What Really Matters in Investing
Many people shy away from personal finance topics almost instinctively, and if you put yourself in their shoes it’s a pretty reasonable reaction. For most people the world of personal finance is a labyrinth of strange concepts and confusing formulas. It’s intimidating and confusing, and no one wants to too publicly point out their own ignorance. So we back off and do our best to ignore the whole idea.
That’s pretty understandable- I’ve been there myself. A few years ago I gained access to the small stack of cash some relatives gave me at birth to someday put toward college. There I was, not even 20 yet, armed only with the desire to not waste it and barely a clue as to what I was doing. So I gathered my shaky confidence and invested it. Since then it’s gone down and it’s gone up, and as a pleasant surprise it actually hasn’t done too badly. It’s not going to pay off my student loans by any means, but I haven’t lost my shirt either.
This illustrates to me what’s really important in the world of personal investing. We have this perception that we need to be experts before we make any moves, but that’s just not true. Over the last couple years I’ve come to agree with what I’ve heard several personal finance experts say: personal finance is 30% head knowledge, 70% attitude. Sometimes they even go in for a 20/80 split.
What does that mean? For investing it means you can be successful without knowing everything, because the knowledge is not what’s most important. Yes, try to do your due diligence in researching before you make a move, but your attitude is what really counts. Here’s how you do that:
- Commit to being disciplined. Consistent investment is what pays off in the long run, so commit to investing the same amount every month. Resist the urge to stop your investment contributions “temporarily” to buy that new car. Make it a priority so it becomes a habit.
- Don’t watch your feet. By this I mean that you need to take the long term view. Most of us are still decades from retirement, so what the market is doing right now is almost completely irrelevant to our plans. If the market crashes, don’t give in to panic. Instead, realize that you can buy a lot more stock for the same amount of money. Long term, stock you picked up cheap during a crash may be the best thing that ever happens to your investment portfolio.
- Put your eggs in several baskets. Okay, technically this one is about knowledge. But this isn’t some technical mumbo jumbo. It’s just a simple principle: if you have a variety of investments, the failure of any single investment won’t hurt you as much. It’s common sense, really.
- Never ride a wagon. If everyone is excited about a given investment, it’s probably too good to be true. This goes back to being disciplined: stick to your plan. Trendy investments often create bubbles that will hurt you in the end. Gold, for example, has lost 13.8% of its value over the past 30 days after enjoying a recession-driven run of popularity.