About three years ago, I finally reached a point in my career where I had a few extra dollars to put towards my future. So, I began the journey of saving and investing without any prior knowledge of financial instruments, retirement planning, or wealth management. It proved to be a rocky start with many difficult lessons. Still, I am happy to have learned them early rather than late in life.
So, I've decided to write down three simple starting principles for less than savvy millennials like me. For the many readers who already know a lot about investing and finance, these things may come as a big "duh," but I hope it may be helpful to those who are (more often than not) clueless like me.
1) Don't invest what you can't afford. Incidental life expenses always pop up and get in the way -- you get sick, you get fired from your job, your car breaks down, you choose to blow the budget on a first date with a cute boy/girl. Don't forget, if you live in America, a simple illness requiring hospitalization is enough to wipe out your early life savings (even with health insurance). Getting margin called by life is a surefire way to have negative returns on your investments. Investments can go up down or sideways, but I've learned that you can't weather a downturn and wait for the rally if you have to sell your holdings to pay for an emergency expense. Thus, I've decided to always allocate a a significant part of my portfolio to a liquid asset. I now keep enough cash in a simple savings account to pay for ~6 months of living expenses. If you choose a run-of-the-mill savings account like Marcus by Goldman Sachs, you'll still earn enough interest (about 2.0% APY) to hold off inflation. Robinhood is also rolling out a money management feature that will earn 2.05% APY for those millennials who are app focused. Both options are theoretically equivalent to having a FDIC-insured savings account with relatively low risk of losing your money. I know it's boring, but I'd prefer that than getting evicted or having my car repo-ed.
2) Don't invest in what doesn't exist. For example, I don't invest in companies that don't have a clear revenue stream from a product, service, or property. I learned this the hard way after investing in a number of biotech startups that burned a ton of cash and ultimately failed to deliver an FDA-approved product to the healthcare market. The companies eventually went under and I lost my money. I've realized that I do not have the risk tolerance for untested/incomplete/unapproved products. This is essentially my own personal interpretation of Warren Buffet's value investing paradigm: pick mature companies that already deliver quality products/services. This helps to ensures that the companies will continue to exist and someday grow in value. For those that want to gamble on the next hot tech unicorn with no true product, just call it what it is - blind faith or pure gamble. Critics of this philosophy will argue that some companies may end up making a LOT of money (ie. Facebook), but for each of those, a great number never become profitable and will continue burning your cash or diluting the worth of your shares for years.
3) Don't invest in what you don't understand. The classic example for this is the options market. Read through /r/wallstreetbets long enough and you'll see what I mean - most people don't really understand derivative instruments and end up going down in flames with naked calls/puts, spreads across ex-dividend dates, etc. etc. If my previous sentence made no sense to you, then that's exactly the point. Many investment strategies are meant to take advantage of your ignorance and extract money from you! Anyway, I digress... here's an example of one of my early investment failures: buying Criteo SA. It's a French web advertising company, but beyond that, I couldn't really understand what product they actually sold... redirected web-links? What? I still don't really understand it to this day, but the point is that they were promptly accused of fraud, embroiled in lawsuits, and lost about 50% of their stock price over a year's time. Since then I've made it a rule to never invest in things that I don't have the time, knowledge, or intelligence to thoroughly understand.
Anyway, to those beginning the investment game, my final advice would be to stay humble, dispassionate, and critical. Your patience will be rewarded with slow but steady growth, while your haste and greed will ultimately get you burned, and it will sting terribly. Before you jump at the next hot investment, just remember, if money were so easy to make, wouldn't we all be billionaires by now?
I'd love to hear any helpful advice or stories that more experienced investors might be willing to share in the comments!
(Cover image by NeONBRAND; used with permission from Unsplash.com)