I'll provide the executive summary here, rather than at the end. Be sure to read the entire post to make sense of each of these points.
- Assume that America will survive, will grow, and will prosper.
- Plan to build wealth over time, not get rich quick.
- Start today.
- Manage your own money.
- Open an account at a brokerage house.
- Your goal is to follow the market, not beat it.
- Follow a Buy and Hold strategy.
- Buy an S&P 500 index fund.
- Invest a fixed amount every month, more if you are able
- Roll your dividends and profits back into your investment account.
Now let's dig into each of those points a little deeper, and give a better explanation of the reasoning behind them.
My entire strategy hinges on one key assumption: that America will continue. That the USA will continue to grow, to exist, and to prosper. If you do not share this assumption, then my investment strategy is not for you. If you DO believe this, then I have some very simple advice to offer you. The strategy I believe in will not get you rich quick. It will make you money over time, assuming our key assumption plays out. It will net you a lot more money than just putting it into a savings account, and in my opinion is one of the best investment strategies around. It's simple, it's safe, it's affordable, and best of all as America grows, so does your net worth.
If you haven't seen the movie "Wolf of Wall Street" yet, I highly recommend it. There's a great little scene in there were Matthew McCaunahey's character is explaining the fundamentals of the investment business to newcomer what's his name.
Your first assignment is to watch this entire video.
The crux of it is this: the people trying to "help" you invest your money and increase your net worth are actually just trying to make money for themselves. SURPRISE! Go figure, right? Turns out, this is entirely true.
Almost universally, financial advice, management or leadership comes with a stiff price tag, be it implied or actual. Every time your investment manager convinces you to do a trade to better position yourself to outpace the market, he gets a commission. Every time you buy a product from them, they get a commission. There's an old joke about money managers: they will continue to manage your money until they've managed it all into their pockets. The other oddity about money managers is that almost universally, they don't know more than you do. They don't have access to any more information than you do, or that which is publically available. What they have is an infrastructure, one which is created to craft the illusion that they can help you beat the stock market, and turn your dollars into millions. The truth is far less appealing. Where do you think they get the money to pay for the big offices, the commercials that run during prime time tv, the bonuses that they pay for their best sellers? They get it from you, the investor. So this begs the question, why give your money to them when it can be put to work for you?
The highest earning sales guys (and that's exactly what they are, sales guys) will tell you that on your own, you don't stand a chance of outpacing the market, and that with them, they can leverage their giant network and access to help make that happen. This is nothing but a sales ploy, in order to get their hands on your money so they can fee you into oblivion.
I say all of this to set up the first pillar of my investing strategy: Manage your own money. Open an account with a brokerage house like Fidelity, and make your own decisions. Don't give your money to some money manager who is free to move it around as he sees fit, and charge you fees with every change. Shop around for a place that you like. There are plenty of them out there. Find a place where you can put your money, manage your trades yourself. Typically there's a transaction fee for each trade, and they will vary. There are lots of great discount brokerages that offer very low transaction fees, and great service. Find the place that works best for you. There are loads of online resources for finding a good place to keep your money. I use Fidelity.
Let's go back to that primary assumption I spoke about earlier. The belief that America will continue to survive and prosper. A brief look at the stock market will show that in general, over time, it has shown improvements and has continued to grow. Just like America. I remember in the late 90's when the Dow Jones Industrial Average broke 10,000 and we were all stunned. Since then it has almost doubled. So since the DJIA began being calculated in 1896, up until the late 90's we go to 10,000, and then less than 20 years later we've almost doubled. THAT is incredible growth. For some reason investors are obsessed with beating the market, when simply FOLLOWING the market will show significant returns over time. FAR superior returns to many other investing vehicles that are available.
This leads to my second pillar: The plan is to follow the market, not beat it. By simply following the market, working under the assumption that America will survive, you stand to make a lot of money over time. Pull up a chart that shows the growth of the S&P 500 over the past 20 years. If those seem like acceptable gains to you, then we are on the same track here. The problem with trying to beat the market is that you need one of two things: critical information on which companies are going to grow unexpectedly over time, or a bunch of money, time AND BLIND LUCK to constantly shift your money into higher earning stocks. Remember, nobody knows which stocks are about to explode. Anyone who tells you that they know is trying to sell you something. And by that, I mean "part you from your money". Remember that moving money around in the stock market costs money. The fees are what will whittle down your nest egg, and rob you of any gains that you make over time. Nobody can predict the stock market. If they could, they would literally own all the money in the world. Even just a slight advantage over time would lead to someone with extra-market knowledge to a position where they would literally own everything. So put aside the fantasy that you can outthink the market, or that you know someone who can do it for you. That's a fantasy. Which leads us conveniently to the next point:
Follow a buy and hold strategy. Shifting money costs money. For every story you hear about a savvy investor who moves his money around frequently and has gotten rich, there are thousands of stories of people who lost tons of money following the same strategy. For many investors, investing in stocks is akin to gambling. They get a good feeling about a company, or a friend gives them a tip about a company THEY have a good feeling about, so they throw a bunch of money at it and cross their fingers. And they lose. Just like gambling at a casino. And honestly, gambling at a casino is more fun because you get free drinks and just might get a free room. Recall that the strategy you are following here is to build wealth over decades, so that when you are ready to retire, you are sitting on a giant pile of cash. If your goal is to get rich quick by identifying companies that are about to blow up, I can assure you that your time, money, and efforts are better spent at the race track or casino, where at least you will have fun losing your money. Once you buy a stock, don't sell it. Don't let the ups and downs of the market force you into thinking that you need to sell. That is the path to the poor house. The sad thing is, this is what many investors do. When they see a drop in the stock price, they sell out of fear that the stock is about to crash. What happens is they lose a chunk of their original investment, and then move onto another stock... where the cycle repeats. Folks, here's how the market works: it goes up and down. it fluctuates. There will be days when you see the value of your investment go down. There will be days when the value of your investment goes up. But over the course of decades, if you believe that America will survive and it continues to do so, you will see your investment grow into something huge. Buy a stock, and hold onto it. Don't sell until you are in your retirement.
And now we really hit the biggest question of all. Which stocks do I buy? The answer is really simple. I recommend you buy an index fund, one that tracks the S&P 500. The S&P 500 is a broad index that covers a large part of the market, and in my opinion, is a good metric of how America is doing. While the Dow Jones is a more well known index, it follows large companies that are more industry leaders than representative of how America is doing. That's just my opinion. Research this if you are curious. There are all kinds of indices as out there, and all kinds of funds that follow them. I like the S&P 500 because it's broad, it's general... it's America. Once you sign up with a brokerage, find which funds or spiders they have that track the S&P 500, and start buying. Look for a no-load fund. That means there are no extra fees on the front when you are buying, and none on the back when you are selling.
How much should you buy? As much as you can afford, and as often as you can. Do not let market fluctuations thwart you. If the market is up one week and the spider you want to buy is more expensive than it was last week, DO NOT try to wait it out and see if the price drops. It might be MORE expensive next week. Trying to outthink the market is NOT the game you want to be in. You want to be the slow and steady investor who is completely unemotional. I recommend you set aside a part of each paycheck that you dedicate to investing. If you can afford 100 dollars, do that. If you can afford more, do that. If you can afford less, do that. There are a number of investment strategies out there that dictate how much to buy each period. For example, if the stock happens to be low when your paycheck arrives, you buy a little more. If it happens to have gone up, you buy the fixed amount you typically buy. This helps reduce the peril of emotional purchases, but also helps you hit it a little harder on the downside. Personally, I think a simple strategy is the best one, where you just buy what you can each month. Set a minimum that you are comfortable with, and stick with that NO MATTER WHAT. If you can afford to buy more on a particular month, do that. The key here is that you are consistent. Don't sit out the month of December because you need that extra money to buy gifts. Budget your money so that you have money available, but are still able to buy your monthly stock.
When should you start investing? Right away. Today. Yesterday would have been better, but today is just as good. Remember, trying to outthink the market is a fool's errand, and anyone who tells you they can is trying to sell you something, or to steal your money. Don't sit on your money hoping that the market will be softer next week. It might not. And whatever you heard on CNBC to suggest that it will could be utter nonsense.
One of my favorite parables about investing is this one: Even the blind squirrel finds the occasional acorn. I bring this up because the investing industry is full of these blind squirrels. People are screaming at the top of their lungs that they saw the housing crash coming, that they knew the fed was going to lower rates, that they saw such and such coming from a mile away, etc. It's all ex post facto posturing. And while the squirrel may have indeed correctly predicted a certain event coming or transpiring, that in no way means they are aware of the next one. I have been reading financial news, articles and blogs on and off for 25 years now, and honestly they have all been saying the same thing over and over and over. And remember, they're ALL trying to sell you something. Whether it's tuning into their show so you are forced to watch the commercials, paying for the latest issue of their online paper, or flat out buying their investing product, the whole money making industry is geared around taking your money from you, not making money for you. My point here is that you shouldn't listen to any "expert" whose ultimate goal is to sell you something.
My last piece of strategic advice is to roll your dividends and profits straight back into your account. If any of the companies in your index pay out dividends, don't take that out as cash, but instead be sure to invest that money straight back into your nest egg. Many places offer to do this automatically, which is an option you should definitely take. It's basically compound interest, which is where great gains can be made over time.
I think the only rebuttal to my strategy is really this question: But what about Birkshire Hathaway? Warren Buffet is probably the single most successful and popular investor on the planet. He makes piles of money investing, and typically outpaces the market. He is really the golden egg laying goose. The man and his company really know what they are doing, and I respect them tremendously. I personally would recommend them as an alternative investing strategy, because they have consistently shown themselves to be profitable. I think the only caveat is that their run could just as easily end tomorrow. Buffet could die, and the new guy that takes over could be a total schmuck. Remember that the first question I asked you was about America surviving. If you believe that and it turns out to be true, then the strategy I have outlined will be successful. You do not have the same level of certainty with BH. I actually really like Birkshire Hathaway, but I prefer to be in control of my own money, so I follow my own strategy.
And that's it! That's all you need to know. Remember, the real key to my strategy is that money managers are really just self serving, and don't have any true insight into the market or mastery of money making. If they did, they sure as heck wouldn't share it with us! By managing your own money, you save a fortune on fees, and will ride along with the market as American continues to grow. Good luck!
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