“I keep six honest serving-men
(They taught me all I knew);
Their names are What and Why and When
And How and Where and Who.”
― Rudyard Kipling
How are we to think about investing? What should we tell a friend who asks for investment advice? I find it difficult to be both helpful and concise. How can I structure how they should think? How can I inform them without insisting they read a dozen large books?
Well, let’s let Kipling be our guide:
What should you invest in? If you want long-term growth over time and want to exceed inflation, then you will need to own some companies. That means equity (stocks). On the other hand, this return comes with volatility (risk). You may decide to add some private investment, cash, real estate, and bonds to reduce the volatility.
It takes discipline and some sacrifice to achieve wealth. Why would you go through that effort? You need a solid why to get through the process. For some of us the desire of financial freedom is strong. We don’t want to be a slave to a financial institution or to an employer and that provides motivation. Will you plan to retire completely from work? Will you cut back? Are you saving so that your spouse could stay at home with the kids? Remind yourself of the why.
Should you try to time the market? It would be great to buy low and sell high. In theory, that is the easiest way to get rich. The problem is no one has ever been able to pick the exact high or low. Not even Warren Buffett. Missing even a few days can result in a significant loss of value or a reduced return. So, when should we invest? Always and Frequently. Every check. Every bonus. This also brings in the value of DCA (dollar cost averaging) that we have discussed elsewhere.
How should we go about investing? The best way to contribute funds is to do so automatically. Schedule it through an electronic wire transfer to deduct from every paycheck. The how also relates to technical mechanics of investing. For most of us it should not be in individual stocks or bonds but rather in mutual funds and/or ETFs.
Where will your cash go? Stay in your area, state, country or other countries? For most diversified investors, we should have investments in our country as well as abroad. We discuss the ratio elsewhere. Where can also mean more literally where to send your money. Generally, a large mutual fund company will be the best choice for parking or investing your money.
Who should do all of this? Would you like to do it yourself? Most investors - and virtually all physician investors - would benefit from having some professional help. An advisor can provide details on the tactical logistics, provide some historical and financial context, and help you manage your own emotions. For example, you may need to be talked off the ledge if you are considering selling after a large market decline. Don’t underestimate the role of emotions. If you get an advisor, we would recommend a fee-only financial advisor.
If you like this kind of reasoning and structure, you may enjoy the book below.