You don't have to be scared of the stock market. How I started "really" investing

Most people are afraid of investing, it's intimidating and all you hear is that you should never pick individual stocks because they are volatile and you can lose everything very quickly. Most people stick to index funds that copy the entire market or very large chunks of the market such as the S&P 500. There's nothing wrong with this approach, I actually recommend it for most people (I have some money invested like this myself). But this is my story of how I got started in investing in individual stocks and how it doesn't have to be scary.

Before I knew what I was doing

7 years ago I knew almost nothing about investing, all I knew was that I needed to save money for the future. I was pretty good at saving, but my knowledge of where to put it was very limited. I had a Roth IRA that I stashed money into, my parents had setup my account for me years ago and I was invested in a mutual fund but I really knew almost nothing about it. A few years later I decided I should diversify so I picked another mutual fund and started putting my new money there.. And that was how it was for a long time.

I always knew I wanted to retire early, and I realized that with how much money I could save and the average returns of mutual funds would take more years decades than I wanted so I had to find a better way.

A new way of thinking

Sometime in 2011, I had a shift in my thinking, I knew that to retire I would need hundreds of thousands of dollars, and based on most retirement calculators, probably millions. At the time I had around $50k saved in my Roth IRA and I realized that money was probably only 5% of the way to my goal. So when I thought about it like that, what's 5%? If I put that money in something riskier like individual stocks what's the worst downside? I lose a good chunk of that. Compared to my final goal, it's not the worst of setbacks, I also knew that I was young enough to come back from a loss like that. But if I return 10% instead of 7% then that shaves off a few years of work.

That simple change in thought got me really looking at the stock market for the first time. But hearing all of the horror stories of how you could lose all of your money in stocks I decided that I should look for "safe" stocks. Yes I know there really is no such thing, but there are "safer" stocks than others. I had always heard things like if you invested in Coke when it first came out you would be a millionaire, or if you bought apple in the 90's you could be a millionaire too.

The "too big to fail" companies

Because of my hesitancy to get into stocks I decided I would look for companies that were so big that I didn't think they would disappear overnight. Granted some of the biggest banks in the US went under in 2008 but I know that is not very common. After looking at the charts of companies like Coke and Walmart, I ended up picking 3 companies that I thought would be around for decades to come. Companies that I thought were relevant and were still growing, that ended up being Starbucks, Disney, and Visa. My first reasoning for all of these companies was that I knew what they did and I was familiar with them. Granted I don't know all of their business but someone had asked me without doing any research I could have told you their core business. This was my individual reasoning for each choice:

Visa: I remember going out with friends back in college and when it came time to split the bill usually everyone had cash on them. But now when I go out, we end up splitting the bill onto 5 different credit cards cause no one carries money anymore. The future is moving away from cash, I even inadvertently wrote about Bitcoin without realizing it less than half a year ago!

Starbucks: I don't drink coffee, but everyone I know does, and Starbucks charges ridiculous amounts for it. They are everywhere, literally everywhere. In parts of the financial district in downtown San Francisco, there is literally a Starbucks across the street from another Starbucks, and the sad part is, there's probably enough business at each of them where it's warranted to have both locations. There's also numerous places where there are multiple Starbucks within a 1.5 block radius.

Disney: This is a company that has been around for forever. After doing research on this one I found out that Mickey Mouse could potentially end up in public domain on January 1, 2019. But since the copyrights have been extended a few times, it may easily happen again, either way, we have some time before that happens. Also their amusement parks charge a ton of money but it doesn't stop people from constantly going. Lastly, Disney has also bought Pixar, Marvel, and now Lucas Films so they have some amazing potential movies and products to market for a long time from now. Being that Star Wars and another Avengers movie will be out next year, I still think this is a good company to own.

Basically what I ended up doing was selling all of my mutual funds and first buying some index funds (because of lower management fees) and these 3 stocks. Over the years since then I have bought and sold many other stocks but this was how I initially started. And it wasn't so scary. I recommend people trying to start with companies that are performing well NOW. Some people have told me that they invest in X company because in 6 years {insert reasoning here} so this company will be huge then! My issue with that is the 5 years leading up to that nothing will happen and you're better off back in a bad mutual fund then buying the company in 5 years.

Start with familiar names that are doing good now, and pick some big companies. It doesn't take a lot of research to do this and once you get started you will gain some confidence that the market isn't a losing game. Don't try to pick the next breakout thing right away, if that fails and you lose a lot of money you may never want to invest again, all because you tried to pick some of the riskiest companies out there. If you want to you can put a small amount of money into chasing unicorns, but when you're starting out, pick some big companies with a good history and bright future ahead of them.

That's how I got started in individual stocks, big companies that outperformed the market. The stock market doesn't have to be scary.

But remember, always try to have an exit strategy just in case. 

5 comments:

  1. I decided on index funds rather than mutual funds and learned to diversify a long time ago. Also every year I get 5k and decide where to put it (it's my "play" money I guess you could say). To be honest I kind of play the gamble game –not futures or anything. I was told to do this when you are younger since we can lose more and not be as impacted by it. -Unless, of course, you are trying to retire early. So what was my big mistake? I decided once that I was going to read about different companies and see if I could "guess" that something was going to happen. I came across Office Depot and read all about how they were hiring a new CEO who was going to really shake the place up. It wasn't really talking about stocks, more so the changes that this new guy was going to make. Their stocks were pretty low at the time so I thought, "I'm going to get in on this". Well the new guy came in and stocks went up a little bit and then BAM! Office Depot had been audited and charged with overcharging big cities on their orders (SF was the one I read about) and owed millions in refunds. YIKES! Their stocks dropped and I took a slight loss when I sold. Ah well. I learned a bit about stocks in high school where we had a certain amount of money, had to choose stocks, follow them, sell them, etc. to see who would end up with the best return at the end. I did really well back then and picked stocks like I first picked horses in a race before I knew what I was doing like, "well that one has a good name". My first horse race I beat 32/1 odds and made a nice pocket full of cash from it. My first pretend stock-buying experience was similar. I find now that I get way too caught up in trying to figure out if something is going to succeed or not (just like I do at the races) and I end up not doing as well as I probably could if I played it "safe"...whatever that means. The stock market to me is always a bit of a gamble though.

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    1. I have a whole series of posts this year on an investing challenge against other personal finance bloggers this year, it's only $1,000 that we are allowed to invest in it but I went chasing unicorns with this investment. Basically I went to either win or horribly lose the challenge, so far, I think I'm winning.

      http://www.work-to-not-work.com/2014/05/the-grow-your-dough-throwdown-may-update.html

      Normally I don't invest in that risky of stuff but this was a blogger challenge. The one thing I have learned from it was what my risk tolerance was which was a good thing.

      Your investment in Office Depot might not have been too bad of a decision based on the evidence stated. If their articles had a positive outlook for the company and it was at a good entry price then no one could have predicted their shipping fiasco. At least you only took a small loss.

      Investing in something is better than investing in nothing though. Did you know that $10,000 invested at a 7% growth rate (which is totally attainable) will grow to over $75,000 after 30 years? or to over $105,000 after 35 years? Time is the most important aspect to investing. The second aspect is consistent contributions, and a distant 3rd place would be what your actual investments are.

      What do you do with your play money from previous years? Do you just "let it ride"? on whatever the original investment was? If you're using it as play money hopefully you are re-assessing where it is and just using that as your play money. After a few years that $5,000 per year can add up.

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  2. This is a really great post I found some really good information here I've got lots of followers on twitter and I will tell all of them about this as I really think it's great information that more people should see keep up the good work be back again soon.

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    1. Thanks for stopping by and sharing, it really doesn't have to be that scary to start investing!

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