In Jim Collins' post #1 we learned that there will be market (stock market) crashes, but the market always goes up and that we have to toughen up and ride out the storm.
In post #2 we learned that the market always goes up (over the long term). Is it sinking in?
In post #3 we learned why most people lose money in the market. Mostly it is from herd mentality as we buy high and sell low. We hear from others the market is doing well and buy in, but by the time we hear that (the market is doing well) it is too late. Then the market drops and we panic. We try to sell before it drops more, but it probably doesn't drop more and rises over the next few years, so we ended up selling low.
If you didn't get it yet, I'll repeat - In the long run the market goes ...
Eat The Financial Elephant has a nice summary of the stock series - DIY Investing Resource #1: JL Collins’ “Stock Series”
So here are guidelines:
- Pay yourself first. Save some of your income every month.
- Invest on a regular basis. Don't panic when the market drops. Don't sell.
- Decide on a portfolio of low cost stock and bond index ETFs.
- Manage your investments yourself. Once you have decided the portfolio of ETFs, you don't need someone to tell you what to invest in.
- Make smart tax based decisions. Re-balance the portfolio as you buy. Once per year check if additional re-balancing is required.
- Once you have investments equal to 25 times your annual expenses, you are financially independent.
The next three posts on Investment Portfolio, Investing and Re-balancing will provide an example of how to execute a particular investment scenario; specifically, where you are saving for retirement and do not have a work funded pension. This means the scenario makes full use of RRSP room and has a long term objective. I chose this scenario as it is very common and will last for a significant portion of your life. You will see the strategy for this scenario is to pick a portfolio of ETFs, contribute cash to your accounts each month and buy the ETFs in your self-directed accounts.
Other Scenarios I will discuss in later posts, on how the strategy will change in these situations, are:
- You can only afford to save a little each month. This makes it relatively expensive to pay the transaction fees to buy a small number of ETFs. Need to do something different.
- You are saving up for a down payment to buy a house. Your time horizon is much shorter and you can't afford a drop in the market.
- You have a mortgage and need to decide whether to pay down the mortgage or invest.
- You have a company defined benefit (DB) pension plan and you still want to save outside of that. The DB plan will likely exclude you from using an RRSP and you will likely want to pick a different asset allocation depending on the security of the DB plan.
- You have a company defined contribution (DC) plan which will also limit or eliminate the room available in your own RRSP. The company DC plan will have a limited selection of funds. You need to think about which funds to have inside the company DC plan and which ones to have in your own investments.
That's it. Short and sweet. Save your energy for the next 3 posts. :)
Disclaimer: These posts are not fully comprehensive financial advice. You should seek your own qualified investment, tax and legal advice.