Investing Plan – What should I Do:
You can make money if you buy and sell any asset at the right time for the right price. This is actually much harder than you think, in fact for most people, it is almost impossible because they don’t have the knowledge or the time to learn enough about the asset.
The easiest way for the average investor to become wealthy is to dollar-cost-average (investing a monthly or quarterly fixed dollar amount) into ETFs. The other alternatives: arrange for someone to manage your investments, or learn to do your own investing with the help of a subscription advice service. Over the last 200 years the stock market averaged about an 8% return a year, seeing how to become a millionaire.
Learn about ETFs: There are many different types, a list of all the ETFs by classification. Three of the most popular ETFs are SPY which mirrors the Standard and Poor’s 500 index, DIA, which mirrors the Dow Jones Industrial Average, and QQQ mirrors the NASDAQ 100 Index. Both the SPY and the QQQ have a high percentage of growth stocks, the links above have the current percentages of individual stocks valued in these ETFs.
Click on these links for more information on understanding the Economy, the Federal Reserve System, and investing in ETFs. Finally, Understanding Graphing of stocks and ETFs is important. You also need to monitor the Federal Reserve’s changing interest rates and how the economy is growing.
You need to diversify into more fixed-income assets as you get older, see understanding preferred stock. The rate of earnings is better for preferred stock than in other fixed assets. Look at the following suggested portfolio diversification below. As you get older you need to move into a more conservative portfolio, particularly for smaller portfolios. The portfolios below are what I would hold as of January 2020.
- SPY 30% of Portfolio:
- QQQ 20% of Portfolio
- China ETFs 20% of Portfolio
- Preferred stocks or Bond ETFs 30% of Portfolio
- SPY 15% of Portfolio
- QQQ 10% of Portfolio
- DIA 15% of Portfolio
- China ETFs 10% of Portfolio
- Preferred stock or Bond ETFs 50% of Portfolio
- Spy 10% of Portfolio
- QQQ 5% of Portfolio
- DIA 10% of Portfolio
- China 5% of Portfolio
- Preferred stock or Bond ETFs 70% of Portfolio
Understanding How to Vary Portfolios:
It is important that you vary portfolios as soon as conditions in the world change. For instance, China has a coronavirus that could impact its economy and it is impossible to determine how it will affect the economy at this time. So you can invest and hope or you can wait until you have a better understanding of the impact on its economy. Also right now Amazon, Microsoft, Apple, Facebook, and Google appear to be growing very rapidly so you may want to reverse the SPY and QQQ holdings percentage in the portfolios above since these stocks have a higher weighting in the QQQ. You want to avoid health care stocks until after the election in the fall if you think the Democrats will win the Senate, House, and Presidency. They want to change health care insurance and prescription drug prices.
Finally, if you believe that the national debt will cause a bad recession or depression then you need to monitor the economy and national debt and be ready to sell. Every day you need to be ready to react to both economic and other news that can affect the market.
Investing Sweet Spots:
Understanding the price-earnings ratio (P/E ratio) is one of if not the most important things to consider when investing in ETFs and common stocks. An example of this ratio, an ETF or company earns $1 a share and sells for $20. It has a P/E ratio of 20 times earnings. If it sold for $30 it would be 30 times earnings. This is important because if earnings increase by 30 cents a year and it’s P/E is 20 its price will go up to $26, if it is 30 times it would go to $29, and if it is 15 it would only increase to $24.50. Why not invest in something higher like a 40 to 70 P/E? The higher the P/E generally, the higher the risk and more difficult to stay at a higher P/E because the price-earnings ratio is a function of earnings growth prospects and investors greed and fear. This results in many high P/E entities decreasing in value.
Try to find entities with rising P/E ratios. For instance, if an entity goes from a 10 P/E to a 20 P/E this means the entity doubles without any increase in earnings. Increases in the P/E ratios are generally caused by an announcement of new products, services, or a merger. However, entities with increasing P/Es usually have increasing earnings so you get two things increasing their value instead of just one.
Finally, for longer-term investors try to envision where the entity’s earnings and the stock price will be in 3 years. If you envision the entity’s earnings increasing by at least 36% then you want to invest, if not you should probably find a good preferred stock and invest in that.
Develop your Trading Skills:
In December of 2018 my portfolio declined by almost 20%, I decided there had to be a better way to invest. I started to look at different methods of making money in the market up until this time I had been mostly a buy and hold investor. After this I also became a swing trader and option trader.
If you read the books below or subscribe to the newsletters they will completely change your outlook on investing and the markets. Remember whenever you invest and whatever system you use there are risks, options are especially risky, you will lose money on trades depending on what the stock market does, and individual stocks, options or ETFs do in the market. You can also lose some or all your money invested if the market goes in the opposite direction when you buy or sell calls, puts, or buy stocks or ETFs. However, over the longer term you should make money, particularly if you do the dollar-cost averaging.
- Swing Trading for Dummies
- Trading Options for Dummies
- Trend Trading for Dummies
- Candlestick Charting for Dummies
- Follow the Smart Money
- Price Surge System
- Trade Like Chuck
- The Six-Figure Slide System
Additional information on Investing:
- Investing Information
- Investopedia – terms and definitions
- Stock charts – an explanation of graphing stocks
- Acorns – very good for small first time investors
- Comparison of Online Brokers
Real Estate is one of the best investment asset classes. The reason is because you get to depreciate the buildings and other improvements while they increase in value. However, you need to be aware of the tax regulations to get the full benefit of the losses the depreciation can give you. Also currently the cap rates are very low compared to historical cap rates, which means that real estate is overvalued if we go back to higher interest rates. You also have issues with managing the real estate, especially if it is residential real estate. One way to solve some of these issues is by investing in Real Estate Investment Trusts (REITS) that own real estate, which give you many of the tax benefits while you also have professional management of the real estate.