New investment strategies are as numerous as fad diets and about as effective. The practical tragedy of the average investment plan is the fact it often eschews simple math in favor of endless vistas of the unreachable blue sky. Like most creative executives will tell you making money successfully is neither exciting nor is it based on a eureka moment. If you want to see the results of a eureka approach to investing, just ask the average California prospector in 1860 what their savings were like.
That said, there are some principles the average person can make use of that will greatly improve their prospects for achieving sustainable and reliable gains in the market. This advice is to investing what instructions on how to block and tackle are to football. They are the fundamentals. Without them, you won’t even get a first down.
Inflation and Taxes
Leaving aside the type of investments you choose, if your total return on those investments doesn’t exceed the combined effects of taxes and inflation, you aren’t going to make it to your destination. The ultimate measure of your personal wealth is less associated with your bank balance and more associated with your buying power. Doesn’t matter how much you make if you can’t buy more with it.
Make absolutely sure your total returns exceed taxes and inflation. That piece of advice by itself will put you on a path to wealth accumulation.
Seasoned investors will tell you gains are acquired by time in the market, not by timing the market. While “buy low, sell high” is good advice, it is from the same school of thought as “show, don’t tell” is for screenwriters. If you make a bad choice in an attempt to time the market, you’re far more likely to buy low and sell lower.
Cost averaging is the solution to this potential problem. The principle is rather simple. Regular purchases of the same stock or mutual fund over a long period of time hardens your portfolio against temporary price decreases. Even if you sustain losses in your recently purchased shares, the proportion of your investment purchased at lower prices doesn’t lose value.
Growth vs. Income
Growth is most important for younger investors, while income is the goal for veterans. The main reason this maxim holds is because younger investors have a much longer time horizon for acquiring valuable shares, while older investors are presumed to have already built their portfolios and no longer need to accumulate assets.
While income is certainly useful, for a new investor, it is important that as many gains as can be afforded to be used to acquire more shares or instruments, whether they are stocks, mutual funds or bonds.
While these investment basics aren’t exhaustive, they can be used as the foundation of a long-term investing strategy that will replace hoping and wish with the kind of ground game investors need for success.