Start saving, investing and following good money habits as soon as possible.
It’s important that you are realistic; that you don’t expect any big overnight returns, but that you look at investments as a long-term approach to achieving financial goals. That means viewing investments not as something extraordinary, or an irregular thing. Look at them as a regular expense. They should be the same as paying your mortgage or rent each month. You’d never let a month go by without paying your bills. View your investments the same way. Pay them every month. When I began building savings and investments in my late 30s, I used an automatic deduction from my checking account to ensure that I was investing each and every month.
More importantly, by investing on a regular basis over a long period, which is sometimes known as “dollar cost averaging,” you reduce the emotion and guessing of investing. The latter is the belief that you know where the market will go everyday. It comes from knowing, or think you know, when a market has made a new high or low. Most people have no idea. Certainly, I don’t know. But some like to pretend they do.
Remember wisdom in investing or in almost anything comes as much from knowing what you don’t know as much as knowing what you do know. It’s tough for most of us to admit what we don’t know something but I believe it is the beginning of wisdom.
Dollar Cost Averaging
The theory of dollar cost averaging is, since you are buying every month regardless of whether the market is up or down, that by doing it you reduce your long-term risk. When the market is down, your dollars buy more shares that month. When it’s up, congratulations, the value of your shares is rising.
But stick to this investing discipline: Don’t get too carried away when things are going well and don’t get too down when the market is bearish. In the latter, since you’re in the market for the long term—10-20-30 years; the longer the better—your time will come if you have patience and, sometimes, courage to hang in when things are going badly such as earlier this year.
Investor Errors in 2020
Here’s an example Early in the year, the market was down some 25 percent. Now, it is up for the year some nine percent. How do the people who jumped out in March feel now?
Here are three funds that my wife, the ever-comely Suzanne Hall, and I have used since we started investing in 1990.
1) Vanguard Star. This is a balanced fund. What is that? It is a fund that has both stocks and bonds—mostly stocks; about 60/40 stocks and bonds. So, say you want to invest in both a stock and a bond fund but can’t afford both. Then a balanced fund will give you both in one fund. Having some bonds as well as stocks is very important. Stocks beat bonds most years. However, there are years when bonds beat stocks. In 2008, the market was down 40 percent. Many days I thought I was going to jump out the window—good thing we live on the second floor—but we were “only” down 25 percent. Why? We had some bond funds along with our stock funds.
By the way, a friend of mine got out of stocks at the end of 2008. “I’ll never invest in the stock market again,” he told me. And he was actually a smart guy in the financial services. Nevertheless, he let his emotions overcome him. Do you know what happened the next year? While 2008 was one of the worst years in stock market history. 2009 was one of the best: The market was up some 25 percent. What ever you do, have a plan, a well thought out plan, and be dispassionate about it.
2) Vanguard Total Bond Market Fund. Again, another cheap way to get a large bond market exposure.
3) Vanguard 500 Index Fund. A way to get exposure to the S&P 500 at a very low price. When I was a reporter for Traders Magazine, I once interviewed the guy who was the head trader for Vanguard, Gus Sauter. And I was convinced that he was relentless in constantly getting the lowest possible costs for the Vanguard investor when he bought shares for the funds. He used “limit orders.” The frequent use of these orders kept trading costs low.
Costs Matter. They Matter a Lot
I find this with most Vanguard funds. They are always looking to keep costs low for the investor. I don’t work for Vanguard. There are some other good fund companies, such as TIAA-Cref. But there are always a lot of other fund companies who are nothing less than pigs, people who spend money like the federal government or the state of New York. Then these financial professionals pass on outrageous costs to the investor in the form of high expense ratios—the higher it is the worst it is for the investor—and 12b1 charges. The latter are a kind of sales charges that helps the fund company, also known as the investment company, but hurts investor performance. I want no part of any of that. The problem is that, sometimes, what’s good for the investment company isn’t good for the individual investor. That can also be true of certain financial professionals, such as stock brokers or advisors, as well as pols more interested in winning office than the best long-term interests of the country.
Some Make Goo-Goo Eyes at Your Geld
So be careful. It’s your money. You worked hard to get this money to invest. You had to work hard, pay a lot of taxes and avoid overconsumption to ensure you had some money to invest. The latter is a discipline that many Americans, especially younger ones, fail to achieve.
And don’t be afraid to ask questions about your money. Again, here I go repeating myself de novo, this is your money; this is your chance to achieve financial independence and achieve whatever your goals are.
GregoryBresiger.com is here to help people who start with nothing end up financially independent.
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