Remember learning about the food pyramid back in elementary school? Meb Faber, the CEO of Cambria Investments has borrowed on that idea to create his own investment pyramid. These are all the things to do before you decide to invest.
Starting at the bottom, he advises to write down your goals, and bluntly states “don’t do dumb things.” The basic premise here is to not self-sabotage. Research any investment before diving in and don’t get swept up in trends. Cryptocurrency is a perfect example. It is very easy to get burned if you don’t do your research. While the price of bitcoin has gone from less than $1,000 in early 2017 to around $6,000 today, jumping on the bandwagon now might be a disaster. Many people who bought in after late November 2017 have actually lost money.
Other ways to ruin your portfolio is to be unprepared for unforeseen costs, for example by not researching transaction fees, or being unprepared for a worst-case scenario or not understanding the taxes you might incur. You should also set aside an “emergency fund” to live off for 3-6 months and pay off any credit card debt that has higher than an eight percent interest rate. It’s important to get your house in order first.
We’ve all heard the term “diversify” – it means to spread out your investments so you don’t put all your eggs in one basket. But it’s important to go beyond just stocks and bonds. There are five asset classes, including real estate, commodities, and mutual funds. Also, don’t be lulled into a false sense of security with a “home country bias” by only investing in American companies. Look at international mutual funds as well as exchange-traded funds. There are websites to help people build a portfolio if you are unsure of all your choices.
Write down your short- and long-term investment goals. Decide how much risk you’re willing to take and have a sense of where you want to be 20 years from now. You should also rebalance your portfolio every year because stock prices change and might not align with your goals.