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Keep Investing Simple-5 Tips for Success

 

I’m doing a blog swap today with Cash Cow Couple, and I have a guest post at Stapler Confessions. Please enjoy Jacob’s post here and check out the others if you have time!

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. 

About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.

16 comments

  1. There are some good basics here, but I can never understand why everyone always pooh-poohs owning individual stocks. Though they are not for everyone, they certainly can help with diversification and meeting other financial goals. My stock portfolio is up almost 25% this year (not including dividend returns on top of that!)

    • I don’t necessarily have a problem with owning an individual stock. I have a problem with the recommendation that it’s a good idea. Finance theory clearly proves that holding individual stocks involves much more idiosyncratic risk than holding the market. Additionally, it takes time and effort to honestly evaluate each purchase. Why bother?

      Although your portfolio is up 25% over the previous year, the Vanguard small cap value ETF (VBR) is up almost 35%.

  2. Good stuff here Jacob! My additional tip would be to start as soon as you can. Time is a big factor in building wealth. The longer you are able to invest the better chance you have of success.

  3. I definitely keep it simple. I only check my 401k investment allocation once or twice a year and just keep auto-depositing money from each paycheck. So far it’s worked well.

  4. I’m in agreement with Brian that starting early is key! It doesn’t matter if it’s your first job and you think it won’t amount to much- it will certainly add up over 30+ years!! The hubs and I also own quite a few individual stocks- but we spent a lot of time reading investing books and researching each and every stock before it was added to our portfolio. I think if you’re not the kind of person who wants to put a lot of time into it, you’re probably better off just going with ETFs as you say.

  5. Great tips, Jacob. We are getting near to the time where we’re going to make the jump into non-retirement investing, so I always love good info like this – thank you!

  6. Good basics here Jacob and when it comes to investing far too many overlook the simple basics. It may not be the most sexy, but slow and steady wins the race in my opinion.

  7. I agree – so many people want to overcomplicated investing because they’ve been told it’s hard, so they make it hard. I understand it can be intimidating and there are a ton of acronyms and lingo to understand but the basic principles are simple are often all that is needed.

  8. Great tips, and smart post – loved reading it. I agree that it’s important to be diversified and to periodically rebalance. And I’ll throw in my hat with Brian and Dee.. start early!

  9. Excellent tips Jacob especially for a beginner just starting out. Its certainly best to know what to focus on, what works and doesn’t.
    I’d add one or two things. Be consistent and be patient with your investments!

  10. Jacob,
    Time and increasing contributions is your friend. Often people’s income increases yet the % they save decreases due to lifestyle inflation. How much you contribute matters early on. The best feeling is when your returns start exceeding your yearly contributions.

  11. There is so much I need to know about investing! Articles like this help. I haven’t taken the plunge beside my retirement account but it is something I am interested in.

  12. I need to get better with diversifying and dollar cost averaging. I typically max out my roth at the end of each year rather than contributing bit by bit along the way. Maybe I can automate that.

  13. It’s actually sad that investing appears more complicated than it is. It’s mainly because greed has gotten into the system and everyone on Wall Street is looking out for their own bottom line. If you follow these basic principles, you will be a successful investor.

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