6 Investing Decisions I’m Happy With
July 25, 2011
We’ve all made our share of investing mistakes, I wrote about mine not long ago and how I ended up losing 50-75% of the money I invested. Today I’ll share the counterpart to that: six investing choices I’m glad I’ve made.
Although the world of investing is always changing, and I am certainly not an investing expert (unfortunately I’m more of an expert on student loan debt), I feel that these six choices were the best I have ever personally made.
Investing Success #1: Not Investing Money I Couldn’t Afford to Lose
I learned early on that investing money I couldn’t afford to lose was a big mistake. I was constantly pulling money out of the market to pay routine things like groceries or car insurance. This cost me a ton of money in transaction fees. When I started to pay myself first, and yet simultaneously only invest with disposable money, I was able to really start investing intelligently.
I didn’t get too excited by the ups and downs in the market, because I knew I was in the market for the long term. This led to the modicum of investing success that I have since enjoyed.
Investing Succes #2: Going With Vanguard
Vanguard is a great company because they’re dependable, well-run, and also inexpensive. I have a lot of faith in Vanguard and they have never done wrong by me. My investing strategy is simple: I put my money into appropriate Vanguard funds, and then I sit back and let them take care of the rest. My favorite move is funding my IRA’s largely with Vanguard’s target retirement 2050 fund.
There are other no-load (i.e. no individual sales commissions per transaction) giants such as T Rowe Price and Fidelity. The important thing is that cutting down on transaction costs makes it so your rate of return doesn’t have to be so large for you to make money from the market. Vanguard has been great in this respect.
Investing Success #3: Focusing on Taxes
When I first started investing, I often ignored the tax consequences of my investments. Who could really blame me, as a college student, I generally didn’t earn enough money to be taxed on it anyway. But with age and maturity (and a real job), I’ve learned to love IRA’s, 401(k)’s, and any other retirement financial vehicles that the government (at least up to this point) has allowed tax breaks on.
Investing Success #4: Reinvesting Dividends
Dividends are one of the investors best friends, and perhaps the purest source of passive income. Why? Because they’re generally legitimate and can be almost fully automated. With time, by reinvesting your dividends, your number of shares should increase. All without you even missing any extra money out of your wallet. It’s really a beautiful thing, and the best part is that the benefits tends to increase as time goes on.
Investing Success #5: Investing in Businesses
This isn’t really the same as using the stock market, but it’s the greatest form of diversification that I have undertaken in my own life during the past few years. I didn’t go out and start a huge business or anything, I simply began blogging and running a freelance writing business. These efforts have not only allowed me to meet or work with great people I otherwise never would have met, but have also provided me with extra income.
When you build a business you are in a sense creating income in two ways: 1) any profits you generate; and 2) increased value in your business should you in the future decide to sell. It’s a lot more work than sitting back and collecting dividends, but it’s another fun “investment” that more people should consider.
Investing Success #6: Being Fearless
Perhaps this will lead me to financial ruin one day, but as soon as I started being fearless in my investments is when I started making money.
I research, diversify, make the calls that I think are right, and then pretty much sit back. When the market hits rock bottom, I tend to keep buying. When the market comes back up I have to this point enjoyed an even greater success.
Perhaps someday the market will hit rock bottom and never come back. That’s the risk that I, as a buy and hold investor take. But by being fearless, I allow paper losses to stay that way. By being fearless I’ve seen a 28% return the past two years (lucky for me I mostly bought in at rock bottom). But note, I don’t believe you can time the market. The best you can do is try and pay yourself first. And then keep investing.
My failures outnumber my successes, of that there is no doubt. But hopefully some of the above will be helpful for when you plan your investing strategies.
What do you agree and disagree with? What are the keys to your investing successes?
Best of luck in your investments.
All posts by Chris Thomas