There are many ways to learn how to invest. In fact, there are so many options available that it can be overwhelming. But here’s the thing…there is a serious amount of misinformation out there too:
- Salespeople disguised as educators are out there advising you to buy investments that don’t make sense for you.
- Marketers may pose as TikTok and YouTube gurus and may not accurately represent risks of investments.
- Well-intentioned friends or family may recommend investments that they don’t know much about.
You’ll face a dizzying array of sources vying for your attention. And today, it’s easy to lose money really fast. So there’s one important thing you need to do when you learn to invest…. learn how to protect your money first.
Know what you are up against when you learn to invest
Sophocles once said, “No enemy is worse than bad advice.”
If you’re like most of us, we’ve all received bad advice at some point in life. With the internet, bad advice can take our money away from us at record speeds these days.
So first, know your source. Do not just trust someone on YouTube or TikTok unless you can verify their credentials. You don’t know how they are getting paid or what they know. They might be sincere and knowledgeable. Or they might be getting paid to promote something and simply don’t share that fact with you.
Learning to invest is a process, not an event
The fact is that investing is something that is as much art as it is science. People study it for a lifetime and still make mistakes.
Human emotions make us lousy investors.
Our emotions –fear and greed–literally push us to make mistakes. So if you do, understand you are not alone.
The good news? You don’t have to study investing for thousands of hours to get good at it. Really, discipline is far more critical to override those emotions and avoid those expensive mistakes.
Read the right books or financial website content
If you’re looking to learn more about investing, start with reading. You can either start with financial education websites or find a book. You can find good books at your local library, online bookstores, or even used book stores. If you’re using a financial website, make sure it is high quality. Be really careful on TikTok and other sources.
Take a course
For many, taking a course is smart as it helps you understand how to make your own investing decisions. That can help you avoid bad advice. Look for a course that curates information for you in an easily understandable way.
With a good course, one topic builds on the next. You can find a class online or at a local community college.
Regardless, since money is at stake, take the time to educate yourself. If you save yourself one expensive mistake, it will be an extremely worthwhile investment. Too many people skip this step and never learn how to invest properly. This can lead to a lifetime of not feeling financially secure. Or they can easily fall victim to bad advice, and find themselves losing money too often. So consider its importance for your long-term financial health and quality of life.
Join an online community
An online community might work if you’re looking to learn from others. But beware, today, in the age of Robinhood and crypto investing, you might end up with just another person’s opinion. It might do more harm than good. So it is best to only do this after you’ve educated yourself on the basics.
Core concepts to help you learn how to invest
In the interest of your financial self-defense, here are some things you will want to learn a bit about first, so you can know what to look for.
- Assess if you are ready to invest
Investing is a long term activity. And all investing involves risk. So that’s why you should only invest money you won’t need for several years.
Are you ready to invest? Answer these questions:
- Do you have an emergency fund? If not, save a few months of living expenses in a high-yield savings account first.
- Do you have high interest debt? If you have high interest rate debt, consider paying it off before investing. If you’re paying a large amount of interest, paying that off first will likely be your best investment.
- If you have a 401(k) or other employer retirement plan, start investing there. That’s because you’ll get tax advantages. Especially if you get an employer match, that’s basically free money. So start there first.
Here are two things you need to know. Every investment has risk, but some investments are riskier than others. As your potential returns rise, so does your risk.
Let’s look at how that works. For example, let’s say you buy a lotto ticket. What is the potential return if you win? Astoundingly high, but what is the chance you win? Microscopic. And the likelihood you lose all of it? Even higher!
On the other side of the spectrum, you walk over to your local bank and start a savings account. What is your potential return? Very low, right? But what is the risk that you’ll lose the money? Very low as well.
How about a more recent example. Many people jumped on the cryptocurrency bandwagon because a friend or family member recommended it. Could you make money? Yes, of course, if your coin takes off, you could make a lot. Could you lose all or most of your money? Yes. Crypto is a new type of asset, and while it is promising, there is a whole lot of risk.
Compare that with buying stock in a well-established company, where you know the name. If it makes money, it probably pays out dividends to its investors. So while you’re not likely to triple your money quickly, you’re likely to collect dividends and see the stock rise gradually (or maybe stay even or fall a bit). But you’re also unlikely to lose all of your money.
So as you can see, some investments are far riskier than others. The ones that promise life-changing gains usually involve the risk of life-changing losses, too. So that’s where your self-defense comes in. Pay attention and protect your money.
And that’s also you should only invest money you don’t need for several years. Otherwise, it is too risky. If you’re saving for a down payment or for a trip, better to put your money in a high-yield savings account. That’s a low risk investment.
Realize that even cash has risk
Today, there’s another risk since inflation is high. That means holding too much cash can have a risk too. Why? Well, when you go to buy something in a few years, it may cost more. So you are losing money because you’re not making any return on that cash while you hold it.
But a small amount of cash is needed for short term goals and to take advantage of opportunities. Just be aware of the risk it presents, too.
What’s the best way to manage risk when you start investing?
One way to reduce your risk is through diversification. In simple terms, that means not putting all of your eggs in one basket.
Fortunately, Wall Street makes diversification easy for us. Mutual funds allow us to pool our money with millions of other investors. Instead of just investing in one company (which could stumble and fail), you can buy a small piece of thousands at the same time. So some will fail, and some will become big winners. By buying index funds, you diversify away that “company risk.”
Exchange-traded funds, referred to as ETFs for short, are newer options that can be even better for many investors. These trade like stocks, so ETFs are easy to buy and sell. With one purchase of an ETF, you can quickly diversify your money.
Our best advice: try dollar cost-averaging to start
Getting your feet wet doesn’t have to be complicated. Ideal world, sign up for an Investing 101 course, but even if you can’t, you can invest with care. One way is to use Dollar Cost Averaging. This simple system helps you remove the emotions from your investment decision-making. In the process, it helps you buy at lower prices.
Here’s how it works.
- First, identify something you’d like to buy. For example, it might be a specific index fund or ETF.
- Then decide on a specific dollar amount you want to invest every month (or week or other interval). For example, it might be $500, and you decide to invest that on the first of every month.
- Then, simply spend the total amount on the first of every month. When your index fund’s price drops, your $500 will buy more shares. When the price is high? You’ll end up with fewer shares.
Do you see what you are doing? You are automatically buying low. Over time this will lower your average price.
- Don’t vary anything.
- Spend the same $500 every month—never more or less.
- Don’t skip a month, even if the market does anything scary.
In fact, that is the beauty of this system. When the market drops, most people get scared and stop investing. But it’s a sale! So with this system, you buy more.
Want more easy help learning to invest?
At Wavelength Money, we’ve got an entire free library to help you become a confident investor.
Check out our Better Investing section.
Want to get confident, fast? Try our Investing 101 course.