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Questions and Answers
Hello, I would like to become a millionaire someday, and I really want someone to be kind of a mentor to me. I need advice, so I'll give you some of my financial details
Right now I am 19 years old, and have about 22,000 saved up.
I am in college currently and it cost me roughly 3,000 a year ( if I do not receive any scholarships)
I have a job that pays me about 350 dollars every 2 weeks / about 13,000 a year
Please give me some pointers on how I should distribute my money, I love seeing it in the bank, but it loses its value when it sits in the bank. I need a way to make it into a million and I would like to do that by the time I am 40. I know it is a long shot, but 21 more years is time and I am good with my money. Please if you do have a big amount of money, do not think in your shoes think in mine. I would like answers to be like " well I would at least put 3000 for next years college, so that way you wont have to worry about that" etc etc.
First, don't fall for scams like binary options, penny stocks, Iraqi dinar, forex robots. Recognize the difference between real advice and an industry promoter for a truly horrible product.
Get-rich-quick schemes do not work. Ignore anyone who says wealth is quick or easy.
A million by 40 is certainly possible. The biggest factors are how much you earn, how much you keep (taxes), and how much you save/invest.
1) Education. The more the better. It opens up opportunities for better jobs. Get to know a few professors – great sources of advice, references, job leads.
2) Do you have any inclination to start your own firm? It is a *lot* of work, but a great way to produce wealth.
3) Use tax deferral accounts where possible. Employers may offer 401k plans with matching. You can open a Roth IRA account on your own.
4) Keep investment expenses low. Vanguard, Fidelity, Schwab are high quality firms with low costs.
5) Tuition money belongs in the bank even if it earns nothing. Money needed in a year or two should not be at risk.
Three great investment books I always recommend:
One Up On Wall Street – Peter Lynch
A Random Walk Down Wall Street – Burton Malkiel
The Intelligent Investor – Benjamin Graham.
My money is not earning Much in a tracker account i want my money to work for me.
Investing is by no means a sure thing, there is definitely risk when you invest in stocks. A broad based indexed fund which is what I presume you mean by a tracker account, diversifies the risk till only market wide systemic risk remains but this also means that the gains will be mediocre at best. Warren Buffett has said during one of his talks at MBA schools that diversification is only if you don't know what you're doing and that for most people it's a good idea but if you do know what you're doing there's no reason to be in more than six or seven stocks. Basically to get better results from your investments you have to work for it.
You need to educate yourself and develop the judgement to make good financial judgments, you need to look for investment opportunities constantly, you need to research your investment candidates and determine what the possible outcomes are and what the probabilities of those outcomes are not just that you might make some money on them, you need to determine what you can do to skew the probable outcomes in your favour and minimize the downside.
You need to invest in yourself.
Now you're not going to be able to instill any reasonable insight and financial acumen into yourself overnight, you need to look at how people develop expertise. People develop expertise by first learning some general rules that guide them mostly along the right path though the rules may not always apply and may not even be correct. In time with experience, you develop the expertise and you don't even know exactly why you're coming to the conclusions that you do. In English, we learn rules like "i before e except after c" and "every friend has an end" but after we've read and written enough, a word simply looks right or wrong when it's spelt correctly or not.
Well the same is true to finance, how do you know what's a good company to invest in, well until you have the experience, you don't but you can read books like "The Intelligent Investor" by Ben Graham and use the equations that he proposes to estimate an intrinsic value to the stocks till you get a feel for it.
How do you know how much to invest or how broadly to diversify, well you can adopt the log utility of wealth as an approximation of the true unfathomable utility of wealth so that you can mathematically evaluate the geometric mean outcome of your investment choices and choose the option or combination that has the highest geometric mean outcome and you can ignore the choices or combinations that has geometric mean outcomes that result in long term decline of capital. For example if W represented your net wealth and X is the amount you are deciding to invest on a 50/50 coin toss with favourable 2 to 1 payout odds (you win twice your wager plus receive your wager back if you win but lost your wager if you lose) then the geometric mean of the outcomes is given by:
e^( 0.5 * ln( W + 2 * X ) + 0.5 * ln( W – X ) )
You'll find that the equation is at it's maximum when X is 25% of W and in simple binary wagers like this can be quickly determined by the simplified Kelly's Criterion, in more complex multiple outcomes and concurrent investment scenarios such as proportioning a portfolio, you'll have to break them down into the aforementioned log utility equations and calculate them iteratively. If the value of the equation is less than W then you don't want to invest.
When you diversify between two coin tosses, you only diversify if the maximum geometric outcome of the four possible outcomes in two concurrent coin tosses is greater than that of a single coin toss. You'll find that especially when you incorporate a cost of participating in each opportunity (a fee to toss the coin or a commission in stock trading) that the equations define an optimal extent of diversification.
Many economists argue that you can't quantify the utility of wealth as it is dependent on the utility and nature of the commodity and services you can buy with the wealth but the log utility of wealth is a reasonable approximation that will give you guidelines as to what the optimal financial decisions might be and optimizes for capital growth.
Remember whatever you learn are just crutches till you yourself develop the expertise and acumen from experience.