How To Be A Successful Investor

I’ve spent the better part of 23 years teaching people how to be better investors. I do it through educating and coaching. In hindsight it seems easy, common sense really. But when I speak to investors, I realize all over again how badly our educational system failed them. Not in a classic liberal arts or the sciences way but in how to be a financially literate functioning adult. I think the world of teachers. I have a sister who teaches and my father was a teacher before getting into finance. It comes quite naturally to me. I enjoy being in front of an audience and sharing what I’ve learned with them. If there’s one thing I do well, it’s communicate often complex topics in understandable ways. But our educational system fails us in preparing young adults to handle the money they are about to start earning as they embark on a career or trade.

So here are some timeless rules for saving and investing followed by some suggestions for improving the chances of success of later generations.

1.       Learn to balance a checkbook. Then live on less than you earn. Have one credit card and use it judiciously to establish credit for later in life. After carrying modest balances for a few months and never missing a payment, pay the entire balance off every 30 days going forward.

2.       Save the difference – “pay yourself first” by having money move automatically from your bank account and your paycheck to investment accounts

a.       This should happen with both pre-tax and after-tax dollars.

b.       Fund a retirement plan at work if available at least up to an employer match.

3.       Your goal should be to save 20% of your paycheck in total.

4.       First create an emergency fund of about six month’s expenses. This is in case you lose your job or have an emergency need for cash. Put this into a savings account or a money market mutual fund – no risk.

5.       As your savings grow, invest in a retirement account (401(k), 403(b), 457, IRA, ROTH IRA, etc.). The younger you are, the greater the percentage of this account that should be in stocks. Ex: if you are 30, put 80% - 100% into a diversified mix of stock mutual funds.

6.       Invest your after-tax savings in a similar mix of low cost mutual funds (index and factor funds are a great choice). The two accounts can have different allocations but together should meet your overall asset allocation target.

7.       Rebalance your mix of funds back to target every one to two years.

8.       Consider getting advice as your assets grow. Seek out a credentialed professional (CFP) with some experience. Pay fees rather than commissions. Make sure you know every fee you pay…every fee! Have a financial plan to work from as you age. If your advisor doesn’t offer a comprehensive plan, move on.

9.       Disregard the financial media – don’t watch the TV shows and cancel your magazine subscriptions.

10.   Read a Random Walk Down Wall Street, Bogle on Mutual Funds, The Investment Answer, and anything you can about “efficient markets” and “index mutual funds”.

11.   Rebalance every five to ten years to a slightly more conservative mix of stock to bond funds. For example, when you’re 50, you might be 60% stocks and 40% bonds. You probably never need to be more than 50% or 70% in bonds.

12.   Carry life insurance not as an investment, but to protect those you love in the event of your demise. Carry short/long term disability and long term care policies.

13.   Create a simple will and revisit it with a lawyer periodically as your wealth grows.  

14.   Own investments via mutual funds that own stocks and bonds in dozens of countries across the globe. Own all kinds of stocks but learn about portfolio risk so that you just don’t load up on the riskiest securities in search of high returns. Always remember that risk and return are related!

15.   If something sounds too good to be true, it probably is. Some financial salespeople can be quite convincing. You don’t need to tie your money up to get a good return. You don’t need to pay exorbitant fees to access sound money management. Your internal investment costs need not exceed ½% per year. A good advisor shouldn’t cost more than 1% per year including the planning.

Local school systems should implement a mandatory financial literacy course for high school seniors that go over the basics of opening a bank account; the prudent use of debt, namely credit cards; the basics of saving and investing for future liabilities and retirement; and how to avoid getting into too much debt and investment scams.

These are a good set of guidelines for the vast majority of people to enjoy a successful investment experience. I will drill down into some of these points in coming posts.