Sheldon Jacobs - Investing without Wall Street: The Five Essentials of Financial Freedom

Contents

A wise man should have money in his head, but not in his heart.

Jonathan Swift

Copyright 2012 by Sheldon Jacobs. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Jacobs, Sheldon.

Investing without Wall Street: The Five Essentials of Financial Freedom / Sheldon Jacobs.

pages cm

Includes index.

ISBN 978-1-118-20464-1 (cloth); ISBN 978-1-118-22839-5 (ebk); ISBN 978-1-118-23927-8 (ebk); ISBN 978-1-118-26560-4 (ebk)

1. Investments. I. Title.

HG4521.J2534 2012

332.6dc23

2011045566

To my wife, Bett, who has enriched my journey with love.

Also by Sheldon Jacobs

Put Money in Your Pocket: The Art of Selecting No-Load Mutual Funds for Maximum Gain

The Handbook for No-Load Fund Investors (20 annual editions)

Sheldon Jacobs Guide to Successful No-Load Fund Investing (2 editions)

How to Pick the Best No-Load Mutual Funds for Solid Growth and Safety

Preface

With some books the Preface is unimportant. Thats not the case with this book. This preface provides an overview of what investors really need to know to prosper in todays markets, which are so very different from the ones we loved in the 1980s and 1990s. But first, I need to quickly touch on two money-making basics.

Do-it-yourself is the real key to lifetime profits.

First of all, you need to appreciate the huge difference between doing-it-yourself and hiring professional guidance. Although there is value in a book explaining the best ways to work with a broker or professional investment advisor, the real benefit comes from a book that teaches you, simply and clearly, how to do it yourself.

The wealth difference is overwhelming. Over a 40-year investing lifetime, an average earner can make $252,000 more doing it him or herself than a person who has to share his or her profits with professionals. Thats a lot of money going to advisors, not you. Thats why this book is titled Investing without Wall Street ! (See Chapter 4 for the computations.)

Achieving this wealth increment is within everybodys ability and takes very little time. In addition, by doing it yourself, you will know your self-interest has always been put first. Thats no small thing in an era where crooks like Bernard Madoff stalk uninformed investors. Investing without Wall Street gives you control of your finances.

Savings are crucial.

All the advice offered in this book is academic if you have no money to invest. Money is accumulated by saving. Savings are not just a good idea; they are crucial.

There is no need for this book to discuss the mechanics of saving. You simply spend less than you earn. If you dont already have savings, start saving . Start as early as you can, the earlier the better. If you have some savings, save more .

A 12-Year-Olds Commentary on Saving

The top reasons why I think it is important to save are:

1. To help me tell the difference between my needs and wants

2. To gain interest on my money

3. To save for larger things such as a bicycle

4. Currently I am working to raise money to go to camp next summer.

Sarah, Shepherdstown, WV. Reported by Michelle Singletary, WashingtonPost.com .

As Bill Donoghue, the money-market maven, once said, If you cant live on your income now, you cant live on 10 percent less. So save 10 percent.

Heres a summary of the books investing advice and philosophy.

Todays Times Call for More Conservative Strategies

In the 1980s and 1990s, the buy-and-hold investing strategy superseded all others. You didnt have to be a brilliant stock- or fund-picker; all you had to do was buy-and-hold stocks, and you could have earned 18 to 19 percent a year.

The market is unlikely to achieve gains of this magnitude again in my lifetime, and possibly yours. Thats because secular bull markets, the long-lived megatrends that last 5 to 20 years, usually occur only when there are dynamic new, giant growth industries such as computers, information technology, the Internet, and in earlier eras, canals, railroads, electricity and automobiles. They provide the basic foundation. All these advances had myriad applications over a broad range of industries. I dont see anything comparable on the horizon. Technological advances since the computer and the Internet became mainstream have been more evolutionary than revolutionary. The new social media are evolutionary, even though they have produced several billionaires.

For many years to come, I believe stock markets will be in a secular bear market. They will move up and down, not basically up as in the 1990s. I expect average gains over the next decade or more will be in the neighborhood of 6 to 7 percent annually. Thats because I dont see any reason for the price/earnings (P/E) ratios of stocks to expand significantly in the coming years, and they may possibly contract. (In the 1980s and 1990s, 43 percent of all gains came from P/E expansion, as investors paid more and more for a dollar of corporate earnings.) I believe stocks, over the next decade or more, will at best gain pretty much in line with their earnings increases (which will depend to a greater extent on the economy than has previously been the case).

The good news is that this means stocks can still deliver returns superior to bonds or cash, albeit with greater risk (which Ill show you how to control). The best news is that since stocks declined 38.5 percent in 2008, they could easily have double-digit gains over the next five to six years, and return to that estimated long-term average.