I spent 7 years working in finance and managed a $1.3 billion portfolio — here are the 5 best pieces of investing advice I can give you

Chelsea Brennan

 

• Former investment manager Chelsea Brennan was managing a $1.3 billion portfolio when she left her seven-year career in finance.
• During her time on Wall Street and working at a hedge fund, she learned how to invest wisely.
• Here, she shares her best investing advice — which includes knowing your goals without assuming you have it all figured out, the importance of index funds, and being prepared for the long-term road ahead and worst case scenarios.

For many people, investing is a bit of a mystery. We know it's a great way to build a nest egg, but we've always got one ear out for the "secret sauce" that turns modest returns into great ones.

But after working with portfolio managers around the world and investing hundreds of millions of dollars for a hedge fund, I know that the secret sauce has nothing to do with dinner party stock tips or Wolf of Wall Street antics. Instead, the best investment managers know how to avoid costly mistakes — and that those mistakes most often come from their own emotions.

Anyone who has invested through a cycle knows the panic and fear of seeing the floor drop out from your portfolio (Spending my career investing in the highly volatile metals and mining space, I've seen a few!). However, the moments when everyone is rushing in or out of the market are when you determine your long-term returns.

Any fool can make money in a bull market. A smart investor keeps it when things aren't as rosy.

Here's what you need to know.

Understand your goals.

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Before I discovered the idea of financial independence, I was already saving a significant chunk of my income. But I still thought I would have to work for 25 to 30 years because I had no idea what my actual goal was. Retirement was just a loose endpoint. It didn't give me enough to define a savings and investment target.

Understanding where you stand financially today, what your next steps are, and defining your ultimate goals in detail lets you evaluate opportunities with a more careful eye. Crowdfunded real estate returns might look great, but can your portfolio withstand the added risk and lack of liquidity? You can only answer that if you know your goals.

While investment managers look to fund strategy, index performance, and investor preference to set their goals, yours will be more focused on your unique financial situation.

I recommend tracking your net worth to get a sense of your starting point. Then, for retirement goals, review your budget and estimate your retirement spending. Finally, with your current assets, spending, and ideal retirement age at hand, calculate your target retirement savings rate.

Investors that lose sight of their guideposts will have a hard time assessing risk. It's like trying to throw darts in the dark.

Index fund investing is the easiest way to win.

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At this point, we've all heard of Vanguard and index fund investing. But if you're still assuming index fund investing is only for the layman, you're wrong. Myself and many of my colleagues hold the majority of our assets in index funds, even when we spend our days picking stocks and bonds. Why?

Because index funds are the most straightforward, cheapest, and most likely way to see strong long-term returns.

Index mutual funds offer instant diversification and guarantee returns equal to the market — because they are the market. Index ETFs offer very similar benefits and lower costs when you have less to invest, but won't match the market quite as precisely.

We all want to be the next Warren Buffett. But even he will tell you trying to follow in his footsteps isn't the way to win. It takes too much time and expertise while letting in too many opportunities to make bad choices.

When it comes to investing, the more you can lower fees and remove human error, the more likely you are to succeed. And the cheapest, fastest way to get diversity without needing to nitpick your portfolio every day is to own just two or three low-cost index funds.

Be in it for the long-term.

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Consistently saving and investing is something that most of us have heard, including putting cash to work through the cycle. Consistency isn't just in how much and when we invest, but also our strategy.

Every investment company has a base investment approach. Whether they're focused on a specific asset class or industry segment, there is a general plan they sell to investors. Some just target outperforming an index. Others work to run countercyclical to the market, providing stability when everyone else is down. Whatever the method, a good firm sticks to their strategy.

Investing is a long-term game. And switching strategies at the drop of a hat, even if you stay invested, not only creates friction cost but also makes it more likely that you suffer the losses of attempting to time the market.

If you want to be a dividend investor, be a dividend investor. If you're going to run a three-fund portfolio, do that. But before deciding whether you're a genius or a failure, make sure you've given it enough time. The average market cycle is seven years. And while many investors can outperform the market for six months, a year, or even five years, few can do it for decades.

Find an investment strategy that is easy to implement and that you can maintain over the long-haul. Make small tweaks and grow your knowledge base. Read books, find a community, stay aware of your options.

Then, before making significant changes to your strategy, take time to evaluate why you're switching things up. Is it an emotional response to a near-term struggle? Are you chasing returns? Or do you really think this new strategy will last?

See the rest of the story at Business Insider

See Also:

• My parents grew up poor, but I retired early at 28 with $2 million. Here are the 6 best pieces of advice I can give you about making money.
• I'm a financial planner, and I repeatedly watch smart people make the same investing mistake
• 16 heirs to some of America's best-known brands who are poised to inherit millions

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