Before I get back to tax related topics I wanted to provide one more blog on investing tips.
Previously I encouraged you to invest a good percent of your tax refund to create wealth for you in the future rather than spending it all now. I gave you several statistics showed that most millionaires were normal folks that did not have paying jobs but became millionaires by simply investing in their employer sponsored retirement plan for 20+ years. Their wealth came far more from the compound interest on those deposits each month than the sum total of the deposits.
On the second investing blog I encouraged you to invest in assets that create income. I mentioned several options and focused on easiest and most common for millionaires which is ownership in companies through the stock market. I will talk about real estate in future blogs as it has many tax advantages. I stated that the 2 biggest drivers for creating wealth in stocks was the amount of money you invested each month and the percent of the investment in stocks over bonds. I pointed out that over the long run the owners of diversified portfolio of stocks made a higher return than the safer route of being an owner of bonds/loans. I recommended you diversify and keep your fees and rates low by using a buy and hold strategy and investing in globally diversified index funds. Index funds have lower fees than mutual funds and numerous studies show that over the long run passive investing with index funds tend to produce higher returns than actively managed mutual funds. I pointed out in addition to lower management fees index funds have the advantage of more consistently (i.e., over 10 years) capturing the return of the market than most actively managed funds due to efficient (i.e., fairly priced) markets.
The following 2 new investment tips can be summarized as:
- If you choose to use an investment advisor use a fiduciary and one who is willing to teach you
- Invest DON’T Speculate
I recommend a fiduciary because a fiduciary is licensed by the SEC and is legally required to put their client’s interest ahead of their own. They are held to a higher ethical standard. They are only paid by their client. They are not paid the investment vehicles they recommend so there is no conflict of interest or financial incentive for them to recommend one fund over another. Their only incentive is getting their clients the highest return for the lowest risk.
Advisors who are not fiduciaries often have an inherent conflict of interest that they are not required to reveal. The conflict of interest is they are usually incentivized by their employer and/or the investment vehicle to put their clients in funds that have higher fees so they get paid more. For example, they get paid higher commissions by putting clients in actively managed funds rather than passive, no load index funds. So there is a temptation for them to recommend the high fee funds. They are usually paid significantly less for putting their clients in no load index funds which makes it tempting to NOT put the clients best interest first. Many resists the temptation and put their clients first but there is less risk with a fiduciary who is required by law to always put your best interest first.
I recommend advisors who are patient and spend the time needed to teach you so you understand what you are investing in and why you are investing in it. Good advisors make sure you understand your options and have you (not them) make the decisions. I don’t like pushy salesman who pressure me to follow their advice. My advisor makes no decisions. He advises me, makes recommendations based on my scenario and risk tolerance and has my husband and I make the investment decisions.
I also recommend you ask yourself with each investment decision if you are making a real investment or if you are speculating. Investopedia defines investing as “seeking to generate a satisfactory return on capital by taking on an average or below average amount of risk”. Investopedia defines speculation as “seeking to make abnormally high returns from bets that can go one way or the other”. Speculating is one step above gambling which is seeks return on pure chance.
I recommend you avoid speculating and only buy assets that have average or below average risk.
I personally do not invest in individual stocks and instead use Index funds because they have significantly less risk and provide a satisfactory return (the definition of investing). I do not invest in gold, futures or commodities because the high returns can just as equally be high losses. I would rather invest in something that patiently and more surely creates wealth (i.e., a bunch of companies in an index fund) than go for a quick return bet on the price of an item (i.e., gold, commodities,…) going up rather than down which I think is speculating.
What ever approach you decide to take to investing the most important thing is that you don’t spend all you make and instead invest and invest regularly.