Timeless Investing Principles

15 Investing Tips

Investing

When it comes to investing, there is nothing magical about the process.  However, it helps if you are open to grounding yourself in a few timeless principles.

After 40 plus years of investing in stocks, bonds, mutual funds, and ETF’s, I’ve learned a thing or two about increasing our wealth through investing.  And, at times, decreasing it by learning the hard way.  40 years?  That’s right, but I’m not as old as you think.

MY INVESTING BIOGRAPHY

Here are a few facts from my investing biography.

HOW I GOT STARTED

My Dad helped me buy my first stock when I was about 10 years old with the profits from mowing lawns and delivering newspapers.  Due to his encouragement, I bought shares in the dividend reinvestment plan (DRIP) of the electric utility Commonwealth Edison (ComEd).

COLLEGE LIFE

With part-time work, scholarships and a little help from my parents I was able to graduate college debt free.  Fortunately, I went to an affordable in-state public university.  Compared to today, it didn’t cost that much.  Less than $15,000 room, board, tuition, fees and books for a bachelors degree and my CPA certification for the entire 4 years.

Of course, I wasn’t living an extravagant lifestyle.  Rather, I shared a dumpy apartment with a couple of other dudes.  In addition, I ate like crap, wore cheap clothes and studied a lot in the library.  I liked girls, but I was scared of them.  So, I mostly stayed away.   My school was great.  In fact, I loved it and felt very comfortable there.  But, it was nothing like some of the luxury campus facilities you see today.

And, my Dad made sure I never touched the ComEd DRIP.  Furthermore, it just kept growing as dividend reinvestment plans will do – drip by drip by drip.  As a result, 11 years later when I graduated it was worth about $10,000.  Maybe that doesn’t sound like much in today’s terms?  However, it was 1986 and I was 21 years oldLook out world here I come!

GETTING GOING IN THE “REAL WORLD”

I dabbled in individual stocks in my early 20’s as a young working adult.  Most of all, I remember owning Disney.  If only I would have held on to it.  I’m sure it would be worth a small fortune today.

However, the stock market was on a tear and mutual funds were becoming popular.  Hence, they brought investing to the masses.  There was no internet.  Company financial information and stock prices were primarily accessed by hard copy quarterly filings, annual reports, newspapers, and magazines.  Opposite of the real-time information we have at our fingertips today.

To make a stock trade, you had to pick up the phone and call your broker.  In addition, confirmations and statements were sent through the US postal service by snail mail.

REALITY STRIKES AT A YOUNG AGE

On October 19, 1987, I was working on a client audit located in the Chicago Board of Trade.  The client was a discount stock brokerage firm called Rose and Company.  A few years later they were bought out by and consolidated into Charles Schwab.

On that day, called Black Monday, the Dow Jones industrial average plunged 23%.  It remains the largest single-day drop in its history.  People crowded into the lobby of Rose and Company to see what was happening in the stock market.  The company’s phone lines were jammed and panic was in the air.

Our audit team was asked to leave.  The client was overwhelmed and couldn’t deal with us being there too.  The stock market losses on black Monday were part of a longer-term bear market.  It took several years for those bear market losses to be fully recovered.

A CHANGE IN MY INVESTMENT STRATEGY

Over the coming months, I decided to let mutual fund managers do my investing work.  I sold my stocks including the ComEd DRIP and created a diversified portfolio of actively managed equity and bond mutual funds.  Why?

Jack Bogle started the first Vanguard index fund in 1976.  However, indexing wasn’t that well known or popular at the time.  If ETF’s even existed, very few people knew about them.  Rather, actively managed mutual funds were the popular choice.  In addition, I didn’t want to hold individual stocks anymore.

INVESTING IN THE 1990S AND EARLY 2000S

From my mid-20s until age 40, I dollar cost averaged into a diversified portfolio of mutual funds.  I mainly focused on growth with a little fixed income thrown in for diversification.  Dividend growth stock investing was less popular during this time.  One reason was high tax rates.  Dividends did not receive the favorable tax treatment they do today.  They were taxed as ordinary income.

Mrs. DD and I were entering our peak earnings years.  Our combined incomes and dividends put us in the top tax bracket.  Between the Federal and State governments, 45% of every dollar paid in dividends was given right back to the tax man.

Due to the taxes, investing for dividends just wasn’t worth it.  On the other hand, capital gains were only taxed if they were realized based on the sale of a holding.  Therefore, investing for growth was much more tax efficient at that time.  So, that is what I did.

And, don’t forget the stock market suffered a 46% decline from August 2000 through September 2002.  Ouch!  The 13-year-old bull market was over with a big bang when the internet and dot com bubble burst.

A NEW INVESTING OPPORTUNITY!

To get the economy and financial markets moving in the right direction, we got the “The Jobs and Growth Tax Relief Reconciliation Act of 2003”.  Also known as the “Bush tax cuts” for former President George W. Bush.

The Bush tax cuts leveled the income tax playing field for dividend income.  The tax code finally taxed dividends at the same lower rate as capital gains.  This cut represented a huge tax reduction on dividend income.  With the 2003 tax law in the books, I became a dividend stock investor about 13 years ago, at the age of 40.  And, I’ve never looked back.

OUR INVESTMENTS ARE WHACKED DOWN AGAIN

Just when it looked like financial independence was in our grasp, the financial crisis and great recession struck in 2007.  After having recovered all of its losses from the early 2000’s bear market, the S&P 500 dropped 53% from October 2007 to March 2009.

Fortunately, the economy and the financial markets have recovered to new post-recession highs.  Most of us know that story.  We have all lived it the last several years.

INVESTING TODAY

Even though dividend growth stocks are my primary investment focus, we still own some ETF’s as well as closed and open-end actively managed mutual funds.  Our investments are internationally diversified across a wide spectrum of bonds, equities, commodities, and real estate through both taxable and tax-advantaged accounts.  I have never taken the increased risk of trading on margin.  This strategy works well for our current stage in life

WHAT’S NEXT WITH INVESTING?

It will be interesting to see what happens when the next bear market rolls in.  Why?  There is a whole generation of young investors that have never experienced large losses on their investments.  And, many of the rest of us have forgotten how it felt.  Or, believe it won’t happen again.  What will cause the next bear market and how will we react?  I don’t know.  Only time will tell.

If you don’t believe me, will you believe Warren Buffet?  In his latest annual letter to shareholders, he warns that losses of 50% or more are not only possible in the future, but inevitable.  My past experiences suggest he is right.

INVESTING TIPS & PRINCIPLES

Turn the investing odds in your favor.  The best way, in my opinion, to handle this uncertainty is to practice solid, fundamental investing principles.

We all need to start investing in assets at some time in our lives.  A strong foundation to work from is a must.

Here are 15 investing principles for you to consider.  Look for more detail on each one of them in past investing articles and future posts.

A FEW GOLDEN INVESTING RULES TO GET US GOING

Start early.  Building wealth through investing takes time.  The earlier in life you start, the better your chances for success.  Not everyone is as fortunate as me to start at 10 years old.  But that’s okay.  If you haven’t started yet, start now.  It will never be earlier than today.

Avoid market timing.  Few people know which direction the stock market will go next.  Or, when it will suffer a correction.  So, don’t try to time the market.

Invest for the long term.  Markets and asset prices go through up and down cycles.  However, over the long run, you stand a better chance of earning positive returns on your investments.

MAKE AN INVESTING PLAN

Determine your investing objectives.  Is your objective capital appreciation, investing for income, or total returns?  Are you investing for retirement many years away?  Or, to make a down payment on a house in a few years.

Know your risk tolerance.  How will you react when you lose money.  If you will sell at the first sign of a loss, you are risk-averse.  Therefore, focus on conservative investments.  Of course, less risk likely means less reward.

What’s your strategy?   What will you invest in?  Individual stocks, ETFs, real estate, certificates of deposit?  Where will the money to invest come from?  How often will you make investments?

Determine your asset allocation.  Asset allocation is the mix of assets you hold.

Most noteworthy, asset allocation is one of the primary drivers of investment returns. Your allocation should be consistent with your risk tolerance.

Since bear markets do happen. Smart assets allocation can see you through the toughest bear markets.

Assets include cash, different types of bonds, stocks, commodities, and real estate. They represent some of the most popular asset classes.

A mix of financial assets and productive real assets can be a good mix to consider. When you want to have all your investment bases covered.

EXECUTE YOUR INVESTING PLAN

Diversify your holdings in each asset class.  If you hold stocks, bonds or real estate, don’t just own one company or property.  Own a portfolio of several, or invest through a diversified fund(s) that holds many.  Also, consider international investments.  With diversification, if one investment goes bad, it won’t take your entire investment portfolio down with it.

Know what you are investing in.  Do you understand what you are buying and why you are buying it?  Research your investments.  Either that or stay away.

Invest on a regular basis.  This strategy is known as dollar cost averaging.  It reduces your risk of putting all your money into an investment at its peak price.

Reinvest all dividends.  If you do not need to spend your dividends, reinvest them.  DRIPs are one method where the dividend is automatically reinvested back into the security that paid it.  Another method is to let the dividends accumulate in cash and reinvest them in a lump sum into an investment of your choosing.

KEEP INVESTING COSTS & TAXES LOW

Minimize investment costs.  Focus on low-cost funds or individual securities.  Furthermore, keep trading to a minimum to avoid transaction fees.

Minimize taxes.  Also, minimize trading to avoid capital gains taxes.  In addition, utilize techniques like tax loss harvesting.

Use tax-advantaged accounts.  Maximize your 401k and IRA options or their equivalents in other countries.

ADAPT AS CIRCUMSTANCES CHANGE

Monitor your investments.  On a periodic basis monitor and review your holdings against these principles.  In addition, learn from your mistakes.  Most importantly, make adjustments as your circumstances change.

CONCLUSIONS ON INVESTING TIPS

So, that’s my 40 years of investing experience poured out in a blog post and some key principles I have learned.  And now, what are your thoughts?  In addition, have I missed any investing principles you think are important?

Disclosure and disclaimer

The information on this site is for educational and entertainment purposes only and not to be construed as investment advice specific to your circumstances.  In addition, consult your personal investment and/or tax advisers prior to investing money and realize you are solely responsible for any investment gains or losses as a result of the investments you enter into.  Most noteworthy, you can find additional information under this site’s Disclaimer and Privacy tab.

40 thoughts on “Timeless Investing Principles”

  1. You are so lucky that your dad taught you how to invest at such a young age. My parents weren’t very good with money!
    Good point on making an investing plan, I am still working on mine:)

    • Hi Caroline, Yes I am lucky that I received some solid guidance when I was a kid. And, I even listened. Not always, but once in a while. Tom

  2. Great advice Tom. I sure hope they never jack up the tax rate on dividends like years ago. That would be painful for a lot of investors. One just never knows.

    • Yes. That would be painful Mr. DS. I am already smarting from the new tax law. Ran the numbers yesterday and the law is going to cost me about $800 more a year. Lost all my state and local tax deductions. Not sure we will be long for the high tax state we live in. That chapter is yet to be written. Stay tuned. Tom

  3. Hey Tom,

    Wonderful post and solid advice! I’m mostly been following these principles, though, of course “everybody’s got a plan until they get hit”. I’ve panic-sold before (to my detriment) and really hope I’ve learned from it and don’t do it again when the next bear market comes.

    As a matter of curiosity, what do you think about technical analysis and candlestick formations? Hocus-pocus, or is there something to it? Are you 100% investor, 0% trader? (I don’t do trading anymore, but you always hear of some mythical people out there that supposedly make lots of money doing it).

    Cheers,
    Miguel

    • Hi Miguel, I’m not a chartist, technical analyst, trader or market timer. I think those methods have merit, but I will leave that to people who are much smarter than me. I am a long term dividend stock investor based on company fundamentals and the principles I outlined in my Dividend Deep Dive post a couple weeks ago. https://dividendsdiversify.com/dividend-stocks-deep-dive/ Interesting question. Tom

  4. Some good advice Tom.

    I think the best way to learn is to do it yourself and learn from mistakes. Even better learn from other people’s mistakes 🙂 That’s what I did when I first got into dividend investing. I trolled older dividend investor to see and learn their tactics and mistakes they regret.

    • Hi Mr. ATM. Thanks, as always, for your thoughts. Totally agree that you learn by doing. And, both from mistakes and successes. Tom

  5. Kind of seems like you went full circle over your investing career. By being involved with all of those types of market events, it makes you smarter going forward. Especially knowing that market drops are inevitable but will rebound eventually. And the long term holding strategy will always win. The tax benefits of dividend investing now make it easy to never look back as well.

  6. It’s great that your Dad provided the discipline in the beginning. That’s key and part of the foundation I’d say as well. Thank you for the loads of wisdom and practicality. I have a long way to go and when the next correction takes place, these steps will help to keep emotions intact.

    I’m working on “training my brain” to get excited when the market drops to become more in alignment with Mr. Buffet. 🙂

    • It is ironic SMM that most people like to buy things when they are less expensive. But, we have to train ourselves to think about stocks and investments that way. Rather than feeling comfortable buying when stock prices are high and selling when they go down. Tom

  7. Wow great list Tom.

    Great that your dad started you at such a early age. i cant wait to pass that onto my kids as they age.

    Nice that you have went through so many cycles. I havent with stocks yet.

    Have a great long wkend
    Cheers!

    • Enjoy the long weekend too Rob. I know you will raise a couple good money managers. It’s in your blood! Tom

  8. Loved your story! It’s good that you were taught about investing from young age. It’s crazy how technology changed with each cycle, but investing stayed. It’s probably one of the best wealth builder we can have.

    • Hi German, Nice to hear from you. We haven’t chatted in a while. Glad you enjoyed the story. Good point on how tech changed with each cycle. So have the investment products available to us now that I think about it. Tom

  9. What a great ride you’ve had over the years Tom! Can’t add much to your wisdom, I think you’ve pretty much covered it all. The hardest part is sticking with the rules when markets start doing funny things! Patience and discipline are probably the two critical traits needed to be a good investor – something I’ve often struggled with. Just like reflecting on your Disney holding, I often think I’d have been better off buying a few good stocks and index funds and leaving them for 30+ years…

    • Hi Frankie, It is hard to stay the course when the going gets tough. One of the things that helped me was I was working so hard and focusing on my career that I was largely able to ignore and ride out the bear markets. I say that with the exception of late 2008-9. That was really bad. Tom

  10. Great post Tom! That’s really cool that you bought your first stock at age 10. I hope your dad knows that you gave him a shout out on your blog today! 🙂

    I’ve only invested through one crash, but in the last correction in February I was already feeling antsy. It was interesting to analyze my behaviour and look at my reaction to the 10% decrease. I agree that many millennials don’t know what can hit their portfolios- everyone is so happy until they are not.

    It would be interesting for those who have already FIRE’d and who done so in their 30’s (perhaps have just lived through one market correction) to see what happens to their investment portfolio if it gets decimated by 50%. I would be very upset with a 50% decrease but yeah, it’s not unexpected…I read the same thing in the annual letter by Warren Buffett 🙂

    • Good catch on the Buffett quote in this long article GYM. You are definitely a Buffett disciple being able to pick that out. The only thing I can say is if you were antsy during the recent correction maybe you should invest a bit more conservatively so you don’t get the impulse to sell on the way down if and when it happens. Tom

      • I don’t think I will have the impulse to sell on the way down, just will have the impulse to look at my portfolio and see the sea of red and cry HAHA.

        But I will be buying more when that time comes, don’t worry my friend.

  11. And consider investing in real estate! Either as a landlord, passive investor in a crowd funded arrangement, or heck, maybe an Airbnb?

    • I admire what you are doing with your real estate portfolio Cubert. I thought I would go that direction at one point in life, but never did. It’s not an area I am very knowledgeable about or comfortable with. Also, I’m not handy and I dislike working with contractors for repairs and improvements. Our primary residence is enough to handle for me. So, I will keep coming over to your blog to learn about real estate management and be satisfied to follow your progress.

      Crazy as this might sound to you, my wife and I are considering being renters again to shed the responsibility of our house. Maybe we can rent from you? We are very tidy, quiet and would always pay our rent on time. 🙂

  12. Hey Tom!

    Great tips here on investing. I love how you outlined everything and your experience. Thank you for sharing such a detailed post!

    Like Warren Buffett, you bought your very first stock at such a young age!!

    I’m seriously ready for a crazy drop like 50%….. eyes shut!!!! 😱

    • Hi Panda, I don’t think I could ever say I’m ready for a 50% drop. Not exactly sure how I will react next time around. Tom

  13. Yo Tom. This was such a great blog post. One of the best I’ve read about your story and the history of the stock markets ups and downs. It’s funny how investment strategies change over time. Who knows, maybe in 30 years there will be another strategy everyone follows. Keep up the great work
    -Money Professor

    • Thanks Professor. It was fun thinking about it and writing it. Mostly good memories and learning experiences. All I know for sure is that in 30 years, “things” will be different. Tom

  14. One of the main things I’m wondering is how this new class of investors will handle a bear market. Anyone who entered the market in 2009 or after has really not been tested in anyway. There’s a lot of risk takers out there that just assume the stock market goes up and up and don’t have a good historical grounding. It’ll be interesting to see how they handle a 20%+ reduction in stock prices.

  15. It’s wonderful that you had the knowledge and confidence to create a strategy. We had nothing/very little to lose during those last two bear markets. We’ve amassed more money and knowledge at this point and I’m confident we won’t be swayed by emotion when the next bear market comes.

    (And I hear you about becoming a renter. Having no home ownership obligations can be very freeing, mentally and financially.)

    • Mrs. G, You and Mr. G seem pretty grounded. I am sure you will weather any future storm just fine. You two are going through a lot with real estate now. So, hang in there, the new house will be wonderful. Tom

  16. Great advise Tom,

    I have had a very similar investment experiences as you and over the years have changed my investment strategies.
    I am also interested to see what happens when the next bear market rolls in and how I will react. I have invested thru all the other downturns since 1987 and have made the majority of my gains dollar cost averaging though out. I hope I am smart enough to do the same now I am closer to retirement.  

    • I would agree with you Steve. I don’t have the exact numbers of course, but investing through the down cycles has to be a large part of my capital appreciation like you. Also like you (being about the same age that is), my asset allocation has become more conservative as the years have gone on. Maybe you are doing the same? But, it should help weather any future storm. Tom

  17. Great advice Tom.

    I think starting early is so important. I have realized this and just turned 28 already super happy I started when I did.

    One question for you do you wish you would have used more leverage in investing?

    Maybe not in equities but using real estate to leverage responsibly?

    • Hi DM,
      I have always been debt averse. We had a pretty modest house when we were younger so I prioritized paying off the mortgage early. So I do not wish we would have used more leverage even in a responsible manner. I like the sure thing when I can get it. I’m certain I could have gotten better returns investing the money rather than paying off the mortgage, but it helped me sleep at night. Additionally, I have never considered investing with margin debt. Tom

  18. Hi Tom,

    didn’t know you were that old 😛

    Just kidding! Great article and really the foundation of principles every investor should have! I really like that you’ve added some personal flavor to it! Keep up the good work!

    I hope to look back in 26 years and have an equally successful investing history and that much knowledge!

    • Just keep doing what you are doing Sir and you will look back on a huge success story. But, its the journey not the destination that’s important. Tom

  19. Great Article Tom! I’m going to save this page and refer back to it from time to time. I think it is great to reinforce your strategy and remember why you are doing what you are doing. Especially when times get rough!

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