It's Never to Early to Start Investing!

It's Never to Early to Start Investing!
by Scott Pearson


Remember the old saying, “never too late to start”? Well, try this on for size: when it comes to investing, it’s never too early to start. Time really is of the essence here. Those of us who find ourselves between the ages of twenty and forty should make investing for retirement a key priority on our list of things to do.

Your average, middle-aged, two-income American family lives paycheck-to-paycheck. And, life expectancies are increasing. So how do you expect to be prepared for a retirement that could potentially span twenty, maybe thirty years? How do you keep your welfare in mind as well as the welfare of your family, especially that of your children, when choosing your investments?

Ladies and Gentlemen, may we present the Roth IRA account.

Sure, it’s easy to think: that’s nice, but the economy is in the pits. I have a hard time dealing with the present as it is. And now you want me to think of investing for retirement or for my kids?

Fair enough. But let’s get out of Personal Budget-Crisis mode for a moment and consider: just $2000 invested in a Roth IRA for a child when s/he is born is worth about 2 to 3 million dollars when that child reaches the age of 65! And you don’t have to add another cent to the principal amount! Astounding, you say, how is that possible? That, my dear Watson, is the beauty of compound interest at work. Roth IRA’s are a perfect investment tool for this situation.

Imagine the results if funds are added over the same number of years. Depending on your income, age, and tax bracket, the Roth IRA now allows an initial investment of $4000, and additional investments of up to $4000 annually. And, profits can be taken absolutely tax-free when you’re 59 ½ years young! The potential for returns blows away the idea of simply holding money in a savings account or a traditional bank Certificate of Deposit (CD).

At the risk of sounding like a bad infomercial, DON’T WAIT…INVEST NOW! But before you tune us out, we understand that you may have concerns like I don’t have time or I don’t know how.

In fact, all is takes is one 15-minute phone call. Talk to someone at a brokerage firm, or to your financial advisor, to set up a Roth IRA account for yourself and your kids. A good financial advisor will explain your options without the need of a “Investments-to-English” dictionary. Take advantage of this basic service. Surely you can spare 15 minutes, especially if it’s to turn $2000 into 2 or 3 million dollars!

Still in college, or recently graduated and fighting off student loans? Believe it or not, it is possible to save a little money and invest for the future. A college professor heard the true story of a janitor who earned about $15,000 a year working at a school for underprivileged children. In the 1970’s that janitor, who had never graduated high school, donated $1 million to the school. Deeply inspired, the professor followed the janitor’s investment example and donated $8 million to a university…on a professor’s salary.

Moral of the story: Don’t determine what you have by what you earn, but by what you save. Both men understood the power of investing just a small portion of his earnings. The results were remarkable donations on seriously unremarkable incomes.

Everyday, young investors are taking advantage of this great system, and planning for their futures. Think of one good reason why you shouldn’t do the same for yourself, and for your family. Go ahead, we dare you.

Compound Interest: A Powerful Concept That Can Make You Wealthy

Compound Interest: A Powerful Concept That Can Make You Wealthy
by Sean Donohue

Compound interest is a powerful concept which can make you very wealthy if you use it to your advantage. So what is compound interest? When you have money in any interest bearing account, such as a savings account, CD, or mutual fund, that money earns "interest"--which essentially is additional money that the bank or mutual fund company pays you for the privilege of using your money. In the case of a bank, they use your money to make loans to others. Mutual fund companies use your money to buy stocks, bonds, and other financial instruments.

You can choose to have that "interest" re-invested, which simply means that it stays in the account rather than being paid to you in cash. Now the amount of money in your account consists of money that you put in AND interest money put in by the financial institution. The next time your account earns interest, it will be higher (even if the interest rate remains the same) because there is more money in the account. This process is called compounding--which leads to the term compound interest. Investopedia.com defines compounding as follows: "The ability of an asset to generate earnings that are then reinvested and generate their own earnings."

Okay, so what is the big deal? Well, over time, this compounding of interest can have a very powerful effect. Consider this: At 10% interest for 30 years, $10,000 would grow to to nearly $175,000 without you ever adding any more money of your own. Compound interest is truly a big deal!

This next example is even more eye opening....

Suppose you were offered a job with the following pay package: You would earn a penny for the first day of work and it would be doubled for each consecutive day. At the beginning of the next month, the process would start again. For example, the first day you would make one cent, the next day you would make two cents, and so on. Would you take the job? Without thinking about it, most people would say, "No way!" Well, what would you have made if you took the job? On the 30th day of the month alone, you would have made over $5 million! And your total compensation for the entire month would have been over $10 million! Don't believe us? Check out the calculations here.

Grasping the power of compound interest can bring you financial success. A commitment to regular investing, I recommend monthly, will pay huge dividends for you when you reach retirement age! The earlier you start your retirement investing plan, the better your results will be. I recommend putting 10% of your monthly take home pay into long-term investments, such as a Roth IRA or the Thrift Savings Plan, each and every month.

Don't think you have the money to invest every month? Check out the budgeting page and find out how you can free up some cash to invest.

Don't know how to invest your money? Looking for some free investing tips? Check out the investing page for answers to your investing questions.

What is the bottom line? Harness the power of compound interest today and put yourself on the path to amassing a sizeable retirement nest egg!

The Power of Compound Interest: How to Own Manhattan

The Power of Compound Interest: How to Own Manhattan
by Jeffrey Strain


Inspiration is often found in the most unlikely places. I received my first lesson in the importance of compound interest and long term savings from a pair of training shoes I bought in high school. To emphasize the point that training a little bit every day could create vast improvements over time, the training manual used an example of the Native American Indians and pilgrims in the US.

In the early 1600s, the American Indians sold an island, now called Manhattan in New York, for various beads and trinkets worth about $16. Since Manhattan real estate is now some of the most expensive in the world, it would seem at first glance that the American Indians made a terrible deal. Had the American Indians, however, sold their beads and trinkets, invested their $16 and received 8% compounded annual interest, not only would they have enough money to buy back all of Manhattan, they would still have several hundred million dollars left over. That is the power of compound interest over time.

Taking this concept to small amounts of money in your daily life can produce significant savings for you over time. For example, let's take the change in your pockets at the end of each day. Let's assume that it adds up to about a dollar a day and you place that into your piggy bank. That dollar a day will become $7 in a week and $30 at the end of the month if you continue to empty your change into your piggy bank each day.

At the end of the month, you take this $30 and place it into your Roth IRA (where it grows tax free and can be withdrawn tax free) which earns 10% a year. That dollar a day will be worth close to $68,000 in 30 years and that's just pocket change. Make a few adjustments in your spending habits and look at the results.

Drive your car 28 miles less a week and you have yourself another $68,000 dollars. Brown bag lunch and find yourself $136,000 richer in 30 years. Make your own coffee in the morning instead of buying it on the way to work and you can add another $136,000 to your account. Do those simple things plus empty your pockets each day and you will have over $400,000 in 30 years.

It's all in the way you look at the money you are about to spend. It may be just a dollar right now, but for every additional dollar you can invest each month, it can add up to more that $2,200 in 30 years. That's $220 for every extra dime you save and $22 for every extra penny you can squeeze out in savings each month. So the next time you're walking down the street and you see a penny on the ground, don't think of it as a penny. Pick it up, place it into your piggy bank to invest and congratulate yourself for finding $22 for your future.

You can be successful with a winning percentage of under 50 percent

Renowned investing and trading coach Dr. Van K. Tharp addressed the issue of winning percentages in the November 1997 issue of Technically Speaking, the newsletter of the Market Technicians Association. In his article, "Why It´s So Difficult for Most People to Make Money in the Market," Dr. Tharp states, "Most of us grew up exposed to an educational system that brainwashes us with the idea that you have to get 94-95% correct to be excellent. And if you can´t get at least 70% correct you´re a failure. Mistakes are severely punished in the school system by ridicule and poor grades, yet it is only through mistakes that human beings learn. Contrast that with the real world in which a .300 hitter in baseball gets paid millions. In fact, in the everyday world few people are close to perfect and most of us who do well are probably right less than half the time. Indeed, people have made millions on trading systems with reliabilities around 40%." It should be noted that Dr. Tharp is not specifically referring to options trading in his discussion of winning percentages. In fact, you should expect winning percentages for option premium buying to be lower than that for trading stocks or futures. Our research shows that successful short-term options traders are correct on roughly 35 to 40 percent of their trades. Although this win rate may seem rather low, there are factors such as fighting time decay and preserving capital by shutting down losing trades beyond a certain point (some of which may ultimately have been winners) that are particularly relevant to options trading. The important point is that positive overall returns over the longer haul result from allowing your profitable trades to run and cutting your losses in other trades relatively quickly. The concept of limiting losses and letting the winners run cannot be overstated. In his classic work, The Battle for Investment Survival, Gerald Loeb states, "Accepting losses is the most important single investment device to insure safety of capital. It is also the action that most people know the least about and that they are least liable to execute ... The most important single thing I learned is that accepting losses promptly is the first key to success." In addition, Loeb says, "The difference between the investor who year in and year out procures for himself a final net profit and the one who is usually in the red is not entirely a question of superior selection of stocks or superior timing. Rather, it is also a case of knowing how to capitalize successes and curtail failures." Our trading goals follow these principles in that we strive to maintain a winning percentage of between 30 and 40 percent. At the same time, we manage our recommendations such that our winning trades gain far more than our non-winning trades lose.

Review your portfolio regularly

We also realize that you may not have the time to evaluate your portfolio on a day-by-day or trade-by-trade basis. However, we still highly recommend that you look at your portfolio situation on a regular basis (monthly or quarterly) to assess how your money management approach is working. You may find that your portfolio has increased in size and in order to maintain the same percentage allocation to each trade, you must up your dollar commitment for the time being. Or, you may find that it is necessary to scale back on your dollar commitment if the portfolio has experienced a setback, so that you are able to stay in the game and participate in the next big winner or winning streak. Furthermore, after a series of evaluations, you may decide that the current allocation (say 15 percent) to each trade is too aggressive. You might then need to back it down because the portfolio fluctuation (volatility) is too much for you to stomach.

Consistency is the key

One other thing we should mention. Don´t vary the percentage you allocate trade by trade. Don´t double up on a trade after a loss hoping to win your money back right away. There´s a technique some blackjack players use in which they double their bet after each loss, the idea being that eventually the cards will turn in their favor and they will be ahead. That´s fine (we suppose) if you´re betting $10 chips since you likely will have a sufficient bankroll to stay in the game long enough for that to happen. But options trading is not so forgiving. The wins are not as frequent, the market may be turbulent and volatile, your system may be flawed, and you might run into a series of trades that will wipe you out. Sure, you may get out of the hole with that one winner, but what if it doesn´t come in time? If you´re sitting on the sidelines with no cash, there´s positively no way to benefit from those big winning options trades. And as the saying goes, you miss 100 percent of the shots you never take. One reason we focus on consistency is that options buying by and large involves more losing than wining trades. In exchange for having more losers than winners, you will also achieve bigger average profits on your winners than on your losers. Success is dictated by using proper money management to stay in the game long enough to reap the rewards of the bigger, though less frequent, winning trades. This brings up an issue that we have not addressed - increasing one´s allocation after a series of winners. This is just as dangerous as increasing the percentage after a losing trade. Why is this so? Remember that there will always be losing trades. Guessing which trade will be profitable and which won´t will have dire consequences if you guess incorrectly. Putting a higher percentage in a loser and less on a winner will ultimately lead to decreased profits. Of course, allocating more to the winners and less to the losers would result in huge profits. But given that you will likely encounter more losing than winning trades, the odds of picking correctly are stacked against you.

Allocation is critical

In the same spirit of "staying in the game," we now turn our attention to allocations per trade. We will not attempt to tell you a minimum dollar amount to trade. This is a decision best left to each individual investor that takes into account their overall profit goals and costs of trading (e.g., commissions). Rather, our goal in this report is to discuss the percentage allocation to each trade. In an excellent chapter on money management in New Thinking in Technical Analysis: Trading Models from the Masters (Bloomberg Press), Courtney Smith discusses how to "play the game long enough to master the skills and information needed to become a profitable trader" using a system he calls the fixed fractional bet. Simply stated, every trade should represent a set percentage of your total account. For example, let´s say you have $25,000 available for options trading and you wish to allocate 10 percent of your total account to each trade. You would therefore trade $2,500 for your first trade. Assume the trade gains 80 percent, or a $2,000 profit. Because your account size is now $27,000, your next trade would be for $2,700 (0.1*27,000). Now let´s say your first trade lost 40 percent (remember you need to let your winners run and cut your more numerous losses short), or $1,000. Your account would now stand at $24,000, meaning that you would allocate only $2,400 to your next trade. Notice how this differs from a fixed-dollar strategy in which you would invest $2,500 in each trade. We should note that with options trading, it is difficult, if not impossible to trade exactly 10 percent (or whatever percentage you choose) on each trade. It is rarely the case that an option´s premium will divide evenly into your dollar allocation for any trade (e.g., five $5 contracts, or $2,500). The best solution is to trade as close to your allocated percentage without going over. That is, if your allocated amount for a particular trade is $2,500 and you´re interested in a $7 option ($700 per contract), you should trade only three contracts ($2,100). Also, do not let your allocation dictate what option you will play. For example, say you have $2,500 for a trade and your trading system calls for higher-premium in-the-money options. If you have your eye on one priced at 7 (three contracts, or $2,100), don´t opt for a cheaper out-of-the-money option priced at 3 (eight contracts, or $2400) just so the total trade is closer to your allocated amount. In other words, don´t compromise your trading system for the sake of getting nearer to your allocation.

What is convexity?

One of the benefits of buying options is convexity. When a stock drops one point, a call option with an initial delta of 50 percent will lose a half-point. But the option will now have a lower delta, such that the next point drop in the stock will result in a smaller loss for the option. This "positive curvature" helps reduce an option´s price risk on each successive decline in the underlying shares, while the stockholder continues to lose the same one point on each successive drop in the stock. This positive curvature also works in the same manner as the stock moves up. A call option´s delta will increase on each successive gain in the stock, allowing the call holder greater upside participation with each successive gain in the underlying share price. Convexity also refers to playing more dollars on successive trades during a winning streak and fewer dollars on successive trades in a losing streak. This preserves capital during a string a losses and provides greater participation during a hot streak.

Losing is part of the game

An offshoot of this lower winning percentage, and something that often comes as a surprise to many traders, is the experience of coping with an extended losing streak. The ultimate goal of achieving profitability will remain out of reach unless great care is taken to control the amount of capital allocated to each position, as even wildly successful traders are not immune to a string of losing positions. In short, the objective in options trading is to "stay in the game" through proper money management techniques that allow you to weather the inevitable storms of losing trades.

Diversify Your Mutual Funds

Invest in multiple mutual funds to diversify your portfolio. After you've invested in a standard index fund, look into industries and markets that interest you. Compare mutual funds that concentrate on different aspects of the market. By using mutual funds to invest in different market segments, you'll be able to take advantage of larger trends without exposing yourself to as much risk. Just make sure that none of the holdings in your mutual funds overlap as that defeats the purpose of diversification.

Insider Trading

The term "insider trading" actually describes two different actions. Legal insider trading is when company officers trade the stock of their own company. As long as they record their trades with the SEC, this action is legal. Illegal insider trading occurs when someone trades a stock based on nonpublic information. The SEC is strict about illegal insider trading because when some people are allowed to take advantage of privileged information, they receive an unfair advantage. Those without connections can lose faith in the fairness of the market.

Investing in Stocks

Investing in StocksBenefit from a company's growth by investing in the company's stock. A stock is essentially a portion of a company. When a company wants to raise money, one option for them is to offer part ownership in the company in the form of stocks. These stocks can be bought through the company directly or through a stock broker. When you own a stock, you get the ability to vote for company officers and policies and attend shareholder meetings. You will get an annual report that gives you information about how the company is doing. If many people believe the company will do well in the future, they will want to buy into the stock and your stock value will go up. If more people believe the company will do poorly, they will sell their shares and your stock value will go down.

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Unique -- And Safe! -- Housing Plays

Brent Wilsey says he's surprised at what he found when he went looking for investment prospects among housing-industry stocks.

Recommendations:

The president of Wilsey Asset Management told CNBC he was impressed by a builder in the Southeast, NVR (NYSE:NVR - News).

"They have no properties in Florida, Nevada, or California," he said. "This builder's doing very well...they have seen their earnings decline by 39 percent, but they still did deliver a 25 percent return on equity."

He sees the company's fundamentals as very good, although the stock does tend to trade on the high side.

Not a homebuilder, but a bank, and thus very closely tied to the industry, is Wells Fargo (NYSE:WFC - News).

"It kind of has this unique situation, that they will only loan you money if you have the potential to pay it back," he said, tongue-in-cheek.

Among Wells Fargo's many attractions, Wilsey finds a healthy dividend, something he also sees in the REIT Prologis (NYSE: pld).

"I had to dig very hard to find a REIT that I liked here, and Prologis was one of those," he said. "Earnings for this REIT were up 35 percent year-over-year."

In still another corner of the housing sector, he found Travelers (NYSE:TRV - News).

"You've got to insure your home," he said. "Travelers is down 16 percent from its 52-week high. You get about a 2.4 percent dividend. The company is looking to earn $6.01 in 2008. Maybe you'll find a dividend increase here, or perhaps a stock buyback."