RICH MONEY MILLION

How To Know When to Buy and Sell Stocks

2008-02-20T12:18:00.014-05:00

While browsing through my blog roll this morning, I noticed that someone had written (about themselves) that when picking investments, “I buy and sell at the wrong times."

It got me thinking about timing. When is the wrong time? When is the right time? How can we tell the difference? How can you truly know when to buy and when to sell?

In the world of investing, it seems it's not so much a matter of ‘how much’ as ‘when’; timing can be everything. When you get in, how long you stay in, and when you get out are emphasized. Like alchemists, traders feverishly scream 'buy, sell, hold!' in an attmept to turn lead into gold. But it’s not so easy to figure out when things are going to go down and when they’re going to go up.

Unless you practice insider trading, where you have privileged information about a company or a sector and use that information to your advantage when trading (which is illegal), the fact is that no one can accurately tell you when it's the right time to buy, sell, or hold. It’s all a guessing game, and comes down to trying to predict the future.

If you talk to a hundred investors, you may get a hundred different techniques of predicting the market and profits. Some rely on sophisticated computer programs and mathematical formulas to develop charts and analyze historic data. Some literally look to the heavens, believing that weather patterns play a role; they theorize that stormy weather puts a damper on investors’ moods as much as it does the corn commodities in Nebraska. Some study politics, checking in to see how the latest revolution or war on the other side of the planet may be influencing shipping routes and oil prices. There are even those who peer into crystal balls, analyze dreams, and seek spirit guides for advice. And, you all know my favorite: getting blindfolded monkeys to throw darts at newspaper stock pages.

The monkey with darts theory was inspired by Burton Malkiel’s book A Random Walk Down Wall Street. In 1988 the Wall Street Journal, inspired by the Princeton professor's theory, created a contest to see if monkeys throwing darts would actually work at selecting a profitable portfolio. They used WSJ staffers rather than monkeys due to liability insurance reasons; personally, I think not using the monkeys was disadvantageous. It was quite interesting, the findings were controversial and much discussed.

While some of these methods may be more scientific than others, there is still the element of uncertainty. The fact is that there are an infinite number of influences on the market, risk of loss can never be eliminated, and the unexpected should always be expected. Ultimately, no one can predict the future and, at best, we're all just making guesses. We can't clearly know when to buy and when to sell. Each person has to develop their own strategy with which they feel comfortable. Otherwise you will be constantly and anxiously looking at the market ticker, and never get a good night's sleep for the rest of your life.

The best method I've heard of so far comes from Warren Buffet who is a firm believer in the 'buy and hold' strategy. He is famous for ignoring the day-to-day rumblings on Wall Street and focuses less on 'when' to invest and more on 'what' to invest in. He has a very precise method for picking the types of companies that he puts his money into, and believes that if you pick good companies, you can get in and stay in for a long time without having to preoccupy yourself with timing.

I like this method and use it; however, I'm still known to fling darts at the newspaper stock pages on occasion.

Foreign-Invested Mutual Funds

2008-02-18T10:45:00.011-05:00

CNN Money recently posted a listing of their opinion of the 70 best mutual funds that you can buy. I was very interested because I have an affinity for mutual funds as opposed to individual stocks and bonds, as an investment.

I think that mutual funds (a collection or ‘grab-bag’ of stocks picked by an investment professional, from companies that often are from the same sector or geographic area) are the best investment for my money because it allows me the opportunity to diversify without having to study hundreds of stock options and it allows me to invest in an area or industrial sector I feel confident about.

In the past I’ve shared how I’ve invested in mutual funds that are connected to the Asian and European markets. If you know me, you know that I’m partial to foreign funds. I think that many domestic investors avoid foreign investments because they believe that they can carry more risk that American investments, due to foreign government instability, world economic issues, and other reasons. I think that many Americans feel more confident and patriotic buying into good old GM, IBM, and Sears, than they do about companies from Asia or Latin America. However, being from a foreign country originally, I appreciate that fact that many foreign countries have stable governments, educated populations, valuable resources, and growing industries. Personally, I think that for maximum investment growth potential it’s better to invest in a foreign country. I was curious to see what CNN Money had to say about my choices and to see what other recommendations that had to make.

What was pleasing to me was to see that they listed my old friend American Funds EuroPacific Growth A (AEPGX); it’s got over 21% returns on a 5-year investment, and over 16% on a 2-year investment. Other items that caught my eye were American Funds New World A (NEWFX), T. Rowe Price Emerging Markets Stock (PRMSX), T. Rowe Price International Discovery (PRIDX), Vanguard Emerging Markets Stock Index (VEIEX), and Vanguard Emerging Markets ETF (VWO).

I recommend doing a Google search on these funds (see search bar convieniently placed below) and taking a look at their past performance and the areas and industries they’ve invested into, and compare them to domestic funds. You'll find that they meet or beat the competition every time. For me, as a younger investor with a lot of years to go before retirement, I can be a little more aggressive and speculative in my investment strategy. My philoposphy is that I should aim for high gains now while time is on my side, and then in ten years or so, start to pull back into a safer position. Although there will be losses, as is natural and expected, I guarantee (to me, not to you) that I'll be way ahead of the other guy. I have over 10K in AEPGX and REREX together and have experienced 20%+ returns so far, and some of these others seem promising as well.

Images: Mumbai (India), Kuala Lumpur (Malaysia), Shanghai (China)

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How To Save Money On Your Property Taxes

2008-02-15T16:32:00.005-05:00

For many homeowners, property taxes are a great burden. They have risen at more than twice the rate of inflation this decade. This surge was understandable during the bubble when the market was hot and house prices were rising, as property tax is linked to home values. But now, when things have cooled off and property prices are actually dropping, some owners are still dealing with rising property taxes. If the value of your home isn’t going up but your property taxes are, you should file an appeal.

Fewer than 1 in 50 homeowners try to appeal assessments, even though up to 60% of properties are overvalued by assessors, according to figures cited by the National Taxpayers Union. Remember that the assessors work for the county; it’s in their best interest to assess your home for as high a price as possible as they receive the taxes you pay on it.

You actually stand a pretty good chance of success in getting your taxes lowered. Here’s a process that could potentially save you hundreds or thousands of dollars each year:

Understand Your Local System

Different tax authorities use different methods to calculate home values. Some looks at recent sales of similar homes, others estimate cost to rebuild, and others may do something entire differently. Call your assessors office and talk with then to clarify exactly what method they use.

Look At Your Assessor’s Evidence

Speak with your local assessor about your particular property and ask for the evidence or documentation used to value your home. Make sure that details about the characteristics of your property are accurate. The assessor’s file should have a worksheet that the appraiser filled out with the addresses of homes that he or she used to compare with yours. Make sure that the others house are in fact similar (built around the same time, similar square footage, number of rooms, add-ons). This may seem a bit pushy, but it’s your home, time, and money we’re talking about.

Get Your Own Evidence

You may have around 60 days or less from the time your annual tax assessment was mailed (typically during summer) to file an appeal. Prior to this you need to do your own research and arm yourself with recent comparable sales or assessments of similar homes that were sold or appraised for at least 10% below your own. Get at least five to ten examples. Actually drive out to the properties, take photos of the exteriors, note any similarities or difference, and put together a listing of your findings.

Present Your Case

Meet with the assessor and go over the evidence you’ve found. He or she may agree with your findings, which makes the rest of the process easier. If he or she does not agree, find our why. Make careful note of these reasons as this is what your need to counter during the formal appeal.

File A Formal Appeal

Get the paperwork and file a formal appeal with your local county board. Be prepared for a wait/response time of weeks, perhaps months. In the meanwhile, attend another hearing to get accustomed to the process. Prepare presentation materials (photos, visuals) and rehearse what you want to say. Keep it brief and allow time for questions.

With reason and a bit of luck, you may have a decision in your favor and a few extra dollars in your pocket.

An Audit You Want

2008-02-14T12:19:00.008-05:00

They say that there's global warming. Lately, I haven't been feeling it. It doesn't snow where I live, but it's been getting pretty cold. That means that my heating bill has been getting heftier and I'm not liking it.

To save a little we've installed double-paned windows, wrapped our water heater in a fiberglass sleeve, keep the thermostat at a reasonable setting, sleep under heavy blankets, and close vents to rooms that we're not in often.

Yesterday, we decided to get an energy audit done of our house to see if there was anything that needed to be done with the actual building to help save money on heating now, and cooling in the summer later this year. We'd been putting it off for a while, because of busy schedules, but last week we finally decided to schedule it and yesterday the guy came out.

Where I live the local utility company is managed by the city and offers energy audits for free. The guy spent about an hour at the house and found that most things were in order, except that we didn't have nearly enough insulation in the attic crawl space and our cooling/heater units badly needed to be cleaned. Because the city manages the energy company, they offer incentives for homeowners to make their homes more energy efficient. We were able to get a $250 credit toward getting our cooling/heater units cleaned professionally. We were also able to get a credit toward the cost of having insulation installed.

The cooling/heating company guys came out this morning and spent about two hours cleaning and tuning up the units. The bill came up to $242, so there was no cost to us. Just at they were leaving, the insulation guys came and spent about another two hours putting in insulation. It ended up costing $900 for the insulation and labor. But, becasue the city gave us a credit for 100% of the first $500 spent and 80% of the rest of the cost, we ended up paying only $70 out-of-pocket for almost $1200 in goods and services!

Because of this experience, I definitely recommend calling up your utility company today and find out about getting an energy audit. They will probably also be able to tell you about credit programs that your local state, county, or city government offers for homeowners. It's worth it, for a few hours of your time, to save hundreds (and eventually, thousands) of dollars.

What's Your Salary?

2008-02-13T15:02:00.008-05:00

toothpastefordinner.com

It's supposed to be rude to ask someone how much money they make. And most people don't typically share this information. I've heard that people are more comfortable talking about their sex life, past drug use, criminal history, and medical issues than about how much money they make.

I think that it has something to do with self-esteem and competition, and the idea that your salary can be perceived by others (and maybe yourself) as a representation of what you're worth. Obviously people don't want to feel less important than anyone else. Or maybe people refuse to acknowlege what they earn to avoid judgement of others who may think that they live beyond their means (especially if the actually do).

In direct opposition to this tradition of secrecy, I'd like to share the following information:

According to Forbes, in terms of actual job salaries, anesthesiologists made the most with an average of $184,340 per year while fast-food workers make the least with an average of $15,230.

According to the U.S. Census Bureau (August 2007), the average household (not individual, per capita) income in the United States was $48,201.

According to the Bureau of Labor Statistics National Compensation Survey, white-collar earnings averaged $21.85 per hour, blue-collar earnings averaged $15.03 per hour, and service occupations averaged $10.40 per hour.

Racially, Blacks households had the lowest median income ($31,969) while Asian households had the highest ($64,238).

Gender-wise, on median men ($42,261) earn more than women ($32,515).

In terms of immigrant status, households maintained by foreign-born non-citizen individuals had the lowest median income ($39,497) while those maintained by foreign-born US-citizen individuals had the highest ($51,440). Households maintained by native-born US-citizens fell in between ($49,074).

Geographically, median household income inside of metropolitan areas was $50,616 while those outside was $38,293. Also, households in the Northeast ($52,057) and the West ($52,249) had the highest incomes while those in the South had the lowest ($43,884).

Is College Worth it?

2008-02-11T16:08:00.001-05:00

What do Richard Branson, David Geffen, Michael Dell, Bill Gates, and Steve Jobs have in common? Apart from the fact that they’re all billionaires, none of them graduated from college.

Granted it takes talent and genius to reach the heights that these men have reached, I have to question, financially, is it worth it to pursue higher education?

According to the US Census Bureau, on average high school grads earn about $28,000 while college grads earn about $51,000 and those with advanced degrees earn about $78,000 per year. Anyone hearing these figures could be convinced that unless you go to college you’ll end up poor and broke.

I was born outside of the US and migrated here when I was 17, just in time to go to college. My parents and other relatives spent a great deal of energy preaching to me about the importance of getting a good education and going to college if I wanted to be successful, financially and otherwise. In many other countries I think that it is very much the case that to have any form of success you have to get an education first.

But here in the United States – the land of opportunity – anyone can be anything, do anything, and have anything. There are successful millionaires with no degrees, and there are Harvard educated businessmen that have run good companies into the ground. It takes a while to realize that education does not necessarily mean success; I had already spent six years in college and grad school and earned a master’s degree before I began to question what it was worth.

According to the American Council on Education, student loan debt held by the average private-institution bachelors-level graduate was $17,000. For masters-level and doctoral level these figures are $29,000 and $71,000 respectively. For all levels, about 70-80% of students were in debt for academic-related loans. In the last decade the average debt for a college graduate has gone up 50% after inflation, according to the Project on Student Debt, a non-profit advocacy group.

In my last job I worked in an office 8am to 5pm, being a good blue-collar, widget-making, cog-in-the-machine worker. I was making about $45,000 a year, before taxes, with a master’s degree and about $50,000 in student debt. I did this for years before I woke up and realized that my life held much, much more potential than this.

I have a friend who is still in school racking up six-figures worth of student loans while he’s studying to be a doctor; I imagine that he may be able to earn $150,000-200,000 a year once he’s done. But, he lives in a very expensive city, has a taste for brand name things, and may, I suspect, struggle to spend less than he earns.

On the other hand, I also have another friend who didn’t go to college, got a job in the oil industry on an oilrig, works about six months out of the year, and makes about $150,000. He has no student loans, and was earning more money in his second year out high school that I was after grad school. He also owns his home, and recently bought several rental properties.

Student loans are burden that many people carry with them for decades, and it’s almost impossible to think about college without getting loans. According to the Center for Economic Policy and Research, college tuition has risen at twice the rate of consumer prices in the last twenty-five years. In the 1980s a student could work full time all summer at minimum wage job and earn about two-thirds of annual college costs; today, a student earning minimum wage would have to work full time for a year to afford one year of education at a four-year public university, assuming he saves every penny.

If I had to do it over again I’d get my undergraduate degree, but not my graduate degree; the benefits gained for the extra time and money spent are not equitable. I’m saving in a 529 plan for my two infant sons’ college education so that they don’t have to get into debt to get an education. But I’m also going to make sure to tell them that they can be just as financially successful on their own. While there’s a lot to be said for academic pursuits, there’s also no honor in getting into debt and working twice as much as others for the same dollar.

Also see, external link: long list of other very successful people who didn't start, or never finished college.

Invest In Foreclosures

2008-02-06T15:00:00.000-05:00

If buying a home is the American dream, then foreclosure is the American nightmare. In prior years, hordes of lenders approved prospective homeowners for loans that were unethical for their erratic interest rates and astronomical long-term cost to the borrower. People ended up in houses that were too big, too expensive, and too much to manage. As a result, thousands of homeowners across the nation are now in foreclosure on their properties. This result has triggered a downturn in the real estate market, decreased revenue for local and state governments, panic in the stock markets, and recession in the economy. While the situation may seem as if it’s all hit the fan, there is opportunity to be found in the very place that caused it all: the real estate market.

Looking at the situation on an individual, human level, there are now untold numbers of people in foreclosure who are being forced out of homes that they once owned. Most are decent, hardworking people who simply were sold a bad mortgage product. These folks and their families now need a place to live, but are now have damaged credit and are tentative about banks and mortgages anyway. They are going to look for someplace that’s safe and requires less financial demand from them. They are going to look for a place to rent.

For investors who are able this is an opportunity to benefit from a in-demand rental market and a weakened mortgage and real estate market. Sales are down, and in neighborhoods all over the nation residential properties have sat for months and months with no interested buyers. Now, agents and auctioneers will lay out a red carpet and individual and corporate sellers will offer all sorts of incentives to entice you. In some areas, prices are still falling, but in other areas they’ve already reached as low as they’ll go or are slowly rising again. It’s now a great time to buy real estate that can be used as or converted to rental property.

Duplex, triplex, apartment, and efficiency properties will be relatively easy to obtain, and easy to rent in this economy. People may not be able to afford mortgages, property taxes, insurance, home owner association fees, and maintenance expenses, but they may be able to afford a deposit and their monthly rent. For the investor, renting properties is a great way to have other people pay the mortgage for you while you build equity in a tangible brick-and-mortar asset that will never be worth nothing as, theoretically, any stock market investment might.

Invest In China Instead

2008-02-01T14:50:00.000-05:00

According to Jim Rogers, famed investor and co-founder (with George Soros) of the Quantum Fund, economic hardship in the United States is only just beginning. He predicts that in the US “we are probably going to have one of the worst recessions we’ve had since the Second World War”. In other parts of the world, specifically China, he sees opportunity and growth.

In December he published his latest book entitled ‘A Bull in China: How to Invest Profitably in the World’s Greatest Market’. That month he also sold his Manhattan townhouse (bought 30 years ago for $100,000 and sold in today’s market for $15.75 million!) and moved his family to Singapore.

He acknowledges that the Chinese market was overheating and may have been in danger of becoming a bubble, but praises the government there for its efforts to cool things down with the real estate and stock markets. He still thinks that there’s some cool down needed, but points out that he’s “starting to prepare his list of things to buy in China”. He also mentions that he’s “not thinking about buying in America”.

So, what Chinese investments is he interested in? Companies and sectors that are involved in tourism, agriculture, power generation, communication, and transportation, providing goods and services that are used nationally and regionally in China and Southeast Asia, as opposed to those that export to the US.

Manufacturers in China who sell goods to America retails giants like Sears and Wal-Mart will feel the US recession half a world away, but he says that “most parts of the Chinese economy are going to be untouched. They won’t even know America’s in recession. They won’t care if America falls off the face of the earth”.

According to Rogers, in the US “things are going to go way, way, way down. The investment banks are down now because of problems in the credit market. Wait until the effects of the bear market come along. If you just go back and look at other bear markets, investment bank stocks have gone down enormously. We haven’t gotten to that stage yet. This is going to get much worse”.

The Largest Fraud in Banking History

2008-01-25T14:41:00.000-05:00

Speculative trading done by Nick Leeson, a British trader working in Southeast Asia, caused a loss of $1.4 billion and the 1995 collapse of Barings Bank, the UK’s oldest investment bank. This event, however, does not come close to events earlier this week.

Jerome Kerviel, a trader working at Societe General, one of the oldest banks in France, manipulated the market by making large fraudulent trades and hiding his positions. These positions were discovered on January 19 by his managers; total losses for the bank are estimated at $7.1 billion. In the few days following, there was a large drop in equity indices (on January 21 and 22), and suggestions that the loss may be partially related to the Federal Reserve Bank’s decision (January 22) to slash interest rates by 0.75% - although the Feds deny this.

What’s also interesting is that Societe General says that it will still make a profit of about $1 billion despite the loss.

Image: Jerome Kerviel mugshot (Smile!)

Finding Balance

2008-01-18T16:49:00.000-05:00

I recently came across the story of Paul Navone, a 78-year-old second-generation Italian-American retiree who, on a salary of $11 an hour, accumulated a multi-million dollar fortune. Paul worked in the New Jersey mills, and made his fortune through buying rental properties and investing his money in the stock market. He also lived a very frugal life, shopping at thrift stores and not having a television or telephone. In interviews, he indicated that the last thing he remembers seeing on television was the NASA moon landing in 1969. Paul never married and had no children. He traveled out of New Jersey only three times in his life (one time for vacation, and one time for a work-related convention, and one time when he was drafted to the Army). He was described as somewhat reclusive; in fact, the only reason he became known is because he recently donated several million dollars to various schools.

Many, many people have found Paul to have an inspiring millionaire-next-door rags-to-riches story. But there have also been many others who, like me, find this to actually be a sad story.

Helen Keller, the deaf-blind American author and activist on whose life the play The Miracle Worker is based, was quoted as saying “Life is either a daring adventure or nothing.” In my opinion, life is about balance and about quality of existence. While it’s very important to save and invest, to avoid waste and seek opportunity, and to think about tomorrow, earning millions means nothing if it’s not used to improve and enrich the quality of your life. If you live like you have nothing, you might as well have nothing; what’s the difference? For all the importance we place on wealth and money here, in the end it’s only a tool, a piece of paper, a currency that we can exchange for goods and services. It’s really only as good as what we use it for. Living a disconnected life, from people and the world around you, is not healthy. Having a telephone and television will not determine whether you become rich or poor; neither will taking vacations, or getting married, or having kids (which, I’ve found, make life much more beautiful and meaningful). When your entire focus is on investing and frugality, you lose focus of all the other important things in life, like family, friends, experiences, spiritual fulfillment, and happiness. Living a hard and lonely life with monk-like austerity, and waiting until you are almost eighty years old before touching your money is, in my opinion, not inspirational or something to strive toward at all.

Happy New Year!...to all my readers who've noticed (like Joe in Tallahassee) that I haven't posted in almost a month. I wish you happiness, peace, and prosperity in 2008!

Interesting Facts About US Currency

2007-12-19T23:41:00.000-05:00

The Bank of the United States was the first central bank chartered by the U. S. Congress. The bank issued the first currency bearing the words "United States". This $50 note was issued in 1801. The bank closed in 1811 when Congress failed to renew its charter.

In 1816 the U. S. Congress chartered the second Bank of the United States which issued this one thousand dollar note.

This ten thousand dollar note from 1928 issued by the Federal Reserve Bank is the highest U. S. denomination ever issued for public circulation. It bears the portrait of Salman P. Chase who served as Secretary of the treasury and Chief Justice of the United States.

This one hundred thousand dollar bill is the highest U.S. denomination; there are no one million dollar bills, contrary to urban legend. The bill bears the portrait of President Woodrow Wilson. There were 42 thousand of these bills printed, and all were used for transactions between the Federal Reserve Bank and the Treasury Department; they were never issued for public circulation. The government stopped using them in 1960 and most were destroyed. Only three are known to exist, and it's illegal for a private person to own one of these notes.

Present-day money is printed by the Bureau of Engraving and Printing (part of the Department of the Treasury) in Washington D.C. and in Fort Worth, Texas. Coin currency is produced elsewhere, by the U.S. Mint. The Bureau of Engraving and Printing's website has a rather interesting URL name: http://www.moneyfactory.gov/. Each day they print 38 million notes, with a face value of approximately $750 million. The notes are printed on paper made by the Crane Paper Company of Dalton, Massachusetts, and made of 25% linen and 75% cotton. Approximately 18 tons of ink are used daily to print the notes.

Counterfeiting, mutilation, defacement, and other currency-related crimes are investigated by the U.S. Secret Service.

The Power of Compounding Interest

2007-12-15T15:50:00.001-05:00

What has been called the most powerful force in the universe, the eighth wonder of the world, and one of the greatest discoveries of our time? No, it's not Rich Money Million - but good guess! It's actually the concept of compounding interest, which can turn a little bit of money, invested well over time, into a fortune.

The easiest way to understand how it works is to imagine a snowball. If you stand at the top of a hill and roll a marble-sized snowball down the slope, as it travels on its journey to the bottom it picks up more and more snow, slowing increasing it's overall volume, and eventually gets so big that it sends punk snowboarders fleeing in fear.

When you save or invest and your money is compounded annually, in the first year you earn interest on the original principal. In the second year you earn interest on the original principal as well as the interest from the first year. In the third year you earn interest on the original principal, as well as the interest from the first two years. And so on. Even at a modest interest rate, given enough time, an unremarkable sum of money can grow to a staggering size.

For example, if you saved $10 a day (about the cost of a fast food meal) and used the money to purchase shares once a year in an investment that offered a modest rate of return (the market average has been about 12% for the last hundred years or so, even counting the crashes of 1929 and 1987), and allowed all your profit to be re-invested (adding your interest to your prinical), after 30 years you would have invested a total of $54,750 and would have a balance of over $1.9 million! If you were smart enough to purchase shares in an investment that offered higher rates of return, you would do even better. With the same figures, but at 15% return you'd end up with over $4.4 million!

Try out this great Compound Interest Calculator, from the National Council on Economic Education. It allows you to experiment with different variables for amount invested, time invested, and rate of return.

To take full advantage of compounding interest, there are three rules to remember:

Start early

With compounding interest, your best friend is time. Start rolling your snowball at the top of the hill and you'll have a much bigger mass at the bottom than someone who started halfway down. Even if you invest for a few years in the beginning then stopped, allowing interest to earn only on what has been invested thus far, you can still walk away a big winner. This point is illustrated in a (paraphrased) example from a book called The Random Walk Guide to Investing by Burton Malkiel.

William and James are twin brothers who are 65 years old. 45 years ago (at the end of the year when he reached 20), William started an IRA and put $2K in the account at the end of each year. After 20 years of contributions, William stopped making new deposits but left the accumulated contributions in the IRA fund. The fund produced returns of 10% per year tax-free. James started his own IRA when he reached the age of 40 (just after William quit) and contributed $2K per year for 25 years, making his last contribution when he turned 65. James invested 25% more money in total than William. James also earned 10% on his investments tax-free. What are the values of William’s and James’s IRA funds today? The answer is that William has $1,365,227 while James has $218,364. James invested 25% more than William, but through the magic of compounded returns, William’s IRA fund is worth more than six times as much!

A little goes a long way

In another article I wrote about how saving pennies can add up to hundreds of dollars. Remember that a bucket of water is filled drop by drop, and you don't necessarily need to have thousands of dollars to start investing. If you started when you were twenty years old and saved $50 a month (less than $2 per day) to purchase shares in an investment earning 10% per year, at age sixty-five your investment of $27,000 would have grown to $528,000!

A little change (pun intended) can make a difference elsewhere in compounding, as well. For instance, if that same investment earned 9% annually instead of 10%, you would end up with $373,000 in the same period of time - a difference of $155,000. The lesson is that it's much better to start investing when you're young, and to do so aggressively in the beginning. If you are relatively young and have several decades before retirement, you should invest as much as possible in stocks or mutual funds (I prefer the latter) and avoid bonds and other conservative investments.

Get it and forget it

There are some investors who have to check the stock ticker every hour and reallocate their investments every week based on what's happening in economics, politics, and even the weather. This is time-consuming, stressful, and is generally not a good practice. It's much more reasonable to pick your investments wisely, and then stick with them for some time. Being steady and patient is one of the cornerstones of Warren Buffet's own investment philosophy.

It can be excruciating at first, as you monitor the growth of your investment, as it will grow very, very slowly in the beginning. There's no exciting, dramatic, double-your-money-in-six-months scenario. But you have to remember that for compounding to work its awesome power, time is the magic ingredient. As your money earns more, it grows and earns even more and more.

Most People Don't Save For Retirement

2007-12-14T11:41:00.001-05:00

A recent Government Accountability Office report estimated that only about 36% of all workers participate in a 401(k) or other retirement plan, and for those with plans the average account balance was less than $23,000. More startling are estimates suggesting that 37% of today’s teen and young adult workers will reach retirement age with absolutely no money saved for retirement.

I did a little more research and found that some experts suggest that many young people know that saving and investing is important, but don’t have any retirement accounts because of a lack of confidence in their knowledge and ability to make good financial decisions and a lack of action. I spoke to several of my friends and co-workers – most of who are in their late 20’s to mid-30’s, and many tell me that they have not saved for retirement either for similar reasons. They say that they know it’s important, but that it’s all too confusing, too overwhelming, and that they’ll figure it out later.

I, myself, did not start saving for retirement until I was in my mid-20s. I guess that places me ahead of the pack, but I completely understand how intimidating it can be to get started. I originally didn’t want to start saving. I thought I could wait until I was in my 40’s or so. I think the thing that spurred me into opening that account was reading an article in a magazine about the power of compounding. The thought of turning a little money into a lot excited me. When I opened my first investment account, I didn’t have a clue what I was doing. I didn’t know what a mutual fund was, I didn’t know who Warren Buffet was, and I didn’t know the difference between a regular IRA and a Roth IRA. Although there was a 1-800 number to call to speak with a financial advisor, the thought of speaking to some stuffy-shirt numbers-and-charts nerd did not sound appealing. For me back then, choosing funds was an eenie-meenie-minie-moe process and all I cared about was which investment would make me the most money. I read a few issues of Kiplinger, and I took a look at historic rates of return and picked the investments which had the highest returns. I figured that I could take the risk of being aggressive and possibly losing it all as I was still young and had time to make it all back up if needed. The company I worked for then did not have a matching contribution and I only managed to invest about $2000, which did well and has more than doubled in less than three years. Now I save more, have diversified my investments, and have incredible – but realistic – plans to have several million dollars saved when I retire.

Going back to today’s young adults who are not saving, on one hand I can appreciate their predicament of not knowing where to start. Knowledge of money matters is not something that many parents share with their children. It’s been said that people are more willing to discuss their sexual habits that they are their income. Additionally, even though there is the vast information resource of the internet available now, and there are many great ‘plain-language’ sites on financial matters (like this one!), there are also many million more stuffy-shirt numbers-and charts sites that can be confusing and leave the reader feeling dumber about money matters. On the other hand, I think about the story of the grasshopper and the ants. I know that Social Security is most likely going to be worthless by the time I’m ready to retire (around 2035), and that if you don’t make the effort to save now, you’ll be out in the cold when winter comes. With the welfare systems in place, these folks will possibly have a little help, but at the cost of taxpayers and those of us who are choosing to be hard-working and responsible. So many young adults prefer to spend their income on frivolities. It’s always amazing to me how co-workers and friends with full-time professional jobs, but with no kids and no mortgage, also never have any money.

To them and you I say, stop spending so much and start saving and investing. If you think you don’t know a whole lot about the process, remember that none of us do, and if we waited until we did, we’d never start. I, myself, learn something new about the market, investment, and economics almost every time I sit down to blog here. If you have a few bucks to spare - and we all should - open a Zecco trading account or enroll in your company’s retirement plan. Invest in one or two mutual funds that you feel comfortable with, and then take it from there. Before long you’ll become a Rich Money Millionaire too, - you’ll see.