Tuesday, August 18, 2009

Dollars and Sense- How I Invest

This is the third post in our series called Dollars and Sense. See part 1 here.

This post isn’t going to be long, because investing the right way is simple. It’s human nature to want to have the very best portfolio and maximize your growth. Countless studies have proven that individuals generally end up minimizing gains and maximizing losses. Not to mention that winning stocks aren’t even picked by 80% of brokers in any given year. Of the remaining 20% of brokers who do beat the market almost all of them don’t repeat the feat in consecutive years. There are very few individuals who have beaten the market on a regular basis (about 3) in the HISTORY of the stock market.

One of those individuals is Warren Buffett. Berkshire Hathaway, currently trading at $99,000 a share, is Buffett’s holding Company. Unlike many investors Buffett engages in very few trades and instead attempts to identify businesses that he believes will profit in the long run. The highlight of owning Berkshire Hathaway is the yearly stockholders meeting which is an open forum for all shareholders to ask questions. This annual meeting is widely covered and many business deals are done at this meeting.

EVERY year people ask Buffett for investment advice. He always says the same thing. The average American should invest in index funds because it gives a diversified portfolio at very cheap operating costs. An index fund or exchange traded fund are typically managed by computers to track a group of stocks (S&P 500, Dow Jones, etc.). As I said above a broker will typically not beat the overall market; additionally when you factor in broker fees (the cost to buy and sell shares) then any profits you would make are eaten up. Brokers make money when you trade, so the more “tips” they give and the more you buy the more money they make.

So what do I personally do? I listen to Buffett and want my money to grow over the long term. I want a highly diversified portfolio to minimize individual stock risk. Therefore I put my money in a no load very low fee mutual fund. Since I have a schwab account right now I am investing in SWPPX. This is Schwab’s version of the low cost S&P 500 index fund. The fees are very low and there are no trade fees. I can buy shares whenever I want for NO COST. This is huge as every dollar I invest goes into the fund.

I invested a large sum when the market was down, but I got lucky. The best way to win over the long term is to invest a set dollar amount on a regular basis take better advantage of the stock market than people who attempt to time the market. Using automatic entries I can set up this through my Schwab account. I use their online banking system (no atm fees anywhere, high interest rate) to collect my paycheck and then allocate funds automatically between credit card, savings, and investing.

Another option is a target retirement fund. What this does is allocate assets based on your target retirement between stocks and bonds. I don’t personally use this because I want all my money right in the stock market, but it’s a great way to take any guesswork out of your future retirement planning. These funds are also computer managed and incredibly low cost.

Any large investment group (Fidelity, Vanguard, etc.) will have similar funds mentioned above. If you want more information let me know. My hope is with this post it spurs you into action. You can literally get started immediately. Call the help line for any of investment group mentioned above and they will literally walk you through the process.

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