Once you get past all the mindset quirks of saving and investing, you will need to formulate an investing philosophy.
Your philosophy will lead to your strategy, which will be your rock during tough times. Everyone’s philosophy is different, so understanding yours is paramount.
Welcome back to the Saving & Investing 101 series (101, 102), where we give you the proper mindset to achieve financial freedom.
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The different types of investing philosophies. I’ll start by listing some investing philosophies so you get an idea of where to begin.
- Capital appreciation. Most investors focus on capital appreciation and capital gains as their primary source of income. This means that they want their asset’s price to grow so they can sell it.
- Buy and Hold. These investors buy their assets and hold them no matter what. They usually derive income from their assets other than selling.
- Growth investors. Many investors follow hot new stocks with the potential to triple or quadruple their money in 2-3 years.
- Value investor. Value investors look for great deals on established stocks, usually dividend-paying stocks. Shopping for discounts gives them higher yields.
- Safe investors. These investors love Certificates of Deposits, Money Market Funds, Index Funds, and Treasuries. They switch between these securities almost monthly.
- Speculative investors. These investors want to be at ground zero for the hottest products. These can be angel investors, cryptocurrency backers, or venture capitalists.
My investing philosophy. It took me a couple of years to discover my investing philosophy. I started as a pure dividend growth investor, buying only blue-chip dividend-paying companies like Mcdonald’s (MCD) and Johnson & Johnson (JNJ).
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But honestly, that was boring to me. I can DGI by simply dollar-cost averaging into twenty stocks over thirty years. I’d hardly need to check my accounts.
Then I stumbled upon Rida Morwa on Seeking Alpha. He is a hardcore income investor, and it piqued my interest.
Every time I receive dividends, I can shop for excellent yields. I look for securities the market has mispriced, giving me even better income for a lower price. I simply love income investing.
Becoming a well-rounded investor. As much as I love income investing, it is still prudent for me to look at the big picture.
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A DGI portfolio will be great thirty years from now, so I continue investing in blue-chip stocks. Index funds are always great to have around; therefore, I invest in them weekly.
I also want to tap into a small amount of growth and speculation. I invest roughly 5% of my portfolio into non-dividend-paying stocks like Google (GOOG), Amazon (AMZN), and Facebook (META).
I also have a bit of money for speculative stocks and cryptocurrencies like Polkadot (DOT), SoFi (SOFI), and DraftKings (DKNG).
At my core, I am a buy-and-hold investor. I have only sold five positions over four years of investing. I am not a day trader, so I don’t invest or trade like one.
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Finding your philosophy. How do you go about finding your philosophy? You have to involve yourself with the markets.
You can’t learn about yourself on the sidelines. You know you have found your philosophy because you can sleep well at night.
You may get a second job and use that money to invest. You can buy certificates of deposits and use that interest to invest in the stock market.
No matter how you achieve investing success, it must be 100% your philosophy and strategy.
When tragedy strikes. No matter how you invest, the markets (cryptocurrency, housing, commodities, stocks, bonds, business) will put your philosophy to the test.
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If you don’t believe in your philosophy honestly, you will sell out as soon as things get gloomy. We call these “weak hands.”
Many people in 2020 and 2021 went to YouTube to seek investment moves. These weren’t strategies or philosophies but full-on direct moves to make in the markets.
The consumers lost a lot of money in 2022 when those moves unraveled. They didn’t understand why they were investing or what the stocks were doing.
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These scenarios are a recipe for disaster. There are no shortcuts in investing or building wealth. You must do the work to read and understand your investments.
Fundamental versus technical analysis. As you start investing, you’ll see two types of investors. Some will focus on a company’s management, health, and products; these investors use fundamental analysis.
Others will focus on the charts of a stock or index. They use things like moving averages, resistance levels, and Fibonacci ratios; these investors use technical analysis.
For the most part, traders use technical analysis and buy and hold investors use fundamental analysis.
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However, it is good to understand both. A buy-and-hold investor can use technical analysis to find a good entry point for a long-term investment.
A trader can use fundamental analysis to determine that a new product announcement will make the stock “pop” for a few hours.
Obtain as much information as possible as you build out your investing philosophy. You may only use some of the information, but it can help you get an overall picture of your investing philosophy.
Overcoming your friends and family. Once you have a strong philosophy, stick with it. The only person that should change your mind is you.
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Your friends and family, who haven’t put in the work, will use their fears and phobias against you.
They will tell you McDonald’s (MCD) is dead money, or Google (GOOG) will lose market share to ChatGPT. You must conduct your own analysis.
Investing is very much an emotional roller-coaster ride. The goal is to extract emotions from your decisions in the markets.
It’s okay to be emotional all day, but when you interact with your computer and accounts, it must be solely business.
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Conclusion. When a downturn strikes, you want to gather all the information. The person who can remain calm, think five years into the future, and make solid emotionless decisions will win.
Your investing philosophy is critical during these moments. Anyone can invest during a pumped-up bull market. You simply pick a stock, and it goes up.
However, 2022 and 2023 showed that tons of people were not genuinely investing; they were gambling.
Let’s not repeat this model. Let’s read the books, study the charts, engage in the forums, and understand the models. That’s how investing works. Good Luck!
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