Frugal Investing Made Easy

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Investing isn't as scary or as hard as it seems. It also does not have to be very expensive. Here are my five rules for becoming a successful investor:

  1. Reduce your risk by putting your investment money into at least four different asset categories that are likely to react in different ways to economic events.
  2. Reduce your investment cost by cost-averaging--investing the same amount of money regularly, no matter what the financial markets and the economy are doing.
  3. Hold on to those investments for as long as you can.
  4. Plan well in advance when to draw cash out of your investments to meet expected needs such as college tuition, a down payment on a house or supplemental retirement income. Otherwise you'll hurt the long-term return of your portfolio.
  5. Pay little or nothing to acquire, hold or liquidate your holdings by buying no-load investments. They don't charge fees when you invest or sell.

Four assets to own

  • Cash. Put an amount equal to three months' living expenses into some form of interest-bearing cash-equivalent account. A smart place to put the cash is a no-load, low-cost Treasuries-oriented money market fund. Keep only enough money to pay your bills in an interest-bearing checking account.
  • Stock mutual funds. Most frugal investors in their 30s and 40s should aim to have 70% to 80% of their total investments in stock funds. Reasons:
    • History shows that over time, stock investments outperform all types of fixed-income investments.
    • Your investment is professionally managed.
    • You can invest as little as 1,000 pesos per month.
    • Your investment is a portfolio of stocks rather than individual shares in a single company.
    Stock fund strategy: Put 55% to 65% of your money devoted to stocks in a good-quality stock fund. Use either an index fund or a fund whose manager buys and sells securities more frequently. Important: Don't listen to those people who say that index fund investing is a stodgy strategy. More than half of the other types of mutual funds generally do worse than index funds over time.
  • International stocks. Put the remainder of your equity allocation into funds that invest internationally. Foreign stocks complement your core investment holdings because markets around the world rarely go up and down together in identical cycles. You can buy a diversified group of foreign stocks through a no-load international mutual fund.
  • Fixed-income securities. You don't have to be a rocket-scientist to find a great group of solid fixed-income investments. These are investments that provide you with predictable cash flow.

    One example is certificate of deposit. The longer the bank holds your money, the higher your return will be. An even better fixed income investment is a bond mutual fund. The reason is that a bond fund is professionally managed and provides diversity.

    Strategy: People in their 30s and 40s should put about 10% to 15% of their portfolio into an investment-grade corporate or short-term government-bond fund. That eliminates the need for worrying about the return of your principal.

Cost-averaging

Cost averaging uses the volatility of the securities markets to your advantage. The simple technique:

  • Select a regular time period--monthly, every other month, every quarter, etc.--to contribute a fixed amount of new cash to your investment portfolio.
  • Stick to this plan for 10 years or longer. You will buy more shares as the market falls--and fewer shares as the market rises.

Excerpt from: Bottom Line Yearbook based on Scott Spiering, president of Spiering & Co.

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