In the first half of this week’s podcast, Doug meets Jim Rogers, the author of Street Smarts Adventures on the Road and in the Markets. Jim is also an author, investment expert, and financial commentator who has appeared in various publications, including Time, The Washington Post, The New York Times, Forbes, Fortune, and more. Jim tells Doug about investing in commodities and why it is advantageous to invest in what you know. Find out more by listening to this interesting podcast.
Posts Tagged ‘stocks’
This week, meet Michael K. Salemi, professor emeritus at the University of North Carolina-Chapel Hill. His many writings include Money, Banking, and Financial Markets: What Everyone Should Know. What do you need to know about your finances and the world of banking? Find out by listening to this weeks show.
Putting your money into individual stocks may be the fastest way to get rich – but it’s also the fastest way to lose the shirt off your back if you guess wrong. Buying a single stock exposes you to high levels of risk, even if the stock is strong. And even if you’re an expert on the company and its industry, there’s no certainty that the market won’t take an unexpected turn at any time and your stock won’t perform as well as you’d hoped. For this reason, it’s important to diversify your portfolio. If you have a diversified portfolio, any possible losses will hopefully be offset by a gain in a different stock.
Another disadvantage of buying individual stocks is that trading them can be very expensive. If you’re a high-volume trader, the multiple transaction costs involved in beating the market and selling your less profitable stocks take their toll.
Additionally, if you are thinking of purchasing individual stocks, ask yourself whether you have sufficient knowledge to choose these investments yourself. Do you have time every day to follow the market and stay in tune with the latest economic forecasts? The economic world is in constant flux and you need to be ready to adjust your portfolio to keep up. Do you really have the time and energy to devote to this, when you are also busy with your work and family?
So what’s the most effective way to invest?
For many people, the answer is mutual funds.
A mutual fund is a collection of securities, most often stocks and/or bonds. Every person who invests in a mutual fund is essentially a shareholder of this basket or collection of investments. The losses and gains of the fund reflect the movements of the individual assets inside the fund. A mutual fund solves the problem of diversification and the fund managers are the ones who have the responsibility of researching and making investment decisions. Though they may not get it right all the time, at least they have the time to investigate their ideas.
It’s important to note that with mutual funds, there’s no such thing as “one size fits all.” Different types and styles of mutual funds are appropriate for different kinds of investors. Indeed, a mutual fund’s value may be the time when the whole is really greater than the sum of its parts.
Call your financial advisor today to find out which fund may be best suited to meet your goals.
Do you know what motivates your investment decisions? Is there a general rationale behind people’s financial behavior? On this weeks Goldstein on Geltshow, Doug welcomes back Meir Statman, the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University and Visiting Professor at Tilburg University in the Netherlands. He is also the author of What Investors Really Want. Professor Statman talks about what drives investor behavior and lies behind financial decision-making.
Did you know that the most important part of a financial planning meeting occurs even before you set foot inside your financial adviser’s office?
Before you meet for the first time, you need to do your homework. Even the most professional adviser can’t help you if you haven’t done these three things:
1. Make a list of your current income and expenses, as well as future anticipated income and expenses. Then, create a careful inventory of your net assets. Include any property you own, including stocks, bonds, mutual funds, savings and pension plans. To make this easier, use these trackers to organize your information.
2. Outline your goals. Take a realistic look at what you want to accomplish beyond paying your monthly bills. Do you have large college tuition expenses or wedding bills looming in the future?
When do you wish to retire? All of the various factors that may affect your future goals and desires should be written down before you meet with your financial planner so they can be included in the plan.
3. Buy a box of tissues either for the disappointing news that your aspirations are beyond your means or for the tears of joy when you find that your dreams are within your reach. While meeting with a financial planner can help create order an increased chances of reaching your goals, it shouldn’t bring any surprises.
The more complete your list of net assets, the more thoughtful your goals, and the more realistic your expectations are, the greater the chances of your reaching them… and the better you’ll sleep.
If you’re like me, even the most comfortable eye shades won’t help you fall asleep unless your finances are in order. A financial planner can’t make miracles or predict the future. However, if the clients supply accurate information and realistic goals, together they can create a financial plan to maximize chances of reaching your life goals.
Schools waste kids’ time by teaching them the wrong math.
Since half of Americans die with less than $10,000 in savings, it appears that maybe they’re not too good at handling money. The educational system seems to be failing in teaching practical financial skills to students. Kids aren’t learning math and money skills that they can apply to everyday life.
Schools seem to favor theoretical math over basic “practical math.” If useful math and money skills were taught in middle school and high school, students would enter the real world equipped to earn and manage their own money. Instead, the education system focuses on esoteric topics that help make future mathematicians and scientists. But how many children grow up and use calculus on a regular basis, compared to those who must balance a checkbook?
Which helps you more in life: knowing how to solve a quadratic equation or understanding how actuaries calculate your pension payments?
My high school math classes included in-depth study of calculus, trigonometry, geometry, and such. As a 20-year veteran on Wall Street, I will admit that other than helping my kids with their homework, I haven’t used any of those disciplines in handling my clients’ money.
Those in favor of keeping the current math curriculum argue that learning complex mathematics helps develop the skills of critical thinking. I agree. But there are plenty of demanding math techniques that also have practical applications. Why not teach those first?
For example, teach the kids ratios, standard deviation, statistics and probability, sampling and estimation, correlation analysis and regression, technical and fundamental analysis of businesses. Wouldn’t studying these before studying the more obscure number topics also help develop the skills of “critical thinking?”
Math has practical applications
Imagine if children learned math that helped them when they went to work. Since about 100% of high-school graduates will eventually hold a job compared to the 1% or so who will use calculus in their careers, shouldn’t schools teach practical topics? Wouldn’t it be helpful to learn the math and concepts behind market forces of supply and demand, gross national product, interest rates, business cycles, inflation, cash flows, and, of course, investments?
As a financial adviser, I talk with thousands of people about their money and through my online school, I teach the basics of investing. It’s surprising to me when folks have credit card debt, yet cannot calculate the interest that they will owe on it. Or, I’ll talk to them about a price/earnings ratio, which is the first number that people look at when checking out a stock, but the clients don’t get the concept of how a ratio works and I have to explain it.
Shouldn’t the next generation of children enter the workforce knowing how to read their brokerage statements and understand them?
I am a big believer in math. I studied many complex topics in college, and I think others should, too. But first teach kids practical math in school, and then if they decide to study further, only then start with the abstruse topics.
As a financial planner, I often ask new clients why a particular investment is included in their portfolio. One answer that I find somewhat worrying is: “I don’t really know how to explain it, but I just had a gut feeling that this stock was going to be a winner!”
Often the stock in question is anything but a winner, but that isn’t the point. If you were to fit a new kitchen, would you simply walk into a builder’s showroom and say that you wanted the kitchen cabinets that are in the storefront window because you had a “gut feeling” about them as soon as you saw them, or would you first visit several showrooms, research the types of materials used and other factors that are important to your decision? Of course you wouldn’t order home renovations based on gut feelings, because thousands of dollars are at stake, as well as the fact that you will have to live with the results of your decision for a very long time. Just like investing.
Yet very often, investors base their financial decisions on irrational reasoning.
The way that emotions affect investing has become a science and much research is conducted into various phenomena such as loss aversion, mental accounting, and herding. Emotions influence investors’ decisions in many more ways than you would expect. Sometimes fear drives an investor to sell a stock because a sudden dip in the market makes him afraid he’ll lose everything. And, at the other end of the spectrum, is the person who did well with a certain small investment, and figures that because he did well once, he’s bound to do even better if he does it again. He continues to invest in something that might not be appropriate at increased levels, just because he wants to duplicate his previous “win.”
On my radio show, Goldstein on Gelt, I interviewed several researchers who study behavioral investing, including Professor Terrance Odean of Berkeley University, Nobel Prize Winner Professor Daniel Kahneman, and best-selling author Professor Dan Ariely (click on their names to watch videos of these interviews). Watch the videos and let me know if the research on behavioral finance jives with your investment decisions.
As a financial adviser I notice that certain money mistakes are very commonplace. Are you making these kinds of errors that can destroy a fortune?
Instead of learning from your own mistakes, try learning from other people’s mistakes. Below is a list of some of the most common mistakes in financial planning:
1. Putting off buying life or health insurance. Even if you are still young and you belong to the mindset of “it will never happen to me,” the truth is that you never know. Accidents, terror attacks, and sudden illnesses are all in the hands of the One Above, and although no one should ever go through life in a constant state of fear and worry, it’s important to be prepared for any eventuality. Think of your insurance policy as “risk management.”
2. Passing up tax breaks. When considering whether to buy or sell an investment, don’t only look at the figures. Find out what this means in terms of tax. How will the dividends/interest be taxed? Does the investment have any kind of tax deferral or tax-free status? While tax status shouldn’t be your sole concern in purchasing investments, make sure to keep tax liabilities in mind.
3. Buying or holding stocks for the wrong reasons. Are you holding onto a stock out of sentimental reasons, because you inherited it from a loved one? Are you thinking of buying a stock simply because you enjoy the company’s products? Don’t base your decisions on emotions. Do your homework, and only buy the stocks that make the most financial sense for you. If you are not sure how to work this out, consult with a financial planner.
4. Not taking enough risk. Some people are very cautious by nature, and they would prefer to invest their money with the least risk of loss. Although this might sound prudent because it minimizes the chance of loss, the other side of the equation means that your gains will be limited. Of course, the appropriate level of risk for you depends very much on your personal situation, so speak to your financial adviser about what is appropriate for you.
Keeping these four points in mind should help you avoid some of the most common money mistakes. Don’t make these mistakes, and if you do, visit a qualified Certified Financial Planner (CFP®) for help in fixing them.