5 Lessons Every New Investor Should Learn
The start of my investing journey wasn’t easy. I started more than three years ago. It was hard to put aside some money that I’d rather be spending, plus there also is a risk of losing that hard-earned money. Especially in the beginning, when emotions play hard.
However, sooner or later, the time has come, and I realized that keeping my money in a savings account with a mere 2% per annum interest won’t lead to financial independence or substantial growth.
I kept hearing the same advice — make your money work for you. And getting less than $50 as interest accumulated in my savings account throughout the year didn’t seem like enough work that my money was doing.
After purchasing a couple of books and reading on a stock investment, learning to analyze the charts, and predicting the market movement, I was even more disappointed as I was becoming more confused about the whole thing.
What drove me further is persistence. I kept thinking — if other people can do it and earn, so can I. It’s as simple as that. Plus, the thought that I was under 30 and should I “burn” all my investment, I’ll still be able to recover, kept me motivated.
So what are the things that I want to share with everyone who is considering starting investing?
I invest only what I am ready to lose
The biggest enemy to any new investor is emotions. They will play a significant role in decision-making; you’ll rush to open new deals, close the ones in red and lose money in that way.
I learned to treat the money that I am investing as if it never existed. In this way, even if I invest $200 and I lose it due to a sudden market crash, I won’t bother as “it never existed”. It helps to build an emotional distance from that money.
If you tried using some trading platforms that offer virtual money to practice trading, you would notice that your virtual account investments are much more profitable. The reason is simple — you aren’t attached to the money that you don’t own. You disconnect any emotion and are ready to think more rationally. It leads to smarter decisions and, thus, higher returns.
I closed way too many positions with small losses, but all those losses accumulate and can be very significant. Eventually, most of the trades recovered and I could have earned. Instead, I lost.
I consistently invest 10% of my monthly income
The logic behind me investing 10% of my monthly salary is simple — 10% is an achievable target, and it does not impede the quality of my life. Indeed, a couple of hundred extra dollars is nice to spare on food, apparel, or entertainment, but thinking in the long-term perspective, it’s just a waste of money.
When you think about it, 10% is a relatively small amount. Let’s do some math: let’s assume a monthly salary of $2000. Then, 10% of $2000 is $200.
What can you buy for $200? Quite a bit, but equally $200 can easily be saved by changing the habits a bit. How about I make my own morning coffee instead of going to Starbucks on my way to work? That can easily save me up to $100 per month. I can keep the remaining $100 by eating at home more often, using public transport instead of Uber more, or not buying a new clothing item every month.
By putting $200 aside for a year, you’ll get $2400 in total contribution value.
The average stock market return is about 10% per year for nearly the last century. Now, assuming a 10% per annum growth in your first year, your $2400 will earn $134; and let’s say if you keep your money invested for 15 years, with continuous monthly contributions of $200, your total portfolio value will become $83,785.
So, if I started using this approach when I was 30, at the age of 45, I’d have almost $84k. My total investment of $36,000 over 15 years would earn $47,585 in interest! That’s more than the amount I contributed.
I always look long-term
Initially, when I started investing, I was looking at short-term gains. I was happy if, during good days, my investment grew, and I often closed the positions when they generated some small profit.
However, what I lost is the long-term possibility of earning even more. If my position increased by 4% today and I cashed it out, I lost the chance of it growing even further and generating even higher returns.
This desire to close profitable positions fast was based on fear of losing what was earned.
I cannot blame myself as it takes time to get used to neglecting the earnings and keep on thinking: “it’s OK, next month my returns will be even higher”. What’s even more challenging is to continue repeating the exact phrase each month.
I remember I closed one position with a return of 300% — it was huge to me! I kept that position for good five months (crazy good five months!!). What happened later is that the same position grew more and more, and I could have easily gained another 200% or even more.
Always keep thinking long-term. The short-term gain is excellent, but it doesn’t outweigh the earnings you can get by keeping it long-term.
I only invest in brands that I use myself
I learned this from another professional investor, and it makes perfect sense. You would purchase the stocks of a company that you believe in and are familiar with. In the end, you need to trust the brand to put your money into it.
Therefore, look around and find the brands that you use and support. These are the first go-to investment choices. Don’t try to invest in something that you have no clue about. For example, I find commodities (gold, oil, natural gas, etc.) very daunting, and I never invest in them even though I know many people who earned quite a bit by investing in these.
Are you an Apple user? Consider investing in Apple. Are you crazy about Facebook? Invest in it. Do you only fly Delta? Then you should invest in it.
Another theory is to invest in companies whose products you use daily. Likely other people use them daily too; thus, they become a necessity. For example, Coca-Cola, Nestlé, McDonald's are just some of the examples. Such companies tend to perform better and are less risky to invest in.
I look for companies that will continuously grow
Some companies will continue growing (at least in the foreseeable future). These are promising and disruptive companies such as Apple, Tesla, Microsoft, Google, Amazon, etc.
You are likely to profit in the long-term no matter when you come in.
COVID-19 has also proven that tech companies are much more resistant to the pandemic and global market shake-up.
The most important lesson of all is — invest what you can afford to lose. Never bet the money that you need for rent, groceries, healthcare, education, etc. These are the essentials that you cannot cut out.
Even if my example of investing 10% seems unrealistic in your case, start with a lower percentage. How about investing 5% or even less? It takes time to adjust to change the habits, and you can then reach 10% or more within several months.
Disclaimer: This is not financial advice. My experience may have been different, and I was hoping you could use the information shared here as education and adapt it to your personal case.