So, you want to start investing? Good! It’s about time! Investing can be a great friend if done right, however, it could also be your worst enemy if you walk in blind. The market can turn on the drop of a hat, and there is nothing you can do to stop it. As the saying goes, “The market giveth, and the market taketh.”
Before you dive in head first, check out these tips and keep them in mind when you start to invest.
1) Just like in poker, there are times you are up and times you are down.
No one’s portfolio just goes up EVERY. SINGLE. YEAR. It just doesn’t happen. In order for markets to go up, at some point they will need to consolidate, then rebuild, and then finally go back up. Traditionally that’s just how markets work; it’s the economic cycle.
2) Will the market be up tomorrow? No idea. Will the market be up 30 years from now?
When you think about what you are doing tomorrow, you may have a pretty good idea. When you think about what the market will do tomorrow, you probably have no idea. How about 30 years from now? All of a sudden, those answers reverse. Over a long time horizon, we generally know with a high level of confidence that the market will be up. We just don’t know to what degree.
3) Do you think skydiving is risky? The odds of dying are less than .001%.1 Risk is a math problem. Uncertainty is why you get that feeling you’ve been calling “risky.”
When people think of risk, they often get the feeling of uncertainty and the hope of a big payoff. After all, that’s why we take risks, right? But all risk is definable by math. We can build a portfolio just like an engineer can build a bridge. By making sure there is a little sway in the bridge, the engineer can build it to weather storms, pressures, and weight that it would normally crack under if static.
4) Growth comes with TIME, and time doesn’t happen overnight.
Ever heard of compounding? It can be your best friend if used correctly, however, there are actually two compounding curves to think about – 1) The growth of your PORTFOLIO, and 2) the one no one usually talks about, the growth of your TAXES. Make sure you understand how both work and will impact your wealth over time. The key thing – get started early, or as soon as possible. 30 years from now, you could be glad you did!
5) If you manage your behavior, you win the battle…and might earn more in your portfolio!
Would it surprise you that the average investor generates a less than 3% return on average per year?2 No wonder so many people are upset they aren’t generating “index-like” returns. That is why this passive movement has taken off. Buy this fund, let it sit (passive), and don’t touch it for 30 years. That’s the traditional buy-and-hold approach with a new twist. The key isn’t to ignore it, but to ignore your emotions and make logical decisions. But very few people make decisions based on logic, humans are wired to make decisions on emotion.
6) Take the second-best thing about your 401(k) and implement it in your investment approach.
One of the best things about a 401(k) is the potential money matching that employers give if you stay there long enough to be fully “vested.” The second-best thing, you are contributing, and therefore investing, every month also known as dollar cost averaging. This means you contribute money, let’s say $500, each month and that $500 goes to buy the target date fund in your portfolio. In July, that fund might be priced at $40 per share, so your contribution adds about 12 shares to your portfolio. In August, you contribute another $500, but this time the fund is priced at $50 per share, so you only buy 10 shares. In September, same contribution, but it’s priced at $30 per share so this time you add about 16 new shares. What you have effectively done is bought fewer shares when the price was high and more shares when the fund went down!
These six tips are not an end all be all for starting to invest. There will be more ideas and strategies I will cover in future articles; however, this is just to give you a few things to think about as you get started. Most of this stuff is not taught in school and can be overwhelming with the detail some people go into online. If you want more detail, insight, or a second set of eyes on your portfolio to make sure you haven’t missed anything, email me at email@example.com, and let’s chat. There is no obligation or requirement on your side for the call. Let’s see how I can help!
Joie de Vivre!