The idea of investing like a millionaire can seem complex — and, for some, a little intimidating. But let’s bust some myths about becoming a millionaire. There are no top-secret ingredients needed. When you figure out their investing recipe, you’ll find out the habits that helped millionaires achieve seven-figure status are remarkably simple.
And no, you don’t need a finance degree, access to a Bloomberg Terminal, or even much investing knowledge at all to invest your way to a million bucks. According to a 2014 Spectrem Group survey, 20% of millionaires said they did not consider themselves knowledgeable about investing, and 60% of those who consider themselves fairly knowledgeable admit they still have a lot to learn.
Here are a few ways you can invest like a millionaire right now.
Millionaires know how to tune out the noise and stay focused
Millionaire investors know that when it comes to money, perception is not always reality. No matter what the headlines on cable news networks or social media say, you should never let those messages sway your investing strategy.
Take Twitter (TWTR), for example. When the social media site went public in November 2013, the media covered the event obsessively. And when Twitter debuted on the stock exchange, its stock value shot up 73% the first day, making it the most traded stock of the day. But what happened since then? Twitter has lost more than 55% of its share price. A $1,000 investment in Twitter back in 2013 would be worth less than $400 today. CNBC’s Jim Cramer was still singing Twitter’s praises back in June 2015. Had you invested then, however, you would have lost 13% of your money.
The same knowledge works in reverse. When the market is performing poorly, it feels logical to get your money and run. But you could actually lose money in the long-term. Smart millionaires develop an investment strategy, and they stick to it (for the most part) come what may. Checking up on investments and reading too much into headlines can actually be harmful. It is best to set up recurring dates to check your investment strategy in advance instead of being reactionary and checking only when you see good or bad news.
Millionaires know success doesn’t have to be complicated
Your investment strategy does not have to be complex in order to be effective. There is nothing wrong with a simple investing strategy; in fact, the most successful strategies can be explained to children.
For example, famous investors like Warren Buffett and Jack Bogle have long championed the merits of investing in index funds. While a regular mutual fund attempts to pick a select group of the best companies, an index fund on the other hand allows investors to own a share of every company. The strategy behind index funds is that you are able to invest in many companies at once, without putting all of your eggs in just a few baskets.
Or, look at it this way: Instead of trying to find all the best-selling books individually, you can just buy a piece of every book in the bookstore. Barnes & Noble doesn’t shut down every time one book fails to sell well, because it has thousands of others on the shelf to balance out its risk.
Not only do index funds often beat their more complex (and expensive) counterparts, they’re actually the most common investment choice for millionaires.
Millionaires know when to act their age
Your investment portfolio is a living, breathing organism that will change over time and need to be adjusted accordingly. Asset allocation — the amount of money you have in stocks and bonds — will be responsible for the bulk of your investing success.
If you’re in your 20s or 30s, keeping 80% to 90% of your portfolio in stocks may be fine depending on how you feel about risk. But your allocations should shift over time, becoming increasingly more conservative with age. It’s generally considered unwise to have so much of your investment funds invested in stocks when you are five to 10 years away from retirement. Millions of people during the Great Recession were hurt tremendously by the market crash because they were too heavily allocated in stocks.
One rule of thumb to check your allocation is to subtract your age from 110. Doing so should give you the percentage you should be investing in stocks. Someone who is 35 years old, for example, should have about 75% of their money in stocks and 25% in bonds. Though it isn’t a perfect rule of thumb, it does give you a general idea of whether you’re going in the right direction.
Again, your risk tolerance is almost as important as your allocation. If you are 90% allocated in stocks and you wake up in a cold sweat each night because you’re worried about the market, you might be better off allocating more into bonds. Of course, you might miss out on big gains when the stock market does well, but at least you’ll be able to sleep at night. An easy way to invest your age is to invest in target date funds. These funds are tied to your estimated retirement date and their allocations will automatically adjust as you age.
The key is staying invested even during the down times. Don’t panic because of a drop in the market. In most cases if you’re properly allocated, you should have nothing to worry about in the long term.
Millionaires probably didn’t wait until they were millionaires to start investing
You don’t have to wait until you have a lot of money to get started in the market.
If a worker were to save just $5,000 a year between ages 25 and 65, it would be possible to become a millionaire. That breaks down to about $417 per month. If you’re putting this in a 401(k), you could be getting a match, meaning you wouldn’t have to put in the full $417. If $417 still feels like a lot of money, you can invest less, but you’d likely have to do it for a longer period of time. There is nothing wrong with starting small, but no matter what you have, it is imperative that you start.
Most workers would do well to open a 401(k) and set aside a percentage of their paycheck each month. If your job offers a matching 401(k), you should at least max out your contribution to capture the full match. That match is like a guaranteed return on your money, something the stock market can’t offer. If you aren’t quite ready to explore 401(k) or IRA options, consider saving a small amount of your pay each month.
Millionaires know cash isn’t always king
As stated earlier, we have a natural aversion to risk. There are many people who feel it is in their best interest to wait until it’s the “right time” to invest or would rather just invest in something with a much lower return because it feels safer.
In their latest guide to retirement, the folks at J.P. Morgan show how investing in cash can seriously limit your ability to grow your wealth.
Let’s start with Noah: He is very conservative. He invests in no individual stocks and no mutual funds. He’s just afraid of losing his money. From ages 25 to 65 Noah invests $10,000 every year in very safe investments like money market accounts and CDs. Assuming he gets a generous average return of 2.25%, Noah would have $652,214; he put in $400,000 of that amount on his own.
Quincy on the other hand also starts investing $10,000 at age 25 each year and stops at age 35. Quincy decides to take on more risk by investing his money in mutual funds. With an average return of 6.5%, he would have $950,588 by age 65!
Though Noah invested four times the amount of money, he’s still nearly $300,000 behind Quincy. Millionaires know the key to investing isn’t to avoid all risk, but instead to take the right amount of risk given the situation.
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