If You’re In Debt, You Won’t Be Making Money Anytime Soon
Sorry. It’s just not going to happen as long as you’re making debt payments, no matter what you’ve heard. The first thing that anyone looking to begin investing should do is to get out from under their debts.
You may not be able to start off your investment career completely debt-free, but you shouldn’t start sinking large amount of money into any investment until you’ve cleared your high interest rate debt payments, like your credit card debt. Once you’re free from that, you can really start beginning to make money.
Until you’ve done so, however, you’ll just be making enough money to manage your debt… but not making any real revenue for yourself. It’ll all just go to feed the debt monster. So if you think you’re ready to get into the investing game, but you’re living with the shadow of your credit card debt or student loans over your head, you might want to reevaluate your situation and what your financial priorities should be.
Many potential investors see this as an opportunity to make the money necessary to pay off their debts without taking from their earnings or savings funds payments. It’s a logical conclusion, but the principal that you’ll be putting into the investment isn’t the wisest option when you still have large amounts of high interest debt. Take care of that first before making several major investments, and then step back and take a look at the new financial situation; post-debt.
It’ll be less about surviving, and more about thriving afterwards. So you’ll be free to start investing and thriving.
Investing Is Not A D.I.Y. Project: Don’t Bother If You’re Not Willing to Consult a Professional
Unless you have real training in investments and finances, don’t mess with investing by yourself. Even the most money-smart people check in with investment professionals to make sure they’re on the right track. They’ll help guide you in the best decisions for your individual goals, needs, and level of risk. They’ll also help talk you out of rookie mistakes like pulling out of an investment too early when it fails to show returns.
Investment decisions are always going to be yours, ultimately. But asking for the advice of a professional investment-advice-giver is an absolute must. Even if you only check in with them every other month, they’ll be able to ensure that your decisions are being executed in the safest manner, and steer you away from investment situations that aren’t right for you.
A good rule of thumb that Dave Ramsey offers newer investors: “ Don’t invest in anything unless you can easily explain how the investment works to your spouse.” If not a spouse, then your best friend, your old college Economics professor, your parents, or whoever. Someone whom you trust and whose opinion and advice you respect. If you were to pitch this investment idea to them, would they look at you with confusion, alarm, and the “are you nuts” face?
Working with a professional investment advisor will get you to a safe place, and provides you with a second opinion from someone who is familiar with the investment world and it’s ups and downs. But by also checking in with an outside party whom you trust, you’ll have a third voice offering their thoughts on the potential investment, and they offer the opinion of someone who cares about you.
Use both of those valuable resources in addition to your own intuition, experience, and gut feelings. With everyone giving their two cents on an investment opportunity, you’re less likely to make an investment that you’ll later regret, and you’ll be able to proceed with more confidence knowing that others are backing you. Who knows- maybe they’ll even save you from making the the wrong investment picks.
Don’t Wait to Start Saving With Your Returns, Because There Might Not Be Any
Many investors get into the scene because they want to finance the wrong things. Using investment returns to feed into your retirement, savings, or emergency funds seems like a responsible pick, but it’s not if you’re not already contributing to those funds.
If you rely on investment returns to provide you with a comfortable retirement, you may be in real trouble when you’re approaching your 60s. It’s a risk that no one can afford to take. That’s because those aren’t optional funds… they’re necessary. And you should never invest with necessary money.
Investment is a smart way to utilize whatever funds you can spare, because you’ll make money off of your money. Sounds great. But investing is really just educated and safer gambling. There’s always going to be a chance that you make very little returns, or even lose the money you initially invested.
So don’t play with the money that needs to be going into the appropriate savings funds. A common mistake that Americans are making is not saving for retirement or emergencies the way that they should. You should always be contributing to those funds consistently and ferociously. Make it a priority along with the things like paying your rent and bills and buying groceries.
You’re Probably Going to Lose Money
Sorry again. Erik Falkenstein says, “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”
You’re probably not going to be making any real money anytime soon. And if you find that you are making money suddenly, remember that it won’t last forever. Someday that investment will run dry, and if you don’t know how to switch up your portfolio correctly, you could make a simple mistake like selling that now-outdated investment too early or too late, or buying something else too high.
If every investor decided that they were going to be the ones to beat the market, it’s not going to work. You’re going to lose money and feel like a fool. But nobody tries to beat the market, the market will stagnate and there will be no aggregation of information in the market. It’s called the Grossman-Stiglitz paradox, and it’s entirely unfair (not that the investment world ever claimed to be fair).
The solution that’s suggested is to let the true experts make the bold discoveries and make the mega-millions. Amateur investors are better off investing in simpler, less risky funds that are guaranteed to bring in more money than you originally invested, even if it’s not much. This seems condescending, but market watchdogs agree that it’s the way of the world.
Don’t invest in some amazing new startup, even if you think it’s the next Google. Leave that to the big dogs. Stick with non-flashy things that will be better long-term investments, like a toiletries manufacturer or a construction equipment provider. People will always need toilet paper and toothpaste, so you’ll always make money.
There’s nothing wrong with being content to make a small but consistent amount of money from your investments. It’s better than not investing at all, and that’s what’s really important. Don’t feel bad. Unless you’re a trained professional investment strategist with years of experience, it’s 100% ok to go with the flow.
Stocks Are Often Completely Unpredictable, Even to the “Experts”
Legendary investor, Nick Murray said, “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.”
You’ll often panic and feel the compelling urge to cash out at the wrong time. Even investors who’ve been playing the market for years will mess up and try to predict the right timing in the market. Honestly- when someone gets it right it’s luck that made that happen more often than it is skill.
In order to be a good investor, you have to learn to acknowledge the fact that most of investing is out of your control, and sometimes out of the control of anyone. The market moves in mysterious ways, and no one can predict it correctly every time.
The market is going to be volatile more often than steady. That’s not a sign to panic. It’s just a natural movement that money makes, and it’s often entirely random.
According to studies, chasing returns in the market isn’t going to help you. It will probably do the opposite. Why? They’re not entirely sure. But they do know that the short-term stock market is almost impossible to predict. All they can be sure of is that in the long-term, the return will always revert back to the average over time… and then proceed to move again.
So while there is consistency in investments when you look at patterns from a distance, there’s no real way to know what’s going to happen to your investments the next week. It’s just something that you have to get comfortable with if you’re going to continue to invest.
You Can’t ‘Wing It’
So how should you approach investing now that you’ve been thoroughly spooked? You’ll need a lot of planning. The U.S. Securities and Exchange Commission has these ten tips for you before you get started:
1. Draw a personal financial roadmap
Establish your personal financial goals, your own level of appropriate risk, and create realistic milestones to plot out throughout your overall plan. You can do this on your own with some research and reading, or with the help of a professional financial advisor.
2. Evaluate your comfort zone in taking on risk
Be practical and realistic in what you can afford to lose. Investing means that you won’t always be making money; sometimes it might even prove the opposite for a while. Your own level of risk that you’re willing to take on will determine the types of investments that you can safely handle. While more risk can mean more investment return, it also has an increased likelihood of losing your principal (the amount you originally invested) or not generating any significant returns over time. Choose what investments best align with your risk comfort zone.
3. Consider an appropriate mix of investments
By diversifying the types of investments you make, you’re better protected from losing significant amounts of money all at once. If one type of your investments is ailing in the current market conditions, another kind of investment of yours is thriving. The wider range of investments you have, the more likely you are to be consistently making even a small degree of investment return.
4. Be careful if investing heavily in shares of employer’s stock or any individual stock
The same basic ideal as number three; don’t invest too heavily in one risky area. Diversify your investments and you’ll be safer in the event that one kind of investment turns sour.
5. “Create and maintain an emergency fund.”
Pretty self-explanatory, and just plain good financial sense; whether you’re investing or not.
6. Pay off high-interest credit card debt
Another good common sense tip. Getting out from underneath your debt is your first priority before tackling heavy investing.
7. Consider dollar cost averaging
Rather than putting all your money into an investment up front, it’s prudent to add slightly more money consistently over a period of time. The price of stocks are constantly changing, and this strategy will help you from throwing all your money at an investment at the wrong time.
8. Take advantage of “free money” from an employer
If your employer offers retirement fund matching, use it! Avoid borrowing from your 401(K) unless it’s an absolute last resort. If your employer will match your retirement fund contributions, you should be contributing as much as possible, otherwise you’re missing out on the opportunity for “free money.”
9. Consider rebalancing portfolio occasionally
You can bring your asset allocation back to their original mix, and helps return your portfolio to a good level of risk.
10. Avoid circumstances that can lead to fraud
Scam artists will always find a way to seek out and exploit investors, making it your fault in the eyes of the government. Be vigilant and only trust sources that are legitimate and verified. Ask questions, get the facts, and check in with trusted unbiased financial advisors before investing.
