Tycho Press - Stock Market Investing for Beginners: Essentials to Start Investing Successfully

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ISBNs: Print 978-1-62315-257-4 | eBook 978-1-62315-302-1

CONTENTS

WHY INVEST?

E verybody invests. From the savvy stockbroker on Wall Street to the assembly line worker who skips breakfast every Friday because he runs out of money before his next paycheck, everyone invests their time, effort, and attention in what they find important.

If you spend your Saturdays training for a marathon or tackling 50-mile bike rides, youre investing in your health. If you pack your weekends with family activities, taking the kids to swimming practice or attending Little League games or visiting museums, youre investing in your children. And if you attend classes in hopes that a college degree will help you land a better job, youre investing in your career.

While each of these forms of investing appears to support a different goal, all of themand dozens moreshare a common purpose: to provide for the future. Investing in good health now increases your chances of a happier, more productive retirement. Investing in your family now can build relationships that will sustain in times when you may require more from others yet have less to give in return. Investing in your career now can open professional and financial doors currently out of reach.

Most people reap the richest rewards from their investments after retirement, but the sooner you start planning, the better off you will be in the future. Making even a small commitment to a different kind of investingthe financial strategies presented in this bookcan put you well on your way to a longer and stronger retirement.

Common Motivations

Motivations behind financial investing are nearly as numerous as investors themselves. Of course, your priorities may differ from your neighbors, but for the most part, motivations for investing tend to fall into three categories:

• Investing to build wealth.
• Investing to support a family.
• Investing to prepare for retirement.

Investors focused on building wealth tend to concentrate more on the near future than do other investors. Wealth allows you to establish and maintain a comfortable lifestyle. For some, that comfort might mean a nice-sized house, a couple of reliable cars, and a trip to somewhere warm for a week every January. Many investors are happy with such a lifestyle, while others set loftier goals. By building wealth slowly over timethe safest and surest way to do ityou can improve your lifestyle along with your net worth.

Investors who prioritize supporting a family often seek to accumulate enough wealth now to afford a home in a neighborhood with good schools, the occasional vacation, and things like ballet slippers, algebra tutoring, and summer camp. At the same time, these investors must look ahead to college, which never seems to get any cheaper. All of this is to say that family-oriented investors must be flexible.

Retirement-oriented investors take a longer view than both the wealth builders and the family oriented. You know the typethe type that work hard for 40 years, climbing the corporate ladder. Like most of us, they earn a respectable living without quite reaching the top rungs. Yet they live below their means and always keep one eye on the horizon. The ultimate goal for these investors is a smooth transition to retirement, where even without a paycheck they can maintain the standard of living they spent all those years earning.

Whether you seek to support a robust lifestyle, provide a happy home for your children, or just store enough away so you wont have to work until you turn 80, you can improve the odds of reaching your goals by putting your money to work. Whether youre 20, 40, or 60, youll enjoy more choices decades from now if you invest wiselystarting today.

And it needs to be today. Not tomorrow, not next week, and certainly not on that mythical day when you suddenly start bringing in more than you spend and can conveniently spare a few hundred a month. People who put off investing until its convenient spend their golden years eating ramen noodles. Youve got to start today.

Not sure how to proceed? Dont panic. By the end of this book, youll have a clear understanding of your financial goals as well as a number of the tools necessary to reach them. The first step is to avoid making a foolishbut frighteningly commonmistake.

Dont Kid Yourself

Many experienced investorseven some who have amassed millions of dollars in assetsdont really understand what is reasonable to expect from their investments. All too often, they say things like, I want annual returns of about 20%. But I dont want to take much risk. Statements like these drive money managers to pull out their hair, because theyre not a whole lot better informed than saying something like, I want to eat nothing but bratwurst and pizza for the rest of my life. But I also expect to consume plenty of fiber and few calories in my diet. Greed, bad choices, and stubbornness have torpedoed many an investor, but the biggest hurdle to successful investing might be unreasonable expectations.

Look at Figure 1.1. Over the last 87 years, large-company stocks have averaged annual returns of 11.8%. Over the same period, stocks of small companies delivered a 16.5% average return. Long-term government bonds returned an average of 6.1% a year since 1926, while Treasury billsabout the lowest-risk investment availablemanaged just 3.6% returns. While both types of stocks handily outperformed bonds, the price of that return was overall higher risk. Small company stocks posted higher highs and lower lows than large companies and bonds, and they were also more likely than large stocks to see returns vary greatly from year to year. Investors call this type of risk volatility. Of course, bond investors didnt suffer nearly as much volatility as stock investors.