03 Sep Growing It
How to Invest and Grow Your Money
You’ve worked hard, earned some good money and now you have money set aside in your accounts waiting for a decision. The next step is to invest your money so it starts working for you and grows. To accomplish this, there are nine key practices you should adopt and follow.
1. Focus On the Long-Term
The only way your money will ever really grow is by committing to long-term investing. People think that they can figure out the markets and engage in-stock selection and short-term trading, but there is a huge fallacy in doing this. Professional investment analysts spend decades following and studying the markets. These are people who understand all the rules of investing; they’ve learned about fundamental and technical investing, read books about investment strategies, and attended and continue to attend workshops … they are experts in the financial markets. Unless you’re willing to also study the markets seriously over a period of years, you really have no business investing in the market by yourself. There is a single exception discussed shortly, but almost everyone reading this book will have better results by hiring a financial advisor who will discuss your investment goals and create a customized investment plan.
2. Be Patient
Yes, it can be tempting to jump in on a seemingly lucrative short-term trade in volatile markets, but you’re asking for trouble. When it comes to investing, it’s preferable and wise to focus on the long-term. Long-term investments will give you better results than any short-term scheme or market fad or trend. You must have patience as an investor and allow time to work in your favor. The best strategy is to select investments that grow steadily and weather market fluctuations.
As an entrepreneur, you’ve become accustomed to making long and short-term investments in your business. Now, however, you have to switch your mindset and focus only on the long-term. You can choose to spend your time watching the markets every day to make sure your short-term investment isn’t creating losses, but most people have better things to do with their time.
If you’re going to watch the markets, be prepared for feeling frightened and greedy. These are the two main emotions in the market; books have been written about this, so if playing the fear and greed game is appealing to you, well, have at it! You’ll be tempted, like everybody else, to jump off your new investment at the first sign of trouble, but this impatience will be costly because most investments rise and fall like the tides. It may be fun to watch the tides at the beach, but the market tides could make you crazy!
3. Don’t Lose Money
It may seem obvious that the last thing you want to do is lose money as an investor, but it’s worth mentioning because a simple detail will help you remember to be cautious.
We’ve all heard about the miracle of compounding. $100,000 left in an account earning 10% becomes $110,000 after a year. This is a simple example, but the point is that money increases over time based on the interest rate.
There’s also a feature called negative compounding in which the reverse happens. If your investment drops 10%, your $100,000 becomes $90,000. In order to restore your original investment to $100,000, you don’t need just 10%, you now need to earn 11.1% to get back to even.
Let’s take a deeper look. If you lost 50% of your $100,000, your account is now $50,000. Assuming you could earn 7% on the $50,000 you have left, it would take you 10.24 years to regain your original $100,000. Not only would it take you over 10 years to recover from your loss, but now you have also lost over 10 years of investment time when your original $100,000 could have been growing. As you can see, this example shows the debacle of making risky investments.
Warren Buffett is famous for saying the following: “Rule number one: Never lose money. Rule number two: Never forget rule number one.”
Thinking like an investor is very different from thinking like an entrepreneur, seal has to train yourself to be patient and let long-term investments add to your wealth over time by balancing your losses and your gains.
4. Asymmetrical Risk and Reward
When you’re choosing your investments, make choices in which the reward outweighs the risk. When presented with the opportunity for making an investment, if the risk of complete loss is 10% and the chance of success is 90%, the likelihood of success is in your favor. In this scenario, numerically you’d be able to invest ten times, lose nine times, and still come out even, though you win only once. When you’re making investments, you want to make investments that are in your favor, where your reward is higher than your risk. Money doesn’t always come easily so it’s important that you take every opportunity to preserve your money and avoid risk as much as possible. Having created wealth, you must become a good steward of it, with your primary focus on the preservation of your wealth. Since you want to increase your wealth, the risks you take must be conservative so that you risk little to gain. If you take the opposite side, you’re risking a lot to gain little.
Because markets can be unpredictable and volatile, it is essential to spread your risk among different markets and the seven classes of assets.
The seven asset classes are stocks (equities), fixed income (bonds), cash, foreign currencies, cryptocurrencies, real estate, and commodities. As you read more about asset classes and diversification, there are a variety of opinions that expand and contract this list, but this is a good starting point. Some financial advisors recommend having holdings in each of these asset classes, and this is a discussion you should have with your financial advisor because some classes may be appropriate for you while others are not.
Once you and your financial advisor have decided how to invest your money across the asset classes, additional discussions will occur about the subcategories of each of these classes. For example, real estate investments can be residential, commercial, or raw land. In another example, there are hundreds of currencies, but the most popular ones are US Dollars, Euros, British Pounds, Canadian Dollars, and Swiss Francs because these currencies have shown long-term stability. A stock portfolio can be diversified in different sectors of the economy, such as resource extraction, manufacturing, technology, retail, financial services, etc. Once you start investigating the different investment opportunities, a whole universe of choices suddenly appears, which is a good reason for having a financial advisor.
Another consideration is not to invest in just one geographic area. Having investments spread across the United States, Europe, Asia, and emerging markets will also diversify and add stability to your assets. The point of diversification is that as one asset class decreases or fluctuates, the others are likely to grow. A professional advisor can help you understand how your portfolio will grow through diversification.
Nobody can time the market on a regular basis. Consistently buying at the market low and selling at the market high is for magicians, not for investors. Even the most experienced hedge fund managers know not to attempt this feat of prestidigitation. A core principle to remember is: It’s not about timing the market, it’s about time in the market.
Studies have been conducted about people who tried to time the market and their results were less than what the market achieved. People are terrible at timing because they are ruled by their emotions. When the market is up, everybody wants to jump in and that causes the markets to rise higher with the froth of greed. There comes a point when key players analyze and realize that the market is overvalued; they withdraw their money to lock in their profits. Everybody else is a participant in a falling market.
Because nobody wants to lose their money, rather than sell their market holdings and take a loss but get out while they can, most investors ride the market all the way to the bottom. At the bottom is a gigantic pool of fear and because everybody in that pool is worried about losing even more money, they finally sell. It’s at that precise moment that the market becomes attractive again because investments are now attractive once more for purchase. Because everybody is still hurting from the fear and the financial losses they suffered, they choose not to get back into the market. Meanwhile, the market is moving upwards. At some point, compelled by the market’s rise and their own greed, they get back into the market usually as the market is approaching its new high, and this cycle repeats over and over. This is why timing the market is a fool’s game.
If anyone thinks they can predict what the market will do, they either have illegal inside trading information or they are deluding themselves. Even the most sophisticated hedge fund managers cannot accurately predict the market consistently. That’s why investment success is not about timing the market; it’s about time in the market.
7. Buy The Entire Market
Earlier in this chapter, it was mentioned that there was an exception to the general rule of working with a professional and independent financial advisor with a history of investment success and who is not allied with a commercial brokerage firm that insists on selling you the company’s products for a commission.
That single exception is when you choose to be your own financial advisor and invest in market indices like the Dow Jones Industrial Market Index, the S&P 500 Index, the NASDAQ Index, the Russell 2000 Index, etc. When you pick individual equities or stocks like Tesla, Facebook, or Amazon, your investment will rise and fall on the performance of the individual company. When you invest instead in market indexes or indices, your investment will be more stable because the index is a collection of companies within the index. If any one company does poorly, the other companies in the index are likely to have performed better and the loss of a few will be protected by the success of the others.
Of course, there is danger here as well. The first rule of investing is to remember that every investment has risk. If you purchase just one index of equities, your fortunes will still rise and fall based on the performance of that single index. This is why it’s wise to also diversify among the different indexes. Each index is a collection of companies that have qualified according to their characteristics. For example, the NASDAQ Index is regarded as a technology company index because it is a collection of technology companies. The S&P 500 Index, on the other hand, is a collection of companies that are performing in the group of the best 500 performing companies in the market. There are standards a company must maintain in order to remain in the index.
Buying the entire market means investing in a collection of index funds that cover all aspects of the market. When you make an investment in all the markets, your portfolio will grow steadily, and as one index retreats, another will advance keeping your portfolio steady and increasing over time.
8. Dollar-Cost Averaging
This is a wise strategy to follow if you are investing by yourself. Dollar-cost averaging Is when you make a regular investment whether the market or your stock is up or down. The concept is that by investing your money every month, there will be times when the market is down and you are adding to your investment when the prices are low, making them a bargain. There will also be times when the market is up and you’re adding to your investment when the prices are high, making the cost a premium to you. However, the wisdom of dollar-cost averaging is that you are making steady investments over a long period of time so that whether the market or your stock is up or down, over time you will still benefit from the longevity of your regular investment.
For example, if you wanted to invest $20,000 in the stock market, an intelligent approach could be to divide that amount by eight and invest $2,500 per month for eight months. This would significantly reduce the impact of stock market fluctuations on the overall purchase, which is the point of dollar-cost averaging.
Another good strategy is to automate your investments. Automation eliminates the risk of becoming distracted or forgetting to invest. It also reduces the risk of spending the money before you invest it. Like dollar-cost averaging, automated investment reduces the impact of market fluctuations on your asset purchases.
With an automated program, you decide how much you want to purchase and how often. The money then moves seamlessly from your bank account to your investment account, or even directly into the specific investments you have pre-selected. You can set up automated deposits for savings accounts, IRAs, mutual funds, stocks, fiat currencies, cryptocurrencies, bonds, precious metals, and almost any other kind of savings or investment account.
Dollar-cost averaging and automating your investments are both excellent strategies to guard against another kind of fluctuation – those of your mind. Our willpower, focus, and self-discipline often vary over time, and this behavior can negatively affect your commitment to long-term investment. Dollar-cost averaging and automating will smooth out the market and guard against internal fluctuations that can undermine a commitment to consistency.
Carefully consider these nine factors for success as an investor; each has a great degree of merit and can help you retain your wealth now that you have worked so hard to achieve it.