There are many times in life when the “KISS” approach is the best. (KISS = keep it simple, stupid!) Successful investing is one of them. The vast majority of investors have a “day job.” That is to say, they work at something other than managing their investment portfolio. That means that most of us need to follow a few simple steps to successful investing.
Simple Steps to Successful Investing
- Take advantage of 401K’s, IRAs, and other tax deferred investment vehicles
- Invest in your home
- Pay off credit card debt before any other significant investing
- Keep your investment vehicles simple
IRA’s and 401 K’s
An IRA is an account that you create with a financial institution such as a bank or stock broker. It gives you a way to save with the growth of you investment being tax free or tax deferred.
Issues such as whether you use a traditional IRA or a Roth IRA are important but the most important part is to have your investments increase in value with being taxed until you cash out.
A 401 K is similar to an IRA but it is sponsored by your employer. A common benefit is that your employer matches your contribution each year. Your money grows without being taxed over the years and is only taxed when you withdraw it during retirement when you income is less and your tax bracket is lower.
Buy Your Home instead of Renting
Interest on your home mortgage is deductible on your income tax. This law is meant to promote home ownership and economic stability. Simple steps to successful investing include owning your own home.
Pay Off Credit Card Debt
In our article featuring tips on how to start investing we mention paying off credit card debt.
Before you start putting money into stocks you need to pay off your credit cards because the interest you pay on those is more than a beginner can expect to make on his money in the market.
In fact, the interest paid on credit card debt is greater than many professional investors can reliably make year after year. The first simple step to successful investing is to pay of the credit cards.
The Minimalist Approach to Successful Investing
One of the simple steps to successful investing is to take a minimalist approach as suggested in an article by CNBC.
Life is complicated enough. The number of investment choices in a typical 401(k) plan – about 25, according to a recent report from the Investment Company Institute – is proof.
If you have a current 401(k), an individual retirement account or two, and perhaps a 401(k) from a former job, you may have money in dozens of funds. That’s not even factoring in an individual retirement account and a brokerage account.
Across these accounts, you may be duplicating where your money goes.
But do you really need to choose that many investments?
Their suggestion is to use three index funds that track US stocks, bonds, and international stocks. They also suggest a mix of taxable, tax free, and tax-deferred accounts.
Active versus Passive Investing
Over the years more and more investors have found that they are unable to successfully time the market. And, many find that their stock picks, bond purchases, and real estate investments are not beating the return on an index fund that tracks the S&P 500. Thus, many have moved to passive investing.
If you want to be an active investor and believe that your investment choices will outperform a set of passive investments, you need to spend the time necessary to track your investments and do research for picking new ones. If you simply do not have the time to do this, consider the simple steps to successful investing that we suggest. These steps are also useful if you are interested in ESG investing.