True or False: “Timing” the market is a highly effective investing strategy.
False. It's not about TIMING the market, it's about TIME IN the market. Crystal-ball investing is not a real thing. Countless studies show the people who try to guess what the market is going to do always do worse than those who "buy right + sit tight".
The world of investing can seem very complex and overwhelming. And as a high-performing H.E.N.R.Y, it can feel very frustrating to know that you should probably be doing something to make your money grow, even though you don't know what that is.
CNBC makes you want to gamble - don't be distracted.
Listening to CNBC, you hear a hot stock tip. Chatting with friends, you hear a hot stock tip. Go to a cocktail party, you hear a hot stock tip. It's exciting, you feel the adrenaline and you say to yourself "I gotta buy before I miss out!"
Not so fast...
If you're just getting your feet wet in the investing world, here are 5 things you should understand and utilize to turn your salary into wealth. And above all, avoid becoming an all or nothing investor - a.k.a a gambler.
1. Have a plan
Wall Street loves to tell you what to invest in before knowing what you're investing for! But successful investors choose their investments once they've answered the questions - "What am I investing for?" and "How long do I have to invest?". A portfolio invested for a long-term goal like retirement (25+ years away) will look very different than a portfolio invested for a mid-term goal like a downpayment on a 1st or 2nd home (3-8 years away). Figuring out what you want is the first step to take before making an investment in the market. Ideally, it's not wise to invest any money for financial goals that you have in less than 2 years. So if you're saving up to move out from your parents' place, keep that money in a money market or high interest savings account with an online bank to ensure that it's there when you need it.
2. Don't sit on the side lines
One of our favorite quotes about successful investing is:
"It's not about TIMING the market, it's about TIME IN the market".
Countless studies have show us that when we try to predict the best days to be invested we almost always get it wrong, costing us big time. By the time individual investors get the information, the trend has almost always run it's course which leads us to act at the wrong time - every time!
If there's one thing Modern Portfolio Theory has thought us, it's that DIVERSIFICATION IS KING. Regular, periodic investments into a well-diversified portfolio is the way to go. No one has a crystal ball to predict the best time to invest. Just get started!
3. The Market Is Irrational
You're smart. You've got good instincts and are a level-headed decision maker. Unfortunately, the market has proven to be completely irrational. Little to no sense can be made of market movements and the most detrimental thing you can try to do is rationalize or theorize about what might happen - don't try to outsmart the market. We say buy right, and sit tight - it's going to be a bumpy ride.
4. ETFs are your friend
The emergence of ETFs (Exchange Traded Funds) have been a huge help to the Millennial investor because of their transparency, liquidity and low fees. Stash uses ETF portfolios for the majority of our clients and feel that they may be a good option for you, too. For one, they provide easier access to diversification (versus single stock picking) which can lower the overall standard deviation (risk) of your portfolio. 2 thumbs up for diversification!
5. Don't invest like someone in their 50s
As Millennials and Gen Y'ers, we've lived through 2 very rough financial time periods, namely the Tech Bubble and the Financial Crisis in 08/09. Studies show that we are a very risk-averse generation and it's certainly understandable.
Taking the right amount of risk in your longer-term investments can help ensure you won't run out of money when you quit working down the road. A portfolio that is heavily weighted towards bonds and cash may not grow fast enough to keep up with inflation, let alone accumulate wealth for you.
The truth is, savings + budgeting alone won't get the job. You need that money to be working and growing or you need to earn more. Don't be afraid to add equities to your portfolio but try to do it in a diversified way (like using ETFs instead of picking single stocks). Yes you will see it move up and down in value over the short-term but in the long-run it will grow!
MILLENNIALS + INVESTING: HOW TO GET STARTED
If you're in your 20s and 30s and find that you have some extra savings that you aren't quite sure what to do with, join us next week as we talk through the risks, techniques and make a few pro suggestions on how to get started investing in the market.
Is an ETF better than a Mutual Fund?
Where are the opportunities in investing at the moment?
How much money do you need to get started?
The #1 thing to do before you invest....
The difference between an IRA and a Roth IRA...
Photo Credit: thecollegeinvestor.com