You can tell whether a man is clever by his answers; You can tell whether a man is wise by his questions.
– Naguib Mahfouz, Egyptian author and Nobel laureate: Literature (1911 – 2006)
Investing does seem complicated, but it doesn’t necessarily need to be! Part of the problem is the sheer volume of information that comes at us, provided through various forms of media. Some of those forms seem designed to make us feel that everyone else understands investing better than us.
Consider the Time it Takes to Invest
Have you ever watched one of the financial channels and seen the commercials that talk about how “easy” it is to trade options? Trust me, trading options is not easy – unless your goal is to lose money. In that case, it is plenty easy. Keep in mind that television networks that focus on money & investing have many, many hours of programming to fill. And good, fundamental long-term investing is, frankly, boring. Building wealth is a long-term endeavor. Happy investors know this and use it to their advantage – investors that try to find shortcuts usually end up sad.
So what do we do? One way to approach money management and investing is to start with a few basic questions:
- If I am looking to invest, what is the time period I plan to hold the investment?
- Is it 1-year, 5-years, or 10+ years?
- How much debt do I have?
- If I do have debt, is it a student loan at 5% interest, a car loan at 8%, or am I paying down credit card balances at 17%?
Consider Your Debt
There is a difference between what some call “good” debt, like a mortgage at 3%- 4% and “bad” debt, like a credit card balance that comes with a 16% – 18% interest rate. One rule that many experts agree on is that you should not consider investing in mutual funds, Exchange Traded Funds (ETFs), or individual securities unless you have paid off your credit card debt.
Here is one example: if I am considering an investment in the stock market via ETFs, but I’m currently paying a car loan that charges 8% interest, I should ask myself if I feel very confident that I will experience a return in excess of 8% on the investment. If the answer is “I really don’t know” it may be best to consider paying down the debt. That is a good place to start.
OK, now I’ve paid down my high-interest debt and I’m ready to begin investing. Start with a basic question. In this case, ask yourself:
- What am I investing for?
- Are we saving for a vacation next year?
- Are we saving to buy a car in five years?
- Is this likely to be retirement money 20+ years out?
Consider “Money Pools”
It is helpful to start by bucketing your investment dollars based on the expected time horizon for the investment. We can call these buckets “tranches” that allow us to focus on different defined outcomes. Time is a significant factor when it comes to investing and these outcome-based tranches should be invested differently. When we build these investments within Marygold for our clients we call them “Money Pools.”
Investing in equity markets is generally a solid investment in the long-term, but markets tend to experience significant volatility in the short-term. For example, the S&P 500 index lost over 4% in 2018 but gained over 31% in 2019. And there has been nothing normal about 2020, with the S&P 500 dropping 34% from February 19th to March 23rd, and the U.S. economy falling into recession driven by the Covid-19 health crisis.
In the history of the U.S. stock market, we’ve only seen one 30% plunge that happened faster, in 1987 when the S&P 500 fell over 31% in only 14 days culminating in the “Black Monday” crash of October 19th that saw a drop of more than 20% in one day. Global and U.S. stocks have started to recover since March, but volatility is likely to remain elevated.
Consider Your Investment Strategies
If I have an investment tranch that I plan to tap into in the next year or two, I’m going to invest conservatively – think savings accounts, money markets, or other cash equivalents. For my long-term investments like my retirement account that will be invested for a decade or more, utilizing a diversified portfolio of equity and fixed income securities via ETFs is typically a sound strategy. And once we establish our long-term investment strategy we need to stay disciplined and not overreact to short term volatility. As many experts have cautioned this year, “panic is not a strategy”.
Consider What You Invest In
Lastly, I need to distinguish between smart investing and gambling. If I had $1,000 to invest I would not be “looking for the next Tesla” as I’ve heard some say. I would probably be looking at passively-managed ETFs that are broadly diversified and come with low-expense ratios. There is another old market adage that is always appropriate – “the bull and the bear go to market, but the pig goes to slaughter”.
We can make the process of long-term savings and investment easier by asking ourselves a few basic questions. Do I currently have outstanding debt? If so, is it better to use my savings to pay it down? If I’m ready to put some money to work in the stock market, then I start by asking how long I intend to hold the investment. Time is always an important consideration when investing. If we begin by asking ourselves what we intend to do with the money or said another way, what is the outcome we hope to achieve, it starts to make the process much more straightforward.
Investing can seem complicated, but it certainly doesn’t need to be.