Investing Basics: 14 Simple Strategies for Building Long Term Wealth
Investing can be made simpler by following a few strategies that focus on ease, efficiency, and long-term success. And, guess what, keeping it simple often results in better financial results than trying to pick the right stock, actively trading, and trying buy and sell at the the highs and lows.
You really don’t need to be a finance whiz and spend all your time plotting returns in a spreadsheet.
In fact, the simpler you keep things and the less you think about your investments, the better. Here are 14 ideas for keeping investing easy and straightforward:
Knowing when you’ll need to tap into your savings is critical to knowing how to invest.
- Your emergency savings or money that you absolutely need access to cover expenses in the next 1-5 years should be kept in very low risk investments or something with guaranteed returns. You do this so that you don’t need to risk having to sell your investments at a loss when or if you need access to the money.
- Money that you are saving for the future, can be invested with more risk, in the stock market for example. Yes, the investment may lose money in the short term, but because you have a long time before you need the money, it is likely to rebound before you need to make any withdrawals.
The stock market is going to go up and down. And then, up and down again and again. But, guess what? Over the long haul it has only ever historically trended upward. When you invest for retirement, you want to
in the long run, the market tends to move towards a more rational assessment of value, where the true worth of investments is weighed and recognized.
“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” Shelby M.C. Davis
“A 10% decline in the market is fairly common—it happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefitting from the wealthbuilding power of stocks.” Christopher Davis
3. Consider Index Fund Investing
Forget about trying to pick just the right stock.
For long term investing, consider low-cost index funds, which track a specific market index, such as the S&P 500. Instead of buying a single stock, you buy a very small percentage of ALL of the stocks in the index. This spreads your risk and enables you to participate in the success of a huge number of companies.
These funds provide broad market exposure and tend to have lower fees compared to actively managed funds. Index fund investing allows you to passively participate in the overall market performance without the need for extensive research or active trading.
As John Bogle, the founder of Vanguard said, “Don’t look for the needle in the haystack. Just buy the haystack!” An index is the haystack.
Everyone believes that it is a great idea to “buy low and sell high.” The reality is that it is almost impossible to actually do that consistently without having a very accurate crystal ball.
When growing your money, it is usually a better idea to just invest consistently, on a schedule.
Implement a systematic investment approach by regularly investing a fixed amount of money at predetermined intervals, regardless of market conditions. This strategy, known as dollar-cost averaging, helps mitigate the impact of short-term market volatility.
Buying investments consistently over time, you buy more shares when prices are lower and fewer shares when prices are higher, effectively reducing the average cost per share.
“The function of economic forecasting is to make astrology look respectable.” – John Kenneth Galbraith
“Though tempting, trying to time the market is a loser’s game. $10,000 continuously invested in the market over the past 20 years grew to more than $48,000. If you missed just the best 30 days, your investment was reduced to $9,900.” – Christopher Davis
Too many people approach investing like gambling. They want to take chances and try to find stocks that are about to sky rocket. Taking risk is perfectly okay so long as you only do so with money that you are one hundred percent okay losing and that you don’t need to achieve your long term goals.
Gambling is okay with money you are willing to lose. Money that you want to grow should not be invested in a way that triggers excitement or angst.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” — Paul Samuelson
Saving and investing takes discipline, especially if you have to set aside time every two weeks to divert money from your paycheck into an investment. Manually saving and investing gives you the opportunity to skip the task sometimes when the allure of spending that money is too great.
Automating your saving and investing is a much better strategy that insures you are paying yourself first.
Take advantage of automation features offered by brokerage platforms or retirement accounts. Set up automatic contributions that transfer funds from your bank account to your investment account on a regular basis. This helps enforce discipline and consistency in your investment strategy, removing the need for manual transactions.
Investing is perhaps the one endeavor where extra effort does not necessarily correlate with success. In fact, the less you do with regards to investing, the better off you might be. Effort – spending a lot of time selecting and worrying about investments – does not necessarily equal success.
It is better to adopt a long-term perspective and resist the temptation to frequently check or tinker with your investments.
Once you have established your investment strategy to meet your goals and risk tolerance, avoid making impulsive decisions based on short-term market fluctuations. Regularly review your portfolio and rebalance if necessary, but avoid making frequent changes in response to market noise.
“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.” – Benjamin Graham
Minimize investment costs by opting for low-cost investment vehicles, such as index funds or exchange-traded funds (ETFs). High fees can eat into your returns over time, so be mindful of expense ratios and transaction fees. Additionally, avoid unnecessary trading and excessive portfolio turnover, as each transaction typically incurs costs.
As you approach retirement, a low-cost target date fund may be a good investment to consider. Target date funds automatically allocate assets based on your target retirement date.
Here’s how a target date fund typically works:
- Broad Asset Allocation: The fund initially invests in a mix of asset classes such as stocks, bonds, and cash equivalents. The allocation is typically more heavily weighted towards stocks in the early years when investors have a longer time horizon and can tolerate higher volatility.
- Gradual Shift to Conservative Allocation: As the target date approaches, the fund gradually reduces its allocation to stocks and increases its allocation to more conservative investments like bonds and cash. The objective is to reduce the portfolio’s risk exposure as investors approach retirement to preserve capital and provide more stable returns.
- Automatic Rebalancing: The fund automatically rebalances its asset allocation periodically to maintain the desired mix. Rebalancing ensures that the portfolio aligns with the target allocation, especially during periods of market fluctuations that may cause the asset mix to deviate.
While investing can be a relatively simple endeavor, it’s a good idea to boost your financial knowledge base. Commit to learning about personal finance by subscribing to a newsletter or regularly reading books on investing.
A lot of people only feel comfortable making investment decisions with the guidance of a financial advisor. This can be expensive and/or worthwhile, it all depends. If you are interested in investment advice, it is important that you understand how the advisor is compensated.
There are basically two ways of paying for financial advice:
AUM: Most investment advisors are paid a fee based on a percentage of the assets they manage for you. This type of compensation is called Assets Under Management (AUM). The AUM fee will typically range between .5% to 2% and the advisor will usually manage all buying, selling, and rebalancing. People like AUM advice because it puts the responsibility of investing on someone else, but the fees can really add up. If you have $200,000 in savings and are paying 1% in AUM, you are out $2,000 a year.
Fee-Only: If you use an advisor who is compensated under a fee-only structure, you will pay an agreed upon flat fee and be given an investment strategy that you can implement on your own. The advisor will help you know how much to invest in which kinds of vehicles, but you make the trades yourself.
Want fee-only advice? Collaborate with a CERTIFIED FINANCIAL PLANNER™ professional from NewRetirement Advisors to identify and achieve your goals. Book a FREE discovery session.
Human beings are not hard wired to make good investment decisions. Our natural emotions, especially fear and greed, can trigger really bad decision making when it comes to money. When the stock market crashes, you may feel panic and fear, but the right reaction is to stay the course. Given enough time, the market will almost certainly recover.
People who sell in a downturn are likely to lose the gains they made.
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” — Peter Lynch
There are multiple ways to determine how much you need to save or have saved for a secure retirement. Knowing this number can help motivate you.
The earlier you start investing, the most wealth you can create. Someone who starts investing when they are young will end up with a significantly higher retirement savings balance than someone who starts later in life. The investments simply have more time to grow.
However, it is never too late. It is entirely possible to amass sufficient savings for retirement no matter how old you are when you start. Substantial savings contributions and the right investment strategy can still lead to significant retirement savings by retirement age.
Betty Spears needed help with her medication management. She also simply wanted a kind word. She got both from…