What’s keeping you from investing in a serious way? If you’re like a lot of people, you think the whole stocks and bonds thing is super-complicated. Lots to learn, including every subject we tried to dodge in college, including macroeconomics, statistics and serious math.
But personal investing really isn’t that complex. Intentionality and discipline are the real keys to success. If you have those, you can build a pretty sweet nest egg following a handful of very simple rules, some of which can be boiled down to one word.
Here are two of those magic words – no charge.
Automatic. You can’t whine about money you never see, nor can you spend said money. So, the best way to establish a regular savings/investment habit is to have your regular contribution taken right out of your paycheck and deposited directly into your employer’s 401(k) or your own IRA. Automating your investment program also saves you time and prevents second-guessing by eliminating this kind of inner monologue: “I don’t I really need to put this much in the account this week, do I? I’ll can make it up later, right?…”
Diversify. The best investment portfolios are made up of different types of assets from various and unrelated sectors of the economy. This diversification reduces your downside risk by limiting your exposure when an industry is buffeted by harsh economic winds. It also expands your potential upside by allowing you to wet your beak in the success of many different companies. Example: Someone who had the bulk of their money invested in energy companies enjoyed a great run, until the price of oil tumbled, taking energy stocks with it. Had that person been more diversified, they would have been better off in the long run, profiting perhaps from their holdings in businesses that got a boost from lower energy costs.
Ideally, your portfolio will contain stocks (growth and income, in the right percentages), bonds and other alternative assets, such as shares in real estate investment trusts or MLPs, which give you a share in the royalties paid for use of energy storage and transportation facilities – tank farms and pipelines, basically.
Diversity is important even if you are trying to keep it simple by investing in index funds. Spread your money across several such vehicles – small cap, mid cap, perhaps international. Include both stock and bond funds in the mix.
These are potent words to live by as you begin your savings and investment journey. But they aren’t the most powerful pair. That would be: Start Today.