The stock market has taken most investors on a wild ride in recent years. Now, it seems that more and more investors are better equipped to achieve success. With this in mind, I want to share my four pillars for better investing. If followed, this financial guidance could help you grow your money in the long term.
While I’m sure you’d love to know the perfect stock portfolio , even if you didn’t manage it properly, you could still turn a big winner into a big loser. Most of the time, big investments are relatively boring. Okay, being a great investor is usually boring. For example, people like Warren Buffett don’t sit down and trade daily. You spend exponentially more time reading financial documents than you do trading, and I’m guessing most of you would find it anything but fun to read that level of financial documents.
Working towards financial freedom may not be the most exciting thing in the world, but reaching that milestone is certainly rewarding. Saving money may not be sexy. When it comes to investing, the more boring the better.
How can you reduce your investing stress?
Many people find market volatility stressful. There seems to be an endless stream of bad news pointing to an imminent collapse of life as we know it. Most financial advice you’ll find online (or in the news) isn’t tailored to your specific financial needs or goals.
These four basic pillars of investing success should help alleviate some of the stress. These are tips that I believe anyone can follow and apply to their specific financial situation and goals. With these steps, it will be almost impossible not to achieve financial freedom, as long as you save enough and give your investment enough time to let compound interest work its magic.
The 4 boring pillars of investment success
Following these four investing tips will help you invest better and make it easier to achieve financial freedom. They may seem boring, but they will leave you more time to enjoy life with your family and friends. They should also leave you more money for that extra time.
1. Invest regularly
When you set up automatic contributions to your investments, you will buy more shares when prices are low and buy fewer shares when prices are high. More importantly, you will continue to buy investments when the sky seems to fall. The worse the stock market has done recently, the more likely it is to earn above-average returns in the future.
Do you know how amazing your returns would have been if you had continued investing money into your 401(k) every paycheck during the financial crisis? And the Covid-19 pandemic? And for any other reason why people panicked in the markets?
People like me did it and let me tell you, the returns on investment look great. Setting up automatic contributions means you don’t have to think about it. It also helps ensure you keep investing money when times get scary.
This boring pillar of investing success is often called dollar-cost averaging. It doesn’t eliminate investment risk, but it increases the chances of achieving your financial goals. It should also help reduce your stress level when investing.
2. Have a diversified investment portfolio
As the saying goes, don’t put all your eggs in one basket . If you consistently invest in a single company and it goes bankrupt (or has problems), your investment could disappear.
Diversification won’t eliminate volatility from your investment portfolio, but it will essentially eliminate the risk of your money going to zero. I suppose it’s possible for every company in the S&P 500 to go bankrupt in a single day. If that happens, there will be more important issues to address than the nominal return on your investment.
You may think a company is awesome because the stock price has skyrocketed. However, owning shares of just one company (no matter how fabulous you think it is) dramatically increases the risk of losing all your money. If you’re not diversified, you’re probably speculating rather than investing. Additionally, the more a stock rises, the greater the chances that its value will decrease in the future.
3. Rebalance your portfolio automatically
Typically, rebalancing is done once a year. Most of the time, you can set this to happen automatically at some regular interval, such as annually. If you never rebalance and the stock market goes up, you’ll end up with a riskier portfolio than the one you initially created. This could make you more affected if the stock market ultimately falls.
On average, the market suffers a 10% drop about once a year. This should not be a cause for concern, but something to keep in mind. These temporary drops don’t matter much if you can ignore them. They can be devastating if you get scared and sell good investments at a discount, only to buy them back later at a premium. Or worse yet, sell and then put that money under a mattress or deposit it in a low-interest bank account where it will languish.
Conversely, if the stock market declines for a time, you could end up with a more conservative portfolio than is appropriate for you. Plus, you could miss out on profits when the market recovers. Rebalancing restores the portfolio to the risk level it started with. It also helps you buy low and sell high over time.
4. Avoid continually playing with your wallet
Even if you could choose the perfect investment portfolio, guaranteed to get incredible returns, there would still be a way to screw it up.
Historically, the S&P 500 has gained about 11% annually over the long term. According to DALBAR research , the average investor going it alone typically ends up earning something like a third of that total return over time. The study is published every year, but the results appear to be similar year after year.
Whether the market goes up or down, some people make bad financial decisions. Those types of decisions would destroy their financial returns even if they were lucky enough to choose the best investment options at that time.
The fundamental thing is to establish the pillars one to four for the success of the investment. Have them work automatically and let them do their thing. You’ll be on your way to financial freedom before you know it.
Investing success is often much more about avoiding big investment mistakes than it is about being able to perfect the timing of buying and selling a specific investment. These boring pillars of success can help you avoid some of the most common investing mistakes.
For additional credit, speak with a fee-based fiduciary financial planner to determine how much and where you should invest each month to achieve your personal financial goals. Hopefully, they will also provide you with valuable tax planning to help you achieve financial freedom faster and easier.
