45 How to choose the best investments
Welcome to episode 45 of the financially free journey podcast and I am your host Courtney dyer.
Welcome back to the financially free journey podcast where we aim to dispel the seemingly complex topic of personal finances, money management, debt, savings, investing and even retirement. And in todays episode we are going to be covering how to choose the best investments for you.
This episodes topic was chosen after a listen wrote me an email which is firstname.lastname@example.org and asked the following question:
“Hi Courtney! I would really appreciate if you would cover how to go about picking the best investments for yourself individually. I have been doing a lot of research and understand some of the basics but I feel like I just cant grasp if the options that I think are right for me…are actually right for me. I am terrified of picking the wrong investments and messing up. Please explain”!
This is a great question and is a pretty common predicament that many of us find ourselves in. It can be human nature to tend to over anaylize. Have you ever heard of the saying “paralysis by analysis”? This is where you think about and research something so much and you have so many options and choses to choose from that you end up not making a choice at all.
This is a predicament that we can find ourselves in throughout many different facets of our lives, and especially when it comes to our money.
Making the right investment decisions IS an important choice to make and you should absolutely not do it without being informed and making the decision with all of the information you need to make the best decision.
The issue here is that a lot of people don’t know WHAT they should be researching or WHERE to find the information.
In this episode, I am going to break down some things that you need to consider and make sure you understand about investing prior to making your investment decisions. For most of us, your investing for big goals like retirement. These big goals you are saving and investing for are too important to jump into as an ill-informed investor. Its important to take the time to research your options and decide whats important to you…but it is also equally as important to take action on the information that you gather.
So before becoming an investor that is going the DIY route, there are some pretty important questions you need to ask yourself to understand your investment style. So lets go over a list of different investment styles and strategies to help you determine your investment style and how to pick the best investments for you!
So here is the first question you need to ask yourself and consider prior to anything else- Are you a “do it yourself” investor or should you hire a professional financial advisor to invest your money for you?
To put it plainly- whether you decide to do it yourself or have a professional advisor do your investing for you…you ARE choosing an advisor. Think about it this way, if your family or friends came to you and asked you for a recommendation on a financial advisor, would you recommend yourself? Do you want to hire you as the advisor to manage an invest your money or do you need to hire someone else to help you? What is the value of your time compared to the cost associated with hiring an advisor?
Also consider this- do you enjoy the process of researching different companies to invest in? Do you enjoy looking through company financials and analyzing things like a stocks P/E ratio? Do you enjoy more basic money things like budgeting, saving, etc? If the answer is yes… fantastic! You could do a great job at investing your funds and making the right decisions for your investment style. If the answer to those questions was NO, then I would highly recommend you look into hiring a professional financial advisor to manage your investments for you.
Regardless of whether you do the physical investing yourself or you hire someone else to do it, it’s important for you to better understand your investment style so you can have an informed conversation with the advisor and understand what is being done with your hard earned money.
Let’s go over a basic principle of investing which is passive vs. active investing styles.
You may have heard the term “index funds” and might not fully understand what that means. You also may have heard the term “day trader” and not know exactly what that entails. Let’s go over these two opposing investing styles and see where you lay exactly.
If you believe that the extra time, energy and trading costs required to actively trade is not worth it, you are most likely a passive investor. Passive investors are looking for more sustainable, long term growth in their investments and believe that over time, the stock market rises and if you are adequately diversified, you will see compounded growth and capital gains on your investments.
Now, if you believe that by doing research, understanding financials and actively being involved in the investments you make, you are more than likely an active investor. This means that you believe you can outperform the market and capitalize on buy/sell opportunities if you pick the correct stocks.
This is also referred to strategic or tactical investment styles. Strategic investors believe that the idea of “outperforming the market” is foolish and if you buy and hold your investments, overtime you will see returns. A tactical investor believes that they can outperform the market with well-timed moves to achieve returns that are superior to the market as a whole.
Now that you have uncovered if you’re a strategic or tactical investor, lets cover the idea of buying stocks vs mutual funds and which one is best for you.
As an investor, you can buy individual stocks of companies or you can buy into a mutual fund which is like a basket of stocks of a lot of different companies. The question a lot of the time is which one of these options is best for you?
If you are an average investor or beginner, looking into the option of mutual funds will most likely be best suited for you. Studies have found that the stocks individuals buy under-perform after they buy them and outperform after they sell them. This is primarily due to the fact that over 75% of all traders are institutions which is some pretty steep competition.
Another aspect that is attributable to this is the concept of investing into a stock based off of investor sentiment. Heres an example, you are sitting around the dinner table with your family and your brother-in-law mentions that he just made a ton of money on a certain stock and that you should look into it. So you go home and buy the stock only to see that you don’t get the returns your brother-in-law was bragging about. Why is this? Well, most individual investors tend to buy stocks when the stocks are “popular” and are on a high when it comes to the price of the stock. The more a stock is traded, the higher it drives the price of that stock. Now, once you see that your not getting the returns your brother-in-law was talking about, you dump the stock after the value of the stock went down because you want to cut your losses. This is another example of buying and selling stock based off of investor sentiment and emotion. Most individual investors buy stock when it’s overvalued in price and then sell the stock when they start to take a lose. This is why most people who try to jump into the market and buy individual stocks fail to see positive returns overall in their portfolio.
This brings me to the next investing styles you will want to consider and determine which style you are as an investor.
Lets talk about value investing vs. growth investing. Whats the difference and why does it matter?
A value investor is someone who is looking for stocks selling at a “discount”, a value investor is looking fotr a good deal when it comes to the purchase price of the stock. Value investors look for stocks that are selling at a rpice that is low in relation to the earnings the company has on the books.
A great way to get exposure to value stocks is by buying into a mutual fund with a value objective. The value objective is built into the investment strategy and the stocks that the fund manager picks to be in the fund. Rather than spending countless hours researching companies are reviewing their financials, you can look into mutual funds with a value objective so you know all of the stocks your money is invested into is aligned with your personal investment beliefs.
Now lets cover growth investing. As the name states, growth stocks typically perform best in the mature stages of the business cycle when the economy is growing at a steady pace. The growth strategy reflects what corporations, consumers and investors are all doing at the same time in a healthy growing economy—gaining increasingly higher expectations of future growth and spending their money to do it. A great example of a growth stock is a tech company. This shows you how a growth investor believes that the tech company is a great pick even though the stock is typically overvalued. That means that the price of the stock is high in comparison to the actual earnings of the company. This is because the investor believes that the company or the sector the company is in, IE TECH, has tremendous growth potential.
Now that we have covered value and growth investing strategies, lets quickly touch on what the term “buy and hold” means.
Buy and hold investors believe “time in the market” is a more prudent investment style than “timing the market.” The strategy is where you buy investment securities and hold them for long periods of time because the investor believes that long-term returns can be reasonable despite the volatility of the market. This strategy is the complete opposite strategy of market timing, which typically has an investor buying and selling over shorter periods with the intention of buying at low prices and selling at high prices. Have you heard of the term “day trader”? That is exactly what this is describing and is the complete opposite of the buy and hold strategy.
The buy-and-hold investor will argue that holding for longer periods requires less frequent trading than other strategies. Which means trading costs are minimized, which will increase the overall net return of the investment portfolio.
Ok, we have covered a lot. We have talked about a few things that you need to think about in order to determine what type of investor you are which will help you pick the best investments for YOU.
So here are some questions to wrap this up nicely:
- Are you a DIY type of investor and want to be actively involved?
If the answer is yes, you will be managing your own portfolio and if the answer is no, then you will be looking into hiring a professional to manage your investments.
- Which theory do your beliefs most align with? Do you agree more with the value investing theory or do you more align with the growth investing theory?
- Do you think it is possible to time the market or do you think that time in the market is more important?
- How do you feel about diversifying your portfolio by investing in hundreds of companies through a mutual or index fund?
- Would you rather take a chance on investing large sums into individual companies? These last 2 questions will help you nail down if you would rather invest in index and mutual funds rather than picking individual stocks
- Last question, how do you feel about market volitility? If you woke up in the morning and your account value had dropped by 50%, how would that make you feel? This question will also help you better understand what type of investor you are depending on the amount of risk you are willing to take with your money.
Make sure you have an answer to these questions and are able to adequetly define what type of investor you are prior to meeting with a professional. You don’t have to know perfectly but you should have an idea of how you feel about the basic fundementals of how the market works.
There is A LOT more than goes into understanding what type of investor you are and how to pick the best investments for you but I will dedicate additional episodes to this topic so we can continue to dive deeper into this topic and you can really understand the fundementals of the market.
But for now, I want to finish up this episode by thanking you for tuning in. If you haven’t already make sure you go subscribe to the show, rate the show by tapping on the stars and take 30 seconds to write a review.
I am excited to announce that I will be giving away FREE LIFETIME ACCESS to my online course to 3 individuals that write a review for the show! I have never given away free access before but I think the holiday season is a great time to run a giveaway for my course that is the gift that keeps on giving!
Reviews help the show become more discoverable to the podcast community and therefore helps more people discover the show and hear this content that could potentially change their life.
Starting today…I am recording this episode on December 18th– any review that is written from today until December 24th will be entered into the giveaway!!!
Here is what you need to do exactly- go write a review on apple podcasts. You just go to the show, scroll down until you see where it says “ratings and reviews”, in purple you will see the words “write a review”- just click that and write a review for the show. Please make sure to let us know what topics you like to hear or you would like to hear more of as well as why you are listening to the show.
After you leave your review- send me a quick email to email@example.com and let me know. This will officially enter you into the drawing to win FREE LIFETIME ACCESS to my online course.
I will announce the 3 winners on the December 25th episode AND I will send you an email to confirm that you have won! How amazing would that be to wake up on Christmas morning and find out that you won access to the course!
If you win, you get to decide if you want to keep the access to the course for yourself or if you would like to gift it to a loved one. When you win, I will email you and ask you some information to activate your access to the course and you can choose at that time if you want to gift it to a loved one.
I hope you all are as excited about this giveaway as I am!
Thanks again for tuning into todays episode and if your not already, make sure you are following us on Instagram @financiallyfreejourney for more tips and motivation to help you on your financially free journey, until next time!