What Do I Know About Investing?

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Last updated on December 22, 2011 Views: 547 Comments: 14

Flexo has often touted the benefits of using a real credit card (as opposed to a debit card) for daily spending, and paying off the balance each month. I guess this finally permeated my skull, since as soon as I saw the news about a credit card that deposits 2% cash back into a brokerage account, I went and got one. At the time, I knew as much about investing as my dog knows about plumbing. I also don’t know a lot about plumbing, but I know how to fill up a water dish, and that’s all the dog cares about.

I did a lot of reading online in preparation, and I’ll be doing a lot more. I even got one of those best-selling books, but I didn’t like what I read in it. That’s okay; it’s just as important to know what you don’t agree with as what you do agree with. There are still plenty of terms I couldn’t define for you, like “solvency”, but my eventual goal is to be a wise, seasoned investor. To start with, I thought I’d summarize for you the things that I’ve read that have resonated with me.

Invest only with the money you don’t need

For the purposes of this article, I’m going to have to assume that you’re not close to retirement. If you are, don’t listen to me. The rules are very different for you; please talk to a financial planner.

I use the phrase “money you don’t need” because I want you to think about the big picture. Think about your monthly budget, savings goals, 3-month emergency buffer, upcoming vacations, birthday and yuletide presents, lofty home improvement goals, and your daydreams of moving somewhere with a nicer climate. Now that you’ve thought about those things, do you have any money leftover? In other words, is it just sort of hanging out in a savings account? If you do, you can consider investing it.

Note: There’s at least one exception to this guideline: company-sponsored 401(k) and IRA plans. If your employer has one of these, and if they’re matching some part of your contribution, take them up on it. My employer is matching 100% of the first 3% of my gross paycheck I contribute, so I’m contributing 3%. This is free money your employer is offering. Now, there’s a good chance that the matching contribution they’re making won’t “vest” (meaning: actually benefit you) until your employment with them reaches some milestone, like 3 or 5 years. So if you don’t like your job, re-think this plan.

Another category of “money you don’t need” is a sudden windfall. You’re chugging along, working within your budget with no credit card debt, and a relative gives you $2,000, or you find through MissingMoney.com that someone owes you $155.

Finally, there’s always the proverbial garage sale. You probably won’t earn enough from a garage sale to make a big investment, I’m just saying it’s free money.

There’s more wisdom on this subject over at fool.com.

There are no low-risk, high-reward investments

Investing and gambling are not quite the same beasts, but they have one huge quality in common: you’ll be making a bet on what you think will happen in the future. And none of us has a plutonium-powered Delorean, flying or otherwise.

Thankfully, brokerage firms don’t offer you free drinks when you’re doing well (on second thought, with some clients they probably do …). My point is that if you’re hoping to see a 50% return on your investment, it won’t be through a mutual fund. So if you want a big reward, you’ll have to forgo a managed investment and make your own predictions, which brings me to research.

You’ll be doing a lot of research

Yes, you’re using the money you don’t need, and you should be willing to lose it, but you don’t want to, so do everything you can to avoid that. Namely, learn about the investment opportunity in front of you. Read about the company, its history, its founders, their histories, etc. We’re living in an Information Age; Google is your best friend.

If you have a friend, even a close one, who comes to you with an “it can’t fail!” opportunity, they’ll probably encourage you to invest all you can, as soon as you can. Take it from a guy who’s just starting to learn (call it beginner’s wisdom): there isn’t a worthwhile investment in the world that couldn’t wait a week for your learned contribution.

If you can, invest as early as possible

I don’t mean quickly, I mean early in your lifetime. I’m 33, so I failed at this. Until now, I’ve had all of my money tied up in food and shelter. I encounter this “start early” advice more frequently than I care to, because it makes me angry at myself. Compound interest is your best friend (Google is now your second-best friend).

But on the other hand, I’ve enjoyed a lot of my life so far, seen a lot of good movies and eaten at some nice restaurants. I wish I’d had the discipline to save even $10 a week when I started working, but I did what I did, and I have to accept that and move forward. If I had that Delorean, I’d go backward, instead.

That’s all I know so far

It’ll be a while before my brokerage account has enough “free money” in it to make any kind of worthwhile investment. In the meantime, I’m going to keep reading, learning from others and absorbing wisdom. I’ll be back every Friday to discuss what I’ve learned and share general investing news with you.

If you have any advice for me or the other readers, please leave a comment or start a topic in the forums (registration password: pluto).

Article comments

14 comments
Anonymous says:

Investing with money you don’t need is the most important thing to me. If a stock dips – that’s okay! I can afford to hold it, because it won’t wreck my world for that money to suddenly not be there.

I might check out that ‘brokerage credit card’ – I’m currently doing something similar, but planning to claim the cash back for savings instead. I’m using the credit card to pay all of my bills (and then immediately paying it off of course) to get 1 -3% cash back on purchases for utilities, groceries, ect. : )

Anonymous says:

Investing early brings different benefits depending on when you start. For instance, I seriously started moving money in the markets in 2003, and enjoyed the good run until 2007 when the market turned. Since then I’ve lost much of the gains.

Someone who began investing in 1997 and lived through the dotcom crash could feel like they shouldn’t have bothered starting.

Believe it or not this is meant to be encouraging! 🙂 The market hasn’t looked this cheap for years, so I think it’s a great time to start drip feeding money in.

Anonymous says:

Good to see I’m on par with you 😉

Anonymous says:

My dog isn’t even quite sure how to drink water so you’ve got a head start on us. I contribute about 15% of my income to retirement. About 6% is matched by my employer to boot, and there is no vesting period. I also maintain a brokerage account but I’m not too active in that these days. Good luck with your new monies, let us know what you invest in.

Anonymous says:

Invest only with the money you don’t need….this is a great and very timely article especially in this economic times. In other words, minimize your risk…

Anonymous says:

Smithee-

One of the things that you will likely find on fool.com is that it might be best to use an index fund and realize that chasing higher returns usually ends badly. Good luck in your journey. This slideshare that I put up yesterday might help

(http://www.slideshare.net/thinkingcarl/average-is-not-normal-presentation)

Thanks making this journey public,

ThinkingCarl