Investing Summer School: 3 Indispensable Tips from the Pros
Starting to invest can be one of the most intimidating tasks you'll ever take on, but it can also be one of the most lucrative. Liberating yourself from the financial strain of paycheck-to-paycheck living and building yourself an investment portfolio that lets you look forward to an even brighter future is your best defense against the financial struggles that millions of Americans face.
Throughout our Investor Summer School series, we've covered the basics on finding ways to save more to invest, the five most common types of investment you might buy, three popular investing strategies for beginners, and the two main tools you'll need.
In our final installment, we want to leave you with a few tips from some highly experienced professionals to guide you throughout your investing career.
Tip 1: You Don't Have to Pick Stocks to Win at Investing.
One reason why so many investors get hung up in getting started investing is that they don't have the time or inclination to comb through thousands of stocks and other investments seeking out the best ones. Here's some welcome news if that describes your current situation: you don't have to be a stock-picker in order to succeed with your investing.
For decades, researchers have known that the most important decision investors make is not which particular stocks of funds they buy, but how they divide their money across major investment categories.
In short, diversify well and you'll do well.
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A landmark study in the 1980s concluded that when you looked at the quarterly returns of nearly 100 corporate pension funds, 93 percent of the variability in those returns came from differences in the way the funds broadly allocated their money across asset classes.
Subsequent studies have produced slightly different figures, but the overall lesson is clear: although spending time seeking out the best investments within a particular category can earn you extra returns, relying on well-diversified investment vehicles like mutual funds and exchange-traded funds will get you most of the way there.
Tip 2: Pay Attention to True Value.
Superstar investor Warren Buffett has said often that you can't rely on the stock market to tell you what a stock is actually worth. Rather, a stock has value as a money-making business, and fundamentals like profitability and growth provide help in figuring out what that true value is.
Of course, the real challenge is trying to figure out exactly what a stock's true value is. Entire books have been written on valuation, but some simple rules to keep in mind include the following:
Even great companies can be lousy investments if you buy them at the wrong time. Big tech companies have made billions in profits since 2000, but many of them have share prices that are still below where they traded at the top of the tech boom. The same goes for banking stocks at the height of the housing bubble.
Out-of-favor stocks, on the other hand, often offer the best bargains. You have to be careful to avoid weak companies that actually deserve their low share prices, but stocks that are simply in the depressed part of a regular business cycle often make smart buys.
Don't try to guess exactly when a stock will hit rock-bottom. If a stock's long-term prospects are sound, then whether you buy at the low or 5 percent above the low won't make much difference in your long-term returns.
Tip 3: Let Time Be Your Best Friend.
Finally, the biggest virtue an investor can have is patience. Over time, the magic of compound interest will make you rich, but only if you give it enough time.
Buffett is a good example of this phenomenon, as he earned 95 percent of the total value of his fortune after his 60th birthday.
The earlier you start investing, the easier it is to save up a nest egg that will provide for your financial needs for the rest of your life. Unfortunately, many investors don't even think about saving until they get closer to retirement, and by then, it's too late to take full advantage of the opportunities that investing offers.
That's why procrastination is your worst enemy, and why there's no better time than the present to get started with your investing today.
So Get Started, and Good Luck!
Thanks for reading our Investor Summer School series. We hope you've learned enough about investing to motivate you to get started with your own investment portfolio. Be sure to stay tuned to DailyFinance for ongoing guidance on how to invest better and take advantage of opportunities when they arise.
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You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.
