How To Win At Investing

For the last couple weeks, we’ve been talking about investing, namely, how it isn’t nearly as complicated as you think it is to get started. (Start here if you want to catch up!)

Maybe we haven’t convinced you quite yet? Today’s topic may be exactly what you’ve been waiting for: How to win at investing. (I like your style.)

Of course, we don’t have a crystal ball or a sports almanac ala Marty McFly, but there are a few core principles that can greatly increase your odds.

Focus on What You Can Control

You can control what you invest. You can control putting it on autopilot. When you’re investing they call it “dollar-cost averaging” and it just means that you continually invest the same dollar amount over and over and over again.

As the market climbs, you’re buying and it’s increasing in value and then the market dips and you’re still buying. So when it dips, you’re buying low; when it’s high, you’re capturing those gains.

[NOTE: If the market were to decline steadily for 10 years and you’re buying during the whole decline this strategy won’t work for you. You will hear investors say that dollar-cost averaging is a way to guarantee that you buy low and sell high, but that is not entirely accurate. This strategy assumes that the market will steadily inch up over whatever timeframe you’re considering.]

The beauty of autopilot is that you aren’t wasting any time or energy trying to game things you cannot control. You are focused on the one thing you can wholly control—when and how much you’ll invest—ensuring that it happens without interruption or exception—and letting time do its thing.

Diversify, Diversify, Diversify

Or don’t put all your eggs in one basket. Allocation is a fancy word for where you are invested—real estate, stocks, bonds? There are different types of investments and different asset classes among each type. It can get incredibly complex, but that isn’t what I want you to focus on. The takeaway here is simply that it is important to diversify your investments.

For example, if you’ve been invested in energy, as of this recording, you would have seen a big dip in energy prices, and as a result the energy stocks. And maybe at the same time, another sector shot way up, a diversified portfolio decreases your overall risk and increases your potential return. (In case you are zoning out already, these are very good things.)

It’s easier than ever before in the history of the world to do this well. You don’t have to become an expert or spend your free time studying asset class performance. A lot of us at YNAB are big fans of Betterment. You specify your risk tolerance, your goals, how long you expect to have the money invested, and automate the rest. Spend a couple hours per year to make sure everything is balanced and back to focusing on the things you can control.

The Relationship Between Risk And Reward

The more you risk, the more the potential reward—but of course, also, the aforementioned risk. Your tolerance for risk will likely change over time. Normally, as your age increases, your tolerance for risk decreases and you end up allocating or diversifying strategically to lower your risk and protect your principal, while (hopefully) still earning a return.

Investing Is And Should Be Boring

Do not lose sight of the fact that investing should be boring. When someone asks me what I think the market will do, I say something along the lines of: “I don’t know. It will either go up or down. But I’m pretty sure one of those.”

When someone asks me what I think the market will do, I say something along the lines of: “I don’t know. It will either go up or down. But I’m pretty sure one of those.”

If I’m asked about what sectors pose the biggest opportunity right now, I’ll answer: “Eh, not sure. I’m invested across all the sectors because some of them could go up and some of them could go down.” Not exciting stuff. Very boring dinner party conversation. As it should be. Because (at the risk of sounding like a broken record) your energy is best spent laser focused on the things you can control—when and how much you invest. Period.

The Most Winningest Strategy? Time.

If you want to win, you start now. Once you are ready financially, of course, and you’ve taken the time to understand what you are investing in, but then, START. Time is the secret sauce of investing.

So, in review, start now. Do not put all your eggs in one basket (aka diversify). Understand the relationship between risk and reward (more risk = more reward), and find the balance that makes sense for you. Set everything up on auto-pilot and sleep well at night because you are in it for the long-haul and you’ve put your money to work for you.

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