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The Journey Begins
After completing college at the end of 1999, I quickly secured a job in my desired field. It was an exciting time. I relocated to another state and settled into a run-down apartment just across the Charles River from Boston. Despite the area being less than ideal, the view of Boston was breathtaking. Watching the sunrise over the city each morning was a truly unforgettable experience.
Much of the modern economy we know today was in its infancy. Google was only a couple of years old, and it would be almost another eight years before the first Apple iPhone was released. Amazon was starting to move beyond selling books and into different products.
Being straight out of college, I did not know much about investing. During those times, I just knew I needed to save money. So, over the next few years, I worked a lot, spent little, and put all my money into a savings account. Soon, I had a sizable emergency fund but no investments. It was around this time I moved south and stumbled across the Clark Howard Radio Show.
Clark Howard shared valuable insights on saving money and making wise investments. His advice left a lasting impression on me, especially when he emphasized the advantages of investing through low-cost brokerage firms like Fidelity and Vanguard and utilizing index funds to build an investment portfolio. With Clark Howard’s advice, I took action and opened a ROTH IRA account with Fidelity while in my mid-twenties.
Over time, I have gained valuable knowledge and learned from my mistakes. As a result, I have identified the top 7 lessons that life has taught me about investing, starting with number one: Just start.
1. Just Start Investing
It’s important to take action and just start investing, regardless of whether you can only afford $25 or $500 per month. Investing even a small amount, like $25, in a low-cost S&P 500 index fund with an average yearly return of 10% can lead to over $100,000 over 40 years. Starting early allows compounding to work its magic and gives you more time to grow your investments. Plus, it’s really important for developing good investing habits.
By starting early, you can start to flex the investing muscle. This will help establish positive money habits and place a high value on investing. Once you begin investing, it can quickly become a habit that you cannot imagine living without. I know once I started investing, I became focused on finding new ways to cut back on my spending so I could put more money to work in the stock market. By starting, I truly came to understand that investing in appreciating assets and securities was the real pathway to wealth, not a shiny new car or a new TV.
To this day, one of my biggest regrets is not investing sooner. I could have started right when I got out of college at 22. Or better yet, I could have started when I was 18 by putting some of my summer job money to work. It might seem ridiculous, but it still bothers me. So don’t delay. The longer you wait, the less time compounding has a chance to work, leading to lower returns.
2. Set And Forget It
After making the decision to invest, the next best step to take is to automate your investments. Automating your investments is a powerful strategy for increasing your wealth. Whether you have a 401K, Roth IRA, or brokerage account, automating your investments will guarantee that you make regular investments and benefit from dollar cost averaging.
Automating your investments is a smart move that simplifies budgeting for investing. You can easily manage your funds by treating it as a regular expense. With automatic deductions from your checking account, similar to paying any other recurring bill, you can effortlessly fund your investments. As your balance grows, you have the option to allocate more funds to investing, fueling a positive financial habit that can have a powerful impact.
In my experience, the ultimate key to successful investing lies in automation. Let’s take a moment to consider a common practice among companies offering free trials. Despite being labeled as “free,” many of these trials require a credit card to be linked. Why is that? Simple: most people forget about the trial and fail to cancel before the monthly recurring fee kicks in. Companies know this and take advantage of human nature. Automating your investments leverages this same principle for a much more positive outcome. Once you start automating your investments, it is hard to stop it.
3. Keep It Simple
When it comes to investing, it’s important to keep things simple. For most people, this means putting the bulk of their funds into a low-cost S&P 500 index fund or ETF. You can also get exposure to bonds through a total bond ETF or index fund. These types of investments give you exposure to a broad range of stocks and bonds and can provide solid returns over time. By focusing on these types of investments, you can avoid the need to closely monitor individual stocks or engage in complicated trading strategies. Plus, with low fees and expenses, you can keep more of your money working for you over the long term.
Maybe you want to add real estate to your portfolio. Buying a home or land can be a good option. However, if that’s not feasible, you can still gain exposure to real estate by investing in REITs or a specialized fund. This is a straightforward and diversified way to invest in real estate without the need for a mortgage or loan. On the other hand, if you’re tempted by late-night infomercials promising quick and easy money through house flipping, it’s best to switch off the TV.
The bottom line is when it comes to investing, I stick to the rule of simplicity. If I can’t describe an investment in a few sentences, it’s too complex to consider. Take options trading or futures trading in commodities, for instance. They’re both highly complex and resemble gambling. They involve betting on the future price of a stock or commodity, which can entail leveraging debt and comprehending puts and pulls. Without expertise, these bets can turn disastrous.
What should you do if you do feel the urge to take on a risky investment? That leads us to the next life lesson on investing.
Great Read
I highly recommend the book The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle. John C. Bogle is the founder The Vanguard Group and is credited with the creation of the first index fund. The Little Book of Common Sense Investing shows how a simple low-cost S&P 500 index fund might be the smartest, most powerful, wealth-generating investment someone can make.
4. Establish a Play Fund
I eventually felt the need to venture into riskier investments and test my skills in outperforming the market. Let’s face it, investing has a competitive edge that is fueled by the fear of missing out on the latest trend or hottest stock. This competitiveness and FOMO can lead to irrational financial decisions.
If you start feeling that urge and do not safely satisfy it, then it might build to a point where you make a bad investment decision with a large amount of your money. So, how do you deal with this urge? The answer for me was play money.
This “play money” is real money, but it is money that I can afford to lose, and it lets me entertain my risk-taking side without jeopardizing my long-term financial health. Some people set aside an amount of play money based on a percentage of their portfolio or treat it like a hobby that they budget for yearly. As for me, I established a play account that is separate from my other investments.
I keep my play money in a separate account, so there is no confusion or commingling with my other accounts. This gives me the freedom to take a chance on a highly speculative stock without impacting my long-term financial goals. I have had some winners, some losers, and a lot in between. The main point is that even if I were to lose all of the money in my play fund tomorrow on a poor investment, it would not significantly affect my overall financial well-being.
5. Be Mindful Of Fees and Expenses
Investing can be a complex undertaking, and it’s important to consider all factors when deciding how to allocate your funds. One important area to watch for is the impact of fees and expenses on your returns. In my experience, opting for index funds rather than actively managed ones can be a wise choice. This is because index funds tend to have lower fees and expenses, which can ultimately lead to higher returns over time. The same is true for low-cost ETFs.
Expense Ratios
Half a percent or more can make a big difference over the long haul in your returns. It may seem trivial, but it is far from it due to the power of compounding. That little difference of a percent or so over 30 or 40 years can add up to tens of thousands of dollars, if not more. So, maybe you want to invest in a fund that tracks the S&P 500. All things being equal, it is probably best to invest in an S&P 500 index fund with an expense ratio of 0.015% than in an actively managed one charging 1%.
Loads
It’s important to be aware of mutual funds that impose sales fees, commonly called loads. These fees can take on different forms, such as front-end and back-end loads or broker commissions. For instance, if you decide to invest $10,000 in a mutual fund with a front-end load fee of 2%, you’ll be charged $200 for the privilege of investing in an expensive mutual fund. This means that instead of being able to invest the full amount of $10,000, you’ll actually only be investing $9,800. This initial $200 charge will eat into your investment right from the start, and it doesn’t even include the additional high fees you may incur over time.
Other Fees And Expenses
There are so many different fees and expenses that you need to look out for, and none benefit you. Every fee and expense you need to pay hurts your bottom line. Some companies will charge redemption fees. Others will charge you a fee for the luxury of having an account with them. Still, others will charge you a fee every time you purchase a fund or stock. The list goes on and on.
Investing with a low-cost brokerage company can make all the difference. Consider trusted firms like Fidelity or Vanguard, which offer low-cost funds with minimal expense ratios and don’t charge you for having an account. Plus, you can trade stocks and many funds without any additional fees. It can be a smart move that can keep more of your dollars working for you.
Once again, I encourage you to read The Little Book of Common Sense Investing by John C. Bogle. It lays bare the destructive power of fees and expenses on your investment returns. It one of the most eye-opening books on investing that I have ever read.
6. Stay Calm
The Lesson Of Y2K
I have witnessed significant economic events since 2000. The Y2K panic began in 1999, and it was mostly about how computers stored dates using only the last two digits of the year. The worry was that when the clock struck midnight and the year changed to 2000, the computer networks would read it as 1900 instead of 2000. This fear led to concerns that computer systems worldwide would crash, plunging us into darkness and chaos.
The news media did what they always do best, and for a year leading up to the year 2000, they were relentlessly playing off of people’s fear in order to make money. The fear surrounding Y2K profoundly impacted many individuals’ lives. Some withdrew their funds from banks and investment accounts, concerned about the possibility of losing access to them. Many used those funds to start farms and build emergency shelters for the anticipated chaos that they thought was coming.
I celebrated the ringing in of the year 2000 in Boston by going out to a bar. I still remember the anticipation and uncertainty when the clock struck midnight. So what happened once the clock struck midnight? Nada. Nothing. The lights stayed on, and I was able to take the subway home that night. Where was the media after all of this? They moved on to hype the next big story.
That is when I truly realized that facts are your friend and fear makes you do irrational things. Furthermore, the news media is in the business of selling news. So if there is a hot story like Y2K that is making them money, the media are going to harp on that story endlessly to keep the money train coming. Be cognizant of that fact when absorbing information.
Tuning out the Noise
Throughout my life, I’ve navigated through various economic crises such as the dot-com bubble, 9/11, the Great Recession, and, most recently, the COVID-19 pandemic. Currently, we are experiencing the highest inflation rate in 40 years. However, I’ve learned that the key to success is to remain calm and stick to my investment strategy. Despite the challenges, I never ceased investing and never allowed these events to alter my approach.
It’s common for news media and TV personalities to sensationalize stories for profit, but I’ve learned to ignore the hype. If I had given in to the fear caused by major events, I may have stopped or sold my investments. Although the market has experienced significant downturns, it has always recovered. It’s important to keep in mind that the Great Recession was followed by the longest bull market in history, lasting 12 years. It took a global pandemic to end it.
7. Always Keep Learning
Life has taught me numerous valuable lessons, and listing them all would take up considerable time. However, I would like to conclude by sharing one of the most crucial lessons I’ve learned about investing: always keep learning. Be hungry for knowledge.
You could read informative books or follow credible news sources like Yahoo Finance. You could also consider taking online courses to expand your knowledge. As someone without a finance and investing background, I even completed several online certification programs on these topics to become a more knowledgeable investor.
It’s important to have a clear understanding of your finances, even if you have a financial planner. If you’re unsure about anything, don’t hesitate to ask questions and conduct some research. Blindly following advice that you don’t comprehend isn’t wise.
Knowledge is power so always keep learning.
Key Takeaway
It’s important to start investing as early as possible, regardless of the amount you can invest. Even small contributions can lead to significant results over time. To maximize your returns, keep it simple and follow a sound investment strategy that involves working with low-cost brokerage firms and investments.
Consistency is key, so make sure to invest at regular intervals, regardless of market conditions. Ignore the noise and stay focused on your goals. The best way to avoid making poor investment decisions is to continue educating yourself. Keep investing and learning, and you’ll be on the path to financial success.