The biggest investing mistake beginners make is to follow someone else’s investing advice without understanding it.
Let’s say some millionaire invested in Amazon and Apple stock a few years ago and has earned a few million dollars from his investments. Should you follow his investing strategy?
Because past results do not predict future performance.
Just because someone invested their money a certain way in the past and did well does NOT mean you will also do well if you follow the same approach.
How to Invest in Stocks Successfully
If you want to get great returns on your investments, it’s not enough to just do what the pros have done in the past. You need to think like a pro and understand your investing strategy like a pro in order to get great results over time.
That’s why Warren Buffet gives the exact same investing advice over and over and over again to every investor who is not working full-time in the investment industry….
Buy and Hold Index Funds
Why does Buffet tell investors to buy and hold low-fee index funds with primarily US stocks and companies?
Because historically, over 100+ years, this approach has been the most profitable and the least risky investment approach for 99% of investors.
So what about the 1% of investors who did even better? Well, if you think you’re going to be the next Warren Buffet, Ray Dalio, or John Templeton, you might want to try a different approach.
But if you’re a regular person with a regular job or business and don’t spend 60+ hours each week studying stocks and investing, you’d be a fool to ignore Warren Buffet’s advice.
Invest in low-fee index funds to maximize your returns, reduce your costs, and minimize your risk* with little to no effort.
Once you decide to invest your money, you have to figure out how you’re going to split up your investments into different buckets so that you don’t lose it all or suffer a big loss if a single stock or investment falls in price. This is called asset allocation—how you decide to invest your total portfolio across different investments.
Warren Buffet instructed the trustee of his wife’s inheritance to invest 90% of the money into index funds and 10% into low-fee short-term government bonds.
Other investment models show that investing 60% in stocks and 40% in bonds produces even lower risk. Regardless, Warren Buffet’s recommended portfolio has done exceptionally well over long periods of historical data with relatively low risk.
So, if you want to follow Buffet’s advice and aren’t extremely risk-averse, you’ll probably want to pick the 90/10 porftolio. If you’re more conservative, you might want to go with a 60/40 mix.
Note: Investing more than 40% of your porftolio in bonds, according to some models, has been shown to INCREASE your risk, so you probably should not do that unless you’re a bond market expert.
How to Find Index Funds
If you’re ready to get started investing, you can find low-fee index funds through Vanguard. You’ll be able to buy any Vanguard index fund through any stock broker, so you don’t necessarily have to have a Vanguard account.
You can also search online for lists of low-fee index funds.
Remember, Buffet recommends you invest at least 80% of your stock portfolio in US companies, so you’ll want to pick index funds that primarily invest in US stocks.
How to Invest in Bonds
You can also find low-cost index funds that invest partially or exclusively in bonds.
You can use these bond index funds to allocate 10%–40% of your portfolio in bonds, according to your choice. Personally, I prefer to follow Buffet’s advice and invest no more than 10% of my portfolio in bonds.
Here’s a great list of low-cost bond index funds.
Investment Risk Management
*Minimizing your risk in investing is critical to your success. For example, if you invest all of your money in a risky investment and lose it all, you’re out of the game for good! Your long-term investment returns will be negative 100%!
You just can’t come back from an investment loss like that, and that’s a common mistake too many investors make.
Investing in index funds is NOT the lowest-risk investment strategy in the world. If you want to learn some of the lowest-risk high-return investment strategies ever developed, you can study Ray Dalio and what he’s done at Bridgewater Capital.
But if you’re just an average person looking to retire with an investment portfolio that will support you and your family for the rest of your life without spending most of your working life studying investing, you’re probably better off just investing in index funds.
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