One of the biggest challenges to being new to investing is that you simply don’t know where to start. Sure you may start by reading a few magazine articles. But it can be overwhelming when they start talking about things like asset allocation, Index funds, P/E ratios, Large cap, Growth sectors, Valuations, etc. What does all this stuff even mean?
The truth is that you don’t need to know everything about everything to get rich. In fact, I would venture to say that most people don’t. In reality, you really only need two things to get started on your investment journey: Curiosity and Common Sense.
We All Start Somewhere:
No one comes into this world being a financial genius. It is something we learn along the way. And if you feel left behind, don’t worry. You will learn how to be a good investor too. But it is going to take time.
Consider how curiosity led me through my own personal journey:
In the first part of this series, I wanted to test the claim that dollar cost averaging (DCA) was an effective strategy for protecting your investments. Too often I’ve heard claims against investing within the media saying that if you had bought stocks (particularly) during “The Lost Decade” between 2000 and 2010, then you would have had a -23% return on your money. After crunching the numbers, we determined that dollar cost averaging would have beat a static investment in the S&P 500 and returned a -6.8% return instead of a -23%.
That’s great, but who wants a negative return?! Why didn’t we just hide our money under the mattress and do nothing?
Unfortunately, that may be true. But remember that when it comes to investing: Defense is just as important as offense. So even though we lost money, the point of our experiment was to see if dollar cost averaging would have helped protect our retirement money during the bad times (also called hedging).
Therefore, in this second part of the series, we’re going to add something new to the mix to further hedge our portfolios: Bonds. That’s right; we’re going to re-run the same dollar cost averaging example as before only this time adding a mixture of bonds to the equation. How do think we’ll do?
From time to time when I get my 401k statement, there is a small newsletter mixed in with my financial statement. It usually presents some very introductory information about retirement, investments, etc. In this issue one of the topics was dollar-cost averaging.
For those of you who don’t know, dollar cost averaging (DCA) is a strategy where you invest the same amount time after time. During the good times when shares are higher, you buy fewer shares. During the rough times when shares are lower, you buy more shares. This strategy prevents you from buying at the wrong time and over-spending or under-spending on your investments by “averaging” your price over time among these periodic investments.
Sound familiar? That’s exactly what you’re doing every paycheck when you invest in your 401k or similar plan.
If you believe at all in the January Barometer (financial-folk-lore that if markets do well in January, the year will be good), then we’re in for a great year! The S&P 500 is up approximately 8% this year and most of the economic reports seem to be more upbeat than they have been in recent years.
So what is there to worry about? Well, in the words of Warren Buffett:
• “Be fearful when others are greedy, and be greedy when others are fearful”.
Looking for Safety:
When my 401k dropped nearly 50% during the Great Recession, I decided it was time to stop playing offense and beef up my defense when it came to how I invest my money.
Just admit it. You do it. I do it too. I’m talking about reading a book with reasonable advice and then never acting on any of it. Not even for a test run. It’s not that we’re lazy or not smart enough to carry it through. It’s just that for some reason it’s really hard to make that leap of faith and act on what we know we should be doing.
Well, there’s always a time to start.
This summer, I read the book “The Big Secret for the Small Investor” by Joel Greenblatt because I was interested in stepping up my stock picking game. If you’d like to read my book review, click here.
In Part “A” of Greenblatt’s “Big Secret” plan, he concludes that:
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