I always love it when someone asks me for the latest hot investing tip, as if there’s some investing secret that’s being hidden from the rest of the world. First of all, if I really knew what the absolute best things to invest in at any time was, do you really think I’d be writing this blog?
I can’t blame people for thinking that we can read the tea leaves and know where to invest, and where not to invest though. I think the industry has done this to them on purpose. For years financial institutions have spent countless dollars trying to convince you that they have an edge, a better way to research, a better strategy for picking winners, etc.
Here’s a dirty little secret: when it comes to investing, there are no secrets.
You are just as knowledgeable as most professionals when it comes to choosing investments; we just make it easier for you. That’s not to say that you shouldn’t work with a financial professional, especially if they give you good advice, offer great service, and help you to stay the course when things get rough. That said, anyone can invest like a pro if they stick to these basic principles:
Principle #1 – Define your goals
Whenever someone asks me, “What is the best thing to invest in?” I’ll immediately ask them, “What are you investing for?” The best investment is the one that helps you achieve your goals. That means you have to have a goal before you invest. Goals can range from buying a car or home, to paying for college, retiring, or just becoming a millionaire as quickly as possible.*Here is a guide on setting goals to help you get started.
Principle #2 – Choose appropriate investments
History can tell us that investing in small company stocks over the last 80 years would have generated better returns than most other types of investments, but that doesn’t make them the “best” investment. Different investments serve different purposes.
Cash is good for liquidity. Bonds are good for current income. Stocks are good for growth. Build a well diversified portfolio around the investments most appropriate for your goals.*Use this guide on asset allocation to help you develop an investment strategy.
Principle #3 – Dollar Cost Average
Think of investments like a swimming pool. There are two ways to get in: gradually, or all at once. Dollar cost averaging is the gradual approach, and generally works well when you don’t know the best time to invest.
*Set up automatic transfers from a checking account to a savings or investment account to take advantage of dollar cost averaging.
Principle #4 – Rebalance periodically
Everyone knows you should buy low and sell high, so do it! Rebalancing your portfolio forces you to sell the investments that are performing well and to buy investments that are underperforming. Most investors instinctively do the opposite—investing in assets that are performing well and selling assets that are underperforming—thus “chasing” the market. It doesn’t matter how often you rebalance, but doing so at least once a year is a good idea.
*Click here for instructions on how to rebalance your portfolio.
Principle #5 – Invest for long periods of time
Setting aside money you plan to spend in the next five years is “saving;” setting aside money you won’t need for more than five years is “investing.” Successful investors know the key to growing wealth is not picking the right investment at the right time, but rather remaining invested in a well diversified portfolio for the right amount of time.
There you have it: all the investment wisdom of the ages, and you don’t have to buy a book, subscribe to a newsletter, or even be the 15th caller to get it. 🙂