investment philosophy was that investors had to put more focus on individual stock-picking for the long term. Discipline, process, consistency, and fundamental research became the basis for his successful investing career.
(4)John Neff
Neff joined Wellington Management Co. in 1964 and stayed with the company for more than 30 years managing three of its funds. His preferred investment tactic involved investing in popular industries through indirect paths, and was considered a value investor as he focused on companies with low P/E ratios and strong dividend yields. He ran the Windsor Fund for 31 years (ending 1995), and earned a return of 13.7%, versus 10.6% for the S&P 500 over the same time span. This amounts to a gain of more than 55 times an initial investment made in 1964.
(5)Jesse Livermore
Jesse Livermore had no formal education or stock trading experience. He was a self-made man who learned from his winners as well as his losers. It was these successes and failures that helped cement trading ideas that can still be found throughout the market today. Livermore began trading for himself in his early teens, and by the age of fifteen, he had reportedly produced gains of over $1,000, which was big money in those days. Over the next several years, he made money betting against the so-called "bucket shops," which didn't handle legitimate trades – customers bet against the house on stock price movements.
(6)Peter Lynch
Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990, during which time the fund's assets grew from $20 million to $14 billion. More importantly, Lynch reportedly beat the S&P 500 Index benchmark in 11 of those 13 years, achieving an annual average return of 29%.
Often described as a "chameleon," Peter Lynch adapted to whatever investment style worked at the time. But when it came to picking specific stocks, Peter Lynch stuck to what he knew and/or could easily understand.
(7)George Soros
George Soros was a master at translating broad-brush economic trends into highly leveraged, killer plays in bonds and currencies. As an investor, Soros was a short-term speculator, making huge bets on the directions of financial markets. In 1973, George Soros founded the hedge fund company of Soros Fund Management, which eventually evolved into the well-known and respected Quantum Fund. For almost two decades, he ran this aggressive and successful hedge fund, reportedly racking up returns in excess of 30% per year and, on two occasions, posting annual returns of more than 100%. (For related reading, see Introduction To Hedge Funds - Part 1 and
(8)Warren Buffett
Referred to as the "Oracle of Omaha", Warren Buffett is viewed as one of the most successful investors in history.
Following the principles set out by Benjamin Graham, he has amassed a multibillion dollar fortune mainly through buying stocks and companies through Berkshire Hathaway. Those who invested $10,000 in Berkshire Hathaway in 1965 are above the $50 million mark today.
Buffett's investing style of discipline, patience and value has consistently outperformed the market for decades.
(9)John (Jack) Bogle
Bogle founded the Vanguard Group mutual fund company in 1974 and made it into one of the world's largest and most respected fund sponsors. Bogle pioneered the no-load mutual fund and championed low-cost index investing for millions of investors. He created and introduced the first index fund, Vanguard 500, in 1976.
Jack Bogle's investing philosophy advocates capturing market returns by investing in broad-based index mutual funds that are characterized as no-load, low-cost, low-turnover and passively managed.
(10)Carl Icahn
Carl Icahn is an activist, and pugnacious investor that uses ownership positions in publicly held companies to force changes to increase the value of his shares. Icahn started his corporate raiding activities in earnest in the late 1970s and hit the big leagues with his hostile takeover of TWA in 1985. Icahn is most famous for the "Icahn Lift." This is the Wall Street catchphrase that describes the upward bounce in a company's stock price that typically happens when Carl Icahn starts buying the stock of a company he believes is poorly managed.
(11)William H. Gross
Considered the "king of bonds," Bill Gross is the world's leading bond fund manager. As the founder and managing director of the PIMCO family of bond funds, he and his team have more than $600 billion in fixed-income assets under management.
In 1996, Gross was the first portfolio manager inducted into the Fixed-Income Analyst Society Inc. hall of fame for his contributions to the advancement of bond and portfolio analysis.
Who among the best investors you want to pick as your choice to copy depends on your needs and personality.
Great money managers are like the rock stars of the financial world. The greatest investors have all made a fortune off their success and in many cases, they've helped millions of others achieve similar returns.
These investors differ widely in the strategies and philosophies they applied to their trading; some came up with new and innovative ways to analyze their investments, while others picked securites almost entirely by instinct. Where these investors don't differ is in their ability to consistently beat the market.
(1) Benjamin Graham
Ben Graham excelled as an investment manager and financial educator. He authored, among others, two investment classics of unparalleled importance. He is also universally recognized as the father of two fundamental investment disciplines – security analysis and value investing.
The essence of Graham's value investing is that any investment should be worth substantially more than an investor has to pay for it. He believed in fundamental analysis and sought out companies with strong balance sheets, or, those with little debt, above-average profit margins, and ample cash flow.
(2)John Templeton
One of the past century's top contrarians, it is said about John Templeton that "he bought low during the Depression, sold high during the internet boom and made more than a few good calls in between." Templeton created some of the world's largest and most successful international investment funds. He sold his Templeton funds in 1992 to the Franklin Group. In 1999, Money Magazine called him "arguably the greatest global stock picker of the century." As a naturalized British citizen living in the Bahamas, Templeton was knighted by Queen Elizabeth II for his many accomplishments.
(3)Thomas Rowe Price, Jr.
Thomas Rowe Price, Jr. is considered to be "the father of growth investing." He spent his formative years struggling with the Depression, and the lesson he learned was not to stay out of stocks but to embrace them. Price viewed financial markets as cyclical. As a "crowd opposer," he took to investing in good companies for the long term, which was virtually unheard of at this time. His investment philosophy was that investors had to put more focus on individual stock-picking for the long term. Discipline, process, consistency, and fundamental research became the basis for his successful investing career.
(4)John Neff
Neff joined Wellington Management Co. in 1964 and stayed with the company for more than 30 years managing three of its funds. His preferred investment tactic involved investing in popular industries through indirect paths, and was considered a value investor as he focused on companies with low P/E ratios and strong dividend yields. He ran the Windsor Fund for 31 years (ending 1995), and earned a return of 13.7%, versus 10.6% for the S&P 500 over the same time span. This amounts to a gain of more than 55 times an initial investment made in 1964.
(5)Jesse Livermore
Jesse Livermore had no formal education or stock trading experience. He was a self-made man who learned from his winners as well as his losers. It was these successes and failures that helped cement trading ideas that can still be found throughout the market today. Livermore began trading for himself in his early teens, and by the age of fifteen, he had reportedly produced gains of over $1,000, which was big money in those days. Over the next several years, he made money betting against the so-called "bucket shops," which didn't handle legitimate trades – customers bet against the house on stock price movements.
(6)Peter Lynch
Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990, during which time the fund's assets grew from $20 million to $14 billion. More importantly, Lynch reportedly beat the S&P 500 Index benchmark in 11 of those 13 years, achieving an annual average return of 29%.
Often described as a "chameleon," Peter Lynch adapted to whatever investment style worked at the time. But when it came to picking specific stocks, Peter Lynch stuck to what he knew and/or could easily understand.
(7)George Soros
George Soros was a master at translating broad-brush economic trends into highly leveraged, killer plays in bonds and currencies. As an investor, Soros was a short-term speculator, making huge bets on the directions of financial markets. In 1973, George Soros founded the hedge fund company of Soros Fund Management, which eventually evolved into the well-known and respected Quantum Fund. For almost two decades, he ran this aggressive and successful hedge fund, reportedly racking up returns in excess of 30% per year and, on two occasions, posting annual returns of more than 100%. (For related reading, see Introduction To Hedge Funds - Part 1 and
(8)Warren Buffett
Referred to as the "Oracle of Omaha", Warren Buffett is viewed as one of the most successful investors in history.
Following the principles set out by Benjamin Graham, he has amassed a multibillion dollar fortune mainly through buying stocks and companies through Berkshire Hathaway. Those who invested $10,000 in Berkshire Hathaway in 1965 are above the $50 million mark today.
Buffett's investing style of discipline, patience and value has consistently outperformed the market for decades.
(9)John (Jack) Bogle
Bogle founded the Vanguard Group mutual fund company in 1974 and made it into one of the world's largest and most respected fund sponsors. Bogle pioneered the no-load mutual fund and championed low-cost index investing for millions of investors. He created and introduced the first index fund, Vanguard 500, in 1976.
Jack Bogle's investing philosophy advocates capturing market returns by investing in broad-based index mutual funds that are characterized as no-load, low-cost, low-turnover and passively managed.
(10)Carl Icahn
Carl Icahn is an activist, and pugnacious investor that uses ownership positions in publicly held companies to force changes to increase the value of his shares. Icahn started his corporate raiding activities in earnest in the late 1970s and hit the big leagues with his hostile takeover of TWA in 1985. Icahn is most famous for the "Icahn Lift." This is the Wall Street catchphrase that describes the upward bounce in a company's stock price that typically happens when Carl Icahn starts buying the stock of a company he believes is poorly managed.
(11)William H. Gross
Considered the "king of bonds," Bill Gross is the world's leading bond fund manager. As the founder and managing director of the PIMCO family of bond funds, he and his team have more than $600 billion in fixed-income assets under management.
In 1996, Gross was the first portfolio manager inducted into the Fixed-Income Analyst Society Inc. hall of fame for his contributions to the advancement of bond and portfolio analysis.
Who among the best investors you want to pick as your choice to copy depends on your needs and personality.
Monday, January 18, 2010
Learn To Invest In 10 Steps
For a beginner who wants to invest, having the know how as well as learning the basic or simple steps to create an investment, this article from Investopdia can be a great help. Having no business degree and the technical savvy, I find it an easy reading and easy to follow, too.
Investing is actually pretty simple; you're basically putting your money to work for you so that you don't have to take a second job, or work overtime hours to increase your earning potential. There are many different ways to make an investment, such as stocks, bonds, mutual funds or real estate, and they don't always require a large sum of money to start.
Step 1: Get Your Finances In Order
Jumping into investing without first examining your finances is like jumping into the deep end of the pool without knowing how to swim. On top of the cost of living, payments to outstanding credit card balances and loans can eat into the amount of money left to invest. Luckily, investing doesn't require a significant sum to start.
Step 2: Learn The Basics
You don't need to be a financial expert to invest, but you do need to learn some basic terminology so that you are better equipped to make informed decisions. Learn the differences between stocks, bonds, mutual funds and certificates of deposit (CDs). You should also learn financial theories such as portfolio optimization, diversification and market efficiency. Reading books written by successful investors such as Warren Buffett or reading through the basic tutorials on Investopedia are great starting points.
Step 3: Set Goals
Once you have established your investing budget and have learned the basics, it's time to set your investing goal. Even though all investors are trying to make money, each one comes from a diverse background and has different needs. Safety of capital, income and capital appreciation are some factors to consider; what is best for you will depend on your age, position in life and personal circumstances. A 35-year-old business executive and a 75-year-old widow will have very different needs.
Read: Step 4: Determine Your Risk Tolerance
Step 4: Determine Your Risk Tolerance
Would a significant drop in your overall investment value make you weak in the knees? Before deciding on which investments are right for you, you need to know how much risk you are willing to assume. Do you love fast cars and the thrill of a risk, or do you prefer reading in your hammock while enjoying the safety of your backyard? Your risk tolerance will vary according to your age, income requirements and financial goals.
Step 5: Find Your Investing Style
Now that you know your risk tolerance and goals, what is your investing style? Many first-time investors will find that their goals and risk tolerance will often not match up. For example, if you love fast cars but are looking for safety of capital, you're better off taking a more conservative approach to investing. Conservative investors will generally invest 70-75% of their money in low-risk, fixed-income securities such as Treasury bills, with 15-20% dedicated to blue chip equities. On the other hand, very aggressive investors will generally invest 80-100% of their money in equities.
Step 6: Learn The Costs
It is equally important to learn the costs of investing, as certain costs can cut into your investment returns. As a whole, passive investing strategies tend to have lower fees than active investing strategies such as trading stocks. Stock brokers charge commissions. For investors starting out with a smaller investment, a discount broker is probably a better choice because they charge a reduced commission. On the other hand, if you are purchasing mutual funds, keep in mind that funds charge various management fees, which is the cost of operating the fund, and some funds charge load fees.
Step 7: Find A Broker Or Advisor
The type of advisor that is right for you depends on the amount of time you are willing to spend on your investments and your risk tolerance. Choosing a financial advisor is a big decision. Factors to consider include their reputation and performance, what designations they hold, how much they plan on communicating with you and what additional services they can offer.
Step 8: Choose Investments
Now comes the fun part: choosing the investments that will become a part of your investment portfolio. If you have a conservative investment style, your portfolio should consist mainly of low-risk, income-producing securities such as federal bonds and money market funds. Key concepts here are asset allocation and diversification. In asset allocation, you are balancing risk and reward by dividing your money between the three asset classes: equities, fixed-income and cash. By diversifying among different asset classes, you avoid the issues associated with putting all of your eggs in one basket.
Step 9: Keep Emotions At Bay
Don't let fear or greed limit your returns or inflate your losses. Expect short-term fluctuations in your overall portfolio value. As a long-term investor, these short-term movements should not cause panic. Greed can lead an investor to hold on to a position too long in the hope of an even higher price – even if it falls. Fear can cause an investor to sell an investment too early, or prevent an investor from selling a loser. If your portfolio is keeping you awake at night, it might be best to reconsider your risk tolerance and adopt a more conservative approach.
Step 10: Review and Adjust
The final step in your investing journey is reviewing your portfolio. Once you've established an asset-allocation strategy, you may find that your asset weightings have changed over the course of the year. Why? The market value of the various securities within your portfolio has changed. This can be modified easily through rebalancing.
Investing is actually pretty simple; you're basically putting your money to work for you so that you don't have to take a second job, or work overtime hours to increase your earning potential. There are many different ways to make an investment, such as stocks, bonds, mutual funds or real estate, and they don't always require a large sum of money to start.
Step 1: Get Your Finances In Order
Jumping into investing without first examining your finances is like jumping into the deep end of the pool without knowing how to swim. On top of the cost of living, payments to outstanding credit card balances and loans can eat into the amount of money left to invest. Luckily, investing doesn't require a significant sum to start.
Step 2: Learn The Basics
You don't need to be a financial expert to invest, but you do need to learn some basic terminology so that you are better equipped to make informed decisions. Learn the differences between stocks, bonds, mutual funds and certificates of deposit (CDs). You should also learn financial theories such as portfolio optimization, diversification and market efficiency. Reading books written by successful investors such as Warren Buffett or reading through the basic tutorials on Investopedia are great starting points.
Step 3: Set Goals
Once you have established your investing budget and have learned the basics, it's time to set your investing goal. Even though all investors are trying to make money, each one comes from a diverse background and has different needs. Safety of capital, income and capital appreciation are some factors to consider; what is best for you will depend on your age, position in life and personal circumstances. A 35-year-old business executive and a 75-year-old widow will have very different needs.
Read: Step 4: Determine Your Risk Tolerance
Step 4: Determine Your Risk Tolerance
Would a significant drop in your overall investment value make you weak in the knees? Before deciding on which investments are right for you, you need to know how much risk you are willing to assume. Do you love fast cars and the thrill of a risk, or do you prefer reading in your hammock while enjoying the safety of your backyard? Your risk tolerance will vary according to your age, income requirements and financial goals.
Step 5: Find Your Investing Style
Now that you know your risk tolerance and goals, what is your investing style? Many first-time investors will find that their goals and risk tolerance will often not match up. For example, if you love fast cars but are looking for safety of capital, you're better off taking a more conservative approach to investing. Conservative investors will generally invest 70-75% of their money in low-risk, fixed-income securities such as Treasury bills, with 15-20% dedicated to blue chip equities. On the other hand, very aggressive investors will generally invest 80-100% of their money in equities.
Step 6: Learn The Costs
It is equally important to learn the costs of investing, as certain costs can cut into your investment returns. As a whole, passive investing strategies tend to have lower fees than active investing strategies such as trading stocks. Stock brokers charge commissions. For investors starting out with a smaller investment, a discount broker is probably a better choice because they charge a reduced commission. On the other hand, if you are purchasing mutual funds, keep in mind that funds charge various management fees, which is the cost of operating the fund, and some funds charge load fees.
Step 7: Find A Broker Or Advisor
The type of advisor that is right for you depends on the amount of time you are willing to spend on your investments and your risk tolerance. Choosing a financial advisor is a big decision. Factors to consider include their reputation and performance, what designations they hold, how much they plan on communicating with you and what additional services they can offer.
Step 8: Choose Investments
Now comes the fun part: choosing the investments that will become a part of your investment portfolio. If you have a conservative investment style, your portfolio should consist mainly of low-risk, income-producing securities such as federal bonds and money market funds. Key concepts here are asset allocation and diversification. In asset allocation, you are balancing risk and reward by dividing your money between the three asset classes: equities, fixed-income and cash. By diversifying among different asset classes, you avoid the issues associated with putting all of your eggs in one basket.
Step 9: Keep Emotions At Bay
Don't let fear or greed limit your returns or inflate your losses. Expect short-term fluctuations in your overall portfolio value. As a long-term investor, these short-term movements should not cause panic. Greed can lead an investor to hold on to a position too long in the hope of an even higher price – even if it falls. Fear can cause an investor to sell an investment too early, or prevent an investor from selling a loser. If your portfolio is keeping you awake at night, it might be best to reconsider your risk tolerance and adopt a more conservative approach.
Step 10: Review and Adjust
The final step in your investing journey is reviewing your portfolio. Once you've established an asset-allocation strategy, you may find that your asset weightings have changed over the course of the year. Why? The market value of the various securities within your portfolio has changed. This can be modified easily through rebalancing.
Sunday, January 17, 2010
10 Simple Steps To Financial Security Before 30
Below is an outline on how to reach financial security before 30 as recommended by Ken Hawkins.
1. Have Fun
Enjoy yourself while you are young - you will have plenty of time to be miserable when you are older. Living a successful, enjoyable and happy life is about achieving a proper balance between time with family and friends and between work and leisure time. Striking a proper balance between your life today and your future is also important. Financially, we can't live as if today was our last day. We have to decide between what we spend today versus what we spend in the future. Finding the correct balance is an important first step toward achieving financial security.
2. Recognize Your Most Important Financial Asset: Yourself
Your skills, knowledge and experience are the biggest asset you have. The value of your future earnings will dwarf any savings or investments you might have for most of your career. Your job and future career is the most important factor in achieving financial independence and security. For those just entering the work force, future career opportunities are as bright as they've ever been. The large number of retiring baby boomers is expected to create labor shortages. There will be room for advancement as companies scramble to fill the positions held by these aging baby boomers. Those who are in a position to take advantage of these opportunities will benefit the most.
Look at yourself as a financial asset. Investing in yourself will pay off in the future. Increase your value through hard work, continual upgrading of skills and knowledge, and making smart career choices. Efforts to improve your career can have a far bigger impact on your financial security than tightening your belt and trying to save more.
3. Become a Planner, Not a Saver
Research has shown that those who plan for the future end up with more wealth than those who do not. Successful people are goal oriented: they set goals and develop a plan to achieve them. For example, if you set a goal to pay off your student loans in two years, you'll have a better chance of achieving this goal than you would if you merely said you wanted to pay off your student loans, but failed to set a timetable.
Become a planner. Set goals and develop an action plan to reach them. Even the process of writing down some goals will help you to achieve them. Being goal oriented and following a plan means taking control of your life. It is an important step toward improving your financial independence and security.
4. Set Short-Term Goals - Long-Term Goals Will Take Care of Themselves
Life holds many uncertainties - and a lot can change between now and 30 years into the future. As such, the prospect of planning far into the future is a daunting task and in many ways, it's often an exercise in futility for young investors.
Rather than setting long-term goals, set a series of small short-term goals. These goals could be a simple as trying to pay off credit card debt or student loans in a matter of months. Maybe your goal is to contribute to your company's pension plan with a set salary reduction contribution each month. Setting short-term goals that will help you to advance in your career is important in helping you get ahead. Remember, these short-term goals should be measurable and precise. You can't win a race if there's no finish line.
As you achieve your short-term goals, set other short-term goals. Maybe you want to buy a house, earn a promotion at work or buy a new car. The constant setting and achieving of short-term goals will ensure that you reach your longer-term goals. If your goal is to be worth a million dollars by age 40, you cannot achieve this without first achieving smaller goals like having $10,000, $50,000 or $500,000.
5. Planning For Retirement: Fuggetaboutit?
Just out of school, retirement planning is the last thing on your mind. So, if you have to for now, just fuggetaboutit. If you follow the other tips, you will not only be more financially secure and prepared in the short term, but you will also be financially prepared for the distant future as well.
However, if you take a few steps now to start saving, like setting up automatic monthly contributions to a retirement plan like an employer-sponsored 401(k) or your own Roth IRA, compounding will work in your favor, which makes reaching your goal much easier.
If you implement this pay yourself first ideal, you won't have to worry about how much you're contributing; the most important thing is to develop the habit of saving. The rest will take care of itself. You can increase your contributions when your income rises or when you've achieved more of your short-term financial goals.
6. Make Sure Your Lifestyle Costs Lag Your Income Growth
Many new graduates find that in the first couple years of working they have excess cash flow. Still used to their more frugal student spending habits, it is easy to make more money than they need. Rather than using excess income to buy new toys and live a more luxurious lifestyle, this excess could be put toward reducing debt or adding to savings. As you advance in your career and attain greater responsibility, your salary should increase. If the cost of your lifestyle lags your income growth, you will always have excess cash flow that can be put toward paying down debt, making investments, saving for a home, or achieving any other financial goals you may have.
Where many people get into trouble is that they feel entitled to a standard of living that exceeds what they can afford. However, if you keep your standard of living below what you earn, you won't have to cut back to accumulate money; instead, you will naturally have excess cash flow because you earn more than you need to live on. In addition, keep in mind that trying to keep up with the Joneses is always a recipe for financial failure. For all you know, you may make more than the Joneses, who may be funding their lavish lifestyle with debt anyway.
The good life should be a reward for your hard work, good fortune and successful planning, not something that you are entitled to. Once you have established a certain lifestyle, it is psychologically difficult to lower it. It is very easy to raise it.
7. Become Financially Literate
Making money is one thing; saving it and making it grow is another. Financial management and investing are lifelong endeavors. Making sound financial and investment decisions is important for achieving your financial goals. The more knowledgeable and experienced you are in financial matters, the fewer mistakes you will make.
Research has shown that people who are financially literate end up with more wealth than those who are not. There is a strong monetary incentive for becoming financially sophisticated. Taking the time and effort to become knowledgeable in the areas of personal finance and investing will pay off throughout your life.
8. Seize the Opportunities: Take Calculated Risks
Taking calculated risks when you are young can be a prudent decision in the long run. You might make mistakes along the way, but remember, mistakes are the lessons of wisdom. You often learn more from your mistakes than from your successes. Also, when you are young, you can recover faster from financial mistakes, and you have many years to recover.
Examples of calculated risks might include moving to a new city with more job opportunities, going back to school for additional training or taking a new job at a different company for less pay but more upside potential. Starting a new company, working for a small startup company, or investing in high risk/high return stocks, is easier to do when you're young. Younger people can afford to take risk, and the same opportunities might not be available later in life. As people get older and assume more family responsibilities like paying off the mortgage or saving for the kids' education, many are forced to play it safe and are unable to capitalize on riskier opportunities that present themselves.
Taking calculated risks when you can afford to do so is necessary to get ahead financially. Playing it safe might be the bigger mistake in the long run.
9. Borrow Money For Investments - Never to Finance a Lifestyle
As mentioned before with the Joneses, you should never borrow to finance a lifestyle you cannot afford. Using credit for a life you feel entitled to is a losing proposition when it comes to building wealth. The constant borrowing will assure that there is no money available for investing, and the added interest expense of borrowing further increases the cost of the lifestyle.
Borrowing money should be used only for investing - where your gain will outrun your borrowing costs. This might mean investing in the literal sense (for stocks, bonds, etc.) or it might mean investing in yourself for your education, extra training, to start a business or to buy a house. In these cases, borrowing can provide the leverage you need to a reach your financial goals faster. Borrowing to meet short-term desires is counterproductive.
10. Take Advantage of Financial Freebies
Not many things in life are free. If you belong to a company pension plan, take the free money it offers and make sure that you contribute at least up to the maximum of what your company will match.
You can also look for (legal) ways to take advantage of tax laws. For example, contributing to an individual retirement account (IRA) will result in a tax savings - in effect, the government is giving you free money to provide an incentive to contribute. There is also an incentive to invest in stocks because of favorable tax treatment on capital gains and dividend income.
Conclusion
Achieving financial independence is a goal most people strive for. It is not necessarily easy, but it is achievable if you understand your priorities, set achievable goals and take the proper steps toward reaching them.
Ken Hawkins is a financial writer and vice president of Second Opinion Investor Services www.secondopinions.ca, an investment consulting firm that provides unbiased and independent investment advice. His experience spans the investment world of the private client investor as well as the world of the institutional investor representing pension funds, asset management companies, mutual funds and investment counselors. Hawkins is also co-author of "The New Rules for Retirement - What Your Financial Advisor Isn't Telling You" (2008).
1. Have Fun
Enjoy yourself while you are young - you will have plenty of time to be miserable when you are older. Living a successful, enjoyable and happy life is about achieving a proper balance between time with family and friends and between work and leisure time. Striking a proper balance between your life today and your future is also important. Financially, we can't live as if today was our last day. We have to decide between what we spend today versus what we spend in the future. Finding the correct balance is an important first step toward achieving financial security.
2. Recognize Your Most Important Financial Asset: Yourself
Your skills, knowledge and experience are the biggest asset you have. The value of your future earnings will dwarf any savings or investments you might have for most of your career. Your job and future career is the most important factor in achieving financial independence and security. For those just entering the work force, future career opportunities are as bright as they've ever been. The large number of retiring baby boomers is expected to create labor shortages. There will be room for advancement as companies scramble to fill the positions held by these aging baby boomers. Those who are in a position to take advantage of these opportunities will benefit the most.
Look at yourself as a financial asset. Investing in yourself will pay off in the future. Increase your value through hard work, continual upgrading of skills and knowledge, and making smart career choices. Efforts to improve your career can have a far bigger impact on your financial security than tightening your belt and trying to save more.
3. Become a Planner, Not a Saver
Research has shown that those who plan for the future end up with more wealth than those who do not. Successful people are goal oriented: they set goals and develop a plan to achieve them. For example, if you set a goal to pay off your student loans in two years, you'll have a better chance of achieving this goal than you would if you merely said you wanted to pay off your student loans, but failed to set a timetable.
Become a planner. Set goals and develop an action plan to reach them. Even the process of writing down some goals will help you to achieve them. Being goal oriented and following a plan means taking control of your life. It is an important step toward improving your financial independence and security.
4. Set Short-Term Goals - Long-Term Goals Will Take Care of Themselves
Life holds many uncertainties - and a lot can change between now and 30 years into the future. As such, the prospect of planning far into the future is a daunting task and in many ways, it's often an exercise in futility for young investors.
Rather than setting long-term goals, set a series of small short-term goals. These goals could be a simple as trying to pay off credit card debt or student loans in a matter of months. Maybe your goal is to contribute to your company's pension plan with a set salary reduction contribution each month. Setting short-term goals that will help you to advance in your career is important in helping you get ahead. Remember, these short-term goals should be measurable and precise. You can't win a race if there's no finish line.
As you achieve your short-term goals, set other short-term goals. Maybe you want to buy a house, earn a promotion at work or buy a new car. The constant setting and achieving of short-term goals will ensure that you reach your longer-term goals. If your goal is to be worth a million dollars by age 40, you cannot achieve this without first achieving smaller goals like having $10,000, $50,000 or $500,000.
5. Planning For Retirement: Fuggetaboutit?
Just out of school, retirement planning is the last thing on your mind. So, if you have to for now, just fuggetaboutit. If you follow the other tips, you will not only be more financially secure and prepared in the short term, but you will also be financially prepared for the distant future as well.
However, if you take a few steps now to start saving, like setting up automatic monthly contributions to a retirement plan like an employer-sponsored 401(k) or your own Roth IRA, compounding will work in your favor, which makes reaching your goal much easier.
If you implement this pay yourself first ideal, you won't have to worry about how much you're contributing; the most important thing is to develop the habit of saving. The rest will take care of itself. You can increase your contributions when your income rises or when you've achieved more of your short-term financial goals.
6. Make Sure Your Lifestyle Costs Lag Your Income Growth
Many new graduates find that in the first couple years of working they have excess cash flow. Still used to their more frugal student spending habits, it is easy to make more money than they need. Rather than using excess income to buy new toys and live a more luxurious lifestyle, this excess could be put toward reducing debt or adding to savings. As you advance in your career and attain greater responsibility, your salary should increase. If the cost of your lifestyle lags your income growth, you will always have excess cash flow that can be put toward paying down debt, making investments, saving for a home, or achieving any other financial goals you may have.
Where many people get into trouble is that they feel entitled to a standard of living that exceeds what they can afford. However, if you keep your standard of living below what you earn, you won't have to cut back to accumulate money; instead, you will naturally have excess cash flow because you earn more than you need to live on. In addition, keep in mind that trying to keep up with the Joneses is always a recipe for financial failure. For all you know, you may make more than the Joneses, who may be funding their lavish lifestyle with debt anyway.
The good life should be a reward for your hard work, good fortune and successful planning, not something that you are entitled to. Once you have established a certain lifestyle, it is psychologically difficult to lower it. It is very easy to raise it.
7. Become Financially Literate
Making money is one thing; saving it and making it grow is another. Financial management and investing are lifelong endeavors. Making sound financial and investment decisions is important for achieving your financial goals. The more knowledgeable and experienced you are in financial matters, the fewer mistakes you will make.
Research has shown that people who are financially literate end up with more wealth than those who are not. There is a strong monetary incentive for becoming financially sophisticated. Taking the time and effort to become knowledgeable in the areas of personal finance and investing will pay off throughout your life.
8. Seize the Opportunities: Take Calculated Risks
Taking calculated risks when you are young can be a prudent decision in the long run. You might make mistakes along the way, but remember, mistakes are the lessons of wisdom. You often learn more from your mistakes than from your successes. Also, when you are young, you can recover faster from financial mistakes, and you have many years to recover.
Examples of calculated risks might include moving to a new city with more job opportunities, going back to school for additional training or taking a new job at a different company for less pay but more upside potential. Starting a new company, working for a small startup company, or investing in high risk/high return stocks, is easier to do when you're young. Younger people can afford to take risk, and the same opportunities might not be available later in life. As people get older and assume more family responsibilities like paying off the mortgage or saving for the kids' education, many are forced to play it safe and are unable to capitalize on riskier opportunities that present themselves.
Taking calculated risks when you can afford to do so is necessary to get ahead financially. Playing it safe might be the bigger mistake in the long run.
9. Borrow Money For Investments - Never to Finance a Lifestyle
As mentioned before with the Joneses, you should never borrow to finance a lifestyle you cannot afford. Using credit for a life you feel entitled to is a losing proposition when it comes to building wealth. The constant borrowing will assure that there is no money available for investing, and the added interest expense of borrowing further increases the cost of the lifestyle.
Borrowing money should be used only for investing - where your gain will outrun your borrowing costs. This might mean investing in the literal sense (for stocks, bonds, etc.) or it might mean investing in yourself for your education, extra training, to start a business or to buy a house. In these cases, borrowing can provide the leverage you need to a reach your financial goals faster. Borrowing to meet short-term desires is counterproductive.
10. Take Advantage of Financial Freebies
Not many things in life are free. If you belong to a company pension plan, take the free money it offers and make sure that you contribute at least up to the maximum of what your company will match.
You can also look for (legal) ways to take advantage of tax laws. For example, contributing to an individual retirement account (IRA) will result in a tax savings - in effect, the government is giving you free money to provide an incentive to contribute. There is also an incentive to invest in stocks because of favorable tax treatment on capital gains and dividend income.
Conclusion
Achieving financial independence is a goal most people strive for. It is not necessarily easy, but it is achievable if you understand your priorities, set achievable goals and take the proper steps toward reaching them.
Ken Hawkins is a financial writer and vice president of Second Opinion Investor Services www.secondopinions.ca, an investment consulting firm that provides unbiased and independent investment advice. His experience spans the investment world of the private client investor as well as the world of the institutional investor representing pension funds, asset management companies, mutual funds and investment counselors. Hawkins is also co-author of "The New Rules for Retirement - What Your Financial Advisor Isn't Telling You" (2008).
Saturday, January 16, 2010
6 Simple Steps To $1 Million
Six seems to be a lucky number for success contrary to what the superstitious folks believe in. Whereas the previous article mentions 6 personality traits that must be inherent for an individual to become a millionaire, this next article outlines six simple steps to acquire a million dollars regardless of time, age, sex, religion or space.
Let's face it; we all don't make millions of dollars a year, and the odds are that most of us won't receive a large windfall inheritance either. However, that doesn't mean that we can't build sizeable wealth - it'll just take some time. If you're young, time is on your side and retiring a millionaire is achievable. Read on for some tips on how to increase your savings and work toward this goal.
Step 1: Stop Senseless Spending
Unfortunately, people have a habit of spending their hard-earned cash on goods and services that they don't need. Even relatively small expenses can really add up. Usually, in order to become wealthy one must adopt a disciplined lifestyle and budget. This doesn't mean that you shouldn't go out and have fun, but you should try to do things in moderation - and set a budget if you hope to save money.
Step 2: Fund Retirement Plans ASAP
Unfortunately, retirement planning is an afterthought for many young people. Here's why it shouldn't be: funding a tax deferred plan early on in life means you can contribute less money overall and actually end up with significantly more in the end than someone who put in much more money but started later. If you deposit $3,000 per year from the age of 23 to 65 at 8% interst you will have $985,749. But if you wait 10 years and contribute $5,000 per year, this number will be reduced to $724,749. Even higher contributions can't make up for the lost time.
Step 3: Improve Tax Awareness
Sometimes, individuals think that doing their own taxes will save them money. In some cases, they might be right. However, in other cases it may actually end up costing them money because they fail to take advantage of the many deductions available to them. Try to become more educated as far as what types of items are deductible. You should also understand when it makes sense to move away from the standard deduction and start itemizing your return.
Step 3: Own Your Home
At some point in our lives, many of us rent a home or an apartment because we cannot afford to purchase a home, or because we aren't sure where we want to live for the longer term. And that's fine. However, renting is often not a good long-term investment because buying a home is a good way to build equity. Unless you intend to move in a short period of time, it generally makes sense to consider putting a down payment on a home. At least you would likely build up some equity over time and the foundation for a nest egg.
Step 4: Avoid New Luxury Wheels
Individuals who buy new vehicles are doing themselves a disservice - especially since this asset depreciates in value so rapidly. Obviously, this depends on the make, model, year and demand for the vehicle, but a general rule is that a new car loses 15-20% of its value per year. So, a two-year-old car will be worth around 70% of its purchase price. Consider buying something practical and dependable that has low monthly payments - or that you can pay for in cash. In the long run, this will mean you'll have more money to put toward your savings - an asset that will appreciate, rather than depreciate like your car.
Step 5: Don't Sell Yourself Short
Some individuals are extremely loyal to their employers and will stay with them for years without seeing their incomes take a jump. This can be a mistake, as increasing your income is an excellent way to boost your rate of saving. Always keep your eye out for other opportunities and try not to sell yourself short. Work hard and find an employer who will compensate you for your work ethic, skills and experience.
Step 6: Don't Rely On Luck
You don't have to win the lottery to see seven figures in your bank account. For most people, the only way to achieve this is to save it. You don't have to live like a pauper to build an adequate nest egg and retire comfortably. If you start early, spend wisely and save diligently, your million-dollar dreams are well within reach
Let's face it; we all don't make millions of dollars a year, and the odds are that most of us won't receive a large windfall inheritance either. However, that doesn't mean that we can't build sizeable wealth - it'll just take some time. If you're young, time is on your side and retiring a millionaire is achievable. Read on for some tips on how to increase your savings and work toward this goal.
Step 1: Stop Senseless Spending
Unfortunately, people have a habit of spending their hard-earned cash on goods and services that they don't need. Even relatively small expenses can really add up. Usually, in order to become wealthy one must adopt a disciplined lifestyle and budget. This doesn't mean that you shouldn't go out and have fun, but you should try to do things in moderation - and set a budget if you hope to save money.
Step 2: Fund Retirement Plans ASAP
Unfortunately, retirement planning is an afterthought for many young people. Here's why it shouldn't be: funding a tax deferred plan early on in life means you can contribute less money overall and actually end up with significantly more in the end than someone who put in much more money but started later. If you deposit $3,000 per year from the age of 23 to 65 at 8% interst you will have $985,749. But if you wait 10 years and contribute $5,000 per year, this number will be reduced to $724,749. Even higher contributions can't make up for the lost time.
Step 3: Improve Tax Awareness
Sometimes, individuals think that doing their own taxes will save them money. In some cases, they might be right. However, in other cases it may actually end up costing them money because they fail to take advantage of the many deductions available to them. Try to become more educated as far as what types of items are deductible. You should also understand when it makes sense to move away from the standard deduction and start itemizing your return.
Step 3: Own Your Home
At some point in our lives, many of us rent a home or an apartment because we cannot afford to purchase a home, or because we aren't sure where we want to live for the longer term. And that's fine. However, renting is often not a good long-term investment because buying a home is a good way to build equity. Unless you intend to move in a short period of time, it generally makes sense to consider putting a down payment on a home. At least you would likely build up some equity over time and the foundation for a nest egg.
Step 4: Avoid New Luxury Wheels
Individuals who buy new vehicles are doing themselves a disservice - especially since this asset depreciates in value so rapidly. Obviously, this depends on the make, model, year and demand for the vehicle, but a general rule is that a new car loses 15-20% of its value per year. So, a two-year-old car will be worth around 70% of its purchase price. Consider buying something practical and dependable that has low monthly payments - or that you can pay for in cash. In the long run, this will mean you'll have more money to put toward your savings - an asset that will appreciate, rather than depreciate like your car.
Step 5: Don't Sell Yourself Short
Some individuals are extremely loyal to their employers and will stay with them for years without seeing their incomes take a jump. This can be a mistake, as increasing your income is an excellent way to boost your rate of saving. Always keep your eye out for other opportunities and try not to sell yourself short. Work hard and find an employer who will compensate you for your work ethic, skills and experience.
Step 6: Don't Rely On Luck
You don't have to win the lottery to see seven figures in your bank account. For most people, the only way to achieve this is to save it. You don't have to live like a pauper to build an adequate nest egg and retire comfortably. If you start early, spend wisely and save diligently, your million-dollar dreams are well within reach
6 Millionaire Traits That You Can Adopt
I have read this article in infodigest and wanted to impart the knowledge to create another millionaire in any place of the world. Sometimes, we just need to share what we read so we can help other people reach their goal of becoming a millionaire.
Millionaires have more in common with each other than just their bank accounts - for some millionaires, striking it rich took courage, salesmanship, vision and passion. Find out which traits are most common to the seven-figure bank account set, and what you can do to hone some of these skills in your own life.
1. Independent Thinking
Millionaires think differently. Not just about money, about everything. The time and energy everybody else spends attempting to conform, millionaires spend creating their own path. Since thoughts impact actions, people who want to be wealthy should think in a way that will get them to that goal.
Just look at David Geffen. A self-made millionaire with $4.5 billion to his name in 2009, this American record executive and film producer was college dropout, but made millions founding record agencies and signed some of the most prominent musicians of the 1970s and '80s. Although he didn't take what many assume to be the usual path to success, his tireless work ethic and sense of personal conviction about artists' potential allowed him to rack up a sizable fortune.
2. Vision
Millionaires are creative visionaries with a positive attitude. In other words, wealthy people not only have big dreams, they also believe they will come true. As such, wealth seekers should set lofty goals and not be afraid of uncharted territories.
Bill Gates, the world's richest person in 2009, did just that. The American chairman of Microsoft (NYSE:MSFT) is one of the founding entrepreneurs who brought personal computers to the masses. Gates jumped into the personal computers business in 1975 and held on tight, creating Microsoft Windows in 1985. When consumers began to bring computers into their homes, Gates was ready to profit from this new age.
3. Skills
Writer Dennis Kimbro interviewed successful people to determine the traits they had in common for his book, "Think and Grow Rich" (1992). He found that they concentrated on their area of excellence. Millionaires also tend to partner with others to supplement their weaker skills. If you don't know what you are good at, poll friends and family. Use training and mentors to refine your strong skills.
4. Passion
Billionaire investing guru Warren Buffett says "Money is a by-product of something I like to do very much." Enjoying your work allows you to have the discipline to work hard at it every day. People who interact with money for a living, bankers for example, often love creating new deals and persuading others to complete a transaction. But finding your dream job may take time. The average millionaire doesn't find it until age 45, and tends to be 54 (on average) before becoming a millionaire.
5. Investment
Millionaires are willing to sacrifice time and money to achieve their goals. They are willing to take a risk now for the opportunity of achieving something greater in the future. Investing may include securities or starting a business - either way, it is a step toward achieving great financial rewards. Start investing now.
6. Salesmanship
Millionaires are constantly presenting their ideas and persuading others to buy into them. Good salesmen are oblivious to critics and naysayers. In other words, they don't take "no" for an answer. Millionaires also have good social skills. In fact, when writer T. Harv Eker analyzed the results of a survey of 753 millionaires for his book, "Secrets of the Millionaire Mind" (2005), he found social skills were more important than IQ. Just look at Donald Trump. His fortune has fluctuated over the years, but his ability to sell himself - whether as a TV personality or as the force behind a line of neckties - has always brought him back among the ranks of celebrity millionaires.
Millionaires have more in common with each other than just their bank accounts - for some millionaires, striking it rich took courage, salesmanship, vision and passion. Find out which traits are most common to the seven-figure bank account set, and what you can do to hone some of these skills in your own life.
1. Independent Thinking
Millionaires think differently. Not just about money, about everything. The time and energy everybody else spends attempting to conform, millionaires spend creating their own path. Since thoughts impact actions, people who want to be wealthy should think in a way that will get them to that goal.
Just look at David Geffen. A self-made millionaire with $4.5 billion to his name in 2009, this American record executive and film producer was college dropout, but made millions founding record agencies and signed some of the most prominent musicians of the 1970s and '80s. Although he didn't take what many assume to be the usual path to success, his tireless work ethic and sense of personal conviction about artists' potential allowed him to rack up a sizable fortune.
2. Vision
Millionaires are creative visionaries with a positive attitude. In other words, wealthy people not only have big dreams, they also believe they will come true. As such, wealth seekers should set lofty goals and not be afraid of uncharted territories.
Bill Gates, the world's richest person in 2009, did just that. The American chairman of Microsoft (NYSE:MSFT) is one of the founding entrepreneurs who brought personal computers to the masses. Gates jumped into the personal computers business in 1975 and held on tight, creating Microsoft Windows in 1985. When consumers began to bring computers into their homes, Gates was ready to profit from this new age.
3. Skills
Writer Dennis Kimbro interviewed successful people to determine the traits they had in common for his book, "Think and Grow Rich" (1992). He found that they concentrated on their area of excellence. Millionaires also tend to partner with others to supplement their weaker skills. If you don't know what you are good at, poll friends and family. Use training and mentors to refine your strong skills.
4. Passion
Billionaire investing guru Warren Buffett says "Money is a by-product of something I like to do very much." Enjoying your work allows you to have the discipline to work hard at it every day. People who interact with money for a living, bankers for example, often love creating new deals and persuading others to complete a transaction. But finding your dream job may take time. The average millionaire doesn't find it until age 45, and tends to be 54 (on average) before becoming a millionaire.
5. Investment
Millionaires are willing to sacrifice time and money to achieve their goals. They are willing to take a risk now for the opportunity of achieving something greater in the future. Investing may include securities or starting a business - either way, it is a step toward achieving great financial rewards. Start investing now.
6. Salesmanship
Millionaires are constantly presenting their ideas and persuading others to buy into them. Good salesmen are oblivious to critics and naysayers. In other words, they don't take "no" for an answer. Millionaires also have good social skills. In fact, when writer T. Harv Eker analyzed the results of a survey of 753 millionaires for his book, "Secrets of the Millionaire Mind" (2005), he found social skills were more important than IQ. Just look at Donald Trump. His fortune has fluctuated over the years, but his ability to sell himself - whether as a TV personality or as the force behind a line of neckties - has always brought him back among the ranks of celebrity millionaires.
How To Make Your First $1 Million
Surfing through the net to find good investment strategies, I came across these simple steps on how to make your first million dollars or pesos or whatever currency you can think of.
Stop Senseless Spending
It's easy to spend your way out of a fortune. Fortunately, the opposite is also true - you can save your way into your first million. Most people working in North America right now will earn well over $1 million during their working lives. The secret to saving $1 million lies in keeping more of what you earn. Just as extending your earnings offers a unique perspective, doing the same with your spending sheds a ghastly light on the waste. If you spend $5 every day of your working life on coffee, snacks, etc., you lose $73,000 of your lifetime earnings, making it that much harder to hit the $1 million mark in savings.
Prune Your Purchases
When you do have to spend, try to get the most utility, not simply the most you can. The difference between great value and utility is a fine line. Buying too much house or too costly a car comes from confusing the two. If you shop for what you need and buy it cheaper than you'd planned, that's a great deal. By keeping the end use of large purchases in mind, you can avoid this drain on your cash. Before paying more than you can afford, remember that Warren Buffet, a man who constantly jockeys for richest person on earth, still lives in his humble Omaha abode.
Target Your Taxes
Another leaky hole you need to plug is the parasitic drain of big government. While you are expected to pay your taxes, it's the right of every taxpayer to try and reduce their tax bills to the absolute minimum allowed by law. Increasing your tax awareness means making taxes a quarterly chore rather than an annual scourge. Keeping abreast of allowable deductions, changes to your withholding and changes in tax limits will allow you to keep more of what you earn, so that you can put that money to work for you.
Crafty Compounding
Time is on your side when you've got compounding working on your savings. The earlier you start saving and the earlier you get your savings into a financial instrument that compounds, the easier your path to $1 million will be. You may be thinking of tenbaggers or hot issues that return 10 times their value in a few weeks, but it is the boring, year-on-year compounding that builds fortune for most people.
Build Through Your Boss
If you're looking to save $1 million dollars for retirement, look no further than your boss. With matching contributions, your employer can be your best ally when it comes to building up retirement funds. If you think you need to squirrel away 20% of your income for retirement and your boss puts up 6% in matched contributions, then you're left with a much more manageable 14%. Even if you are your own boss, there are still options under SEPs.
Ramp-Up Your Retirement Savings
Rather than letting your boss's contribution lessen your load, try to put a little extra into your retirement plan whenever you can. Automating your account contributions will make setting your money aside that much easier. That said, making extra contributions a priority will speed up your journey to $1 million and make your golden years that much more golden. You don't have to eat cat food to do this, just keep your retirement in mind when you've got extra cash on hand.
Incremental Investing
If you've got your retirement portfolios where you want them and are ready to start a pure income portfolio, then incremental investing is an excellent way to begin. You don't have to jump into the market with your life savings to make money. Even relatively small amounts can result in decent returns. The important thing to remember with your income portfolio is that capital gains taxes will be applied yearly to any income you pull out. Again, improving your tax awareness will help reduce the bite, but it takes time and knowledge to make one million solely from a taxable portfolio. Still, it has been done and will be done again.
Dare To Diversify
If your portfolio is made up entirely of American companies or is even all held in stocks, then you may need to diversify. In the first case, more and more financial activity is out there in the wider world. This doesn't just mean investing in emerging economies like China and India that are producing huge gains, but recognizing that there are companies in Europe and Asia that are just as good (maybe better) as investments in the U.S.. Diversifying also means not putting all your money into one type of asset. Being a financial omnivore opens up that much more opportunity in times of growth and makes certain you won't go hungry when one source dries up.
Reconsider Real Estate
Owning real estate provides equity and diversity to your investments. If you own your own home, then paying your rent builds up equity. If you invest in real estate, then someone else's rent builds up your equity. Real estate investing isn't for everyone, but it has built fortunes for many savvy people. Owning your own home, however, is usually a good idea regardless of your opinion on real estate bubbles. Peter Lynch, one of the greatest stock investors of all time, believed that you should own your first home before you buy your first stock.
Increase Your Income
There is nothing terribly romantic about becoming a millionaire while working a regular job, but it is probably the avenue available to most people. You don't need to start your own business to pull in a high income, and you don't even need to pull in a high income if your saving, spending and investing habits are sound. Asking for a raise, upgrading your skills or taking a second job will add that much more to your savings and investments and subtract that same amount from the countdown to your first million. If you are entrepreneurial at heart, starting a business on the side can actually decrease your overall tax bill, rather than putting you in a higher income tax bracket. (See Increase Your Disposable Income for more.)
The Three Ps
Persistence, patience and purpose are common traits that you'll find in every millionaire from John Jacob Astor to Bill Gates. Even though inflation has brought the value of $1 million down from its lofty perch, you still need these traits to reach it. Why isn't everyone a millionaire? Maybe because it is easier to spend now, buy big and put off saving and investing than it is to sacrifice to reach the goal of becoming a millionaire. Using the tips given here can help you on your way, but you have to be brave enough to take the steps - first, final and all the hard ones that lay in between.
Stop Senseless Spending
It's easy to spend your way out of a fortune. Fortunately, the opposite is also true - you can save your way into your first million. Most people working in North America right now will earn well over $1 million during their working lives. The secret to saving $1 million lies in keeping more of what you earn. Just as extending your earnings offers a unique perspective, doing the same with your spending sheds a ghastly light on the waste. If you spend $5 every day of your working life on coffee, snacks, etc., you lose $73,000 of your lifetime earnings, making it that much harder to hit the $1 million mark in savings.
Prune Your Purchases
When you do have to spend, try to get the most utility, not simply the most you can. The difference between great value and utility is a fine line. Buying too much house or too costly a car comes from confusing the two. If you shop for what you need and buy it cheaper than you'd planned, that's a great deal. By keeping the end use of large purchases in mind, you can avoid this drain on your cash. Before paying more than you can afford, remember that Warren Buffet, a man who constantly jockeys for richest person on earth, still lives in his humble Omaha abode.
Target Your Taxes
Another leaky hole you need to plug is the parasitic drain of big government. While you are expected to pay your taxes, it's the right of every taxpayer to try and reduce their tax bills to the absolute minimum allowed by law. Increasing your tax awareness means making taxes a quarterly chore rather than an annual scourge. Keeping abreast of allowable deductions, changes to your withholding and changes in tax limits will allow you to keep more of what you earn, so that you can put that money to work for you.
Crafty Compounding
Time is on your side when you've got compounding working on your savings. The earlier you start saving and the earlier you get your savings into a financial instrument that compounds, the easier your path to $1 million will be. You may be thinking of tenbaggers or hot issues that return 10 times their value in a few weeks, but it is the boring, year-on-year compounding that builds fortune for most people.
Build Through Your Boss
If you're looking to save $1 million dollars for retirement, look no further than your boss. With matching contributions, your employer can be your best ally when it comes to building up retirement funds. If you think you need to squirrel away 20% of your income for retirement and your boss puts up 6% in matched contributions, then you're left with a much more manageable 14%. Even if you are your own boss, there are still options under SEPs.
Ramp-Up Your Retirement Savings
Rather than letting your boss's contribution lessen your load, try to put a little extra into your retirement plan whenever you can. Automating your account contributions will make setting your money aside that much easier. That said, making extra contributions a priority will speed up your journey to $1 million and make your golden years that much more golden. You don't have to eat cat food to do this, just keep your retirement in mind when you've got extra cash on hand.
Incremental Investing
If you've got your retirement portfolios where you want them and are ready to start a pure income portfolio, then incremental investing is an excellent way to begin. You don't have to jump into the market with your life savings to make money. Even relatively small amounts can result in decent returns. The important thing to remember with your income portfolio is that capital gains taxes will be applied yearly to any income you pull out. Again, improving your tax awareness will help reduce the bite, but it takes time and knowledge to make one million solely from a taxable portfolio. Still, it has been done and will be done again.
Dare To Diversify
If your portfolio is made up entirely of American companies or is even all held in stocks, then you may need to diversify. In the first case, more and more financial activity is out there in the wider world. This doesn't just mean investing in emerging economies like China and India that are producing huge gains, but recognizing that there are companies in Europe and Asia that are just as good (maybe better) as investments in the U.S.. Diversifying also means not putting all your money into one type of asset. Being a financial omnivore opens up that much more opportunity in times of growth and makes certain you won't go hungry when one source dries up.
Reconsider Real Estate
Owning real estate provides equity and diversity to your investments. If you own your own home, then paying your rent builds up equity. If you invest in real estate, then someone else's rent builds up your equity. Real estate investing isn't for everyone, but it has built fortunes for many savvy people. Owning your own home, however, is usually a good idea regardless of your opinion on real estate bubbles. Peter Lynch, one of the greatest stock investors of all time, believed that you should own your first home before you buy your first stock.
Increase Your Income
There is nothing terribly romantic about becoming a millionaire while working a regular job, but it is probably the avenue available to most people. You don't need to start your own business to pull in a high income, and you don't even need to pull in a high income if your saving, spending and investing habits are sound. Asking for a raise, upgrading your skills or taking a second job will add that much more to your savings and investments and subtract that same amount from the countdown to your first million. If you are entrepreneurial at heart, starting a business on the side can actually decrease your overall tax bill, rather than putting you in a higher income tax bracket. (See Increase Your Disposable Income for more.)
The Three Ps
Persistence, patience and purpose are common traits that you'll find in every millionaire from John Jacob Astor to Bill Gates. Even though inflation has brought the value of $1 million down from its lofty perch, you still need these traits to reach it. Why isn't everyone a millionaire? Maybe because it is easier to spend now, buy big and put off saving and investing than it is to sacrifice to reach the goal of becoming a millionaire. Using the tips given here can help you on your way, but you have to be brave enough to take the steps - first, final and all the hard ones that lay in between.
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