Investing For Beginners: 3 Most Common Traps

Trap #1: Focusing too much on how to invest and not how much you invest

The Bitter Pill to Swallow: How much you invest matters just as much, if not more than how you invest. That hinges on how much you spend.

Folks agonize over negotiating pay or maximizing their returns by a couple % points. But the really wealth killer? Lifestyle creep. It sounds like "I'm working so hard, don't I deserve x?". If you're getting a piece of the American Dream that your family hasn't had before, I especially empathize. But here's the risk. Spending becoming a ball and chain to the wrong job. 

Spoonful of sugar to help the medicine go down

‍1) Realizing that your money can earn more for you than you can.

• In order for your money to earn for you, you have to invest.
• And in order to invest, you have to not spend it all today.
• I'm not suggesting an extreme of living like a monk, or even going full-on FIRE and living on ramen. I'm suggesting you "pay" your future self so they can live the American Dream too. Here’s how...

2) Focus on the big rocks of spending that matter. 

This means, forget about budgeting lattes. Waste of mental energy. Housing is most people's highest expense, and in my past-life as a white-glove advisor to ultra high net worth families, I spent a lot of time helping wealthy people unwind their real estate.  Avoid their mistake and be judicious when selecting where you live so that rent or housing costs don't creep above ~28% of their pre-tax income. In other words, as “above-average” earners we encourage them to be “above average” on reigning in their housing spend as well (you can see averages in this chart below) 

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3) Reverse Budget to enjoy guilt-free spending. 

Looking over your shoulder to nickel-and-dime every purchase is a quick way to feel miserable. Few people stick with apps like Mint for that reason.  Instead, pay your future self first. How? Automatically deposit a part of your paycheck each month in long-term investments. You'll have a "set-it-and-forget-it" way to ensure you're not overspending. Think of it like filling your plate with veggies so there's less room for dessert. Steward can help you calculate personally how much to invest each month vs. keep in cash, and where to invest in a tax-optimized way here

Trap #2: Marketing Timing and Chasing Past Returns

Bitter Pill To Swallow: You can't time the market. 

This is a devilish one. It comes in disguise! ‍ Folks who insist to me they're not market timers or tempted by hot stock tips, in the same breath also ask:
- "It seems like stocks are heady right now, should I hold off?" or
- "My friend made a fortune on Tesla, should I invest too?"
I can’t blame them. Every investor is tempted to time the market. It's an even sweeter temptation the more educated you are. ‍But, it requires you to get both the exit and the re-entry right, which evidence shows people can rarely do.

Spoonful of sugar to help the medicine go down:

1) Take your predictions for a test drive:

- If you think you can do this, keep a journal of your specific predictions for a few months or so!
- That includes your predictions to "not buy" as well as to "buy".
- If you are like most, you’ll realize your crystal ball is cloudy. Bluntly, you’re not smarter than the market. Nor is almost anyone over consistently over time. 

2) Speculate in a sandbox with a “Vegas” account:

If you really have an itch to scratch on "gaming the market", I encourage you to divide your money into two pots: (a) start by investing your nest egg for upcoming big life events (e.g., a house, house, retirement) in low-cost index funds, and then (b) set up a "sandbox" of "play money" for more individual stock picking with money beyond what you need to save to hit your goals.

That way, you have the chance to try out different ideas, without risking their family's future. Steward can help you run the numbers on how much you need for upcoming big life events and how much you'll have left for "play money" - here

Trap #3:  Analysis Paralysis

Bitter Pill To Swallow: This isn't a problem for your future self. Don't let perfect be the enemy of good.

A lot of folks, particularly highly-educated folks, they let perfect be the enemy of good on investing. This means they often “kick the can down the road”. They start to build up way to much in cash. Cash is not working hard for you, let alone keeping pace with inflation!

Spoonful of sugar to help the medicine go down:

1) Half the battle is having specific and low-effort ways to get started. 

A target date fund is a great way to get started as a simple one-and-done investment. These aren’t limited to your 401(k) account...you can use them for personal investing as well. And on the 401(k) topic, there’s a good reason target date funds make it to so many employers’ top picks list for their retirement plans, after dedicating full teams to researching investments to offer to employees.

2) Recognize time, not money, is your most valuable asset as an investor.

If Warren Buffet had only started investing as he approached retirement, he'd be worth only $12M today vs. triple digit billions. It’s okay to make mistakes – especially now, before you have more money! Rather than waiting till "never" to get 100% right, get 85% right and utilize time to your advantage. I'm reminded of a sign that stuck with me from my Facebook days here: Done is Better Than Perfect.

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3) No "shoulda, woulda, coulda’s”.

‍Don't beat yourself up too much for past actions. My favorite quote from Shoe Dog  (Phil Knight, the founder of Nike’s autobiography), is "the best time to plant a tree was twenty years ago, but the second best time is today."

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Tools to Get Started:

Looking to make the most of your money? Steward is a personalized to-do list for how, where and when to invest and save on taxes in plain-English, with minimal time and effort. Give it a try here.