Despite all the hype and propaganda surrounding investing, it isn’t hard to actually become a successful investor. Well, at least not in theory. In my opinion, the skills and knowledge required to be a good investor are available for the average person. I’m confident that most people have access to everything they need to make good investments which have the ability to make them a considerable amount of money.
Obviously that begs the question – why are there so many investors who have failed? Well, it’s a mixture of issues, often related to mismanagement of risk and FOMO. What I mean is this: usually the thing keeping someone from being a successful investor is their lack of discipline and consistency, or their need to jump on bandwagons because they fear missing out.
Without further ado, let’s go over everything you need to keep in mind to be a successful investor!
When You Invest, Plan For The Future
As it turns out, it is actually quite easy to keep up with the market as an investor. It can be hard to beat it over the long run, but if your goal is to make the same gains as the market then you’ll soon discover that it isn’t an outlandish goal.
The market tends to perform really well over decades – the long haul. As long as your investment strategy is focused on the future, you’ll likely make good returns this way. A lot of people have made their millions with this strategy, and it’s pretty hard to lose in my opinion. With index funds and ETFs it is relatively easy to make investments that mirror the overall market – but I’ll get into that later. Again, this works over the long haul specifically. If you’re planning on withdrawing funds within a few years, you may need to change your strategy.
Alternatively, if you need to withdraw because you’re retiring, then it may be best to withdraw routinely – to avoid the issues that come with trying to time the market. For example, withdraw however much you need (the same amount) every month in perpetuity when you’re retired. That way you don’t withdraw prematurely or jump the gun and pull everything else out when you see dips in the market – which is one of the main reasons active investors fail so often. They let emotions dictate their actions, which screws up their results.
Passive Investments
A lot of people have different definitions for passive investments. Many of those definitions, quite frankly, turn out to be inaccurate. I’ll do my best to define it here in a way that is easy to understand.
First off, another common name for passive investing is the “buy and hold” strategy. With this you’re basically just buying an asset and sitting on it for an extended period of time. This may be a bit of an oversimplification, but it’s one of the best definitions and it’s easy to understand. After all, the jargon in personal finance can be a bit too much. Many people assume passive investing is exceptionally slow though, and that isn’t necessarily the case. Passive investing can work relatively fast, depending on your goals and starting capital. However, passive investing certainly isn’t something you should expect overnight results with.
The real takeaway with passive investing is that it is very much a hands-off approach to investing. With passive investments you shouldn’t have many frequent tasks or maintenance you need to do for it.
The Myths
That brings me to the distinction between myth and reality when it comes to passive investing. Most people categorize anything that you own for long periods of time as a passive investment. If that’s the case, just about everything can be considered a passive investment – from a business to rental properties. Perhaps it stems from misunderstanding the “buy and hold” terminology used in the aforementioned definition, but the distinction is important to note.
If you have an investment that requires constant or frequent maintenance and monitoring, then it likely isn’t a passive investment. The key word here is “passive” after all. The concept is straightforward, so don’t let weird jargon prevent you from fully grasping the concept – which is seemingly one of the biggest issues for people, when it comes to personal finance.
Gambling Is Not Passive Or Wise
I’ve written on timing the market before, and it is a situation that is impossible to win. Well, you may have luck here or there, but it’s impossible to win over the long-term with any consistency. It’s highly speculative, and more like gambling than investing. Don’t fall into the trap of thinking some random stock will make you a millionaire overnight just because someone said it on a YouTube video or on Twitter. Timing the market doesn’t tend to work out, and it is pretty much guaranteed to fail over the long haul.
Seriously, don’t buy into the hype of it! Many people who do it end up losing almost all of the money they put in, and a seldom few make any profit at all over the long run. Sure, you can get lucky and make some extra money here and there, but for the overwhelming majority of people you’re going to end up getting burned in the process. Focus on more traditional and easier methods for consistently making great returns. As a long-term investor, it’s not actually hard to make strong returns – and you don’t need to participate in some sort of collective gambling mentality.
Active Investors Constantly Lose To Their Passive Counterparts
The vast majority of active investors cannot beat the market or even come close to it. The most forgiving estimates tend to lean towards 80-90% of active investors losing when compared to the market’s performance. That’s obviously abysmal, and I don’t know anyone who has much faith in it after hearing numbers like those. However, people still end up falling into the trap of thinking they alone have what it takes to beat the market. Don’t be overly confident – it’s better to follow the tried and true investment strategies!
Real Estate Is Good, But It Isn’t Exactly “Passive”
Overall, real estate is an active investment. Most people try to use real estate as an example of a great passive investment, but that’s not really fair to say. Real estate usually requires work – and a lot of it. Let’s take two of the most common real estate investments, rental properties and flipping houses, as examples.
Rental properties can be great. You can make a lot of money from them, and sometimes they don’t require backbreaking work. However, you still need to do constant maintenance on the house, do legwork to find good tenants, and cover the cost of the house when nobody is living in it. All of these factors together end up taking up a huge amount of time – and money. So, renting out a property isn’t very “passive” at all. It requires a lot of work as well as knowledge.
In the case of flipping, there can be no mistaking it. Flipping is basically a large project you work on. You do your research, tons of legwork, and you find a good deal on a property. After that, you put a bunch of money, time, and hard work into improving the property. Once that is done, you can then sell it for a profit. Even if you outsource the manual labor involved, you’ll need to be on top of things every step of the way. So, overall, it is definitely not a passive way to invest your money.
At the end of the day, real estate can be a great addition to your portfolio. At the same time, it’s better to focus on more passive investments at first.
Investing In The Stock Market Is Amazing For The Average Person
At the end of the day, investing in the stock market is a stellar way for the average person to build wealth. It’s not as glamorous as some get rich quick schemes people make, but it’s tried and true. So, if you want to use your money to help you make more money and garner more flexibility in your life, investing in the stock market is practically a must.
The Fundamentals Of Investing In The Stock Market
Fortunately for all of us, real estate isn’t the only option out there for investing. Another great pick, and one of the all-time best things to invest in, is the stock market. It may seem like I’m beating a dead horse, but it really is an amazing tool for the average person! There are several ways to get started with the stock market, which can be broken down into a few different overarching categories.
Individual Stocks
Individual stocks can be an interesting investment, and you may initially assume it’s the right way to invest in the stock market. While returns can definitely be high, it’s a bit random and can be hard to gauge unless you know the industry well for that specific stock. It’s not a bad idea to invest in individual stocks, but the bulk of your portfolio will probably be in other things that help you stay more diversified.
Index Funds
Index funds are one of the best passive investments. Time and time again, I will always come back to them. They are, without debate, a fantastic option for those opting for a long-term strategy. Find some of the best performers, invest and diversify, then watch as your money grows with the market!
This growth is hard to beat, and passive index fund investors beat the majority of day traders over the long run. When in doubt, this is a simple go-to option that everyone can benefit from.
ETFs
ETFs are a lot like index funds. I’m not going to get into the nitty gritty here, just know that they’re amazing for long-term growth – again, just like index funds. As long as you pick good performers, with low fees, you’re bound to do fairly well. If you want to start investing in ETFs, index funds, or even individual stocks, then sign up for M1 Finance. They make the investment process easy. With them, building a portfolio and automating investments has never been simpler!
Index funds and ETFs are straightforward and pretty amazing. By nature they’re diversified (to various extents) and they have a record of producing great long-term results. They’re so easy that if you want to then you can get started today with very little headache.
REITs
A real estate investment trust is basically one of the only types of real estate investments that can actually be considered passive. It works a lot like dividend stocks, and it can provide a source of income as well as an increase in value over time. All-in-all, they’re a decent investment, and I personally like using them in my portfolio to add a little diversity. One caveat is the tax burden they may place on you. Look into that. You may decide that it’s better for you to invest in them through a tax-advantaged account like a Roth IRA.
Dividend Stocks
These are similar to REITs, but more traditional. They give you dividends, which can provide an income, and they can also increase in value over time. Some people swear by investing in dividend-producing stocks, others find them to be disappointing. Do your own research and decide if they’re for you. Even if you don’t love them, you may decide you want a bit of them in your portfolio!
Diversification Is Key
Diversification is key to a healthy, growing portfolio and will make you less prone to drastic fluctuations. For example, you might invest in one fund that is for large companies in the USA, one fund for small companies in the USA, and another fund for international markets. There are even index funds by industry if you want to invest that way! If all of that confused you even more, don’t worry – I’ll explain more about index funds soon.
Buy, Hold, And Relax
Now that you’ve got those details taken care of, you should know to hold onto whatever investments you make (particularly index funds & ETFs in this case) and lay back and relax. It shouldn’t require much, if any, extra work or management from you – besides the occasional checkup. If you started investing in real estate, you might have some additional headache to take care of, but that comes with the territory.
Consistency
As I’ve said before, discipline and consistency is what separates the successful investors from the failures – far too often. Do yourself a favor and don’t make decisions based on impulse or emotions. If the market drops, ride it out. Your losses are not locked in until you liquidate. Ride out the bad times so that you can get to the good times on the other side. Additionally, do your best to automate investments. The less work required of you, the easier it is to stay consistent and meet your investment goals.
Dollar-Cost Averaging
Dollar-cost averaging will be the best thing for most people who want to invest but have a hard time staying consistent. Here is what you need to do in order to follow a dollar-cost averaging strategy:
- Automate investments.
- Invest the same amount of money at regular intervals.
- Increase the amount you automatically invest as you can. However, do not change it based on guesses or predictions. In other words, as you make more money, use that excess to increase your contributions.
That’s it! Much easier, isn’t it? Also, those who follow this strategy tend to outperform traders by huge amounts, and it is a much more hands-off approach. Not only do you perform better, but you have to waste less time dealing with it. To me that is a huge win and a no-brainer. It doesn’t have the appeal of gambling, or the rush you get when you make a big win, but over the long run you’ll end up making much more than your trading counterparts.
Before We Continue, How Much Should Be Invested Anyway?
This is just my personal opinion, but when setting investment goals I think it is best to invest a percentage of your income. Obviously that will be a fairly consistent amount, but the purpose is to make sure the amount you invest increases with your income. That means every year or so I recommend looking at your current income and adjusting how much you invest based on that. This way you can avoid lifestyle creep, to a certain extent.
Now, whether you invest a percentage based on your post-tax or pre-tax income is up for debate. Personally, I like to use my post-tax income to set my investment goals. Unfortunately, using your pre-tax income can make it a bit more complicated, but if you want to use pre-tax income that is perfectly fine. The only caveat with using your post-tax income is to remember that your 401(k) contributions are based on pre-tax income.
Of course, all of that sounds complicated, and if it is confusing you then don’t worry about it. Just calculate how much money you’re netting each month after taxes, then invest based on that amount.
10-15% Is A Nice Starting Point
Investing 10% of your income should be an absolute bare minimum. Investing this much will get you on the right track, and if you make an average income or more then this shouldn’t be a difficult goal. You’ll have a decent chunk of money due to compound interest eventually, but it may not be enough. Depending on how long you plan on working, and how much money you need in retirement, you could (and probably will) fall far short of what you need.
Consider 10% a baseline. It’s a good place to start, and you should be proud of yourself for taking the effort to save this much. However, if this is where you’re at, be sure to increase how much you invest to match where you want to be in the long run.
Investing 15% of your income puts you at a much nicer spot. I still wouldn’t say it’s ideal, but it’s much more realistic to meet your retirement goals with this amount. If you are several decades from retirement, and you plan on living off a smaller amount once you retire, then this could be enough. With that being said, for most people 15% won’t quite cut it. However, 15% puts you in a good spot, and even if it isn’t where you need to be, it shouldn’t be too hard to catch up a bit.
It’s also worth noting, if you’re investing 15% of your pre-tax income, you should start feeling a lot more secure.
You’ll Feel Safer At 25%
25% is the ideal spot in my opinion, for your post-tax investing goal. I still recommend investing more if you can, but once you’re saving 25% of your post-tax income, you’re usually in a decent position. If you started investing somewhat early in your career, and you plan on retiring at a normal age, then even 20% can be enough to meet your goals in a lot of situations.
If you aren’t investing 25% of your income already, make that a priority. Follow good budgeting tactics, increase your salary, and do what you need to get there. Once you’re at 25%, invest more as you’re able, but don’t forget to avoid lifestyle creep. As your income increases, simply invest more. Do NOT increase your expenses simply because your income is increasing. Your expenses generally shouldn’t increase except after major life events like marriage or having a kid.
Early Retirement Is Possible With 50%
To be fair, I’m well aware that investing 50% of your income isn’t feasible for most households. With that being said, once you start investing more than 25% of your income, you’ll start seeing absolutely astounding returns. If you’re able to invest 50% of your income, then you’re actually well on your way to retiring early! This puts you far ahead of schedule and gives you a lot more flexibility with what you want to do with your future. Again, I know this isn’t feasible for everyone, but it’s a worthwhile goal to try to achieve, especially if you want to retire early.
FOMO
One of the arguably most important things to mention is FOMO. FOMO stands for the fear of missing out. Now, I know a lot of people who struggle with this, and it seems to be just as much of an issue as staying consistent. Something new comes along, gets turned into a buzzword, and everyone jumps aboard – thinking they’ll make a lot of money with it. Then most of the people who invested end up losing much of what they put in.
Don’t let your fear of missing out on the “next big thing” lead you to make a bad decision with your investments. You should err on the side of caution – invest in something only if you believe in the returns, not just because a lot of people are hopping on the bandwagon.
The Memeconomy
For those who don’t know, a meme stock is any standard stock with a strong following behind it – usually for no specific reason. Often meme stocks can have a surge in value, while people are buying into it, followed by a severe drop or fall off. It usually depends on how long the following can keep feeding money into it. In the past, this has caused some amazing returns for people who get in and out at the right times, but it tends to end in disaster for everyone else. It’s a risky move, and most people do it just as a joke. The issue is that many people buy into the idea, and it becomes cult-like.
Bad Calls Make People Lose Tons
Now, I’m not saying people are crazy or stupid for following meme stocks religiously. It’s an easy trap for people to fall into. Just the idea that you could make a killing off of it is enough to entice most people. However, once people put money into it and lose it, they actually dig their heels in deeper more often than not. It’s a denial, of sorts, where they refuse to admit they made a bad call. Instead, they just claim it’s not time to pull out yet.
Again, this is an easy trap because it is possible to make money off meme stocks. The issue is that every time you hear about one person having stellar success, there were far more who lost almost everything they put in.
Don’t Put Your Emergency Fund Into Risky Investments
I wish this didn’t need to be said, but don’t put your emergency fund into risky investments! An emergency fund is best placed in a high-yield savings account. The whole point of the emergency fund is to have easy access to it in case of an emergency, and for it to not be volatile. If you put your emergency fund into a risky investment, even if it performs well over time, you may still lose money! When the investment falls, if you have an emergency, then you’re forced into locking in those losses. The money for investments should be money you won’t need to access for a while. Again, long-term investing is what will help you see amazing gains.
Follow The 5% Rule If You Must Invest In Things You Don’t Understand
In my opinion, a portfolio is served well by reserving 5% of it for the much riskier investments. These can be things you don’t necessarily understand, or assets with a high degree of volatility. An example would be some of the more volatile cryptocurrencies. Setting aside 5% for that means that you’ll be able to take advantage of any potential successes, but you won’t get crippled if its value plummets either.
The Majority Of Your Portfolio
Over the years, the term “index fund” has become a bit of a buzzword – and rightfully so – but many people still have questions about what index funds actually are.
The short explanation is that they’re basically a type of mutual fund whose portfolio is designed to mirror a market index (like Dow Jones, S&P 500, or Nasdaq Composite). Of course, if you’re not already finance-savvy, that may sound like a lot of nonsensical jargon.
As an example, let’s say an index fund is based on the S&P 500. The S&P 500 measures the stock performance of 500 of the largest companies that are publicly traded in the United States. This hypothetical index fund would then possess stocks for all the companies in the S&P 500, in an attempt to mirror their overall performance.
Since an index fund isn’t actively trying to determine which companies will have their stocks decrease and which will have theirs increase, they don’t need to be as actively managed. Consequently, index funds will generally have much lower fees than those that are actively managed. However, most index funds have high commission rates, so if you intend to actively trade they may not be for you – they’re much better suited for buying and holding.
The main takeaway is this – index funds and ETFs are a perfect investment for beginners. The difference between the two is that index funds are bought and sold at the end of a trading day, but ETFs are bought and sold throughout the day. Just remember that they’re both great long-term investments!
How To Start Investing In Index Funds And ETFs
Depending on the brokerage and type of fund, there may be minimum deposits for you to get started. If you have several thousand dollars ready to invest, great, you can pick just about any major brokerage and any fund to get started. If you don’t have that amount of raw cash ready to go, don’t worry, you still have tons of options with low minimum deposit requirements. With that being said, if you have more than the minimum amount to invest, you should still invest that additional amount. The more you invest, the more you’ll gain in the long run. Index funds and ETFs are all about the long-term results and growing your portfolio for years to come.
Remember, keep your goals in mind and focus on the long-term!
Don’t Monitor Your Investments Too Much
An important tip – if you’re investing for the long-term and using index funds, don’t look at their performance all the time. When you’re constantly checking their status, you’ll make yourself crazy. In the short-term they can go up or down by a large margin, but over the long run they have a history of performing well. Just don’t lose yourself in the day-to-day fluctuations!
Watch Out For Fees
Another takeaway – and I really hope you remember this one – is to aim for low-fee index funds. Yes, index funds perform well. Yes, index funds usually have lower fees than many other types of mutual funds. However, not all index funds have low fees, and those fees can eliminate huge swaths of your earnings over time. So, when you’re looking at index funds, make sure you look at their fees in addition to their performance. When fees are high, it can make a seemingly attractive fund a negative part of your portfolio.
Examples Of Low-Fee Index Funds And ETFs
This is my no means an exhaustive list, but here are several funds that are worth checking out.
- Fidelity ZERO Large Cap Index Fund (FNILX) – an index fund with a fee of 0% and no minimum investment, making it one of the better choices for beginners. Yes, you read that right, a 0% fee.
- Vanguard S&P 500 ETF (VOO) – another great fund with a low fee of .03%.
- Vanguard Growth ETF (VUG) – a bit of a “riskier” and more expensive fund. It has an expense ratio of .04%.
- Fidelity 500 Index Fund (FXAIX) – another solid pick with a fee of .015%.
- Schwab Total Stock Market Index Fund (SWTSX) – with an expense ratio of .03%, SWTSK is another great option.
- Vanguard Total Stock Market ETF (VTI) – a big part of many portfolios, it only has an expense ratio of .03%.
Use A Good Brokerage
Just like it’s important to find the right investments, it’s worth researching the right brokerage for you. Fortunately, these days, there are countless brokerages available that offer great features and services. Here are three of the absolute best!
M1 Finance
For those of you who don’t know, M1 Finance is a brokerage that offers high customization and automation to help you build your ideal portfolio that can meet just about any preference or requirement you may have. On top of that, it has low fees and minimum balance requirements. It’s definitely my personal favorite of all the brokerages I’ve used!
You can create and design your own portfolio – made up of anything from index funds to individual stocks. Alternatively, if you are more of a beginner, you can use their premade portfolios based on your current goals. What separates M1 Finance from some of its competitors is that M1 Finance also lets you deal in fractional shares and it gives you immense control over your own portfolio. Overall, it’s a great brokerage that has the flexibility to give just about everyone (except for day traders) the flexibility they need to hit any goal.
Vanguard & Fidelity
Vanguard is another great option. Unlike M1 Finance, it isn’t very friendly for new users. Additionally, account minimums can often be high. However, it’s hard to compete with Vanguard’s different index funds and ETFs, so it’s worth consideration for more advanced investors.
Fidelity is a nice middle-ground between M1 Finance and Vanguard. It doesn’t have as friendly of an interface as M1 Finance, but it may have a few ETFs with attractive growth and fees that M1 Finance doesn’t have access to. At the end of the day it’s a bit of a give and take. If M1 Finance has everything you’re interested in (which it will for most investors), that’s what I’d opt for. If you’re interested in very specific index funds or ETFs, investigate Fidelity and Vanguard more. While M1 Finance is my favorite for general investing, it’s up to you and your needs.
How To Open A M1 Finance Account And Start Investing
Again, part of the reason why I love M1 Finance is because the process is pretty straightforward. If you’re interested, check out the process below. For those who like Vanguard or Fidelity more, skip to the next section!
- Follow this link to get started.
- The sign up process is fairly painless. Just make sure you remember the email and password you use.
- You’ll be prompted to create the type of account of you want. For most people, you’ll want standard or an IRA.
- Link your bank to M1 Finance so that you can start making deposits. You can set up automatic deposits too if you want!
- Set up a portfolio with the index funds and ETFs of your choosing. M1 Finance makes it easy to adopt a “set it and forget it” mindset, as your deposits will automatically be distributed to the portfolio.
How To Set Up A Portfolio – Your M1 Finance “Pie”
So, M1 Finance splits up your portfolio into “pies” which you can manage yourself – or use premade ones. If you’re brand new to investing, I recommend using the premade ones for now. If you are more experienced and want to be more hands-on, the process of building your pie is pretty simple.
- Navigate to your pie and select “manage pie.”
- Select the edit option.
- There should be some option to add funds or stocks, denoted by a “+” icon or an “add” button depending on whether you’re in the app or browser – click it.
- Search for the index fund, ETF, or stock you want to add to it.
- Add it to your pie and specify what percent of your contributions you want allocated to it.
It’s as easy as that! The process should only take a few moments.
Form Good Habits
Coupled with making enough money, you also need to practice good habits for saving money. Even if you make a lot of money, it’s pointless if you don’t save any to invest. The main thing I recommend is creating a complete and thorough budget to help you stay on track. It’s not rocket science – the simpler you keep it, the easier it will be to follow through.
On top of that, it’s also important to go over your financial goals. It can be highly illuminating and help you focus on what you need to do. Plus, if you’re struggling with designing the right budget, knowing your specific goals can help you adjust it to get you where you want to be. These healthy habits that help you save money will be the foundation for you to build your investments from!
Enjoy The Milestones You’ll Reach
There are many financial goals you’ll reach throughout your life, but few are as significant as reaching $100,000. It sounds like a lot – and it really is. Once you reach $100,000, you’ll find that your finances will ramp up and accelerate faster than ever. It’s not the metric by which you can measure financial freedom, but it’s one of the biggest milestones along the way. In fact, it is a huge financial milestone that you’ll immediately appreciate. For those you have passed it, you can attest to it.
Those of you who haven’t reach it yet, don’t view it as insurmountable. With hard work, dedication, and diligence with your finances, you’ll eventually get there too. Just remember to enjoy these types of milestones and even the much smaller ones! The journey is just as important as the destination. Enjoy the little things along the way, and you’ll be more appreciative at the end.
Here Is A Common Priority List Of Investments
Let’s use all the information you’ve learned so far! Below is a list of investments that should probably be your top priority. It varies based on circumstance, but most people will find this to be accurate. Use your new investing knowledge to get started with it!
- Your emergency fund, for emergencies of course. Yes, I consider this an important investment.
- Meet your company’s 401(k) match, if they have one.
- At this point, eliminate any high-interest debt if you haven’t already. Paying off high-interest debt is worthwhile and a guaranteed return!
- Max out an IRA. Whether you choose a traditional or Roth IRA depends on the details of your household. However, I think a Roth IRA is generally a good investment. After that, consider contributing more to your 401(k). There is a lot of debate on this, and I think it comes down to when you want to be able to pull money out of your investments. If you want to retire early, you may want to research your retirement account options more or look at other options like contributing to a standard account with no tax perks (but also no early withdrawal penalties).
- If you’re happy with where you’re at and how your investments are going, think about donating more or contributing to some account (like a 529) for your kids.
Again, this isn’t the end-all priority list for everyone, but it’s a place to start to get you thinking about your personal priorities.
Conclusion
The sooner you start, and the more consistently you’re able to invest, the better off you’ll be. Make it a priority to invest as soon as possible, and make sure you budget in some routine investments. If you’re really struggling to get started, try out Acorns. Think of it a bit like training wheels – it will get you started on your investments and teach you a lot of the fundamentals that you need to know.
If you have any tips or recommendations, let us know in the comments. For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter!
