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Kieran G. Murphy - The Ultimate Financial Warrior Guide - Success in Stock Market Investing is a Choice - Not a Secret_ a Comprehensive Guide to Investing in the Stock Markets for Beginners (UFW Guide
Kieran G. Murphy - The Ultimate Financial Warrior Guide - Success in Stock Market Investing is a Choice - Not a Secret_ a Comprehensive Guide to Investing in the Stock Markets for Beginners (UFW Guide
Kieran G. Murphy - The Ultimate Financial Warrior Guide - Success in Stock Market Investing is a Choice - Not a Secret_ a Comprehensive Guide to Investing in the Stock Markets for Beginners (UFW Guide
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Preface
Investing in the stock market doesn't have to be a daunting task. Even if you've
encountered setbacks in your investing journey or avoided it altogether, the reality is
that the road to financial freedom is much simpler and less intimidating than you think.
If you follow the strategies in this book, you will outperform over 85% of professional
fund managers. And you can do this! You will become the Ultimate Financial Warrior
(UFW). You can start by investing just $100 a month and grow your portfolio over time.
If you invest $100 a month at the age of 18, into the markets, you will return $1,275,340
at age 66 assuming 9.7% return from the markets per annum. And there are many
strategies explained in the book which will outperform the average annual returns.
Unlike other books, this book will explain the mindset required to be the Ultimate
Financial Warrior. Successful investors will tell you it is 90% mindset and 10% action.
Anybody can open a stock broking account online and buy and sell stocks. It is relatively
easy. But unfortunately, statistics show that these investors usually lose most of their
hard-earned cash to the stock markets. They don’t have the mindset or skills required to
be victorious Financial Warriors. They gamble in the stock markets rather than have an
investment strategy. In the words of a great Financial Warrior with a great mindset,
Warren Buffet, "Only when the tide goes out do you discover who's been swimming
naked".
A Financial Warrior's mindset is about implementing a successful strategy and sticking
with the plan. It protects your wealth over the long term when the tide goes out. You
need to learn the "why's" to implement the strategy, and then the "how's" are very
straightforward.
Authored by Kieran G. Murphy, an expert investor and adjunct lecturer at one of the
world's most elite institutions, Trinity College Dublin, this guide will illuminate your
pathway to successful investing. Kieran's extensive experience as a stockbroker and
previously one of the founders of Ireland's most successful stock market training
company makes him the perfect mentor for your journey toward becoming the Ultimate
Financial Warrior.
The Ultimate Financial Warrior website hosts the online certification course, which will
test your knowledge of the key lessons within this book. On successful completion of this
free course, you will receive a certification and will be invited to join the UFWs Private
Members Group on Facebook, where you can interact and learn from other like-minded
Financial Warriors with various levels of experience. All Financial Warriors in the
member's group will have completed and passed the online course. It is important that
UFW investors have access to other like-minded educated Financial Warriors to share
thoughts, ideas and strategies throughout their journey.
So envision the immense satisfaction you'll feel when your money starts working for you,
generating wealth that grants you financial freedom and abundant life choices. Your
journey to becoming a savvy investor starts with The Ultimate Financial Warrior's
Guide – Success in Stock Market Investing is a Choice – Not a Secret. Don't delay
in making the best investment of all - in yourself. Embark on this enlightening journey
today!
Contents
Introduction
Conclusion
About the Author Kieran G. Murphy
References
Your Free Gift
As a way of saying thanks for your purchase, I’m offering the book The Ultimate
Financial Warrior’s Guide – Success in Constructing a Winning Investment Portfolio is a
Choice – Not a Secret for FREE to Financial Warriors.
"The stock market is filled with individuals who know the price of everything, but
the value of nothing."
— Philip Fisher
The path of an Ultimate Financial Warrior isn't dictated by the ticking hands of a clock,
or the passing years marked on a calendar. It is a path that can begin at any point in
your life. Whether you are a teenager who just got your first job, a middle-aged
professional who is starting to think about retirement or a retiree who wants to ensure a
comfortable future, it is never too late to embark on this journey.
Many people I have spoken to, students, friends, and clients, believe they have missed
the bus because they didn't start investing when they were younger. They imagine a
steep uphill battle trying to compensate for lost time, and the thought alone can be
intimidating. I always tell people that the first thing to do is invest in educating yourself
by an expert and then get started immediately. Education coupled with ongoing
guidance are the backbones of becoming financially free. The UFW website allows
readers to continue their financial journey way beyond this book.
In investing, there are no shortcuts or quick fixes, but there are strategies to help
maximize your investment potential no matter when you start. Even if you didn't start
investing at an early age, there's a strategy known as "catch-up contributions" in the US
that can help you save more in your retirement accounts if you're over 50. These are
called Advanced Voluntary Contributions (AVCs) in other countries. Similarly, strategies
like dollar-cost averaging and dividend reinvestment can also help grow your
investments over time.
Think of it this way - every $1 you invest now is a step towards increasing your wealth
and securing your financial future. This journey is not about comparing yourself to others
or dwelling on the past. It's about moving forward with the knowledge you gain and the
strategies you build. Remember, every Financial Warrior has their unique path, and your
age is not a determinant of your success in the arena of investing.
One of the primary objectives of this book is to emphasize that the right time to start
investing is not determined by your age but by your willingness to learn and your
determination to take action. Investing isn't a sprint; it's a marathon. It's about staying
on the track, one foot in front of the other, with your eyes set firmly on the finish line.
Now, having understood why financial education is essential and that starting your
investing journey can begin at any age, let's get a brief overview of the rest of the book.
In the next section, we'll preview the exciting journey that lies ahead, providing an
overview of what this book covers. There are numerous battles to fight, but with every
battle comes the opportunity for victory. Brace yourself, Warrior; the adventure is just
beginning.
The roadmap
"If you fail to plan, you are planning to fail."
— Benjamin Franklin
As we stand on the threshold of our financial journey, it's essential to take a moment to
outline the road map that lies before us. This book is designed to take you through the
terrain of investing in a way that is engaging, educational, and empowering. We'll
traverse the land of mutual funds, index funds, ETFs, REITs, individual stocks, and bonds
with a clear and concise understanding. Like a good MMA fighter, we need a plan of
attack; we can't blindly jump into the octagon.
This book is divided into thirteen engaging chapters, each packed with valuable insights
and actionable steps that will assist you in becoming a skilled and confident Financial
Warrior. Our journey begins with the concept of compounding, illustrating how money
can make more money and the role of time as our ally in wealth building. We'll shed light
on the magic of compound interest and why it's often referred to as the 'eighth wonder
of the world.'
Next, we explore the common financial pitfalls that many beginners fall into. We'll
discuss the dangers of short-term thinking, the importance of an emergency fund, and
the perils of overspending and accumulating high-interest debt.
Choosing the right broker can make or break your investing experience, which is why
we'll dedicate a whole chapter to avoiding common broker selection mistakes. We'll
discuss factors such as fees and commissions, the importance of customer service, and
the features and tools that can make your investment journey easier.
Once we've established a strong foundation of understanding, we'll move on to the
practical steps of investing. You will be introduced to mutual funds, index funds,
Exchange Traded Funds (ETFs), Real Estate Investment Trusts (REITs), individual stocks
and bonds. Getting started in investing is a lot easier than you imagine and I have listed
50 mutual funds, ETFs and REITs so there are no excuses about getting up and running
immediately. The earlier you get started the better.
As we delve deeper into the world of stock market investing, we'll examine the different
types of stocks and how to value them. This understanding will arm you later on in your
financial journey with the knowledge necessary to make informed decisions about your
investments.
Investment doesn't stop with individual stocks; we'll explore the concept of portfolio
diversification, asset allocation strategies, and the importance of rebalancing over time.
Diversification is our shield in the financial octagon, protecting us from the blows of
market volatility.
We will then look at how to maximize your investment returns through tax advantaged
retirement accounts which are an excellent vehicle to super charge your portfolio.
Knowledge about these instruments will make you a versatile and adaptable Financial
Warrior, ready to adjust your strategy according to market conditions. We'll discuss the
importance of regularly reviewing and adjusting your portfolio, and the value of
continued financial education.
We'll discuss the ultimate goal - achieving financial freedom and creating choices in life.
We'll explore the profound impact of financial independence and the benefits to you.
And we will close with the chapter that sums up the Ultimate Financial Warrior’s 8 Point
Plan to Financial Freedom and we look at some case studies.
So, are you ready to venture into the arena? As we navigate the battlefield of investing,
we're not just seeking monetary gain; we're looking to build character, discipline,
patience, and resilience - the true markings of an Ultimate Financial Warrior.
When you are finished reading the book, I encourage you to take the UFW quiz on
www.ultimatefinancialwarrior.com. Not only will this reinforce your understanding, but it
will also give you a chance to earn your UFW certification and be invited to join the
private members group on Facebook where you will meet and learn from like-minded
Financial Warriors. This is all part of the ongoing financial education that is needed to
help you along the way.
Key takeaways
Financial education is crucial in making informed decisions about your money. It
empowers you to take control of your financial future and attain financial
freedom.
Starting your investment journey can happen at any age. It requires a willingness
to learn and a determination to take action.
This book is your guide to becoming a skilled and confident Financial Warrior. It
provides an overview of various aspects of investing, from understanding
compounding and avoiding financial mistakes to selecting the right broker and
maximizing your investment potential.
We are about to embark on a rewarding journey full of valuable lessons and rich insights.
As we proceed, let's bear in mind that, like an MMA fighter, a Financial Warrior needs
both theoretical knowledge and practical experience. There's no shortcut to financial
success; it requires dedication, patience, and strategic planning.
With the overview of the journey laid out, we are ready to take our first steps into the
world of investing. In the next chapter, we will unravel the power of compounding - an
essential concept that underpins successful long-term investing. Remember, fellow
warriors, the journey of a thousand miles begins with a single step.
Get ready for an enlightening journey into the heart of investing. The Financial Warrior
inside you is eager to begin, and there's no better time than now to step into the arena.
The path may seem daunting, but remember, every journey begins with a single step. So
take a deep breath, brace yourself, and let's dive into the fascinating world of
compounding.
Chapter 1
The Magic of Compounding and the
Magic of Monthly Contributions
As a Financial Warrior, our goal is to step into the financial octagon, armed with our
hard-earned money, and let it fight for us. In the world of investing, a powerful ally that
never taps out, never gets tired, and never ceases to fight is 'compounding.' To harness
the power of compounding, we must first understand the simple yet profound concept -
'money makes money'.
Money making money might sound like a riddle, but it's an irrefutable truth in the world
of investing. It's how wealth grows exponentially over time, a truth which lies at the heart
of compounding. As a Financial Warrior, we let our money do the heavy lifting, turning
our savings into a powerful engine of wealth creation.
Let's take an example: suppose you were to invest $100 in a venture that offers a 10%
annual return. By the end of the first year, you would have $110, having earned $10 in
interest. Now, suppose you leave your initial investment and the interest you've earned in
for another year. In the second year, you would earn not just 10% on your initial $100
but also on the $10 interest you earned in the first year. By the end of the second year,
you would have $121, not just $120. If we extend that to year 3, then your investment
would be worth $133.10. You have earned 10% interest on $121 which is $12.10. You are
now earning interest on interest. That’s the magic of compounding.
This might not seem like a huge difference right now, but remember; we are Financial
Warriors who understand that the real fight is long-term. As years pass, these small
differences begin to add up, and before you know it, your $100 has grown into a
considerable sum.
Consider this, if you continued this process for 30 years without adding another cent to
your initial investment, you'd end up with over $1,983! That's nearly 20 times your initial
investment. Now imagine if you were consistently adding $100 to your investment each
month over those 30 years; the growth would be significantly more and you would have
$229,916. Yes you read that correctly. You would have only deposited $36,000 but your
investment would be $229,216.
It's the notion that your money can work for you, instead of you working for your money,
that's central to the idea of money making money. Your earnings generate their own
earnings, which in turn generate even more earnings - a snowball effect that can result
in significant wealth over time.
In the realm of MMA, a single punch or kick can hardly win a fight, but a combination of
well-planned and timed punches and kicks can lead to victory. Similarly, a single dollar
cannot create wealth, but a combination of dollars consistently invested and
compounded over time can lead to financial triumph.
As we move forward in the next section, we will discuss how 'Time,' our most valued ally,
can aid us in our journey to wealth accumulation through the power of compounding.
Let's get ready to understand the core principle that separates financially savvy UFWs
from the rest. After all, we are not just fighters but intelligent warriors.
Warriors, have you ever pondered the significance of time? Time is a uniquely universal
constant, incessantly ticking forward. As Financial Warriors, we are required to
appreciate this precious commodity as a powerful ally in our journey of wealth
accumulation. Like an experienced MMA fighter who understands the importance of
timing each punch and kick in the ring, we, too, must comprehend the critical role time
plays in our investment journey.
Have you ever observed a tree growing? The seed planted in the ground doesn't
transform into a gigantic tree overnight. It takes years for it to develop strong roots and
a sturdy trunk, enabling it to stand firm against the wind and the rain. Similarly, your
investments will not grow dramatically overnight. You need patience, persistence, and,
most importantly, the passage of time for your investments to bloom and bear fruit.
This understanding is fundamental to harnessing the power of compounding.
In the previous section, we looked at how 'money makes money.' However, the magic of
compounding doesn't come from your money alone. It's the marriage of your money and
time that brings compounding to life. Time is your best friend when it comes to
investing. The more time you give your investments, the more they have the chance to
grow and compound, enhancing your wealth exponentially.
The broader US stock market has returned an average of 9.79% annual growth since
1900. So throughout this book, I am going to assume 9.7% annual growth in all
calculations. Whilst the power of compounding is not immediately obvious in the first
few years, it sure does make a difference over time.
If investor A invests $160 a month from the age of 18 to 66 (48 years), they will have
$2,040,544 when they retire. Compounding interest really adds up over time. Investor A
will only have deposited $92,160 over the 48 years but earned a whopping $1,948,384
in interest. So investing money at a young age will completely change the end number
due to the power of compounding.
For the next example, let us assume Investor B invests only $120 a month over the same
period. Then at age 66, they will receive $1,530,408 by depositing $69,120 over 48
years. By reducing their monthly deposit by just $40 a month or $23,040 over the 48
years, they will receive €510,136 less than if they deposited $160 a month. This example
highlights that we should try and invest as much as we can every month as the returns
will be much more significant over time.
To sum things up. The younger you start to invest, the better. The more you can deposit
per month, the better. This is key to being the Ultimate Financial Warrior.
At the start of this book, I mentioned that you can get rich by investing just $100 a
month. Let me back up that statement. If we were to invest $100 a month from age 18 to
retirement at age 66, then you would have a portfolio worth $1,275,340 and would have
only deposited $57,600. Rich can mean many things to many people, but I think we will
all agree that being a millionaire would be regarded as being rich.
Also, another convincing fact that we should explore would be how much an investor
would have to deposit per month to get the same amount of money at age 66 should
they start investing at an older age. We know that at age 18, if they deposit $100 a
month, their portfolio will be worth $1,275,340 at age 66. But let’s assume they don’t
start investing until they are 25. In order to have approximately the same amount of
money at age 66, they would have to deposit $198 per month. That’s nearly doubling
their monthly deposits compared to if they started investing at age 18.
And if they waited till age 35? Their monthly deposits would have to be $538. If they
wait till they are 45, then it jumps to $1,547 a month. At age 55, that would rise to an
incredible $5,400 a month which is a long way off $100 a month had they started at age
18.
These concepts of starting early and maximizing what you can invest is the key to
accumulating gains on your invested funds and transforming them into a formidable
financial force. You invest your hard-earned money, and it starts earning returns. And
here is the beauty of compounding interest; those returns do not just sit idly by. They
join forces with your initial investment, creating a potent combo that accelerates your
investment growth. Even from a small investment, the longer your money has to grow,
and through reinvesting your returns, the compounding effect gives you a competitive
edge over someone who waits.
My strong message for you if you are currently in your teens or early 20s, is that you can
give yourself a head start. Get your money working for you, compounding and growing
with each passing year. Time becomes your ally, amplifying your efforts and accelerating
your financial growth. It is in your best interests to start while you are young, determined,
and hungry for success. Take advantage of currently having fewer responsibilities that
often hinder adults in later life. Let the power of compounding become your secret
weapon, propelling you toward a future of financial freedom and abundance.
Just as an MMA fighter trains tirelessly for months, even years, to prepare for a single
match, your investments, too, require time to prepare, grow, and finally, deliver a victory –
the victory of financial independence.
No matter your age, start now. The path to becoming an Ultimate Financial Warrior is a
marathon, not a sprint. Your future self will thank you for it. It's a journey of endurance,
discipline, and patience. Your ally 'Time' is at your side, ready to amplify your efforts and
help you conquer your financial goals.
This understanding of time as your ally in the financial battlefield is critical in the
journey to becoming an Ultimate Financial Warrior. As we move onto the next section,
we will unravel the final part of our compounding trilogy - 'The Magic of Compound
Interest.' Remember, you are not just a fighter; you are a warrior. A Financial Warrior
equipped with the best weapons and the most effective strategies to win the financial
battle.
Your financial journey is not about making one significant, risky investment. Instead, it's
about the consistent, disciplined investments you make over time. It's about patience,
endurance, and making time your ally. That's what builds wealth.
The true power of compounding, the secret weapon of the Ultimate Financial Warrior,
only reveals itself over time. As Financial Warriors, we recognize this, we embrace this,
and we utilize it in our journey to financial freedom.
At the end of 3 months, we have invested a total of $300 and own 35 shares. At $20 a
share, the total value is $700. This represents a 133% gain with the dollar cost
averaged shares while XYZ fund only went up 100% during that 3-month time
period from its original price of $10 a share.
Essentially, dollar cost averaging allows you to accumulate more stock when prices are
low, effectively lowering your average cost per share over time. This enables you to
consistently build your portfolio irrespective of what is happening in the markets. Your
intention is to buy and grow your nest egg, which entails buying at different intervals and
market conditions. Sometimes, your purchase will acquire more stock if you buy when
prices are low, and sometimes your purchase will get you less if you buy when prices are
already up. What matters is that eventually, you will have lowered your average purchase
price and accumulated more stock.
Key takeaways
Money makes money. Your initial investment can generate returns, and those
returns can generate further returns. This concept is fundamental to
understanding investing.
Time is your greatest ally when it comes to investing. The earlier you start
investing, the more time your money has to grow. Start as soon as you can and
let time do the work.
Compound interest is the key to accelerating your wealth growth. It's the process
by which your investments generate returns, and those returns generate further
returns. It's the reason why investing a little bit consistently over a long period
can result in substantial wealth.
Commit to monthly contributions in order to dollar cost average into the markets
and grow your portfolio every month. Understanding and harnessing the power of
compound interest is crucial to your success as an Ultimate Financial Warrior.
It's your secret weapon on the financial battlefield, helping you to secure a
prosperous future.
In the next chapter, we'll look at some of the common financial mistakes people make
and how you, as an Ultimate Financial Warrior, can avoid them.
Chapter 2
Financial Mistakes to Avoid
Short-term thinking
"When it comes to investing, we want to do it for the long haul. Even if it's the
hardest thing to do, the best thing we can do is nothing."
— Warren Buffett
As Financial Warriors, we are in for a long-term battle. It's not about winning today or
tomorrow but prevailing over time. One of the most common missteps that beginners
make in their financial journey is short-term thinking, focusing on immediate gains
rather than developing a long-term investment strategy. This chapter will address the
pitfalls of such an approach and explain why patience and persistence are the keys to
achieving financial freedom.
Short-term thinking is the investing equivalent of expecting an MMA fighter to win the
championship belt in their first fight. Without rigorous training, strategic planning, and
the stamina to endure the length of the match, the likelihood of victory is slim. Similarly,
short-term thinking in investing can lead to hasty decisions, poor risk management, and
ultimately, financial defeat. It's essential to remember that, like MMA, investing is not a
sprint but a marathon.
The following paragraphs are so important that I have put them in italics in order that
you will read them multiple times. The following few paragraphs are the most important
in this book.
Short-term thinking in investing usually involves trying to take advantage of quick
market trends or attempting to time the market to make fast money. It is often driven by
the desire for instant gratification, coupled with the fear of missing out. Unfortunately,
this approach can lead to impulsive decisions and, more often than not, results in
financial losses. Market timing, as it's known, is incredibly challenging even for the most
experienced investors and virtually impossible for novices.
Short-term thinking can also lead to excessive trading. Each trade incurs a cost, which
can quickly eat away at your profits, especially when you're trading frequently. In the
pursuit of quick returns, many investors neglect the importance of a well-considered,
balanced portfolio that can weather the ups and downs of the market. Such a portfolio
forms the core of a long-term investing strategy.
Remember, as an Ultimate Financial Warrior, your aim is not about securing a quick win
but to build a lasting financial legacy. Think of investing as laying the foundation for a
castle that will stand strong for generations. You want to invest in quality investments
that will grow over time, not just ones that may give a quick return but could crash at any
moment.
Moreover, short-term thinking can cause unnecessary stress and anxiety. The stock
market is inherently volatile, and prices fluctuate daily. If you're constantly worried about
the daily ups and downs, you'll be on a never-ending emotional roller coaster ride, which
is neither healthy nor productive.
Lastly, short-term thinking can prevent you from reaping the benefits of compound
interest, as discussed in the previous chapter. Remember, compound interest works best
when you give it time. The longer you stay invested, the more your wealth will grow.
To transition from short-term thinking to long-term investing, you must shift your
mindset. Understand that investing is not about making quick money but about
building wealth over time. It requires patience, discipline, and a well-thought-out
strategy.
As an investor and mentor, I have encountered so many people who have lost their hard-
earned money by gambling in the stock market and taking short term bets. And that
includes myself and I have the scars to prove it. Sometimes we must experience the
pain to gain the message. Maybe that is what you need to do. I have encountered
thousands of people who have tried day trading and short-term trading over the last 30
years, but I still have to meet a successful day trader face to face. Of course, on social
media sites, there are no limits to the number of “so called successful day traders” who
claim to make millions from day trading. Please take it from me that 99.9% of day
traders are just gambling and eventually lose any wins they boast about.
In the next section, we will discuss another financial mistake to avoid - not having an
emergency fund. It may seem unconnected to investing, but as you will discover, having
a financial safety net is an essential part of your journey as an Ultimate Financial
Warrior.
Opportunity cost
“Intelligent people make decisions based on opportunity costs.”
— Charlie Munger
Investing early in life is crucial to building long-term wealth, and your mindset as a
Financial Warrior plays a significant role in achieving financial success. One important
aspect of this mindset is understanding the opportunity cost of not investing early and
using funds for “wants” rather than “needs”.
If we take an example of a 20-year-old who decides to purchase a car for $5,000 in
cash at the age of 20. The person who decides to spend their money on a car instead of
investing in the stock market may not realize the long-term impact of that decision. If
that person was to invest that $5,000 in the stock market with an average annual return
of 9.7%, by the time they reached age 66, the $5,000 would have grown into a
whopping $425,600. This means that the opportunity cost of not investing the money
but buying the car instead was $425,600 in investment returns over their lifetime. The
same principle applies to purchasing holidays, concert tickets, eating out in restaurants.
Every $100 you spend on non-essential goods or services at the age of 20, has an
opportunity cost of $8,512 by the age of 66.
Therefore, your mindset should focus on the long-term benefits of investing early and
consistently rather than being swayed by short-term temptations. By developing a strong
investing mindset and prioritizing financial goals, you can set yourself up for long-term
success and achieve financial independence at an early age.
Key takeaways
Short-term thinking can sabotage your long-term financial goals. Stay focused
on the big picture, and remember that investing is a marathon, not a sprint.
Not having an emergency fund can leave you vulnerable in times of financial
crisis. Ensure you have three to six months' worth of living expenses saved in a
readily accessible account.
Overspending and high debt can significantly hinder your financial progress.
Develop good spending habits, distinguish between wants and needs, and
manage your debts effectively. Develop a mindset that reflects on the
opportunity costs of spending money on “wants” rather than “needs”.
With these key mistakes addressed, we're now ready to move on to the next part of our
journey - preparing to invest. Remember, a disciplined MMA fighter always builds a solid
foundation before stepping into the ring, and the same applies to the Ultimate Financial
Warrior.
Chapter 3
Preparing to Invest: Building a Solid
Foundation
As an Ultimate Financial Warrior, it's important to remember that the investment arena
is not a place for thrill-seekers. Our goal is not excitement but rather sustained, long-
term growth. Like an MMA fighter training for a fight, we need a strategy and a game
plan. We need to set clear financial goals.
Setting financial goals is akin to plotting your course on a map before embarking on a
journey. Knowing your destination helps determine the best route, the mode of
transportation, and the amount of provisions needed for the journey. In the context of
investing, financial goals will guide your investment strategy, dictate the types of assets
you invest in, and determine the amount of risk you are willing to take on.
Identify your financial goals
To start with, we need to determine what our financial goals are. Do we want to save for
a house? A new car? Are we saving for our kids' college education? Do we want to build
a retirement nest egg that can sustain us for the rest of our lives? Or maybe we're simply
interested in growing our wealth over time? These are all valid financial goals, and as a
Financial Warrior, you may have one or more of them.
However, it's crucial to remember that every goal must be SMART: Specific, Measurable,
Achievable, Relevant, and Time-bound.
Let's illustrate this with an example. Let's say that one of your goals is to save for
retirement. Instead of saying, "I want to save for retirement," a SMART goal would be, "I
want to accumulate a retirement fund of $1 million by the time I turn 65." This goal is
specific (save for retirement), measurable ($1 million), achievable (with a solid
investment strategy), relevant (as we all need to plan for retirement), and time-bound (by
the age of 65).
Classify your goals
Once you've identified your financial goals, it's helpful to classify them into short-term,
medium-term, and long-term goals. This classification will help determine the types of
investments best suited to achieve each goal.
Short-term goals are those you want to achieve within the next five years, such as saving
for a vacation or a down payment for a car. Medium-term goals are those you want to
achieve within the next five to ten years, like saving for a down payment on a house.
Long-term goals are those that you aim to achieve in more than ten years, such as
saving for retirement or your kids' college education.
Determine the amount needed and the time frame
Once you've classified your goals, determine the amount of money you'll need to achieve
each one and the time frame in which you want to achieve them. For instance, if your
goal is to save $60,000 for a down payment on a house in five years, you'll need to
invest approximately $775 per month in the markets, assuming a 9.7% annual return on
investment. It is very important to be aware that during those specific five years, you
might not achieve the average return of 9.7% and you may be a long way off the
$60,000 you had hoped for. On the other hand, the market could return 14% per annum
and you would have $67,500 at the end of the 5-year period. You need to be aware of
both sides of the potential return and then decide if you want to take on risk or not. If
not, then you would choose to save $905 a month into a high yield savings account at a
guaranteed 4% per annum to reach your $60,000 target over the five years with no risk.
Understanding the specifics of your financial goals can significantly help your investing
journey. It provides a clear sense of direction and allows you to tailor your investment
strategy to meet your goals effectively. Just as a disciplined MMA fighter has a clear
strategy and training regime, as a Financial Warrior, you too should have a clear vision of
your financial goals and the steps needed to achieve them.
Align your goals with your investment strategy
Indeed, the alignment of financial goals with your investment strategy is a key step that
shouldn't be taken lightly. This doesn't mean picking stocks willy-nilly or jumping on the
latest hot tip from a friend. As an Ultimate Financial Warrior, you need to approach your
investments as you would an MMA fight - with careful preparation and a well-planned
strategy.
Take, for instance, if one of your goals is to build a retirement nest egg, and you've
calculated that you'll need €1 million by the time you retire. In this case, you might want
to focus on long-term investments that grow steadily over time, such as index funds or
blue-chip stocks. These are often considered lower risk and can provide a reliable
source of growth over the long term.
On the other hand, if you're saving for a short-term goal, like a down payment for a
house in the next few years, you might lean towards more conservative investments.
These could include government bonds or high-yield savings accounts, which won't give
you the same returns as stocks but are far less likely to lose value.
Again, this strategy can be likened to an MMA fight. A fighter who goes all out in the first
round, expending all their energy too soon, may not last the distance. Likewise, a
Financial Warrior who takes unnecessary risks in pursuit of quick gains may find their
financial health compromised in the long run.
Monitor and adjust your goals and strategy
Just like an MMA fighter, an Ultimate Financial Warrior needs to remain flexible,
adapting to the situation as it unfolds. Your financial situation and goals can change
over time, and your investment strategy should be flexible enough to accommodate
these changes.
As an investor, I've seen how market conditions can fluctuate dramatically. To respond
effectively, it's important to regularly review and reassess your financial goals and
investment strategy. This doesn't mean you should panic and sell all your stocks when
the market takes a downturn. Instead, take a step back, review your goals, and decide if
your current strategy is still the best way to achieve them.
A regular review of your financial goals and investment strategy also allows you to
celebrate your successes and make necessary adjustments. If you've reached a financial
goal earlier than expected, for example, it's a good opportunity to set new, more
ambitious goals. On the other hand, if you find that you're not making as much progress
as you'd like, it may be time to adjust your strategy.
Remember, the journey of becoming an Ultimate Financial Warrior is one of constant
learning, adaptation, and growth. That is why when you pass the online quiz and gain
access to the Facebook private members forum, there will be lots of like-minded
Financial Warriors helping each other on the journey. Let's embrace the challenge, step
into the ring, and prove our financial mettle! Let's conquer this financial fight together.
Before we venture any further on our investment journey, there's a particularly thorny
issue we need to tackle. One that, if left unaddressed, can hinder your financial progress
as an Ultimate Financial Warrior (UFW). I'm talking about high-interest debt, which can
quickly snowball out of control and stand between you and your financial freedom.
Imagine you're an MMA fighter about to step into the octagon for a match. High-interest
debt is like an invisible opponent in that ring with you, landing constant blows to your
financial health. It's tough to win a match when you're being attacked from an
unexpected direction, isn't it?
Now, I'm not suggesting that all debt is bad. Some debts, like a mortgage or a student
loan, might be necessary and could potentially be considered an investment. For
instance, acquiring a mortgage allows you to own a home, and a student loan might fund
your education leading to a higher earning potential. However, high-interest debts, such
as credit card debts, payday loans, or high-interest personal loans, are the financial
equivalent of quicksand. The more you struggle with them, the deeper you sink.
So, why is high-interest debt such a big deal? Allow me to illustrate with a simple
example. Let's say you have a credit card balance of $5,000 with an annual interest rate
of 18%. If you only pay the minimum balance each month, it would take you over 30
years to pay it off, and you'd end up paying nearly $10,000 in interest alone!
See how pernicious this high-interest debt can be? It's like a leech that saps your
financial strength, slowing your progress towards wealth building. The good news is we
can devise a plan to combat high-interest debt.
Firstly, we need to stop accruing more high-interest debt. Commit to not using your
credit cards for impulse purchases or non-essential items.
Next, prioritize your debts and pay off those with the highest interest rates first. This
approach is known as the avalanche method. By focusing on your high-interest debts,
you can reduce the amount of interest you pay over time, freeing up more of your money
for investing.
It's crucial to pay more than the minimum payment if possible. As our earlier example
illustrated, making only minimum payments can extend your debt repayment timeline
and significantly increase the amount of interest you pay.
Consider consolidating your high-interest debts. This could involve taking out a lower-
interest loan to pay off your high-interest debts, leaving you with a single, more
manageable payment each month. It's a bit like turning a horde of smaller, faster
opponents into one larger but slower foe. It's easier to focus your efforts and fight back.
In the last chapter, we will look at some real case studies.
Lastly, establish a budget and stick to it. With a good budget in place, you can prevent
overspending and ensure you have enough money to consistently chip away at your debt.
Having said all that, remember that these are just guidelines. Everyone's financial
situation is unique, and you'll need to find the approach that works best for you.
Becoming an Ultimate Financial Warrior is about understanding your financial landscape
and adapting your strategies accordingly.
As your trusted financial coach and fellow Ultimate Financial Warrior (UFW), I want you
to really understand and grasp the essence of what we just talked about. It's critical for
your journey, and it's why we have a UFW quiz online. It's not just to test your knowledge
but to cement the information in your brain and turn it into practical, actionable wisdom.
Once you have finished reading the book, head over to www.ultimatefinancialwarrior.com
and challenge yourself with the quiz. If you get stuck on the questions, then you can
reread the chapter and absorb the information further. When you have answered all the
questions correctly, you'll earn your Ultimate Financial Warrior certification, granting you
free access to the UFW private members Facebook group. There, you'll find an exciting
community of like-minded Financial Warriors, all training and growing stronger together.
Now, as we prepare to venture further into the fascinating world of stock market
investing, keep in mind the key takeaways from this chapter:
Key takeaways
Setting Financial Goals: Clear financial goals are the compass guiding your
investment journey. They provide direction and a sense of purpose. Your goals
could range from buying a house, funding your children's education, or even
achieving early retirement. It's important that these goals are S.M.A.R.T: Specific,
Measurable, Achievable, Relevant, and Time-bound.
Establishing an Emergency Fund: An emergency fund is your financial safety net.
It ensures that unexpected expenses don't derail your investment plan. Aim to
save at least three to six months of living expenses. You never know when you
might need it.
Paying off High-Interest Debt: High-interest debt is the nemesis of financial
growth. Paying it off as quickly as possible should be a top priority. It's a critical
step towards financial independence because the money you save on interest
payments can be invested towards your financial goals.
Next up, we'll be delving into the world of brokers and the crucial role they play in your
investment journey. Remember, knowledge is power, and every chapter you complete
brings you one step closer to becoming the Financial Warrior you are destined to be.
Chapter 4
Broker Selection: Mistakes to Avoid
Just as a seasoned MMA fighter needs to choose their coach wisely, so too must the
Ultimate Financial Warrior select a stockbroker that will maximize their investment
potential. This decision can significantly impact the overall success of your investing
journey.
One of the most critical factors to consider when choosing a broker is the cost of doing
business with them. This cost primarily comes in the form of fees and commissions and
a smart investor must weigh up the financial impact of the fees.
Commissions
The commission is the charge you pay to a broker or a brokerage firm when they
execute a buy or sell order on your behalf. This fee is typically a fixed cost per trade.
Some brokerage firms offer commission-free trading, which can be particularly
beneficial for those who trade frequently or with smaller amounts of money.
Let's take an example. Suppose you decided to invest $1000 in a particular stock, and
your broker charges a commission of $10 per trade. This means you're effectively paying
1% of your total investment as a commission. If you're planning on making frequent
trades, this can quickly eat into your profits. Now imagine you chose a commission-free
broker instead. The $10 you saved on every trade would stay in your account, giving it
more potential to grow over time.
However, low or zero commissions shouldn't be the sole factor in deciding on a broker.
Other features and services might compensate for a higher commission rate. For
instance, some brokers might provide excellent research tools, superior customer
service, or a user-friendly platform that's worth the extra cost.
Fees
In addition to commissions, brokers may charge a variety of other fees. Some common
ones include:
1. Account maintenance fees: Some brokers charge a fee simply for keeping an
account open with them. Often, these are waived if you maintain a certain
balance or make a specific number of trades per year.
2. Inactivity fees: If you don't make a certain number of trades within a specified
period, some brokers may charge you an inactivity fee.
3. Margin fees: If you borrow money from your broker to buy stocks, you'll have to
pay interest, known as margin fees.
4. Foreign exchange fees: If you're trading in international stocks, your broker
may charge you a fee for currency conversion.
5. Withdrawal fees: Some brokers may charge you a fee when you withdraw money
from your account.
Always be sure to read the fine print to understand what fees a broker charges. If you're
in doubt, don't hesitate to ask for clarification. Remember, as an Ultimate Financial
Warrior, you're in control of your financial destiny. So be assertive and ask the tough
questions.
The cost-benefit analysis
While it's important to be mindful of the cost, choosing the cheapest broker isn't always
the best option. A higher-priced broker might provide valuable services, such as in-
depth research reports, user-friendly platforms, excellent customer service, and
additional tools for analysis.
For instance, suppose you're a beginner and need guidance and educational resources
to improve your investing skills. In that case, you might be better off paying a bit more
for a broker that offers extensive educational resources and excellent customer support.
Remember, you're not just paying for a transaction; you're also paying for a service. And
sometimes, the service can be more valuable than the transaction cost itself. This is why
it's crucial to conduct a thorough comparison of the various brokers and what they offer
before making a final decision.
As an Ultimate Financial Warrior, your choice of a broker should not only focus on fees
and commissions but also on the value and service they provide.
Consider it like choosing your MMA coach. You wouldn't simply opt for the cheapest
coach, would you? You'd want someone who offers value, has a deep understanding of
the game, provides guidance based on your unique style and requirements, and
supports your journey towards becoming a champion.
The same concept applies here. The cheapest broker might seem appealing initially, but
what if they offer subpar customer service or lack the necessary research tools? Such
inadequacies can hamper your investing journey significantly.
Consider this example: Let's say you have an urgent question about a trade or a
technical issue on the platform. If your broker's customer service isn't up to par, your
question might remain unresolved, causing unnecessary stress and potential loss. On
the other hand, a broker with a slightly higher commission but excellent customer
service can resolve your issues quickly, giving you peace of mind and allowing you to
focus on your investing strategy.
The impact of fees and commissions over time
The fees and commissions you pay can have a significant impact on your portfolio's
growth over time. Even small differences in fees can compound over time, leading to
sizable differences in your portfolio's value.
For example, if you're investing $100 a month for 30 years with an average annual return
of 7%, and you're paying 1% in fees, you'd end up with approximately $90,000. However,
if you were to cut that fee in half to 0.5%, you'd end up with close to $100,000. That's a
$10,000 difference caused by a mere 0.5% change in fees.
As you can see, even seemingly small fees and commissions can have a significant
impact on your long-term financial growth.
Choose wisely, invest wisely
In the grand scheme of investing, choosing the right broker is as crucial as selecting the
right stocks. Paying attention to the fees and commissions is an integral part of this
process.
In the next section, we'll delve into the importance of customer service and the features
and tools that a good broker should offer for beginners. This information will equip you
to make an informed decision and choose the broker that suits your needs best.
Your journey to becoming an Ultimate Financial Warrior continues, and just as in a well-
fought MMA match, every strategic decision matters. Your choice of broker is one such
decision. Choose wisely, invest wisely, and watch as your financial strength grows over
time.
Choosing the right broker is a significant step in setting up a solid foundation for your
financial battles ahead. But finding a broker with the right features and tools is only half
the fight. An often overlooked but equally essential component in broker selection is the
quality of their customer service. As you navigate the world of investing, an outstanding
customer support team could be the guiding light that ensures you don't stumble in the
dark.
When I was just starting my journey in investing, I knew little about stocks, bonds, and
the like. It was a foreign territory for me and, to be honest, a little intimidating. Luckily, I
had the support of a good customer service team at my brokerage firm. They were
always ready to assist and clarify my doubts, no matter how trivial they seemed. This
helped build my confidence and understanding of investing, and it could do the same for
you.
The role of customer service in broker selection
Customer service plays a significant role in the experience you have with your broker. A
broker with a proactive, knowledgeable, and empathetic customer service team can
make your investing journey smoother, more comfortable, and less stressful.
Imagine you've just made a considerable investment in a promising stock. You're
expecting the stock to perform well based on your thorough analysis. But then, suddenly,
you're unable to access your trading account due to a technical glitch. You start to panic,
unsure of how your investment is faring. At this crucial moment, a responsive and
effective customer service team is a blessing. They can help resolve the issue swiftly,
provide you with timely updates, and ensure your peace of mind.
On the other hand, a broker with poor customer service can be a source of endless
frustration. Delays in responding to queries, inadequate answers, and unprofessional
conduct can all negatively impact your investing experience.
Key features of excellent customer service
When choosing a broker, make sure to consider the following aspects of customer
service:
Remember, the best broker for you should be one that supports you at every step of your
investing journey. A good broker will ensure that you, the Financial Warrior, have all the
necessary tools and support you need to conquer your financial battles.
In the next section, we'll delve into the various features and tools that brokers can offer,
another crucial factor to consider when choosing your ally in the financial battleground.
As an Ultimate Financial Warrior, choosing the right broker is not just about low fees and
commissions. You should also consider what features and tools they offer, especially
those that can help beginners like you.
Online brokers nowadays offer a wide array of features. Some offer research tools,
educational resources, and even robo-advisors. The challenge lies in identifying the
tools that would serve you the best in your financial fight.
Educational resources
Educational resources are an excellent feature for beginners. Brokers offering resources
such as tutorials, webinars, eBooks, and videos, can be beneficial for your learning
journey. For instance, tutorials on how to navigate trading platforms and make trades
can help you understand the system quickly.
Research tools
Good brokers provide their clients with research tools. These include stock screeners,
charts, news feeds, and analytic reports. Research tools can help you make informed
decisions.
Stock screeners allow you to filter stocks based on specific criteria. For instance, you
can filter companies based on earnings per share (EPS), market capitalization, or
industry sector. This helps you focus on stocks that meet your investment strategy.
Simulation or paper trading
Some brokers offer a simulation or paper trading feature. This is an invaluable tool for
beginners. It allows you to practice trading with virtual money. You can try out different
strategies and see how they would have performed without risking your hard-earned
money.
Robo-advisors
Robo-advisors use algorithms to provide investment advice. Some brokers offer this
service to help you manage your investments. While this can be useful for beginners,
remember that the ultimate decision should be yours.
Mobile app
In this digital age, a broker offering a user-friendly mobile app is a plus. It allows you to
trade and keep track of your investments wherever you are. This can be particularly
useful in volatile markets where prices can change quickly.
Customer support
Remember, every fighter needs a cornerman to provide advice and encouragement
during bouts. In investing, this cornerman is the customer support of your broker.
Reliable customer support can make your investment journey much smoother. Look for
brokers that provide excellent customer service, preferably with 24/7 availability.
Choosing the right broker with the appropriate features and tools is an essential step in
your Financial Warrior journey. Take your time, compare the options, and pick a broker
that best suits your needs.
You may feel overwhelmed at first with all the charts, graphs, and financial jargon. But if
you start slow, learn the ropes, gradually increased your expertise, and over time, you will
become proficient.
Start with understanding the basic features like the trading platform, research reports,
stock alerts, etc., and then gradually explore advanced tools like stop-loss orders and
more. Practice paper trading (virtual trading with pretend money) to get the hang of the
trading platform and to test your investment strategies.
Remember, the stock market is a financial battlefield. Arm yourself with the strategies in
this book, hone your skills, and you will stand a much better chance of emerging
victorious in the battle for financial independence.
Key takeaways:
When choosing a broker, consider not just the fees and commissions but also
the value you receive for your money. Remember, the cheapest broker may not
always be the best choice for your investing needs.
Excellent customer service is a key feature to look for in a broker. From
addressing your queries to resolving technical issues, a broker with responsive
customer service can significantly enhance your investing experience.
Familiarize yourself with the various tools and features offered by your broker.
Practice using these tools through paper trading before venturing into actual
trading.
Just like in MMA, knowing when and how to use the right tool at the right time
can be a game-changer in stock market investing. Take time to understand and
effectively use the tools at your disposal.
Chapter 5
Investment Products for Wealth Building
Mutual funds
"Don't look for the needle in the haystack. Just buy the haystack!"
— John Bogle
Just as an MMA fighter diversifies their fighting strategies, an Ultimate Financial Warrior
diversifies their investment portfolio. When you step into the octagon, you don't rely on
one single move, do you? You mix strikes and grappling techniques to keep your
opponent guessing. In the same vein, diversification is a central concept in investing
and one of the main attractions of mutual funds.
Mutual funds pool money from numerous investors to invest in a wide variety of
securities like stocks, bonds, and short-term debt. Each investor owns shares, which
represent a portion of the holdings of the fund. In this way, with a relatively small
amount of money, you can access a diversified portfolio that may be difficult to create
on your own. Mutual funds give you the chance to invest in many different companies
and sectors, thereby spreading your risk. They are managed by professional fund
managers who have the experience and expertise to select and manage the
investments.
It's important to remember, as with all investments, mutual funds come with their own
set of risks, and it's important to understand them before investing. One such risk is the
management risk; if the fund's manager does not perform well, it could impact the
returns of the fund. Market risk is another major factor; if the market as a whole
performs poorly, your mutual fund is likely to follow suit. Nevertheless, mutual funds have
been a popular choice for investors for many years due to their convenience,
diversification, and potential for returns.
Now let's delve deeper into the key features of mutual funds that make them an
attractive investment for Financial Warriors:
1. Diversification: The primary advantage of mutual funds is that they provide
instant diversification. Even with a small investment, a mutual fund can give you
exposure to hundreds or even thousands of different securities. This can help
reduce the risk associated with investing in a single security.
2. Professional management: When you invest in a mutual fund, you're hiring a
professional fund manager to oversee the investments. These managers are
often highly skilled and experienced in selecting and managing investments,
giving individual investors access to expertise they might not otherwise have.
3. Liquidity: Mutual funds are typically very liquid, meaning you can buy and sell
shares of the fund on any business day. This gives you flexibility and ease of
access to your money when you need it.
4. Variety: There are thousands of mutual funds out there, each with its own
investment strategy, asset class focus, and risk profile. Whether you're looking
for a fund that invests in large-cap stocks, international bonds, or emerging
technologies, you can probably find a mutual fund that fits the bill.
5. Automatic investing: Many mutual funds allow you to set up automatic
investment plans. This means you can have a set amount of money taken from
your bank account each month and invested directly into the fund. This can be
an easy way to stick to your investing plan and take advantage of dollar-cost
averaging.
Despite these advantages, mutual funds are not without their downsides. They can come
with relatively high costs, and their returns are subject to the skills of the fund managers.
Some mutual funds also require a minimum investment which might be too high for
beginner investors. In chapter 7, I outline 10 of the most popular mutual funds and I
suggest you start researching these online.
Therefore, as a, it's important to do your due diligence before investing in a mutual fund.
Financial Warrior Look at the fund's past performance but remember that past
performance is not a guarantee of future results. Take the time to understand the fund's
investment strategy, the types of securities it invests in, and the level of risk it presents.
Most importantly, make sure the fund aligns with your own investment goals and risk
tolerance.
Let's take an example. Suppose you're a Financial Warrior who prefers a more
conservative investment approach. In that case, you may lean towards a mutual fund that
invests heavily in bonds or government securities. On the other hand, if you're more
comfortable with risk and are aiming for higher returns, a mutual fund that invests
primarily in stocks may be a better fit.
A handy tool for evaluating mutual funds is the prospectus, a document that fund
companies are required to provide to investors. The prospectus will provide detailed
information about the fund's investment objectives, strategies, risks, fees, and expenses.
It will also provide details about the fund's manager and their track record. Always make
it a point to read and understand the prospectus before investing in a mutual fund.
Moreover, keep an eye on the fees associated with mutual funds. All mutual funds
charge management fees, and some also charge sales loads, which are fees for buying
or selling shares in the fund. These fees can eat into your returns over time, so it's
essential to be aware of them.
Now, consider the practicality of including mutual funds in your portfolio as an Ultimate
Financial Warrior. It's like having a team of seasoned fighters in your corner, each
bringing their unique strengths to the fight. One might be swift and agile, another sturdy
and resilient, and yet another cunning and tactical. When combined, they provide a well-
rounded strategy that is designed to weather various challenges.
In the realm of investing, this team of fighters is akin to the diverse collection of assets
within a mutual fund. When the performance of one asset dips, others may be soaring,
creating a balance that can lead to steadier returns. This level of diversification, which
can be tough to achieve as an individual investor, is conveniently offered by mutual
funds.
But remember, while mutual funds can be a powerful tool in your arsenal, they should not
be your only weapon. A true Financial Warrior understands the importance of a well-
diversified portfolio. This includes a mix of different types of investment products, like
ETFs, REITs, individual stocks, bonds, and, yes, mutual funds.
I hope that this introduction to mutual funds has given you a good starting point for your
investing journey. Remember, there's no one-size-fits-all strategy in investing. The key is
to find what works best for you, aligns with your financial goals, and fits your risk
tolerance but more of that in the next chapter.
In the next section, we will explore another versatile tool in the Financial Warrior's
arsenal and one of my favorite: Index Funds. Stay tuned, Financial Warrior. Your training
is far from over!
Index funds
"Most people would find managing their money a bore and a chore. But if you
look at that as freedom and as fun and games, you'll get rich."
— Robert Kiyosaki
In the journey towards financial freedom, one of the most effective ways to create wealth
is through index fund investing. As Ultimate Financial Warriors, we are always on the
lookout for strategies that allow us to fight smarter, not harder. One of the strongest
moves in our investment repertoire is undoubtedly the index fund.
I remember the first time I heard about index funds. It was a conversation with a
seasoned investor at a stock market seminar. He likened index funds to the
heavyweights of the investment world – they pack a serious punch with much less effort
than individual stock picking. It was a concept that instantly intrigued me, and I delved
into studying this fascinating investment tool.
So, what exactly is an index fund?
In essence, an index fund is a type of mutual fund or exchange-traded fund (ETF) with a
portfolio constructed to match or track the components of a market index, such as the
Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad
market exposure, low operating expenses, and low portfolio turnover. These funds follow
their benchmark index no matter the state of the markets.
Index funds are popular among investors due to their low fees and diversified nature.
They're akin to a 'set it and forget it' investment strategy, making them a suitable choice
for the disciplined, long-term investor.
The power of passive investing
Index funds are synonymous with passive investing. The idea is to build wealth over time
by holding a diversified portfolio rather than attempting to beat the market by frequently
buying and selling individual stocks. This approach requires less time and knowledge
compared to active investing and can often lead to better results.
In investing, timing the market is an exhausting endeavor with poor odds of
success, but time in the market with index funds is a proven strategy that
benefits from the overall growth of the economy.
In a research study conducted by S&P Dow Jones Indices in 2019, it was revealed that
over a 10-year investment horizon, 85% of large-cap fund managers failed to outperform
the S&P 500. The numbers were even worse for mid and small-cap fund managers. This
data highlights the challenge of active management and the relative success of passive
strategies.
Implementing index funds in your portfolio
For those of you looking to start your journey as a Financial Warrior with a $100 monthly
investment, index funds can be an excellent choice. They allow you to begin building a
diversified portfolio with a relatively small amount of money. There are index funds that
track a wide variety of market indices, including bonds, commodities, international
stocks, and specific sectors. The key is to select funds that align with your investment
goals and risk tolerance.
As we progress in our journey to financial freedom, we can increase our monthly
investments and broaden the scope of our portfolio. The key is to remain consistent,
patient, and disciplined. Remember, the power of compounding works best when money
is given enough time to grow.
Internationally, some of the most popular index funds track the S&P 500, the FTSE 100,
or the MSCI World Index. In chapter 7, I list 10 of the most popular index funds for you
to research.
While index funds offer numerous advantages, they are not without risk. Like any other
investment, they are subject to market fluctuations. During a market downturn, index
funds will fall in value. It's crucial to remember that as Financial Warriors, we must
weather these storms and stay the course. After all, we're in this for the long haul, and
market downturns are part of the journey. These downturns are a great opportunity to
pick up the index at a much cheaper price if you are following a monthly contribution
strategy.
Embrace the Financial Warrior mindset
In a way, investing in index funds embodies the spirit of a true Financial Warrior. It's
about making strategic decisions, showing patience, and taking advantage of
opportunities to increase wealth over time. It's not about quick wins or short-term gains
but steady progress towards financial freedom.
Remember the story I shared about the seasoned investor at the stock market seminar?
His words still echo in my mind. "Index funds are the heavyweights of the investment
world. They pack a serious punch with much less effort than individual stock picking." It's
an analogy that resonates with MMA and my approach to investing.
Becoming a successful Financial Warrior is not about getting rich quickly but
about understanding the strategies, staying patient, contributing monthly and
letting the power of compounding work its magic. That's the art of the Ultimate
Financial Warrior.
One of the books in the Ultimate Financial Warrior series is “Success in Real Estate
Investing is a Choice – Not a Secret” and I wrote this book to help Financial Warriors
who would prefer to build their wealth by actually owning real estate. But there is another
way.
Real estate is often the cornerstone of many successful investment portfolios, but what
if there was a way to invest in real estate without the hassle of managing properties,
dealing with tenants or even the huge capital requirements often associated with
property investment? Enter Real Estate Investment Trusts or REITs.
What are REITs?
In the simplest of terms, REITs can be described as mutual funds for real estate. They
are companies that own, operate, or finance income-generating real estate and allow
investors to pool their resources to invest in a broad and diverse range of real estate
assets. They give the Ultimate Financial Warrior (UFW) the opportunity to invest in real
estate without actually having to purchase any physical property.
REITs were created in the United States in 1960 to give all investors, especially smaller
ones, access to income-producing real estate. Since then, they have grown in popularity
and are now an integral part of the global investment landscape. REITs trade on stock
exchanges just like regular companies and offer a unique blend of benefits that can help
you diversify your investment portfolio and potentially enhance returns.
Why should you consider investing in REITs?
1. Performance history: Look at the REIT's track record. A history of stable and
rising dividends can be a good indicator of a well-managed REIT.
2. Management team: As with any other company, the management team plays a
crucial role in the success of a REIT. Experienced and competent management
can often lead to superior performance.
3. Property portfolio: Analyze the types of properties in the REIT's portfolio. Some
REITs invest in a broad range of properties, while others focus on specific
sectors such as commercial, residential, healthcare, or industrial real estate.
Remember, every investment carries some risk, and REITs are no exception. But with
careful research and a solid understanding of your investment goals, you can use REITs
as a valuable tool in your journey towards financial freedom. In chapter 7, I have outlined
10 of the most popular REITs.
In the next section, we'll move on to another powerful investment vehicle – Bonds
Bonds
"The individual investor should act consistently as an investor and not as a
speculator."
— Ben Graham
Bonds, Financial Warriors, can sometimes be seen as the less flashy, quieter counterpart
to the stocks. A prudent investor acknowledges the value of a diversified portfolio, which
often includes a healthy portion of bonds. Bonds are like your defensive moves,
absorbing shocks during volatile market times and providing a steady source of income.
Most young Financial Warriors will not introduce bonds into their investment portfolio
until they are in their 40’s and reducing risk as they get closer to retirement age.
But what exactly are bonds? How do they work, and why should they be included in your
portfolio?
Bonds are essentially loans, but you are the lender. When you buy a bond, you are
lending your money to an organization - typically a corporation or government - that
needs cash for various reasons, such as funding projects, managing debt, or financing
day-to-day operations. The organization issuing the bond promises to repay the loan by
a specified date (maturity date) and agrees to pay you periodic interest payments
(coupon payments) for the use of your money.
So, why invest in bonds? The key advantages are income and safety. Bonds can provide
a predictable income stream, typically paid semi-annually, quarterly, or monthly. And
because the issuer is obligated to pay back the borrowed amount, bonds are generally
considered safer than stocks, assuming the issuer doesn't default.
Let's get more into the practical aspects now and examine how to go about investing in
bonds as a beginner Financial Warrior.
Step 1: Understanding the types of bonds
There are several types of bonds you can choose from:
1. Government bonds: These are issued by national governments and are usually
considered the safest type of bonds because they are backed by the full faith
and credit of the government that issues them. Examples include U.S. Treasury
bonds, U.K. Gilts, and German Bunds.
2. Municipal bonds: Issued by local and state governments in the U.S., these
bonds fund public projects like schools, highways, and bridges. They come with a
unique advantage - the interest is usually tax-free.
3. Corporate bonds: Companies issue these to raise money for various reasons,
such as expanding operations or paying off debt. They usually offer higher
interest rates than government bonds because they come with more risk.
4. Agency bonds: These are issued by government-sponsored enterprises and
federal agencies. They offer slightly higher yields than U.S. Treasury bonds but
are still considered relatively safe.
5. Junk bonds: These are corporate bonds issued by companies with low credit
ratings, making them riskier. However, they offer higher yields to compensate for
the increased risk.
1. Directly from the issuer: Government bonds are often purchased directly from
the government through an online portal. For example, in the United States, you
can buy Treasury bonds directly from the U.S. government through
TreasuryDirect.
2. Through a broker: Many online brokerages offer access to a variety of bonds.
You can purchase individual bonds or invest in bond mutual funds or Exchange-
Traded Funds (ETFs).
3. Mutual funds and ETFs: If you're not ready to dive into buying individual bonds,
bond mutual funds and ETFs provide a way to access a diversified portfolio of
bonds with a single purchase. They're managed by professionals and offer an
easy way to get exposure to bonds.
So far, we've discussed mutual funds, index funds, REITs and bonds with each having its
unique characteristics. In this section, we'll explore another type of investment product:
Exchange-Traded Funds (ETFs).
When I first started my journey in stock market investing, ETFs were not as popular as
they are today. As the financial markets have evolved, ETFs have become one of the
most preferred investment products for both individual and institutional investors
worldwide. Personally, I think they are a great investment product. So, what are ETFs,
and why have they become so popular?
ETFs, like mutual funds, are investment vehicles that pool money from many investors to
invest in a diversified portfolio. However, unlike mutual funds, ETFs are traded on an
exchange, just like individual stocks. This feature of ETFs gives investors the flexibility to
buy and sell them during market hours at market prices, which can be more or less than
their net asset value (NAV).
So, why should you, as a UFW, consider investing in ETFs? Here are some key reasons:
As an UFW, you should understand when and how to use ETFs effectively. Here are a few
strategies:
1. Core-satellite strategy: You can use ETFs to build the "core" of your portfolio,
providing broad market exposure, and then add individual stocks or other assets
(the "satellites") to potentially enhance returns or target specific sectors.
2. Asset allocation: ETFs can be used to implement strategic asset allocation by
purchasing different types of ETFs (such as equity ETFs, bond ETFs, and
commodity ETFs).
3. Sector rotation: ETFs allow you to easily shift your investments from one sector
to another based on your market outlook. For example, if you believe that
technology stocks will outperform in the near future, you could purchase a
technology ETF.
Remember, no one investment vehicle is a panacea. Always do your due diligence before
investing in ETFs. Consider the ETF's investment objective, the index it tracks, its
holdings, its costs, and its historical performance.
Individual Stocks
"A stock market is a market for the exchange of goods, just like any other
market. The only difference is that the goods are pieces of paper."
— Benjamin Graham
As we step further into our journey of financial freedom, we must familiarize ourselves
with the very instruments we will use to build our wealth. One of the most critical assets
that we can use to build wealth is stocks.
A stock represents a piece of ownership in a company. When you buy a stock, you
become a part-owner or a shareholder of that company. This concept might be simple,
but the implications are far-reaching. As a shareholder, you have the potential to share
in the company's success through dividends and capital appreciation.
Stocks are appealing to many investors due to their potential for high returns. However,
with great reward comes great risk. Investing in stocks requires understanding the
business, the industry, and the economic factors that can impact a company's
profitability. So, let's dive deeper into this world and explore how we, as Financial
Warriors, can utilize stocks as our weapons of choice.
Understanding stocks
There are two primary types of stocks - common and preferred.
Common stocks often entitle the owner to vote at shareholders' meetings and to receive
dividends. Most of the stocks that people invest in are common stocks.
Preferred stocks generally do not have voting rights, but they have a higher claim on
earnings and assets. This means that if the company was to go bankrupt, preferred
shareholders would be paid off before common shareholders. They also receive
dividends before common shareholders.
Each type has its advantages and disadvantages. The choice between common and
preferred stocks depends on your financial goals and risk tolerance.
The power of long-term stock investing
In the early 2000s, a friend of mine was drawn to a technology company whose products
he admired. He followed this company closely, researching its financials, leadership, and
future plans. Despite the company facing significant financial troubles at that time, he
saw immense potential. He decided to invest a part of his savings in this company's
stocks. Today, the company is one of the giants in the technology world - Apple Inc.
Over the past 20 years, the value of his investment has grown exponentially, surpassing
all his expectations. The regular dividends he receives from this investment form a
significant part of his passive income today. This is the power of long-term stock
investing – it allows your money to grow significantly over time.
While he had success with his Apple investment, he has had other investments that
didn't work out as well. Thus, a well-rounded understanding of stocks, along with
discipline, patience, and a long-term view, are crucial for success.
How to invest in stocks
So, how does one start investing in stocks? It all begins with a solid strategy.
Key takeaways
Mutual funds pool money from multiple investors to invest in a diversified
portfolio of stocks, bonds, or other assets. They are managed by professional
fund managers and can be a convenient way for beginners to invest in a broad
range of securities.
Index funds are a type of mutual fund or ETF designed to mimic the
performance of a specific market index. They offer broad market exposure, low
operating expenses, and low portfolio turnover.
Exchange-Traded Funds (ETFs) are similar to mutual funds but are traded on an
exchange like a stock. They offer diversification, and flexibility and often come
with lower fees than mutual funds.
REITs offer several benefits, including diversification, income generation
through dividends, liquidity due to being traded on stock exchanges, and
transparency through regular reporting regulations.
Bonds are a form of debt investment where an investor lends money to an entity,
typically corporate or governmental. They offer a relatively safe and predictable
income stream, making them a solid choice for conservative investors.
Stocks represent ownership in a company and are a key component of most
investment portfolios. They have the potential for high returns but also come
with risk. It's important to thoroughly research and understand a company before
investing in its stocks.
Each investment product carries its own risks and rewards. It's essential to
choose a mix that aligns with your financial goals, risk tolerance, and investment
horizon.
Diversification across different types of investment products can help to
mitigate risk and potentially enhance returns over the long term.
As we move forward, we will delve deeper into how to maximize your investment
potential. But for now, our journey as an Ultimate Financial Warrior continues. Are you
ready to step into the octagon of financial independence? Stay tuned, Financial Warrior!
Chapter 6
Investing in Managed Funds
As you venture further into your journey as a Financial Warrior, one of the most vital
skills you need to develop is the ability to select the right investment vehicles. Managed
funds like Mutual Funds, ETFs (Exchange-Traded Funds) and REITs (Real Estate
Investment Trusts) provide an excellent starting point for beginners. They offer an
opportunity to invest in a diversified portfolio of assets managed by experienced
professionals. But the question remains: how does one choose the right Mutual Fund,
ETF or REIT?
I remember my first venture into these territories vividly. It was a daunting task at first,
having to decide which funds to entrust with my hard-earned money. However, with
careful research, patient learning, and a steadfast focus on my financial goals, I was able
to navigate this complex world. Today, I hope to provide you with the tools you need to
make these decisions more confidently and efficiently.
Here are some key factors to consider when choosing the right Mutual Fund or ETF:
As you make your selections, remember to approach the process with patience and due
diligence. Choosing the right fund is not a task to be rushed but rather a step to be
savored in your journey towards financial freedom. At the end of the day, as Financial
Warriors, we fight not for immediate gains but for long-term success and wealth
accumulation.
As we move forward, I invite you to put these principles into practice by exploring some
popular Mutual Funds, ETFs, and REITs in the following sections. And, as always, be
prepared to learn, adapt, and grow along the way.
Ticker symbols
As we delve further into the world of investments, we'll encounter various ticker symbols.
These are essentially a unique series of letters assigned to a security for trading
purposes. In the context of the stock market, ticker symbols serve as an abbreviation or
short code used to uniquely identify publicly traded shares of a particular stock on a
particular stock market.
When you look at Mutual Funds, ETFs, REITs, or individual stocks, each of these
investment vehicles has its own unique ticker symbol. These symbols usually consist of a
combination of letters and, occasionally, numbers that are used as shorthand to denote
the name of the company or the security being traded.
Ticker symbols make the process of researching different investment products far
simpler. By entering these symbols into your internet browser or financial news sites, you
can pull up a wealth of information about the financial performance and outlook of the
given security.
While they might seem cryptic at first, ticker symbols are generally designed to be
concise and easily recognizable. They often incorporate the company's name or an
abbreviation that is immediately identifiable. For example, Apple Inc. is represented by
the ticker symbol "AAPL" on both the New York Stock Exchange (NYSE) and the
NASDAQ.
Moreover, ticker symbols are crucial for investors, traders, and financial professionals
alike. They are used to identify, track, and trade securities across financial markets. This
system of shorthand not only makes referencing specific stocks or securities faster but
also aids in the accurate and efficient execution of trades.
In essence, understanding and using ticker symbols is a fundamental part of navigating
the financial markets. Whether you're conducting research, executing trades, or merely
tracking the performance of your portfolio, these unique identifiers are integral to
successful investing. So, as we continue our journey exploring Mutual Funds, ETFs,
REITs, and individual stocks, keep an eye out for these ticker symbols and consider
using them in your own research and investing practice.
1. Vanguard Total Stock Market Index Fund (VTSAK): This fund aims to track
the performance of the US Total Market Index, providing broad exposure to the
U.S. equity market.
2. Fidelity Contrafund (FCNTX): Managed by Fidelity Investments, this fund
focuses on investing in large-cap growth stocks and has a long-standing track
record.
3. American Funds Growth Fund of America (AGTHX): This fund seeks long-
term capital appreciation by investing primarily in large-cap U.S. growth
companies across various sectors.
4. Vanguard 500 Index Fund (VFINX): Designed to replicate the performance of
the S&P 500 Index, this fund offers exposure to the largest U.S. companies.
5. T. Rowe Price Equity Income Fund (PRFDX): This fund focuses on dividend-
paying stocks and aims to provide a combination of income and long-term
capital appreciation.
6. PIMCO Total Return Fund (PTTRX): Managed by Pacific Investment
Management Company (PIMCO), this bond fund aims to provide income and
capital appreciation by investing in a diversified portfolio of fixed-income
securities.
7. JPMorgan Large Cap Growth Fund (OLGAX): This fund focuses on investing in
large-cap U.S. growth stocks and seeks capital appreciation over the long term.
8. T. Rowe Price Growth Stock Fund (PRGFX): This fund invests in companies
with the potential for above-average earnings growth and aims to provide long-
term capital appreciation.
9. Fidelity 500 Index Fund (FXAIX): Similar to the Vanguard 500 Index Fund,
this fund tracks the performance of the S&P 500 Index and provides exposure
to large-cap U.S. stocks.
10. BlackRock Equity Dividend Fund (MDDVX): This fund seeks to provide a
combination of dividend income and capital appreciation by investing in
dividend-paying U.S. stocks.
If you take the ticker symbol and post it into your web browser, you will be able to review
and research the historical performances of all ten mutual funds.
1. SPDR S&P 500 ETF Trust (SPY): This ETF tracks the performance of the S&P
500 Index, providing exposure to the largest U.S. companies.
2. Invesco QQQ Trust (QQQ): This ETF tracks the performance of the NASDAQ
100 Index, focusing on large-cap technology and growth companies.
3. iShares Core S&P 500 ETF (IVV): Similar to SPY, this ETF aims to replicate
the performance of the S&P 500 Index.
4. Vanguard Total Stock Market ETF (VTI): This ETF seeks to track the
performance of the US Total Market Index, providing broad exposure to the U.S.
equity market.
5. iShares Russell 2000 ETF (IWM): This ETF tracks the performance of the
Russell 2000 Index, which represents small-cap U.S. companies.
6. Vanguard Total Bond Market ETF (BND): This ETF provides exposure to the
broad U.S. bond market, including investment-grade government and corporate
bonds.
7. iShares MSCI Emerging Markets ETF (EEM): This ETF tracks the performance
of the MSCI Emerging Markets Index, offering exposure to companies in
emerging market countries.
8. iShares Core U.S. Aggregate Bond ETF (AGG): This ETF aims to replicate the
performance of the Bloomberg Barclays U.S. Aggregate Bond Index, which
represents the broad U.S. investment-grade bond market.
9. Financial Select Sector SPDR Fund (XLF): This sector-specific ETF focuses on
the financial services sector, providing exposure to banks, insurance companies,
and other financial institutions.
10. iShares MSCI EAFE ETF (EFA): This ETF tracks the performance of the MSCI
EAFE Index, which represents developed market companies in Europe,
Australasia, and the Far East.
Health Care Select Sector SPDR Fund (XLV): XLV targets mirroring the output
of the health care sector within the S&P 500 Index. It offers a diversified
collection of healthcare corporations, including those in pharmaceuticals,
biotechnology, medical equipment, healthcare provision, and services.
iShares U.S. Healthcare ETF (IYH): IYH endeavors to match the results of the
Dow Jones U.S. Health Care Index. It delivers exposure to a comprehensive
array of U.S. healthcare corporations, covering areas like pharmaceuticals,
biotechnology, healthcare equipment, and services.
2. Technology
Similar to health care, the technology sector stands as a significant investment prospect,
demonstrating resilience across various market conditions. Rapid technological
progress in recent years only augments the potential of the technology sector.
Technology stocks often supersede market performance during upward market trends
and tend to remain sturdy during market downturns.
The technology sector enjoys a prominent position in the S&P 500 index. Therefore,
considering the inclusion of technology stocks could enhance your investment portfolio.
This sector includes IT companies, a variety of internet-related operations, and
companies producing and distributing high-tech devices globally. It also consists of
firms involved in computer hardware, software, and semiconductors.
Two notable Technology investment vehicles:
Technology Select Sector SPDR Fund (XLK): XLK strives to mirror the results
of the technology sector within the S&P 500 Index. It comprises an extensive
array of technology-focused corporations, such as those specializing in software,
hardware, semiconductors, internet services, and IT consulting.
Vanguard Information Technology ETF (VGT): VGT attempts to emulate the
performance of the MSCI US Investable Market Information Technology 25/50
Index. It offers exposure to a diverse portfolio of U.S. technology companies,
including those working in computer hardware, software, telecommunications,
and other technology-related services.
3. Financials
The financial sector presents a varied industry comprising numerous sectors. It includes
publicly listed banks, insurance providers, investment brokerages, and financial service
firms. Consequently, it enjoys a strong representation in the S&P 500 and is closely tied
to the overall economic performance.
While intertwined with the economy, the financial sector offers potential for value. During
times of economic expansion, especially when rebounding from a recession, financial
services like loans witness heightened demand. This stage of the economic cycle often
results in superior performance by financial entities.
However, caution is advised when considering the financial sector during periods of
economic decline. A key indicator of a faltering economy is the worsening of loan
performance, which can negatively impact banks and lenders. Investment brokerages
and insurance companies might also experience a hit due to declining investment
values and reduced investor activity.
Two notable Financial investment vehicles:
Financial Select Sector SPDR Fund (XLF): XLF targets to follow the
performance of the Financial Select Sector Index. It delivers exposure to
businesses operating in various financial sectors, including banking, insurance,
diversified financial services, and real estate. XLF is amongst the largest and
most actively traded financial ETFs.
Vanguard Financials ETF (VFH): VFH seeks to mirror the performance of the
MSCI US Investable Market Financials 25/50 Index. VFH invests in a diversified
portfolio of financial entities, including banks, insurance companies, investment
firms, and real estate investment trusts (REITs). It offers broad exposure to the
financial sector and is appreciated for its low expense ratio.
4. Primary Resources
The sector dealing with primary resources sometimes referred to as "materials" or
"basics," consists of companies engaged in extracting and supplying crucial
commodities for the economy. These enterprises may be involved in operations like
mining, forestry, and lumber processing. Energy producers may also fall under this
category, although they are typically classified as a distinct sector.
This sector also extends to the refinement of raw materials, encompassing companies
involved with lumber, steel, and the refinement of different metals such as copper and
aluminum. Chemical businesses may also be considered part of this sector.
Economic recoveries or periods of swift expansion often see the primary resources
sector flourishing. During these times, the demand for primary resources escalates,
driving up revenues and profits for the associated companies.
Investment decisions regarding this sector may be swayed by inflation trends. Since
these companies provide fundamental products, rising prices usually benefit them.
Moreover, any scarcity of specific raw materials, potentially due to supply chain
disturbances in unstable regions, can influence the sector's performance.
Two notable Primary Resource investment vehicles:
5. Power Generation
The energy sector primarily evokes thoughts of oil and natural gas. Companies involved
in the extraction of these commodities indeed form a significant part of the energy
sector. However, the sector also includes enterprises engaged in the mining of coal and
minerals.
The energy sector extends beyond mere extraction to include companies involved in
refining energy and offering products and services crucial to the energy industry. This
includes enterprises producing and servicing energy pipelines or supplying specific
equipment indispensable for the industry.
When the economy is recovering or expanding, the energy sector tends to thrive. This is
because economic growth requires energy, creating a favorable environment for this
sector. However, the sector can also perform well during energy shortages. Since a
substantial portion of the world's energy is produced in volatile regions, potential
reductions in global supply are not rare.
Such situations can lead to fuel price hikes, increasing profits and revenue for
companies in the sector. However, falling energy prices, either due to oversupply or a
weakening economy, usually spell bad news for the energy sector. Hence, during
economic slowdowns or recessions, investing in the energy sector may not be advisable.
Two notable Energy investment vehicles:
6. Manufacturing
The manufacturing sector, often associated with the industrial sector, includes
companies that produce capital goods. This can cover industrial machinery, electrical
equipment, construction equipment, machine tools, and robots. Also, it covers the
production of specific manufactured goods, such as vehicles, aircraft, ships, and
computers.
The manufacturing sector consists of a variety of subsectors, allowing investors to focus
on distinct industries such as automobiles or home appliances.
Like most sectors, businesses within this space tend to prosper when the economy is on
an upward trend. However, because the sector includes some of the largest companies
nationally, manufacturing businesses are already prominently represented in the S&P
500 index. Hence, it's improbable that this sector will outperform the broader market.
On the contrary, during times of economic decline, it might be wise to reduce exposure
to or steer clear of the manufacturing sector. Demand for manufactured goods typically
lessens in a weakening economy.
Two notable Manufacturing investment vehicles:
7. Real Estate
The property sector involves companies engaged in real estate transactions and the
construction of both residential and commercial buildings. Similar to other sectors, it
performs well during periods of economic growth. It can also experience significant
acceleration when the economy is recovering from a recession, as the demand for
housing, retail spaces, office buildings, and other units rises. When the real estate
market is vibrant in a growing economy, it has the potential to outperform the broader
market.
However, the property sector can lag during economic downturns, such as recessions.
Furthermore, certain regions or areas within a country may experience a slowdown at
any given time.
As discussed earlier, investing in property sector funds is an alternative to investing in
Real Estate Investment Trusts (REITs). One of the advantages of REITs is that they own
well-established and often mature properties that generate stable cash flows, resulting
in high dividend payments.
Two notable REITs investment vehicles:
Baron Select Funds – Barron Real Estate Fund (BERF): This real estate
investment fund focuses mainly on growth.
Vanguard Property ETF (VNQ): This ETF seeks to mirror the performance of
the MSCI US Investable Market Property 25/50 Index. It invests in a diversified
portfolio of publicly traded REITs, which own and operate various types of real
estate properties. VNQ's holdings include REITs involved in residential,
commercial, industrial, and healthcare properties.
8. Utilities
Enterprises that cater to life's essentials, such as electrical power, gas supply, waste
management, and water treatment, fall under this category. Given the essential nature of
these services, the market for them remains fairly consistent. Therefore, this industry is
characterized by a limited scope for technological disruptions or swift growth. It also
manages to maintain consistent revenue streams, even during economic downturns.
Investment in utilities can serve as a buffer during a recession, provided there is no
upward trend in interest rates. Moreover, should there be a significant increase in energy
consumption due to a growing economy, this sector may experience some growth.
Two notable Select Utility investment vehicles:
Vanguard Utilities Index Fund (VUIAX): This mutual fund aims to track the
performance of the MSCI US Investable Market Utilities 25/50 Index, which
includes companies in the utility sector.
Utilities Select Sector SPDR Fund (XLU): This ETF tracks the Utilities Select
Sector Index's performance. It invests in firms engaged in generating and
supplying electricity, gas, and water utilities. Major holdings in XLU include
companies like NextEra Energy, Duke Energy, and Dominion Energy.
9. Consumer Goods
These can be broadly classified into two categories: consumer discretionary and
consumer staples.
Consumer discretionary goods refer to non-essential items purchased when disposable
income is available. These include items such as vehicles, restaurant meals, travel, retail
products, and clothing. Demand for these goods rises with economic prosperity and
employment availability. Thus, this sector can be a promising investment option during
economic growth.
On the other hand, consumer staples refer to necessary goods we purchase regardless
of economic conditions. This sector encompasses companies selling food and grocery
items, beverages, personal care products, and common household items. As these
products are in constant demand, the consumer staples sector is viewed as a defensive
investment.
Nevertheless, it could be a prudent investment during economic downturns due to its
unaffected revenue and profit stability.
Two notable Consumer Good investment vehicles:
iShares Gold Trust (IAU): This fund aims to track the performance of the price
of gold bullion, less the expenses of the trust. It seeks to provide investors with a
convenient and cost-effective way to gain exposure to the price movements of
gold.
SPDR Gold Shares (GLD): This ETF is devised to track the price of gold bullion,
providing investors with a mechanism to gauge the gold market's performance.
It stands as one of the most extensive and actively traded gold ETFs.
As a beginner, I suggest you start your portfolio by buying a mutual fund, ETF or REIT
using your monthly investment. Then as you gain more experience, you can look at
adding individual stocks.
Key takeaways
As a beginner, investing in mutual funds, index funds, ETFs and REITs is really a
wonderful way of obtaining financial freedom without having to put in any time
researching individual stocks. You simply invest your monthly contribution into
the investment vehicle without any emotion.
The S&P 500 index is a popular investment choice as it represents ownership in
the 500 largest publicly-traded companies in the US. It provides broad exposure
to different industries and has historically delivered solid returns and using this
strategy, the performance of your portfolio will outperform 85% of professional
fund managers.
Understanding sectors in the marketplace is important for diversification. While
many investors focus on the S&P 500, specific sectors like healthcare and
technology can outperform the broader market. Researching and considering
investments across sectors can potentially enhance returns.
If, at this stage of the book, you want to get started with investing in mutual funds, index
funds, ETFs and REITs, then I suggest that you skip the next chapter. You can always
come back and read the chapter on individual stock selection at another time. The main
thing now is to keep the momentum going and get started with your first investment.
Then as you gain confidence and experience, you can start to introduce individual stocks
into your investment portfolio. Choosing good stocks at the right price is a great way to
boost your portfolio’s performance.
So now, let us look at what is required to invest in individual stocks.
Chapter 7
Introduction to Investing in Individual
Stocks
When stepping into the stock market, it's crucial to remember that you're not merely
buying symbols or numerical representations, but you are investing in actual businesses.
The stock market is home to a wide variety of companies, each with its unique
characteristics and potential for returns. When you invest in these companies, you
become a part owner. As such, it's important to understand the nature of these stocks.
Just as we've trained for our journey as Ultimate Financial Warriors (UFWs), it's time to
delve into the intricacies of our new training ground – buying individual stocks.
To start, let's look at the main categories of stocks that are available for investment:
common stocks, preferred stocks, growth stocks, value stocks, and dividend stocks.
Common stocks
Common stocks are the most prevalent type of stock that investors buy. When you own
common stocks, you have voting rights in the company, and you may receive dividends,
which are a portion of the company's profits distributed to shareholders. However, these
dividends are not guaranteed and are at the discretion of the company.
Common stockholders are last in line to receive any remaining assets if the company
goes bankrupt. This makes common stocks riskier than other types, but they also have
the potential for higher returns, especially in the long run.
Preferred stocks
Preferred stocks are a bit different. While they do not usually carry voting rights, they do
have a higher claim on the company's earnings and assets. This means that if the
company goes bankrupt, preferred stockholders get paid before common stockholders.
Preferred stockholders also receive dividends before common stockholders, and these
dividends are typically fixed, making them more reliable. However, because of their lower
risk, preferred stocks generally have less growth potential than common stocks.
Growth stocks
Growth stocks belong to companies that are expected to grow at an above-average rate
compared to other companies in the market. These companies are often in the
technology, biotech, or emerging sectors.
Investors are attracted to growth stocks due to their potential for high returns. However,
because these companies usually reinvest their earnings back into their business, they
often do not pay dividends. Investing in growth stocks can be risky as their stock price is
highly dependent on the company continuing its rapid growth.
Value stocks
Value stocks are shares in companies that investors believe the market is undervaluing.
These companies often have lower price-to-earnings (P/E) ratios and may pay regular
dividends.
Investors who practice value investing are essentially bargain hunters. They believe that
the market overreacts to good and bad news, resulting in stock price movements that do
not correspond with a company's long-term fundamentals. The goal of value investing is
to capitalize on these price discrepancies.
Dividend stocks
Dividend stocks belong to companies that regularly pay out a portion of their profits to
shareholders. These companies are typically large, well-established, and financially
stable.
Investing in dividend stocks can be a great way to generate passive income. As a UFW,
having a stream of passive income can be part of your strategy for achieving financial
freedom. But, it's essential to consider the company's ability to continue paying its
dividends in the future.
Remember, as an Ultimate Financial Warrior, your goal is not just to land punches blindly
but to understand your opponent's strengths and weaknesses. In the same vein,
understanding these different types of stocks will help you determine which ones fit your
investment strategy and risk tolerance.
Each type of stock carries its own set of risks and rewards. Some investors might prefer
the stable income of dividend stocks, while others might be attracted to the high-growth
potential of growth stocks. And yet, others might see value in the discounted prices of
value stocks or prefer the voting rights and potential profits associated with common
stocks.
It's also worth noting that these categories are not mutually exclusive. A single stock can
fall into multiple categories. For example, a growth stock could also be a common stock,
and a dividend stock can also be a value stock.
In the next section, we'll delve deeper into how to evaluate these stocks and what to
consider before making an investment. We'll cover important concepts such as stock
valuation, the importance of research, and understanding the risks involved.
Remember, investing is not about following the crowd but about making informed
decisions based on your understanding and goals. It's about becoming an Ultimate
Financial Warrior, equipped with the knowledge and skills to secure your financial future.
As a Financial Warrior, you also need to understand the basics of stock valuation.
Valuation is the process of determining the intrinsic value or worth of a stock, and it
forms the backbone of intelligent, informed investing.
Think of valuation as your scouting report, providing you insights into the companies you
are considering investing in. If you are to step into the investment 'octagon,'
understanding stock valuation is not just an option; it's a necessity.
So, how do we value a stock? What elements should we consider, and what tools can we
use? Let's dive into the basics of stock valuation to arm you with the necessary
knowledge as you embark on your Financial Warrior journey.
What is stock valuation?
Stock valuation is an analytical process that involves determining the financial worth of a
company based on various factors. These include the company's current financial
standing, its past performance, and its future earning potential.
The aim of stock valuation is to estimate the 'fair' value of a stock. This value can then
be compared to its current market price. If the intrinsic value is higher than the market
price, the stock may be undervalued and could potentially be a good buy. If the market
price is higher than the intrinsic value, the stock may be overvalued and perhaps not a
great investment choice.
Remember, this is not about quick bets or guesses. It's about detailed, studied, and
disciplined decisions, which is what differentiates a Financial Warrior from the rest.
Key components of stock valuation
There are several factors that investors consider when valuing a stock. Let's break them
down.
1. Earnings per share (EPS): This is the portion of a company's profit allocated to
each share of common stock. EPS serves as an indicator of a company's
profitability. Higher EPS is generally more appealing to investors as it indicates a
more profitable company.
2. Price-to-earnings (P/E) ratio: This ratio is calculated by dividing the market
value per share by the EPS. It represents what the market is willing to pay for a
stock based on its current earnings.
3. Dividend yield: This is a financial ratio that shows how much a company pays
out in dividends each year relative to its stock price. Higher dividend yields can
be attractive to investors looking for income along with capital appreciation.
4. Book value: This is the total value of the company's assets that shareholders
would theoretically receive if a company were liquidated.
5. Market capitalization: This is the total dollar market value of a company's
outstanding shares of stock. It's calculated by multiplying the company's
outstanding shares by the current market price of one share.
1. Income approach: This method values a stock based on the projected income
that it can generate. The most common form of income valuation is the
discounted cash flow (DCF) model, which estimates the value of an investment
based on its future cash flows. The DCF model requires making assumptions
about a company's future cash flows and discounting them back to the present
value using an appropriate discount rate.
2. Relative approach: This method values a stock in comparison to other similar
companies. It uses valuation multiples like P/E, price-to-sales (P/S), price-to-
book (P/B), and price-to-earnings growth (PEG). These multiples can be used to
compare a company's value relative to its peers. The premise here is that similar
companies would have similar valuation multiples.
Each of these methods has its strengths and weaknesses. The income approach, for
instance, takes into account the company's future potential but is dependent on
accurate forecasts, which can be challenging. The relative approach provides an easy
comparison but assumes that the market correctly values the comparable companies.
Knowing how to use these valuation tools is like a fighter understanding how to use both
striking and grappling techniques - each has its place, and the ability to use both will
make you a much more rounded and capable Financial Warrior.
Applying stock valuation in practice
To illustrate how to apply these valuation methods, let's imagine we're considering
investing in a fictional company called "Emerald Tech." This company is part of the tech
industry, which is known for its high growth potential.
1. Income approach:
Let's assume that the analysts project that Emerald Tech will generate annual cash flows
of $10 million for the next five years. Using a discount rate of 8%, the present value of
these cash flows can be calculated using the DCF model. If the present value of these
cash flows is higher than the current market price, Emerald Tech might be undervalued
and, thus, a potentially good investment.
2. Relative approach:
We'll compare Emerald Tech's P/E ratio with the average P/E ratio of other similar
companies in the tech sector. If Emerald Tech's P/E ratio is lower than the industry
average, this might indicate that the stock is undervalued.
These valuation methods are like your striking and grappling skills in the financial
octagon. You need to master them to make informed decisions and select the best
companies to invest in.
Practical tips for stock valuation
As a Financial Warrior, need to adapt your stock valuation approach based on the
specific circumstances. Here are a few practical tips:
1. Use multiple valuation methods: No single method is perfect, and each has its
own set of assumptions and limitations. By using several methods, you can get a
more rounded perspective of the stock's value.
2. Understand the industry: Different industries have different growth prospects,
risks, and levels of competition. You should take these factors into consideration
when valuing a stock.
3. Be aware of macroeconomic factors: Changes in interest rates, inflation, and
GDP growth can significantly impact a company's valuation. Staying updated on
these factors can help you make better investment decisions.
4. Review regularly: It's crucial as a Financial Warrior, to regularly review and
adjust your valuation assumptions and estimates.
In the next section, we'll discuss another essential aspect of stock investing: the key
factors to consider when choosing stocks. This will arm you with even more tools to
enhance your Financial Warrior skills and navigate the investing octagon with
confidence. Remember, understanding stock valuation is not just about making a quick
profit. It's about laying a solid foundation for long-term wealth creation and financial
freedom.
Remember, every step in the stock market, brings us one step closer to victory. Our next
step will be exploring the key factors to consider when choosing stocks.
The act of selecting stocks might seem daunting initially, especially with all the opinions
available in the marketplace. But fear not! Let's look at some of the key factors to
consider when choosing stocks to invest in.
Earnings growth
The first and most crucial factor to consider is earnings growth. A company with a
consistent record of increasing earnings is likely to be a good investment. Look for
companies with sustainable and growing earnings over time. This information can be
found in the company's quarterly and annual reports. Keep an eye out for both past
performance and future earnings projections.
Price-to-earnings (P/E) ratio
The P/E ratio is another important indicator to look at. This is the ratio of a company's
stock price to its earnings per share. While a lower P/E ratio could indicate that a stock
is undervalued, a high P/E ratio could mean the stock is overvalued or investors are
expecting high growth rates in the future. Remember, different industries have different
average P/E ratios, so make sure to compare companies within the same sector.
Dividends
As a UFW, your primary aim is to create wealth and earn passive income. Dividends are
a great way to achieve this. Companies that regularly pay dividends are usually well-
established and have a history of generating enough profits to distribute to
shareholders. Keep in mind that not all companies pay dividends, especially those in the
growth phase. So, if you're looking for consistent income, investing in dividend-paying
stocks is a smart move.
Management team
Behind every successful company is a competent and dedicated management team.
Review the company's management team, their background, track record, and vision for
the future. A strong leadership team is a positive indicator of a company's potential
success.
Debt-to-equity ratio
The debt-to-equity ratio is a financial indicator that shows the proportion of a company's
funding that comes from creditors compared to what comes from investors. A high debt-
to-equity ratio might indicate that the company has been aggressive in financing its
growth with debt. While debt isn't necessarily bad, it can be risky if the company isn't
generating enough return to cover the cost.
Industry health
Understanding the industry or sector in which a company operates is crucial. Some
industries grow faster than others. By investing in companies within growing industries,
you increase your chances of achieving high returns.
Competitive advantage
A company that has a sustainable competitive advantage—such as a unique business
model, superior products or services, or a strong brand—is more likely to succeed in the
market compared to its competitors. These companies are often well-positioned to
maintain their market share and profitability in the face of competition.
Financial health
The overall financial health of a company is a crucial aspect to look at. Reviewing a
company's balance sheet, income statement, and cash flow statement can provide a
good idea of its financial stability. Companies with strong financial health usually have
good liquidity, low levels of debt, and strong cash flow. This financial strength allows
them to weather any economic downturns and still deliver profits.
Valuation
Last but not least, the valuation of a company is crucial to consider before investing. It's
possible for a great company to be a poor investment if its stock is overvalued. There
are several valuation methods available, such as the P/E ratio, price-to-sales ratio, and
discounted cash flow analysis. Understanding these methods will help you determine
whether a stock is overvalued or undervalued. We will discuss valuations in the UFW
private members forum after you have completed the online certification. It will be a
great resource for discussions.
Remember, the purpose of considering these factors is to form a comprehensive picture
of the potential investment. You shouldn't base your investment decisions on a single
factor. It's the combination of all these factors that will guide you in making informed
investment decisions.
In the end, the key to successful investing is doing your homework and understanding
what you're investing in. A true Ultimate Financial Warrior isn't just someone who throws
punches in the dark, hoping to land a hit. It's someone who meticulously plans their
strategy, knowing when to attack and when to stay defensive.
In the next chapter, we will explore how to build a diversified portfolio to minimize risk
and maximize returns. This is where your investment strategy starts to take shape and
where the choices you make in selecting stocks play a critical role. But for now, take
some time to digest this information. It's important for you, as an investor, to take the
time to understand these concepts thoroughly. Remember, the path to becoming an
Ultimate Financial Warrior is a marathon, not a sprint.
Key takeaways:
Different Types of Stocks: There are primarily two types of stocks: common and
preferred. Common stockholders have voting rights but are last in line to receive
any remaining assets if the company goes bankrupt. Preferred stockholders, on
the other hand, have a higher claim on dividends and assets in the event of
liquidation but typically don't have voting rights.
Understanding Stock Valuation: Stock valuation is a method to find the intrinsic
value of a stock. There are several approaches to stock valuation, including the
Dividend Discount Model (DDM), the Discounted Cash Flow (DCF) Model, and
Price/Earnings (P/E) Ratio among others. It's important to understand that the
market price of a stock does not always reflect its true value.
Key Factors to Consider When Choosing Stocks: The key factors to consider
when selecting stocks include the company's earnings and revenue growth, the
sustainability of its competitive advantage, its financial health, and the valuation
of its stock. It's important to look at a combination of these factors to make a
well-informed investment decision.
Long-term Investment Strategy: The Ultimate Financial Warrior should develop a
robust investment strategy. This involves doing your homework on potential
investments and understanding what you're investing in. Patience is crucial to
achieving your financial goals.
Chapter 8
Building a Diversified Portfolio
Dear Financial Warriors, as you've probably understood from the previous chapters, the
journey to financial independence is not a sprint; it's a marathon. This trek is filled with
ups and downs, triumphs and setbacks. In this chapter, we'll learn a strategy that will not
only strengthen our investment portfolio but also help protect it. We call this
diversification. It is a crucial technique that, when used wisely, can help shield our
investments from volatile markets. I want to point out that if you are a beginner, you can
diversify your portfolio from day 1 by investing in the S&P500 index through a mutual
fund or ETF. This will give you more than enough diversification in your early days as you
will own a small piece of 500 of the top companies in the US market.
It is very important to diversify your portfolio once you get up and running. Consider
diversification as the financial equivalent of an MMA fighter mastering multiple martial
arts. Being well-versed in just one form of fighting might be useful in certain situations,
but it limits a fighter's overall effectiveness in the ring. On the other hand, a fighter who
can adapt to different styles and strategies will be more successful over the long haul.
The same goes for investing. By spreading our investments across a variety of assets, we
give ourselves the best chance of success, regardless of how the market behaves.
Diversification reduces the risk of losing all your money if one company, sector, or asset
class performs poorly. For example, imagine you had all your money invested in one
technology company, and then that company has a disastrous quarter and its share price
plummets. If all your investments were tied up in that one company, you could
potentially lose a significant portion of your wealth in one fell swoop.
In contrast, a well-diversified portfolio spreads investments across a variety of different
assets – such as stocks, bonds, real estate, and cash – and across different sectors,
countries, and currencies. So, even if the technology sector is having a rough patch, your
investments in other sectors or asset classes may be performing well, helping to offset
any losses.
The principle of diversification can be traced back to the phrase, "Don't put all your eggs
in one basket." This old proverb perfectly captures the essence of diversification. By
spreading our "eggs" (investments) across multiple "baskets" (different types of
investments), we are reducing our risk.
I have written a book The Ultimate Financial Warriors Guide – What Makes A Great
Investment Portfolio, and you can download this book for free at
www.ultimatefinancialwarrior.com/freebook. This book explains in detail how to build a
diversified portfolio depending on your age profile. It is worth the read.
Now, let's delve into the concept of risk management in investing. The truth is risk is an
inherent part of investing. There's always a chance that the value of your investments will
go down. But by diversifying your investments and properly managing your risk, you can
significantly reduce the likelihood of a significant loss.
Risk management in investing is about making informed decisions that align with your
risk tolerance and investment goals. It involves analyzing each investment's potential
risk and return, considering the worst-case scenario, and planning for it.
Risk can't be eliminated, but it can be managed. This is achieved through a combination
of diversification, regular portfolio reviews, and adjusting your investment strategy based
on changes in your financial situation and the overall economic environment.
Let me share a story from my early years of investing that illustrates the importance of
diversification and risk management. When I was in my late twenties, I had just started
my career as a stockbroker, and I was eager to invest. I had some success with a few
tech stocks and decided to put a significant portion of my portfolio into these
companies. I thought I was onto something.
Then, the dot-com bubble burst.
I watched helplessly as the value of my tech-heavy portfolio plummeted. It was a hard
lesson to learn, but it shows us the importance of diversification and risk management
in investing. They help mitigate potential losses, protect your portfolio during market
downturns, and improve the overall performance of your investments.
In the next section, we will explore more about asset allocation strategies, which are
integral to building a well-diversified portfolio. As a Financial Warrior, it's important to
understand that each asset class has its own set of characteristics and risk-return
profiles. In our upcoming discussion, we will delve into how to strategically distribute
your investments across different asset classes to maximize your returns and minimize
risk.
Remember, the journey to financial freedom isn't easy, but by mastering these
strategies, we can tackle any financial challenge that comes our way. Stay strong,
Financial Warriors, and keep fighting for your financial freedom.
Now, if you're ready, let's continue our journey and delve into the next section, where we'll
explore the role of asset allocation in your diversified portfolio. We're just getting
warmed up, so stay with me, warriors. We're in this fight together.
In the investment world, your fight is against market volatility and economic changes.
You will need to periodically reassess your strategy to ensure it's still aligned with your
goals. This process is known as portfolio rebalancing.
Portfolio rebalancing is the process of realigning the weightings of your portfolio of
assets. It involves periodically buying or selling assets in your portfolio to maintain your
originally planned asset allocation. This is crucial as market fluctuations can throw your
portfolio out of balance and increase your risk exposure.
Using the example from above: Suppose you initially planned a 80%-20% allocation
between stocks and bonds. After a year, due to the stock market's performance, your
portfolio becomes 90% stocks and 10% bonds. This means you're exposed to more risk
than initially intended. So, you rebalance by selling some stocks and buying more bonds
until you're back to your 80-20 allocation.
Now, let's discuss how to implement portfolio rebalancing and make necessary
adjustments over time.
Implementing portfolio rebalancing
1. Choose your rebalancing frequency: How often you should rebalance your
portfolio depends on your specific circumstances and the nature of your
investments. A general rule of thumb is to rebalance at least once a year, but you
could also do it quarterly or semi-annually. Some investors rebalance when their
asset allocation deviates by a certain percentage from their target.
2. Assess your current asset allocation: To rebalance, you first need to evaluate
your current asset allocation. Identify how much of your portfolio is in different
asset categories. Then, compare this with your initial target allocation.
3. Buy and sell as necessary: Depending on your current allocation, you might
need to buy or sell assets. If an asset class has outperformed and now
represents a larger share of your portfolio than intended, you'll need to sell some
of it. Conversely, if an asset class has underperformed, you might need to buy
more of it.
4. Consider transaction costs: Keep in mind that selling and buying assets often
involve transaction costs. Make sure these costs don't outweigh the benefits of
rebalancing. Some low-cost index funds and ETFs may be good choices for
rebalancing due to their low transaction costs.
1. Monitor your goals: Always keep your financial goals in mind. As your life
changes, your financial goals might change too. For example, as you near
retirement, you might want to shift your investment strategy to preserve your
wealth rather than grow it aggressively.
2. Reassess risk tolerance: Your risk tolerance might decrease as you age. As you
near retirement, for instance, you might not be as comfortable taking on risky
investments as you were in your 30s or 40s.
3. Update your asset allocation: If your financial goals or risk tolerance have
changed, adjust your asset allocation accordingly. For example, if you're nearing
retirement and want to take on less risk, you might shift more of your portfolio
towards bonds and less towards stocks.
4. Consider changes in the market: Economic conditions and market trends can
also warrant adjustments to your strategy. For instance, during a recession, you
may want to invest more defensively, focusing on industries that are likely to
weather the economic downturn. Similarly, during a bullish market, you might
want to take advantage of growth opportunities.
I've seen firsthand how markets can quickly swing, causing asset allocations to skew
from their original balance. Rebalancing is a routine part of managing an investment
portfolio to mitigate unnecessary risks. As a beginner, you will not have to be concerned
about this starting out, but just be aware of it in the future.
To sum up, portfolio rebalancing is a disciplined approach to managing risk and
ensuring that your investment strategy remains aligned with your financial goals. Just as
important, however, is the need to adjust your strategy as your life situation, financial
goals, and the economic landscape change. Remember, an Ultimate Financial Warrior is
not just strong but also agile and adaptable.
In the next chapter, we'll explore different investment products that you can include in
your portfolio for wealth building. From stocks and bonds to mutual funds and ETFs, we'll
examine each in detail, discussing their benefits, risks, and how they fit into a diversified
portfolio. Get ready, Financial Warrior; it's time to delve deeper into the investing arena.
Key takeaways
Diversification reduces risk by spreading investments across a variety of assets.
It's akin to not putting all your eggs in one basket. Diversifying within asset
classes (like owning different types of stocks) and between asset classes (like
owning stocks, bonds, and real estate) helps manage and spread risk. Investing
in non-correlated assets, those that don't move in the same direction at the
same time can further reduce risk.
Asset allocation is the process of deciding how to distribute your investments
among different asset classes like stocks, bonds, and cash. Your asset allocation
should align with your financial goals, risk tolerance, and investment timeline.
This can be strategic (fixed, based on expected returns), tactical (varying, based
on market conditions), or a combination of both.
Rebalancing your portfolio involves adjusting your investments back to their
original asset allocation to maintain the desired level of risk and return. This
should be done regularly, at least once a year, or when your asset allocation
drifts by a certain percentage. Also, you should adjust your asset allocation when
your financial goals or risk tolerance change or in response to market changes.
Chapter 9
Beating the Professionals: Secrets to
Success
The stock market, akin to the MMA octagon, is a battlefield filled with both opportunities
and challenges. Thus, it's essential for us as Ultimate Financial Warriors (UFWs) to learn
from the best in the business - those seasoned investors who've mastered the art of the
stock market and emerged victorious.
It's not uncommon to hear stories of everyday people turning small sums into
substantial wealth through smart stock market investments. It's also not unusual for
people to lose money due to poor investment decisions. The question then becomes,
what separates successful investors from the rest? What secrets do they know that
others don't?
Investing is more than just picking stocks and hoping they go up. It's about devising a
strategy that aligns with your financial goals and risk tolerance, understanding market
dynamics, staying patient during volatile periods, and consistently investing over the
long term. Now, let's explore some investment strategies from the best in the field.
Warren Buffett, arguably one of the most successful investors in history, has always
advocated a long-term investment philosophy. According to Berkshire Hathaway's 2020
Annual Report (Buffett, 2020), Buffett is known for his value investing strategy, where he
buys undervalued stocks that he believes will increase in value over time. Buffett
famously said, "Our favorite holding period is forever." This approach encourages
investors to take a long-term view of investing and focus on the value a company can
create over several years rather than quick, short-term profits.
Another notable investor, Peter Lynch, who led Fidelity's Magellan Fund to astounding
success during his tenure from 1977 to 1990, is famous for his 'invest in what you know'
philosophy (Wikipedia contributors, 2023). Lynch suggests that individual investors have
an edge over Wall Street because they can spot investment opportunities in their
everyday lives. For instance, if you frequent a particular restaurant and notice it's always
busy, that could be an indicator of a successful business and potentially a good
investment. Lynch's advice underlines the importance of doing your homework and
understanding the businesses in which you invest.
These are just two examples, but there are countless other successful investors from
whom we can learn. It's crucial, however, to remember that while we can learn from their
strategies, there's no one-size-fits-all approach to investing. Your financial situation,
goals, and risk tolerance are unique to you, and your investment strategy should reflect
that.
In my early investing days, I was drawn to the short-term thrill of day trading, akin to an
inexperienced MMA fighter throwing wild punches. But with time, I've come to realize
the importance of having a long-term investment strategy. I learned the power of long-
term investing, patience, and discipline in my journey as an Ultimate Financial Warrior.
I've also found immense value in understanding the businesses I invest in, just as Peter
Lynch advocates. By being curious and diligent, I've been able to identify promising
investment opportunities, often in unexpected places.
This is not to say that my journey has been without its challenges. As in any financial
endeavor, there were times when I made mistakes and incurred losses. Those losses
didn't discourage me - they simply offered valuable lessons that have helped me refine
my investing approach and become a more competent Financial Warrior.
In essence, one of the most vital lessons I've learned from seasoned investors is to treat
investing as a lifelong journey of learning and growth. It's not about getting rich quickly
but about consistently applying proven strategies, learning from our mistakes, and
patiently waiting for our efforts to bear fruit.
One of the great things about investing is that it's a field where age is an advantage, not
a hindrance. With each passing year, we accumulate more knowledge, more experience,
and more wisdom, which can only benefit us in our investing journey.
As Ultimate Financial Warriors, we're fortunate to be in a field where we can continue to
grow stronger and wiser with time. I believe we can all reach our financial goals if we
apply the strategies of successful investors and remain dedicated to our own unique
investing journey.
In the next section, we'll explore how to develop your own investment strategy.
Remember, there's no one-size-fits-all approach to investing, but there are certain
principles that have proven successful over time. So, are you ready to continue your
training, my fellow Financial Warriors? If you are, then let's move forward and remember
- the journey to becoming an Ultimate Financial Warrior is not a sprint; it's a marathon.
Developing your own strategy
"It's not whether you're right or wrong that's important, but how much money you
make when you're right and how much you lose when you're wrong."
— George Soros
After you've learned from the best, as we discussed in the previous chapter, it's time to
step into the financial octagon and take your stand as an Ultimate Financial Warrior. You
have to develop your own style based on your strengths, weaknesses, and the conditions
of the ring.
As an Irishman who's spent nearly three decades in the world of investing, I assure you
that there's no one-size-fits-all strategy in stock market investing.
There are a few key elements you need to consider when developing your own
investment strategy:
1. Financial goals and time frame - Are you saving for a short-term goal like
buying a house or a long-term goal like retirement? Your financial goals and the
time you have to achieve them play a significant role in the kind of investments
you choose.
2. Risk tolerance - This is your capacity to endure potential losses. A more
aggressive investor is willing to take on more risk for potentially higher returns.
On the other hand, a conservative investor prefers lower-risk investments even if
they may yield smaller returns.
3. Investment knowledge and experience - If you're new to investing, starting
with lower-risk investment products such as index funds might be a good
starting point. As you gain experience and understand the market better, you can
venture into riskier products.
4. Financial situation - How much money can you afford to invest right now? And
how much will you be able to invest on a regular basis? Remember, investing is
not about putting all your money into stocks but about gradually building your
wealth.
1. Have a clear investing plan: Your plan should outline your financial goals, your
investing strategy, and your commitment to regular investments. Write this down,
and make sure it's somewhere you can see it regularly.
2. Regularly review your plan: By reviewing your plan, you can make sure you're
staying on track. This review process will also help you see the progress you're
making toward your goals, which can motivate you to stay disciplined and
patient.
3. Stay informed: Part of being disciplined is continuously learning and staying
informed about the markets and investing. However, be cautious of "noise" or
short-term distractions that could lead you astray from your established strategy.
Reading reputable financial publications and keeping up with market trends will
help you make informed decisions.
4. Practice mindfulness: Emotions can often drive our decisions, which might
lead to impulsive choices in investing. Regularly practicing mindfulness can help
keep your emotions in check, fostering discipline and patience.
5. Use tools to automate investing: As mentioned before, using tools like
automatic investments can make it easier for you to stick to your plan,
enhancing your investing discipline.
Tax-advantaged accounts
"Tax is the single biggest factor that separates people from their retirement
dreams."
— Mark J. Kohler
As the Ultimate Financial Warrior (UFW), you must utilize every financial tool available to
maximize your investment potential. Among these tools, tax-advantaged accounts play a
vital role in accelerating your wealth-building journey. I cannot overstate the importance
of this chapter in your journey to financial freedom. Do not skip this chapter warriors!
While tax laws may vary across countries, the principles remain the same - tax-
advantaged accounts, when used strategically, can provide substantial benefits that
enhance your overall investment returns and allow you to retire free from financial stress.
This chapter offers a general understanding of these accounts, but it is crucial for you,
the UFW, to research your country's specific rules and regulations.
Understanding tax-advantaged accounts (retirement accounts)
These accounts are financial accounts that offer tax benefits for saving and investing,
serving as a powerful weapon in your Financial Warrior arsenal.
Tax-advantaged accounts can broadly be classified into two types:
Let's explore the practical steps to ensure your financial knowledge is always up-to-date,
backed by a handful of studies showcasing the value of continuous learning in the
financial world.
The importance of continual financial education
A study published in the Journal of Consumer Affairs found that financial literacy levels
influence investment decisions and overall financial well-being (Huston, 2010). The study
further suggested that individuals with a higher level of financial literacy were more
likely to plan for retirement, have non-mortgage borrowing, and hold less debt. These
individuals were also less likely to be compulsive buyers and more likely to pay their
credit cards in full each month.
In essence, expanding your financial knowledge enables you to better understand the
implications of your financial decisions, leading to improved financial health and
stability.
Keeping up with financial trends and news
Being an informed investor means staying updated with the latest financial news and
trends. You can subscribe to financial news platforms like CNBC, Bloomberg, or The
Financial Times. Additionally, following reliable financial blogs, podcasts, and YouTube
channels can be a convenient way to absorb information, especially for those who prefer
audio-visual content.
It is wise to understand the current state of the economy, market trends, and potential
investment opportunities.
Remember, the goal here isn't to be swayed by every piece of news or to make rash
investment decisions based on market rumors. Instead, you aim to stay informed,
understand the implications of major economic events, and make well-reasoned
decisions based on your financial goals and investment strategy.
Continuous learning through books and courses
There's a wealth of knowledge in the world of finance and investing captured in books,
both classic and contemporary. Books like "The Intelligent Investor" by Benjamin
Graham and "A Random Walk Down Wall Street" by Burton G. Malkiel offer invaluable
insights and timeless wisdom.
Online platforms like Coursera, edX, and Udemy offer comprehensive courses in finance
and investing. You can find courses tailored to all levels of knowledge, from beginner to
advanced. And many of these courses are taught by instructors from top universities and
financial institutions.
Participating in financial seminars and workshops
Financial seminars and workshops are a great way to deepen your understanding of
specific financial topics. They offer an opportunity to interact with experts and like-
minded individuals, where you can exchange ideas and learn from each other's
experiences.
Joining the UFW online community
As we journey together in this financial realm, I invite you to become part of our
Ultimate Financial Warrior community at www.ultimatefinancialwarrior.com. By
registering on our website, you'll have the opportunity to take a quiz about the key
learnings in this book. On successful completion of the course, you will earn your
Ultimate Financial Warrior certification. Plus, you gain free access to our private
members forum, where you can interact with other Financial Warriors, share experiences,
discuss strategies, and gain valuable insights from each other's journeys.
It's a wonderful opportunity to continue your financial education with like-minded
individuals and broaden your knowledge beyond what's covered in this book. Think of it
as your ongoing training ground, helping you stay updated with the dynamic world of
stock market investing.
Remember, financial freedom is a journey, not a destination. The financial markets are
constantly evolving, and so should your knowledge about them. Let's embrace the
challenge and keep our knowledge up-to-date as we stride towards becoming Ultimate
Financial Warriors.
Lifelong learning and keeping up with industry trends
While it's crucial to understand the basics of investing, it's equally important to keep up-
to-date with new trends, market fluctuations, and emerging investment options. A must
continually update his investment strategies to stay profitable. Financial Warrior
Reading financial news, subscribing to investment-related magazines, and listening to
podcasts or audiobooks about investing can help you keep abreast of the latest
developments in the finance world. Here are a few resources that I recommend:
These resources not only provide a wealth of information but also give different
perspectives on the financial markets, allowing you to refine your investment strategy
over time.
Learning from the masters
One of the best ways to improve your investing skills is to learn from those who have
already achieved success in this field. Warren Buffet, Peter Lynch, and Ray Dalio are just
a few examples of successful investors who have shared their wisdom through books,
interviews, and articles.
Reading their works and understanding their investment strategies can provide
invaluable insights. For example, Warren Buffet's annual letters to shareholders offer a
wealth of knowledge on his investment philosophy.
However, while it's important to learn from these masters, remember that what worked
for them may not necessarily work for you. Each investor's journey is unique and heavily
influenced by their personal financial goals, risk tolerance, and investment horizon. Use
their wisdom as guidance, but always tailor your investment strategies to fit your
personal financial situation.
In the next chapter, we will explore the concept of financial freedom and how achieving
it can create choices in life. As Financial Warriors, our goal is not only to accumulate
wealth but to create a life where we can make choices based on our passions and
dreams, not just financial obligations. So gear up, fellow warriors, as we prepare to
explore the ultimate prize of our financial journey.
Chapter 11
Financial Freedom and Creating Choice
in Life
As a seasoned Financial Warrior, you have undergone your fair share of battles. You have
absorbed punches of financial lessons and have trained relentlessly in the investment
octagon. In previous chapters, we have discussed the techniques and strategies to be
utilized in your investment journey. Now, it's time to glimpse at the prize that awaits you
at the end of this challenging yet rewarding journey: Financial independence.
The concept of financial independence is simple. It is the state where your assets
generate enough income to cover your living expenses. But, I'll tell you this - the power
that financial independence holds is far from simple. It opens a world of choices and
possibilities, allowing you to live life on your terms.
Financial independence allows you to break free from the shackles of financial worries,
making way for a life characterized by choice and freedom. This is what we, as Ultimate
Financial Warriors (UFWs), strive for. Our goal is to achieve financial independence.
Let's delve deeper into the benefits of financial independence and understand why it is
the ultimate goal for every UFW.
Freedom of choice
The most significant benefit of achieving financial independence is the freedom of
choice. Do you remember the last time you dreamt about taking a year off to travel the
world? Or the time you wished to volunteer for a cause close to your heart but could not
due to your financial commitments? Financial independence turns these dreams into
reality.
With financial independence, you're not tied to a job solely for the paycheck. You have
the freedom to choose a career that aligns with your passion, interests, and values. You
can choose to work part-time, take sabbaticals, or even retire early if you so wish.
No financial stress
Have you ever experienced a sleepless night, worrying about meeting your monthly bills,
or facing an unexpected expense? Trust me; I've been there. Financial stress can take a
toll on your physical and mental health, affecting your relationships and overall quality of
life.
Achieving financial independence means you no longer have to worry about the
paycheck-to-paycheck cycle. Your assets are working for you, generating enough income
to cover your living expenses. It provides a sense of security and peace of mind that is
priceless.
Opportunity to make a difference
Financial independence is not just about enjoying the good life. It also provides you with
the opportunity to make a difference in the world.
Whether you wish to support a cause, contribute to your community, or help your loved
ones financially, being financially independent gives you the resources to make a
positive impact. This not only brings immense satisfaction but also adds meaning and
purpose to your life.
In the next section, we will talk about how you can set and achieve your financial goals
on your path to financial independence. Envision your financial independence and work
steadfastly towards it. You are one step closer to becoming an Ultimate Financial
Warrior, making the smart moves today to enjoy the rewards of financial freedom
tomorrow.
As a Financial Warrior, you know the importance of strategy. In financial terms, this plan
takes the form of setting and achieving specific financial goals. If you don't know where
you're going, how will you know when you've arrived? In this section, we'll delve into the
essential steps you need to take to set and achieve your financial goals.
Creating SMART financial goals
One of the best ways to set financial goals is to ensure they are SMART - Specific,
Measurable, Achievable, Relevant, and Time-bound. It's not enough to say, "I want to be
rich" or "I want to have lots of money." You need to specify exactly what you're aiming for
and when you want to achieve it.
Specific: You need to be clear about what you want to achieve. For instance, "I want to
save $10,000 for a house deposit within three years" is a specific goal.
Measurable: You need to be able to track your progress. A goal like "I want to increase
my investment portfolio's value by 10% annually" is measurable.
Achievable: Your goal needs to be realistic. If you're earning $2,500 per month, setting
a goal to save $3,000 per month isn't achievable.
Relevant: Your goal needs to align with your life and financial objectives. If you're
focused on buying a home, your goal might be to save for a down payment.
Time-bound: Your goal needs a deadline. Without a time limit, there's no urgency to
start working towards your goal.
Steps to achieve your financial goals
Now that you've set your financial goals, it's time to make a plan on how you'll achieve
them. Here are some steps to guide you:
1. Save regularly: You've probably heard this a million times, but it's because it's
true. Regular savings is the key to wealth creation. The amount you save isn't as
important as the habit of saving itself.
2. Invest wisely: As a Financial Warrior, you know that your money should be
working for you. Consider investing in assets that will give you a good return over
time. This could be in mutual funds, index funds, ETFs, REITs, bonds, or
individual stocks as we've discussed in previous chapters.
3. Monitor your progress: Regularly check your progress against your goals. This
will help you stay on track and make necessary adjustments. Remember, it's not
about speed but consistent progress.
4. Adjust as necessary: Life happens. You may experience changes in your
financial situation, like a pay rise, an unexpected expense, or even a global
pandemic. These situations may require you to adjust your goals or your plan.
Remember, it's your journey, and it's okay to make changes along the way.
So take the time to set your SMART financial goals and create a plan that suits your
financial situation. Remember, the journey to financial freedom is not a sprint but a
marathon. It requires patience, discipline, and determination.
Stick to your plan: A financial plan is like a map guiding you towards your
destination. It's easy to get sidetracked by the latest investment fad or an
unexpected expense. But remember, success lies in sticking to your plan. This
doesn't mean you can't make adjustments along the way, but the core of your
plan should remain unchanged.
Stay educated: The world of finance is ever-changing, with new investment
products, market trends, and economic policies constantly emerging. Staying
educated will help you make informed decisions and adapt your plan if
necessary. Visit reputable financial news websites, attend webinars, or read
books to keep your financial knowledge sharp.
Practice patience: Rome wasn't built in a day, and neither will your wealth. It's
natural to want quick results, but investing is a long-term game. It requires
patience and resilience. Keep in mind that the journey to financial freedom is a
marathon, not a sprint.
One of the reasons that I wrote this book is that I want to be able to guide my two kids,
aged 20 and 23, on their own financial journeys. It brings me great satisfaction to see
them making informed financial decisions, setting their own SMART goals, and working
towards achieving them.
Setting and achieving financial goals is one of the most critical aspects of financial
freedom. As a Financial Warrior, you have the power to control your financial destiny.
You have the knowledge and the tools at your disposal to build your wealth and secure
your financial future. So, don't wait any longer. Start setting your financial goals today
and embark on your journey to financial freedom.
Remember, as Warren Buffett once said, "Someone is sitting in the shade today because
someone planted a tree a long time ago." Your financial goals are the seeds you plant
today for a prosperous future.
In the next chapter, I sum up everything you have learnt in the UFW’s 8 Point Plan to
Financial Freedom and review the case studies for three new stock market investors.
Chapter 12
UFW’s 8 Point Plan to Financial Freedom
This UFW Investment Triangle will be helpful as you go through the case studies.
Case#1
Stephen is 23 years old and has just finished college. He still lives with his parents. He is
starting a 3-year graduate program with his first employer. His salary scale will be as
follows
Starting$33,000 (net salary – approx. $2,226 a month)
Year 1 $42,000 (net salary - approx. $2,827 a month)
Year 2 $52,000 (net salary - approx. $3,451 a month)
Year 3 $62,000 (net salary - approx. $4,046 a month)
Currently Stephen has $1,950 in debit card debt serviced at 18% per annum interest.
Year 1
Stephen is 23, take-home salary is $2,226. The plan requires $380 per month leaving
him with a $1,846 per month for normal living expenses.
Suggestion:
Pay off high interest credit card debt within 12 months by paying $180 per
month.
Open a Roth IRA (tax exempt account) and invest $100 a month in a mutual
fund, index fund, ETF or REIT. This gets him started with his tax-exempt
retirement account.
Open a stock broking investment account (taxable account) and invest $100 a
month into a mutual fund, index fund, ETF or REIT. This gets him started with his
taxable investment account.
Year 2
Stephen is 24, take-home salary is $2,827. The plan requires $700 per month leaving
him with a $2,127 per month for normal living expenses.
Suggestion:
Open a savings account and commit to 12 months of saving $500 a month. This
would give him an emergency fund of $6,000 by end of year.
Continue the $100 into both the Roth IRA and investment account.
Continue to invest $100 a month into the stock broking investment account.
Year 3
Stephen is 25, take-home salary is $3,451. The plan requires $1,000 per month leaving
him with a $2,451 per month for normal living expenses.
Suggestion:
Continue for an additional 12 months saving $500 a month. His emergency fund
will now grow to $12,000 which can be used for any foreseen events in the
future. It would give him 3-4 months of a financial cushion and remove financial
stress.
Increase monthly contribution into Roth IRA to $250
Increase monthly contribution into investment account to $250
Year 4
Stephen is 26, take-home salary is $4,046 plus $135 tax refund is $4,181. The plan
requires $1,175 per month leaving him with a $3,006 per month for normal living
expenses.
Suggestion:
Stop contributing to the emergency fund which has $12,000 in the money
market.
Continue monthly contribution into Roth IRA to $250.
Increase monthly contribution into investment account to $385.
Open a traditional IRA account (tax deferred account) and invest $540 a month.
This will bring him up to the max allowable contribution per annum which is $6,500 in a
traditional IRA. Now it is important to mention that he will receive tax relief on this
$6,500 over the course of the year which would increase his take-home salary by $135 a
month from $4,046 to $4,181 (these calculations are not exact as everyone’s tax
situation is different, but it demonstrates the point I am making which is that he gets
tax relief on his traditional IRA investment).
Invest this $135 per month to dollar cost average into a dividend ETF in his
investment account to start receiving a quarterly income.
This is a great example of a young person starting out in life and putting a Financial
Warrior plan in place. Staying with the plan will make an enormous difference in
Stephen’s financial future. By his early 40’s he will have so many choices in his life and
none of the financial pressure.
Case#2
Ava has just turned 20 years old and has finished her first year in college. She has
another 3 years left in college. She works part time and earns $600 a month and does
not have to pay tax on this amount. She lives at home with her parents.
She has no debt.
She has $3,000 in savings.
She has no retirement plan.
She has no investments.
Year 1 to 3
Ava is 20, take home salary is $600. This plan requires $200 a month leaving her with
$400 a month for normal living expenses.
Suggestion:
Continue to save $100 a month into her savings account. This will help grow her
emergency fund.
Open a Roth IRA and invest $100 a month in a mutual fund, index fund, ETF or
REIT. This gets her started with her tax-exempt retirement account.
This is a perfect example to show the difference between Ava starting a retirement plan
at 20 versus Stephen at 23. If Ava invests just $100 a month from the age of 20 to
retirement age at 66, then she will have a retirement fund of $1,049,072. If she waits to
start at age 23, then the retirement fund will be $781,978. So the additional 36 months
head start by Ava investing $100 a month, will result in an increase in her retirement
fund of $267,094.
After Ava graduates, then she should sit down again and strategize.
Case#3
Jackson is 30 and is earning $60,000 a month. His take home salary is $3,480. He has
a credit card debt of $4,200 which is serviced at 18% per annum. He has a personal car
loan with $15,000 outstanding which is serviced at 8.2% interest per annum. He is
currently paying $250 a month off his car loan with 77 payments outstanding ($4,219 in
interest is due over those 77 remaining payments).
He rents a room with friends and the cost is $900 per month including utilities. Jackson
spends most of his savings on travel and leisure with his friends. Jackson enjoyed his
20’s and didn’t give much thought to saving or buying an apartment. He is in a steady
relationship, and both he and his partner would like to rent a place of their own
someday.
Year 1
Jackson is 30, take-home salary is $3,480. The plan requires $815 per month to be paid
off debt with an additional $400 a month being earned from a second job. This leaves
him with $3,065 a month for living expenses. He remains renting a room living with his
friends in order to implement this financial plan.
Suggestion:
Pay $415 a month off the credit card and the full amount will be paid off
including interest after 12 months.
Increase car loan repayments from $250 per month to $400 per month which
will reduce the number of repayments due from 77 to 44 and save him $1,900 in
interest payments.
Get a 2 nd job as a delivery driver for 1 night a week and earn him an additional
take home salary of $400 a month.
Open a Roth IRA and invest $100 a month in a mutual fund, index fund, ETF or
REIT. This gets him started with his tax-exempt retirement account. |
Year 2
Jackson is 31 and his salary increases to $70,000 due a promotion and an additional
shift. His take-home salary is $4,384 which includes the $400 salary from his 2nd job.
The plan requires $1,300 per month leaving him with $3,084 per month for normal
living expenses.
Suggestion:
Open a savings account and commit to 12 months of saving $500 a month. This
would give him an emergency fund of $6,000 by end of year.
Continue to pay off the car loan at $400 per month
Continue with a 2 nd job earning $400 per month
Increase monthly contribution into Roth IRA to $250 per month
Open a stock broking investment account and invest $150 a month into a mutual
fund, index fund, ETF or REIT. This gets him started with his taxable investment
account.
Year 3
Jackson is 32 and his salary has increased to $75,000. His take-home salary is $4,736
which includes $500 salary from his 2 nd job. The plan requires $1,300 per month
leaving him with a $3,436 per month for normal living expenses.
Suggestion:
Continue for an additional 12 months saving $500 a month. His emergency fund
will now grow to $12,000 which can be used for any foreseen events in the
future. It would give him 3 months of a financial cushion and remove financial
stress.
Continue to pay off the car loan at $400 per month.
Continue with a 2 nd job but he is now earning $500 per month.
Continue monthly contribution of $250 into Roth IRA.
Continue monthly contribution into investment account for $150.
Year 4
Jackson is 33 and he expects his salary is $75,000 with no pay increase. His take-home
salary is $4,736 which includes $500 salary from a 2 nd job. The plan requires $1,300 per
month leaving him with a $3,436 per month for normal living expenses. He can now
afford to move into a 2 bed apartment with his partner but his monthly rental liability will
increase from $900 to $1300 per month which is his contribution to the monthly rent.
Suggestion:
Stop contributing to his emergency fund and he will need to use some of this
fund for the first month deposit on the new apartment.
Continue to pay off the car loan at $400 per month with final payment due
during the year.
Continue with a 2 nd job earning $500 per month.
Continue monthly contribution of $250 into Roth IRA.
Continue monthly contribution into investment account for $150.
Year 5
Jackson is 34 and he has a new job paying $90,000 per annum. His take home salary is
$5,490 which includes his salary of $500 from a 2 nd job. The plan requires $1,340 per
month leaving him with $4,150
Car loan is paid off and he keeps his car for another couple of years.
Emergency fund is healthy.
Continue with a 2 nd job earning $500 per month.
Increase monthly contribution to $540 into Roth IRA (max contribution for year).
Increase monthly contribution into investment account to $500.
Save $300 a month into savings fund towards new car.
It helps UFW get noticed and helps us all to build the community of Ultimate Financial
Warriors.
About the Author Kieran G. Murphy