Three Steps to Making the Most of Your Investments

Here are what I consider to be the few, key steps to get the most out of your savings and investments. 

While many people seem intimidated by investing and don’t know where to begin or what to do, being a successful investor is not that complicated (just like building wealth isn't that complicated). In the end it comes down to three basic (but important) steps as follows:

1. Save as much as you can.  From the time you get your first job, start living on less than you earn.  As your income increases, continue to keep your expenses low (I call this process increasing your surplus -- growing the difference between what you make and what you spend.)  Obviously, the more you can invest when you are young, the more you will have saved at retirement. And the sooner you save, the better (more on that in a minute.)  This sounds basic, but there are many people who graduate from college and immediately start to spend like drunken sailors. Don't do this!

2. Save as long as you can.  All three of the main investment variables (1) how much is invested, 2) how long it's invested, and 3) the return rate) are important to investing success. However, the one that has the most impact on your results as an investor is how long you invest. As such, the younger you are when you start saving and investing, the larger your nest egg at retirement. The key factor that makes this so: the power of compound interest -- your savings starts to earn money on itself. And the sooner you get this process started, the better.

If you are only beginning to invest in middle age, how much you invest grows in importance because you will need more money to play catch up. That said, how long you invest is a vital success factor for any investor at any age.

3. Get a good return rate. My favorite way to get a good return rate is to use index funds.  They deliver better returns than most actively managed funds after expenses simply because they are less expensive than most other alternatives. Furthermore, they are easy to manage (not much time required) and they allow you to diversify your holdings.

Notice how I didn't say "get a GREAT return rate"? Why not? Wouldn't getting a great rate beat getting a good one? Yes, it would. But the fact is, the vast majority of people (probably 99%+) are unable to invest to consistently beat the returns generated by index funds. In fact, even the most highly educated investing "professionals" with almost endless time and financial resources at their disposal can't regularly beat the performance of index funds. So you think you can? Nope. Neither can I. Thankfully, index funds provide us all with a great alternative.

In the end, successful investing comes down to three simple steps—saving as much as you can to invest, saving as early as you can, and getting a good rate of return.  Do these three and you will be well on your way to making the most of the money you invest.

Readers, any other tips you would give new investors to maximize their investments?

Comments

[MITM]

I'm 34 and have net assets of about $280k. We live super frugally and are saving, investing and paying down debt.

That being said, I feel completely late to the world of investing, so it's really hard to realize that time has such a big impact and I should have started 15 years ago. It's like I missed the bus and there's no going back.

Anyway, sorry to be a downer. It's just honestly how it seems sometimes.

The upside is that it really motivates me to teach my kids better money management lessons than I was taught.

[elb]

Just get started! If you had gotten started at the beginning of the year, you'd be up double digits already. Bull has plenty of room to run for the next few years.

[JNEW]

@ MITM

I am quite a bit older than you. Trust me, you have NOT missed the boat. At 34, you have 30+ years until you are eligible for social security !

Keep reading this blog and others like it--educate yourself and--most importantly, live below your means, save and invest.

If you max out your 401K ( $17,500) starting now--and again and again for the next 30 years until you are 64 years old-- (and even if you only get a 5% return)--- your balance will be $1.2 MILLION. That is hardly "missing" the boat.

Start today. Educate yourself. End up a Millionaire.

Good luck.

[JZ]

@ MITM -

Some simple advice to getting started with anything:

The best time to plan an oak tree is 15 years ago. The 2nd best time is today.

[Old Limey]

Even for people that have poor mathematical skills it is important to understand the power of compounding money.
There is a well known rule called "The rule of 72". It basically says that if you divide 72 by the interest rate on an investment, then the answer is the number of years it takes for that investment to double.

Ex: At 6% return it's 12 years, at 8% it's 9 years, at 9% it's 8 years.

However taking a loss really upsets the "power of compounding" which is why they can be devastating. This is the reason why I learned quickly that to "Buy and Hold" an investment is not the best way to compound money because "Buy and Hold" by it's very nature implies holding an investment during a downtown. There is a term called "Maximum Drawdown" which is the worst drawdown that an investment sustained during a particular period. When your investment is setting at the lowest point since you bought you are experience the maximum drawdown and you have no idea whether it will continue to go down or whether it will start going up.

This is why I always bought investments that had a history of low volatility and I studied their charts daily and set a price at which I would sell immediately. I would then either buy another investment that had a better chart or I would stay out of the downtrending investment until it resumed an uptrend. There are many analytical methods for performing these analyses and I put in my time to become very proficient in using them. I have to admot however that this takes a lot of time and I just didn't have that kind of time while I was working so I made the majority of my money by investing wisely after I had retired. The two terms that describe my techniques are "Fund Selection" and "Market Timing".