Smartest Ways to Invest

Instead of picking and choosing individual stocks, the smartest investors often use index to "purchase" the whole market.Christine Balderas/Photodisc/Getty Images

Few people ever made a million dollars without doing something exceptional. Exceptional doesn't necessarily mean brilliant, but it does mean relatively rare. For example, the people that made millions and billions profiting from the tech bubble in the 1990s were on the cutting-edge of the U.S. economy. Millionaire inventors make new things and billionaire entrepreneurs make new companies. No matter how you spin it, the smartest ways to invest will always be consistent with at least one core principle: you need to invest in the things that will be of higher value in the future.

Index Funds

In the long-term, the market has always increased in size and value, which is why investment living legend John C. Bogle has always advocated that investors put their money into index funds. Index funds basically capture entire segments of the market, by valuing the highest-value companies in the particular industry. For example, the S&P 500 is an index of the most valuable companies in the U.S. economy, and that index has consistently outperformed the market as a whole over the past century. Other index funds offered by companies like The Vanguard Group and Backrock allow investors to value the best parts of the energy, manufacturing, food, or international industries and markets. Though a few companies, in whole or in part, could begin to falter at any point, it is unlikely that an entire industry or market will. Thus, consider putting your money into index funds for consistent growth over the long term.

According to the world's wealthiest investor, Warren Buffet, the smartest way to invest is by buying stocks of a high-value company that you understand in an industry you understand. Hold those stocks for as long as possible, and you'll likely end up a winner. According to Buffet, betting in the day-to-day market is the loser's game, because a stock portfolio can spike and collapse based on a number of factors beyond your immediate control; however, when you invest in a good company that is in a successful industry, you are more likely to have selected a stock that will increase in value in the long term.

As a corollary to Buffet's "Buy and hold" axiom, he also suggests that one profit in the market by being wary of the dominant market sentiment. In his own words, Buffet wrote in a well-known New York Times op ed that "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful." According to the work of economic Robert Schiller and George Akerlof, Buffet's instincts are quite valid -- much of the most severe fluctuations in U.S. and international markets over the past couple centuries have had to do with emotions. People are over-exuberant in the good times and overly fearful in the bad ones. By doing your own research and following your gut instinct on the proper value of a stock, regardless of the market opinion, you are more likely to profit over the long term.