It’s every investor’s dream: a money-making technique that you can get in on for a small amount money. Ignore it for a few years, then reap a great reward.
Does it sound like a lost crusade? It wasn’t for Ann. She’s been putting aside $75 a month for the past five years and has earned an annual return of almost 8 percent per year. And it was not a dream for Martin, who started saving 50 cents per week in 1946 and now has over $82,000.
Ann and Martin have been more successful in their quest than some professional money managers because they stuck to some basic principles of investing:
1. Pay yourself first. (For the Christian, this basic secular principle should be stated as “pay God and yourself first.”) Ann and Martin invested regularly each month. One used payroll deductions, and one used automatic check withdrawals. The critical thing was their commitment to saving a specific amount every month—even if the amount was relatively small.
2. Every little bit counts. That’s due to the miracle of compound interest and its counterpart: dividend reinvestment. Time is on your side when investing. I remember my grandmother’s savings account passbook that was found after her death. The last transaction was many years in the past. It was amazing to see the effects of compounding on a very small, seemingly insignificant amount of money. It had grown over the years to become a significant sum.
3. Don’t’ follow the herd. Regular investing saves you from the tendency to buy high and sell low. By investing an equal amount each month, you benefit over time. Know why you’re investing. Pick investments that are appropriate to your personal risk tolerance level and to your time horizon. For example, you can utilize higher risk investments for retirement that is years away. Above all, don’t chase last year’s winners. Too many sabotage their investment strategy by moving their money to the investment that did best last year. Too often, you will be buying high and selling low, which is no way to make money.