How to select your investments.
Now that we have our strategy it’s time to make some moves and put it to work.
In chess, The Pawns are your workhorses. They get the job done. Think of your investments as pawns. Put them to work and let them guard your King aka your goal of financial independence and generation wealth.
In my opinion the easiest and least costly way of investing and providing diversification to your portfolio is to invest in low-cost index funds via a passively-managed Mutual Fund (MF) or exchange-traded fund (ETF) .
Mutual funds and exchange-traded funds are similar but they have a few differences. I am not going to cover the differences in this article but Investopedia has a great article on this.
There are index funds for every type of investor (including the conservative investor). The generalized rule is to find the one with the lowest cost/fees which has the greatest exposure to the companies you would want to purchase individually. Remember the more costs/fees associated with an investment, the lower your return.
It doesn’t matter if you get 15% from an investment if the associated fees are 5%. The reality is that investment is only worth 10% return in a good year. Now imagine if you have a bad year and you’re paying 5% no matter the performance of the investment.
In addition to index funds, I prefer value investing (i.e. buying great companies at a discount), and to do it effectively I spend a lot of time pouring over balance sheets and corporate filings. Doing this takes a lot of time which is why I only invest in a few companies per year and I am patient to wait for the right deal.
When I find a company of interest I look for the following:
- Each company selected should be large, prominent, and conservatively financed.
- Each company should have a long record of continuous dividend payments.
- Each company selected should have a business model which provides for a size-able economic advantage compared to similar companies.
There are a number of different stock screeners out there to find companies which may meet your criteria or you can analyze companies as you read or discover them. No matter what stick to your risk profile and investment principles.
Here are my stock screening criteria which I adapted from my reading of The Intelligent Investor:
| Limit buying of stocks to those not selling above their tangible-asset value | Tangible-asset Value = ( Total shareholders equity – All soft assets (i.e. goodwill, trademarks, other intangibles) ) / # of shares outstanding |
| Set a limit on the price to pay for the security based upon the average earnings over the past 7 years. | Average Earnings Past 7 years * 25 <= Average Earnings Past 12 months * 20 <= Current Stock price |
After you’ve determined what you’re going to invest in, it’s time to execute the moves. You need a brokerage account which is tailored towards your risk profile.
If you’re the active type and prefer to manage your own investments, find an online broker which fits your needs.
If you’re more along the passive type of investor and just want to throw money at the account then you may want to consider a traditional financial advisor or a robo-advisor like Wealthfront, Betterment, or Vanguard.
Remember this is the long game. Financial Independence and generational wealth are not created overnight. Play the game correctly and you’ll make it to the other side of the board.
As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.
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