Hey everyone! I have a great post today about investing from my buddy Joseph over at Peer Finance 101. Since financial freedom is the BIG goal right now he’s willing to share some great advice about investing and beating your retirement goals (sign me up!). When it comes to investing he really knows his stuff. Enjoy!
Success in investing is about making it personal and motivating yourself to stay on track to reach your money goals
As a former equity analyst and financial advisor to wealthy individuals and money managers, I’ve seen just about every mistake you can make investing.
A lot of these mistakes are ones Andrew shares in his experience investing in a losing stock, ideas like the need for diversification and creating investing rules.
Those aren’t the biggest mistake investors make when it comes to making their money work for them. The biggest mistake investors can make is one you don’t hear about often, but it’s one that will determine if you meet your financial goals or not.
In fact, this is the first thing you should do even before you start investing.
Where Investors Go Wrong Picking Stocks
Turn on any investing show or click through to one of a million blogs and you’ll get dozens of stock picks before you can say, “Take my money!”
Don’t get me wrong, as an investment analyst, I love looking at stocks and trying to find ones that will produce that fabled triple-digit return. But that’s not really what investing is really about. Most investors go wrong picking stocks…by thinking investing is about picking stocks.
Investing is much more personal than most people understand. It’s about YOUR financial goals, YOUR tolerance for risk and YOUR investing needs.
That’s not to say you can’t get investing ideas from your favorite investing show or at least get entertained watching some guy throw stuff at the camera and lean on buttons that scream, “Buy, Buy, Buy!”
Something the investing shows can’t do is make investing personal for you. Appealing to a mass audience means they can’t talk about Andrew’s needs or Jessica’s financial goals.
How to Make Investing Personal
Making investing personal starts with why you want to invest, your long-term financial goals.
This doesn’t mean some vague idea of retirement or an arbitrary goal of having $1 million by the time you retire. Making investing personal means actually sitting down and writing out what retirement looks like for you.
- What do you want to do on a daily basis? Doing nothing gets old real fast and can actually affect your life span.
- Do you want to travel and to where? This isn’t a yes or no question, really think about all the trips you want to take.
- What else is on your bucket list that you’ve always wanted to do?
Creating this mental picture of retirement is going to do two things. First, it’s going to make it easier to figure out how much you need to pay for it all. You’ll have actual expenses from which you can estimate your total income needs.
More than that, creating this mental picture for your financial goals is going to motivate you like some arbitrary $1 million goal never could. Whenever the budget gets stretched or you wonder why you’re saving, you can take out this mental picture to keep you on track. Not sticking with a consistent investing plan, not saving money regularly, is probably the biggest problem I see in investors.
Once you have your financial goals formalized, you can figure out how to get there.
- Put together your budget and see how much you can save for retirement.
- Don’t wait to pay off debt before you start investing. Even starting with $25 a month will get you in the habit of saving as you pay down your debts.
- With your financial goal and how much you can invest monthly, use a retirement calculator to find the return you need to meet your goal.
Related: Is your family protected in an emergency? Click to find out How to Make an Emergency Binder
How Not to Freak Out When Stocks Crash
Another part of making investing personal is understanding risk tolerance, that’s the amount of stress you feel when stocks start looking like a teeter-totter.
Not understanding risk tolerance is a big reason the average investor earns less than 5% annually on their portfolio when stocks produce double-digit returns over the long-run. Investors freak out when stocks tumble and panic-sell at exactly the wrong time.
Now there are all kinds of quizzes on the internet for determining your risk tolerance in investing. These can range from just a few questions to dozens and will help you understand how changes in your investments can cause you stress.
While it’s a good idea to take one of these risk tolerance questionnaires, it’s not altogether necessary. If you’ve been investing for more than a few years, you know how you react to the ups-and-downs in stocks.
Risk tolerance is about your willingness and ability to weather the storms in stocks.
- If you have less than 10 years to invest, you’ll probably want less risk because your money won’t have time to recover from a stock market crash. Conversely, those with more time can wait out the market and let their investments rebound.
- If you have a portfolio that will easily satisfy your spending needs, you can take a little more risk. This is counter-intuitive because people think they need to take more risk for more return if they haven’t saved enough. In fact, it’s just the opposite because you can’t afford to lose what little you’ve saved if a stock market crash occurs just years before retirement.
- If your job is relatively secure, for example you have seniority or are protected by a contract, you might be able to manage more risk in your portfolio. Someone in an industry where layoffs are common during a recession doesn’t want to see their investments drop the same time they lose their job.
The biggest factor in your risk tolerance is just how you react to changes in stocks. If a drop of more than 10% in your portfolio causes you to lose sleep at night, you’ll want to diversify your investments in other asset classes like bonds and real estate investment trusts (REITs).
How to Win the Stock Market Game
The final piece to making your investing personal is to stop playing the stock market game.
Investing shows and advice that throw out a dozen stock picks are only made for one reason, to get you buying and selling so brokers make money. Trying to time the market or pick individual stocks is difficult at best and some would argue impossible even for the professionals.
Instead of trying to pick the best stocks all the time, put most of your money in broad market funds that invest in an entire sector or theme. You’ll still earn a solid return, but your investment won’t depend on the success of one particular company.
You can still pick individual stocks if you like but investing 60% or more of your portfolio in broader funds will smooth out your return even in the worst times. You’ll worry less about your investments and won’t make the same bad investing decisions people make when they panic.
All of this might sound a little boring compared to turning on your favorite investing show and dreaming about finding the next hot stock. Sorry, true investing is boring. Making your investing personal means investing in a way that meets your long-term goals and there’s no room for quick trading in-and-out of stocks. Instead, get your excitement in imagining how great your life will be when you’ve reached those long-term goals.
Joseph Hogue worked as an equity analyst and an economist before realizing being rich is no substitute for being happy. He now runs five websites in the personal finance and crowdfunding niche, makes more money than he ever did at a 9-to-5 job and loves building his work from home business.