How to be a Millionaire? – Part 2

Invest

In the previous post we have discussed about savings. Now we need to do something with that money. Where can we invest our regular savings? The options are endless: put them in a saving account, buy stocks, buy bonds, buy ETFs, invest in mutual funds, peer-to-peer lending, forex trading, commodities, real estate and the list goes on and on. You have a millions ways to invest your money (and a million ways to lose it).

But what is the safest and fastest way to become a millionaire? The honest answer is: I don’t know. And anyone who tells you he knows a safe AND fast way, is either lying or wants to rip you off. Looking back to the past everyone can be smart: “You should’ve bought Apple in 2003 for 1$!”, “Why didn’t you hold gold between 2006 and 2011?”, “I should’ve put all my EUR savings into USD in 2008!”. Nobody knows what will be the best investment, especially when we are talking about an investment plan that is taking 10-20 years. Nevertheless history can teach us a lot of useful things about economy which allows us to come up with a plan with a good risk/reward ratio. In the followings I’m going to explain my early retirement investment plan and the investing principles behind it.

Diversify

As I said I cannot predict the future. But there is a simple way to reduce the risk is to diversify your investment. Yes, you might pick the next winning stock that will worth 100 times in a couple of years, but the chances you don’t is much higher. By adding more assets to your portfolio, you both increase the chance of selecting something that over performs, furthermore you also reduce the overall impact of a bad investment. Let’s say you purchase something that falls 50% in value. If this is the only asset in your portfolio, your overall portfolio value will of course drop 50%. If it represents 1/3 of your portfolio value, the overall impact is 16.67%. If it weights 20%, the impact is 10%, at 5% it is only 2.5%. Sounds more manageable, doesn’t it?

In future posts I will write more about how to diversify your investment.

Keep it simple

Do you really know what you are buying? If you cannot explain it clearly (well, maybe not to a 5 year old kid, but let’s say to your friends over a pint), don’t buy it! There are so many complex investment products out there like MBS, CDO (by the way does subprime crisis ring a bell?) and the list goes on and on. I am not saying that all these are wrong products and you can only lose with them, but if you don’t know how these work, just stay away from them. Furthermore most of these are very actively managed products with high costs. And when you are investing in your early retirement why would you pay all these high fees on the way, while that money would have a better place working for you?

The below video tells more than a thousand words I could write in this subject:

Keep calm

Keep calm

When it comes to investing for early retirement, keep in mind: you are an investor and not a trader. Don’t jump in an out from your positions. Have a solid plan about what do you want to invest in, and stick to it! Is the price going up? Don’t even think about selling the winning players! Is the price going down? Why would you sell? There was a reason why you have invested in that asset, and unless something major has happened around it, now you have a chance to purchase on a discount. The only reason to sell is a fundamental change that makes the long term prospect of your asset questionable. This might happen with individual stocks (companies might go bankrupt), but never with the overall stock market. Recessions will always happen in the economy, but the overall direction is always up. Don’t sell the market in the panic, use the opportunity to buy. Just like you do during seasonal sales at the mall…

 

Three basic principles. Simple, right? In the next post I’m going to explain how I implement them in my early retirement plan.

 

Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on early retirement.

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