Wednesday, January 26, 2011

The First Step

By now you’ve learned about the power of compounding and have been informed about the best investment option for the long term—stocks. You know that $100 earning average stock market returns of 11% annually will end up $18,456.48 in 50 years. You also know that since 1927 stocks have outperformed bonds in every single 30-year rolling period by an average margin of 4.8:1. If you’re still reading our blog, it’s safe to assume you’re interested in investing in stocks, correct? Probably the first thought that has popped into your head regarding stock investing is the simple to ask, hard to answer question: How do I choose a good stock?

Fear not, young grasshopper; we’re here to help you! A great first step is to think of all the products you enjoy and use on a daily basis. Maybe you wake up, check the time on your iphone (Apple), roll out of bed, and saunter towards your kitchen table where you eat a bowl of Frosted Mini Wheats (Kellogg). After eating and brushing your teeth with your Oral B toothbrush (Procter & Gamble) you may want to spend your precious time checking your G-mail (Google) on your new computer (Hewlett Packard) that runs on a Windows OS (Microsoft) before you rush to work in your Taurus (Ford). If you just take a few minutes to look around in your life, you can create a list of many companies to act as a starting point when choosing great stocks to invest in.

Now that you have a list of companies to choose from, it’s time to sort out what actually seems interesting. Don’t get us wrong, though. Many of the dullest corporations can end up phenomenal investments; however, when investing in stocks as a novice (or anyone, as a matter-of-fact), look for something that you will enjoy studying. If you love video games, for example, perhaps you would be interested in researching Activision Blizzard, the company behind Call of Duty, Guitar Hero, and World of Warcraft just to name a few franchises. Researching a business can be a long and arduous task to some once you know what you are looking for, and the best way to be relieved of boredom is to research what you like and can relate to. Knowing about the products or services from first hand experience already gives you a head start in your research.

Of course, narrowing down to a list of businesses you will enjoy studying is a great starting place, but be advised that, by all means, it is not the finish line. Several other factors should be looked at when researching stocks—and we’ll talk about these in later posts. Another thing to keep in mind is that not all businesses are easy for everyone to understand and analyze. If you feel that a sector such as biopharmaceuticals is too difficult to understand, then chances are the wise move is to move on to other businesses you can better comprehend. Even Warren Buffet—potentially the greatest investor of all time—has a file for “hard-to-research” stocks that even he views as too complicated to fully understand. If he thinks certain businesses are too difficult to analyze, then we should feel the same way as well.

As you continue to live out your daily life, think about what businesses provide products and services that stand out to you in society, narrow those down to a list of businesses that you would enjoy learning more about, and stay tuned to MoneyCents where we will continue to teach you more about making sense of your cents.

Wednesday, December 29, 2010

The Best Investment Option for the Long-Term

By now you may be pondering where the best place to invest your money is. You know that US Treasuries offer low returns with very low risk, but you want to achieve better returns than that. You may be thinking to yourself that stocks can earn great returns while being extremely risky and that bonds offer decent returns with much less risk. So bonds are the best place to invest your money, right? WHOOP WHOOP WHOOP WHOOP!! Uh oh; it looks like our myth detector is blaring full blast.

As a matter of fact, bonds aren’t necessarily safer than stocks, and they most definitely don’t offer greater returns. In Debunkery a very well known and successful investor, Ken Fisher, proves this common belief absolutely untrue. Sure, stocks can be volatile and have had many-a-year where they actually lose money. However, once we widen our time frame, things start looking much different.

Fisher shows that from 1927 to 2009 there have been 64 20-year rolling periods. In these 20-year periods, stocks have outperformed bonds in 62 out of the 64 by an average 3.7:1 margin. Still not good enough for you? Fine then (but jeez you are hard to please!). Let’s extend our time period to 30 years. Since 1927 there have been 54 30-year rolling periods, and guess what? Yup, stocks outperformed bonds in every single one by an average margin of 4.8:1. Surprise!

To put it in another perspective, let’s open up Stocks for the Long Run written by Jeremy Siegel. Early in the book, he shows what $1 invested in stocks and bonds in 1801 would look like 205 years later in 2006. If that measly buck was invested in bonds it would have been worth $18,235 in 2006, but if it had instead been placed in stocks it would have been worth $12.7 million in the end. Both look impressive, but investing that dollar in stocks would have earned about 700 times more than if had been invested in bonds. That’s a huge difference!

The numbers don’t lie. Historically stocks have been the best place to invest one’s money. When looking at the big picture with a long-term time horizon, stocks are the safest investment option and offer the best returns. We know where we are placing our money for the future, and we hope you do too now. In the future we’ll start sharing some ideas about how you can find great stocks yourself and make sense of your own cents.

In case you are interested in either of the books mentioned:

Have a wonderful holiday season and a happy New Year!

Monday, December 20, 2010

The Power of Compounding

As Albert Einstein once said, “The most powerful force in the universe is compound interest.” Although ‘most powerful’ could be a stretch, in an investment portfolio compounding does wonders. For example, consider you have $100 right now and are willing to put it in the stock market receiving the historical average return of 11% over the next 50 years without adding or removing any money. Let’s take a look:

1st Year- $111
2nd Year- $123.21
3rd Year- $136.76
4th Year- $151.81
5th Year- $168.51
10th Year- $283.94
25th Year- $1,358.55
50th Year- $18,456.48

Impressive, eh? In the first few years not a whole lot occurs, but over time your measly $100 starts gaining some nice momentum. To understand how compounding works, you have to know what three basic factors influence your returns:

1. The amount of money you initially invest per year
2. The growth rate of your investment
3. How long you keep your money invested

All these factors are important in maximizing returns; basically, depending on the amount of money, the growth rate, and the amount of time you hold the investment, your returns will fluctuate. However, one factor stands out above the other two. To see what it is, let’s look at a possible scenario:
 John and Mary are both twenty years old and are going to start their first full time jobs. John starts investing right off the bat, and for the next 25 years he invests $1,000 a year and never adds any more once he turns forty-five. On the other hand, Mary doesn’t see a need to invest money until she turns forty, and so from forty on she invests $5,000 annually. They both receive the stock market average return of 11% a year and retire at age seventy. Who has more money in the end?

If you are one of the few to guess John, then you are 100% right! Check it out:

John: $1,725,337.19
Mary: $1,104,565.87

Even though John invested only one sixth as much as Mary, his twenty extra years of time made him over half-a-million bucks richer. Compounding is definitely powerful, but time is the key to riches. We hope we showed you that the sooner you start –even with limited capital– the better off you will be in the end.

We’ll assume that most of you don’t want to figure out using mental math (is that even possible?) what you can personally achieve through compounding, so here is a compound interest calculator you can play around with:

Have a fantastic holiday, everyone! Remember to check back for more posts where we do our best to make sense of your cents!

Saturday, December 18, 2010

Welcome to MoneyCents

Hey guys! This is Aaron and Eric here!

Have you ever wanted to make money through investing but had no clue where to begin? It's no surprise if that was you or even if it is you right now; after all, the investing world is gigantic with a bazillion types of investing methods out there to use. From bonds to commodities to exchange traded funds (ETFs) to options to stocks and so forth, it can be frightening to know where to begin, especially with the madness of all the Wall Street "experts" always rambling without ceasing. So where to start? Well my friend, that's where we want to help!

Here at MoneyCents we want to provide you with the knowledge and ability to look beyond the misconceptions and illusions people commonly get tricked by and to understand that investing money is actually fun! But ultimately, our goal is to provide you with the skills that will allow you to invest successfully on your own.

Whether you are a brand new investor or already have experience, stay tuned to MoneyCents where we strive to make sense of your cents.