Investing involves putting your money at risk with the prospect of earning a return higher than what is offered in a bank account. Many people have beliefs about investing before they experience investing themselves, as a result of conditioning from childhood, usually from parents.
How parents talk, or avoid talking, to children has an indelible impact on the young ones’ relationship with money and can have long lasting implications well into adulthood. In order to be a successful investor, you need to have an awareness of your beliefs about money and the role it plays in your life.
It is nearly impossible to separate emotions from financial decision making. But being aware of your relationship with money can help make you a better investor. I have broken down some critical considerations you should take before you start investing.
Knowing your risk tolerance can help you stick with your long-term plan. The key to successful investing is time. The longer the time period, the greater the chance of success. Mike Tyson famously said, “Everyone has a plan until they get punched in the mouth.”
The markets are inherently uncertain and knowing how much risk you can stomach is critical to staying invested. Consider starting by talking to you parents (or siblings) about their experience with money and contemplate your own childhood experience with money.
Do you have memories of your parents talking about money? Could you not afford things you wanted? Are you concerned that you will never have enough money? What are your biggest financial fears? What are your financial goals?
Writing down answers to these questions will give you clarity on how much investment risk is realistic for you.
Be careful on following what your friends ‘with experience’ are doing with their money. It can do more harm than good. You have to start with yourself and know who you are as an investor. Know the game you are playing. What your friends and colleagues are doing is not relevant to your situation.
Financial literacy is a huge problem and has largely gone unaddressed. Money is a taboo topic that many parents avoid talking about. Before you start investing, you should have some basic understanding of concepts like time value of money, different investment vehicles, historic market performance and taxes.
There is no need to become an expert but having a basic understanding of finance and markets is an important foundation to ensure you are not going to be misled or taken advantage of. To get started, consider reading a book on personal finance (i.e., Wall Street Journal – Complete Money and Investing Guidebook) or investing blogs.
Identifying what goal you are trying to achieve is another critical prerequisite to successful investing. Are you saving for your retirement or a new home to move into next year? You are more likely to stick with an investing goal if there is a tangible outcome in your mind that you can visualize.
For example, saving to retire to your dream home in a Florida retirement community that you love versus just saving for retirement. Money is personal, so you want to make your goals personal as well.
You have something to track your progress against versus just open white space. It will also inform you when you have enough to accomplish the goal. If the goal is too open-ended, how will you know when you achieved it?
The legendary investor Warren Buffet famously quipped, “The stock market is a device for transferring money from the impatient to the patient.” He is talking about a bedrock principal of investing – time horizon.
Investing is marathon game and measuring your performance in yards is an impediment to reaching your goals. This is a simple concept, but very difficult to execute. You could have the most brilliant insight about a stock, but if you do not stay invested long enough for things to play out and the noise to clear, it will not matter.
Many of your biggest goals (retirement, college education, second home, etc.) will have a time horizon of more than 7-10 years. Make sure that your mindset matches your time horizon.
When you integrate all these considerations, you give yourself a greater chance of successful investing. If you are still unsure after addressing these considerations, experiment with a small amount of money or speak with a financial professional to develop an investing plan. Putting in the work up front can help pay large dividends down the road.
What is your relationship with money and investing? Were those taboo topics to discuss with your parents? Have you tried investing and what were the results? Do you know your risk tolerance?