It Really Isn't Hard to Learn The Best Way to Invest Money
Can a beginner at investing invest easily and safely without sacrificing profits?
Absolutely. If you're like me, you worked hard for your money the first time and don't wish to work hard for it again. I spend very little time managing my investments nowadays. I also have not lost any sleep during this latest downturn because I know my investment decisions are good. Instead of worrying about what's up, what's down, or what's all around, I spend my spare time doing the things I love - such as playing with my daughter.
What I've eliminated is the constant boring studying of company balance sheets, earnings reports, key ratios, etc. Zzzzzz. I don't want a 2nd job. Do you? I'm not an accountant and I don't want to be one. As an investing beginner, going into that much detail is a long and hard path.
I ignore the latest investing trends and fads. I don't care what industry is up or down. I don't care what product is selling like hotcakes. I'm too busy enjoying my life to think about these trivial things. I'll let others argue over what's hot. Studies have shown that the methods I use to invest will beat those people most of the time anyway.
I've read many books on investing and done a lot of research over the years. I've spent hundreds of hours and hundreds of dollars on books searching for the best way to invest money. The results surprised me because anyone can do it. Actually, people with very little investing or business experience will probably do better because they will follow the plan consistently.
I'm not promising that you'll double your money every year ("Guaranteed!"). Anybody who does that is lying or misinformed. The best investor in the world - Warren Buffett - has a 20%-30% compounded annual growth rate (not "average annual growth rate" -- see the investing basics section) depending on when you start his investing timeline. Even he wouldn't guarantee positive returns of 20% every year. Remember, he's the best investor in modern times and the richest man in the world! He also spends 60+ hours per week working on investing. If anyone guarantees you results anywhere near Warren Buffett's results, run, don't walk, run the other way. In fact, the basics to which I subscribe are the same as what Warren Buffett recommends to laymen investors.
My way of investing is one of the best ways to invest money for a beginner. In fact, I think its the best way to invest money for just about everyone. I can't and won't promise you that it will always beat everything out there over the short-term -- it won't. I can't and won't promise you that it will make you a millionaire over night -- it won't. I can and will promise you that it will be very simple and easy to implement. I can and will promise you that you will do better than most laypeople who try to be more active and buy individual stocks or other financial assets.
I invest this way myself, so I put my money where my mouth is.
Once I set this up, I spend 2 hours maximum per year managing it. It really is that easy.
Not only is easy to maintain, but it is quick and easy to setup. You could have a good investing plan set up and ready to run automatically within a few hours.
I no longer spend time worrying about my investments or checking the stock market regularly.
It is highly diversified.
It has a high level of negative asset correlation. In other words, the different assets within the plan tend to not move up or down together. As a result, your portfolio will be less risky to fluctuate less.
You will automatically sell high and buy low in a simple way.
Wall Street does not want you to follow my way because it will reduce their commissions and your costs -- giving you an immediate jump start over other investors.
Now, I enjoy learning about investing and business, so spending all that time and money was not so terrible. But I recognize that most people won't want to spend 50 or more hours and a substantial amount of money looking for the best way to invest money.
So, What is the best way to invest money?. What follows applies to beginners and non-beginners.
Pay off any high interest credit card debt before investing a dime into stocks or bonds. The only exception to this is getting a matching contribution from your 401k. There's no point in trying to get 10% returns on investments when you are paying 20% credit card balance. Generally, it helps to just try to save as money on purchases where you can without making too big a deal out of it. One way to save more money to go towards your investments and paying down any credit card debt is to use coupons.answers.com for everyday deals.
Have a good chunk of money in a money market account or cds. How much? At least $1,000. As much as $50,000 or more. It really depends on you. If you're less tolerant to swings of the stock market, put in a larger percentage. It will make you feel safer during the rough times. If your lifestyle means that you may need large amounts of cash suddenly, then it needs to be bigger. If you have a steady source of income that is unlikely to be removed and aren't bothered by stock market swings, then you probably don't need that much. I like my money market to be at $10,000. This takes care of just about any emergency that I will have.
Put 25% to 75% of the rest of your investments in a general stock index fund like Total US Stock Market index, Total World Stock Market Index, or S&P 500. Index funds are definitely the best place to invest money.
Put what's left in a general bond index fund.
Once a year or once every 6 months (no more frequently), look to see if your set designated percentages are off by more than 5%. If so, rebalance to your original plan. For example, you check up on your 75% stocks and 25% bonds plan and stocks are at 85% and bonds are 15%. Therefore, sell enough of your stock % and buy enough bonds to realign the percentages.
Add money to your portfolio regularly -- at least twice a year -- with dollar cost averaging. Stay as consistent as possible in the timing and, less importantly, the amounts. If you want to increase the amounts, do it, but avoid decreasing the amounts you invest at each interval. Most index fund providers will allow you to do this automatically for no fees. I highly recommend setting your investments to automatic.
Don't look at your portfolio except when balancing. I can't emphasize enough how liberating it is to ignore the waxing and waning tides of stock market pessimism and optimism. This is very important to your investing success. Most people's worst enemy is themselves. The market will fluctuate. I let other people get worried and excited about the short-term gains and losses. Who cares if the DOW rose or fell 50 points today? I sure don't. My portfolio's success isn't riding on a single day, week, month, or even year. for more about the ups and downs of investing check out investing 101 and stock market 101
Use Vanguard for all of your index funds. I don't get any money for sending you to them. They just have the lowest fees around for simple, yet effective, index funds. Also, my experience with their customer service has been good. I only needed to call the customer service a few times because their website is so simple.
When I first came upon the basics of this plan, I dismissed it. Don't make the same mistake as me! The one disadvantage to this portfolio is that you may get portfolio envy when stocks are roaring because bonds will underperform the stocks. When this inevitably happens again, stay strong my friend! Know that they are not telling you about the speculative stocks they own that dropped 90%.
How do you choose how much of a percentage to assign to stocks or bonds?
If you're young and have many years of working ahead of you, then lean towards heavier stocks. If you didn't panic during this recession and sell off your stocks, then lean towards heavier stocks. If you can't stand to see losses - even for a brief period - then lean towards heavier bonds. If you're close to or in retirement lean towards heavier bonds. If you still don't know or don't care to put in the effort to get a base of understanding about investing, then default to 50%/50%. You can sleep safe at night knowing that with less than 1% of the effort that most people put into investing you'll do better than most.
Still not sure what percentage you need? Just stick to a target retirement fund as I describe below.
If you are putting money into a retirement account, you can see if your fund provider has the easiest way to make a great portfolio balance -- target retirement fund. You can even put non-retirement money into target retirement fund with, for example, Vanguard. This is the simplest and easiest way to invest if you can afford the minimum contribution of $3000. Just choose the approximate time when you'll need the money, buy the fund with the date closest to that time, fund it the rate that you wish, and get back to living life knowing that you will beat most people out there.
I would say target retirement funds are the easiest and simplest way to invest intelligently. All you need to do is invest regularly in the Vanguard target retirement fund that fits the timeline for when you plan to spend the money. Then sit back and enjoy life. For example, if you plan on saving for goal in 2020, use this fund. If that's not the right year for you, go here and scroll down to the correct target retirement fund.
Sidenote: If this stuff fascinates you, I suggest you look into building a career in investing by earning an MBA or a masters in finance or business intelligence from an accredited university, for example St Josephs University Online.
Don't believe that this is the best way to invest? I got the concept of this plan from Benjamin Graham. It's also very close to what Warren Buffet recommends for the layman. Also, if you read the rest of this site, you'll see that I'm not just making this up or taking a wild guess.
Historical demonstration of portfolio balances.
To demonstrate what different portfolio balances look like, I pulled the values of the total stock market and total bond indexes from 1990 to Jan 3th, 2012 -- 1990 is as far back as I could go. I used the "adjusted. close" price for each because that accounts for any dividends received and assumes they were reinvested in the fund. I had the portfolio rebalance to the set balance if the balance was off by more than 5%. For example, if the target balance was 75% stocks and the balance was 83% stocks, I automatically rebalanced the portfolio back to 75%. I checked for rebalancing every 6 months. Each portfolio started off with $100 total.
You can pull the same prices by going to Yahoo finance and looking at "historical prices" for a stock or fund. I used the VFINX and VBMFX funds for my data. Here is a graph of the results:
If you can handle the big swings of emotions of a 100% or 75% stock portfolio and you really don't need the money for at least 5 years and preferably more than 10 years, then a 100% or 75% stock portfolio will most likely give you the most money in the end.
An all bond portfolio is relatively stable.
Mixed portfolios can help make the sudden drops less extreme.
The values of all portfolios converge during a recession