A New Way To INVEST
7 Proven Steps To Get
RICH Before You Retire
Jim Jorgensen
Dedicated to:
My wife, Nancy Jorgensen, who taught me everything I know about life.
Smashwords Edition
Other books by Jim Jorgensen (Non-fiction)
The Graying of America
Your Retirement Income
How to Stay Ahead in the Money Game
How to Make IRAs Work for You
Money Shock
Money Lessons for a Lifetime
It’s Never Too Late To Get Rich
Retire Tax Free
Copyright © 2011 by Jim Jorgensen
Digital ISBN: 978-1-4523-1550-8
Formatted by: Laura Shinn
Cover Design Copyright © 2011 Laura Shinn
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While a great deal of care has been made to provide accurate and current information, the ideas, suggestions, general principals and conclusions presented in this text are subject to local, state and federal laws and regulations, court cases and any revisions. The reader is thus urged to consult legal counsel regarding any points of law – this publication should not be used as a substitute for competent legal advice.
Because of the dynamic nature of the Internet, any Web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.
This book is intended to provide general information; it should not be used as a substitute for legal or other professional advice.
First paper printing 2010 / Bull Run Press, San Francisco
Step 2: Stay Out Of The Same Rut
Step 4: Work On Your Retirement Plan
Step 5: Build Your Retirement Plan
Step 6: Be Aware Of The Time Clock
Step 7: Be Proactive, Never Give Up
Excerpt from “Retire Tax Free”
Once upon a time in a city somewhere in America lived a hard-working employee who used his experience and felt comfortable solving the daily problems. But he felt the money he was pouring into his retirement plan was going nowhere. He also realized he could no longer understand what was happening to his money invested by some people in a far away land. And he often felt helpless while he watched much of his previous payroll contributions disappear.
He began to understand if he wanted to build a realistic retirement nest egg he would have to take responsibility for his own actions and make his investment decisions. In short, he could no longer wait for good things to happen. It was time to trust his ability to solve his own money problems.
What had taken him so long to come to this conclusion was not that his plan was continually losing money, but that he knew he’d have to spend the time to remain constantly alert to recognize the buy and sell signals to protect his assets. And he’d also have to learn a new system of handling his money. It was time he continued to tell himself he didn’t have. But now it became apparent that he had to find the time if he wanted to retire with enough money to pay his bills, play golf and plan the vacations he’d always wanted.
He found himself looking over a maze of investment plans but most of them were too complicated and required too much time. They also required other people’s help which he now felt he could no longer trust. What he needed, he told himself, was a plan where he could watch over just a few socks and spend maybe 15 minutes a week to stay on top of his game. Then he discovered Trend Investing and if he was faithful to the weekly drill he was convinced he could do as well as others using this plan. At least it was worth a try; his current mutual fund program had been a bust, never making much money in an up and down market and costing him a lot of fees and expenses.
With the discovery of Trend Investing came a spring in his step. At last he knew what to do to lock in profits in an up and down stock market instead of waiting for a phone call to help him that never came.
In my 35 years of advising investors and from letters and callers on my nationally syndicated radio shows, I’ve witnessed scared and confused investors watch their retirement plans lose money beyond their control. I’ve felt their pain from opening mutual fund statements and with glazed over eyes looking at what’s left of their once hefty IRA or 401(k).
I’ve also found most investors don’t take advantage of the ups and downs in the stock market to make double-digit returns each year. They feel frozen in panic when the bottom appears to be dropping out of their investments and miss the stock market rebound.
But knowing how to invest your money is only half the game. That’s because, after you have a plan to become rich you have to want to become rich. You have to be willing to work the plan and no matter how difficult it becomes, never give up. I remember a 74-year old man who made the 240-mile trip to visit his 80-year old brother, who was ill, driving his lawn mower all the way. He chose his John Deere riding mower as his vehicle because he didn’t have a driver’s license. Hitched to the back of the mower was a trailer in which he hauled supplies and camping equipment. He averaged only five miles an hour and the trip took six days.
What I discovered talking to people on the air and at seminars, along with the man on the lawn mower, if you want to become wealthy and you stick with your plan, you can. The problem is most people underestimate what they can do with a plan and a few bucks a day. They look at the money they have and think becoming rich at retirement is beyond their reach.
“But Jim,” I heard the caller on the radio say, “I only have a couple thousand to invest and it won’t make any difference anyway.”
Don’t laugh. You’ve probably said this before. Almost everyone has. But it’s not true. There are a lot of distractions as we plow through life, but I’m reminded of a story of a man who in spite of a meager income saved a few dollars each day. He never missed the few bucks stashed in the cookie jar, and today he’s retired with a hefty income and money in the bank. But I’ll never forget what he told me about the secret of how he saved his money.
“I don’t buy things because I have money; I buy things because I need them.”
Like many of the richest people in America he began at age 25 investing $200 a month in good stocks and continued to do this until he reached age 65. Over this 40-year period with $200 a month he’d invested a total of $96,000, yet his retirement nest egg had grown to more than $1 million. He told me what surprised him was he made most of his money over the years on the growth of the money he’d already invested.
A listener in Chicago called my radio show and said he had a simple way to understand how he got rich with very little money. “Try to visualize it this way,” he began. “To make a loaf of bread you let the dough rise. The bread gets bigger over time. You don’t do anything; the yeast makes it rise. That’s the same way your money grows in your IRA, but instead of yeast, it’s the incredible power of compounding over time.”
Remember, as you read this book; hide some money each month in the cookie jar where you put your spare cash. If its $200 a month and you start now you could retire rich. Of course, like everything else, the more money in the jar each month the bigger the payoff at retirement.
The good news is that the principles of building wealth on a shoe string have remained the same since the guy rode his lawn mower. But the stock market and the way we invest changed dramatically in the 2000s, compared to the roaring 1990s. Investors in the 90s started to think the annual 20 percent gains from Standard & Poor’s 500 Index funds were their constitutional right and that making money in stocks was easy.
But the bubble bursting stock market in early 2000 and the recession starting in 2007 have been a very different story indeed. A continuing unfolding of one major corporate scandal after another has severely shaken investor confidence in the whole system of investing. All of the major institutions that were supposed to protect investors—the corporate board of directors, auditors, accountants, stock analysts, investment bankers, stock exchanges, attorneys general, state and federal securities regulators—all failed to uncover or stop massive fraud and shareholder abuse by a laundry list of American corporations including Enron, Adelphia, Qwest, WorldCom and many others.
But the decade of the 2000’s told us one thing: In uncertain times its best to invest in the common stock of some of the nation’s big blue-chip companies with long established well-known brands, and a long history of profits.
The purpose of this book is to outline my investment strategy that has made money in up and down stock markets for years. If you put these rules into practice and into your life, you can end up a far richer, more comfortable investor than the vast majority of Americans who are still hiding their investments under that proverbial rock.
It may sound crazy, but it’s true. You have to have spare cash to invest in the stock market. I learned that early in life talking to the farmers at the farm equipment store where my dad was keeping books. As was my custom, and with a wink at my dad, I reached into the five-cent Coke tub, dipped my hand into the ice water, and took out a bottle.
The farmers were talking about the new hay rakes and money. I drew closer to listen to their words, not because I was interest in anything about hay rakes but because I knew these farmers always had money. And money in my youth was a precious commodity. It was easy to tell the farmers from the salesmen, the farmers wore bib overalls. Not just any overalls, the garment of choice, as far as I could tell, had the logo “Oshkosh B Gosh” sewn on the top flap. As you might guess, it didn’t take long for a high school kid who wanted to become rich to wear the Oshkosh B Gosh label.
Farmers are a strange bunch. You pretend to be comfortable with them, but you never are. They know it, but they also pretend they don’t. But much of what I learned in life came from talking with the farmers.
If I had to wrap up all the financial planning ideas in the world they could be boiled down to one simple premise told to me over a hay rake: First, save some money, and then spend the rest. Everyone in town knew it worked for the farmers; they paid cash and drove Cadillac’s.
I was on roll now so I went for the good stuff. “If I’m not too personal,” I said, “how did you learn to pay yourself first.”
“The problem most people face is they can’t save any money because no one has sent them a bill. To get started I made up a bunch of bills, put them in envelopes addressed to me, and gave them to a friend. Each month he dropped one in the mail and I paid the bill. And now,” he said with a smile, “I can pay cash for everything.”
At the time I didn’t have much money, but from talking with the farmers I knew I had a head start on most people accumulating wealth. Later we lived near a golf course with a pond and I quickly made the tools of my trade: a long handle net to scrap the balls off the bottom of the pond and back in our basement I built a wooden slide lined with brushes powered by a garden hose. With my homework, trips to the pond and work in our basement I was a busy guy. But in high school it paid better than a paper route and I learned that after some holidays the pond was full of golf balls and I had a real payday. At $2.50 a box the stray polished golf balls piled up the money and when my passbook account when to double digits I started buying stocks. I didn’t know much about Wall Street, but from pulling my wagon full of groceries home with my mom I knew the names of my favorite drink Coca Cola, the people who built my electric fan General Electric and the Pepsodent toothpaste my mom required I used each day. I figured that was a good place to start. If they were in my house they must be in other people’s homes. Later I learned all of these companies had well-established consumer named brands and people would pay extra for the comfort of knowing they had the “real thing.”
When I went to the university driving my golf ball paid for convertible, I learned that business professors never talked to the farmers, never drove Cadillac’s, and saved only a few dollars a month instead of creating investment portfolios. Maybe that’s why none of them taught courses on getting rich. I learned how to accomplish that from the farmers.
But today Wall Street appears turned upside down. In fact, after the last decade with a stock market crashing one day and standing still the next, you probably feel like Howard Beale in the 1976 film Network when he says: “I’m mad as hell, and I’m not going to take it anymore.”
You’re mad because your broker or financial planner told you to buy Enron, Washington Mutual, Lehman Brothers or some computer stock set to double in price because they were making huge profits. You’re mad because you later lost your money when the profits turned out to be nothing more than a classic case of cooking the books. You’re mad because the rush into mortgage debt was said to be as safe as cash and turned out to be almost worthless. And you’re mad because analysts on Wall Street made millions of dollars while they told investors to buy new issue stocks they privately ridiculed. All the while you were glued to the doom and gloom each day as the stocks and funds continued to slide. Like a caller on the air told me, “the stock market shock feels like a guy in a bath tub holding a toaster – and in this plunging market no one knows when to let go!”
More likely your past investment statements have been tucked into a file box unopened while you stuck you head under the covers and followed the once time-tested buy-and-hold approach to investing. But now, in 2010, you can buy a share of Citigroup – the nation’s largest bank – that sold for $55 at the beginning of 2007 for $4. Or, for the price of a single spark plug you can buy a share of General Motors stock.
Like most investors, in this prolonged period of a crashing stock market, you probably avoided making any changes in the way you manage money. Instead, you waited for the stocks or mutual funds to regain their value. History tells us, however, when you stand pat things could get worse and they usually do.
But is fear and denial the best way to manage your financial future? Not if you want to build a sizeable nest egg for your retirement years. In fact, this book is about ways to encourage you to make a commitment to change the way you invest in the future.
As you survey the smoking wreckage of your IRA and 401(k), you probably wonder: What should I do now? My answer is start with Rule #1.
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Rule #1
The secret to prosperity is your ability and desire to adopt changes in the way you manage your money.
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If the recent market turmoil hasn’t frightened you, if you’re not ready to take charge of your own investments, then I want you to consider Time magazine’s January 28, 2002 cover issue that told investors: “With so many choices and no one to trust in today’s world, you’re on your own, baby.”
The article asked: “Can I count on my broker? Who’s looking after my 401(K)? What’s happening to my mutual funds in my employer retirement plan?” Time concluded that the old safety nets are gone. And it really is true: You’re on your own baby!
But if you can change what you believe, you can change what you do. As a result, the first thing you need to believe is that like Time magazine you’re on your own and you have to manage your money. I’m not going to claim to know everything about investing – I only know what has worked for me (and what hasn’t) over the years. A wise man once said, “If you want to know how you feel about someone, talk about their youth.” So let me tell you a little about mine.
I was born in Omaha, Nebraska in the 1930’s and grew up in a household that today would be called economically disadvantaged. I didn’t know that at the time, but I did know since my family didn’t own a car, and if I wanted to go someplace, I walked. And when I went to a birthday party I had to bring a gift. My mom usually bought the gift, but one day she gave me a dollar to buy one. “What can I buy?” I asked. She said, “Buy whatever you’d like, I’m sure Johnny will like it, too.” I went to the store and found just what I’d always wanted. All I had to do was convince my mom to let me keep it. I tried the ploy that Johnny might not like it and maybe we should get another gift. Mom didn’t buy that. Then I said it had batteries and maybe we should open the’ package to make sure they were still good. Mom said we’d trust the batteries. I even tried to get sick the day of the birthday party in the hope that Mom would forget about the gift.
Do you know what it’s like to give a birthday gift that you’ve always wanted to someone else? That’s the whole deal with birthday parties, except I never forgot that day and I vowed that someday I’d learn how to make enough money in the stock market to buy the things I wanted.
I was able to do that by investing early in some of the items each week in my wagon from the grocery store. Buying and holding stock in these household names has, over the past 40 years, made a lot of money. How much? $100 invested back then, or as I like to say the equivalent of forty boxes of golf balls, could be worth about a half a million dollars today.
But as I entered Wall Street a new world opened up for me. The traders on the floor of the Exchange told me about buying on the dip and selling on the curve. This concept became Trend Investing. In other words, the trend of the share price indicated when you buy or sell a stock. But to make this work you have to become an active manager of your investments.
That’s what I’ve tried to incorporate in this book and help you learn the difference between people who actively save and manage their money and those who don’t, and those who make money in up markets and don’t lose the same money in down markets.
The importance of this plan became clear, even to those who never look at their mutual fund statements, when the stock market wiped out 40, even 50 percent of their retirement nest egg in a recent major business turndown.
I gave early pre-publication copies of this book to my employees and to those who listened to my radio show because I was eager to explain ways to bring success in their financial lives and, for the first time, imagine themselves managing their own money.
Money is often the soul of our well-being. We pursue it each workday because we believe it will make us happy. But if we get it and then lose it, we can face a traumatic future. If we get it, keep it and make it grow, it can lead us to a full and rewarding life with the people we love.
Over the years one of the most important things you can do in life is to make yourself happy, to share your love and understanding with your family, and to take each day one day at a time. After all, your trip to financial success should be as much fun as arriving at the destination.
What I’ve learned investing in the financial markets, on Wall Street, writing six books on personal finance and listening to thousands of callers on the radio is what you’ll read in this book. It’s also my belief that if you save some money each month and invest in good stocks the results can literally be the difference between retiring rich and working behind a fast-food counter.
I hope each time you read this book you’ll find something new and useful for yourself, your loved ones and your friends. I’m glad that I can share what I’ve learned and I wish you well as you build your financial future.
Step 2: Stay Out Of The Same Old Rut
Maybe you’re stuck in a comfortable rut that you’ve followed for years. As long as things haven’t fallen completely apart, why make a change? It reminds me of an Aesop fable. The hares think they can do better if they’re constantly on the move, always looking for the new investment or selling an old one that went into the dumpster as they race towards the finish line.
The tortoises believe they don’t need to zig or zag; instead they hold on to what they have, ignore the stock market and believe they are making steady progress toward a goal. If the going gets rough and the stock market makes an occasional hair-raising drive they pull into their shell. In the dark, they wait for their investments to recover.
Today, most people who contribute to a retirement plan at work like a 401(k) behave like tortoises. How do I know this?
According to a recent study by the University of Michigan, looking at a group of 1.2 million workers in more than 1,500 retirement plans, found that fully 80 percent of workers initiated no trades in their 401(k) plans during a two-year period. Eleven percent made only a single trade.
The findings are even more alarming when you consider that many large 401(k) plans permit employees to sell stock on a daily basis.
The one fact that should now have become obvious: if you want to make money over time in the stock market you’re going to have to find someone to look after your money. That someone might not be a mutual fund manager, a salesperson disguised as a financial planner, not an investment advisor at the bank, or not a local friend.
Today that someone is you!
In fact, the chances are you may have depended on others without realizing that no one really cares about your money as much as you do. Ask yourself - did any one call on your sinking mutual funds? Did you learn about the plummeting Washington Mutual, Lehman Brothers and Citicorp stock before it went into the dumpster? Did anyone offer to sell your investments in the recent stock market plunge and save what you had left?
You may also realize that stuck in a rut you no longer leap for the letter opener when the mail brings your investment statements. You seldom look up the value of your portfolio. What was once a vague sense of fear about the future has transformed itself into unmistakable terror that your financial world could collapse at any time.
When you look over your mutual fund statements what kind of mood are you in? What do you want to see in those statements? Do you sense that you are torn between letting things go to the next statement just to see if things get better, or take charge, pick up the phone and try something different?
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The 15-minute drill with the gang
On a Saturday morning at Starbucks, as was my custom, I had coffee with the gang. We talked about last week’s golf game and about how many of our friends were losing money in the hot picks that floated around the office.
“Look at the guy that lives next door,” a member of the group in workout clothes said. “He’s worked for the same company for fifteen years and after socking all that money into his 401(k) and IRAs he tells me each year the overall balance inches up if it moves at all. He said it feels like he’s dropping dollar bills in front of his lawn mower,” he said with a grin.
“The problem with this guy, as we’ve all learned on Saturday morning,” I heard from across the table, “is that everyone has to cope with unexpected changes. They can make life complicated, even challenging, but if you resist change because it’s new or unfamiliar you can be taken by surprise and find that most of what you want out of life is no longer within your reach.”
“I hear you,” another said. “He’s just stuck in the same old rut. Now let’s get down to business and compare our 15 Minute Drills,” he said, laying his newspaper on the table. “What do you have you have to sell and keep?”
Everyone marked up their paper checking the movement of their mutual funds and stocks and a feeling of accomplishment spread across their face. The buys that morning were going to make some members in this group a lot of money. They were using the cash they saved from their previous sales to buy the stock at the bottom of the curve. Then with the 15 minutes a week drill they could concentrate on when to later sell the same stock at the top of the curve. The purpose of the weekly meetings is to make the stock market work for the investor. That’s important because of Rule #2.
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Rule #2
History has shown the biggest risk is not being in the market when it rises.
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How do I know this? Because over a period of time more than 90 percent of the gain in the stock market can occur in just a few days. The Bull Market from 1983 to 1987 is a good example. Those investors who panic and sell on a downturn and were out of the market the best 40 days in the five-year period [that’s 40 days in 1,825 days] had an average annual total return with dividends of just 4.3 percent.
That’s why I say if you’re out of the stock market when it rises from a sharp downturn you’ll kill any chance of building a realist retirement nest egg. Unfortunately, this news has been lost on most investors. Here’s why. During a market meltdown, frozen in fear as their stocks and funds plunge in value and locked in place, they miss the selling opportunity to take their profits off the table. But that’s one of the secret of making money in an up and down market.
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Rule #3
The stock market goes up and down.
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In March, 2009 with the Dow Jones Industrial Averages around 6,500 and giant financial firms on Wall Street collapsing like dominoes, smart investors knew that the economy would rebound as it has in all previous stock market melt downs.
They also knew that stocks like Ford, Goldman Sachs and Bank of America were, according to the Federal Reserve, too big to fail. With an economic recovery it was only a matter of time until these stock prices climbed once again.
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Rule #4
The best time to buy a stock is when no one wants to buy; the best time to sell is when everyone wants to buy.
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Or, as Warren Buffett, another sage investor from Omaha says, “you should be fearful when everyone else is buying, and buying where everyone else is fearful.”
I remember very well March, 2009. I was speaking to a national convention in San Diego and some lady, with concern across her face, asked “Do you expect the Dow Jones Industrial Average to fall below 6,000?”
I replied, “Not if it’s recently been 10,000. Until the market shakes out its fears, this is a buying opportunity before it comes back to its previous high.”
As I expected, in March of 2010 the Dow Jones Industrial Averages were once again over 11,000. That’s a hefty 70 percent gain in about one year from a market low to a market high. During a rollercoaster stock market like this it’s important to remember rule #5.
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Rule #5
The key to building a nest egg today is making money in an up market and avoid losing that same money in a down market.
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By using Trend Investing, here’s what I did when the stock market hit bottom:
In March, 2009 I bought 200 shares of Ford and Bank of America and 100 shares of Goldman Sachs common stock. My 15-minute weekly drill told me their stock was starting to creep back up. But more than that I figured:
Since Ford did not take any government money on the financial bailout and because they had a good product line and a credit line for their dealers to sell cars, Ford should make money as the economic recovery continued.
Since Bank of America, one of the largest banks in the country, had branches all across America with billions of deposits the government could not let the company fail. I also knew the bank had a massive stream of income from millions of customers each month that would eventually pull the company back into the black.
Since Goldman Sachs had lost its main competitors Lehman Brothers and Bear Stearns, they were about to sit on a money machine on Wall Street. In good financial shape, they were in an excellent position to grab huge chunks of the business and profits would soar as the economy recovered.
Therefore, I invested $8,312 in March, 2009.
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Buy price: As of March, 2010
Ford $1.80 to $12.00
Bank of America $3.76 to $18.00
Goldman Sachs $72.00 to $175.00
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Let’s say you had invested in these stocks. From an initial investment of $8,312, I had a year-end account value of $23,500. That’s a gain of $15,188 in one year.
But that’s not the end of the story…
As you will learn in this book, Trend Investing is a long-term way to manage money and build wealth. And buying on the dip and waiting for the economic recovery also takes time.
Now, with glazed over eyes, consider what this total return could be in four years. In 2008, Bank of America’s stock sold for $50 a share, Goldman Sachs’, $225 a share. Assuming the economic recovery continues and the stocks return to these former share prices, here’s what my portfolio might look like in 2011 or 2012:
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Ford: $12.00 to $2,400
Bank of America: $50.00 to $10,000
Goldman Sachs: $225.00 to $22,500
Total portfolio value: $34,900
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From a purchase price in March, 2009 of $8,312 my persistence in following Trend Investing as outlined in this book could result in a profit of $26,588 in 2012. No guarantees, but I’ve always bet on the nation’s economic recovery from a downturn and I’ve never been wrong.
If Cinderella were dancing on Wall Street many investors might think the clock never strikes midnight. That their investment can always wait for the carriage ride back to a profit. But apparently most investors never met Cinderella at the ball. She was racing for a disappearing carriage; they are waiting for a disappearing investment.
So you see Wall Street is really like the ball with Cinderella when her gown turned into rags at midnight. You’re stocks can also turn into rags if you fail to pull the trigger before midnight.
Make no mistake, to be a successful investor you’ll need the determination and guts to quickly buy and sell your securities. I know cutting losses can be emotionally tough. That’s because most people understand buying a stock or mutual fund is much easier than selling one. To buy you only need the basic optimism that the stock will go up and create wealth.
Sometimes the tip comes from a friend, sometimes from some investment newsletter, and often at a party or from someone who heard the tip at work. But once the investment goes sour it’s tough to sell and admit you were wrong. That’s hard for many people to do.
But the big problem to overcome is the typical decision not to pull the trigger until you’ve recouped all your losses. But history tells us once a stock goes into the dumper the stock market doesn’t care if you made or lost money. And what you paid is not important and has no bearing what investors will pay in the future. You have to accept the fact that what’s gone is gone. Just because you’ve lost a substantial sum doesn’t mean your luck will change.
The trick is to realize when your fund or stock has fallen 5 percent from its recent high to sell before the “whales” – the big mutual funds and pension managers – dump the same stock. They can’t unload their huge holdings over night, and in fact many money-managers continue to tell investors the stock is doing well, while desperately placing sell orders and watching the price decline.
Let me say again, once the stock is trending down, once you’re weekly 15-minute drill tells you to sell and take profits or cut your losses, you have to act like a cold-blooded vampire because, unless you manage your own money, a mutual fund is not going to call you and tell you its fund is going into the tank. Nor is it likely that a broker or financial planner will pick up the phone and give you the bad news. As Time magazine has already told us, we’re in a world of do-it-yourself investing.
You’re on your own baby!
Managing your money can be a new game and it can often be a numbers game. And the numbers start as soon as you invest. But, as you’ll find out in this book, the numbers go against the stand patters who can lose two ways even if they later break even.
Let’s say you had $20,000 in a mutual fund, but when you got your last statement the fund was worth only $10,000. Your palms are clammy and your heart is pounding as you look at what’s left of your account and think about the hair-raising dive in the stock market. If you’re like most people what’s really running through your mind is how to save what’s left of your nest egg. In fact, you probably don’t care if you make any money; all you want now is to break even.
But consider this: If you lose money and you want to break even the next year you’ll have to make a huge profit just to get back to where you where before you lost the money.
Consider these grim numbers:
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One-year loss - Gain to break even
25% loss requires 33% gain
50% loss requires 100% gain
75% loss requires 300% gain
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And I’ve got more bad news you’re not going to like. Let’s look at making the money you lost back. If you could earn 9 percent a year on the money you lost and avoid paying taxes and other fees, it could take you eight years to re-build your loss of $10,000 and turn your IRA or 401(k) back into $20,000. That’s eight years wasted building a retirement nest egg.
But if you avoided the loss in the first place with the weekly drill, and earned 9 percent each year for eight years on the money, your investment account could now total $40,000 instead of $20,000.
Under this example, once you’ve made up the loss, is the huge difference in your retirement nest egg at age 65. If you are 35 when you lost 50 percent in one year, and you make back the money in eight years, here’s the numbers:
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Investment: $10,000 $20,000
First 8 years: 20,000 40,000
At age 65: 205,000 410,000
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In this case you lost twice!
Once when the value of the fund was cut in half.
Once when you failed to make any money on the money you lost until you retire.
Take this quiz. Which would you rather do for the next two years—Invest in a mutual fund with an 80 percent return one year and a 50 percent loss the next. Invest is a 5 percent savings account?
My guess is you’d pick the fund that made an 80 percent return, and say, “let’s go for it!”
But, my friend, you’re looking at the screaming headline for a mutual fund with a huge loss the previous year. With a $10,000 investment in a stock or fund that’s earning 80 percent return the first year, you’d have an account balance of $18,000. But with a 50 percent loss in the second year, the account balance falls to $9,000. With the same $10,000 investment in a five percent savings account, the total of the account at the end of two years could be over $11,000.
Now be honest. If you picked the high-flying mutual fund you never thought it could cost you more than you would earn in a laid back insured savings account. Right? Of course not.
But then you probably believed with an 80 percent gain this was just the fund to make money and not follow the last high-flyer which you watched go into the dumpster.
Let’s look at some actual examples of picking mutual funds based on their recent short-term track record.
In 2009 Aegis Value stock fund was a top-performing fund with a 93 percent return, according to investment research firm Morningstar. This record came on the heels of a dismal 2008 when the fund lost 51 percent and fell near the bottom of its category.
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How did investors do?
2008 invest $10,000, lost 51%, year-end $4,900
2009 gained 93%, year-end $9,957
Birmiwal Oasis, a small-cap growth fund, turned in a 91 percent gain in 2009. But in the previous year it lost 63 percent.
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How did investors do?
2008 invest $10,000, fund lost 63 percent, year-end $3,700
2009 gained 91% year-end $7,067.
That’s why Rule #6 is so important.
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Rule #6
Investors can lose more money when share prices fall than they make when share prices rise.
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That empty feeling of losing money may have happened to you in the past, but I know someone who has an answer: Warren Buffett, the most famous investor in America. He puts first things first.
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Rule Number 1: Don’t Lose Money. When someone asked him what was
Rule Number 2, Buffett simply said, Rule Number 2: Don’t Forget
Rule Number 1
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Sometime we can’t see the obvious because we can’t see the future from where we stand in the present. Think again of the hard-earned money you’ve lost in the market that won’t be there when you retire. Say you lost just $5,000 last year. In 25 years, when you apply for Social Security, that five grand could have been $50,000 resting in your IRA.
Then think about the money you could have made on the money you lost over the last twenty-five years. Money you could have used for a great vacation instead of counting Social Security checks.
Let’s be honest, Warren Buffett is on to something when he says don’t lose money in the market. In fact, I believe this is the really big factor in building your future financial life.
You only have to look at 2008 to see how Buffett’s rule comes into play. According to Lipper, who has been tracking stock mutual fund performance records since 1959, if you had $100,000 in your 401(k) plan at the start of that year, you’ve lost $40,000 by the end of the year.
But the full effect of Buffett’s rule becomes clear when you consider you’ll have to earn a 66 percent return in the next year on your new balance of $60,000 just to get your account back to where it was a year earlier. What if you can’t beat the experts on the Street and earn a 66 percent on your 401(k) assets in one year? If you can earn an average annual return of 9 percent you’ll need an additional 6 years to turn the $60,000 back into $100,000. Another painful lesson for investors is that under this example you just lost 6 years of earning a return on your original 401(k) money.
Let’s use the $40,000 loss in this example and say you have about 25 years until you collect Social Security. You’re probably wondering what it costs to lose this money because you sat on your hands and were afraid to do anything. If you can earn an average 9 percent annual return until you collect Social Security, the $40,000 you lost could amount to a cool $350,000 when you hit retirement age.
The scary part: on average, each year over that 25-year period, your average annual return on that initial $40,000 you lost could be $14,000 a year! As I was told on the floor of the New York Stock Exchange, an average annual return of 35 percent can make you rich!
Let me explain it this way. Every dollar you lose in the market this year could be ten dollars you won’t have at retirement. That’s why I say on radio and television if you have any money to invest, no matter how much or how little, this compounding principle can still work for you. Here’s why…
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80 to 90 percent of the money that ends up in your retirement nest egg could be money you never saved or invested at all.
Rule of 72
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But the clincher in building a retirement nest egg might be how much you actually earn on the money you’ve invested. No one talks about this, but it’s the secret of becoming rich.
There’s a simple way to determine how fast your money can accumulate over time and make you rich. It’s called the Rule of 72. This rule lets you quickly determine approximately how many years it will take an investment to double in value if the rate of return remains the same.
For example, if you want to double your money in 7 years, divide 72 by 7 and you get 10.3. Your money has to earn 10.3 percent a year for the next 7 years in order to double.
If you want to double your money in 6 years, divide 72 by 6 and you get 12. Your money has to earn 12 percent a year for 6 years to double your money.
But playing it safe with a 5 percent savings account, you’d have to wait almost 15 years to double your money. And with a one-year insured CD paying maybe 3 percent you could wait 24 years to double your money. Over time these numbers add up.
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Suppose you start with $10,000
A 3 percent annual return over 25 years could grow to about $18,000.
A 5 percent annual return over 25 years could grow to about 32,250.
A 10 percent annual return over 25 years might total $100,000.
A 15 percent annual return could be worth about $325,000.
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You might not earn 15 percent a year in common stocks and funds, but staying in savings accounts at a lower annual rate of return can make a huge difference in your retirement nest egg. Fortunately for me and my kids, the lightning bolt hit home when I discovered that I might be able to double my money every 7 years in the stock market.
Let me show you again the effects of low returns over time on building a retirement nest egg.
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A one-time deposit of $10,000
15-yrs or 30-yrs
Savings 5%: $20,000 or $43,000
Stocks 10%: $41,700 or $175,000
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Look at this way. Once you know the rule of 72 you begin to understand how important the percentage of your annual return over time can be. As I’ve said, the other important point is the magic of compounding, with only a few dollars a day you can build a sizeable retirement nest egg.
Step 4: Work On Your Investment Plan
The mythological Greek figure Sisyphus was condemned to Hades with the fate of repeatedly rolling a huge stone up a hill only to have it roll down again each time. Even more mythological than Sisyphus is the notion that you can build a retirement nest egg over many years and not look out for the stone rolling your way.
From my own conversations with people at seminars and on the air I can tell, like Sisyphus, there are millions of people who don’t know what they’ve invested in and why every time they look around a huge stone have flattened their investments. If you want to avoid the rolling stone, now is the time to develop your own personal investment plan.
Successful investors usually start out with companies they understand. In these companies, they look for the right opportunity on the basis of the realization that the product is a well established brand in the consumer’s mind and sales volume and profits will continue to grow. In that case, you swing for the fence.
You remember my wagon I lugged back from the grocery store. Well, as I’ve said, my golf ball money from scraping the pond went into stocks that had a lock on the consumer. With every washed and scrubbed golf ball I could sell I bought Pepsodent because people brush their teeth every day, Coke because people get thirsty, KB Homes because people want and need to buy homes and later in life Starbuck because people have a habit of drinking coffee.
In each case the product or sales of the company is tied directly to the cash register – the more or less consumers buy directly affect the profits of the company and therefore the price of the common stock.
Here’s how Trend Investing works:
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The First Step:
Find out what you have. As a caller on the air told me, “Until you know what you’ve got you don’t know what to do.” I agree. Unfortunately, too many investors almost never look at their holdings and have no idea what has happened to their stocks and mutual funds.
Here’s what you can do:
Buy the Saturday New York Times, Wall Street Journal or other paper with the stock and fund tables. As you move to the web, replace the newspapers with www.bigcharts.com. You can also list your stocks and funds on your brokerage web site. This page will automatically keep track of your stocks and funds each time you go to the web site. On this web site simply type in the name or ticker symbol of the stock or mutual fund and the site will display the history over the last one to five years. The graph gives you a good idea of how and when the price of the security rose or fell. If the chart tells you the stock or fund has been in a downward slide, or is five percent less than its recent high or your purchase price, you should cut your losses and sell.
One way to look at a possible sale of the stock or fund is to ask yourself would the stock or fund be worth buying at today’s prices? If the answer is no, and you’d rather not buy more, sell. Put the money in your Lock Box.
Once you’ve decided to sell and cut your losses you have another decision: dump all at once, or sell gradually? My experience tells me if the stock has been a loser, is one you wouldn’t buy, dump it all. If you have a fear of missing out on a rebound my history of looking at the stock market tells me the odds are slim to none you’ll make money later on with a loser.
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The Second Step:
Find a stock that will directly benefit from an uptick in consumer spending and an upbeat economy. You’re only interested in the effect of an economic downturn or upturn on the company’s business. The first indication could be when consumers slow down spending.
Again, Starbucks Coffee comes to mind. At the start of 2007 I held 100 shares of Starbuck stock at $35 a share. But as the economy went into a deeper slump and jobs were disappearing at a fast pace, I read where people were backing off buying Starbuck lattés at $4 plus. I visited the local stores, talked to the staff and learned the news reports were true. Thinking that sales would continue to decline and profits would take a major hit as people avoided the pricey coffee, I sold the stock from my 15-minute weekly drill after a 5 percent decline at $33.25 a share.
The stock could always take a leap upward after I sold, but as I’ve learned on Wall Street it’s better to cut your losses on a stock you want to sell before the next downturn. Anyway, I put the sale of 100 shares, or $3,325, into my cash Lock Box.
Watching the stock each week I found that I was right. By October 2008, with the slowdown at the coffee counter, the stock had fallen to $10.50 a share. But I stayed on the sidelines in a down market. The economy wasn’t getting any better and my visit to the coffee shop told me that business had again slowed and the shares had fallen to $9.60. That was good enough for me. My weekly drill told me that the stock had started an uptick, and with the money in the Lock Box from the recent sale of Starbuck stock, I was in a perfect position to buy back the stock. I converted the cash into 346 shares of stock. The important point is that my original investment was the same, only the number of shares had changed from 100 to 346.
Then Starbucks closed hundreds of store, cut overhead, and came out with an instant coffee they guaranteed was as good a ground coffee. Better yet, for stockholders the company sold instant packages at Target and Costco. So, as the economy recovered and people return to their habit of rushing back into the coffee shops, I will was one happy guy. By the start of 2010 Starbuck stock was $23 a share. By May it was $27 a share. Instead of sitting on my hands with an account of 100 shares worth $2,700, I held 346 shares worth $9,342 – all because of the weekly drill, watching the economic recovery, and in the case of Starbucks, the return of the habit of drinking coffee. Believe me, ten grand never tasted sweeter!
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The Powerful Kicker
But that’s only the beginning of the good news. What most investors don’t realize is the future gains from making money in an up market. The powerful kicker that could let you tour Europe in retirement is the nest egg building that could occur in the future.
My feeling is by 2011 Starbuck’s stock could at least return to its former price, or $35 a share. Now I’m in the chips, making money like I did when I walked the floor of the New York Stock Exchange because now the numbers become scary.
Instead of sitting on my hands with 100 shares of stock that could be trading at $35 a share, or worth $3,500, I now have 346 shares worth $12,110. That’s how investors who learn the connection between the company, the customer and the cash register get rich.
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The Third Step
Now that you know where you stand, each week check the value of your investments – the stocks and mutual funds in your personal account, your IRA, SEP-IRA, 401(k) or 403(b). As you already know, a group of us did this each Saturday morning at Starbucks and reviewed the end of the week numbers. It’s not the cozy surroundings, or maybe the best food, but whatever it is we trade stories, catch up on the news, and drink coffee. And, I have to confess, we also think about how much money we’re making for every customer who comes in the front door.
With the paper stock tables laid out on the counter each of us did the weekly 15-minute drill. We locked heads and went over the results. Who was down 5 percent from the recent high? John, who missed last week’s meeting, was down 9 percent.
“Son of a gun,” he wailed. “That missed meeting cost me a lot of money. But I know what you’re going to say, I should have sold that sucker two weeks ago.”
The group sat around and smiled. One regular, with a roll on his fork, took a gulp of coffee and said. “Well, fellows, for most people their plunging stocks don’t bark, but thanks to our weekly meeting ours die before they bite.”
Remember, like our group meeting at Starbucks, it’s the numbers you’re after. Keep a log of each security, its purchase price, current price and price trend.
You won’t be able to buy and sell at just the right time, nor do you have to. And it’s rarely worth spending an additional 90 percent of your time to get a one percent increase in performance. But I promise you’ll feel a sense of relief as you watch other investors, who hang on in the eternal belief that in a plunging stock market the price will come roaring back, continue to lose money.
Again, for the record if the stock or fund has fallen more than 5 percent from its recent high, or 5 percent under your original purchase price, sell. If you read where the Dow Jones Industrial Averages took a big hit, you might want to check your holdings and sell mid-week. If you feel the stock or fund is in a forced sharp decline, you could sell immediately.
Above all, don’t try to second guess the market.
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Most of the small investors I’ve known have gone to the poor house
expecting the stock market to run in their favor if they just waited long enough.
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Once you get the hang of managing your investments each week you can probably cut the loss on your stock and sell with less than a 5 percent dip in price, but you’ll have to be careful of false bottoms.
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The Fourth Step:
This is ultimately about having a plan to gain the ability to protect the value of your investments in a falling market by selling, and later using the cash to buy back your stocks to double your money in an up market.
Managing my money I look at the original investment as the starting point. As the months unfold I’m willing to lock in a profit even if the price goes higher later on. That’s because, once the stock price trends downward you can’t live on hope that it will rebound.
Once you sell the stock, put the money in your money-market or cash account. I call this holding place the Lock Box. Above all, don’t worry about how much interest you’ll earn. The important point is you want the money available when you buy the stock.
I believe this is one of the most important steps. By keeping the money intact you’ll have the cash to make the instant buy on a stock at the beginning of the up market.
Kids can play this game!
I wanted to know if Trend Investing was easy enough for kids to master the concept. We sent out the material and to my radio producer’s surprise on the line was Katie, a 14-year-old investor from Illinois, who said, “Got your stuff and every morning I grab the stock pages to see how my stocks are doing. My mom thinks it’s great and she can’t believe how much money I’m making. But I have one complaint,” she sighed. “I now face a reduction in my allowance.”
Another caller on the line was Chris, a 15-year old from Arizona. “How are you doing with the Trend Investing package we sent you?” I asked.
“Great,” was his immediate reply. “I first had my money in a bank account and I didn’t make much so I got some money from my dad and so far I’ve made $400 on paper. My dad wants to know how I do it!”
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