I recently read a book (not to be named) where they mentioned that investing in individual stocks is a big mistake. The book started out great with some solid personal finance advice but when I got to the chapter about investing I was a bit turned off.
As someone that is passionate about stock investing and that has been investing for almost a decade I obviously disagree with the idea of staying away from stocks. I do agree that stock investing is risky when you don’t know what you are doing. Hence, is not something you can just jump into.
To be honest, this is not the first time I see these kinds of discouraging statements in a book and it makes me sad. Why? because I’ve seen first hand how investing in high quality, growing, thriving corporations can grow personal wealth faster than anything else I’ve ever seen.
With that said, I want to just put it out there that there are in fact risks attached to individual stock investing but there are also great rewards.
Here is what you should know:
(1) When you buy an individual stock you are buying part ownership of a company. This means that the return on your investment will be highly correlated to the performance of that company. When you buy a piece of a business you are entrusting management to do everything in their power to make the company great and make sure your investment grows over time. You also go in with the agreement that there are no guarantees.
(2) Bad things can happen to great companies at any time. Companies go out of business, get disrupted by technology, lose their competitive advantage, and the list goes on. One way to protect your portfolio from crashing when a single company is doing badly is to make sure you strategically diversify the investments you own and make a conscious effort to make sure you are choosing companies of quality. It is VERY dangerous to invest in random businesses you don’t understand much about or are not sure how they even make money. Always do your own homework.
(3) The market is unpredictable and volatile – One thing you need to understand before you get into stock investing is that the market can be very volatile and unpredictable. It can go up or down at any time for any reason. You have to be able to put up with these kinds of ‘mood swings’. The money you put aside to invest should be part of your disposable income – extra money you may have and that you wont need for a while – at least the next 3-5 years. Money that you need for your emergency fund, your mortgage, your rent, your car payments, your high school senior’s education, anything immediate should not be in the stock market.
(4) Historically, the market has gone through serious crashes. You have to understand that those things happen but you also have to understand how to remain calm and remember that panicking is not an investing strategy. Here are some market crashes that come to mind: Market crash of 1929, Black Monday (1987), the Dot Com Bubble of 2000, Housing Market Collapse of 2008. I personally lived through the market crash of 2008 and my love for investing remained intact.
(5) If you invest blindly in anything that you don’t understand simply because of other people’s recommendations or simply because you think someone gave you a “hot stock tip” you dramatically increase the risk of losing your money very rapidly. Understand that investing is not playing the lottery. You MUST take the time to educate yourself and this is something I will strive to help you with through the content I share.
In conclusion, investing is an incredible way to build wealth but you have to learn to make educated decisions and understand that not all companies make great investments.
There is a reason why interest rates on savings accounts is 0.001% – because there is zero risk involved. If you put $1000 in your bank today, you will see the same $1000 2 years from now. The stock market does not offer those kinds of guarantees but it does present you with the opportunity to grow your wealth significantly and faster over time if you do things the right way.
Yes, stock investing is risky but things that have the potential to offer great rewards usually are.
Questions? Comments? Wish to discuss further? Comment below!
Cheers to profits!