5 Tenets of Successful Stock Investing

Stock investing doesn’t have to be overly complicated.

Anyone, given a paycheck and the desire to acquire wealth, can succeed using my simple stock investing strategies.

Those strategies are summarized below. They will help you maximize your returns and minimize your risk. They’ll make you a better stock investor whether you’re just starting out, ready to retire, or somewhere in between.

Stock Investing Tenet #1: Minimize Investing Expenses

There has been a revolution of sorts against high stock investing costs as of late. Still, there are plenty of rip-off artists disguised in suits out there ready to take your money. Don’t let them fool you. Keeping your investment expenses as low as you can is fundamental to your investing success.

That’s why I favor no-load index mutual funds and commission-free passively managed ETFs. I’ve found these vehicles are not only effective but have the lowest costs and are the most hassle-free. Go ahead and add more active elements to your investment plan, but only if you’re willing to dedicate the time necessary to manage them.

Seek out funds with the lowest of the low expense ratios, which should be your only cost of investment. Use a brokerage that doesn’t charge you a fee when trading individual stocks and ETFs. Be your own best money manager and make your own investment decisions.

Stock Investing Tenet #2: Utilize Risk Management Strategies

Risk can never be eliminated from an investment plan. It can, however, be managed. Let me introduce you to three risk management strategies, inspired by Modern Portfolio Theory, which should be incorporated into all your investment plans:

Risky to Not-So-Risky Ratios

Decide beforehand how risky you want your plan to be, based on both your time horizon and your risk tolerance. Make decisions on your risk level for the coming year as well as all subsequent years before you invest.

This is accomplished by setting percentages for both sides of your risky to not-so-risky ratio for each year of the investment plan. Start with year one. On the risky side are your stock investments and any other risky investments like real estate, commodities, and digital assets. On the not-so-risky side are bonds and any other less risky investments like CDs and money markets.

The longer your time horizon and the higher your risk tolerance for investing, the closer you want to be to the riskiest of all ratios, a 100-0 risky to not-so-risky one. Contrarily, the shorter your time horizon and the lower your risk tolerance for investing, the closer you want to be to a 0-100 risky to not-so-risky ratio.

Dynamic Diversification

Another advantage of using no-load mutual funds and ETFs is the amount of diversification you can achieve. Hundreds of top-performing companies can be bought with a single fund. Use multiple funds, and you can achieve levels of diversification not possible with individual holdings.

On the risky side, you want to mix small, medium, and large company stocks, along with stocks with different investment styles (value and growth) into the plan. When longer time horizons exist, small-cap and international stocks as well as alternative investments can be added as part of the dynamic diversity.

On the not-so-risky side, interest rate risk and business risk exist. Interest rate risk is managed by investing in short-, medium-, and long-term investments, while business risk is managed by investing in fixed-income investments that have varying degrees of it.

The “dynamic” element of dynamic diversification refers to how your diversity changes from year to year, on both sides of the ratio. Just as your risky to not-so-risky ratios get more conservative over time, so should your diversity.

Rebalance and Reassess

At least once a year, investment plans need to be rebalanced back to the risk level defined by the plan, which may get knocked out of whack due to the volatility of the stock market. Eventually, yearly downward adjustments to your risk level must be made too, per your pre-determined risky to not-so-risky ratios and dynamic diversification.

It’s been my experience that many investors implement the first two strategies, then for whatever reason don’t rebalance and reassess, which needs to be done at least once a year. All three risk management strategies, including rebalancing and reassessing, need to be done well for you to succeed. Hire someone to do them for you or invest in a well-run all-in-one index fund if you think you’ll neglect your management duties.

Stock Investing Tenet #3: Invest Tax-Advantaged

When investing for longer-term goals like financial independence and retirement, you need to be all-in on tax-advantaged accounts. Why? You’re practically guaranteed a higher after-tax rate of return because of the tax advantages.

I advise maxing out all your tax-advantaged opportunities before even considering investing in a regular taxable account. Why not take advantage of the free wealth-building tools your Uncle Sam offers?

Start with any employer-sponsored option you’re offered, especially if there’s a match. If you don’t already have one, open and fund a Roth IRA. I believe everyone should have a Roth IRA, even if you have a Roth option at work. Or maybe you want to become an HSA millionaire?

Combine those tax savings with high-performing funds with the lowest expense ratios. Then add my three risk management strategies and you’ve got one of, if not the best wealth-building tools on the planet!

Stock Investing Tenet #4: Make Timely Investments

Spend most of the money you earn as you wish. That’s your business. I’m only concerned about a sliver of those earnings, that percentage of net income you take right off the top of every paycheck. I’ve found that’s the best way to save and invest for any financial goal: Do it every paycheck.

Even the best stock investing plan with the greatest amount of tax advantages does you no good if you don’t have the money to feed it. Call this small fraction of your income saved your prosperity percentage, savings percentage, or whatever. It’s your most important money.

Stock Investing Tenet #5: Have a Plan

Never invest in stocks without a purpose. If you do, your investment will be much like a rudderless boat: You’ll go this way and that and never really get to where you want to go.

Right now, I’d like you to allot at least an hour of your time for an important meeting. With yourself. If you have a significant other, invite them to the meeting too.

You’re going to make some important decisions during this meeting (see tenets 1-4), so set it at a time when you’ll be at your best and won’t be distracted. Keep in mind even a small amount of time spent on financial planning and goal setting pays huge dividends.

Your 250-page Stock Investing Guidebook

Learn more about my 5 tenets, plus much more, in my new book DIY Stock and Securities Investing Investment Strategies for Building Wealth and Attaining Financial Independence. Keep the book, along with the detailed table of contents, handy to help answer all your questions on your journey to financial independence.

Purchase at Amazon®