Why you should invest is not much different than why you should save

You want a better life. You have goals. You want financial freedom. All of these are good reasons, but they require you to educate yourself and take action as you become the wise and efficient investor. Here are two starter books that will take you in that direction: What Color Is The Sky by Michael Finley and The Millionaire Teacher: The 9 Rules of Wealth You Should Have Learned in School by Andrew Hallam

Get your house in order before tackling the investing world

Paying off high interest rate debt (anything above 6%) and setting money aside for emergencies should be a high priority before you invest your hard earned money.

The exception to that rule of thumb would be matching money with a retirement plan. If your employer is going to give you free money (any amount), go get it. Never pass up matching funds at work. After the matching money, go back and pay off high interest rate debt at an accelerated rate. This will set you up to become a great saver.

Focus your efforts in understanding the big 3 assets classes

Stocks, bonds, and real estate are the places where you want to invest and grow your money. They have historically provided a positive real return on your money (return beyond the inflation rate). Inflation is the true enemy going forward. Your money is either growing or shrinking. Make it grow. Educate yourself on these investment options and make sure you do it at the lowest possible cost. This would lead you to no-load index mutual funds through Vanguard.

Invest your money only in income producing assets and avoid speculation (believing that you know better than the next investor as you try to predict the future)

If it doesn’t provide yearly income (dividends, interest, capital gains, or rent) run away from it. This eliminates most options that are available to you. Here are a few you should avoid: individual stocks, life insurance products to include cash value policies and most annuities, gold, silver, raw land, collectibles like art and bit coins, timeshares, and whatever else the financial industry comes up with that sounds “wonderful,” but isn’t when we drill down to the truth.

Start with the understanding that most products created by the financial services industry (Wall Street) are created for them, not you.

They create high cost products that make them a great deal of money and then they market those products heavily trying to convince you how wonderful they are and how you should come running to them. They are simply trying to squeeze between you and your investments. The best defense you have is a clear understanding on how all of this works and what you can do to avoid those high cost options.

Find your independent sources and learn as much as you possibly can from them, while avoiding the salespeople

This is critically important to understand. Conflicts of interest are rampant in the financial services industry. Finding people who will educate you without selling you is so very important.

Here is a list of wonderful teachers: John Bogle, Burton Malkiel, Charles Ellis, William Bernstein, David Swensen, Daniel Solin, Rick Ferri, and Larry Swedroe. Read their books, watch their videos, and follow their advice. You won’t be sorry.

Pick up the vocabulary and this new world of money will make more and more sense to you

You can learn the language and then apply what you learn to your portfolio and your life. Keep reading until you get it. See my vocabulary page for a quick reference guide here.

Owning No-Load Index Mutual Funds that diversify you all over the world at the lowest possible cost is the simple and sound approach to investing 

The financial services industry doesn’t want you to know that, but thanks to John Bogle, that opportunity is available to you and me today through Vanguard. When in doubt, listen to John Bogle:

Own the world in stocks and bonds and ignore the daily, monthly and yearly gyrations of the markets

It really doesn’t matter what happens to the markets over short periods of time. Your goal is to invest for your future and that means years and decades down the road.

Identify the right asset allocation for you. Own those index funds in your retirement plan at work and at Vanguard (Roth IRA when possible). And then feed those funds consistently over time. Compound interest will do the rest!

Keep it simple early on by owning broadly diversified stock index funds that own entire markets (Total Stock Market Index Fund and the Total International Stock Market Index Fund for example) and then gradually add to them over time with index funds that own parts of a market (REITs and small-cap value for example). 

Your goal is to capture market returns minus a small cost. If you do that, you will become one of the best investors in the world. When in doubt, follow the advice of the greatest investor of our time:

“Most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.” –  Warren Buffett

Costs matter a great deal when investing your hard earned savings

You want to make sure you get your investment costs as low as possible. This means avoiding the financial services “advisors” and investing in very low cost no-load index mutual funds in your retirement account at work (401k) and in a Roth IRA at Vanguard outside of work.

The  informed investor does not pay commissions, loads, or high yearly fees (portfolio expense ratio should be below .3% and with a bit of effort you should find yourself at a point around .10%). Higher returns will follow!

When investing in mutual funds, eliminate loads (commissions) and get that expense ratio (your cost when investing in pooled assets like mutual funds) to an absolute minimum amount

You can do this by eliminating the salespeople (investment broker, fee-based financial advisor, life insurance agent, etc.) and go directly to the investment firm (Vanguard.com) to invest in those inexpensive no-load index stock and bond mutual funds. This will end up putting less money in their pocket and more money in yours. Research two broadly based and inexpensive funds here: The Total Stock Market Index Fund and here: The Total Bond Market Index Fund.

You must assume short-term risk (loss to your capital that you have invested) if you hope to receive higher returns on your money over time

Stocks have done this better than any other investment over long periods of time (10.2% over the last 89 years). Do not complicate this matter. Buy inexpensive index funds, feed those accounts month after month, ignore people who try to predict the future, and stay the course.

Start early and keep feeding those no-load stock and bond index mutual funds (or Target Date Retirement Funds that own Index Funds) by dollar cost averaging the money in each and every month

Do not spend your days trying to play catch up by starting late in life with saving and investing your money. Start today. It is never too late or too early to start. Learn now so you can help the people you love.

You can be your own financial advisor. You don’t have to spend hours each week on this matter. You don’t have to run to the financial “helpers” for guidance (in most cases, they are not the experts they pretend to be). You don’t need to be the smartest person in the room (this is about being informed on the subject, not about being some financial wizard). You simply need to educate yourself on what to do and what not to do when it comes to investing. Becoming informed and taking action on the subject will reduce stress and increase your future wealth and personal well-being over time!

Become the Wise Investor