first posted this on April 16, 2001. anyways good to post now that everything is saved just in case I lose the copy.
Got this article in an email this morning, many things in the article make a great deal of sense, and several great points are made. However Suze Orman (I believe on CNBC) talks about believeing in a stock and averaging down, I will post later why this can be very dangerous.
thanks
selkirk
Suze Orman's
The 9 Steps to
Financial Freedom
It never ceased to amaze me when I was a stockbroker that when I would buy the exact same stocks for my clients, some would always make money and some would never make money.
When brokers find stocks they like, they try to do what is called "building a position" in the stock -- buying lots of it for their clients. For instance, if I liked Widget stock, I'd call every single client I had to tell them all about Widget. Then I'd say: "How many shares would you like, five hundred or one thousand?" I was taught in stockbroker training school never to ask a "yes" or "no" question when trying to make a sale. By asking in an open-ended way whether you want five hundred or one thousand shares, you leave the client only with a choice of how many they want, not whether they want them.
I was a good salesperson, so most of my clients would buy Widget at, let's say, 85 a share. Now let's suppose all of a sudden Widget cuts its dividend, and before you know it, the stock is down to 40 -- and my phone begins ringing off the hook.
Some people would invariably say, "Sell, sell, I don't want to lose more than half my money!" In those cases, I had no choice but to sell their stock. Some of my other clients, in for a longer haul, even though they might not have been happy that the stock was down to 40, still knew that this was a good company and that in time it could come back. Often they would buy more shares at the lower price. Before you knew it, Widgets was at 120 a share.
All of my clients had bought the same stock. Some had made money, and some had lost it.
It bothered me when my clients lost money, and I began to think more about it. Finally I realized that it wasn't a matter of luck, but a matter of, well, spirit, for lack of a better word. It was the attitude, the instinct, with which the client went into an investment that helped to determine whether he or she would make money or lose money. Of course, there are good investments and bad investments. But however solid the investment, the investor has to be solidly behind his or her investment, as well.
When I started as a stockbroker, the financial world was quite different from the way it is today -- and it's still changing fast. You might think that this means it's all the more important to have a financial adviser look after your money for you, but the opposite is true. The changes in the financial world are actually making it much, much easier, and much, much safer, for individual investors to invest and look after their own money.
When I first started out at Merrill Lynch, money-market accounts were just beginning, mutual funds numbered in the low hundreds and hadn't yet been embraced by a wide range of investors, much less changed the way millions of us now invest for our futures. Discounted ways to invest were just starting, which meant that the most common way into the stock market was through a full-service broker like mine.
Suze Orman: Money Mistakes You Can't Afford
Full-service brokers charge high commissions and offer investment advice. They certainly are reputable, and you may eventually feel more comfortable investing with their guidance. But today, discount firms are thriving. Why? Because smart consumers always flock to where they'll get the best deal for their money. On their way, they stop to study what they're buying and where they're buying it.
I'm not in any way suggesting that if you take your nest egg and go out and find a speculative stock to invest it all in, you'll get rich. You won't. You'll be a sitting duck if you do that. What is more, I doubt your inner voice would guide you in that direction, anyway.
Nor am I suggesting that you shouldn't listen to others or learn about what you're planning to invest in. You need information to make good decisions. But your inner voice will help you weigh that information properly. What I am suggesting is that you test the waters before you jump in with everything you have and that you practice listening to that inner voice. As soon as you see how easy it is to stay afloat, and get used to the investing temperature, so to speak, you very well might want to go in deeper.
It doesn't matter if you have a large lump sum you want to invest or if you're just starting from scratch and want to put in a little here, a little there, as you can. Rule No. 1 is that to invest in the stock market (through mutual funds, index funds and the like, not just by buying and selling this stock or that one) you must invest only money that you will not need to touch for at least 10 years. Why? Because there has never in the history of the stock market been a 10-year period of time when stocks have not outperformed every single other investment you could have made.
Not that history always repeats itself, but this is a spectacular indicator -- a really great bet.
If you don't give your money 10 years, however, you will be taking a significant risk. If you don't have the time to leave this money sitting there, it is possible that when you do need to take it out, that need will arise at the worst possible time. Let's say you invested in 1999 and were planning to withdraw the money to buy a house within the next four years. You decided, "Okay, I'll just invest in the market, make all I can, and then have more money when the time comes to make the down payment."
One year later you find the house you want and make the offer, which is accepted on the very day the market goes down considerably. You have to sell on an awful market day and you will most likely take out far less than you initially put in. If you could have just waited -- but you could not, for you needed the money to buy your home. So time is everything.
Remember dollar cost averaging? That's the technique of walking money into an investment in small steps over a long time. This is the technique that works so well for long-term growth, in which you are investing wisely by limiting your risk. If you are investing that $50 or more a month, or if you have a huge stash of cash in a savings account that you now feel right about testing the waters with, this is your method of investing, because with dollar cost averaging, you raise your chances enormously of ending up a winner.
I am not talking here about you turning into one of those tycoons in B-movies who is always shouting, "Buy, buy, buy" or "Sell, sell, sell" into the half-dozen phones on his desk. Instead I'm talking about you venturing into the market in a safe way, spreading your money among dozens or hundreds of stocks, via mutual funds that gifted professionals spend their lifetimes watching and guarding, and having time and the market touch your money with magic.
These days, the richest and savviest investors may like to shout, "Buy, buy, buy" or "Sell, sell, sell" into a phone from time to time for the thrill (and potential payoff) of playing the market on a hunch or a tip. But these same investors have most of their money exactly where I am going to tell you to put yours: in a safe place, where over time it will grow and grow.
If you are reading this and still feeling your inner voice say, "No, I can't do this, it's not right for me," then consider hiring a professional adviser. But if you can, try testing the waters on your own first. Most people, I find, discover they truly love dealing with their money once they understand how to do it. Just remember: Give your money 10 years to grow.
Got this article in an email this morning, many things in the article make a great deal of sense, and several great points are made. However Suze Orman (I believe on CNBC) talks about believeing in a stock and averaging down, I will post later why this can be very dangerous.
thanks
selkirk
Suze Orman's
The 9 Steps to
Financial Freedom
It never ceased to amaze me when I was a stockbroker that when I would buy the exact same stocks for my clients, some would always make money and some would never make money.
When brokers find stocks they like, they try to do what is called "building a position" in the stock -- buying lots of it for their clients. For instance, if I liked Widget stock, I'd call every single client I had to tell them all about Widget. Then I'd say: "How many shares would you like, five hundred or one thousand?" I was taught in stockbroker training school never to ask a "yes" or "no" question when trying to make a sale. By asking in an open-ended way whether you want five hundred or one thousand shares, you leave the client only with a choice of how many they want, not whether they want them.
I was a good salesperson, so most of my clients would buy Widget at, let's say, 85 a share. Now let's suppose all of a sudden Widget cuts its dividend, and before you know it, the stock is down to 40 -- and my phone begins ringing off the hook.
Some people would invariably say, "Sell, sell, I don't want to lose more than half my money!" In those cases, I had no choice but to sell their stock. Some of my other clients, in for a longer haul, even though they might not have been happy that the stock was down to 40, still knew that this was a good company and that in time it could come back. Often they would buy more shares at the lower price. Before you knew it, Widgets was at 120 a share.
All of my clients had bought the same stock. Some had made money, and some had lost it.
It bothered me when my clients lost money, and I began to think more about it. Finally I realized that it wasn't a matter of luck, but a matter of, well, spirit, for lack of a better word. It was the attitude, the instinct, with which the client went into an investment that helped to determine whether he or she would make money or lose money. Of course, there are good investments and bad investments. But however solid the investment, the investor has to be solidly behind his or her investment, as well.
When I started as a stockbroker, the financial world was quite different from the way it is today -- and it's still changing fast. You might think that this means it's all the more important to have a financial adviser look after your money for you, but the opposite is true. The changes in the financial world are actually making it much, much easier, and much, much safer, for individual investors to invest and look after their own money.
When I first started out at Merrill Lynch, money-market accounts were just beginning, mutual funds numbered in the low hundreds and hadn't yet been embraced by a wide range of investors, much less changed the way millions of us now invest for our futures. Discounted ways to invest were just starting, which meant that the most common way into the stock market was through a full-service broker like mine.
Suze Orman: Money Mistakes You Can't Afford
Full-service brokers charge high commissions and offer investment advice. They certainly are reputable, and you may eventually feel more comfortable investing with their guidance. But today, discount firms are thriving. Why? Because smart consumers always flock to where they'll get the best deal for their money. On their way, they stop to study what they're buying and where they're buying it.
I'm not in any way suggesting that if you take your nest egg and go out and find a speculative stock to invest it all in, you'll get rich. You won't. You'll be a sitting duck if you do that. What is more, I doubt your inner voice would guide you in that direction, anyway.
Nor am I suggesting that you shouldn't listen to others or learn about what you're planning to invest in. You need information to make good decisions. But your inner voice will help you weigh that information properly. What I am suggesting is that you test the waters before you jump in with everything you have and that you practice listening to that inner voice. As soon as you see how easy it is to stay afloat, and get used to the investing temperature, so to speak, you very well might want to go in deeper.
It doesn't matter if you have a large lump sum you want to invest or if you're just starting from scratch and want to put in a little here, a little there, as you can. Rule No. 1 is that to invest in the stock market (through mutual funds, index funds and the like, not just by buying and selling this stock or that one) you must invest only money that you will not need to touch for at least 10 years. Why? Because there has never in the history of the stock market been a 10-year period of time when stocks have not outperformed every single other investment you could have made.
Not that history always repeats itself, but this is a spectacular indicator -- a really great bet.
If you don't give your money 10 years, however, you will be taking a significant risk. If you don't have the time to leave this money sitting there, it is possible that when you do need to take it out, that need will arise at the worst possible time. Let's say you invested in 1999 and were planning to withdraw the money to buy a house within the next four years. You decided, "Okay, I'll just invest in the market, make all I can, and then have more money when the time comes to make the down payment."
One year later you find the house you want and make the offer, which is accepted on the very day the market goes down considerably. You have to sell on an awful market day and you will most likely take out far less than you initially put in. If you could have just waited -- but you could not, for you needed the money to buy your home. So time is everything.
Remember dollar cost averaging? That's the technique of walking money into an investment in small steps over a long time. This is the technique that works so well for long-term growth, in which you are investing wisely by limiting your risk. If you are investing that $50 or more a month, or if you have a huge stash of cash in a savings account that you now feel right about testing the waters with, this is your method of investing, because with dollar cost averaging, you raise your chances enormously of ending up a winner.
I am not talking here about you turning into one of those tycoons in B-movies who is always shouting, "Buy, buy, buy" or "Sell, sell, sell" into the half-dozen phones on his desk. Instead I'm talking about you venturing into the market in a safe way, spreading your money among dozens or hundreds of stocks, via mutual funds that gifted professionals spend their lifetimes watching and guarding, and having time and the market touch your money with magic.
These days, the richest and savviest investors may like to shout, "Buy, buy, buy" or "Sell, sell, sell" into a phone from time to time for the thrill (and potential payoff) of playing the market on a hunch or a tip. But these same investors have most of their money exactly where I am going to tell you to put yours: in a safe place, where over time it will grow and grow.
If you are reading this and still feeling your inner voice say, "No, I can't do this, it's not right for me," then consider hiring a professional adviser. But if you can, try testing the waters on your own first. Most people, I find, discover they truly love dealing with their money once they understand how to do it. Just remember: Give your money 10 years to grow.
