Something that your Wall Street broker never wants you to find out is that investing like a Pro is actually pretty easy. The fact is, practically anyone can put together a portfolio that’s well diversified with stocks, bonds and other investments with only a small amount of effort. Indeed, it doesn’t take all that much time, extensive market knowledge or even a lot of money to do so if you follow these rules and tips below.
- · Keep things as simple as possible. Frankly, investing isn’t all that complicated. In most cases just a couple of low-cost index funds will be better than buying individual stocks and bonds. In his 1996 letter to the shareholders at Brookshire Hathaway, even the great Warren Buffett recommended index funds: Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expense) delivered by the great majority of investment professionals. Seriously, costs matter.
The simple fact is, if you take what Mr. Buffett recommends to the extreme, you could use a single target-date mutual fund to build a very nice, well diversified investment portfolio.
- It’s okay to “go cheap”. What most people either forget or ignore when it comes to investing is that, as Mr. Warren Buffett noted in his letter above, “costs matter”. The fact is, you won’t get a monthly bill from your mutual fund like you would from your credit card company but instead they’ll simply just subtract their fees from your assets. While one month’s worth of fees may be relatively small, multiplied over a lifetime’s worth of investing these fees can take a seriously large bite out of your portfolio and your retirement funds.
Investing in low-cost mutual funds is an excellent way to go as today many index funds will cost you less than 10 basis points or .10%.
- Always have an investment plan. It’s actually quite simple to create a relatively sound investment plan and, with the help of index funds, a simple asset allocation plan between bonds and stocks can be put together by practically any investor. Most experts will tell you that you should “own your age” in bonds and put the rest into stocks. For example, if you were 45 years old you would put 45% of your investments towards bonds and the other 55% of your investments towards stocks. Some might suggest that you own a percentage of stock’s that’s equal to 120 minus your age, which is a bit more of an aggressive approach. The fact is that both of these are plans and, regardless of which one you choose, you should definitely stick with it.
The best thing about having a plan is that, when difficult times arise (and they will) your plan will help you to “stay the course”. Over the next 50 years any investor that’s now in their 20s will undoubtedly experience bear markets that are significant as well as one year losses of 20 to 30% and other ups and downs. The best way to weather the storms? Have a plan.
- Don’t let fear or greed get in your way. Sound investing definitely does not mix well with fear and greed. Far too many investors will jump on the stock market bandwagon when it’s moving up and try to make some fast money and, when those stocks eventually start falling, those are the same people that are the first to look for the exit sign. What this causes is a repeating pattern of buying too high and selling too low.
In the perfect investing world the opposite would actually be idyllic. An ideal time to buy stocks would then be during a bear market. Look back to 2008 and 2009 and you’ll see that there were many stocks that could have been purchased at bargain basement prices. As we mentioned above, following a plan is an excellent idea and, even if you don’t have one (but you should), definitely avoid your buys and sells based on a daily, monthly or yearly market fluctuations.
- Make sure to track your results. This is a critical piece of advice because, since the price of investments definitely fluctuates, you’ll need to periodically rebalance those investments to keep them in line with your plan. For example, as you near any type of investment goal (like retirement), your asset allocation plan will definitely need to be changed. Investment costs in general should always be monitored as well.
Today there are a metric ton of online tools to help track your portfolio, and most of them are free. The matter which tool you decide to use, the most important part of this tip is that, at least on a yearly basis, you take a long hard look at your portfolio and make sure that it’s performing up to speed and doesn’t need any major overhauls.
We can’t promise that if you follow these tips you one day be as ridiculously wealthy as Warren Buffett but we can tell you that there will be a much better chance of that happening than not. If you have any questions about investing, saving for retirement or financial questions in general, please let us know and we’ll get back to you with advice, options and solutions ASAP.