Doesn’t everyone want to make money in the stock market? Apparently not, see 10 Ways to Lose Money in the Stock Market. But, if you want to make money in the stock market, the deck is stacked for you
- Plan – to succeed. While you could just hope something good will happen to you, a plan helps you get what you want. Perfect plans you never start are useless, but a mediocre plan, consistently followed, works. I know people who invested faithfully in low return investments and retired self sufficient.
- Automate – your success. Trying to remember to save whatever is left over at the end of the month might mean never saving anything. If you automate your 401k contributions, stock options, IRA, new car fund, etc., then good things happen to you automatically. Don’t expend willpower and memory on something you can decide on one time.
- Take – your opportunities. If you get a 401k match you’d have to be awfully rich to afford to skip the free money. If you can buy your employer’s stock at a discount, why not do it and sell it once your gain is long term?
- Save – for yourself, not the credit card company. We all save, it’s just a question of whom we save for. Do you love your credit card company more than you love your family?
- Own – Don’t gamble. If you own a stock mutual fund, you own parts of many companies and your fair share of their profits. If you buy a fancy thing you can’t understand you probably bought a fancy lottery ticket.
- Avoid – Avoid needless expenses. Low cost mutual funds are the most likely to succeed (.05% expense is not unusual for index funds). The number you really care about is how much money you keep and funds with low turnover (e.g. index funds) minimize expensive short term capital gains. Reinvesting your dividends (often the default) also reduces taxes. If you use a Roth or conventional 401K or an IRA you protect yourself from taxes for years. Avoid experts who plan to beat the market (yes, monkeys throwing darts are better stock pickers). Avoid penalties by not cashing in your old 401K.
- Diversify – Grandma would tell you to not keep all your eggs in one basket. She’s right about stocks too. A diversified portfolio lowers your risk and increases your returns.
- Grow – Instead of using yours, or someone else’s psychic powers to time the market, just buy and hold, letting your investments grow in value. Remember how well changing lines at the grocery store works? Remember how long shortcuts can be?
- Rebalance – For example, if you start with 40% large cap index fund, 30% medium cap, and 30% bonds, then buy and sell once a year to get back to those levels. This is a way to make yourself buy low and sell high, the exact opposite of what most investors do.
- Improve – You’re not likely to do all of these things right out of the starting blocks. So what? Nobody does. just do one more of the above each year. Put half of each raise into your 401k.
Investing is like a marriage. If you contribute faithfully, over time the results will seem magical. If you ignore it…well, you won’t get much from it.
