6 Tips on Investing

by TTMK on September 30, 2013 · 10 comments

investing money tipsAs we know, it’s usually not enough to simply save our money.  We have to make sure it earns a good rate of return, since we need to keep up with inflation at the very least! Hopefully though, we’ll earn much more that that, and will help us build wealth.

To earn that increased rate of return, it’s important to focus some of our personal finance efforts on investing.  Sure, there is some risk involved.  But that’s often the way it is, and over time the power of compounding can really work some magic and help us grow that nest egg.

Along those lines, here are 6 tips on investing:

Invest as Early as Possible

By this, I don’t mean as early in morning as possible 🙂  Rather, get involved in investing as early as you can in your grown up life.  For example, investing $10,000 and holding it until an age 60 retirement while earning 8% annually can result in vastly different amounts depending on when you start investing:

  • Starting at age 50: 10 years until retirement, final amount = nearly $22,000
  • Starting at age 40: 20 years until retirement, final amount = nearly $47,000
  • Starting at age 30: 30 years until retirement, final amount = nearly $101,000

Clearly the earlier we start, the more we could end up with later in life.  I used age 30 as an example, but naturally it would help if we started earlier in our 20’s when starting work in the case of most of us.

Every Percentage Point Matters

Don’t lose sight of how every percentage point of returns can matter.  For example, if someone gets a 10% rate of return, that can lead to much better things down the road that an 8% rate of return.

To illustrate, let’s take revisit hat example above with the importance of time.  With a 30 year time horizon, that $10,000 would equal nearly $101,000 with the aforementioned 8% rate of return (annually).    If you increase that rate of return just slightly, to 10%, there is a noticeable impact.  The total is just short of $175,000 in that case, which is substantially higher than just over $100,000!

All this for simply 2% more in rate of return on an annual basis.

Diversify

Putting all of our eggs in one basket can be tempting but dangerous.  Where there is risk there can often be reward, but there is also a need to keep in mind the downside.  Diversification can allow us to stay ahead of wild fluctuations by mitigating risks.  This includes diversification not only within asset classes but among them as well.

Don’t be Too Reactionary

Markets seem to be quite volatile, especially stocks in recent years.  One or two bad days don’t necessarily signify an imminent free fall.  Think about how many people panic and sell when markets decline by 25%, only to realize later that it was actually a better time to buy.

This doesn’t mean that we should stay with dogs for a long time.  If a stock has experienced protracted declines and shows no tangible signs of going back up (no real business reason), it could be time to give up.  However, in many cases, it can be a great idea to simply stay the course in other cases.  Buy and hold for the long term can work sometimes!

Watch Out for Bubbles

There was the Tulip bubble many centuries ago, many stock market bubbles, the real estate bubble…you get the idea.   The great times and outsized returns simply don’t last forever.  Knowing that there isn’t a magic bullet for quick riches can be a great start toward making the right decisions.  We generally can’t get something for nothing, and shouldn’t expect the party to last forever!

Regularly Contribute

Whether it’s your tax-deferred option such as a 401(k), or a taxable account, it’s important to regularly contribute funds to be invested.  Making this a priority can only fuel our quest for growing wealth even further.  Obviously if we invest more we can earn more, but the step of actually saving money in order to have money to invest is an important step in investing – even if it’s a pre-step.

My Questions for You

Do you think about these aspects of investing?

Any other tips to add?

 

 

 

 

 

{ 10 comments… read them below or add one }

Joe Saul-Sehy September 30, 2013 at 3:31 pm

I love these tips! I love trying to remove myself from the actual results of my investments. I’ve seen many investors take their investments too personally and they don’t sell when they should, while they sell investments that clearly should be held. If I can remove emotions and stick with a plan, I’ll come out ahead more often.

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TTMK October 1, 2013 at 4:11 pm

Joe – yes, I know what you mean. Being the “Tin Man” with little emotion can actually be a really good thing for investing:) Much of this is based on math, as well as objective analysis on companies or markets. Emotion really isn’t a part of it!

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Little House October 1, 2013 at 9:07 am

Great tips. I wish I had taken the advice of an employer in my 20’s and invested in a retirement plan early on. Instead, I did what he did: wait! So dumb.

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TTMK October 1, 2013 at 4:09 pm

Well, the great thing is that we have this knowledge now and can use it. The things I wish I did differently in my 20’s…..there are a few for sure.

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Money Beagle October 1, 2013 at 9:21 am

The starting early tip can’t be said enough. I wish I would have followed it more when I was in my early 20’s. As it was, I did start investing, but looking back, had I even doubled what I put in then, I’d have double the investments today. It’s easy to say that you need that money for living expenses, but there’s always room to stash away a few more bucks, especially that early in life when most people aren’t afraid to live on the cheap as it is.

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TTMK October 1, 2013 at 4:08 pm

Exactly, when younger it can be easier to live on the cheap and it’s actually smart to do so. As for wishing that you would have started when younger, I think we can take a few things from that. First, we can’t go back in time but what we can do is apply our lessons learned immediately! Second, we can take our wisdom and also help our kids make the right moves when they’re at that point in life. At least those are a couple of ways we can positively go forward armed with the knowledge that time is our ally when it comes to building up our net worth

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getrichwithme October 1, 2013 at 11:02 am

Great tips. You’ve covered all the bases.
Start saving as soon as you can, keep the costs down and wait for time to work it magic compound interest.

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TTMK October 1, 2013 at 4:04 pm

Thanks! You actually summarized things succinctly right here.

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thepotatohead October 1, 2013 at 10:41 pm

I was way too careless with my investing in my late teens and early twentys. I put alot of money in super high risk stocks and lost big. Oh why oh why didn’t I just put it in index funds 🙁 Anyways, now I’m doing my best to invest smartly and much more safely. The younger you start the better you are, so I hope some of my similarly young co-workers and friends start to taking their investing more seriously, sometimes I feel like I’m the only one lol

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TTMK October 1, 2013 at 11:12 pm

Things like that happen, which is often the case with being younger. Risks are taken, and sometimes they pay off and sometimes they don’t! It’s not too late to learn and make the right moves going forward.

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