Warren Buffet gave this advice about investing. He said, “Rule #1—Don’t Lose Money, Rule #2—Don’t Lose Money.”
I get asked a lot about practical rules to abide by as you start investing. Whether you’ve been investing for years or you’re just getting your toe in the water, there are four investing rules you need to know.
Rule #1: Have an Investment Goal
This might sound boring, but it’s critical to your success. Make a goal of how much you want to invest each month. Don’t start investing without a plan or you’ll never be successful.
You might be thinking that I’m asking you to set a goal for how much profit you’re looking for. No. This isn’t how much you want to make, but a goal of how much you want to invest per month.
An ancient proverb says, “The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty” (Prov. 21.5). You have to plan and be diligent to set aside funds to invest. It’s not going to just happen. The best way to do this is to decide how much out of each paycheck you want to designate toward investments.
Jesus said, “One who is faithful in a very little is also faithful in much, and one who is dishonest in a very little is also dishonest in much” (Luke 16.10). The key is to be faithful. Although it might not seem like you’re investing much at first, think of that amount as seeds that will grow into a harvest down the road.
To help you reach your goal, set up an automatic transfer each month from your checking account to a designated separate investment account that you can’t easily access. That way, it’s less tempting for you to spend that money and it’s specifically earmarked for investing.
Rule #2: Diversify Your Investments
The key is to investing is diversification. I mentioned in a recent blog that investing is risky. The single most important thing you can do to help mitigate risk is to diversify your portfolio. This means maintain the right portfolio mix. We’ll get into how to do that in a minute.
This is the number one advice everyone in the financial world gives, but so few people take it.
You might be surprised to find that even the Bible says to diversify your holdings. Ecclesiastes 11:2 says, “Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” This means life is uncertain, and you don’t know what’s around the corner. So it’s wise to spread out your wealth because you don’t know which venture will fail and which will succeed. Don’t put all your eggs in one basket, so to speak.
How can you make sure your accounts and investments are properly diversified? You might say you’re diversified if you have money in a bunch of different mutual funds. But I’m telling you that true diversification means spreading your money around different asset classes, so it won’t all move in the same direction at the same time.
You have to change your philosophy of money. Don’t think of investment as a soup pot, where you throw in different ingredients, but more like a lasagna—layering different assets to truly diversify. Diversification and time cure all sins and mistakes of investing.
Rule #3: Be Boring
Don’t let your emotions dictate the rules. Paul Samuelson was the first American to win the Nobel Memorial Prize in economic sciences for his fundamental contributions to nearly all branches of economic theory. He said: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
Investment is custom to you, so I can’t tell you how to invest, but I recommend the following to a 30-year-old today who is wanting to invest in the stock market:
|VONE – Vanguard Russell 1000 ETF
|VO – Vanguard Mid-Cap ETF
|VB – Vanguard Small-Cap ETF
|VT – Vanguard Total World Stock ETF
|VNQ – Vanguard Real Estate ETF
|Cash / Money Market
This might seem overly simple, too boring, not enough panache—but I assure you that you want vanilla when it comes to your money. If someone is giving you the brand-new fly by night investing strategy, be wary. You want to look for boring. I’d rather have a boring investment strategy so I can have a wildly adventurous bucket list I get to cross off in retirement.
Rule #4: Do Regular Check Ups
There’s no “set it and forget it” to investing.
One of the most important things you can do to mitigate risk is rebalance your investment accounts to keep the allocation consistent, because asset categories will grow or decline at different rates over time. This way, you’ll ensure you’re on track for retirement or other investment objectives.
Overall, expect to revisit your investment style and approach every three to five years or when you have a major life change. Over an eight-year period, the British cycling team won 16 gold medals and seven Tour de France wins. Credited for their success, the team used the theory of marginal gains. The theory goes that if you make a 1% improvement in a host of tiny areas, the cumulative benefits would be extraordinary.
This theory is critical in investing. When my financial advising office does our stress test on our clients’ portfolios, there are tiny tweaks that each move makes, and those marginal gains really pile up. For example, how diversified are you among Large, Mid and Small cap? Are you too heavy in one sector, or are you to heavy into domestic US stocks? Are there equivalent funds that cost .25% less? All of these small incremental changes make a world of difference.
So those are four rules of investing to get you started:
- Rule #1. Have an investment goal. Don’t start investing without a plan or you’ll never be successful.
- Rule #2: Diversify your investments. The key is to investing is diversification. This means maintain the right portfolio mix and spread your money around different asset classes.
- Rule #3: Be boring. Don’t let your emotions dictate the rules. Believe me, you want vanilla when it comes to your money. I’d rather have a boring investment strategy so I can have a wildly adventurous bucket list I get to cross off in retirement.
- Rule #4: Do regular checkups. Rebalance your investment accounts to keep the allocation consistent, because asset categories grow or decline at different rates over time.
Follow these rules, and you’ll avoid mistakes others have made before you.
When I help people with investing strategies, I always think about the best time to plant a tree: The best time to plant a tree is 10 years ago. The next best time is now. So don’t worry about making more money. Don’t worry about knowing more about investing. Don’t worry about picking the right investment. Just invest.
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