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- Dec 9, 2014
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Last year I put a fair sum of money into the SP500, VFIAX to be exact. I've had nothing but great returns but I really take no credit for it. I picked the easiest, most common stock (at least in terms of advice I had been given) went all in and waited. What else was I to do, just let it sit in my bank account? I received the money from the death of a parent, I didn't earn this so I am extremely careful. I don't try anything crazy or attempt to make huge gains. I realized that this money can go just as fast as it has come. However - I am seeing stocks rocket like AMD, Tesla, NVIDIA - All things that I Have an interest in.
The one I've really had my eye on is AMD. I'd love to put a fair amount into that since I've seen what they've been coming out with and it's just incredible how far that company has come.
How do you decide where to diversify without over thinking it? I understand that you can only think so much, you can only read so much before you realize you cannot tell the future.
I keep reading that AMD is going to go off in 2020... But I am not a risk taker, I am somewhere between way too safe and completely manic in my decisions. I want to generate wealth but I also do not want to squander what ever bit I have.
Firstly, if you are not sure about AMD, then don't invest in it just because you keep reading about it. Whether it does or doesn't, it's ultimately your decision to make. You're literally throwing money away if you just invest in it because you're stuck on the idea of investing in the company without really knowing the value. Everyone can say it's "going to go off in 2020" but that doesn't mean it's a good investment. The secret to getting wealthy in the stock market is by buying companies that are priced well below their intrinsic value.
For example, if I have a $20 bill, the intrinsic value of that money is $20. If I offer it to you for $25, would you buy it from me? Probably not. If I offered it to you for $10 (50% discount), would you buy it from me? Absolutely. You should do that every single time it's offered to you. You can then turn it around and instantly have a 100% return. You will get rich very quickly if you can make 100% returns consistently.
The tricky part is knowing the value of an entire business. How much is AMD worth? It's currently valued at $64.7 billion. Is that high or low? I personally don't know. If the business is actually worth $50 billion, then you're paying too much. If it's worth $100 billion, then you should probably consider making an investment. You want to make sure you're building a "margin of safety" into the investment.
What does that mean? If it's currently valued at $64.7 billion and it's actually worth $65 billion, there isn't a lot of wiggle room there. If it's actually worth $100 billion and over the next couple years it appreciates to $90 billion, well, you didn't quite make it to $100 billion but you still had a good investment.
So back to your real question on how to diversify. With the S&P fund, you're already diversified. You'll probably see slow and steady gains over a long period of time. You'll ride the market waves. Last year, the S&P returned over 30%. Great! Some years, though, it'll go down 10-30% and you just have to roll with it. Make sure to reinvest the dividends to continually increase your shares and it'll start to become a significant investment in the future. It's probably the best place to have your money parked to protect it.
Now, Fastlane? That's a whole different ballgame.