“He who will not economize will have to agonize.”
by Glenn R. Swift
No matter what kind of investing you are doing, whether you are investing for retirement, saving for college or putting money aside for your first home, there are five basic principles to which you need to adhere. By doing so, you will avoid many of the common pitfalls that novice investors make and which sometimes take years from which to recover.
Invest in Quality
Whatever you choose to invest in, don’t buy junk! Investing is not gambling; it’s about taking prudent risks not reckless ones. This is particularly important when investing in securities. Buy great companies and mutual funds, and invest in high-grade bonds not low-grade. Try to hit singles and doubles, not homeruns. If you’re always trying to hit the long ball, you might get lucky once in a while, but you’re going to strike out a lot. Now if you feel that you just have to speculate, do it with a small amount of money. The secret to accumulating wealth is not by taking big risks but simply being in the market long enough and allowing your assets to grow over time at a compounded rate. A quick pearl of wisdom… The capitalist system works every time it’s tried! So don’t worry that your account might be a tad boring! Keep investing in those “widow and orphan” stocks in industries like food and energy. You’ll be just fine!
Don’t try to trade the market, and don’t worry about short-term moves in the market. In the short run, the market is unpredictable. In the long run, the short-term moves don’t matter, and the market goes higher. A little Wall Street secret… The only people who are always buying low and selling high are liars! Warren Buffet says: “The most important quality for an investor is temperament, not intellect.” To understand exactly what he means, just take a look at the growth in stock prices over the century as measured by the Dow Jones Industrial Average or the S&P 500 Index, and you’ll see why advisors call it a mountain chart! Then again, don’t get too glued to CNBC. Remember, the financial media is in the business of “selling the news” to increase their audience—not to make you rich! So if your plan is to invest $1000 a month, and you’re wondering if you should “wait ‘till things settle down” as your neighbor recommends, forget about it! Nobody rings a bell at the bottom of a stock market cycle. Keep a long-term horizon—keep investing!
No matter how good anything is, remember grandma’s age-old adage: “Don’t put all your eggs in one basket!” Well, grandma was diversifying! In the investment world, diversification is a technique that reduces risk by allocating investments among various financial instruments and industries. All portfolios need to be balanced to avoid unnecessary risk. Precisely how you go about doing it is a decision that you need to make with a trusted financial advisor. Just don’t forget that diversification is an important tool that will help you achieve your long-term goals.
Be leery about financial instruments that won’t allow you access to your money or that you can’t make changes to without incurring substantial costs. Granted, you don’t want to be doing a lot of buying and selling with your “serious money”—that’s trading not investing. But you do need to be able to react to changing market conditions and to changes in your personal situation. Of course, you should always have a liquid cash fund equivalent to six months’ expenses for those unseen emergencies that can arise at any time. This is something with which you should not compromise no matter how secure you feel or tempted you may be to use your emergency funds for other purposes.
Be Aware of Costs
Fees can add up and take a huge bite out of your overall savings, but if you ask many investors what they are paying in fees you will often get a blank stare. The reason so many investors are clueless is that the expenses being charged are sometimes difficult to determine. Then again, many investors don’t realize the significance that even a relatively small change in costs can make over a long period of time. The cold truth is that these costs do add up and can make an enormous difference in the performance of your portfolio. Here’s a striking example… If you have $50,000 in a 401(k) that averages a gross return of 7% per year compounded with fees and expenses of .5% per year, after 35 years your account will have grown to $454,000. However, if you invest the same amount of money and earn the exact same rate of return but pay 1.5% in annual fees (that is, 1% more each year than the first example), your account will grow to just $326,000—a reduction of 28%! So, the message is clear: investing is never without a cost, but costs need to be reasonable, and you shouldn’t be paying a penny more than is necessary.
Glenn Swift is a financial advisor in Northern Palm Beach County with more than 35 years in the financial services industry. If you’re interested in working with an experienced, objective, independent investment professional, e-mail email@example.com or call (772) 323-6925 for a complimentary consultation.