Connect with us

Investing

The Four Golden Rules for Achieving Financial Independence

Published

on

The Four Golden Rules for Achieving Financial Independence

By Dale Gillham 

Over the past twenty years, I have been fortunate enough to be involved in helping thousands of people achieve their financial goals. However, a common theme,which became apparent in the early days of my career, is that most people don’t know where to begin their journey towards achieving financial independence.Interestingly, in my experience, little has changed despite the enormity of information available on this subject.

The cold reality is that investing in the stock market is one of the few things you can do where you know from the outset you will lose money. The issue I find is that while many people agree with this statement on an intellectual level, the majority never believe it will happen to them.

The irony is that most people seek out quick fixes to achieving their financial goals with the mindset that short-term gratification will fulfill their long-term needs.This is often spurred on by the proliferation of seminars available on trading the stock market. Whether the strategies presented actually work for you or not is usually of no concern once a sale is made. Indeed, from experience, I can say that all you really gain is a little bit of knowledge and very little understanding.

Think about it: If I spent a few days with you learning how to do your job, do you really believe I would gain the required knowledge or experience to be proficient?It is highly unlikely. Yet, many people are blinded by the instant gratification that the stock market offers, plunging head-first into the market using complex strategies in the hope of profiting from their efforts. Sadly, many have lost their capital, or a substantial portion of it, trying to implement these supposed wealth strategies. As a result of these poor experiences, many do nothing or seek out-advice from a financial planner or broker, believing this is their only hope of achieving long-term wealth. But is it?

What I’ve learnt from over twenty years of investing in the stock market is this: gaining knowledge is one thing; it’s gaining the right knowledge and understanding that is critical to your long-term success in the stock market.While self-education requires both commitment and work, what I have discovered, and what I share with you in my book, Accelerate Your Wealth, is that you don’t need to be a genius or a rocket scientist to achieve consistently profitable returns in the stock market. In fact, I think it help snot to be a rocket scientist.

What people need to be truly successful in creating financial independence in the stock market is a practical framework they can follow that is tried and tested, and provides a higher probability of ensuring that they are consistently profitable while reducing their risk of losing. Therefore, what follows, are my four golden rules to success in the stock market. While some may see these rules as too simplistic, please do not underestimate the power of them, as they do really work and will make you a lot of money while reducing your risk. I then follow this up with how you can apply these rules regardless of the amount of capital you have to invest. 

Golden rule #1

Irrespective of the amount of money you have to invest or the instrument you are trading, you should always spend the same amount of time researching your options to ensure you are protecting your capital on each and every occasion.

 Golden rule #2

When constructing a medium to long-term portfolio, you should always aim to have between five and twelve stocks in your portfolio. The idea is not to have lots of stocks with small amounts invested in each; instead, you only require a small number of the right stocks, with larger amounts invested in each because:

  • Smaller portfolios are easier to manage and represent lower risk
  • It is far easier to select a smaller number of stocks that are rising in price. The result is increased returns.
  • You will have fewer transaction costs when buying and selling stocks simply because a smaller portfolio will have fewer transactions.

Golden rule #3

Never invest more than twenty percent of your total capital in any one stock. If you invest in the stock market, you need to accept that some stocks will fall in value. However, this rule will help reduce your exposure to risk, while allowing you to achieve good returns simply because you are minimising the amount of capital you could lose at any one time.

Golden rule #4

You should only ever invest ten percent of your available capital in trading short-term highly leveraged markets and allocate the remaining ninety per cent to trading a medium to long-term portfolio. This is a very solid money management rule that allows you to take a low risk approach with your money while still achieving good returns on your capital.

Now that you know the four golden rules to success in the stock market that will help you Accelerate Your Wealth, let’s take a look at how you would initially construct your portfolio based on the amount of capital you have to invest.

Small investors 

One of the most common questions I get asked is: “How much do I need to start investing in the stock market?” You can begin investing with as little as a $1,000, although you will want to develop a savings strategy so that you can build up your portfolio until you hold at least five stocks. Because of transaction costs, I always recommend that the minimum amount you should allocate to a particular stock is $1,000.

Obviously, if you have less than $5,000 to invest, you will be breaking Golden Rule #3 which is to never invest more than twenty percent of your total capital in any one stock. Until your portfolio grows large enough to ensure you only ever invest twenty percent of your total portfolio in any one stock it’s okay to break this rule in the short term; for many, it is the only way they can get started in the stock market.

Once you hold a minimum of five stocks, you can begin to increase the amount of shares you hold in each company. If you sell a stock, reinvest the capital from the sale into another stock, as well as any savings you may have accumulated, to increase the amount you are purchasing. Gradually your position size will increase, rather than the amount of stocks you own, which will ensure you are able to manage your risk.

 If you have less than $5,000 to invest, it is not recommended that you consider leveraging as part of your overall portfolio strategy until you build up your capital to around $20,000.

Small to medium investors

If you have between $5,000 and $20,000 to invest, you may still need to break Golden Rule #3, particularly if you have less than $10,000, as you want larger parcels of your capital invested in stocks, so that you minimise your risk. Therefore, if you have less than $10,000, I recommend you split your capital into parcels of twenty-five per cent so you hold four different stocks.

If you have $10,000 to $20,000 to invest, you would comfortably invest no more than twenty percent of your total capital in each stock. In other words, you would simply buy five different stocks to hold in your portfolio.

If you want to incorporate leveraging into your portfolio, I would only recommend this if you have $20,000 or more to invest. In this instance, you would allocate $18,000 to your medium to long-term portfolio and $2,000 to your short-term trading account, which would provide you with capital of $20,000 at 10:1 trading on margin. To minimise your risk when using margin lending, it is advisable that you avoid using all of the available funds that the lender provides. Allow yourself a safety margin in case something does go wrong.

 Larger investors 

If you are a large investor with capital holdings over $20,000, you may want to purchase more than five stocks. This way, the percentage of your total capital that you invest in each stock will drop below twenty per cent. For example, if you have $100,000 to invest, you may want to purchase ten stocks, with each stock representing ten per cent of your total portfolio. On the other hand, if you have a million to invest, you may want to invest $100,000 in each stock, which would still represent only ten per cent of your total portfolio in any one stock.

Although I recommend you should never invest more than twenty percent of your total portfolio in any one stock, obviously your portfolio will grow as the stocks rise in value. Over time, this growth will change the percentage each stock represents in your portfolio, as one or more rise in price. This is perfectly okay, as Golden Rule #3 only relates to the amount of capital you should invest when initially purchasing a stock. Remember—the purpose of this money management rule is to protect your total capital should a newly entered position turn bad.

Those with larger portfolios are better placed to incorporate leveraging as part of their overall investment strategy, however, as I have stressed many times before, you need to ensure you are consistently profitable in the stock market over the medium to long term before you consider this approach.

To sum up 

Let me say, from experience, if you follow the golden rules and strategies outlined, you will reduce your risk and achieve greater returns than most in the stock market. Remember,

  • Always take the same amount of time researching your options to ensure you are protecting your capital on each and every occasion.
  • Always aim to have between five and twelve stocks in your portfolio.
  • Never invest more than twenty percent of your total capital in any one stock.
  • Only ever invest ten percent of your available capital in trading short- term highly leveraged markets and allocate the remaining ninety per cent to trading a medium to long-term portfolio.

You also need to consider the amount of capital you have to invest, as this will determine how you initially construct your portfolio.

Last, but not least, it is important, if you want to achieve better than average returns, to focus your attention on assets that are rising in value and increasing your wealth.

Good luck and good trading!

Dale Gillham is Chief Analyst at Wealth Within and international best-selling author of How to Beat the Managed Funds by 20%. He is also author of Accelerate Your Wealth: It’s Your Money, Your Choice, which is available in book stores and online at www.wealthwithin.us.

Investing

World stocks’ dance to continue, but inflation could mute the music – Reuters poll

Published

on

World stocks' dance to continue, but inflation could mute the music - Reuters poll 1

By Vivek Mishra and Rahul Karunakar

BENGALURU (Reuters) – The bull-run in global stocks fuelled by cheap cash and reflation hopes will continue for at least another six months but a rise in bond yields as inflation expectations grow could throw a spanner in the works, Reuters polls found.

Despite severe economic damage from the pandemic, MSCI’s global stock index — which tracks shares across 49 countries — notched up all-time highs this month, having risen over 70% since hitting rock-bottom in late March amid ample liquidity from central banks and massive fiscal stimulus.

In recent trading sessions, world stocks have pulled back as a rapid surge in global bond yields raises expectations that major central banks could eventually turn less accommodative in a bid to tame inflation.

But even as a gauge of equities slipped this week on hints of rising inflation led by higher oil prices and the strongest copper price in nearly a decade, the Feb. 12-24 polls of nearly 300 equity strategists found the trend of stock market gains was set to continue this year.

All 17 major stock indexes polled on by Reuters, from Tokyo to Toronto, were expected to end 2021 higher from here, with nine predicted to extend their record-setting rallies.

Fifteen of those indexes have already breached the mid-2021 consensus level and 10 indexes are above the end-2021 median level predicted in the previous poll in November.

In response to an additional question, over two-thirds, or 79 of 111 analysts, said the run-up in global stocks would continue for at least another six months, including 58 who said over a year.

“It’s the health-crisis nature of this recession that has led to the greatest monetary and fiscal policy response in history. It’s not that people are so bullish about the future but rather they are flush with cash and the excitement of making money,” said Michael Wilson, chief U.S. equity strategist at Morgan Stanley.

“Our advice here is to take pause and observe a bit as these excesses are wrung out; but bear in mind we are at the beginning of a new economic cycle and that usually means a multi-year bull market has begun.”

With over 65%, or 72 of 110 strategists who responded to a separate question, expecting corporate earnings to return to pre-COVID-19 levels within a year, stock markets from developed to emerging were forecast to rally through 2021. [EPOLL/JP][EPOLL/IN][EPOLL/RU][EPOLL/EU][EPOLL/BR][EPOLL/US][EPOLL/CA]

“In some sectors and markets, corporate earnings are now above their pre-virus levels, whereas in the energy sector and some of the other badly hit sectors they are still below,” noted Simona Gambarini, a markets economist at Capital Economics.

“That is why we think the next leg-up in equity markets will coincide with a rotation towards coronavirus-vulnerable sectors.”

But concerns were growing for a significant market correction as surging U.S. Treasury yields on rising inflation prospects have triggered caution over pricey equity valuations.

Those fears have already hit shares of high-flying growth companies and top technology-related firms, which were at the heart of a stunning rally that drove major indexes to record levels.

That was also reflected in a market gauge of inflation expectations, the Treasury Inflation Protected Securities’ (TIPS) break-even rate, which has risen this month, with the yield on 30-year U.S. TIPS rising above zero for the first time since June.

When asked about the likelihood of a significant correction — commonly defined as a fall of 10% or more — in stock markets in the next six months, 87 of 115 respondents said it was “likely”, including 27 who said “very likely”.

“Yes, there are those pesky rising long-bond yields that could, like an overlooked reactor vent, be the fatal flaw in the blueprints that blow everything up,” said Michael Every, global strategist at Rabobank.

“But let’s overlook that systemic risk … After all, central banks can always adopt yield curve control if needed and take away that market function — striking it down and seeing it disappear without shoes or underpants left as reminders.”

(Other stories from the Reuters Q1 global stock markets poll package:)

(Reporting by Vivek Mishra and Rahul Karunakar, Additional reporting and polling by correspondents in Bengaluru, London, Mexico City, Milan, New York, San Francisco, Sao Paulo, Buenos Aires, Tokyo and Toronto; Editing by Jonathan Cable and Catherine Evans)

Continue Reading

Investing

GameStop stock doubles in afternoon; even Reddit is surprised

Published

on

GameStop stock doubles in afternoon; even Reddit is surprised 2

By David Randall and Sinéad Carew

NEW YORK (Reuters) – GameStop Corp shares more than doubled in afternoon trading on Wednesday, surprising those who thought the video game retailer’s stock price would stabilize after recent hearings in the U.S. Congress prompted by the fierce rally and steep dive that upended Wall Street in January.

GameStop shares were up 60% after hours at around $146, following a 103% rise during the day’s trading.

Trading in GameStop was halted several times following a rally that began around 2:30 pm Eastern time Wednesday with no obvious catalyst.

Analysts that follow the stock could not point to one single reason for the sharp move, offering reasons that included a corporate reshuffle.

“GameStop announced the resignation of its CFO last night. Some may have taken this as a good sign that RC Ventures is making a difference at the company in terms of trying to accelerate the shift to digital,” said Joseph Feldman, an analyst at Telsey Advisory Group.

Stephanie Wissink, analyst at Jefferies Research declined to comment on the afternoon stock spike but referred to her research report following the CFO resignation. Wissink said it did not seem like a coincidence that the CFO resigned after the company settled with activist investor Ryan Cohen’s RC Ventures.

“We expect GME to pursue a CFO with a more extensive tech (vs. retail) background, which will be a signal of the direction the company is due to take in coming years,” Wissink wrote in her note.

The spark also seemed to take posters on Reddit’s popular WallStreetBets forum by surprise.

“Why is GME going back up. is it Melvin covering?!,” one user wrote.

In January, shares of GameStop soared more than 1,600% as retail investors bought shares to punish hedge funds such as Melvin Capital that had taken outsized bets against the company. Melvin Capital said it lost 53% before closing its position in GameStop.

Other so-called “stonks” – an intentional misspelling of ‘stocks’ – favored by retail traders, also shot higher in Wednesday afternoon trading. AMC Entertainment Holdings Inc gained 18%, while BlackBerry Corp rose nearly 9%. Shares of Canadian cannabis company Tilray Inc gained nearly 13%.

The retail trading frenzy was the subject of hearings in Washington last week, where Keith Gill, a Reddit user and YouTube streamer known as Roaring Kitty who had boosted the stock with his videos, reiterated that he was a fan of the stock.

Shares of GameStop remain nearly 74% their all-time high reached on Jan. 27 despite Wednesday’s rally.

(Reporting by David Randall; Editing by David Gregorio)

 

Continue Reading

Investing

Analysis: Central banks say no tapering. Markets aren’t buying it

Published

on

Analysis: Central banks say no tapering. Markets aren't buying it 3

By Sujata Rao and Dhara Ranasinghe

LONDON (Reuters) – Central bankers worldwide have been unequivocal: There are no plans to cut back on money-printing any time soon, let alone raise interest rates.

Markets don’t seem to be buying it.

U.S. 10-year Treasury yields rose on Wednesday to one-year highs above 1.4%, extending this year’s near 50 basis-point jump that has dragged up sovereign borrowing costs in Europe, Japan and elsewhere.

The reckoning is that the spending step-up by U.S. President Joe Biden’s administration and post-vaccine economic reopening will fuel a global growth-inflation rebound, forcing central banks to “taper” or withdraw stimulus ahead of schedule.

A brighter outlook may indeed justify higher yields. But what has started to spook markets is a sudden move up in so-called real yields, or returns in excess of inflation. That shift can tighten financial conditions, suck cash from stock markets and in general, hamper the recovery.

It’s spooking policymakers, too. From the Federal Reserve’s Jerome Powell to New Zealand’s Adrian Orr, many have weighed in this week to stress policy will remain loose for some time.

But the mantra they have chanted for years seems now to be falling on deaf ears.

Powell, the world’s most powerful central banker, knocked yields just a couple of bps lower even after commenting that the inflation target was more than three years away.

Euro zone yields only briefly heeded European Central Bank chief Christine Lagarde’s warning on Monday that the bank was “closely monitoring” the recent rise in yields.

(GRAPHIC – Who’s uncomfortable with rising bond yields?: https://fingfx.thomsonreuters.com/gfx/mkt/jbyvrdbewve/de2402.png)

(GRAPHIC – Powell reassures bond markets but yields stay high: https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgdmzapq/US2402.png)

The reason, according to ING Bank is that markets are pricing “with an increasing degree of conviction” the end of ultra-easy policies.

“Market confidence in the strength of the U.S. recovery is so strong and widespread that the tapering boat has sailed already,” they said, predicting “tapering” to happen by the end of 2021, earlier than the early 2022 predicted by Fed surveys.

“We expect consensus is converging to our view,” they added.

Money markets show investors expect a Fed rate rise next year; some bet on an even earlier move. Euro-dollar futures suggest a roughly 64% chance of a 25 basis-point rate hike by the end of 2022. A week ago it was seen at 52%.

If travel, dining out and shopping fully resume in coming months, it could unleash trillions of dollars in pent-up savings worldwide. Just in the United States, personal savings totaled $2.38 trillion at a seasonally adjusted annual rate in December, higher than at any time before the pandemic.

(GRAPHIC – U.S. savings: https://fingfx.thomsonreuters.com/gfx/mkt/azgpoeylypd/Pasted%20image%201614185996035.png)

That makes it an inflection point of sorts for the economy, according to April LaRusse, head of fixed income investment specialists at Insight Investment. At times like this, even strong forward guidance can fall flat, she said.

“Markets hear central bankers saying ‘Stop it, markets, you are going too far’, but they are worrying central banks might change their mind as new data emerges,” LaRusse said.

“Markets are saying: ‘Yes, we believe what you are saying, but conditions could change and could necessitate a change of policy’.”

ELSEWHERE

It’s a similar picture elsewhere.

In New Zealand, Orr’s highlighting of potential downside risks to the economy contrasted with the buoyant picture painted by data.

Bond yields shrugged off his comments to hit 11-month highs. More importantly, overnight index swaps (OIS), instruments allowing traders to lock in future interest rates, have started pricing a small possibility of an end-2021 rate hike.

Not long ago it was seen cutting rates below 0%.

BNY Mellon noted across-the-board rises in one-year forward inflation swaps — essentially gauges of future inflation — from Canada to Australia.

“Risks are now more toward further removal of easing prospects,” they added.

There is of course the possibility that the pledges to keep policy ultra-loose in the face of recovering growth only fan inflation expectations further. So, could markets force central banks to act rather than just jawboning?

Here the Fed faces less of a dilemma than its peers.

Japan’s 10-year yields are near the highest since late 2018 at 0.12%, posing credibility issues for a central bank that aims to hold yields around 0%.

The ECB too, already struggling to lift growth and inflation, may have to step up bond purchases under its emergency asset-purchase programme to combat rising yields.

“At the moment it’s a tension between markets and central banks rather than a conflict, though that might come,” said Jacob Nell, head of European economics at Morgan Stanley.

“The attitude of the Fed is that if markets think growth is stronger than we do then that’s fine, it will help growth and inflation expectations. So the Fed won’t fight the market — it just doesn’t believe it.”

(Reporting by Sujata Rao and Dhara Ranasinghe; Editing by Hugh Lawson)

 

Continue Reading
Editorial & Advertiser disclosureOur website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.

Call For Entries

Global Banking and Finance Review Awards Nominations 2021
2021 Awards now open. Click Here to Nominate

Latest Articles

Newsletters with Secrets & Analysis. Subscribe Now