Some stocks may provide a high return but also carry additional risks, whereas others might be modestly priced for their potential growth prospects. It’s worth investigating every investment before you choose to commit your hard-earned cash to it!
This is a difficult topic. One that isn’t easy to find the answers for, and it’s certainly not a subject that can be covered in a quick read on the web, either. The best you can hope for is to get some clarity, and here’s a simple way to do that:
What do you need to know?
You need to know what you are thinking about buying first. You need to know why you’re doing it. Are you buying stocks as a hedge against inflation? As a means of generating retirement income? Because you think it’s going to fetch better returns in the future? To invest in your kids’ education? Or to secure some of your family’s financial future?
Likewise, you also need to know what you are trying to achieve with the investment decisions you are making, and what those outcomes look like. Are the profits from your stock investments that will help you retire earlier or provide the financial resources for your kids’ college education more valuable than the money that can be invested towards pushing back against inflation or providing a steady stream of money to fund your retirement?
Finally, know about what happens if you’re wrong, and inflation does rise to 15% over 30 years as expected instead of 10% –. Do you increase your investment in gold? If it falls to 5%, do you sell or hold?
Once you’ve got an idea of what you’re trying to achieve, look at your risk tolerance. Is the potential risk worth the potential reward that you think you’ll get from investing in stocks? Remember that if your portfolio takes a big hit, it’s not just a one-off loss.
The decline will reduce your ability to meet future cash flow needs and will have compounding effects on future wealth building. The bigger the decline, the more damage is done.
That’s why most people are simply not cut out for stock market investments.
So what should you invest in?
The smartest choice you can make is to invest in yourself by focusing on getting educated and growing your career as much as possible over time. Invest in yourself by learning new skills or career paths that will allow you to generate financial comfort as a way to live beyond your means while using your income to fund retirement.
Invest in yourself by smartly saving as much money as possible, and then investing that money at the right time in the right market based on your own risk tolerance.
The best investments for you may lie outside of the stock market. There are opportunities for growth and wealth building outside of only owning stocks.
There are ideas that can create wealth with less risk than stocks. (Focusing on areas like alternatives, real estate, precious metals, natural resources, etc. are excellent investments that can help you achieve your goals.)
Positive mindset and Proper Focus: The key
A few people, though, have the temperament to withstand the volatility of stock market investments and make a career out of it. These are people in their 30s and 40s or older who have some form of a growth mindset. They understand that you can’t ride the yellow brick road forever. The fruits of your labor must be shared with someone else.
They know they don’t want to be like Baby Boomers, with decades worth of savings lost to inflation and then a lifetime’s worth in retirement equivalents wiped out by an early retirement due to high medical expenses coupled with significant investment losses. Baby Boomers can’t do that, as they don’t know any better.
So, how do you take advantage of this? Simple: invest in stocks with a good growth track record that you’re comfortable selling later or liquidating. Invest in stocks with a good growth track record and the potential to rise in value over the next several years that you’ll hold until they’re worth enough to cash out and use those proceeds to fund your retirement goals.
If you are somebody who doesn’t have this temperament yet, start investing today in index funds through your 401(k). Start early – it’s never too late! These index funds give you exposure to all industries without giving up liquidity in the event of an overall market downturn.
The great thing about index fund investing is that you don’t have to try to beat the market. You don’t need a crystal ball to tell you what the returns will be 3, 5, or 10 years from now. And unless you start early and keep your investing costs low, it’s likely that your returns won’t beat the market anyway.
Stocks are risky. (I know, but what about the “best of the best” stocks …”? Trust me, it’s best to not get too attached to any particular stock.
If you have good disposable income and no pressing financial needs, for the time being, stick with low-cost index funds.) Stocks are also a very nice way to diversify your wealth over time into multiple distinct asset classes.
One thing I do advocate for is that you should take advantage of market inefficiencies. The Fed has been keeping interest rates low to spur growth, and other economies around the world are experiencing significant growth as a result.
If you can leverage your position in the market by taking advantage of these temporary opportunities, do it! This will put more money into your investment accounts earning a lot more money while exposing you to less risk.
Don’t just focus on the fact that stocks can be volatile and confusing, though. It’s also important to recognize what makes stocks attractive investments over time.
Stocks are attractive because they provide investors with some of the highest returns of any asset class (excluding real estate). That’s right, you can find investments that may seem riskier and less reliable than stocks, but will still return lower rates.
Understanding the Risks
In fact, it’s all about your risk tolerance – if you look beyond the bubble and realize that all of these things are more rewarding in the long run and allow you to achieve your goals more efficiently over a period of time, you can probably make more money by buying more assets in these categories.
There is one caveat to this whole discussion – don’t invest in the “best of” lists like Warren Buffett or Peter Lynch invest in the best companies. This is dangerous because human emotion often gets in the way here. Sure, the best companies will do well. They may not do as well as you think they will, though.
That’s why it’s important to not invest in a “best of” list: you give up too much control to outside forces and your mindset is clouded by emotion. Invest in strategies that are more dependent on something you can control: your actions. In this case, I’d focus on “what you can control. … you can control your actions, and the best stock [or stock strategy] may be one that you have never even heard of”.
Make sure you understand the risks involved in any particular investment before putting money in.
What is a risk to you? What is a reward for you? And what do you think about these things when it comes to stocks? What happens if stocks are successful? How do you react when they crash and burn (which they will)?
(1) If you’re interested in learning more about investing and are looking for some good resources, there are a ton of good ones out there. The Vanguard Investing Blog – Dr. John C. Bogle, is one of my favorites. And the Rockerfeller Foundation has a great get-started guide to investing – including how to find out what you should invest in the long term, how to manage your investments, tips for buying stocks (including a great list of fundamental factors that should be taken into account), and more.
(2) If you’re interested in getting started with index funds it’s important to keep costs low at all times. One way to do this is to start with a target that has very low costs and then forgo any additional investment expense for the duration of your plan, as well as track how much you save every month.
(3) If you want to learn more about investing in alternative investments like precious metals, real estate, and natural resources there are a lot of great resources out there. I recommend talking to a professional financial advisor or seeking advice from someone who can help you determine which alternative asset class is the best fit for your situation.
(4) If you want to take advantage of market inefficiencies to prevent yourself from being left behind during a market correction, it’s important that you use diversification. Using a variety of strategies can help you ride out the wave of panic during a market correction and allow you to ride that wave further.
I hope I’ve helped you to get a better understanding of the world of investing. I’m by no means an investment professional, but what I’ve tried to do is give you a basic overview of how I view investing as an alternative to traditional assets like stocks and bonds. If you have any comments or questions, please feel free to comment below.