Authors: Allen Wong
4
Investing Wisely
“A penny saved is a penny earned”
– Benjamin Franklin
Despite making decent money as an herbalist, my father, who had borrowed money to start his store in Chinatown, continued to live frugally throughout his life. Our family focuses on value over extravagance. There is a Chinese proverb that goes, “Showing off your wealth is a fool's idea of glory.” By saving and investing your money, you will end up wealthier in the long run. Wait until you have more money than you need to save before you start splurging.
Living Frugally
One of the things I admired about my father was his self-sacrifice. He could have bought a luxury sedan to get to work every day, but instead he rode a bike to work each morning. The whole commute took him maybe an extra hour or so of commuting each day. It was a tedious and time-consuming commute, but he did it to save money. Our whole family had followed suit.
Our family car was an old $15,000 family sedan which we kept in our family even to this day. Its fuel efficiency and low cost were what appealed to my family. Even though we had this family car, my father never drove it. The car was used sparingly by my mother to drive to places that we could not reach by foot or public transportation. My mother didn’t even use the car to get groceries. She walked to the local grocery stores. Even after having the car for over a decade, the mileage on the car was less than 20,000 miles.
My father was also a Do-It-Yourself handyman. If the toilet broke, my father would fix it himself. If the faucet was leaking, he would fix the faucet himself. If roofs leaked, he would climb to the rooftop with a bucket of tar and repair the leak himself. Not only did this cut the cost of hiring someone, it also gave my father experience at fixing things. Thus, it was a win-win situation for him.
These inquisitive and engineering traits later passed on down to my brother and me. He and I would break down broken electronics around the house in an attempt to understand and fix the problem. We learned how to solder wires and repair circuit boards from our father. Our neighbors even started giving us broken electronics for us to fix.
We fixed all of our neighbors’ remote controlled cars, television sets, computers, laptops, and even video gaming consoles. We became known on our block as the family that knew how to fix things. And they all came to us, because we never charged them any money. While we believed in saving money, we also did not believe in greed.
Even though my parents only bought me one video game per year, they always gave away video games to our neighborhood kids during their birthdays and during Christmas. So while we were frugal when it came to buying things for ourselves, we were generous when it came to other people. And whenever we got a parking ticket, my mother always said that we should just think of it as a donation to the U.S. government. This mentality of self-sacrifice and generosity was what kept us in control of money and not the other way around. We never let our money control us and dictate our emotions. At no point in our lives did we ever feel that we really needed a large amount of money.
With all of the money we saved, my family invested in my father’s herbal store business, in real estate and in mutual funds comprised of stocks and bonds. We never felt poor again, because we knew that we were steadily building a financial nest egg for ourselves in the future. Besides earning money, it is also important to keep the money and make the money work for you.
Lifehack #6: Diversify your investments.
“A fool and his money are soon parted”
– Dr. John Bridges
It is easier to think of ways to spend money than it is to think of ways to invest money wisely. There are many stories out there about how celebrities end up bankrupt. People like Nicholas Cage and M.C. Hammer may have been making millions before, but they have struggled with managing their money properly by spending more than they were saving. This is a very common problem among wealthy people who do not properly grasp the concept of investing.
Thus, a man's wealth is not about how many luxurious and unnecessary things he owns. Instead, wealth is measured by how long someone can last in his current lifestyle with just his savings alone. If it is several lifetimes over, then that person is truly wealthy. For the average person, it would only be for a few months.
So where should
you invest your money? There's no single safe place to invest your money if you’re looking for big returns. For a while, we thought we could safely put our money in stocks. But the Internet bubble in the early 2000’s and the recession of 2008 crushed a lot of people’s stock portfolios. We thought it was real estate, but housing prices dropped significantly after 2008. We thought it was gold, but even gold sometimes retreats.
That's why we invest in several places. You should never go “all in” with your investments, or you'll suffer what is called, “Gambler’s Ruin”. The idea behind this is that if you keep gambling all your money against a casino that has infinite money, then you will end up losing all of your money. Even if you win in the beginning, you will lose all of your money over time, because it is a negative sum game. By this I mean that the casino always has a slightly higher chance of winning, so you will lose money in the long run. Therefore, if the person played forever, then the chances of that person losing all of his money would be 100%.
Trading Stocks
A lot of people forget that trading stocks is a negative sum game as well. There are commission fees and ask/buy spreads. Those fees and spreads are often really small, but they do add up over time. Studies have shown that more day traders lose money compared to those who hold onto stocks for at least a month and only trade occasionally. And when it comes to new traders who only trade for a brief period of time and then quit, over 90% of them lose money during that time period (according to a study conducted by Ronald L. Johnson for the North American Securities Administrators Association). That study concluded that a majority of traders were heading towards ruin and bankruptcy if they kept trading in the same way they were trading.
Similar studies have all shown the same results. Terry Odean, a grad student at the University of California Berkeley, and his professor, Brad Barber, researched the accounts of 10,000 discount-brokerage trading accounts from 1987 to 1993. Odean later repeated the study by examining the accounts of 66,465 households from 1991 to 1996. In their studies, they found that as a group, amateur traders were doing poorly versus the market (i.e. they were making less money than if they just bought index stocks).
The reason why amateur traders were doing so poorly was that those traders tend to sell winning stocks too early and hold onto losing stocks for too long. There is a psychological reason for this. When you are holding a losing stock, you tend to not want to sell it, because you’d be admitting to a loss. Nobody likes to admit that they are wrong. So instead, these traders tend to find every excuse to hold onto a stock. They are hoping and praying that the stock will turn around. Then, they end up spending most of their time trying to break even and making more and more emotional trades. The more they traded, the more risk they were putting onto themselves. The studies showed that the more frequent a person trades, the quicker a person loses money and the riskier the account becomes.
On the flip side, if a trader was holding onto a winning stock, they tend to sell it too early. They see a profit and take it immediately. Then as the stock rises, they buy back into the stock, because they don’t want to miss out on more profits. However, they tend to buy it back when the stock is at a higher price already. Thus, they already missed out on profits. That loss in profits isn’t noticeable to the trader, because they just see it as a missed opportunity. But that loss is truly a loss, because that same trader would hold onto a losing stock and absorb every loss that the stock suffers. This makes their losses larger than their gains.
The other reason why day traders are losing is that they tend to follow what others are doing. When good news about a company comes out, the retail trader just buys the stocks that have already shot up in price. This leaves retail traders with a losing strategy, because they have already missed out on the profits of the stock that shot up. Thus, there is more room for the stock price to decline than to go up further.
Thus, the final conclusions from those trading studies were identical: trading hurts your wealth.
Lifehack #7: Avoid paying for free advice.
Be wary of websites and people trying to sell you tips on stocks or secrets to making money online. Most of these people care more about earning a buck off you than they do about your finances. They can show you their winning trades and show you how much money they won by trading, but they will not show you their losses. What they want is to sell you on the idea that you are missing out on a great opportunity to earn money without working. They want to make money off of you by posing as a guru who knows things that you cannot learn about elsewhere. They will also post “testimonials” or “reviews” on their website to show that real people are actually making money from their advice. This is where you should be cautious. Those testimonials/reviews were either faked or hand-picked. They would never post the negative reviews and testimonials on their own website. And the trading "secrets" that they offer are actually no secrets at all. There is plenty of free trading advice found online already if you really want to dip your toes into trading.
My advice would be to avoid day trading altogether, since it's an emotional roller coaster that will stress you out and waste your time. But if you must try it, then here are some things I learned when I did some day trading in the past. If you are holding onto a winning stock (i.e. a stock that is performing better than the market), then hold onto it until it stops going higher. If you are holding onto a losing stock, then make sure to sell it sooner. Don’t ever fall in love with a stock. Once you attach emotions to a stock, you will start making mistakes. The better way to trade would be to set a fixed amount that you’re willing to lose and stick to it. Don’t ever let a trade make you lose more than 7-8%. Just cut your losses short and move on.
If you want to invest in stocks without day trading, then you should consider putting your money in an index fund. Index funds were created to match the overall market. Thus the price of an index fund is very closely tied to the performance of the overall market. The benefit is that you end up with less analysts and active stock pickers to pay, and thus, you pay lower fees when compared to an actively managed mutual fund. They are also simpler and easier to understand. And since they’re passive investments, there are less capital gains taxes to pay and less trading fees to pay. Those things are usually passed onto the fund investors in an actively traded fund.
Your
bank's financial adviser will most likely try to get you to invest your money in a mutual fund. There’s a reason for this. Take a look at the “front load” of the mutual fund that he or she is recommending. It should be around 2-5%. That's basically what your financial adviser will get paid in commissions if you take his/her "advice" and buy that fund. It is an upfront fee that you pay as soon as you invest your money in the mutual fund. Then there is also an expense ratio, which is the percentage calculated by taking a fund's operating expenses and dividing it by the average dollar value of its assets under management. Those operating expenses are taken directly out of your investment, and could also end up in the pockets of your financial adviser. Always keep this in mind when you speak to him or her. That person may not have your best interests in mind.
Here's a better idea. Set up a Scottrade account
(or some other e-trading account) and buy an ETF with your money for just $7 per trade. You can find ETF's that mimic the mutual funds holdings or mimic index funds. If you want to avoid the load fees but still want to join that mutual fund, look to see if that fund has Class D shares. Those usually have no loads, even though the two types of shares are almost identical (Class D shares may have a slightly higher expense ratio). Class A shares (the ones that your financial adviser would push you to get) are the ones with a front load. Class B and C don’t have front loads, but they have fees associated with how soon you take out your investment. There's a lot of free education online that teaches you how to invest. And if you really want to learn it in detail, there are cheap investing books you can buy that are written by accomplished investors.
Lifehack #8: Avoid get-rich-quick schemes.
These fee-based advice websites are no different from your typical get-rich-quick website, book or video that promises you “secrets” in exchange for money. The people who make those things tend to misrepresent their wealth in an effort to prove that their “secrets” really work. These are the ones who show off high-end cars, yachts, houses, and make videos about it. They’ll talk about how they made thousands of dollars in a day and even show you some Google® AdSense® account statements that “prove” their high income. They’ll show you written reviews for their products from “real” people.
But they are faking it in order to sell you their get-rich-quick products. I’ve been approached many times by these scammers who offered to pay me a few hundred dollars to borrow my exotic cars so that they could make these types of videos. They would also rent a mansion for a few hours and shoot videos of that. All of this was created to give you the illusion that their “secret” system works.