Editor: Crass Cash
People love it when the stock market goes up. If you're a value investor you love it when the market falls. One thing you can be sure of is the market will either be going up or falling. The psychology of dealing with this can be absolutely essential. If you sell during a fall you'll miss out on the rebounds. During a bull market your brain can become euphoric. Dealing with both scenarios requires emotional intelligence EI.
I'm sorry fiction fans, GARP is not a person when it comes to investing. Instead it's an acronym for Growth At A Reasonable Price (please don't correct me about the extra A I didn't invent this). There is a constant debate about which method of investing is better: growth vs. value. GARP combines the two.
While Warren Buffett has never explicitly said that he's a GARPer, he may have very well have invented it. Buffett started out as a die hard value investor, strictly buying stocks that were incredibly cheap based off of their balance sheet. His philosophy slowly changed to more growth oriented companies, but as always he wasn't willing to over pay for them.
Let me explain the difference among these using real estate since that's a lot easier for people to value. Value investing is only willing to buy a house for a lot less than its replacement cost. You see a house and it's selling for say 50% of what it would cost if you had to build a new one, that's value! The problem is that it may be that cheap for a reason. Like for instance it's in a bad neighborhood and you can't rent it out for anything. No cash flow.
Growth on the other hand is buying something that is overvalued and hoping that rent pays for it eventually because the rental rates are growing very quickly. You buy an investment property where cash flow from rent isn't enough to cover the monthly costs of the house. But you're hoping that the prodigious increases in rental rates will eventually cover this gap and the property will be worth much more later. Here's the problem. The growth may not come and you're stuck with an investment that is losing money each month. Just ask all of the investors who bought real estate using this method over the past 7 years.
Now here's the beauty of GARP. You buy a piece of real estate that you know can be rented out for X dollars. After doing your cash flow analysis you see that this will be less than (with a nice margin of safety) your projected rent. Thus creating a situation where it's making you money and you're not hoping that something has to change. Even during the worst of the property bubble, rental rates only dropped about 10%. If you had a nice cushion you would have been fine through out the whole bubble.
Finally, and most importantly, if you can't find any investment meeting GARP standards, don't buy into that market! It's a good sign of a price bubble.
Editor: Crass Cash
Let me first say that I in no way work for nor receive any sort of money/compensation from Vanguard. I'm simply using them as an example because I like them (full disclosure: I do NOT have an account with them) and also because I helped a friend with setting up their account this weekend.
The above link and 8 screen shots will get you going for opening up an account with them. It's incredibly easy and I was able to do it in 15 minutes for my friend this weekend.
A lot of it is some very basic information that they need to know about you personally. Some questions and road blocks that you may run into are:
Screen 1: choose to open a new account until you want to setup a retirement account or transfer an account from another brokerage.
Screen 3: opt for the general savings account and the individual account type unless you want it to also be in your spouse's name as well. In that case choose "joint".
Screen 6: Choose "no" for both questions a the bottom unless the account owner is a FINRA employee or if somebody close to use is a big wig at a publicly traded company. Meaning they own 10% of the company, they're an executive, or is on the board of directors.
Screen 7: I like the electronic bank transfer the best because it'll allow for you to setup an automatic investment plan. Be sure to save $3,000 first and then start off with that amount for the investment amount.
Screen 8: To make this as simple as possible, just go ahead and select "reinvest". What this means is when your investments pay you dividends (cash payments to the owners) it will automatically buy more of the paying investment.
Now if you're wondering how this will make you a millionaire, it's quite simple. Assuming that you start around the age of 25 and work until 65 and you get manage a very average 8% return. All you have to do it save a measly $321.68 per month. Better yet, just throw an even $100 a week at it and you'll have a nice little nest egg of $1,347,000 when you retire. Super easy. Set it up, automatically draft $100 a week into it and let it do the rest!
This website was created due to the atrociously misguided financial advice that I've heard over the decades. Financial freedom is not intellectually strenuous, but it takes discipline.