How to Invest Money

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MrBogosity wrote: “I liked your top 5 tips on saving money. One of them dealt with investments, which is really important. He made investment sound like gambling, but it doesn’t have to be that way. Invested properly, it’s the best thing you can do with your savings. So here are my top 5 investment tips.”

• Keep permanent money separate from mad money. Permanent money is money you want for your retirement, your kids’ college tuition, for medical emergencies, or whatever. This is the money with which you want long-term stability. Mad money is money that you could blow and not worry about, whether it’s risky nvestments, gambling, going on a tropical vacation, or buying lots of shoes. Don’t touch your permanent money.
• Learn the difference between “investing” and “speculating.” Investing is when you put money into a market in order to get the market return. Speculating is when you think you can beat that and get a better return, with better timing, inside information, or some kind of scheme. DO NOT speculate with your permanent money; only mad money. Consider speculating to be the equivalent of gambling. This also means don’t fall for the schemes that investment advisers try to convince you to follow. Really, they’re about as accurate as psychics–that is, not at all. A disturbing number of them base their schemes on pseudoscience such as numerology, and none of them have been shown to work long-term.
• Diversify investments. I recommend that your Permanent Portfolio be equal parts stocks, bonds, gold, and cash. Yes, markets are volatile, and are prone to slumps, but not all at the same time. Each market responds differently to different economic indicators. For example, right now stocks, bonds, and cash are all hurting as inflation rises and interest rates fall, but gold is doing VERY well. They usually offset each other, and with a robust portfolio, losing years are rare. I do NOT recommend that you invest in real estate. I have real estate stocks as part of my stock portfolio, but as far as buying a house and considering it an investment, I think it’s foolhardy. After all, if you want to liquidate part of your investment, you can hardly cut off your back porch and sell it. Buying a home should be considered consumption, not investment. Buying a property to rent should be considered a business venture. Buying property figuring the value will go up is speculation. Don’t do this with your Permanent Portfolio.
• Invest in market-wide funds. For stocks, get an S&P500 fund or some other market fund instead of trading individual stocks. (I have 5 funds in my stock portfolio: S&P large cap, small cap, growth, value, and a real estate fund, all invested equally.) Get a negotiable bonds account instead of buying in individual companies. Get gold bullion instead of collectible coins, so your value will be the market spot price. For cash, a good money market account will be fine, but you can also get accounts in other currencies (such as euros) for additional protection. If you have an IRA or a 401(k), you should have many funds to select from that’ll get you most of these. Unfortunately, very few have gold accounts (gold stocks are NOT the same thing), so you may have to go somewhere else for that. I use GoldMoney.com.
• Think long-term. Once you have your Permanent Portfolio, LEAVE IT ALONE. When you put in new money, put it in evenly in all four areas (if you’re putting money in monthly, you can alternate months–stocks one month, bonds, the second, etc. to reduce transaction costs). Check it every six months or a year and balance it out; for example, if your money in stocks has increased while bonds haven’t done so well, move money from stocks to bonds so that they all stay around 20-30% of your portfolio. Above all, DO NOT panic and take money out of stocks when the stock market starts doing bad (same with the other areas). Remember, you’re not speculating, you’re investing, and you want the market’s long-term strength, not the fickle instabilities of the short-term. This isn’t advice for the rich, the business executives, or anything like that (although they could benefit from this advice, too). If you do like the other video says and just take $20 out of each paycheck, before long you’ll have a nice amount to play around with. Figure out how much of that you want for your retirement and put it in a Permanent Portfolio. You–and your kids–will be very glad that you did.

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