Today’s blog will be featured in Pull Magazine’s print version.
The costliest mistakes, in life and investing, are usually fear based. Successful investing does not require a specialized degree. It does, however, require time and a plan. Many people believe that wealth and financial freedom is unattainable unless they win the lottery. That is not true.
When I present individuals with tools to produce long-term wealth through investing, I usually hear two things: “I can’t figure that stuff out” or “I’m afraid I’m going to lose money.” I can’t figure that stuff out usually means, I’m afraid of making a mistake. Aren’t we all? However, if you do not invest, you WILL lose money by losing out on the opportunity to earn money. Not investing could be the costliest mistake you make.
How? In 2000, if I purchased an item for $100.00, that same item would cost $135.28 in 2013. Inflation decreases the value of money over time and erodes its buying power. If your money is not earning at that same rate as inflation, you are losing money. You must actively do something to counteract inflation. This also means that in order to “make” money, you need to invest in something that will exceed inflation over the long term.
There are several financial products available; however, many will not exceed inflation. Bank savings accounts, money market accounts, and Certificates of Deposit typically do not exceed the inflation rate. In order to consistently exceed inflation, you must look to the stock market. Overall, the United States stock market has had positive returns during any 20 year period since the 1920s. Considering that time period included the Great Depression, the stock market should not seem as scary over the long term.
Five Rules for investing
1. Stocks are risky.
The best way to guard against risk is time. In the short term, there can be jaw dropping, blood pressure rising, catrospic swings in the market. That’s why rule #2 is so important.
2. Patience is paramount.
Investors who use a buy and hold strategy for 10 years or more, do well. Warren Buffet, the owner of Berkshire Hathaway and the world’s greatest investor said it best, “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”
3. Educate yourself.
Do not invest in a business that you cannot understand. The great thing is, we know more about businesses than we think we do. Look at your habits. Where do you do your grocery shop? Where do you buy gas? Where do you buy your morning cup of coffee? Do you drink Pepsi or coke? We tend to be ardent supporters of certain brands. Why don’t you own a piece of them? Google is a highly useful tool to use when getting more information about companies.
4. Use index mutual funds. Here is a great piece about finding good index funds from one of my favorite guides to personal finance, Kiplinger’s.
In most years, many standard mutual funds do not beat the market. As a result, an investment strategy that works well is buying a Standard and Poor’s (S&P) 500 index fund or a Wilshire 5000 index fund instead of paying a manager significantly more in investment fees to select what he or she believes to be the best funds.
5. Don’t overdiversify.
When investing, many individuals spread their money too thin. When too little money is spread over too many investments, you don’t realize many gains and it’s generally hard to evaluate how your account as a whole is doing.
Pick an index mutual fund and one or two stocks to begin investing. If you aren’t able to reasonably purchase more than one stock, then don’t. I’m a proponent of purchasing round lots, which are 100 shares of a stock, when feasible. However, I do realize this can be hard considering the per share price of any given stock. My main point is to buy a large number of shares, as many as you can. You should feel comfortable buying a large number of shares if you follow rule numbers 2 and 3.
Investing is not hard. It requires educating yourself and patience. Many of the online brokerage firms such as Ameritrade, E-trade, Scottrade, Merrill Lynch, have great investment commentary available to read. Find other people who invest and talk to them, exchange ideas. The key to investing is life long learning and patience. If you can master those things, you will have a good time making money.