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  • Investment 001

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ID:	16626763Should women have financial independence? This was the topic in a recent thread. But what exactly is financial independence? It is not just about earnings power. It is also about knowing how to manage money.

    We recently went on a business trip which required 5 hours' driving each way. A colleague was unfortunate to bring up stocks. Little did she realize that the next 30 minutes would be more boring than a Misbah ul Haq inning. But the captive audience had nowhere to run. They were trapped.

    Some of the questions posed were:
    what is the criterion to pick stocks?
    Do you watch the prices daily?
    How do you know when to sell?
    Which sectors do you buy?

    The first step is to have ones asset allocation in place. Any funds you need for the next five years should not be in stocks. One needs to work with a financial planner to set ones asset allocation. A sample allocation, not including ones residence and ornaments, could be 60% stocks, 20% bonds, 15% cash and 5% gold or real estate.

    It is widely known that low cost Index Funds that mimic the market best about 80% of all actively managed mutual funds. In other words, if you want to be in the top 20%, just buy Index Funds and stop reading.

    Most market tracking indexes are market cap weighted. So more a stock rises, more its representation in the index. This could lead to a bubble as seen in 2000 April when the S&P 500 was overweighted with Technology companies, many of which no longer exist.

    For example, Nortel Networks was awarded a huge market cap. So was Sycamore, WebMd, JDSU, Infospace.. you get the drift.

    In Aug 2007, the scenario repeated itself, this time with Finanicial disasters such as Countrywide Financial, Bank of America, Bear Stearns, Lehman Brothers, AIG etc.

    Each time, the market dropped more than 50% during the inevitable bear market that followed. Of course, any investor who hung on, and continued dollar cost averaging into the market, did very well. Those who panicked and sold at the bottom got burnt.

    Hence before we delve into stock picking, I want to emphasize - disciplined dollar cost averaging into Index Funds is all that is needed. In the next article, I will discuss individual stocks. And how they can provide a countering force to the market cap weighted Index Funds. Most of you don't need it though.

    Remember, the only free lunch is Asset Allocation. And low cost Index Funds.

    About the writer- the writer gets excited when anyone visits his financial threads. So enter with caution.

    • Southie
      #20
      Southie commented
      Editing a comment
      As promised here is my 5 min analysis. Bought back 7 billion in stock 2010 and 2011. Great move. Price was low. 9 billion in cash on hand 7.5 billion debt. 6.5 billion equity. Balance sheet strong.

      Market cap 62 billion. P/E 25. On the expensive side ( for me at least).

      Looks like you have > 100% gain. If I was in your position I would take profit and not look back. Or at least sell half the position.

      Each person has to judge for himself. My opinion is just that.

    • Southie
      #21
      Southie commented
      Editing a comment
      GILD down 2.7% today.

    • Southie
      #22
      Southie commented
      Editing a comment
      It was down only 2.4% not 2.7%. Today it was up 2.5%.
    Posting comments is disabled.

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