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