Dear Investor,
The average investors should allocate roughly 80% of their investable assets into low-cost ETFs and index funds. Time in the market and continuous dollar cost averaging are much more important than trying to pick the next hot stock.
I’ve worked in the Equities department of two major Wall Street banks since 1999, and I’ve seen three boom and bust cycles. The people who got taken out on a stretcher were the ones who bought stock on margin and panic sold. The people who are now seeing record high portfolio values are those who stuck with investing for the long term.
For the rest of the 20%, you can try to invest in actively run mutual funds and pick stocks. Picking home run stocks is the only way to really outperform. Just know that the long-term track record of outperformance is not very good.
When I was 22, I bet almost my entire liquid savings at the time on a stock called VCSY. Within six months, my position went from $3,100 to almost $200,000 due to the craziness for internet stocks at the time.
I sold the stock at around $150,000 and parlayed the proceeds into a downpayment for a $580,000 property in San Francisco a couple years later that is now worth $1,200,000.
By the age of 28, I became a millionaire due to aggressive savings and investing. Now at the age of 40, I’m worth over $10,000,000 and earn roughly $250,000 a year in passive income. You can’t get wealthy by just being a scrooge. You’ve got to own assets that appreciate over time!
Debt is an interesting animal. Most of us get into debt because we WANT something we cannot afford. We want a private school education so we borrow $50,000 to learn something we can learn for free on the internet. We want to live a fabulous lifestyle in our 20s so we put everything from fine dining to designer clothes on our credit cards. We want to stop paying rent, so we leverage up 4:1 to own a property that will crush our finances if we need to sell in a down market.