In the two previous posts we covered spending less and saving more. By employing the lifestyle changes in those posts we can begin to pay off our short term debt, build our six month emergency fund, and then if we are choosing financial independence as our goal we can begin investing.
Investing is a complex topic, with no one-size-fits-all approach. Depending on your risk tolerance and willingness to learn about investing, you may wisely choose to invest fairly effortlessly by using Vanguard funds or you may choose to pick individual stocks.
Whatever you choose, make sure to invest as early as possible to take advantage of compounding, invest your money slowly and with caution, and I think you’ll come to find out building wealth comes easily as long as we’re continuing to live with our lives designed to spend less and save more.
Then, here is what we need to do to get started investing:
1. Get a brokerage account
2. Pay yourself first
Use the adage of “pay myself first.”
This means before anyone else gets our money, we get our money. Automatically on the first of the month, have a certain amount of money withdrawn from where your paychecks go and deposited directly into your brokerage account.
3. Decide who is going to invest your money
Either let someone do it for us or do it ourselves. I like the latter. If you’re just getting started investing perhaps you’re more comfortable having a professional manage your money before deciding to branch out on your own.
4. Decide what you want to invest in
If we’re letting someone else invest for us we won’t have to do anything except answer some questions from our financial planner. If we’re investing ourselves, we might think about using popular funds like Vanguard or even individual stocks. I like the latter.
Ironically, I choose to invest in consumer companies, particularly the Retail, Restaurant and Technology sectors. One of Warren Buffet’s famous quotes is, “Invest in what you know” and for that reason my holdings include companies like Apple, Amazon, Chipotle, Coach, Google, Netflix, Priceline, Panera, Whole Foods and Starbucks.
I chose these companies because I use and am familiar with their products: I own an Apple laptop, I shop at Amazon, I chow down burritos at Chipotle, I get hotel rooms from Priceline, and I shop at Whole Foods.
5. Decide how many stocks or funds to own
We may only need a few funds to be well diversified. If we’re investing in individual stocks we probably want to hold positions in about 15-20 companies.
It takes time to follow that many companies, around two to four hours a week.
If it’s something you think you’ll enjoy doing, you’ll make the time for it. If it’s not you’re probably better off with funds.
6. Be patient
Warren Buffet has said, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
The markets will go up and down. Our portfolios will go up and down. Invest in solid funds and/or solid companies and don’t sweat the normal market gyrations.
Your job at this point is to invest regularly through those ups and downs.
Most of us have been through a recession now (2008-2009), so we should understand when and when not to be fearful. In 2008, my portfolio hit a peak on September 22 and dropped to its lowest point on November 24.
My portfolio lost 40% of it’s value in those two months.
I was fine with that, okay, mostly fine with that. But what I learned was that it was an excellent time to invest money in the market because everything was on sale.
7. Understand your time-frame
We don’t invest money that we might need tomorrow, next month, or even within a year or two.
8. Create an investment policy and investing journal
In the book Your Money and Your Brain, Jason Zweig suggests writing an investment policy which is much like a corporate policy. This is an excellent idea because it takes the emotion out of investing, a dangerous trait.
I have written and use an investment policy, and I revise it as needed at least once a year. The other beneficial habit is to keep an investment journal.
My journal consists of an entry for each stock in my portfolio where I write down the date I purchased shares, how many shares I purchased and at what price, along with the P/E ratio and the cash flow yield.
I also note the reasons why I purchased shares and how I felt about the company as an investment at that time.
This has been really useful in order to look back at previous purchases and reflect on the decision to invest at that point and to learn from investing mistakes.
9. Read and learn about investing
There are an overwhelming number of resources on investing. I stick to books rather than the talking heads on CNBC, which both tend to be short-sighted and fear-inducing.
10. Have fun!
Meeting financial goals and watching wealth build is exciting! First, we might have a few thousand dollars and we think we’ll never get anywhere.
Time passes, and those few thousand dollars turn into tens of thousands. Then we think, wow, that was awesome. We’ve never had that much money before!
As time goes by we pass the six figure amount! Then we may pass the $200,000 mark, $300,000 mark, and maybe even reach $500,000. We realize anyone can do this!
For some, an amount of $500,000 may be enough to cover living expenses for the rest of their lives! For others, they might be shooting for $1,000,000.
What we realize is that it takes time to build wealth (#6), there will be setbacks, recessions, unexpected expenses, and the normal bumps along the road, but if we keep spending less, saving more and investing we will be rewarded.