If you are interested, and can afford it, you might consider setting aside some personal “investment fun money”. This is money with which you allow yourself to invest outside the standard “buy-and-hold index funds” method. If nothing else, it's an interesting psychological experiment. It certainly teaches you how willing you are to hang onto losses, and how afraid you are of losing gains.
I already have a fine retirement account through my employer. I also plan to fully fund a Roth IRA when I've finished paying off my home equity loan (in March 2008). But because I have a strong itch to invest, in January of this year I opened a Roth IRA with Sharebuilder with the intention of funding it at $100 each month. During the first nine months of this year, I've put $700 into it.
First, I purchased $400 worth of a very beat-up General Motors. (I got in at about $20/share). I sold it a few months later for $463.25 (after all fees). I then bought $750 of Microsoft (at just over $23/share), which had just taken a plunge. I sold this stock at the end of September for $866.04 (after all fees).
Not bad, huh? I've turned $700 into $866.04 in just nine months. Warren Buffet would be proud. Except for a couple of things:
- Past performance is no guarantee of future results.
- My method — and I do have one — is a variation of Phil Town's Rule #1 method. I follow the same ideas, but I do very little research. Doing “very little research” is a good way to get burned.
- I've spent about $44 to buy and sell these stocks. (Meaning my investments are actually worth about $910.00 if no fees were involved, and even more impressive return.) My automatic purchases have only cost $4 — which is the reason I use Sharebuilder — but each sale has cost me $18. (Sharebuilder is designed to encourage automatic buy-and-hold investments.)
- If I had left my $400 GM investment untouched, it would be worth $673.50 right now. If I had then only invested $300 in MSFT, that would be worth $352.23. In other words, it's nice that I have $866.04, but my $700 investment would be worth $1025.73 right now if I had just bought and held. That's 50% in nine months, which is twice as good as 25% in nine months.
I read recently that “no one ever went broke taking a profit”. Maybe so. But I'd be a little less broke if I had practiced simple “buy and hold” techniques. Still, I made my decisions based on my personal investment rules, so I can't beat myself up over opportunity cost. Especially since I have a nice return on my money.
Now I'm sitting on my $866.04, waiting to find another stock that meets my requirements. If only UPS would drop below 70 again…
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.