How do you start investing? Where do you invest? And when do you know when you’re “ready” to do so? I’ll be walking you through the blog’s best investing articles to answer all that.
But to understand things better, let’s look at Bernie Madoff; a former chairman of the Nasdaq. Because of his credentials, people trusted him and they invested in his fund. He promised them a 13% to 20% annual return. Even if the Standard & Poor’s 500 (which tracks the performance of the top 500 companies in the United States) is only posts around 10% annual returns.
Madoff started taking people’s money in the 90s. In 2008, he was finally caught. The whole operation was a Ponzi scheme: Madoff was merely taking money from his clients and circulating that money as “returns.” Investors lost a total of over $17.5 billion.
The lesson of this story? Don’t believe everything you see/read about investing. Even people who have “respectable investing credentials” are not entirely trustworthy. Always remember that if an investing “opportunity” sounds too good to be true, then it likely is.
Here is what every beginner and intermediate investor needs to succeed: Knowledge and understanding of what they’re investing in. You don’t need to read every spreadsheet. But you do need some basic understanding.
In this guide, I share the most important things investors need to know before they invest. By taking the time to learn more now, you can avoid losing too much money in the future.
On This Page
- 4 things to know before you invest
- Investing principle: Stoic Investing
- How to avoid losing all your money
- Read all articles on investing
4 things to know before you invest
Before you start investing, ask yourself: “What is my investing goal?”
Is it to build long-term wealth, with the goal of a comfortable retirement? Or a means to increase your income? The best way to invest always depends on your investing goal. This leads to:
- Know the difference between short-term trading and long-term investing — If you’re investing to give yourself a comfortable retirement, then your goals are long-term. But if you’re investing to increase your income, then you’re looking at a shorter horizon.
- People who invest for the long term are best investing in the S&P 500 index fund where the returns are more substantial as time passes. We’re talking decades of compounding.
- Meanwhile, those who aim to increase their income in the stock market will likely find interest in active trading. This is where the horizon is a few months to several years.
- Personally, I don’t try to increase my income by investing: That’s what my career is for. Instead, investing is a tool for me to use the power of compounding.
- Investing is a habit, not an act — Making a one-time, lump-sum investment won’t go far. And if your investing goal is to build long-term wealth, then you’ll need a consistent investing routine.
Since the market is volatile, I apply the “dollar cost averaging” system. You can learn more about that method here. With this strategy, you can become a millionaire by investing 500 bucks a month. It’s all about consistency.
- Understand corrections and bear markets — “Market correction” and “bear market” both mean a period of decline in the stock market. But they’re not the same. By definition:
- A correction happens when the market drops at least 10% from its most recent high. This usually happens once every (roughly) 2 years. And it’s often because a major event or economic shock made investors sell more than buy.
- A bear market is a decline of 20% or more. And it lasts from a few months to an average of a little over a year. Bear markets occur every 7 years on average in recent decades. They primarily happen because of low economic growth.
- When you know whether you’re in a bear market or a correction, you’ll have a better idea of your next steps as an investor.
- Spot get-rich-quick schemes — Investing comes with two powerful emotions: Greed and fear.
When we hear about an opportunity to make more money, we feel an itch. That itch is greed. When bad things happen to the economy and investors start panic-selling, that’s fear.
The key is to identify these emotions when they arrive, ignore them, and stick to our plans. Many of the people that Bernie Madoff defrauded were professional investors. Yet, why do smart people get scammed into bad investments? That’s because emotions are involved.
When you know how to manage your emotions, you become better at managing your investments.
Investing principle: Stoic Investing
Investing comes with pain. Every time you make an investment or trade, you have to deal with various risks. If you’re afraid of those things, you will make life unnecessarily hard for yourself—especially when there’s a market downturn.
So it boils down to how we manage our emotions. During bull/bear markets, corrections, and so forth, people’s emotions lead them to get in or out of the stock market. The people who come out on top are those who managed to not allow fear and greed to take over their investing decisions.
This is where philosophy comes in. I find the ancient stoic way of managing one’s emotions to be very effective when you start investing.
The Stoic philosopher, Epictetus, talked about how we blame others or ourselves when bad things happen unexpectedly. Like when people blame the market during low economic growth. Or those who blame themselves for their lack of skill or foresight when their investments are down.
But as Epictetus said:
“When you blame others for your negative feelings, you are being ignorant. When you blame yourself for your negative feelings, you are making progress. You are being wise when you stop blaming yourself or others.
You can’t worry about things that are outside of your control. This is a good way to look at a market downturn. If we want to build wealth over time, we need to keep investing so we can benefit from the power of compounding. We can’t allow our emotions about short-term fluctuations to get in our way.
How to avoid losing all your money
Jesse Livermore is a Wall Street trader who’s famous for making and losing millions in the early 20th century. One of the lessons I’ve learned from studying his life is this: As long as you avoid financial ruin — anything that drastically reduces your net worth — then you’ll eventually build wealth.
When Livermore shorted the stock market in the crash of 1929, he made around $100 million in a matter of days. Yet, he was broke by the time he died in 1940. That’s because his lifestyle and investing decisions made him lose huge portions of his wealth over time.
The best way to avoid losing a lot of money in the stock market is to avoid these investing fallacies:
- “You must start early” — You’ll do yourself more harm if you invest when you’re not yet actually ready to do so. Instead, assess your personal finance first. That’s how you’ll know when you’re ready.
- The extrapolation bias — Just because you made money on an investment doesn’t mean you’ll keep making more over time.
- “This time it’s different” — Investors often say this during market bubbles. During the 2021 tech bubble, people were overly enthusiastic, thinking it would be different from the 2000 dot-com bust. We now know it wasn’t very different after all.
- The “Hot Hand” — Similar to a basketball player who suddenly seems to score with every shot they make, the hot hand fallacy puts us into the mindset that we can keep playing because we’ll keep winning. This happens a lot during bull markets where people often mistake their positive returns for their investing skills, and not because of the simple fact that the market is simply in an upward trend.
Smart investors manage to stay in the game even during market downturns. It’s all about recognizing the patterns in your own thinking and avoiding investing fallacies.
When it comes to investing, you even don’t need to know everything. As long as you know your goals, stick to your plans, and avoid investing pitfalls; you’re already ahead.
Read all articles on investing
- Money Fallacy #1: The Checks Will Not Always Come
- The Perfect Time to Start Investing: When Prices are Low
- Why Investor Behavior Never Changes
- 4 Things to Know Before You Start Investing
- ”This Time it’s Different” and 2 Other Investing Fallacies
- 8 Reasons Why the 1929 Stock Market Crash Won’t Happen Again
- What to Do During a Recession: A Timeless Strategy
- 3 Lessons About Building Wealth From an Investing Legend
- How Writing Made Me a Better Investor
- Investing and The Fear Of Missing Out
- Uptrend vs Downtrend: Why Everything is Directional
- 11 Things Every Stock Market Investor Should Know
- How Losing Money Can Help You to Earn Money
- Money Is Time—Not the Other Way Around
- 5 Destructive Money Habits to Quit Today
- What I Would Do If My Net Worth Went to $0
- 9 Money Principles I’d Tell My 17-Year-Old Self
- Earn, Save, Invest: 3 Rich Habits for Life
- Become a Millionaire… With 500 Bucks a Month
- Why Short-Term Solitude Makes You a Better Thinker
- Stoic Investing: Why managing your emotions is the key to building wealth
- Opportunity Cost: Master Your Options—Master Your Career
- The Five Pillars of Wealth Building
- How Do People Become Wealthy? 2 Case Studies
- On The Cyclical Nature Of Life
- Investing Fallacy: ‘You Must Start Early’
- You Can Achieve Anything If You Focus On ONE Thing
- 5 Money Rules That Will Increase Your Net Worth
- Always Protect the Downside
- How I’m Getting Richer Every Day
- 8 Books That Teach You to Be Rich
- The Power Of Compounding: Good Things Take Time