You may just be coming of age, or you may have received a windfall of expendable income that you are looking to spend in the right way. If you have been following the news, then you have been hearing a great deal of positive things about the market in general. This may have piqued a desire in you to invest in some way. Before you make this complicated decision, you must answer a twofold question:
Is now the time to invest in the market?
Is now the time for me to invest?
Investing in the Market
The market as a whole is never something to invest in or not to invest in. People make money whether the market is going up or down. In order to determine if you should invest, you should first understand the angle from which you will attack the market.
The most successful investors of all time, people such as Peter Lynch and Warren Buffett, have been able to stay in the market and make money during the 90s Internet boom and the worst recessions in all of humanity. What is the secret? Although there is no such thing as a simple solution to making money in the marketplace, the closest thing to this solution might be encapsulated in this quote from Peter Lynch: “I don’t invest. I pick money up off of the sidewalk.”
What Peter Lynch was getting at was the way that most people think of investing versus the way that winners think of investing. There is no need to stay in the market putting money into places that are not profitable just to say that you are an investor to your friends. The only time that you need to be in the market is if you see a true opportunity to make money.
This does not mean that you are going into the market like an opportunistic day trader. Neither Lynch nor Buffett is a short term investor. The time window for an investment that you discern as a positive opportunity may be years, not hours or days. What is necessary is the discipline to discern these opportunities and act on them in a decisive manner.
Another thing to consider is that the two investors Lynch and Buffett are moving into and out of the market at different times. This means that there is no “good” or “bad” times for the market – there is only proper capitalization on opportunity.
How do you know what to invest in?
When you are looking to invest in the market, you should really be looking for the angle. You can only invest in one part of a market at a time, so it behooves you to know everything that you can about that piece of the market. If you have an intricate knowledge of one stock, you can play that stock for your entire life and make money, ignoring the rest of the market entirely.
The research that you do will determine when it is a proper time to invest in the market for you. If you have an interest in a certain stock or industry, then learn everything that you can about it. Follow the stock or the industry and paper trade it before you put real money on the line. Once you are able to discern the patterns of the stock/industry and how people respond to news in that stock/industry, then you have a much better chance of making money when you invest.
How do you know when it is a proper time to invest for you?
No matter how good your research abilities may be, there is still a risk of loss when it comes to investing in any part of the market. This risk of loss means that you must be able to withstand losing your entire investment without lowering your quality of life. In order to determine when it is a proper time to invest for you, you must determine how you manage your personal finances.
Your Personal Finances and Investing
There are a few rules about certain types of investments – you must have US $25,000 in an investment account in order to day trade. You must have at least US $100,000 of net worth before you can become involved in certain types of small, private business investments. Even though these rules stand, there are truly no barriers to entry if you are looking to begin investing in the market in some way. Even these rules can be completely flouted if you have the right connections.
This means that you must create your own internal barriers when it comes to investing in the market. The lack of rules also means that no one will care if you lose your entire investment. In some cases, you may even end up owing money to a creditor. There are ways to invest in the market that are more like a lottery, and if you fall for those investments and lose, you can create a great deal of financial trouble for yourself in a matter of minutes.
Your personal finances should be in order before you start investing in stocks, options or ETFs. Mutual funds and bonds are safer investments that may be a better solution for people who are looking to invest and not follow the investments on a daily basis. Here are a few of the rules that smart investors impose on themselves before they begin to invest in earnest.
First of all, all debts are paid.
For most investors, all debts are paid including the home mortgage. This is especially true if a person is day trading, which is a fast-paced and highly risky form of trading. Most day traders do not have credit cards, and they are able to pay their daily expenses from the interest off of capital that they have already set aside.
Secondly, their investment strategies are hard boiled.
You would be hard pressed to get a professional tech investor looking at the textiles market, and vice versa. Only amateur traders follow “hot tips” without a centered focus in an industry. Pro traders do not mind if they lose money if the investment that made money was outside of their wheelhouse. Warren Buffett did not invest at all in the huge 90s tech bubble that made Mark Cuban a billionaire – yet they stand side by side as rich men. Your investment strategy may be different from that of your neighbor, but that does not mean that you cannot both be rich. Sticking to your guns is the most important factor.
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