Freethinking about finances
Compiled by Jim Walker
07 September 1998
Reproduced without permission
If you wish to live freely, not only must you have physical & mental health and physical freedom, but you must have the ability to finance your lifestyle without inhibiting your passions. Having wealth of course will not guarantee you happiness, but it will allow you a better chance of achieving it and, at the very least, allow you financial security. You might have good health. You might live in a free country. But you can hardly live freely and happily if you and your family cannot afford a decent meal, or if you lose your home, or becoming hopelessly lost in debt. Financially secure people tend to live longer, healthier and have more self-control over their lives than poor people.
Having financial freedom, however, requires some knowledge, common sense, self-discipline and, hopefully, without the debilitating influence of beliefs. It takes a bit of work, but let me remind you that in general, its takes far more struggle to live poorly then it does to become financially secure. If you do not have the finances to solve your problems, you will spend more time arguing, worrying, waiting in lines, writing letters to institutions, paying more, and working harder just to stay alive. The relatively small amount of effort to understand how finances work will give you a much greater chance of financial freedom.
Unfortunately many people think about their finances the way dogs think when leashed to a tree. Have you ever seen a dog get wrapped around a pole? They keep trying to go around the same direction only getting themselves in a tighter situation. Dogs seldom think of backing off and going in the opposite direction. Unfortunately many people use the same kind of one-dimensional thinking when it comes to spending their hard earned money. If you wish to free yourself from financial worry, you must back off, have patience and put your money to work. You must gain some knowledge about finances and to discipline yourself before you can create wealth. Freethinking involves rejection of dogma and authority in favor of rational inquiry and speculation and this applies to financial affairs as it does to other concerns.
I hope that after you read this that you will get foot stomping angry. Anger can serve as an emotional red flag to induce you to do something, but the unfortunate facts show that most people are getting swindled, conned, and reamed by financial institutions. And this includes banks, credit corporations, insurance companies, mortgage companies, and brokerage stock & bond "experts." But if you wish to finance freely, you must begin to think about financial independence. In other words, taking responsibility for your own finances, depending on no one; having no debt and not believing in any institutional gobbly-gook. Reject all the financial dogma you've heard.
I've provided this brief overview out of my own and other's experiences. I have made many mistakes and I felt compelled to take serious look at my own financial troubles. Perhaps you can learn from my errors.
I have no connections to any corporation, nor do I charge a fee. As best as I can gather, all of my observations derive from facts, facts that anyone can check out for themselves. I have learned that the most prevalent beliefs about finance not only do not work but they will greatly increase your chances that you will remain in debt for most of your life! If I can show you example of the dangers of belief-systems, you could not do better than to examine the common beliefs about borrowing money and investing.
GET RID OF YOUR DEBT
Perhaps the most important and difficult step to achieve financial freedom should aim to get rid of your debt before anything else. If you don't have debt, then try to avoid the trap of getting into debt. This should appear evident when you realize that most debt results in paying companies higher interest rates than you can get by investing. People pay hundreds of thousands of dollars over the years for services that serve absolutely no useful purpose except to make other companies rich.
As a side note, I recall Joseph Campbell observing that you can always tell who's in power during any historic time by simply observing the tallest buildings of that era. For example, in ancient times, the tallest structures were temples and churches controlled by priests. In feudal times the largest buildings were castles, and fortresses controlled by lords and kings. During the Enlightenment the tallest buildings were capital buildings controlled by politicians. Who owns the tallest buildings today? Corporations. Especially insurance, credit, and banking companies!
Consider that corporations have more controlling power over your life than do priests and governments. If you doubt this, think how much of your waking time you devote to them. Like most people, you work for a company 40 hours a week, you put your money in a bank or brokerage, you spend time with insurance agents, car dealers, shopping, and paying bills. You get hounded by advertisements from junk mail, phone calls (usually at dinner time), door-to-door salesmen, and internet e-mail. Even the fed interest rate and your money gets controlled by private corporations (the federal banks). Corporations profit by your devotion and poverty. Note that in the eight hours or more you spend at work a day, you have little freedom. Certainly you have no freedom of expression, you cannot freely go where you want, you must be careful of social and sexual blunders, and, of course, you have no right to bear arms. In effect, companies control most of your waking life! And if you do not have the financial ability to free yourself from your job, you have become, in effect, a corporate slave.
Realize that corporations want you to remain in debt. This gives them the power to control your job, your dues, your life; they like it when you're paying off debt-- that's how they get richer and more powerful.
So you might believe (as corporations want you too) that credit allows you to use other people's money so you can enjoy the comforts of a better home, car, or entertainment system, etc. Sure. And dogs think they can get somewhere by orbiting poles. The entire economy structure works to make you earn money to accumulate wealth for the companies you interact with. It's not for you-- it's for them. So for starters begin to doubt the belief about living off credit. It may seem to work in the short run but in the end, it will cost you thousands of dollars.
One of the most astonishing examples of wasted money goes to paying off home mortgages. For example, if you buy a home with a 30-year rate mortgage, you will pay for that loan roughly three times. If you multiply your payment times 360 months, you will see that the total amounts to approximately three times the value of the money you borrowed. Two-thirds of that total goes to interest. Interest goes to the profit the mortgage company makes for lending you the money in the first place. And they feel that you should pay them back three times. That's 200% interest!
Let's put some real numbers to this. If you buy a $250,000 home, with a $200,000 mortgage, you will end up paying about $600,000 over 30 years. This means that you will pay over a half million dollars in interest!
Imagine the number of hours you will have to work week after week, year after year, just to make your loan company richer. Do you really think they deserve all this money of yours more than you do? Do they do such a service that you must work so hard just to add such an amount for themselves? You earned that money, you pay taxes on it, yet they end up with most of it.
Imagine, instead, that you could put those thousands of dollars into a mutual fund that averaged 10% interest a year. You could enjoy a $40K-a-year retirement income without ever touching the principle. You would mostly likely never have to work again.
Another false belief comes when a friend or your account tells you that you should never pay off your mortgage because it's a good tax shelter. If they tell you that story, get a new accountant. Think about what that would mean. What they are really saying is "keep on paying a dollar of interest to get back 28 cents in tax deduction." If you persist on believing the tax shelter myth, may I suggest that if you feel willing to give me a dollar for 28 cents, I'll gladly supply you with the loan.
Car loans come next to home mortgages. Notice how finance companies bend over backwards to allow you years to pay off these loans. How thoughtful of them. That's because car loans work like mini-home mortgages. And don't get swayed by zero-interest loans. That's advertising scam. No corporation will give away for nothing; the loan usually gets attached to a higher price of the car. It's a win-win situation for the corporations and a win-lose situation for you. You get a decent car in the short run but you're paying through the nose for it while they convince you you're getting a great deal.
Credit ratings serve as one of the silliest needs ever invented by corporations. In effect, they are saying, "you are so poor that I will not trust you until you can prove that you will pay me back." I consider credit ratings an insult. Instead, I demand credit ratings from corporations. I do not trust them and I demand evidence that they will work for me, not the other way around. Please note that once you have control of your finances, you will not need a good credit rating because you will owe no one. Instead, they will owe you. This defies conventional beliefs, but beliefs have no connection to facts,. Common sense should tell you that if you have no debt, you will not need a credit rating. The only use I have for credit companies, are the free credit cards they offer, not for paying off debt, but for the convenience of paying without cash. If you have a credit card, make sure you make your payments on time so you don't have to pay any interest.
Instead of paying off mortgages, succumbing to a car loan, or paying off high interest credit cards, consider other alternatives. Instead of that expensive home, go for a cheaper home, one that you can pay in cash. Or live with relatives for a few years, paying rent by washing dishes, mowing the lawn, doing the groceries, etc., things you'd have to do anyway in your own house. You may want to comprise by renting with friends. Instead of a new car, buy a used car, get a bicycle, use the public transportation. Think of ways to avoid loans. Use your own money to pay yourself back instead of paying off credit cards. If you do not trust yourself to pay yourself back, why should anyone else trust you?
In the mean time, instead of paying off loans, put that money to work for you in stocks, bonds, or mutual funds. Once you've accumulated enough wealth, only then consider buying a house or a new car. You'll amaze yourself at how quickly you can accumulate wealth. When you invest in corporations, you're not only doing them a favor (they get to use your capital for new investments) but you've just turned the table around. Instead of you paying them, they pay you in the form of dividends, interest or capital gains!
So sacrifice a little, and avoid loans for the chance of great financial success in the future. And if you have loans, get rid of them before you put you money in other investments. Only after ridding yourself of debt, should you invest your money. Consider that virtually every rich person in America invests his or her wealth. Could it be that you cannot become financially secure with out investing? Think about that.
So first. . . GET RID OF YOUR DEBT!
INSURANCE
Perhaps there exists no other service paid by people with so little understanding of the value they are getting than with insurance. It behaves similar to debt, but at least you're getting some promised value for your money, usually for the sake of peace-of-mind. Their insurance agents may convince you that they are working to protect you, but please realize that they are working for a business dedicated for their profit, not yours. Interestingly, insurance companies do not lose money on insurance policies. Oh, they may go out of business for being sued, breaking the law, or for their risky investments, but they never lose on their insurance programs. When they sell you a policy, they are gambling, with odds greatly in their favor, that bad things will not happen to you. You, on the other hand, are gambling that bad things are likely to happen to you. On balance, insurance companies never lose. Just as the odds are in favor of casinos, so are they in favor of insurance companies.
Another way to think about it is that if they are willing to sell it to you, you probably don't need it. Their mathematicians (actuaries) have statistically calculated that you probably will never need it, or they would never sell it to you.
Many people do not realize just how insurance fees can add up over time, sometimes adding up to a greater value than the thing you are trying to protect! If you have your financial house in order, and have accumulated a certain amount of wealth, you may be able to act as your own insurance agent. When you have wealth, more often than not, the odds will play in your favor (instead of the insurance companies) and you can pay for items in full in the small chance that it does become damaged or destroyed.
While there are some areas of insurance that you do want covered and some that are required by law (car insurance, for example), it's almost certain that you do not need exactly what they want to sell you. If you cannot understand their sales pitch, or become suspicious, (and I confess, I have never understood the language printed on their policies) get advice from a separate advisor, or get insurance information from libraries and publications. Get as little insurance as you need and avoid the unnecessary burden of paying for unknown promises. It's an unfortunate fact but there's an unavoidable risk to life and property and there's nothing that anyone can do about it, insurance companies included. Look at the bright side: you could die at any moment, but then you'll be completely free of money worries forever!
After reading the above you may think that I have a hatred for corporations and financial institutions. Far from it. On the contrary, I find that a capitalistic economy offers the greatest (so far) chance of becoming free and independent. I only criticize their controlling practices, not so much because of their manipulations but rather because people allow themselves to be controlled by them. It's supply and demand and if people allow themselves to live like slaves, the corporations will take every advantage of it. But with knowledge, you will realize that you can control them instead of them controlling you. Corporations offer the very financial means for you to become financially independent. In fact, if you have the fortunate ability to add a product or value to society, you can start a corporation yourself. How else do you think corporations get started in the first place?
INVEST YOUR AVAILABLE MONEY
If you do happen to survive, it should become obvious that once you eliminate debt, virtually all your purchases will be in cash. If you are young and just starting out, your income will probably derive from an allowance, job or an inheritance. If you cannot sacrifice enough for the earnings you're getting then you need to get a job with higher income.
The reason why you should invest after eliminating your debt is because paying debt while investing can cancel themselves out. For example, if you have debt that amounts to paying 8% and you have an equal amount of investments paying you 8% interest, the net result is zero, a no-sum-gain, and it will take longer to eliminate your debt. Even if your investment pays more than your debt interest, you still have to subtract the net gain from the net loss and thus usually amounts to very little gain while you're increasing the time to pay off your debt. If, on the other hand, you put all of it work to eliminate your debt, it goes to reduce your deficit by 8%. You will eliminate your debt quicker and the quicker you can do this, the quicker you can put your money to work for you.
Of course there are situations that will not allow you to put all your investment money to eliminate debt (such as alimony or legal obligations) but wherever you can eliminate debt, put all the money available to you for that purpose.
Put some money from your job earnings into a 401K plan.
Many companies offer 401K plans for their employees. These are special accounts set up in your name where a portion of your job income automatically gets inserted into this special account. Usually these are excellent opportunities for great rewards. Make sure you learn about your company's 401K plan and how they work. Most plans allow you to put a sliding scale of a percentage of your income into these accounts usually ranging from 1% to 16%. Sometimes companies will offer a matching dollar-for-dollar for the first few percentages of your distribution into the account. Don't pass this up! You will rarely find free money in your life and this is one risk free way to get it. Usually you will have the option to put your distribution into a variety of investment instruments, ranging from money market funds, or mutual funds. The only draw back is that you cannot take this money out of your account until you retire without a penalty (although there are some exceptions such as for emergency reasons or special loans). 401K plans are also tax deferred. That means that you don't pay income tax on it until you retire. If you quite your job, you can roll-over your 401K account into an IRA account or into another 401K plan if you get another job. Note, not all companies offer 401K plans, but if they do, seriously consider it.
Open an account with a discount brokerage.
What ever extra money you have, put it into an investment that will earn you money over time. This does not mean a bank or their saving accounts. Banks are traps that invest your money for themselves and dole out pennies for you while keeping the majority of interest gains for themselves. And saving accounts are a joke. They pay you single digit interest rates (many times in the fraction range when you subtract their finance charges). I recommend banks only for getting cash and the convenience of using their ATM machines. Put only a minimum amount in a bank, just to keep enough cash for personal cash spending . The rest of your money should go into a brokerage account, preferably a discount broker. Many times discount brokers will operate like a bank with free checking, free credit cards, etc. except that they earn more money for you. (Unfortunately they do not use ATM machines, but this may change in the future). Discount brokers are generally better than full brokerages (like Merrill Lynch) because discount brokers charge less for financial fees, sometimes no fees whatsoever. Also, the fees for buying and selling stocks are much cheaper. But most of all, they do not hound you with an assigned stock salesman. Getting advice from a broker is about as sound as getting advice on what car to buy from a used car salesman. Avoid broker advice. If you need financial assistance, hire a separate financial adviser that works for you instead of a brokerage company.
When opening your account, put your money into a money market account (this is usually done automatically anyway). Money market accounts usually pay higher than bank interest rates but this will not make you rich. You should put your money to work by putting most of it in stocks, bonds, mutual funds, or a combination of them. The money market account will act as a holding place whenever your buy and sell your stocks or funds.
As you build up wealth, and you need some quick cash to cover an emergency or the cost of an expensive item, you will have the ability to borrow from your own account. The neat thing about loaning from yourself is that you pay no interest fees! But if you borrow from yourself, you must pay yourself back. Unfortunately, paying yourself back, apparently, seems to be a very difficult thing for many people to do. They have no self-control. But if you can not do this very simple disciplinary act, then you are, in effect, acting like a dog. If you cannot discipline yourself, you may as well resign yourself to be controlled by others for the rest of your life. You will then most likely succumb to low interest saving accounts or CDs because they are more difficult to get your money out, or you will submit to loans from others, letting them control your financial direction instead of you.
PICKING AND BUYING INVESTMENTS
Once you open a brokerage account, you'll find it amazing at how easy it is to buy an sell stocks. You only need to call them up and tell them you want to buy a number of shares. You'll never have to go to your brokerage company, sign papers or get special permission. In fact, one of the brokers I use, I've never seen or been in its building. It's all been done by phone. You can also buy & sell through the internet, which is actually more convenient. In fact it's so easy, its deceptive. The problem is not buying and selling but rather, how and when should you buy and sell. This is the age old question that no one seems to be able to consistently answer.
One of the myths about the stock market is that some individuals can actually predict what the market will do or how a certain stock will perform. You only need to listen and watch investment "experts" on financial programs telling you which way the market will go the next day, month or year. If you've noticed, when the market goes up, most often you'll hear from the "bulls" (experts who think the market will go up). And when the market goes down, you'll hear from the "bears" (those who think it will go down). They certainly look and sound professional in their expensive suits and elegant financial talk. But don't be fooled. If they could accurately predict the market, the market could not work. If they were consistently right, everyone would follow them and there would be no risk. The market works out of uncertainty. It cannot continually go up and it cannot continually go down. It must have a large measure of randomness. Consider that if they could actually predict the market, why are they not multi-millionaires banking from their own predictions; why are they working for investment institutions? Basically, there are two types of investment soothsayers, the chartists and the fundamentalists.
Chartists are faithful to arcane and impressive plot charts of stocks and indexes. Oh the poor chartists. They actually believe that the stock market is so orderly that its movements can be plotted on paper in such a way as to predict the future. They look for patterns that repeat themselves. When things don't happen as predicted (which is usually the case), the poor chartist blames himself or herself for not seeing the right pattern. The chartist "knows" the market can be predicted, if only he or she can identify the right pattern. The chartist is a good example of trying to force fit the theory to the data instead of letting the market speak for itself.
The fundamentalists are like Christian fundamentalists. They look at the Bible of the stock, the corporation itself. They look at the financial health of the company, its quarterly reports, sales, assets, liabilities, etc. They think that a company with good fundamentals will outperform in the market. Unfortunately a company's fundamental status is only one of a plethora of factors that affect the stock price, in many cases, a very negligible factor.
Stocks can rise and fall for so many reasons that trying to predict their immediate future accurately is less likely than predicting racing horses. If you believe these market prophets, you're only indulging in the modern superstitions of our society.
There are many reasons, usually a combination of reasons why people sell and buy stocks and why they move up, down or remain the same. For some examples:
A recent war, terrorist action, or public scandal frightens investors and the whole market reacts by a sell off. A false rumor is spread about a company causing its stock to drop in value. An employee buys a stock because his company is offering it without sales charges. An investor needs the money so he sells all his holdings. An unthinking investor buys a stock at greater value than its going price. A racist sells his stock because he thinks the company is controlled by Jews. An Astrology buff buys a stock because Mars has aligned with Venus. A chartist buys because he "sees" a pattern in his chart. An investor buys a stock because a broker recommends it. A moralist buys stocks on the basis of her beliefs about a company's moral position in the world. A fundamentalist sells a stock because he sees the company's assets go down. A naive investor buys stock because the company name intrigues him. An investor buys a stock because he thinks the company will do good in the future. An investor sells a stock because he thinks the company will do badly in the future. The fed chairman hints at raising the fed interest fund rate, and the majority of investors begin to sell.
These are just a few out of millions of reasons why people buy and sell stocks. The total consensus from all these reasons produces an up market or a down market. Please realize that stock prices are not determined by companies or stock experts but by the emotional consensus of millions of investors. In a way, the stock market works like a parimutuel horse race where people bet, not because they know which horse will win but by which horse they believe will win. Although a company's health may be the greatest predictor, it's only a minority compared to the accumulation of other reasons. And even then, the company only has an indirect influence on the price of its stock (this is not counting initial offerings or buy-backs).
What should this tell you? That there simply exists no reliable way to predict what a stock or a market will do at any point in the future. Do not believe in what the professionals tell you. Oh, sure, they may guess right some times, how could they not? They have a 50/50 chance of getting it right but does this mean they actually predicted it? No. If I predict that an airliner will crash within the next month, and if one actually crashes, does that mean that I really have prophetic powers? Of course not. Predictions of this sort fall under the common fallacy of confusing a correlation with causation. Just because there's a coincidence of correlation says nothing about what caused it.
There are only a couple of semi-reliable indicators on which to invest and even these are not absolute. Ironically they come from a combination of chartist and fundamentalist basics (not everything they do is incorrect). The first is that in the long term the major indexes (The Dow and S&P 500, for example) have shown an upward growth. In the history of the Dow and S&P, they have never remained down forever. They have always eventually gone up to set new records at some unpredictable time future in the future. This is a chartist observation, but anyone who looks at a chart of the history of the Dow will see the upward growth. This is the only semi-reliable pattern I have ever seen in a chart. Second, a company that makes a good product will more likely than not, go up at some time in the future and remain in existence longer than companies that do not make good products. This is a fundamentalist observation but one that proves correct more times than not in the long term. Companies that make good products are more likely to be in demand in the future and this gives them a fair chance for a longer existence. That's why some of the largest Dow industrials have remained on the board for many years.
These are, as far as I can see, the two main reasons why investing in stocks are a good gamble.
Can I actually rely on the stock market to rise in the future? Well, no, because I have no way to predict when or even if it will ever rise again. However, if it never rises again, then something worse would occur. The market would no longer work and the entire economy would crumble, perhaps because of a world war or catastrophic disaster. In this case, money would lose its value and the government, our social system and perhaps our lives would be destroyed. Like I said, there are risks in life and I'm only risking my money along with my life. I'm willing to bet that the economy will not crumble just as I am betting that I will be alive tomorrow.
Buy low, sell high
Note that making a profit in the stock market works by a simple rule: buy low, sell high. This appears deceptively easy.The rule says that it's best to buy when stocks are priced low and sell when they are priced high. Can anyone forsee when they will be at it's highest or when they will fall to its lowest? Unfortunately no. Like I've said, you cannot predict how or when. However, you can look at its history and say that at this time it is either higher or lower than it was in the past. On this basis you can buy at a time when it is lower than it was in the past and you can sell when it is higher than it was in the past. This you can do with virtual certainty.
So what does this information from the market tell us? Buy stocks or mutual funds when they are lower than they have been in the past and hold on to them until they rise at a profitable point. Since you cannot predict when they will rise to your desire, it's best to pick a stock from a company that has a good chance of existing for a few years so it will have a longer chance of its stock moving to a higher position. This means that a company that makes a viable product has a better chance of thriving than one that makes a bad product.
Diversify
Even though you may think you've made a good choice of stock, the company can still fail for many and unpredictable reasons. The company may go out of business due to unforeseen competition from another company. It may be bought out. It may fail for illegal reasons. To offset these possibilities, you can diversify your investments by purchasing several stocks. That way, if one or two stocks go down, you won't lose much and the others will keep you going. One of the simplest ways of diversifying is to buy into a mutual fund, a bond fund or a mixture of both.
Mutual funds
Most mutual funds are controlled by investment managers, the very soothsaying "experts" that I've been criticizing. If they cannot predict what the market will do, why should I let them decide on my investment choices? This would, in effect, counter the very purpose of financial independence. Many of these managed funds also incur load fees, sometimes as high as 5 or 6% a year. Avoid these funds! In general, don't buy mutual funds that are controlled by the professionals.
Fortunately, there is a class of mutual funds whose stocks are not predicted by money managers. They are called index funds and the have a bonus advantage above others in that you will generally pay very low maintenance fees! Index funds are designed to follow a specific market index, for example the S&P 500 index. This fund will invest in the 500 largest S&P stocks. They are the cheapest and easiest way to get started into diversified investments. For as little as $1000, you can start an index fund account. More importantly, the S&P index funds have outperformed, over time, all other managed funds by over 80%. If anything tells you that managers cannot predict the future, the fact that S&P index funds outperform most other funds ought to tell you something. Even the funds that do outperform an S&P rarely repeat their performance in the years that follow.
The index funds low yearly maintenance fees are usually below 1/2 percent. Beware, though, that some index funds charge up to 1.5% a year or a load (a load is an initial up-front percentage fee as high as 4 or 5%). Avoid these funds. They do not perform any better than the lower fee funds and since they can only follow the market index, they can do no better at giving you profits.
For an example go to this web page to see the fees and expenses for the Schwab 500 index fund: http://biz.yahoo.com/p/s/swpex.html
Then go to this web page to see the fees and expenses for the BlackRock Index fund: http://biz.yahoo.com/p/c/ciebx.html
Note, that because both funds follow the S&P, both will perform virtually identically, but compare the fees. Which fund would you rather invest in?
How much to put in stocks?
How much you should invest into stocks should be your decision based on what you want to do with your investments. If you're young and want your investments to grow until retirement, you have the potential to handle greater risk. In this case you may want put most of your money into growth stocks. If you're near retirement, you may wish to lower your risks by putting most of your investment into high grade bonds and live off the interest.
Picking your own stocks.
As you gain knowledge about stocks, you may become more interested in the subject to the point of it becoming a hobby or a self-feeding preoccupation. You may want to pick out individual stocks for your diversified portfolio. Watch out! The stock market may begin to look so simple to you that you will think you can guarantee your wealth. I'm sorry but there are no guarantees. If the stock game becomes irresistible to you, learn the risks of your investments and never gamble on risky stocks what you cannot afford to lose. If you wish to play this game, start out will a small amount of your investment, or better yet, play it out on paper before you commit yourself.
Beware that if you buy and sell stocks, always changing your portfolio into a "better" position, you will generally pay higher fees than those who hold for the long haul and they will generally do better than you will. This is what many have observed. I cannot vouch for others but this observation certainly holds for my past mistakes. Brokerages love buy & sell customers because they make a commission whenever you buy and sell stocks. Think of it this way: as a rule, people who buy & sell in the short run are speculators (read: gamblers) and those who buy and hold for the long term are investors.
If your company offers stocks, you may be in the rare position of getting insider information. Since you work for that company, you might have knowledge of a new product that will be released that no outsider knows. You may realize that this new product will have a good chance of selling well and may esult in a major profit for your company. Also, companies usually offer stocks to their employees with no fees at all. Consider buying from your own company, if you know valuable insider information.
Know what you are buying from
It's amazing how many people do not know what they are invested in. Some people actually buy stocks on tips without even knowing what that company produces! If you do not have some idea of what you own or what your stock company does, how can you possibly determine the risk of your investment? This is like gambling while wearing a blind fold. Try to invest in companies whose products you know or are comfortable with. If you buy General Motors, you will probably know what products they produce. If you like a particular product or service, and you observe that other people like it too, there's a good chance that their stocks might be good investment. Do not invest blindly.
Risk
There will always exist a certain amount of risk no matter what you do. You can, however, learn how to evaluate risk and how much of it you are willing to take. Beware of risk that promises a high percentage of success. Along with high dividends and promises comes a greater chance for failure. You'll discover high percentage promises that await the unwary investor. You'll find stock prices that cost only a couple of dollars per share that provide 40% interest from dividends, junk bonds that pay 50%, and newly released stocks from emerging companies that don't have a product yet but only a promise of a future product. Watch out, these may look tempting but along with these promises goes a much higher risk of failure.
On the other side, beware of life plans that offer virtually no chance of success. One of the lowest chances of success are those who take the path of borrowing from others. In other words, debtors. The second lowest are those dependent on drugs, alcohol or some physical material. Substance abuse reduces wealth and produces little of value. The lowest of the low are those who rely solely on superstition and prayer to get them through life. You'll find millions of poverty stricken people in the most religious parts of India, Islamic, and Catholic controlled countries who intransigently believe in their superstitions. They haven't a chance to achieve financial freedom much less live freely. Nor can they help society from charitable acts since their lives depend on charity from others; their entire lives are spent in debt. Superstitions spread poverty, falsehoods, create disease of mind & body and contributes nothing of value to society. Avoid them.
These are only a few basics about investing and there are lots of other possibilities not mentioned here like bonds, high dividend utility stocks, Overseas investments, etc. By gaining knowledge about how money and markets work you will begin to understand how to utilize this knowledge to your financial advantage.
SPEND
Once you've achieved financial independence, you will have more power over your life. It's not so important that you become rich, but rather comfortable enough to achieve the freedom that you desire. If you decide that you do not like your job, your financial position will allow you to bargain for a higher salary. If you get layed-off, you will be able to live off your investments until you find another good job, or perhaps you'll never have to work again. But most importantly, you'll be able to spend more for what you want than you've ever done before. Instead of paying something through credit, you'll be able to pay in cash while the bulk of your investments continue to work for you, gaining in value over time.
If you make the mistake of hoarding your money, never allowing yourself to enjoy your success, then what's the point of investing in the first place? If it's just for security you're after with no pleasure, I suggest committing yourself to a state mental institution; this will take far less effort and you'll feel secure in your straight jacket knowing that others will take care of you for the rest of your life.
Having greater wealth means that, not only can you spend more for yourself, but you can spend more on others. Your wealth can't help but spread to other people. Your investments will help raise capital for corporations, which means more jobs, and the potential for technological advances.You will be able to give more to charities, friends, and family. Even if you are selfish and don't give a dime to anyone, your added wealth means paying more taxes which will indirectly benefit social systems, education, medical care and defense. Even if you hoard your wealth, you can will your remaining money to your family, or your favored charity after your death. Even if you do nothing, your wealth will be granted to the government.
Being financially independent means that you'll have more control over your life, doing what you want to do and paying for what you want rather than what other want. You will feel better about yourself and this provides the greatest opportunity for your life's success and will add to the success of the social economy.
SUMMARY
1. Dicipline yourself. Don't think like a dog. Avoid financial beliefs.
2. Eliminate your debt before you invest. Sacrifice expensive items today for later gains tomorrow.
3. Pay in cash. If you need to borrow, borrow from your own account and make sure you pay yourself back.
4. Minimize your insurance.
5. Invest. Don't buy into risky stocks what you cannot afford to lose. Invest for the long term. Utilize 401K plans and open a brokerage account.
6. Diversify. Don't put all your eggs in one basket. You want minimum risk for the largest gains.
7. Don't believe the experts. Educate yourself. Gain knowledge.
8. Control your life. Spend what you can afford to take out from your investments and have fun.
Should you accept what I've written?
Of course not. Do not believe any of the suggestions I have provided or act on my observations until you check out my observations. How do you know I'm right? For all you know, I could be making this up. Maybe I'm a deceiver who likes to confuse people. Perhaps you're more informed than I and have better ideas. I certainly do not claim to possess any special knowledge. Think for yourself! The information listed below should also be doubted and checked out. However, much of it will provide you with the information you will need to help you decide your financial path so you can make decisions based on your observations.
References
Ted Carroll, "Live Debt Free : Make the Dollars Work for You-Instead of the Bank," Adams, Pub., 1991
Bob Hammond, "Life after debt," 1986
Louis Engel, & Henry R. Hecht, "How to Buy Stocks," Little Brown & Co, 1994
C.C. Hazard, "Confessions of a Wall Street Insider," Playboy Press, 1972
Peter Lynch, "Learn to Earn : A Beginner's Guide to the Basics of Investing and Business," Fireside, 1994
David A. Solomon, "How to Win the Mortgage War : No Mortgage, No Debt, in As Little As Two Years," Sirrom Pub., 1997
Truth Seeker: the Jornal of Independent thought, Vol 122, No. 3, 1995
The information about S&P index funds comes from the ratings reports for mutual funds from Consumer Reports magazine: May 1990, May 1993, May 1995, May 1997, May 1998. (Note that Consumer Reports is a non-advertising publication that has no direct connection to financial institutions.)
Internet sites
There are so many web sites on investing, it boggles the mind and I have not remotely come close to examining all of them. These are just a few that I have found informative:
Yahoo Finance web site gives you just about all you need to know about a stock. It will allow you to check market values, stock and mutual fund prices, charts, research, profiles, news messages and more: http://quote.yahoo.com/?u
Daily Stocks will provide you with a plethora of information and if you like to look at charts, this is a chartist's dream: http://dailystocks.com/
Zacks Wall Street Snapshot allows you to look at the balance and income statements from the stock companies. You can also see a consensus of brokers buy-hold-sell recommendations for a stock: http://www1.zacks.com/cgi-bin/JMFR/FreeReport?ref=DAILY&ticker=BA
The Motley Fool provides tips, suggestions, and messages from investors. It can help provide a consensus about how people feel about a certain stock: http://www.fool.com/
Fair Value Worksheet will calculate the fair value of a stock and tell you in percentage if it's overvalued or undervalued (Note, 'fair value' is not always a good indicator of a stock choice. Sometimes it's too conservative, other times it's meaningless.): http://www.pathfinder.com/money/value/index.html
Dow 30 industrials lists the stocks and their prices (these are the stocks that determine the Dow average): http://fast.quote.com/fq/infosk/group?dj30
Ever wonder what companies are in the S&P 500?: http://www.dbc.com/cgi-bin/htx.exe/symbols/sapstock.html?source=blq/dailystocks
WARNING: Beware of free web sites showing their stock recommendations. They may be making up the recommendations for their own benefit, not yours.