If you want to invest like a millionaire, here’s the good news: There are no top-secret ingredients needed. When you figure out their investing recipe, you’ll find out the habits that helped millionaires achieve seven-figure status are remarkably simple.
Here are a few ways you can invest like a millionaire right now.
Tune out the noise and stay focused.
Be very careful about investing based on news cycles and headlines. Take Twitter (TWTR), for example. When the social media site went public in November 2013, the media covered the event obsessively. When Twitter debuted on the stock exchange, its stock value shot up 73% the first day, making it the most traded stock of the day. But what happened since then? Twitter has lost more than 55% of its share price. Millionaires develop an investment strategy, and they stick to it, no matter what the media claims is the new hot stock.
Keep things simple.
Your investment strategy does not have to be complex in order to be effective. For example, famous investors like Warren Buffett and Jack Bogle have long championed the merits of investing in index funds. While a regular mutual fund attempts to pick a select group of the best companies, an index fund on the other hand allows investors to own a share of every company. The strategy behind index funds is that you are able to invest in many companies at once, without putting all of your eggs in just a few baskets. Not only do index funds often beat their more complex (and expensive) counterparts, they're actually the most common investment choice for millionaires.
Act your age.
Asset allocation — the amount of money you have in stocks and bonds — is a crucial part of your investing success. If you're in your 20s or 30s, keeping 80% to 90% of your portfolio in stocks may be fine depending on how you feel about risk. But your allocations should shift over time, becoming increasingly more conservative with age. It’s generally considered unwise to have so much of investment funds invested in stocks when you are 5 to 10 years away from retirement. Millions of people during the Great Recession were hurt tremendously by the market crash because they were too heavily allocated in stocks.
One rule of thumb to check your allocation is to subtract your age from 110. Doing so should give you the percentage you should be investing in stocks.
Don’t wait until you have $1 million to start investing.
You don't have to wait until you have a lot of money to get started in the market.
If a worker were to save just $5,000 a year between ages 25 and 65, it would be possible to become a millionaire. That breaks down to about $417 per month. If you’re putting this in a 401(k), you could be getting a match, meaning you wouldn’t have to put in the full $417. If $417 still feels like a lot of money, you can invest less, but you’d likely have to do it for a longer period of time. There is nothing wrong with starting small, but no matter what you have, it is imperative that you start early.
Never leave money on the table.
Most workers would do well to open a 401(k) and set aside a percentage of their paycheck each month. If your job offers a matching 401(k), you should at least max out your contribution to capture the full match. If you don’t, you are leaving money on the table. That match is like a guaranteed return on your money, something the stock market can’t offer. If you aren’t quite ready to explore 401(k) or IRA options, consider saving a small amount of your pay each month.
Cash isn’t always king.
Cash may seem like a safe investment. But if you are saving exclusively in cash, your savings will never keep pace with inflation, and it’s very unlikely you’ll meet your long-term investing goals. In their latest guide to retirement, the folks at J.P. Morgan show how investing in cash can seriously limit your ability to grow your wealth.
They tell the story of Noah and Quincy. From ages 25 to 65, Noah invests $10,000 every year in very safe investments like money market accounts and CDs. Assuming he gets a generous average return of 2.25%, Noah would have $652,214; he put in $400,000 of that amount on his own.
Quincy on the other hand also starts investing $10,000 each year at age 25 and stops at age 35. Quincy decides to take on more risk by investing his money in mutual funds. With an average return of 6.5%, he would have $950,588 by age 65!
MagnifyMoney is a price comparison and financial education website, founded by former bankers who use their knowledge of how the system works to help you save money.