What's So Scary About Investing?
Be afraid. Be VERY afraid.
No matter how many times I try to drive the point home about the importance of investing in the stock market, the most common excuse for not getting started is not "I'm too poor" it's this:
"I'm afraid to lose money."
This is a bit like saying, "I'm afraid to go to school because I might learn something I don't want."
Frankly, this fear is on par with someone living in your closet - there MIGHT be someone in there, but there's a good 99.9% chance that there's no validation for this fear. And in the case of the stock market, there is no validation for this fear either. In honor of Halloween I will address three of the most common mistakes that cause investors a lot of unnecessary angst.
1. Stop. Checking. Your. Account. - Seriously, just stop it. Nothing will discourage you more than paying close attention to the massive ebbs and flows in individual stocks that occur on a daily basis. If you bought a stock for $10 and then checked in the next day to see it at $9.10 (for a loss) you would become sad and discouraged at the fact that your oh-so-smart-investment suddenly proved you wrong. Guess what? This is not the end of the world! Obviously if you bought this stock there was something substantial about it and you know the company won't go bankrupt. If you know you are going to be discouraged, only check your brokerage account a handful of times per year. Yes, per YEAR. Set it, forget it, and don't second-guess yourself.
2. Look At Everything Long Term - Believe it or not this is one of the hardest things for people to do. You don't even know what you're having for dinner in a few hours - how can you be expected to think about anything beyond today? Being prepared is something that you should already be doing because it will save your life. Don't wait for a power outage to consider buying a flashlight. Don't think about an emergency plan once you need it. And don't think about investing once you're ready to retire. Think of how much the stock market will grow between today and when you retire - completely ignore the bumps in between the takeoff and landing. You made it out the other end alive and that is all that matters. Don't wait until you're 65 with $100 in savings and wonder how it is going to last you for the rest of your life. Plan for the future - TODAY!
3. Don't Put All Your Eggs In One Basket - You can put all your investing money in one account, but I'm referring to diversification of investments. I can't tell you how many times people show so much bias to one sector and either lose big or don't gain too much overall. A while ago when the price of crude oil was over $100 per barrel people were buying energy stocks like crazy. Today the price of oil is around $40 per barrel and all those people whose portfolios are 100% in energy stocks are virtually worthless. If your portfolio included stocks in energy AND technology, your losses would be cut in half. Why? Because technology stocks have returned 6.3% in the last year while basic materials have declined by 17%.
The more you diversify your bets, the lower your risk - this is called "Portfolio Theory" and I will talk about this at length in the coming weeks.
I hope you all have a SCARY HALLOWEEN!!