5 Best Investing Tips to Make More Money
Whether you’re an investing beginner, or just want to maximize your success, these 5 fundamental investing tips from Money Girl can help you make more money.
Did you know that a third of Americans have no savings for retirement? And, believe it or not, 21% of adults actually think that winning the lottery is the best way to retire!
No matter if you’re a newbie investor or have been at it for decades, it’s important to understand the fundamentals. In this episode I’ll review the best investing tips to make more money, so you can achieve your long-term financial goals.
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5 Best Investing Tips to Make More Money
Good investing never includes a get-rich-quick scheme or mindset. Nor does it involve taking risks that keeps you awake at night. If you’re an investing beginner, or anyone who wants to succeed, use these 5 investing tips to make more money over the long-term:
Investing Tip #1: Start Early
Saving and investing early means that you put the power of compounding interest to work for you. Albert Einstein called compound interest “the eighth wonder of the world.”
Compare these 2 investors, John and Sally, who set aside the same amount each month and get the same annual return:
John
- Begins investing at age 20 and stops at age 60
- Invests $100 a month
- Gets an average return of 8.5%
- Ends up with $406,825
Sally
- Begins investing at age 30 and stops at age 60
- Invests $100 a month
- Gets an average return of 8.5%
- Ends up with $166,339
Because John got a 10-year head start, he has $240,000 more to spend in retirement than Sally! But the difference in the amount John contributed was only $12,000 ($100 x 12 months x 10 years.)
So never forget to start investing as early as possible!
Investing Tip #2: Don’t Try to Beat the Market
While it might sound boring, you should aim to be an average investor. That’s because it’s better to “be” the market, rather than try and beat it.
When you try to match the performance of a financial market – such as the S&P 500 or NASDAQ – it’s known as passive management, or indexing. On the other hand, active management means that you try to beat a market index.
Problem is, over just about any historical 5-year period, passive index funds beat actively managed funds. That’s because it’s impossible to consistently beat the market without taking on additional risk over the long term.
For example, only 20% to 35% of actively managed funds beat the benchmark for their category over the past 5 years. That means most funds can’t beat the market. In fact, over the last 15 years, 46% of active funds closed due to poor performance, and 7% of them failed every year.
What does that mean? Well, professional fund managers are not smarter than the market, and neither are you. Plus, active funds charge more, which I’ll cover in the next tip.
See also: Money Girl’s Smart Moves to Grow Rich – Download 2 Free Chapters!
Investing Tip #3: Choose Low-Cost Funds
Different funds charge different fees, known as the expense ratio. For instance, an expense ratio of 2% per year means that each year, 2% of the fund’s total assets will be used to pay for expenses, such as management, advertising, and administrative costs.
Actively managed funds have an average expense ratio that’s about 1% higher than passive funds. One percent may not sound like much, but when you strip it off the average historical return of 8.5%, it becomes much more meaningful.
For instance, if you invest $100,000 over 30 years with an average annual growth of 8.5%, paying for those higher fees will cost approximately $280,000. In fact, low fund fees have been pegged as one of the best predictors of future returns by Morningstar, a leading independent investment research firm.
So, the bottom line is that choosing low-cost index funds will make you more money over time because they give you average returns, but at a much lower cost.
Investing Tip #4: Use a Buy and Hold Strategy
Even though the historical average market return has been 8.5%, the average investor only earns about 5%. Why? Well, unfortunately we’re terrible at investing.
We chase returns, react to fear, and buy into media hype. When we invest emotionally, we end up buying high and selling low, which is the exact opposite of how you make money.
We chase returns, react to fear, and buy into media hype. When we invest emotionally, we end up buying high and selling low, which is the exact opposite of how you make money.
Yes, in the short term investment returns may vary. But over the long term, market returns always revert to the average.
Investors think their choices must be right if other people are doing the same thing. The media says buy, so most investors get in the market. And when everyone else is in a panic and selling, that’s what most people do.
In other words, emotional investing is a losing strategy. So stick to a long-term, buy and hold investment strategy.
See Also: Smart Moves to Start Investing on Any Income
Investing Tip #5: Stay Diversified
Diversifying your investments means that you spread them out over a variety of industry sectors and asset classes, such as stocks, bonds, and cash. That reduces the risk that any specific investment could fail and lower the return of your overall portfolio.
Diversifying doesn’t increase investment returns all by itself, but it does allow you to reduce investment risk, without lowering your return. The idea is that you limit losses without sacrificing gains. So invest in a mix of assets that suit your individual goals and investment time horizon.
Following these 5 fundamental investment tips by diversifying, maintaining a buy and hold strategy, choosing low-cost funds, being an average investor, and starting early is the best way to set yourself up for investment success.
What All Kids (and Adults Too) Should Know About Saving & Investing
This article was written by Rob Pivnick and edited and read in the podcast by Laura Adams. Rob is the author of What All Kids (and Adults Too) Should Know About Saving & Investing, a guide to help students develop smart, long-term, saving and investing habits.Visit whatallkids.com for more information and follow Rob on Twitter: @RPivnick.
More Money Resources
Investment Tips: How and Where to Invest (the Easy Way!)
Financial Planning Success in 3 Simple Steps
How to Make Money Investing in Stocks
8 Tips to Invest Without Too Much Risk
7 Investment Rules to Make Money
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
