The Confident Investor

The money that you invest in stocks needs to be money that you do not need immediately. This does not mean that it is not money that you will not need for 20-30 years. If you have money that you are confident you will not require for decades, you should probably invest that money in your own home. Follow the old Benjamin Franklin saying, “A penny saved is a penny earned.” (Yes, I know he probably didn’t say this).

If you currently pay 7% interest on your home loan, any extra money that you apply to your mortgage will immediately give you a 7% return for the balance of your mortgage term. Therefore, if you pay a one-time extra $1,000 on a 7% mortgage that has 23 years left on it, then it will result in $5,002.04 that you did not have to pay over the course of the 23 years. This is a guaranteed return: over the course of 23 years you will be more than $5,000 wealthier due to that one-time investment.

Your home mortgage is the safest “buy and hold” investment that you can make! You already know that you pay a certain percentage. If you pay the loan off early, you effectively get that loan percentage as an investment return.

The same logic also applies to your auto loan and credit cards. This is typically more short-term debt than your home. Quick payoff on any short-term debt will guarantee you the quickest and best investment strategy. You are not spending those pennies, you are saving them. Benjamin Franklin will be proud of your efforts to pay off your short-term and long-term debt quickly and efficiently.

I must admit that I have been guilty of violating this principle that is taught by Barry Ritholtz. I recently read his great article that analyzed the impact that politics and economics has on investment community. It was enlightening to me and I encourage you to click through to the article and read it.

Economic issues

Barry points out that most economic issues are either estimates or such long-term trends that they have very little impact on specific stocks.  He quotes Warren Buffet: “If you knew what was going to happen in the economy, you still wouldn’t necessarily know what was going to happen in the stock market.”

Political issues

Barry points out that politics has even less of an impact on the market. He points out that the markets wobbled a bit for various political panics. He also points out that within a short time the previous trends continued as if the politicians didn’t matter.

Interesting that if the market spiked or dropped during those politically sensitive times the only ones that probably made or lost money were the ones that worried about the event. They also probably just took money away from each other and not from the steady investor that sat back and didn’t panic.

Personally, I know that I have been guilty of worrying about political issues. I thought for sure the market would react badly to the fiscal cliff at the beginning of 2013. I pulled all of my capital out of the market except for my free shares (read my book, The Confident Investor, to learn how to get free shares of stock). Nothing essential happened to any of my Watch List stocks during the fiscal cliff. Granted, I didn’t lose money but I am sure that I lost the opportunity to make more money. Bad mistake on my part that I won’t be repeating in the future.

I don’t wish to regurgitate all of the great points that Barry made – go over and read his article. He makes excellent points on ignoring these two issues.