Have you heard of these before?
- Stocks or bonds.
- Or was it stocks and bonds?
- Mutual funds?
- Index funds?
- Maybe index mutual funds?
- What about IRAs?
- How about Roth IRAs?
Where do you start? Where are you supposed to start? Is it really as hard as it sounds?
Investing is sometimes propped up as this big complicated entanglement of information and acronyms. Truth is, there’s only a few areas you need concern yourself with.
What are they?
I can tell you they’re not stocks and/ or bonds, not mutual and/ or index funds, and not IRAs (Roth or otherwise).
Instead, it’s much more personal. A few key areas that you know well, or that you will have to figure out.
Follow along.
Start with A Goal in Mind
Before you get down to business, why do you want to invest?
That’s not a rhetorical question. Seriously, why bother? Do you want to build up a decent nest egg for you and your spouse? How about send your kids to college without crippling debt? Maybe you just want to be able to not work so much as you near retirement age.
Whatever your reason for wanting to invest, you need to do it with a goal in mind.
A goal is a practical, attainable, and arguably tangible measure to getting what you want. Without one, you’re likely to dilly-dally and flounder your way in the dark as you trip over unforeseen obstacles. Your goal is like a flashlight that helps you navigate and avoid any potential pitfalls.
Also, having a goal is a good way to prioritize what matters most in your life. If you want to invest in order to provide for your children’s education, you also need to start thinking about what kind of education it is. Community college or ivy league graduate? Does their field require a Master’s or PhD? What if they want to study abroad?
Variables will affect how much time you’ll need to invest. It also affects how much you need to put away in order to meet a reasonable deadline. It forces you to work within your means; an ivy league school looks good on paper, but if you’re unable to save the necessary monthly amount, you’ll have to re-evaluate the plan.
You don’t need to have every little detail down to a T, but you do need something.
The Hunting Analogy
If you’re still unconvinced of your need to invest with a goal in mind, consider this analogy.
Imagine if you went hunting to prepare for the long winter. You put on your camouflage, grab your rifle, and head out for the forest. You even remembered to bring bullets this time. But instead of analyzing tracks, using bait, or waiting up in a tree stand for any animals to pass by, you close your eyes, point your rifle in a random direction, and fire.
Sounds silly, right?
It is, and so is investing without a goal in mind. If you invest without proper preparation, research, or intention, it’s sort of like hunting with your eyes closed. Throw your money into some random stock because Joe-schmoe said so, and you’ll probably be eating bark all winter.
Okay, so you’re not a complete idiot (I hear some of your moaning in your head), but again, consider the variables at play. Are you just hunting for yourself or do you have a spouse too? Do you have children? A lot of children? Do you have to feed your entire village? Did you make a deal with the butcher down the street? Variables like these are what determines the need to hunt a few rabbits or a few bears.
Are you single and just looking to coast through retirement? Or do you have a large family and wish to see them get through the early years comfortably? Perhaps you own a small business and are in charge of some people’s livelihoods. Or do you plan on creating a big business that will leave an imprint on the world?
Having a goal in mind helps you steer your ship through the investing waters.
Plan for Future Changes and Complications
You’ve got it. You battened down the hatches, turned off the TV, and have it.
A goal. A real life goal to shoot for.
Now, you know what else you need? A buffer.
That’s right, you’re not quite done. A buffer doesn’t have to be big, just big enough to reach your goal. It’s what separates you from working a few more soul crushing years, or from your business benefiting that much more. I’m talking about Murphy. In case you don’t know, “Murphy’s Law” is an adage about expecting the worst, because “if it can go wrong, it will go wrong.”
You don’t have to expect the worst, but you should definitely prepare for it.
Since you’re at the start of your investment voyage, now’s the time to really think about possible run-ins with Murphy down the line. Plan on only having two kids? Well so did your co-worker Ryan. Now he has seven. You want to retire in Italy? Well so did your neighbor Barb, but a tree fell on the house. Now she’s stuck in the States because all her savings were used to buy another home.
Life happens. We all know this, yet some people are utterly shocked when it does. Accidents, natural disasters, medical diagnoses, family emergencies, lay offs, crime, the market plummets,… you get the idea. Luckily, or maybe unluckily, Murphy makes random visits. The good news is that you can increase your odds of shooing him away when he arrives.
You won’t be able to avoid Murphy completely, but you also won’t be holding up a flashing neon sign inviting him into your house.
Make a Promise
Right now. Say to yourself, “I promise to invest for [insert your goal here].” Whisper, shout it, I don’t care, just make a promise that you’ll actually follow through and invest for what you say you’re going to invest.
Know the Game You Want to Play
So you have some numbers down. Retirement, college, Italy, something. You’re ready to dive in and grab the bull by the horns.
There’s just one problem:
You don’t know how any of it works.
Stocks and bonds? Mutual funds? IRAs? Okay, so you did a quick google search and found a bunch of companies vying for attention to put your hard earned money into their hands. But who do you go with? More importantly, who do you trust?
Get the Right Kind of Help
In his book, “MONEY Master the Game: 7 Simple Steps to Financial Freedom,” Tony Robbins equates brokers to butchers. If you go to a butcher, he’s likely to sell you meat, regardless of what you want to eat. Why? Because he has a strong incentive to do so. Likewise, a stock broker is likely to encourage you to buy into a mutual fund tied to his company. Why? Because he earns a commission and thus has a strong incentive to do so.
Not a great start. Instead, search out a fiduciary.
In the same chapter section, Tony equates fiduciaries to dietitians. Both are paid to tailor their services to your specific needs, not theirs. A fiduciary is a financial adviser, but the main difference is that they’re legally obligated to have no conflict of interest when working with you. At the very least, they must disclose if they do.
*Note: Remember, just because someone has the title of “fiduciary” doesn’t mean they’ll provide the best or acceptable service. Always research before you invest.
Know Your Limits
We’re not all born with the same athletic, academic, and artistic abilities. The same is true with finances. We’re all born to different socio-economic classes. Some of us are fortunate to be born into a family where the biggest worry is what sweater to wear for the Christmas photo. Others are born into poverty and literally don’t know when their next meal is.
Of course, not everyone stays on the same rung of the ladder. Some are born with a silver spoon and lose it all with reckless spending habits and actually have to work for a change. Others work themselves from rags to riches where they can finally take a day off to relax.
In the meantime though, you should know what resources you have available and where your strongest capabilities lie.
If you have a desire to work in a specific field, make sure you can actually hack it. That sounds harsh, but there’s nothing quite like spending eighty plus grand on school just to find out you suck harder than you thought you did. On the flip side, if you don’t have the money to make large investments, you don’t have the money. Period.
Sure, you could always take out a loan to fund your new brilliant idea, but if you don’t have discipline to follow through, you’re now in debt and have a failed business you can add to your resume.
Know your limits. If you don’t know them, ask your spouse, family, and/ or friends. They’ll probably be more than happy to tell you all your shortcomings. It’s tough to hear your weak spots. It’s even tougher to climb out of a financial hole you didn’t need to dig in the first place.
Prepare for Future Changes and Complications
Make sure that your investment strategy aligns with your goal. If you know the year your children will be attending college, be sure that you can cash in your mutual fund without incurring a steep penalty for early withdrawal. If you know you plan on settling down in a different country, make sure your business is portable, or be prepared to go through the real estate process of selling and buying.
Murphy is always at the ready, and you should be too. If you own and/ or operate a large business, be prepared if the market takes a dive. Have fail safes in place so you’re not scrambling to catch up. If you plan on just saving for you and your spouse, consider if there are any other family members, like a parent, who might move in, or if you need to help them settle in somewhere.
Expect the best, prepare for the worst.
Make Good on Your Promise
So you have a plan and you’ve done your research.
All that’s left is to do it.
“Just do it,” to quote Nike.
Knowledge and wisdom are under-appreciated values. You know what’s even more under-appreciated?
Application of said knowledge and wisdom.
We know it’s bad to smoke, but that doesn’t stop some people from smoking three packs a day.
Information without action, is still non-action.
One Last Thing
Money is a tool. It’s paper. In the United States (and most of the world), we have fiat money. Meaning, that green piece of paper doesn’t have any inherent value, only the value we give it. Therefore, money merely multiplies whatever base characteristics we have. If you’re nice, money provides you more opportunities to be nice. If you’re an a**hole, money gives you more opportunities to be more of an a**hole.
Money doesn’t actually change you, it just amplifies who you are.
I have an anecdote this time, not an analogy:
A man walks up to a woman in a bar and asks, “If I gave you a dollar, would you sleep with me?”
Angered, she slaps him and exclaims, “Absolutely not!”
Before she leaves, he asks, “What about a million dollars?”
She pauses, then says, “Actually, I would.”
“Okay then,” he says, “How about twenty bucks?”
Angered again, she says, “Of course not! What kind of woman do you think I am?”
He replies, “Oh we’ve already established what kind of woman you are. Now, we’re just negotiating.”
Crude humor aside, it illustrates a very good point. Rich people are criticized for being rude, pompous, selfish, aggrandizing, and a whole bunch of other negative traits, simply for having a lot of money. Yet, plenty of poor people have these same character traits in droves. It’s not the money that creates the character.
Money is more of a bullhorn. It increases your visibility due to what it can provide.
If you’re looking to get rich, you don’t exactly need the “right” reasons to do so. But you better make sure it’s not for the wrong ones.
