For 22-39 Year olds – Timothy F. McCarthy https://timmccarthy.com Official Site for The Safe Investor Sun, 02 Feb 2014 01:53:01 +0000 en-US hourly 1 https://wordpress.org/?v=6.4.3 61396971 Pigs and Sheep, Balancing Greed vs Fear https://timmccarthy.com/pigs-sheep-greed-vs-fear/ Sun, 01 Dec 2013 22:51:51 +0000 https://timmccarthy.com/?p=145 Investing is often a psychological game between two emotions: fear and greed. The stock market can behave in a similar manner as stock prices act like a tug-or-war between fear and greed like when a company’s stock price goes up and down daily. Timing the markets is ridiculously hard because …

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]]> Investing is often a psychological game between two emotions: fear and greed. The stock market can behave in a similar manner as stock prices act like a tug-or-war between fear and greed like when a company’s stock price goes up and down daily. Timing the markets is ridiculously hard because of the crowd, that is buyers and sellers, and driven by emotions and short term events rather than long run time horizons. The great value investor Ben Graham said it best, in the short run, the market acts like a voting machine, but in the long run, it acts like a weighing machine.

Since short run and long run investing is so different, it is best to know how human psychology works. An angel in one ear may be telling you to buy before it is too late, but a devil in the other may be warning you to run away from this investment. So rather than thinking of the market in terms of a bull market or a bear market, in the short term, the market participants behave more like a pig and sheep (greedy or fearful).

Take aways
It is good to know market sentiment and how powerful greed and fear can be to the market. Prices can spike or dip depending on the sentiment. Another thing is to broadly diversify your holdings so that you do not suffer the disadvantage of short-term volatility.

Information taken from The Safe Investor published by Palgrave Macmillan

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]]> 145 The Three pockets: Saving, Investing, Trading https://timmccarthy.com/three-pockets-saving-investing-trading/ Sun, 01 Dec 2013 20:16:32 +0000 https://timmccarthy.com/?p=149 The Safe Investor teaches investors how to organize their savings into three “pockets”. This makes it easier for them to budget their savings and investments into three categories: savings, investing, and trading. First, sit down with your financial advisor to discuss about a savings plan. Relevant information include your take …

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]]> The Safe Investor teaches investors how to organize their savings into three “pockets”. This makes it easier for them to budget their savings and investments into three categories: savings, investing, and trading. First, sit down with your financial advisor to discuss about a savings plan. Relevant information include your take home pay, monthly expenses, and a breakdown of what you spend on every month.  Once you are ready to commit to putting aside some money periodically (usually monthly), then you are ready to put this money into the three pockets.

Below is a diagram of the three pockets: as seen on page 102 of The Safe Investor

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The Savings Pocket has two objectives for. First is to not lose any principal. Second is to be liquid in case of any emergencies. Trade offs for the savings pocket is that cash sitting here will not have a real return.

The Investing Pocket is for true investments. This pocket is used to successfully minimize risks in a diversified portfolio. You and your financial advisor can decide which funds to invest in, while the book The Safe Investor, will expand on possible investments and recommended allocations. You will want to invest with a long term time horizon in order to capture compounding returns and further minimize risks of cyclical stock market activities. Meanwhile, the periodic deposits into this pocket will act as a buffer in order to lower the average price of your investments in case of a possible market bubble and crash.

The Trading Pocket is a psychological release valve. An investor that is constantly watching what the market does is also aware of popular trends and hot ipo issues going around. Rather than risk the majority of an investor’s capital, the Safe Investor can save and invest, and have a third account that is proportionately smaller in order to make these sorts of bets. This will keep any investor looking to make 15%+ returns satisfied.

Lessons of The Three Pockets:

  • Savings Pocket is your “rainy day” pocket or for emergencies. This is short term money used for short term expenses.
  • Investing Pocket grows more than your savings pocket but less risky than your trading pocket. The key thing is to diversify across a variety of asset classes, and across many country types and geographies. Use time in order to trickle in your investments.
  • Trading Pocket helps to alleviate your brain’s response to either panic when the market goes down, or become greedy when the market goes up. With this account, you can go ahead and make concentrated bets on stocks.

Information taken from The Safe Investor published by Palgrave Macmillan

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