Figuring out how and where you should be investing your money isn’t a simple task in today’s trading environment. In the last twenty years, we’ve seen at least three major crashes in stocks, and one in house prices.
In this post, we take a look at how and where to invest your money so that you can ride the storm and, hopefully, build real wealth.
Learn the principles
All the best investors in the world operate on a set of principles. In fact, billionaire hedge fund manager Ray Dalio enshrined the guiding forces that led him to fortune in a book entitled Principles, underscoring their importance.
There are multiple investing approaches that you can adopt. These include:
- Value investing – where you attempt to find undervalued stocks in the market and wait for them to appreciate in price (similar to the strategy used by Warren Buffett and Charlie Munger)
- Income investing – where you seek out companies known for providing consistent dividends over the long-run
- Contrarian investing – where you adopt a strategy that appears to contradict the general beliefs of other market participants
- Indexing – where you buy an ETF that bundles the value of all of the stocks in the index
- Growth investing – where you seek out companies that are small now but have the makings of tomorrow’s giant corporations
There are, of course, other methods out there. However, the important point is this: you must stick with a strategy. Chopping and changing typically leads to less than optimal results.
Find a mentor
The next step is to find a mentor who can guide you where to invest money. Social trading and copy trading have become increasingly popular in recent years as an inexpensive method of piggy-backing on the skills of others.
The idea is simple: you find somebody who is good at trading and then copy their trading moves (in a relative sense) with your own assets.
Picking an investor is challenging, though. You need at least twenty years of data to prove that they have the skills to consistently beat the market. Less than that, and you can’t generate the statistical confidence that proves their ability.
Invest in proven assets
Lastly, where to invest is another common bugbear. Generally, you want to put the majority of your money into non-speculative assets. These are financial instruments that have real-world backing, such as stocks, bonds and real estate.
Stocks generally return around 8 percent per year, historically. Real estate fluctuates, but may be able to yield around 6 percent over the long-haul. And bonds, being guaranteed payments, generate anywhere from 1 to 4 percent typically.
Experienced investors create so-called “all-weather” funds. These take advantage of the relative price fluctuations of different asset classes. For instance, when stocks rise, bonds tend to fall. You can exploit these trade-offs to increase your risk-adjusted rate of return – the level of risk you must accept to get a given return on your capital.
Remember, most investments in conventional assets only pay off in the long-run. Be prepared to stay in the market for at least five to ten years.