Are you currently investing some of your hard-earned money toward retirement? Based on the recent reports, approximately 52% of all Americans are not investing in the stock market, and I sure hope that you’re not included in that staggering percentage. By not investing, people are forgoing the amazing returns of compound interest and are basically leaving their fate up to the government, who (let’s be honest) doesn’t have the best track record with handling money. I am currently invested in the stock market, and I believe that it will earn me a hefty sum by the time my retirement date comes due.
4 Common Sense Tips for Investing
When many people hear the word, “investing” they get nervous. They fully intend to invest because they know it’s the smart thing to do, but many are confused by investing lingo and feel they aren’t informed enough to invest. Their fear and uncertainty paralyzes any and all action, which leaves them right where they were before: not invested.
Truly though, investing doesn’t have to be all that difficult. To invest well, you don’t have to know anything about put options or call options, you don’t need to understand P/E ratios, and you certainly don’t need to dig into the various strategies of investing. In fact, many who study the market for a living don’t earn any better returns than you or me, the simple investors. In many ways it’s almost an advantage to know less, so there’s no reason why you shouldn’t get started today.
What do you need to know? With these four common sense tips for investing, you’ll have more than enough information to get started.
1) Avoid purchasing single stocks
I know plenty of people that purchase single stocks and every single one of them thinks they are savvy investors. However, much of the time their single stocks return less than the market average each year, and they end up paying more in taxes than the simple investor that puts his money into his 401k Index Funds.
Individual stocks are purchased with after tax dollars. Meaning, you work your job and earn your take home pay (after taxes are taken out), and THEN you can buy those individual stocks. Beyond this, when you decide to sell your stock, you’ll have to pay 15% capital gains tax on your earnings! The tax structure of single stock purchase certainly doesn’t make sense from a tax perspective.
The other downside of single stock purchases lies in diversification. We all know that putting all of our money in one place is an accident waiting to happen. If something bad happens to that one investment, we’re dead broke. This is exactly what you’re doing when you buy single stocks. Heck, even if you buy 10 different stocks, you still aren’t very diversified and you’ll be incredibly vulnerable in a market crash. Instead of buying stocks one at a time, look into mutual funds (think Vanguard). By purchasing one mutual fund, you are actually buying shares of 30+ companies and are immediately much more diversified than your “savvy” investor friend.
Related Story: Is Investing In Individual Stocks or Mutual Funds Better?
2) Stay consistent
One of the biggest keys to succeeding in your investments is to stay consistent with your contributions. I once worked with a lady that thought she was pretty impressive when it came to investing. After all, she had earned thousands (if not hundreds of thousands) of dollars in the market. But, she committed two cardinal sins that resulted in many lost dollars. First, she broke rule #1 and was mostly invested in our company stock. This worked out great in the 90’s when our company was booming, but when 2009 hit she started losing money hand over fist as the orders dried up and our company value tanked.
She then committed sin #2, she didn’t stay consistent with her contributions. After a few months of seeing her retirement fund drop in value, she decided that it wasn’t worth investing in anymore. After all, the value just kept going down anyway. As you may have guessed though, the stock price didn’t continue falling indefinitely. A few months after her decision, the stock price started ticking up again. It grew to a few dollars above its previous low, and then it even started inching toward it’s previous year’s high. By the time my coworker started contributing again, she missed out on the discounted stock price. If she had only stayed consistent with her contributions, she could have had over a hundred thousand dollars more in her retirement account today.
3) Rebalance your investments
When you purchase a few different mutual funds, you’ll inevitably have your money invested in many different types of funds. Some of your money will be invested in growing start-ups, some will be in older large companies, some will be invested internationally, and another portion will likely be invested into different categories of bonds. While it is a great thing to diversify your investments, you should also remember to rebalance those investments at least once a year.
What does it mean to rebalance? When you first choose your investments within your retirement plan, you decide what percentage of your contributions will go to which investments. Over the course of a few months, you’ll begin to notice that the total value of these funds might not reflect the percentages that you put in. This is simply because investments fluctuate. Some of the funds might make big money, while others might even go down in value, so even though you contribute say, 20% to a particular fund each week, it might grow to become 25% of your overall portfolio value. When you decide to rebalance (which is often done automatically by the online brokerage where your funds are held – all you have to do is select the option, “rebalance”), a portion of that 25% will be sold off to get it back down to 20%, and that 5% will then go toward one of the investments that had been going down in value and was less than your selected contribution percent.
You might be thinking,”But why would I want to take my money out of a winning fund and put it into a losing fund? That makes no sense!” It can be difficult to grasp initially, but just remember that funds don’t go up in value indefinitely, and the same is true on the other end of the spectrum as well – funds won’t go down in value indefinitely. So what will likely happen, even if you didn’t rebalance? The low-performing fund will get better, and the high-performing fund will get worse. Now, what happens if you rebalance before this phenomenon happens? You end up selling high and buying low, just like you’ve always been told you should do! Set up the rebalance option on your portfolio so you can capture these potential gains.
4) Keep it simple
I used to get caught up in that Jim Cramer show, Mad Money, but then I realized that his buy and sell advice was typically not very accurate. The same is true for most of the professional investors out there. They find a couple of tidbits that might infer that the stock price will go up or down, but they assume that all the other variables hold constant, which of course they don’t! The economy might struggle or they’re might be a war halfway around the world. Things happen outside of a company’s control that make the stock prices rise and fall.
Instead of trying to dig into every bit of information on every single stock, you could really do yourself a favor by ignoring most of the intricacies of the market, invest simply (into mutual funds within your 401k), and then spend your time doing something more productive (like starting your own company!).
Are you invested in the stock market?