When it comes to making the most of our days, novelty is the way to go. We remember the exciting moments for much longer than the mundane. We tune out our drive to work every day, but we remember the drive around the Grand Canyon.
While the thrilling might be great for our personal lives, you’ll end up with more money in the end if your financial life is dull. When it comes to your investments, boring is better.
The Investments You’d Like to Tell Your Friends About
It’d be nice to have something to chime in with at a party when everyone else is raving about their latest hot stock.
“Social media stocks are hot right now. You gotta get in on that.”
“I bought Apple when it was $100 a share, and it’s up 300%! That’s where I’m going to put my money!”
“The stock market is the place to be right now. S&P 500, baby!”
It might sound like you’re missing out on all the action. How will you ever be able to save enough for your big future plans if you aren’t investing where the action is at?
The Thin Line Between Exciting and Scary
Stock picking might be exciting now, but the line between exciting and scary is very narrow. There’s a huge downside if today’s hot stock turns out to be tomorrow’s bad buy.
Imagine you were having that conversation about 15 years ago, right before the dot-com crash. Only 48% of the dot-com companies survived when that bubble burst. What if Mr. Stock Picker had most of his money in WorldCom, a market leader that went bankrupt due to accounting fraud? His portfolio would be crippled.
What if he’d invested solely in dot-coms? His portfolio might have been painfully reduced from its former value during the pre-bust glory days. That kind of drop is hard to stomach. And if he pulled out of the flailing stock market, he’d have missed the booming growth of technology giants like Amazon, Google, and the rest of the market.
The Snooze-Worthy Way to End Up with More
Set aside the sexy investments, and implement these uninteresting — but effective — investment principles instead.
THE COSTLY PARTY MAKER: Picking the hot stock
THE BORING MONEY MAKER: Using mutual funds or exchange traded funds (ETFs) to buy more of the market
As Warren Buffet said, the #1 (and #2) rule of investing is to never lose money. If you put most of your money into a hot stock, you’re putting your money at great risk. The company could go bankrupt, and you’ll be out of all of your money.
By buying a mutual fund or ETF, you’ll instead buy a little piece of many companies. You may not see the absolute best performance every single time around, but you won’t be risking a healthy portion of your money, either.
THE COSTLY PARTY MAKER: Picking the hot social media tech stocks
THE BORING MONEY MAKER: Use the time-honored investing principle of diversification — diversify by market sector, company size, international vs. domestic, and by asset class (i.e. stocks, bonds, etc)
There’s a significant downside to concentrating too much of your portfolio in any one sector of the market. In fact, it’s best to diversify your portfolio in as many ways as possible. You can diversify by sector — technology, healthcare, energy, and more.
You can diversify by company size or market capitalization, so you capture the growth of small, medium, and large companies. Or diversify by location by including both domestic and international companies. And you can also diversify by asset classes, making sure you have a mix of assets like stocks, bonds, and cash.
There are two great things about diversification. First, diversification helps smooth out the ups and downs of the market so your portfolio is less likely to tank in value. It’s a lot less stressful, and investors tend to make better decisions with a smoother ride in their portfolio.
Second, by choosing a diverse asset allocation, and sticking to your chosen asset allocation over time by rebalancing, you’re much more likely to buy low and sell high — unlike the average investor who is easily persuaded to buy and sell at inopportune times.
THE COSTLY PARTY MAKER: Pouring money into stocks because it’s a bull market
THE BORING MONEY MAKER: Steadily dripping money into the market, whether it’s up or down, and to stop timing the market
Your friend might think he can time the market, but investment research has shown that investors are notorious for buying high and selling low. From 2003 to 2013, across every asset class, investors made less money than the fund itself from pulling in and out of the fund at the wrong time. This bad behavior added up to a return that was 2.49% less than entire market.
Instead attempting to time the purchase of your investments, automate your investments and send money into your investments on a regular schedule. You’ll dollar cost average into the market. You’ll buy some investments when they’re high, and some when they’re low.
By constantly having your money in the market, you’ll be there for the big runs that really move your investment forward.
For a Sound Financial Future, Keep Investments a Little Boring
Sexy stock picking might make for entertaining party conversation. But when it comes to investments, set aside the exciting choice for a solid, boring investment strategy. It’s thrilling to own a winner on the upswing, but often, there’s a nasty downside when the bubble bursts.
Instead of following the latest investment trend, create a diversified portfolio of stocks, bonds, and other types of assets. Avoid chasing the hot stock by owning mutual funds. Stop owning one sector, and instead own a wide variety of companies, from small to large, domestic to international, and across many industries. Instead of timing the market, rebalance regularly.
By heeding these time-honored, snooze-worthy investment strategies, you might bore your cocktail guests. But luckily for you, you’ll end up with more money in your pocket.