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Beating The Market Is Harder Than You Think

By Benjamin C. Sullivan

The world is oversupplied with oil, U.S. interest rates are rising and international prospects look dim, with slowing growth in China and persistent troubles in Europe and Japan. How should investors react?

When asset prices decline, people naturally want to take action to alleviate the pain. Yet sometimes no action is the best reaction. Trying to avoid the next market meltdown or identify the next hot market is a siren song for all investors, but even professional investors are collectively unsuccessful when they try to time buying into or selling out of particular investments. For the 15 years ending December 31, 2014, only 19 percent of stock mutual funds and 8 percent of bond mutual funds survived and outperformed their indexes, according to data from Dimensional Fund Advisors and the Center for Research in Security Prices at the University of Chicago.

Knowing a bit more about how the markets work can help you understand why maintaining a consistent, diversified approach to investing is the right philosophy for achieving long-term success, regardless of the crisis du jour.

Understanding Valuation Principles

The basic theory behind investing is easy to understand: Buy low; sell high. However, determining what an investment is worth, and thus which investments are underpriced and which are overpriced, is not as easy as it seems.

U.S. Treasury Regulations define "fair market value" for federal tax purposes as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts." Essentially, this describes what happens in the stock market every day. Two independent parties reach a mutually agreed-upon price at which to trade an investment.

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Delayed Saving: Starting Late in Life to Save for Retirement

By Maryanne Pope

"The best time to plant an oak tree was 20 years ago... the second best time is today."
- Chinese Proverb

Likewise, the best time to start putting aside money for one's retirement is when you are young. For when it comes to getting compound interest to work its magic, time is the key ingredient.

But what about all those people who don't have 40 or 50 years left to build a significant-sized nest egg for retirement?

Well, according to financial expert and author, David Bach, it's never too late to start. "Even if you're starting late," Bach writes in his book, Start Late; Finish Rich, "you can still amass quite a respectable amount of money."

And you don't have to be earning some sort of mega annual income either. In fact:

"How much you earn has almost no bearing on whether or not you can build wealth."
- David Bach, Start Late; Finish Rich

Rather, explains Bach, "It's not how much we earn, it is how much we spend." And some of that spending can easily be trimmed by looking at what Bach calls the "Latte factor." If, for example, you are currently buying a fancy coffee every day for $5 - and you instead saved and invested that $5 per day, you could actually build a nice little sum of money.

Here are some numbers:

If you save $5 a day ($150/month) and got an average 10% return on your money (compounded annually), then in 10 years, you would have $30,727. But in 30 years, you would have $339,073.

Now, if you double your savings and were able to save $10 a day ($300/month) and got an average of 10% return on your money (compounded annually), then in 10 years, you'd have $61,453. But in 30 years, you'd have $678,146. Now we're talkin' (especially if you live in Canada and put that $3600 a year into a TFSA, as then that money can be withdrawn tax-free).

And let's say you can afford to put aside $20 a day ($600/month) and got an average of 10% return (compounded annually), then in just 20 years, you would have $455,621. But in 30 years, you'd have $1,356,293.

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