Investing over the last few years has been a mixed bag of results. I made all the classic mistakes that you can think of, buying high, selling low, being emotional about my decisions just to name a few. Only after reading about financial independence I discovered the topic passive income and adjusted my investment plan accordingly.
Passive income requires some initial time and money investment and should after that run on its own. Selling your own t-shirts on redbubble for example requires an initial investment (time), the sales afterwards are passive income (assuming someone is buying your t-shirts).
The most prominent representative in that field is the dividend strategy. The idea is to invest primarily in shares or funds that pay dividends on a regular basis.
The amount of information about how to invest is endless and it is easy to get lost in the sea of information. Therefore, it is important to have a fix set of rules for yourself and follow this approach.
Here are my 12 investment rules that I follow:
1) Time in the market always trumps timing the market
It is a myth believing you can time the market and predict patterns. There might be some exceptions to this if you get information before anybody else does (eg insider information) but that is hardly legal. The markets have been turbulent the last few years but nevertheless, equities performed very well. A lot of people telling me since a few years that the market will drop and then they will start to invest. A majority of those people are still waiting to this day.
2) Frequent investment interval vs the all-in approach
I follow the dollar cost average strategy and divide my investment over several periods instead of going all-in at once. This reduces the impact of volatility on large purchases such as equities. If your setup allows frequent investments (trading costs) you should consider this too.
3) I don’t want to follow the markets on a daily basis
Although I could easily spend the whole day following the markets and reading research for new ideas, in the end this is just a big waste of time. Second, I get easily tempted to invest emotionally and make mistakes by doing so. Every investor has an opinion and there is always someone predicting a crash. In the end most predictions are wrong. If anyone had a crystal ball that shows the future this individual would not talk about it openly. COVID 19 is a good example, no one would have predicted in their wildest dreams what was going on in 2020.
4) I stick to my strategy
Once I decide on a strategy, I stick to it no matter what the market does on a short-term basis. This is primarily to not waste time and money. This point ties perfectly to the previous points made and is another safety feature for me not to go down a rabbit whole. This does not mean that I never change anything, if I do a rebalancing, I do it after giving it some thought and only after a predefined period (yearly in my case).
5) In simplicity lies beauty
Complex trading setups and investment structures is something I avoid at all cost. Mainly because I don’t understand them. These sorts of vehicles try to lure you in in order to beat the market but this comes at a price. It might work for a while, but normally there is a salesperson in the background who benefits from selling this due to high margins. Avoid this at all costs and don’t get intimidated if a banker calls you, if you don’t know what the person is talking about just ask.
6) Diversify as much as possible
If you put all your water in one pot and your pot breaks all the water is gone. To avoid that risk it is smart to put your water into many pots because if one pot breaks you will not suffer a total loss. The more pots you have, the less likely you will lose all of your investments. For that reasons I invest primarily into funds which are invested into many companies to have a stake in many pots. “But why should I already calculate for the worst and not just pick a good pot?” you might ask. Predicting where the market goes is impossible in the long run so it is a necessity to diversify to lower your risk end get better investing results.
7) Low cots matter in the long run
Transactions costs might seem only marginal to a particular trade. However, if you sum up all the transaction costs paid over the years, it might lower your potential profit significantly. Consequently, transaction costs are something I always consider before investing in anything.
8) Buy and hold
I follow the buy and hold principal which is closely related to the previous point. My investments are long term and go into value assets. By value assets I mean companies that are likely to be around for a while. As I am in this game for the long run, I refrain from using stop loss triggers. When the markets tank, I see that as a buying opportunity. Even though my investment is in the red this is only a negative book value. Unless I sell my position, this theoretical loss can turn into a profit in the future. There are exceptions to this but they are very rare and by following this rule I spend a lot less time agonizing over the markets.
9) My investment horizon is long
Following the buy and hold principal my investment horizon is long (between 15 – 40 years). I might even pass some of my investments on to the next generation, then it is even longer. Again, this rule prevents me from checking market news regularly because the market does what it does which doesn’t concern me in the short run.
10) Only invest what you don’t need in the near future
During the recent bitcoin rally I read comments from people borrowing money to put it into cryptos. Not a smart move that might cause you a lot of trouble. Only invest money that you don’t need on a short to midterm basis. Why you ask? What if you had to sell some of your assets in March 2020 because you needed some liquidity? During that time the market tanked because of Covid 19 and you don’t want to sell unless you really have to. It is also smart not to be fully invested and always have some emergency fund that might come in handy if you lose your job or some other event might occur that you are not prepared for.
11) Consider tax effects
Following a dividend strategy, withholding tax is an important factor to consider. Depending on the country or domicile of a fund, potential dividends will be significantly smaller than anticipated. This topic can be daunting to tackle due to its complexity. If you are not sure how to approach this in the right way start by primarily investing in your home market to begin with before you go into foreign markets.
12) Robo-and investment advisors are not for me
Roboadvisors and investment professionals have their place and depending on your situation might be useful to you. Personally, I think they cost too much. My investment strategy is simple and easy to follow. I prefer deciding on my own instead of paying someone to do the work.
In a nutshell:
For about two years I invested mainly in shares that pay dividends. Stock picking was a lot of fun but in the long run I decided that I want to minimize the time I spent researching investment ideas. A second factor were the transaction costs which are in my case quite high as I am bound to a certain broker due to my job. Last year I switched to Exchange Traded Funds (ETF). The dividend shares stay in my portfolio, but for the moment I focus on ETFs.
This year I plan to invest monthly. I picked four ETFs that I will focus on and the money I will invest is already decided. With this approach I get the maximum bang for my buck. There might come a time when I do things differently again but for 2021 and probably some more years, I will follow this strategy.
What is your investment approach for this year?