Advice for the Young Investor

Don’t be fooled by the title of this post.  The advice I’m going to give will be of tremendous benefit to anybody of any age who’s just starting out on this great adventure of stock investing, or who’s still thinking about it but doesn’t know where to start.  (For you late-bloomers like me, perhaps another post I wrote will also be of benefit.)

However, I’m specifically targeting those of you in your younger years – your late teens to early twenties – because you have the greatest and most wonderful gift at your disposal:  time.  And believe me, you don’t realize the value of a gift like time until you’ve lost or wasted a whole lot of it!

Assuming you remain healthy, you could statistically be expected to live into your eighties.  This also means that you have over 40 years to prepare for when you no longer are willing or able to work full-time.

Those of you in your late teens to early twenties have the greatest and most wonderful gift at your disposal:  time

Now, I’m writing from the perspective of having about half the time that you do to prepare for those years, and if there’s one thing I wish I could do more than anything else, it would be to go back in time to my late teens/early twenties, knowing what I know now about investing.  If I could, I would have several times more accumulated wealth than I do now.  I might possibly be a millionaire, but alas, I can only write from the perspective of a hundred-thousand-aire!  But I’m off to a great re-start, so hopefully in twenty years I’ll be where you can be by that time!

So hold on as I tell you some of the things I’ve learned and put into practice these past couple of years in order to turn things around from the investing disaster that I used to be into the portfolio in which I now find myself.  This could be one of the most important things you’ll read at this point in your life in terms of impacting your financial future!

A tale of a twenty-something

I’d like to start with the story of a co-worker, a hard-working young man in his early twenties who caught the investing bug from ‘yours truly’ about a year ago.  We’ll call him Jim.  His dad had worked as a stock broker and so he had some familiarity with stocks and trading before we met.

Anyhow, Jim caught ‘the bug’ and so he asked me what to do next.  I told that him the best thing to do was get great advice, and to that end I recommended a stock-investing-advice service that has been instrumental in turning my investing fortunes around, literally:  The Motley Fool’s Stock Advisor.  Then I suggested he set up an online trading account in order to do his own self-directed trading as opposed to going through a brokerage.  Here in Canada, the best ones are those offered through the big banks, and they’re very quick and easy to transfer your money into.  I recommended RBC Direct Investing to him because they charge only $9.95 per trade with no strings attached (unlike most other online trading sites that may look cheaper but have all kinds of conditions).

However, I actually regret getting Jim excited about investing.  Why?  Because he’s missed a few key points about the whole thing that will cause him to miss out on a whole lot of money unless he can settle himself down and learn how to be a true investor.

You see, right now he’s too worried about investing.  He’s continually checking his phone throughout the day, wondering if now’s the best time to buy or sell this-or-that.  He’s also too impatient.  On those especially volatile days or weeks in the stock market, he often reports to me the next day or the next week about how he sold this-or-that because he couldn’t take it any more.  And so he takes a small profit here, a small loss there, and never really gets anywhere.  Meanwhile, those $9.95 trades start to add up after a while.

I just shake my head when I hear things like this, because despite all the advice I’ve offered – and all the advice at his disposal through the stock-investing service that I’m not sure he’s even read – he continues to invest like most people:  always worried and impatient and trying to control the situation instead of exercising the gift of time.

So in an attempt to help you avoid becoming like another Jim, here are some things I’d like to share that will hopefully get you off to a great start on this great adventure of stock investing!

1. Set aside 10% of your paycheck

The bottom line is that you can’t start investing in anything if you don’t have money.  And earning it is one thing, but having the discipline to set some aside is another.  Sometimes a formula is the best means to create discipline, and the idea of setting aside 10 percent of what you get paid toward investing is a very popular one.  The trick is to set it aside as soon as you get paid, before you pay for any other monthly expenses, and not hoping that you have that money at the end of the month!

After a few months of doing this, you might have a nice nest-egg saved up that could tempt you to want to spend it on something else, like a new phone or gadget.  So I suggest putting that money into a separate savings account, one that also forces you to wait at least one business day before you can withdraw or transfer your money.  This is one way to protect your investing nest-egg from impulse buying.

After you’ve saved up several hundred dollars (I’d suggest at least $500, but $1,000 is better), I would suggest transferring the money from your savings account to your investing account and then buying shares in one of the stocks you’re interested in (more about finding those later).  Then after saving another $1,000, buy shares in another stock, and then another, and so on.

Sometimes a formula is the best means to create discipline, and the idea of setting aside 10 percent of what you get paid toward investing is a very popular one

Why so many stocks instead of just one?  Have you heard of that term, ‘Safety in numbers’?  You minimize your risk by having your money invested in several different stocks instead of just one.  You don’t have all of your ‘eggs’ in one ‘basket’.  If that one stock goes to the moon, then great – you’ve lucked out and chosen well!  But if that stock takes a big hit – which any stock in existence has experienced at some point – then so has your money.

Some investors starting out want to minimize their risk even further.  Here in Canada, the major banks allow a person to invest a minimum of $25 per month into a no-fee or low-fee mutual fund through an automatic purchase program.  Of course, you can invest more than that, and/or invest twice a month, etc.

A mutual fund is just another way to own stocks.  A mutual fund is a collection of a whole bunch of stocks and sometimes a mix of bonds and other investments as well, chosen and maintained by a professional portfolio manager and not an amateur like you!  They’re like a satellite TV package:  you buy the package, the satellite TV company picks the channels.

There are mutual funds for different industries (health care, transportation, technology, etc.), for different parts of the world (U.S., North America, Europe, etc.), and for different mixes of investment type (stocks, bonds, T-bills, etc.).  You simply choose what type of fund you want.  In this way, your money is in a whole bunch of different companies right off the bat instead of one at a time.

My wife’s retirement account has a mutual fund that pays a monthly dividend which is automatically used to buy more shares in that mutual fund.  Buying mutual funds is how I started out over 20 years ago, then once I learned about stocks and gained confidence, I started moving that money into stocks.  It’s as though I’ve created my own mutual fund by buying a number of different stocks, and I get to pick them, not somebody else!

Investing only $25 per month will take a very long time to build any sort of reasonable nest-egg, but there’s more than one way to do this.  Sticking with the 10-percent idea, perhaps you could auto-invest $25 or $50 per month into a mutual fund or an index fund (like the Vanguard S&P 500 ETF, ticker symbol VOO) and then save up the rest of your 10 percent toward a future stock purchase?

2. Seek great advice:  successful friend/relative, investment advisor, newsletter?

What totally turned my investing record around from disaster to where it is now was approaching an uncle of mine who has been investing in stocks for many years and simply asking him where he got his stock advice.  However, I only asked in the first place because of the many stories I had heard about his success over the years.  Make sure you’re getting advice from successful people!

Now, if you’re intimidated about approaching someone much more successful or older than you, know from my experience that often such people are more than willing to tell you what they’ve learned.  Their success is like a badge of pride, and so they like to tell their story whenever they can.  They’re far more likely to be flattered than insulted or annoyed!  In fact, every successful person I’ve ever approached has never been insulted or annoyed.

If you don’t know such a person, head to your local bank or investment brokerage and set up an appointment.  But by all means, don’t be afraid to ask the person advising you on how to invest about how they’re doing with their investments!  If they appear awkward or their attitude suddenly turns negative, then perhaps they’re hiding something.  Either they’re not doing so well, or they’re recommending something they’re not invested in themselves, or they’re only selling you what gives them the highest commission instead of what’s best for you.  In any case, end the appointment as soon as possible and seek advice elsewhere.

So, back to my uncle.  What was his advice?  Again, my investing fortunes have been turned around largely due to subscribing to a stock-investing-advice service, and this is what my uncle advised me to do because this is how he has successfully picked stocks for many years.  If you go to my contact page, I’m more than willing to tell you the services that he and I each subscribe to (no strings attached, by the way).  I don’t specifically state their names in my posts because they don’t pay me to recommend them!

3. Learn as much as you can (about investing in general, companies and industries in particular)

I don’t just learn a ton about individual companies and how to invest from the service I’ve subscribed to.  Sure, I start there for stock recommendations, but then I learn more about these companies by looking at other resources.  I like to be confident about what I’m thinking of putting my hard-earned money into.

For example, I learn a lot by using things as simple as the Stocks app on my iPhone!  When you enter the ticker symbols of companies you’re interested in (for example, UA for Under Armour or AAPL for Apple), you can see price history charts and read news articles from many different sources about these companies.  In fact, I first found out about The Motley Fool by reading some of these articles.

As I learn about individual companies, I start to learn about different companies doing similar things, but more importantly, I also start to learn about entire industries.  And then I learn about how one industry benefits or complements another.  This teaches me a whole lot about investing, economics, politics, technology, etc. in a much more interesting way than by taking courses!  And most importantly, this makes me a wiser investor.

Once I learn a lot about a company that I’m interested in, usually a leader in its respective industry, I buy shares of it after I’ve saved up enough money.  Research like this is a great thing to do while I’m saving up because it gives me time to really think seriously about my decision.

Lastly, learn from famous investors (not your uncle, unless he’s also famous).  Warren Buffett, Benjamin Graham, and Peter Lynch are just a few names that come to mind.  After a while, your actions will start to reflect their success.

4. Make time your friend, not your enemy!

It has been said that time can be your greatest friend or your greatest enemy depending upon how you use it.  (The same is true with money.)  If you respect it and use it to your advantage, it can reward you with wealth.  If you don’t use it to your advantage and don’t make deliberate decisions while you’re young, you’ll wake up one day and realize that you’re 40 years old and broke or an investing disaster.

So, how do you make time your friend?

  1. Start investing as young as possible.
  2. Once you buy a company’s stock, don’t EVER think of selling it unless something starts to go really wrong with the company.  (The exception:  a critical life emergency.)

As you read more about people like Warren Buffett, you’ll start to see a pattern emerge:  buying a number of quality stocks and then holding onto them for a long time (3 to 5 years at the very least) is the only statistically proven way to increase your wealth through investing.

People like Jim who sell a stock after only a short time – the traders – are only ever making small gains and taking small losses while paying $9.95 every time they buy and sell.  When they do get ahead, they don’t get ahead by very much because they haven’t waited long enough.  But people like Warren Buffett or the brothers David or Tom Gardner or heck, even unfamous people like me! – the investors – who buy and then hold on for the long term, make tremendous gains that statistics show the trader will never experience.  Some of those gains are hundreds of times more than the money they originally invested!

Buying a number of quality stocks and then holding onto them for at least 3 to 5 years is the only statistically proven way to increase your wealth through investing

I hope you’ve learned a lot by reading this and that you now have some direction about how to get started in the wonderful world of stock investing!  Again, please contact me or leave a comment if you want to know more.

One last thing (I promise!):  be sure to click the Follow button near the top of this page.  Also, since you’re a brand-new stock investor, I highly recommend moving on to the more in-depth advice of my 5-part Stock Starter Series.  To new beginnings!

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