5 Secrets to Investing on Your Own
Financial independence isn’t hard – or at least it doesn’t have to be. Banks, advisors, and hedge fund managers want you to think it’s impossible to invest and grow wealth on your own. They concoct elaborate financial products with fancy names to obscure the fact that they’re taking money out of your pockets. If you don’t understand what they’re saying, it’s because they don’t want you to.
They want you to think that you need them when the reality is they need you… and your money. It’s time to take back control of your money and declare your own financial independence. Below are five, easy to follow steps that you can take tomorrow to put your portfolio on the path to better gains and ultimately financial security with less worry.
These aren’t really secrets – they’ve been well-documented and are supported by decades of research- but they take diligence, commitment, and a long-term outlook. If you’re looking for a get rich quick scheme, this isn’t it. (And quite frankly, there’s no such thing… except of course for the con-artist selling you on their system.) The secret to making money is that there is no secret.
Follow these five steps to help you achieve your investing goals.
1. Dollar Cost Averaging
Contribute a fixed dollar amount to your portfolio on a regular basis, regardless of the share price. More shares are purchased when prices are low and fewer when prices are high. Dollar cost averaging mitigates the number one reason for poor returns: You. It forces you to contribute towards your investing goals regardless of how you feel about the market. The only way you can ensure your portfolio grows is to regularly contribute.
Mix your investments to include a wide range of products, industries, markets, and risks. There is such a thing as a free lunch: On average, diversified portfolios yield higher returns while offering lower risk and volatility.
Rebalancing your portfolio on a set schedule forces you sell and buy assets to maintain your original desired asset allocation. In practice, it forces you to sell your gains on rising asset to buy out of favor assets that have fallen behind. It will help decrease your risk exposure and ensure you “buy low; sell high” without your biases influencing what constitutes a good buy.
4. Asset Allocation
Although there is no right mix of which assets you should buy, you should consider your risk appetite, your investment goals, and timeframe. Generally, you’ll allocate your assets among equities, fixed-income, and cash equivalents, but you may also want to consider holding commodities, real estate and other less common assets to further your diversification goals. Note: Research shows that most investors (especially those that are younger) don’t have enough of their portfolio in equities, which historically offer the greatest return, so long as your timeline is long enough. Your asset allocation should move towards less volatile investments over time.
5. Loss Mitigation
Another way to force yourself to buy low and sell high is to contribute more as your portfolio’s value falls (and therefore the underlying assets’ values are cheaper). Any time that the total value of my portfolio at the end of the month is lower than the previous month, I contribute an additional amount (on top of regular dollar cost averaging contributions) to at least match the previous month’s value. During market downswings, you’ll be throwing more and more money into a falling portfolio, but on the inevitable rebound, you will gain more than you would have using the previous four tips alone.
I use all of these secrets to manage my own 401k, Roth IRA, and personal investments. But there’s one more I’ve also employed to great success – a sixth secret that I’ll share in my next post. Come back to learn that sixth and final secret to achieving better returns with less stress.