How to Grow Rich Slowly


Everyone has seen the late night advertisements.   There is a guy standing in a large backyard by a sky-blue pool with tropical flowers and a large stucco-roofed house in the background.  Perhaps he has a woman 10-20 years younger than him lounging next to him in a bikini, enjoying the sunny day.  They are both probably wearing sun glasses – wealthy people are always wearing sunglasses.  He says that he is ready to share the secrets to building great wealth and obtaining economic freedom.

He then proceeds to tell you that you can make a fortune while you keep your day job using his system.  It may be a real estate trading scheme.  You may be buying and selling penny stocks.  Perhaps you are doing multi-level marketing — a technique only a hair different from a pyramid scheme.  Maybe you are selling products over the internet for them.  All you need to do is set up an account and then check each day to see how much cash you made.  Just sign up for their seminar, which conveniently is coming to the Holiday Inn near you.  The price is never mentioned.

Unfortunately, wealth will not come to you from some scheme.  If there really were a scheme that could create untold wealth, why would they share it with you?  Why not just sell the real estate themselves?  Why wouldn’t they set up their own websites to sell their products?  If the individuals in the commercials actually are wealthy (and they didn’t just rent out a house for the commercial), you can bet that they got that way off of the fees for their seminars and classes, not from the scheme they are presenting.

 

The Compound Effect

Getting wealthy through starting a business, which is the fastest way, requires time, risk taking,  hard work and long hours.  Getting rich through investing luckily doesn’t require as much hard work, but it requires sacrifice,  prudent risk taking,  time, and discipline.

Sacrifice is required.  You don’t buy a new car every few years; you buy a 3-4 year-old car every 5-8 years.  You don’t buy a boat; you rent one during the few occasions you actually go boating during the year.  You don’t eat out every night; you learn to cook and eat out perhaps once a week.  You set a budget and stick to it, and that budget has less money going out each month than is coming in from your job.  You understand that by waiting and buying the toys later for cash and from the gains from your assets, you can have both the money and the toys.  Buy them now, on credit, and you’ll end up spending twice as much for them as the sticker price.  Plus in five years, they’ll be old and broken and you’ll still be making the payments!

You take prudent risks.  This does not mean going to Vegas and betting on red.  It means investing your money in places where the odds are in your favor, but that grow faster than the rate of inflation.  Things like stocks, real estate, ETFs, mutual funds, and bonds.  These investments allow your money to earn money and compound, growing as you work so that eventually your portfolio is providing more income than your job.  This is when things really start to happen.

 

For more information on why you can have too much diversification, try one of these great books:

        

Growing wealthy requires time.  Do some calculations on compound interest and you will find that very little interest is made in the first few periods, but huge amounts are made during the last few.  Try this experiment: start by placing a penny in a jar.  The next day place two pennies, the next day four pennies, and so on, doubling the amount each day.  See how much you will be putting in the jar by the end of thirty days.  (If anyone does this, please write a comment telling everyone what happened).  Be patient and let your money compound.

Finally, discipline is required.  Money needs to be put away every month into investments.  It doesn’t matter if the market is up or down, put some money away.  If the market falls through the floor, buy all you can.  If the market seems really pricey, perhaps hold back a bit on the side in a money market account, but put some in anyway in case you are wrong.  In any case save some money each month from you earnings.  Consistency is the key.

Learn how to use mutual funds from the founder of Vanguard:

 

 

 

 

 

 

 

Join the conversation and help make this blog more exciting!  Please leave a comment.  Also, if you have an investing question, email  vtsioriginal@yahoo.com or leave the question in a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why You Really Need to Invest


You’ll find a lot of blogs on people getting out of debt.  Perhaps they start out with a student loan balance of $150,000 and pay it off over a period of three years.  If they are persistent, and particularly if they see their income rise, perhaps because they get a lot of revenue from their blog and affiliate advertising, they will make their way out of debt.  But what then?

What happens after you pay off that last student loan?  After you close that last credit card account?  You make your last car payment?  You make your last mortgage payment?  And what if you never got into debt in the first place?  Often that’s where the blog stops.

If you want to move from just being debt-free to being financially independent – being able to pay for things without needing to depend on a paycheck – you need a way to make money efficiently.  There is only so much time in the day.  Even if you get a second job, unless you have a phenomenal salary, it is really difficult to simply work and save enough money to reach financial independence.  Plus, your income level is usually limited and it will top out at some point in your career.  If you make an average of $60,000 during your working career and save 10% per year, you’ll have $240,000 over your entire career.  If you save 20%, you’ll still only have about half a million dollars at age 60.  To sustain yourself, you’ll probably need something north of $2 M unless you live a very meager existence.
                           

Great beginner investment guides.  

One way to attain financial independence is to start a business.  If you start a business and run it well, your potential income is theoretically limitless.  If you open a store and do well, you can open a whole chain.  The same thing goes for a lawn care business, or a manufacturing business, or a restaurant.  Because you can hire people to work for you, and take a small percentage of the amount of money they generate, you can expand your income.  But many businesses fail, and you often need to take a big risk to start a business, possibly borrowing a lot of money.  Starting a business when you already have a family that depends on your income is also risky.  Is there another way?

The answer is investing.

When you invest, it is like you are buying an ownership stake in a business, which means that, just like starting a business, your theoretical income is limitless.  There are people who bought a $5,000 stake in Home Depot or Wal-Mart who are now millionaires.  The beauty of investing is that you get to enjoy the possibility of growth that you get from starting a business, but don’t have all of the headaches that come from actually running a business. You don’t need to check inventory, order supplies, or manage employees.

Not only that, but you get to benefit from other people’s good ideas.  You probably didn’t get the idea to build a search engine that everyone would use, let alone go through the hassle of coding it, getting servers set up, and getting the word out.  But you can buy shares of Alphabet and benefit from the efforts of people who did.  You can buy shares of Walgreen’s and have drug stores on all of the best corners in every city in America.  You can buy into a successful restaurant, a successful credit card issuer, or a successful tobacco company.  If it trades publicly, you can get a stake in the company and take advantage of other people’s good ideas, execution, and hard work.

 

Want all the details?  Try The SmallIvy Book of Investing.

There are some people who will become rich by working really hard and saving  every dime.  There are others who will become doctors or lawyers, get hired by the right firm or practice or start their own practice, and live on little enough to build up their savings and become wealthy.  There are still others who will start a business and work hard to grow it into a huge company and become wealthy.  For the rest of us, investing is the way to wealth.  If you’re interested in learning how, pick up a copy of The SmallIvy Book of Investing and keep reading The Small Investor Blog.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Place an Order to Buy or Sell a Stock


So you’ve decided to take the plunge and buy your first individual stock.  Now what?  In order to place a stock order, it is important to learn the lingo of stocks trades.  This allows you to communicate clearly with your broker to avoid misunderstandings.  If you’re buying online, knowing what the different orders are and which ones to uses is equally important.  Learn these terms and you’ll be sounding like a pro in no time.

Here are the types of orders for buying or selling stocks and other securities, plus some other ordering terminology, that every investor should know:

Buy – An order to buy a security.

Sell – An order to sell a security.

Bid price:  The highest price at which someone is willing to buy shares at a given time.  For example, someone may be out there ready to buy 500 shares of XYZ corporation for $30.25 per share.

Ask price:  The lowest price at which someone is willing to sell shares.

Market Order – An order to buy or sell a security at the current market price.  Because at any given time the market price includes the Bid price (the price someone is willing to pay for a security) and the Ask price (the price at which someone is willing to sell), if you put in a market order to buy you will pay the ask price, and if you put in a market order to sell you will sell at the bid price.  The difference between the Bid and the Ask is called the Spread.  In actuality, professionals in the markets will buy shares from someone at the bid price and then sell it to others at the ask price, so they will get to keep the spread as profit.

Limit Order – An order in which a price is set as a threshold for the sale.  For example, a buy order with a limit of $50 would execute when the Ask price of the stock was at $50 or lower.


A Beginner’s Guide to Investing: How to Grow Your Money the

Smart and Easy Way, only  $6.99 at Amazon

Stop– An order to buy or sell a stock if it passes through a specific price.

All or None – An order which is executed only if all the shares can be bought or sold in one lump.

Good ‘Til Canceled (GTC) – An order that will stay open for a month after it is entered.  Normal orders are only open for the trading day and must be reentered if not executed on that day.

So, if you wanted to buy 100 shares of XYZ corp, which was currently trading with a bid price of $50 and an ask price of $50.25, and you wanted to pay mno more than $50.50 per share, you would tell your broker:

“Buy 100 shares of XYZ corp with a limit of $50.50.”

Because the ask price was below your limit, assuming there were 100 shares available at that ask price and there were no one else in front of you, you would end up buying 100 shares at $50.25 since that was below your limit price. If there were only 50 shares available at that price and 50 more at $50.50, you would get fifty shares at each price.

The above terms can be combined.  For example, one would say “Buy 100 shares of XYZ at the market” to buy 100 shares of XYZ corporation at the market price.  One could say “Buy 100 XYZ, limit of $50 or better, GTC” to put out an order that would stay open for a month in which 100 shares of XYZ corporation would be bought if the Ask price dropped to $50 or lower during that month.

Note that stop orders can be stop limit or stop market orders.  If you place a stop limit order, it will create an order to sell (or buy) if the stock price reaches your limit with a minimum (maximum) of your limit price, where a stop market order will sell (or buy) at the market price if your limit is reached.


Try Anti-Monopoly, a twist on the classic game.

You may be thinking that this is all well and good, but which orders should I uese and when?   Let’s now go into the strategies I use when selecting the type of order to use.

The investing strategy I use and that I promote with this blog is to invest for the long-term and make a lot of money with each successful trade.  We’d like the stock to go up 1000% or more over the time period that we hold it.  Because of the long time period involved, we are not that concerned with getting a few extra pennies per share on a trade.  For this reason, I generally use a market order when buying.  This will cause the order to be filled within the next few trades (we may need to wait a few trades if there are people ahead of us with market orders).  On a stock that trades a lot, said to be “liquid,” market orders are generally fine and we won’t get a crazy price, which can happen in stocks that trade rarely and therefore are illiquid.  There,  a limit order is needed to prevent getting a bad price.  Buying stocks at-the-market prevents us from missing a good buying opportunity and seeing the stock shoot up out of range be cause we’re waiting for the price to drop by a few cents.  If you make $30,000 from a stock trade, it won’t matter much if you pay an extra $50 for the shares.


Get The Compound Effect for only $9.52 at Amazon

When I’m looking sell because I’ve made a good profit and I’m worried it may evaporate, I also find that it is best to use a market order and get out.  I’ve had the experience before when a gain turned into a loss because I set a limit and it didn’t fill before the bottom dropped out.  Again, it is usually best not to quibble over pennies.

If I’m in the process of accumulating shares and I feel that the stock has good long-term prospects but there is probably nothing to cause it to shoot up in the near-term, I may set a limit order and wait.  I may also enter with a market order to get some shares, and then place a limit order a little lower to buy more shares if the price then dips.  (Note with a limit order I also tend to use Good-Til-Canceled since it may take a few days to execute.)  When setting a limit, I pick an odd amount (for example, $20.16 per share or better) because there will generally be other people with limit orders in and people tend to like round numbers.  With a limit order, the first in line at the price gets the shares.  If the stock is thinly traded, or illiquid, I will never place anything but a limit order.  This is because if there are only a few buyers or sellers, the price may easily change by 10% or more between trades.  Looking at the typical spread for the stock (difference between the bid and the ask price) and the volume is a good way to tell if the stock is illiquid.   I also always use a limit order when selling stocks short or covering a short position, generally setting the limit slightly above the ask price in the latter case to make sure it executes rapidly, but giving me protection fram radical price movements.

Stop orders, often called “stop loss” orders, are sometimes recommended as a way to limit losses.  For example, you buy 100 shares of xyz, and then set a stop loss order at $36 so that if the stock drops by 10% you’ll get out automatically.  I generally don’t recommend stop loss orders for two reasons.  The first is that the market will set all kinds of prices based on rumors, news, and just fluctuations driven by trading (the stock goes down a little so more people jump out, causing it to continue down).  These fluctuations really mean nothing about the underlying business, and we don’t want to get out of a good company just because it becomes temporarily unpopular.  The second reason is that various traders use stop loss orders to make profits and get shares at lower prices.  A stock may move down temporarily, hit your stop causing you to sell your shares, and then shoot back up, leaving you behind.

One case where I may use a stop order is when a stock has gone up a lot and I’m looking to take some of the money off of the table and move it somewhere else (the stock has gone up enough that I don’t want to risk the loss).  In that case I may set a stop loss a few dollars below the current price, and then move the stop up if the stock rises until it eventually hits.  This is nice psychologically since you don’t feel like you’re selling a stock that is a winner and will climb higher, but in general I’ve found I end up just losing a couple of dollars when my stop gets hit and I should have just put in a market order and sold the shares.

As said above, there is what is called a stop market and a stop limit.  A stop market will sell the shares at the market price if the stop price is reached.  The stop limit will put in a limit order at the stop price if the stop is reached.  Never use a stop limit because if the stock falls below your limit price, the order will not be executed and you will still own the shares.

Finally, I may use an all-or-none order for a thinly traded stock to avoid getting a few shares and having to pay minimum commissions on more than one trade.

So there you have it.  Time to buy some shares.

To ask a question, email vtsioriginal@yahoo.com or leave the question in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

 

Blog at WordPress.com.

Up ↑

%d bloggers like this: