I started to write this for my (Millennial) sons, but then I thought perhaps others might find it useful. It was written to encourage them to get started saving and investing as soon as possible, but really, it’s a good idea to get started no matter what your age.
Full Disclosure: I am not an investment professional and make no claims as such. What follows is merely What I Have Learned About Investing.
- Understand that investing isn’t rocket science; anyone can do it. It is, however, one of those things that, if you’ve never done it before, can seem just a tiny bit intimidating. At first. It is also one of those things that simply must be done. Remember taking your driver’s test? If you want a driver’s license, you have to wade into the bureaucracy and do a few things in order to get it. Investing is the same way; not overly complicated but there are a few things – like setting up an account – that will need doing in order to do it.
- It doesn’t take a lot of money to be a successful investor. The single most important thing about investing is to get started investing, because over time a small amount will become a much larger amount.
- Do not expect to get rich overnight; instead, plan to accumulate wealth over a long period of time. Think in terms of decades. This is why you want to get started as soon as possible.
- You are the person responsible for your future. Set aside a portion of your income for the purpose of investing in that future. Start with 5% of your income and notice how you do not miss it.
- Whenever and wherever possible, automate your savings and investment plan by establishing regular monthly withdrawals for investment. Your Bank or Credit Union can help you set this up.
- Investing via regular monthly purchases allows you to Dollar Cost Average your way into a given investment, reducing the chances of buying at a high and increasing the chances that you’ll buy at a low.
- If your employer offers a 401(k) plan, enroll in it immediately and save enough to get any matching funds available. Most companies that offer a 401(k) will match your contribution dollar for dollar up to 3% (some are more generous, some less so). If you are contributing 6% of your salary and your employer is adding 3%, this equates to an instantaneous 50% return on your investment. I am unaware of any other investment that consistently earns that kind of return.
- Establish a Roth IRA as soon as possible. This money can be withdrawn tax-free in your retirement. There are salary limitations, so get one started while you are young and your earnings allow you to do so.
- Mind your fees. Over the long term, an average investment with tiny fees will always outperform an average investment with high fees.
- Dividends are your friend. Many of the very best holdings are those that offer a Dividend Re-Investment Plan (DRIP). Buying stocks and collecting dividends that are reinvested periodically over the long-term provides a double-edged advantage: 1. Most stocks will appreciate over time, and 2. Generating additional shares through DRIPs boosts performance while hedging against downturns.
- Diversify, diversify, diversify. Buying stocks in different sectors can help to bullet-proof your portfolio. An even quicker and easier way to achieve diversification is to invest in a low-fee mutual fund.
- The key to growth is the compounding power of interest and dividends. Do not be tempted to mortgage your future by tapping into your nest egg today. Let it grow! Things will happen; there will be surprises and emergencies, but they can be addressed without raiding your investments.
- Remember: You are a long-term investor. As such, there is no need to monitor (or get emotional about) the day-to-day performance of your portfolio. Individual stocks will go up and they will go down. Don’t live and die with each market fluctuation.
- Determine to inure yourself against market swings. In fact, keep cash on hand to invest when others flee the market. As Baron Rothschild said, “The time to buy is when there’s blood in the streets.” This is a truthitude. Buying additional shares when a holding drops in value allows you to dilute your overall cost basis. This is Dollar Cost Averaging.
- Educate yourself about investing. It really isn’t as complicated as it might seem. Contact an investment professional, talk with a stockbroker, reach out to a financial advisor. Enroll in a 401(k) or an IRA. Open a savings account, a brokerage account, an online trading account. Cultivate an interest in learning about investing by reading articles about investing (there are scores of them online).
- When it comes to investing, there are no guarantees. You can get most things right and still lose money. The trick is to minimize the things that hinder your success – like fees and expenses – while embracing the things that contribute to success – like planning and patience.
Bottom Line: Time is your biggest ally. The longer you are invested, the greater your return. What are you waiting for?