Philosophy
Investing is available to everyone and the internet tools make it more accessible than ever before. Before you jump into investing, I recommend these guiding principles as you navigate investing and retirement planning.
Guiding Principles
- Identify a trusted source of information and help
- Invest only in investments/vehicles that you understand
- Understand the nature of economic cycles and don't panic during the down cycles
- Know your timelines . . . as in when do you need your money
Governing Philosophy
In today's information overload, you can find all the information that you desire to consume. However, it is critical to exercise extreme caution in the sources. In addition to finding reliable and trustworthy sources, one must understand your individual comfort level with risk. Our rule has become under no circumstances, will we pay someone a percentage of our portfolio to manage our money.
Risk
Risk is not just about length of time between "today" and when the money is "needed". Risk is also about personal preference. The adage of "Greater Risk, Greater Reward" is often stated without including the corollary of "Greater Risk, Greater Potential Loss". In short, know your boundaries and be willing to adjust when you learn something new about your personal comfort level.
Know What You Know and Know What You Don't Know
The most dangerous person is someone who thinks they know more than they actually knows. For example, a podiatrist who "thinks" they are qualified to perform brain surgery because the attended medical school is quite dangerous. A favorite saying that I have is "If you get a chance to get something for nothing, only take a little because it is not worth much". The bottom line is knowing your boundaries is critical. Knowledge ≠ Wisdom. It has been said "knowledge is knowing that a tomato is a fruit. Wisdom is knowing to not put it in a fruit salad". Honestly recognizing what you do not understand is the best place to start with financial planning.
Boundaries
Boundaries matter is many aspects of investing. A key boundary is establishing guardrails that protect you, often from yourself. There are many ways to invest (add a link to the vehicles page). Choose wisely. My #1 investing rule is: IF YOU DON'T UNDERSTAND HOW THE VEHICLE and/or INDUSTRY WORK, DO NOT INVEST IN IT.
Invest in What You Know - Keep It Simple
Investing philosophy . . . understand what you invest in and keep it simple. Complexity does not translate into higher performing returns. Over the past 30 years,the S&P500 has delivered approximately 10% returns. Inflation adjustments make it more like 6.5% - 7.0%. The big investment houses (Vanguard, Fidelity, etc.) have created index funds that track the index well. People pay big money for money managers to try and beat the performance of the markets. However, as no one has a crystal ball, few succeed in this endeavor. One resource indicates that only 8% of professional fund managers beat the markets. (Link) Even with all of their tools and effort, few exceed the market. Hence, my advice to keep things simple. So, key questions to understand are:
- What are the various ways to invest? (Link)
- What is compound interest?
- Do I need a strategy now when I am young?
- When do you want to retire?
- How do I prepare for retirement when it is many years away?
Compound Interest
Compound interest is interest that is earned on both the principal and the accumulated interest from the previous periods of interest. It allows exponential growth of your investment. Understand compound interest and live with discipline. A quote, often attributed to Albert Einstein communicates the essence of this philosophy: Those who understand interest earn it and those who don't, pay it.
Strategy
When you understand compound interest, you'll recognize the importance of starting early. Start saving early . . . consistently. . . never touch it. Building on this principle, the next step is capitalizing on this understanding. This is where the value of having an investing strategy for all phases of your life becomes indispensable. Phases can be viewed with respect to age or with respect to how long before you want to retire. The phases control how aggressive or conservative you need to be with your money. When you have 30 years before retirement, a down cycle in the market is meaningless as you were not ready to touch the money anyway and you have time for the market to recover and continue to grow. When you have 30 months before your planned retirement, a down cycle in the market may affect when you do something. This will be outlined on the phases (add a link to phases) page.
Retirement - Have a Plan
Don't retire from something . . . retire to something. Planning is key in life. Just as this content is focused on financial preparedness for retirement, it is critical to acknowledge that the money saved for retirement must accompany a life plan. I highly encourage a philosophy.