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Investing is counterintuitive. Successful investing doesn’t correlate with intelligence. Great investing is boring and not at all newsworthy. Bad advice is more common than good advice. The good advice is often overly complex. This is your shortcut to the simple, yet essential, rules of investing that will put you ahead of the curve.

High School Stockbroker

My first experience investing was a royal failure. It was the year 1999. I was 16 and after a long summer of hard work I had amassed $5k cash. I wanted to put it to work for me so I started learning about investing. After scouring several “get rich quick” investing books, I was ready to roll – I definitely knew what I was doing!

My first purchase was a handful of tech stocks that were listed as “strong buys” in everything I was reading. This started my journey of building wealth. A few of my stellar picks were SUNW, CSCO, & GLW (I still remember the tickers). They were crazy volatile from the start. I literally watched them online during school – it’s was like watching a horse race and I had my entire net worth riding on it. It started out hot! I was making big money – had it all figured out. I was up around $1k. Then the bottom dropped out. There were days I was losing over $500 – big money for a junior in high school.


This graph is a rough depiction of the experience (I know, it’s bad on so many levels). It’s not representative of my actual experience (I can’t draw that well) – but you get the point. This is a much prettier version of the history of CSCO covering the time I bought and sold.

And CSCO was one of my big winners – only lost around 70%. After a couple years I was down 90% on my initial investment. That was enough. I’d had it. I cashed in the remaining dollars (a few hundred) and I was done. I didn’t even take the losses on my taxes (I had income in High School that could have been offset by my losses). A royal failure on many levels!

But I learned a little about what NOT to do. I avoided the mirage of success that many stock pickers feel. My failure was very obvious.

Beginner Rules for Investing

1) Don’t be a stock picker

Most expert investment managers picking stocks or bonds perform poorly – how in the world do you have a chance? You don’t. Don’t believe me? Read all the academic studies on investing and see for yourself. Their overwhelming conclusion is the collective market not only crushes Average Joe trying to beat it, but it also outperforms the experts trying to beat it.

Instead, own the entire market (by owning all the underlying stocks). It’s very simple and extremely inexpensive. For example, the Vanguard Total Stock Market Index Fund owns a large percentage of United States stocks (3,824 to be exact). Quick side note – you will not hear this from most financial services salespeople. But keep in mind their firm doesn’t make as much money on products that simply own the market.

2) Understand investment expenses

Most people believe past performance is the best indicator of future performance. Not true! Fund expenses are a much better indicator of future performance (lower being better). Seek investments with minimal costs. For example, the above mentioned Vanguard fund charges 0.05% annually on your balance – very low! If you are going to pay more, understand why. Compare it to the lower cost alternative. Vanguard has a great free tool that allows you to compare all different types of investment funds.

3) Buy and Hold (with very small adjustments over time)

Get married to your investments. Never make adjustments based on circumstances out of your control. For example, the news says Greece is going broke and you should go buy Apple stock. Their track record of investment advice is the worst. Don’t let this noise affect your investment strategy.

An inexperienced investor and/or an investor with small balances should consider buying an inexpensive target retirement date fund such as Vanguard’s Target Retirement 2050 or the Fidelity Freedom 2050 Fund. Target date funds automatically spread your money around many stocks and bonds based on your time until retirement. As you get older, they slowly and automatically adjust the risk downward.

4) Invest in yourself!

Read a few beginner books or do some online research. Learn the basics before you get started. Remember, nobody cares about your money more than you do. Be careful what you read. Here are a few of our suggestions.

5) Create an Investment Plan (formally – write it down)

You have to start with your “why” and an investment plan will help you write this out. Your plan should ultimately direct your decisions. It allows you to clarify the risk you will be taking (stocks vs bonds) or that you are defaulting to a target date fund. This is a helpful template from Morningstar to help get you started.

6) Taxes are Important

There are many different types of accounts (401k, IRA, Roth IRA, Joint, Individual, 529 and many more). Most of these allow for very similar investing options, for instance, your IRA might allow for the exact same or similar investment funds as your Joint Investment account. The biggest difference here is how you are taxed. Your Joint Investment account will generate more taxes than your IRA (unless you are in a low tax bracket and state with no income tax your entire life). Tax efficient accounts perform better for you – often substantially better! However, there are downsides. For example, tax efficient accounts often have age restrictions on accessing funds while taxable accounts do not.

Now, let’s do a quick re-cap of your 6 steps:

Steps To Smart Investing

  • Don’t pick individual stocks – own the entire market!
  • Seek very low cost funds
  • Get married to your investments
  • Learn the basics yourself and/or hire an advisor
  • Create your investment plan
  • Seek tax efficient investments

Have you had any good or bad experiences investing?

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