I started the mock portfolio challenge on February 18th of this year to demonstrate that it doesn't take a lot of money to make money and slowly build wealth over time. With an initial account balance of just $500.00, I wanted to show that a long-term strategy of patience, research, and discipline can build wealth.
Results So Far
This past week, I sold the one stock I purchased in the account. After a little less than four months, we have a gain of 17.82%, having turned our $500 into $589. For comparison the New York Stock Exchange Composite Index (according to Yahoo!) was $10,826.59 on February 18th, and has risen to $10,968.50 as of June 8th. That's a gain of about 1.31%. That's our benchmark. Any good managed stock portfolio should outpace the broad market after commissions and fees, or you might as well just buy index funds. At 17.82% for less than four months, we have done extraordinarily well.
What Many Investors Do Wrong
Unfortunately, all the others competing in the contest (It's not too late to join in at at Marketwatch.) have lost money in the same period. If you look carefully, you'll see a strong pattern. the dollar ranking from top to bottom is inversely proportional to the number of trades the player has made. I bought one stock and sold one stock, the second place player has also made just two trades. At the bottom of the stack, the last place player has made 17 trades. Next to last, 9 trades.
A high number of trades indicates a lack of patience and a short-term, gambler's mentality. They seem to be playing for a quick hit or the chance of a sudden windfall. That's not how successful investors approach the market. The successful investor is patient. I don't buy companies because I think they will go up next week and I can sell for a quick profit. I buy companies that I feel have a strong business position and which I think are undervalued by the investment community.
The Importance of Research
The stock I bought for example, SFL, is one that I have watched for many years. I know that it generally trades between $15 and $17.50 with rare periods where it may go a dollar or so to either side of that range. I know that it pays a regular dividend of 43 cents per share per quarter (regularly increasing over time) that is supported by free cash flow. I know their business model, I know their management by their actions over time, and I know what factors would materially affect their business prospects.
Personally, with a dividend of roughly 10%, I think the stock is undervalued even at $17.50, but based on history, the rest of the market does not agree. So I can safely buy this stock as it approaches $15/ share and sell it when it passes $17/ share. There is always the chance that this time the market will recognize its value and push it into a new higher range, but that's a chance a gambler might take. It is important to know, when you buy a stock what your expectations for its performance are. In other words, when you buy the stock, you should have a set criteria that will cause you to sell it.
Always Have an Exit Strategy
These criteria should span several possibilities. If all goes as planned, I will sell at price X. If the stock does not perform according to my expectations or if new information comes to light, I will sell at a loss at price Y after giving it a specified amount of time to make sure its not just a normal market fluctuation.
Once you know everything you can find out about what you're buying and have set specific goals for getting out of the investment, either profitably or if need be at an acceptable loss, you are ready to buy. Then stay patient, stay up on any news that might have a long-term impact on your stock either expected or unexpected. Adjust your goals as conditions change, but don't react to the daily whims of the market. You are not day-trading or playing blackjack. You are investing for the long term based on solid research, patience and discipline.
Disciplined Saving is Essential to Building Wealth
Of course, to really build a prosperous future, you have to save as much as you can to build the investment account balance. Whether it's $15 each week or 15% or more of your gross pay, putting aside as much as possible on a regular basis is absolutely key.
As an example, if you put $50 into your stock account each month and averaged a 1% gain per month, then in five years you'd have contributed $3000 in savings, but would have $4083 total including your earnings.
The Power of Compounding
If you stopped contributing any new savings at that point (not recommended), then by the end of the second five years, that $3000 investment would grow to $7418. It would be growing faster and faster over the next years, so that it would reach $13,477 by the end of the next five year period. At that point, you could withdraw $134 every month forever without touch the $13,477 at all.
If you continue contributing and increasing your contributions over time throughout your working life, you can build a comfortable investment pension income, and have a large chunk of money sitting in the bank.
Results So Far
This past week, I sold the one stock I purchased in the account. After a little less than four months, we have a gain of 17.82%, having turned our $500 into $589. For comparison the New York Stock Exchange Composite Index (according to Yahoo!) was $10,826.59 on February 18th, and has risen to $10,968.50 as of June 8th. That's a gain of about 1.31%. That's our benchmark. Any good managed stock portfolio should outpace the broad market after commissions and fees, or you might as well just buy index funds. At 17.82% for less than four months, we have done extraordinarily well.
What Many Investors Do Wrong
Unfortunately, all the others competing in the contest (It's not too late to join in at at Marketwatch.) have lost money in the same period. If you look carefully, you'll see a strong pattern. the dollar ranking from top to bottom is inversely proportional to the number of trades the player has made. I bought one stock and sold one stock, the second place player has also made just two trades. At the bottom of the stack, the last place player has made 17 trades. Next to last, 9 trades.
A high number of trades indicates a lack of patience and a short-term, gambler's mentality. They seem to be playing for a quick hit or the chance of a sudden windfall. That's not how successful investors approach the market. The successful investor is patient. I don't buy companies because I think they will go up next week and I can sell for a quick profit. I buy companies that I feel have a strong business position and which I think are undervalued by the investment community.
The Importance of Research
The stock I bought for example, SFL, is one that I have watched for many years. I know that it generally trades between $15 and $17.50 with rare periods where it may go a dollar or so to either side of that range. I know that it pays a regular dividend of 43 cents per share per quarter (regularly increasing over time) that is supported by free cash flow. I know their business model, I know their management by their actions over time, and I know what factors would materially affect their business prospects.
Personally, with a dividend of roughly 10%, I think the stock is undervalued even at $17.50, but based on history, the rest of the market does not agree. So I can safely buy this stock as it approaches $15/ share and sell it when it passes $17/ share. There is always the chance that this time the market will recognize its value and push it into a new higher range, but that's a chance a gambler might take. It is important to know, when you buy a stock what your expectations for its performance are. In other words, when you buy the stock, you should have a set criteria that will cause you to sell it.
Always Have an Exit Strategy
These criteria should span several possibilities. If all goes as planned, I will sell at price X. If the stock does not perform according to my expectations or if new information comes to light, I will sell at a loss at price Y after giving it a specified amount of time to make sure its not just a normal market fluctuation.
Once you know everything you can find out about what you're buying and have set specific goals for getting out of the investment, either profitably or if need be at an acceptable loss, you are ready to buy. Then stay patient, stay up on any news that might have a long-term impact on your stock either expected or unexpected. Adjust your goals as conditions change, but don't react to the daily whims of the market. You are not day-trading or playing blackjack. You are investing for the long term based on solid research, patience and discipline.
Disciplined Saving is Essential to Building Wealth
Of course, to really build a prosperous future, you have to save as much as you can to build the investment account balance. Whether it's $15 each week or 15% or more of your gross pay, putting aside as much as possible on a regular basis is absolutely key.
As an example, if you put $50 into your stock account each month and averaged a 1% gain per month, then in five years you'd have contributed $3000 in savings, but would have $4083 total including your earnings.
The Power of Compounding
If you stopped contributing any new savings at that point (not recommended), then by the end of the second five years, that $3000 investment would grow to $7418. It would be growing faster and faster over the next years, so that it would reach $13,477 by the end of the next five year period. At that point, you could withdraw $134 every month forever without touch the $13,477 at all.
If you continue contributing and increasing your contributions over time throughout your working life, you can build a comfortable investment pension income, and have a large chunk of money sitting in the bank.
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