At this point, I’d like to introduce you to what I firmly believe is the most effective investment strategy available today – Rule #1 investing. Once you’ve reached the maximum amount of money that your employer is willing to match for the year, though, investing in a 401 becomes less desirable. Investing in a 401 is another way to invest in the stock market. The real value of a 401, though, comes if your employer is willing to match a portion of your contributions. Investing money for small returns is incredibly easy and almost fail-safe. For example, you can put your money in US treasury bonds and be almost guaranteed to earn 2-3% annual returns on your investment. With long-term investing, though, you are able to minimize your risk and negate the sometimes-crushing effects of short-term volatility and price-drops.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. As Rule #1 investors, the goal is to find wonderful companies for a bargain price (50% off their actual value). By using our margin of safety calculator, you can determine whether a company’s stock price is on sale relative to the true value of the company. The final of the 4Ms of Rule #1 investing is Margin of Safety. The Margin of Safety is a measure of how “on sale” a company’s stock price is compared to the true value of the company.
Bonds are typically considered ‘less risky’ than stocks, however, their potential for returns is much lower as well. When you invest money, what you are doing is either buying a portion of a company or a commodity with the belief that the value of that company or commodity will grow over time.
There are five key ways to double your money, which may include using a diversified portfolio or investing in speculative assets. Doubling your money is a badge of honor, often used as bragging rights and a promise made by overzealous advisors. Perhaps it comes from deep in our investor psychology—the risk-taking part of us that loves the quick buck.
This chart compares the numbers given by the rule of 72 and the actual number of years it would take these investments to double in value. It won’t double in a year, but it should, eventually, given the old rule of 72. The rule of 72 is a famous shortcut for calculating how long it will take for an investment to double if its growth compounds. The result is the number of years it will take to double your money.
We’ll talk later about how to find good investments, but for now, know that once you have a few companies chosen, it doesn’t matter how much or how little you are able to invest. When you’re investing in your 20s, it’s best to start out by focusing on paying off any debt you may have such as student loans or credit-card debt. However, as is usually the case, low risk means low returns. The risk when putting your money into a savings account is negligible, and typically, there are little to no returns. Rather than buying a single stock, mutual funds enable you to buy a basket of stocks in one purchase. The stocks in a mutual fund are typically chosen and managed by a mutual fund manager.
As Baron Rothschild supposedly once said, smart investors “buy when there is blood in the streets, even if the blood is their own. ” When dealing with low rates of return, the rule of 72 is a fairly accurate predictor.
Investing money may seem intimidating, especially if you’ve never done it before. If you choose not to re-balance, keep in mind that you are taking on additional risk by having a portfolio dominated by stocks. Once you make your purchase, the wisest course of action is simply to do nothing. You can expect your investment to fluctuate in value over time, and it is important not to sell simply because an investment moves downward. Remember, just as you did not predict the downward movement, you will also not be able to predict a rebound. There are two basic types of orders that can be used to purchase and sell assets in financial markets.