How not to lose your shirt when investing

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There are many reasons people start investing, including saving for retirement and building wealth. But one of the best reasons to start putting money in the market is that it will grow faster than if you left everything in a bank account.

Of course, investing also involves certain risks. Stocks can go up in value, but they can also go down. And if you’re not careful, you could lose money. One of the worst mistakes you can make as a newbie investor is thinking that putting money on the stock market is a quick way to make a lot of money.

A new survey by Select and Dynata has found that young investors also invest for fun. In fact, more than half (61%) of 18-34 year olds agree that they invest because it is exciting to ‘gamble’ in the market. This is the highest percentage of all the age groups we surveyed. By comparison, only 16% of investors 65 and over agreed that they invested in the market for fun.

It’s easy to simply override these findings and attribute them to the fact that risk tolerance tends to decline with age: young investors, further away from retirement, may have more fun in the market than investors. older people who are approaching their non-working years and may want to be more conservative.

But younger, less experienced investors should be wary. While you may enjoy the sudden excitement when a stock price rises, one day you will have to deal with the stress of seeing the stock price drop.

“I think there is a real difference between investing and trading,” says Sallie Krawcheck, co-founder and CEO of digital investment platform Ellevest. “Trading certain types of securities can be like gambling, but historically the market wins. Non-professional traders, recreational traders, have historically ended up losing. “

For investors looking for a thrill, here are some tips on how to invest to avoid losing your shirt completely.

Only invest with money you can afford to lose

The money investors use to fund their market thrill seekers should be money they are financially comfortable losing, says Erin Lowry, author of “Broke Millennial Talks Money” and “Broke Millennial Takes On Investing ”.

Investing comes with risk, and even more so when you choose individual stocks over diversified funds. With diversified funds, your money is spread across various stocks, so it is more likely that when some stocks in your portfolio go down, others go up and balance the loss. However, when you put your money in individual stocks, that risk is concentrated on that one company. For this reason, financial advisers recommend that you only trade individual stocks with money you can afford to lose.

Before investing, Krawcheck recommends that you ask yourself, “How will I feel if this drops to zero?” Will I be okay? Did I have enough fun along the way? “

Refrain from using your retirement money

Whatever you do, don’t use your retirement money to fund your investments. The money you set aside for your non-working years should be kept in a tax-efficient retirement account for the long term. These accounts, like IRAs, are made up of a mix of investments like mutual funds, ETFs, and bonds and you can rebalance it to suit your retirement schedule.

When investing in individual stocks, Lowry suggests that it’s okay to learn by trying as long as you don’t put everything you have at risk – and that includes the nest egg you’ve built up during your retirement years.

“I don’t want you looking for thrills with your retirement account,” she says.

Establish rules in advance

While Lowry doesn’t like the analogy that investing is like gambling, she acknowledges that “if the whole problem is an emotional jolt, it’s a lot more like gambling.”

If you are looking to trade stocks like you do in a casino, you should follow the same rules you set for yourself on a trip to Vegas. Give yourself a certain amount of money to invest, and when you have run out of it, don’t let yourself invest more.

Experts generally suggest setting aside 5-10% of your overall investment portfolio for stock picking in a taxable brokerage account. “Basically it’s about how much loss you can take,” Lowry explains.

If you’re not comfortable with all of the concentrated risk of buying individual stocks, it’s okay (and arguably a smarter decision) to stick with a diversified investment portfolio where the risk is spread. on a wide variety of asset types and investment vehicles. With diverse portfolios, things have to be really bad to get to zero, says Krawcheck.

Recognize how difficult investing can be

When it comes to investing in individual stocks, some people will make a lot of money, but it’s more likely that you’re just putting your future financial stability at risk.

“Every bull market has a bunch of new traders who come in and say, ‘It’s easy,'” Krawcheck said. She cautions that this new class of traders should be wary of the fact that the market tends to end up winning.

“I don’t know of a single hobbyist trader who has retired,” adds Krawcheck.

Newbie investors should feel good about starting with a more manual approach to the market using a robot advisor that does the work for them, offering low-cost diversification and regularly rebalancing their portfolios automatically.

Betterment and Wealthfront are two pioneers of the automated investment space, the first which also provides access to a human advisor. Betterment’s premium plan allows users to get unlimited access to a financial advisor, and the advisor’s one-time consulting fee ranges from $ 199 to $ 299.

Don’t pursue what others pursue

Following trends is one of the biggest mistakes an investor can make.

“Even a stock of memes,” Lowry says. “This bubble came so quickly.”

We’ve seen enthusiastic new investors launching into AMC and GameStop in January 2021 and some have made millions, but those who follow the trends often come too late once they hear about it and end up buying for the best price.

“As soon as your grandmother knew what bitcoin was, you wouldn’t have the same opportunity to amass insane wealth,” Lowry explains.

Beware of gamification investment tools

Understanding the tool you are using to invest is essential. With gamified apps, Lowry points out that investors may be tempted to make particular moves that aren’t the best for their portfolio.

“Your game is not realized until you sell,” she adds.

To be a successful investor, you need to determine your own long-term investment goals and ignore push notifications alerting you to market rises and falls. In fact, experts often warn against over-monitoring the market as it is constantly changing. You are better off leaving your investments alone for the long haul than trying to keep up with the excitement of the stock market. Create an investment account with a recurring monthly transfer and forget about it.

Recognize broader gender norms

It is important to understand that your investing behavior can be the result of our social environment.

There is a clear difference between how women and men are conditioned to think about investing, says Krawcheck. While women tend to think that they are not so smart when it comes to money, the exact opposite is true of men.

“Our society expects men and sends them messages that money is something they should be good at,” Krawcheck said. “What worries me is that men are overconfident and women are not very confident. This socialization is also important here.”

In other words, men’s overconfidence can lead them to make exciting investment decisions because they feel it fits their perceived role in society. It’s part of male behavior to be good at trading, and a big win in the market is something to brag about later in the conversation, says Krawcheck.

At the end of the line

While it’s important to start investing early, young investors who choose stock picking for the thrill could very easily find their strategy backfiring.

Before you even start investing in individual stocks, make sure you have the basics: you’ve paid off any high interest debt (hello, credit cards), have an emergency fund, and you’re investing – and meet n any business. – in your 401 (k).

Once you’ve checked these boxes, follow the tips above. Invest in individual stocks with extra money you can lose, set limits ahead of time, know it’s not easy to ‘win’, forget about trends, make sure your tool is investing works for you and don’t feel pressured to be a thrill-seeking investor just because the company makes you feel the way you should.

Select The survey included 1,006 US respondents in total and was conducted by Dynata between August 12 and August 18, 2021.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.

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About Daniel Lange

Daniel Lange

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