(Guest Post by Ornella Grosz)
I get asked questions about investing quite frequently. It shouldn’t be a surprise as my background comes from the financial industry and I’m a licensed investment advisor. I understand people’s concerns and fears about investing. Truthfully, it’s only natural to be fearful of things you don’t understand. Warren Buffet’s infamous quote “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” is, basically, the foundation to investing.
Here are some of the concerns I hear:
- “Investing is like gambling.” (Gambling carries more risk)
- “I would rather invest in real estate.” (You can, they are called REITs and real estate funds. But you can still lose money investing in property, too)
- “It doesn’t seem like it’s the right time to invest.” (No offense, but there’s no golden opportunity)
My response to above concerns and anyone else’s concerns about investing is to Keep It Simple and Stupid. And I’m not the only one who feels that way. Investing is a long-term approach. The long-term approach means that you have time to allow your money to compound and weather the ups-n-downs of the market.
In a weird way, you can take advantage of both the upside and downside of the market. The truth is volatility is necessary for your investments to grow. You definitely don’t want to buy high and sell low, that’s for sure.
All too often, financial analysts spew tons of information in our direction and our minds are overloaded. Facts and important figures become obscure. The media drills in to our heads the slash backs, cuts backs, and bad news that are detrimental to good-will, and subsequently have a negative impact on the value of our investments. In many cases, information of that kind isn’t necessarily relevant. And I’m sure we can recall a time when analysts have been incorrect.
I’ve had people say to me you should sell your losing stocks or investments. This is where you should get a financial professional involved to make sure the decision you make is appropriate for your financial circumstances. My point of today’s post is not to provide with all the answers to investing, rather to keep it as simple and as stupid as possible. If later on you want to delve into higher levels of investing, go right ahead. But, I feel, it’s best if you can KISS it for now.
What do we know already about investing?
- You can’t time the market. You have to recognize there are things that are just out of your control, such as what will the markets do next.
- You have to mix up your assets. Have some equities, bonds, and cash. The more time you have to invest (10+ years) the more equities (aka stocks) you can hold in your investments.
- Diversify is a must. Diverse your investments among different sectors, like technology, retail, real estate, beverage industry, foreign markets, energy companies, etc. Diversification helps to minimize risk, but you already knew that.
- Rebalance your investment portfolio. By periodically rebalancing, no more than once a year, you can reduce your exposure to risk relative to your target asset allocation.
Now that we already know what we know about investing, here are some tips to help you keep investing simply and stupidly as possible:
- Consider what you already know about investing. (Hint: it’s the four bullet point right above)
- Start with index funds. Because I’m a licensed investment advisor I have a choke-hold around my neck from saying the name of any index fund. What I CAN say, though, is that index funds are a great starting point because they are really low-cost. Choose an index fund(s) that has a low expense ratio less than .5%. I’ve even seen less than .1%!
- Strategize: Know your target asset allocation mix. Rebalancing is very important because it will help you stay aligned with your target asset allocation. It will help you sleep better at night, too!
- Know why you pick that investment. Write out a few short sentences of your reasons for buying into a particular investment. Maybe something like, “I am investing in this {insert name of investment) because the expense ratio is low, research has shown most actively managed mutual funds fail to beat the passive index funds, blah blah blah.” Then, review your choices periodically and be mindful of your basic reasoning for it.
- Turn away from the negative media. I think it’s safe for me to say you know what happens if you listen to too much negativity. It will lead you to making emotional and irrational decisions.
Keep investing as simple and as stupid as possible. Then move on with your life!
How do you balance investing in your life? Do you allow it to consume you?
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Ornella Grosz, CFEd® is a financial expert, keynote speaker, author of Moneylicious: A Financial Clue for Generation Y, and member of the National Financial Educators Council (NFEC) Financial Literacy Curriculum Advisory Board. She is an advocate for young adults, women, and beyond (she doesn’t discriminate) to view money differently, and currently blogs at Moneylicious adding a little more spice to all money matters. You can join her on Twitter as well: @OrnellaGrosz.
(Awesome yarn photo by Hey Paul Studios)
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Very good article. That last point is probably the most important!
If I may, I would add one more thing: understand the economic cycle. In our lifetime it has bottomed out every 7-10 years – http://bit.ly/economy_chart.
That tells you when to expect bad news and negative press, so you can tune it out. While timing the market is impossible to do, it does give you a general idea of when to go liquid and ease out of investments (usually when everyone is all excited – the scared when greedy part of Buffett’s quote).
Most importantly, though, it gives you the courage to jump in and invest when everyone is whining and moaning – the greedy when others are scared part.
Investing toward the end of a recession is like shooting fish in a barrel – it’s almost impossible to go wrong. Only people who understand the cycle usually have the courage to take advantage of this, rather than look back and wish they did it.
I dollar cost average! I invest in my Roth IRA, Roth 401(k) and taxable investment account every pay check. I automatically contribute to my target date fund in my Roth IRA and Roth 401(k) and a balanced fund for my nearer term taxable investments. My non 401(k) assets are with Vanguard because of their low fees and decent returns! I like their investment philosophy.
Sensible advice to anyone venturing into the markets — and following the sensationalism of media, like CNBC talking-head hype, certainly is not recommended. I’m more of a ‘buy and forget’ investor unless there is a drastic price plunge, in which case I buy more.
The best investors I know tend to be contrarians; they’re able to recognize under-valued investments and enter markets cheaply while the majority are fleeing, or sell heavily into ‘irrational exuberance’ during a frenzied wave up.
I keep it pretty simple right now. I have a mutual fund, IRA, bonds and I invest the biggest chunk into myself-school tuition. I usually only check the accounts once a month or more depending on when I get a statement, need some info, want to invest some extra birthday money etc. Nothing crazy as I really don’t have enough money I would like to play with or time to learn more (school is my #1 priority as I would like to get it done quickly).
Thanks for the info! I do like your simple tips; something for me to keep in mind if I steal a little bit of time away to learn more about my investments and what I want to invest in for the future. :)
Ornella,
I think this is great advice. I am somebody who used to be overwhelmed by investing. I taught myself the basics of investing, and now I love it. I don’t try to get too fancy or cute. I don’t try to outsmart the markets. I “Keep it Simple Stupid” and watch my money grow.
This is a very good post for most every investor. Most people are not served by constantly checking their accounts and balances. I check mine a couple times a day and follow the news because I am an investment junkie. That being said, I am by no means an active trader. I continue to DCA every week and reinvest all my dividends. So in the end I do keep it pretty simple.
Thanks for the tips, Ornella! This is great even for me who needs a constant reminder of the basics so I don’t try and get fancy over here ;) It’s a bad mixture with the sucky memory I have too, haha…
@William I can’t tell you how many times I’m asked if I heard about this negative news story and that negative news story. And usually, I respond with “yes, and what about it?” A lot of the news has really no impact on long-term investing. However, I can understand someone who had 10 years left until retirement and lost a substantial amount of it. There’s usually a reason why someone lost so much of it, but I won’t get into it here. I wanted to keep this post light and to the point. And you are right, economic cycles are important to understand. But to the average investor who let’s say enjoys travelling, running their business, taking care of the family, etc, economic cycles ends up being last on their list of things to think about. In regards to the recession, if you take a look at the last 10 years (not the first 10 years of the millennium) you will notice the rebound—but the media hasn’t talked about it. Go figure ;-)
@Lance dollar cost average is great way to remain consistent with your contributions. I have a taxable account too, so I totally understand. Actually by the looks of your retirement account, you will not pay a dime in taxes. Even your taxable account will be subjected to capital gains tax (unless that changes, but we don’t know what will happen with taxes). It’s great that you are diversified Vanguard really does have low cost funds. I have a few of them in my non-retirement accounts, too. As you know Vanguard was founded by John C. Bogle—pioneer of index funds.
@Jennifer Lynn catchy title! You sound like one of American’s great investors—Warren Buffet. You are not broke-a** mommy at all :-)
@LB take your time learning about investments. You are very smart by taking it slow and keeping it simple. You have other obligations. The more you learn the more you can venture to do more things with investing. But keeping the core of your investment portfolio with a clear, simple strategy is the best approach for now.
@Greg Thank you! I tried to keep investing light and simple. It’s too easy to fell prey to the hype and then it becomes complicating. Once you learn the basics you realize simplicity and an investment strategy is key.
@Brian you are different than those who watch and pay attention to the news of the markets…you know not to use your emotions to make investment decisions. It’s amazing how keeping it simple actually works with investing. As you know, active trading can really eat into your returns—those costs, ouch!:-)
@J$ you just have too much going on in your head—you are too creative! :-) But I’m glad you liked the post! If you want to get fancy, you can, but don’t do it with money that you really need–retirement, emergency, baby money, etc. If you really want to get “fancy” set up an account strictly to be fancy with that money!
I really loved the post!!!! I’m so excited to start investing again :). Right now it’s only through my 401K and ESPP. Planning to start the ROTH IRA in the next year or so.
@SavvyFinancialLatina hey, missy…nice to see you over here:-) Glad you LOVE the post! Start that Roth IRA, it’s a solid way to diversify your accounts. Actually, without realizing it, you are spreading your taxes around for the future–accounts that will be taxed at your ordinary income and an account where you will not be taxed at retirement. Very cool!
Great points. I think it’s important for people to realize that stations like CNBC make money on ads. Most of the complexity these shows present only make it worse for the average person who watches. So much of it is irrelevant to a healthy financial life.
I’m just getting into investing. Actually, finished a book yesterday that helped me learn all the common types of investing, how to determine where to allocate your money, etc. Next step for me is determining where to actually put the money. Its an overwhelming process for me but it’ll get started soon
@AverageJoe. Thank you. Why can’t they talk about the rebound that happened the last 10 years! “The complexity” you are describing leads to so many detrimental investing decision making. I’ve met people who rebounded from the recession within 3 years! Warren Buffet is right, be greedy when others a fearful…
@Em if you are just getting started, low cost index funds are a great way to start. As you learn more and read the research behind them, you will find that the majority of active mutual funds don’t beat them over the long haul. You may want to check out The Little Book To Common Sense Investing and then of course there’s my book–just had to throw that in there..lol. Good luck and keep it simple.
I keep it simple by rolling over any surplus money into my roth vanguard index funds, I also have 401K funds that I have been putting more money into Index funds in that account as well. Its pretty easy to scan the title of a fund and notice that it says Index and immediatley you will know that the fees will be a lot less than other non index funds.
When I first started investing, I just nodded yes to the recommendations my financial advisor(s) made, because I was so clueless. I know I still have quite a bit to learn but now that I’ve started to read up on it more, I actually understand what they are talking about. I even made suggestions as which mutual funds I should purchase. When one of them agreed that the fund I suggested was what he was thinking of and that was a good choice, I was so proud of myself! It can be overwhelming with all the jargon and what the media says, but I feel one of the key things is to constantly educate yourself about the market.
@RichUncle El the index funds are easily noticeable. I like your idea of rolling over any surplus money you have into your Roth IRA–excellent idea :-)
@MakintheBacon$ Congrats on taking the first step–educating yourself. It must have been an amazing feeling that you were able to make investment decisions on your own. It’s quite empowering! It’s great you have a financial advisor that you trust.
@Ornella @ Moneylicious – Yup! My ROTH account is pretty much my “do and try whatever I want” place where I test stuff out and get a bit riskier than normal :) It’s refreshing to have an account that you don’t have to be super strict with!