How Should a Young Person Invest Their Money?

Guest Blogger: Yuvraj Wadhwani

I have recently written answers to similar questions. My answer to this question will be similar to those.

My advice would be not be appreciated by everyone, but I suggest you have an open mind when reading my answer. Comments and questions are welcome.

Let’s begin with some wise words.

Investing is a plan, not a product.

Plans have goals.

The question does not specify what is your goal. But since you have asked this question, it means that you are looking to make some money by investing money.

It is wise to divide your investing plan into 3 parts.

  • A plan to be secure
  • A plan to be comfortable
  • A plan to be rich

Let’s take them one by one.

Plan to Be secure

A plan to be secure should do as it says, make you secure. It should protect you against calamities, health problems, accidents etc. A good insurance plan that covers your medical expenses should be good. Also saving money equivalent to a 3 months salary is wise for a rainy day.

Everyone should have a plan to be secure

Now before I move on to the second or third plans, it is important to that you define your goals. Ask your this question “Am I wanting to be comfortable or am I wanting to be rich??”

This is an extremely important question to answer, as it will determine your investing plan. I would suggest you to read the rest of the answer to get a better idea about what you will need to do if you chose either plan.

This choice is similar to buying a gym membership. You may choose to have a light jog on the treadmill, or you can sweat it out with weights. The choice of your goal determines your actions.

Plan to Be Comfortable

Here I would agree with Aditya Rathnam, choose diversified mutual funds, dollar cost your investment, manage your equity to debt ratios, save taxes using all the available options and invest for the long term. Also, have a good financial planner who can guide you with your plan. Leaving any financial calamity aside, you should be reasonably well off in the long term.

Plan to Be *Rich*

Q: “What is your advice for the average investor?”
A: “Don’t be average”

Why?

Because average investors depend on the market to make money. Because average investors make money when the market goes up and lose money when the market goes down. Because average investors don’t have much control over their financial returns Because average investors think that they take less risk, but they are the ones who take the most risk.

Average investors buy investments and then hope that they will go up. Rich investors know that hope is a poor way to invest. Rich investors have a plan for their investment when the market goes up, down or does nothing. Rich investor seek control

So how is an average investor different from a smart (rich investor)??

I hope the following conversation will make things clearer.

Avg Inv:  My house is an asset.
Rich Inv: My house is a liability.

Avg Inv:  Don’t take risks.
Rich Inv: There is always risk, so learn to control and manage risk.

Avg Inv:  Diversification is risk reduction
Rich Inv: Diversification is useful when you don’t know what you are doing

Avg Inv:  Mutual funds are good and safe investments
Rich Inv: Mutual funds are poor investments, and useful only when you sell them.

PS: If you think mutual funds are safe, walk into a bank and ask to borrow money to invest in mutual funds. It should be fun.

Avg Inv:  The market is falling, I should sell
Rich Inv: The market is falling, it’s time to buy

Avg Inv:  That’s risky!
Rich Inv: Risk comes from not knowing what you are doing

Avg Inv:  I bought that stock, I hope it goes up
Rich Inv: I bought the stock at a favorable price and put a stop loss to protect my downside

Avg Inv:  All my friends invested in this fund, so it must be a good investment
Rich Inv: The risk/reward ratio looks good, so it might be a good investment

So, rich investors have a very different mindset from the average investor. Don’t get me wrong, what the average investor is saying above isn’t bad advice, but its average advice, and as I mentioned, average investors make money when the market goes up and lose it when the market goes down.

Average investors buy and hope that the market goes up. Rich investors plan what to do with the investment if the market goes up, when the market goes down or the market goes sideways.

Broadly there are 3 Es that rich investors have that average investors don’t.

1. Education

Rich investors spend a good portion of their time and resources into their education. This is essential to know market trends, and to learn how to take control in their investments.

2. Experience

Because of a good education, they are able to minimize risk as they start small and practice their skills to gain experience.

3. Excessive cash

When you have a good education + experience, excessive cash soon follows.

Now that we’ve covered the basics, it’s time to learn some basic rules of investing

Investing in Business and the Business of Investing

Whether you realize or not, you are always investing in a business.

When you buy stocks, you are investing in a business. When you buy real estate, you are investing in business. When you buy bonds, you are investing in business

The thing is, business and investing go hand in hand. The better business skills you have, the better your investing decisions are, and the better your investing skills are, the better your business skills become.

It is important that you sharpen your business skills to be a better investor.

Successful investing is not about the investment, it’s about the investor.

This is perhaps the least and most misunderstood concept in investing. This is the reason why people ask questions like “Where should I invest my money?”, and the answer is that there is no right or correct answer.

Let’s try to understand this concept with an example. Suppose that you were invited to have a friendly racing session with F1 guys on the track. You were given a race car like the other guys and were asked to drive just like they do and at the speeds they do.

What do you think will be the result if you attempt that? A possible crash? A sprained neck because of the downward G-force?

The result would not be pretty in any case.

Now you may blame the car, the circumstances or god for the bad outcome, but the reality is that your skills of driving an F1 car at high speeds are not good enough.

Investing is very similar. Unless you have good skills as investor, the best investments will be the riskiest for you, but safe for a skilled investor.

Diversification vs. Focus

If I were your career adviser and I told you to invest 15% of your time to be a doctor, another 15% to be an engineer, 20% to business skills, 20% to arts, 15% to philosophy and 15% to be a fashion designer because it diversifies your skill set and reduces career risk, you’ll fire me in a minute and call me crazy. But a financial adviser would give you give you similar advice and you’ll happily pay him. (Talk about discrimination.)

The point is diversification is average advice. If you want to put your money everywhere and pray that more of it goes up that it goes down, then you are welcome to do it, but I’ll pass.

The message most financial management companies give out in their ads is that managing money is hard, so give it to us. The reality is that doing anything is hard if you don’t have the skills or the experience. If I try to do graphic design, then I’ll probably suck, but I spend a few months learning it and practicing it, then I’ll definitely get better. Most people don’t take charge of their finances themselves.

Business and Investing Are Team Sports

The most successful people in the world have coaches. Christiano Ronaldo and Messi may be few of the best football players in the world, but they still have coaches and train to sharpen their skills. They have a team who helps them win.

When a movie is made, then a team of actors, cameramen, directors, produces, script writers work together to make it successful.

Similarly, in the investing world, you should also have coaches. Here you would have mentors, advisers, accountants, CPA’s, lawyers as your team.

You may not have a team today, but as you start your education and become a better investor, start building your team.

An investment should make sense if the market goes up, goes down or goes nowhere

This is kind of a litmus test for an investment and almost all average investment advice would fail this test. To understand this concept more, let me remind you of the important investing principle, “Investing is a plan, not a product.”

The lesson here is that whatever the investment, there should always be a plan for if the market goes up, goes down or goes nowhere.

Profit is made when you buy, not when you sell

This is another litmus test for an investment. Whenever you are investing in something, ask yourself this question, “Will I able to make money with this without selling it to someone else at a higher price?”

If the answer is no, should you probably rethink your investment and how you will generate returns from it.

Planning your exit before your entry

If you are leaving home in your car, you usually have decided where you will get off even before you sit inside. In other words, you are clear about your exit from the vehicle before entering it.
Similarly when you invest, it is wise to plan your exit from the investment before you enter it.

P.S. It is not a coincidence that investment assets are also called investment vehicles.

Professional IQ vs. Investing IQ

People usually think what they are doing extremely good in their professional life, it automatically means that they will be descent investors. The truth is that investing too is a profession which requires a completely different mindset and skill-set from other professions.

There is a great story that will express the importance of this concept.

Once upon a time, in the year 1700, there lived a great man whose intelligence was extra ordinary, and who invested in the stock market boom then. A particular company that was booming that time was the South Sea Company. The man invested in the South Sea company. A little while later he sold the investment and made a little money. But the company’s stock price kept rising and he invested again. Briefly after that, the stock went bust and he lost around 2000 pounds (a significant amount of money in 1700.) That was almost 90% of his total holdings.

That man was Sir Issac Newton!

Yes, the man who invented calculus in his spare time and penned the 3 Newton’s laws of motion, lost 90% his money while investing it. He may be the most intelligent mathematician and physicist, but he was certainly not an extraordinary investor.

Knowledge is an unfair advantage

We live in a fast changing world, also called the information age. Gone are the days when you could get a job, stick with the company, retire and live on a pension. The world is changing fast and in this world, your knowledge is your real wealth. The better investing knowledge you have, the better your chances of being a successful investor. Quoting one of my mentors, “If you have a solid financial education, then taxes, debt, inflation and retirement can make you richer, not poorer!”

Closing Words and the Real Answer to This Question

Q: “How should a 22 year old invest his/her money?”
A: “I don’t know, are you a good investor?”

Now after reading my full answer, hopefully you understand that there is not straightforward answer to this question.

P.S. If you were looking for actionable and specific advice, I would tell you to stay away from the US dollar. Don’t save your money or keep it in the bank. Also avoid anything that is denominated in US dollars, like US stocks etc. The US bond market is a bubble and will pop eventually. Invest in foreign stocks, precious metals and commodities. The US economy is a disaster waiting to happen. (I am assuming that you are a US citizen.)

But don’t take my word for it, become a better investor.

Yuvraj Wadhwani

Read Yuvraj Wadhwani’s answer to, “How Should a Young Person Invest Their Money?” on Quora

Click here to learn about my marketing and training system.

How about starting an Online Business?

We’re on a mission to create Independent Entrepreneurs. Our goal is to transform YOU into a leader in this industry so you can achieve the level of income and freedom YOU desire. We have a very detailed and systematic process for assisting you to not only learn the skills but also to give you the exposure, credibility and authority that will transform you into who your destined to become Online.

Are You Ready? Click here to join our team and learn how to create the freedom you crave!

 

If you liked this article, then you might also like these:

How to Grow Your Blog Into a Business

3-Step Action Plan for Success

Please follow and like us:
RSS20
Follow by Email7
Facebook
Google+20
Google+
Twitter
YouTube20
Pinterest
Pinterest
LinkedIn20
Instagram20
SNAPCHAT
SKYPE
FLICKR
REDDIT
TUMBLR