What I Wish I Knew When I Started Investing
Today I’m comfortable with talking about different topics in finance, taking out hundreds of thousands of dollars to buy a house, and continuing to invest through the bear market both in 2020 and 2022. However, it took me years to become comfortable with making my first equities investment. For years I had been comfortable making a budget, saving, and avoiding the thought of investing. The thought of making a mistake and losing all that I saved for was gut wrenching. In hindsight here are a few things I would’ve told myself 10 years ago.
Only you can take control of your financial future
If you’re sitting and waiting for someone else to prioritize your financial health, you might be waiting a while. The good news is you don’t need to wait around for a call from a financial planner to start investing for your future. There’s no degree required to open a brokerage account and there’s no excuse not to get started when you’re young. With the incredible benefit of time, compounding investing will work wonders.
When I returned from my deployment to Afghanistan, I was 24 years old and sitting on the biggest balance I had ever seen in my life at nearly $30,000. That amount of money could cover almost 3 years of expenses at the time, a mind-boggling amount for me at the time. Some soldiers blow their deployment money within the first couple of months on booze or cars, but I didn’t want that future, so I opened an IRA and made two years’ worth of contributions to a Roth IRA. The only problem was that my money wasn’t being put to use. I had been so fearful to move my money outside of Navy Federal, with whom I had a long-standing relationship, that I allowed my money to be invested in a money market mutual fund (MMMF) which earned next to nothing in 2014. My contributions continued to remain in that account for two years until I made the decision to take control of my financial future by opening a brokerage account with Vanguard. With the new account I planned to move into riskier securities like ETFs and mutual funds that carry higher returns. Interestingly it was only after I attempted to move my money to my new brokerage account that Navy Federal tried to get my business by having one of their financial planners reach out to me.
Waiting for a financial institution to come to you with a plan for your financial independence goals could leave you waiting for years. If you desire financial independence, then you must take steps to make it happen. But you don’t need to be intimidated by thinking that you have to invest all the money you saved in one step. Instead of taking one large investment leap, take a few small steps. You can take small steps by investing small amounts each month then increasing your contribution as you become more comfortable. Spreading out your purchases over several months might be preferable for many investors as it allows you to dollar cost average your purchases.
No one knows the future with certainty
There are almost always some economic rumors going on that can make you pause when considering whether to invest. In 2012 everyone was still bummed out about the financial crisis of 2008-2009 and the Great Recession. TARP and federal reserve actions the next few years through 2015 were cautiously optimistic albeit with the wounds of the recession still healing. 2016 brought political uncertainty with the election of Donald Trump. In 2018 the Fed began raising rates and we weren’t exactly sure what would happen next. 2020 was a global pandemic out of left field and now here we are wrapping up 2022 with a bear market and cloudy economic skies as inflation remains elevated.
I don’t think anyone could have predicted the series of events we witnessed from 2012 through 2020. Yet, in spite of all this uncertainty and doubt there were huge gains in both real estate and the stock market throughout the decade. As a new investor I had concerns about timing the market correctly and picking the ‘right’ funds. However, as someone just getting started investing, you don’t need to make big guesses on what the hot new tech companies will be to make significant gains. Simply matching your returns to the market average using a boring ETF or index mutual fund can leave you with significant gains over leaving your money in a high yield savings account or CD. Owning the entire market means that you’ll be less exposed to the actions of any single company. While you might not make as much as if you had staked your future on a pre-IPO company, you’ll also significantly limit your risk.
In order to take advantage of some riskier investment decisions with higher upside potential I allocate a percentage of my discretionary fund to be used for investing. My discretionary fund is money set aside after all other expenses including retirement saving are funded. The money could be used for a wide variety of items including grabbing a beer with a friend or colleague, surfing down at Stinson beach, buying a new video game, or investing in risky assets. Since I’ve mentally already spent the money in my discretionary fund, I feel much less resistance to investing in a newer concept like online real estate crowdfunding with Fundrise. As someone who is naturally risk-averse, the discretionary fund is a great way to allow me to take on a reasonable amount of risk. At 31 I’m still at a young enough age to be quite aggressive with my portfolio and can, with luck, make some outsized gains.
You need liquidity beyond just your emergency savings account
Emergency funds are a great early step towards future financial success. They are tools that allow you to mitigate the risk of losing your job, having your car breakdown, or needing to pay for expensive surgery. They can also provide people with the confidence to make smart bets in their career like moving across the country for a lucrative job offer. Having a sound emergency savings account is perhaps the biggest reason that I was so comfortable with moving across the country from Colorado to DC in 2015 to pursue my bachelor’s degree at George Mason as well as subsequently moving to Wisconsin for a job offer after graduation.
However, as I began investing in 2017, I found that I needed several buckets of funds beyond just a single emergency fund. In 2018 my fiancée (now wife) and I began to plan for our wedding, and we had separate plans to purchase a house. A single emergency savings account was insufficient because we needed the existing emergency savings to act as a buffer in case we had a true emergency. It’s not like an emergency would wait for me to replenish my account after drawing it down to pay for a wedding and house down payment. An additional concern was that I wanted to be able to invest some extra money if I saw the market go down significantly. What I realized I needed was not just an emergency savings account but a liquidity plan to manage my cash flow with my expected spending and the emergency savings account was just one part of that liquidity plan.
Financial literacy is a necessity. Better to start sooner than later
Whether you like it or not, managing your financial health is something that each of us is responsible for and if we want to improve our financial literacy then we need to be able to talk about financial topics. I’m quite certain that some topics I’ve learned in life can be forgotten without much of a loss. For example, I don’t think that my future success will depend much on whether I remember the details of the chemistry class that I took back in my freshman year of college. However, finance is a topic that tends to continue to appear in a wide variety of decisions throughout our lives. Early in our careers we might look at the financial consequences of when deciding where to go to school, whether we should finance a car, what credit card we should get, etc. While later in our career we might look at rules around maximizing our retirement account with catch-up contributions, decide when we’re ready to retire, and determine our estate plan. Financial literacy is a necessity to make choices that match our desires so we might as well learn sooner rather than later.
Don’t dwell on your mistakes, learn from them
None of us are perfect. Several personal finance bloggers even began their journey after finding themselves in significant debt and I am no exception. I’d likely be better off financially today if I had read and stuck to Financial Samurai’s 1/10 Rule for car buying instead of financing my car after only a month at my first job post-graduation.
It’s not a realistic expectation to become a financially savvy investor overnight. You’ll likely make mistakes on your journey to financial independence and that is okay! The important part is to learn from your mistakes so that you avoid making the same ones in the future.
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