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It can be easy to feel intimidated by the wide world of investing. There seems to be so much to learn. But I can summarize it into five points.
Number one: invest in low-cost index funds. When you invest in a low-cost index fund, you are buying a broad, diversified chunk of lots of different stocks or bonds. That index fund is designed to perform as well or as poorly as the underlying index that it represents. So for example, if you buy a total US stock market index fund, that fund is designed to reflect the performance of the entire total US stock market. No better and no worse. You’re avoiding the strain, the risk that comes with having to make choices about individual stocks. So you’re not trying to beat the market — you’re just trying to do as well as the overall market. Over a multi-decade period, the market, historically, consistently, always goes up.
Number two is to buy in a diversified way. And what that means is that you want at least one index fund that represents the market in your home country. You want at least one index fund that represents the international equities arena or stock arena. And then you want at least one index fund that represents the bond market in your home country. So at a minimum, one domestic stock index fund, one domestic bond index fund, and one international stock index fund. That would be a minimum level of diversification.
Step three is to hold those index funds in some type of tax-advantaged account if possible. And that might include a retirement account that you get through your workplace. It might include a Health Savings Account that allows you to keep that money in investments. If it makes sense for your life, it might include a taxable brokerage account that is not tax-advantaged. But if you are at a point in your life where you value flexibility over tax optimization, then that might be the right choice for you, at least for a portion of your portfolio. And so holding these investments in the right types of accounts, that’s the third step.
The fourth step is to keep on keeping on. This is not a one-time thing. This is where that conversation about automation and habits, that’s where this really becomes important because a lot of times people get very excited about these topics. They’ll do it once, and then they’ll forget about it and never do it again. But if you can set up the right automations so that you’re automatically investing every month, or every quarter, or every paycheck, every periodic increment of time, that’s going to do a heck of a lot for you. And if you can build certain habits, like checking your savings balance, or checking your checking account balance, or checking your credit card statements, if you can build certain habits that allow you to monitor how your money is doing, not how your investments are performing, but how your money is doing, which is distinct, that’s part of this fourth step of just keep on keeping on. Make it part of your routine.
And then finally, the fifth and final step — and this is really internal — is to feel calm throughout this process. And what that means is that you should neither be too excited about the highs, nor too down about the lows. If you get to a point where your investments are doing really, really well, don’t feel too excited about it because what goes up often comes down. This is a roller coaster ride that we’re all going to be on for the rest of our lives. So trust in the process. Know that over the long term, over a multi-decade period, if you put the right habits in place, you are likely to do well.