To get the best returns in the long run, investing wisely is critical. In this article are some tips for investing that will help you grow your money. While I will never recommend the latest “stock picks” in my blog, I will openly share my advice on strategies for investing. Below are some of my overall thoughts to take into consideration as you invest your hard-earned money. I will go into some of these things in further depth in later articles.
Invest early and often. But, its not too late either.
If you are a younger person reading this, investing wisely means you should start investing as soon as you can. Historically, you’ll make out big if you’re a persistent investor. If you’re in your 40s, 50s, etc, there’s still time left. When I was 25, I learned that my divorced 53-year-old mother had NEVER invested in her 401k and had missed out on years worth of 100% company matches (if you read my intro blog post, I mentioned her). You can imagine the face that I made when I heard this. She was missing 100% guaranteed returns (aka double) her money. I quickly got to work with her. We figured out her base expenses, added some extra for fun, then used that to figure out how much she had remaining to pump into her 401k to hit her employer match and beyond. My mother, a single mother for most of her life (who always worked low-wage jobs), retired a few years ago at 65. She will pay off her home in a few months. She has a significant amount of funds saved and is completely debt free. She has a trip to Hawaii booked for next year. She started late, but still accomplished her goals. My preference, however, is start early and invest often.
Don’t time the market. You’ll lose this pissing contest.
I often hear comments from people regarding the state of the market. “I think things are going to start dropping.” “Stocks are going to shoot back up. Maybe I’ll get back in.” I actually know someone who got spooked back in 2008, pulled all of his 401k out of the market after it had already dropped 40%, then never knew quite when to get his money back into the market for fear it might drop again. To this day, he is still out that 40%, and all of the significant growth that has happened since that time. The thing is, when you invest wisely, it means you know that you can’t time the market. You never know. Time IN the market (meaning how long you persistently invest) beats timING the market. By timing the market, you are betting that you are a financial genius and can get into and out of an investment at precisely the right times to see returns. Timing the market will only leave you frustrated and more often than not, at a loss. Early on in investing in my younger years, I attempted to time the market a few times. Let’s just say, the market schooled me on occasion…and I live and breath this stuff.
Over time, the market always goes up. Stay along for the ride.
This is related to timing the market. In 95 years of the S&P 500 (the index that tracks the performance of the largest 500 companies in the United States), the average return over that time has been just over 12%. There were around 25 down years during that time while there were 70 up years. The ups were higher percentage-wise than the downs. Somebody is always predicting a market crash, but unlike the saying “what goes up must come down,” in the stock market, what goes down must come up, and the market has always risen over time. For this reason, I prefer to invest wisely by establishing a preferred mix of investments (mostly index funds) and continue piling money in week after week, month after month. In doing so, I’m investing when things are low, and I’m investing when things are high. Overall, however, I’m seeing a nice, smooth, healthy return over time. Many investment firms allow you to contribute weekly, b-weekly, monthly, etc. automatically. By putting in little increments more frequently, you are doing what is called “dollar cost averaging” into the market, meaning you are buying on the up points and the down points to smooth things out over time.
Don’t overcomplicate things – make it easy by considering low-cost index funds
For many years, I spent my time researching the latest company that was “about to pop.” I was actually pretty good at picking investments. I had some early wins with companies like Chipotle and Marvel, which helped us with down payments for houses. However, I also had some losers along the way. The vast majority of my investments previously were in mutual funds. Think of mutual funds as baskets of individual stocks that someone on the other end (a fund manager) is choosing to go into the basket, and they are actively managing what goes in and comes out of the basket (which drives increased expenses). While it sounds nice to have someone else doing the picking, that picking comes with a cost. Some mutual funds have what is called a ‘front load’ which is a percentage you pay just to get into the mutual fund. In my opinion, you want to stay away from those. Mutual funds also have annual fees for ongoing management. Anything over 1% is excessive. Mutual funds are constantly on a mission to “beat the S&P.” The thing is, most of them don’t! 60% of actively managed funds over the past year have failed to beat the S&P index. Are the fees of these mutual fund companies worth your money?
An alternative to all of this is an index fund. Index funds are passively managed, meaning you don’t have a person on the other end picking investments. Instead, index funds are tied to broader measures, such as the S&P 500 index mentioned above…you know, the one that beat 60% of actively-managed mutual funds? The vast majority of my portfolio today is in index funds. One very popular one is the Vanguard Total U.S. Stock Market Index (VTSAX). The fees for this index are a measly 0.04%. The return over the past year is 32% and over a 10-year period, 16.6%. Every 401k or IRA should have access to index funds, so these should be relatively easy to access. You may need to opt for an S&P index fund vs. a total stock index. I’m not telling you to rush out and get this particular index fund. I’m suggesting that index funds are low-cost investment options that are extremely low maintenance. So, if you’re someone who strives for low maintenance, these might be right for you.
Re-balance your portfolio at least annually
When you buy investments in your portfolio, even if they are index funds, investing wisely means you will re-balance your portfolio of investments regularly. Let’s say, based on your age and risk tolerance, you have 80% of your portfolio in stocks or a stock index fund, and the remainder in bonds. Over the year, the stock market goes gangbusters and stocks are now 90% of your portfolio. Re-balancing means that you bring your portfolio back to 80/20 by selling off some of that stock and buying more bonds to stay at 80/20. By balancing, you’re maintaining your level of risk tolerance with time and also smoothing out the ride along the way. It ensures that one particular investment type doesn’t take over your portfolio.
Check your fees! Keep your investment fees low.
If you currently have retirement and other investment accounts, I encourage you to go check on your fees. Fees occur both inside of your investment (like the mutual funds I mentioned above) and also with your financial advisor. If you know which investments you’re in, simply go out to a place like morningstar.com to check on fee percentages of each mutual or index fund. If you have a financial advisor, ask them about the fees you pay. Ask them to give you an overview of the fees being paid on an annual basis, both for the investments you’re in as well as their fees. You may be surprised by the dollar amounts. How many hours did you have to work to pay for these fees?
Fees matter. Why? Because they eat away at your returns. Your money is YOUR money. Over time, fees add up. They add up to the tune of you having to work an extra 3 or so years that you wouldn’t have had to work otherwise had you been in lower fee investments. Who wants to work 3 more years than they need to because of unnecessary fees?
If you need financial help, don’t hire a commissioned salesperson
Whenever my wife and I have been in the market for furniture, we’d head up to the local Art Van furniture store to browse. There was nothing more annoying than being hunted by the sharks as soon as we walked in the door. After a few visits to the store, we started simply saying something to the salesperson along the lines of “Mike? That’s your name? We’ll tell you what Mike, we’re going to look around, and if you let us kinda be free around the store, we will promise to come get you if we’re interested in buying something. Deal?”
While I respect a good salesperson, there’s a time and a place for salespeople. It is NOT in your investments. A good chunk of financial “advisors” out there are mere salespeople, pushing the things that earn them the most in commissions. These are more often than not, the things that do not earn you the return your hard-earned money deserves. This includes things like whole life insurance and annuities. These advisors or agents receive large commissions on these products, so which ones do you think they’ll be first to recommend to you? Do they have your best interests at heart? They attempt to sell whole life insurance, for instance, as an investment. Life insurance is NOT intended to be an investment. It is intended to replace income in the event of a death. These advisors rake in more than 50% of the first year’s premiums and significant percentages on renewals in most cases.
Instead of hiring an advisor who makes a percentage of your investments or commissions on premiums, I urge you to hire a professional who charges fees by the hour, similar to how you might hire a lawyer (or plumber…I love skilled trades). This ensures that this individual is giving you unbiased advice and recommendations for your investment portfolio. In addition to the per-hour fee model, look for a Certified Financial Planner or CFP designation. Planners with this designation have gone through rigorous exams on the various aspects of financial planning and also have been grilled on ethics, which is really important.
In Closing
My tips above are there to help you take some simple steps forward or make simple tweaks with your current approach in a way that’s Good for Your Wealth. Your money is your financial independence and freedom. Freedom to earn a living the way you choose. Freedom to enjoy the time you have. Freedom to explore new ideas. You choose the level of freedom you ultimately get by the savings and investment choices you make.
Good luck out there!