The Simple Secret of Investing
May 18, 2007
What’s the single most important factor in the value of an investment portfolio? Some might say risk or diversification. Others might think costs or taxes. These are all vitally important but not as crucial as the most basic investing principle.
The good news is that getting this factor right is simple. As a matter of fact, it’s the simplest secret there is to investing. The sad part is that many people can’t even get this one thing right. Until they do, there is no possible way they’ll ever make any money in the stock market. So what’s the secret? Read on and I think you’ll figure it out.
When I began my investment portfolio 7 years ago I wasn’t sure where to start. I didn’t know which funds to buy. I wanted to take advantage of the 10% average annual growth I’d always heard about in the stock market but I also didn’t want to lose my hard earned money.
The day I finally picked 4 mutual funds and setup my 401k was the turning point in my investing portfolio. While that first action was a little scary, it was also very simple. As I look back on all my investment decisions, that was by far the most important.
Figuring Things Out
Was I taking a risk, investing in mutual funds without being an expert? To some degree, yes. Anytime you put money in the stock market there’s a chance you could lose it all. However, I think it’s much worse to avoid getting started than it is to put some money in the market and learn from its performance.
My initial investment was a few hundred dollars in 4 different mutual funds. Many funds have a minimum but if you’re investing through a 401k or 403b plan you don’t have to worry about these minimums. If you don’t have one of these plans, check out the investing options for new investors and investing rookies. While I was risking a few hundred dollars, I was also gaining priceless investing experience. Over time my balances grew and eventually I hired a certified financial planner to look over our allocations and diversifications.
I implemented many of the suggestions I received from our financial planner and have made a few tweaks since then. A review of the investment holdings of several personal finance writers yesterday gave me a chance to take a look at where we stand today. The small investing experiment that began about seven years ago is now worth a little more than a quarter million dollars and is relatively well diversified as you can see below:
29% – Vanguard 500 Index (VFINX) – Large Blend
14% – American Century Equity Income (TWEIX) – Large Value
13% – Vanguard Small-Cap Index (NAESX) – Small Blend
11% – American Century Ultra (TWCUX) – Large Growth
11% – Vanguard Total Bond Market Index (VBMFX) –
6% – American Century Intl Growth (TWIEX) – Foreign Large Growth
5% – Vanguard High-Yield Corporate Fund (VWEHX) –
4% – Oakmark International (OAKIX) – Foreign Large Value
4% – Vanguard REIT Index (VGSIX) – Real Estate
3% – Dodge & Cox International (DODFX) – Foreign Large Value
I’ve lost a few thousand dollars over the last 7 years with American Century Ultra but that’s a small price to pay for getting a jumpstart on a nest egg for our future. I’ve since stopped investing in the Ultra fund and am trying to decide whether I should sell it all at once or a little at a time.
In addition to my mutual fund investments, I also put some money into Internet and B2B stocks through Etrade in the dot com boom. Caught up in the stock market rush of the late 90’s I lost all of it when the bubble burst. Although losing the money was painful, this was a wonderful investing lesson to learn early in life. I learned the difference between speculating and investing and how to use financial statements to understand the financial health of a corporation. If I hadn’t gotten started investing I may not have learned these lessons until much later in life when I could ill afford to do so.
The Simple Secret of Investing
If you haven’t figured it out yet, the simple secret of investing is just getting started! You may not know what you’re doing but you definitely won’t learn if you don’t start. The best thing to do is start small. Put in a little money to see how the investing process works and how your picks perform. Staying diversified across industries and asset types will help reduce your risk and make you feel more at ease.
If you don’t feel comfortable making the decisions yourself or would like a second opinion, hire a financial planner like we did. Make sure they hold a CFP designation and are a fee only planner. This way you’ll know they have knowledge and experience and don’t stand to earn any money off of your investment choices.
Whether you go it alone or with the help of a professional, getting started on your investing journey is the most important step to building wealth for yourself and your family. Now that you know the secret, get out and get started investing today!
All posts by Ben Edwards