When Should I Invest?: Timing the Market and Other Bad Ideas
When young people first set out into the world of investment, they usually have a few things in common:
- They aren't used to having extra money. Early investments mean that they've only recently started achieving other personal finance goals.
- They are very busy. The same factors which give them extra money for investment (a good job, a successful business, etc.) also mean they don't have endless hours to research investment options.
- They are uncertain about the best way to start investing.
If this sounds like you, take heart: this is how most of us start.
If you know anything about investing in stocks, you know that the stock market is fickle. Due to tons of worldwide economic factors (oil production in Saudi Arabia, biotech successes and failures in America, election results and politician gaffes). It all results in an endlessly complex system that boggles the mind: everyone's mind, in fact.
While there are great investors, there is no one who "understands" the market. Great investors take advantage of their comprehension of specific market forces, focusing on certain segments and learning to identify real opportunities. To get to this level, you'll have to do a lot of research, to find the side of investment which is yours to master. We won't get into that here. For now, let's focus on what not to do: the big mistakes common to the beginning investor.
Timing the Market - If ever there was a rookie mistake within investment circles, it's this one. Because market forces are so complex that no human being can truly comprehend them, it's impossible to meaningfully anticipate a bull or bear market. Even people with deep insider knowledge get this stuff wrong. Let's say you are trying to figure out how to make contributions to a plain ol' index fund. If you make contributions when the market is low, you might just "get a deal". But this deal only good if the market immediately recovers following your purchase. Because there is nothing to prevent prices from sinking into the abyss just after you've made your purchase, buying decision based on "timing the market" are just as likely to succeed as they are to fail. The Solution: Buy funds like index funds when you have money or on a regular schedule. Because these funds tend to gain value more than they lose it, your regular contributions are likely to be more profitable than those based on occasional speculation. This ain't Vegas, folks.
Investing in Trendy Stocks - We're all tempted to do this at one time or another. The only time I was tempted to do this myself was when I was doing research for an article about a search for the cure for Hepatitis C. One company (not named here) looked like they had it all figured out. Investors around the world were buying up their cheap little stocks in hopes that their newest trial would bear great results. I was almost one of them, but I decided not to buy. I waited to see what happened, and surprise....the trials were a failure. The cheap stocks that my fellow investors bought fell into the toilet, and I was glad that I didn't follow the trend of them month. Stock picking is like this. While it's possible to make bank on well chosen company stocks (can you say 1990's Apple?), you've really got to know what you're doing. The Solution: Research the crap out of any individual company stock you might be interested in. My stock wizard application can help. Learn how your chosen company fits into its industry at large, and how that industry is related to other industries. Only invest as much money as you are willing to lose, and make sure you are well diversified in general, including funds that draw on the health of entire markets, not the flightiness of individual stocks.
Letting Time Slip By - The 50-year-old investor almost never regrets having maxed out annual IRA contributions when he or she was 30. As an investor, your best friend is time. Intelligent investments made today will pay off better, the longer they are given to do so. The Solution: Start today, and make sacrifices to maximize your investments. By making sacrifices that few are willing to make, you will one day live a lifestyle that few are able to afford.
Investment can get very complicated. But it doesn't need to be this way in the early days. In the early days, make sure you only invest according to your level of skill and understanding. By avoiding the above pitfalls, you'll be unlikely to do anything that you'll regret later on. Set a firm foundation for your investment life. As you develop into a more sophisticated investor, you'll be able to create more opportunities for success in the future.