100 Rules of Success: Investing for Beginners

What follows is the continuation of success habits that will become part of a book I’m writing, “100 Rules of Success”. 

Success in Investing

Investing does not have to be complicated.  If you’re willing to establish and follow a handful of proven ‘rules of investing’ you can create a successful investment program.

RULE:  Avoid the Cardinal Sin of Investing.  The cardinal sin in investing is this: Never put yourself in a position where you must sell stocks in order to raise money for needed cash, for emergencies or otherwise.  The stock market is inherently unpredictable and Murphy’s Law has a way of raising its head at just the wrong time.  I’ve seen it time and time again…someone is making good progress on building their investment program and something they didn’t expect happens that requires immediate cash.  They have no savings, little cash reserves and nowhere to turn so they cash in their 401k, or sell their personal stocks…just after the stock market has made a significant correction.  There are only two solutions to this:

  1. Assume there is an unexpected emergency in the near future that will require significant cash.
  2. Make sure you have a ready source of cash for emergencies. Typically, this will be as simple as a savings money market account at your bank or it could be as complex as a Home Equity Line of Credit (HELOC) that you can tap as a bridge for cash that allows you time to solve your cash problems.  How much should be in your reserve account should be tailored to your personal facts.  One rule of thumb often used is three to six months of your average monthly bills.  If you give it some thought, my guess is you’ll get a ‘feel’ for the right number for you and your family.

RULE:  Don’t Believe you can ‘Time’ the Stock Market.  You cannot imagine how many times I’ve had people (and a small handful of clients) tell me they sold out of stocks or plan to sell out of stocks because they sense a market correction is imminent.  Here’s the problem.  You don’t have to make one call correctly; you have to make two.  If you decide to exit the stock market, and let’s say to you that call was right; you’ll also eventually have to decide when to get back in the market.

Here’s a good case example.  The new husband of our client said he felt the stock market was due for a significant drop and wanted to sell all stocks.  We responded that we felt that action was ill-advised and said that if they followed through with the decision to sell, they would also be responsible for telling us when to re-enter the stock market.  At their request, we sold the majority of their stocks and the market continued to move up over thirty percent.  They found themselves ‘stuck’…realizing they had missed a significant opportunity for returns (including dividend income) that they desperately needed but were unwilling to make the call to re-enter the stock market out of fear they’d make an even bigger mistake.

I’ve been in the investment business for over thirty years and have never met a single person who has successfully used stock market timing as an investment strategy.

RULE:  The First Rule of Investing: “Go Ahead, Start Investing”.  A lot of people don’t start an investment program because they know that they don’t know anything about investing.  The single best way to learn how to invest is to actually go ahead and invest some money.  Here are two simple approaches for beginners:

  1. S&P 500 Index Fund. One simple way to get started is to begin a monthly automatic investment program using an S&P 500 Index fund.  With an S&P 500 Index fund, you own a piece of 500 of the largest companies in America.  This creates two advantages.  The first is that you have instant diversification since no one company will represent more than about 4% of your portfolio.  The second advantage is that these type funds are very inexpensive to own.  For example, Charles Schwab & Co. has a series of index funds with no minimum investment and minimal fees (0.03%).

Invest in companies you know.  Again, what’s important is to get started investing since there’s nothing like having a little skin in the game to get you paying attention.  Invest in a handful of companies where you like to do business.  Examples might be Apple, Home Depot, McDonald’s and Verizon.  It’s fun to follow your favorite companies and the great news is you can buy them with minimum trading costs using discount brokers such as Charles Schwab ($4.95 per trade).