Thursday, July 26, 2012

My Approach to Investing

My approach to investing is simple. And by simple I mean painfully simple. Like, so simple that it makes the heads of financial goobers all across the world explode. I do not use tricks, gimmicks or “sophisticated” investment strategies that only stroke the egos of those that have “studied” finance their entire lives. I take a real world and applicable approach that builds wealth slowly and consistently over a period of time, which conveniently feeds into my first point:

Time Horizon
Any money invested I plan to leave alone and in the investment for at least five years. I don’t care if the overall market is up, down, upside down or sideways. I am careful in my investment selections and want to give the investments time to grow and ride out short term market cycle fluctuations. Jumping in and out and trying to time the market will only lead to a bottomless pit of despair. For over a century experts and people who live, work in and breathe the stock market have NEVER developed a fireproof formula that leads to riches. My approach screams that wealth is built slowly and layer upon layer consistently and over a period of time. So if I buy shares of a mutual fund and in the following month the overall market drops (which happens when you invest consistently over a number of years), I leave the investment alone and do not panic and sell. I give the investment time to grow and ride out market cycles to get positive average annualized returns, which as of MY LAST ANNUAL CHECK UP was 9%. Which coincidentally leads me to:

Investment Choices

Individual stocks have the potential to generate big returns, but you have to go through a ton of dogs (see facebook) before you even get a glimpse at a long term winner (see apple). So I do not own any single stocks. They are too risky, you and I cannot predict who the next Microsoft is going to be and we could easily waste a lifetime’s worth of earnings chasing after the next “one.”

Bonds are debt instruments and are not nearly as safe as we are led to believe (and honestly, the goobers who probably started this myth were bond sellers). If you are an above average bond investor then you are barely staying ahead of inflation, so I stay away from bonds.

My investment of choice is a diverse and well screened army of mutual funds. I evenly spread my investments across four types: Aggressive Growth (small-cap), Growth (mid-cap), Growth & Income (large-cap) and International. I seek out mutual funds that have been around for at least 10 years, have average annualized returns greater than 12% since inception and have a lead fund manager that has been with the fund for at least 5 years. Do you see a recurring theme here?

I utilize the stock market for long term investing aimed for growth. I do not invest with money I need in the short term and I am not trying to hit a home run with a single purchase. By investing in proven winners (my pre-screened mutual funds) and consistently buying my map to wealth building is being layered and structured over decades, which leads me to:

Purchasing Cycles

Since I’m focused on long term growth I do not care what the overall market is doing in the day to day. Every month I set aside 15% of my gross income to automatically flow into retirement vehicles and as soon as I have enough money to do a minimum purchase on my mutual funds I fire away and buy consistently. Sometimes the market is up, sometimes it is down, but through the way I am investing, to date I am staying ahead of taxes and inflation and my overall net worth grows just about every quarter. I follow the same rule of thumb for purchases through my brokerage account.

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