For the newly anointed, investing can be intimidating. Part of the problem is that this is a world of confusing words like the stock market, bonds, mutual funds, ETFs, and IPOs. And since there is so much at stake, the consequences of getting it wrong can be huge. A mistake now could result in a disappointing financial future or even make it impossible to ever retire. I can understand why many people prefer to bury their heads in the sand and put off investing all together.
While I understand the sentiment, it’s not in your interest to delay your investing career – even if you don’t fully understand all the in’s and out’s of finance. Here’s how to get out of the starting blocks starting now:
1. Embrace Imperfection
When it comes to money, everybody makes mistakes. In fact, the more money you have the more expensive your mistakes become. In that regard, beginners have a distinct advantage; your mistakes probably won’t sink your ship if you have limited resources. Relax Novice Pilgrim. Be happy and enjoy!
Neal’s Notes: Do you think that investing is like gambling? If so, here’s how to become the House and stack the odds in your favor.
That isn’t to say that you should go in to investing completely ignorant. There are plenty of products designed to sap every last dollar from you in the financial world. And you certainly have to be careful and get informed. But generally speaking if you understand how investments work and pick the right investment class to meet your objective, you aren’t going to get too far off the path.
Your investing habits are far more important than squeaking out an extra 1% on your portfolio in any given year.
(Please read that sentence again. It’s probably the most important line in this entire post.)
2. Use Time Effectively
The really difficult thing about investing is that we want immediate, predictable and continuous (positive) results. You might intellectually think you are a long-term investor and you might be right. But lots of people I know say they think long-term but only do so when the market is moving up. When the market turns south or the daily/weekly/monthly/annual results disappoint them, they change course. This is one of the most expensive mistakes you could possibly make.
Note: I am not saying you should buy and hold. There are a variety of investment approaches and buy and hold is only one of them. What I’m saying is that you should select the appropriate investment approach and stick with it even if the results aren’t always what you want them to be.
If you want fixed returns, you’ll probably settle for sub par returns and you may not achieve your financial goals. If you want and/or need to grow your money you will probably need to invest in growth and that means risk over the short term. The only way to make that work for you is to think very long-term (10 or more years). For most people, that isn’t a problem objectively speaking. But when the emotions take over, the logic goes out the window and the expensive mistakes start adding up.
3. Understand the Payoffs of Starting Now vs 5 Years From Now
Let’s look at the difference in two portfolios with one starting now and one delaying 5 years. The former will be invested for 40 years while the latter for just 35. We’ll assume the first investor got started at age 25 and retired at 65 while the latter started at age 30.
All other variables will be the same:
- $5,000 investment per year at the beginning of the year
- 7% average growth annually
Here are the portfolio totals at the end of the investing period, when our investor retires:
- Invested for 40 years: $1,068,047.85
- Invested for 35 years: $796,687.01
The difference is a staggering $271,360.84. The first investor only contributed an extra $25,000 total ($5,000 per year for five years) yet came out hundreds of thousands of dollars ahead. The second investor would need an average growth rate of 8.23% to make up for waiting 5 years. Starting investing late is costly. And it also means the investor who delayed will have to take on more risk in order to catch up to his friend who started earlier. Waiting is costly and risky.
That is the power of compounding. The earlier you start investing the better. Agreed?
4. Anticipate Problems.
As I said, you’ll be much happier if you start off knowing you’re not going to get everything right. Getting started is what is important. If you sit around forever waiting to perfect your investment style, you’ll never get started and miss out on the power of compounding over the years. Contribute to your investment accounts on an automatic basis to make setting up good habits extremely easy. Don’t wait until you have everything figured out or you will be waiting forever.
5. The Longer You Delay the Less Likely You Will Start
Each year that goes by without you getting started with investing increases the odds that at some point you will realize you are never going to hit your retirement goals and just give up. Don’t let that happen to you friend.
Even if you are playing from behind, getting started investing at any time is smart decision.