There is no secret to investing. It’s a simple process, just not necessarily easy at first. Understanding the process thoroughly can help you from making mistakes in the future or taking advice from someone who may not have your best interests in mind. Not understanding your investments or allowing someone else to handle them can cost an incredible amount of your money and more importantly, your personal financial freedom. By understanding investing and your investments you eliminate the stress of not knowing how much you need to save, not knowing how long you will have to work, not knowing if you are investing in the right investments, etc. You then can make honest assessments of your financial future and your life today. Once you have become knowledgeable about your investments the process is quite simple.
Take a minute to see if you can answer the following questions regarding investing.
- Do you know exactly what your investments are? Are they stocks, bonds, real estate or cash? Are they mutual funds and if so, are they managed funds or index funds? Do you know your asset allocation? All of this matters and isn’t complicated but is important to understand. Your returns will be dramatically affected by your answers. Historically stocks have returned close to 10%, bonds around 5% and cash around 3.5%. How you divide these assets up can make as much difference as your return. It’s a fairly simple process.
- Do you have an advisor? Do you know exactly how much they charge? (They all charge in some form or another.) Do you understand what they are investing in or do you let them handle it? Do you know if they are fee based or fee only? If you are paying 2% in fees over your career, your investment account will be 65% less. That is not a typo. Invest for yourself and chances are you will have a much larger investment account and potentially a much shorter work life or personal freedom as I like to call it.
- Do you know what your return is on your investments? This is a must for planning, if you don’t know how much your money is making, you have no logical way to plan your future. Do you know the historical returns on investments? Again, easy information to find and makes planning much easier.
- Do you know how to compare your return to a market benchmark? In other words, are you getting a good return on your investment? You may think you are getting a satisfactory return but are you? It’s easy to find out.
- Do you know what the fees are on your investments? (All investments have fees and expenses.) Do you know what a load fee is? Have you paid them? The higher the fees, the lower the return on most investments. Do you know how to avoid them? It’s not hard.
- Do you know the difference between a Traditional IRA, Roth IRA, 401K, 403B, etc.? The type of investment vehicle that you put your money in can make an extraordinary difference in your returns and future tax liability.
- Do you know what an index fund is versus a managed fund? Index funds are low cost non-managed funds and typically beat most managed funds with little or no effort on your part. Approximately 75% of managed mutual funds fail to beat their market benchmark each year and the other 25% vary each year- this is not a typo. Not only do managed funds typically fail to beat a market index but they typically charge much higher fees. Again, very simple.
- Did you know that many academics that have studied investing recommend index investing? This includes many famous finance professors including Burton Malkiel (author of A Random Walk Down Wall Street), Charles Ellis (author of Winning the Loser’s Game) and David Swenson (former Chief Investment Officer of the Yale Endowment).
- Did you know that Warren Buffett advises investors to invest in index funds? You might be surprised to learn that when he dies he is leaving money for his wife in an index fund at Vanguard. He has been quoted as saying, “I know of maybe 10 investment professionals in my lifetime that could achieve superior returns to the market index” He does not believe that investment advisors add value. If your advisor is picking your investments, do you think they are one of the ten that Warren Buffett mentioned? Unlikely.
Once you understand investing, you will achieve superior returns and spend very little time dealing with it. It really is that simple. Click on the About me tab to find out more about simple (and smart) investing.