This isn’t your typical first time investor blog post. When Personal Capital contacted me to see if I would be interested in writing a post on this topic, my mind initially went towards the idea of discussing actual investments. Not surprising right?
But that's not what I'm going to do. I believe that's not what you immediately need to know if you're a first-time investor.
There are a few key life tips that I've learned through my research and personal experience that are fundamental concepts I want to share with you today. I hope these tips will help give you some perspective before you invest your hard-earned money.
- Don’t overspend
It's important to point out the fact that a huge portion of the population will never invest or have financial freedom because they are too deep in consumer debt. The easiest way to ensure you’ll have money to invest is to consistently put a portion of your income into a separate subaccount. It's there for you when you're ready and confident to take the step of into investing in a specific asset. Happy high net worth people tend to divide their money into four main categories, what I call the GISS Method, which begin as young as five years old. These categories are give, invest, save and spend. These people consider putting money into investing as important as paying the mortgage and their basic expenses. Dividing your money into categories from a young age can help build powerful wealth habits that will prevent you from overspending and going down a devastating financial path.
- Learn your cash flow first
What expenses do you have, and how much is going out per month versus how much is coming in? Until you are highly aware of your own financial situation, investing is at best a shot in the dark, at worst throwing money away. If you’re paying 19.99% on a credit card and making 4% return on your investments, you’re losing money. First pay down your debt as fast as possible so you aren’t sinking with high interest payments.
- Start early and invest consistently
The difference between starting when you’re in your late teens or early twenties, versus starting a decade later can result in massive differences by the time you hit fifty or sixty years old. Someone who starts investing at age nineteen or twenty and invests for tens years can outperform someone who starts ten years later and invests double the total amount over double the length of time. Why? Compound interest. The interest growing on itself and adding up over time. There is a reason Einstein called it the “eighth wonder of the world.”
- Don't expect perfection, it’s about progress.
Every successful financial investor has made mistakes in the past. The key is they work to learn from the “mis-takes” so they don't repeat them - and they don't quit investing. Typically they will come up with a system to follow as they begin to learn what works and what doesn't. So keep track, and don't get discouraged. Easier said than done sometimes, but your future financial freedom depends on it.
A word commonly used in the investing world, it is a method to reduce risk by owning a variety of investments within your portfolio. The old “don’t put all your eggs in one basket” philosophy. However, many people still get hurt when financial cycles go down because they have only diversified within one asset class. Stay clear of this mistake. Diversifying within only oil stocks is not a truly diversified portfolio. High net worth individuals tend to be involved in numerous assett building investments including the stock market, commodities, real estate or owning their own businesses - often all of the above.
- Stocks and bonds have different levels of risk
Stocks represent ownership in a corporation, and bonds are a type of long-term debt you can provide to an organization, which they promise to pay back on a given date. Stocks are known as being more volatile. Bonds are considered to have more security, but not as much potential upside. Typically younger investors will hold more stocks and less bonds because stocks theoretically have a higher risk and potentially a greater return long-term. However, holding 50% stocks and 50% bonds is not truly an equal split, precisely because the stocks are much riskier, and are dependent on the specific stocks you own – and their individual levels of risk. As you set up your portfolio, ask questions and learn about your real risk exposure.
- Don’t try to beat the market, you won’t
The majority of trades are now done by highly sophisticated computer programs. In fractions of a second stock values can change significantly. Don't worry about trying to take on this challenge. As phenom investor Warren Buffet says, “invest in a broad-based index fund that tracks the S & P 500.”
- Find out the fees
Fees can eat up your profit if you’re not careful. A management fee is the amount paid to a fund manager and may include a trailing commission, which is paid to the advisor’s company that sold the fund. This is meant to cover the cost of giving advice to the client but many clients don’t realize they are paying it. It is often the largest fund expense. Then there is the MER – the management expense ratio. It covers the management fee plus the fund’s operating expenses administratively. Note that some mutual funds also charge a front- or back-end “load.” This fee is paid to the advisor’s firm for selling the fund and is separate from the MER. Be aware of your fees so you know what your investment return really is.
- High net worth individuals tend to have successful mentors
They have listened and learned from the experiences of others. Before you go out looking for a specific asset, talk to 10 millionaires, not people who just make a good income, but people who have invested well and maybe already financially free. Ask them what their first really effective financial move was when they were young and just beginning to become financially successful, and what factors are important to look at now. Find out what they think are the most important two or three investments to own to have a solid financial future. “How” and “what” questions are very powerful in determining what steps you might consider taking in your financial future. Many first time investors don’t ask questions of people most capable of answering accurately. If you don’t have access to any millionaires at the moment, read up on some who have not only succeeded financially, but are making a positive contribution to the world.
- Just do it.
A Personal Capital study found 40% of millennials haven’t opened a single retirement savings account and 73% don¹t know their net worth. This is your life, you can create what the one you want, but you need to take action and develop financial habits that will benefit you. There will always be plenty of “things” to spend your money on, investing in solid assets can create peace of mind and fulfillment knowing you are creating the life you imagine. Set up an automated process within your finances to simply and easily invest on a regular basis, your future self will thank you.
As in life, investing isn’t about overnight success; small steps can lead to big results.
To your success,