Do you find the thought of investing money to be a bit daunting? Well you’re not alone. Many of the people that I talk to about investing have a similar outlook. Everyone knows that you can make money by investing wisely, but many people are too worried about losing it all, or being worse off because of a poor investment decision.
I decided a long time ago that I didn’t want to spend the rest of my life working for someone else, so I made a conscious effort to learn as much as I could about money, and to work out the best way to realise my dreams of retiring early. One of those ways was to learn about the world of investing. I had no prior exposure or understanding about investing, I just knew that other people were making money investing in things like stocks and I wanted a piece of the action.
When I first started out, things went well, probably a little too well if i’m going to be honest. I felt like no matter what stock I picked, I just couldn’t lose money. I think I ended up picking about 5 in a row where I made a good 10-15% on each trade – I was ready to become a stock broker after that.
As it turns out, I had started investing during what is known as a “bull market” and that pretty much means that the entire market is going up, so there was a good chance that even if the stock I was on was a bit of a dud, it was still going to go up simply because everything else was going up – it doesn’t make a lot of sense really, but if I’ve learned one thing, it’s that psychology is a massive part of the stock market.
The other major thing that i’ve learned is that investing comes with a level of risk associated with it. Sometimes the risk pays off, sometimes it doesn’t. I learned about risk the hard way… After doing so well on some larger stocks, I decided to try the more risky side of the market. I decided that if I was really serious about making good money in a hurry, I needed to make bigger returns than a few percent each trade.
I entered a stock which I still own to this day. At the time it’s code on the ASX was URA and I bought in at about 20 cents. Within a month or two it was over $2, and I had made a 1000% return on my investment. The stock was going to $20 based on all the hype and expectations the company had, and I ended up buying more at $2.12 – that was the highest the stock ever got. Over the coming months it sank all the way back to 20 cents and then continued it’s descent.
Today it is worth less than 1 cent.
As painful as that was, it was one of the best lessons about investment risk vs reward that I have ever learned. Having that company’s stock still sitting in my portfolio every time I log into my account, is the best reminder I could ever hope for.
I learned that investing can have some really high highs, where you can make a lot of money in a short period of time, but it can also have some low lows, where you can lose your money.
So what did I do after I learned that lesson. Well, I stopped for a while and had to regroup. I was no longer infallible, I had been bitten and lost pretty much 100% of my money. Then it occurred to me, despite losing almost the entire amount I invested in that stock, at one point I was able to sell out of it for 10 times as much money as I started with if I had understood more about knowing when to sell. The maximum I could ever lose is 100%, but the maximum I could gain was unlimited.
So I dove back into the market and have (for the most part) done reasonably well ever since.
Investing and Risk
Anyway, back to the point of this post. Many people I speak to just don’t understand how to invest, and they are worried about losing their money. I don’t actually see this as a bad thing, you should be worried, but what’s more concerning to you – working until you are close to 70 years old, or taking a few calculated risks now so that you might be able to retire significantly earlier in life?
I’ll take early retirement every single day of the week.
So, if you think the same way that I do, there are at least 2 ways you can get started.
1 – Learn about the Stock Market
OK, so I know telling you to learn about the stock market is really easy to say, but not necessarily easy to put into practice. Fortunately, there are thousands of websites where people have dedicated large amounts of their time to teaching others how to get started investing in the stock market. I’ve even had a few attempts at it.
All that is required from you is the willingness to learn, and then to go out and put some of your learnings into action. The main thing to remember is that you should only invest money that you can afford to lose. So that means that you should ease yourself in and not go throwing all your money at the first company you read about. If you don’t understand something, head over to Google and type it in. As an example you might wonder – what is a PE ratio? How is it calculated? What is a good PE ratio.
Google is your friend.
If you don’t have the time to learn about the ins and outs of investing, then proceed to number 2.
2 – Managed Funds
If you don’t have the time to learn about investing, or you just don’t have the confidence – then something that many people decide to do is to put their money into a managed fund like Clime. Managed funds essentially invest your money for you based on your risk profile and the type of returns that you would like to achieve. Normally they will charge a fee for the service, but it is an easy way to get some exposure to the market without having to make a big time commitment.
The major differences is that with DIY investing, you will have 100% control over your money and where you place it, whereas with a managed fund you are hiring a professional to make those decisions for you. I’m yet to meet someone who has been in a managed fund and has had a 1000% return on investment in a couple of months like I could have had, but with a managed fund you will get exposure to the market, which historically has had far better returns than leaving your money sitting in the bank.