From prediction markets to meme stocks to punting on the next momentum trade, so much of the noise about achieving wealth is the opposite of what we’d call wise investing. At least for ordinary people like you and me.
Actually, scratch that – the same goes for many of the professionals, too.
Consider the popular perception of coked-up City boys staring at banks of flashing monitors while simultaneously screaming into two phones and placing bets big enough to sink the economy – or even to blow up their $45bn AI fund.
That’s not investing. It’s speculation – or Hollywood myth – and it has little to nothing to do with how you build wealth.
Most rabid share traders fail to beat their do-less rivals, anyway.
A word to the wise
By contrast, wise investing is a long-term plan whereby you devote part of your income to buying a diversified portfolio of assets.
You choose assets that have a history of climbing in value (eventually, not constantly) and in some cases that also pay you a stream of income.
If you keep at it, this growing pot of capital and income together replaces your wages, pays your bills, and enables you to live off your assets for the rest of your life.
One of the little known truths of investing is that complexity does not equal success. You can achieve great results at a low cost by keeping things simple.
Monevator’s favourite strategy of passive investing is founded on that principle.
Know nothing experts
You should not feel that a lack of time, interest, or financial schooling is an obstacle to managing your own investment plan.
This is another of the counter-intuitive realities of investing. It seems complicated because the financial industry excels at conjuring up complexity. But a lot of the apparent ‘science’ is smoke-and-mirrors designed to convince you that you’re too dumb to understand it and should hire a pro for a fat fee instead.
Don’t fall for this.
To bust just a few of the myths, here are a few things that wise investing does not involve:
- You do not have to worry about how many points the FTSE 100 moved yesterday or whether it’s time to sell gold.
- You don’t have to bury yourself in analysts’ reports.
- You don’t need to understand the inner workings of the economy.
- You don’t need insider tips or access to secret trading strategies.
- You avoid the ‘experts’ who reveal ‘The six secret biotech stocks they don’t want you to know about’ or want to flog you their options trading YouTube course. These are BS merchants.
- You definitely don’t trade on apps that bait you with get-rich-quick opportunities in cryptocurrencies or whatever else they think they can sell you.
You don’t need any of that to be a wise investor.
Instead you do this
Start with your financial goals.
Perhaps you’d like to retire early (or at all), send the kids to uni, or buy a secret volcano base. Knowing the what, when and why enables you to estimate the four critical parts of your plan:
- How much money you need
- How long you need to invest
- How much money you need to put in
- How much risk you need to take
You then pick a portfolio of investment funds that invest in the asset classes best suited to meeting your investment goals.
Index trackers to the rescue
There are many different funds but as wise investors we invest in the type called index trackers.
Index tracker funds work because they are a brilliant way to diversify your wealth across the global asset classes at a super low cost to you.
You invest your cash into low-cost funds because that leaves more of your wealth in your pocket.
One of the most important decisions you’ll make is your split between equities and bonds. (Though we’d also suggest adding a few other diversifiers like gold, cash, and commodities in time, too.)
You put enough in equities to power you towards your goal.
You put enough in bonds to stop yourself freaking out when your equities tumble.
To buy and hold your index tracker funds, you’ll need an online investing account. Your account will be with a specialist fund retailer known as a platform or online broker. Your regular contributions can be automatically channelled into buying your chosen investments via this platform.
Choose the best platform to achieve your aims. Not the one with the sexiest adverts!
Be sure to maximise your returns by using legitimate tax shelters to protect every pound you can.
You then leave your portfolio alone and let your assets rise like buns in the oven. Stay the course and you will achieve your financial goals. Just like I did.
The sooner you start, the less money you’ll need to throw at your goals later on. That’s thanks to the snowball effect of compound interest.
Don’t panic
You must never sell in a panic. That’s a surefire way to torpedo your future with locked-in losses. You avoid that danger by only taking as much risk as you can handle.
To play safer, you mostly own fewer equities and more bonds. (Do note that bonds are not risk-free, however. Rather, they are usually ‘differently risky’ to equities.)
Don’t meddle with your plan on account of media scares, political crises, or fears about the ‘state of the economy’. You will come to realise the world is always said to be going to hell in a handbasket:
- Recessions and depressions always lurk around the corner
- Some region or other is always about to blow up
- War, Famine, Pestilence and Death are always due in town
- Someone’s always got a chart that proves we’re about to run out of food, water, oil, or ice cream cones…
And yet somehow civilisation survives.
So you should usually ignore the media, social media, your friends, and your own reptilian brain.
You can expect the stock market to fall often – roughly one year in three on average. No big deal. It’s always bounced back eventually, although it may not look like it at the time.
Ideally you’ll buy equities when they’re going cheap and then sell them later, when the herd has come out of hiding and is bidding top dollar. Luckily, a clever but simple investment technique called rebalancing helps you to do just that.
That’s easy to say but not easy to do. It takes courage to buy unpopular assets when the world is throwing them overboard.
But doing it by automatically following rules can help take the emotion out of the equation.
Don’t believe the hype
Whatever happens, don’t try to pick winners or losers. Accept that you do not know how events will play out and neither do the so-called experts.
Don’t get sucked into believing some guru can predict whether Bitcoin will make you a killing next year, or that an aging population makes drugs companies a sure bet.
If forecasters were better than astrologers then they’d make their fortune by acting exclusively on their secrets – not by sharing them on the Internet
Understand that it’s very hard to reap outsized returns from future trends, even when you back the right one. The big players know everything you do – and usually long before you do. They’ve already bid up the price before you bought in, curtailing your profits unless you catch a lucky break.
The passive investing mindset
The dos and don’ts we’ve just waltzed through are a quick intro to the principles of a strategy called passive investing. We believe this is the most effective strategy for most people.
Passive investing keeps things simple and lets you get on with the rest of your life. But it also gets results because it’s based on sound financial theory and investing habits that enable you to sidestep the conflicts of interest that riddle the financial services industry.
Once you understand how passive investing works, you’ll be equipped to set up and manage your own investments with minimal impact on your time.
This is what we call wise investing. Try it and give it some time and we think you’ll agree.
Take it steady,
The Accumulator
