Why Invest?

Posted on March 16, 2024 by Unk

People invest money to generate passive income that can equal or hopefully surpass earned income. Let me explain.

First, if you work at a job or run a business (you’re an entrepreneur), you have Earned income.

Passive income is made whether you work or not. You probably hear the saying that it’s money that you make while you sleep. This means that passive income increases your net worth, or wealth, whether you work or not.

At first, most of us don’t have enough passive income to replace our earned income without some severe cutbacks on our lifestyle. Ideally, passive income should be nearly twice the level of active income because of market downturns and inflation.

I stack my passive income, and by this I mean I continually invest in my passive income and use that income stream to go on vacations and other personal goals. Underneath the fun activities (aka vacations), I have layers of expenses that can be substituted for the vacation in tight times. I’m sure we all do this.

I like both dividend stocks and growth stocks for passive income. Dividends are the simplest form, you get a check from the stock you own. Growth stocks are not as predictable but could have a higher upside, think Amazon, or lately Nvidia, but for those you need to sell the gains on the stocks. Growth stocks are a trick, because I owned both Tesla and NetFlix, but sold for the capital gain way too early. My loss… That is why a good dividend stock or dividend ETF is simpler.

Because I had to build up a passive income from practically zero (long story), I tend to mostly invest in S&P 500 ETFs (like Vanguard’s VOO, SPDR’s SPLG, etc.) and some select dividend stocks and ETFs.

There are plenty of books out there to motivate you to follow the investing path, books like “The Millionaire Next Door”, half the battle with investing is believing.

“The Millionaire Next Door” is great, but some of the financial statistics are a bit dated since the book is over 20 years old. So while the core principles are solid, the details have changed with time. For example, recently I read 88% of millionaires are college graduates, while that percentage was much lower in TMND.

For a strategy, I loosely follow this personal finance pyramid.

The goal of long-term investing is to increase your wealth for your family, security, comfort, and adventure.

Thanks for reading,

Unk

AI’s improvement on the above:

Passive Income and Its Importance:

  • Earned Income: When you work at a job or run a business, you earn active income. This income is directly tied to your effort and time.
  • Passive Income: Unlike earned income, passive income is generated whether you work or not. It’s like money that flows in while you sleep. This type of income contributes to your net worth or wealth, regardless of your active involvement.

Building Passive Income:

  • Initially, most of us lack sufficient passive income to fully replace our earned income without making significant lifestyle adjustments. Ideally, your passive income should be nearly twice the level of active income. This buffer accounts for market downturns and inflation.
  • Stacking Passive Income: I follow a strategy where I continually invest in my passive income sources. I use this income stream for various personal goals, including vacations. Beneath the enjoyable activities (like vacations), I maintain layers of expenses that can be substituted during tight financial times.

Types of Passive Income Investments:

  1. Dividend Stocks: These are straightforward—you receive regular dividend payments from the stocks you own. They provide a consistent income stream.
  2. Growth Stocks: These stocks may not be as predictable, but they offer higher upside potential. Think of companies like Amazon or Nvidia. However, with growth stocks, you’ll need to sell the gains to realize the income.
    • Personal Experience: I’ve owned the stocks Tesla and Netflix, but I regret selling them too early for small capital gains. This highlights the challenge of timing with growth stocks.
  3. S&P 500 ETFs: Investing in exchange-traded funds (ETFs) that track the S&P 500 index (such as Vanguard’s VOO or SPDR’s SPLG) is a reliable way to build passive income.
  4. Select Dividend Stocks and ETFs: Diversify your portfolio by including specific dividend-paying stocks and ETFs.

Motivation and Belief:

  • Numerous books motivate individuals to embark on an investing journey. One such book is “The Millionaire Next Door.”
  • While “The Millionaire Next Door” is excellent, keep in mind that some of the data may be dated, as the book is over 20 years old. Belief in your investment strategy is half the battle.

Remember, building passive income takes time and consistent effort, but it’s a rewarding path toward financial independence. 

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Dollar Cost Averaging In Practice

Posted on September 24, 2013 by admin

In my last post, I wrote about what Dollar-Cost Averaging is about and gave some example of how it works.

Today, I’m going to talk about how I personally use Dollar-Cost Averaging in my “real life” and why I think overall it’s the way to go.

Dollar-Cost Averaging in Practice:

  1. 401(k) –  For the most part the mutual funds that I’m invested in get the same amount invested in them, month after month.  This is by far where I use dollar-cost averaging the most.
  2. Kid’s 529 –  I had to do a little more work to get these accounts setup to use Dollar-cost averaging versus my 401(k), but not much… maybe 10 minutes total (nice)!  I deposit $200 per kid per month (just in case your curious).  I started the accounts when they were each (2 kids) born.
  3. Brokerage Account – I do a lot of work to get this to be dollar cost averaged, and it’s only for 1 particular stock that I do it for!  This can be automated like the processes above, but I like doing it manually, don’t ask me why (I have no idea why…), but it’s fun.
  4. Dividend Reinvestment Stream – This is reaching a bit, but I have a stocks that distributes monthly dividends.  So for this one particular stock that I own (Realty Income Corp, ticker: O)*, I’m in their DRIP (Dividend Reinvestment Program).  You could have your stocks reinvest in themselves for quarterly distributions too.  They are all good.

And there you have it!  These are the ways that I use the very powerful Dollar-Cost Averaging concept.

How do you use dollar-cost averaging?

*Realty Income Corp – I’m long on and own this stock.
(Disclaimer, I’m not recommending this stock, I’m just displaying what I’m doing.  Please don’t purchase this stock without doing the necessary research).

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What is Dollar Cost Averaging?

Posted on September 21, 2013 by admin

Dollar Cost Averaging  is an investment strategy where you are investing static amounts of chunks of money spread out over time (instead of a lump sum purchase) in a given investment.

You might be wondering “what is the advantage of doing this form of investing”?  You might think that investing in small chunks is inferior to lump sum investing because depending on the investment vehicle, it can seem be more expensive because of transaction costs versus a lump sum purchase.

A lump sum purchase is were you take all the money that you want to invest and purchase an investment all at once instead of in small purchases via a dollar cost averaging method.

So let’s now look at how the Dollar Cost Averaging ideology works.

Below is quarterly purchases of the fictitious stock XYZ:

Amount
Price of the Amout of Cumulative Value of
Invested Date XYZ Stock Shares Shares Shares
100 12/03/08 34.48 2.9 2.9 99.99
100 01/23/09 6.24 16.03 18.93 118.1
100 05/01/09 8.7 11.49 30.42 264.65
100 10/30/09 14.58 6.86 37.28 543.52
400 01/02/10 15.06 37.28 37.28 561.42

This would be about a 40% return on my investment!

However, if you were to buy everything on the initial purchase date, you would have been down by more than 40%!  This is the power of dollar cost averaging!  If you mess up and buy at a bad time, you have an opportunity of averaging out the cost by buying in small chunks instead of one lump some.

One of the most famous dollar cost averaging devices is your company 401(k) plan.  The typically company 401(k) plans purchase mutual fund or ETF shares in biweekly or monthly allotments.  This is powerful because it takes some of the gambling aspect out of investing by enabling you to spread the risk out over time.

Another beautiful aspect of dollar cost averaging is that it takes advantage of sudden deep dips in the stock market, enabling you to buy shares cheaply!  In the chart above, you see on 05/01/09, I was able to buy XYZ shares at the $8.70.  At $8.70 I was able to buy 11.49 shares instead of the 2.9 shares that I would have bought on 12/03/08.  When the share price recovered, I got a big boost in the value in my portfolio!  Brilliant!

This is why I don’t mind seeing temporary dips in the market for a month to two!

Okay, now let’s talk about if you have a large amount to invest… 

If I had $100,000 (or even $5,000), I’m not going to stuff it under my mattress or have it sit around doing nothing waiting until I can Dollar Cost Average it!

While your money is waiting to be invested, it need to be invested! Confused?  Yeah, I wrote it that way on purpose, sorry (mauhaha)…  What I mean is you need it invested the large amount in CDs, Bonds or some highly liquid (or at least safe) investment so that it at a minimum the value of the money keeps up with inflation (or tries too).  Mostly this paragraph is moot though, since the money you’re investing mostly comes from wages that you’ll be investing into dollar-cost averaging devices.

Do you use dollar cost averaging and if not, what technique do you use?

 

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Is Beating the Median Income Levels Keeping You Poorer Than You Should Be?

Posted on October 15, 2012 by admin

As a stats junkie, I like to know what the income level statistics are, and in particular the household incomes ($50,500)! I like to know how far I am above that amount, and percentage that we (as a household) bring in!  But if you are like me, is beating the income averages keeping you poorer than you should be?

What do I mean by “Is Beating the Media Household Income Level Keeping You Poorer than you should be”?

Basically I mean are you setting your financial income goals too low?  After all, is the median income levels really that hard to beat?  I use to compete against the middle income level as a gauge as to how well I was doing, especially when I first got out of college.  But why was I competing against the middle of the country, when just by graduating from college, I’m doing better than 75% of the country?  So the fact that I was comparing myself against the median income levels didn’t really make much sense considering all of the other factors about me (and you too, if you are reading this post…  I’m willing to bet you shouldn’t be comparing yourself against the median income levels either!)

The Thinker

Why Beating the Median Income Levels Might Be Holding You Back

I now think that a lot of us get complacent and think “Oh, I’m beating the median income statistics, that’s good enough”, and slack off and do mindless activities that doesn’t benefit themselves or society (like watching the Kardashians… etc).  This is the wrong attitude and a huge waste of life.

The liberal media groups and certain educators demonize those that try to get a head of the the median/average income levels, but this is not correct either.  There is such a thing as critical mass where until that mass point is met, everything is in limbo, but to do explosive, creative, society benefiting things, you need the critical mass equivalent in money and hard work (be it intellectual or physical)!  Without the correct ingredients or elements, a masterpiece doesn’t happen!

Where would be we if Henry Ford didn’t strive to create an automobile that the average person could afford (biking anyone)?  Why do you think he worked as hard as he did?  Do you think you work that hard?  I know I don’t, but I should…

I’ll be honest and say that I’ve wasted time thinking that I was doing better than the average income level and could drift for a while, but now I realize that the average income level isn’t my competition… It’s just a middle point number that doesn’t represent me or you!

If you (like me) want to be stuck on competing against a statistic, go for the top 5% of income level!  At least at this level it’s more of a challenge.  If you are already at the 5% level then try to make the jump to the top 1% level.

The key is to keep creating and innovating, in that way, you can increase your wealth and hopefully contribute greatly to society!

 

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What is the Price/Earnings (P/E) Ratio?

Posted on October 10, 2011 by admin

What is the Price/Earnings (or P/E) ratio?

The Price to Earnings (P/E) ratio: is a ratio used to determining how much a potential stock buyer is willing to pay for for 1 share of common stock in a company.

The P/E ratio is the Price of 1 share of common stock divided by the earnings per share of the company.  So if the price of 1 share of a company’s common stock is $10, and the EPS of the company is $.50, then the P/E ratio is 20.  A P/E ratio is best used to compare the company that you are considering purchasing share of common stock in against other companies that do a similar thing.  A group of companies that do a similar thing are call a Segment.  An example of such a group of companies (a segment) could be the financial segment (financial firms such as Bank of America, JP Morgan Chase, Well Fargo, etc.)  Another example would could be individual companies that sell a similar product as the company that you are interested in.  Coke and Pepsi have similar products so if you were interesting in buy shares in either or, you would looks at the P/E ratios as part of the determination process (of course this would be just one thing to consider and not the determining factor).  So Pepsi has a P/E ratio of 16.22 and and Coke has a P/E ratio of 12.76. Based on Coke and Pepsi, a P/E ratio of 20 would seem a bit high.

The real power of a P/E Ratio, is that it makes stocks comparable to other stocks in a quick glance!  While it’s not a complete answer in itself, it is a powerful metric when combined with other health/growth metrics on a company.  Personally I like to look at the P/E Ratio, Debt to Equity Ration, Sales growth rate, EPS Growth rate and the beta on a stock in my decision making process as to whether I’ll buy the stock or not.

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