Unlike the swine flu, the personal finance bug is a relatively hard bug to get. Unfortunately (for them), far too many people avoid putting any thought into their future until that ‘future’ is right around the corner. Investing is a topic that comes up a lot when I talk with people. How you field open ended questions like “How do I invest in stocks?” is a make or break question in which you need to figure out before your trust is deserved. I’ve come up with a step by step method which I use to narrow my confidant’s thoughts and distill their true intentions. Read on, then leave me comments on your style.
How Do I Get Started in Stocks?
In my (admittedly few) years on this earth, I have become somewhat of a goto guy when it comes to financial and investing topics for people who know me. Always with my trademark deadpan delivery and ample warnings to my own qualifications, (Go see a financial adviser if you have any specific questions. Advice in this article can’t be guaranteed to fit your own unique situation. Consider yourself warned!) I try to boil down complex topics with simplistic examples and ridiculous metaphors (often comparing ‘free money’ avoided by my friends in things like 401(k)s to ‘heating their building by burning money’). Even though when pressed I try to get people interested in the 360 degree view of the personal finance world, the question I receive most often is, “How do I get started in stocks?”. (Followed inevitably by, “What brokerage do you use? Is Scottrade good?”).
There is nothing wrong with the question on the surface; any attempt to start the journey on the so-called path to wealth is a good one. For whatever reason, most people associate ‘living within your means’ to day trading (Hyperbole, I know. But certainly with stock investing). Blame it on a vast Wall Street conspiracy, government meddling, a cult, or whatever you will, that’s the reality as I view it in Generation Y. Rather than instantly dashing the dreams of my friends, I have developed a sort of methodology to answering this question (always after prudently checking they have the excess cash to invest! For example, no credit card debt…)…
- Do you have the patience to work your way through books such as The Intelligent Investor (Benjamin Graham)
(at a minimum) and Security Analysis (also Benjamin Graham)
? (Yes, I encourage people to be value investors.)
- Do you have the fortitude to trust your judgment when hell seems to be breaking loose in the market? If you lost 40% of your portfolio, what would you do?
- Do you have the analytic skills to follow your stocks with the same valuation methods you used to purchase them?
- What account are you going to use to start this investing? (I mean IRA, Roth or Traditional, or a normal brokerage)
- Stocks Don’t Generally Do This (Kevin Zhengli)
If they answer no or are unsure, I point them at articles on ETFs. I always suggest that most people who don’t want to follow all of the rigors that stock trading demands diversify widely. In fact, my retirement accounts are invested in broad based mutual funds since I want to minimize the amount of research needed for these accounts. I always stress that all stock market investing carries risk, and if they want to see this money ever again, don’t plan on pulling it out for a bare minimum of 5 years. Stocks are inherently risky… this is why they historically return more than bonds. I don’t beat around the bush on this point; I tell people stock market investing is like Vegas when sometimes you can beat the House. The problem is sometimes is rarer than it first appears. Even in people who still want to continue, strongly advise leaving most of their money in ETFs or similar funds and using the remaining cash to ‘play’ in the stock market. I can’t stress this enough.
For the people that are still with me at this point? Well, at this point I’ve probably found a true disciple. I extoll the benefits of Roth IRAs vs. taxable accounts, and boil down what they are trying to gain. Ensuring they read a sufficient amount I tell them to develop a method and stick to it- unemotionally. These people are the truly rewarding ones (students?) . Expect to learn something from them soon after you send them on their way.
Congratulations, you’ve made a convert! Make sure you check in from time to time until he or she is truly comfortable with what they are doing. Investing is a hobby that tends to stick with people for a long time. Keep your friends on point and years later you’ll still be able to trade war stories of your failures and triumphs in the public equity markets.
Stock market thumbnail sourced from www.flickr.com/photos/24001469@N00/2291498318, shot by Perpetual Tourist.
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Just a little caveat, when you say “beat the house” in Vegas… I assume this means beat the stock market’s broad returns. Or, in other words getting a 10% return when the stock market returned, say, 8%. This is slightly different than the original conceptions of beating the house in Vegas.
Also, for me, the first step I take in trying to get people interested or enthusiastic about investing is asking what they are investing for. If they do not know the answer to that, then I would suggest reading books like “The Millionaire Next Door,” or explain how the future of investing starts today, etc. etc. If they have different investment goals than I do, (say want to turn a profit in 6 months), then I can hopefully point them in the right direction, but can’t give much more help. Beyond that, I would explain why I like to look long-term and, also, why they should too. If they are still with me after that, then it is time to lead them onto AA and some Burton Malkiel.
Yes, I mean as in beat a broad based measure of the market. The best way to look at individual stock investing is beating the ‘rake’ in poker. The rake takes money out of every pot in a poker game. The stock market equivalent is fees for investment funds like Mutual Funds and ETFs. MY own personal criteria for beating the house is avoiding the fees and generating better returns than some measure of the market like the S&P 500 index.
[...] Quit Your Day Job: Infecting Others With the Personal Finance Bug – Stock Market Investing I tell people stock market investing is like Vegas when sometimes you can beat the [...]
This is awesome , I’m sure that technology will get much much better.