Investing can be very simple or very complicated. You can just throw some money into a savings account and not worry about it. The concern here is that you may not keep up with inflation or you might not make as much of a return as you could. The stock market gives, in general, greater returns, but lacks the safety of a bank account. If you pick the wrong savings account, or decide to change savings accounts several times, you aren’t going to get much more than a headache. If you screw around like that in the stock market you could very well lose all of your money. There are a lot of ways to make and lose money in the stock market. The best ways to lose money have a lot of similar characteristics.
Don’t trade constantly
Better if you don’t trade at all. In fact, according to a study done by somebody or other, the people who did the best in the stock market are dead. When you trade you lose the commission, you also get hit with capital gains taxes when they apply. People in general seem to also trade at the exact moment it is worse for them. This makes some sense. In investing, you generally get paid the most when staying invested is the scariest. It’s hard to think of a scarier moment to invest, or stay invested, than early 2009. If you stayed invested then, and didn’t trade you have nearly tripled your money in about six and a half years. Folks who traded when they got scared would probably be pretty sad to hear that.
Don’t pay large fees
Stock market prices generally reflect an accurate estimation of the value of the companies they represent. Therefore, it probably doesn’t make a lot of sense to pay a mutual fund manager 1% per year (which is about 10% of your expected earnings) to decide what you invest in. You can get a much better deal by simply investing in an index fund which should generally charge less than 0.15%.
The easiest way to lose all of your money in the stock market is invest it all in one super-popular sure-fire stock. (Actually, that’s kind of a lie. The easiest way is invest everything in way out of the money options.) Diversification is protection against ignorance. It’s important to remember when diversifying your investments that they have to be actually different. It doesn’t do you a great deal of good to just invest in six different tiny natural gas companies. If the natural gas sector gets hit, all of your investments are in trouble. A really simple way to diversify would simply be to buy Vanguard Total World Stock Index (VTWSX). VTWSX is basically the easiest way to invest in every public company in the world. Boom! Instant diversification. You can acquire additional diversification by also buying some BND (a diversified bond fund).
Now you don’t suck
You can make a great deal of mistakes in the stock market and still come out okay if you follow these rules. Buy many different stocks or mutual funds with low fees and don’t trade them. This may not be the best possible investment plan, but its the simplest one that doesn’t suck.
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