Successful investing is, in part, about determining your own investing style. Invest like yourself — not like someone else.
One of the most important things you can do for your money, especially when it comes to your investment portfolio, is to know yourself.
As you consider your investing style, and put together a solid plan for your future money, it makes sense to understand your own situation, and how you react to market circumstances. You need to put together a strategy that works for you, so that you can avoid investing pitfalls that?can bring you down.
How Much Do You Know About Investing?
The first step to creating an investing style is to recognize how much you know about investing.
First, consider what you know about investing in general. Then, think about what you understand of different asset classes and individual investments. Warrent Buffett famously pointed out that you should invest in what you know.
If you understand the real estate market, and you get how things work in that area, it can make sense to invest in real estate. Whether you are buying distressed property or looking to create regular passive income with the help of a fourplex, you should understand what you're doing.
What you know should heavily influence your investing style. I don't like to get into the nitty-gritty of P/E ratios and other valuation techniques, so I'm not much into value investing in individual equities. I also don't have the interest or time to really get into technical analysis, so forex trading and day trading stocks are of little interest to me.
Instead, I'm a very?boring investor. I like low-cost index funds and index ETFs because they are easy to understand and they don't require a lot of maintenance. I also like dividend stocks (particularly dividend aristocrats) because, again, they are easy to understand and they provide you with the chance for reasonable growth and reinvestment. Hooray for DRIPs.
When developing your investing style, take into account what you know, and start there. You can always adjust your style later, after you've learned more. But if you don't know?anything about investing, a good place to start is with index funds and ETFs. You don't need a complex investing plan to get started. And you should start.
Where are You at Financially?
Don't forget that where you are at financially right now matters to your investing style. If you can't afford to lose a big chunk of money, don't invest aggressively in assets that are considered higher risk.
Your ability to invest also depends on how much capital you have available to you right now. Your investing style is very different if you have a windfall of $10,000, versus the reality that you might only have about $200 a month freed up to use for investing. When you have a small amount of money, dollar cost averaging can be a good way to start consistently building your wealth over time.
Start investing with as little as $25, and slowly build up the amount you put in over time. As you have access to more money, and more options, your investing style can change. For the most part, I stick with dollar cost averaging. However, I also like to have a bit of liquidity in reserve so that I can use a chunk of capital to purchase extra shares when the market drops.
Pay attention to your finances, and invest accordingly. However, as your situation changes, don't forget to adjust your investing style.
How Much Time and Effort Do You Want to Put In?
Finally, consider how much time and effort do you want to put in? If you are really interested in investing, and you have the time and energy for it, you can be a really hands-on investor.
However, many of us don't know where to start. And, even if we do, it can be a lot of work to actively manage your own portfolio. This is why my investing style is so boring and low-key. I don't have the desire to be that involved. Instead, I'm all about using Betterment to grow my retirement portfolio, and I like to use an automatic investment plan for my emergency fund, since it is in a taxable account.
My investing style is so incredibly boring that I have it running on automatic, and it generally does just fine for me. When you automate your investments, you need to make sure that you understand what you are getting into, and that you choose assets that don't need a lot of hands-on management. This is why I love Betterment, and why I love other automatic investment plans. I don't have to do anything but check in every few months and see how my portfolio is growing.
As you consider your own investing style, think about what matters to you, and how much you know. And remember that your investing style doesn't have to be static. Personal finance is just that –?personal. Stick with your own style, and tweak it as necessary. You'll be more likely to find success.
What's your investing style? What are your best investing tips?