How a Market Professional Invests His Money (and it’s not picking stocks!)

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I’d like to welcome a guest post from Joseph Hogue, CFA who runs several blogs and a YouTube channel on stock market basics, working from home, and peer finance. Today, Joseph shares with us how he invests his money and gives us some tips to become more comfortable with investing decisions!

Learn your Investing Options and Know that It’s Not all about Stocks

After a 30% return on stocks last year and the longest bull market in history, people have never been so excited about investing. Just imagine it, that same 30% return each year would turn just $100 a month into a million in just 20 years!

And with new investing apps, Bitcoin and something else popping up each day, getting started on your road to riches can be more than a little confusing.

First, I hope you’re not thinking the stock market is going to produce a 30% return every year. The long-term average is more like 9% annually and I’ll show you how chasing those huge double-digit returns will leave you broke.

More importantly though, you might be surprised to hear that your best investment may not be in stocks at all. I spent more than 10 years as an equity analyst. Stocks have been my life and I love talking about the markets…but that’s not where I have most of my money. 

It’s also not where the world’s millionaires invest. 

How People Lose Money in the Stock Market

Let’s back up though so I can share an embarrassing story. 

When I first started investing, in my early 20s while in the Marine Corps, I thought the real path to wealth was through stocks. It was 1999 and people were becoming millionaires every day by investing in tech companies like Startup.com, Lastminute.com and eToys.com…the secret was investing in anything with a .com at the end!

So I spent what little free time I had watching CNBC and what little free money I had, and that wasn’t much as a lowly Lance Corporal, to invest in the dot-com miracle.

Then the dot-com miracle became the dot-com bust. My portfolio fell by double-digits in a heartbeat. At first, I held on tight but then my car broke down and I needed to withdraw money to fix it. 

Mistake #1: Only invest what you can afford so you aren’t forced to sell at the wrong time or when an emergency comes up.

Of course, seeing my portfolio value go the wrong way didn’t help my motivation to save. First the market wasn’t playing nice then I had to withdraw money to pay car repairs. I wondered if investing was worth it at all. The answer wasn’t affirmative and I took more money out, never having the chance to see it grow when stocks eventually rebounded.

Mistake #2: Investing is a marathon, not a race (don’t you hate how that analogy is used for everything?). Keep your money invested and the market will reward you eventually.

I learned from these lessons though and went on to learn many more through years as an equity analyst then working with people in private wealth management. 

How to Invest in the Stock Market

I’ll share my investing strategy next, and you might be surprised how little it involves stocks, but if you’re set on putting your money to work in the market…here’s a few rules to do it smartly.

First, understand the market isn’t a get rich scheme but more like a savings account with a really good rate. That means what you put in is just as important as the money you make. Plan for regular deposits each month and benefit from the compounding returns.

Don’t try to beat the market. There’s an amateur game and a professional game in stocks. The professional investors are trying to beat the market because their jobs depend on it…and most of them don’t do a great job at that. 

The amateurs, that’s you and me, don’t need to beat the market. We just need to beat our own goals. That means you don’t have to pick the next hot stock but you do need to avoid the big mistakes and lost money that comes with trying to beat the market. Invest in a diversified portfolio like the one I’ll talk about next and don’t freak out when the market tumbles.

Finally, invest most of your money in broad, diversified funds. Consider putting 60% to 70% of your money in three to five funds that give you exposure to the three asset classes; stocks, bonds and real estate. This will give you a market return and smooth out some of those big stock market shocks. Invest the rest of your money in no more than 10 or 15 individual stocks that you really like and think can do well.

How to Really Invest Your Money to Grow

If you really want to invest to grow your money though, look no further than what millionaires do…and it’s not in stocks. 

The table below is from a survey by Scorpio Partners and BNP Wealth Management, a survey of 2,500+ millionaires in 17 countries and with a net worth of over $7 million. It shows the percentage of the respondents’ wealth held in different assets, averaged by millionaires in different regions and overall.

The first thing you see is how little millionaires have in stocks. With the exception of the United States, most have less than one-in-five dollars wrapped up in the stock market. Even millionaires in the red, white and blue have less than three of every ten dollars invested in the market.

Much more than in stocks, the rich have their money invested in their own business and other startups. While the rest of us are trying to get rich investing in someone else’s company through stocks, the rich are creating their own assets. For example, I try reinvesting around half my profits each year back into my YouTube business to keep it growing.

Millionaire Investing Lesson #1: Invest in yourself and your own business.

The third fact that struck me when I saw the survey is how much the rich have invested in relatively safe assets like bonds and cold, hard cash. Between the two, it accounts for four-in-ten dollars of millionaire net worth.

Now that might seem counter-intuitive, to have your money sitting there earning next to nothing. Aren’t the rich supposed to know how to make their money work for them?

This is really about risk management though. These millionaire business owners know that running their own company will continue to make them even wealthier, if they can survive the occasional recession. That means having enough cash on hand even when times get tough. It’s worth it to have cash sitting there earning next to nothing if the cash you have invested in your business is earning double-digits over the long-run.

Millionaire Investing Lesson #2: Balance out your investments for that long-term approach, holding enough bonds and cash to ride out the storm.

You don’t have to be a millionaire to invest like one. Invest in yourself and create the assets that will grow your dough without all the ups-and-downs of the stock market. Keep some money in stocks but make the smart decisions that will see your portfolio grow over the long-term. 

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