What I've learned about investing after reporting on financial markets for 29 years
- These six simple investing rules can help grow stock-market wealth over the long-term.
- Understanding them and sticking to them can be valued in thousands of dollars earned.
I've seen a lot covering financial markets for CNBC in the last 29 years. Here are six simple investment principles that stick out to me.
1. Understand compound interest
With compound interest, you make money on your money. The amount of money you make gets larger as time goes by, and the amount of money you make gets larger with even small differences in returns. The difference between a $6,000 annual investment at a 6% annual return and a $6,000 annual investment at an 8% annual return over 20 years is enormous: at 6%, you have $239,956, at 8 percent, you have $302,537. Don't leave money on the table by waiting to invest your money.
2. Keep costs low
High fees, costs and expenses can eat into your investment profits. It's fine to pay for advice and services but don't pay more than you need to. There's a big difference between fees and costs of one percent a year, and fees and costs of two percent a year. That one percent difference can make a considerable difference in your profits when taken over many years.
3. Keep it simple
You don't need to own 50 different investments. You should be able to explain what you own on the back of an envelope and you should consider investing in what you know. If you are using mutual funds or ETFs, you can cover the world with six to 10 investments.
4. Don't time the markets: Use dollar cost averaging
Put the same amount of money in the markets every month. You buy when the markets are up, but you are also buying when the markets are down. The vast majority of professional traders do not outperform the markets because they cannot get timing right — when to get in and out. Investing in the S&P over the last 20 years produced an annualized return of 7.2%, but missing just the top 10 days in those 20 years cuts the return in half, to 3.5%. Use dollar cost averaging instead, which is putting the same amount in the markets every month.
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5. Invest the maximum amount you can
Invest as much as you can personally and try to do it on a pre-tax basis. Take advantage of any 401(k) plan and invest at least until the maximum match the company provides. Many companies offer 401 (k) plans that match your investment from anywhere from three to six percent. Free money! Whether you invest more than the company match depends on your ability to save as well as your investment options, like the number of funds available to invest and what the fees are.
6. Stick to your plan. The biggest mistake I see investors make is they do not have a plan, or they have a plan and they do not stick to it because the markets drop and they come to doubt their strategy. The strongest and most sound plan is to be a long-term investor, do not time the markets and just stay put. Have a smartly diversified portfolio of global stocks and bonds and a little cash. Most importantly, figure out how much you need to save each year to get to your retirement goal and assume about a 6% return for a diversified portfolio.
We'll be LIVE with Bob Pisani from the floor of the New York Stock Exchange talking the retirement crisis, how to make the most of compound interest, markets and more! You can tweet @CNBC with your questions for Bob. Tune in Friday, May 17 at 12 p.m. ET on Twitter.
Check out Don't Fall For These 5 Myths About Money via Grow with Acorns+CNBC.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.