The Only Investing Primer You’ll Ever Need
In past articles, I’ve discussed what investments to stay away from, as well as pointing out common mistakes that retirees make with their portfolios. So this week let’s talk about what you should do when investing.
I find that a big part of my job is to help you tune out 95% of the noise that is completely irrelevant to you and your situation. We need to focus on the 5% that actually allows you to maximize your money.
I find that most people make investing more complicated than it actually is- and at the end of the day, there are a handful of non-negotiable attributes to a well-developed investment strategy.
So here it is. A list of actions and strategies that actually can help you and your savings.
- Diversify. Diversify. Diversify. Using instruments such as mutual funds and ETF’s, you get exposure to 1000’s of bonds and 1000’s of stocks. Diversification is a method used to reduce risk. It does not guarantee investment returns and does not eliminate the risk of loss.
- Keep expenses low. Any sort of financial product has fees- usually in the form of an “expense ratio.” These (somewhat hidden) expenses are what the fund managers are paid for putting the product together.
When it comes to mutual funds, some charge upwards of 1-2% in fees. While others charge as little as .04%. So, as you can see, there are massive fee differences in funds that might look very similar from the outside.
- Invest in both stocks AND bonds. In the past 40 years, stocks and bonds have never gone down in the same year. (source)
- Turn off the financial news. Period. There is literally zero benefit.
- Keep a long-term view. I am constantly asked questions such as, “Dave, is the economy due for a recession? Should we take the money out of the market since it has been so volatile in the past six months? Would a trade war hurt my portfolio?”
My answer to all those questions is: It doesn’t matter. Between now and the end of your life, if a diversified portfolio of stocks and bonds do not return at least a historical average annual return of 5%, it is the first time in modern economic history where it hasn’t. Past performance is never a guarantee of future results
- Rebalance. If you start with a 50/50 portfolio of stocks and bonds, and stocks have a couple great years, your new mix might be closer to 60/40. Rebalancing a portfolio is simply reverting the mix back to the original allocation.
- When you take a withdrawal, take the money from what is working at the time. If stocks are down, bonds are up. Take the money from bonds. If stocks are rocking, take the money from stocks. Withdrawing money from a temporarily down asset-class is a big no-no.
- Use managers with long, successful track records. While this doesn’t guarantee success, siding with proven managers just makes sense.
- Keep your retirement accounts fully invested. I stay away from money markets and cash inside IRA’s. While having an emergency fund in cash in the bank is an important component to a plan, cash inside retirement accounts is just lost opportunity.
- When it comes to making changes to your portfolio, less is more. Frenetic buying and selling can trigger costs as well as taxes- not to mention that it rarely helps anything. A few well-thought-out strategic moves a year is plenty.
There you are. The secret to investing success. I don’t want to give you the impression that I invented these ideas myself- but so few people actually follow all of these rules when managing their money.
I hope this helps.
There is no certainty that any financial strategy will be profitable or successful in achieving your investment objectives.