How to Invest Without Wetting Your Pants
May 19, 2011
Deciding where to invest your money can be an unnerving experience in today’s world of corporate scandals, failing banks, and rivers of debt. When I asked you and other readers for your biggest concerns about investing, I found a wide range of topics. While some of them had to do specifically with the rocky economic environment, many of your concerns would apply in a good or bad economy.
It does seem the anxiety experienced by the economy and financial markets over the last decade has made it more difficult for some of you to get started. Many times there’s not just one thing that holds you back from investing, it’s usually a collection of worries and uncertainties that convince you to sit on your money. Maybe you’re not scared to the point of wetting your pants with fear of losing your money as the title suggests but there are lots of little nagging worries that stop you from making investing decisions.
Here are some of the questions I’ve gathered from newsletter readers in regards to investing.
- Where should I setup my investment plan?
- How can I pay better attention to my investments?
- How can I be more disciplined about saving and investing?
- What’s the best way to set investing goals?
- What’s the best way to monitor my investments?
- How can I find low-risk investments?
- What should I do next after maxing out my 401k investments?
- What’s my proper asset allocation, how’s it determined?
- I don’t where to invest my money, how should I decide?
- Can I invest for growth and safety?
- How do I know how much I need to invest for retirement?
- How do I decide whether to invest in a 401k or Roth 401k?
If you’re facing any of these questions or others, you might feel nervous about putting your money into the stock market, which is understandable. You’re definitely not alone, many other people have similar concerns – one person shared with me that their “biggest fear is actually taking the plunge to start investing”. The good news is that with reading, research, and planning people are conquering theirs fears and finding an investing strategy that works for them.
There are many reasons you might invest your money but one of the big ones is so that you’ll have funds to support yourself when you’re older. Some people look ahead to a period of time when they can retire and not have to work so hard, others are simply just worried that as they get older their waning strength and failing health will make it tough for them to make ends meet. I think this reader captured the fears of many people – when asked about their biggest financial worry they answered, “I’m afraid I won’t have enough money saved for retirement”.
Over the coming weeks we’ll address these and other investing questions to try and take some of the fear and uncertainty out of the investment decision making process. I think one of the best ways to tackle something you’re worried about is to learn more about. So we’ll start off by taking a quick look at what it means to invest your money.
What is Investing?
There are many acronyms, terms, and strategies in the world of investing but at it’s core it boils down to putting your money into the hands of a company that you think can make more money from your existing cash than you can.
Thanks to the entrepreneurial spirit of human kind there never seems to be a shortage of people looking for money in order to solve problems and create new solutions. You see lots of great examples of this is the area of technology, where new innovations are making our lives better and easier.
An Investing Example
Let’s say there’s a medical technology company that wants to launch a new product but doesn’t have the money to turn their ideas into a reality. They can sell shares of stock to investors who feel that the proposed new product could profitably fill a need in the marketplace. The company uses the money raised from the sale of stock to hire a team of engineers who develop the new product and bring it to market.
In order to keep it simple, this example doesn’t go into the risk/reward considerations of the investment but at a basic level, there are two main scenarios to consider – the product might be successful or it could turn out to be a flop.
A Profitable Investment
If the new device earns the company enough profit to boost the bottom line then the investors could earn money. When when the company reports it’s earnings the price of the stock might go up and investors can choose whether they want to sell and take profits – or hold onto the stock in anticipation of future increases in profits.
A Money Losing Investment
On the other hand, if the product doesn’t sell well then the money the company spent developing and launching the device isn’t recovered by an increase in profits. When the company reports the resulting drop in earnings, the stock price may go down as well. If investors paid $45 a share for the stock and the price drops to $40 and they sell, then they’ll have lost money.
Risks vs Rewards
As this example hopefully shows, investing involves both the potential of profit and the risk of losing money. If you were considering investing your money into this fictional technology company I’m sure there are many questions you’d want to ask before handing over your cash. There are lots of considerations when evaluating the risk and reward of a company and how it compares to any other investments you’ve already made.
We’ll cover the details behind those considerations in the coming weeks and try to address the investing questions that are keeping you awake at night.
All posts by Ben Edwards