Investing should be at the top of your agenda if you handle any kind of money. Seriously. For the longest time, people are under the impression that as long as they save money or they successfully set aside some money, they will be okay.
I’m sorry to be the one to break this to you, but that money that you put away in the bank for a rainy day is going to start decaying. In fact, it’s rotting right now. This rot continues regardless of what you do until you get that money out of the bank and do something else with it.
This rotting process that I refer to, of course, is inflation. Every single year, the value of the money that you put in the bank goes down because the volume of money in circulation, as well as total economic activity, goes up. The money that you have in your pockets, the money that you have under your mattress or in the bank loses value every single day.
You may now feel it right now but, given enough time, you can definitely feel it. If you need an example of this, keep in mind that you could have bought a house somewhere in the United States in the 1800s for $100. That’s the power of inflation. We’re not talking about a shack either. We’re talking about a mansion. That’s how powerful inflation is.
In fact, people were able to ride the bus for a penny. Name whatever merchandise, service or investment you can find, and people used to be able to buy it very cheaply. Now is a completely different story thanks to inflation.
Now that I have gotten your attention, the next step, of course, is to figure out what to do about inflation and, of course, the answer is also obvious. You invest it. You invest your money so as to make it grow or at least hold its value.
Most people can get this far. Most people can understand the need to invest, but the problem is a lot of newbie investors approach the whole investment game like a trip to Vegas. They have several thousand dollars in their hand, and they see on end the craps table. On the other end, they see the slot machines and right in front of them are the blackjack and poker tables. They’re like that kid in that proverbial candy store. What could possibly go wrong, right?
Well, you have to understand that unless you are operating with set investment goals, you are setting yourself up for failure. That’s the bottom line. People who start investing with absolutely no clue except that they can turn $1 into $2, end up crushing and burning.
How do I know? I’m one of them. When I started right after high school, I didn’t know what I was doing. I knew that financial analysts were saying that there were these small stocks that were just going up. They were going blockbuster. So, I bought those stocks and, after a while, they just crapped out.
The reason was I did not have investment goals. I did not know what I was in the market for. I did not know when I should exit. I did not know what ultimate value was. I did not have a staying strategy. I was completely clueless. I was just basically thinking shots in the dark and hoping to get lucky. That is not a strategy. It doesn’t lead to anything good.
So, the first thing that you need to do is set investment goals. Are you trying to retire soon? Are you trying to double your money? Are you trying to preserve the value of your money? What exactly is your investment goal? Are you trying to buy a house in five years? Set that goal.
The next step is to break it down into numbers. To buy that house, for example, which costs $500,000, how much does your nest egg have to be so you can afford the down payment? Pretty straightforward.
If you’re trying to get from point A to point B, you need to slice and dice the path there. You have to run several scenarios. You have to overlay some sort of timeline over it so you can set important goals regarding how aggressively you should invest, what you should be investing in and how much to invest. Sounds good so far?
Well, here’s the kicker. Everything to this point is logical. Most people up to this point can wrap their minds around this information and behave logically and reasonably. Unfortunately, life doesn’t work that way. We are, after all, creatures of emotion.
One of the most powerful emotions that you would have to overcome is your impatience. Impatience is often fed by greed and fear, and it almost always leads to disappointment. You have to overcome your impatience. If you set your goal, let’s say your day trading and you want to hit 2% today, once you 2%, you’re done. That’s it. Finito. Cut it out. Close that window. Call it a day. Tilt back a few. Have yourself a good time. However, do not trade again.
Similarly, if your goal is 2% up or 2% down and your stock broke past the 2% loss barrier, now is the time to cut your losses. Resist the almost irresistible temptation of just hanging in there because it might bounce back up. With everything else being equal, it won’t. In fact, in most cases, it would get worse before it gets better.
Overcome your impatience. This is the most important piece of advice you would ever get. Unfortunately, a lot of people don’t focus on this. They focus on their goals. They focus on how awesome it is to trade stocks, but they lose sight of having set goals, and they get in over their heads. They throw good money after bad and, ultimately, they’re in the hole for tens of thousands of dollars.
Invest for Gains
Invest in stocks for gains. I know this seems pretty straightforward. In fact, it may seem like common sense. I might even seem stupid for pointing this out. However, let me explain myself. When people invest in stock, they tend to ride it out.
For example, you get into a Biotech stock at $5 and then it spikes to $7, you’re happier than a pig in mud. Conversely, the problem is your investment goal is 10% so you should have exited that stock once it hit 5 and on and on it goes. Well, that’s a fantasy because oftentimes, it would go from 5 to 7 and then back to 1. What do you then?
Invest for gains. Understand the concept of opportunity costs because if you are going to invest in a stock, and it sinks, let’s say it dips 10%, exit it and invest the remaining money that you have for another stock that may be able to hit your investment goals. It doesn’t take a rocket scientist to guess that most people actually waited out, and they keep on waiting for a long, long time.
It may well have been that if they had just exited, they could have invested in something else and hit their goals and kept going up. These are opportunity costs. Be aware that this is always in play. So, if your stock goes up or goes down, remember to exit. If you don’t hit your goals, remember to exit and find another opportunity until you hit your goals. The last thing that you want is to wait or to ride a stock that you think would take you to the moon only to take you to the gutter.
Moreover, understand that figuring out how to invest may invest money the smart way means wrapping your mind around this one key concept. What’s this concept? The higher the risk, the higher the reward. A lot of investors think that stocks that are just too risky are not worth it.
Well, they’re worthy to people who are looking for a higher return very quickly. Now they may not get that return, but the fact there is this risky stock available at least gives you that opportunity. Always remember to get a high return, you have to increase your risk tolerance. These go hand in hand. They are joined at the hip.
Be Clear on Your Investment Model
By this point, you should be learning a lot of key trends and a lot of key techniques in investing. Try these models out a few times; however, by this point, you should also be fairly clear as to what kind of investment style fits you personally.
Are you the type of person who invests for value? Are you the type of person who is a fundamental investor or a technical trader? There’s no right or wrong answer. Instead, pay attention to your trading patterns as well as your mindset and expectations so you can get to the right answer in your particular situation.
Stick to Your Model and Its Internal Rules
Again, like I said, there is no right or wrong model whether you are a value, fundamental or technical trader. What’s important is that you decide which model and understand their rules and you stick to them. The last thing that you want is to call yourself a technical trader but at the same time trade like a value investor. That’s like mixing oil in water. It’s not going to work.
Do yourself a big favor. Be clear on the model and make sure that it truly fits the asset growth trajectory and trading style that you want for yourself as well as your investment goals.
Follow the advice I shared above if you are serious about figuring out how to invest money the smart way. It can be done. You can get the same results as the “smart money” in the market. You just have to go through the process of learning what they know.
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