The crazy, bizarre events of the last few years have had me scratching my head as I tried to figure out how to invest our money.
The older we get, the scarier these decisions become because we have less time to make up for our mistakes. And who has the time to keep up with each new crisis and every speech politicians make? Not to mention the volatility caused by high-frequency trading.
Barry Ritholtz’s article “Keep it simple, avoid the pitfalls” has good suggestions for simplifying investment decisions. These strategies help tame some of the emotions that are involved with investing money.
- Use passive investing versus active investing. In other words, instead of investing in individual stocks or hiring an active manager, use index ETFs (Exchange-Traded Funds). My post “Resources to Help Boomers Decide if ETFs are Right for Their Portfolios” details a list of reasons investors choose to use these securities. It suggests articles that give basic information about Exchange-Traded Funds and helpful websites.
- Diversify across asset classes and keep expenses low. You hear this advice all the time but it is important—and hard to follow. We all want to pile into to the latest hot investment as the price is rising.
- The suggestions of dollar cost averaging and “be mindful of valuation” seem to be contradictory but can be used in combination. I try to make myself add a little bit of exposure to an asset class that is underweighted in my portfolio as markets are dropping. I don’t try to buy at the very bottom since who knows when that will happen. I just figure, if a sector is down substantially, on average, I should be OK in five to seven years.
- A few suggestions are particularly important for beginning investors:
Avoid venture capital and private equity
“Most IPOs are a sucker play.”
“Avoid new financial products”
Really, do you think the big money is going to give us individual investors a good deal?! These complex products are meant to humble, confuse, and separate us from our money. Warren Buffet is right when he repeatedly says that he only buys what he understands.
I recommend Ritholtz’s easy-to-read article. “Keep it simple, avoid the pitfalls” The Big Picture