We are asked, from time to time, to give investment advice. We want to share a couple of principles we have learned over time. Investing and personal finance are huge topics in the Black Community. It is important that we understand the basic principles. But first we have to cover the pre-investing basics.
Are you ready to invest?
- Have a big dream. Car, education, house, taking care of your parents
- Develop goals to reach your dream. Breakdown the dream into steps.
- Create plans to meet your goals. If you don’t meet your goals adjust your plans.
Before you can think about investing, you must have some basic pieces of the puzzle in place. First, you must have a dream, then personal goals, and finally, a plan to achieve them. We love dream maps. Each investment plan needs a dream to motivate you, then time-bound medium-term goals (3-5 years), and finally a plan to meet those goals. Dreams and goals do not have to be specific (a nice car, a nice house or a dream vacation with family and friends) but they do have to be written down.
The simple act of writing them down makes them concrete. The time involved is your “first” investment. And it costs nothing but time. The difficult idea here is that written goals force self-relection. And with self-reflection comes course correction. Sometimes you have to do stuff you don’t like. You have to put the work in. It takes maturity and wisdom. Self-reflection turns dreams into drive, determination, and motivation. That’s why a dream map on your refrigerator works so well.
To keep motivation going, you must practice “Strategic Rewards.” A good rule is 5-10% of savings should be a reward for saving. Get a fancy coffee at the end of the month, take an end-of-year trip, or attend a concert. Reward good behavior on a consistent basis.
We cannot offer investment advice to someone who won’t do the work. So, meet us halfway. You have to be ready. You have to complete your written dream map and/or monthly budget.
To become an investor you need investable funds. How will you create investable funds?
- Earn more money
- Save more money
- Invest the surplus after covering the basics
- Increase your income
- Find partners
Education is the best investment by far. Formal or informal. “It is impossible to tell the blind what path to follow.” Education has proven over time to be the best investment. Not just formal education, but daily learning, curiosity, experiment, and failure. There are plenty of books, conferences, YouTube videos, podcasts, articles, and online classes. You are trading your time for knowledge and future money. Invest in yourself. But you must have some basic knowledge, ideas, and vocabulary to discuss investments.
Increase Your Income. There is a reason rich people are rich, they have higher incomes. They plan the next step to a future job that will earn more money. Learn everything you can from the current job a move on. Improve your skills for the next job. Take night classes or online classes. Invest in yourself to earn a higher income. Then move to a higher-paying job. See-ya. Companies don’t care about you. Well, we mean, don’t confuse a comfortable job with your own goals.
Find Partners. No successful person does it alone, as much as they brag. Successfully investors have a few key partners they discuss things with: “What do you think of this idea?”, “Is crypto a scam?”, “My ex wants everything, what do I do.”
With all that being said here is our pre-investment list. You can only invest if you can afford to invest. You must cover basic needs first. Take care of home. Make sure you have checked everything off the list first before you consider investing.
The Before You Invest List
- Own real estate instead of renting. Real estate returns 5-10% each year risk-free. It protects your money. With rent, you have nothing to show.
- Start small. Start your retirement savings early either through work or personal savings. We are talking about $50 to 100 dollars off the top. Make it automatic so you don’t have to think about it.
- Zero credit card balances. Credit cards are for emergencies and electronic payments. We recommend a Discover card. Set-up automatic minium balance payments, so you never get a late fee.
- A monthly budget. You have to know where your money goes. You may not like it, but you have to know. You must have money left at the end of the day to even think about investments.
- An emergency fund of $2000 for car repairs, school supplies, and relatives.
Real Investment Strategies
Our basic investment strategy is to not try to beat the market, but instead, go with the market. The economy is rigged toward large corporations and shareholder returns. You have to be an owner. So investing in the low-cost S&P index funds and ETFs always works. Then when you get older shift your money to low-fee bond indexes to create a stable income. Boring, but it works. But own a house or business first.
Asset Allocation. A fancy term for not putting all your eggs in one basket. You want to balance your three asset categories: real estate, stocks and bonds. You have to think about how each category performs during recessions and growth periods over the long term. Most people want a balance between the three. A typical middle-class portfolio, age 50, has 50% real estate, 35% stocks and 15% bonds. During a recession bonds do well. During growth stocks do well. Real Estate almost always does well, but works differently. It’s dependent on population growth, location and housing demand.
Growth Versus Income Stocks (Equities)
There are different types of stocks (called equities). Most people are invested in stocks through their retirement funds. There are growth stocks whose return is based on share price growth and don’t pay dividends(Google, Microsoft, nVidia) and income stocks that pay a cash dividend each quarter. When you invest in equities you must pick a fund and its strategy. Most retirement funds are broad market index funds like the S&P 500 index fund. However, you can choose a riskier asset class like “Tech” which has done well during growth periods, or a safer asset class like “Consumer Cyclicals” which does well during recession and growth periods. Another category is ESG, which promises socially responsible investing.
Finally, do not confuse Black Investing with social equality, equal opportunity, community power, government power or political power. Investing is not an excuse for community participation. Investing will help Black people control their own future. But politics also matter. Movements matter. Social justice matters. The structure of the US economy since 1980 has been to reward corporate power and shareholders while reducing taxes on the rich, blocking unions, limiting minimum wage increases and limiting social spending on things like education, healthcare, and social welfare programs. The result is a huge increase in economic inequality in the United States since 1980. These are much larger problems than just “investing.”
If the “Business of America is Business,” then you might as well go along for the ride and make some money.
There is a huge amount of research that says: “You cannot beat the market.” It’s called the efficient market theory. Basically, everything you know and everything everyone else knows is already included in the price of an investment. In other words, if you are beating the market, which is called Alpha, someone else will figure out how you did it, copy your idea, and reduce your Alpha.
Get-rich-quick schemes do not work for the same reason. You cannot beat the market. They have been around for a long time. From snake oil to beauty creams, from the numbers to the lottery, from multi-leveling marketing to FX and crypto; none have worked out for the long term. But they sure are a lot of fun.