3 Rules for Simple Investing
Investing…Just the word can be intimidating. There are so many options available when it comes to investing, a thousand different ways to invest these options and then the “how to” invest on top of all that. We have a saying that “a confused mind says no.” And our fear is that all of this mental chaos is resulting in “no,” even when “no” is detrimental to your future.
It costs more to live every year. You can’t buy the same amount of groceries this year as you did last year for the same amount of money. Inflation will cause you to go broke if you don’t position your dollars to outpace it.
At this point, you are stuck between a rock and a hard place. Investing is confusing and even scary at times, yet not investing at all could cause you to go broke safely. So, what do you do? Well, let’s make it simple. Sometimes the more you think, the less you actually understand.
- Understand risk and pick something you can stick with. Taking risk in the investment world doesn’t always mean all or nothing. It can simply mean the amount of ups and downs you are willing to watch to achieve a desired level of return. Before we invest money for anyone, we input these options into our software and stress test what might happen in order to gauge these ups and downs. It is kind of like deciding which roller coaster you are okay riding—the Texas Giant or the kiddie coater. The thing to remember is that once you commit, don’t jump out – you will get hurt. If you stay on the ride, you probably won’t.
- Invest in things that make sense. I brush my teeth every morning and hopefully you do too. I don’t plan to stop brushing my teeth anytime soon. And if I did, it would only be because there happens to be new technology that does it for me. To add to this, think about the world for a minute. Is the population growing? Are more people coming out of poverty every day? If you answered yes to both, your answers are correct. Add to that, the idea that more people will be brushing their teeth in the future. Now this is not a recommendation to go buy stock in toothpaste or toothbrushes, but you get my point. Unless the entire world stops brushing their teeth, it would make sense that these companies have a positive outlook for growth or at least income.
- Make it systematic. Most successful people built their wealth one dollar at a time. It wasn’t a windfall or good timing in the stock market. No one has a crystal ball. And this is one area where most people actually end up getting hurt when it comes to investing. They use their emotions instead of their heads. Either fear or greed gets in the way. Since 1988, the stock market’s average return has been about 10% per year. But stock fund investors have earned only 4.1% per year, according to Dalbar’s Quantitative Analysis of Investor Behavior. This study proves people overreact way too often. Our solution to address this is called “dollar cost averaging.”
To explain further, let’s assume you are at the grocery store on Sunday and plan to buy black-eyed peas. They are one dollar per can. You forgot something so you returned to the store on Monday and black-eyed peas are on sale. They are two cans per dollar. Did I forget to mention you really like black eyed peas? So, you buy more. Tuesday, your wife sends you to the store for toilet paper and you can’t believe it. They are on sale again – and even further discounted. Three for one dollar! Your curiosity has you, so you go back Wednesday and sure enough—four for one dollar. So, let us summarize:
How many cans do you have? How many dollars have you spent? Now, suppose the store ran out the day before New Year’s Eve. Everyone wants black-eyed peas and you have ten cans. You sell them for a dollar per can, for a total of $10. What was your profit? Six dollars! This is the power of dollar cost averaging. As Aaron says, he can guarantee two things. The market will go up and it will go down. Now, the past cannot predict future results, but the market has also always gone up more than it has gone down. A systematic investment plan like this may be like watching paint dry, but patience is truly a virtue.
Don’t say “no” or “when I have time” to finally say yes to your future. Even if it is $100, start using these three simple steps to start growing your future and begin Living Life on Purpose!