Many would claim that finding and riding the investment waves is the best method for successfully growing a braggable nest-egg. While riding the waves, avoiding troughs, and buying low is everyone’s desirable strategy for investment, executing on such a strategy is much easier said than done.
Remember, it’s those financial experts that promise vast returns, because they claim to understand the markets so much better than us average folk. This so often, can get us into trouble.
The fact is, everybody wants to get rich, but nobody wants to get rich slowly. Avoiding this all-to-familiar investment blunder takes a lot of discipline; however, it also helps to get in early and invest often. If you’re thinking about investing here are three important tips:
1. Get in early.
It doesn’t take a genius to understand that investing earlier is usually better. In case you’ve not had a recent side-by-side comparison between investing 29 years ago and 30 years ago, here is a simple example.
If you invested $100 every year starting 29 years ago at an interest rate of 8%, compounding annually, you would have $12,160. On the other hand, if you started 30 years ago instead, the value of your investment, all else being equal, would equate to $13,240. Add larger, more frequent payments with additional compounding and the numbers grow even further apart. The point is, earlier is better.
Assets seem to behave differently when you have more of them. Why does it always seem that those that have money are able to make so much more of it? Is it always because they use interest? Are they smarter than you or I?
In most cases, they adhere to the multiplying effect of dollars producing more dollars through interest. They got in early enough that their money now works for them, instead of the other way around. In other words, they learned how to invest in a fluctuating market.
One of the best examples of getting in early is Warren Buffett. He purchased his first stock when he was 11 after saving for five years just to buy it. He may not have understood the principle of getting in early at eleven years old, but he is certainly reaping the consequences of this time-tested principle today.
2. Invest often.
While some of us are merely wondering how to get through a recession, some of us who failed to dive in after everything went belly-up in 2008 have kicked ourselves over and over for missing the gains over the last 4 years. Some are so disappointed that they failed to “time things just right” that they’re not ready to get back in again until things drop. There’s a simple solution to such concerns.
A recent article in the Wall Street Journal outlines the importance of dollar-cost-averaging as an effective investment strategy for today’s equities fiends. For those of us who may be late to the party on the “market timing” issue, the opportunity to take advantage of continuing market growth is still available through this little-known tactic.
The biggest investment blessing to dollar-cost-averaging (i.e. buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price) in today’s market is the fact that it beats lump-sum investing by a long shot. It’s an effective method for smoothing returns when markets swing wildly due to low interest rates and asset bubbles. It also helps to decrease the average price you pay for a particular stock, even in up markets.
We would love to wait for the market to swing south again so we could “get back in.” But it can be very foolhardy to anticipate such an event just to throw in a lump sum payment. Investing piecewise over time in average markets tends to shrink the marginal difference in gains you have between you and the lump-sum strategists.
However, lump-sum investors can see huge losses if their timing is not quite right. In short, investing more frequently can help you sleep better at night.
Perhaps one of the best ways to “get in often” is to simply invest at regular intervals. I’ve personally found that taking a set percentage from my regular earnings is an effective method for forcing the discipline of regular investing, early investing and, of course, dollar-cost-averaging. It also adheres to the “get rich slowly” principles of Mr. Buffett.
3. Make Long-Term Investments
Recent history has helped to popularize the idea that average investors can profit from large market drops by going short. In reality, most of the money gained in equities is not made by market manipulation schemes and creative derivatives orchestrated by the likes of “brainiac” Goldman Sachs employees. No, you and I will best be served by well managed, indexed mutual funds.
In effect, average investors like you and I will gain the most by buying early, getting in often and sitting it out for the long haul. We’re going to be here awhile. We might as well act like it.
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Nate Nead has an MBA from the University of Washington with an emphasis in Business Finance. He works on middle market M&A deals with DealCapital.com and provides expert start-up planning advice.
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