Most of us know exactly what we want. Better yet, we even know exactly what we need to do to get it. Yet, for some reason, each day passes leaving us no closer to our goals. The cause: ourselves. We are our own worst enemy. We find every excuse in the book to avoid facing our fears head on. Our own self-doubt and insecurities keep us on the sidelines, instead of hitting the ground running and attacking each obstacle with the tenacity befitting our natural human instincts.
When it comes to our financial future, this complacency tends to reach new heights. Maybe it’s because investing isn’t viewed as “fun” by most of us, or it’s just that Wall Street has gone out of its way to keep their competitive advantage by making it appear more complicated than it is. Either way, we always seem to find some reason to avoid getting started, but each passing day without a plan, puts us in a more precarious financial situation. Let me take this opportunity to provide my argument for why your 5 most common fears of investing are just silly insecurities that you can easily overcome. That way, you can break the inertia and start learning how to invest, so you can finally put some extra money in your pocket.
5. Investing Is Too Risky
Your Concern: You worked hard for your money, so the last thing you want to do is see it disappear because you “gambled” it away in the stock market.
In Reality: True, there is risk in nearly any investment, but the chances of you losing all your money in the stock market is about as likely as a fire burning up all the benjamins stuffed under your mattress. Do you really think companies like Apple, GE, Google, Wells Fargo, etc. would all go bankrupt at the same time? In an apocalyptic scenario like that, I’m guessing your investment portfolio would be the least of your concerns. It is true, however, that the prices of your securities may fall from time to time, especially during times of fear or economic uncertainty, but over the long term, reality sets back in and good, solid companies quickly return to where they were and continue to rise on their own fruition.
There is always a risk in an unknown, untold future, especially keeping in mind the fraud and deception we witnessed over the past few decades with respect to the dotcom boom, Enron, Bernie Madoff and those darn sub-prime mortgages. However, to use a very common poker term, they all were flashing an obvious “tell” for all of us to see. At the end of the day, they were generating too good to be true, inflated returns that couldn’t be justified or rationalized. We all knew it, but we ignored it in search of a quick buck.
While it may be fair to associate stock trading to gambling when it comes to day trading or speculative trading, I don’t think it holds true with respect to rational, long-term investing. For one, there is a major difference between the two. While gambling forces us to manage the cards we’re dealt, investing allows you to pick all of your cards. That said, if you properly align your return expectations with the securities you purchase for your portfolio, you put yourself in a strong position to achieve success. In the end, setting proper objectives and picking diversified investments with proper risk metrics can ensure your money will safely take you to where you want to be.
Closing Argument: If you want to talk about risks, you should consider that the real risk: opportunity cost (or the risk of not investing). Let’s hypothetically say that you’re 30, and you save $5,000 per year. As you can see from the chart below, if you put that money into a savings account, paying an optimistic average of 3% per year (as seen over the last 50 or so years), you would find yourself with roughly $393,316 by the time you reach retirement age (estimated to be 70 in this example).
Now compare that to if you invested that same $5,000 per year in the stock market, which has a conservatively estimated average return of 9.5% per year. As per the following chart, you’d now have roughly $2,121,197 reasons to smile at age 70 (and not just because you could afford a lot more botox).
We’re talking about a $1,727,881 swing. That risk you spoke of earlier doesn’t seem so scary now, does it?
4. I Don’t Know How
Your Concern: With all that industry jargon, how is anybody supposed to understand what’s going on?
In Reality: As with anything, there is a learning curve. So securing that 9.5% annual return is going to take a little legwork. But, the beautiful thing is that there are lots of resources out there that can help get you up to speed. For starters, Google is an amazing thing. Type in anything and answers just start flowing. For example, if you use the search term “Investing For Beginners”, you get 2,600,000 results. Switch that up slightly to “How To Invest” and you’re looking at a whopping 263,000,000 results. So, the issue isn’t finding the information you need to learn the ropes, but figuring out where to start.
Closing Argument: With everything from books to courses to investment communities and virtual stock market simulations, your learning options are endless. It may take some time, but the fact is you CAN teach an old dog new tricks.
Books: In order to ensure your newly discovered reading material doesn’t turn into the perfect cure for your insomnia, here are 5 of the best investing books for beginners that should keep your attention:
The Intelligent Investor – by Benjamin Graham
While this gem was written long before online investing took shape, it’s fundamental teachings on how to minimize losses and find the real value of companies still hold true. It is Mr. Graham’s genius that helped shape the stock picking prowess of renowned investor, Warren Buffett. Enough said. Buy it on Amazon
The Essays of Warren Buffett: Lessons For Corporate America – by Warren Buffett and Lawrence Cunningham
The famed investor, Warren Buffett, collects his thoughts in a series of easy to read essays that allow everyday investors access into one of the most brilliant investment minds of our day. Get a glimpse into how he evaluates companies and what he looks for in deciding to add an investment to his prestigious portfolio. Buy it on Amazon
Rich Dad Poor Dad – by Robert T. Kiyosaki
In his best seller, Robert Kiyosaki highlights the difference between how the poor and middle class approach money as compared to the rich, diving into how best to tackle the topics of financial literacy and financial independence to make sure you break the cycle and avoid the rat race we seem to always find ourselves in. Buy it on Amazon
One Up On Wall Street – by Peter Lynch
Peter Lynch, the esteemed portfolio manager that helped put Fidelity Investments Mutual Fund business on the map, explains how “normal” investors like you and me can outperform industry experts by avoiding what’s “hot” or “sexy” and instead investing in what we know (which happens to be a lot more than you’d think). Buy it on Amazon
A Random Walk Down Wall Street – by Burton Malkiel
This popular read successfully takes the complexity of the markets and boils it down into simple, easy to understand prose that a beginning investor can relate to. Malkiel advocates for a more conservative buy and hold approach that will ensure your money grows with the market. Buy it on Amazon
Courses: Tackling the learning process may be as simple as going back to school. But who can afford tuition these days? That said, here are a few free resources to get you started, without having to deal with the freshman 15 all over again:
Not quite structured as online education per se, but Motley Fool does combine most of the content needed to help a beginning investor get started and stay on the right track.
The world’s online investment encyclopedia pulls together tutorials across every aspect of the investing world laid out in plain language that’s easy for beginners to understand.
While these lessons aren’t solely on investing, they do offer some great tips to help you manage your financial situation as a whole. Take a journey through 23 brief sections covering everything from the basics of investing to managing your taxes.
Learn everything you need to know about investing while choosing from 172 different courses covering stocks, funds, bonds, and portfolio management all in one place.
Track your progress through 24 thoughtfully organized chapters that outline the who’s, what’s, where’s, and how’s of investing. While the course information is public, you will have to sign up for a free account to follow your progress and take quizzes. What’s great though is that once you have an account, you can also connect to thousands of other investors in the SprinkleBit community, as well as get $5k of virtual currency that can be used to practice investing risk-free through a stock market simulator.
3. I Don’t Have The Time
Your Concern: With all that I have going on, there just isn’t enough time in the day to manage my investments.
In Reality: Somewhere tucked in between your morning corn flakes, Facebook stalking your old high school friends, and the latest episode of The Daily Show, you can probably spare 10-15 minutes to tend to your finances. Yup, that’s all you really need. Once you get through the annoying steps of opening and funding an account, it’s just a matter of doing a little research to figure out which investments you want to take you to the promised land. After that, you just need to put a little time in to monitoring your investments, in order to make sure nothing has fundamentally changed from when you first bought them. It’s pretty easy to stay on top of that by setting news and/or price alerts, which will ensure you stay informed even when you’re not engaged. While daily portfolio monitoring isn’t really necessary unless you want to ride an emotional roller-coaster, I’d recommend allocating a few minutes a day to reading the major headlines in the Wall Street Journal, Yahoo! Finance, or your favorite news outlet, so you can stay up to date with the market in general. It’s a good practice and can help you avoid some common investor mistakes. In the end, you’d be surprised how much you can learn from such a simple act.
I know time still isn’t on our side, so to help you save more of that precious resource, here are a few tools and resources you may want to leverage, whether you want to tackle the markets on your own or outsource it to someone that knows best (for a fee of course):
Do It Yourself: Just remember what your mommy told you: there’s nothing you can’t do if you just put your mind to it.
No matter which brokerage you choose, you will probably have a variety of traditional research tools like analyst ratings, news articles, and email alerts at your disposal, but I’d like to highlight some interesting tools that you may want to check out when doing your own stock research:
Seeking Alpha – Undoubtedly “THE” blog for investors. With over 7,000 contributing editors covering pretty much every stock you could imagine, you’ll never have a shortage of perspectives on the companies on your radar. You can set up alerts for any of the companies you’re interested in or subscribe to a daily dose of suggested content. The writing does tend to cater to somewhat experienced investors, but the insights are front and center, and you’ll be able to pick up on the lingo pretty quickly.
StockTwits – If you love what Twitter has done for the news, then you’ll love what these guys have done for investing. You can start following other users to find out what real investors and traders are saying about the stocks you care about, all in no more than 140 characters.
Estimize – An open platform that aggregates fundamental earnings estimates from independent buy side and sell side investors (think Wall Street types), along with those of private investors and students. This is a great way to keep track of which direction your stocks are heading around quarterly earnings time.
SprinkleBit – Ever wonder what other people are investing in? No need to wonder anymore. Now you can join the SprinkleBit community to see who’s buying what, when they’re selling, and what their motivations are. As a full-fledged social media platform for investing, experienced and aspiring investors alike can create an account that lets them “tap into the wisdom of the crowd”, so they never have to go it alone.
Outsource It: No point in doing something you don’t like when you can pay someone else to do it for you.
For those of you that just don’t want to put the time and effort in to properly manage your investments, there is a myriad of options at your disposal. Depending on how much money you have and how much you want to spend on advice, there are varying degrees of investment support you can get, starting with mutual funds & exchange traded funds (ETFs) [minimum investments are typically under $1,000 and fees are charged in the form of expense ratios that vary per fund family] to full-fledged investment advisors [typically need at least $100k-$250k to start with advisory fees from your personal advisors coming in around 1% of your total assets per year] . As you might imagine, the more you pay, the more personalized your portfolio becomes. While there are a number of companies that offer services along those lines, I prefer to highlight some companies taking more innovative approaches:
Betterment – Using Nobel-prize winning research, the team at Betterment has comprised a set of maximally diversified “managed portfolios” that can be customized based on your investment needs. For an advisory fee of 0.35% for as little as $1oo per month auto deposit to as low as 0.15% for $10 million, their team of advisors will help your money grow according to plan.
Covestor – As a registered investment advisor, Covestor lets you pick a “portfolio manager” that meets your needs, then automatically mirror their trades through their “portfolio sync” capabilities. Depending on which portfolio manager you follow, you’ll pay between 0%-2% of your total portfolio value with no additional transactions fees or charges.
Wealthfront – Led by Dr. Burton Malkiel (see A Random Walk Down Wall Street above), Wealthfront automates the investment process by allowing you to invest in diversified, continually rebalanced portfolios of index funds. Minimum account size is $5k with a flat fee of 0.25% per year with no additional fees or trading commissions (plus there are no management fees for your first $10k).
Closing Argument: As they say, time is money. There’s no better way to show that than by revisiting our earlier example. Hypothetical you, a 30 year-old with $5k to invest per year, an expected retirement age of 70, and an obvious investor in stocks (after what we’ve gone through so far), finally decides to invest resulting in that expected return of $2,121,197. Now let’s pretend that you didn’t procrastinate, recognizing that time lost is actually more important than a bit of time per day allocated, and instead the 24 year old version of you started investing $5k per year back in the good old days, you could be looking at $3,694,595, or a not so modest difference of $1,573,398. Think about what those cups of coffee, beers, shoes, flights or whatever your preferred use of funds could have been….
2. I’m Not Good With Numbers
Your Concern: I need an app to calculate a tip at a restaurant, so there’s no way I have what it takes to analyze the stock market.
In Reality: Yes. All those numbers and boring financial statements can even put an accountant to sleep, but the fact is that you don’t have to build regression models or algorithms to be a great investor. Basic math will do. To be honest, some of the best investors are able to to take math out of the equation altogether. When it really comes down to it, analyzing a company has a lot more to do with what products they have and who the management team is than what their financial statements say every quarter. Sure, it’s important to be able to understand the impact of revenue, expenses, and income on the company’s ability to produce results, but most of that analysis can be outsourced to a few trusted number crunchers (e.g. analysts, reporters, and bloggers), who kindly will summarize the results for you.
There are always tools and resources that can conduct most of the financial analysis you need. All you really need to do is understand is what makes a company valuable, how to compare them to their competitors or other potential investment opportunities, and when a company is a good buying opportunity.
Closing Argument: Let me know if I lose you here….
Spend = Buy 100 shares of XYZ Company @ $50 + $8 commission = $508
Receive = Sell 100 shares of XYZ Company @ $100 – $8 commission = $992
Difference = $992 – $508 = $484 or 95.28%
Sure there may also be some tax implications down the road, but if you can handle the above (even with a calculator as needed), then you’re good to go. If not, you may want to write to your congressperson to have a chat about “no child left behind”.
1. I Don’t Have Enough Money
Your Concern: Only rich people can afford to invest.
In Reality: I won’t lie. It’s a lot easier to invest when you have a lot of money already. As they say, it takes money to make money. Every dollar that comes out of your paycheck is probably noticed. The question is whether you can sacrifice a dollar or two here and there to create something bigger. What’s important to consider is how the rich got rich. Wealth is not created from your salary. Wealth comes from owning things that are worth money. Somewhere down the line, you’ll see every wealthy individual either on their own or via a Great, Great, Great Grandpa, took a risk and invested in something, whether a company, real estate or an idea. That’s where it all starts, so it’s just a matter of taking the first step towards ownership. Buying a few shares of a company may seem insignificant, but that little fraction of that company means you own a small piece of every dollar they generate from each product they sell. When you add up all those pennies, it can amount to a whole heck of the lot at the end of the day.
Look at it this way. What does it take to buy a share of Apple (AAPL) these days, and change? Add in the usual -10 brokerage commission charge for purchasing the stock and you’re on your way. I’d be surprised if you couldn’t scrape together that kind of money. Wouldn’t you love to own a piece of every iPhone 6 that gets sold later this year, or each iWatch? No, then, how about Nike? You think Nike won’t enjoy the fruits of the upcoming NFL season as the NFL’s jersey sponsor? You can pick up a share of Nike (NKE) for about $77. Add that one into your portfolio and you’re really getting somewhere.
This may not seem like much, but remember those graphs I showed you earlier. The reason why a few thousand dollar can grow to a few million is because of the power of compounding interest. Each dollar invested has the ability to return money to you each year. When that money is automatically reinvested, it also earns money each year. Keep doing that year after year, while also adding a few bucks from each paycheck every month, and soon enough, you won’t be living paycheck to paycheck anymore.
If you don’t believe me, replace that $5,000 initial investment we used earlier with just $100 and invest $100 per month from age 30 onward, and you’ll be staring at $467,596 at retirement age. As you can see, it doesn’t matter how much you start with. The most important thing is that you take that first step, and once you do, it all gets easier.
Closing Argument: Don’t want to have to wait for retirement to enjoy the fruits of your labor? Let me leave you with a real world example from SprinkleBit CEO and founder, Alexander Wallin. At the ripe age of 14, Alex had saved up about $2,000 dollars from a part-time job at an ice cream kiosk in Sweden. He had big dreams for that money, but prudently decided that he wanted to try to make it grow by investing it. Without any background knowledge or financial know-how, he dove into the markets, teaching himself how to invest along the way. After 6 years of ups and downs, failures and successes, that measly $2k transformed into Alex’s college tuition. I bet you can only imagine what he’s doing with his portfolio now. Check it out here
Conquer your fear of investing: check. Now you just need to get started. Want some ideas on how to invest or what to invest in? Join the SprinkleBit community, where you can follow Alex and thousands of other investors that allow you to see what they’re investing in, so you never have to trade alone again.