Category Archives: Investing

Investing Extra Income and The Value of Diversification

Making money is something we all want to do.  Not just making money, but for many people it really means making more money that we currently earn.

So how do we do this?  Well, one way to do it could be to focus on one’s career.  Getting promotions and/or switching jobs opportunistically (but not too often) to earn a higher income can be a great way to accomplish this.  The earlier in your career you grow your income, the more you can save.

Another way to do this would be to earn side income.   Seemingly growing in popularity, and certainly a topic that’s discussed more and more on personal finance blogs.  There are so many ways one can earn side income, ranging from blogging to tutoring to dog walking and points in between.  There is a side hustle opportunity for so many things!

This is all great, and as we know, it’s making more money can be a great way to build wealth.  However, that could be an incomplete approach.  It’s been discussed before, but the question of what to do with side income can really apply to any incremental income.  What can be done with it?

Keeping everything in cash might seem safe, but that’s not likely to appreciate versus inflation :)  One could also choose other low-risk or alternative investments, but those can be a potential part of a diversification plan.

What might make sense, and what fits conventional wisdom, would be to diversify the use of this extra money.  One aspect of diversification that can be profitable for many people is stocks.  Investing in stocks can be a tremendous way to grow net worth, though of course even within share trading there can be opportunities to diversify as well.  Of course one can invest in different companies within different industries.  There are also different investment types, besides individual stocks there are also ETFs and funds.

Additionally, people can diversify in terms of where the stocks are actually traded.  Quite often people trade in the U.S. stock market, as the Dow and S&P 500 are two widely followed baskets of stocks that are watched to gauge the strength of the domestic market.  Additionally, there are plenty of other markets as well.  There are opportunities to invest in stocks in the U.K. market, Japanese (NIKKEI) exchange, Australian stock exchange, the market in Hong Kong, and others.

However one does it, stocks can be an important part of a person’s portfolio.  When allocating assets, generally speaking many people do keep some portion in stocks.  The longer the time to retirement, often times the higher the percentage of investments that many people are willing to put into stocks.  While people should always think about risk as well, the growth potential of stocks, including those within a diversified portfolio, can be hard to ignore.

What it comes down to is that it takes more than just making additional money to get ahead for a lot of people.  Investing that additional money could potentially supercharge that growth.

Readers, do you actively invest extra (or regular) income? How do you choose to diversify your stock investments?

 

Overanalyzing Investments

It seems like every year that goes by, there new sites or apps that capture the attention of different people.  These run the gamut of genres, from educational, to informational, and mostly (it seems) entertainment.

A number of these can help people with different aspects of their lives.  For example there are sites out there that help people track expenses and nutrition.  These can be very useful. However, there are also sites or apps out there that end up causing people to waste time- such as many games.  Yes, I should know…..I really enjoyed Angry Birds when it came out:)

There also apps that can do both: help you as well as waste your time.  Some can even lead you to overreact and make decisions that aren’t always necessary to make.

Along those lines, there was an interesting article on MarketWatch recently that talked about the notion of deleting investing apps.  While I don’t know that I would go that far as a rule of thumb, the article does bring some good points.  What resonates with me is the idea that people getting more information might be compelled to act on such additional information.  Which, in reality, might not always be such a good thing!

Here’s the deal, as I see it: many people like to actively trade in the market, or at the very least are predisposed to feel that they can beat the market.  There is some sort of bias I suspect many folks have about their own intelligence and skills.  The thing is, many times index funds outperform actively managed funds.  So, if many pros can’t beat the market, why does the totally average investor believe he or she has special talents to do so?

Armed with additional information at one’s fingertips, some people might make a higher frequency and volume of trades.  This could result in a financial outcome that isn’t necessarily better than would happen otherwise.  In some cases, Januarybe worse.

Or, this might get a person to simply spend more time checking investments out of habit and obsession.   This can waste time.  Sort of like a blogger checking traffic stats all the time :) The time adds up, and for little incremental reward.

Bottom line is that while many apps are cool and can truly be helpful, we should be watchful over how much time and importance we give to using them.  Sometimes it’s better to keep things simple!

Readers, what do you think of the notion that more information can sometimes result in excess analysis and reactionary behavior? Also, the idea that sometimes with more information, we can risk wasting our time for very little incremental return?

How Frequently Should You Check Your Investments?

Checking InvestmentsDo you know how your investments are doing?

We’ve talked before about tracking expenses, and how it can help you know where your money is going.  This is of course important, as saving money is necessary for us if we want to reach the goal of financial freedom.  That being said, saving alone might not be enough, as we need to make sure that we earn more than just a miscule amount each year in interest.  Thus, we should allocate our investments in different classes.

In terms of those investments, they can be a big part of our net worth.  Additionally, they can vary in value every day.  Yes, some can change in value every single day.  Much like our expenses, our investments can be dynamic in terms of what they look like from day to day, hour to hour, and in some cases – minute to minute.  Stocks in particular can go up and down quite a bit, especially individual stocks.

Along those lines, how often do you check the value of your investments.  All it takes a few clicks, and we can get this information real time.  With our smartphones, we can check on our investments, and the markets in general, at just about any point in time.  If someone is so inclined, they can check different markets globally at different times, as exchanges are in place around the world.

Personally, my current thinking is that it’s not necessary to check markets or investments daily, for the average investor.  I would put myself in that category.  It seems like once a month might be a good thing.

Now, that doesn’t mean that there aren’t opportunities to take advantage of certain situations.  However, considering that index funds quite often beat actively managed funds, what makes a typical stock investor think that he or she will do so much better by actively trading as a daytrader? Additionally, there is a high level of effort involved with constantly checking investments and markets.   Anyway, this is my currently line of thinking on this, and I realize that different people handle things differently.

This all reminds me of a guy I worked with years ago.  He was constantly checking the market, multiple times a day, on his phone.  Who knows how much time he spent doing that at his desk.  All that time spent could have been put to better use, perhaps?

Readers, how often do you check investments? Do you think it makes sense to keep tabs less frequently?

 

Investing and Why Rate of Return Matters

InvestingWe all know that we need to save money.  This means making sure that our income exceeds our expenses, and keeping it that way regularly.  If we do that, we can build our savings for our future needs.

However, just saving money alone isn’t going to be enough to get us there.  The next step is what we do with our savings, which involves making sure that our money is working for us.  This means we need to invest money!

I’m sure we all know people that are quite risk-averse, and don’t feel comfortable with investing money.  These people simply want to hide money under the mattress, or put most money in a low-yield savings account.  Or, perhaps throw money in CDs or some other conservative investment.  But where is the upside there?

Sure, we do need to think about the notion that risk and reward often go together.  But over the long-term, if we hold on long enough, it’s been the case than people have done quite well in the markets versus staying on the sidelines.

Let’s take a couple of examples, to answer the question of “why does rate of return matter?”

Example 1: 2 % rate of return

Let’s say someone invested $10,000 and held for 30 years.  A true long-term investor!  Let’s also assume that this person earned 2% per year, compounded annually.  After 30 years, the $10,000 will end up being over $18,000.

Example 2: 8% rate of return.

Again, let’s say that person invested $10,000 and held for a 30 year time frame.  However, in this case the rate of return is 8%, compounded annually.  This $10,000 will become over $100,000!

That’s a pretty big difference! Now, it doesn’t account for inflation and taxes.  However, the magnitude of the difference between the two options in pretty clear.  Just imagine if we looked at an example where money was invested every year, instead of the one-time investment noted above!

The Moral of the Story:  Rate of return really matters! This is why it’s important to invest, and not be too afraid or stuck with inertia.

Readers, do you ever think about making sure you’re investing your savings properly, and getting the a good rate of return?