Most people believe that when you invest in the stock market, you will instantly become wealthy and that the world of finance is glamorous and chic. Haven’t you seen Wall Street? Obviously there is some truth to this; investing your money in general is a great way to generate wealth, whether it be in real estate, which has created more billionaires than any other industry, or in generic stocks and bonds. There are many success stories out there about getting rich quick, but there are considerably more stories about people who lost it all and then some—you just don’t hear about them.
You should know that most fund managers or brokers don’t beat the market. Beating the market means you had a better return than an index fund that just tracks the DOW, the S&P, or the Nasdaq Composite ( the three main three indices by which we measure the market). You might be asking yourself, “then why are these people employed?” And the short answer is that, just like gambling, anyone can get lucky. Plus, most people are smart enough to know they shouldn’t manage their money themselves.
Forget beating the market, even to have decent returns takes a lot of work to put together a sound investment portfolio. These guys do earn their paycheck. But if you don’t want to pay someone to manage your wealth for you and want to go it alone, there are a few things you should know.*
Before I get into the nuts and bolts of how the stock market works and how to evaluate a company, which will be in a future blog post. I am going to talk a little bit about the mindset you should have when investing, because developing the right mindset is more important than developing the perfect investment strategy. You really need to know what your goals are and how much risk you can tolerate. Because contrary to the popular notion that investing isn’t gambling since it requires skill and knowledge, I am here to say that just isn’t the case. In order to be the best poker player you must possess skill and knowledge, but nobody is arguing that playing poker isn’t gambling.
A disciplined mindset is key when you finally decide to invest. This means that you don’t invest with money that you need today or in the near future. You will set aside a specific amount that you are comfortable with never seeing again. Investing with your retirement money, your 401(k) or pension, which would otherwise be savings, is necessary. This is the only way you can accumulate enough money to continue your lifestyle long after you have stopped working. Putting it in a savings account or CD (a savings account you can’t touch) won’t cut it.
You must then be patient when your money is finally in the market. You should be investing for retirement and be looking at a three- to five-year horizon before you re-evaluate the investment. This is how long it usually takes a company’s actions to truly be reflected in its value or stock price. You should know by now that the stock market fluctuates wildly, because the majority of the market is determined by emotion not facts. If you master your emotions you will master the market. That is why patience and discipline are your two best friends.
And finally, this should go without saying but I’ll say it anyway; Fear and greed are your worst enemies, because they can make you act against your better judgment when the market swings. Stay away from them at all costs, lest ye be burned.
*Note: Please read my post on personal finance before going further. Investing should be the last thing you do when managing your wealth. Before you begin to build wealth, you must be able to responsibly manage the wealth you already have. Otherwise as you make more money, you will also make more problems.
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