The 4 Pillars of Investing: Making Your Money Work for You in the New Year
This article will be a crash course on the four pillars of investing, so you head into the new year with the right mindset to MAKE BIG BUCKS!
Let's start slow, though. You may remember the name William Bernstein from a basic economics class. The book The Four Pillars of Investing by William J. Bernstein, and Donald G. Coxe, published in 2002, explains how independent investors can construct a superior investment portfolio by learning the four essentials of investing.
Sometimes it’s helpful just to get back to basics when it comes to investing, whether it’s in the stock market, real estate, precious metals, or anything else. Here’s a mini recap of the main concepts in the book. Or you could read it yourself!
Pillar One: The Theory of Investing
Bernstein starts by giving an outline of Investing Theory. The whole process sounds scary. The most important concept for investors is the interplay between risk and returns. To gain a higher return, higher risks are involved.
“High investment returns cannot be earned without taking a substantial risk. Safe investments produce low returns.”
So we’re not advocating that you go crazy here. We’re not advocating anything at all! We just want you to understand that, essentially, you usually get what you give. Invest a lot in high-risk markets that could take off, and you’ll get a lot of bang for your buck. Conversely, if you invest a lot in safer opportunities, you’re never going to receive that major windfall (most likely).
A good example of a safe investment would be a money market at a major investment firm. This choice is a no-brainer when it comes to having your money work for you. Especially with interest rates as high as they are right now, your money will literally be acquiring value annually at no cost to you. There are also rarely any tax penalties when you want to access those funds for whatever reason.
Conversely, you may want to take the bet that 2023 is the year cryptocurrency will become regulated and used as a national currency. It’s risky! But if it happens, you will be way ahead of the curve. This is where you need to do your homework or work with a broker you really trust. Find someone that will give you an honest assessment of the risk and see if it is in line with your personal risk philosophy. Some people are willing to invest it all in a clunker and keep going – a certain electric car mogul comes to mind!
Pillar Two: The History of Investing
Investing really hasn’t changed much over time. We’re talking centuries. In the book, Bernstein gives a very in-depth look at the history of investing, from the ancient Greeks and Romans, who mostly traded in debt all the way to today, the principles of supply and demand, and risk and return have stayed pretty constant.
In Berstein’s words:
“The most profitable thing we can learn from the history of booms and busts is that at times of great optimism, future returns are lowest; when things look bleakest, future returns are highest. Since risk and return are just different sides of the same coin, it cannot be any other way.”
Understanding history is just another lens to prepare yourself as you embark on your investment journey. Read some stories of booms and busts. What were people investing in when? Who gained and who lost out? We always like to say whether you’re interested in sports, art, architecture, or anything really: follow the history of money!
Pillar Three: The Psychology of Investing
Unfortunately, when it comes to investing, we all tend to be our number one saboteurs. We ultimately have sole control over the decisions we make with our money. We can pay advisors or ask friends, but the one who signs the notes is you.
That being said, there are a few tips for staying ahead of your own brain! First, be aware that conventional wisdom is almost always wrong. Avoid following herd instincts. Remember GameStop? We don’t. Ultimately booms and busts are going to be bad for your bottom line. In the same vein, don’t become too overconfident. You and the market are equal players.
Think long-term. Appreciation takes time, and short-changing stocks shouldn’t be your full-time job if you’re doing it with your own money. Leave that to the pros. If you get into the habit of checking your investments constantly, you are essentially just gambling. This is a long, smart game. You want to invest well to ensure your principal gains long-term. Likewise, don’t fret about short-term losses. People tend to panic at the first sign of any trouble, but it is normal for the market to dip and rise. That’s why it’s called a market! Prices change, but if you invest smartly in the long term, you’ll most likely gain. And pro tip: Diversifying your assets will help mitigate any major losses.
Pillar Four: The Business of Investing
When you begin your investment strategy planning, be well aware that investing your assets is investing in an entire business world. Nobody trades stocks for free. Bbrokerage fees, mutual fund expenses, and taxes are all a big ‘drag’ on investors' financial portfolios. So smart investors should do their best to reduce all three.
New investors tend to make mistakes like paying high fees to load funds, which is another word for expensive mutual funds. Most of the “free” advice available on the internet regarding investing is also just advertising dressed up as journalism. A booming entertainment industry is focused on financial markets, so don’t let yourself get caught up in the hype. It’s important for investors to educate themselves with some classical economic literature together with following the markets and working with a trusted advisor.
“Investing is not a destination. It’s an ongoing journey through 4 continents: theory, history, psychology, business.”
We hope this little economic refresher has put you in the right state of mind to think about where you will invest your money this year. At Premier Law Group, we believe in making smart investment decisions that will help you optimize the value gained for the long haul.
Start the year off right with financial freedom! Check out this video to learn more and access additional resources that will help you on your journey to economic freedom.
This blog post is intended to provide general information and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship with Premier Law Group.
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