Are your trying to figure out how to be an investor who actually succeeds and makes money? It can be a daunting and confusing task. There are so many different “gurus” pulling you in different directions. How do you know who to listen to? It’s mind boggling. Here’s an email I recently received from Pat (Wealth Pilgrim subscriber) that really demonstrates the confusion:
Can you give me some investing tips? When Facebook went public, I got interested in investing but I wasn’t able to buy shares. That worked out OK but I don’t understand why the stock has done so poorly. How should I get started? Should I buy stocks? Should I get a broker or a discount broker and trade online? Should I go back and buy Facebook now? If not, when? And how much should I invest?
I don’t know about you but when I read this email I felt dizzy. Pat’s mind was racing 1000 miles an hour. I’m certain that at least half of the questions Pat asked were planted in his mind by various talking heads in the media. That’s why he’s all over the map.
My first piece of advice for Pat is to slow down and approach this methodically if he wants to be a successful investor. Let’s break down the process to give Pat (and you) a track to run on.
1. Commit to a process.
It feels like Pat is clutching at straws here. Maybe I’m reading too much between the lines but if feels like he is looking for a way to make a fast buck. I never endorse this approach to investing. This is like the person who wants to lose weight and jumps on a new diet/exercise program every other week. Can such a person actually expect success? No. And the same thing can be said about becoming a successful investor. Slow down. Understand you have to go through a process to hone your investment skills.
2. Background
Before jumping into action, you need the proper knowledge. Fortunately it’s very easy to get educated about investments. You can get a ton of free information about investing on the internet (like getting my free e-course on How to Invest Like a Genius! by signing up for my free newsletter). Take the time to understand:
- How bonds work
- What a mutual fund is
- The pros and cons of owning individual stocks
- IPOs
My advice is not to do anything unless and until you have a clear understanding of each of these investment alternatives – at the very least.
3. Goals
Before investing in anything, be clear about what your goals are and over what time frame you want to achieve those goals. Let’s say you are saving to buy a home next year. Since your investment time frame is so short, you should not take any risk. Deposit your money in the bank and don’t worry about the paltry interest you’ll receive. You can’t afford to take risk so you must settle for the low return. That’s OK.
On the other hand, if your goal is to save for retirement, you can invest for many years and use growth investments like mutual funds and ETFs. You may find it difficult at times to stomach the ups and downs of the market. But your main goal is long-term growth so it makes sense to use equity or balanced mutual funds to achieve your goals.
4. Understand Trade Offs
Unfortunately you can’t have your cake and eat it too. You must understand that short-term investments provide absolute safety over the short-term but almost no growth (when you consider inflation and taxes) over the long-run.
Growth mutual funds, ETFs and even balanced mutual funds provide potential long-term growth but subject you to short-term volatility. You can’t escape this reality. You can take certain measures to reduce your volatility but you can’t escape this entirely.
5. Start Slow
Once you have the background, understand the basics, get clear on your goals and become willing to accept the trade-offs, you are ready to start.
At this point, you’ve decided to invest in individual stocks, bonds, mutual funds or ETFs. You’ve (hopefully) made the decision to stay clear of IPOs and other “get rich quick” schemes.
At this point open a small account with an online broker like Scottrade or if you want more investment advice use a service like Betterment. They make a lot of the decisions for you and they are very reasonably priced.
You are going to make mistakes and you can’t beat yourself up when you do. You will learn more from doing (and making mistakes) than by reading and talking. Do your homework and start small.
What investment tips can you share to help others learn how to be an investor that makes money?
Chad says
Being a former stockbroker for a discount brokerage firm, the most prevalent mistake I would see people make is knowing what they are invested in. I would suggest two things. First pick an investment class and learn about it. Whether it be funds, ETFs, bonds, stocks, whatever. Know how they work and what they are comprised of. Second, and this is really important, know what your risk tolerances are. It is really is hard to grasp this until you are in an investment and see it move a little. The mistake I would often see people make here is they got a “tip” from a friend or from the media (re: Facebook), got into something and had no idea that it was so volatile. For me I pick ETFs and just trade the broad indexes using them.