When managing money, people are often their own worst enemies. Some folks tend to overestimate their ability to manage money and underestimate the risks and complications involved. This means that millions of people are missing out on big opportunities to save, invest and spend more wisely.
Here are some ideas for how you can manage your money smarter – often by “doing” less.
Don’t pick stocks.
Buying and selling individual stocks is highly risky. When you buy $100 of a company’s stock, you are essentially making a bet that the price of that stock is going to keep going up – that you will eventually sell your stock for more than you paid for it, earning a healthy return on investment. The problem is, no one knows for sure which companies are going to continue to do well in the future and which ones are going to fail. Stocks can go up, but they can also come crashing down. A $100 investment can turn into $200, or it can go to $0.
Most people do not have the investment expertise and detailed knowledge of the stock market to be able to reliably pick stocks. Instead, put your money in a diversified investment portfolio of stocks and bonds. Buy index funds so that you own hundreds or thousands of stocks, so that you’re protected in case any single company’s stock goes down. Instead of putting “all your eggs in one basket” by buying individual stocks, a diversified portfolio puts your (nest) egg in thousands of baskets – and makes it likely for you to get better returns in the long run.
Don’t time the market.
Many people think that they can choose the “right” time to buy stocks (or sell stocks) based on the fluctuations of the stock market and the news of the day. “When the stock market goes up, I’ll sell and put everything into cash,” these people say. “Then when the stock market goes down again, I’ll buy more!”
This kind of investing is almost always a mistake. You never know what the stock market is going to do. It’s up one day, down the next. Over the course of a year, or even several years, the market will go up and down based on millions of factors and decisions that are beyond your control. Instead of timing the market, use dollar cost averaging to invest a fixed amount of money each month – buying a diversified portfolio of stocks in good times and bad – and hold on to your investments for the long term.
Don’t constantly rebalance your portfolio.
Many people are too active in managing their investment accounts – they shift from one stock to another, one fund to another, constantly moving their money around and paying fees as they go. This short-term “churn” is unlikely to pay off in the long-run. Instead, set a long-term strategy for your investments and stick to it.
You can even buy “lifetime” funds with a target retirement date – these funds will gradually shift the allocation between stocks and bonds depending on how soon you want to retire. They do the work for you; you just have to sit back and wait for the results.
Instead of picking stocks, timing the market, and constantly changing your mind about where to put your retirement savings, it’s often best to take a “hands-off” approach. Set a plan, and stick to it. Let your money grow over time. People often unwittingly undermine their long term financial security by taking rash short-term actions. As John Bogle said, when it comes to managing your money, “Don’t just do something, stand there!”
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