Freethinking about finances

by Jim Walker

07 September 1998
Additions: 10 June 2011


If you wish to live freely, not only must you have physical & mental health and physical freedom, but you must have the ability to finance your lifestyle without inhibiting your passions. Money allows astonishing choices to direct your life as you see fit. Having wealth of course will not guarantee you happiness, but it will allow you a better chance of achieving it and, at the very least, allow you financial security. You might have good health. You might live in a free country. But you can hardly live freely and happily if you and your family cannot afford a decent meal, or if you lose your home, or becoming hopelessly lost in debt. Financially secure people tend to live longer, healthier and have more self-control over their lives than poor people.

Having financial freedom, however, requires some knowledge, common sense, self-discipline and, hopefully, without the debilitating influence of beliefs. It takes a bit of work, but let me remind you that in general, it takes far more struggle to live poorly then it does to become financially secure. If you do not have the finances to solve your problems, you will spend more time arguing, worrying, waiting in lines, writing letters to institutions, paying more, and working harder just to stay alive. The relatively small amount of effort to understand how finances work will give you a much greater chance of financial freedom.

Sadly many people think about their finances the way dogs act when leashed to a pole. If you've ever seen a dog leashed to a pole, you might have noticed their comical attempts to undo themselves yet manage to get themselves wrapped around the pole in a tighter situation. Dogs seldom think of backing off and going in the opposite direction. Unfortunately many people use the same kind of one-dimensional thinking when it comes to spending their hard earned money. If you wish to free yourself from financial worry, you must back off, have patience and put your money to work. You must gain some knowledge about finances and to discipline yourself before you can create wealth. Freethinking involves rejection of dogma and authority in favor of rational inquiry and speculation and this applies to financial affairs as it does to other concerns.

I hope that after you read this that you will get foot stomping angry. Anger can serve as an emotional red flag to induce you to do something, especially when you realize that most people get swindled, conned, and reamed by financial institutions. And this includes banks, credit corporations, insurance companies, mortgage companies, and brokerage stock & bond "experts." But if you wish to finance freely, you must begin to think about financial independence. In other words, taking responsibility for your own finances, depending on no one; having no debt and not believing in any institutional gobbledygook. Reject all the financial dogma you've heard.

I've provided this brief overview out of my own and other's experiences. I have made many mistakes and I felt compelled to take serious look at my own financial troubles. I intend this article for the young freethinker and those who have little knowledge of financial affairs. I hope that some of you can learn from my errors.

I have no connections to any corporation, nor do I charge a fee. As best as I can gather, all of my observations derive from facts which anyone can check out for themselves. I have learned that the most prevalent beliefs about finance not only do not work but they will greatly increase your chances that you will remain in debt for the rest of your life! If, in any sense, you have understood the dangers of beliefs given as examples throughout this web site, you might also recognize the dangers of common beliefs about borrowing money and investing.


GET RID OF YOUR DEBT

"You can tell what's informing society by the size of the [building], what the building is, the tallest building in the place. When you approach a medieval town the cathedral's the tallest thing in the place. When you approach a 17th century city, it's the political power that's the tallest in the place. When you approach a modern city it's the office buildings and dwellings that are the tallest things in the place."
-Joseph Campbell & the Power of Myth (Aired on PBS, show 2)

Perhaps the most important and difficult step to achieve financial freedom should aim to get rid of your debt before anything else. If you don't have debt, then try to avoid the trap of getting into debt. This should appear evident when you realize that most debt results in paying companies higher interest rates than you can get by investing. People pay hundreds of thousands of dollars over the years for services that serve absolutely no useful purpose except to make other companies rich.

Joseph Campbell's observation above about the informers of society, religion, politics, and businesses, reveals an interesting exposure. Who owns the tallest buildings today? Corporations. Especially insurance, credit, and banking companies!

Consider that corporations have more controlling power over your life than do priests and governments. If you doubt this, think how much of your waking time you devote to them. Like most people, you probably work for a company 40 hours a week, you put your money in a bank or brokerage, you spend time with insurance agents, car dealers, shopping, and paying bills. You get hounded by advertisements from junk mail, phone calls (usually at dinner time), door-to-door salesmen, and internet e-mail. Even the federal interest rate and your money gets controlled by private corporations (the federal banks). Corporations profit by your devotion and poverty. Note that in the eight hours or more you spend at work a day, you have little freedom. Certainly you have no freedom of expression, you cannot freely go where you want, you must act carefully against social and sexual blunders, and, of course, you have no right to bear arms. In effect, companies control most of your waking life! And if you do not have the financial ability to free yourself from your job, you have become, in effect, a corporate slave.

Realize that corporations want you to remain in debt, not as written policy or out of a conscious social desire, but as a means to profit. The way corporations inform society gives them the power to control your job, your dues, your life. They profit when you pay off debt; they get richer and more powerful.

So you might believe (as corporations want you to) that credit allows you to use other people's money so you can enjoy the comforts of a better home, car, or entertainment system, etc. Sure. And dogs think they can get somewhere by orbiting poles. The entire economy structure works to make you earn money to accumulate wealth for the companies you interact with. The wealth does not aim toward you, but rather them. So for starters begin to doubt the belief about living off credit. It may seem to work in the short run but in the end, it will cost you thousands of dollars.

One of the most astonishing examples of wasted money goes to paying off home mortgages. For example, if you buy a home with a 30-year rate mortgage, you will pay for that loan roughly three times. If you multiply your payment times 360 months, you will see that the total amounts to approximately three times the value of the money you borrowed. Two-thirds of that total goes to interest. Interest goes to the profit the mortgage company makes for lending you the money in the first place. And they feel that you should pay them back three times. That's 200% interest!

Let's put some real numbers to this. If you buy a $250,000 home, with a $200,000 mortgage, you could end up paying as much as $600,000 over 30 years (depending on the mortgage interest rate of course). This means that you could pay over a half million dollars in interest!

Imagine the number of hours you will have to work week after week, year after year, just to make your loan company richer. Do you really think they deserve all this money of yours more than you do? Do they perform such a service that you must work so hard just to add such an amount for themselves? You earned that money, you pay taxes on it, yet they end up with most of it.

Imagine, instead, that you could put those thousands of dollars into a mutual fund that increased over the years. You could enjoy retirement income without ever touching the principle. You would mostly likely never have to work again.

Another false belief comes when a friend or your tax accountant tells you that you should never pay off your mortgage because it makes a good tax shelter. If they tell you that story, get a new accountant. Think about what that would mean. What they have really said amounts to: "keep on paying a dollar of interest to get back 28 cents in tax deduction." If you persist on believing the tax shelter myth, may I suggest that if you feel willing to give me a dollar for 28 cents, I'll gladly supply you with the loan.

Car loans come next to home mortgages. Notice how finance companies bend over backwards to allow you years to pay off these loans. How thoughtful of them. That works because car loans act like mini-home mortgages. And don't get swayed by zero-interest loans. They serve only as advertising scams. No corporation will give away for nothing; the loan usually gets attached to a higher price of the car. It provides a win-win situation for the corporations and a win-lose situation for you. You get a decent car in the short run but you pay through the nose for it while they've made you believe you got a great deal. Even after your purchase and you begin to doubt the deal (usually pointed out by friends), putting your cash on the line makes many people defend it to prevent embarrassment.

Credit ratings serve as one of the silliest needs ever invented by corporations. In effect, what they say amounts to: "You live so poorly that I will not trust you until you can prove that you will pay me back." I consider credit ratings an insult. Instead, I demand credit ratings from corporations. I do not trust them and I demand evidence that they will work for me, not the other way around. Please note that once you have control of your finances, you will not need a good credit rating because you will owe no one. Instead, they will owe you. This defies conventional beliefs, but beliefs have no connection to facts,. Common sense should tell you that if you have no debt, you will not need a credit rating. I use credit companies for my purpose, not theirs, not for paying off debt, but for the convenience of paying without cash. If you have a credit card, make sure you make your payments on time so you don't have to pay any interest.

Instead of paying off mortgages, succumbing to a car loan, or paying off high interest credit cards, consider other alternatives. Instead of that expensive home, go for a cheaper home, one that you can pay in cash. Or live with relatives for a few years, paying rent by washing dishes, mowing the lawn, doing the groceries, etc., things you'd have to do anyway in your own house. You may want to compromise by renting with friends. Instead of a new car, buy a used car, get a bicycle, use the public transportation. Think of ways to avoid loans. Use your own money to pay yourself back instead of paying off credit cards. If you do not trust yourself to pay yourself back, why should anyone else trust you? Yes this takes some conscious effort, but far less effort than the work you will need to pay off debts in your future. A leashed dog would have to work far less by going in the opposite direction, but dogs have limited cognitive ability to solve problems compared to humans (a least most humans).

In the mean time, instead of paying off loans, put that money to work for you in stocks, bonds, or mutual funds. Once you've accumulated enough wealth, only then consider buying a house or a new car. You'll amaze yourself at how quickly you can accumulate wealth. When you invest in corporations, you not only do them a favor (they get to use your capital for new investments) but you've just turned the table around. Instead of you paying them, they pay you in the form of dividends, interest or capital gains!

So sacrifice a little, and avoid loans for the chance of great financial success in the future. And if you have loans, get rid of them before you put you money in other investments. Only after ridding yourself of debt, should you invest your money. Consider that virtually every wealthy person in America invests his or her wealth. In fact, if you do not invest in either stocks bonds or mutual funds, the chances are extremely high that you will never achieve financial security. Consider that the top 1% of wealthy Americans own over 50% of U.S. stocks, bonds and mutual funds. Half of all Americans own only 0.5% of stocks and bonds [see chart]. Consider this question: can one ever become financially secure by remaining in debt and without investing at all? Think about that.

So first. . . GET RID OF YOUR DEBT!


HOLD OFF HAVING CHILDREN

According to a U.S. Department of Agriculture report, a middle-income family in the U.S. who had a baby in 2010 will spend almost $300,000 of raising that child to the age of eighteen. You simply cannot become financially stable if you have children unless you have inherited money or if you have a well paying job. Hold off having children until you can afford it, or better yet, don't have children at all! Once you have a child, you have legal obligations to raise it properly, and if you don't you could end up in prison. If you get a divorce, you may have to pay alimony and child expenses for years.

Children also produce financial risks because you can never know if they might become sick and you may have to pay thousands of dollars worth of medical bills to keep them alive. Children also pose potential legal problems (drug abuse, crimes, etc.) that could cost you lawyer fees, not to mention draining you of your mental health and personal freedom. Does the world really need more people?

Having children in today's overpopulated world doesn't make sense. Consider that overpopulation creates world problems such as food & water shortages, and adds to human induced climate change due to its reliance on fossil fuels, carbon, and other greenhouse causing elements. The more people we have in the world, the more world problems we will have. If you care about the environment and your financial condition, avoid children.

If you have an innate maternal need to take care of something, adopt a cat or dog instead.


INSURANCE

Perhaps there exists no other service paid by people with so little understanding of the value they get than with insurance. It behaves similar to debt, but at least you get some promised value for your money, usually for the sake of peace-of-mind. Their insurance agents may convince you that they work to protect you, but please realize that they work for a business dedicated for their profit, not yours. Interestingly, insurance companies do not lose money on insurance policies. Oh, they may go out of business for being sued, breaking the law, or for their risky investments, but they never lose on their insurance programs. When they sell you a policy, they gamble with odds greatly in their favor that bad things will not happen to you. You, on the other hand, gamble that bad things might happen to you. On balance, insurance companies never lose. Just as the odds go in favor of casinos, so do they favor insurance companies.

Think about it this way. If they feel willing to sell insurance to you, you probably don't need it. Their mathematicians (actuaries) have statistically calculated that you probably will never need it, or they would never sell it to you in the first place.

Many people do not realize just how insurance fees can add up over time, sometimes adding up to a greater value than the thing you try to protect! If you have your financial house in order, and have accumulated a certain amount of wealth, you may have the ability to act as your own insurance agent. When you have wealth, more often than not, the odds will play in your favor (instead of the insurance companies) and you can pay for items in full in the small chance that it does become damaged or destroyed.

Of course in some cases you do want insurance and sometimes the law requires it (car insurance, for example), in most cases you do not need exactly what they want to sell you. If you cannot understand their sales pitch, or become suspicious, (and I confess, I have never understood the language printed on their policies) get advice from a separate advisor, or get insurance information from libraries and publications. Get as little insurance as you need and avoid the unnecessary burden of paying for unknown promises. The very fact of living results in unavoidable risk to life and property and no one can do anything about it, including insurance companies. Look at the bright side from the worst that could happen: you could die at any moment, but then you'll have escaped money worries forever!


After reading the above you may think that I have a hatred for corporations and financial institutions. Far from it. On the contrary, I find that a capitalistic economy offers the greatest (so far) chance of becoming free and independent. I mainly criticize their controlling policies, not so much because of their manipulations but rather because people allow corporations to control them. It amounts to supply and demand and if people allow themselves to live like slaves, the corporations will take every advantage of it. But with knowledge, you will realize that you can control them instead of them controlling you. Corporations offer the very financial means for you to become financially independent. In fact, if you have the fortunate ability to add a product or value to society, you can start a corporation yourself. How else do you think corporations get started in the first place?


INVEST YOUR AVAILABLE MONEY

If you do happen to survive, it should become obvious that once you eliminate debt, virtually all your purchases will come from your cash. If you start out young, your income will probably derive from an allowance, job or an inheritance. If you cannot survive from the earnings you get, you need to get a job with higher income, even if the job results in a temporary sacrifice to comfort.

You should invest only after eliminating your debt because paying debt while investing can cancel themselves out. For example, if you have debt that amounts to paying 8% and you have an equal amount of investments paying you 8% interest, the net result equals zero, a no-sum-gain, and it will take longer to eliminate your debt. Even if your investment pays more than your debt interest, you still have to subtract the net gain from the net loss and this usually amounts to very little gain while you increase the time to pay off your debt. If, on the other hand, you put all of it to work to eliminate your debt, it goes to reduce your deficit by 8%. You will eliminate your debt quicker and the quicker you can do this, the quicker you can put your money to work for you.

Of course there occurs situations that will not allow you to put all your investment money to eliminate debt (such as alimony or legal obligations) but wherever you can eliminate debt, put all the money available to you for that purpose.

Put some money from your job earnings into a 401K plan.

Many companies offer 401K plans for their employees. These special accounts get set up in your name where a portion of your job income automatically gets inserted into this special account. Usually these provide excellent opportunities for great rewards. Make sure you learn about your company's 401K plan and how they work. Most plans allow you to put a sliding scale of a percentage of your income into these accounts usually ranging from 1% to 16%. Sometimes companies will offer a matching dollar-for-dollar for the first few percentages of your distribution into the account. Don't pass this up! You will rarely find free money in your life and this gives you a risk free way to get it. Usually you will have the option to put your distribution into a variety of investment instruments, ranging from money market funds, or mutual funds. The only draw back amounts to the realization that you cannot take this money out of your account until you retire without a penalty (although there occur some exceptions such as for emergency reasons or special loans). 401K plans also get their tax deferred. That means that you don't pay income tax on it until you retire. If you quit your job, you can roll-over your 401K account into an IRA account or into another 401K plan if you get another job. Note, not all companies offer 401K plans, but if they do, seriously consider it.

Open an account with a discount brokerage.

What ever extra money you have, put it into an investment that will earn you money over time. This does not mean a bank or their saving accounts. Banks act like traps that invest your money for themselves and dole out pennies for you while keeping the majority of interest gains for themselves. Consider saving accounts as a cruel joke played on ignorant people. They pay you single digit interest rates (many times in the fraction range when you subtract their finance charges). I recommend banks only for getting cash and the convenience of using their ATM machines. Put only a minimum amount in a bank, just to keep enough money for personal cash spending. The rest of your money should go into a brokerage account, preferably a discount broker. Many times discount brokers will operate like a bank with free checking, free credit cards, etc. except that they earn more money for you. (Unfortunately they do not use ATM machines, but this may change in the near future). Discount brokers provide generally the same service as full brokerages (like Merrill Lynch) but discount brokers charge less for financial fees, sometimes no fees whatsoever. Also, the fees for buying and selling stocks come much cheaper. But most of all, they do not hound you with an assigned stock salesman. Getting advice from a broker amounts to the likes of used-car salesmen giving advice on a car purchase. Avoid broker advice. If you need financial assistance, hire a separate financial adviser that works for you instead of a brokerage company.

When opening your account, put your money into a money market account (this usually happens automatically anyway). Money market accounts usually pay higher than bank interest rates but this will not make you rich. You should put your money to work by putting most of it in bonds and mutual funds. The money market account will act as a holding place whenever your buy and sell your stocks or funds.

As you build up wealth, and you need some quick cash to cover an emergency or the cost of an expensive item, you will have the ability to borrow from your own account. The neat thing about loaning from yourself amounts to paying no interest fees! But if you do borrow from yourself, you must pay yourself back. Unfortunately, paying yourself back, apparently, seems a very difficult thing for many people to do, not because they physically can't do it but rather because they have no self-control. Consider that if you can not do this very simple disciplinary act, then you, in effect, act like a dog tied to a pole. If you cannot discipline yourself, you may as well resign yourself to the control by others for the rest of your life. You will then most likely succumb to low interest saving accounts or CDs, or you will submit to loans from corporations, letting them control your financial direction instead of you.


PICKING AND BUYING STOCK INVESTMENTS

When I first wrote this article only people used to pick stocks. However, since then, stock markets have changed dramatically due to changes to laws and technology. Today, mostly automated computers buy and sell stocks. Of course humans can still choose stocks to buy or sell them them through brokers or from their computers, but this accounts for less than half of all US stock trading today. Almost all trading done today gets done through computer controlled mathematical algorithmic programs executed within milliseconds. Many of these programs get used by big institutions such as mutual funds, insurance companies, and hedge funds. This makes it virtually impossible for a human to outguess the stock market. The odds go against the human stock picker, so let the buyer beware! Because of these stock market changes, I no longer recommend people choosing and buying individual common stocks (buying mutual funds, however, describes another thing. More below).

If you open a brokerage account, you'll find it amazing how easy you can buy and sell stocks and mutual funds. You only need to call them up and tell them you want to buy a number of shares (most investors today use their personal computers, and moble phones instead of land-line phones). You'll never have to go to your brokerage company, sign papers or get special permission. In fact, one of the brokers I use, I've never seen or gone into its building. It all gets done by computer. You can buy and sell through the internet without speaking to a human broker at all. In fact gets so easy, it can deceive you. The problem comes not with buying and selling but rather, how and when should you buy and sell. No one has yet had the ability to answer this age old question with consistency.

Persistent myths abound about how some individuals can actually predict what the market will do or how a certain stock will perform. You only need to listen and watch investment "experts" on financial programs telling you which way the market will go the next day, month or year. If you've noticed, when the market goes up, most often you'll hear from the "bulls" (experts who think the market will go up). And when the market goes down, you'll hear from the "bears" (those who think it will go down). They certainly look and sound professional in their expensive suits and elegant financial talk. But don't get fooled. If they could accurately and consistently predict the market, the market could not work. If they always got it right, everyone would follow them and no risk would result. The market works out of uncertainty and risk. It cannot continually go up and it cannot continually go down. It must have a large measure of randomness. Consider that if these financial advisers could actually predict the market, why do they work for a corporation; why not simply utilize their own predictions for themselves? Basically, there occurs two types of investment soothsayers, the chartists and the fundamentalists.

Chartists serve faithfully to arcane and impressive plot charts of stocks and indexes. They actually believe that the stock market works so orderly that they can plot out its movements in such a way as to predict the future. They look for patterns that repeat themselves. When things don't happen as predicted (which usually proves the case), the poor chartist blames himself or herself for not seeing the right pattern. The chartist "knows" how to predict the market if only he or she can identify the right pattern. The chartist provides a good example of trying to force fit the theory to the data instead of letting the market speak for itself.

The fundamentalists act somewhat like Christian fundamentalists. They look at the Bible of the stock, the corporation itself. They look at the financial health of the company, its quarterly reports, sales, assets, liabilities, etc. They think that a company with good fundamentals will outperform in the market. Unfortunately a company's fundamental status gives only one of a plethora of factors that affect the stock price, in many cases, a very negligible factor.

Stocks can rise and fall for so many reasons that trying to predict their immediate future accurately gets less likely than predicting racing horses. If you believe these market prophets, you will only indulge in the modern superstitions of our society.

Stock prices move up, down, or remain the same for many reasons. For some examples:

A recent war, terrorist action, or public scandal frightens investors and the whole market reacts by a sell off. A false rumor gets spread about a company causing its stock to drop in value. An employee buys a stock because his company offers it without sales charges. An investor needs the money so he sells all his holdings. An unthinking investor buys a stock at greater value than its going price. A racist sells his stock because he thinks Jews control the company. An Astrology buff buys a stock because Mars has aligned with Venus. A chartist buys because he "sees" a pattern in his chart. An investor buys a stock because a broker recommends it. A moralist buys stocks on the basis of her beliefs about a company's moral position in the world. A fundamentalist sells a stock because he sees the company's assets go down. A naive investor buys stock because the company name intrigues him. An investor buys a stock because he thinks the company will do good in the future. An investor sells a stock because he thinks the company will do badly in the future. The fed chairman hints at raising the fed interest fund rate, and the majority of investors begin to sell. And of course we have the unpredictably of unconscious computers buying and selling stocks.

These give just a few out of thousands of reasons why stocks get bought and sold. The total consensus from all these reasons produces an up market or a down market. Please realize that stock prices do not get determined by companies or stock experts but by the consensus of millions of investors and automatic computer systems. In a way, the stock market works like a paramutual horse race where people bet, not because they know which horse will win but by which horse they believe will win. Although a company's health may serve as the greatest predictor, its financial health serves as only a minority compared to the accumulation of other reasons. And even then, the company only has an indirect influence on the price of its stock (this does not count the initial offerings or buy-backs).

What should this tell you? That there simply exists no reliable way to predict what a stock or a market will do at any point in the future. Do not believe in what the professionals tell you. No doubt they may guess right some times, how could they not? They have a 50/50 chance of getting it right but does this mean they actually predicted it? No. If I predict that an airliner will crash within the next month, and if one actually crashes, does that mean that I really have prophetic powers? Of course not. Predictions of this sort fall under the common fallacy of confusing a correlation with causation. Just because you see a correlation says nothing about what actually caused it.

There occurs only a couple of semi-reliable indicators on which item to invest and even these do not come as absolute. Ironically they come from a combination of chartist and fundamentalist basics (not everything they do proves incorrect). The first comes in the form of long term the major indexes (The Dow and S&P 500, for example) that have shown a general upward growth throughout its history. In the history of the Dow and S&P, they have never remained down forever. They have always eventually gone up to set new records at some unpredictable time in the future. This serves as a chartist observation, but anyone who looks at a chart of the history of the Dow will see the upward growth. This gives us the only semi-reliable pattern in a chart. Second, a company that makes a good product will more likely than not, go up at some time in the future and remain in existence longer than companies that do not make good products. This comes as a fundamentalist observation but one that proves correct more times than not in the long term. Companies that make good products deem more likely to continue in demand in the future and this gives them a fair chance for a longer existence. This gives partial reason why some of the largest Dow industrials have remained on the board for many years.

These observation give, as far as I can see, the two main reasons why investing in stocks results in a good gamble.

Can I actually rely on the stock market to rise in the future? Well, no, because I have no way to predict when or even if it will ever rise again. However, if it never rises again, then something worse would occur. The market would no longer work and the entire economy would crumble, perhaps because of a world war or catastrophic disaster. In this case, money would lose its value and the government, our social system and perhaps our lives would get destroyed. Like I said, there occurs risks in life and I will have only risked my money along with my life. I feel willing to bet that the economy will not crumble just as I bet that I will remain alive tomorrow.

Buy low, sell high

Note that making a profit in the stock market works by a simple rule: buy low, sell high. This appears deceptively easy to imagine but difficult to carry out. The rule says that you will profit best when you buy stocks when prices go low and sell when they go high. Can anyone foresee when they will reach their highest or when they will fall to their lowest? Unfortunately no. As observed before, no one can predict how or when. However, you can look at its history and say that at this time it either appears higher or lower than it did in the past. On this basis you can buy at a time when it appears lower than it did in the past and you can sell when it appears higher than it did in the past. This you can do with almost certainty.

So what does this information from the market tell us? Buy stocks (preferably mutual funds), when they appear lower than they have appeared in the past and hold on to them until they rise at a profitable point. Since you cannot predict when they will rise to your desire, you can best pick a stock from a company that has a good chance of existing for a long time so it will have a longer chance of its stock moving to a higher position. This means that a company that makes a viable product has a better chance of thriving than one that makes a bad product. But like I said before, because of computer trading, I no longer recommend purchasing individual common stocks unless you want to gamble with your money.

Diversify

If you do decide to buy individual stocks, diversify. Even though you may think you've made a good choice of stock, the company can still fail for many and unpredictable reasons. The company may go out of business due to unforeseen competition from another company. Another corporation may buy it out. It may fail for illegal reasons. To offset these possibilities, you can diversify your investments by purchasing several stocks. That way, if one or two stocks go down, you won't lose much from your total investment and the others will keep you going. One of the simplest ways of diversifying goes with investing into a mutual fund, a bond fund or a mixture of both.

Mutual funds

Most mutual funds get controlled by investment managers, the very soothsaying "experts" that I've criticized. If they cannot predict what the market will do, why should I let them decide on my investment choices? This would, in effect, counter the very purpose of financial independence. Many of these managed funds also incur load fees, sometimes as high as 5 or 6% a year. Consider avoiding these funds! In general, don't buy mutual funds where professionals control them.

Fortunately, there exists a class of mutual funds whose stocks go not get predicted by money managers. They call them index funds and they have a bonus advantage above others in that you will generally pay very low maintenance fees. Index funds get designed to follow a specific market index, for example the S&P 500 index. This fund will invest in the 500 largest S&P stocks. They serve as the cheapest and easiest way to get started into diversified investments. Usually for as little as $1000, you can start an index fund account. More importantly, the S&P index funds have outperformed, over time, all other managed funds by over 80%. If anything tells you that managers cannot predict the future, the fact that S&P index funds outperform most other funds ought to tell you something. Even the funds that do outperform an S&P rarely repeat their performance in the years that follow.

The index funds low yearly maintenance fees fall usually below 1/2 percent. Beware, though, that some index funds charge up to 1.5% a year or a load (a load requires an initial up-front percentage fee as high as 4 or 5%). Avoid these funds. They do not perform any better than the lower fee funds and since they can only follow the market index, they can do no better at giving you profits.

For an example go to this web page to see the fees and expenses for the Schwab 500 index fund: http://biz.yahoo.com/p/s/swpex.html

Then go to this web page to see the fees and expenses for the BlackRock Index fund: http://biz.yahoo.com/p/c/ciebx.html

Note, that because both funds follow the S&P, both will perform virtually identically, but compare the fees. Which fund would you rather invest in?

How much to put in stocks?

Once you decide to invest in stocks, you must decide on how much to invest into stocks based on what you want your investments to do.

If you start out at an early age and want your investments to grow until retirement, you have the potential to handle greater risk. In this case you may want to put most of your money into mutual fund growth stocks. As you get closer to retirement, you may wish to lower your risks by putting most of your investment into high grade bonds or preferred stocks, and live off the interest. (Preferred stocks act somewhat like bonds in that their price remains relatively stable while giving high percentage dividends.) Preferred stocks represent the only kind of stock that I would consider buying individually.

Picking your own stocks.

Again, I no longer recommend buying individual stocks except in certain cases such as: preferred stocks, or if you have insider company information (especially if you work for that company). Of course not everyone will agree with me so I give the following advise for those who choose to purchase individual common stocks anyway.

Common stocks represent a form of corporate equity ownership, sometimes referred to as Ordinary Shares. When people talk about stocks they usually refer to common stocks such as General Electric (GE), Coca-Cola (KO), Ford, (F), etc. The reference "common" distinguishes it from "preferred" stocks. When you buy a common stock you become part owner of that company, usually with voting rights. Many times common stocks include earning dividends and capital appreciation. Common stocks represent the riskiest form of stock.

As you gain knowledge about stocks, you may become more interested in the subject to the point of it becoming a hobby or a self-feeding preoccupation. You may want to pick out individual stocks for your diversified portfolio. Watch out! The stock market may begin to look so simple to you that you will think you can guarantee your wealth. Unfortunately no guarantees exist. If the stock game becomes irresistible to you, learn the risks of your investments and never gamble on risky stocks that you cannot afford to lose. If you wish to play this game, start out will a small amount of your investment, or better yet, play it out on paper before you commit yourself.

Beware that if you buy and sell stocks, always changing your portfolio into a "better" position, you will generally pay higher fees than those who hold for the long haul and they will generally do better than you will. I cannot vouch for others but this observation certainly holds for my past mistakes. Brokerages love to buy and sell for customers because they make a commission whenever they buy or sell stocks. Think of it this way: as a general rule, people who buy and sell in the short run perform like speculators (read: gamblers) and those who buy and hold for the long term perform as investors.

If your company offers stocks, you may sit in the rare position of getting insider information. Since you work for that company, you might have knowledge of a new product release that no outsider knows. You may realize that this new product will have a good chance of selling well and may result in a major profit for your company. Also, companies usually offer stocks to their employees with no fees at all. Consider buying from your own company, if you know valuable insider information.

Preferred stocks represent equity securities that have properties of both equities and debt instruments (similar to bonds). Preferred stocks usually carry no voting rights but most of them provide dividends and have priority over common stocks in case the company defaults or goes into debt. For this reason, preferred stocks have less risk than common stocks. They also do not have the volatility of common stocks, while at the same time produce stable dividends. Most preferred stocks have a par price of $25 dollars.

Unfortunately it proves difficult to get information about preferred stocks and the information sometimes appears conflicting. The ticker symbols differ depending on the exchange and brokerage firms tend to push common stocks over preferreds because they make more money selling and buying common stocks, thus they offer little or no information about preferred stocks. However, you can find information on the internet such as Quantum online that provides preferred stock listings with the proper ticker symbols and dividend amounts. Also learn about their call dates because some companies can call the stocks in (buying back your stocks) at a set date in the future.

Know what you have invested in

Amazingly many people do not know what they have invested in. Some people actually buy stocks on tips without even knowing what that company produces! If you do not have some idea of what you own or what your stock company does, how can you possibly determine the risk of your investment? Would you consciously gamble while wearing a blind fold? Try to invest in companies whose products you know or have comfort with. If you buy General Electric, you will probably know what products they produce. If you like a particular product or service, and you observe that other people like it too, a good chance exists that their stock might follow the feelings of the people. Always have a reason for investing; never invest blindly.

Risk

There will always exist a certain amount of risk no matter what you do. You can, however, learn how to evaluate risk and how much of it you feel willing to take. Beware of risk that promises a high percentage of success. Along with high dividends and promises comes a greater chance for failure. You'll discover high percentage promises that await the unwary investor. You'll find stock prices that cost only a couple of dollars per share that provide 40% interest from dividends, junk bonds that pay 50%, and newly released stocks from emerging companies that don't have a product yet but only a promise of a future product. Watch out, these may look tempting but along with these promises goes a much higher risk of failure.

On the other side, beware of life plans that offer virtually no chance of success. One of the lowest chances of success come from those who take the path of borrowing from others. In other words, debtors. Another low chance of success come from those dependent on drugs, alcohol or some physical material. Substance abuse reduces wealth and produces little of value. The highest risk of all come to those who rely solely on superstition and prayer to get them through life. You'll find millions of poverty stricken people throughout the world, especially in the most religious parts of India, Islamic, and Catholic controlled countries who intransigently believe in their superstitions. They haven't a chance to achieve financial freedom much less live freely. Nor can they help society from charitable acts since their lives depend on charity from others; their entire lives get spent in debt. Superstitions spread poverty, falsehoods, create disease of mind and body and contributes nothing of value to society. Avoid them.


These give only a few basics about investing and there occur lots of other possibilities not mentioned here like bonds, high dividend utility stocks, overseas investments, real estate, gold, etc. By gaining knowledge about how money and markets work you will begin to understand how to utilize this knowledge to your financial advantage.


SPEND

Once you've achieved financial independence, you will have more power over your life. The importance of this comes not from your financial holdings, but rather because of your comfort and ability to achieve the freedom that you desire. If you decide that you do not like your job, your financial position will allow you to bargain for a higher salary. If you get layed-off, you will have the ability to live off your investments until you find another good job, or perhaps you'll never have to work again. But most importantly, you'll have the ability to spend more for what you want than you've ever imagined before. Instead of paying something through credit, you can pay in cash while the bulk of your investments continue to work for you, gaining in value over time.

If you make the mistake of hoarding your money, never allowing yourself or others to enjoy your success, then what point will you have made of investing in the first place? If you did it just for security but without experiencing pleasure, I suggest committing yourself to a state mental institution; this will take far less effort and you'll feel secure in your straight jacket knowing that others will take care of you for the rest of your life.

Having greater wealth means that, not only can you spend more for yourself, but you can spend more on others. Your wealth can't help but spread to other people. Your investments will help raise capital for corporations, which means more jobs, and the potential for technological advances. You can give more to charities, friends, and family. Consider that the greatest philanthropists come not from religion or social welfare systems, but from rich people who have successful businesses or who have invested wisely (George Soros, Bill Gates, Ted Turner give just three examples).

Even if you feel selfish and don't give a dime to anyone, your added wealth means paying more taxes which will indirectly benefit society through paying for education, medical care, defense, etc. Even if you hoard your wealth, you can write a will to give your remaining money to your family, or your favored charity after your death. Even if you do nothing, your wealth will go to the government. However, if you remain poor, what can you possibly give? Your blessings? A promise that you'll eventually live in the world of the undead (heaven)?

Being financially independent means that you'll have more freedom and control over your life, doing what you want to do and paying for what you want rather than what others want. You will feel better about yourself and this independence provides the greatest opportunity for your life's success and will add to the success of the social economy.


SUMMARY

1. Dicipline yourself. Don't think like a dog. Avoid financial beliefs.

2. Eliminate your debt before you invest. Sacrifice expensive items today for later gains tomorrow.

3. Pay in cash. If you need to borrow, borrow from your own account and make sure you pay yourself back.

4. Minimize your insurance.

5. Invest. Don't buy into risky stocks what you cannot afford to lose. Invest for the long term. Utilize 401K plans and open a brokerage account.

6. Diversify. Don't put all your eggs in one basket. You want minimum risk for the largest gains.

7. Don't believe the experts. Educate yourself. Gain knowledge.

8. Control your life. Spend what you can afford to take out from your investments and have fun.


Should you believe what I've written?

Of course not. Do not believe any of the suggestions I have provided or act on my observations until you check out these observations. How do you know I have it right? For all you know, I may have made this up. Maybe I like to deceive and confuse people. Perhaps you have better information and better ideas. I certainly do not claim to possess any special knowledge. Think for yourself! You should also feel skeptical of the information listed below until you check it out. Some of the information here may provide you with the information needed to help you decide your financial path so you can make decisions based on your observations.


References

Joseph Campbell, "The Power of Myth," Anchor, 1991

Ted Carroll, "Live Debt Free : Make the Dollars Work for You-Instead of the Bank," Adams, Pub., 1991

Bob Hammond, "Life after debt," 1986

Louis Engel, & Henry R. Hecht, "How to Buy Stocks," Little Brown & Co, 1994

Friedrich A. Hayek, "The Road to Serfdom," University of Chicago Press, 1994

C.C. Hazard, "Confessions of a Wall Street Insider," Playboy Press, 1972

Peter Lynch, "Learn to Earn : A Beginner's Guide to the Basics of Investing and Business," Fireside, 1994

Adam Smith, "The Wealth of Nations," 1776

David A. Solomon, "How to Win the Mortgage War : No Mortgage, No Debt, in As Little As Two Years," Sirrom Pub., 1997

Truth Seeker: the Jornal of Independent thought, Vol 122, No. 3, 1995

The information about S&P index funds comes from the ratings reports for mutual funds from Consumer Reports magazine: May 1990, May 1993, May 1995, May 1997, May 1998. (Note that Consumer Reports serves a non-advertising publication that has no direct connection to financial institutions.)

Internet sites

The internet has so many web sites on investing, it boggles the mind and I have not remotely come close to examining all of them. These give just a few that you might find informative:

Yahoo Finance web site gives you just about all you need to know about a stock. It will allow you to check market values, stock and mutual fund prices, charts, research, profiles, news messages and more: http://quote.yahoo.com/?u

Daily Stocks will provide you with a plethora of information and if you like to look at charts, this will fulfill a chartist's dream: http://dailystocks.com/

Zacks Wall Street Snapshot allows you to look at the balance and income statements from the stock companies. You can also see a consensus of brokers buy-hold-sell recommendations for a stock: http://www1.zacks.com/cgi-bin/JMFR/FreeReport?ref=DAILY&ticker=BA

The Motley Fool provides tips, suggestions, and messages from investors. It can help provide a consensus about how people feel about a certain stock: http://www.fool.com/

Fair Value Worksheet will calculate the fair value of a stock and tell you in percentage if it gets overvalued or undervalued (Note, 'fair value' does not necessarily give a good indicator for a stock buying choice. Sometimes it proves too conservative, other times it has no meaning.): http://www.pathfinder.com/money/value/index.html

Dow 30 industrials lists the stocks and their prices (these consist of the stocks that determine the Dow average): http://fast.quote.com/fq/infosk/group?dj30

Ever wonder what companies make up the S&P 500?: http://www.dbc.com/cgi-bin/htx.exe/symbols/sapstock.html?source=blq/dailystocks

How to Make Money in Microseconds: http://www.lrb.co.uk/v33/n10/donald-mackenzie/how-to-make-money-in-microseconds

WARNING: Beware of free web sites showing their stock recommendations. They may have made up the recommendations for their own benefit, not yours.


An E-Prime document

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