stock questions

[cicy33]

I think you are presenting your information a little at a time, which makes advice jump around.

What are you trying to accomplish? (list the goal, not how you plan on accomplishing it). For best planning, it is best to have one goal which supercedes others.

Might be
1) retire at age XX
2) to get a higher return than the market
3) to beat the return on a savings account
4) maximize income
5) minimize taxes
or something else...

What is your goal?

Also list what you have saved already, how old you are and when you plan to access (withdraw) the money.

I know this may seem strange. But I don't have a specific goal at this moment. I am trying to learn some information and then compile it and go from there. I guess If I had to be specific I would say the plan for us is to be comfortable and working for ourselves in about the next 4 years, which is where this number is coming from. We are exploring different options and ideas and deciding which directions we would like to go. This post wasn't about trying to decide the best safe way to go, it was just trying to learn something new that I didn't understand. and for the record I am 41.

[jIM_Ohio]

You say you want to invest to learn.

You are asking questions I will make as being analagous to trees or branches or leaves. You do not even see a forest because you are so focused on a leaf.

That leaf might be important to you, but most of us can see you do not understand the big picture enough for the answer we supply to do you much good.

4 years is not enough time for any stock market investment to do well. Think in terms of 10-16 years for positive returns.

If people have to convince you to invest, do not invest. You need to know it will be successful or have confidence in the market. Read a book or get a magazine subscription to teach you the basics.

I would not teach a person how to play soccer until they could walk, I could not teach a person to read until they knew the alphabet. Just because you want to learn something about buying a stock does not mean you can skip learning the basics about investing.

[jIM_Ohio]

For example, if you have 4 years to see something go up, I would go to treasury direct, buy some ibonds or TIPS, then move on to next problem.

If you wanted to get more involved, maybe buy a diversified bond mutual fund which had high exposure to ibonds or TIPS.

Convertables also have less risk than stocks, and would be a better short term investment (less volatile).

Stocks in 4 years could go up 30 percent one year, then down 40 percent the next. Too volatile over short periods of time to really get a good feel for direction. Over 10-16 years the direction of the market will be upwards (always has been in past), but short periods (like the 1970's- the WHOLE decade), have close to zero returns.

Without big picture knowlege like this, picking individual stocks is meaningless.

[cicy33]

You say you want to invest to learn.

Not really, I want to learn to invest. Or rather I want to understand how it works to invest. Personally I still believe that it is not a good area but am trying to be open minded for him. I will not invest until I have an understanding of how it all works.

[jIM_Ohio]

Not really, I want to learn to invest. Or rather I want to understand how it works to invest. Personally I still believe that it is not a good area but am trying to be open minded for him. I will not invest until I have an understanding of how it all works.

If you do not believe it's good, invest in something you have confidence in- real estate, bonds or other.

If at the first sign of trouble you bail, the stock market will be a losers game for you.

The way investing works is this:

You invest a set amount (say $400) every month into something. Preferably a mutual fund for a newbie.

The mutual fund will take $$ from you, me and thousands of other people and buy stocks (or other things, I assume we are discussing investing in equity mutual funds). The stocks will either increase or decrease in value.

As the group of stocks the mutual fund invests in trend in a direction, the mutual fund will follow that direction (if most of the stocks go up, mutual fund goes up; stocks down, fund down.

The next month you will buy another $400 and repeat this over a 10-20 year period. Your investment is subject to many risks:

1) market risk- the fact the market value of your $400/month will move up and down. There is no guarantee the investment increases in value.

2) political risk- the iea that the goverment could collapse and render all investments worthless. Usually this is common when investing in places like Africa or Asia types, South American types.

3) interest rate risk- the idea that when the fed changes interest rates, the value or return of your investment changes.

4) currency risk- the risk that the currency you use to invest either changes in value or no longer exists. This is most common if you invest in European or other countries. There are times currency risk INCREASES the investment (weak US dollar) or decreases (strong US dollar).

5) return risk- the risk that another investment gives a higher return than the one you chose.

No single investment eliminates or optimizes every risk mentioned. There are risks I have not mentioned (inflation risk, knowledge risk and others). It's possible the information I am giving you is incorrect or wrong or that what has happened in the past is nothing like what will happen in the future.

When investing in stocks (mutual funds or individual stocks), over time some risks get larger (like inflation risk) and some risks diminish (like return risk, market risk) and some are less of a factor (interest rates do not directly affect stock market returns).

This means the more TIME you give the stocks, the more likely they are to go up. 4 years is not enough time to reduce or eliminate this risk (IMO). 10 years maybe. 20 years almost definitely.

[cicy33]

We have discussed it further and I have finally got him to see that short term especially is not a good idea for stocks. We are going to consider some for long term possibilities but that is still in discussion. I personally don't think that this is a good idea for retirement at this time. I am thinking a savings account at 4% and constant work to build it will hopefully help us. But we have also agreed that is not good to leave all in one place so we are working on other options to build several points of income or returns on money. but I do thank you all for your answers. Even if the idea is not a good one it does help me to when I can at least understand why.

[jIM_Ohio]

Instead of 4 percent savings, use TIPS- higher return with almost as much safety (TIPS are indexed to inflation, your 4 percent savings is not).

Long term (20+ years) few investments have ever even came close to stocks. Not real estate, not bonds, not cash.

Only better investment (IMO) is owning your own business.

[Investing First Steps]

TIPS are a winner all around in my opinion. They don't even have a downside. Even if there's severe DEflation, the worst you can do is break even. Given current government policies I don't see long term deflation as a likely problem.