How difficult do you make investing? I think we all have a tendency to chase hot leads and follow the market day by day, but I don't think that's a recipe for success. Attempting to forecast short term changes in the market is futile.
Simplicity is the your key to investment success. The easier, the less complicated, the better. The simplicity effect can be combined with a solid investment plan to ensure long term success.
I'd like to share 5 tips with you today that will help you accumulate more wealth with less effort and less stress. Here are my 5 tips for successful investing!
1. Have a Plan
Remember the short term market forecasting statement above - it just doesn't work. Making a preset plan with a defined asset allocation, specific assets, and a determined rebalancing period will help prevent you from making bad decisions and chasing down ice cold leads. A plan is probably far more important than the specific assets you choose to hold.
2. Invest based on Your Risk Tolerance
If you can't stand losses, own more short term bonds. The worst possible mistake you can make is holding 100% equities and then selling out when the market tanks. You'll ensure financial ruin with that plan. The best asset allocation is one that should yield the highest return up to your maximum loss tolerance. You've got to figure out if you can sleep at night after losing 10%, 25%, or 50% of your portfolio.
3. Dollar Cost Average
Dollar cost averaging means buying your predetermined assets in set intervals, which is often monthly. In other words, contribute a portion of your paycheck each month to your investment account, which should automatically invest in the assets your determined in your plan. Coming full circle, aren't we?
This is another way to prevent yourself from trying to time the market or forecast upcoming market movements. You just set it up and let it work. When the market is down, your money will buy more shares of your chosen investment. When the market is up, you'll buy less. The average is actually in your favor over time.
4. Diversify with ETFs
ETFs are a wonderful investment vehicle. They allow you to own thousands of stocks, or even the whole stock market for a very small fee. They are extremely tax efficient because you get to choose when to buy and sell, which means you can control all capital gains.†Did I mention fees? ETFs have crazy low fees. Many charge less than 0.10%!
I like Vanguard's ETF choices, which are free to trade. I also like Motif Investing which allows you to buy up to 30 ETFs for a flat $10, or Optionshouse which offers $4 individual trades. There are pros and cons about each, but without a doubt, the cheapest option is Vanguard.
If you are still not ready to invest your own money, I've grown fond of the investment company Betterment. They invest in high quality passive ETFs from Vanguard, which is fantastic. They also handle all rebalancing in a tax efficient manor and even do tax loss harvesting for you. For all this and more, they charge roughly 0.15% in management fees. That's a bargain when compared to the 1% often charged by wealth management firms.
5. Avoid Popular Media
Stop listening to the guys on TV who are yelling about the bull market or the upcoming crash. Just stick to your predetermined plan and invest on a regular, set basis. If you begin chasing hot leads or hopping in the raging hot market, you'll lose long term.
I would also add that you should avoid trying to purchase individual stocks based on tips or gut feelings. Individual stocks bear much more risk than a diversified index investment, and they probably don't have a place in the intelligent investors portfolio. Of course, this is the direct opposite of what you'll hear on the TV. So don't listen.
Do you follow these 5 tips for successful investing?
Author Bio: I'm Jacob, one half of the Cash Cow Couple. My wife and I enjoy teaching others how to live an abundant life on a very modest salary. We are attempting to spend less than $12,000 in our first year of marriage because we enjoy a good challenge.