1. The first rule of investing is …. invest. Put money into an investment account. If you can’t do so on a set schedule, do so on a set program - for example, every time you have windfall cash, put half of it immediately into your investment account. Use the other half on debt reduction or, if you must, something you will enjoy - but always put half into your investment. What are windfalls? Overtime! That’s not part of your salary - it’s a windfall. Bonuses. Gifts. Rebates. Refunds (looking at you, tax refund!) A $200 incentive you earn by opening an account. Cashback from credit cards. A repaid debt from a friend (not that this actually ever occurs, I know).
2. The second rule of investing is … never, ever, EVER touch your capital. If you put $100 into your investment account, that initial investment always stays there. You can take out dividends if you absolutely must but never touch that capital. This is the “goose that lays the golden eggs” principal. The capital - that means anything other than dividends, cash-in-lieu, and royalties - is your goose. The income you earn from it, such as dividends, are the golden eggs. Don’t kill your goose. Don’t even cut body parts off it. Leave the goose alone.
3. The third rule of investing is … when buying stocks, buy only dividend (income) producing stocks. If stocks don’t pay you dividends, they are only worth money when you sell them - and guess what? When you sell them, you don’t have them anymore. You don’t get regular return on your investment. For every good non-income stock, there’s a good income-paying stock. Why on earth wouldn’t you choose an income stock?
4. Rule #4: Do NOT use dividend reinvestment (DRP) plans. First, it takes the decision to reinvest out of your hands. Why would you trust someone better than you trust yourself? Second, it has a ginormous opportunity cost. Those little drips eventually grow into a share of stock, but is that necessarily the stock you’d be deliberately purchasing at the moment? Even worse than having someone else make the decision for you, drip programs have no intelligent oversight at all … they just are.
5. Rule #5: NEVER pay someone to manage or invest your money. This includes financial planners, fund managers, ETFs, and fees for trading (commissions). If you like an ETF or a specific fund, look at the top ten holdings and start acquiring those holdings independently. ETFs DO have a built-in cost. If you put $100 into an ETF, you will NOT get $100 worth of equities. If you put $100 into a fund, you do NOT get $100 worth of equities. If you want to buy $100 worth of stock and there’s a $5 fee for buying it, you are NOT getting $100 worth of stock. No-load funds are not exempt from fees. Somebody is paying for the Jaguar the fund manager is driving, no matter what fund (and ETFs are funds) you choose, or how it’s sold to you. Buy your own Jaguar someday … don’t buy one for the guy managing your money.
I’m not fond of spending money on investment advice subscriptions (Motley Fool, etc.). The internet is full of free information on the market and investing. You’re better off putting that $60 subscription fee into a $60 income-producing share of stock. Let’s see … $60 a year for five years is $300 you’ve spent. A $60 share of stock every year is $300 of investment money. If it yields a modest 4% dividend, not even taking in account capital gains, dividend increases, and reinvestment potential, at the end of three years of investing you’ve got $312 dollars. That’s a $612 difference between buying something and investing the money. No brainer!
6. Rule #6: Your stock value, or lack thereof, is only real on paper unless you sell it. Don’t panic when your stock prices fall. Eventually you will diversify enough that one stock can hit rock bottom (or even go bankrupt) and you won’t even care, because everything else in your portfolio is doing well. You’re in this for the long term. You buy something with that precious $100 you’ve got, and next month it goes down to $80. Who cares? It’s likely still paying you the same dividend and, if you have chosen wisely, it’ll come back up eventually. In the meantime, that number doesn’t impact you unless you unwisely choose to sell. Sell it at $80, and you’ve lost $20. Wait until it comes back up and you haven’t lost a thing.
7. Rule #7: When you first start buying stocks, follow certain rules. These are mine:
~ Companies must produce tangible products or visible things. If you can’t SEE what they’re selling, don’t buy it.
~ Invest in companies you understand and, ideally, use and believe in. Do you like a certain product? Research it. Use something reliably, and know it to be a good product? Consider it. You’ll not only be knowledgable (to some degree) about what the company produces, but you’ll have an understanding of the product availability, quality, and consumer issues.
~ If something is glittery and shiny and everyone is buying it, don’t. If Elon Musk says, “Buy this stock!” don’t. If it’s the top of the list on the Kiplinger “Ten Stocks You Must Buy,” don’t. First, you won’t get it at the right value because there’ll be a surge in price, no matter how modest. Second, trust yourself before you trust others. Third, too often what everyone is “talking about” is a fad, a trend, or a risky speculation. Think of stocks as fashion: What’s trendy today is, by definition, not trendy tomorrow. You’re better off picking classic stocks and comfortable blue jean stocks than the skinny pants of stocks, because you don’t want your portfolio to look ridiculous when fashions change.
~ Avoid stock in companies that are ridiculously vulnerable to certain market influences to include litigation, legislation, sudden supply issues, or abruptly-changing consumer tastes.
~ DO NOT TIME THE MARKET. Identify a good, solid, income-paying stock you like, buy the damned thing at market price, and then don’t touch it.
~ Consider buying stock with potential to split or to spin-off new baby companies. I love companies that have their fingers in a dozen different sectors, because eventually they birth baby companies. Those baby companies don’t pay dividends so I sell them and then buy dividend-producing stocks. I’ve made a lot of money this way. I’m looking at you, Honeywell, Ralston-Purina, and several others. For splits, Apple has done right by me. Although investors love to say, “Buy low, sell high,” that’s actually not a rule I follow. Buy high on a good, solid, product-producing and income-producing stock and often your stock will soon split.
~ With rare exceptions, avoid retailers when buying stock. Better to buy the stock in the manufacturers that produce the things being sold at retail outlets than to buy the stock in the retailers themselves. How many big box stores are vacant in your area? Also to avoid: restaurants. See above.
Now, some nuts and bolts. How do you get started? Open an online investment account with FREE trades. There are many that do not require an opening balance for those free trades. Consider a bank that also offers free trading, such as Ally or Wells Fargo, because you can move money back and forth to your linked checking and savings accounts. This has many advantages. Better yet: Open an account at a bank that offers you a $200 or $500 bonus for opening an account, and then use that money to fund your investment. This will also keep your investments “pure” so you’ll know how you’re doing without having to deduct all the deposits and withdrawals you make from your regular bank.
Once you’ve got the account open, make your first trade. Just do it. Don’t overanalyze and be paralyzed by all the kajillions of choices and variables. Pick a major company that’s doing well - something that isn’t sexy and isn’t trendy - and buy the damned shares. Got $100? Buy some Pfizer (PFE) and you’ll own some “big pharma” stock (they usually pay solid dividends, BTW.) Consider 3M (MMM) (did you know they make sandpaper and sticky notes?) or Procter and Gamble (PG). I mean, everyone uses toilet paper and toothpaste … and they pay good dividends. Do you ever eat? So does everyone else. Look at General Mills (GIS), Mondelez (MDLZ), or Kraft Heinz (KHC). What do these have in common? They produce tangible goods, they pay dividends, they may split or spin off other cute little baby stocks, and they are definitely not sexy or fashionable. They make the goods that other companies sell or cook up into dinner dishes.
Keep good records of all your trades. You’ll need them at tax time, particularly when one of your stocks splits, merges, or spins off others. You’ll have to establish a cost basis for the proceeds, and you can’t do that without keeping records of your purchases.
Do not sell any stocks short term! This will impact your taxes also. Of course, you weren’t going to do that anyway, because of Rule #2, above.
Now, get together that pool of cash you have on hand - or take that credit card rebate money you’ve got accrued - and invest. See Rule #1.
Go forth and prosper!
(c) Copyright 2021 Marcy J. Miller * All rights reserved * No part of this content may be used without express permission of author * Links to this page, however, may be freely shared and are appreciated.
