Please welcome Tony from Trade Slugger for today’s guest post on investing.
Investing can seem like a pretty daunting task at first. There are many stories of people who saved money for twenty years, invested all of their savings and retired early as millionaires. Of course, there are also many stories of people who invested all their savings and got clobbered by the 2008 market crash. Many of these failures were caused by investors not knowing the basics of investing. You can’t just jump right in the market and buy anything that looks “cheap” (which, by the way, is a relative term). Here’s how to get started investing.
Select a Cheap Broker
If you’re investing outside of your 401(k), then you need to choose a broker. Do not go with brokers that offer telephone investment advice. Those brokers’ interests are not aligned with your interests. Brokers want you to buy and sell as much stock as possible because their commissions depend on your volume. Brokers often send out dozens of recommendations a day in hopes of you making a quick and large transaction. That is why you should invest with the cheapest brokers: online brokers who merely facilitate a platform for you to buy and sell. These online brokers will not send you investment advice, which is useless anyways. Online brokers tend to charge low commissions because their costs are much cheaper. For example, my broker charges a commission of $1 per hundred shares. To select a cheap broker, just do a Google search for online brokerage. There are dozens of options to choose one. My advice is to choose one that is the largest and most reputable. Most online brokerages charge similar transaction fees.
Know Your Investment Strategy
This scenario is far too common: a buy and hold investor sees soaring stock prices, wants in on the action, essentially becomes a day trader, and gets slaughtered by the subsequent market crash. Why do these investors fail? Because they can’t stick to their investment strategy. There are many different investment strategies , all of which work well if they suit your personality. Too many investors fail because they select an investment strategy based on their time commitment, not their personality. Many investors choose to buy and hold not because that strategy suits their personality, but because they don’t have the time (or aren’t willing to make the commitment) to actively observe the market.
Investors who buy and hold need patience. This is why many buy and hold investors fail. They became buy and hold investors because they are too busy with their day jobs, not because their personality included patience as a virtue. But when the market surges, they instantly abandon buy and hold in favor of a more active investment strategy, which inevitably leads to ruin. Let your personality determine your investment strategy: doing otherwise inevitably leads to financial ruin.
Know What Your Good At
Newsflash: you don’t have to buy stocks. Too many people have asked me in the past “since you’re bullish on the U.S. stock market, what stocks did you buy?” My answer is always as follows: “I bought the index. I don’t buy individual stocks”. You have to know what you’re good at. Are you an accountant who is good at dissecting corporate financial statements? Then stock picking might be right for you. Personally, my mind goes blank when I see a bunch of numbers and tables on a sheet of paper. Are you good at connecting seemingly unrelated events to create a big picture of the global economy? Then macro investing is probably right for you. The good thing about investing is that you can play on your strengths and avoid your weaknesses. This isn’t like the SAT’s in which if you sucked at math, you still needed to do a lot of equations in order to get into a good college or university. Stick to what you’re good at and avoid what you aren’t good at. I have one last piece of advice for you.
Make Sure Your Cashflow is Secure
The key to any successful investor is that you have to be able to feed yourself (and your family) without dipping into your investment fund. You’ve probably heard of the famous investor Warren Buffett. This man was able to start investing via buy and hold from the time he graduated from college. Why? Because he had $200,000 by the time he graduated, which is equivalent to $2 million in cash today! Buffett does not represent the rags-to-riches story. His father was a Congressmen, and his family hailed from a relatively well-to-do background. In order to invest successfully, you must have enough cashflow that you won’t need to dip into your investment account. For example, a lot of buy and hold Average Joe’s got clobbered in the 2008/2009 market crash. They sold right near the bottom of the crash, which is the cardinal sin of investing. Why? It wasn’t because they wanted to sell at the bottom but because they had to. If you’re unemployed and cannot make ends meet at home, you have no choice but to abandon your investment strategy, sell your assets for whatever price you can fetch, and use your investment money to feed your family. Thus, in order to invest successfully you must have a secure cashflow.
Thanks for reading! I’m Tony from Trade Slugger Feel free to check out my blog 😀