When people want to start investing for the first time, “How to Invest” is a search term they’re likely to type into Google (GOOG). That search will yield many strategies, and as the intrepid young investor starts reading, he or she might get caught up in a strategy within one of the first articles they read. It’s hard to make a solid decision about one’s own future investment path without understanding the investment landscape as a whole. In reality, there is no one-size-fits-all approach to investment, but there are specific approaches which will make sense for some people and not others. In most cases, these represent the best course of action with the amount of time and energy you are personally able to devote to your chosen investment strategy.
Investing for Different Temperaments
First of all, most people don’t invest at all. Without being too judgmental, I want to describe this as the “Ignorant” approach to investment. Of course, some people have good reasons never to put their money in an investment account (“the world might end!”, “I don’t want to lose it all right before I really need it!”). But for the most part, there are strategies of investment which can be successfully followed by anyone with enough money to fund them (and it doesn’t have to be much). People who oppose investment in all its forms usually do so with arguments based on fear and paranoia. Yes, risk is baked into investments of all kinds. Perhaps the thing you sink your money into won’t pay off. But there are ways to minimize this risk. If you never invest, the only sure thing you can depend on is that your money won’t grow, and will actually lose value over time due to Inflation.
You don’t want to be ignorant of investment, making important financial decisions based on fear and faulty understanding of basic elements of investing. If you want to learn about real investment, you’ve crossed over from ignorance to the “Beginner” stage. And this is where personality really starts to matter.
Desire, Time, and the Capacity for Steady Learning
If you’re a beginning investor, you have a lot of options ahead of you. There are many ways you can specialize within different investment markets. You could also rely on tried and true strategies like index funds. Or you could invest in real estate. These are only a few options, of all the many that are available to you.
But the one you choose should depend on your ability to see that strategy through. For example, some people make tremendous fortunes by picking successful stocks that they believe will soar over months, years, and decades. Just think of everyone who made millions with early investment in Apple, Inc. (AAPL). The problem is, this strategy is incredibly difficult, because obviously if it was easy, everyone would just buy stock in future hit companies and wait for their riches to pour in.
The fact is that it’s very difficult to pick a hit stock. Most companies fail, and the ones that don’t fail usually don’t become international success stories. People who make the most on investing in specific companies are the ones who are willing to obsess over the companies in question: their place in the market, their personnel, their innovations relative to the innovations of competitors, their position in the industry relative to their plans for growth, etc. People like Warren Buffett invest this way. Buffett buys enough of each company he invests in that he is given a seat at the table, to have a strong hand in managing that company and growing it so that his investment pays off handsomely.
This investment temperament might be called the “Obsessive.” It’s the kind of person you meet who is amazing at online poker. For people unwilling or unable to give this kind of stock investment the right kind of effort, this strategy is usually a recipe for disaster. People sometimes hire stock picking managers in order to cut corners, hoping that the person they’ve hired will have the expertise they themselves lack. But stock pickers usually fail, also. Basically, if you’re going to invest in individual stocks, the best way to do it is to do it yourself, to become an expert in your industry of choice, and to make the most educated decisions of anyone in your field.
That’s a tall order. Most of us don’t want to be professional investors on that level. Of course, it’s possible to do any level of that, just as many casual investors learned about Apple in the 80’s, enough to convince them that investment in this company would pay off many times over. But with this method, risk will always be present, relative to the amount of effort and insight you are able to develop.
This leaves us with investment strategies for “Normal Investors.” These are people who know that investment must happen in order to have a great retirement, or to rely on dividends instead of long hard hours grinding at a decades-long career. For people like this, index mutual funds through companies like Vanguard and Betterment are often the way to go: taking advantage of decades of market growth, while investing a manageable portion of their income the whole way.
“Normal” investors also look how everyday decisions and lifestyle choices can be viewed as investments. To rent a home or buy? How much to spend on a car, or to avoid the bar entirely? What employer financial benefits will pay off the most, when choosing a new employer? For people like this, investment is just one of life’s many facets. Family, job, friends, hobbies, travel: all told, it’s just too much for some people to specialize in investment. But this doesn’t mean that investment can’t be done right by the average person. Learn about the basics of investment, avoid overextending yourself in a single investment, and don’t invest in anything you don’t understand. Let investment be a committed part of your life, even if it isn’t one you spend all of your time thinking about.
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