Contrary to the Typical Advice Given Regarding Investments

Before we get started, I feel it necessary to disclose to everyone that I am not a licensed financial advisor, despite the fact that I portray one on television. As a result, I am not going to offer financial advice because the law prohibits me from doing so. This is being provided solely for informative purposes, and I am in no way advising anybody else to follow any of the personal financial plans that I have developed.

In light of the aforementioned information, I will now provide an overview of some of the methods I employ for my individual investment plan without going into a great deal of detail. Although I do employ both a conservative and a not-so-conservative strategy, in general I invest contrary to the common knowledge that you are used to hearing about investments. However, I do use both strategies.

The vast majority of financial counselors place a significant amount of importance on diversity. Even though this is something that the vast majority of people may benefit from, I don't buy it. The premise behind it is that it cuts down on risk. Although it helps reduce risk, the opportunity for me to benefit from it is drastically reduced, which is a shame.

As a result, I very much dismiss the entire idea. The majority of financial consultants will recommend that clients invest for the long term. This technique is often successful in terms of amassing riches, but unhappily for me, it wouldn't take until I'm either old or dead before it would do either of those things. I make investments with both the short and medium term in mind.

I also do not purchase individual stocks, nor do I engage in stock trading. Instead, I invest in and trade no-load mutual funds, including index funds like those offered by Vanguard. Even if I use a broker who offers huge discounts, the commissions that I pay when I trade individual stocks will pile up over time and reduce the amount of money I make. The purchase and sale of genuine no-load mutual funds do not incur any fees for me.

In addition, holding shares in a mutual fund is analogous to holding shares in a number of different stocks all at once, whereas buying individual stocks is unnecessary when holding shares in a mutual fund. I've decided to invest in classes or groupings of equities rather than buying individual shares of stock. The management of the fund takes care of deciding which stocks should be purchased and which should be sold, so I don't have to worry about that either.

Now that we have that out of the way, let's speak about some specific rules I utilize for my conservative plan. Morningstar's (www.morningstar.com) "Five-Star" rating is the only one that qualifies a fund as one that I will invest in. In addition to this, they must have a risk rating from Morningstar that is "low," "below average," or "average." In addition to this, their Morningstar return rating needs to be either "above average" or "high." Additionally, they need to be winners over the long term, which means that they should be towards the top of their categories in terms of performance over the past five and/or ten years. In addition to this, I necessitate that they be "Lipper Leaders," which can be found on the website www.lipperleaders.com, under the categories of "Returns," "Capital Preservation," and "Consistency."

Consistency is, in my opinion, one of the most crucial aspects, along with excellent overall return and the protection of capital. Even if the fund has performed very well over the longer term, investors who hold positions for three months or less may experience difficulties if the fund is inconsistent or erratic. The issue is as follows: Let's imagine that the first year I owned a fund, the value of my investment dropped by fifty percent (%). If it were to increase by a staggering 100% in the following year, then I would be able to break even after two years.

Nevertheless, let's imagine that after the first year, it dropped by a quarter of its value. In that scenario, all the fund would need to do to break even is increase its value by 33 percent in the following year. If there was a drop of 20% in the first year, there would need to be a rise of 25% in the second year for there to be a break-even point; if there was a reduction of 15%, there would need to be an increase of 18%; if there was a drop of 10%, there would need to be an increase of 11%; and so on. Because of this, I only invest in funds that have never experienced a loss of more than 10–20 percent in a single year. I think the best funds are ones that have never had a year where they lost money, but those are extremely difficult to discover.

What about the more combative approach that I proposed? This is the one that I'm using more and more often, and it's growing more profitable, even if it's unlikely that I'll be able to quit my job and rely only on it to make a livelihood just yet. Will I become filthy rich as a result of it? Almost certainly not. On the other hand, my long-term goal is that it will eventually put me in a situation where I can retire earlier than expected. This approach involves making frequent trades in a variety of index funds that do not incur load fees. According to knowledgeable individuals, there is no way to correctly time the market. In accordance with the most stringent interpretation of the word "market timing," I believe this to be the case.

Despite this, I have found that it is possible to profit from trading by utilizing the short-term momentum that the market has already built. Why invest in no-load market index funds rather than individual equities or exchange-traded funds (ETFs) that mimic other market indices? Since no-load market index funds enable leverage and short selling without the requirement of a margin account, these funds are becoming increasingly popular.

In addition, some of these funds permit trading on both the daily and twice-daily markets, which is essential for getting out of a bad position quickly. In addition, the fund firm that I use does not levy any redemption fees on actively traded products offered by its own company. These costs are charged by the vast majority of fund companies, including those that focus on providing no-load funds.

As I mentioned at the outset of this discussion, I won't go into a lot of detail, particularly with regard to my more aggressive plan. However, I should begin by explaining a few terms for individuals who are just starting out in the world of investments so that the rest of this will make more sense to them.

What exactly is the term leverage? In the context of this discussion, leverage refers to the capacity to buy shares of a stock or mutual fund and then realize a multiple of the gain or loss that occurs while you hold those shares. For instance, you would earn a gain of forty percent if you invested in a fund that was leveraged at a rate of two times a particular stock index and that fund went up by twenty percent. On the other hand, if it drops by 20%, you will suffer a loss of 40%.

In order to accomplish this with individual stocks or exchange-traded funds (ETFs), you will need a margin account. When you have a margin account, your broker will lend you money on "margin" at a somewhat high interest rate in order to cover the leveraged (or additional) amount. It should come as no surprise that this could result in a significant loss. On the other hand, there are some funds that already include this leverage without charging you anything more for it. You will automatically receive one and a half or two times the gain or loss of a particular stock index if you invest in these funds.

What exactly is selling short? Short selling is when you sell a stock (that you don't already own) instantly at its present market price while agreeing to buy it at whatever the market price will be at a set point in the near future. This allows you to profit from price fluctuations in the stock market. To put it another way, you are making a wager that the price of the stock will continue to fall, allowing you to purchase it at a price that is lower than the one at which you sold it.

Have you ever heard the phrase "don't sell me short" used by anyone? So, this is where the expression "that term" originated. When you sell someone short, you are essentially acting as though they are a terrible stock that you believe will continue to decline in value. It is true that this is done in the opposite order of how equities are typically bought and sold. To accomplish this with individual stocks or exchange-traded funds (ETFs), you will need a margin account, just like you would with leverage. To enable you to sell a stock that you do not yet own, your broker will lend you money on "margin," which means that the broker will actually buy the stock temporarily on your behalf.

However, the funds that I use already have this short-selling mechanism built into them, and there is no additional expense to you as a result of this. You may, for instance, invest in a fund that provides you with the inverse performance of an index such as the Nasdaq-100. The fund's value drops by 10% whenever the corresponding index rises by 10%; conversely, the fund's value rises by 10% if the corresponding index falls by 10%.

There are even funds that do not charge you any additional fees despite having leverage and the ability to engage in short selling. For instance, there is a fund that investors can choose from that increases by 20% whenever the Nasdaq-100 Index falls by 10%. Naturally, the value of that fund drops by 20% whenever the Nasdaq-100 Index moves in the opposite direction. For people who are aware of how to make profitable use of these funds, they can be extremely useful instruments; nevertheless, for those who are not aware of how to make profitable use of these funds, they can be quite harmful. You can probably imagine this already.

Get in touch with a financial advisor or do some independent research if you want additional information about any or all of these topics, as well as if you want help determining the type of investment that is most suitable for you. I am hoping that I have given you some food for thought as well as numerous resources that could be beneficial to you when conducting your own study, and that this has been helpful to you.