Whenever I bring up the stock market to some people, they immediately retort with the crash of 2008 as a reason to not invest money. But if you follow basic principles you’re much more likely to make money than you lose.
Diversify
This is the oldest advice in the book, but what does it mean? Diversification means spreading your money across several investment platforms. Imagine you’re sieging a castle on an island and you need a battering ram to knock through the front door. You could either load multiple rams on one ship and hope it makes it to the shore or you could place a ram on each of seven boats. The latter demonstrates diversification because you’re not screwed if your important ship gets obliterated. In the financial world, diversification is across various sectors, bonds, real estate, and cash. The more diverse your portfolio, the more protected from risk. Consider if you hold 50 percent of your net worth in your company stock and the company goes bankrupt. You’ve now lost your job and most likely, half your net worth. Your ship is sunk.
Stay in for a minimum of 5 years
I can’t tell you how many people I know who buy stocks and sell them within a year. Some stocks do make money in that short of time, but if you want substantial gains, you need to hold long term. Ninety percent of investors made money in five years.
Be greedy when others are fearful, fearful when others are greedy
The stock market crash of 2008 plunged many people’s portfolios and hopes into hell. But some people made a killing off of the insanely low prices.
Warren Buffett bought 5 billion in preferred shares in Goldman Sachs, 3 billion in General Electric, and billions in Dow and Swiss Chemical. Dave Ramsey made similar purchases, especially on real estate that the owners forfeited. In short, when stocks drop, you should see them as discounted and a reason to buy. But this teaches another lesson: liquidity is king. If these moguls had all their money tied up in real estate, then they couldn’t have snagged these deals.
On a more critical note, this is why a 6-9 month emergency fund is vital. In the words of Buffet, “You can only tell who’s skinny dipping when the tide comes in.” Don’t get caught naked holding items you’ve financed because you can’t afford them.
The opposite of this idea is simple if you know the point of investing is to make money. But herd mentality hurts us when a stock or Bitcoin is on fire, and people keep buying at higher prices because they don’t know how high it could go. The #1 rule of investing is to buy low and sell high. If it seems like a stock is too high, that’s not the time to buy.
Plan for tax implications
If you want to retire early then you shouldn’t put all your money into accounts you can’t touch until you’re 65. Similarly, if you plan to make more money when you pull them out than you make now, then you should place the money in accounts in which you pay the taxes now. I’ll dive deeper into this topic in future posts.
Personalize your risk
How risky are you? That’s a bit of a trick question because the higher the amount of risk you take, the higher your returns are. While you may lose money, the money you make with be much more than if you invested in bonds.
Your split between stocks and bonds should be close to 100 percent bonds until you’re 40. You should always be riskier when young because you have such a long horizon that you can earn more money if you lose any, and the extra money you make can compound rapidly.
You should only be switching weight into bonds as you get old enough that you can’t re-earn money lost. Even then, you can invest in bonds making three percent, along with money market funds and even savings account like Weathfront paying two percent.
Making money is the stock market is so simple that it’s boring. But if you follow a few simple rules, you’ll cash out with large amounts of profit.