Tuesday, May 28, 2013

Long Term Investing

I have seen how long term investing can be very helpful to almost anyone. Most people want to make a whole lot of money right now or yesterday. Sometimes, these people are called Day Traders and usually most day traders go bankrupt within 5 years. Why is this? Because the laws of probability are against them. They could theoretically make 100 perfect trades upward. Then maybe the wife or kids are sick one week and they make one bad trade and then they are bankrupt. This is the problem probability wise for day traders.

Whereas long term investors usually take a much different strategy. They are literally investing for the long haul. Their goal is not to make 1 million dollars this year but to get there over time. For example, I know of someone who invested 50,000 dollars in GE in the 1950s and simply held it until 2000. The stock in 2000 or around there was now 3 million dollars. But, they didn't sell they held onto it through the downs and ups and reinvested it at a good moment and diversified into many stocks. So they are still okay today even after the downturn in the early 2000s and the one in 2008 or around there.

So, in long term investing you do a lot of research on the constancy of your (usually blue chip) investment. By investing in companies that do business all around the world you tend to be able to fight devaluation of your home currency (whatever it is) because your stock is also being bought by literally people in every country on earth through the U.S. stock market or however they are doing it. In this way by investing in U.S. based international businesses you tend to beat currency devaluation of your home currency (whatever it is around the world) and you also tend to beat inflation in your home country as well. However, a lot of research should be invested into whatever you want to invest in long term.

But remember, you are investing for at least the next 5 to 10 years or more. You shouldn't park money you are going to need within that time (unless it is an absolute unforeseen emergency) in the stock market for a long term investment. It has to be money you can live without for 5 to 10 years except for it being collateral for loans and the like. (Which means you can leave it where it is in the form it is and likely borrow against it if you have to for something like buying a home or whatever). This leaves your investment intact and allows you to go on living your life as the market goes up and down and all over the place which it is going to do. So you have to be prepared to realize that you have done the research and you are willing to wait for a good outcome. But, you diversify your investments into 10 or more companies you have researched. Never leave all your money in any one company because that always is a recipe for disaster. By spreading your risk through many companies, one or more of them are going to do really good, some will do average, and some won't do as good. As time goes on, the ones that don't do well for a certain amount of time you will sell and reinvest in other companies doing better. But you leave the really good ones and the average ones there where they are because you don't want to pay capital gains tax by selling them until you absolutely have to. Because right now capital gains tax(federal) is 20% and if you live in California it is now 13% on top of that. So, having an accountant to be able to legally deduct the 13% from the Federal 20% is necessary. So more than ever you likely need a really good and honest accountant to be in the stock market even long term these days.

I have watched two good friends of my wife and I lose 70% to 90% of their retirement portfolio because they were too much invested in growth stocks. The problem with growth stocks is that things happen very quickly both up and down. so if you are into growth stocks you have to be watching the market every single day. One of our friends was having some problems and didn't watch close enough for only 1 week and lost 70% of their investment. So, I'm not really a fan of fast growth stocks.

So, before you invest do enough research to learn what people successful in the stock markets do. Most of them do their research before they invest anything and then stay in that well researched investment sometimes for 50 years. $50,000 to 3 million dollars isn't bad if you are willing to wait for it. But no one can guarantee this on any stock. This is why research is important before you invest. and then after you invest you still have to keep tabs of what is going on at the very least once a week or more even if you are a long term investor.

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