The Secret to My (Investing) Success
My primary objective with this blog is to focus on young and new investors. For those of you who follow my clucking, SIMPLICITY rules this roost. My PDQ Principles of Investing (Patience, Diversification and Quality) revolve around the concept of simplicity…and some good old common sense, which by the way, isn’t all that common. I sincerely believe that, by keeping it simple - in a PDQ fashion - anyone can master their investment strategy and pad their retirement nest egg! NOTE: Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
Buy the Haystack
I've got two pieces of commonsense advice. First, don’t look to the national and cable news media for advice. Their job number one is to entertain…usually in a sensational manner. If you need entertainment, fine, but take what they say with a fist full of salt. And second, follow Vanguard founder, Jack Bogle’s sage advice: "Don’t buy the needle, buy the haystack."
Let's review some Wynn$ights basics.
P = Patience
We’ll begin with patience, something very few folks exercise when it comes to investing. Why patience? A lifetime of observation tells me that it’s very unusual to get rich quickly. But it’s not uncommon to become “well off” slowly.
Patience is the key ingredient to successful investing. Like I said, it’s the rare bird out there who becomes wealthy quickly. By exercising patience - even with an average income - it isn’t that unusual to become a very successful investor over time, the good Lord willing.
D = Diversification
You’ve heard the old saying, "Don’t put all of your eggs in one basket." That’s a good way to explain diversification. And diversification is even better if approached with a plan. I personally recommend building your portfolio around an index fund. My favorite is a Total Stock Market Fund. Then, dare to be average - be happy with the market rate of return. Over a lifetime, you’ll be glad you did. Study after study shows that it beats trying to “time” the market. Remember Bogle said…and I repeat…“Don’t buy the needle, buy the haystack." By diversifying your portfolio, you are less likely to be a victim of speculation.
Q = Quality
Being confident that your investment portfolio is one of quality involves planning as well as patience. And there are several steps to a good plan:
You have to save in order to invest. No surprise there.
Spend less than you make by eliminating unnecessary expenses and invest the surplus.
Focus on your income and develop good spending and investment habits.
Investing Super Power
I’ve found that focusing on the long-term is the least risky way to improve your return.Given enough time, patience and a highly diversified, quality portfolio, the amazing power of compounding will breathe life into an IRA or 401(k) account. Always keep in mind that if you have quality investments, they are worth holding onto for the long haul. Hell, maybe forever (until it freezes over). And, don’t forget to reinvest those dividends and capital gains. That’s another important component of compounding.
While we’re on the subject of compounding, it’s a simple yet elusive concept to get across to budding…and often broke…young investors. Because so many youngsters have so many uses for so little money, in their minds it’s hard to rationalize compounding zero savings. Thus, we must first climb that steep hill of convincing young folks to save…even a little…and the earlier, the better. Like so many thing in life, consistency is key. Getting started is the hard part, but doing things consistently for a long time works, particularly with compounding. Surely somewhere in your life, there’s a million dollar habit (smoking or vaping, perhaps) that could be jettisoned so that you can start saving that hard-earned cash.
And when a market corrects (the dreaded Bear), as it surely will, DO NOT…let me repeat…DO NOT join the thundering herd scrambling for the proverbial exit. A patient investor is by definition not a panicky investor. Markets can be volatile, but volatility alone is not risky. It’s how you react to volatility.
Don't Live in the Past
Without question, past returns are seldom indicative of future returns. Nor are past predictions revealing of the future.
Unfortunately, investment advisors (who I like to call WAZOOs) love complexity, as though only they have the IQ , the special skills, and the contacts to navigate today’s world of personal finance. They often try to correlate all sorts of things to help predict future markets…Fed Chairman speeches, interest rates, the GDP, Covid-19 and its twists and turns, the last and future election results, unemployment numbers, and so forth. I’ve found that some events might correlate to today’s events but could very well have the direct opposite impact the next time. From these experiences, I’ve decided that it’s best not to place too much faith in such correlations at all.
Put it All Together
There is a definite link between risk and return...more frequently in the short-term. In the case of young and middle-aged folks, the link is less apparent, because with time on your side, you can ride out most volatile moments and lingering corrections.
Stressful? Yes, such moments can be stressful, but take heart in those comforting PDQ Principles. No one can predict the future, so don’t try…and the past can be a poor guide, too. But with a plan that follows those important principles, market-wide events on long-term charts reveal upward momentum over time.
Develop a carefully thought out plan and stick to it. Remember that word “consistency” mentioned above in the Patience section? Practice it. Don’t fly blind. If the plan works for you, stick with it. If you have people you trust, listen to what they have to say, but remember, it’s highly probable that their advice will be influenced by their own unique situations and experiences in life, as is yours…and mine.