Investing is always a risk, but one that can be calculated to plan for a comfortable retirement.
Top rules for investing in the stock market:
- Start saving and investing early in life, time is the most valuable asset you have to see growth in your portfolio. Every dollar you spend now on possessions could turn into 3 or 4 in the future if you invest it.
- You need to invest or your money will lose value as the economy inflates over time. Savings accounts are not a strategy.
- Don’t pay off low interest loans, instead invest the money. As long as your average return is higher than the interest rate you pay (after tax considerations) you should be positive.
- The stock market is highly rigged to benefit those with special access to info and fast algorithms. But you can still make money over long periods of time with some research and planning.
- If your employer offers a 401k plan to avoid taxes on income until retirement, put as much money in it as you can and invest in ETF’s not Mutual Funds.
- If investing outside a 401k, setup an automatic withdrawal from your paycheck to your investment account so you don’t see the money as disposable.
- Stocks generally rise in the first 6 months of a year and stagnant or fall in the last 6 months. Time your buys/sells accordingly.
- Markets are cyclical, what goes up must come down. The more extreme it goes up the more extreme the drop will be. Your job is to buy low (when others are fearful) and sell high (when others are euphoric).
- Think of stocks as items, buy when they are on sale and sell at they are not.
- Be a prudent custodian, on your birthday every year check your portfolio and rebalance if needed.
- To reduce risk, diversify with Exchange Traded Funds which are groups of stocks pooled into one and easy to buy/sell through your online broker.
- With ETF’s stick to large names like Vangaurd, Proshares, iShares as unlike mutual funds, they don’t overcharge management fees that can eat big chunks of your returns.
- Balance your stock portfolio based on your risk tolerance between large index funds that track the Dow Jones and S&P 500, Foreign Stocks, Emerging Markets and safer investments like dividend stocks and bonds by investing in targeted ETFs.
- Hold on to investments longer than 1 year to pay lower tax rates (15% capital gains in US vs your usual income tax rate). However, if you have healthy gains, then don’t worry about selling and paying taxes. Gains could disappear soon.
- If you don’t feel like it’s the time to invest, there is no shame in holding onto cash until the right opportunity comes.
- Invest little bits in large companies you love & know, and think are at the top of their game. Keep investing as you go. Hold on to these long-term. Buy them especially when they are undervalued after a bit of bad news as long as the company underneath is sound.
- Keep a portfolio of all your investments in one place with tools like Google Finance Portfolio
- To see if a market is over-valued, look at the Shiller P/E Index. If it’s >20 the stock market as a whole may be overvalued and it’s time to sell. If >25 brace for a big drop. If it’s under 16, it’s time to buy. Be patient.
- For individual stocks, look a the P/E ratio. If it’s >15 it’s probably over valued. But factors such as speculation, fads, and future earnings potential need to be taken into account.
- If you are comfortable and able to take more risk (younger or have money you can afford to lose) then focus on leveraged ETFs – like the Proshares and Ultra Proshares line which can swing up to 3X the index they track or 3X under depending on the direction.
- Look into annuities as a long term investment plan.
- If you missed the signals and the market is crashing, don’t panic 🙂