Tag: investing

Money principle #1

Pay yourself first…make sure that you have automatic payments set up to invest in yourself. Ideally, you want this set up going to a low fee index fund. Time and compound interest will be your best friends. The earlier you can start regularly contributing to this fund, the better off you’ll be. The best part about having it automatically set up is that you don’t have to remember to keep investing every month. If you want to invest more, you can. But here, it’s basically like a subscription model (set it and forget it).

If you’re saving up for a specific purchase like a vacation, a new car, a house, etc, set up a separate account and automatically transfer money to that account. Have it set up for every paycheck. If you don’t “see the money” in your regular checking account then you’ll be far less likely to spend it. This will help you actually hit your saving goals and then you won’t have to use credit to purchase your consumer goods.

Smart debt versus dumb debt

If you’re buying an asset that makes you more money (whether through appreciation, cash flow/dividends, or tax benefits) than it costs to borrow (paying down your principal and interest while more than keeping pace with inflation), you can make a legitimate argument to go into debt to invest in that asset.

If you’re going into debt to buy something that doesn’t make you money, you’re giving into your inner child.

Only borrow money to buy things that go up in value. Otherwise pay all cash for it or not at all.

Thinking about diversification

Does diversification really make sense? I used to think, of course it makes sense! When you diversify, you are spreading out (aka minimizing) your potential risk. But you’re also minimizing your potential reward. So now, my thinking is…maybe. I think it depends on your level of knowledge in what you’re investing in.

Diversification for the novice investor can be thought of as risk mitigation, but for the expert in their field, instead of putting all of their eggs in the basket they know best, they would be putting some eggs in that basket and some in other baskets which they have limited information/knowledge on how to properly optimize their return on investment. An analogy would be to consider a generalist versus a specialist. A generalist might be a jack of all trades, but a master of none, just as diversifying your portfolio makes you “good” in several areas, but not excellent in any. This is because you have spread yourself too thin to truly become an expert in one area.

For the novice investor (which I am, so no judgement is being passed here), I think diversification makes sense. But if you are an expert in your field and you know something better than 99% of the population, why would you reduce your investment where you have an informational advantage? Does it really make sense to invest in things that you don’t know as well just so you are diversified?

Does a top-tier athlete try to go pro in multiple sports or do they eventually select one and try to be the best at that? When you are starting a business, will you get as far by trying to do a little bit of everything and serving every type of client or does it make sense to niche down and become the “go-to” person/business for one specific type of client? That’s where the saying comes from, “when everyone is your customer, nobody is.” You don’t differentiate yourself from your competitors who have either become the experts in their field or who have the name brand recognition and can afford to spread their resources thin.