A Noob’s Introduction to Investing

I believe the single most important skill for early retirement is being a competent investor. There’s a whole universe of skills that can save you money, but most people in retirement will be earning their income either by investing in standard securities (stocks, bonds, ETFs), or by renting out property.

I’ve been investing for two years now. That qualifies me as slightly more than a rank amateur. However, I’ve learned quite a bit over this time and now when I see people asking “How do I start investing?” I have a few thoughts to share.

  • The most important thing is practice As with anything, the most important thing you can do is to practice. That’s why, if you have a little bit of savings that aren’t part of an emergency fund, it’s a good idea to put them in an investment account and play around with them. The worst-case scenario is you make a stupid decision and hit your stop loss, and then trade back to cash. Consider this paying for an education. You’re going to have to make and manage investments sooner or later; sooner is better than later.
  • Investing is mostly a psychological game Although from the outside, investing looks like numbers and math, once you put money on the line it becomes almost entirely psychological. Here’s a few dilemmas you’ll encounter:
    • You see a stock, which metrics show is priced too highly, continue to climb steadily as people jump on board. Can you withstand the temptation to join in, even as people you know are getting rich?
    • The market plunged 4% today as people panicked. Some of your holdings are now down 8-9%. Can you keep from selling?
    • A stock you own has gone up 12% and it still seems reasonably priced (earnings have gone up as well). Can you resist taking your gains?
    • An ETF you bought recently plunged and hit your 15% loss limit. Even though you’re certain it will turn around, do you have the balls to sell?

    While numbers have their place, in many cases your overall performance will be defined by whether you can resist your lizard brain and listen to reason.

  • Invest with a goal and theme When I started investing, I had no theme. I heard that index investing was good, so I’d put a bunch of money in indices. And then I’d think that emerging markets were great, and I’d put a bunch of money there. I ended up with a lot of random holdings.

    Now, my investment goal is to earn more investment income than my monthly expenses. That includes bond coupons, stock/ETF dividends, etc. I know that my primary investment vehicle is dividend-growth stocks with 4-5% yield. I diversify with municipal bonds and treasuries, which also provide me income. I have some REITs and MLPs to boost yields. And I speculate a little bit with emerging markets ETFs. If I feel the market is getting bearish, I know what I’ll liquidate first (emerging markets), and also where I will search for opportunities.

  • You don’t need to read every book out there While there’s a near-infinite amount of investment books, a few books will get you started – there’s little return on reading 50 books before investing a cent. Good starters include classics such as A Random Walk Down Wall Street as well as The Intelligent Asset Allocator and so on. Read these, and you should be comfortable enough to get started.
  • Ignore daily price movement Go to Google Finance. The headline every day will read something like “Investors nervous about Greek Bailout” or “Wall Street lifted by Employment Numbers.” Guess what? That’s bullshit. 90% of the time, the market’s movement during a day doesn’t matter. The major media outlets, such as CNBC, won’t say it, because their whole business model is getting you to read their ‘up to the second information,’ but in most cases there’s no story to the market’s movement. It’s just random. Watch trends. Read up on news on your holdings, as well as securities you’ve identified as targets. But ignore stories people have made up about why the market is up or down 2%.
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2 Comments

  1. Petra

     /  November 9, 2011

    As to point one: you can even practice before you have any money to put in. Practice on paper, imagine you have 10k to put in, pick the stocks and see how they fare over the months. Virtually sell them and buy others, too, if that’s what you want to do. It’s not the real thing, but you will learn a lot about the stock market that will be useful when you do have real money in there.

    Reply
    • m741

       /  November 9, 2011

      Yes, it’s possible to practice this way. However, investing is a lot like poker in that you can ‘play’ without real money, but it doesn’t work the same as when you have real skin in the game.

      Reply

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