Investing does not have to be an extremely complicated matter. For some, it may be more daunting than it is for others. If you are not someone who thinks that they can go the financial roads alone, I strongly suggest you find a qualified fee-only fiduciary financial planner to assist you. But if you are brave enough to go it alone, it is always good to get a second opinion and set of eyes on what you are doing by the same type of financial planner. But regardless, here are four very simple rules to adhere to when investing.
The first rule to adhere to is to ensure that you are properly diversified in your investing assets. In layman’s terms, this could mean owning equities, bonds, real estate, other assets, and a portion in cash. For some, the term diversification is lined, and properly so, with the term asset allocation. This is simply the way you invest your funds and gauge it to the risk you are comfortable taking with those funds. Equities provide the best long-term returns while bonds provide a level of safety and income. Everyone has a proper mixture of assets that they are comfortable investing in to achieve their financial goals. The younger you are the more risk you can take with your portfolio. But here I would like to comment when it comes to your retirement accounts and funds you can take some risks and invest in equities but do so in a manner that shows restraint and a desire not to lose any of your principal capital. And if you achieve your desired asset allocation or diversification, you will also reduce your overall risks because these different assets tend to move at different rates and in many instances in opposite directions. And when you reduce your risks by proper asset allocation, you generally will also increase your overall returns as well. Many people tend to seek out professional assistance when it comes to developing a proper asset allocation plan as they can be difficult to develop at least at the beginning.
The second important rule is to rebalance your portfolio on at least an annual basis provided you can do it easily and without incurring too many costs. In many 401(k) plans the plan administrator allows you to rebalance your portfolio without incurring any additional costs and I recommend you do rebalance at least annually as that will allow you to readjust your balance percentages as your investment risks changes. There have been numerous studies that have shown that portfolios that rebalance do indeed produce better returns over long periods. The concept is simple; you sell some of your assets that have appreciated over some time and put the proceeds into assets that have lagged the ones you are selling. Here we are talking about asset classes and not individual securities as there may be other reasons other than a performance that have caused an individual stock or fund to perform poorly. Always stay on top of your investments to know if they are down due to the overall economy or are they down due to specific reasons. Always a key to remember. And in the theme of keeping costs down instead of selling winners and buying laggers stop buying more winners and buy more of the laggers to reach your desired asset mixture. Either way, it is important to remember to rebalance your portfolio.
Many people tend to let emotion get the better of them and buy at the wrong time, normally when the price of an asset is high due to the herd mentality. But the third rule is to dollar cost average your investments. This is when you invest a set amount on a set schedule much in the same manner as a 401(k) as in those plans you invest a percentage of each paycheck into your account. Here you will be buying fewer shares when the price is high and more when the price is lower. As we never can even begin to predict what the markets much less an individual investment will do over time, dollar cost averaging makes sense. When you do this properly over some time you will on average, get a lower overall price for more shares had you bought the investment all at once. I know, you could get extremely lucky and buy everything when the price is low, but it could just as easily be at the wrong time when the price is extremely high. By averaging the prices, you will get the best of both worlds, a lower per share price and more shares as a general rule.
As I alluded to a bit in rule two, it is important you keep your transaction costs as low as possible to maximize your returns. Rule four is to keep fees low. With the advent of online brokerage accounts, the costs of buying and selling equities have come down considerably over the years. With certain firms, you can buy or sell for as low as $2.95 a trade which is much better than the fees once charged by brokerage firms. And if you are buying mutual funds or exchange-traded funds, you can even go to that fund’s family’s website and more than likely buy and sell in an account there for free. I know I use Vanguard for one of my individual retirement accounts and it has no transaction fees for all Vanguard funds and thousands of non-Vanguard exchange-traded funds. And speaking of fees always watch out for a fund’s management fees as they will also eat into your profits and over decades even a small percentage in management fees can cost you tens of thousands of dollars in lost profits. No matter if they are trading fees or management fees, keep them all to a minimum.
If you can follow these four rules, you will have a better than average chance to achieve your financial goals. But as always it is wise to have the number of a fee-only fiduciary financial planner you can call to review your plans.
If you have any questions or comments, I always welcome them either here or feel free to contact me directly. And if you would like access to my newsletter, please sign up on the form below.
