- Buy early and buy often– Even if you don’t always pick winners playing the game will benefit you in the long run. If you have a part time job or allowance, invest small amounts every time you can. People who become wealthy buy stocks every single month for their entire life.
- Risk it all– Making big bets early will pay off long term. Taking risks will certainly play out well over time. Don’t buy into idiots on the internet, your parents, or friends telling you how risky you are being by betting on individual stocks. Most of the people giving advice aren’t wealthy themselves, this probably includes your parents. Conventional wisdom of saving and investing 10–15% of your income is going to ensure that you need to work full time for 40+ years. I you want the option to retire early, you need to save and invest a greater portion of your money. Try half ….or more. People will advise not to invest too much because you may lose it. They will also advise you to put it all into index funds. They’ll give some speech about how active funds don’t perform better than passive funds, and this is true most of the time. Even if you become an expert you probably won’t be better at picking stock that if you just randomly drew companies out of a hat or bought an index fund. This also means you are unlikely to do worse than an index fund. So control what you can control and invest in things that you are excited about and make you want to invest more.
- The best saving and investing plan is the one you will follow– This is similar to dieting and exercise, the best diet plan is the one that you like and is easy for you to follow. When you are young and don’t have a lot of money, it is more important that you build a habit and contribute more principal than what your ROI is. If you think Mustangs are cool and want to buy Ford stock , just do it if that gets you excited. If experts can’t figure out which car stock is the best, who’s to say you are wrong about Ford. If you think you (or your friends) look hot Calvin Klein underwear, buy some stock. Liking the product is just as good of reason as anything else to buy a stock.
4. Diversify– They key to hedging against losses is to diversify. This will limit your volatility and protect against losses. You can do this on your own though without an mutual fund. Index funds are a good option, but so are a variety of individual stocks. Assuming that you are interested in investing, you probably will enjoy researching companies and making decisions. Index funds will dull your experience. Buy a dozen or more individual stocks in roughly equal amounts. If you do this you will be properly diversified and have potential for large growth while staying engaged. Remember the engagement and commitment is more important that the performance.
5. Don’t get scared– Plan to buy and hold long term, regardless of what you buy. The only way you’ll lose money over time is if you get scared and sell every time you have a bad day, this will also cost you a fortune in transaction fees.
6. Control what you can– You can’t control the market buy you can control your tax scenario and the fee you pay. Today you can set up a brokerage account with Chase or Robinhood and not pay any fees at all on trades. You can also purchase index funds from somewhere like Vanguard and pay next to nothing in management fees. You also shouldn’t be in need of dividend income until you are much older and planning your retirement. This means you should focus on growth stocks and avoid high dividends. If you buy an hold a growth stock, you don’t pay taxes until you sell, an when you do it’s a much lower capital gains tax. Dividend stocks and funds force you to realize returns immediately and pay income tax every year. As a rule of thumb, always push the taxes out as far as possible, because someday you’ll die and the taxes will be someone else’s problem.
Ultimately the fact that you are investing at all is more important than what you invest it. Make a habit of investing and stick it out forever and you will certainly become wealthy.
If you want to read more about how to really read wealth, check out my favorite book The Millionaire Next Door.