It’s easy to get caught up in the media coverage of the stock market. There are thousands upon thousands of talking heads who like to shout about why the market is up or down, or going to crash.
You shouldn’t worry about it, and you should ignore it. Investing should be a simple process. The more complex you try to make it, the more problems you’ll face.
Here are 5 tips to keep it simple.
1. Have a Plan
If you’ll create an investment plan, you’ve won a big part of the battle. Knowing what you are investing in can help you remove the emotional response that often accompanies big market swings. A plan is far more important than trying to select winning stocks or bonds.
2. Stop Trying to Time the Market
Research has shown that short term stock market forecasting is impossible. If someone predicts the movement of the market, it’s pure luck. Stop trying to decide about whether or not stocks will rise tomorrow. In doing so, you’ll ensure that you don’t miss out on upward swings, and you’ll save yourself a lot of time and trouble.
3. Invest and Diversify
Individual stocks should probably not be held by an individual investor. There is much more risk involved and it takes a lot of time to properly evaluate each individual company.
Beyond that, if you only hold a few different stocks, you are taking a lot of unsystematic risk, which is unnecessary and unrewarded.
Purchase broad asset classes in the form of ETFs or index funds. I tend to favor ETFs because they hold a few benefits over mutual funds and they have lower expense ratios at places like Vanguard. If you want to own a bunch of different ETFs, consider Motif Investing. You can buy 30 ETFs or funds for $10.
Another option for the individual who doesn’t want to manage all the investments or worry about rebalancing is Betterment. They’ll manage all your investments for the crazy low fee of 0.15%.
There are a million reasons why these diversified investment classes make sense, but just remember that they allow you to own thousands of companies for a very small fee. ETFs are extremely tax efficient as well.
4. Dollar Cost Average
Automatically invest the same amount each and every month. Just have it auto drawn out of your paycheck into your investment of choice. Most brokerage firms make the super easy to do.
By investing the same amount each month, you automatically eliminate the urge to attempt to time the market. You remove yourself from the equation and it results in long term investment success.
When the markets are down you’ll be buying more shares of the ETFs you invest in. When the markets are higher you will be buying fewer shares. This will keep you honest and prevent you from making emotional short term decisions.
5. Track and Rebalance
Always track your investments and your asset allocation. My favorite free investment tracker is Personal Capital. It allows you to easily keep track of all your investment accounts in one place and will calculate investment fees and asset allocation for free.
Rebalancing is another important aspect of your investment plan. If you own a portfolio that consists of 60% stocks and 40% bonds, it may eventually need rebalanced because stocks have tended to outperform bonds over time. This could leave you with a huge portion of stocks and very little bonds.
In order to prevent that, you can either sell some stock and buy bonds, or just add a bigger portion of your monthly investment to the bond portfolio. Just be careful to minimize taxation and short term capital gains!
Do you have other investing rules that you favor? Let me know with a comment!
Author Bio: I’m Jacob, one half of the Cash Cow Couple. My wife and I enjoy teaching others how to live an abundant life on a very modest salary. We are attempting to spend less than $12,000 in our first year of marriage because we enjoy a good challenge!
Kim’s Comments: I’ve been keeping it simple for years and see no reason to change. I think lots of people make it seem harder than it needs to be and never start investing, which is way worse than investing in the wrong fund.