The Investing Rules

Investing in today’s marketplace is extremely daunting, the plethora of choices can make for paralysis by analysis. The most experienced investor can become contrite with all the choices. Just imagine somebody without any experience in investing and how hard it may be. Because of this issue facing many not familiar with investing, I developed the investing Rules. The rules will be there for many to follow as a guideline. This is an informative post on how to begin on what might be a financially smart path for you.

The first investing rule never invest more than the employer match in 401K when in debt. If you have a budget that allows you the ability to allocate $100 dollars a month to invest in after tax brokerage accounts and another $300 towards student loan debt. Yes you will be growing your net worth month by month and reducing debt month by month. The normal way of thinking behind this scenario is that you are paying down debt to the tune of 3 times what you are investing, and you might not see a problem with this process. The behaviors you are displaying are good, but they are also not the financially smart method. Why, you may be asking?

First off let’s say that giving the $300 dollars a month to the student loan gets you out of debt in 60 months.Did you know that if you instead gave $400 dollars towards the student loans and stopped investing until you were debt free that you could potentially save thousands of dollars in interest? In addition to those savings you could be debt free 15 months sooner with the higher monthly amount, which can give you a motivational boost. Now many financial gurus might tell you to stop contributing to the 401K completely during the debt repayment phase, but I say do what makes you comfortable. Never turn down free money is a great mantra, but for debt freedom it makes sense to stop it temporarily.People see the most gains when they focus on one goal at a time, and with debt out of the way people can really invest some dollars afterwards.

Once you have completed the debt repayment then you will now increase the 401K to 10%, and invest another 10% in after tax brokerage accounts. This way you will be covered if you want to retire prior to age 59.5, the legal age where you can take out retirement funds penalty free. I want you to look into a mixture of 60% stocks, 20% bonds, and 20% international. This allocation will give you a good balance without too much risk.

The next rule is to be mindful of expenses. The best way to place investing dollars will be 5% in economical ETF’s, Index funds, and mutual funds. This is the easiest way to be fully engaged in the broad based market and not have to pay a large amount of money in management fees. The other 5% you will place in one dividend stock you have faith in and that is currently in the dividend champion list. This is the list of companies who have been successfully in business for 25+ years and have been paying dividends for 25+ years as well. I want anyone to find a systematic way to invest in a stock quarterly or semi-annually and always reinvest the dividends to maximize growth. The reason you do want to avoid monthly investing is to reduce trading costs. When you reach a goal of 100-300 shares within that stock then you will move on to the next stock and start the process over. (200 shares is a good threshold for me)  Obviously it all depends on the price of the stock, as higher priced stocks might take a longer time to build up than lower priced stocks.

Another investing rule is to never put all your eggs in one basket. Do not invest 100% in your employers stock or do not invest in a single stock or mutual fund in the long term. For example if you invested all $400 dollars into Coca Cola for 5 years into the future and are giddy with the amount your investment has been growing from 1 share to 500 shares, you might be tempted not to get off the gravy train. But I will advise you to get off because placing all your funds and faith into 1 company is very risky. The success you had was great, but one thing that people tend to forget when they are making money with stocks is what goes up eventually must come down. It’s time to diversify into a different sector of the market.

Now you have been debt free for 5 years, and have 500 shares of Coca Cola. Where can you place your new money for a better financial position in the future. Well Coca Cola is in the Food & Beverage sector of the market, and now you must consider moving into a different sector as mentioned above. What are the choices for all investors to consider? The sectors of the US stock market to name a few include Financial, Defense, Energy, Telecommunications, Technology, Utilities, and Industrial.  By taking a good approach to sector management you might get a diversified consistent rate of portfolio growth. The total number of sectors available is 30 different ones to choose from. It’s important to have the confidence to be able to select the sector you would like to invest in.

The last rule to ingrain in your mind is that investing is a long term process. Keep buying shares until you are either satisfied with the size of the portfolio or the investments can cover your expenses with dividends.  Always maintain a 10-15% buffer above and beyond future expenses, where your investments will still grow to help with future inflation costs.

Now with a balanced portfolio of 401K funds, ETF’s or Index Funds, and Dividend Stocks anyone can be in a better position with investing. The point is to get started and stick to a plan. After 20 years all your accounts with a bit of luck should cover all expenses and more. Now all that’s left is for you to experience extensive overseas traveling.

Resources:

Sectors

Dividend Champions

Comment on the Investing Rules?

Rich Uncle EL