Investing in the stock market can be life changing. Even simply contributing up to the employer match in your 401(k) can drastically change the lifestyle you can afford to enjoy during retirement. But just because investing can drastically improve your finances, you can really screw up your financial life if you don’t get some basics right. That’s why it’s so intimidating for many to get started. It’s not so much that it’s mentally taxing to invest in the stock market or that the basics are hard to learn. It’s the emotional aspect of investing that so many people find hard to control. If you are someone who’s intimidated by the power of investing, this post is for you. This post will give you the confidence to begin investing right away.
Set a Goal
It’s important to give yourself a reason to invest. Pick one of two ways to frame your investing goal. The first option is to frame it in a way of looking at what you’ll get by investing: a new Corvette, for example. The second way is to consider what you will lose if you don’t invest. For example, you may not be able to retire early, spend more time with the grandkids, or travel much…
Use whichever method works best for you, but set a goal. A goal will give you hope, hope brings action, and action brings achievement.
Take a Tested Approach
Investing in the stock market seems scary because there is a silly stigma surrounding it. Most people think investing is risky, scary, and only for rich people. But many, many people invest in the stock market. It’s the way most people save for retirement. Something this widespread cannot be terribly difficult.
To make things easy on yourself – take a tested approach by buying into an index mutual fund or ETF. We will collectively call these index funds from now on. Since an index fund doesn’t try to beat the market, the performance tends to follow the trajectory of the ever expanding global economy. And for most people, that’s fine because the stock market, on average, has offered excellent returns since its inception.
You needn’t be a prodigy to begin investing. Stick with an index mutual fund and put your investments on autopilot.
Let People Help
Reading stock tickers all day may lead to feelings of loneliness and vulnerability. Investing doesn’t have to be that way. You can find real people to help. This can be done in a few ways. Obviously, you could get a financial advisor to assist you. If you do, here are some credentials these professionals should have.. You could also pop over to the human resources department and ask for someone to help explain the company’s 401(k) options. You’ll be surprised how ready to help they are (not many people are curious about 401(k) details). You can also contact companies such as Vanguard to chat with a representative. Even though they can’t help give you specific purchasing recommendations, they can help answer many questions you will have. Consider also speaking with friends/relatives/neighbors. Get their two cents. Finally, you can get advice via personal financial blogs (like this one) and via online forums. There are many personal finance nerds (like me) who love to help.
Make It Automatic
My guess is that fewer people would go skydiving if they knew they would have to do it over and over again. Make things automatic to lessen your stock market fears. This way you don’t have to keep making major decisions over and over again. Otherwise, you’ll likely join the masses and end up buying when the market has already run up and then sell when it goes down – the opposite of what you should be doing.
To make things automatic, set things up to succeed in the long term. This way, you won’t have to pick investment vehicles often, you won’t have to continually guess how much you should invest, and you won’t have to always wonder how often to rebalance the portfolio, etc. Create a plan and then stick to the plan.
Leave FOMO Behind
Some people have this attitude towards investing. They feel that if they invest the money, they won’t be able to have fun now. It doesn’t have to be that way.
First, realize that delayed gratification is a good thing. Second, realize that the money you save to invest doesn’t have to make a large impact on your lifestyle. Most people don’t need to invest half of each paycheck in order to look forward to a fulfilling retirement. Third, realize that you can always make more money. Let’s say your newly hired financial advisor says you should save 15% of your income in order to live the lifestyle you want at retirement. Okay. If 15% of your current salary is a lot, then start with 10%. If that’s still too much, then begin with 5%. Heck, even 1% is good. The first step is the hardest to make. Once you get comfortable with the process, then continually increase the percentage. You can also find ways to increase your income. Expand your mind and expand your bank account.
The Importance of Staying the Course
We briefly touched upon the difficulty of keeping emotions in check when we invest and this point bears repeating, as it’s the hardest part of investing to get right. Stay the course! Stock market valuations are volatile and you will see your portfolio go up and down by thousands, if not tens of thousands of dollars every single day. Think about this for a minute. It’s not easy to leave the portfolio alone when the value of your holdings goes down more than a year’s worth of slaving away at the day job all the while reading about how the world is ending. Yet, this is the key to successful investing because no one can accurately predict when the market will suddenly crash or zoom upwards. What most people end up doing is selling their investments after valuations have already gone down and then don’t get back in until the market’s gone way up. Classic buy high and sell low. Don’t be like them.
Make It Count
War, inflation, natural disaster, political blunders, and many more will scare people enough to sell, but the global economy weathered all these events and kept on growing all throughout history. Don’t bet against human ingenuity. You have the tools necessary to invest with confidence. There’s no need to be afraid. You’ve read enough. It’s now time for action.
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They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.
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I agree becoming comfortable with managing an investment portfolio is well worth the effort for those who believe they can have a bright financial future. When you start your career your salary far exceeds your investment returns, but during your working years this ratio will flip so by the time financially successful people are ready to retire, their passive income matches or exceeds their wage income. You don’t want to be unprepared for that day, plus as a bonus getting in early will likely accelerate your progress towards financial freedom.
Let’s not frame investment and spending as binary decisions– both are best handled by tracking an appropriate percentage. For investment we call this ‘asset allocation’ and for saving/spending, well that’s a ‘budget’. Each individual needs to select these percentages based upon their ideal balance. It’s fine to start small, but know that a zero/zero allocation today will almost certainly be something you’ll seriously regret in the future. Don’t take my word for it, just ask anyone a few decades older than you and listen carefully to what they have to say.
For millennials who (I’ve heard) are more risk averse, perhaps one way to wade into the water would be to allocate 100% of your 401k contributions including company match to an equity index fund. It really doesn’t matter which one, don’t let the multitude of choices distract you. Over time as this balance grows you’ll see firsthand how diversification breeds stability, so your asset allocation can gradually swing towards equity as you watch your 401k balance outrunning the CDs in your taxable accounts. Eventually by the time you retire your net worth will amount to far more than the value of your home, and it’s this difference that will be the source of the lion’s share of your post-retirement income.
One of the reasons why I know saving more is the better route to take is because I hear many people wishing that they’d save more but far less people complain that they’d save too much.
And of the people that do whine about not spending enough earlier, they are still in a far better position than people who are in dire straits because they spent too much over the years.
As freebird advised, look for clues from people older than you because learning from example is a great way to catch a glimpse of the unknowable future.