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The Strategy
When it comes to investing your money for the long haul, the stock market could make sense for you. You may have already slipped retirement account money into the stock market without much thought simply because it’s what everyone does, or because you’ve been conditioned to believe that it’s the right thing to do. Sometimes this passive strategy can be the best way to achieve your financial goals without much effort, especially over more than twenty-five years. This strategy sure worked for me in my twenties when I was working corporate at a company with an employer matching retirement account; my goal was to make enough money in my retirement fund to leave corporate and be my own boss. Fortunately, my timing was good, and I reached my five-year goal allowing me to escape the 8 to 5.
Investing Your Money: Essential Knowledge
It worked out well, but after three decades of investing, I now know that I had more to learn, and that luck was on my side, too. The truth is that investing your money in anything without a certain amount of knowledge about that investment is not the right investment. The only right investments are educated investments. (I call this education the 1% you’ll absolutely want to know if you have money in the stock market, and it’s free in my Investing Basics eBook that you can get when you click here.)
The Real Goal
Let’s remember that the primary goal of investing is either for that investment to pay income to you while you own it, or to increase in value over time for later use, or both. But the real goal is to not lose money.
Rule No.1
Here’s why: Unfortunately, if you invest $100,000 into the stock market and it drops 40% to $60,000, it must increase 67% to get your investment account back to $100,000, or what it was before the drop. This tricky math reality is a bit of a bummer because it seems like you could just earn back the 40% that you lost, adding insult to injury. Now you see why Warren Buffet says Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
Lower The Risk of Losing
It does seem that the real challenge with investing your money is more about not losing money than making money. Unfortunately, almost every investor has lost money, including me, and it’s painful! I want to share what I’ve learned from over three decades of investing in the stock market, both on my own, and when working with financial advisors, that has lowered my investment risk.
1. Develop an awareness of cycles and invest accordingly
The economy moves in cycles from expanding to contracting, or shrinking. These cycles affect the earnings of stocks. Earnings are a primary driver of stock market cycles. Sound complex? It’s pretty easy to see when times are good in the economy. You’ll notice that stores are hiring, and they’re well stocked. In general, people you know who are seeking work can find it. You are probably familiar with real estate cycles if you own a home.
2. Check to see how many years the stock market has been going up or down
Compare that number of years to the typical number of years the market moves in that direction. For example, if the stock market has been moving up 8 years, that’s longer than usual, so you may want to invest a smaller percentage of your money in the stock market, or make sure you have an investment that typically moves in the opposite direction of the stock market.
3. Get ready for this one: Look at a long-term weekly chart of the investment you’re considering to get a valuable long-term perspective
Yikes! Check out the 200-Day Moving Average and the 100-Day Moving Average. You don’t need to be a technical guru to do this! If you can look at 2 lines to see when they cross, then you’ve got this, so please don’t email and tell me it’s too complex. This is so simple yet important (and free!) that I made a video where I explain this simple yet powerful signal that huge institutions and top experts use to enter or exit the financial markets. As I learned from William O’Neil, Founder of Investor’s Business Daily, the actions of the huge institutions drive the market up or down, and they take the value of your investment accounts right along with them!
4. Diversify among different types of investments
This is often called Asset Allocation in financial lingo. Ideally, you’ll have some investments that move up while other move down. This is where a financial advisors or wealth manager often get an opportunity to shine. Traditional investments that often (but not always) move opposite the stock market are Treasury bonds since investors logically flee to safety during market turmoil. Commodities are another common way to hedge stock investments.
5. Cash Is a Type of Investment
It’s easy to feel like you have to have all of your money invested all of the time. Keep enough money in cash for at least 6 to 18 months living expenses in case the market tanks, a job is lost, or unforeseen circumstances. See my article here for more about how much money to keep in cash.
6. The largest factor that lowers your investment risk is awareness and knowledge
By learning a little about investing, and paying attention to your investments, whether you invest yourself or work with a financial advisor, you can lower your risk. Learn your wealth! No one can argue that your wealth isn’t worthy of a few hours of your time.
7. Awareness is Key
Allow yourself to lead your wealth. Even if you know all of the above and you don’t act on your knowledge, it’s dangerous. Limiting beliefs about money, especially among women, often lead us to give away our power around it. Own that having and managing money is good, and live from this ethos. This seems to be the most overlooked step that drives us to ignore our money, even though we often use time, family or work responsibilities, or lack of aptitude as excuses. Let’s face it: the information is here if we want to devote a few hours to learn it. What’s the cost of not learning about YOUR investments? Again, the biggest risk your investments face is lack of awareness.
Commit to Your Investments
Commit to investing your money with prowess. Don’t have your money anywhere that you don’t understand the potential risks. No one cares about your money more than you, because you’re the person that will be affected most if you lose it. Who else will be affected if your investments drop 40%? Your children? Your parents? Your spouse? Learn how to invest, lead your wealth and live a lifestyle you enjoy while attaining your financial goals.