The four secrets that will help you become a successful investor are:
Focus on Discipline
Why is gratitude critical for successful investing? When we are not grateful for what we have, we tend to covet what our friends, relatives, coworkers, and other people have. When we covet other people’s houses, trips, or clothes, we tend to take on more risk than we should, striving to get what they have.
What type of risk might we take on? We spend more than we make. We borrow on our credit cards to “live the lifestyle” and we seek to get rich quick with our investments.
Being grateful for what you already have allows you to control the amount of risk take with your investments. Gratitude will keep my younger readers from suffering from FOMO (i.e., fear of missing out), while it keeps my older readers from having to keep up with the Joneses.
"Not everything that can be counted counts, and not everything that counts can be counted." - Albert Einstein
Keeping your investment costs low is absolutely critical to your long term investing success.
Financial advisor and high cost mutual fund fees of only 2% reduce your long-term investing portfolio size by 50%!
This numerical truth is truly shocking, and the major reason smart investors instead buy low cost ETFs and or invest directly in stocks. To learn more about the impact of investment costs on your portfolio, see Investment Piece #3.
Why are we even investing to begin with? To simply get rich? Or worse, to get rich quick?? TheAnswerIs NO!
The real reason we should invest is to replace our income so that we can gain financial liberty, i.e., the ability to choose. We are buying the opportunity and challenge of free time.
Investing is really about income replacement, so you can get paid even when you are not working.
"We don’t have to be smarter than the rest. We have to be more disciplined than the rest." - Warren Buffett
So what exactly do you have to be disciplined about?
1) The money you have, or will set aside for long-term investing, whatever that amount is, needs to go untouched, so it can do its thing. See Investment Piece #1 and Investment Piece #8 to understand the potential. You must treat the money you decide to set aside for long-term investing on a weekly or monthly basis, like rent or a mortgage payment, i.e., never miss it! Only this time, you are paying yourself, not “the man”.
"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
2) If you don’t have any money available for long-term investing yet, learn how you can earn money to invest, (TheAnswerIs HERE) or save money to invest, (TheAnswerIs HERE). Don’t try to set aside too much, it will be too tough to stay away from it, what with student loans, contract jobs, the cost of rent, and one day a house, kids, and other responsibilities.
All you need to do to start to make a huge difference in your life is invest one hour’s pay per week.
3) When it is time to buy your Exchange-Traded Funds (ETFs) and/or stocks, restrict your investing to large, dividend-paying ETFs and stocks, to the exclusion of all of your friends’ "sure-thing” tips.
That's discipline – not that hard, eh? I'm not even going to ask you to exercise three times per week.
You are young, it’s not your fault. Actually it’s a huge ginormous advantage – don’t waste this one!!!
Don't allow yourself to fall into the Youth Trap, i.e., putting off investing today, because you will get to it tomorrow.
Time is a funny thing. Quite a paradox actually. A paradox that you must teach your brain to master! The value of time is quite different in life than it is in investing:
In life, when we are young, we have a lot of time left, so we don’t value each individual unit of time very highly. This is quite rational. Economics 101 students will recognize that a huge supply of an item (i.e., time), reduces the unit value of that item. As we age into our 40s, 50s and beyond, people say time becomes more valuable, because we obviously have less of it. Again this is rational.
But in investing, the value of time works in reverse: time in and of itself is valuable. And in one of the quirks of economics, the more time you have (i.e., the younger you are), the more time is worth. This the opposite of how time is valued in life! This paradox of time must be understood and mastered so that you avoid falling into the Youth Trap.
Suppose, with some manageable risk, the money you invested in an all equity portfolio earned 10% per year, and therefore doubled every seven years (if you are not sure about this please see Investment Piece #1: Mankind’s Greatest Discovery). Suppose you are 18 and you plan on working until you are 60 – an early financial liberty age by almost any standard.
For every $1 you invest when you are 18, how many dollars would you have when you turn 60? Let's see:
|Age||Number of Times Your Money Doubles||Return on Your $1 Investment|
My middle daughter said the above chart was lame. She couldn’t get excited over $1 turning into $64. So here goes the example starting with $10,000:
|Age||Number of Times Your Money Doubles||Return on Your $10,000 Investment|
OK, now those are big numbers!
BTW, did you notice the last double? You go from $320,000 to $640,000 in just seven years. What would happen if you decided to retire at 67 instead of 60?
Don't let one of your biggest assets, (your youth and time horizon) go unused. I know, I know, you are young and 60 is forever away! And therein is the Youth Trap, i.e., letting your Current Self put off investing today until tomorrow.
Don't fall into the Youth Trap. Tell your brain you will take control, by starting to invest early and letting time (i.e., compounding, “Mankind's Greatest Discovery” according to Einstein), do its job.
Gratitude, low investment costs, focus on discipline and time, will turn you into a successful investor. And BTW, you don’t need a CFA, CFP, PFP, CIM, CLU or RFP, or any other financial planning designation to become a successful investor.
You can do this!
Be thankful for what you have today, don't fall into the youth trap, stay disciplined and keep your investment costs low, and you will be on your way to becoming a successful investor.