Week 47: Building Wealth
"Compound interest is the 8th wonder of the world. He who understands it, earns it. He who doesn't, pays it." - Albert Einstein
What did I do:
On a recent flight home from a NYC work trip, I watched a documentary titled "Becoming Warren Buffett." It was the most productive 90 minutes I have spent on an airplane. For those of you who don't know of Mr. Buffett, he is a business magnate, philanthropist, and investor who is the Chairman and CEO of Berkshire Hathaway. Let's just say, Mr. Buffett understood the concept of compound interest at a very young age. If you haven't seen it, get on Netflix and carve out 90 minutes of your life to watch. For me, it was a wake up call.
I've been on the side lines when it comes to managing my money. I have a 401k and also put money aside for a rainy day and travel, but that's pretty much it. I've known for a long time I need to be more active in investing my money, making it work for me versus me working for money. But I have stayed away because it felt and still feels daunting and intimidating.
I'm no longer going to hide behind that excuse. Let's face it, this is my year to face fears and Thrive, right? Money is not everything but it is definitely important to me. Interestingly enough, many people have a dysfunctional relationship with money that keeps them in a state of lack versus abundance. I speak from experience as I have actively worked on shifting my mindset about money over the last decade. In fact, I am now at a point when I can openly and without any shame or guilt say that I love money. It provides options in life and allows you to make a difference in the lives of your loved ones and community. It is an aspect of my life I truly want to master.
So, I decided to call a trusted friend and spend a rainy Saturday afternoon learning the basics of trading and investing with the intention of making some strategic and informed moves in the near future.
Who was with me:
My friend Shawn is a hobbyist. Once he decides to get into something, he really dives deep. For example, a few years ago he wanted to start cooking and now he is a self trained chef and makes gourmet meals that give the best LA restaurants a run for their money (ha ha, no pun intended). In passing, Shawn had mentioned to me a few years ago he was teaching himself about trading, and now he has licensed up and trades every morning. Not to mention, he has been investing for the last 20 years. In recent months, he has even been approached by his friends to invest their money but he doesn't feel credentialed enough to offer it as a professional service, not yet anyway.
What did I learn:
Between research i've done so far, the conversation with Shawn and the Warren Buffet documentary, I learned a lot. But most of all, I realized how much I DON'T know.
Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
Use this compound interest calculator to have some fun. Play around with the variables, it's pretty exciting!
- Long term to build wealth gradually over an extended period of time (years, decades) taking advantage of perks like interest and dividends
- Buy and hold a portfolio of stocks, mutual funds, bonds, or other instruments
- On average investors are looking for a 10-15% annual return
- Markets fluctuate but investors have the philosophy to "ride out" the downtrends with the expectation that prices will rebound and most losses will eventually be recovered
- More frequent buying and selling of stock, commodities, currency pairs or other instruments
- Seek average of 10% return each month
- $6.95 per equity trade. You can qualify for $4.95 per equity trade if you trade up to 30 transactions a quarter
- Profits are generated from
- Buying at a lower price and selling at a higher price within a relative short period of time
- Selling at a higher price and buying to cover a lower price, known as "selling short" to profit from failing markets
- Trader's style refers to timeframe/holding period in which assets are bought and sold. Basic categories:
- Position Trader: positions are held from months to years
- Swing Trader: positions are held from days to weeks
- Day Trader: position held throughout the day without overnight positions
- Scalp Trader: position held for seconds to minutes
Common beginner's mistakes:
- Investing money they don't have by getting involved in margins and margin calls. According to Shawn, this can be very dangerous and as a newbie, he recommends to stay clear away
- Emotional decision making. If there is a decision that lead to loss of money and we get emotional, it can turn into a domino effect of one bad decision after another
- Naively assuming every trade is a winning trade. Your goal is to have a net positive
- Locking all money in investments without any available cash to buy assets at a cheaper price when there is a correction in the market. Shawn recommends having a third of your money available in cash
- Greed. Bulls make money, Bears make money, but Pigs get slaughtered. Pigs are people who get greedy and have little to no discipline when it comes to investing and trading
Where to start:
- Create goals and have a plan. How much are you starting with? What kind of return do you want to get in x amount of years? How much risk are you willing to take? How much time do you have to spend on this during a given day or week? Answering these questions will help you determine if you want to trade, invest or do both and put into motion an initial plan that can be adjusted as necessary
- When trading, have a set of criteria and guidelines to adhere to. Stay disciplined and don't make emotional decisions. Know % loss and % gain that you are comfortable with before you start purchasing assets
- If you are starting with a small amount of money and can't afford paying fees on more elaborate platforms, start with a micro investment app. Check out this article by The Balance to learn about the top 5 investment apps of 2018
Would I do this again:
As I said earlier, one of the things I learned is how much I DON'T know about the world of building wealth. Yes, I look forward to learning more and participating in investing and trading. This is time well spent investing in myself and my future.