Commentary (Page 445)

Let’s say you were around on VJ day, September 2, 1945, which was the day that Japan formally surrendered at the end of World War II. For the month of September 1945, the Dow Jones Industrial Average was at $180. Sixty years later in September 2005, the DJIA was $4,789. That is an increase of over 2600% over 60 years.

The problem is that the increase in the DJIA was not a straight line; it went up and down the entire time. If you could not wait for 60 years but only had 40 years, the price in September 1985 was $1,329, which is only a bit better than 700% for the four decades. If you only could wait 20 years, the price in September 1965 was $931, which was a bit better than a 500% increase.

How does this compare to interest earned in a bank? If you put $180 into a bank account and it earns 8.22% compounded daily for 20 years, then you will have about $931 (the same value as the DJIA that year). For 40 years, the $180 invested at 5% would result in your $1,329. The 60 year mark would turn your $180 into $4792 at 5.47%. This shows that the timing of your buying and selling can have a dramatic impact on the return of that investment.

“Buy and hold” may be good, but it does not necessarily mean that the longer you hold your investment, the wealthier you will become! This is due to the erratic nature of the stock market. You need a system that can maximize the return during the peaks and minimize the risk on the valleys. Five to eight percent returns seem quite small, especially for something as high-risk as the stock market.

Five to eight percent returns are probably adequate for a bank, but this is not a safe, FDIC-insured bank. This is a highly-volatile holding that can decline in value quite rapidly. Conservative banks can pay a lower interest rate because the saver can be assured that the rate of return is safe. In the stock market, your only stability comes from your understanding of what is happening to your investment.

You need a system that allows you to evaluate companies, buy into those companies that are good investments, and then transfer that money to other companies when the investment is better elsewhere. That system is described in my book, The Confident Investor. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in ebook formats for Nook, Kindle, and iPad.

I have discussed mutual funds on this site before, but the term “bond” often appears. Most mutual funds have a combination of cash, stocks and bonds. Some funds specialize only in bonds. In order to be confident that you invest wisely, you should know the basics of bonds.

When a person wishes to purchase a house or car, the bank loans the money for the acquisition in return for an agreed interest rate and payment schedule. Just as people need money; so do companies and governments. A company needs funds to expand into new markets, while governments need money for everything from infrastructure to social programs. These large organizations typically require far more money than the average bank can provide at a reasonable cost as a loan. The solution is to raise capital by issuing bonds that are sold on a public market. Thousands of investors buy bonds to lend a portion of the capital needed.

Buying a bond is just like being a bank or a credit union and loaning money to someone. A bond is similar to an I.O.U. When you purchase a bond, you are the lender of money to a government, municipality, corporation, federal agency or some other entity. The organization receiving the money is known as the issuer. In return for the loan, you are promised an interest rate and repayment period for the principal.

Among the types of bonds you can choose from are:

• U.S. government securities
• municipal bonds
• corporate bonds
• mortgage or asset-backed securities
• federal agency securities
• foreign government bonds

You should maintain a portfolio that consists of bonds, stocks, and cash. Bonds typically have a predictable stream of payments and repayment of principal. Investing in bonds can provide reliable interest income.

Since a mutual fund may often have a portion of its holdings in bonds, you are taking advantage of this “loaning” of money. The precise blend of cash, bonds, and stocks that would be most optimal for you cannot be advised in a book or a website. I discuss this more in the last chapter of my book, The Confident Investor, where I talk about other things that you may want to research. In general, a bond will provide a more stable but smaller return than an investment in individual stocks.

If you are trying to build your net worth by investing, then you need to worry about how much you spend on a daily basis. To quote Benjamin Franklin, “A penny saved is a penny earned” (yes, I know that it is not very likely that Mr. Franklin coined that phrase). By not over-spending you will have more money to put into your investments which allow your net worth to increase dramatically.

An article by Free WordPress Lessons caught my eye and you may want to jump over and take a look. They have many ideas to save money and they are in the following categories:

1. Getting cash back on online purchases
2. Daily deal sites
3. Coupon sites
4. Getting rid of cable TV
5. Deal aggregation sites
6. Price comparison sites
7. Saving money on travel
8. Auction & classified ad sites
9. Budgeting / saving money / coupon blogs

Under each category are many links and descriptions. I can almost guarantee that you will find a site that you didn’t know about (I found several). It is definitely worth your time to jump over and read the article if you are concerned about getting the most value out of your dollar and increasing your savings.

I have not thought of the Coffee Can portfolio in many years until I read a recent article on Daily Reckoning. This excellent article reminded me of the decades old investing philosophy. Basically, the concept is to buy truly excellent companies and then ignore the investment. The theory is that constantly worrying about the various movements in the market will only give you an ulcer. It will also ruin your return if you react at the wrong time. If you have enough diversity in your holdings, surely one of them will result in a huge gain.

We have all heard the stories about someone’s aunt that found her recently departed husband’s desk drawer full of stock certificates from IBM, Apple, or Wal-Mart that were bought many years earlier and then forgotten. These heart-warming stories are typically told that the aunt was destitute until the discovery but then was financially independent for the rest of her days.

There is a significant problem with the Coffee Can Portfolio. I believe I have solved this problem with my GOPM (Grow on Other People’s Money) strategy that I describe in my book, The Confident Investor. The basic problem is that most people do not have sufficient reserve funds to  diversify their holdings appropriately. My strategy gives investors the ability to diversify their holdings and grow their investment at a more rapid pace. Once the investor accumulates a  sufficiently significant position in a particular company, the Coffee Can principle starts. The investor can sit on that position of a great company and forget about the investment for many years.

Jump over to Daily Reckoning and read about the Coffee Can Portfolio. It is a good article and worth your time.

It is also worth your time to read my book, The Confident Investor, if you are interested in growing your portfolio. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.