Occasionally I chat with others about investment principles and strategies. Here are some of my investment philosophies. They’re not original ideas, but they work for me. They continue to evolve.
1. Buy what you know.
What do you know? What products do you use? Are they good companies with promising futures and good growth prospects? If so, buy some of their shares. But do your homework first.
2. Don’t try to time the market, but know the season.
It’s folly to jump in and out of the market when you think it’s going up and down. It’s better to look at the long term and invest accordingly. What’s in store for 2010? Will the market do as well in 2010 as it did in 2009? Not likely. The January swoon will get better in February or March, but with all the structural issues the U.S. is dealing with now, it’s better to either put money in conservative investments or look to the global markets for gains. Although I could be wrong in the short term, my long-term view has a much better chance of being correct.
3. Don’t spread yourself too thin…concentrate.
Don’t try to track too many stocks or funds. Pick a few (up to 10-12) that you like and focus on them. Study them and look at their fundamentals. Professionals don’t try to track too many stocks, and you shouldn’t either. Add or remove companies as they under- or outperform.
4. Watch those fees.
If you don’t feel like a savvy investor, be sure to read the fine print before hiring a broker or buying a fund. Sometimes the fees can be in excess of 2% of the total principal, meaning that your broker would have to outperform you by at least that much. Sometimes doing it yourself – and employing available investing tools such as stock and fund screeners – yields better returns (or fewer losses) than hiring someone to do it for you.
5. Move past the basics of investing.
The smartest investors don’t put all their eggs in one basket. Consider real estate – the next two years will be a good time to buy a rental property. Consider options/margin trading. Consider micro-loans. Prosper.com lets you offer higher interest loans to Americans, and Kivu.com does the same for international micro-loans. Try the IPO market. W.R. Hambrecht offers periodic open IPOs. Try angel investing or secondary shares of privately held companies. Try investing in foreign markets or currency trading. Interactive Brokers facilitates trades in foreign exchanges and currencies.
These are several basic investment strategies you can use to improve your financial situation on $50 per month:
1. Open a Roth IRA and invest in it as an after-tax retirement benefit;
2. Increase your 401(k) withholding until it hits the $15,000/year ceiling;
3. Open 529 accounts for your children and set the money aside for future college expenses;
4. Set the money aside in a Health Savings Account; and/or
5. Pay an additional $50/month on any credit card debt and/or mortgage.
What you should NOT do:
1. Spend the money on depreciable fixed assets (aka “stuff”).
2. Spend it on dining out, entertainment, or any expense that offers a one-time benefit.