I started investing at the young age of 15. It took me over 10 years to truly learn how to invest. During those 10 years, I tried every investing “get rich quick” strategy there was: day trading, options, IPOs, futures, tech stocks, Jim Cramer tips, buy and hold. If there was an investment book written about the strategy, I probably tried it—and failed at it.
Because I had no investment philosophy. I was simply throwing darts at the board, hoping to hit the bull’s-eye.
Eventually, I started to go back and look at all my old trades, and I found something odd. If I would have just stuck with the investments I had originally made, I would have made a killing!
Essentially, anytime I made a change to my portfolio, I ended up making the wrong move. I should have just stayed with my original investments.
Because of my early investing mistakes, I was able to develop what I believe are the five keys to being a successful investor.
(1) Emotional Consistency
Most people come into our office and say something like this: “Matthew, I want to invest my money, but I don’t want to lose any of it.”
“That’s great,” I say. I then proceed to draw the following diagram on the whiteboard in our conference room.
The diagram shows that when measuring stock performance on a daily time period, performance is essentially a coin flip: 45% of the time it’s down, while 55% of the time it’s up.
Over a monthly time period, those numbers become 37% down and 63% up. Finally, over an annual time period, 25% of the time the stock market is negative, while 75% of the time it is positive.
That means that one in every four years, the stock market will experience a down year.
It also means that the longer you stay in the market, the higher probability you have, percentagewise, of making money and not losing it. However, there is a massive tradeoff: When the market is down, you cannot sell.
I’ll repeat that: When the market is down, you cannot sell. You must hold on to your investments and trust capitalism.
(2) Low Costs
Warning, this is going to be quite a controversial statement. In life (generally speaking), the more you pay for something, the better it is.
This principle can relate to clothes, cars, hotels, event tickets, and more. You name it, and I’ll bet you when comparing two similar items, the more expensive one is better quality or a better experience.
This rule holds true in almost every life situation except investing. When investing, we want to pay the lowest fees possible.
Why? Because when you are paying a high fee on an investment, the investment manager gets rich, not you.
Let’s say we have two investments: A and B. Both investments hold the same stocks, so the rate of return is the same. The only difference is the fee charged by the investment company.
With investment A, the fee is 2%, which means if it earns 10%, you take home 8%. With investment B, the fee is 0.20%, which means you take home 9.8%. That’s 1.8% more going into your pocket, not the investment manager’s!
(3) Stocks and Bonds
Most people who sit down with us have no clue what a stock or bond is. Some might have a general idea, but it really doesn’t pass my test of understanding.
What is a stock? A stock is ownership in a corporation. When you purchase stock, you automatically become a minority owner of that corporation. As an owner of the corporation, you get paid in earnings and dividends.
On the other hand, a bond is “loanership” in a corporation or government. If you purchase a bond, you are lending your money, and in return you get paid interest.
Stocks and bonds are critical components to your success as an investor.
Stocks are usually seen as high risk, high reward, while bonds are seen as low risk, low reward. In game terms, stocks are your offense, and bonds are your defense. You need both to win a championship.
When you put stocks and bonds together, you can create a killer portfolio that is unique to your risk tolerance and situation.
Almost every individual investor follows what I like to call the “neighbor” or “cocktail” party strategy.
It goes something like this: “I want to invest in company X because my neighbor told me he has made thousands (millions) investing in company X. He bought a new boat!”
This is not a strategy. In fact, it’s a surefire way to lose money.
Instead, you should follow the smart globally diversified investment strategy.
It’s a strategy based on a globally diversified portfolio of stocks and bonds. Inside that portfolio, you have your money invested all over the world, in 50-plus countries, 14,000-plus companies, and all for an extremely low cost.
Sounds great, right? But there’s one catch to this strategy.
Once you make this smart yet boring investment, you sit on your hands and never change it unless …
You need to rebalance! That is when you make a change to your portfolio.
What exactly does that mean?
Let’s say you have a portfolio of stocks and bonds. You have 60% of your money invested in stock funds and 40% invested in bond funds.
Over the years, your stock appreciates in price. You now have 65% of your money in stocks and 35% in bonds.
When this happens, you rebalance. You sell 5% of your stock and buy 5% in bonds. By rebalancing, you are selling high and buying low!
Rebalancing is very similar to getting the tires rotated on your car.
Investing is super easy—I just made it difficult on myself for many years. Now I follow my above rules, I sit back, and I compound my wealth. Hopefully, you will too.