Most personal financial advice is limited to savings and debt payoff. After we paid off our debt, we looked around and asked, “What now?” What were we supposed to do now that our money was freed up from not having to make any debt payments? Should we just save it?
I used to think saving money was enough, and I didn’t invest for two reasons:
- I was cautious.
- I didn’t know where to start.
It’s good to have money in a savings account that is easily accessible, but if all of your money is sitting in a savings account earning three percent interest, it will be eaten up by inflation. Inflation is caused by the government’s increasing the money supply. When more dollars are created, the existing dollars have less buying power.
The “official statistic” for the Consumer Price Index (CPI) shows an increase of only two to three percent each year, but it’s been heavily modified. It doesn’t have to include basic needs like food or gas. It’s clear that inflation is really much higher when you see how the price of eggs and milk have gone up at the grocery store.
As we thought about saving for the future, we realized that we needed to learn how to invest those savings.
What We’ve Learned:
* Do your research and learn how to read a balance sheet. If you invest in individual stocks, read up on the annual report and all of the information available to you online. If you invest in mutual funds, know how the funds are allocated.
Example: After the tech bubble burst in 2001, one of the mutual funds in my 401(k) tanked. All I knew at the time was that it was called something like “Small Cap Growth”. I hadn’t looked at the prospectus to see that the fund was mainly invested in technology.
* Do not make investment decisions based on popular news from mainstream media. Do not go along with what everyone else is doing. By the time something reaches the six o’clock news, it’s too late. You need to be watching for future trends.
Example: In 2006 Yahoo highlighted an article about how silver was the hot investment. It had reached a record price, and my coworkers asked me about buying silver. Listen, when something reaches a record price, it’s too late to buy, it’s time to sell.
* Invest for growth, but also invest for income. We often think about making money by selling a stock at a higher price than you paid, but another strategy can work well too: invest in stocks that pay reliable dividends. When the stock price goes up or down, the companies continue to pay stockholders a steady divided amount.
Example: The stock price for Chevron stock has dropped from almost $105 down to $55 during the past year, and yet the dividend payment slowly increases every quarter. Those who are looking to buy and hold a stock can enjoy regular income payments. (The Simple Dollar has a more detailed explanation of investing for income.)
* Find an expert to learn from. Instead of looking for stock tips, gain an understanding of the bigger picture. Stay clear of anyone who wants to focus on only one area, whether it be in real estate, hedge funds, or any other niche. The investment market shifts in waves, and there is never an all-the-time, one-size-fits-all strategy.
Example: We’ve learned so much from Financial Sense. The weekend podcasts are long but full of insight and explanation. We spend a couple of hours a week studying and learning more, and the results are definitely worth it. (Note: This is my personal recommendation.)