Not everyone can live like the rich, but that does not mean we can't invest like the rich.
There's a common misconception that investing is only for an elite group of people, namely people with tons of money. I used to feel the same way. However, with the help of my friends and the Internet, I discovered I didn't need a lot of money to start investing.
Everything I want to learn is readily available on the Internet for free, from online news to podcasts, Discord servers, Reddit communities, and YouTube channels. With fractional investing, anyone can invest with as little as $20. Ultimately, how much we start with doesn't matter as long as we stay consistent.
Currently, about 55% of Americans aren't investing, which is a complete shame. Most people who are not investing in the markets think they don't have enough money, don't know how to invest, or are afraid of losing money. However, the truth is, a bit of financial knowledge and capital can go a long way.
We'll cover some of the best practices for beginning investors and go over some (not-so-secretive) tips for investing in the stock market like a pro.
The Million Dollar Advice - 9 Ways to Invest Like the Rich
As we hinted earlier, there are no secrets to building wealth (that we know of). However, successful investors follow common tips and tricks.
1. Develop Healthy Saving and Investing Habits
We've all heard the stories. Apple co-founder Steve Jobs wore the same black turtleneck every day. Facebook CEO Mark Zuckerberg wears the same gray t-shirt at most public events he attends. Berkshire Hathaway CEO Warren Buffett still lives in the same house he bought in 1958 for $31,500.
The common thread - live minimally and pay yourself first.
The fastest and most surefire way to financial independence is to develop healthy saving and investing habits. If you are spending every dollar you make, you'll never be able to accumulate wealth. For most people, the choices we make today will determine how much wealth we have in the future. The more we spend on consumption now, the less we will have to save and invest. To build a strong foundation for our future, we need to start thinking about ways to cut back on our spending and set money aside for our future.
Old Habits Die Hard
Many of our spending and saving habits are developed when we are young. That is why developing discipline early on is crucial for building wealth. Saving money was something I struggled with throughout college. Because it was my first time living away from home, there were a lot of unexpected expenses that came up all the time.
However, during the pandemic, I had a lot of downtime to reflect on my values and lifestyle. I realized that my lifestyle before was unsustainable. I was spending every dollar I made and not saving anything for my future. I needed to make some changes to cut out my frivolous spending habits and spend money more purposefully. Though I may have swung to the extreme end of saving and investing these days, I feel much more satisfied with the purchases I do make.
Make Investing Easy
There's a common misconception that investing is hard or takes too much effort. The easiest fix is to automate as much as possible and use technology to your advantage. For example, at my previous company, I automatically invested 10% of every paycheck into a couple of index funds in my 401(k). That way, I did not have to worry about manually allocating money to my retirement account every two weeks. I also transferred money into my savings and investing accounts immediately when I got paid to ensure that I always pay myself first.
Create a Budget
In the perfect world, we would never have to worry about money. However, for most of us, that is not the case. That's why creating a budget is necessary. With a budget, we can set realistic expectations of our expenses and what we can afford. Currently, I use Mint to create different buckets of expenses, such as rent, food and dining, and entertainment. I also made my own spreadsheet to track my spending from month to month to hold myself accountable.
2. Create Financial Goals
Creating specific financial goals will help you stay grounded and accountable. If you are vague about what you want to accomplish, it's harder to stay on track and make progress. When I was a competitive runner, I often set specific times I wanted to hit for different races each season, which motivated me to prioritize my goals and work harder toward them.
Think about your short-term, medium-term, and long-term goals and prioritize from there. If your goal is something huge, such as saving for the down payment of a house or retirement, establish smaller milestones. That way, you can celebrate the wins along the way while staying focused on your long-term goals. Because I am in my early 20s, it's harder for me to visualize how retirement will look. So instead, I think about how much I want to have invested a few months to a year from now.
3. Live Within Your Means
This piece of advice is easier said than done, but a guaranteed way to build wealth is to save and invest more than you make.
To do that, you need to either live within or below your means. If you are a big spender, you'll always feel like you're living paycheck to paycheck no matter how much you make. Of course, the shortcut would be to increase your income as much as possible. However, spending responsibly also plays a significant role as most people tend to lose out to lifestyle inflation as their income rises.
I'm a huge advocate of living below your means. Though people often immediately think about the sacrifices they'll have to make to live frugally, it's all about finding the right balance. Rather than depriving yourself of things that make you happy, reframe the way you think about saving and spending.
In the past, I sought validation and happiness by overloading myself with material items like shoes and clothes, but spending money on all those things was not making me happy. Instead, I now apply Marie Kondo's Rule 6 to my life - ask yourself if it sparks joy. Looking at all the things I accumulated in my closet didn't bring me joy. So, instead, I started focusing on things that add value to my life, such as quality food and live experiences.
4. Diversify Your Portfolio
If anyone tells you they know exactly what will happen to the financial markets in the future, they are either a time traveler or a liar. Because nobody knows which asset classes will perform well at any given time, the only way to deal with market uncertainty is to diversify your holdings. By investing in a wide range of securities, you spread out your risk and ensure that you do not overinvest in any single asset.
Currently, I hold cash, stocks, bonds, and cryptocurrencies. I also have a California real estate license and plan on purchasing properties in the next couple of years. The key to diversification is to diversify within each asset class and among different asset classes. For example, I invest in individual growth stocks as well as total market index funds and ETFs. That way, my more stable investments balance out the riskier ones.
5. Manage Your Risk
Understanding your risk appetite will impact the type of investor you will become. If you are risk-averse, you are better off investing in an S&P 500 index fund or blue-chip stocks, such as Coca-Cola, Disney, or IBM. If you have a high risk tolerance and can stomach volatility well, consider investing in cryptocurrencies and growth stocks.
Because of my age and tech background, I lean towards assets that are traditionally considered highly risky. However, I only put in money that I am willing to lose, especially if the securities are volatile and fluctuate daily. With investing, not every asset you pick will be a winner, so knowing how to manage your risk will go a long way. If you overextend your positions, you could be in for a world of pain if things don't go the way you planned.
6. Control Your Emotions
Our emotions heavily impact our behaviors and thought processes, which is why being methodical and disciplined is valuable. There have been many times where I got caught up in a momentum trade and ended up bag-holding because I kept waiting for the stock to reach higher highs. As much as we'd all like to think that we are rational beings, sometimes FOMO, or the "fear of missing out," gets the best of us.
In an age where most people are constantly on social media, staying calm and composed can be difficult, especially when we see people like the Dogecoin Millionaire or Roaring Kitty. No matter what happens, remember to do your due diligence and not panic or succumb to FOMO. As a primarily buy-and-hold investor, I generally take a long-term approach to my investments. That means not letting FUD (fear, uncertainty, and doubt) control my decisions. Instead, I invest only in things I understand and limit some of my positions if I do not feel confident in them.
7. Keep Investing Costs Low
If you plan on investing a lot of money, knowing your investing fees could make a significant difference in your overall profits. That includes financial planners and coaches, mutual fund managers, robo-advisors, index funds, exchange-traded funds (ETFs), etc. Investors with high net worths tend to focus on minimizing costs because fees eat into their profit margins. But, no matter what your income level is, your investing costs should be at the top of your mind.
Before investing in anything, make sure you understand the fees and tax implications. For example, many actively managed funds have high fees, but they do not always outperform the market. As a cost-conscious investor, I do all my research on my own and try to avoid funds with high expense ratios. While some people prefer having a financial planner or advisor to guide them, you do not always need one. If you have the time and motivation, you can learn everything on your own.
8. Stay Patient and Consistent
Unless you expect to win the Mega Millions Lottery or become an IPO millionaire, your ticket to becoming financially independent will likely be through saving and investing consistently. Rather than dwelling on get-rich-quick schemes, stay patient and focus on the long game. For some people, that may mean investing in S&P 500 index funds like VOO or SPY, which is not sexy but gets the job done. Others may choose blue-chip stocks, such as Walmart, Microsoft, Apple, and Amazon, to hold for the next few decades.
With any investment, there will be risks involved, which will test our patience and determination. During times when the markets are declining, rather than getting discouraged and losing focus, understand that these circumstances are normal. Investing comes with many hurdles and obstacles.
We recommend dollar-cost averaging, or investing regularly, even during bad times and making adjustments to your portfolio as needed. Whenever I see stocks on my watchlist dip significantly, I start loading positions in my highest conviction stocks. However, note that this strategy is not for the faint of heart. There have been many times where my assumptions were wrong and I bought positions in stocks that continued to fall afterward.
9. Start ASAP
There is no right age to begin investing. You can start as early or as late as you want, but the longer you wait, the less compound interest works in your favor. I often think about how much more money I would have now if I had invested part of my money from part-time jobs and internships into the stock market back in high school. But, no matter what your financial circumstances are right now, it's never too late to start investing.
As most investors like to say, "time in the market is better than timing the market." Many factors affect the financial markets, most of which are out of our control. No matter how many statistical models we make, we can't predict everything. So, instead, we should focus on investing as early as possible and as consistently as possible.
The Bottom Line
Regardless of your age, income, or background, you can achieve financial independence with a bit of knowledge and discipline. Get started as soon as possible with as much as you can afford. Your investing strategy does not need to be perfect as long as you take the first step. The earlier you start, the more time you give yourself to make mistakes and achieve your goals!