The Perfect Investment

With all of the TV shows, books, blog posts, academic studies, and everything else dedicated to the subject of investing, it would be reasonable to think that, with enough research, you could create the perfect investment strategy that maximizes your odds of getting the best returns possible.

The exact right mix of stocks, bonds, and mutual funds, in the exact right percentages, placed in exactly the right accounts.

In my profession I see a lot of people get caught up in this search for the perfect investment, and as well-intentioned as it may be, it typically leads to one of two undesirable outcomes:

1. Analysis paralysis: The constant uncertainty around which decisions are “best” prevent you from ever making any decisions at all.
2. Constant tinkering: Never-ending research leads to constant discoveries of new investment strategies, which leads to constant tinkering and constant changes in your investment plan that prevent any long-term progress.

The truth about investing is, in some ways, a lot less satisfying than the idea of the perfect strategy. But it can also relieve a lot of stress and anxiety, and, if understood properly, can lead to much better (though imperfect) outcomes.

The Elusive Perfect Investment

The truth is that there is, absolutely, a perfect investment out there. There is something that will provide better returns than everything else over your personal investment timeline.

The problem is that it’s impossible to know what it is. The future is unpredictable with any degree of accuracy, which means that there isn’t anyone who can tell you ahead of time which investment strategy will outperform all others.

To say it another way, no matter what you do, it is a virtual certainty that you’ll be able to look back and find other investment strategies that would have performed better.

It’s best to accept that now and forget the idea of perfect. Because the flip side is that you don’t need the perfect investment in order to succeed.

All you need is something that’s good enough to help you reach your goals.

Creating a ‘Good Enough’ Investment Plan

The good news is that while perfection is impossible, “good enough” is pretty simple. There are a handful of investment principles that have been shown to work and are relatively easy to implement.

The following steps, while imperfect, are the real way to maximize your odds of investment success.

1. Save Money

Eventually your investment choices and the returns they provide will start to matter. But for the first decade-plus of your investment life, the importance of returns is dwarfed by the importance of your savings rate.

Even if you have no idea what you’re doing and happen to choose terrible investments, you are setting yourself up for long-term success by saving early and often. Those contributions add up, eventually providing a foundation upon which real returns can be earned.

Here’s a calculator you can use to figure out how much to save: How Much Should You Be Saving for Retirement?

2. Use Tax-Advantaged Accounts

Of course, you do want that money you’re saving to be put to good use, and the easiest way to do that is by maximizing the tax-advantaged accounts available to you.

Accounts like 401(k)s and IRAs allow your money to grow without being burdened by taxes, which means that it can grow faster than it would in other accounts. Here’s how to choose between them: How to Choose the Right Retirement Account.

3. Minimize Costs

Cost is the single best predictor of future returns, with lower costs and fees leading to better returns. The less you pay, the more you get.

And the good news is that cost is one factor that’s directly under your control. Here are the major costs to watch out for and how to minimize them: Eight Investing Fees to Watch Out For.

4. Strike a Balance

A good investment strategy has a mix of higher-risk, higher-return investments like stocks, and lower-risk, lower-return investments like bonds so that you can both grow and protect your money at the same time.

This is one of the places people get tripped up: looking for the perfect balance. Let me be the one to tell you that it doesn’t exist, so you can forget about that.

But you can absolutely strike a balance that’s well within the “good enough” range. Here are some tips on doing just that: How to Choose the Right Mix of Investments for Your Personal Goals.

5. Use Index Funds

Index funds have been shown again and again to outperform actively-managed funds, and they do so with lower costs. They also make it incredibly easy to diversify your investments and to strike the right balance between risk and return.

Nothing is guaranteed, but the evidence shows that using index funds increases your odds of success.

6. Stay Consistent

No matter which investments you choose, there will be a lot of ups and downs along the way. You’ll also hear about other investment strategies that sound appealing, and some that feel like “can’t miss” opportunities.

Your job is to ignore the noise and stick to your plan. As long as you follow the principles above to implement a “good enough” investment plan, there shouldn’t be much need for change unless there’s a significant change in your goals or circumstances.

As Warren Buffett once said: “Lethargy bordering on sloth remains the cornerstone of our investment style.”

When you have the courage to settle for “good enough,” you can sit back and let your investments do the work. It may not be perfect, but it’s a whole lot better than the alternative.

Matt Becker, CFP® is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families.

Related Articles:

• Why Do You Want to Beat the Stock Market?
• The Power of ‘Good Enough’
• How to Start Investing on a Tight Budget

The post The Perfect Investment appeared first on The Simple Dollar.