Investing isn’t gambling: 5 things you need to know
True investing may not look like what you think it does. So if you really want to use it to make your money work harder for you, here are the things you should understand about investing to turn your salary into wealth. And above all, avoid becoming an all-or-nothing investor – a.k.a a gambler.
Look, we’re the only financial advisors that exclusively serve HENRYs. And one of the questions we get most often get is, “how do I make my money work harder for me?”
Of the many answers there are to that question, the one that piques the interest of our High Earner the most, the one they want to know about and feel confident with is….investing. Investing is a great way to make your money work harder for you.
Probably not a huge surprise.
Whether you’re just getting your feet wet in the investing world or you’ve been dabbling for some time, we’re here for it.
But for dabblers, especially, listen up.
True investing may not look like what you think it does. So if you really want to use it to make your money work harder for you, here are the things you should understand about investing to turn your salary into wealth. And above all, avoid becoming an all-or-nothing investor – a.k.a a gambler.
Here are the 5 things you need to know about investing:
1. Have a plan
Wall Street loves to tell you what to invest in before knowing what you’re investing for! But successful investors choose their investments once they’ve answered the questions – “What am I investing for?” and “How long do I have to invest?”. A portfolio invested for a long-term goal like retirement (25+ years away) will look very different than a portfolio invested for a mid-term goal like a downpayment on a 1st or 2nd home (3-8 years away). Figuring out what you want is the first step to take before making an investment in the market. Ideally, it’s not wise to invest any money for financial goals that you have in less than 2 years. So if you’re saving up to move out from your parents’ place, keep that money in a money market or high interest savings account with an online bank to ensure that it’s there when you need it.
2. Don’t sit on the sidelines
One of our favorite quotes about successful investing is:
“It’s not about TIMING the market, it’s about TIME IN the market”.
Countless studies have shown that when we try to predict the best days to be invested we almost always get it wrong, costing us big time. By the time individual investors get the information, the trend has almost always run its course which leads us to act at the wrong time – every time!
If there’s one thing Modern Portfolio Theory has taught us, it’s that diversification is king. Regular, periodic investments into a well-diversified portfolio is the way to go. No one has a crystal ball to predict the best time to invest. Just get started!
3. The market is irrational
You’re smart. You’ve got good instincts and are a level-headed decision maker. Unfortunately, the market has proven to be completely irrational. Little to no sense can be made of market movements and the most detrimental thing you can try to do is rationalize or theorize about what might happen – don’t try to outsmart the market. We say buy right, and sit tight – it’s going to be a bumpy ride.
Remember: time in the market beats timing the market.
4. ETFs are your friend
The emergence of ETFs (Exchange Traded Funds) have been a huge help to the Millennial investor because of their transparency, liquidity and low fees. They provide easier access to diversification (versus single stock picking) which can lower the overall standard deviation (risk) of your portfolio.
5. Don’t invest like someone in their 50s
As Millennials and Gen Y’ers, we’ve lived through 2 very rough financial time periods, namely the Tech Bubble and the Financial Crisis in ’08-’09. Studies show that we are a very risk-averse generation and it’s certainly understandable.
Taking the right amount of risk in your longer-term investments can help ensure you won’t run out of money when you quit working down the road. A portfolio that is heavily weighted towards bonds and cash may not grow fast enough to keep up with inflation, let alone accumulate wealth for you.
The truth is, savings + budgeting alone won’t get the job. You need that money to be working and growing or you need to earn more. Don’t be afraid to add equities to your portfolio but try to do it in a diversified way (like using ETFs instead of picking single stocks). Yes you will see it move up and down in value over the short-term but in the long-run it will grow!
Let’s wrap with a fair warning against news headlines.
6. Bonus: Don’t listen to CNBC
Listening to CNBC, you hear a hot stock tip. Chatting with friends, you hear a hot stock tip. Go to a cocktail party, you hear a hot stock tip. It’s exciting, you feel the adrenaline and you say to yourself “I gotta buy before I miss out!”
Remember what you just read. And If you want to gamble - go for it. Just don't come crying to us when the dealer says you're out of chips.
Want to learn more about investing from the pros at Stash Wealth? This is what the Stash Plan was built for.
Stash Wealth provides financial plans designed to assist high earning young professionals build and manage their wealth.
Stash Wealth offers a pragmatic approach to financial planning and wealth management. Whether saving up for Tahiti or a Tesla, we help you achieve your short-term and long-term goals.
Written by Stash Wealth Staff Writer
Stash Wealth Staff Writers are knowledgeable about personal finance topics. Their objective is to unravel the complexities of finance trade jargon, products, and services in order to equip HENRYs with a sound understanding of financial matters.
