Our previous post discussed some tips for financial planning, for a regular person. While those tips spoke about finances in general, here we are going to get into the nitty gritty, and deal specifically with tips for investing.
Let’s jump right in, and get started!
Thinking of paying off debt as an investment.
Yes, that’s right. An investment in yourself.
We modern humans are notoriously bad at calculating the costs of borrowing money. There’s an example of a man in college wanted a tent to go camping with friends. He purchased the tent on his credit card, and ten years later, still had not finished paying of the interest on that single purchase. He figured it to be roughly equivalent to a down payment on a house, and he claims his tent is the most expensive tent in camping history.
Considering your debts as an investment in yourself is something that doesn’t make much sense, but once your debts can be eliminated from your financial equations, more money is suddenly available for tons of other things, like stocks, retirement accounts, and even vacations. So, clear the slate before pursuing investing seriously.
Invest smart, and think science.
A doctor once said that if he practiced medicine the way he invested his money, he would have killed more than half his patients.
Think of your investment options as prescriptions. You want to know whether this medicine is a good fit for you, so you would read up on it. Peer-reviewed studies of its effectiveness would likely give you the information you would need to make an informed decision, so why would you instead choose to ask a friend what he heard about the medicine?
Also, don’t put all of your eggs in one basket. Marie Curie did not discover radium by narrowing her vision to one aspect of the science. She looked at tons of options, and found the one that worked.
Another tip is realize there is a correlation between risk and reward. The more you risk, the higher the potential return, but there is no guarantee it will return a reward. Don’t bet everything on one stock, but weigh your options. Stocks generally pay more than bonds, and small companies generally pay more than large ones, and financially weak companies may return greater rewards than strong ones. Pick a few risks, and carefully place the rest where they will hold steady, and yield small returns over the long term.
Hire a real financial advisor.
It’s not easy to be unemotional about your personal money. You earned it. You want to keep it, use it, and it’s hard to make a smart decision when you are literally personally attached to your money.
A financial advisor’s job is to help steer you away from potentially bad investments or dangerous risks, and will be honest with you about your money. They are an outside observer, like a peer-review board on a scientific panel. The advisor is there to give you investment advice, and help you find the best path to your financial goals.
Behave, for a long time.
Building the best portfolio in the world means nothing if you don’t let it do its job. Logically it makes sense. These investments are engineered to make money over the long haul, but emotions get in the way. Consider your portfolio of investments as a baby tree.
You plant the tree. You build the portfolio and make the investments.
You go out next month and dig up the roots to see how the tree is doing. You micromanage your portfolio, and constantly second guess yourself about whether you need to trade this share or sell out on that stock.
Your tree will die. Your portfolio will never reach its full potential.
A common sentiment is that, “Investing is one of those cool, rare things where we actually get rewarded for being lazy.” So, plant the tree, then let it do its thing.