Just so you know, I'm not a Certified Financial Planner, but I play one on the internet which counts for something (no- it does not, you should run now). Despite the fact that I am not a financial planner, I have lost much more money in "investments" than almost anyone I know, so I figure I have a few gems of wisdom to share with the internet.
My goal in sharing this post is to inspire you to learn about investing because you probably shouldn't have to lose $60K to learn the lessons that I did.
Lesson 1: Sometimes rich people make bad investments
What's the fastest way to become a millionaire? Start as a billionaire and then buy an airline.
Many great investors will encourage you to watch what rich people are doing and to copy them, but let me give you a little caution on that.
I started investing shortly after I learned how to read stock prices at age 12 (spring of 2000). I started reading the Star Tribune and the Wall Street Journal, and I found gloom and doom on every page of the finance section (along with the tickers that I was following). It only took another 3-4 more months for the NASDAQ to reach its low, but as I watched the daily drops I determined that the stock market was not in fact the place to find this elusive "compound growth" that would make me a millionaire by age 30.
I turned my sights toward a safer haven, undeveloped land. I gave my dad and grandpa my life savings ($3000 dollars plus a pile of IOU notes from my siblings) to buy land that my grandpa planned to develop later that year. Unfortunately, city planning officials had other plans and blocked off all entrances to the land with newly built roads. I still own a worthless chunk of land in Cambridge, Minnesota. One year, I planted some flowers on it, and I'm supposed to pay about $8 a year in city taxes (I think my Grandpa has paid those the last decade and a half though).
My grandpa and my dad started a multi-million dollar business together, and my grandpa has been investing in real estate for 40+ years. I took advice from the best, richest people I knew and it didn't pay off. My grandpa and my dad are still really awesome though. They lost a lot more money on this deal than I did.
Lesson 2: Goals trump tactics
I started working in the formal sector at age 16. I waited tables which is an extremely lucrative career if you have a salesy mindset (which I do). I earned between $30 and $100 per hour, and I started "getting itchy" with all the money I had in my custodial savings account. I have a hard time describing this feeling, but if you get itchy around large sums of money, you know what I mean.
If my own kids are ever in this situation, I'll probably direct them to invest in a Roth IRA, but I had no such guidance. Instead, I started moving my money around to different bank accounts to get deposit bonuses. I guess this is a little like credit card churning.
My little money moving tactics earned more money than they would have if I put the money in an index fund, so my tactics worked. Right?
No, my tactics did not work. Today, I have zero dollars of that $40K+ that I earned between 16 and 18. Some of it was spent on college living expenses (a wise expenditure), and some of it slipped through my fingers. If you don't have a goal for your money, you will lose it.
If you don't have a goal (like pay off debt, save for retirement, saving for kids college, or building an emergency fund) then I'll give you a generic goal. It's called an opportunity fund. Money needs a goal or it dissipates. Your goal for your money will inform your tactics. Don't let your tactics inform your goals.
Lesson 3: "What am I buying?" is a good question
How many healthy 23 year olds need Universal (or Whole) life insurance? Unless that 23 year old is part of succession planning at a family owned business, then the answer is none. Whole life policies are a waste for at least 97% of the population, and probably more. I bought a whole life insurance policy because I thought I was buying an investment product. It is the highest fee, worst investing product on the planet. Rob and I wasted close to $12K on this policy before we realized it. We recovered approximately zero dollars from this "investment."
We never bothered to differentiate between buying insurance and investments, and we paid very dearly for this mistake. Do you understand what you're buying? We sure didn't.
Basic investing is easy to understand. You buy ownership rights of something, and if the something makes a profit, you get money, because you're an owner now. Whether you buy mutual funds, ETFs, bond funds, individual shares, or index funds its all the same basic concept.
The only difficult thing to understand is how an individual can balance risk and reward in their personal portfolio. Sometimes, you will pay a financial adviser to help you with this. Sometimes you will pay for access to a tool that will help you with this. Sometimes you will simply read articles for free on the internet.
Tools, articles, and advisers aren't investments- they are expenses. You can shrink these close to zero if you want, but you don't have to. Sometimes the expenses are well worth it. Just be clear that when you hire an adviser (even if they aren't fee based), or you pay for a tool- you are buying education not an investment.
Lesson 4: I can better afford to be a mediocre investor than a bad one
After studying the markets, prices, economic theory and individual investing strategies for nearly a decade and a half, I've found that there are few strategies that consistently beat market performance. The first strategy is "timed buy in" which is essentially hoarding cash until the market drops and beginning to buy as the market tumbles downward. It seems that very disciplined investors can avoid buying at the peaks which leaves them money to buy more at or near the bottom of a dip.
The second strategy is choosing individual stocks. People who understand the technology, energy or consumer goods sector very well can often determine which companies that are undervalued, but will become profitable over time. These investors are essentially timing the market for an individual stock rather than for a specific index.
I don't practice either of these strategies. These strategies take a remarkable willingness to rely upon mathematical formulas above emotion. I don't have that willingness. Instead, I simply invest as much as I reasonably can each month.
This is also why we pay cash for real estate instead of taking on debt. Some great investors take on debt, and all bad investors take on debt. I would rather take a gamble on being a mediocre real estate investor.
Bad investors chase returns and take on excessive risk. They may see long runs of success, but in the end bad investors usually fail. I don't try to beat the market, because I'm probably a bad investor (my track record indicates as much).
I can afford a 5 or 6% annualized return with acceptable risk, much more than I can afford to lose everything on a stupid bet. My goal is to create an efficient portfolio, not to chase returns.
Lesson 5: Jargon first, vehicles second
Investing seems difficult when you first start. This is because investing has a language all its own. In fact, fixed income, equities, real estate and commodities all have their own language. The reason that these languages exist isn't because of small penis syndrome. Talking about investing requires a language of exactitude that most modern vernacular does not provide.*
In general knowing just 5-10 terms per asset class (investment type) will be sufficient to get you up and running as an investor. Taking just a few hours to look at Investopedia to learn about Modern Portfolio Theory, and to look at a few graphs on Morningstar or Vanguard will help you gain a world of confidence in investing. As you start gaining confidence, you might start reading a few investing blogs. A recent favorite for me is Bigger Pockets (Real Estate), and A Wealth of Common Sense (Portfolio Management).
Before you ever put a dollar into an investment, be sure you understand the "jargon." The vocabulary of investing will help you to ask more of the right questions as you refine your investing goals and strategies. Once you know the language, you can start researching the vehicles for investing. Don't get caught in analysis by paralysis, but spending 5-6 hours researching something for the first time is not a bad use of your time.
I made the mistake of finding great investing platforms and throwing money into them before I knew what I was doing. I purchased dividend stocks, real estate trusts, international emerging markets funds, and penny stocks and my only goal was a big green number. I regret not spending that time up front, because I had to untangle a web of investments to try to build a portfolio that works for me.
*The reason investing requires such exacting language is that modern portfolio theory is built based on statistics rather than probability. Probability is the plausible range of outcomes whereas statistics is the certainty of uncertainty. This is a fancy way of saying that no outcome is guaranteed.
I'm a wife, a mom, an employee, and a personal finance nerd who is devoted to spreadsheeting my way through life.