Investing is an important step towards financial freedom. Even if you don’t want to be rich, you want financial freedom. Life gets better when you are in a position to not stress about money.

Many people delay investing because they think it is complicated. Nothing coupled be further from the truth. The basics of investing are simple enough for everyone to understand.

Before You Invest

It is important to build a strong foundation before you start investing. These 3 steps will make investing easier in the long run.

1. Spend Less Than You Earn

I know this is a very basic concept, but it is essential. The goal of investing is to win with money. You will never win with money if you spend more than you earn.

There is no reason to even think about investing until you prove that you can consistently live within your mean.

2. Get Out of Debt

If you have credit card debt or any other high-interest debt, tackle that first.

The average interest rate on a credit card is around 16%. That makes paying off a credit card similar to a 16% return on investment. A return that big is very hard to come by.

3. Emergency Fund

Before you start investing, it is a great idea to have an emergency fund with at least 3–6 months of expenses. If you are exceptionally risk-averse, you can make your emergency fund bigger.

There are two main goals of an emergency fund.

• Make financial emergencies feel more like minor inconveniences.
• Help you sleep better at night.

The safety of an emergency fund will make the ups and downs of investing easier to tolerate.

Investing Principles

Having a set of core principles makes investing a lot easier. If you have core principles that you follow, every decision becomes easier.

If a decision goes against one of your principles, don’t do it. If the decision follows all of your principles, go for it.

1. Invest for the Long Term

 

“We have long felt that the only value of stock forecasters is to make fortune-tellers look good.”
Warren Buffett

There is a reason most financial experts warn against timing the market. It simply does not work.

You will be much better off investing with a long-term mindset than trying to buy and sell regularly. Trying to time the best times to buy and sell is a waste of time and energy. It’s also very likely to cost you money in the long run.

2. Don’t Get Emotional

We all make bad decisions when we are emotional. No matter what you invest in, there will be ups and downs. You have to be ready for this fact so that a downturn doesn’t affect your decision making.

If you let big gains go to your head, you will get overconfident and careless. If you let big losses scare you, you will panic and make bad decisions. Only make important decisions when you are feeling neutral.

3. Investing Should Be Boring

 

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
Paul Samuelson

I know it sounds weird, but good investing should be boring.

4. Investing Should Not Take a Lot of Time

The best part of investing is that it allows you to generate passive income. Don’t make the mistake of spending so much time on your investments that it feels like a full-time job.

Read enough to stay informed about financial markets. But don’t overthink it.

Investment Strategy

Once you get the basics down, it’s time to start investing. Don’t worry. People make it seems a lot harder than it really is.

Diversification

 

“In choosing a portfolio, investors should seek broad diversification, Further, they should understand that equities - and corporate bonds also - involve risk; that markets inevitably fluctuate; and their portfolio should be such that they are willing to ride out the bad as well as the good times.”
Harry Markowitz

Diversification just means investing in many different things. Not having all your eggs in one basket, so to speak.

Having too much invested in one place is great if that investment works. But, it will completely wipe out your entire portfolio if the investment goes bad.

Diversification is important because for several reasons.

• It drastically reduces the risk of losing everything.
• It gives you more opportunities for positive returns.
• It reduces volatility. (ups and downs)

Here are the three easiest ways to diversify.

1. Index Funds

Index funds are an investment that tracks a certain index. The most popular is the S&P 500. The S&P 500 is a collection of the top 500 companies in America.

An Index Fund that tracks the S&P is one of the most recommended investments because of its proven track record. Since it is made up of the top companies in the country, it increases as the economy grows.

It is also simple and great for diversification. One investment gets you a piece of 500 different companies.

2. Bond Funds

Bonds are loans to businesses. If you are heavily invested in stocks, adding bonds to your portfolio is a great move.

The only problem is that individual bonds are time-consuming to invest in.

A bond fund is much easier. A bond fund is a fund that owns many different bonds. It is basically an Index Fund with bonds instead of stocks.

3. REIT

The two things that have produced the most wealth in history are the stock market and real estate.

The problem is that real estate is a difficult investment for beginners. Investing in real estate takes a lot of start-up money and is very time-consuming.

REIT stands for Real Estate Investment Trust. A REIT is a trust that owns many different properties and pays out at least 90 % of its profits to the shareholders.

They are great because they allow you to get into real estate for little money without the hassle of being a landlord.

Dollar-Cost Averaging

Don’t worry. This is another one of those fancy investing words that are not as complicated as they sound.

Dollar-Cost Averaging is investing a set amount on a schedule. For example, investing 100 per month, every month. This means investing consistently, no matter what the market is doing.

There are two big advantages to this strategy.

Forced Savings

Returns are only one part of successful investing. Consistency is the other, more important, part. The longer you invest consistently, the more success you will have.

Dollar-Cost averaging forces you to be consistent.

Cheap During Downturns

When your investments go down, they are cheaper to buy. Investing when the market is low is essentially buying stocks at a discount.

Investing consistently will ensure that at least some of the time, you are investing at a discount.

Final Thoughts

Investing can be complicated, but it doesn’t have to be.

Master the basics outlined above. Then, you can get more complicated if you want.