I’ve been investing for years; I’ve made money and lost money. More importantly than that, I’ve seized and missed opportunities. Probably the biggest mistake would-be investors make is missing opportunities when they are evident. An even bigger mistake investors make is running after a train that has already left the station. There are four key things that all would be investors should do before taking the plunge into the world of the stock market.
1) Observe: I’ve met a lot of people who seem weirdly casual about their investing (“it’s only money!”) If that,s you, then you know, great; however most of us want to have some kind of return on our money and don’t just lackadaisically flush it down the tubes. If you’ve got any interest in investing the best thing you can do is to get yourself familiar with the industry. Learn the language, watch CNBC, read the business section of the paper, go to Borders and look at the investing books and magazines (heck; why not get crazy–support a writer and buy one!), see what other people say. You’ll begin to hear a lot of the same stuff being said. One of these ‘oh too common’ themes are that many young investors…
2) Aren’t In it to Win It: Many times what new investors will do is see a phenomenon (one which comes to mind is Google), watch as it goes up for a while, and then buy into it. As soon as there’s any dip in the price, they panic and sell out (usually at a loss). You’ve got to know what you’re investing in and you’ve got to appreciate that what you’re investing in will at some point go down. Fluctuate is what prices do. But if you catch onto a shooting star and then sell out prematurely at a loss, no one wins. And you’re very likely to have the experience of looking back at a stock three months later to find its price has corrected.
3) Don’t Spend What You Can’t Afford to Lose: If you’re considering getting into the market with your lunch money or next month’s rent money (or last months rent money!), you should not be in the market. Money in the market needs to be able to be invested for the long haul (barring unforeseen emergencies, for at least 6 months) to have the of opportunity to do something real. Yes, there are exceptions; we all saw movies like Wall Street. Fortunes can be won and lost on a whim. Unfortunately that’s not the great majority of cases.
I like to think of investing like baseball: while there are seasons of glory for even underdog teams, in the large majority of cases, even underdog teams have, at their core, good fundamentals and good management and that’s what carries them through. It’s the same with investing: while there is the occasional hot streak, good fundamentals and good management win out in the long run every time.
4) Jump Right In: In the end, the only thing you can do is give it a shot. You can try any number of times, but if you sit too long on the sidelines, it’s easy to end up second-guessing yourself into inertia.
Investing is a great thing for anyone who is interested in learning about making money and anyone who is interested in learning about how markets function. Whether you’re investing in a small money market, Roth IRA through your employer, mutual funds, or actual stocks there are myriad risk levels and potential returns. But you need to get yourself familiar with the territory before you start out. You of course eventually need to get in or move on with your life and do other things with your money, but those Manolo shoes aren’t going to fund your retirement in 40 years. (They likely won’t even be in your closet anymore.)