I got my first “real” job at the age of 23 and could not wait to begin investing. I knew that if I was going to achieve wealth I had to start young and with my parent’s financial advisor. Turned out I was wrong. I only had thousands of dollars to invest, and my FA had clients who had hundreds of thousands, even millions. I paid fees to the FA, still to this day I’m not sure what they were, that were at least 1%. I took the advice of my advisor believing they were the “expert”. Eventually I learned they weren’t.
1. INVEST IN STOCKS, NOT BONDS
Most advisors will tell you that you need an appropriate mix of stocks and bonds, especially the older you get. Why do they tell you this? Bonds have a lower volatility than stocks, but that lower volatility also means lower returns. Nick Murray states in his book, “You should be an owner not a loaner”. A good FA will allow you not to freak out and sell when the market turns south. By owning stocks and not bonds, you ensure the highest possible return on your portfolio. After all, the S&P 500 has returned an average of over 10% per year for over the past century.
2. GET A GOOD FINANCIAL ADVISOR, OR CONVINCE YOURSELF NOT TO SELL
Nick’s reasoning for a financial advisor is that he or she will make sure you won’t sell equities when times get rough. He uses the following example in his book:
“Warren Buffet’s net worth declined over six billion dollars between July 17 and August 31, 1998. His net worth decreased by six billion in 45 days, but how much did he lose? The answer is zero.”
Times got tough during those 45 days for equities, but since Warren didn’t sell he didn’t lose. The natural tendency of people is to sell when the market heads lower and buy when the market goes up. If you can wrap your head around this philosophy that markets will go down and up, but keep in mind the long-term investing horizon, I say there is no reason for an FA.
3. INVEST CONSTANTLY AND FOR THE LONG TERM
Stocks may not return 10% in the short run, but the best predictor of the future is the past, and over the long-run they should return about 10%. Invest with a long-term horizon and invest on a constant basis. Investing on a constant basis means every week, paycheck or month, add to your investments and let compound interest work its magic.
Finally if you get a chance I definetly reccomend that you pick up a copy of Murray’s book. Its available on Amazon for around $20 bucks. Thats a lot, but its definetly worth the investment. Click here to get it.
Budget Smart, Invest Wise
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.