investing Archives

If you are reading this, you probably understand that investing is smart and that a lot of people have made a lot of money doing it. The problem is, you’re scared to lose all of your money, and you don’t want to do the work involved.

Investing is the key to financial success. If you don’t invest to build a nest egg and accomplish financial goals, you’ll have nothing to show for a lifetime of labour. Of course, you don’t want to invest your money just anywhere you need to be smart about what you invest in so you can grow your wealth and become financially free. To make sure you invest the right way, here are nine investing rules you should know by heart.

1. Draw a personal financial roadmap

Before you engage at all in any investment, you must have your plans clearly laid out.

How much do you want to invest?

Why are you investing?

What do you know about the investment option? Do we have sufficient information to go by?

Things like:

The time frame of the investment

The returns you are expecting from the investment

The RISKS involved

You must also know and understand your risk appetite. The reward for taking on risk is the potential for a greater investment return.

2. Invest for the long term

An investor who puts money aside over the long term for the proverbial rainy day is far more likely to achieve his or her goals than someone looking to ‘play the market’ in search of a quick profit. The longer you invest, the bigger the potential effect of compound performance on the original value of your investment.

Many investors will be familiar with the term ‘compounding’ from owning cash savings accounts. The term refers to the process whereby interest on your money is added to the original principal amount and then, in turn, earns interest. Over time compounding can make a huge difference. The same can be true of investment returns, so long as you reinvest the income that you receive.

3. Diversify your portfolio

Minimizing investment risks means not only understanding how investments work, but also ensuring you don’t put all your eggs in one basket. While you may have a particular company you love, if you sink your entire nest egg into buying its stock and it turns out the CFO was a thief who was cooking the books, you could lose everything. To reduce the likelihood of big losses, spread your money around a mix of different assets. You could, for example, put some of your cash into big companies in the U.S., but also invest in emerging markets or real estate with the hope that if some of your investments perform poorly, others will do well.

If diversifying your portfolio and getting the right mix of different assets sounds complicated, you can opt to invest in target-date retirement funds that give you exposure to a mix of different assets appropriate for your age and goals. Robo-advisors can also help you build a diversified portfolio without requiring you to be hands-on.

4. Invest for a maximum real return

This means the return on invested dollars after taxes and after inflation. This is the only rational objective for most long-term investors. Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped. It is vital that you protect purchasing power. One of the biggest mistakes people make is putting too much money into fixed-income securities.

Today’s dollar buys only what 35 cents bought in the mid-1970s, what 21 cents bought in 1960, and what 15 cents bought after World War II. U.S. consumer prices have risen every one of the last 38 years. If inflation averages 4%, it will reduce the buying power of a $100,000 portfolio to $68,000 in just 10 years. In other words, to maintain the same buying power, that portfolio would have to grow to $147,000— a 47% gain simply to remain even over a decade. And this doesn’t even count taxes

5. Don’t go with the flow

Investing is not easy. As we saw to great effect in 2008, following the collapse of US investment bank Lehman Brothers, unexpected or adverse newsflow can have a significant effect on stock market performance. Indeed, there have been times when highly cash-generative, defensive businesses capable of creating value in a range of market conditions have been hit by the same negative sentiment that has driven down the price of stocks more sensitive to economic cycles and those that are poorer quality.

6. Create and maintain an emergency fund

Most smart investors put enough money in a savings product to cover an emergency, like sudden unemployment. It’s ideal to make sure you have up to six months of your income in savings. Automating a tiny bit of your income into a savings account can help you ensure that you always have some liquid enough cash for emergencies.

7. Invest in what you understand

While a well-constructed portfolio can produce a healthy return for investors, the converse is also true. It is easy to incur permanent losses by putting money into an asset that behaves in an unexpected way. Investors should always set aside time to try and understand what it is they want to hold.

8. Monitor your investment

Expect and react to change. No bull market is permanent. No bear market is permanent. And there are no stocks that you can buy and forget. The pace of change is too great. Being relaxed, as Hooper advised, doesn’t mean being complacent.

Consider, for example, just the 30 issues that comprise the Dow Jones Industrials. From 1978 through 1990, one of every three issues changed because the company was in decline, or was acquired, or went private, or went bankrupt. Look at the 100 largest industrials on Fortune magazine’s list. In just seven years, 1983 through 1990, 30 dropped off the list. They merged with another giant company, or became too small for the top 100, or were acquired by a foreign company, or went private, or went out of business. Remember, no investment is forever.

9. Learn from your mistakes

The only way to avoid mistakes is not to invest which is the biggest mistake of all. So forgive yourself for your errors. Don’t become discouraged, and certainly don’t try to recoup your losses by taking bigger risks. Instead, turn each mistake into a learning experience. Determine exactly what went wrong and how you can avoid the same mistake in the future.

The investor who says, “This time is different,” when in fact it’s virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing. The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.

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Investing may seem daunting at first, especially if you get started when the market is experiencing a crash, but it doesn’t have to be a terrifying ordeal. If you do your research and due diligence, you should be well on your way to a healthy and robust financial future. Do you want to learn how to invest money but don’t know where to begin? We’ve put together this guide for beginners to help you grow your hard-earned money, even when the market gets rough.

1. Start investing as soon as you begin earning

One of the most important factors in how much wealth you can accumulate depends on when you start investing. There’s no better example of how the proverbial early bird gets them worm than with investing. Starting early allows your money to compound and grow exponentially over time even if you don’t have much to invest. Compare these 2 investors, John and Brad, who set aside the same amount of money each month and get the same average annual return on their investments:

John

Begins investing at age 35 and stops at age 65

Invests $200 a month

Gets an average return of 8%

Ends up with just under $300,000

Brad

Begins investing at age 25 and stops at age 65

Invests $200 a month

Gets an average return of 8%

Ends up with just under $700,000

Because Brad got a 10-year head start, he has $400,000 more to spend in retirement than Jessica! But the difference in the amount Brad contributed was only $24,000 ($200 x 12 months x 10 years). So never forget to start investing as early as possible. It’s a huge mistake to believe that you don’t earn enough to invest now and will catch up later. If you wait for a someday raise, bonus, or windfall, you’re burning precious time. Neglecting to invest even small amounts today will cost you in the long run.

The earlier you start saving and investing, the more financial security and wealth you’ll have. Please remember that you’re never too young to begin planning for your future. But what if you didn’t get a head start on investing and now you’re worried about running out of time? You’ve got to just dive in and get started. Most retirement accounts allow for additional catch-up contributions to help you save more in the years leading up to retirement, which I’ll cover in a moment.

2. Passive Investing

This “set-it-and-forget-it” approach to investing is for people who don’t have the time or interest to do all the heavy lifting themselves. There are a lot of options out there if you want to hire someone to invest for you. You can invest in mutual funds or invest in exchange-traded funds (ETFs) through a Robo advisor.

If you’d rather not be too involved in the investing process, then you’ll probably prefer using a Robo advisor. These platforms do all the work for you, once you’ve answered a few questions about your investing goals and how much risk you want to take. Betterment is the biggest Robo-investing platform in the industry, and it’s a good starting point for beginning investors and a useful platform for more experienced investors.

However, there could be a limit in what you can invest in. You can also use a service such as the Paladin Registry to locate a fiduciary investment advisor who’ll act in your best interest.

3. Minimize Taxes

The more you save on taxes, the more money you have available to invest and earn compound interest. There are several ways to minimize your tax liability, including deferring it by managing your portfolio to control the difference between when the tax is accrued and when it is paid.

You can minimize your tax liability by using a Roth IRA. Your family can structure its holdings to take advantage of the stepped-up basis loophole upon death, protecting heirs from capital gains taxes. Utilize the asset placement technique, which strategically locates your assets to minimize tax payments. Or you can form family limited partnerships to transfer wealth and lower gift and estate taxes.

To take advantage of any breaks Congress has given you under the law, speak with your advisors to find out what you’re missing.

4. Control Your Expenses

Another aspect of investing wisely is controlling your fees and expenses. Sometimes, fees can be worth the cost. For certain high-net-worth people with complex needs, a registered investment advisor charging a 2% fee can absolutely be worth his weight in gold. Someone structuring a portfolio using a charitable remainder trust or another setup would be well-served by paying a professional to assist.

But for most small- and medium-sized investors, cost matters. You can reduce expenses by choosing something like a low-cost, passively managed index fund from a firm like Vanguard, or by paying close attention to the expense ratio of a chosen mutual fund. You may consider switching to a discount brokerage to save on trade fees, or you might use a Robo-advisor to manage your investments instead of an expensive financial advisor.

Investing wisely is key to growing your net worth, and you can get there with careful attention. Cultivating the financial habits above allow you to minimize costs, maximize returns, and proactively manage your investments as your financial future takes shape.

5. Invest money to accomplish long-term goals

Investments are the opposite of savings because they’re meant to grow money that you spend in the distant future, namely in retirement. Investing is also best for smaller goals you want to achieve in at least 5 years, such as buying a home or taking a dream vacation. Historically, a diversified stock portfolio has earned an average of 10%. But even if you only get a 7% average return on your investments, you’ll have over $1 million to spend during retirement if you put aside $400 a month for 40 years.

So, start investing a minimum of 10% to 15% of your gross income for retirement. Yes, that’s in addition to the 10% for emergency savings that I previously mentioned. Consider these amounts monthly obligations to yourself, just like a bill with a due date you receive from a merchant. If saving and investing a minimum of 20% of your gross income seems like more than you can afford, start tracking your spending carefully and categorizing it. I promise that when you see exactly how you’re spending money, you’ll find opportunities to save more.

After you build up a healthy emergency fund, continue putting aside 20% of your income. You could invest the full amount or invest 15% and save 5% for something else, like a new car or a vacation.