My Investing Principles
I have four investing principles that I use personally and try to instill with members of The Clubhouse:
Know Your Why
What are you investing for? To get filthy rich? To be able to retire on a beach? To pay for your kid’s education? To buy nice handbags?
I want you to define your reasons for investing. If you don’t know why you are investing, you won’t have a sound investing plan (or be able to stick to one).
Keep It Simple and Organized
I meet with a lot of people who are overwhelmed by managing their finances. They’ve let their financial life become a tangled web of accounts and investments that they can’t make sense of.
When I start working with a new client, my job is to untangle that web until the financial picture becomes clear for them.
Each account should have a defined purpose. Each investment should have a defined purpose. Only put your money into investments you understand.
Return on investment (ROI) is important, but so is return on hassle (ROH). The more complicated things get, the higher the chance you’ll get stressed out by everything surrounding your finances. Always consider the impact of complexity.
Understand Time, Diversification and Volatility
This chart from JP Morgan’s Guide to the Markets gives an idea how you should think about allocating your investments between stocks and bonds based on different time horizons.
The reason to know why you are investing is because you can match your investing goals to specific time horizons to manage your risk and return.
Want to retire in 30 years? Building a portfolio of mostly stocks will likely grow wealth much more than holding bonds or an even stock/bond split. The biggest “edge” a young retail investor has is time. Take advantage of it.
Want to buy a house in seven years? A 50/50 stock and bond mix historically returns positive % over a five year span.
Do you have a payment you need to make within a year and need to protect the money? Don’t invest that money in solely stocks, where historically-speaking, the one year return is extremely volatile.
Creating a “bucket” strategy (short-term, medium-term and long-term) is effective to organize your investments by time horizon to match your needs.
Monitor Your Financial Ecosystem
When your financial ecosystem is set up so that 1) you understand how it functions and 2) it is easy to execute, you have to decide how often to monitor it.
You can review your entire ecosystem annually. If you want, you can check on your accounts quarterly or monthly. Whatever you need to feel comfortable!
The one thing you don’t need to do is check your investment portfolio every day. This is the quickest way to turn someone who should be an “investor” into a “trader'“.
These four investing principles give you the foundation to set yourself up for financial success.
To learn how to set up your own personal money system in an easy, efficient way, you can download my Nine Inning Finance Guide: Where to Start With Money? One-click download, no need to give me your email address.
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