Fire and Knowledge

If you’re nervous about investing in stocks directly, or you don’t know where to start in mutual funds, here is a nice overview of the “only 7 investments you need.”

I wish someone would have convinced me of this at 15. Or 20.

Even investing $50 per month, and never increasing the amount can give you a seven-figure portfolio. You just have to start early. A fifteen-year-old who invests $50 per month until age sixty-five, or a total of $30,000, will have an investment portfolio of more than $1.3 million (assuming an average annual return of 11 percent). While that may not be much help to you given your age, I’m sure you know a teenager who would benefit from this knowledge.

—Charles Carlson, Eight Steps to Seven Figures (Currency; 2000), p. 169.

Here are my five top stock picks for 2008:

1) Apple (APPL). Obvious. With record profits and a high mindshare among the young, things are going to explode over the next few years. It’s already gained 35% since I bought it two months ago. I think that’s just the beginning.

2) Amazon (AMZN). Amazon is in a very good place. They’re a household name for ordering online. They have an e-reader that will continue to become more popular, and distributing digital books will reduce overhead and inventory and increase profits. What really got my attention, though, is their developer services. They have their simple storage solution (S3), scaling database service (SimpleDB), virtualization solution (EC2), and payment services (FPS and DevPay). Long term Amazon is a huge winner.

3) Intel (INTC). The best chip maker in the industry. Now they’re moving into storage, too, which will provide new revenue. I don’t expect this to be as lucrative as Apple or Amazon, but it’s a good growth stock. And they pay dividends.

4) Pulte Homes (PHM). The housing market has been bad, and Pulte has tanked along with it. It’s a great time to buy in. (I’m less certain here than with Apple because it’s not my area of speciality, but investment gurus are saying the same thing.)

5) Regions Financial (RF). Since buying AmSouth, they’re everywhere down here in Florida. Their stock has tanked due to the housing slump, and like with PHM, it’s a great time to purchase.

(If you’re just getting into buying stocks, contact me and I can send you a Scottrade referral that will give you (and me!) three free trades.)

As Carlson implies here, a 401(k) or other employer IRA is one of the best methods of investment because of the tax breaks and ease of investment. Most employers also match up to a certain percentage, which is an immediate 100% gain. If you’re not funding a retirement account, get started today!

If you are not taking full advantage of your employer’s 401(k), you are making a very big mistake. You have no business investing in any other investment until you contribute the maximum allowed by law to your plan.

–Charles Carlson, Eight Steps to Seven Figures (Currency; 2000), p. 60.

Update: I actually don’t agree with his last sentence. If you need the money before you retire, then no-load index funds or quality stocks are great investments even if you’re not maxing out your IRA. This is especially true for those of us with 401(k) plans, where one can contribute up to $15,500 a year. It’s not realistic for most of us to max that out!

But even then a Roth IRA is often the best investment account, as your contribution can be withdrawn at any time, while the earnings grow tax-free. If you need the earnings before retirement, then I recommend a standard investment account from a discount broker like Scottrade (the one I use) or Etrade.

When we traded homemaking for careers, we were implicitly promised economic independence and worldly influence. But a devil of a bargain it has turned out to be in terms of daily life. We gave up the aroma of warm bread rising, the measured pace of nurturing routines, we received in exchange the minivan and the Lunchable. (Or worse, convenience-mart hot dogs and latchkey kids.) I consider it the great hoodwink of my generation.

—Barbara Kingsolver, Animal, Vegetable, Miracle: A Year of Food Life (HarperCollins: 2007), pp. 126-127.

Eight Steps to Seven Figures by Charles Carlson, 293 pages.

What does it take to be a millionaire when you retire? Less than you think. Certainly less than I thought.

Charles Carlson gives eight steps to achieve that goal:

1. Start investing right now. Every day you wait is lost money.
2. Establish a goal that matters to you. If possible, make it measurable so you can track your progress.
3. Buy only stocks and mutual funds. Forget about the rest.
4. Buy only high quality stocks that are leaders in their field or, if you know the area, you are sure will be leaders. Buy what you know and when you don’t use no-load index funds.
5. Invest monthly, no matter how small. It adds up through compound interest and forces you to invest when the market is down. Diversify through time, not assets.
6. Buy and hold. Sell only when necessary. Never daytrade, which just makes your broker and government rich. Buying and holding makes you rich through better returns and tax reduction. And it’s less stressful to boot.
7. Limit taxes as much as possible by taking advantage of tax breaks. Hold stocks for at least a year (though the longer the better) and put in the maximum legal contributions into your 401(k) and/or IRA, or as much as you can afford.
8. Live a stable and simple life. Limit shocks to your finances – don’t divorce, don’t job or house hop, don’t get into debt, don’t have ten kids, don’t daytrade. Dare to be boring.

Sounds simple enough. Here’s an example. If a 20 year old invests just $67 per month into a 401(k) (assuming 11% average annual return), he will have a million-dollar portfolio by age 65. That’s less than $37,000 turned into $1,000,000, the magic of compound interest.

But the longer a person waits, the harder it gets. By age 30, the monthly requirement increases to $202 per month. By age 40, it’s $629 per month. That’s why the number one step is to start now, especially if you want to retire early.

If you want to be a millionaire, it isn’t that hard. It just takes a willingness to contribute regularly to your retirement account and live on less than your income. That’s something even I can do. And so can you.

It is useless to reduce your own consumption unless you also reduce your income. Everything you earn gets saved or spent, and anything that you save just gets spent later, by you or someone else. Changing your spending pattern will put a dent in the amount consumed only if it allows you to reduce your income.

–Joseph Heath and Andrew Potter, Nation of Rebels: Why Counterculture Became Consumer Culture (UK Edition, 2004), p. 153

To have a great capital is not so necessary as to know how to manage a small one, and never to be without a little. It is not large funds that are wanted, but a constant supply, like a small stream that never dies.

–William Cooper, A Guide in the Wilderness (1810) as quoted in Scott and Helen Nearing, The Good Life, p. 285