The Number 1 Bullet Proof Investment Strategy To Start Early
One of my relatives, let's call him Ken, asked me for advice on how to invest in stocks in last year Christmas party. I was not too sure about his age but he was definitely in mid 40. Ken was not the type of person who was interested in investing. Otherwise he would have started much earlier and wouldn't have asked me such elementary question on how to start investing at such age. Anyway, it's better to start late and then too late. So I was very eager to share with him my experiences (yes I do get excited about investing) with him about fundamental, technical, economic analysis and so forth. After a long conversation, Ken concluded that he will "study until he understand everything" then he will dive in. It was a positive conclusion but to my opinion is that one will NEVER understand everything about investment. So Ken will never start investing if he is actually going to go according to his conclusion.
Of course I don't think Ken meant literally "everything" but "to a sufficient level of study". However, the conversation does makes me think hard about why people do not start investing early. Even at such age of mid 40, he or she will still have to learn about investing! How can I help them and make them to start early?
There are obviously many reason why one does not start investing early:
- Lacking of knowledge
- Fear of losing
- The return seems insignificant to immediate livestyle
- Does not think about long term
- Not interested in money
I believe there is nothing I can do to help those who has no long term vision or simply have no interest in money. They are simply not motivated. For those who lack the knowledge, it would be a easy fix. Just point them to some books or training classes to get them to level up. For me, the most interesting case is "Fear of losing".
Fear of losing is an emotional barrier. If a person simply cannot handle losing due to stress, no matter how much hard knowledge they study, they will be unable to start executing. If fear of losing is the main reason, the solution to help the person to start investing early would be to keep the investment amount small and keep the investment goal small! Keep it simple and easy. Just invest in something rather simple and boring, say S&P500 index ETF (Symbol SPY), with an investment amount small. Even in the slim chance that S&P500 will drop to zero, which means we lose 100% of our investing amount, our lifestyle won't be impacted!
For me, investing in the S&P500 ETF (Exchange Traded Fund), means my investment is diversified to 500 largest companies on US stock market. It also means that I don't have to adjust my portfolio as companies with poor performance will be kicked out and new strong companies will be added into the S&P 500 index all the time. So some professional executives working in the Standard & Poor will be working for you to pick good companies to invest into. I can be lazy and don't have to spend time analysing each and every companies.
Since S&P500 is a very good proxy of the overall US Economy, investing in S&P500 means that you will ride along with the US Economic growth. Since it's unlikely that US economy will be down for long term, given enough time you will most certain to realise certain gains from your long term holding.
If US$200 is what you can afford to be locked up every month in investing, then invest whatever number of shares of SPY that amount to around US$200 every month. The most important thing is that you don't need the money for near term (say 2 or 3 years). This method is actually called "Dollar Cost Averaging".
Since there will be time the ETF market price will go up and down all the time, dollar cost averaging strategy let you buy more shares (to be more aggressive and buy at bargain) when the market is down and avoid risk (buy fewer shares when the price is high). Based on the assumption that the market will go up in long run, your aggressive investing in the down months will mean extra returns for you in long run. If you do this consistently over long period of time, you chance of having sizeable gain will be rather high. This is of course base on the assumption that you investing in something that will likely to grow in long run and not some money losing speculative stocks.
For me this strategy is number one strategy for someone to start investing early in their life even if they don't know much about investing. It has so many benefits:
- It is simple to execute.
- It does not require the investor to over invest and take on too much risk.
- It does not require one to be watching and analysing the market all the time.
- It's flexible too if you miss out one or two month not able to invest due to unexpected expenses.
- Best of all, it let the investor to start early and not to waste time to learn forever.
To me, investing in SPY using dollar cost averaging is like investing in the economy (not specific companies). As long as the economy is growing, some profit will eventually seep through the system and eventually make it to the earning (profit) of these companies. Unless you believe US economy will go down for 10 years and never bound back, chances are that you will make good return over long period of time. This strategy form the foundation for the young investor for future, more sophisticated investment strategies as they personally grow and learn.