Investment Advice

Once you max out your Roth IRA and 401k, you are going to need to save your money in other investments. That is where the stock market comes in. The market is volatile. Warren Buffett once said “you only find out who is swimming naked when the tide goes out” so here is a free pair of swim trunks:

  1. Invest in mutual funds with low fees. These are bundles of lots of stock so your risk is spread out. Your fees may look low, but if your mutual fund grows at 7% per year, than even a 1% fee is 14% of your earnings. You can thank John Bogle and Vanguard for low-fee mutual funds.

  2. Invest consistently over time - ideally, a little bit directly out of every paycheck. This will even out the volatility of the market and make sure that you are earning based on the growth of the economy and not on the undulations of uncertainty. In order to invest in the whole market, see number 1.

  3. Stocks and funds are sold as fractional quantities. This simplifies your investing greatly by allowing you to invest the same dollar amount every paycheck. Do so efficiently by following the advice of 1.

  4. The most common path to becoming a millionaire is living within your means and investing your savings for a long period of time, not by winning the lottery, becoming a celebrity, or any other get-rich-quick schemes. The most efficient way to save for most people is by following the advice of number 1.

  5. If you think that a certain industry is going to perform well in the next several years, it may be worth investing in that industry. (Think, defense contractors or tech companies or car companies) Do so by investing in a mutual fund of that industry, and see number 1.

  6. There is a theory that a large number of people bidding on the value of a company (by buying or selling their stock) will equalize at the true value of the company, like a crowd each submitting guesses for the weight of a cow. The problem is that you have no idea how to start valuing a company and your guess is biased by those of others, through the current price of the stock, which leads to market bubbles. Avoid hubris in your investing through number 1.

  7. The efficient market theory assumes that all information about a company or asset is already priced into it - and this means that only new information is valuable, but given the speed of the trade you can make (about three days) compared to hedge funds, see number 1.

  8. I once made $50 at a casino, but that doesn’t mean I bring my retirement savings on the floor. Just because a stock has performed well in the past does not mean it will do so again, and if a strategy has worked well in the past, it is more likely to be priced into the stock in the future (see number 5). Diversify your investments across the entire market to account for inefficient decision making, by following the advice of number 1.

  9. Unless you have a PhD in Astrophysics or Computer Science, you should not deign to think that you will be able to accurately predict the market and you will almost certainly make less between the inefficiency of your portfolio and the inefficiency of your fees than you would have if you had just bought into a mutual fund. If you do have either of those things, then apply to work at a hedge fund; they pay better than your current job. Therefore, see number 1.

  10. Don’t buy pharmaceuticals. What do you know that the MD/PhDs at the hedge funds don’t? Instead, see number 1.

  11. Buying a stock means you are risking the amount of money that you spend on that stock (that is the most you could lose if it goes to zero). Shorting a stock means that you are risking an infinite amount of money. (the more the stock increases, the more you lose, and there is not necessarily a cap on how much it can be worth) Avoid risking literally everything you own by following the advice of number 1.

  12. When someone tells you to invest in something, assume they are getting a cut of it. When your friend tells you to invest in something; smile, nod, and assume they don’t know what they are talking about. (after all, it is your money they are risking if you follow their advice) Avoid this complication through number 1.

  13. Sometimes it is worth buying a stock because it has sentimental value and you want to own a part of a company. Maybe you really like your employer and it is important to you to own a bit of your company. Maybe you really like Mickey Mouse, so you buy Disney. Maybe you really like cartoons, so you buy Disney. Maybe you really like theme parks, so you buy Disney. Maybe you really liked Iron Man, so you buy… Disney. This is fun, but it is not investing. Thanks to number 2, only new information matters, which you, by definition, do not have yet. To invest, see number 1.

  14. Despite a booming HGTV industry, flipping a house is really expensive. Unless you have the time and expertise to make the upgrades yourself, you will probably spend more on contractors and over-runs than you make in the increased value of the house. It is far less risky and more productive to invest in mutual funds, following the advice of number 1.