Sunday, December 27, 2009

Be a Successful Investor: Buy Low and Sell High – Don’t Follow the Herd!

Here are some characteristics of successful investors:
  • Successful investors don’t follow the Herd.
  • Successful investors don’t listen to the Media.
  • Successful investors stay in the Market.
When investing, most people have heard the saying “buy low and sell high”. But do you think that is what people actually do? There is contrary evidence to this advice that shows that a great deal of people actually “buy high and sell low”.

First of all, I would like to clear up some terminology before I get into the explanation. In this article we discuss the S&P 500 Index Value. The S&P (Standard & Poor’s) 500 Index Value is a calculation based on 500 widely held public companies in the United States weighted based on market value. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Large cap companies are generally, companies with a market value (capitalization) of over $10 billion and are typically well-established with solid histories of growth and dividend payments. Also, when discussing time frames, this article uses references to quarters of years. Q1 or quarter one consists of January, February and March; Q2 or quarter two consists of April, May and June; Q3 or quarter three consists of July, August and September; and Q4 or quarter 4 consists of October, November and December.

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The graph above shows the actual flow of money into and out of the stock market for a ten year period (from the fourth quarter of 1998, all of the way to the fourth quarter of 2008). If you look at the bottom scale of the graph, you can see a horizontal timeline of years with tick marks in-between, representing the different quarters of the year. If you look at the scale on the right side of the graph, you can see the S&P 500 Index Value and the actual value is represented by the black line that is squiggling up and down horizontally across the graph. If you look at the scale on the left side of the graph, you can see the net new flow of money in the millions of dollars into or out of the stock market. And this is represented by the vertical bars that move horizontally across the graph, where each bar represents a different quarter in a year.

This graph depicts exactly what happened in the stock market for a 10 year period.
OneLarge inflow at market peak. In the first quarter of 2000 the market peaked. As you can see from the graph, (remember that the net new flow of money is represented in the millions of dollars) during that market peak, almost $120 billion of new money was put into the stock market.
TwoLarge outflow at market bottom. In the third quarter of 2002 the market tanked and there was a lot of fear in the market. Looking at the graph at this time, you can see that almost $45 billion was taken out of the stock market.
ThreeLarge inflow after 2003 gains. Furthermore, in the first quarter of 2004 the stock market rebounded and we were in prosperous times once again. During this time there was a large influx of new money into the stock market – almost $120 billion!
FingerOctober 31, 2008. Again, you can see, from the end of 2007 to the end of 2008, after the housing bubble busted, the stock market was in a free fall. During the month of October 2008 alone $55.8 billion dollars was taken out of the stock market.

That sure seems like buying high and selling low to me!!

The Money Message:
  • The “Stock Market” has always gone up and down in relatively unpredictable ways -- and will continue to do so.
  • When the “Market” is low, a given amount of invested money buys more shares -- then, when the “Market” goes up, the investment grows. The key is: “Buy Low & Sell High”.
  • Wise investors are in the “Market” for the long term -- and love “Market” fluctuations because they understand, and use, “Dollar Cost Averaging”
I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.

Monday, December 14, 2009

Understanding the Power and Benefits of Dollar Cost Averaging

Three friends were enjoying a barbeque when the topic of investing for retirement came up in the conversation. They realized that they all needed to start planning soon if they were going to be able to retire some time in the future. So, right then and there, they all made a pact to start investing as soon as possible. They all agreed to invest $5,000.00 a year to fully fund a Roth IRA and they would compare notes in 6 years to see who did the best. (By the way, $5,000.00 a year would be a little over $400.00 a month)

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All three friends stuck to the pact and invested the same amount of money every month for 6 years. Coincidentally, they all invested in funds that started at $10.00 a share. But that’s where the similarities ended.

The friend that chose the green fund increased every year for 6 years and ended up with at $15.00 a share. That’s a 50% increase. The friend that chose the red fun started dipping immediately, but by the end of the 6 years it finally broke even at $10.00 a share. That was a 0% increase. Finally, the friend that chose the blue fund was really bummed out because it really tanked. In the 6th year it started to rebound a little and ended up at $4.00 a share. That was a 60% decrease!

Which color fund would you wish you had chosen if you wanted the most money at the end of the 6th year?

Here are the surprising results at the end of the 6th year:

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You can see that all three friends started with a fund that cost $10.00 a share. So, $5,000.00 bought 500 shares at $10.00 a share.

However, for the friend that chose the green fund, the price of the shares kept on going up over the 6 years, so every year, $5,000.00 bought less and less shares. At the end of the 6 years, he accumulated 2,444 shares. 2,444 shares at $15.00 a share equals $36,660.00. He contributed $30,000 ($5,000.00 a year for 6 years), so he made $6,660.00 on his investment. Not bad.

The friend that chose the red fund had the price per share drop, so he was able to buy more shares during that time period. When the price went back up, the amount of shares purchased went down. All in all, at the end of 6 years, he accumulated 3,916 shares. Since the cost per share ended at $10.00, he ended up with $39,160.00. So, at the 6 year mark he made $9,160.00 on his investment. Surprising huh?

Finally, the friend that chose the blue fund had the price of the shares really tank and go all of the way down to $1.00 per share. But if you notice, the year it dropped to $1.00 per share he bought 5,000 shares with that $5,000.00. At the end of the 6 years he racked up 10,875 shares. So, even though the price per share was only $4.00, with 10,875 shares, he ended up with $43,500.00 -- a $13,500.00 return on investment! Now that’s shocking!

Here are some important things to take away from this story about Dollar Cost Averaging:
  • Dollar Cost Averaging is a lot like gravity – it works whether, or not, you believe in it.
  • Dollar Cost Averaging automatically insures that you will buy more shares at a lower price – and fewer shares at a higher price, over the long term.
  • Dollar Cost Averaging is working in equity mutual funds, even if no new money is added, because the “Dividends” and the “Capital Gains” can be periodically reinvested to buy more shares.
I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.

Friday, December 11, 2009

The Rule of 72 – How Long Will It Take To Double Your Money?

The Rule of 72 is a simple concept, yet it is a very powerful way explaining the amazing way money can compound if you just give it enough time.

Here’s the rule: Your money will approximately double at a point in time determined by dividing 72 by the interest rate you earn

Let’s look at some examples:

72 ÷ 2% interest = 36 yearsAt 2% interest, your money will double in approximately 36 years.
(Meaning it will double 1 time in 36 years)


72 ÷ 4% interest = 18 yearsAt 4% interest, your money will double in approximately 18 years.
(Meaning it will double 2 times in 36 years)


72 ÷ 6% interest = 12 yearsAt 6% interest, your money will double in approximately 12 years.
(Meaning it will double 3 times in 36 years)


72 ÷ 8% interest = 9 yearsAt 8% interest, your money will double in approximately 9 years.
(Meaning it will double 4 times in 36 years)


72 ÷ 12% interest = 6 yearsAt 12% interest, your money will double in approximately 6 years!!
(Meaning it will double 6 times in 36 years!)


I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.

Saturday, December 5, 2009

The Magical Power of Time and Compounding

This is a really powerful story that blew my mind when I first heard it called "The Sam and Sarah Story". It is about twins, age 22, who both decided to fund their Roth IRAs, for their retirement “Nest Egg.”

It starts off this way: Although Sam had good intentions, he waited for 6 years before actually starting to fund his Roth IRA. He kept saying: “Now next year I’ll get started.” He did that for 6 years. When he finally saw, at the end of the 6th year, that his twin sister had already invested over $28,000.00, he said: “That’s it, I’m starting now!” And for the next 37 years, he invested $400.00 every month, until he reached age 65.
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By the way, in the Figure above, you can see that each green block represents 1 year of investing $400.00 per month. And, that each white block represents 1 year of investing nothing each month. The reason that we are using $400.00 is because it is a nice round number. The IRA maximum this year would be around $416.00 per month for people under the age of 50 and around $500.00 per month for people over 50.

Now back to the story. Sarah, being very disciplined and focused, immediately started investing $400.00 per month. And, she continued investing for 6 full years until she got married and then she all of a sudden stopped. She never invested another penny for the remaining 37 years -- to age 65. So, as you can see, Sarah only invested a total of $28,800.00 from age 22 to 65. Sam, although he was slow at getting started, invested over $177,000.00 over the same period -- from age 22 to 65.

Which Nest Egg do you think most people would choose?

Well...assuming a 12% return on investment Sam ended up with $3,309,805.00, while Sarah making the same 12% return on investment ended up with $3,507,997.00! Now isn’t that surprising? They both got great results, but who would have ever thought that, over a 43 year period of time, from age 22 to 65, Sam -- who invested over 6 times more money than Sarah -- would end up with $200,000.00 less at retirement? That’s why we at The ProMagnum Group say: “If you don’t know the rules of a game your playing, not only will you not win the game, but you probably won’t have fun playing the game. And, the “Money Game” is just as much of a game as football, tennis, or golf. In fact, we believe it’s more important than any other game -- because it’s a game everyone has got to play, whether they want to, or not!”

There are two very important points to be understood from this story.
  1. If Sam would have started investing at the beginning, like his twin sister Sarah, and continued to age 65 -- he would have had Sam’s $3,309,805.00 plus Sarah’s $3,507,997.00 at age 65. In other words, it cost Sam over $3,500,000.00 because he waited 6 years before starting to invest. That’s the magical power of Time & Compounding!
  2. The last point I want to mention is: Using the particulars in this story, the money invested over the first 6 years contributes more to the “Final Nest Egg Value” than all the money invested over the last 37 years!
Would you agree that this is a most valuable retirement concept?


I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any questions or comments, please feel free to contact me.