How To Get Started With Investing
When you talk about investing the first thing most people think about is the stock market. The stock market has been around in so many different variations for more than 100 years but long story short it every iteration it has been building wealth. The key word is wealth, wealth is something that is built over an extended period. History has proven if you take a long-term approach, it normally pays off more than in the short term. I know there are many successful day traders out there but trust me they are far and few between. I know there are a lot of gurus pretending they can teach you overnight how to become a millionaire investing in stocks, I always go by the saying if it was easy everyone would be doing it especially if they are only charging $29.99. It takes years of practice and hours of research to become a pro at day trading. The key to investing in the stock market is thinking long-term.
Do You Have The Time?
The first question I always ask is do you have at least 3 years to commit. If you are not able to commit the money for at least 3 years you are running a higher risk of loss in value. Look at the current market cycle, we are currently in a bear market and if you look at the market as a whole we are still at a level higher than 3 years ago. The stock market is woven into the US economy so much to where if you are betting on the market you are almost sure to win.
The main area where people go wrong is not knowing their own limitations. One of the riskiest things you can do as a novice investor is concentrating your money into one individual stock. This type of investment exposes you to unforeseen risk. The stock market is a fickle place and companies fall out of favor overnight. This year alone we have seen billions of dollars wiped off the table by household names such as Netflix, Meta, and Amazon just to name a few. An experienced investor with the right resources maybe be able to avoid these things but a beginner is taking a huge chance. So investing in stocks can increase your time horizon when it comes to being in the positive. I think we can all bet that those companies will be around for decades to come but their value probably will take a couple of years to recover. (We talk in another blog about how to buy value positions because a significant drop in a company can be an opportunity but there are certain technical you should be looking for.)
Protect Your Emotions
One of the most important things about stock market investing is avoiding loss. Investing has a lot to do with percentages. When we calculate gains and losses it’s percentage base from the value at that time. This means if you lose 10% it is going to take an 11% gain just to break even. This is important to understand because losing in the market for a long time can have long-term non-monetary effects. There are two aspects to investing, an emotional aspect and technical aspect. As a beginner investor it is important to protect your emotions because this is how you create doubt in your decision making, most call it “paralysis from analysis”. You will start to take too long to make your choices, or you may never make them at all. So even though avoiding loss is important, it doesn’t matter what principals you have you will never make money sitting on the sideline forever.
What Should I Be Looking For?
As a beginner investor you should be looking to spread out your risk through diversification. Investing in the stock market is mostly about probability. The more you can spread out your money the better chance you have at avoiding loss. I suggest if you are looking to start investing in the stock market you should investigate ETFS (Exchanged Traded Funds) and Mutual Funds.
Mutual Funds are investment vehicles consisting of stocks, bonds and or other securities. It gives individual investors a chance to invest in a professionally managed portfolio with small financial commitments. Mutual funds do change annual fees and sometimes commission charges upfront. These fees do effect their overall returns but it is important to remember if you are unfamiliar with how to do this on your own then you should pay someone to do it professionally. You shouldn’t just find any mutual fund and invest in it make sure you do some research. You should also be tax aware while investing too.
Exchange-Traded Funds are very similar to mutual funds. Exchange traded funds are pooled investment that typically track a particular index or sector. One of the big differences is that ETF’s trade like stocks on the open market. ETF are also a lot of the time cheaper than mutual funds. ETFs are very beginner friendly relative to everything else you could be investing in the stock market.
Where Do I Invest?
This is a very good question; in the new world we have with everything being done on your phone people have fell victim to investing on their own using apps like Stash and Robin hood. It’s not that you can’t be successful, in my opinion you should still do your research before you pick a position. I think platforms like Merrill Lynch, Schwab, and TD Ameritrade offer platforms that help you filter out securities on your own. This also depends on the amount of money you have as well. If you are looking to invest anything more than $100000 I suggest you speak to a financial advisor first because there might be a better way to position that outside the market such as life insurance with cash value that you can borrow against. (We will have a blog at a later date about the living benefits to life insurance).
Investing is a part of our new world. The stock market is the new long-term savings account. The US economy has proven that low interest rates promote growth. Interest probably will never be high enough for the middle and lower class to combat inflation.
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