A lot of my friends have approached me lately about investing - I guess word got out that I'm obsessed with personal finance. They want to know what to buy, which firm to use, what accounts to open. You get the idea. You might be wondering the same things.

Before I get tactical with them, though, I always point out that this is a MAJOR ACCOMPLISHMENT! Deciding to invest extra money means two things: first, it means they have extra money, derived from spending less than they earn. And second, it means they're thinking about the long term. These are the building blocks of wealth; people who think this way tend to become wealthy. So props for having some extra cash.

So now they're smiling, they're feeling good. They want to jump right into which broker they should use or which stocks they should buy. <smh> At this point, I have to stop the whole conversation again, and ask two simple questions:

1) Are you sure you should invest?
2) What are you investing for?

The answers to these two questions will have a much, much bigger impact on their investing success than any brokerage choice or stock tips I could share (which I actually can't, because someone starting out should never buy individual stocks). Anyway, let's dig into those two questions:

1) Are you sure you should invest? This one's huge. So you've saved up ten grand and are ready to put it to work. But are you sure you should invest it? I mean, have you already reviewed your Personal Balance Sheet? If you've paid off your credit cards, stashed away some cash for an emergency, and don't anticipate any big expenses for a few years, ok - maybe you should invest.

2) What are you investing for? Investing for retirement, a child's college tuition, or a down payment on a house each has a different time horizon. The last thing you want to do is pull money out of an investment account a year into a big market downturn. Once you know your time horizon, you can figure out which accounts to use, how much to allocate toward stocks or bonds, and even which broker to choose. Seems like a simple question, but it'll get you thinking.

So imagine we're friends. You might be a little peeved I didn't recommend buying AMZN, but you'll be glad I asked these questions. Take a day or two to think them over - review your Personal Balance Sheet and write down your long term goals. Then let's talk shop about when, how, and where to put that extra money.

You may have come across the term “asset allocation” as you read about investing. It’s one of the most important concepts to understand, and isn’t as complicated as it sounds.

Even though almost anything we own is an asset (furniture, cars, education, art), the assets we’re addressing here are stocks, bonds, and cash.

Each asset type carries a certain amount of risk and reward (called return). Cash is the lowest risk – a $100 bill won’t turn into $50 if you put it in your sock drawer for a month. But it’s also the lowest return – that $100 bill won’t magically turn into $200, either. Stocks are the other end of the spectrum: high risk, high return.

If you’re not thinking “how can I get the highest return while taking the lowest risk?” you may be asleep at your desk. Pay attention! The goal is to maximize return while minimizing risk. Since there are virtually unlimited combinations of assets in a portfolio, you can choose the risk/return scenario that you feel most comfortable with.

Generally, the younger you are, the more stocks you should own. In fact, there’s a simple formula for calculating the percentage of stocks to own: 130 (or 120) minus your age. For most millennials saving for retirement, stocks are the way to go, with perhaps a minor allocation to bonds and cash.

Until next time,

- MMM

We all like lists, so I put this one together to highlight what I've found to be the Best 8 Rules of Investing.

1. Time is the investor’s best friend. As Einstein dubbed the “8th wonder of the world", compound interest is pretty powerful. But it only works when you give it enough time. So invest early, and invest often.
2. But timing the market is a fool’s errand. Very few people successfully time the market – buying at the bottom and selling at the top. More often, people end up selling near the bottom and waiting until the top, then buying back in and getting pretty lousy returns. In fact, in any given year, actual investor returns are usually lower than the market returns due to investors trying to time the market and missing out on some of the gains. It's easier to just make a plan and stick to it regardless of what the market is doing.
3. Have a plan – allocate wisely. Before you invest, you should outline your goals and your timelines. This will help you choose an appropriate allocation based on your time horizon and appetite for risk. Remember to choose the Right Asset Allocation.
4. Markets tend to revert to the mean. Meaning, if the market has been hot for a few years, outperforming the mean, expect it to eventually cool off and underperform. This isn’t always a bad thing, though, because you’ll be able to buy in at lower prices when the time comes.
5. Diversification is key. It's easy to create a well-diversified portfolio of stocks and bonds – just buy mutual or index funds. As your portfolio grows, you might want to get into individual stocks, but for anyone with less than seven figures to invest, stick to diversified funds. You might miss out on a ten-bagger once in a while, but you’ll also miss out on the bankruptcies or other disappointments out there. Don’t swing for home runs starting out.
6. Reinvest the dividends. Most funds and stocks pay out annual dividends or capital gains, which you can either reinvest or receive as cash. Unless you’re living off the income, reinvest it. It’ll juice your contributions and compound over time. Most platforms will either default to this option or let you choose it when you buy your fund.
7. Fees are our enemy. Remember to keep fees low! You’ll be smart to avoid them. Don’t be lazy – just shop around a little. Vanguard has a lot of low cost funds you can buy as you earn your first million. And don’t even get me started on trade commissions. You should not be trading much in the first place, and, if you really can’t resist, you definitely shouldn’t be paying $10/trade! Shop around!
8. And taxes are even worse! There’s a reason Ben Franklin grouped death and taxes in one phrase. Taxes are the death of a good investment strategy! Make sure you’re using tax advantaged accounts when possible, and enable tax loss harvesting offered by many robo-advisors to minimize the tax bite from a taxable account.

Consider each of these when thinking about your investment goals. Did I miss any?

- MMM