Seems like everywhere I look, there are stock market gurus coming out of the woodworks. As if the stock market isn’t unpredictable enough, novice investors are being flooded with “expert” advice on how investing is the most easy thing to do today.
The rookie investor, looking to set their initial investment in the market, may not be aware culprits are lurking everywhere online. Whether it be Youtube’s algorithm driving “how-to-invest” videos to their feed or Facebook ads displaying the “next best class for investing”, it can be tough to separate the good advice from the bad advice.
If you are an aspiring investor and want to avoid heading down the wrong investment path, consider following these 12 very simple tips.
1. Accept That FOMO Is A Real Feeling
More worse than missing out on an opportunity is listening to an “expert” tell you how they knew that opportunity was coming and why you should have listened to them. Next you’ll be bombarded with offers to act now and purchase their online courses while they’re still on sale.
Opportunities to buy will come and go. As your investing journey progresses, so will the number of times you question your ability to invest in the first place. If your plan is to wait for the perfect time to put your chips into play or allow gurus to tell you to take action, you’re doing it wrong.
The type of advice out there is geared towards promoting action based behaviors. A quick Google search on any given day – whether in a bull or bear market – will result in investing advice that conflicts with each other. Steer clear from gurus giving the obvious news of the opportunity that passed, there’s nothing to be done now – just accept it.
2. Improve Your Financial Literacy
Financial jargon will be confusing no matter what level investor you are, it’s all relative. The amount of information you understand is directly proportional to the level of familiarity you possess. It serves no purpose in comparing one’s journey to another.
The best advice is to self-learn. Go back to school and learn the basics until they’re embedded into your mind. Terms like brokerage account, index funds, and asset allocation are a great place to start.
As you encounter more of these terms, intimidation should no longer be overwhelming. Through repetitive learning – the constant exposure to the terminology – you will grasp those concepts at a “surface” level. At that point, you can determine if you prefer to build a deeper level of understanding or remain content with what you know so far.
3. Personal Finance Is Personal
Imagine a world where everyone is confined to the same exact rules. No venturing off for experimenting. No coloring outside the lines. Just black or white – you either do or you don’t. Very simple to follow, from an execution perspective, but the absolute worst way to execute. That goes for anything in life.
The beauty of personal finance is we are given guidelines – basic rules – to abide by. We then use these to influence our behavior towards how we interact with money. This interaction paints a picture of our risk tolerance. Depending on how well we handle risk will determine what we do when money comes available.
We are allowed to make money moves however we wish and whenever we want. There are groups of other like-minded individuals in the same boat as you, you just need to find them. They can give advice on what they’d do in your situation. But in the end, you have the final say in what you actually do.
4. Time In The Market Beats Timing The Market
The age old advice, stated by Peter Lynch, has been repeated by so many investors and gurus alike. This may be the only instruction you should follow from gurus. Sadly enough, they could give this one piece of advice and call it a day but that wouldn’t sell many online courses.
Remove the “market timer” stigma that many investors feel forced to believe. Numerous studies have shown how panic selling is affected by the psychology of fear. Sitting on the sideline with idle cash just waiting for the perfect moment to dump into the market isn’t any easier.
Risk tolerance, defined as the amount of market risk an investor is comfortable tolerating, needs to be understood before heading down the long road of investing. Hopefully you are geared towards the “buy and hold” mentality. This style of investing eliminates the need for market timing but instead drives a behavior to consistently invest in the market regardless of what it does.
5. Avoid The Herd Mentality
In the words of the wise Warren Buffett, “Be fearful when others are greedy and be greedy when others are fearful.” This is tried and true advice every misguided investor should follow especially when emotions are involved.
“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”
– Warren Buffett
Hearing the latest gossip about the newest IPO coming out will be tough to resist buying into. You will feel the need to be a part of the “tribe”. Instead, be the one sheep that breaks away from the flock and treads their own path. Follow Mr. Buffett’s advice and you will do fine.
It’s hard to deny a self-made billionaire so when he speaks, investors listen. You won’t hear gurus giving that kind of advice because it doesn’t sell. It’s much harder convincing people to act opposite of how they feel. Keep your emotions at bay and go against the grain.
6. Buy On A Consistent Basis
Get into the habit of investing automatically. Through the ups and the downs, you want your money in the market going through it. That doesn’t sound like the greatest idea considering your portfolio could encounter a negative double-digit in any given month.
That reason alone is why you want consistency in your investing plan. This goes back to avoiding market timing. If you have idle money while the market is down, it’ll earn you zero compounded growth when the market decides to explode. The market always trends upward.
Most investors fail to recognize that markets are cyclical. Specifically, frustration stems from knowing exactly what market phase we are in at the moment. It won’t matter if you just buy consistently through every phase of the market. Through the rise, peak, dip and bottom – buy through every one.
7. Understand The Relationship Between Risk And Reward
Investing, in and of itself, is considered risky. I believe this to be true. But even more risky is not investing at all. Accumulating money in, say a savings account, will never help you acquire the financial goals you dream of.
Assets with higher potential returns carry stomach turning risk while safer assets provide much lower returns. Returns from a savings account are practically non-existent. At least investing in an index fund will provide a much better return.
With calculated moves, you can make the best decision based off of what you know at the time your money enters the market. Increase the chance of safety by choosing the right investment for your long term plan. All you can do, moving forward, is know that your money puts you in a better position than you previously were.
8. Keep Investing Simple
First, one must have a plan in order to stick to one. Stock picking is not a plan. In fact, even managers have an extreme difficulty being right the majority of the time. They only have to be right 1 out of 10 times to look like a genius. At least that’s the news you’ll hear about.
Whatever plan you decide, make it simple to stick to. Falling victim to the next stock craze will hurt your buy and hold strategy. Assuming you adopt a long-term game, picking individual stocks have little room in that game.
Until your portfolio has grown substantially, don’t go pouring money into the next Apple or Amazon. Contribute a large portion of funds to simple index funds or ETFs (exchange traded funds) that track a specific financial market index such as the S&P 500.
9. Remain Loyal To The Process
There will be days, even weeks, when your plan feels like a downward spiral of gloom. No sugarcoating, no lying. This is going to happen at some point in the journey. Think back to the four phases of the market.
No one can honestly say they know what phase the market is in until that phase has passed. Hindsight is always 20/20. The fact is it doesn’t really matter if the process is followed regardless of the phase.
Stay true to the process through the peaks and the valleys and you’ll be certain to come out ahead in the long run because markets relentlessly trend upward. With a long time horizon, you can ride out the uncertain times. Maintain control over your financial journey by trusting a series of actions to achieve the end result.
10. Remove All Obstacles
As best as you can. Majority of people fall victim to not having money or the lack of control over money. Money isn’t the problem. The mismanagement of money is the problem. The misinformed consider their life to be normal when in fact is much worse.
What happens is something called lifestyle inflation – when luxuries are perceived as necessities. Another term for these luxuries are “obstacles”. They will set you back on your financial journey longer than you’d expect. You may never reach financial independence with them in your life.
“If you will live like no one else, later you can live like no one else”
– Dave Ramsey
Living in the now can be done on a smaller scale. Dial down the get-togethers with friends. Minimize the restaurant dine-ins. Decrease spending on consumer goods. These, and many more, can be done to keep more money in your pocket so you can have more for investing.
11. Investigate Before You Invest
Pretend you know nothing about what you’re investing in. This should be the starting point for every investment you ever get yourself into. To be a serious investor, you need a basic understanding of the company or index fund you plan to add to your portfolio.
You’ll regret less when your investments “lose” after you’ve poured hours of researching before investing. This falls back on trusting the process. The upfront work you put in pays you dividends on the back end.
Your knowledge broadens with the more you know. Sometimes, you just need to know enough to be dangerous. That could mean simply learning about the index fund of choice, uncovering everything you need to know, and call it a day. You don’t need to waste time learning every single element, just the ones that actually matter.
12. Never Sell
Not only will you pay fees, and possibly taxes, you will regret when that stock soars. Take it from me, I sold DIS back when it jumped up 17% in a year. Fast forward to 2020, the value is +350% and continues to steadily rise. Talk about gut wrenching.
If you’ve followed the steps laid out above, there should be very minimal reason to sell anything in your portfolio. Think of every company, every stock, and every fund as a member of your team. There needs to be something extremely drastic to drop them off (bankruptcy, poor management, closing business, etc).
Other than that, keep everything you can and don’t sell. Remove the emotional aspect and think logically. Huge opportunities have been lost from emotional investing but big gains have been won thanks to logic. Mindset is everything when it comes to investing.
Conclusion
By now, you are equipped to tackle investing on your own. Save yourself from paying a guru to give advice they don’t even follow. Adopt the DIY mindset that will excel you and your investing journey. Play the long-term game and reap the benefits of learning about the stock market that comes with being a self learner.
What will you do differently as an investor? Do you believe you can become an investor on your own?