Author Topic: New to investing, unclear on income return  (Read 3585 times)

MaxRules

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New to investing, unclear on income return
« on: January 02, 2014, 11:43:28 AM »
Hi all, great forum you have here. I'm new to investing in the stock market and have just gotten started with $5000. I have learned a lot in the past week but I am still unclear on many aspects of how the system works. I am 30 years old and have a few relatives that make good money on the market, by their own accounting, but haven't done a very good job explaining just how that comes to be. I understand that if you buy low and sell high you'll make a profit. This is not the gambling I am looking to do. I'd rather buy and hold like my grandparents have done their whole life. The market always goes up and down. How do you make money by holding stocks? Investing $5000 (which I realize is very little) might gain some dollars over the next few months, let's say 5%. Then I'll have $5250. Then the market will surely go back down, as much or more than it went up. Then I'll have as much or less than I started with. How is money made on this, am I missing something? I know dividends can pay out some but that doesn't seem to be enough to add up. How can you have a constant stream of income from this, even with a large amount invested?
Thanks for any advise you can offer. There is very little real info on investing out there.

NinetyFour

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Re: New to investing, unclear on income return
« Reply #1 on: January 02, 2014, 12:04:58 PM »
Actually, I think there is probably a lot of info out there about investing, not all of it good probably.

Here are some places you might start:

http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy

http://jlcollinsnh.com/2012/05/09/stocks-part-v-keeping-it-simple-considerations-and-tools/

http://jlcollinsnh.com/stock-series/

Good luck!

matchewed

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Re: New to investing, unclear on income return
« Reply #2 on: January 02, 2014, 12:05:59 PM »
A - http://jlcollinsnh.com/stock-series/ This will explain buy and hold strategies pretty well.

B - It generally over long periods of time goes up, only in the short time frame does it do the up and down effect. See the picture below.

NinetyFour beat me to JL's stock series.

KingCoin

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Re: New to investing, unclear on income return
« Reply #3 on: January 02, 2014, 12:13:16 PM »
Then the market will surely go back down, as much or more than it went up.

The market trends up, despite short term fluctuations.
S&P500 1990: 340
S&P500 2013: 1832

You might want to read some of the books in MMM's recommended reading section in addition to many of the good internet sources already mentioned.

MaxRules

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Re: New to investing, unclear on income return
« Reply #4 on: January 02, 2014, 05:19:14 PM »
Thanks everyone for the input and good reads. The jlcollins blog is very informative. The 4% withdrawal rate is something that seems to come up in a lot of articles and that makes sense. Basically once you contribute a portion of your income over a long period of time, you can then take 4% out for an income and it should never actually reduce the amount invested. I think the occasional story of "I made $9000 in the last three months!" had me off track a little bit. Mutual funds are not really meant to be an income now, but rather an income later.

Most people say when the market is high you should buy, and when it is low you should buy buy buy. I'm worried about how high the market is now to buy much. If you had $50k to invest, would you throw it in now or wait?

iamlindoro

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Re: New to investing, unclear on income return
« Reply #5 on: January 02, 2014, 06:52:09 PM »
Most people say when the market is high you should buy, and when it is low you should buy buy buy. I'm worried about how high the market is now to buy much. If you had $50k to invest, would you throw it in now or wait?

I'd throw it in now.  You only worry about whether the market is "high" (which is totally subjective, we've only recently gone above where we were over five years ago) if you're worrying about the wrong time horizon-- What does it matter if it drops 2%... 5%... 10%... in the next six months?  We only care about what it will be in 2 years... 5 years... 10 years... and beyond.  And by and large, that will be way above where it is today.

"Set it and forget it."

(Or better still, set it and then keep adding to it like clockwork)

wtjbatman

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Re: New to investing, unclear on income return
« Reply #6 on: January 02, 2014, 09:45:44 PM »
If you're 30 years old (hey so am I), I would invest now. That's what I'm doing. It doesn't matter if the market is "high" right now, by the time you retire it will go higher. I assume you will retire in 20? 25? 30 years? Well any money you put in now will go up and down several times before it's time for you to retire. Don't sweat how the market is doing right now. Determine your investment strategy, stick to it, and enjoy your money in the future.

lano

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Re: New to investing, unclear on income return
« Reply #7 on: January 02, 2014, 11:27:22 PM »
Here is a summary.

1.  First you want to learn time value of money.  (Basic arithmetic)

2.  Using time value techniques you can learn how to value a plain US treasury bond that pays coupons.  Say a ten year bond.  At this point it is also good to understand why the US treasury is the benchmark rate used all over the world -- why the full faith and credit of US is called the risk free rate.

3.  The big step:  A stock, a piece of a business, can be valued just like a bond, with the key understanding that:

3a.  Stock coupons (earnings) can wary and are not fixed as in a case of a US treasury bond -- they can go up or down.

3b.  Stock coupons may not necessarily be given back to you in cash:  1) some of it can be given to you via dividend, 2) some of it can be given back to via stock buyback, 3) and some of it can be given back to you by a reinvestment in the same company or a purchase of some other company or business.  The potency of the second method, and especially the third method of giving cash back to you are also uncertain:  the money reinvested in the business can produce 2 dollars for every 1 invested, or it can produce 0 for every 1 invested.

Over time the market will value the company based on how well it performs 3a and 3b.  Buy and hold will work really well for individual stocks if you can understand 3a and 3b of a particular company, if you then buy the stock at a price fair to current stock coupon levels and discount rates, and if the company does perform 3a and 3b well over the years that you hold it.

If you do this you are literally investing.  You are buying a piece of business with the view that it will increase revenue and profits, and that management will return those profits back to you in one way or another and not squander them.

Now, on this site and others, (in this sub forum especially) you will hear a lot about index funds, and diversification, and stuff like:  "You must have bonds, and you must have international exposure (why?), and its all about asset allocation (whatever does that mean), and its all about the dividend (as though buybacks and reinvestment are not performed with real money), go to Bogleheads, go to Vanguard, go read Bernstein, etc, etc."

What it all boils down to is "we don't want to do 3a and 3b so we will just buy everything..."

Buying everything is not a bad strategy, but you should understand the limitations.

   
Go to

http://www.google.com/finance?q=NYSE%3AKO&ei=oVPGUqCkKKXz0gHo1AE

Click on Zoom: All

On the Compare: line click on the S&P 500 check button.

Take a look at the results. 


Coca Cola has done really well in terms of 3a and 3b over the years.  The indexes by definition are filled with some companies that have really crappy 3a and 3b, some companies with average 3a and 3b, and of course some companies really amazing 3a and 3b as well.

However, by the same definition the results will be average as well.