You can talk to 10 different people and get 10 different opinions about investing. Or even different definitions of investing. In this post, I intend to lay out my personal thoughts on investing, which have been cultivated over the past 10 years or so.
It started with a passing interest due to a friend in the Army Reserve that was interested in investing. We talked about interesting stocks and companies when killing time on drill weekends or while deployed in Iraq, and that led me to further research about investing.
When I returned from Iraq – and subsequently left the Army Reserve and lost my civilian job – I was looking for something to do as I entered my post-Army life. I was completing a degree in accounting, and on a whim, I applied for an internship with The Motley Fool. I wasn’t selected for that internship, but it was suggested to me that I should apply to their Writer Development Program that was starting up later that year, and I was accepted into that program. After spending six months in Alexandria, Virginia learning how to be a “Fool,” I was unleashed on the world as a contract writer for the site, where I wrote primarily about banks, specifically small and regional banks.
This further stoked my interest in investing, and because I wasn’t doing all that well as a writer – #WritingIsHard – and because I had nearly a year of G.I. Bill benefits left, I decided to return to school to get a master’s degree. Not content with an MBA – I wanted something more about finance and not management – I pursued (and received) a Master’s of Science in Finance from the University of Illinois, with grand plans to become a financial planner or something related to finance. Even though this career path didn’t necessarily pan out, I remain interested in investing*, and it is something that is currently on the backburner as a potential post-government career.
*Note: I believe that any investing, whether done inside a 401k or IRA, or purchasing investments in a non-tax advantaged account, is all part of that overall pot of money that will ultimately help me in retirement. Right now, my only “investing” is done inside my federal TSP, though that will eventually expand to other accounts once I start making a little more money. If you want to view “investing” as only the purchase of things in non-retirement accounts, feel free. I just wanted to point that out so it’s not that confusing going forward.
Through all this, my general thoughts about investing can be drilled down to a couple of different points:
- Invest Something
- Invest Consistently
- Invest Only What You Can Afford To Lose
- Invest in What You Know
With the majority of Americans having no retirement savings at all, point number one is extremely important. Even if it is a very minimal amount, it will be more than zero when you eventually get around to retirement. If you have access to a 401(k) at work, this is obviously the best way, especially if your employer provides a match of some kind. For 2018, an individual can contribute up to $18,500 in a 401(k). That does not include the amount that your employer matches; that limit is $55,000. This gap indicates that an employer can contribute $36,500 on your behalf every year! Most employers won’t do this obviously, but it is possible. Personally, my employer matches dollar-for-dollar up to 5% of my wages, so it’s silly not to contribute up to 5%, otherwise I’d be rejecting this free money.
It is also important to invest consistently; if you are saving for retirement through a 401(k), this already happens automatically, as contributions to your account are made with you paycheck. But if you are investing for retirement outside of a 401(k) – like through an Individual Retirement Account (IRA) – spreading your investment throughout the year allows for dollar-cost averaging. The market moves around over the course of the year, and since it is impossible to know where it will be at any given time. Dollar-cost averaging should lower your overall cost for an investment because you are buying shares at different peaks and valleys in the market cycle.
For example, here is a simple illustration. Let’s say you are investing $5,000 into a fund of some kind (it doesn’t really matter what kind of investment). You have the option to buy shares immediately, or you can choose to invest over five different periods. Unless the share price goes up from the initial deposit date, you will end up with more shares – at an overall lower cost per share – if you invest over different periods.
|One-time investment||Five periods|
|$5,000 @ $20/share||250 shares||$1,000 @ $20/share||50 shares|
|$1,000 @ $18/share||55.56 shares|
|$1,000 @ $15/share||66.67 shares|
|$1,000 @ $19/share||52.63 shares|
|$1,000 @ $24/share||41.66 shares|
|Total shares||250 shares||266.52 shares|
|Total values at last price||$6,000||$6,396.48|
|Average price per share||$20/share||$19.20/share*|
*This average cost would boost your individual return if you were tracking that, though in the context I am discussing here, returns won’t matter except to track performance versus inflation.
This helps to illustrate that adding to an investment over time could result in better returns in the long run, though if share prices went up from the initial investment, you’d actually have fewer shares, but over multiple decades, the difference would be pretty minimal at the end of the day, and may average out with other investment options.
You should be investing in retirement, at least up to the match your employer provides (if they do). However, if you decide to invest beyond that, you should only invest the money that you can afford to lose. The stock market is a great tool for gaining wealth, but the inverse is also true. Share prices can go to zero, and you can lose all of the money that you have invested. Therefore, you shouldn’t be investing money that you need to pay rent on Friday, or money that you are saving to buy a house. This should be money that you can afford to be without for a very long time. Investing should be viewed as something that is for the very long-term, not something that is done on a whim.* If you are investing for the long-haul – and not paying attention to the daily moves of the market – the swings of the market should average out in the long run.
*That is not to say that you can’t use some of your additional money to “play” the stock market. Just don’t mortgage your future to do so by spending money that can be better utilized elsewhere.
Finally, if you are going to invest in individual stocks, only invest in companies that you understand. In my opinion, the best choice in investing is always the most passive one: index funds and similar vehicles allow an investor to put their money in something that will most likely earn more than a savings account and don’t require much thought in making a choice. Fees are low, and, in the case of index funds, spread your money over a wide swath of companies. Even Warren Buffett thinks the best option for retirement is an S&P 500 index fund. Target date funds are also “set and forget,” with reallocation happening over the life of your investment with regular rebalancing depending on how close you may be to retirement.
That said, I personally like to dabble in individual stocks, and own quite a few in the portfolio that I manage for my mother. But I only invest in companies that I understand: banks, retailers, light manufacturing, etc. I avoid most technology stocks because some companies do a lot that is hard to understand, or at least hard to value. I avoid biotechs for the same reason, even though the right one could have astronomical returns. I also tend to avoid smaller companies (based on market capitalization), as well as companies new to the public market. Nevertheless, each person views stocks differently, but I hope over the course of this series to convince the skeptics that individual stocks aren’t really that bad or scary, but that they just require a little more care than the “set and forget” options mentioned previously.
This was supposed to be a quick overview of my overall thoughts on investing and saving for retirement and it got a bit away from me, but nevertheless, this is how I feel about investing. Everybody should be saving something for retirement, if only because social security may be different in the future than it is now – not to mention that it wasn’t ever really intended to give people a lot of money in retirement in the first place.
I’m hoping that over the next few days (and beyond) to fully expand on a lot of the “behind the scenes” stuff when it comes to investing, using some of the experiences I mentioned to lead this post off. Investing doesn’t have to be scary, but it also shouldn’t be something that should be ignored entirely, especially if you have 20+ years until you plan on retiring.
Until next time…