How to Create an Investment Plan

How to Create an Investment Plan.

Creating a viable investment plan requires a little more than simply establishing a savings account and buying a few random shares of stocks. In order to structure a plan that is right, it's important to understand where you're at and what you want to accomplish with the investments. Then, you'll define how to reach those goals and select the best investment options to reach them. The good news is that it is never too late to create and implement a personal investment plan and begin creating a nest egg for the future.

Part 1 Assessing Where You're At.
1. Select an age-appropriate investment option. Your age will have a significant impact on your investment strategy.
Generally speaking, the younger you are, the more risk you can take. That's because you have more time to recover from a market downturn or loss of value in a particular investment. So, if you're in your 20's, you can allocate more of your portfolio to more aggressive investments (like growth-oriented and small-cap companies for example).
If you're nearing retirement, allocate more of your portfolio to less aggressive investments, like fixed-income, and large-cap value companies.
2. Understand your current financial situation. Be aware of how much disposable income you have available to invest. Take a look at your budget and determine how much money is left over for investments following your monthly expenses and after you have set aside an emergency fund equivalent to three to 6 months' worth of expenses.
3. Develop your risk profile. Your risk profile determines how much risk you're willing to take. Even if you're young, you might not want to take a lot of risks. You'll select your investments based on your risk profile.
Generally speaking, stocks are more volatile than bonds, and bank accounts (checking and savings accounts) are not volatile.
Remember, there are always risk trade-off's to be made. Often, when you take less risk, you make less. Investors are richly rewarded for taking significant risks, but they can also face steep losses.

Part 2 Establishing Your Goals.
1. Set goals for your investments. What do you want to do with the money you make from your investments? Do you want to retire early? Do you want to buy a nice house? Do you want a boat?
As a rule of thumb, you're going to want a diversified portfolio no matter what your goal is (buying a house, saving for a child's college education, etc.). The idea is to let the investment grow over a long period of time so that you have enough to pay for the goal.
If your goal is particularly aggressive, you should put more money in the investment periodically rather than opting for a more risky investment. That way, you're more likely to achieve your goal rather than lose the money that you've invested.
2. Establish a timeline for your goals. How soon do you want to reach your financial goals? That will determine the type of investments you make.
If you're interested in getting a great return on your investment quickly, and you are prepared to take the risk that you could also see a great loss just as quickly, then you'll select more aggressive investments that have the potential for significant return. These include undervalued stocks, penny stocks, and land that might quickly appreciate in value.
If you're interested in building wealth slowly, you'll select investments that generate a slower return on investment over time.
3. Determine the level of liquidity you want. A "liquid" asset is defined as an asset that can be easily converted to cash. That way, you'll have quick access to the money if you need it in an emergency.
Stocks and mutual funds are very liquid and can be converted into cash, usually in a matter of days.
Real estate is not very liquid. It usually takes weeks or months to convert a property to cash.

Part 3 Creating the Plan.
1. Decide on how you want to diversify. You don't want to put all your eggs in one basket. For example: Every month, you might want to put 30% of your investment money into stocks, another 30% into bonds, and the remaining 40% into a savings account. Adjust those percentages and investment options so that they're in line with your financial goals.
2. Ensure that your plan is in line with your risk profile. If you put 90% of your disposable income into stocks every month, then you're going to lose a lot of money if the stock market crashes. That might be a risk that you're willing to take, but be sure that's the case.
3. Consult a financial adviser. If you're uncertain about how to set up a plan in line with your goals and your risk profile, talk to a qualified financial adviser and get some feedback.
4. Investigate your options. There are many different accounts you might use for an investment plan. Familiarize yourself with some of the basics and figure out what works for you.
Set up a short-term emergency savings account with three to six months worth of living expenses. It's important to have this established to protect yourself if something unexpected happens (job loss, injury or illness, etc.). This money should easy to access in a hurry.
Consider your options for long-term savings. If you are thinking about saving up for retirement, you may want to set up an IRA or 401(k). Your employer may offer a 401(k) plan in which they will match your contribution.
If you want to start an education fund, think about 529 plans and Education Savings Accounts (ESAs). Earnings from these accounts are free from federal income tax as long as they’re used to pay for qualified education expenses.

Part 4 Evaluating Your Progress.
1. Monitor your investments from time to time. Check to see if they're performing according to your goals. If not, reevaluate your investments and determine where changes need to be made.
2. Determine if you need to change your risk profile. Generally speaking, as you get older, you'll want to take less risk. Be sure to adjust your investments accordingly.
If you have money in risky investments, it's a good idea to sell them and move the money to more stable investments when you get older.
If your finances tolerate the volatility of your portfolio very well, you might want to take on even more risk so that you can reach your goals sooner.
3. Evaluate whether or not you're contributing enough to reach your financial goals. It may be the case that you're not putting enough money from every paycheck into your investments to make your goals. On a more positive note, you might find that you're way ahead of reaching your goals and that you're putting too much money into your investments on a regular basis. In either case, adjust your contributions accordingly.

Community Q&A.

Question : Is 400, 000 dollars enough money to retire on?
Answer : If you own your own house and a new car, then possibly. If not, then no. Try to retire on 900,000 to a million at least.
Question : As a young investor, where can I find a reasonably priced, honest financial advisor?
Answer : See Hire a Financial Advisor and Select a Financial Advisor.
Question : Is it possible to invest with $500?
Answer : Yes. See Invest Small Amounts of Money Wisely and Invest a Small Amount of Money Online.
Question : Where do I start investing my money?
Answer : Ask this Question :  of a professional, fee-based financial advisor. If you don't want to pay for advice, open an account with a large mutual fund company. Fidelity, Vanguard and T. Rowe Price are excellent choices among many others.
Question : Can a kid make an investment plan?
Answer : Absolutely. Use the above suggestions. The younger you are when you start saving and investing money, the better off you will be later in life.
Question : Which business is less risky and more profitable?
Answer : Profit follows risk. That means that any business that's quite profitable probably involves considerable risk. To address your Question :  specifically, "blue chip" companies typically represent the chance for profit at less risk. They are large, well-established firms such as those on the Dow Industrials index or the S&P 500 index.
Question : Is it good to embark on an investment where $200,000 is needed as capital, while in return I get $100,000 as profit in a year's time?
Answer : It's not possible to say whether such an opportunity is "good" without knowing a lot more about it, but you're talking about a 50% annual return, which is probably not a realistic possibility.
Question : How do I select the kind of business I want to invest in?
Answer : Most people choose a business that they want to invest in based on what their gut instinct is telling them. Risk takers will most likely want to invest in stocks or assets that will yield more significant returns. "Safer" investors will stick to low-risk investments, wishing to gain what they will over a more extended period. Overall, identify the type of investor that you are and then do a bit of research about companies that offer you the returns that you are looking for.
Question : How can I create an account for a simple investment plan?
Answer : It is very easy to open an account with any brokerage firm or mutual fund company. Call them, and they will lead you through the process, or go to their website, and they will have all the instructions you need.

Tips.

Even the best investment plan may need tweaking as changes in the economy occur or your personal circumstances shift in some manner. See those situations as opportunities to rethink your strategy while still keeping your goals uppermost in your mind. Doing so will lend direction to your investment activities and make it easier to see the big picture even as you deal with what is happening today.

June 02, 2020

How to Create a Profitable Property Portfolio

How to Build a Diversified Portfolio.

“Don’t put all your eggs in one basket” is sound advice in life as well as in finance. Diversifying an investment portfolio can help cushion the ups and downs of the market and the broader economy. You can diversify by investing simultaneously in different asset classes. These classes include stocks (or "equities”), bonds, the money market, commodities, precious metals, real estate, gemstones, fine art and any of several other valuable assets. Because most growth in wealth comes from owning stock, equities also represent the most risk in a portfolio, so you will want to diversify your stock holdings. The following article presents a number of commonly acknowledged steps in building wealth through a diversified investment portfolio.

Method 1 Diversifying in Stocks.
1. Invest in many different companies. When you buy stock, you buy a share of the ownership of a company. You can buy stock in individual companies by using an online broker, such as E-Trade, Charles Schwab or TD Ameritrade (among many others). Do not, however, commit a large portion of your money to any single company. If such a company were to get in trouble, you could lose most of your money.
For example, Snap Inc. received a lot of press when it went public in March 2017 with shares priced at $27. However, by the following August the stock price had fallen to $11 per share. That's a drop of about 60%, which would have really hurt someone who had invested a large amount of money at the opening price.
To avoid such a disaster, limit your investment in any one stock to 5% or (preferably) less of your total portfolio.
2. Invest in different sectors. Entire industries often rise and fall as a unit. If the price of oil surges, most oil-related stocks will rise as a group. When the price of oil dips, oil-company stocks tend to fall together. You can protect yourself against this risk by investing in several different industries or sectors of the economy.
Major sectors include technology, health care, financial services, energy, communication services, utilities and agriculture.
The industries or sectors you choose should have a low correlation to each other. That is, invest in various sectors whose stock prices tend to fall at different times.  For example, technology and communication services might be too closely related. On the other hand, energy and health care are not closely related and might be expected to rise or fall separately.
3. Look at foreign stocks. As the economy in one country falters, the economy in other countries might be doing well. For this reason some experts recommend that you diversify by buying foreign stocks in addition to the domestic stocks you own.
Buying stock in multinational corporations automatically exposes you to international markets. For example, if you buy McDonald’s stock, you are already investing in foreign markets, since McDonald’s has expanded into more than 100 countries.

Method 2 Investing in Other Assets.
1. Diversify with bonds. When a company or government need to raise money, they may borrow it by issuing bonds to the public. A bond is a promise to repay borrowed money, accompanied by a certain amount of interest. Owning bonds is a good way to hedge against equity risks, because bond values tend to move in a direction opposite to stock values in general.
You can buy individual bonds or invest in a bond mutual fund. A bond fund holds a portfolio of many different corporate or government bonds. Research a fund to see how diversified its holdings are before buying shares. As with equities, bond diversification is very desirable.
Bonds are rated based on the issuer’s creditworthiness. Find bond ratings at Moody’s or Standard & Poor’s credit-rating services. A highly-rated bond will offer a lower interest rate but a higher likelihood of repayment. Choose bonds or bond funds that reflect your tolerance for risk. An aggressive investor (whose risk tolerance is high) might choose bonds with a higher interest rate but a lower safety rating.
2. Invest in U.S. Treasury bonds or bills for increased safety. U.S. Treasuries are the safest securities you can own. You lend money to the U.S. government and receive a promise for repayment. Treasury bonds often rise when the stock market falls, so they are a good way to diversify your portfolio.
3. Consider money market funds. Such a fund is similar to a savings account. The fund invests money in low-risk vehicles such as certificates of deposit and government securities. You can buy CDs and government bonds yourself, but a money market account can be more convenient, because it will do the investing for you at a nominal fee.
As an added benefit, some money market accounts let you write checks (or use a debit card) on the account. However, you will be limited in the number of withdrawals you can make per year.
4. Forget commodities. Some experts recommend diversifying by buying commodities such as oil, wheat, gold, and livestock. These commodities have no correlation to the stock market, so the value of these commodities should be unaffected if the stock market collapses. However, commodities are a poor bet if you are looking to buy and hold investments. Commodities are meant to be traded regularly and are therefore considered speculation (gambling) rather than investment.
5. Invest in real estate. One way to do this is to buy an apartment building and rent it to tenants. However, you may not have the time or energy to involve yourself in what can be a complicated endeavor. Instead you might invest in REITs, real estate investment trusts. With this option you invest in companies that own real estate. In exchange for your investment, you receive a share of the companies' income.
Many REITs charge very high fees, so they might not be the best way to diversify your portfolio.
Another option is to invest in a mutual fund that invests in REITs. This can save you a lot of research time by letting the fund managers do the research for you. You do pay for that service, of course, but it may be worth it to you if you value your time.

Method 3 Investing in Mutual and Other Funds for Diversity.
1. Diversify easily with mutual funds. A mutual fund is a portfolio operated by a fund manager. Buying into a mutual fund is a great way to diversify because each portfolio can hold multiple equities and other assets. For example, a mutual fund might hold stocks and/or bonds from 40 companies in various sectors. By buying into a fund, you can get instant diversification.
However, mutual funds are not automatically diversified. Everything depends on the assets held in the portfolio. Carefully analyze the individual holdings in the portfolio. Some mutual funds will be better diversified than others.
If you invest through an employer-sponsored plan (such as a 401k or an IRA), chances are you are investing in mutual funds.
2. Invest in an exchange traded fund (ETF). An ETF is like a mutual fund, except you buy it on a stock exchange, not from a fund. ETFs generally have lower fees than mutual funds, so they are a good option for investors.
As with mutual funds, an ETF is not automatically diversified. For example, you might buy an oil ETF, which is concentrated in one industry. Carefully analyze the underlying investments to make sure the ETF has the necessary diversity.
3. Consider an index fund. An index fund is a mutual fund designed to track an index, such as the Standard & Poor’s 500 Index or the DJ Wilshire 5000, which tracks the entire U.S. stock market. It is an easy way to get broad market exposure and thus diversify.
Remember that you want to diversify across asset classes. Don't forget bonds, Treasuries and the money market. Some funds do invest in these other assets.
Remember, too, that all mutual funds and ETFs charge fees for their service. Investigate the size of those fees before committing money. There are many good funds that charge total fees of less than 1% of your account balance, so there is no valid reason to pay more than that.  If you do your research, you should be able to find funds that are properly diversified.
With respect to equities, aim to hold at least 20 stocks spread across various sectors. You can invest by picking individual stocks, or you can more easily diversify by investing in a fund that contains hundreds of stocks and/or bonds.
4. Get expert advice. Every person’s situation is different, and there’s no one right diversification approach for everyone. Instead, you should meet with a "fee-only" financial advisor who can help you analyze your situation. Look for an advisor who is a certified financial planner (CFP). To earn this designation, candidates must meet certain experience, education, and ethics standards. The advisor should also be a fiduciary, someone legally bound to work primarily in your best interests. (Just ask, "Are you a fiduciary?" If you don't get an immediate "yes" for an answer, find another advisor.)
You can find a fee-only financial advisor through the National Association of Personal Financial Advisors. A fee-only advisor is one who does not earn a commission by recommending the purchase of specific financial products.
Discuss your investment goals with your advisor. Many people invest for retirement, and what qualifies as a well constructed portfolio will change over time. As an investor gets older, they will want to increase the ratio of bonds to stocks in their portfolio in order to diminish risk. (Some mutual funds can do that for you automatically.)

Method 4 Buying and Selling Intelligently.
1. Analyze your risk tolerance. How comfortable are you in taking financial risks? The more aggressive an investor is (the larger the rewards they hope to achieve), the larger the stock portion of their portfolio -- and the greater their risk tolerance -- will have to be.
A conservative portfolio might have only 20% in equities, 70% in bonds and 10% in cash and cash equivalents (including certificates of deposit, banker's acceptances, treasury bills and other money-market instruments).
A person more tolerant of risk might invest 70% in equities, 20% in bonds, and 10% in cash or cash equivalents.
2. Invest on a periodic basis. Let’s say you have $6,000 to invest in a year. If you invest all of that money at once, you might inadvertently buy into the market at a moment when equities are priced relatively high. A better option is to invest $500 a month. You would invest the same amount of money in a year's time, but as prices rise and fall, it's likely you would acquire a larger number of shares by year's end.
This type of investing is called “dollar-cost averaging,” and it allows you to take advantage of the inevitable price dips that regularly occur in the market.
3. Avoid market timing. You might dream of getting into the stock market at a price bottom and then selling at a peak. Many people who try to "time" the market in this way end up losing money, because recognizing a market peak or bottom isn't possible until after the fact.
4. Choose appropriate assets based on when you plan to withdraw investment income. For example, if you have 40 years before you plan on retiring, you can ride out peaks and valleys in the stock market. There’s less reason to worry if the market falls when you are in your 30s, because you have plenty of time to recoup your losses. A younger person can afford to be more aggressive in their investing than an older person.
5. Rebalance your portfolio when necessary. Building a diverse portfolio is not a one-time event. Instead, you may need to rebalance your portfolio periodically. Review your investments once a year, and see if they still align with your investment goals.
You might need to rebalance if some assets outperform others. For example, your equities might be on a hot streak for six years. Although they were 50% of your portfolio when you started investing, they now make up 70% through price appreciation. Assuming you still want stocks to form 50% of your portfolio, you’ll need to sell some stocks and replace them with bonds or other assets in order to maintain your preferred ratio.
Rebalancing might trigger tax consequences or transaction fees. Carefully analyze the process with your financial advisor before going ahead.
If you invest through a "balanced" mutual fund, they will typically do this rebalancing for you automatically. (A "balanced" fund invests in both stocks and bonds.)

Warnings.

Diversification can manage risk, but it cannot completely eliminate it. Diversification won’t save you if the entire market goes into a tailspin, as it did in 2008 and 2009. Nonetheless, diversifying is a critically important tool for all investors

April 01, 2020

how to organize your personal year end finances

How to Organize Your Personal Year End Finances.

You should never organize your year-end finances all at once. Rather, you should be engaged in a steady process of organizing and reorganizing your financial documents and information throughout the year. The process you use when organizing at the end of the year will be basically the same process you use monthly or quarterly to evaluate your investments, insurance, and budget. Use the year-end financial organizational process to get the opinion of a financial planner to help you streamline your finances, identify areas of waste, and take corrective actions to save money.

Method 1 Getting Organized.

1. Select your organizational categories. Knowing how to organize your financial documents can be tough. Thinking broadly about the sorts of documents you ought to organize for your year-end finances will help the process move along smoothly. Some documents might need to be copied and placed in multiple locations. For instance, education loan payments might need to be in a “loans” folder and also a “taxes” folder. Depending on what sort of financial documents you have, you may or may not need folders devoted to each of the main financial categories, which include.

Financial management (bank statements and loan records).

Insurance and annuity documents (policies and statements).

Estate documents (wills, trusts, and powers of attorney).

Investments (stocks and bond).

Income tax information (tax returns and documents attesting to charitable giving).

Employment and military records (discharge papers and employee benefits).

Home records (appraisals, renovation receipts).

Medical documents (summaries of recent appointments and any medical bills or payments made).

Legal documents (passports, personal records, and real estate settlements).

2. Use the same organizational system for all your documents. You probably receive and pay some bills through regular mail, and some through digital outlets or automatic account debiting. In this case, it's important to impose a parallel structure on your analog and digital documents alike.

For instance, if you organize your vertical files containing utility bills, credit card bills, and other significant financial documents in order that they were received, you should not organize your digital files into folders containing payments, bills, and receipts according to the company or institution that you made the payments to.

3. Know what to keep. Retain anything tax-related for at least three years. Keep anything that demonstrates a financial loss for seven years. For instance, you ought to keep a bill of sale on a property that sold for less than what you paid for it. You should also retain receipts for transactions paid by credit card until you get the credit card bill that reflects them. Finally, keep all monthly account statements until you get the year-end reconciliation statement.

Conversely, you should know what to get rid of.When new insurance policies arrive, get rid of the old ones.

Err on the side of caution when disposing of financial documents. If you're unsure if you need to keep something, retain it.

For more in-depth guidelines on what you should pitch and keep, consult IRS Publication 17.

4. Use an app or website to help you organize. There are a variety of handy apps to help get your year-end finances organized. For instance, you might check out feedthepig.com, manilla.com, or mint.com.Apps that might help include Mint, Personal Capital, and Spending Tracker.

Method 2 Looking Ahead.

1. Set a budget. Find ways to save next year. Use your year-end financial organization time to identify sources that are draining your money. For instance, if you're paying for cable TV but never watch it, think about cancelling it altogether.

Overall, you should be spending about 35% of your income on home expenses (rent, utilities, and groceries), 15% on transportation expenses (car insurance, train fare, and auto repairs), 25% on entertainment and other miscellaneous expenses, 15% on paying off debt, and putting the final 10% of your income toward savings.

If you live in an expensive area or have a low income, you might need to contribute more money to home expenses and less toward debt or miscellaneous expenditures.

2. Simplify payments and financial data for next year. When you're done organizing your current year's financial data and documentation, look for ways to streamline the process next year. For instance, you can cut back on time spent searching for wayward documents by using automatic bill payments. You might also use debiting by tying regular payments like utilities and credit card charges directly to your bank account.

Cut back on the number of credit cards you use regularly. This will reduce the number of credit card bills you need to juggle. Use the credit card with the lowest interest rate as your day-to-day credit card, and use the other cards once a month in order to prevent their disuse from hurting your credit score.

For the same reason, limit your bank accounts. You should have one checking account and one savings account. If you have multiple checking and savings accounts, close the one with the most fees and least generous terms of service.

Consolidate your retirement accounts and investments, too. If you have several IRAs, transfer all the money into a single IRA. Use one brokerage firm to simplify investments.

3. Keep your finances organized throughout the year. Instead of putting all your receipts, account statements, and other financial documents in a stack and watching them slowly pile up over the course of a year, put them in the appropriate file or folder as you receive them. This will prevent confusion when trying to organize everything at year's end.

Use a three-ring binder with pockets to organize your financial materials in an orderly way. Move non-current financial records to your filing cabinet.

If you feel more comfortable printing out digital documents, print them out and put them in your vertical file or binder.

If you don't print out digital receipts and other documents, ensure that you put them in the appropriate folder according to your predesignated system as you receive them. For instance, when you get your digital W-2, immediately download it and put it with your other tax documents.

If you need to copy certain digital documents to make them accessible in multiple locations, don't be afraid to do so.

Method 3 Evaluating Your Financial Health.

1. Consult a financial planner or accountant. With the help of a certified financial planner or accountant, you'll be able to get your year-end finances under control. They can help you find ways to save when you file taxes in the coming months, and can explain some of the nuances of the tax code. For instance, you might want to ask.

Should I accelerate or defer income?

What losses or gains should I take this year?

Should I convert my traditional IRA to a Roth IRA so that my earnings will grow tax-free?

Are there any charitable donations I should make?

2. Total your year-to-date spending. You should have a column with all the payments, investments, and savings you have at the end of the year. Compare these numbers to their counterparts at the beginning of the year to get an overall sense of your financial health.

Your investment value should be greater at the end of the year than it was at the beginning of the year.

Your savings should be higher at the end of the year than it was at the beginning of the year.

Your spending should be less than the value of your savings.

3. Review your credit reports. Each year, you are entitled to three free credit reports, one each from the three major credit agencies (Experian, Equifax, and TransUnion). These reports will let you know if your credit score is good or if it needs a boost.

The best way to check your credit reports is not to check all three at once, but rather to space them out regularly over time. Ideally, you'd check one every four months.

4. Check your portfolio. Read the latest reports from your stock broker or financial planner to determine the relative health of your investments. If your portfolio is not doing well, think about investing elsewhere. Talk to a certified financial planner or stockbroker for advice about how to develop a robust portfolio.

Method  4 Finding Ways to Save.

1. Analyze your insurance coverage. If you have home, life, auto, or other insurance, contact some agents representing insurers in your area to find out if you have the best coverage you can afford. If you've made improvements to your home over the past year, you may have increased the value of your home, and that value should be reflected in your insurance policy.

Likewise, if you've welcomed a new family member into your family over the past year, you must check with your insurance provider to guarantee that they're covered under your insurance.

2. Review your tax data. Working with a tax professional, find ways to reduce your tax burden before the year is out. Charitable giving is the easiest way to do this. Look for reputable charities whose work you believe in through GuideStar (http://www.guidestar.org), CharityWatch (https://www.charitywatch.org/home) and Charity Navigator (http://www.charitynavigator.org).

You can also make in-kind (material) donations to thrift stores like the Salvation Army in exchange for a tax discount.

You can also qualify for tax deductions based on work-related expenses like travel or items of clothing you bought specifically for work.

3. Update your information where necessary. If you've had a change in your marital status you may need to revise your tax withholding and/or employee health coverage. If you're unsure if you need to update this information, contact a financial planner for assistance.

4. Empty your flexible spending account. A flexible spending account for healthcare should be used to cover outstanding claims from your doctor, dentist, or other health provider. If you have a flexible spending account oriented toward other types of spending like dependent care, employ the account to cover the appropriate expenses before the year is out.

Only $500 of a flexible spending account can carry over into the following year, so it's important to take full advantage of the account before the year ends.

January 22, 2020

How to Organize Your Personal Year End Finances

How to Organize Your Personal Year End Finances.

You should never organize your year-end finances all at once. Rather, you should be engaged in a steady process of organizing and reorganizing your financial documents and information throughout the year. The process you use when organizing at the end of the year will be basically the same process you use monthly or quarterly to evaluate your investments, insurance, and budget. Use the year-end financial organizational process to get the opinion of a financial planner to help you streamline your finances, identify areas of waste, and take corrective actions to save money.

Method 1 Getting Organized.

1. Select your organizational categories. Knowing how to organize your financial documents can be tough. Thinking broadly about the sorts of documents you ought to organize for your year-end finances will help the process move along smoothly. Some documents might need to be copied and placed in multiple locations. For instance, education loan payments might need to be in a “loans” folder and also a “taxes” folder. Depending on what sort of financial documents you have, you may or may not need folders devoted to each of the main financial categories, which include.

Financial management (bank statements and loan records).

Insurance and annuity documents (policies and statements).

Estate documents (wills, trusts, and powers of attorney).

Investments (stocks and bond).

Income tax information (tax returns and documents attesting to charitable giving).

Employment and military records (discharge papers and employee benefits).

Home records (appraisals, renovation receipts).

Medical documents (summaries of recent appointments and any medical bills or payments made).

Legal documents (passports, personal records, and real estate settlements).

2. Use the same organizational system for all your documents. You probably receive and pay some bills through regular mail, and some through digital outlets or automatic account debiting. In this case, it's important to impose a parallel structure on your analog and digital documents alike.

For instance, if you organize your vertical files containing utility bills, credit card bills, and other significant financial documents in order that they were received, you should not organize your digital files into folders containing payments, bills, and receipts according to the company or institution that you made the payments to.

3. Know what to keep. Retain anything tax-related for at least three years. Keep anything that demonstrates a financial loss for seven years. For instance, you ought to keep a bill of sale on a property that sold for less than what you paid for it. You should also retain receipts for transactions paid by credit card until you get the credit card bill that reflects them. Finally, keep all monthly account statements until you get the year-end reconciliation statement.

Conversely, you should know what to get rid of.When new insurance policies arrive, get rid of the old ones.

Err on the side of caution when disposing of financial documents. If you're unsure if you need to keep something, retain it.

For more in-depth guidelines on what you should pitch and keep, consult IRS Publication 17.

4. Use an app or website to help you organize. There are a variety of handy apps to help get your year-end finances organized. For instance, you might check out feedthepig.com, manilla.com, or mint.com.Apps that might help include Mint, Personal Capital, and Spending Tracker.

Method 2 Looking Ahead.

1. Set a budget. Find ways to save next year. Use your year-end financial organization time to identify sources that are draining your money. For instance, if you're paying for cable TV but never watch it, think about cancelling it altogether.

Overall, you should be spending about 35% of your income on home expenses (rent, utilities, and groceries), 15% on transportation expenses (car insurance, train fare, and auto repairs), 25% on entertainment and other miscellaneous expenses, 15% on paying off debt, and putting the final 10% of your income toward savings.

If you live in an expensive area or have a low income, you might need to contribute more money to home expenses and less toward debt or miscellaneous expenditures.

2. Simplify payments and financial data for next year. When you're done organizing your current year's financial data and documentation, look for ways to streamline the process next year. For instance, you can cut back on time spent searching for wayward documents by using automatic bill payments. You might also use debiting by tying regular payments like utilities and credit card charges directly to your bank account.

Cut back on the number of credit cards you use regularly. This will reduce the number of credit card bills you need to juggle. Use the credit card with the lowest interest rate as your day-to-day credit card, and use the other cards once a month in order to prevent their disuse from hurting your credit score.

For the same reason, limit your bank accounts. You should have one checking account and one savings account. If you have multiple checking and savings accounts, close the one with the most fees and least generous terms of service.

Consolidate your retirement accounts and investments, too. If you have several IRAs, transfer all the money into a single IRA. Use one brokerage firm to simplify investments.

3. Keep your finances organized throughout the year. Instead of putting all your receipts, account statements, and other financial documents in a stack and watching them slowly pile up over the course of a year, put them in the appropriate file or folder as you receive them. This will prevent confusion when trying to organize everything at year's end.

Use a three-ring binder with pockets to organize your financial materials in an orderly way. Move non-current financial records to your filing cabinet.

If you feel more comfortable printing out digital documents, print them out and put them in your vertical file or binder.

If you don't print out digital receipts and other documents, ensure that you put them in the appropriate folder according to your predesignated system as you receive them. For instance, when you get your digital W-2, immediately download it and put it with your other tax documents.

If you need to copy certain digital documents to make them accessible in multiple locations, don't be afraid to do so.

Method 3 Evaluating Your Financial Health.

1. Consult a financial planner or accountant. With the help of a certified financial planner or accountant, you'll be able to get your year-end finances under control. They can help you find ways to save when you file taxes in the coming months, and can explain some of the nuances of the tax code. For instance, you might want to ask.

Should I accelerate or defer income?

What losses or gains should I take this year?

Should I convert my traditional IRA to a Roth IRA so that my earnings will grow tax-free?

Are there any charitable donations I should make?

2. Total your year-to-date spending. You should have a column with all the payments, investments, and savings you have at the end of the year. Compare these numbers to their counterparts at the beginning of the year to get an overall sense of your financial health.

Your investment value should be greater at the end of the year than it was at the beginning of the year.

Your savings should be higher at the end of the year than it was at the beginning of the year.

Your spending should be less than the value of your savings.

3. Review your credit reports. Each year, you are entitled to three free credit reports, one each from the three major credit agencies (Experian, Equifax, and TransUnion). These reports will let you know if your credit score is good or if it needs a boost.

The best way to check your credit reports is not to check all three at once, but rather to space them out regularly over time. Ideally, you'd check one every four months.

4. Check your portfolio. Read the latest reports from your stock broker or financial planner to determine the relative health of your investments. If your portfolio is not doing well, think about investing elsewhere. Talk to a certified financial planner or stockbroker for advice about how to develop a robust portfolio.

Method  4 Finding Ways to Save.

1. Analyze your insurance coverage. If you have home, life, auto, or other insurance, contact some agents representing insurers in your area to find out if you have the best coverage you can afford. If you've made improvements to your home over the past year, you may have increased the value of your home, and that value should be reflected in your insurance policy.

Likewise, if you've welcomed a new family member into your family over the past year, you must check with your insurance provider to guarantee that they're covered under your insurance.

2. Review your tax data. Working with a tax professional, find ways to reduce your tax burden before the year is out. Charitable giving is the easiest way to do this. Look for reputable charities whose work you believe in through GuideStar (http://www.guidestar.org), CharityWatch (https://www.charitywatch.org/home) and Charity Navigator (http://www.charitynavigator.org).

You can also make in-kind (material) donations to thrift stores like the Salvation Army in exchange for a tax discount.

You can also qualify for tax deductions based on work-related expenses like travel or items of clothing you bought specifically for work.

3. Update your information where necessary. If you've had a change in your marital status you may need to revise your tax withholding and/or employee health coverage. If you're unsure if you need to update this information, contact a financial planner for assistance.

4. Empty your flexible spending account. A flexible spending account for healthcare should be used to cover outstanding claims from your doctor, dentist, or other health provider. If you have a flexible spending account oriented toward other types of spending like dependent care, employ the account to cover the appropriate expenses before the year is out.

Only $500 of a flexible spending account can carry over into the following year, so it's important to take full advantage of the account before the year ends.

January 22, 2020

How did Warren Buffett get started in business?

How did Warren Buffett get started in business?

By BRENT RADCLIFFE.
Warren Buffett may have been born with business in his blood. He purchased his first stock when he was 11 years old and worked in his family’s grocery store in Omaha.
His father, Howard Buffett, owned a small brokerage, and Warren would spend his days watching what investors were doing and listening to what they said. As a teenager, he took odd jobs, from washing cars to delivering newspapers, using his savings to purchase several pinball machines that he placed in local businesses.

His entrepreneurial successes as a youth did not immediately translate into a desire to attend college. His father pressed him to continue his education, with Buffett reluctantly agreeing to attend the University of Pennsylvania. He then transferred to the University of Nebraska, where he graduated with a degree in business in three years.

After being rejected by the Harvard Business School, he enrolled in graduate studies at Columbia Business School. While there, he studied under Benjamin Graham – who became a lifelong friend – and David Dodd, both well-known securities analysts. It was through Graham's class in securities analysis that Buffett learned the fundamentals of value investing. He once stated in an interview that Graham's book, The Intelligent Investor, had changed his life and set him on the path of professional analysis to the investment markets. Along with Security Analysis, co-written by Graham and Dodd it provided him the proper intellectual framework and a road map for investing.

Benjamin Graham and The Intelligent Investor.
Graham is often called the "Dean of Wall Street" and the father of value investing, as one of the most important early proponents of financial security analysis. He championed the idea that the investor should look at the market as though it were an actual entity and potential business partner – Graham called this entity "Mr. Market" – that sometimes asks for too much or too little money to be bought out.

It would be difficult to summarize all of Graham's theories in full. At its core, value investing is about identifying stocks that have been undervalued by the majority of stock market participants. He believed that stock prices were frequently wrong due to irrational and excessive price fluctuations (both upside and downside). Intelligent investors, said Graham, need to be firm in their principles and not follow the crowd.
Graham wrote The Intelligent Investor in 1949 as a guide for the common investor. The book championed the idea of buying low-risk securities in a highly diversified, mathematical way. Graham favored fundamental analysis, capitalizing on the difference between a stock's purchase price and its intrinsic value.

Entering the Investment Field.
Before working for Benjamin Graham, Warren had been an investment salesman – a job that he liked doing, except when the stocks he suggested dropped in value and lost money for his clients. To minimize the potential of having irate clients, Warren started a partnership with his close friends and family. The partnership had unique restrictions attached to it. Warren himself would invest only $100 and, through re-invested management fees, would grow his stake in the partnership. Warren would take half of the partnership’s gains over 4% and would repay the partnership a quarter of any loss incurred. Furthermore, money could only be added or withdrawn from the partnership on December 31st, and partners would have no input about the investments in the partnership.

By 1959, Warren had opened a total of seven partnerships and had a 9.5% stake in more than a million dollars of partnership assets. Three years later by the time he was 30, Warren was a millionaire and merged all of his partnerships into a single entity.
It was at this point that Buffett’s sights turned to directly investing in businesses. He made a $1 million investment in a windmill manufacturing company, and the next year in a bottling company. Buffett used the value-investing techniques he learned in school, as well as his knack for understanding the general business environment, to find bargains on the stock market.

Buying Berkshire Hathaway.
In 1962, Warren saw an opportunity to invest in a New England textile company called Berkshire Hathaway and bought some of its stock. Warren began to aggressively buy shares after a dispute with its management convinced him that the company needed a change in leadership..  Ironically, the purchase of Berkshire Hathaway is one of Warren’s major regrets.
Understanding the beauty of owning insurance companies – clients pay premiums today to possibly receive payments decades later – Warren used Berkshire Hathaway as a holding company to buy National Indemnity Company (the first of many insurance companies he would buy) and used its substantial cash flow to finance further acquisitions.

As a value investor, Warren is a sort of jack-of-all-trades when it comes to industry knowledge. Berkshire Hathaway is a great example. Buffett saw a company that was cheap and bought it, regardless of the fact that he wasn’t an expert in textile manufacturing. Gradually, Buffett shifted Berkshire’s focus away from its traditional endeavors, instead using it as a holding company to invest in other businesses. Over the decades, Warren has bought, held and sold companies in a variety of different industries.

Some of Berkshire Hathaway’s most well-known subsidiaries include, but are not limited to, GEICO (yes, that little Gecko belongs to Warren Buffett), Dairy Queen, NetJets, Benjamin Moore & Co., and Fruit of the Loom.  Again, these are only a handful of companies of which Berkshire Hathaway has a majority share.
The company also has interests in many other companies, including American Express Co. (AXP), Costco Wholesale Corp. (COST), DirectTV (DTV), General Electric Co. (GE), General Motors Co. (GM), Coca-Cola Co. (KO), International Business Machines Corp. (IBM), Wal-Mart Stores Inc. (WMT), Proctor & Gamble Co. (PG) and Wells Fargo & Co. (WFC).

Berkshire Woes and Rewards.
Business for Buffett hasn’t always been rosy, though. In 1975, Buffett and his business partner, Charlie Munger, were investigated by the Securities and Exchange Commission (SEC) for fraud. The two maintained that they had done nothing wrong and that the purchase of Wesco Financial Corporation only looked suspicious because of their complex system of businesses.
Further trouble came with a large investment in Salomon Inc. In 1991, news broke of a trader breaking Treasury bidding rules on multiple occasions, and only through intense negotiations with the Treasury did Buffett manage to stave off a ban on buying Treasury notes and subsequent bankruptcy for the firm.
In more recent years, Buffett has acted as a financier and facilitator of major transactions. During the Great Recession, Warren invested and lent money to companies that were facing financial disaster. Roughly 10 years later, the effects of these transactions are surfacing and they’re enormous.

A loan to Mars Inc. resulted in a $680 million profit.
Wells Fargo & Co. (WFC), of which Berkshire Hathaway bought almost 120 million shares during the Great Recession, is up more than 7 times from its 2009.
American Express Co. (AXP) is up about five times since Warren’s investment in 200813
Bank of America Corp. (BAC) pays $300 million a year and Berkshire Hathaway has the option to buy additional shares at around $7 each – less than half of what it trades at today.
Goldman Sachs Group Inc. (GS) paid out $500 million in dividends a year and a $500 million redemption bonus when they repurchased the shares.

Most recently, Warren has partnered up with 3G Capital to merge J.H. Heinz Company and Kraft Foods to create the Kraft Heinz Food Company (KHC). The new company is the third largest food and beverage company in North America and fifth largest in the world, and boasts annual revenues of $28 billion. In 2017, he bought up a significant stake in Pilot Travel Centers, the owners of the Pilot Flying J chain of truck stops. He will become a majority owner over a six-year period.
Modesty and quiet living meant that it took Forbes some time to notice Warren and add him to the list of richest Americans, but when they finally did in 1985, he was already a billionaire. Early investors in Berkshire Hathaway could have bought in as low as $275 a share and by 2014 the stock price had reached $200,000, and was trading just under $300,000 earlier this year.

Comparing Buffett to Graham.
Buffett has referred to himself as "85% Graham." Like his mentor, he has focused on company fundamentals and a "stay the course" approach – an approach that enabled both men to build huge personal nest eggs. Seeking a seeks a strong return on investment (ROI), Buffett typically looks for stocks that are valued accurately and offer robust returns for investors.
However, Buffett invests using a more qualitative and concentrated approach than Graham did. Graham preferred to find undervalued, average companies and diversify his holdings among them; Buffett favors quality businesses that already have reasonable valuations (though their stock should still be worth something more) and the ability for large growth.

Other differences lie in how to set intrinsic value, when to take a chance and how deeply to dive into a company that has potential. Graham relied on quantitative methods to a far greater extent than Buffett, who spends his time actually visiting companies, talking with management and understanding the corporate's particular business model. As a result, Graham was more able to and more comfortable investing in lots of smaller companies than Buffett. Consider a baseball analogy: Graham was concerned about swinging at good pitches and getting on base; Buffett prefers to wait for pitches that allow him to score a home run. Many have credited Buffett with having a natural gift for timing that cannot be replicated, whereas Graham's method is friendlier to the average investor.

Buffett Fun Facts.
Buffett only began making large-scale charitable donations at age 75.
Buffett has made some interesting observations about income taxes. Specifically, he's questioned why his effective capital gains tax rate of around 20% is a lower income tax rate than that of his secretary – or for that matter, than that paid by most middle-class hourly or salaried workers. As one of the two or three richest men in the world, having long ago established a mass of wealth that virtually no amount of future taxation can seriously dent, Mr. Buffett offers his opinion from a state of relative financial security that is pretty much without parallel. Even if, for example, every future dollar Warren Buffett earns is taxed at the rate of 99%, it is doubtful that it would affect his standard of living.

Buffett has described The Intelligent Investor as the best book on investing that he has ever read, with Security Analysis a close second. Other favorite reading matter includes:
Common Stocks and Uncommon Profits by Philip A. Fisher, which advises potential investors to not only examine a company's financial statements but to evaluate its management. Fisher focuses on investing in innovative companies, and Buffett has long held him in high regard.
The Outsiders by William N. Thorndike profiles eight CEOs and their blueprints for success. Among the profiled is Thomas Murphy, friend to Warren Buffett and director for Berkshire Hathaway. Buffett has praised Murphy, calling him "overall the best business manager I've ever met."
Stress Test by former Secretary of the Treasury, Timothy F. Geithner, chronicles the financial crisis of 2008-9 from a gritty, first-person perspective. Buffett has called it a must-read for managers, a textbook for how to stay level under unimaginable pressure.
Business Adventures: Twelve Classic Tales from the World of Wall Street by John Brooks is a collection of articles published in The New Yorker in the 1960s. Each tackles famous failures in the business world, depicting them as cautionary tales. Buffett lent his copy of it to Bill Gates, who reportedly has yet to return it.

The Bottom Line.
Warren Buffett’s investments haven't always been successful, but they were well-thought-out and followed value principles. By keeping an eye out for new opportunities and sticking to a consistent strategy, Buffett and the textile company he acquired long ago are considered by many to be one of the most successful investing stories of all time. But you don't have to be a genius "to invest successfully over a lifetime," the man himself claims. "What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

August 04, 2020

How to Start an Investment Club

How to Start an Investment Club.

If you're interested in investing but don't want to go at it alone, you can join an investment club or even start one of your own. An investment club consists of members who study stocks, bonds and other investments. The goal is to have each member take an industry and report to the group why they think it is a great investment. Knowledge is power, and wisdom from many helps assure success. Many times they will pool their money together in order to make joint investment decisions. It's a great way to give and get wisdom. Working with others will help you and others make intelligent investment decisions.

Part 1 Getting Your Club Together.
1. Find potential members for your club. They can be local, so you can meet in person, or they can live far away, and you can meet online. Aim for a club with 10 to 15 members, but anything from six to 20 is workable. When you have fewer people you might have trouble getting enough funds together to invest (some investments favor the larger investor). However, with a large group, both maintaining high-quality discussions and finding a place to meet become concerns.
Spread the word. Tell family, friends, and co-workers about your club-in-the-making. Put together a flyer describing what you have in mind, and pass it out, post it on message boards, send it through e-mail, etc.
2. Hold a preliminary meeting. Get together with the people who are interested, provide snacks and refreshments, and discuss the formation of a club.
Define goals. Are people more interested in the club for its educational value, or for the financial returns? Are they interested in short-term or long-term investing? (Most investment clubs use a buy-and-hold strategy.) Will your members share a general investing philosophy and approach?
Determine how much each member can contribute financially.
If people make different contributions, their returns should be proportional.
You can either pool your investment funds and invest together (a common practice) or invest through individual accounts (self-directed).
Consider starting your club through BetterInvesting.org, an organization that can provide education, support, and online tools and resources for your club.
Determine if your club needs to register with the SEC. You can find more information on the U.S. Securities and Exchange Commission at: https://www.sec.gov/investor/pubs/invclub.htm
3. Gauge member interest level. In other words, decide whether you really want to invest with these people. An investment club will involve significant risk for those involved. The risks, and consequently the rewards, are shared among all members. This means that everyone involved should be equally interested and participate similarly. Be on the lookout for red flags among your potential members. For example, consider carefully members that might.
4. Hold an organizational meeting to iron out the details. Have another get-together with the people who are still interested to discuss and implement the club's policy and organization. The first step should be to decide on an official name for your group. Next you'll want to decide when and where to meet (a living room, library, church, or coffeehouse, depending on the size of the group). Meetings should last an hour or two. After defining these basic rules, consider also doing the following.
Defining and appointing roles within the club (president, secretary, treasurer, investor). What are their responsibilities? The terms should be one or two years, and the treasurer should have an assistant who can move up later.
Writing out how the club will manage payouts, divestiture (reducing assets or investments), or dissolution.
Laying out the policies on gaining new members and figuring out what happens when a member wants to leave the club.
5. File the necessary paperwork. In order to pool your money and invest together, you will need to incorporate your investment club into what is known as a general partnership. You will have to write out the rules of this partnership and its operation and have each member sign it once you all agree.
You should also write a club operating agreement. This would outline all the policies discussed in the previous meeting and should be signed by everyone in the group (as well as others who may join later). There are sample contracts and agreements available online and in books.
To pay taxes, you also have to apply with the IRS for an Employer Identification Number (EIN) and file a "Certificate of Conducting Business as Partners" form with a local jurisdiction (such as a Secretary of State office). Contact your local jurisdiction (city, county, or state) for more information.

Part 2 Investing with Your Club
1. Open a brokerage account or bank account. Most clubs start with both a checking and a brokerage account. Choose a broker who suits your needs (full-service, discount, or online). A full-service broker will provide advice and may attend a few meetings, while a discount or online broker will leave you to your own devices. Many investment clubs end up choosing the latter.
2. Develop an educational agenda. In most cases, investment clubs are formed by people who are still learning about investing. Not everyone is on the same page in terms of his knowledge base. Ask each member what big Question : s they have about investing. Having them submit Question : s anonymously is a good option. Choose the topics you feel should be addressed as a group. Make a "syllabus" and decide who will be doing the research and presenting the topic to the group.
You may also wish to provide a list of good, reliable sources for research. In general, you should stick to reputable financial news services and online investing encyclopedias.
3. Research potential first investments. After a period of time, when contributions to the club have been made by group members, you're ready to start looking at first investments. Have each club member research potential asset purchases like stocks, mutual funds, or investment properties and defend her choices with research. Then, you can have the group vote on their favorite choices and determine how much money to allocate to each.
Remember to keep some of your initial money uninvested in case the market presents an opportunity.
4. Invest as a group. Finalize your choices for your first investment and take the plunge. As your club continues operating, evaluate new and old investments during your regular meetings. These will typically be held once a month, although market conditions may dictate more frequent gatherings. In these meetings you should also:
Review club finances (overall gains or losses, individual investment progress and cash balance available for investment).
Make sure you have designated a single, trustworthy member who has the authority to buy and sell on behalf of the club.
5. Have fun. Celebrate your victories and commiserate your losses. This is one of the biggest reasons people join investment clubs. You could even set aside some of your gains for group outings or events. The idea is to keep everyone entertained and involved in the group so that they keep contributing funds each month and don't get bored over time.

Community Q&A.

Question : Can a group of my friends start a club where we focus on trading Futures contracts?
Answer : Yes, you can focus on any sort of investment you like. Find a full-service broker who's very experienced in that area unless you know what you're doing, in which case you can use an online brokerage.
Question : I have an existing Investment Club of 20 years and now our broker is asking for an updated membership list. We have had numerous changes in membership that we have not made officially through our by-laws. What should we do?
Answer : It is not necessary for your by-laws to list your members by name. It's a good idea, however, to keep a current membership list. Let it include identifying information such as Social Security numbers. Share that list with your broker. He may be required by law to have that information on file. If your club has a secretary or treasurer, it can be that person's responsibility to keep your membership list current along with all individual contributions and earnings.
Question : Can whole life insurance be a viable investment tool for investment clubs?
Answer : No. Life insurance could potentially be a decent investment for an individual but not for a group.
Question : We are forming an investment club for stocks, real estate, etc. How do we register and what type of account do we need?
Answer : "Registration" is not necessary. You are simply private parties making private investments. If you'll be making group purchases, you'll want a checking account for the club, as well as trading accounts with one or more brokerages. (You don't have to work exclusively with one broker.)
Question : Why, when we leave the investment club, do we only get 95% of our money?
Answer : Read the by-laws of your club. There may be a provision stating that the club retains 5% of your money for maintenance purposes.
Question : In this era where investing in stocks is highly risky, what other investment windows would you advise?
Answer : Bonds are usually considered to be less risky than stocks. You can invest in certain mutual funds that own an array of bonds. Some mutual funds invest mainly in stocks, and that's a way of diversifying your stock investment and taking on less risk. Money-market instruments such as certificates of deposit (CDs) are safe investments, but they don't pay very much interest. Unfortunately, that's usually the case: the safer the investment, the less it's likely to pay you.
Question : There are six of us. We want to pull our funds together each month and ultimately invest it. Would we need to register our group as a limited partnership the state's secretary of state office?
Answer : Probably a general partnership. Re-read Part 1, Step 5 above.
Question : Are we limited as a group to investing in stocks, bonds and real estate? Can we also invest in things like buying and selling cars, boats, auctioned-off storage units, estate sales, etc.?
Answer : A club is free to choose its own investments without restrictions.
Question : How should the profits be shared among the club members?
Answer : Profits are commonly shared in direct proportion to the amount of each member's investment, but you can agree on other arrangements if you like, such as recognizing certain members' investing prowess or willingness to do administrative work on the club's behalf.

Tips.

Don't invest immediately. Give the group a couple of months to deposit money. This will weed out those who aren't really committed to the club or who can't afford it.
When an investment goes wrong, keep your pointing finger to yourself. Use the experience to learn what not to do. Go back to the drawing board and change things if need be.
Trust has to be established for the club to be effective.
Limit investments to cash with no leverage. If margin accounts are used, every partner may be liable for the full debt.

Warnings.

Make sure that everyone understands that they might not make money and could actually lose money. Not all investments are profitable. If they were, everyone would be doing it.
Proper planning, a supportive group, and an understanding leader are vital in promoting cohesion and optimism within the group
Some members may be tempted to embezzle funds. This is why having an operating agreement and ironing out the details is important. So is your choice of club officers.
Be ready for the fact that your group will experience emotional highs and lows in the course of investing their hard-earned money.

July 02, 2020

Financial Advice from Ray Dalio.

Financial Advice from Ray Dalio.

His first recommendation is to focus on savings, and to think about how many months of living expenses your savings can get you through. Savings, explains Dalio, is “freedom and security.” Savings can also provide you with opportunities. If you need to further your education, start a new business, or invest in a discounted asset, it’s easier if you have extra money. If you can accumulate enough savings to last you for the next 300 months then you can be considered financially independent. 🙂

Dalio’s next advice is about what to do with your savings. He says “it’s important to realize that the least risky investment that you can make, which is cash, is also the worst investment you can make over time. You can judge that by comparing the rate of inflation to the after tax rate of return you will earn.” So if inflation is 2%, and you’re only making 1% on your cash investment then you are actually losing purchasing power and getting poorer. “So you have to move into other assets that will do better over a longer period of time.” This is why some people like myself don’t have a cash emergency fund.

The last advice Dalio gives is a bit of surprise to me. Instead of going with the mainstream and buying an index fund, he suggests that millennials should do the opposite of what their instinct tells them to do. This can be emotionally difficult to pull off. The market reflects the crowd and your instincts will usually lead you to do the same thing the crowd is doing. But herd mentality won’t get you any further than the rest of the herd. So you want to buy when no one else wants to buy. Famous investor Warren Buffett has a similar saying: “Be fearful when others are greedy and greedy when others are fearful.” The best way to approach this last advice for me is to apply original research and critical thinking to your investment strategies if you want to outperform the market. But then again, a lot of people are perfectly happy earning market returns and I think indexing is an acceptable way to invest as well.

Ray Dalio created a 30 min YouTube video about his famous work, Principles for Success. He believes that dreams, reality, and determination can all help to create a successful life. And that pain plus proper reflection will give us the tools to progress. It’s an interesting watch if you’re into mental models and self development.

Motivational speaker Tony Robbins interviewed self-made billionaire Ray Dalio for his book, Money; Master the Game. Ray heads the largest hedge fund in the world, Bridgewater Associates, which has over $150 billion in assets under management.

The All Weather Portfolio.
According to Ray, “there is one thing we can see with absolute certainty: every investment has an ideal environment in which it flourishes. In other words, there’s a season for everything.” The four seasons he refers to are the following.

Inflation.
Deflation.
Rising economic growth.
Declining economic growth.

He suggests that these 4 economic environments will ultimately affect whether an asset’s price will increase or decrease. So for example, bonds should outperform in a deflationary period. Ray elaborates by saying we should have 25% of our risk spread out evenly across all 4 economic seasons. This is why he calls this investment approach “All Weather.” There are 4 seasons in the financial world and nobody knows for sure which one is coming next. So the idea is to keep a balanced portfolio that will not only make us money, but also help protect us against any surprises in the markets. Here are some assets we can allocate to each of the four categories, and keep in mind it’s possible for two of these conditions to overlap.

This is an interesting strategy. I’ve always had a bullish bias towards investing. In other words, my investment decisions are based on the idea that financial markets tend to increase with economic growth over the very long run, so I don’t try to short anything. But Ray’s approach suggests that it’s possible to make money even in environments of economic decline and deflation that doesn’t involve timing the markets.

Asset Allocation.
Using the philosophy behind his All Weather portfolio, Ray has developed the following asset allocation for the average investor which should work with his strategy.

30% stocks via low fee index funds such as the ones that track the S&P 500 index.
15% intermediate-term government bonds.
40% long-term government bonds.
7.5% gold.
7.5% commodities.
And the results speak for themselves. 🙂 This all weather portfolio has performed quite well from 1984 to 2013. During that period, the portfolio earned a positive return 26 out of 30 years. The average annual return was 9.7%. According to Tony Robbins, this portfolio never lost more than 3.95% in any given year over the past 75 years. Gold and commodities are known for being highly volatile in price, but it appears having a 15% allocation in this case might actually reduce portfolio volatility.

Over the last 20 years, Bridgwater had annualized returns of 14.7%. To put that into perspective, the S&P 500 index returned about 8.7%. During the financial crisis Bridgewater even managed to earn a positive, albeit modest return in 2008 when the general stock market was down. So when Ray Dalio speaks about investing, I’m inclined to listen. 😀 It doesn’t matter how poor people are, anyone can at least afford to pay attention.😄

The only thing I’d change about the all weather portfolio is to buy investment grade corporate bonds instead of government bonds because the yields on T-Bills and other government debt are abysmal right now. For me, the key point is to maintain a balanced asset allocation, and rebalance it once a year.

August 11, 2020