The 9 Steps to Financial Freedom (35 page)

There are no right answers to these questions and no wrong answers. Instead, the exercise is about getting in touch with your inner voice so that you can begin to listen, really listen, to
what it has to say, because this voice will tell you what’s right for you to do. All the brilliantly conducted research in the world about an investment, all the enthusiasm and salesmanship of a broker, all the hype in the press about this company or that one, none of it means a thing if the pure voice inside you says it’s wrong for you to do. You are far better off taking no action than taking an action that feels wrong to you. Sure, it’s fine to ask around and learn what others are doing, but to be able to act upon what your own feelings and thoughts tell you to do is a priceless gift that only you can give yourself. This kind of power comes from trusting yourself more than you trust others.

There are some great brokers out there as well as some who aren’t so great, but if you’re in awe of brokers (who now often call themselves financial advisers, figuring, I guess, that broker isn’t the most confidence-inspiring title), or if you believe you can’t possibly take any investment action without one, I want you to know how it feels from the other side. I was a very good stockbroker, but I had no mystical insights, no inside sources, no information I could learn that you couldn’t learn, too. And a good many brokers out there probably feel like the Wizard of Oz hiding behind his curtain. It can be a scary business, investing other people’s money.

There is not one adviser out there who wants to lose money for you, I can promise you that. The good ones would probably rather make more money for you than they do for themselves. It’s also true that financial advisers are real live human beings with feelings, insecurities, bills to pay, dreams of their own, pride, and ego.

Imagine the pressure. Most people don’t want to deal with their own money, so try to think how it feels to be responsible for dozens of other people’s money, their livelihood, their futures. Think how an adviser feels if she recommends an investment to you that she can’t afford to invest in herself. Is she telling you the right thing to do? Think how she feels if she’s also investing in the stock herself—will it cloud her judgment? The pressure, particularly if the broker is a caring person, can lead to what I call the jitters, which is not a good state in which to make important financial decisions.

The jitters occur when raw nerves take over and important decisions about money, which after all are decisions about people’s lives, are made from fear and nervousness, rather than from that pure inner voice and true knowledge.

Suppose an adviser has built a tremendous position in XYZ stock. As he sits at his computer, he watches every time XYZ moves up and he watches every time XYZ moves down. With every tick down, his phone rings and it is a client asking about XYZ; with every tick up, he awaits the next tick down, he gets jittery; the notion hits him that maybe it’s time to sell.

Now he starts punching in the symbol of that stock over and over again to get more detailed information than what the screen normally tells him. He watches the volume: What do others who are selling know that he doesn’t know? He looks at the bid, the ask, the research reports. What do they really mean? He calls a few of his friends who also have a position in the stock, to see what they think. Even if none of these people had been thinking sell, even if they reply, “Well, I really still like the stock,” something happens. Doubt has a domino effect; I’ve seen it.

Meantime the supervisor walks by to remind the adviser, who works on commission, that he hasn’t met his sales quota
this quarter. To do so, he must buy some more stocks on his clients’ behalf or sell some more. Then his wife calls. They need a new furnace. Then a colleague he sits near starts jumping around with joy—another stock she has built a position in has just gone through the ceiling. She begins making excited calls to tell her clients the great news. Then our adviser hears a tick and looks at the screen: XYZ is down another one-half point.

After a few hours of this, the adviser makes the decision, calls his clients, and sells the stock. End of jitters? No way; now the real test begins. If the stock starts rising, the phone begins ringing with clients wanting to know why he sold so soon. It’s almost harder not making as much as could have been made in a stock than it is to lose some and feel relief at not having lost everything. The whole experience goes into our adviser’s jittery memory bank and is automatically recalled the next time he thinks about buying or selling.

It takes an extraordinarily disciplined person to overcome these jitters and to make continually intelligent decisions based on his or her pure inner voice and what can be learned about a stock. It takes even more discipline to believe what you know when the jitters of other people who happen to own the same stock as you are spreading through a brokerage firm like the flu.

If you decide you want to go with a broker, fine. If you already have a wonderful broker who has so far done very well for you, even better. Best of all is if you decide to handle your own money and feel powerful and confident about doing so. In any case, though, it is your money—and it must be guided by what your inner voice tells you to do.

With most of us, decisions come, decisions go—we make them and deal with the consequences when we have to. But we all make decisions about our lives, financial and otherwise, all the time: What kind of a car do I think I should buy? When do I think I should buy it? Where should I send my child to school? What color should I paint the bedroom? Do I really want to go to dinner at the Wentworths’ on Saturday night, with such a busy week ahead and my proposal due at work on Monday? Is such-and-such an issue worth the fight it’s going to cause if I bring it up with my partner? Might this or that stock that I keep reading about be a good stock to buy?

Such decisions come up every day, and always that inner voice is there to guide us in making them wisely—if we let that voice have its say. When these decisions come up, I am asking you now to start keeping track of them: What was the decision that had to be made? What did your inner voice, your first instinctual response, tell you to do? What did you actually do? Please write down the answers and keep them wherever you keep the monthly bills. Now see how the decisions played themselves out, depending on whether or not you followed your voice. Should you have painted your bedroom that ivory, which was your first impulse, instead of the yellow? Should you have bought a new car when you knew you should have, before the old one collapsed for good? Did the stock you were thinking about in fact go up? Didn’t you really know deep down inside that little Jenna would be better off at a school that was less competitive?

You will see the results for yourself. Testing your voice will enable you to trust it. It’s your voice, and when you begin to
take action based on what you yourself truly believe, you’ll begin to feel power over your life—and over your money.

When I started as a stockbroker, the financial world was quite different from the way it is today—and it’s still changing fast. You might think that this means it’s all the more important to have a financial adviser, or a Certified Financial Planner
^®
professional like me, look after your money for you, but the opposite is true. The changes in the financial world are actually making it much, much easier, and much, much safer, for individual investors to invest and look after their own money.

When I first started out at Merrill Lynch, money market accounts were just beginning. Mutual funds numbered in the low hundreds and hadn’t yet been embraced by a wide range of investors, much less changed the way millions of us now invest for our futures. Exchange traded funds (ETFs) did not exist. Discounted ways to invest were just starting, which meant that the most common way into the stock market was through a full-service company like mine. With a full-service brokerage firm you’re paying full-service prices: you’re paying for their real estate, their overhead, their business lunches, their advertising, their commissions on all kinds of brokers. These firms are reputable, certainly, and once you read the rest of this chapter about the language and workings of investment, you may even decide that the way you wish to be respectful to yourself and your money is to have an adviser at a full-service firm, fees notwithstanding. As for the discount firms, they’re thriving. Why? Because smart consumers always flock to where they’ll get the best deals for their money. On their way, they stop to study what they’re buying and where they’re buying it.

Do you play tennis? If so, you’ve had to learn a few new terms and concepts to play the game—set point, double fault, and so on. If you play golf, same thing—par and eagle. To cook, you need to learn about basting, sautéing, reductions.

There’s also a language of money, and by the time you finish this book you will know it.

If you have ten years or longer before you need your money, you
must
invest, whether in your 401(k) or on your own. And the more you invest, the better. After you finish reading this section, by trusting yourself, you will know which kinds of investments are right for you. Those investments don’t have to be in the stock market; you can invest in Treasury notes and bonds or in your house. You can decide whether you want to invest on your own or whether you want to go with an adviser. Again, these are decisions you will reach by trusting yourself.

My own opinion is that most people have more than it takes to invest on their own. The information sources on the Web are extensive and accurate. You can learn a lot this way and, just as important, really begin to feel much more comfortable in the world of money. The point is, you must learn the language of investing and have the knowledge to decide what kind of investing is best for you.

There are also plenty of general-interest money magazines out there. And, of course, money is a popular topic on cable television stations, and in most cities there are financial shows on the all-talk stations. Eavesdrop on the world and language of money, and pretty soon you’ll know you belong.

The price of admission to the world of money is lower than you might think and, especially with the onset of mutual funds
and ETFs, the easiest and safest way to create your own fortune. Here’s what you need to know.

A mutual fund starts out as a pool of money that many investors just like you have put their money in together—mutually. The manager or managers of the fund take all this money and put it into different investments. The manager is typically the one who decides what he or she wants to buy and sell, based on his or her judgment and the research of many others in the mutual fund company, but sometimes these decisions are made by a team of people.

The goal of each mutual fund is different and, as a result, each fund invests in different kinds of stocks, bonds, or other investments. Some funds invest for long-term growth, some for income, some for a combination of the two. (Growth funds typically invest in stocks of companies that are growing rapidly and whose price per share may increase dramatically in value. Income funds invest in bonds and have a smaller chance of making a lot of money; they generate present-day income—retirees might own these, for example, after they’ve seen their money grow during their working years.) Some invest in stocks just in the United States; some, those known as international funds, invest only in stocks overseas; funds called global funds invest in both. The variations go on and on, but if you have a specific interest, I guarantee that you can find a mutual fund that addresses it. When you invest in a mutual fund, basically you own a tiny fraction of each share of stock or whatever they’ve purchased, so even if you own just one mutual fund, your money is still quite diversified, because you own a little of everything they’ve invested in.

If you had a financial adviser at a full-service brokerage firm
like Merrill Lynch, he or she would have to consult you before making any transactions, and you would have to pay a commission almost every time you bought or sold anything. That’s not the case in a mutual fund, where the manager has free rein over the money in the fund and you’re not charged a commission when transactions are made. You will receive a prospectus and information with a breakdown of what the mutual fund has been up to, but you’re not notified day to day. By buying shares in the fund, you have made the decision to trust the fund manager.

A good mutual fund is a great way to invest money, particularly small sums of money: You achieve diversification, commission-free trading within the account, and a professional manager or team of managers who are buying and selling and doing what they think best.

Once a fund starts to do well, the word gets out and it seems as if everyone wants to invest in it. A fund that continues to take on new investors’ money and keeps getting larger and larger is known as an
open-end mutual fund
. This means there’s no set limit as to how much money the managers will permit to be invested in the fund. At their discretion once they’ve taken in more money than they feel is manageable, the manager and others in authority may sometimes close the fund to new investors, but this is a decision they can make anytime, as they go along.

How Is an Open-End Fund Priced?

At the end of each day, the manager totals up the entire value of the portfolio that constitutes this mutual fund. He divides that total by how many shares are owned by the investors. This figure, whatever it comes out to, is called the
net asset value
, or
NAV
. It is what each of your shares is worth. If you are a new
investor and want to invest $1,000 into this mutual fund, and the NAV that day was $10 a share, you would own one hundred shares of the mutual fund. If the fund’s value goes up by $.25 a share, you will make $25. The more shares you have, the more you make—and the more you lose if the fund goes down.