Our generation needs all the help it can get. We are inheriting record debt levels and rising inflation, contributing to higher standard of living costs. But all these problems can’t be used as excuses. You still have a responsibility for your wealth– here’s 20 investing tips to help.
Written by a boomer, okay I’m just slightly older than you but you get my drift…
1. Time is on your side
The best part of being young is that you have so many years ahead of you. The biggest advantage of investing comes from the power of compounding.
Compounding interest is like a snowball rolling down a hill, it picks up more and more snow until it’s like an unstoppable avalanche.
The average 25 year old who invests $5,000 a year and makes 10% would have $2,430,366. That’s a millionaire who didn’t have to start a business or take crazy risks. That’s a millionaire who had a very average income.
Nobody talks about that story because it’s boring. But it’s so possible, especially for the 20 year olds.
What if the average 25 year old above had stated at 20 instead of 25? That person would have $3,947,653. That’s almost double, in only 5 years!
The power of time is unparalleled. Don’t ignore it.
2. It’s not about winning
You might be surprised to hear that successful investing is more about avoiding big losses than finding big winners. But it’s true.
The best investors know how to limit drawdowns.
It’s more important to know how to identify a bad investment than it is to know how to find a good one. Most people ignore this side of investing. You can give yourself a vastly superior advantage by learning how to avoid losses.
It makes sense if you think about it too. You could build up so much wealth, only to lose it all at once with a bad investment. Of course, you can avoid this by diversifying and knowing how to identify companies in trouble.
But some people don’t think to prevent this from happening. They get burned, bad.
3. Debt is Dumb
Mark Cuban, the billionaire who owns the Dallas Mavericks, says the fastest way to get rich is to get out of debt. He couldn’t be more right.
In fact, if you survey millionaires and ask how they became wealthy, you can be sure they won’t give you credit card tricks or secrets.
If you have a basic understanding of math, you can quickly understand why debt keeps you from wealth. When you are in debt, you are paying the lender interest. This interest compounds over time.
Especially if you are only making minimum payments, it seems impossible to crawl out. Investing is the opposite of debt, you risk your capital and are paid interest on this risk.
When you are in debt, you become the one who has to pay interest.
The quicker you learn about the finance world, you’ll soon find out that the interest you pay while in debt is much larger than the interest you can get in investing.
Like a casino, it’s a losers game. Just stay away from it.
4. Social Security is not an investment
This might shock you. Social Security is broke.
It’s not an investment fund. The fund doesn’t hold assets. The fund collects money from tax payers, and then pays ALL of it out to recipients.
When there’s no money left, there’s no way that any of it can be invested. And this is exactly what happens, every single year.
In fact, if you look deep into the numbers you’ll find that the fund won’t survive past 2030 at its current rate. It’s not a secret. You can go on the government website yourself, and it will tell you the same thing!
The Social Security fund is going no where but down. The numbers show that it is deteriorating. The “returns” that recipients are getting compared to what they paid in are getting smaller and smaller.
There’s not much you can do about it, except learn to fend for yourself.
If you are depending on Social Security for your retirement, you are setting yourself up for a miserable life. I know most 20 year olds don’t want want to think about retirement because it is so far away, but this isn’t a way to live.
Think about it, the only thing that is certain is that the sun always rises in the morning. No matter how good or bad things get, time always goes on.
The days always come, whether you like it or not. Most of you will retire one day, like it or not.
You can put all your trust in a bankrupted system or you can trust in yourself. It’s all up to you. Just understand that the money you are “putting in” to Social Security probably won’t be there later.
5. Learn how to protect your back
Nobody is going to look out for your money for you in the stock market. Nobody will truly have your back at all times, except for yourself and the precautions you put in.
I’ve written before about how you can limit your losses and maximize your gains.
I’ve told you already about how important it is to limit your downside risk. You can do it systematically with a trailing stop.
A trailing stop will have your back at all times. No matter what happens in the market, a trailing stop will limit your losses to an exact science.
This maximizes your gains by letting your winners ride, and cutting your losses. If you want to learn more about the trailing stop, I encourage you to click the link above.
If you don’t watch your back, no one will.
6. You have an advantage over older investors
This goes back to what I said in #1. Time is your biggest ally, and older investors can’t get it back. More time is more opportunity to make great sums of money.
The best way to profit from this advantage is to focus your investments on the long term.
Long term investments take full advantage of the 8th wonder of the world, compounding interest. Long term investments aren’t subject to the whims of the short term market.
The market is rocked back and forth from fear and greed. At times it can be a tumultuous environment. Only long term investments aren’t affected by these fluctuations.
An investor who is holding long term can ride out the ups and downs of the market, because they don’t matter. A long term investor is holding all through out.
The market always recovers in the long run. Long term investors hold and profit. Short term investors are dependent on every move.
You have a long time to compound your money. Take advantage.
7. Your #1 wealth killer is inflation
The income inequality problem is a hot issue. But a bigger problem is affecting many more people. It affects everyone who lives in America.
I’m talking about inflation.
Inflation occurs when the government prints money out of thin air. Every time you hear about a new version of QE, you can be sure your dollars are being inflated.
The problem with infinite money printing is that it increases the money supply in circulation. This drives up the stock market and real estate prices, which makes everybody feel richer.
But nobody is actually getting richer. Because as the money supply increases, so do the prices of EVERYTHING.
Food prices, gas prices, rent prices, prices of supplies and services. All these things become more expensive with inflation.
Why do you think you can’t get an ice cream for 5 cents anymore? Inflation.
Why is gas so expensive? Inflation.
The big problem is that inflation is quickly outpacing household median incomes. Everybody who owns dollars is seeing their dollars lose value, as more and more of it gets printed.
Inflation currently averages about 3% a year, but it could be much more in the future.
This means if you aren’t investing your money… YOU ARE GETTING POORER EVERY DAY. Inflation silently destroys your wealth. It blindsides the millions of elderly.
The only way to protect yourself from inflation is by investing. Whether it’s in stocks, bonds, real estate, or precious metals, get invested in something.
Asset prices are rising from inflation. As long as the government gets deeper and deeper in debt, this inflation will continue. Investors know this, and buy assets to keep their wealth from being destroyed. Others aren’t so lucky.
The worst victims of inflation are those who don’t participate.
8. Stocks over bonds, but don’t forget about bonds
Stocks are historically better investments than bonds. For 20 year olds with a long term horizon, stocks are the best investments to grow their capital.
You could put your money under a mattress, where it will make nothing.
You could put your money in a CD, where it will make peanuts.
You could put your money in a T-Bill, which with today’s rates is still peanuts.
You could put your money in bonds, which gives decent returns.
You could put your money in stocks, which give you part ownership in a business. Pick successful businesses, and you will have access to a fantastic cash flow.
Stocks generally outperform bonds. Capital gains and dividends make for great returns, which often outpace bond payments in most successful businesses. History tells us stocks are better than bonds. Common sense shows that stocks have higher upside.
Especially in the long term.
You should have a good portion of your portfolio in stocks. But you should also have some in bonds. You need something to provide steady income even during recessions, and bonds do that.
A good exposure to bonds will give you more consistent returns during the worst times of economic crisis. Even for the young investors, bonds are important too.
So remember, stocks over bonds… but don’t forget about bonds.
9. Cash is King
If you truly want to get wealthy, investing is only part of the game. You must work equally as hard to increase your income.
Investing is only part of the equation. You need money to make money.
The truth is investing alone won’t make you a millionaire. You have to have an adequate income and be invested in safe securities.
Increasing your income is the only way to accelerate the process to wealth.
Why do you think most of the wealthy are entrepreneurs and small business owners? Because when you give yourself the chance to earn more, you can earn more. You give yourself the ability to leverage skills and hard work to make more money.
The type of economy in this country only gives you more opportunity to succeed this way. With all the technology unlocking vast opportunities for budding entrepreneurs, there’s really no excuse for those who want it bad enough.
Cash is king. The best way to get more cash into your life is to find ways to increase your income stream.
Then, you can make your money work for you.
10. Your mortgage is NOT an investment
This is a common misconception. Many smart people believe that their home is an investment. They see their home value go up, and think that this makes them more wealthy.
Some even use their increasing home value as a creative way to get into more debt. They “tap into their equity”, basically borrowing against their home. They assume their home will keep going up in value, like it has in the past.
Like we saw in the housing crash of 2008, this isn’t always true. The common person thinks that an increasing home value makes him or her richer.
Unfortunately, it does not. And it’s easy to explain too.
Most real estate in America is highly correlated. What this means is that when home values move up or down, they tend to move together.
So what does this have to do with your primary home being an investment or not? Well a lot, actually. Because real estate is highly correlated, when your home value is rising that means your neighbor’s is likely rising as well. And so is the rest of the country’s.
While your home may be worth more, so is all the other real estate around you.
You won’t get the money from your increasing home value until you sell it. Once you sell the home, well you have to move somewhere else.
Since your home value has gone up, most likely other homes have also. Selling your home means you probably will buy a new home somewhere else.
And so all the increase in home value you’ve seen will be negated by the new home’s increase also.
I hope you can see the logic in this.
Sure in some cases, a home owner will be able to “buy low, sell high” with real estate. Maybe that person knows a lot about real estate, and will want to move into a new home in a lesser valued area.
Maybe that person will profit from a situation like this. But most people won’t. The average person won’t. And how often will a person move anyways?
It sure doesn’t make sense to keep moving in order to capitalize on changing real estate prices…
This is why your primary residence is not an investment. That’s why just because it has increased in value, this doesn’t make you more wealthy.
Don’t fall into the same trap that so many others did in 2007 and before.
History teaches some nasty lessons, but only to those who listen.
11. Don’t believe everyone
I hope this one is obvious. Wall Street is not filled with people who have your best interests in mind.
As sad as it is, most people in the investing world have something to sell you.
You have to be able to filter out the people who are truly trying to help you from those who just want you to buy their products.
Take someone who sells survival supplies for example.
What kind of information would that person give you? Well it would probably be very biased, towards things that make you scared. Specifically scared of an apocalypse.
There’s a ton of doom and gloom-ers out there that are ready to make a quick buck off you. The information they will share to you is only in their best interests.
Why? Because it scares you. And makes you buy stuff.
The preppers wouldn’t be buying survival supplies unless they thought there was a good chance they would need it. And so the people who sell this stuff reinforce that fear.
It’s not just limited to the apocalypse industry.
Plenty of Wall Street sharks are out there pushing their products. Don’t get me wrong, there are plenty of good guys too.
But you have to know who is giving you biased, and who is giving you unbiased information. Once you understand what that person’s motives are, you can start to decide whether to trust them or not.
12. Listen to books not crooks
This one kind of goes with what I said in #11. Want to know a little secret about books? I’ll tell you.
If you want to find the best books in investing, look for the oldest ones.
Why? The oldest books are the ones who have stood the test of time. A bestselling book that was a bestseller 50 years ago is much more likely to be helpful than a book that just recently became a bestseller.
People wouldn’t be recommending that book unless it really helped them. The fact that it has been so popular for so many decades means that the principles in that book are timeless.
A good book like this will have helped people before, and had continued helping them all along. That’s the only reason why it is still a bestseller.
When you buy a book that is a recent bestseller, you take a chance on whether the information is really quality or not.
It should be obvious why you should listen to books not crooks.
In fact, as a person who has been intensely studying everything I can about investing, I’ll say that books have been my #1 best resource. By far.
There’s too much junk out there about investing. There’s also so much great information in books. Yet too many people are too impatient to realize this.
13. Respect history, it always repeats itself
Read any ancient story about the fall of man or the fall of empires. They’ve all happened the same way. Really nothing has changed, except the characters.
Human beings are just very predictable.
The way we treat each other has been the same throughout the span of time. Human relations are timeless.
We all share the same vices, struggles, virtues, and emotions. Everyone from the ancient Roman times to the present has experienced the same human condition.
Nothing is really new in this world. Style is stolen from previous generations. Same with economies and governments. It’s all been done before, you can read about it.
Perhaps one of the most groundbreaking things I’ve ever learned about investing was that is follows a predictable boom and bust cycle. Predictable in the sense that you know it will always happen, you just don’t know when.
Don’t be fooled into thinking that stock market crashes are a new thing.
Markets have been crashing since the beginning of time. They form a bubble and then they crash. It’s just a part of life.
Maybe you’ve heard about the tulip bubble in the 1600s. Maybe you haven’t. But whether you have or haven’t doesn’t change the fact that these events happen over and over and over again.
It’s because man is inherently fearful and greedy. There’s nothing you can do to change that.
Mistakes in money have been made before. There is a way to learn those mistakes instead of making them. But you have to put in the effort.
14. You are buying a business, not a stock
This point can really get lost in the age we live in. It seems like Wall Street has turned into a game, with tickers flying around on CNBC, reminding us of SportsCenter.
They make us feel like you have to be connected at all times, as if you need to know the latest market price every second of the day.
But really smart investors like Warren Buffett know that this is a fool’s game. A guy like Warren Buffett buys businesses for the long term.
Notice the wording I used there. Not stocks, but businesses.
Because that’s really what you are doing. A stock is nothing more than a piece of ownership in a business.
So when you are evaluating possible investments, be sure to evaluate your purchase as if you were buying the whole business upright.
It shouldn’t matter to you what happens in the next month or two, because you are going to be part owner of this business for a long foreseeable future.
If you want to learn how to evaluate a business, look to value investing. I’ve referenced it all over my site, and have recommended some great books about it too.
Don’t delay, get started now.
15. Dividends are your best friend
Dividends are the name of the game in investing. It’s how you– as an investor– get paid.
I like to use this analogy because it really makes the importance of dividends clear. Consider the real estate investor. Buy and home, maybe fix it up. What next? Well you can try to flip it but a smart investor isn’t depending on the flip.
The smart investor will rent out the property in order to build a cash stream. Like I said in #9 cash is king, increasing the cash stream is so important.
So the investor will rent the property, and collect rent money.
This is the payment that the owner gets. It’s no different with stocks. Dividends are the payment that the owners get. It is their rent.
Yet too many beginner investors will jump into stocks that don’t pay dividends, trying to flip them for a quick profit. A model like this is unsustainable, and can’t be consistently successful over a long period of time.
That’s why a good dividend is important.
16. Buying good stocks is no different than thrift shop buying
Sure, you can go out and splurge on the Louis Vuittons and Guccis of the stock market– like Netflix, Twitter, and Tesla.
You’ll have the most trendy names, if that’s more important to you. But at the end of the day, when you look back at your wallet don’t be surprised at the results.
When you pay for expensive brand names that’s what you get, expensive. In the game of building wealth, expensive never wins.
Instead you should be buying stocks that are discounted. These stocks, as long as they are quality companies with solid balance sheets, are the ones who are most likely to gain value over time.
This concept seems so simple, but it’s so true. Read The Intelligent Investor to get a good understanding of what I mean.
17. Losing money hurts, be sure you are limiting it
Did you know that when you lose 50% in an investment, it takes you to get a 100% gain just to break even?
That is just how the numbers work out, nothing you can do about it.
You really can’t understand how much it hurts to lose money until it happens to you. You need to take precautions to protect yourself.
Again, implement trailing stops on your positions. Make sure you’ve mastered the end game strategy of when to sell.
Crawling back from a losing pit is much harder than avoiding it.
So just avoid it.
Letting greed and carelessness take over is the best way to ensure that you will lose massive amounts of money.
18. There’s no magic pill, stop looking for it
Everybody wants the shortcut to everything. Weight loss, riches, love. Anyone with a bit of wisdom knows that this stuff just doesn’t happen.
Grand stories of magic pill solutions are just fairy tales. Fairy tales and marketing hype.
If you can do yourself one favor, get rid of your lottery mindset. Stop thinking that there’s magical gold you can just dig for and find. Stop depending on luck.
This kind of hope is the one kind of hope that I don’t want you to have. This type of hope is destructive. It takes away all of your personal responsibility.
It seems that our country is heading towards this pipe dream as a legitimate plan. I wish this wasn’t the case but it seems to be true. An increasing number of Americans are eager for handouts and magic pills.
This is a victim mentality. All it will get you is broke.
19. Save, don’t spend
Nobody likes to hear this. A bit of good ol’ fashioned advice.
Money expert Dave Ramsey can attest to this. Listen to his podcast for some ideas on how you can spend less and save more.
The guy knows a thing or two about getting people to wealth. He’s helped millions of people get out of debt and onto financial freedom.
You can learn all you can in the world about investing but until you get your financial house in order, you’ll never make progress towards getting wealthy.
Wealth is half offense and half defense. Investing is the offense and personal finance is the defense.
Good defense wins championships.
20. Discipline is more important than talent
The stock market is a great equalizer. It doesn’t matter how good looking you are, how smart you are, who your parents are, how athletic you are, or how creative you are.
When I own the same stock as you do, I have the exact same chance to make the same return as you do. Wealthy investors and average investors are subject to the same returns. Different overall amounts sure, but same percentages.
In this highly competitive world, there is a game where the winners aren’t pre-selected. They work hard, research hard, and are rewarded handsomely. You don’t need Wall Street’s permission to join in the profits.
You can do anything you set your mind to.