When I think about the question of “how to invest money?” and all of the investing ideas and rules that I have heard financial gurus share over the years, the most memorable words were from Warren Buffett,
“Rule No. 1. Never lose money.
Rule No. 2. Never forget Rule No. 1.”
Although Warren Buffett’s words are probably most directly linked to stock-picking for the long-term, they still resonate equally for investors trying to decide which types of broad asset classes (read mutual funds and ETFs) they should buy.
Preserve capital, don’t lose it.
This website is not about stock-picking. But it is about Rules No. 1 and 2.
Rule No. 3 – How to Invest Money
How should I invest my money?
Unless I want to spend my workweek learning how to invest money, it seems evident that choosing a smart financial advisor is essential.
“Someone is sitting in the shade today because someone planted a tree a long time ago.” Warren Buffett.
This is what sound financial advice can help you do. Wise investors look to the long term. And they commit to a long-term strategy.
Finding a financial advisor with the depth of experience and understanding of history will be essential to your success. Long-term investing is not about momentum. It is about judiciously investing in assets with long-term potential.
And that phrase, “judiciously investing in assets with long-term potential,” is pretentious and a mouthful.
Nevertheless, it is true.
Finding and acting upon wise advice is essential.
Rule No. 4 – Dealing With Misbehaving Grown-Ups
From Warren Buffett and his right-hand man, Charlie Munger,
“We’ve long felt that the only value of stock forecasters is to make fortunetellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
So let’s mention those misbehaving grown-ups. They can easily affect the value of your investments.
Consider how unelected central bank governors cause their organizations to intervene in financial markets. Current historically low interest rates are unnatural. Historically high stock and bond prices result from unnaturally low interest rates. Amidst unpredictable central bank and government-controlled pension fund market interventions, where can one invest with certainty?
There are no easy answers to this question.
Are markets really efficient? Or are they seriously affected by larger forces? Does anyone think that Bank of Japan equity purchases cause artificially high stock prices or that the European Central Bank’s bond purchases cause European interest rates to be unnaturally low?
I do. And in the short-term these forces are strong.
But it does not matter. Even if interest rates rise.
What does matter is the long term.
Again from Warren Buffett,
“You only have to do a very few things right in your life so long as you don’t do too many things wrong.”
Rule No. 5 – History Counts
Not doing too many things wrong and planning for the long term is essential.
History demonstrates clearly that economic growth and productivity trends favor higher returns through investment in shares of companies that can ride and profit from naturally growing markets.
So, no matter how one analyzes short-term market factors, equity investments should remain an important component of an investor’s portfolio. Hold more cash when stock prices are high. Average your cost base by investing in equity mutual funds and ETFs over time. In the long run, you have a better chance of realizing the investment returns that you and your financial advisor planned.