What To Consider Before Investing

[DeletedUser394]

[FONT=&quot]Your Risk Tolerance[/FONT]

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[FONT=&quot]This is one of the most important things to consider before you invest. It’s never good to lose sleep over an investment. Ask yourself what risk level you think you can handle without harming yourself emotionally. Many people can’t stomach swings of more than 10%, and some people withdraw their money after losing 20%. Ultimately it’s up to you and what you think is right for you. Never invest in something that you don’t fully understand or are having second thoughts about.
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[FONT=&quot]Your Age[/FONT]

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[FONT=&quot]This is another important factor to consider before investing. A sixty year old on the verge of retirement will not have the same goals as a thirty year old saving up for a new home. While the sixty year old will be interested in securing his or her money, the thirty year old will want to invest his money for long term growth.[/FONT]

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[FONT=&quot]Your Time Horizon[/FONT]

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[FONT=&quot]Your time horizon is the amount of time, (expressed in years), that you plan to invest your money, which normally ends the day you retire or pass away. The sixty year old will have a time horizon of about 10-15 years, whereas the thirty year old will have a time horizon of 35-45 years.[/FONT]

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[FONT=&quot]Your Personality[/FONT]

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[FONT=&quot]Are you lazy? If so, you might want to hand your money over to a mutual fund manager or an index fund. Otherwise investing, especially in individual stocks, requires a lot of well planned research. It’s pretty straight forward once you get the hang of it, but most people don’t have the time.
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[FONT=&quot]Set Goals[/FONT]

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[FONT=&quot]You need to have a clear path to follow, as to what you would like to accomplish financially. Trudging aimlessly through will more often than not leave you grounded. Goals are essential. Without them, how do you know where to start?
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[FONT=&quot]Asset Allocation[/FONT]

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[FONT=&quot]After deciding on the issues above, it’s time to determine your necessary asset allocation. Asset allocation is simply the amount of diversification, (stocks, bonds, cash, etc), that you have in your investment portfolio. This is normally expressed in a percentage form. Ultimately it is up to you to decide alone or with the help of a financial advisor, because after all it’s your money.[/FONT]

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[FONT=&quot]What Type of Investor Are You?[/FONT]

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[FONT=&quot]There are three general categories of investors – active, passive, or regular. The passive investor typically relies on the tips/advice of others. He or she only reviews their portfolio once in a while and rarely changes their holdings. [/FONT]
[FONT=&quot]Active investors, also known as traders are looking for fast appreciation. Many people in this group day trade, and ride the stock market up and down like a roller coaster ride. Active trading can be dangerous to your portfolio especially if you don’t have a lot of experience, and few people can actually turn a profit. People who dollar cost average are also considered active investors who are more on the passive side. [/FONT]
[FONT=&quot]Regular investors will generally return a steady (not necessarily higher) profit over time. A regular investor does his or her homework, researches every investment, and finds ways to keep costs low. You can argue that a person who dollar cost averages can also be placed in this category, provided that that person is consistently looking for better investments.[/FONT]

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[FONT=&quot]Dollar Cost Averaging[/FONT]

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[FONT=&quot]Dollar cost averaging is one of the smartest things a greenhorn investor can do. While it generally is better to do with index funds, exchange traded funds, and mutual funds, you can also apply this strategy to stocks and other securities. Dollar cost averaging is very simple to do, and can build wealth, especially during a bear market. [/FONT]
[FONT=&quot]It involves putting a set amount of money aside to buy more shares in an investment that you already own. Pretend that you buy 5000$ worth of the Vanguard 500 index fund, a fund that tracks the S&P 500. The Vanguard 500 is currently trading at $120, so you would be able to purchase 41.67 shares. Then every month you add $500 to buy more shares. Take a second to look at the chart below.[/FONT]
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[FONT=&quot]January[/FONT]
[FONT=&quot]$140 (3.57 )[/FONT]
[FONT=&quot]February[/FONT]
[FONT=&quot]$90 (5.56)[/FONT]
[FONT=&quot]March[/FONT]
[FONT=&quot]$20 (25)[/FONT]
[FONT=&quot]April[/FONT]
[FONT=&quot]$80 (6.25)[/FONT]
[FONT=&quot]May[/FONT]
[FONT=&quot]$200 (2.5)[/FONT]
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[FONT=&quot]Assuming that you stick to your plan of investing $500 every month, in January you can only purchase 3.57 shares. As the price of index fund changes, so does the amount of shares that you can buy for the same amount of money. The average price of this index fund was $108.34. Assuming you were to spend that same $5500 to buy shares in that same fund when the price was at its average of $108.34, you would have been able to buy 50.77 shares.[/FONT]
[FONT=&quot]If you stayed with your original plan of dollar cost averaging, you would now have 84.55 shares with the same regular deposits of investment! Dollar Cost Averaging is a great idea for anyone interested in investing, but who might lack the experience and or time to invest in more complex financial instruments. When the price of the fund goes down, you buy more shares, therefore allowing a higher value of appreciation. When the price of the fund goes up, you buy fewer shares, limiting the amount of money you would otherwise have to spend. This strategy works great over time, especially for index funds and exchange traded funds. If you were alive during the great depression or even the correction of 1987, (there were over 30 market corrections over the last 100 years), and you stuck to your dollar cost averaging plan, you would probably have a suitable nest egg for retirement. That’s because when everyone was selling their stocks and other securities, fearing the end of the world, the prices declined so fast that you could pick up many stocks at bargain-basement prices. [/FONT]
[FONT=&quot]Like I said, throughout history there have been over 30 corrections. It’s important to note that after each one of these, the rebounds were higher than the last. Don’t use the “end of the world†as an excuse to stop dollar cost averaging or to even sell your shares. As you might be aware, the stock market has never yet defaulted, since its creation many many years ago.[/FONT]

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[FONT=&quot]Diversify, Diversify, Diversify[/FONT]

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[FONT=&quot]Diversification is one of the key components to investment success. While your gains will typically be lower than if you’d invested your money in only a few places, your losses will be minimized.[/FONT]

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[FONT=&quot]Practice Accounts[/FONT]

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[FONT=&quot]These are excellent ways to get a feel for what it means to be an investor. On most sites you are given a set amount of “play moneyâ€, which you can then invest in real time on the world’s stock exchanges.[/FONT]





I've been working on these for a while :smxB:

 

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[MrPink]

Risk tolerance: is important although for many it is probably difficult to assess if it has not been tested.

Age: I don't see how age matters. I would be looking at risk tolerance, need to take risk, time horizon and personal goals for the money.

Personality: Constructing an index profolio is quite complicated. If this is only for the lazy could you please let me know which one will be the best in future (I don't think this is possible to predict) or select the best mutual fund for the future.

Dollar Cost Averaging: Overall, it has been shown better to lump sum than DCA since on average the stock market has gone up over time. I realize that you can 'cherry pick' various start and end dates when this isn't true, but overall it is better to lump sum (assuming of course that you lump sum in regards to your risk tolerance).

Diversification: I think Warren Buffet summed it up best '[FONT=Arial, Helvetica, sans-serif]Wide diversification is only required when investors do not understand what they are doing.' If you realize that you do not know what you are doing then it is fine, but if you do - why diversify?[/FONT]

Mr. Pink

 

[andviv]

You wrote all of this? wow, I think you have great writing skills.
Now, about the message, it seems you are targeting main street with it, your notes are very much oriented towards financial security for the beginner person that does not understand much about financial matters. Are you looking for feedback or just wanted to share your text with others here?

 

[ramy98]

Richkid, I would recommend that you pickup these two books on investing. It is critical that you read these books a couple of times before you invest in the market.

Reminiscences of a Stock Operator (Paperback)
by Edwin Lefevre

& Trade Your Way to Financial Freedom (Hardcover)
by Van K Tharpe

amazon.ca is where i usually get my books.

These two books are worth their weight in Gold; if I have read these books before I started investing I would have saved THOUSANDS of dollars. Everything I was doing in the markets was WRONG !!! And you know what; most people are doing the same.

The good thing is ; Im starting to get a return on the purchase price of these books.

These two books will change the way you look at the markets; I guarantee it !

They will change the way you look at many of the topics you just posted about.

 

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[slim_jim]

I agree with ramy98.... both books are excellent and highly recommended.

speed ++

 

[KLPInvestments]

Diversification steers you towards average results. It completely eliminates the possibility that you will have good results. You will do what the averages do over the long haul.

I think you can do very well by just putting your eggs in a few select baskets....but you absolutely must KNOW those baskets well...and you must WATCH those baskets. It's important to establish a circle of competence. It's not important how large/wide is the circle, but rather how well you define the borders of that circle. What is more, you can enlarge that circle over time by expanding your competence into other areas. As one famed investors once said....'I'm smart in spots, and I tend to stay in those spots"

No one ever has ever had phenominal success with wide diversification. Mutual funds are the face of diversification. Go ask 100 multi-millionaires how they achieved success. I promise you not one will say he/she started with 10 gran in a mutual fund....unless perhaps they are 100 years old.

I think some fund investors had a great run with Peter Lynch at Magellan, but that was the exception, not the rule. And for what it's worth, Peter Lynch retired at the peak of a bull market...so he got out when the market favored his record. If he had retired in 2002 I wonder if he would still be such a legend?

 

[DeletedUser394]

Can you think of any billionaires (or even multi-millionaires) who got that way through diversification?

Warren Buffett would be a candidate.....He's bought everything from undergarments to insurance. I don't diversify, and I"m in and out of stocks in less than three months, (I'm starting an event-driven strategy.)

I believe in Alpha, so if I can manage beta without too much market exposure I'm happy

 

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[DeletedUser394]

Richkid, I would recommend that you pickup these two books on investing. It is critical that you read these books a couple of times before you invest in the market.

Reminiscences of a Stock Operator (Paperback)
by Edwin Lefevre

& Trade Your Way to Financial Freedom (Hardcover)
by Van K Tharpe

amazon.ca is where i usually get my books.

These two books are worth their weight in Gold; if I have read these books before I started investing I would have saved THOUSANDS of dollars. Everything I was doing in the markets was WRONG !!! And you know what; most people are doing the same.

The good thing is ; Im starting to get a return on the purchase price of these books.

These two books will change the way you look at the markets; I guarantee it !

They will change the way you look at many of the topics you just posted about.

Thank you for the recommendations but I've read them already, my YTD return is 24.023%.....last year was 64.20%, and I only hold 5-8 stocks at a time, usually in the same sector, and for a limited time. (one up on wall streat, and beating the street by Peter Lynch)
I'm a pure Alpha guy:fastlane:

 

[DeletedUser394]

You wrote all of this? wow, I think you have great writing skills.
Now, about the message, it seems you are targeting main street with it, your notes are very much oriented towards financial security for the beginner person that does not understand much about financial matters. Are you looking for feedback or just wanted to share your text with others here?

You hit it right on the nose my friend!

I assumed that since this forum was comprised of mostly entrepreneurs it would be fitting, but I've been proven wrong! Time to start talking about my latest love affair with stochastic oscillators, MACD, CANSLIM, and the like!

I'm giving you rep for the compliment, and because you were able to identify this post's target audience.

 

[snowbank]

Warren Buffett would be a candidate.....He's bought everything from undergarments to insurance.

Warren Buffet has said, "Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing."

 

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[Kung Fu Steve]

I don't mean to be offensive or anything so please don't anyone take this the wrong way..

but at 16 you are investing in stocks and putting together a diverse porfolio?

 

[DeletedUser394]

I don't mean to be offensive or anything so please don't anyone take this the wrong way..

but at 16 you are investing in stocks and putting together a diverse porfolio?

I've been running my own money since I was 11 or 12. I personally don't diversify as I'm a very strong believer in Alpha... and yes I trade stocks, bonds, convertible bonds, covered bonds (eu), certain commodities, and I'm working on forex and futures contracts. I usually reduce my beta exposure with options, but not always.

I want to run a hedge fund to battle the likes of Carl Icahn and Goerge Soros

I don't see how what you said is insulting :smxG:

 

[DeletedUser394]

Warren Buffet has said, "Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing."

The quote actually begins with the word "wide"... So I'm prepared to battle with you that he does in fact diversify.....you can attain diversification by simply investing in 2 or 3 sectors.....which he does :boxing_smiley:

Here's a quote from a producer of the globeinvestor;

Since 1965 Mr. Buffett has grown Berkshire Hathaway into a $216-billion conglomerate not because he has supernatural abilities to see into the future, but rather because he can effectively manage risk through diversification.
Berkshire has always been a conglomerate with roots in the insurance industry but if you look at the actual holdings it's a variety of value sector plays. Nearly 40 per cent of the portfolio is invested in consumer goods such as Kraft Foods, Coca Cola and AnheuserBush. 32 per cent is invested in financials such as Wells Fargo and American Express. The remaining 28 per cent is invested in industrials, health care and a tiny 2.3 per cent weighting in oil & gas - a signal from the oracle that energy stocks could be overvalued.
Investors wanting to get into Berkshire Hathaway can get first hand experience in patient investing. One share costs over $133,400

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

 

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