Smart Investing For The Rest Of Us

There are several books that mention dumb and investments in the title, including Dumb Money: Adventures of a Day Trader, The Dumb Things Smart People Do with Their Money: Thirteen Ways to Right Your Financial Wrongs, and 5 Dumb Investments Smart People Make. These books are about the volatile world of day-trading, common financial mistakes, and investing advice.

There are also other books that discuss the topic of investments and financial mistakes without using the word dumb in the title, such as The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness and The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns.

While there may not be a book specifically titled Investments for Dumb People, the aforementioned books offer valuable insights and guidance for individuals seeking to improve their financial knowledge and investment strategies.

Investments you can't afford

The first step to investing is to ensure you have a stable financial foundation. Before investing, it is important to build an emergency fund that can cover three to six months' worth of essential living expenses. It is also crucial to get out of debt, except for a reasonable mortgage that does not exceed 25% of your monthly gross income.

The Exception to the Rule

The only exception to the debt-free rule is if your company provides a match on contributions to your 401(k) plan. In this case, it is advisable to contribute enough to take advantage of the match while also making more than the minimum payments on your debts.

Understanding Your Investments

It is essential to understand your investments thoroughly. Before investing in an individual stock, ensure you can explain what the company does, who its competitors are, and why it is a worthy investment. For mutual funds or exchange-traded funds, you should be able to explain their overarching strategy and underlying investments simply.

Matching Your Investments to Your Time Frame and Temperament

Your investments should align with your investment time frame and risk tolerance. Tools like Morningstar's Lifetime Allocation Indexes can help determine an asset allocation strategy suitable for your goals and temperament. Ensuring your investments adhere to an appropriate asset allocation is more critical to long-term success than specific investments.

Avoiding Investments That Sound Too Good to Be True

Be cautious of investments that seem too good to be true, as they often are. Avoid "can't miss" or "guaranteed" investments, as these are red flags for potential Ponzi schemes or scams.

Investing Early

Time is a crucial ingredient for successful investing. The power of compound interest, where interest earns interest over time, highlights the importance of starting early. The earlier you begin investing, the more time your investments have to grow and benefit from compound interest.

Final Thoughts

In conclusion, successful investing involves both a strong offensive and defensive strategy. While capturing market upticks is essential, it is equally vital to avoid major mistakes, such as investing in opportunities you cannot afford or fully understand.

Investments you don't understand

• Don't invest in what you don't understand: If you can't explain an investment to an 11-year-old, you don't understand it well enough to invest in it. Be sure to ask questions and do your research before investing.
• Avoid complicated financial products: Stick to simple stocks, bonds, and mutual funds or exchange-traded funds (ETFs) that you can easily understand and manage.
• Seek advice from the right people: Get advice from trusted sources who have your best interests at heart, such as fiduciary advisors. Avoid taking financial advice from people trying to sell you something or those who don't have your best interests at heart.
• Don't be swayed by "get-rich-quick" schemes: Be wary of investments that sound too good to be true, such as Ponzi schemes or "can't miss" investment opportunities.
• Consider your time frame and risk tolerance: Ensure your investments match your investment goals and risk tolerance. Use asset allocation calculators to determine an appropriate mix of investments for your portfolio.
• Start investing early: Time is a crucial factor in successful investing due to the power of compound interest. The earlier you start investing, the more time your money has to grow.

By following these tips, you can avoid making dumb investments and improve your chances of financial success.

Investments that don't match your time frame and temperament

When it comes to investing, it's crucial to consider your time horizon, which is the period you expect to hold an investment before needing the money. This is influenced by your investment goals and strategies. Short-term investments typically refer to those held for less than five years, medium-term investments range from three to ten years, and long-term investments are those held for a decade or more. Your time horizon impacts the level of risk you can take on; longer horizons allow for more aggressive, riskier portfolios, while shorter horizons call for a more conservative approach.

Your investment temperament, or risk tolerance, is another key factor. This refers to your emotional and psychological ability to handle the ups and downs of the market. Some people are comfortable with aggressive, riskier investments, while others prefer a more conservative approach to avoid sharp swings in their portfolio.

Ensuring that your investments align with your time frame and temperament is crucial for long-term success. It's more important than the specific investments you choose. If you have a short-term horizon and a low-risk tolerance, aggressive investments in the stock market may not be suitable, as they are susceptible to short-term market fluctuations. On the other hand, if you have a long-term horizon and a higher risk tolerance, you can afford to be more aggressive in your investment choices.

It's important to remember that investing is a personal journey, and what works for someone else may not work for you. By considering your time frame and temperament, you can make more informed investment decisions that align with your goals and comfort level. This will help you avoid the pitfall of making investments that don't match your time frame and temperament.

Investments that sound too good to be true

While there is no book titled "Investments for Dumb People", there are several books that offer advice on how to avoid making dumb investment decisions. One such book is "The Dumb Things Smart People Do with Their Money: Thirteen Ways to Right Your Financial Wrongs" by Jill Schlesinger, a Wall Street trader, investment advisor, and money expert for CBS News. In the book, Schlesinger identifies 13 common mistakes that even smart people make with their money and provides rules to follow regarding retirement, college financing, insurance, real estate, and more.

Another book that can help readers avoid making unwise investments is "Dumb Money: Adventures of a Day Trader" by Joey Anuff and Gary Wolf. The book is a cautionary tale about the author's brief involvement in the volatile world of day trading during the late 1990s. While it may not offer much in the way of valuable investment advice, it does provide an accurate historic account of the idiotic behavior of that time and serves as a reminder that if an investment opportunity sounds too good to be true, it probably is.

• You are contacted out of the blue by someone offering an investment opportunity that sounds amazing.
• You are promised high returns with little to no risk.
• You are pressured to act quickly or given a sense of exclusivity or scarcity.
• The investment is described using vague or exaggerated language, such as "secret", "underground", or "guaranteed".
• The investment is not properly licensed or registered with the relevant authorities.
• You are unable to verify the identity or credentials of the person offering the investment.
• The investment involves complex strategies that you don't fully understand.

Remember, if an investment opportunity sounds too good to be true, it probably is. It's important to do your own research, ask questions, and consult with a trusted financial advisor before making any investment decisions.

Investments you think you can afford not to make

There are many reasons why people choose not to invest. Some of the most common ones include not having enough money, not understanding the investment, or thinking that investing is too risky. While these may be valid concerns, there are also several investments that you may think you can afford to skip but could end up costing you in the long run. Here are some examples:

Not Investing in Your Retirement Early Enough

One of the biggest mistakes people make is not investing in their retirement early on. Compound interest, which is when your interest earns interest over time, can make a significant difference in the long run. For example, if you invest $200 per month starting at age 20 and generate an average annual return of 7%, you will end up with over $1 million by the time you're 70. However, if you wait until you're 30 to start investing, you will have missed out on a large portion of those gains, even if you invest more money each month.

Not Taking Advantage of Your Company's 401(k) Match

If your company offers a 401(k) plan with a matching contribution, it is generally a good idea to contribute enough to take full advantage of that match. This is essentially free money that you are leaving on the table if you don't contribute. Of course, you should still prioritize paying off any high-interest debt, but contributing enough to get the full match from your company is a wise investment in your future.

Not Understanding Your Investments

It is important to thoroughly research and understand any investment before handing over your hard-earned money. Mutual fund manager Peter Lynch famously said that if you can't explain an investment to an 11-year-old, you don't understand it well enough yourself. Whether you're investing in individual stocks, mutual funds, or exchange-traded funds, you should be able to explain the company's business, its competitors, and why you believe it is a good investment. Don't invest in something just because someone else is or because it sounds too good to be true.

Not Having a Diverse Portfolio

Diversifying your investments across different asset classes, sectors, and geographic regions can help reduce your risk and improve your long-term returns. Don't put all your eggs in one basket, as the saying goes. Make sure your investment portfolio is appropriately diversified for your investment time frame and risk tolerance. There are many free asset allocation tools and calculators available online to help you determine the right mix of investments for your situation.

Not Planning for the Future

In addition to investing for retirement, there are other financial milestones and potential pitfalls to plan for. For example, not having a will or not planning for the care of aging parents can lead to costly mistakes and added stress down the road. It is important to have difficult conversations about money with your family and to make sure you have the appropriate insurance coverage, such as disability and life insurance, to protect yourself and your loved ones.

Final Thoughts

While it may be tempting to put off investing or skip certain types of investments, the above examples illustrate how these decisions can end up costing you in the long run. It is important to educate yourself about personal finance and investing, seek advice from trusted sources, and make informed decisions that align with your financial goals and risk tolerance.

Frequently asked questions