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Automatic wealth The 6 steps to financial independence - Masreson M.

Masreson M. Automatic wealth The 6 steps to financial independence - Wiley & sons , 2005. - 291 p.
ISBN 0-471-71027
Download (direct link): automaticwealththesixstepsto2005.pdf
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As I said at the beginning of this chapter, the best thing about equity investing—and this is most true of stock investing—is that, after the work you do investigating a particular investment, you don’t have to do anything else to get richer. You just lock in a stop-loss in case the price moves against you, and watch your wealth build.
Building a Stock Portfolio
My portfolio reflects my belief that no one can ever confidently predict the behavior of any individual stock or any sector or the stock market as a whole.
Currently, I have less than 2 percent of my net worth invested in stocks. In the past, it has been higher, but I don’t think I’ve ever had more than 10 percent of my money tied up in stocks. To most financial planners, that would seem like an ultraconservative position— especially for someone who recently turned 50. But for me, it feels smart. Not just because I’m skeptical about stocks, but also because I invest heavily in real estate and small businesses.
I prefer to have most of my money in investments that are more interactive than stocks. By “interactive” I mean investments about which I can have more intimate knowledge and over which I can have
Step 5: Get Richer While You Sleep 177
more control. Take real estate, for example. It doesn’t take a genius to know when the residential housing market in the neighborhood is overvalued. All you have to do is keep an eye on prices and buyers and make some commonsense decisions about whether this trend can continue.
When I invest in start-up enterprises, I always restrict myself to businesses I know. And when I take a position, I make sure it comes with some influence so that, if things should start heading south, I can step in and effect some changes. This combination of inside knowledge and active control makes me feel much more confident about investing my money. And that’s why I have about 50 percent of my investable wealth tied up in real estate and new businesses.
What Others Say
My portfolio may be too conservative for you. If so, consider following a more traditional approach:
• Safe portfolio—20 percent stocks, 80 percent bonds. For more than 70 years, this portfolio has averaged 7.0 percent a year. Its worst year was a loss of 10.1 percent. It lost money 17 percent of the years.
• Balanced portfolio—50 percent stocks, 50 percent bonds. During the same time period, this portfolio has averaged 8.7 percent a year. Its worst year was a loss of 22.5 percent. It lost money 22 percent of the years.
• Risky portfolio—80 percent stocks, 20 percent bonds. This portfolio has averaged 10.0 percent a year. Its worst year was a loss of 34.9 percent. It lost money 28 percent of the years.
You see the pattern, don’t you? The riskier the portfolio, the more robust the growth was in the good years. But losses were greater during the bad years and there were more bad years.
In choosing which portfolio suits you best, take your age into consideration. The older you are, the less risk you should want to bear. Why? If you’re retired, the practical consequences of your losses cannot be assuaged by your current job income. Even if you’re not retired, you simply lack the luxury of having several decades to make up for moderate-to-heavy losses.
Another consideration is the current direction of the stock market. Is it going up or down? It’s not always easy to tell. Just because it’s down
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today doesn’t mean that tomorrow it will begin to rebound. Or if it’s up today, it may begin a long decline tomorrow. I’ll let you in on a couple of secrets in just a few pages that will help you decipher the direction and trend of the market. Bear in mind that in a down market, you should lower your stock holdings even more than suggested in the preceding three recommendations. If the market is making hay, increase your stock holdings accordingly, let’s say by 20 percent. So, if you’re holding 50 percent in stocks, you would increase it to 60 percent.
One way to divvy up your portfolio is this: 30 percent U.S. stocks, 30 percent foreign stocks, 10 percent high-quality corporate bonds,
10 percent high-yield bonds, 10 percent U.S. Treasury bonds (TIPS), 5 percent real estate stocks, and 5 percent gold and precious metals.
A Closer Look at Stop-Losses:
The Exit Strategy That Professionals Use
One thing that both Alex and Steve agree on is this: Whatever your approach, you’re bound to make some bad stock selections. In fact, there’s no guarantee that your good decisions will outnumber the bad ones. Here’s the good news: It doesn’t matter.
If you make twice as many bad stock purchase decisions as good ones, shouldn’t you lose twice as much as you’ve earned? No. Because stock investing is not just about buying. It’s also about selling. As important as buying the right stocks at the right time is, it is equally important to sell the right stocks at the right time. And you’re not going to make the same selling decisions for depreciating stocks as you would for appreciating stocks.
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