A Beginners (and Time Tested) Approach to Investing

A Beginners (and Time Tested) Approach to Investing

OLYMPUS DIGITAL CAMERAIt’s often difficult to start investing especially if you don’t know where to begin. There have been horror stories of Ponzi schemes and market fluctuations that have left investors with little or nothing. Leaving some young savers to apply the Wedding Singer approach to investing:

“I have no experience but I’m a big fan of money. I like it. I use it. I have a little. I keep it in a jar on top of my refrigerator. I’d like to put more in that jar.”

Sure, it’s safe up there with the cookies, but over time inflation will naw away at the jars contents, leaving you in a worse position. Investment and financial advisers would have you believe the only option is to hand your money over to them to deploy as they see fit but there are other options out there.

Canadian MoneySaver has provided five rules that have proven to yield positive results over the long haul, which I have started to use myself over the past few years.

1)      Start Early!invest early and often

Starting early is the simplest way to ensure your nest egg continues to grow over time. Albert Einstein called compounding interest “mankind’s greatest discovery”. The Rule of 72 is a method that allows us to determine how quickly our nest egg will double in size. Dividing 72 by our estimated annual return will provide the number of years required for our money to double. For example if we expect a 5% return each year, it will take approximately 14 years for our money to double. Let time and your money work for you – start investing early and often.

stock picking

2)      Don’t Pick Stocks

This is often a lesson young investors learn early. You hear your pal at the pub describing the next big stock and you “wisely” go out and invest everything you have only to see it tank shortly thereafter. Stock pickers often trail average market returns. You’re far better off to choose ETF’s the mirror the market (XIU – for the Toronto Stock Exchange or the XSP for the S&P 500). It may be boring as hell but over time it works. P.S. you’re buddy is drunk not a trusted investment adviser.

3)      Keep Costs Lowinvestor fees

The average Canadian investor annually pays 2% in fees, more than any other developed country in the world. Managing your own investment portfolio is a great way to reduce fees, especially with the introduction of ETF’s which often have fees lower than 1%. Paying 2% annually in fees is a killer over a long period of time when you consider a 5% annual return is respectable. If your knowledge and confidence in regards to investing is low, consider a fix fee adviser who you can pay set amounts to rather than continuing commissions.

4)      Diversifyinvesting - eggs all in one basket

Decades ago it would have been extremely time consuming and expensive to manage your own diversified portfolio of investments. However, as mentioned above, with the dawn on ETF’s and mutual funds this process of diversification has become much easier. The goal is to stay right in that meaty part of the average market returns – don’t show off, but don’t fall behind. Believe it or not this approach often beats the stock pickers and actively managed hot-shot portfolios.

5)      KEEP YOUR COMPOSURE!investing composure

If you’re an emotional person, investing may not be for you. Having the conviction to stick to your investment approach can be difficult during times of market turmoil. Conversely, during bull markets it’s just as important to avoid greed. Just ask the Dot.Com bubble burst investors. Warren Buffet (investing mogul) said it perfectly:

“Be fearful when others are greedy and greedy when others are fearful”

The bottom line is your investing approach should be to invest often in a well-balanced manner. Do this and the specific types of investments become less important as your strategy will ensure you come out on top despite the ups and downs of the market.

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2 comments

  1. A thought on stock picking for investors that insist on an active approach (i.e. no broad market index or exchange traded fund). In (at least) keeping with the diversification rule, it seems the general consensus if that a adequately diversified portfolio includes no less then 20 different equities and probably should include 30. The effort of trying to effectively manage 20 – 30 holdings is not something I’m looking to take on…and don’t even get me started on the transactions costs of the buys and sells for those with an itchy trigger finger (not advisable)! Great rules to invest by Jon!

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