A tough question when talking about investments. Who could have predicted what would happen to home prices over the previous 5 years and then the huge drop the past year? Not many..if any. In preparing people's taxes I learn all about how much they bought their home for and how much they sold it for. I get to hear all the stories of crazy appreciation and more recently the stories of lost value. For the average person it is just luck and timing. What about stock? Is there any way to accurately predict what will happen in the future? Simply, no. Especially in the short run. There are many theories and ideas of how to predict the potential appreciation in the value of a company's stock, but they are theories and ideas. They sometimes work and they sometimes don't. Consequently, it is best to have a general rule to apply to your purchasing and selling of stock. Not a theory but a rule.
In an article by James Stewart in Smart Money magazine, the wall street journal magazine, James shares one of his rules as an investor. Let me share that with you. James considers himself a journalist and not a day trader. He doesn't stay glued to the computer fretting about stock prices, yet he does have a rule that he lives by in order to maximize his profits. This rule works especially well when there is so much volatility in the market, though it may be tough to catch the down turns because sometimes they don't last very long, but overall it will always work. James calls this his Common Sense Approach. What he does is "buy on 10 percent declines in the NASDAQ and sells on 25 percent gains." By following this simple rule he is able to always buy low and sell high.
Over the past year there have been record gains in a short period of time after a small down turn in the market. This means that if you were just casually keeping track of the market and had a couple of stocks in mind you could have easily bought them after the had fallen 10 percent and then cashed in as the stocks quickly rebounded with the market. You don't have to be a day trader to do this. It is a simple rule buy 10 down, sell 25 up. Easy enough. Ideally every person, especially college aged like myself would have some money in a Roth IRA and/or a college savings plan which can earn interest tax free. Think about it. All your gains are tax free. Crazy! If you are not taking advantage of this then it is time that you start. With a minimal investment you can open up a Roth IRA and then invest with the following rule: buy 10 down, sell25 up. Follow this rule and watch your tax free money begin to add up. Keep on investing and following the rule and you will have plenty of money to retire on, even if you don't save much more than the maximum IRA contribution year. And imagine it will be tax free!!
On a side note, working with individual tax returns has taught me something. The wealthier higher earning people do their best to avoid taxes and take advantage of tax free earnings, while lower income people have not even heard of such investment vehicles let alone be investing in one. It starts with financial education. Don't be one of my latter clients. Be high earners that know how to invest.
When to Buy, When to Sell is always...
US Economy: Will it Turn Around?
In the January 7 edition of Forbes magazine, Ernesto Zedillo, the former president of mexico and now director of the yale center for the study of globalization has an intriguing article. He touches on the recent down fall of the US economy and how the global economy will be affected during 2008. One of the problems that he mentions is America's propensity to consume and our negative savings rate. As many of you may be well aware the savings rate is negative in the United States. That means that on average an American citizen spends more money than they make. It means that a growing number of the US population is imprisoned by debt. Ernesto mentions that this behavior of "swallowing our savings" has troubled many analysts because in the rest of the world there is a "savings glut." Other countries around the world love to save. This is our major problem, not big corporations and not corrupt bankers and brokers. It is us.
The reason why we are even in a credit "crunch" is primarily because Americans have no soul. It is not because some broker wanted to make more money though that is part of the problem and let me emphasize, they are only a smalll part of the problem. The major catalyst is the prideful desires of american citizens. We do not respect money and what money can give us. No, we only love what money can buy. Therefore, even if we don't have the money we lust after the "things" we can have and consume. Eventually this lusting forces us to buy the product on credit. We will refinance our homes, or even take out second mortgages so that we can buy more and more stuff. We will even sell our souls for the new plasma, car, bigger house or lates video game console. Thus, we have no principles, no self control, no morals and sadly enough, NO Soul.
Consequently, the government should not step in and help the economy. The markets need to correct themselves. If GDP must decrease because Americans are finally realizing that they can't just keep buying everything they want then let it decrease. They are begining to realize that if they are not smarter with their money they will lose their homes. Reality is finally starting to settle in. If I don't have the money then I can't buy it. What a concept. If millions of Americans need to lose thier homes so that they and the rest of prideful america can wake up, then so be it. But no. We have some fake Republican in the white house who is now going to "fix" the problem by sending people more money. It is ridiculous and it will only encourage people to not learn that they can not spend more than they make. Though this "stimulus" package may help in the very short run in the long run it will only continue to damage the crumbling value of the dollar and continue to distort American's view of reality. Wake up People! Think for yourselves! Regain Your Soul!
