Beginning to invest can be exciting and overwhelming.
On one hand, you feel like you’re finally making some “adult” moves, but at the same time you don’t want to be “Madoffed.”
So, how do you know if you’re on the right track when investing?
Well, in this blog you’ll learn 5 steps for a quick start so you’ll actually get the results you want.
This information is geared towards people who are starting out, but if you’ve been investing for some time you’ll find some helpful tips that you can incorporate into your existing plan.
Throughout this article keep in mind, that investing is a long term game.
By taking simple steps over and over again through a number of years, you can become financially free and wealthy.
Money is an emotional thing. Not ‘teenage love’ emotional, but similar.
Money can make you feel like you’re on top of the world or like you’re stuck to the bottom of someone’s shoe.
Many people will look at this relationship as a weakness, but that’s why we want to address it first by defining what you are saving for.
Don’t simply say that you want to buy a house or retire or start your own business. Go further than that by getting as specific as possible with what you are investing for.
If you want to buy a house write down which neighborhood you want to be in and why. Write how big the house is, what features you want, how you would furnish it and more.
Go online and find out how much that house is in your desired neighborhood, visit open houses so you can really get a sense of the property, and then learn about qualifying for a mortgage.
Once you’ve written all the details about your target goal, print a picture that you can put on your mirror, bedside table, desk or somewhere that you’ll see every day. Getting very specific with your target goal is going to keep you motivated in tough times and it’s going to help you build a realistic savings plan to make your dreams a reality.
It might sound “fu-fu” to go this far, but when you are clear about your intentions, your mind will help you take steps to fulfill them.
Consider that Drake used this principle to buy his dream house with the world’s largest pool. He started by putting the picture of the property on his desktop, and three years later he owned it.
You don’t have to be a superstar to meet your financial goals.
Instead, get specific about what they are, write down as much detail as possible and then put pictures up to remind yourself on a daily basis what your goals are and why they’re worth having.
Whether it’s a cracked windshield, an unexpected trip to see family, or any of the other curveballs that life will throw at you, there will be times when you have to decide to spend or save.
More often than not, the immediate gratification wins.
If this happens more than a few times, your savings goals will be put off and forgotten like that review you meant to leave on Yelp that time you got great service at your favorite restaurant last year.
Put in place the tools that will give you micro successes.
These are small steps you can take toward your goals that will help you stay focused on making them a reality.
Here are a few things you can do to get yourself closer to your goals:
Now that you know how much your new house, business, or dream retirement will cost, it’s time to do some math to get you one step closer.
Simply take the total cost of your financial goal and divide it by the amount of time until you would like to realize it.
For instance, if your goal is to buy a home that costs $300,000 and you plan to put down a 20% payment of $60,000 in three years, then that means that you would need to save about $20,000 per year.
If you get paid bi-weekly then you’ll need to put aside about $770 every two weeks for the next three years to have enough money saved for a down payment for your home.
However, since you’ll be investing, you need to incorporate the rate of return you think you can get on your money.
Let’s say you believe that 5% is a reasonable return, then you could calculate that you only need to actually save $685 each paycheck to buy your home.
Use this calculator for help.
Your PV is the amount you currently have saved toward your goal.
Your FV is the amount you need to make your goal a reality.
The rate is the return from your investments and periods are the amount of time to reach your goals.
Remember to break down the periods so they match when you’ll be saving the money.
For instance, if you get paid bi-weekly and you want to buy your home in 3 years then you would have 3 x 26 = 78 periods. Once you’ve input this info, you calculate for PMT. That’s the amount you have to save to reach your goals.
Have you ever noticed that you spend what you earn?
Most people don’t know what they pay for taxes or insurance. They just know that they get a paycheck every two weeks and that’s enough to hold them down for two weeks.
However, a funny thing happens when you set up an auto pay from your paycheck: you find a way to do without.
Log on to your company’s payroll website to set up an auto pay that goes to a separate account dedicated to savings.
You should only check this account once a month or so.
Don’t use the debit card unless making deposits.
The idea is that you don’t see the money regularly so it just builds over time.
This small step can create huge momentum for reaching your goals.
Once you’ve hit a major milestone towards your goal, like 30 – 50%, it’s helpful to reward yourself with something nice that will serve as a reminder and keep you motivated.
Ideally, this is something tangible that doesn’t take away from your progress.
Having someone who can hold you accountable can be a source of support when times are tough.
This can be your spouse or someone close to you.
You’re more likely to complete your goals when you have someone who can serve as a sense of direction and encourage you to fulfill your intentions.
There is no way to invest without capital.
Therefore, you shouldn’t plan on investing until you have sufficient capital saved.
This becomes most apparent when you begin generating returns on your capital.
If you have a $10,000 account that generates an 8% return over a year, that is about $67 per month. While this is a step in the right direction, it’s not a huge amount that will keep you motivated.
You’ll also have a tough time making investments without a proper capital base. The smaller your capital base, the fewer investments you should have.
While diversification helps preserve capital, it is a drag on accumulating it.
The idea behind not having all of your eggs in one basket is sound, however large multi-national companies can provide many of the benefits of diversification due to their size.
Big companies earn money in different countries, with different product lines and other benefits that resemble the tenants of diversification.
Understanding your total fees can be overwhelming without help.
If you’re doing things on your own then you should take your time to get full details below before committing any of your money. If you’re paying a professional, you’ll want to get these details in writing:
For better or worse, investing can be like gambling.
Even with proper planning and investment selection there will be down periods for your investments. Whether you choose to participate in them or not will depend on your risk tolerance.
Your risk tolerance is the most amount of money you’re willing to lose. It’s the maximum pain point you can withstand before saying enough.
Knowing this number up front can be extremely helpful for your confidence and peace of mind. You’ll no longer feel out of control while relying on hope, but instead, have a plan for what to do if your investment under performs.
An easy way to get your risk tolerance is by using a tool like this.
It’s essential to know your investment strategy before putting your money to work. The strategy is the guiding principle(s) that you’ll follow as you invest.
There are several variations, but here are some of the most common:
Once you’ve found an investment strategy, write down some rules that you’re going to stick with regarding buying, selling, and choosing your investments.
As your money grows, you’ll be inclined to take more risk. The greed factor usually will outweigh your fear, just because you are a human. Due to this preconditioning, we have to put in place systems to help us avoid beating ourselves up.
One of the easiest ways to do so is to put a stop loss or maximum pain point on every trade.
Many investors stick with an 8% limit, which means that if the stock or investment loses 8% or more they automatically sell.
I can’t stress enough how important this is to your success. Many people fall in love with their investments and can’t take their blinders off to see reality when times get tough. This causes them to hold on to positions for longer than they should, allowing their money to depreciate beyond the point of revival.
Consider, if you lose 8% in a position, you need a 16% return on the remaining capital in order to get back to your original position. This is a tall order that can leave you kicking yourself, analyzing the “if onlys” and preventing your money from growing.
If you’re just starting off depending on your investment strategy, you may want to have a lower stop loss like 1 – 5%. This will help you avoid putting your money into an investment that doesn’t offer positive returns and preserve your capital only for investments that generate positive returns.
The same stop loss approach should be applied to selling as well. There will be times when your investments perform very well, but by knowing when you are going to sell you won’t get attached to the position.
You can set rules like if the position grows 50% then you take your gains and let the rest continue or something along those lines.
Whatever your rules, write them down and review them every time you check on your investments.
By drilling these rules you’ll begin to follow them even if you think your position will “go to the moon.” You can also program automatic actions like sell if the position gets to $x in your accounts so you don’t have to be so hands on.
Remember, you’ll have to constantly check your emotions during investing so these type of hacks can go a long way to your success.
It’s very common for people to leave their investments alone and not review them regularly. This type of behavior can be helpful to manage the daily hurdles that come your way, but it won’t help you get to your goals faster. How good of shape would a boxer be in if he didn’t check his weight daily?
Scheduling a periodic review of your investment performance, fees and strategy can be helpful with identifying opportunities or adjustments that need to be made.
If you’ve hired a financial adviser for help, don’t just assume that they’re doing a good job. Being meticulous about reviewing performance can help your adviser get a sense of the importance of your financial goals, but also ensure they’re following your wishes.
I recently met with a client who had an investment account originally opened in 1997. The account had $40,000 of deposits with zero withdrawals in the 20 years. The balance when we met was just under $13,000.
This person had relied on their financial adviser who had chosen an investment and never went back to review it. This is common if you have a smaller account with an established adviser.
Unfortunately, you’re probably at the bottom of the importance totem pole, so it’s your responsibility to track performance and raise issues when necessary.
At first, I recommend checking your performance and strategy on a weekly basis. This is going to seem a little neurotic or redundant, but should help you get a better grasp of your investments and how they work.
Remember, small actions taken over and over again can help pave a road to success. Check your performance relative to similar investments and a benchmark, if available.
This can be done using tools like Morningstar, Portfolio Visualizer or FinViz.
Once you’ve developed a strategy that you can stick with for the long term, you’ll only need to review your investment fees on a quarterly basis or when you’re making significant changes.
There aren’t many huge changes in pricing that happen without a notice being sent to you, so you can have some confidence here. However, you still need to be diligent in understanding the expenses, particularly because they can be used to help reduce your taxes.
I set out to provide you with a brief overview of the essential steps to investing, but didn’t feel like I’d be able to really help you without going into sufficient detail. If you’re reading this, thank you!
Check out this video to sum things up!
Remember investing is long term game that can be won by anyone, with any background and any amount of starting capital.
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What questions do you have about getting started with investing? Let us know in the comment section below!
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