Investing is one of the most popular ways to build wealth. In my junior year in college, I made my first investment. At the time I had no idea what I was doing and largely depended on my Finance textbook as a guide. I was a full-time student and spent my mornings glued to Bloomberg TV, my afternoons monitoring my Yahoo Finance notifications and my evenings checking my stocks’ closing price. While I lost money on some trades, I made a killing on others. By the time I graduated, I sold my holdings and used the money I had earned as a deposit for my first car. I have learned a lot about investing since then and will share with you the lessons I learned. If you’re already a savvy investor treat this as a refresher course, but the focus of this post is what they don’t tell beginner investors.
Establish An Emergency Fund
Stick To What You Know
Warren Buffett, one of the most successful investors of all time, said “invest only what you know….and nothing more”. Investing can be a very complicated task. Furthermore, the average man does not have access to the resources, data nor analysis that finance professionals have at their fingertips. To make the process easier, invest in what you know. For example, if you are tech savvy, start out in the technology industry or if you work in and have a lot of knowledge in insurance, invest in the insurance industry. When you do this, you’re already familiar with the industry’s corporate leaders and innovators, jargons and future prospects. Armed with this knowledge, you’ll be able to perform better analysis and make more informed judgments about the investments that you want to make. This is not to say you shouldn’t explore industries outside of your expertise. You most certainly can. But when you’re just starting out, you want to start on a playing field that you’re familiar with.
Determine Your Risk Tolerance
Risk tolerance is how sensitive you are to losing return on your investment. Many people jump into investing without taking a moment to determine their risk tolerance. I was one of those people. When I started investing, I thought I had a much higher risk tolerance than I actually did. I bought a small cap semiconductor company that gave me anxiety as the stock would drop 15% with no warning or changes in the companies or industry fundamentals. Knowing your risk tolerance will help you determine the type of assets that are the best fit for you. For example, persons with a high risk tolerance will purchase dogecoins while someone with a low risk tolerance would prefer to purchase treasury bonds. Your risk tolerance will change as your knowledge and circumstances change. Consequently, so will the type of assets that you choose to invest in. Smart investors use their risk tolerance to guide their investment strategies to maximize their returns.
Grow Your Knowledge
The world of investing is ever changing and requires investors to be ready for those changes. As seen from the unprecedented effects of the COVID-19 pandemic, there are many unforeseen events that can change a country’s economic landscape. While none of us predicted a pandemic, there are other events that you could prepare for. For example, changes in laws that affect the industry, emerging competitors and the business life cycle of the company you’re interested in. You’ll know these things only if you put effort into learning the fundamentals of investing and the unique characteristics of the company/industry. There are many resources beginner investors can use to learn, from podcasts to books to various newspaper publications. In the long-run, more knowledge means better judgement thus more positive outcomes.
Be As Prepared To Lose As You Are To Win
As I mentioned before, there have been instances where I have earned a 100% return on my investment. There were also times when I lost over half the money I paid. Investing is a zero sum game. There will be winners as well as losers and before you decide to invest be cognizant that you may lose a significant portion of your investment. In the current economic conditions in the US, it’s easy to believe that everyone is winning. This perception is further amplified by the prices of meme stocks and meme crypto currencies skyrocketing and a very lenient Federal Reserve. The truth is, for every news story of someone becoming a millionaire from investing, there are multiple average Joes who are losing money.