How you answer those two questions defines what kind of investor you are... and what kind of opportunity you go for. Today, I’ll show you why it pays to have a foot in both camps…
It makes sense to have a long-term portfolio – with the kind of shares that are not necessarily going to make you rich overnight... but which might well make you rich by the time you retire.
Use Einstein’s “eighth wonder of the world” to make you rich... slowly...
With your long-term portfolio, a couple of things are important. The first is to make money from the ideas themselves. The second is even more important. It’s to make money from ‘the eighth wonder of the world’, as Albert Einstein (supposedly) called it...
I’m talking about the phenomenon that is compounding and today I’ll show you just how much difference it can make to your overall wealth.
Compound interest is simply staggering. I only wish that I’d cottoned on to it when I was 16 years old instead of 35. Compound interest is how you get rich slowly... but surely (if you pick the right investments, of course!)
The message to your kids is this: forget about going clubbing at the weekend, forget about fashion and music and having fun. Concentrate on saving and investing instead. Getting started with investing as young as possible can make a huge difference to wealth creation – the benefits of saving early in life are greatly magnified by compounding.
Behold the miracle of compounding
You may know this already, but it’s worth a reminder.
Compounding means that you earn interest not only on your principal investment, but also on any other interest you may have accumulated. In terms of the stock market, you reinvest any dividends you receive from a share, and compounding works the same way.
Let’s say you to invest £1,000 in company XYZ Plc and in your first year, the shares rise by 20%. Your investment is now worth £1,200. Now let’s say you keep holding the shares and in the second year they go up another 20%. Now your £1,200 grows to £1,440.
So your shares have gone up by £240 in the second year, rather than the £200 you made in the first year. That’s because the £200 you gained in the first year grew by 20% too. So far, so obvious, right? And you might just think “so what?”
But if you keep this process going over a long period of time, the power of compounding really starts to kick in. £1,000 invested at 20% annually for 25 years would grow to nearly £100,000. And of course, as you get older and your career and salary progresses, you should be able to invest more... allowing you to make more of the miracle of compounding.
So that’s a good game plan for your long-term investment portfolio. Buy good shares, let the taxman add in his contribution by keeping them in a self-invested personal pension (SIPP) or in ISAs and then let them grow, adding in dividends as you get them.
Of course, if you decide you no longer like a particular share, you can ditch it and stick the proceeds in a new one. That’s the beauty of a SIPP – you can choose the shares you want to build your retirement pot with.
Using short-term “punts” to build some cash
What about the short term? Well, not everybody likes to trade. and to be honest, I haven’t got the spare cash to take a lot of risks right now on that front. I have two small children and I’m the only one bringing in cash to the home.
I have to say, though, I do like to have the occasional directional punt on the FTSE or on the Forex markets if I see a trade I like the look of. How about you?
It can be very rewarding, but you need to be in the right mind set. And you need to have discipline. Trading can be hairy stuff... but having been working with a trader recently for a new Forex service we’re launching, I’m pretty strict on money management. That means when I do see a trade that I like – be it in Forex or on an index or individual share or commodity – I limit the loss to what I’m comfortable with. That way, I can always stay in the game. That’s something you need to exercise, too, if you trade.
Here are some other ground rules...
With the short-term stuff, it’s a good idea to just trade when you really like the trade. Understand it and agree with it. Keep the risk small, keep the risk/reward profile sensible. That’s what I do. And when I have made a decent amount of profits, then I’ll put some of it into my pension pot... and then let Einstein’s miracle of compounding do the rest…
Now, just before I go, I’m interested in your feedback. It’s to do with the new Forex service I’m working on. Just one simple question: do you have a Forex account or do you use a spread betting company?
That’s all. Just hit reply and add one word: “Forex” or “Spreadbet” or “Both”.
Good investing,
Frank Hemsley
For The Right Side
MARKET NOTES
Decoupling not back
BY FRANK HEMSLEY
Stock markets around the world had a blistering run from March until last Friday. The American S&P500, for instance, was up 40% from the low on 9 March until yesterday’s Friday’s close.
But as today’s chart shows clearly, that’s nothing compared to some of the most talked about emerging markets: Brazil, Russia, India and China, or, as they are collectively known, the BRICs.
As you can see, the performance for these countries since the start of the year has left America for dust. Whilst the S&P is basically flat in 2009, the BRICs are up between 39.7% and 72.1%, with Russia leading the pack.
Little wonder then that people are starting to talk about decoupling again. That’s the theory that emerging markets would be able to continue growing at breakneck speed, despite the ailments of the Western developed countries.
But not so fast…
While the S&P 500 Index slumped 38.5% in 2008, these emerging markets stars performed even worse. Brazil was down by 41.2%, Russia fell 72.4%, India 52.45% and China lost 65.39% of its market value. In other words, the BRICs outperform, whatever the direction…
Money may be pouring into emerging markets at an alarming rate. But the S&P’s -2.1% wobble yesterday could mark a turning point in this global rally. If that turns out to be the case, then you can bet that the BRICs and other emerging markets are going to tank at double the pace.
This is not the time to be adding to emerging markets positions. Wait for the correction.
The Daily Reckoning – Things our grandparents took for granted
BY BILL BONNER
London, England
Yesterday, the Dow fell 187 points. Oil slipped to $70. The dollar rose to $1.37. And gold lost another $12 – to $928.
The rally may run through the summer; it may not.
Asked about the rally on Wall Street, Barron’s latest Roundtable Panel had various views about how far and how fast it would take us. But all were sure of one thing: the worst is over. We will not go below the lows set this past March.
This recovery is for real, they believe... and so is the bull market on Wall Street.
Investors believe it too. Analysts believe it. Economists believe it.
And why not? The ‘Committee to Save the World,’ part II, is on the job. And here are two of the three committee members writing in the Washington Post. “We have nothing to fear but fear itself,” they would have written. But that line had already been taken:
“Like all financial crises, the current crisis is a crisis of confidence and trust. Reassuring the American people that our financial system will be better controlled is critical to our economic recovery.
“By restoring the public's trust in our financial system, the administration's reforms will allow the financial system to play its most important function: transforming the earnings and savings of workers into the loans that help families buy homes and cars, help parents send kids to college, and help entrepreneurs build their businesses.” Get it, dear reader? The slump has nothing to do with bad investments and bad businesses... or with too much debt... or with too many producers making too much stuff for too many people who can’t pay for it.
Instead, it’s all in our heads! And if we can make some ‘reforms’ that cause the public to think everything is all right, well... heck... everything WILL be all right.
Except that it’s not all right. You can pull as much wool over the public’s eyes all you want, GM still won’t be a going concern. Nor will any of the other problems go away. And until those problems are worked out, there won’t be enough earnings and savings to push the economy forward.
As for the feds’ confidence tricks, they only make the situation worse. If the public spends more money... it just goes even deeper in debt!
Our old friend Rick Ackerman has no more faith in this recovery than we do. It’s “just like the recovery of ’31,” he says.
Of course, as regular DR sufferers know, there was no recovery in ’31. Instead, it was a head-fake upwards, followed by a major drive to the bottom in ’32. The ’29 crash was just the beginning. The Dow reached its peak of 381 in September ’29. It crashed in October... but then bounced back for the following 5 months. By April 17th the bounce was exhausted at Dow 294. Then, too, people thought the ‘worst was over’ and that the initiatives of the Hoover administration had put the economy back on track for growth and prosperity. But then stocks headed down again and the economy sank. On July 8th, 1932, the Dow hit 41 – its low for the Great Depression.
Why won’t history repeat itself?
Read on...
To read the Daily Reckoning in full, click here.
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
