Prelims

Half Title

The H. Kent Baker Investments Series

The Savvy Investor’s Guide to Building Wealth Through Traditional Investments

Title Page

The H. Kent Baker Investments Series

The Savvy Investor’s Guide to Building Wealth Through Traditional Investments

BY

H. Kent Baker, John R. Nofsinger, and Andrew C. Spieler

United Kingdom – North America – Japan – India – Malaysia – China

Copyright Page

Emerald Publishing Limited

Howard House, Wagon Lane, Bingley BD16 1WA, UK

First edition 2020

Copyright © 2020 Emerald Publishing Limited

Reprints and permissions service

Contact: permissions@emeraldinsight.com

No part of this book may be reproduced, stored in a retrieval system, transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without either the prior written permission of the publisher or a licence permitting restricted copying issued in the UK by The Copyright Licensing Agency and in the USA by The Copyright Clearance Center. No responsibility is accepted for the accuracy of information contained in the text, illustrations or advertisements. The opinions expressed in these chapters are not necessarily those of the Author or the publisher.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

ISBN: 978-1-83909-611-2 (Print)

ISBN: 978-1-83909-608-2 (Online)

ISBN: 978-1-83909-610-5 (Epub)

Contents

List of Figures

List of Tables

About the Authors

H. Kent Baker, DBA, PhD, CFA, CMA, is University Professor of Finance in the Kogod School of Business at American University. He is an award-winning author/editor who has published 36 books and more than 300 articles and other publications. He is among the top 1% of the most prolific authors in finance. He serves on seven editorial boards and is the editor of two investment book series. His scholarly work has been presented at nearly 190 conferences. He is internationally known for his work in investor behavior, dividend policy, and survey research. He has consulting and training experience with more than 100 organizations in the United States, Canada, and Europe. He has received numerous research, teaching, and service awards including the Southern Finance Association’s 2019 Distinguished Scholar and American University’s Scholar/Teacher of the Year.

John R. Nofsinger, PhD, is the William H. Seward Endowed Chair in International Finance at the University of Alaska Anchorage. He also works as a portfolio manager for Denali Advisors. He has written or edited 14 finance trade books, textbooks, and scholarly books. He is a prolific scholar who has published 70 articles in prestigious scholarly and practitioner journals. He is most widely known in the areas of behavioral finance, socially responsible investing, and biology of finance. He has presented his scholarly work more than 60 times at universities and academic conference and more than 50 times at practitioner associations, industry conferences, businesses, and individual investor associations. He has been quoted or appeared in the financial media, including The Wall Street Journal, Financial Times, Fortune, Business Week, Smart Money, Money Magazine, Washington Post, Bloomberg, Nightly Business Report, and CNBC, and other media from The Dolans to MarketWatch.

Andrew C. Spieler, PhD, CFA, FRM, CAIA, is the Robert F. Dall Distinguished Professor of Business and Professor of Finance in the Frank G. Zarb School of Business at Hofstra University. He is the founder of Advanced Quantitative Consulting. He has published over 40 articles, book chapters, and books in wide ranging topics including real estate, fixed income, hedge funds, and behavioral finance. His work has been presented at over 60 universities and conferences. He received three “Best Paper” awards from the American Real Estate Society. He was also the recipient of two “Distinguished Teacher of the Year” and two “Researcher of the Year” awards at Hofstra University. He is the Co-director for the annual conference sponsored by the Breslin Real Estate Center. He is frequently quoted by the financial press including The Wall Street Journal, New York Times, MSNBC, ABC News, Fox News, and others.

Acknowledgments and Dedications

“The most valuable of all talents is that of never using two words when one will do.”

—Thomas Jefferson

In writing The Savvy Investor’s Guide to Building Wealth Through Traditional Investments, we tried to keep Thomas Jefferson’s advice in mind. This short book is filled with many powerful ideas. Its publication would have been impossible without the support of several parties. We appreciate the professionalism of everyone at Emerald Publishing, especially Charlotte Maiorana (Senior Editor). Charlie Wilson (Associate Editor), Sophie Barr (Senior Content Editor), and S. Rajachitra (Senior Project Manager). We also owe our respective institutions – Kogod School of Business at American University, College of Business and Public Policy at the University of Alaska Anchorage, and Frank G. Zarb School of Business at Hofstra University – a debt of gratitude. Finally, we thank our families for their support and understanding: Linda and Rory Baker; Anna Nofsinger; and Terry, Harrison, Teresa, Robin, Kate, and Hudson Spieler.

Introduction

Would you like to be a millionaire or better yet a multi-millionaire? If you’re like most people, your answer is “yes.” This goal is not beyond your reach. As Morton Shulman once quipped, “To make a million, start with $900,000.” However, most people don’t have the luxury of starting with this amount of money so let’s take a hypothetical example. Assume you have a defined contribution plan in which both you and your employer deposit a total of $158.13 at the end of every month into an S&P 500 Index fund that earns a 10% yearly rate of return. If you don’t withdraw any money along the way, how much money will you have in your fund after 40 years? Take a guess. You’d have slightly more than $1 million. You’d be a millionaire. Although the assumed inputs may not mirror your situation, the key point is that regular investing and the power of compounding leads to building wealth over time. Thus, small efforts can create big results in terms of your wealth. Keep in mind, however, that the purchasing power of your money would be much less 40 years from now than today due to price inflation.

“Money, if it does not bring you happiness, will at least help you be miserable in comfort.”

Helen Gurley Brown

How can you build wealth? The answer is simple but not easy. It is more common sense than magic formula. You become wealthy by starting early, spending less than you make, managing risk, and saving and investing regularly and wisely over the long term. Along the way, focus on what you can control, such as the amount of risk you’re willing to take, the costs you’re willing to incur as well as your investment horizon, asset allocation, and behavior. The single greatest factor in growing your long-term wealth is the rate of return you get on your investment, which is determined over time by the market. This roadmap to wealth is straightforward, but it requires discipline and patience. Little by little, a little becomes a lot.

Unfortunately, many people lack sufficient discipline and patience to become wealthy. Others wait for some fortuitous event to occur such as winning a lottery or inheriting a large sum of money. For most people, such events never happen. Consequently, they aren’t wealthy and will never be. It’s sad, because many of them could have become wealthy if they’d only been proactive and taken the necessary steps to building wealth. Don’t be one of these people. Building wealth takes planning and requires both productive work and dedication.

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”

Will Smith

As an investor, you face many challenges. Savvy investors turn challenges into opportunities. After you eliminate high consumer debt, especially high-interest debt, and build up sufficient savings to handle emergencies, you need to decide how and where to invest your hard-earned money. Most people don’t know much about investing and some don’t even know where to begin. As a result, they either never get started investing or make costly mistakes. A good way to start building wealth is to invest in traditional investments – stocks, bonds, and cash or cash equivalents. Stocks and bonds are the heartbeat of Wall Street. You can invest in individual securities, which most individual investors don’t do, or in a pooled investment vehicle, which combines the funds of many investors for the purposes of investment. Pre-packaged products such as index mutual funds or exchange-traded funds offer economies of scale, which provide lower trading costs per dollar of investment, diversification, and professional money management. When you invest in stocks and bonds, you can receive a future income stream in terms of dividends and interest, as well as the alluring prospect of capital growth and compounding returns over time. Creating wealth with these financial instruments is tied to the market’s performance, which you can’t control. Additionally, one of the most powerful avenues to invest and build wealth is through retirement plans.

“Acknowledging what you don’t know is the dawning of wisdom.”

Charlie Munger

“Building wealth is a marathon not a sprint. Discipline is the key ingredient.”

Dave Ramsey

Before you begin your wealth-building journey, you need to be honest about what you know and what you don’t know about investing. The Savvy Investor’s Guide to Building Wealth Through Traditional Investments is intended to help you learn about traditional investments and to become a better investor, especially if you are a novice or an inexperienced investor. As Maya Angelou once wrote, “Do the best you can until you know better. Then when you know better, do better.” By following the advice presented in this book, you can build wealth and be on a path to financial freedom.

“If your ship doesn’t come in, swim out to meet it.”

Jonathan Winters