Tips for the Investor Who Started Too Late

A popular mantra that people constantly hear about from the investing community is how important it is to “start early”, ideally when one is in their early twenties.  Now by investing, I’ll be referring to investing in the stock market either directly through buying stocks or through mutual funds and other types of investing “vehicles”.  If you want advice about different forms of investing, like real estate, your own business, yourself (i.e. education and training) and the like, these might be topics for another post/posts.  But for now, I’ll be talking about stock investing.

Anyhow, the whole “start early” idea is certainly a great one, but unfortunately some of us either didn’t have our act together until much later, or we’ve been investing for a long time but mistakes have set us back to the point where we don’t have much left to work with.  Now with way less time to work with, the temptation is to do some pretty stupid things to try to increase our retirement savings, like gambling on penny stocks or trying to get one of our children to become a sports superstar or sinking money into lottery tickets.

If any of this describes you, then this post if for you because I found myself in a similar situation up until only a couple of years ago.  My parents started me off with a couple of mutual funds in my early 20s as a sort of gift to get me started.  However impatience, thinking I knew better, and getting nailed by a few economic crashes over nearly twenty years left me little to show for it even though I had eventually pumped in a lot of my own money.

How did I get back on track?  More importantly, how can you get back on track, or even started if you haven’t started yet?  Here are some ideas that might help.

1. Get good advice

After becoming a self-directed investor, i.e. after getting set up on an online trading account, I operated on the advice and whims of others and high hopes.  That’s about as stupid as buying a house just because it looks nice instead of getting it inspected and doing research about the neighborhood and local market.  Frankly, I didn’t know where to look for good advice on what stocks to buy, and I didn’t want to go through an investment advisor or broker again because, as I learned through experience, they had the same knack for losing my money as I eventually did.

After thousands of lost dollars gambling on small-cap and penny stocks, I was fortunate a couple of summers ago to be able to ask my wealthy uncle his advice on the matter.  He suggested to me that, like him, I subscribe to investing newsletters.  (As I’ve learned, he actually meant ‘stock advising services’ that typically send out a periodic newsletter and updates about their latest picks and general market commentary.)  He then told me some of his success stories by following the advice of such people who know a lot more than him and me.

To date, I have found excellent advice through services offered by The Motley Fool and Cabot Investing Advice.  They’re motivated to give you good advice because great returns give them something to brag about in order to win new customers, so it’s a win-win for everyone as they’re very good at picking more winners than losers.  (By way of warning, nobody – not even Warren Buffett – earns money in all their stocks!  Successful investors just hold on to their winners for a LONG time and ditch their losers in the process before they lose too much.)

If you’d prefer to get personal advice through a bank or brokerage, by all means do so.  But carefully consider whether they really have your best interests in mind, or are the fees of going through them going to severely limit eat into your profits in the long run?

2. Get out of debt

It’s hard to find money to invest for the future when your current debt is eating you alive.  However, like investing, the money management required to get out of debt takes great discipline.  There are many great resources about how to get out of debt, but many followers of Dave Ramsey’s methods have had incredible success doing so.  That might be a good starting point.

Some people have the mindset of being impatient about getting out of debt, so they borrow money to invest and get into even more debt, hoping that their rate of return will be greater than the interest rate on their debt.  However, impatience is the major reason why people get destroyed by the stock market, so I’d first suggest developing patience through the discipline of getting out of debt before investing a single dime in the stock market!

3. Set a 10% goal

Being a Canadian, I first read about this tip through a famous David Chilton book in the early 1990s called “The Wealthy Barber”, and I’ve heard about it from many other sources since.  However, I never got serious about forcing myself to invest 10% of my net income until – surprise! – only two years ago.  It’s funny how mistakes and wasted time can force one to smarten up, isn’t it?  If you start this in your early 20s and buy quality stocks (not the garbage I used to “invest” in), who knows where this will get you in another 20 years!

What I do is set aside 10% of my net income from each paycheck in my bank account.  Once I have about $2,500 U.S. saved up, I transfer from my bank account into my online trading account.  Sometimes I’m even patient enough to wait for market dips in order to buy some shares in one of my favorite stocks!

4. Don’t buy garbage stocks

I could write an entire post on this topic alone.  Prior to 2013, I was not an investor in stocks but rather a gambler.  By that, I mean that I was trying to find that one sure-fire winner that would quickly make up for all the time and money I had lost to that point.  So I was allured by the only type of stocks that I thought would promise a quick doubling, tripling, etc. of my money:  penny stocks!  Well, those and other very small-cap stocks.

There are many problems with penny stocks.  First, only a tiny fraction of them ever grow beyond that status.  Also, if you spend $1,000 on a penny stock for 5 cents a share and it drops down to 3 cents a share and never recovers (as they rarely do), you’ve already lost $400.  And on the extremely rare occasion that it doubles or more, most people get greedy and don’t take a profit, then ride the stock below the price they bought it at where it almost always stays until the company goes out of business.  Those who do sell and make a profit most often buy another penny stock (another “slot machine”) or buy back into the current one at a lower price, where again the stock usually languishes until it exists no more.

Penny-stock investing is a trap from which no investor has ever come out on top.  It’s not worth trying even if you think you’ve got all the time in the world.

People who claim that the market has “robbed” them have practiced this sort of lunacy.  By doing so, the stock market has become a one-armed bandit instead of a legitimate investment vehicle.  Thus the saying:  “How do you end up with $1 million in the stock market?  Invest $5 million!”

Once I discovered a very good stock advising service, whom you’re paying often only a few dollars a month in order to pick the few best stocks out of the thousands available, I started to dig into the ones that interested me the most and created my own watchlist.  Once I’ve saved up enough money, I either buy a starter position in a new stock or increase a position in one of my winners.

By following the above steps, I may not have generated an incredible return in these first two years, but it’s been a positive one!  Prior to that, my returns were always negative and they got worse every year.  I also believe that I’ve built a very solid foundation based on some pretty strong companies and admittedly some smaller ones (and thus smaller positions) that some investment services – combined with my own research – claim have great potential.  Therefore, I’m excited to see where I will be after a few years of patiently holding onto my winners.

Hopefully now you have some hope that you haven’t started this great adventure of investing too late after all!

One last thing:  be sure to click the Follow button near the top of this page.  Also, if you’re a brand-new stock investor – or still thinking about it – then I highly recommend starting with my 5-part Stock Starter Series.  To new beginnings!

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