A Letter to Someone Who Has Never Invested Before

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The process of investing can be overwhelming. Throughout the site, you’ll find hundreds of articles to help you understand everything from what stocks are to how you can reduce you risk through techniques such as dollar cost averaging. Before we get into the details about investing, it’s important to understand some general concepts that will help along the way.

#1. Your Money Can Do More For You Than Your Labor

The first thing you need to understand before beginning an investing plan is this: Your money can do more for you than your labor. You wouldn’t know that by listening to the average lower or middle class family, who constantly extol the virtues of getting a good job. We discussed this concept in-depth in two articles: The Four Ways to Make Money. which was designed for new investors, and the more advanced How to Utilize the Berkshire Hathaway Model in Your Own Life. We also touched on this concept in How to Become Wealthy where you learned that each dollar you save is helping you “buy” your financial freedom.

Sometimes the process of investing is going to be difficult. You’ll be tempted to pull out when the market falls, to switch investments when things aren’t moving quickly enough, or to invest in something you don’t understand: DON’T.

#2. You Can Tailor Your Investment Plan to Your Personality

There is no “right” answer when it comes to investing. Once you understand the basics, you can put together a

portfolio that represents who you are as a person. There is a famous story of a man who worked for a water company and became fascinated with water stocks. He spent his whole life trading nothing but shares of water companies, amassing a substantial fortune to the point that he knew precisely, to the penny, the profit one of his “companies” made when someone flushed a toilet.

Others, who are passionate about real estate. may never own a stock in their life. Instead, they may buy rental properties, growing their collection of houses over time (it’s even possible to buy real estate through something known as a self-directed IRA but that’s beyond the scope of this article).

The point is that you can’t listen to every investment commentator on television. You don’t see dentists running off to become a singer every time they hear about a pop star earning royalties so why would you think about cashing in your investments, the ones that you’ve spent time choosing and understand, for some exotic new thing you heard about on CNBC? If you know beauty companies, or restaurants, or real estate, it doesn’t make any sense for you to trade them in for oil futures just because a billionaire says that’s the place to be.

#3. Control Your Costs

Regardless of if you choose to invest in stocks, bonds. mutual funds. commodities. real estate – it doesn’t matter – you must focus on controlling your costs. What seems trivial can make the difference between having enough, and scraping by, in retirement. Buying an index fund from a wealth management company may come with what is known as a “sales load” of 5%. That means that when you first invest, $5 of every $100 you put to work is going to get taken as a fee by your bank or financial institution. For a $10,000 investment, that means that over 40 years, you’re going to end up with $22,600+ less money assuming a 10% return than you would have had!

A lot of this has been solved by the age of the Internet. A generation ago, you may pay $200 in commissions on a $10,000 stock trade. Today, you don’t have to pay more than $10. This should have resulted in more wealth in the hands of new investors. Instead, it led to people hyper-trading, buying and selling at such a frequent pace that they forget stocks represent ownership of a business, not just pieces of paper.

#4. Don’t Invest Money You Can’t Afford to Lose