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Posted by on March 1, 2007, 5:00 am
I recently started investing my money. Right now, my money's going
into an index fund. I figure it's a safe bet while I learn more about
investing.
I'm currently researching the stock market and trying to understand as
much as I can before I throw myself into it. The basic premise that I
think I've learned so far is that investing in stocks directly is
meant for the long-haul. What I mean is, an investor should look for a
good company and regularly put money into it, if their budget allows
for it. Doing so will get you dividends--if not immediately, then
eventually.
I've also read about the "power of compounding interest" and read
countless phrases like this "$10,000 invested in XYZ in 1980, if you
reinvested the dividends, would be worth over 4 GAJILLION DOLLARS!."
This question is going to seem really weird and naive, so please don't
think too poorly of me. If the tried-and-true method of making money
on the stock market is through informed investment, and re-investment
of dividends, at what point are you actually making money. And by
"making money", I mean, when are you taking cash in hand to reap the
rewards of your successful investing? It seems like you'd just be
constantly putting your dividends back into stocks and watching a
number get larger over time. There's got to be a cut-off point or
something where you start taking money for yourself, right? Or maybe
you initially put the dividends back into the market, but over time
start taking a percentage for yourself?
I can't wrap my head around what I'm sure is an incredibly simple
concept. I must be over-thinking something here.
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Posted by John A. Weeks III on March 1, 2007, 7:26 am
kareem.badr@gmail.com wrote:
> I recently started investing my money. Right now, my money's going
> into an index fund. I figure it's a safe bet while I learn more about
> investing.
It is most likely an inexpensive bet, and that is also very important
over time. Index funds tend to have a low expense ratio, and they
tend to be very tax efficient.
> I'm currently researching the stock market and trying to understand as
> much as I can before I throw myself into it. The basic premise that I
> think I've learned so far is that investing in stocks directly is
> meant for the long-haul. What I mean is, an investor should look for a
> good company and regularly put money into it, if their budget allows
> for it. Doing so will get you dividends--if not immediately, then
> eventually.
There is a huge different between investing in the market and
investing in an individual company. When you invest in the market,
your risk is spread across many companies and many industries. You
give up the chance for spectacular events like doubles and triples,
but you do get good steady rates of return over time.
Investing in individual companies is more like speculation. You
can hit a home run, or you can strike out. Without some inside
information, it is a real crap shot, but using inside information
is illegal, so you are totally at the mercy of the corporate PR
staff, which has proven to be iffy at best over the past decade.
Investing in individual companies is difficult and expensive.
First off, you have to pay commissions both on the way in and
the way out. That means that you have to put a healthy sum of
money into each company to minimize the impact of the commissions.
Second, you have to invest in perhaps a dozen companies to get
meaningful diversification. That often takes more money than
what a younger investor has available.
I'd suggest investing in the market, and maybe use only a small
part of your portfolio (5%) to take some flyers on individual
companies.
> I've also read about the "power of compounding interest" and read
> countless phrases like this "$10,000 invested in XYZ in 1980, if you
> reinvested the dividends, would be worth over 4 GAJILLION DOLLARS!."
> This question is going to seem really weird and naive, so please don't
> think too poorly of me. If the tried-and-true method of making money
> on the stock market is through informed investment, and re-investment
> of dividends, at what point are you actually making money. And by
> "making money", I mean, when are you taking cash in hand to reap the
> rewards of your successful investing? It seems like you'd just be
> constantly putting your dividends back into stocks and watching a
> number get larger over time. There's got to be a cut-off point or
> something where you start taking money for yourself, right? Or maybe
> you initially put the dividends back into the market, but over time
> start taking a percentage for yourself?
What you are missing are goals. What are your goals in life? What
investing goals do you have to support those life goals. Investing
for the sake of investing is nothing more than watching a number
grow slowly over time. You need to figure out what your retirement
timeline is, and how you fund it. Then fill in the gaps in between
with a toy or two, or a lifestyle choice, and fit in a house, kids,
college, etc. You want to be investing for something, not just
investing for the sake of investing.
-john-
--
======================================================================
John A. Weeks III 952-432-2708 john@johnweeks.com
Newave Communications http://www.johnweeks.com
======================================================================
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Posted by Elle on March 1, 2007, 11:12 am
I think you need to understand the big picture of "Why buy
stocks?" The most popular answer is that, historically, they
have been the best place to sock one's money for the long
term in terms of returns and risk.
It's not at all just about dividends. Some companies may not
pay a dividend in your lifetime, yet owning their stocks
will enrich you many times over. Or some may cut their
dividends. Generally speaking, stock prices (and so the
value of your investment in the same) rise because company
earnings rise. Company earnings tend to rise because of
inflationary effects; population increases; increased share
of the market for the product; etc.
For a quick introduction that will likely get you thinking,
I recommend the following three sites:
http://www.moneychimp.com/articles/randomness/time_horizon.htm
(about historical stock market volatility in the short and
long terms)
http://home.earthlink.net/~elle_navorski/id8.html (has links
to free online asset allocation tools, which are quick and
dirty to use, showing the emphasis put on stocks for the
long run, based on historical returns)
http://home.earthlink.net/~elle_navorski/id10.html (article
"What Good Are Stocks?"; what it means to own stock; etc.)
> And by
> "making money", I mean, when are you taking cash in hand
> to reap the
> rewards of your successful investing? It seems like you'd
> just be
> constantly putting your dividends back into stocks and
> watching a
> number get larger over time. There's got to be a cut-off
> point or
> something where you start taking money for yourself,
> right?
Most people invest /for retirement/. In retirement, they
start shifting from stocks to bonds/CDs, and start taking
money for themselves.
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Posted by jIM on March 1, 2007, 1:34 pm
> I recently started investing my money. Right now, my money's going
> into an index fund. I figure it's a safe bet while I learn more about
> investing.
>
>
> If the tried-and-true method of making money
> on the stock market is through informed investment, and re-investment
> of dividends, at what point are you actually making money. And by
> "making money", I mean, when are you taking cash in hand to reap the
> rewards of your successful investing? It seems like you'd just be
> constantly putting your dividends back into stocks and watching a
> number get larger over time. There's got to be a cut-off point or
> something where you start taking money for yourself, right? Or maybe
> you initially put the dividends back into the market, but over time
> start taking a percentage for yourself?
>
> I can't wrap my head around what I'm sure is an incredibly simple
> concept. I must be over-thinking something here.
You invest with a goal. Retirement is a common goal, others may chime
in other "goals" suitable for stock market investing.
So the day I retire is the day I start withdrawing some of my earnings
and investment dollars. There could be LOTS of theoretical discussion
on when you have enough to retire... my simple basic calculation is
income/4%. This implies if you have an amount invested which allows
you to withdraw 4%, and the 4% is enough to live on, you are close to
being ready (financially) to retire.
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Posted by on April 3, 2007, 4:52 pm
On Mar 1, 5:00 am, kareem.b...@gmail.com wrote:
> I recently startedinvestingmy money. Right now, my money's going
> into an index fund. I figure it's a safe bet while I learn more aboutinvesting.
>
> I'm currently researching the stock market and trying to understand as
> much as I can before I throw myself into it. The basic premise that I
> think I've learned so far is thatinvestingin stocks directly is
> meant for the long-haul. What I mean is, an investor should look for a
> good company and regularly put money into it, if their budget allows
> for it. Doing so will get you dividends--if not immediately, then
> eventually.
>
> I've also read about the "power of compounding interest" and read
> countless phrases like this "$10,000 invested in XYZ in 1980, if you
> reinvested the dividends, would be worth over 4 GAJILLION DOLLARS!."
> This question is going to seem really weird and naive, so please don't
> think too poorly of me. If the tried-and-true method of making money
> on the stock market is through informed investment, and re-investment
> of dividends, at what point are you actually making money. And by
> "making money", I mean, when are you taking cash in hand to reap the
> rewards of your successfulinvesting? It seems like you'd just be
> constantly putting your dividends back into stocks and watching a
> number get larger over time. There's got to be a cut-off point or
> something where you start taking money for yourself, right? Or maybe
> you initially put the dividends back into the market, but over time
> start taking a percentage for yourself?
>
> I can't wrap my head around what I'm sure is an incredibly simple
> concept. I must be over-thinking something here.
Kareem - I am glad that you are taking this so seriously because it is
your money and you will care about it more than anyone else.
Investing in the stock market can be very complex in theory yet so
simple in process. What I mean is you can open an account and buy a
stock rather easily. The complex part of it is researching and coming
up with a method that fits your personality, beliefs, goals and
values. Most people skip over finding a strategy that fits them.
This is one of the most important steps. Trust me. I have used a
system only to not be content with the returns, the length of trades,
the stock selections, etc. Find what works for you and you are happy
with.
I do agree that an index fund is a great idea. Index funds are well
diversified and work great over the long-term 5-10 year range where
you can weather the bear markets (I.E. the famous bear market of
2000-2002). I have studied and testing the stock market for over 20
years. I say this not to impress you, but to validate what I am
saying. I believe that investing with the market is the best way to be
wealthy. Investing in the market might mean that you will be in cash
during bear markets or better yet shorting the market. Bear markets
do come around and each person needs to make their own judgement call
on whether they are comfortable watching the markets drop and doing
nothing about it.
This is a lot to take in so take your time and do some research. The
one thing that is great is that you are starting so time is on your
side.
Keith
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