One of the reasons people don't get involved with investing is because they make it more complex than it has to be.
One of the most reliable ways to build wealth over time is to invest. However, many people are intimidated by the idea of investing. How do you choose a good investment? And what happens if the market has problems? And, of course, the process of investing just seems complex sometimes. Between asset allocation and worries about how much to set aside, it's very easy to become discouraged.
The reality, though, is that you don't actually need to put together a complex portfolio. Investing can actually be fairly simple.
Simplify Your Investing Strategy
Before you start investing, whether it's in a retirement account?or?income portfolio, or for some other purpose, you need to figure out the?why behind your portfolio. What are you trying to accomplish? Creating a solid investment plan is about tailoring it to your goals. For most of us, goals don't necessarily coincide with a complex plan. Building wealth for the future doesn't need to be difficult or complicated. In fact, there are indications two of the most important factors in long-term success for investors are:
- Investing more. The more money you put in, the more you get out. You have to invest enough. Amount matters.
- Asset allocation. You need to consider your asset allocation — and it doesn't even have to be a complex asset allocation. For most of us, a basic asset allocation including stocks and bonds is sufficient.
As you can see, it's not about stock picking, or trying to “beat” the system. It's not about chasing the hottest new investment. It's about really think about what you want to accomplish, and then making a realistic plan to accomplish it.
When you simplify your investments, it is easier to get started. Investing in low-cost index funds and ETFs is one way to get started simply. You don't have to worry about choosing individual investments, and it's possible to diversify as much as you would like — even investing in commodities, real estate, and currencies if you are so inclined. These types of investments are easy to begin with, no matter what online broker you use, and it's possible to build a rather simple portfolio with them.
It's in Your Head
For many, the complexities of investing are in their heads. While there are complex financial instruments out there, the truth is that you don't need them. Yes, understanding options and futures can be difficult. However, you don't need to be a derivatives genius to start investing, and to build wealth. There are plenty of simple investments that are easy to understand — and just as easy to invest in.
Get out of the mind set that investing is difficult. It can actually be quite simple. You can start with a few bucks, and use dollar cost averaging to your advantage. You can boost your wealth, and improve your financial situation long-term with the help of investing. Open an online brokerage account, choose a couple of funds to get you off on the right foot, and get started. The important thing is to start. Once you are more comfortable you can, if you want, add more complexity to your investment portfolio.
Image source: Manu_H via Flickr
Nice post, Miranda. I read similar advice in one of Warren Buffett’s books. Just get an index fund! Thanks for the reminder. Investing should be simple.
I think the important thing is to get started, and index funds are among the easiest investments out there. Start with an all-market fund, and then do a little research and branch out a bit. But it doesn’t have to be complicated.
For a long time I kept putting off investing because I thought I had to learn more before starting out. But then I finally figured out that the most important thing was to take action and get started.
The average investor would be wise to just block out most of the noise coming from the financial industry and invest in simple index funds. Stay the course and over time you’ll be better off than most people who chase after one hot stock after the next.
That’s so true, Mike! Listening to the noise and the sensationalism will just have you chasing after the herd — and probably doing so a step behind.
Miranda:
Have you ever thought about researching and writing about the performance difference between active funds and index funds during the last decade? The period between 2000-2009 was a very rough period with 9/11, 2 wars, 2 bear markets and a bull market. I have often seen it referred to as the “lost decade”. What puzzles me is that the active stock funds I’m familar with did fine during that time period and continue to deliver. The index funds have only recently climbed into the black. It seems like the better active funds excel during down, flat, and volatile markets. The index funds do well only during raging bull markets but seem to flounder during bear markets and flat periods such as 2000-2009. What’s your take on this?