Getting started in investing is really a bit like getting started in fishing. Sure, you can go and get elaborate lessons, or you can hire someone else to just bring you fish (for a price). Sometimes though you just go and cast your line in the water and see if something bites. Over time you learn the best bait and the best color of lures. Maybe you even get a fancy bass boat with a sophisticated fish finder and learn where the fish go at different times in the year. The point is that you need to start somewhere, and until you drown a few worms, there is only so much you can pick up from books and websites.
Of course, going out and buying an $80,000 Bass Tracker before you even know you like fishing would be unwise. Likewise, dropping $80,000 in stocks with no clue of what you are doing would be unwise. Here are some steps to take and things to consider before you make your first cast:
1. Get in slowly. It is important for both your psychology and your wallet to wade into the markets slowly. If you start with a large sum to invest and put everything you have in at once right when the market decides that’s the time to take a drop, you are likely to get scared, sell out, and then swear off investing forever. If you buy in a little bit, wait a few months, then buy a bit more, then if there is a drop in the price of the stocks you selected it will be like you’re getting more shares on sale. Note also that there have been a few times (like 1929 and 1999) where if you invested all at one time it would take more than a decade to get back to even. Even in those times, however, if you had invested a small percentage regularly over several years you would have come out well ahead.
If you’re starting with a small cash position (say a couple of thousand dollars) but then saving regularly to invest more, it would be alright to invest all you have saved for investing at once since you will have more money to invest in a few months once you have saved up again.
2. Ignore the hype. If you hear about a hot stock on CNBC or Money magazine, chances are the stock has already run up and is ready to tumble. Likewise, there are always people out there selling doom and gloom. If they do it long enough, they will eventually be right, but you will have missed a lot of return sitting on the sidelines. Do your own research and remember you are looking at the long-term view. If things start to look dicey, start saving up cash so that you can buy in cheap if there is a fall.
3. Read, read, read. Millionaires read at least one non-fiction book a month. Read books on investing strategies and the fundamentals of stock analysis. Read about business and negotiations. Read about history. Get a subscription to the Wall Street Journal and read the articles on investing. Get Money magazine and Forbes. Keep point number 2, “Ignore the hype,” above in mind as you do this reading – there is a lot of bad advice out there. Take in all perspectives but then see what actually works.
4. Have the right mindset. Invest in businesses, not stocks. People trading stocks will have a lot of good stories to tell but the fact is almost none of them will beat the market over long periods of time. Most will do far worse. The reason is that the market prices in all news that is out there almost immediately. The fluctuations in price that occur therefore are almost random. Trading stocks is like flipping a coin and betting on the outcome. You may get a short-term streak, but you will lose out over time.
Instead, find businesses that look like they can grow over the long-term and buy into them. At times their stocks will rise dramatically and become overpriced. At times their stocks will fall along with the rest of the market and become very cheap. Perhaps sell a few shares if the price is really high, or buy more shares if the price is really cheap, but in general ignore these aberrations and hold the stock so long as the company is doing well. Reward will always come eventually.
5. This is a marathon, not a sprint. Sprinters wear out and die. Buy for the long-term. It is difficult to find stocks that will do well in the next few month or the next year. It is far easier to find companies that will do well over the next decade. Because stocks will be at a lower price today than they will be in the future if they continue to increase earnings (because there is a risk that they will not make those earnings), it is possible to actually find the stocks likely to go up if you take the long-term approach. The same cannot be said for the short-term. Find stocks that look good in the long-term and plan to buy in and stay in.
Also, don’t sweat the short-term fluctuations. Even good stocks decline when the whole market declines. Keep focused on the finish line 26 miles away, not on the first 100 yards.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
Picture Credits: Pierre Amerlynck , Downloaded from stock.xchng