If there is one thing both investing in the stock market and online poker obviously have in common, it’s gambling. Both require the high levels of risk, and there is often hard earned money on the line. However, online poker for US citizens, does offer some insight into investing in the stock market, and can offer practical lessons for a relatively inexpensive price. A few easy, yet invaluable, lessons online poker can teach you about investing include:

Start Small

Poker players rarely go all in on the first hand, and generally ones that do risk losing immediately. To monitor their wagering, most poker players will ease themselves into a game. They may start by placing small bets until they get a feel for the other players. The same goes for stock investing – especially for novice investors. If you don’t have experience in the stock markets, don’t be afraid to start small. Let yourself get comfortable and get a true feel for what is going on before making further investments.

Some Things Are Just Out of Your Control

No one wants to admit that they are not in control – especially when their money is involved. However, just like with poker, it’s true for investing too. Poker is a game of skill and probability, and so is investing in the stock market. While you may be able to may be able to choose seemingly stable stocks, unexpected economic and political factors can affect any stock.

Although certain factors may be out of your control, that doesn’t mean that you should turn a blind eye to your investments. What it does mean is that you need to gain a greater sense of awareness. In poker, a player knows that there are times when luck may not be on his side. However, instead of playing blindly, he focuses on what he can control: his own reactions. For investors, it means knowing what is going on in the world around you, and knowing how those things could affect your investments. So when a political or economic event occurs, you know how to react to save your investments.

Know When to Fold

In poker, the players who stay in the game the longest and reap the greatest rewards, are those who know when to fold. The same goes for investing. While we may not want to admit it, not every investment is going to have a high return. Some may even fail completely. To avoid losing more money than necessary, learn when to pull out of an investment. There is no reason to ride a stock into the ground because it may eventually turn around. Doing so, could cost you hundreds, if not thousands, in invested dollars.

Penny stocks are investments that trade at five dollars and under. Good for short term investments, usually these stocks are a low investment priority, and can be a good way for new investors to practice on the market. These types of stocks can be bought and sold cheaply, and can result in excellent return for such a small investment. However, penny stocks are a speculative investments, but there isn’t the danger of losing a large investment. Look at penny stocks as a portion of money that’s set aside that you can risk.

For longer-term stocks, you’ll want to look into investments that have shown a consistent growth and return over a long period of time. Stocks, such as Johnson & Johnson, Apple, and Google, are always going to be a great way to put your money to work. These types of stocks still have the buy and hold mentality of committing to an investment for a long time and are designed for those planning for future retirement.

As we know, every stock is a risk, but there are different levels of risk involved. It’s up to you to educate yourself on the options, and decide which kind of stock works best for your unique needs.

1. S&P 500: The S&P 500 is an index which publishes the
   prices of large-cap common stocks which are traded throughout the United States.
2. Large common stocks: Large stocks are large securities where you
   have equity stake in a company making you an owner. Stocks are derivatives or shares of the
   company.
3. Small common stocks: Small stocks are large securities where you
   have equity stake in a company making you an owner. Stocks are derivatives or shares of the
   company.
4. International bonds: A bond is
   debt security which means that you
   would purchase another country’s
   debt and they would pay it back to you with interest. It is a
   type of security where you would have stake in the company as a lender.
5. Real Estate Investment Trusts:
   Real estate investment trusts are tax
   designations for corporate
   entities which are investing in real estate. They are used to
   eliminate any corporate income taxes, providing an investment
   structure for real
   estate that mutual funds provide for stocks.

Once you’ve made your investments in each sector, be sure not to panic when you see that the market is dropping. At any given time, you will have one particular market falling and its counter-part rising. Instead of panicking, remember to move profit from the rising market into the falling market, making large purchases at a low cost and increasing your profits no matter what the outlook.

About The Author: Elias Cortez is the editor of www.TopNetbookpicks.com and provides reviews and information for netbooks computer products. You can read his latest reviews about the acerao532h and the toshiba netbook nb305 and other popular netbooks at his website.

I make no qualms about it.  I was incredibly fortunate and walked away with a private school education and a master’s degree from a top-10 program in its field with only $18,000 in student loans.  The majority of my college was paid for my father with his Amex (if you weren’t aware, if you pay for a college education on your credit card, you are likely to earn enough reward points to get a 50 inch flat panel when all is said and done).

Now, contrary to what you are going to read, I actually believe with MD over at Studenomics on why a kid should pay for his or her own college expenses.  But, where is the fun in a debate without at least one-person playing devil’s advocate.  Read on to see why parents, kids and both parties benefit from paying for a child’s college expenses.

Why – For Parents

There is some incredible savings that can be had by setting up a 529 plan for your kids’ education.  While there may be some state deductions you can take for contributing to a 529, there are no federal deductions.  However, that doesn’t mean this plan isn’t the shiz.  If you put money into a 529, it will grow tax-deferred.  When you go to withdraw funds, it will be free of federal taxes.  That is some serious savings.  Considering there are no income limits in order to contribute and the contribution limit in most states greatly exceeds $300,000, this is one of the best vehicles to invest.  Oh, and for the control freak parents out there (read the next paragraph too), the money inside of a 529 doesn’t ever leave the donor’s control.  If for some reason you would rather not give the contents of the 529 to your kid, you don’t have to.  It’s not their money, it’s yours.

To go along with the money remaining under your control, the obvious benefit of paying for your kids college is that you now have a say in their decision.  I am not suggesting you hold this over your kids’ head. But if you feel they need to work hard for grades in high school or they need to apply for scholarships to help offset some of the costs, you have the means to persuade them.  However, I do urge you not to limit their school choice or their choice of study (being a Jewish kid, the old joke was, “what’s your major? Law or medicine?”).  Let them be an individual, but you do have some say in how they reach the end goal by using your means.

Why – For Kids

The benefits for paying for your kids’ education greatly favor the children, but that shouldn’t be a surprise.  There are two major benefits that will make a difference in your children’s life if you pay for their education.  The first benefit is that they will be able to focus on more things than just making money while in college.  That means they will be able to spend more time studying, more time looking for quality internships (even if they are unpaid) and more time partying.  Yes, partying – on your dime! The relationships that people foster in college last a lifetime and help to build a social network and framework for their careers.  You should be proud to have your kids be partying with your money, as these types of relationships will make them far more successful than the average college course.

The second benefit is giving your kids a fresh start upon completion of college.  Instead of feeling weighed down by a mountain of debt they will be free to go after their dreams.  There are enough examples of personal finance bloggers that feel bogged down by student loans and end up taking a 9-5 job they can’t stand because they feel the pressure to pay down their debt.  Us readers can empathize with them.  If you have the means to aid your kids, this may be the greatest benefit of all.

Why – For Both Parties

There are some additional benefits to paying for your kids’ college for both parties.   Primarily, after college you can get rid of your kids and they can get rid of you. You paid for college, therefore if they hold up to their end of the bargain, they should be able to find work at go out and start their lives.

Economically speaking it makes sense as well.  Making best use of your money and your kids’ money, using a 529 saves you from capital gains tax as well as saving your kids from having to pay interest on loans they would otherwise have to take out.

Thanks for reading my side of this debate.  Be sure to check out the flipside over at Studenomics and let us know what you think by leaving a comment.

What is passive investing

Passive investing is the type of investing I mentioned yesterday when I talked about “setting and forgetting” my accounts. It means you are taking a passive approach to investing. You aren’t trying to time the market, you aren’t day trading, you aren’t caring about the hot stock tip you heard about at a dinner party. You are sitting back and relaxing with a low cost index fund, watching your wealth grow exponentially over time. The market has historically returned an average of 8% . While average is not normal (I love that post) it is a good bet that the trend will continue over time.

A passive investor will employ the following techniques:

• Buying index or lifecycle funds and holding them for an extended period of time
• Regularly contributes to their portfolio
• Reinvests dividends to give their portfolio an extra boost in the game of compounding
• Doesn’t worry about daily market fluctuations

Why is passive better than active investing.

Active investors are people that trade and turnover stocks quickly for a profit. This can be done with some success but that doesn’t mean everyone will be successful. Buying and selling funds or stocks carries hefty commissions and capital gains tax implications. An active investor can spend all week researching, buying and selling their stock and making a decent return on their investment. However, that return is whittled away by commissions and taxes.

Timing is a major factor in active investing that one doesn’t have to worry about with passive investing. For example, if you are a new investor and started to day trade last week, you probably lost 5-10% of your money in just a few days. However, if you started to invest this week you would be up 5-10% . Would you like to bet your wealth and livelihood on a method as fickle as this? It’s surely not a strategy for me.

Want others are saying?

Over fifteen years to 1998, on a pre-tax basis the Vanguard S&P 500 index fund outperformed 94% of general equity mutual funds and 97% on a post-tax basis. The post-tax average difference in annual performance was 4.2% .~ From Common Sense on Mutual Funds, by John Bogle

Research supporting passive management comes from the nation’s universities and privately funded research centers, not from Wall Street firms, powerful banks, insurance companies, active managers, and other groups with a vested interest in the huge profits available from active management.

The results from this research are very clear: Active investment management is an appealing mirage which substantially boosts costs and decreases returns compared to properly designed passive portfolios. Research employed in the development of passive and index investment strategy has shown that. ~ From Evanson Asset Management

What if I don’t have money to invest?

Do not despair if you don’t have any money to invest. Today’s post is not about how to invest in the Marley today. It’s about how to build wealth over time whenever you are ready to begin. However, saying you don’t have money to invest vs actually not having money to invest are two different stories. I know a lot of people that don’t make a lot of money but could afford to put $50 a month into the market. Starting off small is not a problem, as your income grows so will the amount you invest. Starting is the most important part. Once you make that commitment to add money to your investments and passively let them grow over time, you are on the path towards creating true wealth, not just money.

I urge the average investor saving for long-term goals to become a passive investor.  Passive investing is a way to build wealth.  If you are looking to make money, and have the extra money to play around with, feel free to dabble in the market and become an active investor. Look at this type of investing as a hobby, not as a way to provide for your family and your future.

Some Great Links that I have learned from or have made me think differently with regards to investing:
12 Investing Mistakes I’ve Made (and How You Can Learn From Them) – From Moolanomy (Guest Post on GRS)
Do you have an Investing Exit Strategy? – From Mrs. Micah
Index Funds are still the best way to buy stocks – From the Examiner

]]> http://mynextbuck.com/the-lazy-way-to-creating-real-wealth-in-the-market/feed/ 0 http://mynextbuck.com/set-it-and-forget-it-%e2%80%93-my-struggle-with-tracking-my-long-term-investments/ http://mynextbuck.com/set-it-and-forget-it-%e2%80%93-my-struggle-with-tracking-my-long-term-investments/#comments Wed, 15 Jul 2009 15:05:56 +0000 Brian http://buildingwealthtogether.com/?p=203 One of my personal struggles has always been information overload.  I am not overwhelmed by information; I constantly seek ever-changing information. This is evident in a lot of my personal interests.  I tend to enjoy things that are constantly changing, shifting, and updating.  I enjoy the news, sports, and online video games for these reasons.  Now that I have started to invest in the market, I find myself watching the stock indexes even more closely.  This… can become an addiction.

I have money in the market right now in my Roth IRA and in my brokerage account.  The Roth is not going to be tapped for almost 40 years and the brokerage account is probably going to sit and accumulate wealth for at least 10+ years.  With no short-term investments, why do I feel the need to be constantly checking how the market is doing throughout the day, everyday?  I have even had nights where I have checked the Nikkei Market (which opens at 7pm and closes at 1am EST) to see if there is any indicator of how the NYSE will react the upcoming morning.

Tell me, my investing friends, do you watch the market closely even if you are only invested for the long-term?  Is there a way to, literally, set up my investments and then forget about them except to check them around tax time?  Or, is watching our money grow slowly too much fun to not watch on a daily basis (like watching a caterpillar move across the sidewalk)?

A Traditional IRA and a Roth IRA are similar.  The primary difference between the two is that a Traditional IRA allows for people to invest pre-tax dollars (meaning you get to deduct your contributions from your taxable income) while a Roth IRA allows for you to deposit post-tax dollars.  It would seem that the Traditional IRA is the way to go, but it’s not about how the money goes in, it’s about how it comes out.  With a Traditional IRA you are taxed accordingly when you withdraw the money during your retirement.  The Roth IRA allows you to withdraw your money without paying tax on it (you already paid the taxes when you earned it via income tax).  It’s this tax advantage that makes a Roth IRA a very smart investment choice for everyone, especially young people.

So you are in your early 20s and asking yourself, why should you worry about retirement, it’s 40+ years away?  It’s these years that are the most important for investing for your retirement.  I have two examples for you and then I will explain a bit more about the benefits of a Roth IRA.

Example 1: If you invest $5000 into a Roth IRA at the age of 25, and you let your money sit in that account and compound interest for 40 years until you retire you will have $108,000 in the account when you retire.  That’s right, $5000 today can equal $108,000 in the future assuming an annual growth rate of 8% (this percentage is the historical annual growth rate of the market).

Example 1 – Contribute $5000 at age 25 and watch it become $108,000 40 years from now

Example 2: In this example, person A (the blue line) contributes $5000 a year into their Roth IRA starting when they are 25 years old. They contribute for ten consecutive years ($50,000 in total).  Assuming the same 8% returns as above they will have a nest-egg of $837,000.   Person B starts contributing to their Roth IRA at age 35.  They put $5000 a year into their Roth for the next 30 years ($150,000 in total).  That individual ends up with around  a $617,000 nest egg.

Example 2 – Person A Contributes $50,000 from age 25-35, Person B contributes $150,000 from age 35-65. Person A ends up with over $800,000. Person B ends up with around $600,000. The Power of Investing Early!

Person B isn’t in bad shape by contributing to their Roth IRA starting at age 35, but Person A has the upper hand by starting 10 years earlier.  Person A contributed $100,000 less in after-tax money, and has an additional $200,000 to show for it, solely because they started earlier.  If you have the means, starting to contribute to your Roth IRA at a young age should be a priority.  (Head to Dinkytown’s Roth IRA Calculator to play with these numbers further)

Facts about Roth IRAs:

• You can contribute up to $5000 if you file your taxes as a single adult and make less than $105,000.  (The income limits will be steadily increasing over time to keep up with inflation).
• People over the age of 50 can contribute an extra $1000 into their Roth each year, meaning they can contribute $6000 a year.
• You can withdraw your Roth IRA contributions at any time without fear of penalties or fees.  However, you will be required to pay a hefty percentage if you withdraw Roth IRA earnings before you are 59 ½.   This money is for your retirement!
• You will not pay capital gains taxes on your earnings (your money is only taxed once with a Roth IRA, and that is from income tax).

With the uncertainty of Social Security being around for my generation, it is important to look towards retirement, and make sure we can enjoy our later years in style.  Person A in Example 2shows us why investing early is so important.  Our twenties and early thirties are the most valuable time to invest and will give you a head start on saving for your retirement and accumulating wealth.  To think, $5000 today could be $110,000 years from now.  This is the classic characterization of having your money work for you.

To find out more information about a Roth IRA, please click here.  To learn about where I set up my Roth IRA and how it is invested, please take a look at my post on Optimizing My Own Accounts – Making My Money Work for Me.  If you have any questions about Roth IRAs or other retirement vehicles, feel free to contact me or leave a comment.

The author, Burton Malkiel, references two different theories with regard to investing based on what the prospects of the future hold.  He calls these two theories, “The Firm Foundation Theory” and the “Castle-in-the-air Theory”.

The Firm Foundation Theory assumes that there is an intrinsic value for all stocks.  Something is either undervalued, overvalued, or at the right price.  Discovering what is undervalued or overvalued, and playing the market in the right direction until the stock reaches equilibrium is the way this theory works.  This also epitomizes the ‘buy and hold’ strategy of investing.  For example, lets assume Microsoft’s stock has been in the tank for some reason the past handful of months.  You know they will bounce back eventually; it’s only a matter of time.  So you buy the stock when it’s low, and hold onto it.  Eventually it will come back to its equilibrium value, and you made yourself a nice profit.  Warren Buffett is the perfect example of someone who has made billions using strategies similar to this.

Tickle Me Elmo Was The Hottest Toy of 1996

The Castle-in-the-air Theory was put forth by legendary economist John Maynard Keynes.  In layman’s terms, Keynes felt that investors were better off and would rather catch trends on the upswing, and then sell their stake in the trend at its peak.  For example, if you bought a crate of Tickle Me Elmo’s back in the summer of 96 for $30 a piece, you could have bought yourself a couple of cars if you sold your stock in early December of 96.  However, if you bought that same crate of Elmo’s in late December, and held onto them until January, you stood to lose a lot of money.  The Castle-in-the-air theory takes advantage of trends.  If you get in on a hot stock before anyone else, and exit just as it’s starting to plateau or fall, you have done well.  This theory focuses on consumer psychology more than on actual valuation of stocks.

There will be more to come from this book, but these were interesting enough theories to share.  If you have read the book, or if you have other investing books to recommend, please leave a comment below.