Straight Talk on Investing: What You Need to Know
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The advice is elegantly simple, eminently sensible, and delightfully readable. We request your telephone number so we can contact you in the event we have difficulty reaching you via email. We aim to respond to all questions on the same business day. Sharpe, Professor Emeritus Stanford University Graduate School of Business Recipient of the Nobel Prize in Economics, "This gem of an investment guide packs into pages everything an individual needs to know to make informed savings and investment decisions.
A look at the financial facts of life. Chapter Keep Things Simple. Chapter Buy and Hold Really Works. Chapter Time Is Everything. A look at the things that can cause investors to come unglued. Chapter Regrets? Appendix B: Some Industry Jargon.
Many studies have shown that holding investments for the long term works far better than trying to time the market. I firmly believe that a buy-and-hold strategy is the best path to success. Trading is really all about speculating, not investing. Sell it to someone else—or better yet, set it aside. Traders spend lots of time and effort on investments, but get back less than the buy-and-hold investor who simply goes about living life.
Another habit to cultivate is to resist keeping score too often. The danger in looking at your portfolio too often is that the short-term fluctuations will make you think that you have to take action when, in fact, almost always your best course is to sit tight. Be Skeptical of Fads Many businesses have an interest in getting you to make changes in your investment program—brokerages, fund firms seeking to get you to switch, gurus selling newsletters, books, and so on.
Now is the time to get the facts on three common myths about investing.
Fads can lead you into great errors, the kind that can wipe out gains achieved through years of patient investing. Successful investors understand that doing the right things is not the only key to success—you also have to avoid big mistakes. The dot-com bubble is fresh in our minds today, but there are lots of examples.
In the late s and early s, there was a lot of hoopla over the so-called Nifty Fifty—one-decision stocks that you could supposedly buy and safely hold forever. At the time, the 10 largest publicly traded U. They were seen as one-decision stocks because they were world leaders with sustainable business advantages that seemingly would always dominate the market. I remember my parents giving me a single share of Eastman Kodak stock for my sixteenth birthday in July and telling me I would be able to hold it forever.
The Nifty Fifty fad lasted until the — bear market dragged the onedecision stocks down with all the rest. From July through , 7 of the 10 companies underperformed the broad U. As for Kodak, it produced gains averaging 4. Keep Learning about Investing Successful investors need to keep absorbing new information.
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This is just common sense. Devote a little bit of regular attention or a regular bit of a little attention to the markets and to your own investments. Look at the reports that you get on your investments. Pay periodic attention to magazines or local newspapers or national publications that cover business and investing news. What you want to accomplish is threefold: 1. To deepen your understanding of what happens to your investments.
To protect yourself in case of developments that threaten your investments. To keep abreast of new opportunities. New investment opportunities will surface from time to time.
Straight Talk on Investing: What You Need to Know - Jack Brennan - Google Books
You can distinguish the significant ones from the fads by taking a close look at the trade-offs. Should you be willing—as some investors were in the s—to give up the diversification of a broadly based mutual fund in order to seek a higher return by sinking all of your money into one hot-performing stock? Should you be willing to give up the safety of a passbook savings account at the bank for a higher-yielding money market fund that invests in high-quality short-term commercial debt—as many investors have done in the last few decades? Missing valuable new investment opportunities can hurt you—sometimes a little, sometimes a lot.
The rise of money market instruments in the late s is a perfect case in point. Money market funds revolutionized the financial industry because they offered market interest rates on very liquid high-quality securities. Indexing is an investment strategy in which a fund seeks to mimic the behavior of a market index by holding all the securities in the index or a carefully chosen sample of them. That may sound less than exciting until you realize that index funds have a tremendous cost advantage that can mean greater profits for their investors.
Investors who have ignored the opportunity to invest in index funds have done so to their detriment. So there you have it.
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The four priorities of confident investors are: Do your homework, establish good habits, be skeptical about fads, and keep learning. Basic Information Every investor needs to know certain terms. This Basic Information sidebar will be the most basic. For starters, you should understand something about the risks and rewards of three fundamental asset classes— stocks, bonds, and cash investments.
Asset Classes Just to take care of this musty-sounding but essential term: An asset, as you know, is simply something of monetary value. In finance, the asset classes are types of investments that offer different combinations of risks and rewards. If you own a share of General Motors stock, then you are a part-owner of General Motors. If the company does well, you can benefit in two ways: 1 The value of your stock rises, so you could sell it at a profit if you wanted to, and 2 the company may decide to pass along profits to you and the other owners in the form of a dividend.
On the other hand, if the company does poorly, your stock can fall in value and dividends can cease to flow. In the worst case, the company could go bankrupt and leave your stock utterly worthless. What makes a company do well or poorly? There are many variables. A company with prudent management, a sound business strategy, and high-quality products or services that steadily sell is likely to do well.
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These forces include interest rates and other economic factors, new technologies, competition, government regulation and legislation, and customer preferences. Stocks are risky. As traders constantly second-guess each other about market trends and all the rest, stock prices jump around from day to day and month to month. Over long periods, though, stocks as a group have rewarded investors more than any other investment.
Since , stocks have provided average annual returns of A final note: Stocks are often called equities. Bonds A bond is essentially an IOU. When you buy a bond, you are lending your money to the issuer, typically a company or a government agency. The issuer is promising to pay you a stated amount of interest on the loan and to return the money at a certain time the maturity date. Though bondholders are creditors, rather than owners, they care about the soundness of the company or agency that issued the bond because that affects the prospects for payment.
Treasury bonds are considered the safest investment in the world because they are backed by the full faith and credit of the United States government. Most established companies can be counted on to pay the interest on their bonds and repay the principal at maturity, no matter how their stock prices are faring. But bonds do indeed have risks.