Learning How to Invest, Wisely and Safely
- Details
- Written by Will from Holland
- Category: Articles
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With saving account interest rates at all-time lows (2024 national average at 0.60%), more and more people are looking to invest their money instead.
At FoolProof, we don't typically give investing advice. But we can outline investing basics and help you towards a plan and some preparation.
That's cool and all, but where do you start? The world of investing is complicated at best, and really complicated if you're looking to make big money. Plus, investing without thinking can be a big trap that can cost you dearly, or worse, throw you in debt or bankruptcy.
At FoolProof, we don't typically give investing advice. But we can outline investing basics and help you towards a plan and some preparation.
If you haven't seen our video on "investing through gamification", we recommend that you give it a watch! With that knowledge—and the included warnings—let's take the next step.
So, let's start at the beginning.
Stick to These Rules
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Develop an Investing Budget
Make sure your regular budget is in order first. Look at your savings and figure how much money you can safely afford (some say lose) without stressing or busting your budget (emergency buffers included) or worrying about losses.
Know that investing subjects your money to risk. As such, only invest money that you can afford and know there is always the risk of loss. Aside from wanting to make more on your savings, investing is an important part of reaching your financial goals.
In this budget think of your retirement also. You typically should invest retirement savings, so that it grows while you're contributing.
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Turn off Your Emotions
If you are going to invest, switch off emotions. And turn off thoughts of unbelievable (quick) profits. Wanting to win huge, quick, usually leads to huge loses, quick.
Take cryptocurrency for example. Humongous overnight rate increasements, may seem enticing! However, if you find out instead that the rate dropped 50% overnight after investing, you're looking at losses you can never make up!
Here's a good quote on that:
"If you're emotional about investing, you're not going to do well. You may have all these feelings about the stock, but the stock has no feelings about you." — Warren Buffett -
Develop an Investing Plan and Strategy
In your plan, answer the following 3 questions:
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What is the purpose of your investment plan? For example: save for retirement, grow my savings, etc.
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How much time do I have to get there? Risky investments give more return, but chances of losing your money are really risky, too. If you know how much time you have to see profits—you can find a balance between risk and reward that works well for you.
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What's the max risk I can take? Sure, you have your budget set aside to invest, and can potentially lose all that "safely". But do you really want to? Probably not. So, always set loss amounts per investment item or portfolio. Say, on this investment I'm willing to take a maximum 20% loss, etc.
Tattoo those three questions on your brain. By thoughtfully answering them, you can hopefully avoid many adverse decisions and pitfalls. This allows you, for example, to accept a loss in time to prevent a free fall.
Examples of the three questions at work.
Case A. If your investment falls from $100 to $80, you have a 20% loss. In order for that $80 to get back to $100, you have to make a return of 25%. This could be a feasible result — like within a year or three.
Case B. If your investment falls from $100 to $60, you have a whopping 40% loss. To get that $60 back to $100, you need to make a return of 67%. A very tough situation for which you probably need 5 (very) positive years.
Case C. (likely with cryptocurrency). If your investment falls from $100 to $3, you have a 97% loss. In order for that $3 to get back to $100, you have to make a return of 3200%. That's almost impossible life's work!
Let's assume you have set up a good investment strategy. You decided that your maximum loss can be 20% per year. In Case A, you would immediately sell the stock to avoid a further fall (the potential free fall) of your stock.
Without a good strategy, you would be guided by the emotions of fear and getting-rich-quick, hoping that the value of the stock will rise again. Once it's too late, you‘re probably looking at that 97% loss and your savings have simply evaporated! Better to keep your money in your savings account with an average +0.06% winnings!
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Take Stock Warnings Seriously
Let me say again: take stock warnings seriously. Has the price dropped significantly? Are there issues with the company and/or industry? Is the price stagnant? Although these warnings are a signal that the price of a stock is not doing so well, a lot of people ignore them. The first warning is often the mildest of the warning series that usually follow. Don't get too attached to your stock (they can become like old friends you hate to say goodbye to — see Buffet quote #2 on emotions), and sell before your losses are too great.
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Learn Proper Investing Skills, and Start with a Mock Program
I'm pretty new to investing, too. A friend suggested looking into mock apps instead. She said: "they don't sell you fish, but teach you how to fish instead."
When I started, I gave the free Rapunzl app a chance, and it helped me understand the workings a bit, in a safe environment. Rapunzl connects soon-to-be investors with simulated stock portfolios & stock trading competitions. It's a good practice effort before diving in the deep end.
Big tip: I am not a pro on investment apps either! You may find a better one. So, do a little research on mock investment apps before trying anything.
Lastly, work through FoolProof's online module on investing, too.
Learn all about ROI's, compound interest, 401k's and the like from your peers, in an interactive and video driven form. Sign up/in to FoolProof Solo, and start the "Pay Me While I Sleep" module now.
Becoming an "investor" is a lot better than spending your life staying a "spender." Put your money to work while you sleep! Just prepare properly, so you protect yourself from any nightmares, don't you think?
Cheers, Will