This post is brought to you by Pauline of InvestmentZen.com
I have always been fascinated by the process of making money, saving and investing. I even write about it for a living! Yet, I consider myself a dumb investor. And that is ok. When it comes to investing, I follow a very simple method: I just invest. I invest, and invest, and invest again.Whenever I get a payment, be it a regular one at the beginning of the month from my tenants or the sporadic ones I get from freelancing clients or renting out my guest house during the month, I invest. My bills get paid with the rent monies and then whatever is left gets invested. Other expenses go on my credit card, which I then pay in full the next month. In the meanwhile, the rest of my cash hopefully works hard on the markets. Rinse, repeat the next month and the one after.
I don’t really pay attention to where the markets are at that particular time, because I simply dollar cost average my investments. By investing frequently and regularly, sometimes I will buy cheap, sometimes a little more expensive. That is ok, too. I am not smarter than the market. Being a dumb investor is about doing what works, and not trying to be smart. As a matter of fact, only a few active fund managers are able to beat the market. By using that dumb investing technique, you are already getting ahead of the vast majority of people. You are actually saving money.
With an abysmal savings rate around 5%, American households are not doing everything they can to prepare themselves for a bright financial future. A dumb investor on the other hand, knows how to live within his means to find more money to invest. Have you ever read these posts about people who looked plain normal, yet when they pass their family discovers they were sitting on millions in stocks and shares? Do you think they spent hours researching the markets? Probably not. One I remember was a janitor. They were average people like you and me who invested faithfully a big part of every paycheck into index funds or dividend paying stocks. Eventually, their money snowballed and reached the seven digits.
It takes just a few dollars to get started. Many low fee robo-advisors let you open an account with less than $500.
And the snowballing happens sooner than you think if you keep investing. From 1980 to 2016, the S&P500 has returned 8% annually, and 11% if you reinvested the dividends. Let’s use 8% to be safe. If you are 25 and manage to find $300 per month in your budget to invest, by the time you are 60, you will have $697,100 in your nest egg. $300 if quite a bit of money when you are young, but many of us have car payments bigger than that. It is $10 a day, that you can save by brown bagging your lunch to work. Or you can try to make an extra $75 a week, by freelancing for a couple of hours.
Whatever the way, it is much easier to find $300 now than to find $1,000 a month from age 40 to 60, a setup that will only allow you to save $594,800. By investing early and frequently, even if the market dips, you have time on your side to build a sizeable nest egg. Don’t try to be smart and look for the next Tesla, or risk all your money in shiny stuff like Bitcoins. Dumb investing is boring, it is not glamorous, but it works.