Many times I am asked the following :
“I want to invest. How do I get started?”
At first I thought this would be easy, but after some thought and discussion I needed to think about this some more. There is a lot of bad advice out there, and people require a heads up on a lot of things they will encounter from other ‘investors‘, not to mention the media. I will give my best attempt to address them in this multi-part article. I’m not the best writer, and I notice that at many times, not all of my thoughts and ideas are fully captured in my articles. After I complete this series, I will probably improve upon them over time.
The answer is not that straight forward. Before you begin I have some important recommendations:
– Hold Your Money – Hold your money until you’ve assessed if you need the money in the near future or not. If you need it, you will want to put it in a short term secured financial instrument (such as a GIC or term deposit) or high savings interest account because it may be money you cannot lose, or it may be difficult to re-accumulate in a short period of time. In addition, after you learn more, you may find a more suitable short term place for your money that you wouldn’t have been able to evaluate adequately.
– Learn First – You will most likely have an idea of what an investment means to you, and what you want to invest in. Most people think stocks & mutual funds, but there are others which include real estate as well. The investment world contains much more than just those investment vehicles too. Learn about the other investment vehicles. An investment plan will most likely be made, and your choices may change afterwards.
– Patience – Many people don’t want to wait, and jump in right away without knowing anything. Many people will also recommend that you don’t wait, stating that now is the best time. Others will tell you to buy “safe” or “low risk” unsecured investments, to make money while you are learning, instead of actually learning first. Real risk comes from not knowing what you are doing and not being able to properly assess your personal financial situation in relation to the investments.
– Patience is required until further knowledge is accumulated on the subject matter. You will be better able to make investment decisions, whether it be stocks, or even what real estate to put your money in. You may then also have an idea of how (if at all) you may want to split money among different investments. Don’t be worried about lost opportunities to make money while you are learning. When you are more knowledgeable, you will have plenty of time to make money, and will be able to see the opportunities you wouldn’t otherwise be able to see. Also, if you use up your capital on bad investment decisions, then you have a lot less to use on good ones.
– Continue Learning – Investment, styles & techniques are imprecise & highly debated. Many should be tools that you are able to use in various situations & stages. You’ll find investing very much an imprecise art, and perspectives on investing philosophies/methods will be like religions to people. No matter what one investor says, it may always be invalid to another. Some examples include groups who believe totally and/or partially in market efficiency, market psychology, fundamentals, technical analysis, etc. Keep an open mind, and most importantly continue to educate yourself with financial knowledge.
– Logic, Not Emotion – When investing you must keep your emotions out of the picture, in order to make logical decisions and assessments. Most people fail because of this. This is probably the largest make or break factor of any investor. Even if you have the knowledge, emotion distorts an individual’s thinking, resulting in action that is not based on the knowledge.
BEGINNING – THINGS TO CONSIDER
Decide whether you want to Do-It-Yourself, or rely heavily on a Financial Advisor. I’ll use the letters DIY & FA in the rest of this article.
DIY or FA? There are advantages & disadvantages that each person needs to consider carefully. The paths will be very different, but you can always change your mind later as well. My preferred choice is Do-It-Yourself.
– Results vary from individual to individual – DIY as a consequence, is highly dependent on the individual investor’s attitude & mindset, as well as knowledge & experience. All of which can be accumulated/learned.
– Time, effort, commitment – Learning, analysis, research, planning (but it doesn’t necessarily mean difficult work, or spending hours on end each day). As with anything, there are things that you will need to do. DIY requires more of a commitment.
– Individual goals – Super wealthy, affluent, financially free, retire early, etc. In the majority of cases many of these goals may be achieveable only through DIY.
– The role of your FA – An information resource, financial resource (instruments, financing/capital, etc). Will be less hands on.
– Control – You are the decision maker, manager of risk, and the most knowledgable in terms of what investmestments will be the most suitable at each moment in time. Basically you’re the captin of the ship.
– Trust – Can you trust yourself to have & keep the necessary temperment? Learn what is necessary? Take steps to invest properly? Does your family trust you for this task? You also need to trust the information, and ability of the FA to do what you need them to do.
– Investments – Virtually an unlimited range of investment vehicles and business opporunities.
– Results will vary from advisor to advisor – Is dependent on the advisor’s attitude & mindset, their knowledge, their ability to adequately assess what is suitable for you, and your own knowledge of yourself.
– Time, effort, commitment – Learning enough about yourself so that the advisor can assist you. Finding a knowledgeable & competent advisor. Keeping up to date with general economic news. Also, requires commitment, but less than DIY.
– Individual goals – Retire early, retiring at 65, etc. Can an advisor help you reach your goals?
– The role of your FA – Decision maker, information resource, financial products & instruments. Will be more hands on.
– Control – Less control, as you will most likely not have an adequate amount of knowledge. Relying more on the advisor. Less of a decision maker. You still give final consent.
– Trust – You must trust your advisor a lot more, as you will be relying on them almost completely.
– Investments – Most likely limited to GICs, mutual funds, stocks.
Contrary to what the general public is lead to believe by banks & investment firms, people need to understand that investing is not just the act of purchasing an investment (GICs, mutual funds, stocks, real estate, etc). Investing is much more, and there are important steps to follow whether you DIY or rely on a FA. If you are not willing to do all the steps, you may be financially better off by putting money into secured GICs, high interest savings accounts, & paying off the mortgage. The alternative is losing money from unknowledgeable decision making or bad advice. We have seen countless individuals across the globe who lost their life savings from blind investing in stocks, mutual funds, and other products recommended by their local bank, investment firm, and financial advisor. People have also lost money in real estate as well through improper investing and speculation.
The steps for either are straight forward, but extremely important. No step can be skipped or fast tracked. Most are valid for both DIY or FA, but one focuses on certain aspects more than the other. The steps should also be revisited continually:
Steps For DIY:
1. Make sure your personal finances in order first.
2. Educate yourself on the subject area & increase your knowledge on a continual basis.
3. Make sure you have the right attitude & mind set.
4. Know yourself, your needs, & your goals. (Gives you direction – learning, control, etc.)
5. Build your advisory team.
Steps For FA:
1. Make sure your personal finances are in order first.
2. Educate yourself on the economy & general economic trends.
3. Know how to find a competent, knowledgeable, and honest financial advisor.
4. Know yourself, your needs, & your goals (so that the advisor can best assist you).
5. Build your advisory team.
In Part II, I will elaborate on each step and its importance.
Thanks & Happy Investing!
The Investment Blogger