Often, we overcomplicate the investing process. It doesn’t have to be that way, though! The science of investing has been studied over many decades and some “best practices” or fundamentals of investing now exist based on actual data, not simply promises by an investing “professional”.
The vast majority of people can and probably should handle their own investments. If you need a little help or a second opinion from time to time, hire a fee-only, fiduciary advisor on an hourly basis! Commission-based and asset-under-management (AUM) fees add up over time and erode your portfolio. As Jack Bogle (the founder of Vanguard) once said, “You get what you DON’T pay for.” So, keep your costs low and follow some basic investing fundamentals.
Fundamentals of Investing
Here’s a summary of investing fundamentals I learned through years of good (and sometimes bad) financial moves, as well as from working with various coaching clients:
1. Start saving as early as possible
There’s an old adage out there that the best time to plant a tree was 20 years ago; the second best time is today.
It’s the same with saving and investing. Sure it would have been better to start decades ago, but you can’t do anything about that now, so start where you are and make the best of it.
2. Get yourself ready to invest first
- Understand your spending habits and make sure they line up with your goals and values.
- Eliminate, or at least have a plan to eliminate, your non-mortgage debt. Debt payments are a lien on your future earnings. Getting rid of them frees up cash to invest in your future, not the banks.
- Establish a sufficient emergency fund. It’s not an investment, its insurance. Trust me, something will eventually go wrong and you’ll need the cash.
3. Avoid unnecessary lifestyle inflation
This one is important especially if you’re considering early retirement, but this is good advice for everyone.
Just because your pay went up 10% doesn’t mean your spending needs to as well. Commit to saving (for example) 50% of any increase in income. A simple step like this will pay huge dividends over time! It holds down your spending (while still allowing for some increase in your standard of living) and can really boost your savings.
4. Understand yourself
Success with investing is more about understanding yourself than understanding how to read a prospectus.
- Be honest with where you are financially right now.
- Understand the goals you’re trying to achieve……and what you value.
- Understand your risk tolerance! I think this is the primary reason investors sell out when the market tanks (and it will eventually!). Their portfolio was riskier than their risk tolerance.
- Understand your NEED to take risks. Another common adage: Once you’ve won the game, quit playing. For example, my personal risk tolerance is closer to 70%/30%, but I reduced my exposure to risk by moving to a 60%/40% portfolio. Why? Because we’re far enough along that we can give up the marginally better return to take the risk off the table.
5. Write your Investment Policy Statement (IPS)
Keep it simple, but documenting your plan will help keep you on track and away from impulse decisions (to buy or sell something). One of the best things I ever did when it comes to investing.
6. Keep the costs of investing low
Keep your costs, taxes and expenses as low as possible, while making sure you spread your investments over many asset classes.
Index funds work great for this purpose. They are inexpensive to own, tax-efficient, and offer a great way to spread your risk over many companies.
7. Stay the course!
Unless there has been a significant lifestyle change, keep with the plan detailed in your IPS. You chose it when you were calm and thinking clearly. Don’t throw it out because the market is TEMPORARILY acting up.
Last adage: Your investment portfolio is like a bar of soap. The more you touch it the smaller it gets! Changes you make to your portfolio solely because of market turbulence will almost always come back to haunt you.
8. Re-balance your investments periodically
Over time, your 60/40 allocation can turn into a 70/30 or 50/50 allocation due to changes in the market. Periodically sell the overweighted investments and buy the underweighted. Do this at least once per year, but no more than quarterly.
9. Adequately insure risks you want to offload
This means having sufficient liability coverage, additional umbrella coverage, use of LLCs for rental properties. You don’t want to lose what you’ve worked so hard to acquire and manage.
10. Get your estate documents in order
Don’t let the courts decide who gets what, and don’t let the IRS get any more than necessary!
I’m going through this process now, so I know how daunting the task can be. But it’s well worth your time and expense.