KNOW YOURSELF
"Rule #1: Never lose money.
Rule #2: Never forget rule #1″
- Warren BuffettBefore you open a brokerage account, before you put one dollar in the market, before you even try and learn any jargon I want you to take a good long hard look at yourself. I don’t know how you’ve come to this site. I don’t know your circumstances. I have no idea if you’re even up to the task. What I do know is that investing directly in shares is much harder than you think. If you’re new to the share market please understand this now. The floor of the exchange is littered with the empty wallets of people who thought they could get rich quick.
This is the very first and very tiny step on a long journey. Understand who you are. Are you going actually interested in learning all about shares, studying balance sheets, reading research reports, understanding technical and fundamental analysis. Or should you simply purchase index base ETFs, contribute regularly and let compounding work it’s magic over 10 years plus.
I’ve made a lot of mistakes myself. I wish someone had taken me by the scruff of the neck and made me take a good, long, hard look at myself. I only found out by making a podcast, speaking with experts and acknowledging my mistakes.
Forget about getting rich quick. There are plenty of services that make promises. Some are great, some are only interested in taking your money. The best ones will require you to do a lot of hard work to learn a methodology. That’s the key. Learning takes time and effort.
Trading in shares is like learning a language. It’s not something will happen overnight.
SOME MYTHS ABOUT INVESTING
- It takes a lot of money to buy shares. There's now an incredible range of apps and websites that allow you to start with even the smallest amount of money. You don't have to wait on the sidelines until you have a large sum to invest
- You have to be good at picking stocks. It's not about picking a single winning company. It's about having a diversified portfolio
- It takes a lot of time to research. You only need to research as much as your interest takes you. Buy index ETFs if you don't like research. But you might catch the bug and actually enjoy putting in some time and effort to optimise your portfolio.
- The share market is too risky. You can't ignore the benefits of buying and holding a diversified range of companies for the long term. It's all about long-term thinking
Key takeaway: patience, diversification and the power of compounding will help your returns in the long term.
THINGS TO THINK ABOUT WHEN STARTING TO INVEST
- Start now. The sooner you start, even if it's only with $5, the sooner you start learning and compounding.
- Plan your finances. Write down your current financial situation and list your goals. Do you have an emergency fund? Are you saving to buy a property? Are you starting a business or a family? Draft a realistic plan with clear steps that you will need to take to reach your financial goals.
- What is your risk tolerance? See the section about risk below. Do you think you will be able to sleep at night when the market makes one of it's inevitable plunges? Are you a long-term investor until everyone starts running for the exits?
- Understand diversification. You must learn about industry sectors and asset classes so that you can attain true diversification in your portfolio.
- Stand by to do nothing. Do your homework, diversify your portfolio, think long-term, and review quarterly. Trying to time the market will only lead to stress and burnout.
- Reduce your fees. Fees compound - take them into account when you are setting up a brokerage account or investing with an app.
- Check your super. Study your super and how your money is invested. It will help you learn about your own investing, whether you have chosen the right options and help you to consider your overall diversification.
Doing well with money has a little to do with how smart you are and a lot to do with how you behave. - Morgan Housel.
WHAT IS RISK?
Rewards are directly tied to risk. Cash in the bank carries very little risk but you don't get much back in the way of interest. Speculative mining stocks can generate fantastic returns but carry a lot of risk. Most will do nothing or disappear without a trace.
A key point to understand is the difference between an investor and a trader. A trader is looking for short-term gains. They are not interested in dividends. The trade of is usually short term often very short term. While the investor is interested in both capital gains and dividends. The holding time for investor is longer, certainly longer than weeks and months. It's maybe years or forever in the case of a buy and hold investor. And you can be both a trader and the investor.
"Each person has to play the game that takes into account his own psychology. If losses are going to make you miserable – and some losses are inevitable – you might be wise to utilise very conservative patterns of investment and saving all your life. So you have to adapt your strategy to your own nature and your own talents. I don’t think there’s a one-size-fits-all investment strategy that I can give you.”
- Charlie Munger, 1998, answering, "How do you learn to be a great investor?"Treat your portfolio like a garden
Australian Shareholders' Association is a fantastic organisation that advocates on behalf of retail shareholders and provides a ton of great information for learning. They also hold member meetings where investors share their experience and opinions about the many companies available on the ASX.
I was struck by a comment from a member who said: "Treat your portfolio like a garden" When I asked her what that meant she said to leave it alone to grow, pruning and weeding once a year.
That was a light bulb moment for me. I was too focussed on taking short term gains and locking in losses unnecessarily.
"An investment in knowledge pays the best interest." - Benjamin Franklin
