15 Investing Tips They Don't Teach in School

Few of us learn much about money management, not to mention investing, in school. (I even went to business school for a graduate degree and gained little practical investing smarts there, too.) Fortunately, whether you're 17 or 37 or 67, it's not too late to learn some valuable financial lessons to build a more secure future for yourself.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Let's start with this tidbit: You can get rich by investing, even if you're an average person. You just need to be able to sock away meaningful sums regularly, over a long period. For example, if you invest $18,000 per year (that's $1,500 per month) for 20 years, earning an average annual gain of 8%, you can amass close to $900,000. With $12,000 per year over 25 years, you can grow a nest egg of almost $950,000. Even if you just have 15 years until retirement and you can sock away only $5,000 annually, that can amount to more than $145,000, growing at 8%.

ALSO READ: Stock Market Bubble? Here's How to End Up a Winner

More good news: Investing in the stock market may seem complicated and mysterious if you know nothing about it, but it's much easier than you think. Yes, there are complicated ways to go about it, but you can keep it simple and do very well. Lots of teachers and janitors and secretaries have quietly and regularly socked away money in the stock market, eventually becoming millionaires. You might just make the most of your 401(k) at work, or open an account at a good brokerage and invest in an index fund (more on them soon).

Of course, there should be no investing if you're saddled with high-interest-rate debt, such as that from credit cards. Instead, get out of debt first.

If you're carrying, say, $25,000 in debt and you're paying 25% in interest, which is far from unheard of, you're being charged a whopping $6,250 per year -- just in interest. You'll have to cough up much more than that to put a dent in your debt. If you're putting money in the stock market, which has averaged returns of close to 10% over long periods, while paying 15% or 20% or 25% or more, it will be difficult or impossible to build wealth.

It's also important to have an emergency fund ready, able to cover your essential costs such as food, shelter, transportation, utilities, taxes, and insurance in the event of a job loss or unexpected major expense. It can be easy to assume that you won't face such a financial disaster, but many job losses are very unexpected, and health setbacks or other big expenses can suddenly rear their heads -- especially during a pandemic. If such an event happens to you, you need to be able to pay for it without taking on costly debt or selling stocks at a loss. Consider that a Marketplace-Edison Research Poll last year found that 60% of respondents said they'd be unable to handle an unexpected $1,000 expense.

ALSO READ: Do You Need a Larger Emergency Fund in 2021?

The sooner you can start saving and investing, the better off you'll be -- by far -- because your money will have so much time in which to grow. That's why it's especially tragic that we aren't taught about investing and the power of compounding while we're young. For example, if you're 30 and hope to retire at 65, you can let your money grow for 35 years -- long enough to turn annual investments of $10,000 into $1.8 million (growing at an annual average rate of 8%). Many of us can become millionaires in our lives, but young people will be far more able to achieve that -- if not multimillionaire-hood.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

It should be clear by now that it's important to have a long-term outlook when investing, because it's typically over many years that great wealth -- and financial security -- is achieved. But having a long-term outlook and sticking with investing through the market's inevitable ups and downs are much easier said than done. Many, for example, will just quit investing altogether once they're burned by a stock that cratered. Know what to expect from the stock market, have a plan, and be diligent. Determination will get you far.

It's fine to diversify your portfolio with some bonds, as well as stocks, but understand that over long periods, stocks outperform bonds handily. Wharton business school professor Jeremy Siegel studied investment returns from the 1800s to recent years and found that stocks outperformed bonds in 96% of all 20-year holding periods between 1871 and 2012, and in 99% of all 30-year holding periods. The annualized growth rate for stocks in a more modern period, from 1926 to 2012, was 9.6%, as compared with 5.7% for long-term government bonds.

ALSO READ: The Top 21 Stocks to Buy in 2021 (And the 1 Ultimate Stock)

Investing can be a very simple and easy thing to do if you just stick with index funds, which are mutual funds that track certain market indexes, holding roughly the same securities in roughly the same proportion and therefore earning roughly the same return. Index funds are perfect for many people because few of us really have the time, interest, and skill to study the universe of stocks and carefully select the most promising individual stocks in which to invest. They're not a low-return compromise, either: Due largely to their ultralow fees, index funds outperform the vast majority of actively managed mutual funds. Indeed, as of the middle of 2020, the S&P 500 outperformed 87% of large-cap stock funds over the past 15 years.

Some good index funds to consider are the SPDR S&P 500 ETF (NYSEMKT: SPY), Vanguard Total Stock Market ETF (NYSEMKT: VTI), and Vanguard Total World Stock ETF (NYSEMKT: VT), which will, respectively, spread your dollars across 80% of the U.S. market, all of the U.S. market, or most of the world's stock market. There are index funds that track bonds and other segments of the market, too.

Next, make good use of tax-advantaged retirement accounts such as IRAs and/or 401(k)s. (You can typically buy into broad-market index funds through them, too.) At a minimum, if your employer offers a 401(k) plan, participate in it -- at least enough so that you max out any available matching funds, as that's free money. (Matching funds are when your employer contributes to your 401(k) account based on how much you contribute -- such as by chipping in 50% of what you contribute, up to 6% of your salary.) Take advantage of IRAs, too -- traditional and/or Roth. A traditional IRA gives you an up-front tax break, reducing your taxable income, while a Roth IRA offers tax-free withdrawals.

It's important to pay attention to fees -- which are levied by banks, mutual funds, and retirement accounts, among others -- if you want to maximize your investing results. To appreciate the effect of fees, imagine two mutual funds in which you invest $5,000 each year for 25 years. If your average return net of fees is 10% in one fund but it's only 9% in the other, you'll end up with $541,000 in the former fund and only $462,000 in the latter -- a difference of roughly $79,000.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

When looking for great stocks for your portfolio, it's important to focus on both the quality of the company and the value of the stock. Ideally, you want to invest in good or great companies, at low or reasonable prices. A great company may have little to no debt; multiple years with revenue, earnings, and profit margins growing at a good clip; competitive advantages (such as a strong brand); and solid growth prospects. Valuing a stock to see whether it seems undervalued or overvalued is a bit of an art form, involving estimates, but you can get at least a rough idea by looking at factors such as price-to-earnings (P/E) ratios, price-to-sales (P/S) ratios, and price-to-cash-flow (P/CF) ratios, and comparing them with those of peers and with the company's ratios in the past.

ALSO READ: Here's My Top Value Stock to Buy Right Now

Unless you're taught otherwise, you might just assume that dividend-paying stocks are boring, won't grow fast, and won't build your wealth very effectively. Wrong. After all, even Apple, Starbucks, Broadcom, Microsoft, and Activision Blizzard pay dividends these days. It's true that many younger and smaller and faster-growing businesses tend to not pay dividends until they're more established, but there are still lots of companies offering a powerful combination of expected stock price appreciation and growing dividend payments over time. Indeed, various studies have found that dividend stocks, overall, outperform non-dividend payers. For instance, researchers Eugene Fama and Kenneth French examined stock performance data from 1927 to 2014 and found that dividend payers outperformed nonpayers, averaging 10.4% annual growth versus 8.5%.

Next, know that while the thought of buying shares of an exciting company that has just begun trading on the stock exchange via an initial public offering (IPO) can be tantalizing, many IPO stocks quickly soar to unreasonable levels. It's often best to avoid IPO stocks for at least a year or so, until their shares settle down and the companies have a few quarters of earnings reports filed for investors to review. University of Florida professor Jay Ritter has found that, on average, IPOs underperform the market in their first three years. Those faring better than average were larger companies and those that had been backed by venture capital firms.

For best results when investing, keep your emotions in check and make decisions based on research, facts, and rational reasoning. Many investors, especially new ones, will be lured by the stock market after it has surged. That can be an OK time to buy some stocks for the long term, but many stocks might be overvalued and likely to retract in the next correction or crash. Conversely, when such crashes inevitably occur, lots of investors sell their holdings in a panic (perhaps even at a loss), instead of just patiently riding out the downturn. The stock market has always recovered from drops, eventually going on to set new highs. Indeed, market crashes are excellent times to go against the crowd and buy stocks, as many great companies will suddenly be trading at much lower prices.

ALSO READ: Stock Market Panic? 4 Reminders to Calm Your Fears

Even though you're out of school, aim to keep learning about investing -- for the rest of your investing life. Read about great investors and their investing philosophies. Learn about great companies and how they became great. The more you read, the more you'll come up with questions such as what's value investing? And what's portfolio diversification? Learning the answers to such questions will make you a savvier investor and may well lead to much better portfolio performance.

Consider this quotation from Charlie Munger, the business partner of superinvestor Warren Buffett: "In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time. You’d be amazed how much Warren reads -- and how much I read. My children laugh at me. They say I’m a book with a couple of legs sticking out."

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Finally, if you want to always (or usually) have money available to invest, aim to always (or usually) live below your means. That means spending significantly less money than you bring in -- and it can be achieved by spending less, earning more, or both. It will take determination, and may involve using coupons, seeking discounts, not shopping for entertainment or out of boredom, taking on a side gig now and then, eating out less, and shopping around for better prices on insurance. Living below your means is a common habit of people who have become millionaires.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Selena Maranjian owns shares of Activision, Apple, Microsoft, and Starbucks. The Motley Fool owns shares of and recommends Apple, Microsoft, and Starbucks. The Motley Fool recommends Broadcom Ltd and recommends the following options: long January 2022 $75 calls on Activision and short January 2022 $75 puts on Activision. The Motley Fool has a disclosure policy.