The Winning Investor's Guide to Making Money in Any Marketby Andrew Horowitz
Over the past few decades, certified financial planner Andrew Horowitz has helped countless clients make loads of money in the market; now he's written a basic investing guidebook to share his expertise with the rest of us. Want to know the difference between ETFs and mutual funds? He tells you. Want to know how you can possibly select the best investments when you
Over the past few decades, certified financial planner Andrew Horowitz has helped countless clients make loads of money in the market; now he's written a basic investing guidebook to share his expertise with the rest of us. Want to know the difference between ETFs and mutual funds? He tells you. Want to know how you can possibly select the best investments when you have so many choices? He explains that too.
Whether you're just getting started or you want to manage your money more closely, you can invest smarter and Andrew will tell you how. You'll learn:
- Which investments you should hold to have a truly diversified portfolio
- Ways to choose the best stocks and know when to buy and when to sell
- How to make sense of the current economic climate and invest accordingly
- The best ways to minimize risk and protect your investments
Andrew's blend of expertise and spot-on advice has landed him in numerous national newspapers and on shows like CNBC and The Daily Show With Jon Stewart. Discover what millions of Winning Investor podcast fans already know: Andrew's straight-shooting style, real-life examples, and quick and dirty tips take the mystery out of the market, put you on the surefire path to investing success, and make the life and future you've been dreaming of yours for the taking
“Andrew Horowitz uses his extensive experience and wealth of knowledge to give the reader clear, practical and sensible ideas for becoming a more successful investor. His wisdom and insight into investing make this book a necessary addition to your investment library. ” Scott O'Neil, Investors Business Daily and President, MarketSmith
“Andrew knows his stuff and those looking to make sense of all of headlines investors confront every day will find this book useful. ” Charles E. Kirk, The Kirk Report
“Investing these days can be tricky but luckily Andrew Horowitz is here to help with a easy-to-follow guidebook that takes the mystery out of the market and presents tried-and-true investing strategies that investors of all levels can benefit from.” Harry S. Dent, Jr., economist and bestselling author of The Roaring 2000s and The Roaring 2000s Investor
“Unless you were born with a million dollars in your mouth, you need help to make your sunset year "golden." In his introduction to investing, Andrew Horowitz provides those starting out with a successful money manager's practical "inside" information, on processing information, financial planning and making investments or just keeping your advisor honest. A DIY guide that you should read, unless you want to be poor.” Satyajit Das, author of Traders Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives
“Andrew Horowitz is not only one of the most successful money managers I know, he's a great author to boot. His incredibly useful investing guide is packed full of practical tips and tricks investors of all levels can use and benefit from. A must-read for anyone who wants to understand the market better and make the smartest investment decisions possible.” Brian Shannon, author of Technical Analysis Using Multiple Timeframes
“Amid the countless how-to-invest guides that hit the market every year comes a straightforward primer that translates the jargon, breaks down the concepts, and provides advice neophytes can actually use.... Beginning investors will find this no-nonsense manual a helpful resource to navigating the markets. ” Publishers Weekly
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The Winning Investor's Guide to Making Money in Any Market
By Andrew Horowitz
St. Martin's PressCopyright © 2010 Andrew Horowitz
All rights reserved.
Step One: How Much Time and Energy Do You Want to Spend Managing Your Money?
The first thing you need to know about investing is that there are different ways to invest. When they hear the word investing, many people think of stocks only, not realizing that many other investment vehicles exist. I'll explain all of the basic options in chapter 2. Because there are so many options, the first decision you need to make is: how much time do you want to spend researching potential investments, choosing and deciding what to invest in, and managing your investments? Investing can be a full-time activity, or it can be something you do only part time. Only you can decide how many hours a day, a week, a month, or a year you will spend on your investments.
You may also decide to work with somebody else to come up with a game plan that meets your goals, and if that's the course you want to take, you can learn more about that in chapter 11, which will give you quick and dirty tips on choosing a reputable and qualified financial advisor. It's up to you to decide what kind of investor you are (or want to be), what exactly you want to do, and how much you want to be involved in managing and tracking your investments.
What Are Your Investment Goals?
Asking yourself why you want to invest may seem obvious, and if you're already clear on what your financial goals are in the short and long term, then feel free to skip this section. But if you haven't really thought about what you want to do with your money and when you will want to spend it, then you need to start thinking now. Time is critical when you're investing. If you need money tomorrow or within the next six months, you should probably be "investing" your money in cash, via a savings account, money market fund, certificate of deposit (CD), or short-term bond. On the other hand, if you're saving for retirement, then you have a much longer time frame — depending of course on how old you are and how close you are to retiring.
When you hear or use the word invest, don't confuse it with investing in company stocks only, which, as mentioned earlier, is what many people do. They think of investing only in terms of the stock market — that is, buying individual stocks, like Microsoft (MSFT), Pfizer (PFE), and so on. But investing encompasses so much more than just the stock market: you can invest in bonds, cash, mutual funds, ETFs (exchange-traded funds), and more — all of which I'll discuss in chapter 2.
We need to think of the word investing more along the lines of saving, preparing, and planning. In short, when you invest, you're simply putting money into something that you believe will pay off in the future. The first thing to determine — before you put any money anywhere — is how far into the future you're going to want to access that payoff, and what you're going to use it for.
Let's consider a few typical possibilities:
Are you investing for your retirement?
* If so, when do you want to retire?
* How much money do you want to have (or do you think you'll need to have)?
Are you investing for your kids' college tuition? How far off is college? Are you the parent of a newborn, with seventeen years to accrue the money you'll need (though who knows what college will cost in seventeen years)? Or do you have thirteen-year-old triplets who want to go to Harvard, Yale, and Brown in five years?
Are you investing so you can buy a house?
* If so, when do you want to buy? Again, your answer will affect whether your investments will be long-term (e.g., if you're twenty-one years old and want to buy a house by the time you're thirty) or short-term (e.g., if you want to buy a house within the next year).
* How much will you need for the down payment?
I realize these life goals require lots of self-knowledge and long-term planning — and you may have no idea yet what you want out of life, especially if you're relatively young. When the goals you're saving for, like buying a new house or retiring, are so far off, it can be hard to even think about investing, let alone actually do it.
One of my clients told me that when she was twenty-five, she didn't fully participate in her company's 401(k) plan because age sixty-five seemed like a lifetime away (and it was!). Plus she earned so little money that the thought of setting any of it aside was painful, and so she invested only the 2 percent of her salary that her company automatically set aside for her. After five years, her boss mentioned he had amassed $63,000 by investing the maximum allowable amount of 6 percent, with a matching contribution of another 6 percent from the company. During this time my client had accrued only $7,000. When she heard that her boss had accumulated enough for a healthy down payment on a house, she hightailed it down to Human Resources and increased the amount she invested. Fortunately, she was still young enough to save and invest wisely, and so twenty years later, she's very comfortable. That's an example of the power of the compound effect of interest — but you need to start young. Figuring out your goals is a good way to start.
How to Figure Out Your Investing Goals
One of the most important goals you should have is to save enough to have the kind of retirement you want. Almost every investing Web site and periodical includes a tool or worksheet to help you calculate how much money you'll need to save. Most ask you a few questions to give you a ballpark estimate, such as:
your annual salary
how much you've saved for retirement in your 401(k), other savings, or both
how much you save each month
whether your investing style is aggressive, moderate, or conservative
Fidelity.com has a helpful interactive worksheet. You can get to it by clicking on "Guidance & Retirement," then on "Retirement," and then on "MyPlan Snapshot." Assuming you plan to retire at age sixty-five, the tool gives you two different amounts that it estimates you'll need for retirement:
one amount based on the market performing poorly
one amount based on the market performing on average
As mentioned, many other similar worksheets are available. A simple Google search for "retirement calculator" should help you find them.
Let's take a look at what a simple retirement calculator looks like.
As you can see, the calculator asks you to input only a few variables:
Annual income required: How much money do you think you'll need to live on each year, once you're retired?
Number of years until you retire: This depends on your age. If you're thirty and plan to retire at sixty- five, then you have thirty-five years until retirement; if you're fifty-five and plan to work until you're at least seventy, then you have fifteen years; and so forth.
Number of years required after retirement: This is, of course, a difficult question to answer because who knows? Give it your best conservative guess.
What you think the annual inflation rate will be: This is another tricky number to estimate. In the 1970s, the inflation rate was above 7 percent, but during the first decade of the twenty-first century, it was below 3 percent. We can't know for certain what the rate will be, but for now let's use 4 percent.
Annual yield: What interest rate do you expect (or hope) to receive on the money you've saved or invested?
Now, let's look at a popular retirement calculator from MSN Money at http://moneycentral.msn.com/retire/planner.aspx, where you can find and input your own variables.
It asks us a few more questions than the basics we just covered, such as how much money we have saved already, what our current salary is, and how much we are contributing to our retirement as a percentage of our salary. The MSN Money calculator assumes a 3 percent annual inflation rate, which is preset and you cannot change in the calculator.
Here's a sample calculator for Olivia, a single forty-five-year-old woman who already has $50,000 saved for retirement, plans to retire at age sixty-five, and guesses that she'll live until age eighty-five.
After inputting the information, the calculator shows Olivia that after retiring, she'll be withdrawing over $25,000 each year from her savings and investments, which will be added to her other retirement benefits to receive $40,000 annually.
It also says that, assuming a 7.0 percent annual rate of return and that her 10 percent annual contributions continue, Olivia's retirement savings would grow to almost $295,000 when she turns sixty-five.
That number might initially sound great, but as you can see, the calculator also tells Olivia that her retirement savings would run out when she is seventy-nine years old — six years before she predicts she'll stop needing it. That tells her she'll need to adjust her savings or expected spending in retirement.
Let's say that she starts saving 15 percent of her income each year instead of the 10 percent that she does now. With that change, the calculator tells her that her retirement account is expected to grow to $386,000 when she retires at sixty-five. The calculator also now shows that she will run out of retirement savings at age eighty-five, which is what she input as her life expectancy. If she feels like she might live longer than that, she might try saving 16 percent or up to 20 percent of her annual salary.
Keep in mind that your salary will hopefully increase over the years. Though this sample calculator doesn't, some calculators allow you to input your expected percentage of salary increases each year, which may be 1 percent to 5 percent per year depending on your career.
Spend some time using different calculators and inputting different parameters. If you have a spouse, be sure to add his or her information into the calculations if you combine your retirement accounts. Some online calculators allow you to calculate individual information for your spouse as well.
This information can be very eye-opening, especially if you find out that you will not meet your retirement goals if you continue saving and investing as you do right now. Though learning this might be painful at first, it can help put you on the right path for a secure future.
Investing Helps You Achieve a Secure Future
Most of us want to have a secure future, and so we need to identify our goals now — particularly how much money we'll need for retirement — before we actually need that money and learn that we don't have enough. In addition to saving for retirement, you may have additional goals, such as saving to buy a house or paying for your child's education. It's not enough to simply wish for the best and hope that money will be there when you need it. Identifying your goals will enable you to put together the plan you need to reach them. And learning how to become a winning investor will help you achieve them.
Why Investing Today Is More Important Than Ever
The world has changed dramatically over the past few decades so that in terms of taking care of and planning for your own financial security, you really need to make your own way. Most companies used to provide retirement plans for their employees. Called defined benefit plans, they stated unequivocally (that's the defined part) what the company would pay you (that's the benefit part) when you retire. The plan would say something like "When you retire, you'll receive $2,000 a month from us for the rest of your life." (Of course, the final amount depended on annual salary and how many years the employee worked for the company.) Plus, there was Social Security income from Uncle Sam (more about that in a minute).
Around the mid-1980s, many companies changed their approach to employee retirement plans: they no longer offered the defined benefit plan. Instead, they started offering defined contribution plans, most often 401(k) plans — which required you to contribute to your own plan. In other words, you were now in charge of saving and investing for your own retirement, and the most your company would do was match a portion of your contributions.
All of a sudden, you're on your own: you are solely responsible for deciding how much of your paycheck you're going to save for retirement, and how you want to invest that money. So you'd better know what you're doing!
Even worse though, not only are you on your own, but in the wake of the financial meltdown of 2008, there aren't any guarantees that your employer will continue to make matching contributions; many companies have eliminated this benefit in order to save money. Now you're totally responsible for your future financial well-being.
In other words, over the last twenty years, retirement planning has changed completely. Whereas employees used to have a secure and planned retirement as part of an overall benefits package, now you can work for twenty or thirty years, getting your regular paycheck, but if you don't contribute financially to your retirement plan, you're not going to get anything on the way out.
In short, you need to figure out your financial future now, because more than ever before you are responsible for your own personal finances, your own personal stability, and your future. You need to plan as if nobody is going to be there to support you.
To add more salt to your financial wounds, we can't even say whether Social Security will be available when we retire. If you're a young person — or even if you're in your forties or fifties — you can't count on receiving it. For most of us (unless you're close to age sixty-five), Social Security is just a vanishing mirage. Of course, we continue to receive annual updates from Uncle Sam, indicating how much we should receive when we retire, but we certainly can't depend on that money, because it is possible that the system will eventually be bankrupt.
Here it is, in a nutshell: you have to be that much smarter about how you're investing because you're bearing all the risk and responsibility for your investments. Thus it is very important to know what you're doing. You can no longer just make assumptions and believe that the future is going to be a certain way. The world has changed too much. That doesn't necessarily mean that it's worse, but it has changed, and so you need to be more adept in understanding investments and how they work.
How Much Time Do You Want to Spend on Your Investments?
Essentially, there are two types of investors: passive and active. However, there are degrees of each, and I tend to think of them on a continuum, as shown in the accompanying diagram. Let's look at each investor type in terms of how much time and energy each is putting into investing.
What Type of Investor Are You?
If you plan to check on your investments and to consider changing your portfolio, or collection of investments, once or twice a year, then you're a superpassive investor. There are tens of millions of people just like you. Superpassive investors are often people who invest for the long term primarily through their 401(k), 403(b), IRA, or other retirement account; in other words, they don't have any other type of investment, such as an individual brokerage account. This group really doesn't want to research specific stocks, bonds, or alternative investment opportunities, so they simply invest in mutual funds or exchange traded funds (which I'll talk more about in chapter 2).
Here's an example of a superpassive investor: Cami is forty-five years old, and she has a good job, where she works a regular eight-hour day. She has a decent 401(k) plan that she's been contributing to since she graduated from college and got her first job. She's also married, with four children. She and her husband Fred have decided they don't want to spend a lot of time reading financial newspapers and magazines or watching financial news commentators on TV who are espousing their view of the markets. But Cami and Fred do want to invest for their kids' college educations and for their eventual retirement.
Therefore Cami and Fred have decided to invest in mutual funds and ETFs (we'll discuss these in chapter 2, or you can turn to the glossary for quick and dirty definitions). Cami and Fred are traditional "buy-and-hold" investors; in other words, they plan to hold on to whatever they buy for a long time. They're not going to track the price of what they've bought today so that they can sell at a profit tomorrow, or next month, or even next year. They're trusting that they'll earn money over the long haul.
The Buy-and-Hold Investing Strategy
Buy-and-hold is a popular strategy for many investors, including the famed Warren Buffett. Buffett, whose approximate net worth is $47 billion, made his money solely by investing. Although he's hardly a passive investor, his long-term investing strategy fits that of a passive investor. There have been dozens of books written about him and his investing strategy, based on his preferred investing time frame, which he says is "forever." His attitude is, "I've invested in a quality company, so why should I get rid of that investment?"
Buffett's strategy can certainly work if you have a long enough time frame. All things considered, a broad-based and well-researched diversified investment portfolio can do well over many years, so you don't have to watch over your investments every minute. In fact, the buy-and-hold strategy has also been called the "Sleeping Beauty" portfolio, because you essentially go to sleep for many years, hoping that you've chosen your investments wisely, and then you wake up and see if your investments have paid off as you planned and hoped.
Keep in mind that Buffett is really in a class by himself as an investor, because he doesn't simply invest in companies the way the average investor does. Instead, he frequently buys entire companies so that he has direct control over how they are run, so in those companies, he is more of an owner-investor.
Excerpted from The Winning Investor's Guide to Making Money in Any Market by Andrew Horowitz. Copyright © 2010 Andrew Horowitz. Excerpted by permission of St. Martin's Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Meet the Author
Andrew Horowitz is the host of the The Winning Investor podcast and a Certified Financial Planner who has been managing money for individual and corporate clients since the late 1980s. He is president of the investment advisory firm Horowitz&Company and has written frequently for the MSN Money Blog and for AOL Finance. He was also the former host of "The Money Doctor,"a radio call-in show. Various local and national media often seek Andrew out as an authority on diverse investment management issues. He has been featured in The Wall Street Journal, USA Today, Barron's, the Financial Times, Miami Herald, The New York Times, and the Sun Sentinel to mention a few. Andrew has also appeared on CNBC, Fox News, and the Jon Stewart Show. Andrew lives in Florida with his family.
Andrew Horowitz is the host of The Winning Investor podcast and a Certified Financial Planner who has been managing money for individual and corporate clients since the late 1980s. He is president of the investment advisory firm Horowitz&Company and has written frequently for the MSN Money Blog and for AOL Finance. He was also the former host of “The Money Doctor,” a radio call-in show. Various local and national media often seek Andrew out as an authority on diverse investment management issues. He has been featured in The Wall Street Journal, USA Today, Barron’s, the Financial Times, Miami Herald, The New York Times, and the Sun Sentinel to mention a few. Andrew has also appeared on CNBC, Fox News, and the Jon Stewart Show. Andrew lives in Florida with his family.
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