Saturday, September 15, 2007

Some Common Sense Investing Rules

The stock market is not such a complicated place as they make it out to be. The professional investors and money managers purport to be the smartest kids on the block but the reality is a lot different. It is historically proven fact that most mutual funds (80-90%) cannot beat the market consistently over a long period of time. My experience has been that there are strategies and options that can help the retail investor - make money on Wall Street.

Investing in your 401(K) - This is the simplest option to pursue, especially if your employer matches a certain percentage. What your employer matches is free money - or a guaranteed return on your investment. Then your money grows tax-free and if you make smart investment choices, your 401(K) account will grow smartly over the years.

Invest in index funds - For after tax saving - the preferred option is index funds. Invest directly in the markets with these funds, reduce your investment fee and diversify by splitting between domestic, growth, value, international, emerging and developed market funds. Quit chasing the fictitious returns of most mutual funds (previous performance is not a guarantee of future performance!) and invest in the market directly.

Cost average investing - Don't try to time the market but invest consistently and regularly. One way to do this is by setting up automatic investment on a monthly basis. When the market is high - you buy less and when it is cheap you buy more.

Don't pay down your house - With a fixed rate of 6-7% on a 30-year mortgage and after the tax deduction your actual rate is 4-5%. So the question is can you do better than 4-5% in terms of rate of return. And if you have a reasonably long time horizon - the US stock market has returned an average of 10-12% annually. So would you rather make 10% or 5%.

And finally its your money - Don't trust the money managers or the analyst or the brother-in-law to help you make good investment decisions. Read, learn and become smart about investment choices. It’s your money and your life - make the right choices.

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