Investing is sort of like working on your car. It really isn’t all that difficult and most people can learn how to do it. It does take some amount of time, however, and investing in some special “tools,” including various subscriptions to get data on stocks can make it easier and productive.
Like working on your car you can also make mistakes from inexperience that will result in losing some money. Even when you do everything right, however, you will also suffer losses from time to time. The trick is to learn from those mistakes and keep investing since future gains will make up for present losses if one keeps adding money and investing.
People who invest for the long-term will win out in the stock market. Those who try to jump in and out usually end up treading water or even losing money, mainly to fees (my father always joked that you know you’re trading too much when your broker starts sending you a Christmas card). Perhaps the most difficult situation for professional money managers are the years when the market just doesn’t perform or their picks don’t work out. They know that there will be great years in the future that will more than make up for recent losses, but it can be difficult to assuage the fears of the client who just lost 30% of his money. That client may want to pull the money out right then, which usually is the exact wrong thing to do since after years where there are big declines the market often rebounds. Witness the huge gains in 2009 after the losses in 2008, or the gains in late 1987-1988 that completely erased the unbelievable one-day 25% drop in 1987.
Going back to the car analogy, people who work on their cars generally do it for three reasons. 1)They want to save money, 2) They want it done a certain way, or 3)They enjoy working on cars. With cars the first reason is false for many repairs. One can make generally make more money working extra hours with the time spent on fixing a car, particularly since it may take the home mechanic a whole weekend to do a repair that a shop could do in a few hours using the right tools. The second reason, making sure the repair is done right, is more valid since the best way to ensure the right oil is used or care is taken in assembling a transmission is to do it yourself. The final reason, that one enjoys it, is probably the best since for many working on cars is a hobby they enjoy.
Investing is much the same way. You can save some money since you aren’t paying a professional advisor, although you need to weigh the value of your time against the savings. Having control of your money means that you can avoid over-trading of stocks (called churning) which can reduce returns due to increased taxes and fees. Finally, many enjoy investing. Some even do what money manager JD Spooner calls, “playing around,” since their goal is really to trade for entertainment rather than make money.
On the time issue, investing really can require much less time than many expect. One can do just fine investing in a set of mutual funds and ignoring them, spending just a few minutes once in a while performing maintenance and spending a little more time preparing tax forms. One can do even better if they take an hour or two each year to rebalance the funds (many mutual fund companies even have tools to make this very easy). Readers are advised to go to Vanguard’s website for information on setting up an account and getting started – it really isn’t that hard.
Long-term investing in stocks directly also does not require that much time. Once one has the knowledge it may only require a few hours each week to read annual reports, find new stocks to invest in, and trim stocks that aren’t performing well. Time must be spent learning how to pick stocks, however, and if one does not enjoy it there is nothing wrong with going the mutual fund route or hiring a professional to manage the accounts.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. In addition the writer of this blog is not an accountant and writings should not be taken as tax advice which should be left to a CPA. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.