Today we have a guest post by Ryan from Money For Young Kiwis. Enjoy!
Investing is tough. There’s such confusion as to what to invest in. Whose opinion do you trust? Friends? Family members? Professionals? Everyone has a different view, and it’s hard to know who to listen to.
I began investing as a naive (read: stupid) 22 year old, around five years ago. After years of working part-time jobs and playing online poker, I’d ended up with quite a bit of money, but I lacked the knowledge of what to do with it. I had a vague idea that I wanted my money to be working for me, but I had no idea how to go about it.
How I decided what to invest in
I wasn’t much interested in investing in property, so I talked to friends and family members and decided investing in the stock market and commodities was the way to go. I also spoke to some investment advisors and ended up spreading my money across managed funds, Apple shares, and some gold and silver.
Apple was a no-brainer, the sexiest company in the world at the time. All my friends and I owned their products including iPhones, iPods, and MacBooks. I’d also heard the idea that “you should invest in what you know” and as a 22-year-old with too much money, boy did I know high-priced tech goods!
It seemed like an obvious choice to invest in managed funds. I knew nothing about the stock market, so I’d be better off paying the professionals to invest my money for me. At the time I thought this was the quickest way to riches.
I thought that having gold and silver as part of my portfolio was a good way to balance out the risk of my other investments. It was a nice feeling to own something tangible and safe. With the benefit of hindsight, this turned out to not be entirely accurate – but more on that later.
During 2011 and 2012 (my first year of investing), both gold and Apple shot up in value. “Investing is easy!” I was thinking to myself. “I’ll be a millionaire in no time!” Visions of retiring at age 30 and dozing in a hammock on the Caribbean entered my mind. I saw nothing but bright blue skies ahead.
However, I hadn’t realised how dramatically markets could change. It came as a huge shock when over the next year or so, both Apple and gold lost around 30% of their value. My visions of early retirement had disappeared in a puff of smoke.
Losing such a large amount of my money hurt worse than the time I broke my ankle landing on another basketball player’s foot. Not only had my finances taken a big hit, but my ego had too. I wasn’t as smart as I thought I was. I was just another know-nothing investor.
I remember my heart rate quickening when I would open my stocks app and see red next to my shares, denoting that they had fallen yet again. I was torn. Panicked thoughts ran through my mind: do I sell? Are they going to drop lower? Will they rebound? I was terrified that I’d lose all my money.
Becoming a smarter investor
The shock of seeing my Apple and gold investments nosedive made me want to become a smarter investor. I decided to stop taking other people’s word for it when it came to how my money was invested and become 100% responsible for my investing decisions. This didn’t mean I couldn’t listen to anyone else’s advice; it only meant that from now on I would know what I was doing and why I was doing it.
I read a lot about why Apple and gold were falling through the floor. I learned that gold has little practical use. If you invest money in a company then theoretically that company will use that money to improve its business, which then comes back around to you as a shareholder in dividends or the share price increasing. On the other hand, gold just sits there in a safe doing nothing. It doesn’t pay any dividends, and it doesn’t create any value. I read an old quote from Warren Buffett about gold, and it stuck with me.
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
This made sense to me, so I decided to sell my gold and silver. The lesson learned here is: do your research! Make sure you know why you are investing in what you’re investing in.
I held onto my Apple shares because I figured that Apple was still the same great company I’d originally invested in. However, I’d learned that it was a terrible idea to have such a significant portion of your money invested in a single company, so I decided to lessen my holdings of Apple shares slowly.
Realising that I can’t beat the market
The more I read about investing, the more actively managed funds didn’t seem like the way to go. I read about how they charge fees which don’t look like a lot but add up hugely over the long run. I also learned that most fund managers can’t beat the market index. They study hard and buy and sell, but often do worse than a simple index fund!
I became a believer in the idea that low-cost index funds are the way for normal people to invest. I realised that I probably can’t beat the market, and neither can my fund manager! Investing in index funds seemed like the best way to get great diversification without having to pay greedy fund managers a mint in fees.
I sold my managed funds, even though they’d performed well over the time that I’d held them. What I’d learned from this was not to be results-orientated! You can make the wrong decision and get lucky like I did with my managed funds. I happened to hold them during a period where they did well, but that didn’t change the fact that managed funds weren’t a good decision for me.
I began investing in low-cost index funds with my primary focus on the S&P 500 (500 of the largest companies in the United States). Investing in the S&P 500 allowed me to get great diversification at a very low cost. I’ve gone deep into what makes index funds such good investments here.
Going from a “speculator” to an “investor”
I resolved to be an “investor” not a “speculator.” Investors aim to profit from long-term returns from companies, whereas speculators try to outwit the market for easy money, and the majority of them don’t succeed.
No longer would I buy gold because I thought it was due to rise. No longer would I buy a managed fund just because it had had a couple of lucky years. I would never approach investing through the lens of “how can I make a quick buck”. Instead, I decided I was in this for the long haul – I would invest regularly for the long term and not panic about fluctuations in the market.
I don’t regret my investing mistakes, as I’ve learned so much from them. The pain of my Apple and gold investments plummeting inspired me to learn more and work harder to manage my money properly. I had to get smarter and do my research instead of just blindly trusting what I’d been told.
How I invest today
Today I have a set investing plan that’s well researched and not too time consuming. I don’t get worried or anxious in market downturns because I know there’s sound reasoning behind the decisions I’ve made. I regularly invest in a variety of index funds which gives me great diversification, and means I profit when the market’s good and can buy cheaper shares when it’s not.
I’ve still got heaps to learn about investing, but I know so much more than I did when I started! I’ve come a long way from the 22-year-old with more money than sense, and I’m confident that my money is now working hard for me.
No matter what your financial goals are, it’s so important to own your decisions. Listen to good advice, do your research, come to your conclusions and make your decisions.
Ryan writes a blog on money matters for young people called “Money for Young Kiwis”. His goal is to make money easier to understand. You can find it at http://ryanjohnson.co.nz