Wednesday, October 31, 2007

Google GaGa - $700 Milestone

Google hit $700 today, a milestone. There are people kicking themselves for not buying GOOG. For me, I know my risk tolerance, and I prefer investing in the stock market via mutual funds, ETFs, or indices.

Stocks zooming to the stratosphere are good for headline news and dinner party bragging. But I prefer boring mutual funds, ETFs and indexes like the S&P500. It's like the story of the Hare and the Tortoise. Over the long run, I've learned that I just need to grow my investments at the market rate. Don't need to find the next Microsoft, or Google, or Wall street darling.
The important thing is to stay invested over the very long term.

For my financial health, I follow these guidelines
1. Dollar cost average. I participate in the 401k plan at work and it invests bi-monthly. This gives me an average price for the securities I buy. Another nice thing, is I don't even miss it because it gets automatically deducted from every paycheck.

2. Don't be too greedy - Don't put all your eggs in one basket. So even though you work at a great company (GOOG?) and the stock is shooting up, don't be greedy. Invest your 401k in mutual funds, indexes, or ETF, don't put it all in the company stock where you work. All it takes is a financial implosion like Enron and all your retirement hopes blow up. Or maybe some scandal like backdating, and poof!, your portfolio got a free buzzcut!

Ask yourself, if GOOG is unstoppable, why do the founders consistently sell x number of shares every quarter? Because they are smart, and they know the importance of diversification. So don't put all your investments in individual companies. Learn from the dotcom bust. (Some people thought buying MSFT, SUNW, CSCO, GE and a few more was enough diversification... duh!)

3. Use other people's brains. I don't have time to research a bazillion companies, especially if they are overseas if I want to invest in Asia, EMEA, or BRIC. If you can't find an index or ETF for that segment you are interested, then find a no-load mutual fund that invests in that segment that has a proven 5 year track record. Let those guys worry about what to buy. is a good place to start.

4. Spread it Out. Don't just invest in US large cap stocks. Putting money in an S&P500 index is a good start. But remember to also put some money in other "baskets" to spread the risk. Put some in small cap funds, mid cap funds, international funds, and emerging markets.

Check Morningstar to see if the international fund is just invested in large caps, or maybe just invested in a specific countries like Japan, Korea, UK, France. You should look into emerging markets too such as funds that invest in BRIC, or other smaller asian or eastern european countries.

5. Don't forget Land. Don't forget to also have some exposure to real-estate investment. Either by buying properties like a house. Or invest in REITs.

6. Take Calculated Risks. Don't be too risk averse. I know someone who is too scared and invested in CD's, money market funds, and Treasuries. You may feel safe, but you are forgetting your exposure to inflation. During WW2, a loaf of bread was 50 cents, and a car cost about $1000. So you need to be invested long term in the stock market, in order for your money to have growth and sustain buying power.

7. Gamble with Money You can Afford to Lose. For some people, they have a need to gamble, maybe by buying penny stocks, or following a hot tip. Or buying multiple real estate properties like Casey Serin. If you have that itch that needs to be scratch, then take out a small amount and use it as your "CRAZY" money. After you lose that money, hopefully you will learn some valuable lesson about risk.

8. Adjust SLOWLY Over Time. I've found that as I mature, and learn more about investing, I've needed to adjust the baskets where I have invested. So for example, if you have a starting portfolio looking like this.
50% Large cap index
20% International index
20% Mid cap index
10% Bonds

Review the performance, and adjust accordingly. Maybe you are too conservative, or you want more exposure to emerging markets. Don't make drastic changes. Just slowly tweak and move sums across baskets. MAKE SURE THERE ARE NO PENALTIES. Some funds have penalties if you are invested less than 90 days or whatever time frame.

How about you? What guidelines have helped you learn real-world financial lessons?

Disclaimer. I am not a financial professional. This blog is just for entertainment purposes. I'm just a working stiff with some investments in 401ks, roth IRAs, and a mortgage. You should contact an investment professional before making investment actions.

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