Top 10 Investing Tips

Successful investors have things in common. I’m going to share with you the top 10 investing tips that are important to successful investing:

  1. Open a brokerage account with a well-established company.

My first investing tip is very basic. I’m not a fan of trading apps, even though they can have lower fees. Having been through crashes numerous times, I can tell you when the next one happens, which it will, you won’t want to have your money in something “virtual.” You will want to be able to go down the street and talk to a human being if necessary. 

2. Invest using ETF’s.

Exchange-traded funds (ETF’s) are low cost, diversified investments. With one purchase, you are buying a pre-determined portfolio of companies. For example, in the S & P 500 ETF, symbol SPY, you are investing in the largest 500 companies in the U.S.  With one purchase you own those 500 companies and you are doing so with the lowest fees. The downside of investing in an ETF is it is a static portfolio and is not professionally managed like mutual funds. When you invest in a mutual fund, a manager is buying and selling the companies in the portfolio, trying to improve the performance. If a company is losing money, a mutual fund manager can sell it, but an ETF can’t. However, a mutual fund charges higher fees for the service, so you are sacrificing 1% or more for a management fee.

3. Get your asset allocation right.

The biggest mistake I see people make investing is not getting their asset allocation right. They put too much money, or worse, all of their money in one fund or ETF. It’s usually the S & P 500. By doing that, you are missing out on other great investments that are medium or small sized companies, international, emerging markets, real estate, bonds, precious metals and other possible asset classes that could perform well. The stock market rotates performance from one area to another, so it is important to own some of all of the potential areas of performance. You are also protecting your portfolio and are better diversified, reducing the risk of loss in one area. I use pie charts to demonstrate proper asset allocation. The asset allocation chart below is addressing only the equity portion of your portfolio and the percentages are estimates, not carved in stone. You may want to add short-term or intermediate-term bonds.

“Metals” is for precious metals, “EEM” is emerging markets. Many ETF’s have the same name as the asset class, so you can “plug in” a Mid-Cap ETF into the Mid-Cap asset class (mid-caps are medium-size companies), or an International ETF into the International asset class.

4. Don’t use target date funds.

I am not a fan of investing in target date funds for several reasons. First, the fees are extremely high, meaning you keep less and pay a lot for the privilege of having a target date fund. Second, they are heavily weighted with bonds. Historically, bonds have had great returns. If you look at a track record of a long-term bond fund, it looks amazing. The problem is, that performance is impossible to duplicate because it happened due to interest rates declining. When interest rates decline, bond valuations increase. Conversely, when interest rates rise, bond valuations decrease. We are in a rising interest rate environment, so the opposite of what created the great performance is occurring now. As interest rates rise, the value of the bonds will decrease and you will be paying high fees – a double whammy! Don’t use target date funds, handle your asset allocation yourself.

5. Adjust risk by adjusting your asset allocation.

If you are getting close to retirement (within 5 to 7 years), you want to reduce risk by having less of your portfolio invested in stocks. The way to lower your risk is to have less invested in the stock market, so if you are getting close to retirement, start phasing out of stocks into cash or short-term bonds. Some people use stable REIT’s as a bond substitute. An example of a “stable” REIT might be a long-term care REIT (because we have an aging population), which may be better than investing in a REIT that owns shopping malls.

6. Consolidate your 401k’s from your former employer.

If you have 401k’s left at your former place of employment, it’s a good idea to open an IRA and rollover the 401k into the IRA. You’ll likely have more investment selection, lower fees, and certainly will have more control over your investments. Simplifying your accounts by consolidating them in one place makes managing your money easier and you can also see what you own in one place.

7. Invest for the long term.

Most people cannot make money in the short-term, they make money by being long-term investors. When you invest, don’t try to trade stocks or ETF’s. Buy them with a 3 to 5 year time horizon. Think about long-term trends and what will do well in that time period. During the internet stock boom, I was able to select a few companies to invest in like Google and Amazon that I knew would be winners and I was able to make a lot of money by owning them for years and years. You can too.

8. Do not buy on tips or rumors.

If you hear a rumor about a company or someone tells you that you should own a particular company, do your research. Companies that become mega cap companies like Apple, Google, etc., because they are making a lot of money.  It’s all about how much money they make and keep (their earnings). If you aren’t familiar with what makes stocks go up, I suggest you listen to my podcast, “What Makes Stocks Go Up.”

9. Don’t use leverage or short the market.

It’s possible to borrow and invest. It’s called buying on “margin” and it means you are borrowing against the value in your account. When the stock market declines, you have to pay back the debt or they will automatically sell what is in your account to pay off the debt. This is not a good idea to go into debt to invest.

10. Master your emotions.

Mastering your emotions while investing takes practice. When the market declines, it feels worrisome and the natural inclination for many is to panic and sell. The problem is, that’s usually the bottom and the market will move back up again. Had you stayed invested, part of your losses would have been recouped. A big drop in the market is often a good time to buy and when you feel elated, it’s usually a good time to sell. I did a podcast about how to master your emotions.

There are my top 10 investing tips. I hope you put them into practice and avoid common mistakes. For continued learning about investing, tune into the “Be Wealthy and Smart” podcast.

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